Business Context and Reporting Period
Company: SCBT Financial Corporation (SCBT)
Reporting Period: Fiscal year ended December 31, 2008
Business Overview: SCBT is a bank holding company headquartered in Columbia, South Carolina, operating primarily through its wholly-owned subsidiary, SCBT, N.A. The bank provides retail and commercial banking services across 50 financial centers in South Carolina and Mecklenburg County, North Carolina. During 2008, SCBT merged two subsidiaries, The Scottish Bank (now NCBT) and South Carolina Bank and Trust of the Piedmont, into its primary bank subsidiary.
Key Financial Metrics
| Metric | 2008 | 2007 |
|---|---|---|
| Total Assets | $2.77 billion | $2.60 billion |
| Total Loans | $2.32 billion | $2.08 billion |
| Total Deposits | $2.15 billion | $1.93 billion |
| Net Interest Income | $95.8 million | $80.7 million |
| Net Income | $15.8 million | $21.6 million |
| Diluted EPS | $1.52 | $2.32 |
| Return on Average Assets | 0.58% | 0.95% |
| Return on Average Equity | 7.00% | 12.42% |
| Net Interest Margin (TE) | 3.83% | 3.85% |
| Efficiency Ratio | 63.17% | 65.31% |
| Shareholders' Equity | $244.9 million | $215.1 million |
Material Changes vs. Prior Period
- Earnings Decline: Consolidated net income decreased 26.8% to $15.8 million. This was primarily driven by a $6.6 million (after-tax) realized loss on the sale of Freddie Mac preferred securities and a 144.9% increase in the provision for loan losses to $10.7 million.
- Asset Quality Deterioration: Nonperforming assets (NPAs) increased to $21.1 million (0.76% of total assets) from $6.9 million (0.27%) in 2007. Nonperforming loans totaled $14.9 million, representing 0.64% of period-end loans.
- Loan Growth: Total loans grew 11.1% to $2.32 billion, driven largely by a 37.1% increase in commercial owner-occupied real estate loans.
- Capital Raising: In October 2008, the company raised approximately $26.8 million through a private placement of common stock. Subsequent to year-end (January 2009), the company participated in the U.S. Treasury's Capital Purchase Program (CPP), selling $64.8 million in preferred stock.
- Noninterest Income: Decreased 30.4% due to the $9.9 million net securities loss, offset by growth in service charges and bankcard services.
Guidance, Outlook, and Risks
- Outlook: Management expects net charge-offs to increase to 0.50% in 2009 due to the economic environment and real estate market pressures. The company anticipates significant increases in FDIC deposit insurance costs in 2009 due to new risk-based assessment systems and special assessments.
- Capital Position: The company remains "well capitalized" with a total risk-based capital ratio of 12.34% and a Tier 1 leverage ratio of 8.54%. The subsequent TARP investment further strengthens this position.
- Key Risks:
- Credit Risk: High exposure to commercial real estate (316.9% of total risk-based capital) and construction lending, which are susceptible to economic downturns.
- Geographic Concentration: Operations are concentrated in South Carolina and Mecklenburg County, North Carolina, making the company vulnerable to regional economic downturns.
- Regulatory Constraints: Participation in the TARP CPP imposes restrictions on executive compensation, dividend increases, and stock repurchases until the Treasury's investment is repaid or transferred.
- Investment Portfolio: $7.8 million in unrealized losses on available-for-sale securities, primarily related to pooled trust preferred securities.
Investor Verification Checklist
- Verify the adequacy of the $31.5 million allowance for loan losses given the 144.9% increase in the provision and rising nonperforming assets.
- Confirm the impact of the $64.8 million TARP preferred stock issuance on future earnings per share and dividend policy restrictions.
- Monitor the trajectory of commercial real estate loan performance, which comprises a significant portion of the portfolio.
- Assess the potential for further other-than-temporary impairment (OTTI) charges on the $7.8 million of securities in unrealized loss positions.
- Review the specific terms of the FDIC special assessments and their projected impact on 2009 noninterest expenses.