FIRST FINANCIAL HOLDINGS, INC. 10-Q 2009
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2009
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-12669
SCBT FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Indicate the number of shares outstanding of each of issuers classes of common stock, as of the latest practicable date:
SCBT Financial Corporation and Subsidiaries
March 31, 2009 Form 10-Q
SCBT Financial Corporation and Subsidiaries
(Dollars in thousands, except par value)
The Accompanying Notes are an Integral Part of the Financial Statements.
SCBT Financial Corporation and Subsidiaries
(Dollars in thousands, except per share data)
The Accompanying Notes are an Integral Part of the Financial Statements.
SCBT Financial Corporation and Subsidiaries
Three Months Ended March 31, 2009 and 2008
(Dollars in thousands, except per share data)
The Accompanying Notes are an Integral Part of the Financial Statements.
SCBT Financial Corporation and Subsidiaries
(Dollars in thousands)
The Accompanying Notes are an Integral Part of the Financial Statements.
SCBT Financial Corporation and Subsidiaries
Note 1 Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Certain prior period information has been reclassified to conform to the current period presentation, and these reclassifications had no impact on net income or equity as previously reported. Operating results for the three months ended March 31, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009.
The condensed consolidated balance sheet at December 31, 2008, has been derived from the audited financial statements at that date, but does not include all of the information and disclosures required by accounting principles generally accepted in the United States for complete financial statements.
The information contained in the consolidated financial statements and accompanying notes included in SCBT Financial Corporations (the Company) annual report on Form 10-K for the year ended December 31, 2008 should be referenced when reading these unaudited condensed consolidated financial statements.
Note 2 Recent Accounting Pronouncements
In April 2009, the Financial Accounting Standards Board (FASB) issued a FASB Staff Position (FSP) 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. The FSP allows an entity to determine whether a market is not active for a financial asset, considered in relation to normal market activity for that asset, using a list of factors provided in the FSP to aid in making that assessment. If, after evaluating the relevant factors, the evidence indicates the market is not active, the entity would determine whether a quoted price in that market is associated with a distressed transaction. The determination of whether transactions are distressed should be based on the weight of the available evidence. The FSP provides illustrative circumstances that could indicate that a transaction is not orderly (i.e., distressed). More weight should be placed on transactions that are orderly and less weight placed on transactions that are not orderly. The FSP requires new disclosures relating to fair value measurement inputs and valuation techniques (including changes in inputs and valuation techniques). The FSP is effective for periods ending after June 15, 2009 with early adoption permitted. The Company has decided not to early adopt for the first quarter of 2009. The Company is currently evaluating the impact, if any, that the FSP will have on its consolidated financial statements.
In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments. The guidance in this FSP will change (1) the method for determining whether an other-than-temporary impairment exists for debt securities and (2) the amount of an impairment charge to be recorded in earnings. To determine whether an other-than-temporary impairment exists, an entity will assess the likelihood of selling the security prior to recovering its cost basis. This is a change from the current requirement for an entity to assess whether it has the intent and ability to hold a security to recovery.
If the entity intends to sell the debt security or it is more-likely-than-not that the entity will be required to sell the debt security prior to recovering its cost basis, the security should be written down to fair value with the full charge recorded in earnings. If the entity does not intend to sell the debt security and it is not more-likely-than-not that the entity will be required to sell the debt security prior to recovery, the security would not be considered other-than-temporarily impaired unless there are credit losses associated with the security. In that case: (1) where credit losses exist, the portion of the impairment related to those credit losses should be recognized in earnings; (2) any remaining difference between the fair value and the cost basis should be recognized as part of other comprehensive income. The entity will be required to present on the face of the income statement both the total of any other-than-temporary impairment loss, and the noncredit portion recorded in other comprehensive income as an adjustment thereto. The entity is required to provide enhanced disclosures, including its methodology and key inputs used for determining the amount of credit losses recorded in earnings. On adoption, the noncredit portion of an other-than-temporary impairment previously recognized in retained earnings should be reclassified to other comprehensive income as a cumulative effect adjustment if the entity does not intend to sell the debt security and it is not more-likely-than-not that the entity will be required to sell the security prior to recovery. The impairment model for equity securities is unaffected by this FSP. The FSP is effective for periods ending after June 15, 2009
Note 2 Recent Accounting Pronouncements (continued)
with early adoption permitted. The Company has decided not to early adopt for the first quarter of 2009. The Company is currently evaluating the impact, if any, that the FSP will have on its consolidated financial statements.
