Business context and reporting period
SCBT Financial Corporation’s unaudited Form 10-Q covers the quarter and six months ended June 30, 2012. The filing identifies SCBT Financial Corporation—not SouthState Bank Corp—as the registrant. It describes a South Carolina bank holding company with approximately $4.4 billion in assets. Unless otherwise noted, amounts below are in millions of dollars.
Financial performance and condition
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net interest income | $42.5 | $38.0 | $81.6 | $70.8 |
| Provision for loan losses | $4.6 | $4.2 | $7.4 | $14.9 |
| Noninterest income | $11.7 | $8.8 | $21.2 | $24.7 |
| Noninterest expense | $37.5 | $35.0 | $72.7 | $69.3 |
| Net income | $8.0 | $4.9 | $15.1 | $7.4 |
| Diluted EPS | $0.55 | $0.35 | $1.05 | $0.55 |
- Q2 net income rose about 63%; management attributed the improvement primarily to higher net interest income and noninterest income, partly offset by higher credit provision and operating expenses. Q2 noninterest income included mortgage banking growth and recoveries on acquired loans; FDIC indemnification-asset negative accretion was a headwind.
- Net interest margin was 4.62% on a non-tax-equivalent basis and 4.69% taxable-equivalent in the detailed MD&A table. The filing’s narrative also refers to 4.62% as taxable-equivalent, an apparent inconsistency to verify. The Q2 efficiency ratio was 68.3%, or 64.7% excluding merger and conversion costs.
- For the six-month period, operating cash flow was $66.2; investing cash flow was positive $76.1 and financing cash flow was negative $3.8. Cash and cash equivalents increased $138.5 to $309.9.
- At June 30, assets were $4,373.3, loans net of allowance $2,958.2, deposits $3,661.0 and shareholders’ equity $424.9. Total assets increased 13.9% from June 30, 2011; deposits increased 14.2% and equity increased 14.5%.
- Borrowings included $220.3 of federal funds purchased and repurchase agreements and $46.1 of other borrowings. The company reported no advances on its $326.0 federal-funds lines, $75.0 of discount-window availability, and an FHLB facility of $297.3, with $43.7 used for letters of credit and no advances.
- Regulatory capital ratios remained above minimum requirements: company Tier 1 risk-based capital 13.82%, total risk-based capital 15.09%, and Tier 1 leverage 9.24%; the bank was also classified as well-capitalized. The company’s equity-to-assets ratio was 9.72%.
Material changes versus comparable periods
- Q2 net interest income increased 11.9% year over year, reflecting acquired and organic asset growth and lower deposit costs. The taxable-equivalent margin was nearly unchanged year over year as lower asset yields were largely offset by lower funding costs.
- Six-month net income more than doubled, while total noninterest income fell year over year because the prior-year period included a $5.5 million Habersham acquisition gain.
- On April 24, 2012, SCBT acquired Peoples Bancorporation for approximately $44.5 million, including $31.1 million of SCBT shares and $13.3 million paid for and retiring Peoples’ TARP preferred stock. The acquisition added about $234.2 million of loans and $435.1 million of deposits at acquisition-date fair value.
- Non-acquired nonperforming assets declined to $83.1 million from $93.7 million a year earlier; classified non-acquired assets fell to $160.6 million from $184.4 million at year-end 2011. Non-acquired nonaccrual and restructured loans totaled $57.6 million. Annualized Q2 net charge-offs were 0.77% of average non-acquired loans, versus 0.71% a year earlier.
- On July 1, 2012, the bank converted from a national to a state charter and changed its name to SCBT. On August 8, the company agreed to acquire Savannah Bancorp for approximately $67.1 million in stock, subject to regulatory and shareholder approvals; closing was expected in Q4 2012.
Outlook, commentary, risks and unusual items
- No formal earnings or financial guidance is provided. Management expected acquired-loan interest income to increase in Q3, partly because of a full-quarter contribution from Peoples; the filing cautions that interim results are not necessarily indicative of full-year results.
- Management characterized non-acquired asset quality as manageable and said liquidity was adequate. It noted the subjectivity of loan-loss and asset valuations and the possibility of future reserve increases, additional charge-offs, or regulatory adjustments.
- Key risks include credit and collateral deterioration, interest-rate and liquidity exposure, FDIC loss-share cash-flow estimates, integration of acquisitions, regulatory and compliance changes, and economic conditions. Proposed Basel III requirements were under review; their ultimate impact was not yet determinable.
- At June 30, commitments to extend credit and standby letters of credit totaled $631.2 million; management did not anticipate material losses from them. An investor lawsuit challenging the Peoples merger was subject to a memorandum of understanding settlement that still required court approval.
Important facts for investors to verify
- Confirm the issuer identity: this filing is for SCBT Financial Corporation, not an entity named SouthState Bank Corp.
- Reconcile the MD&A’s inconsistent presentation of the Q2 net interest margin (4.62% non-tax-equivalent versus 4.69% taxable-equivalent in its table).
- Assess credit quality separately for acquired and non-acquired loans, including past-due acquired loans, collateral values, allowance adequacy, and FDIC reimbursement assumptions.
- Track Peoples integration costs and results, the status and terms of the proposed Savannah Bancorp acquisition, and any changes in capital or liquidity after those transactions.
- Verify court approval and final resolution of the Peoples merger lawsuit, and monitor regulatory developments and their potential effect on capital, compliance costs, and earnings.