SCBT Financial Corporation — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. The filing identifies the registrant as SCBT Financial Corporation, headquartered in Columbia, South Carolina; it does not identify Southstate Bank Corp as the registrant.
Business context and financial position
SCBT is a bank holding company whose principal business is community banking through SCBT, N.A. Its growth strategy combines organic growth with selected acquisitions. In 2011 it acquired Habersham Bank and, on July 29, BankMeridian, both through FDIC-assisted transactions with loss-share agreements.
| Key balance-sheet measure | September 30, 2011 | Comparison |
|---|---|---|
| Total assets | $3.936 billion | Up 8.9% from September 30, 2010 |
| Total loans, excluding loans held for sale | $2.880 billion | Up 9.6% year over year |
| Total deposits | $3.288 billion | Up 8.9% year over year, principally from acquisitions |
| Cash and cash equivalents | $158.8 million | Down from $237.1 million at December 31, 2010 |
| Shareholders’ equity | $381.7 million | Up 15.7% from December 31, 2010 |
Results, cash flow and capital
| Measure | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net interest income | $40.7 million | $31.0 million | $111.5 million | $90.8 million |
| Provision for loan losses | $8.3 million | $10.3 million | $23.2 million | $43.6 million |
| Noninterest income | $20.8 million | $11.8 million | $45.5 million | $124.5 million |
| Noninterest expense | $37.2 million | $29.9 million | $106.4 million | $91.5 million |
| Net income | $10.3 million | $1.8 million | $17.8 million | $51.3 million |
| Diluted EPS | $0.74 | $0.14 | $1.28 | $4.04 |
Q3 net interest margin was 4.88% on a non-taxable-equivalent basis and 4.93% taxable-equivalent, up 95 basis points year over year. Management attributed the improvement to acquired-loan yields, loan growth and lower funding costs; excess liquidity still reduced margin by an estimated 6 basis points. Q3 efficiency ratio was 60.0%, versus 74.3% in Q2 2011, with the BankMeridian acquisition gain a major contributor.
Nine-month 2011 earnings were well below 2010, chiefly because the prior-year period included a $98.1 million acquisition gain from CBT, compared with $16.5 million of gains from Habersham and BankMeridian in 2011. For Q3, the $11.0 million BankMeridian gain helped lift income; acquired-asset accounting also produced a $3.5 million negative FDIC indemnification-asset accretion charge in noninterest income.
For the first nine months, operating cash flow was $112.1 million, investing cash flow was $106.3 million, and financing cash flow was negative $296.7 million; cash and cash equivalents declined $78.3 million. Financing uses included deposit outflows, FHLB repayments and dividends, partly offset by $35.2 million of stock issuance proceeds. The February private placement raised $34.8 million net.
At September 30, the company reported a 9.70% equity-to-assets ratio. Company regulatory capital ratios were 13.92% Tier 1 risk-based, 15.19% total risk-based and 9.04% Tier 1 leverage; management said the company and bank remained well-capitalized. Federal funds purchased and repurchase agreements were $184.4 million; other borrowings were $47.0 million.
Material changes and credit quality
- Non-acquired loans grew 9.0% year over year, with growth concentrated in owner-occupied commercial real estate and consumer owner-occupied loans. Construction and land-development loans declined 21.4% to $316.1 million.
- Non-acquired nonperforming assets were $96.1 million, up from $86.4 million a year earlier. Including covered assets, nonperforming assets were $176.2 million. Non-acquired classified loans declined to $157.6 million from $180.5 million a year earlier.
- Non-acquired allowance for loan losses was $49.1 million, or 2.00% of non-acquired loans; coverage was 0.67 times non-acquired nonperforming loans. Q3 annualized net charge-offs were 1.16% of average non-acquired loans, versus 1.74% a year earlier.
- OREO totaled $102.4 million, including $79.7 million covered by FDIC loss-share arrangements. Non-covered OREO was $22.7 million. Acquired loans were $418.0 million, net of a $12.1 million allowance; most acquired assets are subject to FDIC loss sharing.
- The FDIC loss-share receivable was $274.7 million on the balance sheet; management estimated $19.6 million was currently receivable from the FDIC. Management increased expected losses on three CBT loan pools by $4.3 million in Q3, with a net provision impact of $216,000 after the FDIC benefit.
Outlook, risks and unusual items
- No earnings or revenue guidance was provided. The company expects approximately $400,000 of additional branch-consolidation costs in Q4 2011 and estimates annual cost savings of about $3.0 million beginning in 2012. Ten branches were announced for closure or consolidation; the company also planned further BankMeridian branch consolidations and systems conversion.
- Management cited possible deposit attrition in the acquired Habersham and BankMeridian markets. By September 30, time-deposit balances had run off by approximately $120.7 million at Habersham and $104.3 million at BankMeridian. Liquidity was described as adequate; available sources included $194.0 million in federal funds lines, $76.3 million at the Federal Reserve discount window and an FHLB facility of $246.8 million, with no advances outstanding under those facilities at quarter-end.
- Acquisition accounting, FDIC reimbursement estimates and acquired-loan cash-flow assumptions involve significant judgment and may change. Management noted potential credit losses, real-estate valuation pressure, interest-rate and liquidity exposure, integration and deposit-retention risks, and added regulatory/compliance costs under Dodd-Frank. Debit-card interchange rules and the repeal of Regulation Q may affect fee income and funding costs.
- The filing reported $772.5 million of commitments to extend credit and standby letters of credit and stated that material losses were not anticipated. No material pending legal proceedings were reported. Disclosure controls were assessed as effective, with no significant quarterly change in internal control over financial reporting.
Important facts for investors to verify
- How acquired-loan performance, FDIC loss-share reimbursements and expected cash flows affect recurring earnings, provision expense and the indemnification asset.
- Whether non-acquired nonperforming assets, charge-offs, OREO balances and commercial real-estate exposures continue to improve or deteriorate.
- Whether acquired-deposit runoff remains within management’s expectations and whether liquidity and funding costs remain manageable.
- Whether branch-consolidation savings materialize as planned and how integration costs affect operating expenses.
- The sustainability of reported Q3 earnings and margin after excluding the $11.0 million BankMeridian gain and other acquisition-related effects; nine-month comparisons are also affected by the $98.1 million CBT gain in 2010.
- Management’s selected-ratio table reports nine-month 2011 return on average assets as 61.00%, which appears inconsistent with the stated quarterly results and other reported returns; verify the intended figure in the filed statement or source data.