In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments. The FSP will increase the frequency of fair value disclosures from annual only to quarterly to provide financial statement users with more timely information about the effects of current market conditions on their financial instruments. The FSP requires public entities to disclose in their interim financial statements the fair value of all financial instruments within the scope of FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, as well as the method(s) and significant assumptions used to estimate the fair value of those financial instruments. The FSP is effective for periods ending after June 15, 2009 with early adoption permitted. The Company has decided not to early adopt for the first quarter of 2009. The Company is currently evaluating the impact, if any, that the FSP will have on its consolidated financial statements.
In April 2009, the FASB issued FSP No. FAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies. The FSP amends and clarifies the accounting for assets acquired and liabilities assumed in a business combination that arise from contingencies. Assets acquired and liabilities assumed in a business combination that arise from contingencies should be recognized at fair value on the acquisition date if fair value can be determined during the measurement period. If fair value can not be determined, companies should typically account for the acquired contingencies using existing guidance. Contingent consideration arrangements of an acquiree assumed by the acquirer as part of a business combination will be accounted for as contingent consideration by the acquirer. The guidance is effective for fiscal years beginning after December 15, 2008. The Company will prospectively apply the FSP to all business combinations completed on or after January 1, 2009. The Company has no business combinations currently scheduled.
In October 2008, the FASB issued FSP No. FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active. FAS 157-3 clarifies the application of FASB Statement No. 157, Fair Value Measurements, in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FAS 157-3 is effective upon issuance, including prior periods for which financial statements have not been issued.
In June 2008, the FASB issued a FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities. The guidance in this FSP applies to the calculation of earnings per share (EPS) under Statement 128 for share-based payment awards with rights to dividends or dividend equivalents. Unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of EPS pursuant to the two-class method. This FSP is effective for financial statements issued in fiscal years beginning after December 15, 2008. Adoption of FSP EITF 03-6-1 did not have a significant impact on the Companys EPS calculation and related disclosures.
In April 2008, the FASB issued FSP No. 142-3, Determination of the Useful Life of Intangible Assets. FSP 142-3 amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under FASB Statement No. 142, Goodwill and Other Intangible Assets. This new guidance applies prospectively to intangible assets that are acquired individually or with a group of other assets in business combinations and asset acquisitions. FSP 142-3 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. Adoption of FSP 142-3 will be prospective on any future acquisitions by the Company.
In February 2008, the FASB issued FSP No. FAS 157-2, Effective Date of FASB Statement No. 157. FSP FAS 157-2 deferred the effective date of the disclosure requirement for nonfinancial assets and nonfinancial liabilities by FAS 157 until the beginning the first quarter of 2009. The Company has adopted FAS 157-2 (see Note 10 Fair Value).
Note 3 Loans and Allowance for Loan Losses
The Companys loan portfolio is comprised of the following:
An analysis of the changes in the allowance for loan losses is as follows:
At March 31, 2009 and 2008, there were $15.2 million and $1.5 million, respectively, of loans classified as impaired under the definition outlined in SFAS No. 114 Accounting By Creditors For Impairment of a Loan. Specific reserves allocated to these impaired loans totaled $2.1 million and $379,000 at March 31, 2009 and 2008, respectively. At March 31, 2009, there were approximately $11.2 million of impaired loans with specific reserves. At March 31, 2009, there were approximately $4.0 million in impaired loans for which no specific reserve had been recognized. The average recorded investments in impaired loans for the quarters ended March 31, 2009 and 2008 were $16.4 million and $3.5 million, respectively.
The Companys total deposits are comprised of the following:
The aggregate amount of time deposits in denominations of $100,000 or more at March 31, 2009, December 31, 2008, and March 31, 2008 was $515.9 million, $510.2 million and $482.7 million, respectively. The Company had brokered certificates of deposits of $25.0 million, $110.0 million and $622,000, respectively, at March 31, 2009, December 31, 2008, and March 31, 2008.
On January 16, 2009, the Company completed the sale of $64.8 million in preferred stock and a warrant to the U.S. Treasury as part of the governments TARP Capital Purchase Program. The Company issued to the Treasury 64,779 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series T, and a ten-year warrant to purchase up to 303,083 shares of the Companys common stock at an initial exercise price of $32.06 per share. The senior preferred stock is non-voting, other than having class voting rights on certain matters, and pays a cumulative annual dividend rate of 5% for the first five years and resets to an annual rate of 9% if still outstanding after year five. The senior preferred stock is callable by the Company at par after three years.
