The following tables illustrate the trend in quality and risk inherent in the loan portfolio.
The decrease in net charge-offs for the quarter ended June 30, 2012 as compared with the prior quarter was the result of lower charge-offs in all loan categories.
Quarterly Results of Operations
First Financial reported net income from continuing operations of $12.6 million for the three months ended June 30, 2012, compared with $1.7 million for the three months ended March 31, 2012 and a net loss of $(40.3) million for the three months ended June 30, 2011. The changes in the key components of net income from continuing operations are discussed below.
Net interest income
Net interest margin, on a fully tax-equivalent basis, was 4.08% for the quarter ended June 30, 2012, as compared with 3.84% for the quarter ended March 31, 2012 and 3.83% for the quarter ended June 30, 2011. The increases over both prior periods were primarily the result of a 14 basis point improvement due to the low-cost core deposits acquired in the Liberty transaction, the balance sheet repositioning, and better performance on the Cape Fear nonperforming loans, as well as a 10 basis point improvement due to the accretion and amortization of purchase accounting adjustments resulting from the Plantation acquisition.
Net interest income for the quarter ended June 30, 2012 was $31.7 million, an increase of $3.5 million or 12.3% over the prior quarter and an increase of $2.3 million or 7.8% over the same quarter last year. The increases were primarily the result of higher levels of average earning assets from the Plantation and Liberty acquisitions.
Provision for loan losses
After determining what First Financial believes is an adequate allowance for loan losses based on the estimated risk inherent in the loan portfolio, the provision for loan losses is calculated based on the net effect of the change in the allowance for loan losses and net charge-offs. The provision for loan losses was $4.7 million for the quarter ended June 30, 2012, compared with $6.7 million for the linked quarter and $77.8 million for the same quarter last year. The decreases from both prior periods were primarily the result of the continued stabilization of historical loss trends and credit metrics through June 30, 2012. Additionally, the decrease from the same quarter last year was due to an additional provision for loan losses of $65.7 million associated with classifying $155.3 million of portfolio loans to loans held for sale in June 2011.
First Financial Holdings, Inc. June 30, 2012 Earnings Release | Page 6 |
Noninterest income
Noninterest income totaled $32.5 million for the quarter ended June 30, 2012, an increase of $19.3 million over the prior quarter and an increase of $21.1 million over the same quarter last year. The increases were primarily the result of the $14.6 million gain on the acquisition of Plantation, and a $3.5 million gain on the sale of investment securities related to the balance sheet repositioning. Mortgage and other loan income increased $937 thousand due to a higher volume of residential loans sold into the secondary market during the current quarter as a result of expanding the correspondent lending channel. Service charges on deposit accounts continue to trend upward due to a higher number of transaction accounts.
In addition to the two gains discussed above, the increase over the same quarter last year was primarily the result of higher service charges on deposit accounts ($576 thousand) due to higher transaction-related revenue from increases in both volume and fees, as well as higher mortgage and other loan income ($2.3 million) due to higher residential mortgage origination levels related to the continued low interest rate environment and the addition of correspondent lenders.
Noninterest expense
Noninterest expense totaled $39.3 million for the quarter ended June 30, 2012, an increase of $10.5 million or 36.7% over the prior quarter and an increase of $10.7 million or 37.2% over the same quarter last year. The June 30, 2012 quarter included an $8.5 million termination charge on the prepayment of FHLB advances as part of the balance sheet repositioning. Excluding the termination charge, noninterest expenses for the June 30, 2012 quarter increased $2.0 million or 7.0% over the prior quarter. Increases in salaries related to severance and retention bonuses, as well as regular salaries, for Plantation associates were substantially offset by lower benefits costs as group insurance claims and other benefits decreased from the linked quarter. Occupancy costs increased $666 thousand due to expenses associated with closing four unprofitable in-store branches during the quarter. Professional services increased $385 thousand due primarily to conversion, accounting, consulting, and other expenses related to the Plantation and Liberty acquisitions. Intangible amortization increased $278 thousand due to establishing intangibles related to the Plantation and Liberty acquisitions. Other expense increased $906 thousand due to losses related to FNMA put-back charges ($284 thousand), data processing expenses related to the upcoming conversion of Plantation’s systems ($215 thousand), higher travel and training ($160 thousand) related to the Plantation acquisition and certain annual training programs, and timing of franchise fee payments and accruals ($165 thousand).
