Business context and reporting period
The filing is SCBT Financial Corporation’s unaudited Form 10-Q for the three months ended March 31, 2013, comparing results with the first quarter of 2012. The company is a South Carolina bank holding company operating through SCBT and banking divisions in the Carolinas and Georgia. The filing identifies the registrant as SCBT Financial Corporation; it does not identify the filer as Southstate Bank Corp.
Results reflect the 2012 acquisitions of Peoples Bancorporation and The Savannah Bancorp. On February 19, 2013, SCBT agreed to acquire First Financial Holdings, a transaction still subject to regulatory and shareholder approvals at quarter-end.
Financial results and condition
| Metric | Q1 2013 | Q1 2012 or comparison |
|---|---|---|
| Net interest income | $53.8 million | $39.0 million; up 37.8% |
| Net interest margin | 4.86% non-tax-equivalent; 4.94% taxable-equivalent | 4.66% and 4.70%, respectively |
| Net income | $10.6 million | $7.0 million; up 51.5% |
| Diluted EPS | $0.63 | $0.50 |
| Noninterest income | $9.5 million | $9.5 million |
| Noninterest expense | $46.4 million | $35.2 million; up 31.9% |
| Provision for loan losses | $1.1 million | $2.7 million |
| Operating cash flow | $22.4 million | $46.1 million |
| Cash and cash equivalents, March 31 | $495.9 million | $403.2 million at March 31, 2012 |
Total assets were $5.14 billion, versus $4.05 billion a year earlier. Loans, net of allowance, were $3.53 billion; total deposits were $4.22 billion; and shareholders’ equity was $514.2 million. Quarter-end deposits decreased $79.0 million from December 31, 2012, while federal funds purchased and repurchase-agreement funding rose $90.1 million to $328.7 million. Other borrowings were $54.6 million.
Capital ratios at March 31 were 13.21% Tier 1 risk-based, 14.47% total risk-based, and 8.88% Tier 1 leverage at the holding company. Management said capital remained well above minimum requirements and the company remained “well capitalized.” The efficiency ratio was 72.4%, versus 72.0% a year earlier; excluding OREO and merger/conversion costs, management reported 64.5%.
Material changes versus the prior comparable period
- Net interest income benefited from acquired and organic earning-asset growth, higher income from acquired loans, and lower deposit funding costs. Average interest-earning assets rose 33.1%; the average rate on interest-bearing liabilities fell 18 basis points.
- Acquisitions materially expanded the balance sheet and share count. Total loans, including acquired portfolios, were up 28.3% from March 2012; non-acquired loans rose 6.9%. Total deposits were up 25.7%, primarily due to acquisitions and organic growth, although deposits excluding the acquisitions declined $107.2 million year over year.
- Expenses increased $11.2 million, led by $5.2 million higher salaries and benefits and $1.8 million higher merger/conversion expense. The filing attributes much of the increase to acquired operations, staffing and integration costs.
- Non-acquired credit indicators improved year over year: nonperforming assets fell to $76.4 million from $91.4 million, and annualized net charge-offs declined to 0.56% from 0.66%. The allowance was 1.60% of non-acquired loans, compared with 1.95%.
- Other comprehensive loss was $1.9 million, primarily from unrealized securities losses; available-for-sale securities had $704,000 of gross unrealized losses at quarter-end.
Outlook, risks and unusual items
No quantified earnings or financial guidance was provided. Management expected the First Financial merger to close in the third quarter of 2013, subject to approvals and other conditions. First Financial reported $3.2 billion of assets, $2.4 billion of loans and $2.6 billion of deposits at March 31; the agreement provides for approximately 7.0 million SCBT common shares for First Financial common shareholders, plus preferred-stock consideration.
Management described liquidity as adequate and readily available. At quarter-end, the bank reported $376.0 million of federal funds credit lines, $70.4 million of available Federal Reserve discount-window capacity, and a $342.9 million FHLB facility, with no outstanding advances under those facilities. The bank had $495.9 million of cash and cash equivalents. Management also cautioned that wholesale funding could become more costly if rates rise or deposit retention weakens.
Credit and acquired-asset risks remain important. Non-acquired classified assets were $140.9 million; acquired loans contractually 90 days or more past due totaled $79.6 million but are treated as performing under the acquisition accounting method. OREO totaled $70.7 million, including $34.2 million covered by FDIC loss-share agreements. The $124.3 million FDIC indemnification asset had an estimated fair value of $86.0 million in the filing’s fair-value disclosure; its cash-flow assumptions and loss-share recoveries may change. Management reported no additional deterioration requiring changes to initial Savannah or Peoples loan valuation estimates during the quarter.
Other risks cited include interest-rate and liquidity exposure, merger integration and completion, regulatory changes and capital requirements, cybersecurity, economic conditions, and credit losses. The filing describes shareholder litigation relating to prior acquisitions and the proposed First Financial transaction; management believed the claims would not materially affect financial condition or operations, but settlements or court approval were not assured. Management stated that disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Confirm the proposed First Financial merger’s approvals, final terms, closing timing and integration costs; review the related shareholder litigation.
- Track whether organic deposit growth offsets deposit declines excluding acquisitions, and monitor the increased use of repurchase-agreement funding.
- Review acquired-loan cash-flow estimates, FDIC loss-share receivables and claims, nonperforming assets, charge-offs, OREO and reserve coverage.
- Assess whether expense growth and merger costs are contained and whether reported margins and efficiency improve without relying on acquired-asset accretion.
- Compare capital and liquidity ratios with subsequent filings and evaluate sensitivity to interest-rate changes, deposit outflows and credit deterioration.