Based on the Black-Scholes option pricing model, the common stock warrants have been assigned a fair value of $9.19 per warrant as of March 31, 2009. As a result, the Company assigned $3.4 million to the common stock warrants and $61.4 million to the Series T preferred stock using a relative fair value approach. The fair value assigned to the common stock warrants has been recorded as a discount on the preferred stock and will be accreted up to the redemption amount of $64.8 million as a reduction in net income available for common shareholders over the next five years at approximately $565,000 to $765,000 per year.
For purposes of these calculations, the fair value of the common stock warrants as of January 16, 2009 was estimated using the Black-Scholes option pricing model and the following assumptions:
The Companys computation of expected volatility is based on daily historical volatility since January 2004 using the period of time between the grant and ten year expiration date. The risk-free interest rate of the award is based on the closing market bid for U.S. Treasury securities corresponding to the expected life of the stock option issuances in effect at the time of grant.
The Company and its subsidiaries provide certain retirement benefits to their employees in the form of a non-contributory defined benefit pension plan and an employees savings plan. The non-contributory defined benefit pension plan covers all employees hired on or before December 31, 2005, who have attained age 21, and who have completed one year of eligible service. Employees hired on or after January 1, 2006 are not eligible to participate in the non-contributory defined benefit pension plan. On this date, a new benefit formula applies only to participants who have not attained age 45 or who do not have five years of service.
The components of net periodic pension expense recognized during the three and nine months ended September 30 are as follows:
The Company contributed $360,000 to the pension plan for the three months ended March 31, 2009 and anticipates making similar additional quarterly contributions during the remainder of the year.
Electing employees are eligible to participate in the employees savings plan, under the provisions of Internal Revenue Code Section 401(k), after attaining age 21. Plan participants elect to contribute portions of their annual base compensation as a before tax contribution. The Company matches 50% of these contributions up to a 6% employee contribution for employees hired before January 1, 2006 who were age 45 and higher with five or more vesting years of service. The Company matches 100% of these contributions up to a 6% employee contribution for current employees under age 45 or with less than five years of service. Employees hired on January 1, 2006 or thereafter will not participate in the defined benefit pension plan, but are eligible to participate in the employees savings plan and the Company matches 100% of the employees contributions up to a 6%. Effective April 1, 2009, the Company temporarily suspended the employer match contribution to all participants in the plan.
Employees can enter the savings plan on or after the first day of each month. If an employees hire date is on or after April 1, 2007, and the employee does not elect to defer at least 2% of his or her salary by the required election date, the Company will automatically enroll the employee and defer (withhold) 2% of his or her salary and contribute that amount to the Plan as a salary deferral. The employee may enter into a salary deferral agreement at any time to select an alternative deferral amount or to elect not to defer in the Plan. If the employee does not elect an investment allocation, the plan administrator will select a retirement-based portfolio according to the employees number of years until normal retirement age. The plans investment valuations are generally provided on a daily basis.
Basic earnings per share are calculated by dividing net income available to common shareholders by the weighted-average shares of common stock outstanding during each period. The Companys diluted earnings per share are based on the weighted-average shares of common stock outstanding during each period plus the maximum dilutive effect of common stock issuable upon exercise of stock options or vesting of restricted shares. The weighted-average number of shares and equivalents are determined after giving retroactive effect to stock dividends and stock splits.
The following table sets forth the computation of basic and diluted earnings per share for the three months ended March 31:
The calculation of diluted earnings per share excludes outstanding stock options and warrants that have exercise prices greater than the average market price of the common shares for the year as follows:
The Companys 1999 and 2004 stock option programs are long-term retention programs intended to attract, retain, and provide incentives for key employees and non-employee directors in the form of incentive and non-qualified stock options and restricted stock.
With the exception of non-qualified options granted to directors under the 1999 and 2004 plans, which in some cases may be exercised at any time prior to expiration and in some other cases may be exercised at intervals less than one year following the grant date, incentive stock options granted under the plans may not be exercised in whole or in part within one year following the date of the grant, as these incentive stock options become exercisable in 25% increments ratably over the four year period following the grant date. The options are granted at an exercise price at least equal to the fair value of the common stock at the date of grant and have terms ranging from five to ten years. No options were granted under the 1999 plan after January 2, 2004, and the plan is closed other than for any options still unexercised and outstanding. The 2004 plan is the only plan from which new share-based compensation grants may be issued. It is the Companys policy to grant options out of the 661,500 shares registered under the 2004 plan.
Activity in the Companys stock option plans is summarized in the following table. All information has been retroactively adjusted for stock dividends and stock splits.
