Business Context and Reporting Period
Company: SCBT Financial Corporation (Southstate Bank Corp)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2010
Overview: The Company is a bank holding company headquartered in Columbia, South Carolina. The reporting period was significantly impacted by the FDIC-assisted acquisition of Community Bank & Trust, N.A. (CBT) on January 29, 2010. This transaction involved the purchase of assets and assumption of deposits and liabilities, including a loss share agreement with the FDIC covering 80% of losses up to $233 million and 95% of losses thereafter on covered assets.
Key Financial Metrics
| Metric | Q1 2010 | Q1 2009 | Dec 31, 2009 |
|---|---|---|---|
| Net Income (Available to Common) | $48.96 million | $3.71 million | Not provided |
| Diluted EPS | $3.86 | $0.33 | Not provided |
| Total Assets | $3.67 billion | $2.84 billion | $2.70 billion |
| Total Loans (Net) | $2.57 billion | $2.26 billion | $2.17 billion |
| Total Deposits | $3.00 billion | $2.15 billion | $2.10 billion |
| Net Interest Income | $28.63 million | $25.00 million | Not provided |
| Noninterest Income | $101.96 million | $7.13 million | Not provided |
| Noninterest Expense | $32.92 million | $20.19 million | Not provided |
| Provision for Loan Losses | $20.78 million | $5.04 million | Not provided |
| Cash and Cash Equivalents | $238.10 million | $129.61 million | $104.91 million |
| Shareholders' Equity | $334.77 million | $311.18 million | $282.82 million |
Material Changes vs. Prior Period
- Acquisition Impact: The primary driver of financial results was the acquisition of CBT, which generated a pre-tax gain of $98.08 million. This acquisition added $438.8 million in loans covered under FDIC loss share agreements and approximately $1.0 billion in deposits.
- Profitability: Net income available to common shareholders increased 1,222% year-over-year, primarily due to the acquisition gain. However, this was partially offset by a $5.59 million other-than-temporary impairment (OTTI) charge on trust preferred securities and a $3.19 million prepayment fee on Federal Home Loan Bank (FHLB) advances.
- Asset Quality: Nonperforming assets (excluding covered assets) increased to $63.2 million (1.98% of total assets) from $30.9 million (1.09% of total assets) in Q1 2009. Net charge-offs rose to $16.87 million (3.13% of average loans) compared to $4.47 million (0.79%) in Q1 2009.
- Allowance for Loan Losses (ALLL): The ALLL increased to $41.40 million, or 1.90% of total loans, up from 1.40% in Q1 2009. The coverage ratio of the ALLL to nonperforming loans decreased to 76.89% from 150.37% in Q1 2009.
- Liquidity: Cash and cash equivalents increased significantly to $238.1 million, driven by the acquisition and a $231.6 million cash receipt from the FDIC.
Guidance, Outlook, and Risks
- Management Commentary: Management believes legacy asset quality remains manageable despite the rise in nonperforming assets. The efficiency ratio improved to 24.12% (from 62.41% in Q1 2009) due to the high noninterest income from the acquisition gain.
- Outlook: The Company anticipates continued pressure on the real estate market and economy. They plan to close 10 locations of the acquired Georgia franchise in late May/early June 2010. The Company expects to continue monitoring the acquired loan portfolio for fair value adjustments over the next year.
- Risks and Contingencies:
- Credit Risk: Rising unemployment and weak real estate markets in the Southeast continue to drive charge-offs. A significant portion of charge-offs ($6.4 million) was in commercial and industrial loans.
- Investment Securities: The Company recognized a $5.59 million OTTI charge on six pooled trust preferred securities (TRUPs). Management continues to monitor these and other securities for potential future impairments.
- Merger Integration: Risks include deposit attrition, higher than expected integration costs, and customer loss associated with the CBT acquisition.
- Liquidity: The Company experienced approximately $200 million in run-off of time deposits from the acquired CBT portfolio between the acquisition date and March 31, 2010.
Key Facts for Investor Verification
- Acquisition Gain Sustainability: Verify the sustainability of earnings excluding the one-time $98.1 million gain on the CBT acquisition.
- Asset Quality Trends: Monitor the trajectory of nonperforming assets and net charge-offs, particularly in the legacy portfolio, as the coverage ratio of the allowance for loan losses has declined significantly.
- FDIC Loss Share Agreement: Understand the terms of the FDIC loss share agreement (80% coverage up to $233M) and how it impacts the valuation of the acquired loan portfolio and future provision requirements.
- OTTI Exposure: Review the remaining exposure to trust preferred securities (TRUPs) and the potential for further impairment charges given the downgrade of mezzanine tranches to "C" ratings.
- Deposit Run-off: Assess the stability of the acquired deposit base, given the reported $200 million run-off in time deposits shortly after acquisition.