Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
SSB > SEC Filings for SSB > Form 10-Q on 8-Aug-2014All Recent SEC Filings

Show all filings for SOUTH STATE CORP

Form 10-Q for SOUTH STATE CORP


8-Aug-2014

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, 2013.

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, South State Bank (the "Bank"), a South Carolina-chartered commercial bank that opened for business in 1934. The Bank also operates Minis & Co., Inc. and First Southeast 401k Fiduciaries, both wholly owned registered investment advisors; and First Southeast Investor Services, a wholly owned limited service broker dealer. The Company does not engage in any significant operations other than the ownership of our banking subsidiary.

At June 30, 2014, we had approximately $8.0 billion in assets and 2,095 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, or branches in certain market areas.

The following discussion describes our results of operations for the quarter ended June 30, 2014 as compared to the quarter ended June 30, 2013 and also analyzes our financial condition as of June 30, 2014 as compared to December 31, 2013 and June 30, 2013. 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

Preferred Stock Redemption

On March 28, 2014, the Company redeemed all 65,000 outstanding shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series A. The shares had a liquidation preference of $1,000 per share, and dividends were accruing at 9% per annum.


Table of Contents

Name Change and System Conversion

Effective June 30, 2014, the Company changed its name from First Financial Holdings, Inc. to South State Corporation. On June 30, 2014, the Bank also changed its name to South State Bank from SCBT and from the following divisions:
NCBT, Community Bank & Trust ("CBT"), and The Savannah Bank. The name of First Federal Bank, a division of the Bank, was changed in July 2014 in conjunction with the systems conversion and integration. The Bank now operates all of its branches under the name "South State Bank."

Critical Accounting Policies

We have established various accounting policies that govern the application of accounting principles generally accepted in the United States ("GAAP") 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, 2013. 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 Form 10-Q, "Provision for Loan Losses and Nonperforming Assets" in this Management's Discussion and Analysis of Financial Condition and Results of Operation ("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, 2013 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 in a business combination. As of June 30, 2014, December 31, 2013 and June 30, 2013, the balance of goodwill was $317.4 million, $317.4 million, and $103.3 million, respectively. The increase from the balance at June 30, 2013 was the result of the FFHI merger, which added $214.1 million in additional goodwill. 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 not considered 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 any.

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 two reporting units.

Our stock price has historically traded above its book value. As of June 30, 2014, book value was $39.50 per share. The lowest trading price during the first six months of 2014, as reported by the NASDAQ Global Select Market, was $54.03 per share, and the stock price closed on June 30, 2014 at $61.00 per share, which is above 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, 2014, our annual test date, and


Table of Contents

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, client list intangibles, and noncompetition ("noncompete") intangibles consist of costs that resulted from the acquisition of other banks from other financial institutions. Core deposit intangibles represent the estimated value of long-term deposit relationships acquired in these transactions. Client list intangibles represent the value of long-term client relationships for the wealth and trust management business. Noncompete intangibles represent the value of key personnel relative to various competitive factors such as ability to compete, willingness or likelihood to compete, and feasibility based upon the competitive environment, and what the Bank could lose from competition. These costs are amortized over the estimated useful lives, such as deposit accounts in the case of core deposit intangible, on a method that we believe reasonably approximates the anticipated benefit stream from this intangible. 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 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 June 30, 2014, 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 states of South Carolina, Georgia, North Carolina, Florida, Virginia, Alabama, and Mississippi. The Company's filed income tax returns are no longer subject to examination by taxing authorities for years before 2010.

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 financial condition and near-term prospects of the issuer, (2) the outlook for receiving the contractual cash flows of the investments, (3) the anticipated outlook for changes in the general level of interest rates, and (4) 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, and (5) the length of time and the extent to which the fair value has been less than cost. 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 valuations obtained principally from independent sources, adjusted for estimated selling costs. 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. 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 the current valuations used to determine the fair value of OREO. Management reviews the value of OREO periodically 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.