The fair value of options is estimated at the date of grant using the Black-Scholes option pricing model and expensed over the options vesting periods. The following weighted-average assumptions were used in valuing options issued:
As of March 31, 2009, there was $637,000 of total unrecognized compensation cost related to nonvested stock option grants under the plans. The cost is expected to be recognized over a weighted-average period of 1.76 years as of March 31, 2009. The total fair value of shares vested during the three months ended March 31, 2009 was $300,000.
Note 8 Share-Based Compensation (continued)
The Company from time-to-time also grants shares of restricted stock to key employees and non-employee directors. These awards help align the interests of these employees and directors with the interests of the shareholders of the Company by providing economic value directly related to increases in the value of the Companys stock. The value of the stock awarded is established as the fair market value of the stock at the time of the grant. The Company recognizes expenses, equal to the total value of such awards, ratably over the vesting period of the stock grants. Grants to employees have typically vested over a 48-month period, and beginning in 2007, some grants cliff vest after four years. Also, some grants issued during 2008 to certain employees cliff vest after ten years. Grants to non-employee directors typically vest within a 12-month period.
Nonvested restricted stock for the three months ended March 31, 2009 is summarized in the following table. All information has been retroactively adjusted for stock dividends and stock splits.
As of March 31, 2009, there was $3.8 million of total unrecognized compensation cost related to nonvested restricted stock granted under the plans. This cost is expected to be recognized over a weighted-average period of 5.8 years as of March 31, 2009. The total fair value of shares vested during the three months ended March 31, 2009 was $606,000.
In the normal course of business, the Company makes various commitments and incurs certain contingent liabilities, which are not reflected in the accompanying financial statements. The commitments and contingent liabilities include guarantees, commitments to extend credit, and standby letters of credit. At March 31, 2009, commitments to extend credit and standby letters of credit totaled $622.1 million. The Company does not anticipate any material losses as a result of these transactions.
On January 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements, (SFAS 157), which defines fair value, establishes a framework for measuring fair value under accounting principles generally accepted in the United States, and enhances disclosures about fair value measurements. SFAS 157 clarifies that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions.
The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Available for sale securities are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as loans held for sale, loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.
Note 10 Fair Value (continued)
SFAS 157 establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value as follows:
Following is a description of valuation methodologies used for assets recorded at fair value.
Securities available for sale are valued on a recurring basis at quoted market prices where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable securities. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange or U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities and debentures issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets. Securities held to maturity are valued at quoted market prices or dealer quotes similar to securities available for sale. The carrying value of Federal Reserve Bank and Federal Home Loan Bank stock approximates fair value based on their redemption provisions.
Pooled trust preferred securities are Level 3 securities under FAS 157s three-tier fair value hierarchy because of an absence of observable inputs for these and similar securities in the debt markets. The Company has determined that (1) there are few observable transactions and market quotations available are not reliable for purposes in determining fair value at March 31, 2009, and (2) an income valuation approach technique (present value technique) that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs will be equally or more representative of fair value than the market approach valuation technique used at prior measurement dates. This income valuation approach requires numerous steps in determining fair value. These steps include estimating credit quality of the collateral, generating asset defaults, forecasting cash flows for underlying collateral, and determining losses given default assumption.
Mortgage Loans Held for Sale
Mortgage loans held for sale are carried at the lower of cost or market value. The fair values of mortgage loans held for sale are based on commitments on hand from investors within the secondary market for loans with similar characteristics. As such, the fair value adjustments for mortgage loans held for sale is nonrecurring Level 2.
The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan may be considered impaired and an allowance for loan losses may be established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with SFAS 114, Accounting by Creditors for Impairment of a Loan, (SFAS 114). The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At March 31, 2009, substantially all of the impaired loans were evaluated based on the fair value of the collateral. In accordance with SFAS 157, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company considers the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company considers the impaired loan as nonrecurring Level 3.
Note 10 Fair Value (continued)
Other Real Estate Owned (OREO)
OREO, consisting of properties obtained through foreclosure or in satisfaction of loans, is reported at the lower of cost or fair value, determined on the basis of current appraisals, comparable sales, and other estimates of value obtained principally from independent sources, adjusted for estimated selling costs (Level 2). At the time of foreclosure, any excess of the loan balance over the fair value of the real estate held as collateral is treated as a charge against the allowance for loan losses. Gains or losses on sale and any subsequent adjustments to the value are recorded as a component of OREO expense.
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
The table below presents the recorded amount of assets and liabilities measured at fair value on a recurring basis.
Changes in Level 3 Fair Value Measurements
When a determination is made to classify a financial instrument within Level 3 of the valuation hierarchy, the determination is based upon the significance of the unobservable factors to the overall fair value measurement. However, since Level 3 financial instruments typically include, in addition to the unobservable or Level 3 components, observable components (that is, components that are actively quoted and can be validated to external sources), the gains and losses below include changes in fair value due in part to observable factors that are part of the valuation methodology.
