Business context and reporting period
SCBT Financial Corporation filed this unaudited Form 10-Q for the quarter ended June 30, 2011. The filing describes a bank holding company operating through SCBT, N.A., with markets in South Carolina, North Carolina and Georgia. The request names Southstate Bank Corp, but the filing itself identifies the registrant as SCBT Financial Corporation.
The company continued its strategy of organic growth and FDIC-assisted acquisitions. In February 2011 it acquired Habersham Bank; the Georgia franchise was converted to SCBT’s operating platform during the quarter.
Financial performance and condition
Unless otherwise indicated, figures below are in millions of dollars.
- Second-quarter results: Net interest income was $38.0, up 22.0% year over year; provision for loan losses was $4.2 versus $12.5; noninterest income was $8.8 versus $11.0; and noninterest expense was $35.0 versus $29.0. Net income was $4.9 versus $0.6, with diluted EPS of $0.35 versus $0.05.
- First-half results: Net income was $7.4 versus $49.5 and diluted EPS was $0.55 versus $3.90. The comparison is heavily affected by acquisition gains: $5.5 in the first half of 2011 versus $98.1 in the first half of 2010.
- Margins: Second-quarter net interest margin was 4.62% on a non-taxable-equivalent basis and 4.67% on a taxable-equivalent basis, compared with 3.99% and 4.04%, respectively, a year earlier. Management estimated excess liquidity reduced second-quarter margin by 29 basis points.
- Balance sheet and funding: Total assets were $3,839.9 at June 30, up from $3,594.8 at December 31, 2010. Loans, net of allowance, were $2,711.2; deposits were $3,205.8; cash and cash equivalents were $249.1. Federal funds purchased and repurchase agreements were $187.6, and other borrowings were $46.3.
- Cash flows, first half: Operating activities provided $50.6, investing activities provided $114.0, and financing activities used $152.6. Cash and cash equivalents increased $12.0 from year-end to $249.1.
- Credit and asset quality: The allowance for loan losses was $61.9, including $13.7 for acquired loans; the allowance was 2.00% of non-acquired loans. Non-acquired net charge-offs were 0.71% of average loans annualized in Q2, versus 1.41% a year earlier. Nonperforming assets were $93.7 excluding covered assets and $168.7 including covered assets.
- Capital: Shareholders’ equity was $371.1, or 9.66% of assets. Regulatory ratios were 13.89% Tier 1 risk-based capital, 15.15% total risk-based capital and 8.82% Tier 1 leverage. Management reported the bank remained well capitalized.
Material changes versus comparable periods
- Q2 net income improved year over year as net interest income rose and loan-loss provision fell, partly offset by lower noninterest income and higher operating expenses.
- Net interest income benefited from lower deposit and borrowing costs, loan growth and stronger yields on acquired loans. Average interest-earning assets rose 5.4% year over year.
- Non-acquired loans grew 8.0% year over year, led by commercial owner-occupied and consumer real estate lending. Construction and land-development loans declined 20.0% to $338.3.
- Noninterest expense rose 20.9% in Q2. Management cited higher salary costs, Habersham integration, OREO and loan-related expenses, and other operating costs. Non-covered OREO was $24.9, up $15.1 from June 2010.
- Total deposits increased from June 2010 primarily due to Habersham. Excluding the acquisition, deposits decreased $59.8, while noninterest-bearing deposits increased $71.7.
- Shareholders’ equity increased 12.5% from December 2010, supported largely by a $34.8 net private-placement proceeds in February 2011.
Outlook, risks and unusual items
- The filing gives no quantified earnings or margin guidance. Management said liquidity was adequate and readily available, while noting that excess liquidity was diluting margin and that deposit runoff in northeast Georgia could continue.
- Habersham accounting materially affected results. Q1 2011 included a $5.5 acquisition gain; acquired-loan cash-flow estimates also affected interest income and FDIC indemnification-asset accretion. In Q2, improved expected cash flows on certain acquired loan pools lifted loan yield, while reduced expected FDIC reimbursements produced negative indemnification-asset accretion of $4.0 in the quarter.
- On July 29, 2011, after quarter-end, SCBT agreed to acquire certain assets and assume deposits and liabilities of BankMeridian under an FDIC loss-share arrangement. The filing said purchase accounting was incomplete and the expected acquisition gain could not yet be estimated.
- Principal risks include borrower defaults, real-estate collateral values, future charge-offs, acquired-loan cash-flow estimates and FDIC reimbursements, deposit retention, interest-rate and liquidity exposure, acquisition integration, and higher regulatory and compliance costs. The company also warned that Dodd-Frank interchange provisions and the repeal of Regulation Q could affect fee income or funding costs.
- Management stated that its allowance estimates are subjective and actual losses may exceed estimates. Commitments to extend credit and standby letters of credit totaled $644.3; management did not anticipate material losses from them.
Important facts for investors to verify
- How acquired-loan performance and the related FDIC indemnification asset evolve, including the impact of further changes in expected cash flows.
- Whether non-acquired credit quality, non-covered OREO and charge-offs continue to improve or deteriorate.
- Deposit retention and funding costs, especially in the Habersham markets and following the Regulation Q repeal.
- Integration costs and final purchase accounting for the July 2011 BankMeridian transaction, including its effect on capital and earnings.
- The sustainability of Q2 earnings and margins after separating recurring banking results from acquisition effects and other unusual items.