Southstate Bank Corp. (filing registrant: First Financial Holdings, Inc.) — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; the filing was signed February 28, 2014. The registrant completed its merger with First Financial Holdings, Inc. (FFCH) on July 26, 2013 and adopted that company’s name. It announced plans to rename the company South State Corporation, subject to shareholder approval, and its bank subsidiary South State Bank. This is an annual report, not a standalone Q4 filing; fourth-quarter figures below are unaudited.
Business context and key financial metrics
The company is a regional bank holding company operating through SCBT in South Carolina, North Carolina, and Georgia, with retail and commercial banking, mortgage, trust, investment, and consumer finance services. Unless noted, dollar amounts are in millions.
| Metric | 2013 | 2012 | Change/comment |
|---|---|---|---|
| Total assets, year-end | $7,931.5 | $5,136.4 | Up 54.4%, substantially reflecting FFCH merger |
| Loans, net of unearned income, year-end | $5,679.3 | $3,613.6 | Up 57.1%; acquired loans were a major driver |
| Deposits, year-end | $6,555.5 | $4,298.4 | Up 52.5%; excluding FFCH, deposits declined about $102 million |
| Total revenue (net interest income plus noninterest income) | $327.1 | $217.7 | Up about 50.2% |
| Net interest income | $273.3 | $176.4 | Up 54.9% |
| Net income / income available to common shareholders | $49.2 / $47.9 | $30.0 / $30.0 | Common earnings up 59.4% |
| Diluted EPS | $2.38 | $2.03 | Up 17.2%; share issuance for FFCH affected per-share growth |
| Net interest margin, taxable-equivalent | 4.99% | 4.83% | Up 16 basis points |
| Return on average assets / common equity | 0.77% / 6.90% | 0.70% / 7.15% | ROA improved; ROE declined |
| Efficiency ratio | 75.85% | 72.20% | Worsened; operating ratio excluding specified costs was 64.9% vs. 62.1% |
| Provision for loan losses | $1.9 | $13.6 | Lower alongside reduced charge-offs and improving credit indicators |
Cash flow: Net cash from operating activities was $149.5 million, investing activities provided $511.3 million, and financing activities used $562.2 million. Cash and cash equivalents increased $98.6 million to $479.5 million at year-end. These banking cash flows include acquisition and loan-related movements and should not be read like industrial-company free cash flow.
Capital and funding: Shareholders’ equity was $981.5 million, compared with $507.5 million. Total risk-based capital was 14.47% and Tier 1 leverage was 9.30%; the Bank was reported well-capitalized. Deposits were $6.56 billion; federal funds and repurchase agreements were $211.4 million and other borrowings $102.1 million. Core deposits excluding time deposits were 77% of deposits. The company reported $479.5 million of cash and cash equivalents and substantial unused borrowing capacity, including $376 million of federal funds lines and approximately $809 million of unused FHLB capacity after letters of credit.
Material changes versus the prior comparable period
- The FFCH merger added approximately $2.5 billion of deposits and $2.3 billion of loans at acquisition, and the company issued 7.0 million common shares. FFCH results were included only from July 26 through year-end; consequently, reported year-over-year growth is not fully comparable on an organic basis.
- Net interest income rose with the larger acquired earning-asset base and lower funding costs. Interest expense increased only $1.9 million despite growth in interest-bearing liabilities; the company reported an overall cost of funds of about 25 basis points.
- Noninterest income rose 30.4%, led by deposit service charges, bankcard, and trust and investment income. Mortgage banking income fell 27.4% as refinancing activity declined. Negative accretion on the FDIC indemnification asset increased to $29.5 million from $20.8 million.
- Noninterest expense increased 57.7% to $250.6 million, including salaries and benefits of $122.1 million and merger expense of $22.5 million. Management attributed much of the increase to FFCH and prior acquisitions; additional integration and systems-conversion costs were expected in 2014.