A reconciliation of the beginning and ending balances of Level 3 assets and liabilities recorded at fair value on a recurring basis for the year ended March 31, 2009 are as follows:
Note 10 Fair Value (continued)
Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis
Note 11 Subsequent Events
After evaluating the Companys capital position, and discussions with the primary regulators, the Company has provided notice to the Treasury on April 30, 2009 requesting permission to redeem all of the shares of Series T Preferred Stock, which was issued to the Treasury as part of the Treasurys Capital Purchase Program. This proposed redemption of the Series T Preferred Stock would be made with currently available cash resources. In addition, the Company may purchase the warrant issued to the Treasury in connection with the Capital Purchase Program transaction. There can be no assurance whether or when the Series T Preferred Stock can be redeemed or whether or when the warrant would be repurchased following the redemption of the Series T Preferred Stock.
The Company currently intends to commence a public offering of 1,150,000 shares of its common stock, in which the underwriters would have an option to purchase up to 172,500 additional shares of the Companys common stock to cover over-allotments. This disclosure does not constitute an offer of any securities for sale. No assurances can be provided that any such offering will be completed on terms acceptable to the Company or at all.
Managements Discussion and Analysis of Financial Condition and Results of Operations relates to the financial statements contained in this quarterly report beginning on page 1. For further information, refer to Managements Discussion and Analysis of Financial Condition and Results of Operations appearing in the Annual Report on Form 10-K for the year ended December 31, 2008.
We are a bank holding company headquartered in Columbia, South Carolina, and were incorporated under the laws of South Carolina in 1985. We provide a wide range of banking services and products to our customers through our wholly-owned bank subsidiary, SCBT, N.A. (the bank), a national bank that opened for business in 1934. We operate as NCBT, a division of the bank, in the state of North Carolina. We do not engage in any significant operations other than the ownership of this banking subsidiary.
At March 31, 2009, we had approximately $2.8 billion in assets and approximately 703 full-time equivalent employees. Through our banking subsidiaries we provide our customers with checking accounts, NOW accounts, savings and time deposits of various types, brokerage services and alternative investment products such as annuities and mutual funds, trust and asset management services, business loans, agriculture loans, real estate loans, personal use loans, home improvement loans, automobile loans, credit cards, letters of credit, home equity lines of credit, safe deposit boxes, bank money orders, wire transfer services, correspondent banking services, and use of ATM facilities.
The following discussion describes our results of operations for the quarter ended March 31, 2009 as compared to the quarter ended March 31, 2008, and also analyzes our financial condition as of March 31, 2009 as compared to December 31, 2008 and March 31, 2008. Like most financial institutions, we derive most of our income from interest we receive on our loans and investments. Our primary source of funds for making these loans and investments is our deposits, on which we may pay interest. Consequently, one of the key measures of our success is the amount of our net interest income, or the difference between the income on our interest-earning assets, such as loans and investments, and the expense on our interest-bearing liabilities, such as deposits. Another key measure is the spread between the yield we earn on these interest-earning assets and the rate we pay on our interest-bearing liabilities.
Of course, there are risks inherent in all loans, so we maintain an allowance for loan losses to absorb probable losses on existing loans that may become uncollectible. We establish and maintain this allowance by charging a provision for loan losses against our operating earnings. In the following section, we have included a detailed discussion of this process.
In addition to earning interest on our loans and investments, we earn income through fees and other expenses we charge to our customers. We describe the various components of this noninterest income, as well as our noninterest expense, in the following discussion.
The following section also identifies significant factors that have affected our financial position and operating results during the periods included in the accompanying financial statements. We encourage you to read this discussion and analysis in conjunction with the financial statements and the related notes and the other statistical information also included in this report.
Recent Government Actions
The following is a summary of certain recently enacted laws and regulations that could materially impact our business, financial condition or results of operations. This discussion should be read in conjunction with the Regulations and Supervision section on Form 10-K for the year ended December 31, 2008.
