Business context and reporting period
SCBT Financial Corporation, a bank holding company headquartered in Columbia, South Carolina, filed this Form 10-Q for the quarter ended September 30, 2012. The company provides banking and related financial services through SCBT and regional divisions. Unless otherwise stated, amounts below are in U.S. dollars; financial statement amounts are in millions.
Financial performance and condition
- Third-quarter earnings: Net interest income was $46.9 million, up 15.3% from $40.7 million a year earlier. Net income was $9.1 million, down from $10.3 million; diluted EPS was $0.60 versus $0.74. Pretax income was $14.0 million.
- Nine-month earnings: Net interest income was $128.5 million versus $111.5 million; net income was $24.1 million versus $17.8 million; diluted EPS was $1.66 versus $1.28.
- Margins: Third-quarter taxable-equivalent net interest margin was 5.03%, up 8 basis points year over year and 34 basis points from the second quarter. GAAP-basis net interest margin was 4.95%, versus 4.90% a year earlier. The average cost of interest-bearing liabilities fell to 0.34% from 0.64%.
- Revenue and expenses: Third-quarter noninterest income was $9.2 million, down from $20.8 million, largely because the 2011 quarter included an $11.0 million acquisition gain. Noninterest expense rose 2.3% to $38.0 million. The provision for loan losses fell to $4.0 million from $8.3 million. The efficiency ratio was 66.9%, compared with 60.0% a year earlier; the prior-year figure included the acquisition gain.
- Balance sheet: Total assets were $4.33 billion, up from $3.90 billion at December 31, 2011. Net loans were $2.96 billion; deposits were $3.59 billion; shareholders’ equity was $433.9 million. Cash and cash equivalents totaled $278.1 million, compared with $171.4 million at year-end 2011.
- Funding and debt: Federal funds purchased and repurchase-agreement balances were $226.3 million; other borrowings were $45.8 million. The company reported no brokered deposits and no outstanding advances on its $326.0 million federal funds lines or $69.4 million Federal Reserve Discount Window availability. Its $321.9 million FHLB facility had $16.7 million of letters of credit outstanding and no advances.
- Cash flow: For the first nine months, operating activities provided $36.2 million, investing activities provided $142.2 million, and financing activities used $71.7 million. Cash increased $106.6 million to $278.1 million.
- Capital and dividends: The company reported Tier 1 risk-based capital of 13.96%, total risk-based capital of 15.23%, and Tier 1 leverage of 9.35%; management said capital remained well above minimums and the company remained “well capitalized.” The quarterly dividend was $0.17 per share.
Material changes versus comparable periods
- Third-quarter net income and EPS declined despite higher net interest income and a lower loan-loss provision; the comparison was affected by the $11.0 million BankMeridian acquisition gain recorded in third-quarter 2011.
- Peoples Bancorporation was acquired on April 24, 2012, adding $491.9 million of assets and $435.1 million of deposits at acquisition-date fair value. SCBT issued approximately 1.0 million shares and paid $13.3 million for TARP preferred stock; total consideration was approximately $44.5 million.
- Period-end loans grew, with non-acquired loans at $2.52 billion. The portfolio included $309.0 million of acquired covered loans and $212.0 million of acquired non-covered loans. Management cited growth in owner-occupied commercial, commercial and industrial, and consumer owner-occupied lending, while reducing construction and land-development exposure.
- Credit indicators improved year over year: nonperforming assets including acquired assets fell to $133.9 million from $176.2 million; non-acquired classified assets declined to $157.5 million from $184.4 million at year-end 2011. Non-acquired nonaccrual loans, including restructured loans, were $59.3 million. Annualized third-quarter net charge-offs were 0.85%, down from 1.16% a year earlier.
- The allowance for loan losses was $77.6 million, including $46.4 million for non-acquired loans and $31.1 million for acquired loans. The allowance was 1.84% of non-acquired loans and covered 78.3% of non-acquired nonperforming loans.
- Effective July 1, the bank converted from a national to a state charter and liquidated its Federal Reserve Bank stock.
Outlook, risks, contingencies and unusual items
- No formal earnings guidance is provided. Management expected acquired-loan interest income to increase in the fourth quarter, partly because of the full-quarter impact of a release related to the BankMeridian acquired loan portfolio.
- SCBT had agreed to acquire Savannah Bancorp for approximately 1.802 million SCBT shares, valued at about $71 million using the October 24 share price. The transaction was subject to regulatory and shareholder approval and was expected to close in fourth-quarter 2012.
- Negative accretion on the FDIC indemnification asset was $6.6 million in the third quarter and $14.2 million for the first nine months, reducing noninterest income. The company reported an FDIC loss-share receivable of $174.3 million and expected to receive $20.6 million in claims in October and November 2012.
- After quarter-end, the company auctioned 175 covered OREO properties with a carrying value of about $9.2 million; some sales might not close. OREO totaled $74.5 million at quarter-end, including $47.1 million covered by FDIC loss-share agreements.
- Management identified credit, interest-rate, liquidity, acquisition-integration, regulatory, technology/cybersecurity, and economic risks. It noted uncertainty around proposed Basel III capital and liquidity rules and potential compliance costs from regulatory changes.
- Commitments to extend credit and standby letters of credit totaled $658.9 million; management did not anticipate material losses. Management said ordinary-course litigation was not expected to materially affect results. A shareholder suit relating to the Peoples merger was subject to a proposed settlement requiring court approval; a separate suit challenged disclosures in the proposed Savannah merger.
- The filing disclosed the South Carolina Department of Revenue cyberattack announced October 26, 2012, and said the company was evaluating potential effects on its systems, records, and customer accounts.
Important facts for investors to verify
- Whether the Savannah Bancorp transaction received required approvals and closed as expected, and whether integration costs or deposit attrition differ from expectations.
- Trends in acquired-loan cash-flow estimates, FDIC indemnification-asset accretion, reimbursement timing, and the post-quarter OREO auction proceeds.
- Whether improving nonperforming-asset and charge-off trends continue, and whether the allowance remains adequate as loan mix and economic conditions change.
- How deposit trends, excess liquidity, funding costs, and proposed regulatory capital requirements affect margins and capital.
- The outcome of the Peoples and Savannah shareholder litigation and the assessed impact of the South Carolina Department of Revenue cyberattack.