- Credit quality improved in the non-acquired portfolio: net charge-offs fell to 0.41% of average loans from 0.73%; non-acquired nonperforming assets declined to $55.7 million from $81.1 million. Total nonperforming assets, including acquired assets, were $108.1 million versus $128.6 million.
Outlook, risks, contingencies, and unusual items
- Management outlook: Management expected net charge-offs to continue declining in 2014, citing economic indicators and improving real estate markets. The FFCH system and operational conversion was expected in the third quarter of 2014; further savings and synergies were anticipated but not quantified. No formal earnings guidance is provided in the supplied filing text.
- Integration and FDIC accounting: Integration execution, deposit runoff, goodwill, acquired-loan cash-flow estimates, FDIC indemnification accounting, and loss-share agreement compliance are significant uncertainties. FFCH deposits experienced about $99.6 million of time-deposit runoff through year-end. Estimated FDIC loss-share true-up obligations were $7.1 million in contractual-obligations disclosures; actual amounts depend on future losses and agreement terms. The company reported $34.5 million of projected FDIC cash flows below the indemnification asset’s carrying value, to be recognized as negative accretion over time.
- Credit and market risks: About 81.7% of loans had real estate as a primary or secondary collateral component. Commercial real estate, construction, and business lending carry heightened loss risk; regional economic weakness, collateral declines, interest-rate changes, and borrower defaults could raise provisions. The allowance for loan losses was 81.2% of period-end nonperforming loans, and its adequacy depends on management estimates.
- Interest rates and securities: A modeled 200-basis-point rate increase was estimated to raise net interest income about 0.93% over 12 months; management characterized the balance sheet as somewhat asset-sensitive. Available-for-sale securities had $16.0 million of gross unrealized losses, and the total investment portfolio’s fair value was $8.5 million below amortized cost. Management did not consider the securities other-than-temporarily impaired at year-end, but future impairment remains possible.
- Regulatory and operational risks: Basel III capital rules were scheduled to phase in from 2015 through 2019, with potential effects on capital, distributions, and lending. Other cited risks include consumer mortgage rules, cybersecurity and third-party systems, compliance costs, deposit insurance assessments, and competition. Management reported effective disclosure and financial-reporting controls; however, the acquired FFCH operations—12.1% of consolidated revenue and 32.8% of assets—were excluded from the internal-control assessment and audit scope.
- Debt, dividends, and subsequent event: In January 2014, the Bank obtained regulatory approval for a $31.4 million special dividend. On February 26, 2014, the company received Federal Reserve non-objection to redeem $65 million of Series A preferred stock, carrying a 9% dividend, and intended to redeem it on March 28, 2014. The company paid common dividends of $0.74 per share in 2013; future dividends remain subject to regulatory and capital constraints.
- Legal matters: The filing describes merger-related shareholder lawsuits. The Arnette and FFCH shareholder actions had settlements approved by courts; a separate action concerning the FFCH merger remained subject to court approval of a settlement as of the filing date. Management stated that pending or threatened litigation was not expected to materially affect financial position or results.
Most important facts for investors to verify
- Separate acquisition-driven growth from organic growth, especially for earnings, loans, deposits, and expense comparisons; review FFCH pro forma results and integration costs.
- Track acquired-loan performance, nonperforming assets, charge-offs, reserve coverage, and the assumptions underlying the allowance.
- Reconcile the FDIC indemnification asset, negative accretion, loss-share coverage periods, and possible true-up payments.
- Confirm completion and cost of the FFCH systems conversion, realized merger synergies, and any continuing deposit runoff.
- Verify the preferred-stock redemption, its funding, and the resulting effects on capital, preferred dividends, and common-shareholder earnings.
- Review liquidity sources and deposit mix alongside securities’ unrealized losses, interest-rate sensitivity, and the scheduled Basel III transition.
- Consult the audited financial statements and notes for the full balance-sheet, cash-flow, loan-quality, and legal-contingency detail; the filing’s headline figures alone do not establish future performance.