In response to the challenges facing the financial services sector, several regulatory and governmental actions have recently been announced including:
· The Emergency Economic Stabilization Act of 2008 (EESA), approved by Congress and signed by President Bush on October 3, 2008, which, among other provisions, allowed the U.S. Treasury to purchase up to $700 billion of mortgages, mortgage-backed securities and certain other financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets. EESA also temporarily raised the basic limit of FDIC deposit insurance from $100,000 to $250,000; the legislation contemplated a return to the $100,000 limit on December 31, 2009;
· On October 7, 2008, the FDIC approved a plan to increase the rates banks pay for deposit insurance (see page 12, Insurance of Deposits on Form 10-K for the year ended December 31, 2008);
· On October 14, 2008, the U.S. Treasury announced the creation of a new program, the Troubled Asset Relief Program (the TARP) Capital Purchase Program (the CPP) that encourages and allows financial institutions to build capital through the sale of senior preferred shares to the U.S. Treasury on terms that are non-negotiable (see disclosure under Note 28 Subsequent Events on page F-53 on Form 10-K for the year ended December 31, 2008);
· On October 14, 2008, the FDIC announced the creation of the Temporary Liquidity Guarantee Program (the TLGP), which seeks to strengthen confidence and encourage liquidity in the banking system. The TLGP has two primary components that are available on a voluntary basis to financial institutions:
· The Transaction Account Guarantee Program (TAGP), which provides unlimited deposit insurance coverage through December 31, 2009 for noninterest-bearing transaction accounts (typically business checking accounts) and certain funds swept into noninterest-bearing savings accounts. Institutions participating in the TLGP pay a 10 basis points fee (annualized) on the balance of each covered account in excess of $250,000, while the extra deposit insurance is in place;
· The Debt Guarantee Program (DGP), under which the FDIC guarantees certain senior unsecured debt of FDIC-insured institutions and their holding companies. The unsecured debt must be issued on or after October 14, 2008 and not later than June 30, 2009, and the guarantee is effective through the earlier of the maturity date or June 30, 2012. The DGP coverage limit is generally 125% of the eligible entitys eligible debt outstanding on September 30, 2008 and scheduled to mature on or before June 30, 2009 or, for certain insured institutions, 2% of their liabilities as of September 30, 2008. Depending on the term of the debt maturity, the nonrefundable DGP fee ranges from 50 to 100 basis points (annualized) for covered debt outstanding until the earlier of maturity or June 30, 2012. The TAGP and DGP are in effect for all eligible entities, unless the entity opted out on or before December 5, 2008.
· On December 2008, we decided to participate in the TLGPs enhanced deposit insurance program. As a result of the enhancements to deposit insurance protection and the expectation that there will be demands on the FDICs deposit insurance fund, it is clear that our deposit insurance costs will increase significantly during 2009.
· On February 17, 2009 President Obama signed into law The American Recovery and Reinvestment Act of 2009 (ARRA), more commonly known as the economic stimulus or economic recovery package. ARRA includes a wide variety of programs intended to stimulate the economy and provide for extensive infrastructure, energy, health, and education needs. In addition, ARRA imposes certain new executive compensation and corporate expenditure limits on all current and future TARP recipients, including SCBT, that are in addition to those previously announced by the U.S. Treasury, until the institution has repaid the U.S. Treasury, which is now permitted under ARRA without penalty and without the need to raise new capital, subject to the U.S. Treasurys consultation with the recipients appropriate regulatory agency.
· On March 23, 2009, the U.S. Treasury, in conjunction with the FDIC and the Federal Reserve, announced the Public-Private Partnership Investment Program for Legacy Assets which consists of two separate proposed programs, addressing two distinct asset groups. These programs are evolving and subject to change.
· The Legacy Loan Program is intended to facilitate the sale of troubled mortgage loans by eligible institutions, which include FDIC-insured federal or state banks and savings associations. Eligible assets may not be strictly limited to loans and the ultimate scope of eligible assets is to be determined. Additionally, the Legacy Loan Programs requirements and structure are subject to notice and comment rulemaking, and its implementation timeframe is uncertain..
· The Legacy Securities Program, which will be administered by the U.S. Treasury, involves the creation of public-private investment funds to target investments in eligible residential mortgage-backed securities and commercial mortgage-backed securities issued before 2009 that originally were rated AAA or the equivalent by two or more nationally recognized statistical rating organizations, without regard to rating enhancements (collectively, Legacy Securities). Legacy Securities must be directly secured by mortgage loans, leases or other eligible assets, and may be purchased only from financial institutions that meet TARP eligibility requirements.
Further regulatory actions may arise as the Federal government continues to attempt to address the economic situation.
It is likely that further regulatory actions may arise as the Federal government continues to attempt to address the economic situation.
Critical Accounting Policies
We have established various accounting policies that govern the application of accounting principles generally accepted in the United States of America in the preparation of our financial statements. Significant accounting policies are described in Note 1 to the audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2008. These policies may involve significant judgments and estimates that have a material impact on the
carrying value of certain assets and liabilities. Different assumptions made in the application of these policies could result in material changes in our financial position and results of operations.
