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SCBT > SEC Filings for SCBT > Form 10-Q on 9-Aug-2013All Recent SEC Filings

Show all filings for FIRST FINANCIAL HOLDINGS, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for FIRST FINANCIAL HOLDINGS, INC.


9-Aug-2013

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management's 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 Management's 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, 2012.

Overview

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 (the "Bank"), a South Carolina-chartered commercial bank that opened for business in 1934. We operate as NCBT, a division of the Bank, in Mecklenburg County of North Carolina, Community Bank & Trust ("CBT"), a division of the Bank, in northeast Georgia, and The Savannah Bank ("Savannah"), a division of the Bank, in coastal Georgia. Minis & Company, Inc., is a registered investment advisory firm and a subsidiary of the Bank which provides asset and wealth management services along with our trust and investment services group. We do not engage in any significant operations other than the ownership of our banking subsidiary.

At June 30, 2013, we had approximately $5.0 billion in assets and 1,304 full-time equivalent employees. Through the Bank, 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.

We have pursued, and continue to pursue, a growth strategy that focuses on organic growth, supplemented by acquisition of select financial institutions, branches, or failed bank assets and liabilities in certain market areas.

The following discussion describes our results of operations for the quarter ended June 30, 2013 as compared to the quarter ended June 30, 2012 and also analyzes our financial condition as of June 30, 2013 as compared to December 31, 2012 and June 30, 2012. 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 (sometimes referred to as "ALLL") 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 Events

First Financial Holdings, Inc. Acquisition

On July 26, 2013, the Company completed the previously announced merger with First Financial of Charleston, South Carolina, the bank holding company for First Federal. In connection with the completion of the merger, the Company changed its name from "SCBT Financial Corporation" to "First Financial Holdings, Inc." The Company's common stock will continue to trade under the symbol SCBT on the NASDAQ Global Select Market. See Note 18 -Subsequent Events for additional information on the First Financial merger.


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Critical Accounting Policies

We have established various accounting policies that govern the application of accounting principles generally accepted in the United States 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, 2012. 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 bank's 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 "Note 6 - Loans and Allowance for Loan Losses" in this 10-Q, "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 in our Annual Report on Form 10-K for the year ended December 31, 2012 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. As of June 30, 2013, December 31, 2012 and June 30, 2012, the balance of goodwill was $100.2 million, $100.2 million, and $66.5 million, respectively. 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 asset's fair value. The goodwill impairment analysis is a two-step test. The first step, used to identify potential impairment, involves comparing each reporting unit's 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 the Company has one reporting unit.

Our stock price has historically traded above its book value and tangible book value. The lowest trading price during the first six months of 2013, as reported by the NASDAQ Global Select Market, was $39.56 per share, and the stock price closed on June 30, 2013 at $50.39, which is above book value and tangible book value. In the event our stock was to consistently trade below its book value during the reporting period, we would consider performing an 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 April 30, 2013, our annual test date, 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 consist of costs that resulted from the acquisition of deposits from other financial institutions 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.

Noncompete intangibles are amortized over the life of the underlying noncompete agreements (generally 2 to 3 years) on the straight-line method. The estimated lives are periodically reviewed for reasonableness.


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Client list intangibles are amortized over the estimated useful lives of the client lists (generally 15 years) on the straight-line method. The estimated 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 the accompanying consolidated financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the basis of 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. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. The Company files a consolidated federal income tax return with its subsidiary.

The Company recognizes interest and penalties accrued relative to unrecognized tax benefits in its respective federal or state income taxes accounts. As of December 31, 2012, there were no accruals for uncertain tax positions and no accruals for interest and penalties. The Company and its subsidiary file a consolidated United States federal income tax return, as well as income tax returns for its subsidiary in the state of South Carolina, Georgia, and North Carolina. The Company's filed income tax returns are no longer subject to examination by taxing authorities for years before 2009.

Other-Than-Temporary Impairment

We evaluate securities for other-than-temporary impairment ("OTTI") at least on a quarterly 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 or for a debt security whether it is more-likely-than-not that the Company will be required to sell the debt security prior to recovering its fair value. For further discussion of the Company's evaluation of securities for other-than-temporary impairment, see Note 5 to the unaudited condensed consolidated financial statements.

Other Real Estate Owned

Other Real Estate Owned ("OREO"), consisting of properties obtained through foreclosure or through a deed in lieu of foreclosure in satisfaction of loans or through reclassification of former branch sites, 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. Management also considers other factors, including changes in absorption rates, length of time the property has been on the market and anticipated sales values, which have resulted in adjustments to the collateral value estimates indicated in certain appraisals. At the time of foreclosure or initial possession of collateral, 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. For acquired OREO, the loan is transferred into OREO at its fair value less costs to sell not to exceed the carrying value of the loan at foreclosure. Subsequent adjustments to this value are described below.