Table of Contents

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, including performing loans and revolving 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 Assets are initially recorded at fair value, and are 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. The FDIC indemnification asset is measured at carrying value subsequent to initial measurement. Improved cash flows of the underlying covered assets will result in impairment of the FDIC indemnification asset and negative accretion through non-interest income over the shorter of the lives of the FDIC indemnification asset or the underlying loans. Impairment of the underlying covered assets will result in improved cash flows of the FDIC indemnification asset and a credit to the provision for loan losses for acquired loans will result.

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, 2013, 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 $17.9 million, or diluted earnings per share ("EPS") of $0.74, for the second quarter of 2014 as compared to consolidated net income available to common shareholders of $12.5 million, or diluted EPS of $0.74, in the comparable period of 2013. The $5.4 million increase in consolidated net income available to common shareholders was the net result of the following items:

Improved net interest income of $25.7 million due primarily to acquisition of FFHI and the increase in average earning assets of $2.4 billion which increased interest income by $27.3 million. Average interest-bearing liabilities increased $1.8 billion, and the related interest expense increased $1.6 million with a rate of 0.29%, three basis points higher than a year ago;

An increase in the provision for loan losses by $2.0 million over the comparable quarter;

An increase in noninterest income totaling $15.9 million, due in large part to the acquisition of FFHI;

An increase in most categories of noninterest expense totaling $31.0 million due to the acquisition of FFHI. The larger increases were $16.5 million in salaries and benefits, $5.7 million in merger expenses, $2.5 million in net occupancy, $1.1 million in amortization of intangibles, $1.3 million in information services expense, and $2.0 million in other expense; and

An increase in the provision for income taxes of $3.2 million due to higher pre-tax income.

Diluted EPS was $0.74 and the same for the comparable period in 2013, due to the issuance of approximately 7.2 million shares in the acquisition of FFHI in July 2013, even though net income increased by $5.4 million.

Our asset quality related to non-acquired loans continues to be at manageable levels and improved from the end of 2013. Non-acquired nonperforming assets declined from $49.6 million at March 31, 2014 to $44.3 million at June 30, 2014. Compared to the balance of nonperforming assets at June 30, 2013, nonperforming assets decreased $24.4 million due to a reduction in nonperforming loans of $17.4 million and a reduction in non-acquired OREO of $6.9 million. Our non-acquired OREO decreased by $3.2 million since March 31, 2014 to $9.0 million at June 30, 2014. During the second quarter of 2014, classified assets declined by $12.8 million from March 31, 2014 to $78.7 million at June 30, 2014. Since June 30, 2013 classified assets have declined by $44.9 million. Annualized net charge-offs for the second quarter of 2014 were 0.17%, down from the second quarter of 2013 of 0.40% and up from the first quarter of 2014 of 0.05%.


Table of Contents

The allowance for loan losses decreased to 1.12% of total non-acquired loans at June 30, 2014, down from 1.16% at March 31, 2014 and 1.45% at June 30, 2013. The allowance provides 1.00 times coverage of nonperforming loans at June 30, 2014, higher than 0.93 times at March 31, 2014, and 0.73 times at June 30, 2013.

The Company performs ongoing assessments of the estimated cash flows of its acquired loan portfolios. In general, 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 for those assets that are covered. When a provision for loan losses (impairments) has been recognized in earlier periods, subsequent improvement in cash flows will result in reversals of those impairments.

These ongoing assessments of the acquired loan portfolio resulted in reduced loan interest accretion due to continued decline in loan balances. The overall credit mark for these loans continued to decline, partially from charge offs and partially from net improvement in expected cash flow. Below is a summary of the second quarter of 2014 assessment of the estimated cash flows of the acquired loan portfolio and the related impact on the indemnification asset:

Removals from the loan pools due to repayments, charge offs, and transfers to OREO or other assets owned through foreclosures resulted in a decline in loan accretion income of $4.3 million from the first quarter of 2014; and compared to the second quarter of 2013, there was a large increase in loan accretion income of $22.3 million primarily from the FFHI merger; and

The negative accretion of the indemnification asset also decreased by approximately $1.3 million compared to the first quarter of 2014, and by $1.5 million compared to the second quarter of 2013. This was primarily the result of the decline in the difference between the net carrying value of the FDIC indemnification asset and projected cash flows of the indemnification asset.

