Business context and reporting period
This is First Financial Holdings, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2013. The filing says the company changed its name from SCBT Financial Corporation after acquiring First Financial Holdings on July 26, 2013; its stock continued to trade as SCBT. The filing is therefore not identified as a SouthState Bank Corp filing, a discrepancy investors should verify. Third-quarter results include the acquired business for only 66 days, limiting direct year-over-year comparability.
Financial performance and condition
Unless otherwise noted, dollar amounts are in millions.
| Metric | Q3 2013 | Comparable period / change |
|---|---|---|
| Net interest income | $79.7 | $46.9; up 69.8% |
| Net interest margin | 5.05% non-taxable-equivalent; 5.11% taxable-equivalent | 4.95% and 5.02%, respectively, in Q3 2012 |
| Provision for loan losses | $0.7 | $4.0 in Q3 2012 |
| Noninterest income | $15.3 | $9.2 in Q3 2012 |
| Noninterest expense | $75.4 | $38.0 in Q3 2012; includes $10.4 merger/conversion expense |
| Net income / available to common shareholders | $12.1 / $11.5 | $9.1 / $9.1 in Q3 2012 |
| Diluted EPS | $0.52 | $0.60 in Q3 2012 |
- For the nine months, net income was $35.2 versus $24.1 in 2012; diluted EPS was $1.85 versus $1.66.
- Q3 efficiency ratio was 78.7%, versus 66.9% a year earlier; excluding OREO and merger/conversion expenses, management reported 64.3%.
- At September 30, total assets were $8.03 billion, net loans $5.69 billion, deposits $6.66 billion, cash and cash equivalents $645.2 million, and shareholders’ equity $970.0 million. Assets, loans, deposits, and equity increased substantially, mainly due to acquisitions.
- Other borrowings were $101.3 million and federal funds purchased/repurchase agreements were $233.8 million. Regulatory capital ratios were 13.15% Tier 1 risk-based, 14.40% total risk-based, and 10.10% Tier 1 leverage at the holding company.
- Nine-month cash flow: $99.0 million provided by operations, $593.9 million by investing, and $428.4 million used in financing; cash increased $264.4 million to $645.2 million.
Material changes versus prior periods
- The July 2013 First Financial acquisition had a stated purchase price of approximately $447 million, including $65 million of preferred stock. It added approximately $3.1 billion of assets and $2.9 billion of liabilities at preliminary fair values, and $217.9 million of goodwill. The company also acquired Savannah in December 2012.
- Acquisitions drove much of the growth in interest income, fee income, assets, deposits, loans, and operating costs. Common shares outstanding increased materially; diluted EPS fell year over year despite higher net income, in part because of acquisition-related share issuance.
- Q3 merger-related expense was $10.4 million; nine-month merger and conversion expense was $13.2 million. Management said systems conversion and integration costs were expected to continue through the remainder of 2013 and 2014.
- Credit metrics for non-acquired loans generally improved: nonperforming loans were $49.6 million, compared with $59.3 million in September 2012; classified assets were $111.5 million, compared with $157.5 million. Annualized Q3 net charge-offs were 0.45%, down from 0.85% a year earlier. The allowance was 1.32% of non-acquired loans and 72.9% of their nonperforming loans.
- Unrealized losses on available-for-sale securities rose: gross losses were $11.9 million at September 30, 2013, versus $0.2 million at December 31, 2012. Management considered the declines temporary and said it did not expect to be required to sell the securities before recovery.
Outlook, risks, contingencies, and unusual items
- No quantified earnings or revenue guidance is provided. Management expected additional integration costs and cited anticipated cost savings and business synergies from the acquisition, without quantifying them. The company announced plans, subject to regulatory approval, to consolidate 20 branches during 2014.
- Management described liquidity as adequate. The bank reported $376.0 million of federal funds credit lines, $241.9 million available at the Federal Reserve Discount Window, and a $775.9 million FHLB facility, with no outstanding advances on these facilities at quarter-end. A $30 million unsecured credit line was entered into on October 28, 2013, maturing October 27, 2014, at one-month LIBOR plus 1.75%.
- The FDIC indemnification asset was $115.8 million on the balance sheet; its disclosed estimated fair value was $77.5 million. Management reported projected cash flows approximately $39 million below carrying value, recognized through negative accretion over time, and expected $12.5 million in subsequent loss-share claim receipts. Coverage terms differ by acquired portfolio and losses may not be fully reimbursed.
- At quarter-end, commitments to extend credit and standby letters of credit totaled $1.4 billion. Management did not anticipate material losses from these commitments. The filing discusses ordinary-course litigation and merger-related shareholder suits; some settlements remained subject to court approval. Management stated it did not expect litigation to materially affect financial condition or operations.
- Risks identified include credit, interest-rate and liquidity risk; acquisition integration and deposit attrition; regulatory and capital-rule changes, including Basel III; cybersecurity; and economic conditions. The company said its disclosure controls were effective and there had been no material change in internal control over financial reporting during the nine months.
Important facts for investors to verify
- Confirm the issuer identity and relationship, if any, between this First Financial Holdings/SCBT filing and SouthState Bank Corp.
- Assess the effect of acquisition-related share dilution, merger costs, ongoing integration expenses, branch closures, and whether projected synergies materialize.
- Review the preliminary acquisition fair values, goodwill and intangible asset assumptions, and acquired-loan cash-flow estimates; these could be refined after closing.
- Monitor credit quality, charge-offs, allowance coverage, acquired loans contractually past due, OREO balances, and FDIC loss-share recoveries.
- Evaluate the securities portfolio’s unrealized losses, the FDIC indemnification asset valuation, liquidity and funding mix, and the potential effects of changing interest rates.
- Check the status and final outcomes of merger-related litigation and the implications of the new capital rules.