Allowance for Loan Losses
The allowance for loan losses reflects the estimated losses that will result from the inability of our banks borrowers to make required loan payments. In determining an appropriate level for the allowance, we identify portions applicable to specific loans as well as providing amounts that are not identified with any specific loan but are derived with reference to actual loss experience, loan types, loan volumes, economic conditions, and industry standards. Changes in these factors may cause our estimate of the allowance to increase or decrease and result in adjustments to the provision for loan losses. See Provision for Loan Losses and Nonperforming Assets in this MD&A and Allowance for Loan Losses in Note 1 to the audited consolidated financial statements on Form 10-K for the year ended December 31, 2008 for further detailed descriptions of our estimation process and methodology related to the allowance for loan losses.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price over the sum of the estimated fair values of the tangible and identifiable intangible assets acquired less the estimated fair value of the liabilities assumed. Goodwill has an indefinite useful life and is evaluated for impairment annually, or more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the assets fair value. The goodwill impairment analysis is a two-step test. The first step, used to identify potential impairment, involves comparing each reporting units estimated fair value to its carrying value, including goodwill. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill is considered not to be impaired. If the carrying value exceeds estimated fair value, there is an indication of potential impairment and the second step is performed to measure the amount of impairment.
If required, the second step involves calculating an implied fair value of goodwill for each reporting unit for which the first step indicated impairment. The implied fair value of goodwill is determined in a manner similar to the amount of goodwill calculated in a business combination, by measuring the excess of the estimated fair value of the reporting unit, as determined in the first step, over the aggregate estimated fair values of the individual assets, liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination. If the implied fair value of goodwill exceeds the carrying value of goodwill assigned to the reporting unit, there is no impairment. If the carrying value of goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess. An impairment loss cannot exceed the carrying value of goodwill assigned to a reporting unit, and the loss establishes a new basis in the goodwill. Subsequent reversal of goodwill impairment losses is not permitted. Management has determined that SCBT has one reporting unit.
Our stock price has historically traded above its book value and tangible book value. However, during the first quarter 0f 2009, our stock price traded below book value, but always above tangible book value. The lowest price during the quarter the stock traded was $16.53, and the stock price closed on March 31, 2009 at $20.90, below book value. In the event our stock price was to trade below its book value, we would perform our usual evaluation of the carrying value of goodwill as of the reporting date. Such a circumstance would be one factor in our evaluation that could result in an eventual goodwill impairment charge. We evaluated the carrying value of goodwill as of March 31, 2009 and determined that no impairment charge was necessary. Additionally, should our future earnings and cash flows decline and/or discount rates increase, an impairment charge to goodwill and other intangible assets may be required.
Core deposit intangibles, included in other assets in the condensed consolidated balance sheets, consist of costs that resulted from the acquisition of deposits from other commercial banks or the estimated fair value of these assets acquired through business combinations. Core deposit intangibles represent the estimated value of long-term deposit relationships acquired in these transactions. These costs are amortized over the estimated useful lives of the deposit accounts acquired on a method that we believe reasonably approximates the anticipated benefit stream from the accounts. The estimated useful lives are periodically reviewed for reasonableness.
Income Taxes and Deferred Tax Assets
Income taxes are provided for the tax effects of the transactions reported in our condensed consolidated financial statements and consist of taxes currently due plus deferred taxes related to differences between the tax basis and accounting basis of certain assets and liabilities, including available-for-sale securities, allowance for loan losses, accumulated depreciation, net operating loss carryforwards, accretion income, deferred compensation, intangible assets, and pension plan and post-retirement benefits. The deferred tax assets and liabilities represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred tax assets and liabilities are reflected at income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. In situations where it is more likely than not that a deferred tax asset is not realizable, a valuation allowance is recorded. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. We file a consolidated federal income tax return for our subsidiaries.
Other-Than-Temporary Impairment (OTTI)
We evaluate securities for other-than-temporary impairment at least on a monthly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) the outlook for receiving the contractual cash flows of the investments, (4) the anticipated outlook for changes in the general level of interest rates, and (5) our intent and ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.
We reported net income during the first quarter of 2009 despite a significant increase in the provision for loan losses, FDIC assessments and costs associated with collection of loans and other real estate owned. While consolidated net income decreased 37.9% from the first quarter of 2008, our net income showed improvement by a 4.4% increase from the fourth quarter of 2008. The increase also includes a reduction in net income to arrive at net income available to common shareholders for the preferred stock dividends and accretion of discount on the warrant issued to the U.S. Treasury in the first quarter of 2009. We believe our asset quality continues to be at manageable levels despite the increase of nonperforming assets as a percentage of total assets to 1.09% and net charge-offs as a percentage of average loans to 0.79% annualized for the three months ended March 31, 2009. The allowance for loan losses increased to 1.40% of total loans at March 31, 2009 compared to 1.36% at December 31, 2008 and 1.27% at March 31, 2008. Our allowance provides 1.50 times coverage of nonperforming loans at March 31, 2009.