As of June 30, 2014, the Company had not made any changes to the estimated cash flow assumptions or expected losses for the acquired loans from the merger with FFHI.

Compared to the balance at March 31, 2014, our non-acquired loan portfolio has increased $194.7 million, or 26.1% annualized, to $3.2 billion, driven by increases in most categories. Consumer real estate lending increased by $49.4 million, or 23.0% annualized; consumer non real estate lending by $23.3 million, or 63.0% annualized; commercial owner occupied loans by $3.3 million, or 1.6% annualized; construction and land development by $52.3 million or 65.5% annualized; and commercial and industrial by $19.6 million, or 23.6% annualized. The acquired loan portfolio decreased by $131.0 million, in the second quarter of 2014, due to continued payoffs, charge-offs, and transfers to OREO. Since June 30, 2013, the non-acquired loan portfolio has grown by $509.0 million, or 19.1%, in most categories. Consumer real estate loans have led the way and increased by $196.7 million, or 27.7%, in the past year.

Non-taxable equivalent net interest income for the quarter increased $25.7 million or 46.5% compared to the second quarter of 2013. Non-taxable equivalent net interest margin decreased by 23 basis points to 4.70% from the second quarter of 2013 of 4.93% due to the decrease in yield on acquired and non-acquired loans. Compared to the first quarter of 2014, net interest margin (taxable equivalent) decreased by 24 basis points. Interest earning assets yield decreased by 26 basis points primarily from the decrease in the yield of the acquired and non-acquired loan portfolios. The rate on interest bearing liabilities decreased by 1 basis point compared to the first quarter of 2014 from a 3 basis point decrease in the rates on certificate of deposit balances.

Our quarterly efficiency ratio decreased to 71.5% compared to 73.8% in the first quarter of 2014, and increased from 69.5% in the second quarter of 2013. The decrease in the efficiency ratio compared to the first quarter of 2014 was the result of a $1.5 million reduction in noninterest expense primarily from decreases in OREO and loan related expense. The increase in the efficiency ratio over the second quarter of 2013 was the result of a 69.1% increase in noninterest expense, a 187.6% increase in noninterest income, and a 46.5% increase in net interest income compared to the second quarter of 2013. Compared to the second quarter of 2013 noninterest expense was up $31.0 million with a $5.7 million increase in merger expenses, $16.5 million increase in salaries and employee benefits, $2.5 million in net occupancy expense, and $1.5 million in other noninterest expense. Excluding OREO and merger and branding related expenses, the efficiency ratio was 63.6% for the second quarter of 2014, compared to 64.1% for the first quarter of 2014 and 63.8% for the second quarter of 2013.

Diluted EPS and basic EPS were both flat from the comparable period in 2013 at $0.74 and $0.75, respectively, for the second quarter of 2014. This was the result of a 43% increase in net income available to common shareholders, along with a 42% increase in weighted average basic and diluted common shares from 7.2 million shares being issued in the FFHI merger.


Table of Contents

Selected Figures and Ratios



                                       Three Months Ended            Six Months Ended
                                            June 30,                     June 30,
(Dollars in thousands)                 2014           2013          2014          2013

Return on average assets
(annualized)                               0.91 %        0.99 %        0.88 %        0.92 %
Return on average common equity
(annualized)                               7.63 %        9.72 %        7.27 %        9.09 %
Return on average equity
(annualized)                               7.63 %        9.72 %        7.26 %        9.09 %
. . .
  Add SSB to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for SSB - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.