Business Context and Reporting Period
Company: SCBT Financial Corporation (SCBT)
Reporting Period: Fiscal year ended December 31, 2009
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, mortgage lending, and trust services through 48 financial centers in South Carolina and North Carolina. The company pursues a growth strategy based on organic growth and selective acquisitions.
Subsequent Event: On January 29, 2010, SCBT acquired Community Bank & Trust (CBT) in an FDIC-assisted transaction, adding 38 locations in North Georgia. The acquisition included approximately $1.0 billion in assets and $1.0 billion in deposits, with a $158.0 million discount on assets and a loss-share agreement with the FDIC.
Key Financial Metrics
| Metric | 2009 | 2008 |
|---|---|---|
| Total Assets | $2.70 billion | $2.77 billion |
| Total Loans (Net) | $2.20 billion | $2.32 billion |
| Total Deposits | $2.10 billion | $2.15 billion |
| Net Interest Income | $104.6 million | $95.8 million |
| Provision for Loan Losses | $26.7 million | $10.7 million |
| Net Income | $13.6 million | $15.8 million |
| Net Income Available to Common Shareholders | $8.9 million | $15.8 million |
| Diluted Earnings Per Share (EPS) | $0.74 | $1.52 |
| Return on Average Assets | 0.48% | 0.58% |
| Return on Average Equity | 4.66% | 7.00% |
| Net Interest Margin (Taxable Equivalent) | 4.05% | 3.83% |
| Efficiency Ratio | 61.17% | 63.17% |
| Shareholders' Equity | $282.8 million | $244.9 million |
| Nonperforming Assets (NPAs) | $52.9 million (1.96% of assets) | $21.1 million (0.76% of assets) |
| Allowance for Loan Losses | $37.5 million (1.70% of loans) | $31.5 million (1.36% of loans) |
Material Changes vs. Prior Period
- Earnings Decline: Net income available to common shareholders decreased 43.5% to $8.9 million. This was driven by a 148.8% increase in the provision for loan losses ($26.7 million), $5.0 million in other-than-temporary impairment (OTTI) charges on pooled trust preferred securities, and $4.7 million in costs related to the repurchase of TARP preferred stock.
- Asset Quality Deterioration: Nonperforming assets increased significantly to $52.9 million (up from $21.1 million), reflecting pressures in the real estate market. Nonperforming loans totaled $49.7 million, representing 2.26% of period-end loans.
- Net Interest Income Growth: Despite a 9.1% decline in total interest income due to lower yields, net interest income increased 9.2% to $104.6 million. This was primarily driven by a 38.3% decrease in interest expense as certificate of deposit balances re-priced lower in a declining rate environment.
- Capital Strengthening: Shareholders' equity increased 15.5% to $282.8 million, largely due to a public offering of common stock in May 2009 that raised approximately $29.2 million. The company remains "well capitalized" with a total risk-based capital ratio of 14.42%.
- Regulatory Costs: FDIC assessments and other regulatory charges increased by $3.6 million (196.6%) due to new FDIC rules requiring prepayment of assessments and increased rates.
Guidance, Outlook, and Risks
- Outlook: Management expects net charge-offs to increase in 2010 due to the economic environment, real estate market pressures, and rising unemployment. OREO (Other Real Estate Owned) expenses are expected to remain elevated as problem loans are foreclosed and disposed of.
- TARP Participation: SCBT participated in the U.S. Treasury's Capital Purchase Program (CPP) in January 2009, issuing preferred stock and a warrant. The company repurchased all TARP securities in the second quarter of 2009, incurring a $3.3 million accelerated deemed dividend charge.
- Investment Portfolio Risks: The company holds 39 securities in an unrealized loss position totaling $6.6 million, primarily consisting of pooled trust preferred securities (TRUPs). While management does not consider these other-than-temporarily impaired (except for the $4.9 million charge already taken), continued deterioration in the credit markets could lead to further OTTI charges.
- Acquisition Risks: The recent acquisition of CBT introduces integration risks and potential deposit run-off in the new Georgia markets, though the FDIC loss-share agreement mitigates credit risk on acquired assets.
- Interest Rate Sensitivity: The company is slightly asset-sensitive. Simulations indicate a 200 basis point increase in rates would result in a 0.08% increase in net interest income.
Key Facts for Investor Verification
- Allowance Adequacy: Verify the sufficiency of the $37.5 million allowance for loan losses given the sharp rise in nonperforming loans to $49.7 million and the coverage ratio dropping to 75.4% of nonperforming loans.
- TRUP Exposure: Monitor the $6.25 million fair value of remaining pooled trust preferred securities (TRUPs) for potential future credit-related OTTI charges, as these assets are highly sensitive to the financial health of underlying issuers.
- FDIC Prepayment Impact: Confirm the impact of the $11.2 million prepaid FDIC assessment on future liquidity and expense recognition, as this prepayment covers assessments through 2012.
- Acquisition Integration: Track the integration of the Community Bank & Trust (CBT) acquisition, specifically the realization of the $158.0 million asset discount and the performance of the acquired loan portfolio under the FDIC loss-share agreement.
- Dividend Sustainability: Assess the sustainability of the $0.68 per share dividend given the 43.5% drop in net income available to common shareholders and the resulting 74.66% payout ratio.