Subsequent declines in the fair value of OREO below the new cost basis are recorded through valuation adjustments. Significant judgments and complex estimates are required in estimating the fair value of OREO, and the period of time within which such estimates can be considered current is significantly shortened during periods of market volatility. In response to market conditions and other economic factors, management may utilize liquidation sales as part of its problem asset disposition strategy. As a result of the significant judgments required in estimating fair value and the variables involved in different methods of disposition, the net proceeds realized from sales transactions could differ significantly from appraisals, comparable sales, and other estimates used to determine the fair value of OREO. Management reviews the value of OREO each quarter and adjusts the values as appropriate. Revenue and expenses from OREO operations as well as gains or losses on sales and any subsequent adjustments to the value are recorded as OREO expense and loan related expense, a component of non-interest expense, and, for covered OREO, offset with an increase in the FDIC indemnification asset.


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Business Combinations, Method of Accounting for Loans Acquired, and FDIC Indemnification Asset

We account for acquisitions under Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 805, Business Combinations, which requires the use of the acquisition method of accounting. All identifiable assets acquired, including loans, are recorded at fair value. No allowance for loan losses related to the acquired loans is recorded on the acquisition date because the fair value of the loans acquired incorporates assumptions regarding credit risk.

Acquired credit-impaired loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality, found in FASB ASC Topic 310-30, Receivables-Loans and Debt Securities Acquired with Deteriorated Credit Quality, formerly American Institute of Certified Public Accountants ("AICPA") Statement of Position (SOP) 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer, and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loans. Loans acquired in business combinations with evidence of credit deterioration are considered impaired. Loans acquired through business combinations that do not meet the specific criteria of FASB ASC Topic 310-30, but for which a discount is attributable, at least in part to credit quality, are also accounted for under this guidance. Certain acquired loans, such as lines of credit (consumer and commercial), are accounted for in accordance with FASB ASC Topic 310-20, where the discount is accreted through earnings based on estimated cash flows over the estimated life of the loan.

In accordance with FASB ASC Topic 805, the FDIC indemnification asset was initially recorded at its fair value and is measured separately from the loan assets and foreclosed assets because the loss sharing agreements are not contractually embedded in them or transferrable with them in the event of disposal.

For further discussion of the Company's loan accounting and acquisitions, see "Business Combinations and Method of Accounting for Loans Acquired" in our Annual Report on Form 10-K for the year ended December 31, 2012, Note 4-Mergers and Acquisitions to the unaudited condensed consolidated financial statements and Note 6-Loans and Allowance for Loan Losses to the unaudited condensed consolidated financial statements.

Results of Operations

We reported consolidated net income available to common shareholders of $12.5 million, or diluted earnings per share ("EPS") of $0.74, for the second quarter of 2013 as compared to consolidated net income available to common shareholders of $8.0 million, or diluted EPS of $0.55, in the comparable period of 2012. This $4.5 million increase was the net result of the following items:

Improved net interest income of $12.8 million due primarily to improved interest income on the acquired loan portfolio of $12.6 million, the increase in earning assets from the acquisition of Savannah, and reduced interest expense on deposits and other borrowings of $690,000; these were partially offset by reduced interest income on non-acquired loans of $988,000.

A decrease in the provision for loan losses by $4.5 million over the comparable quarter;

A decrease in noninterest income totaling $3.3 million; $1.1 million in mortgage banking income and $2.9 million in negative accretion on the FDIC indemnification asset, which were offset by increases in the other categories of noninterest income.

An increase in most categories of noninterest expense totaling $7.4 million. The larger increases were $5.5 million in salaries and benefits, $705,000 in OREO and loan related expenses, and $587,000 in business development and staff related expenses; and

An increase in the provision for income taxes of $2.1 million due to the higher pre-tax net income.

We believe our asset quality related to non-acquired loans continues to be at manageable levels and improved from the end of 2012 as well as from March 31, 2013. Non-acquired nonperforming assets declined from $76.4 million at March 31, 2013 to $68.7 million at June 30, 2013. Compared to the balance of nonperforming assets at June 30, 2012, nonperforming assets decreased $14.4 million due to a reduction in nonperforming loans of $4.9 million and a reduction in non-acquired OREO of $9.6 million. Our non-acquired OREO declined by $3.7 million since March 31, 2013 and by $3.1 million since December 31, 2012 to $16.0 million at June 30, 2013. During the second quarter of 2013, classified assets declined by $17.3 million from March 31, 2013 to $123.6 million. Since December 31, 2012 classified assets have declined by $19.6 million. At June 30, 2012, classified assets were $160.6 million and have declined by $37.0 million. Annualized net charge-offs for the second quarter of 2013 was 0.40%, down from the first quarter of 2013 of 0.56% and from the second quarter of 2012 of 0.77%.

The allowance for loan losses decreased to 1.45% of total non-acquired loans at June 30, 2013, down from 1.73% at December 31, 2012 and 1.91% at June 30, 2012. The allowance provides 0.73 times coverage of nonperforming loans at June 30, 2013, higher than 0.72 times at December 31, 2012, and lower than 0.82 times at June 30, 2012.