Compared to the first quarter of 2008, our loan portfolio has grown 6.9% to $2.3 billion driven by continued growth in consumer real estate loans, home equity loans and commercial owner occupied loans. However, compared to the fourth quarter of 2008 we have experienced a slight 1.0% decline in the loan portfolio. For the three months ended March 31, 2009, we originated approximately $198.4 million mortgage loans in the secondary market reflective of the low interest rate environment and an increase in refinancing activity by our customers.
Non-taxable equivalent net interest income for the quarter increased 9.1% and non-taxable equivalent net interest margin increased by 1 basis point to 3.87% from the most recent quarter of December 31, 2008 and increased by 8 basis points from the first quarter of 2008. Our quarterly efficiency ratio decreased to 62.41% compared to 65.05% in the fourth quarter of 2008 and 65.66% for the first quarter of 2008.
The following key operating highlights for the first quarter of 2009 are outlined below:
· Consolidated net income decreased 24.2% to $4.5 million in the first quarter of 2009, as compared to $6.0 million in the first quarter of 2008. Consolidated net income available to common shareholders decreased 37.9% to $3.7 million in the first quarter of 2009. Consolidated net income is reduced by the preferred stock dividends and accretion on preferred stock discount to arrive at net income available to common shareholders.
· Diluted earnings per share (EPS) decreased to $0.33 for the first quarter of 2009 as compared to $0.58 for the comparable period in 2008. EPS in the current period reflects an increase in common shares issued and outstanding due to a private placement transaction of 1,010,000 shares during the fourth quarter of 2008 and dividends paid on preferred stock issued in the first quarter of 2009.
· The provision for loan losses as a percent of average loans reflects an increase due to an increase in nonperforming assets and an increase in net charge-offs during the first quarter ended March 31, 2009 compared to year ended December 31, 2008. The allowance for loan losses as a percent of total loans has increased to 1.40% as compared to 1.27% in the first quarter of 2008. The rise in NPLs this quarter has lowered the coverage of NPLs by the allowance from 395.75% at March 31, 2008 to 150.37% at March 31, 2009.
· For the three months ended March 31, 2009, return on average assets (ROAA), return on average equity (ROAE) and return on average tangible equity decreased compared to the same quarter in 2008; however, compared to the fourth quarter of 2008, ROAA and ROAE increased while return on average tangible equity decreased.
· Dividend payout ratio increased to 54.24% for the three months ended March 31, 2009 compared with 1550.42% for the three months ended December 31, 2008 and 33.67% for the three months ended March 31, 2008. The high payout
ratio in the fourth quarter of 2008 reflects net income of $124,000 resulting from an other-than-temporary impairment recognized in the third quarter of 2008.
· Equity to assets ratio increased to 10.96% at March 31, 2009 compared with 8.85% at December 31, 2008 and 8.22% at March 31, 2008. The increase from December 31, 2008 to March 31, 2009 reflects the issuance of preferred stock to the U.S. Treasury.
· Average shareholders equity increased $82.7 million, or 38.0%, from first quarter ended March 31, 2008 driven by the issuance of equity in the private placement transaction in the fourth quarter of 2008 and issuance of preferred stock in the first quarter of 2009.
Net Interest Income and Margin
Our taxable equivalent net interest margin increased from the first quarter of 2008 as a result of the Federal Reserves 200 basis point reduction of Fed funds rates from the first quarter of 2008 to the first quarter of 2009. Non-taxable equivalent and taxable equivalent net margin expanded slightly by one basis point from the fourth quarter ended December 31, 2008. We continue to actively manage deposit pricing and funding sources during the first quarter of 2009. The slight margin expansion was mostly driven by a larger decrease in the average interest-bearing liabilities compared to the decrease in interest-bearing assets. Non-taxable equivalent and taxable equivalent net margin expanded by 9 and 8 basis points, respectively, from the first quarter ended March 31, 2008. Margin expansion was driven by a 150 basis point drop in the average rate on certificates of deposits (CDs), the largest average balance of interest-bearing liabilities, compared to a 107 basis point drop in the average yield on total loans, the largest average balance of interest-earning assets, for the three months ended March 31, 2009 as compared to the same period in 2008.