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The Company performs ongoing assessments of the estimated cash flows of its acquired loan portfolios. Increases in cash flow expectations result in a favorable adjustment to interest income over the remaining life of the related loans, and decreases in cash flow expectations result in an immediate recognition of a provision for loans losses, in both cases, net of any adjustments to the receivable from the FDIC for loss sharing. These ongoing assessments of the acquired loan portfolio resulted in a positive impact to interest income from a reduction in expected credit losses, which was partially offset by a charge to noninterest income for the impact of reduced cash flows from the FDIC under the loss share agreement during the second quarter of 2013. Below is a summary of the second quarter of 2013 assessment of the estimated cash flows of the acquired loan portfolio and the related impact on the indemnification asset:

The review of the performance of the loan pools during the second quarter resulted in a net increase in the overall cash flow expectations for the acquired loans, specifically in the CBT acquired loan portfolio and the Peoples acquired loan portfolio; and

The negative accretion of the indemnification asset also increased by approximately $140,000 from the first quarter of 2013, due to the reduced cash flow expected from the FDIC in the CBT portfolio.

As of June 30, 2013, the Company has not made any changes to the estimated cash flow assumptions or expected losses for the acquired loans from the Savannah acquisition.

Compared to the first quarter of 2013, our non-acquired loan portfolio has increased $61.3 million, or 9.4% annualized, to $2.7 billion, driven by increases in consumer real estate lending of $18.9 million, or 10.9% annualized; in consumer non real estate lending of $10.2 million, or 43.6% annualized; in commercial construction / land development lending of $11.9 million or 17.4% annualized; in other income producing property lending of $5.2 million, or 15.7% annualized; in commercial owner occupied loans of $6.0 million, or 3.0% annualized; and in commercial and industrial of $3.3 million, or 4.5% annualized. The acquired loan portfolio decreased by $73.4 million due to continued charge-offs, transfers to OREO and payoffs. Since June 30, 2012, the non-acquired loan portfolio has grown by $184.3 million, or 7.4%, in all categories. Commercial and industrial loans have led the way and increased by $66.6 million, or 29.2%, in the past year. For the period ended June 30, 2013, mortgage loans originated and held for sale in the secondary market decreased by $2.5 million as refinancing activity and home sales slowed with rising interest rates.

Non-taxable equivalent net interest income for the quarter increased $12.8 million or 30.0% compared to the second quarter of 2012. Non-taxable equivalent net interest margin increased by 31 basis points to 4.93% from the second quarter of 2012 of 4.62% due to the increase in average earning assets and the 12 basis point decrease in the rate on interest-bearing liabilities to 26 basis points at June 30, 2013 from 38 basis points at June 30, 2012. Compared to the first quarter of 2013, net interest margin (taxable equivalent) increased by 7 basis points. Interest earning assets yield increased by 6 basis points primarily from the increase in the average balance of the acquired loan portfolios. Interest bearing liabilities yield declined by 1 basis point compared to the first quarter of 2013 from continued decline in interest bearing deposits (primarily certificates of deposit).

Our quarterly efficiency ratio decreased to 69.5% compared to 72.4% in the first quarter of 2013, and increased from 68.3% in the second quarter of 2012. The decrease in the efficiency ratio compared to the first quarter of 2013 was the result of improved net interest income and a decrease in noninterest expense, specifically merger related expense. The slight increase in the efficiency ratio over the second quarter of 2012 was the result of higher noninterest expense in the second quarter of 2013 than the second quarter of 2012, and lower noninterest income resulting primarily from negative accretion on our indemnification asset. Noninterest expense was down $453,000 compared to the first quarter of 2013 and up $8.5 million compared to the second quarter of 2012, excluding merger and conversion related expenses. The increase compared to the prior year includes the additions from the Savannah acquisition. Excluding OREO and merger and conversion related expenses, the efficiency ratio was 63.8% for the second quarter of 2013, compared to 64.5% for the first quarter of 2013 and 60.8% for the second quarter of 2012.

Diluted EPS increased to $0.74 for the second quarter of 2013 from $0.55 for the comparable period in 2012. Basic EPS increased to $0.75 for the second quarter of 2013 from $0.55 for the comparable period in 2012. The increase in both diluted and basic EPS reflects improved net interest income and a lower provision for loan losses partially offset by an increase in noninterest expense and a decrease in noninterest income.


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Selected Figures and Ratios



                                         Three Months Ended         Six Months Ended
                                              June 30,                  June 30,
(Dollars in thousands)                   2013          2012         2013         2012

Return on average assets
(annualized)                                 0.99 %       0.75 %       0.92 %       0.73 %
Return on average equity
(annualized)                                 9.72 %       7.77 %       9.09 %       7.58 %
Return on average tangible equity
(annualized)*                               13.48 %       9.92 %      12.71 %       9.80 %
Dividend payout ratio **                    24.46 %      31.93 %      26.43 %      32.90 %
Equity to assets ratio                      10.24 %       9.72 %      10.24 %       9.72 %
Average shareholders' equity (in
thousands)                            $   517,141   $  415,952   $  514,282   $  399,668



* - Ratio is a non-GAAP financial measure. The section titled "Reconciliation . . .
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