In addition to the termination charge on FHLB advances and Plantation expenses, the increase from the same quarter of the prior year was related to occupancy costs ($816 thousand), and professional services ($722 thousand), partially offset by lower OREO expenses, net ($666 thousand) and lower goodwill impairment ($630 thousand). The increase in occupancy costs was primarily the result of expenses associated with closing four unprofitable in-store branches during the current quarter, as well as increased property taxes and insurance. The increase in professional fees was primarily the result of acquisition expenses related to Plantation and Liberty and other strategic initiatives. The decrease in OREO expenses is primarily the result of fewer write-downs of OREO properties, recognition of more gains on the sales of properties, and less OREO related expense. First Financial wrote-off the goodwill associated with its insurance premium financing operations during the second quarter of 2011.
Income Taxes
The income tax expense for the three months ended June 30, 2012 totaled $7.7 million, an increase of $3.5 million over the linked quarter and an increase of $33.0 million over the same quarter last year. The quarter ended June 30, 2012 included the establishment of a $5.6 million deferred tax liability related to the gain on the Plantation acquisition. The quarter ended March 31, 2012 included a $2.1 million write-down of the state deferred tax asset after First Federal’s conversion to a South Carolina state-chartered commercial bank due to a difference in South Carolina tax laws for banks versus thrifts. In addition, the variances from both prior periods were the result of the change in pre-tax income.
Year-to-Date Results of Operations
First Financial reported net income from continuing operations of $14.3 million for the six months ended June 30, 2012, compared with a net loss of $(41.6) million for the six months ended June 30, 2011. The changes in the key components of net income from continuing operations are discussed below.
Net interest income
Net interest margin, on a fully tax-equivalent basis, was 3.96% for the six months ended June 30, 2012, as compared with 3.83% for the same period of 2011. The increase over the same period of 2011 was primarily the result of average rates paid on interest-bearing liabilities declining 34 basis points while interest-earning asset yields declined only 18 basis points. The impact of the acquisitions contributed to the improved margin, as well as organic growth in low-cost core deposits during the twelve month period.
First Financial Holdings, Inc. June 30, 2012 Earnings Release | Page 7 |
Net interest income for the six months ended June 30, 2012 was $60.0 million, an increase of $1.3 million or 2.1% over the same period of 2011. The increase was primarily the result of the Plantation and Liberty transactions.
Provision for loan losses
The provision for loan losses was $11.4 million for the six months ended June 30, 2012, compared with $90.5 million for the same period of 2011. The decrease was primarily the result of $65.7 million recorded in 2011 related to the reclassification of loans to loans held for sale, as well as continued stabilization of historical loss trends and credit metrics through June 30, 2012.
Noninterest income
Noninterest income totaled $45.7 million for the six months ended June 30, 2012, an increase of $23.0 million over the same period of 2011. The increase was primarily the result of the $14.6 million gain on the Plantation acquisition and the $3.5 million gain on the sale of investment securities related to the balance sheet repositioning strategy. In addition, mortgage and other loan income increased $4.6 million and service charges on deposit accounts increased $1.5 million, as discussed above.
Noninterest expense
Noninterest expense totaled $68.0 million for the six months ended June 30, 2012, an increase of $9.2 million or 15.7% over the same period of 2011. The increase was primarily the result of the $8.5 million FHLB termination charge related to the balance sheet repositioning strategy. Other significant variances included higher occupancy costs ($875 thousand), professional services ($827 thousand), other loan expense ($610 thousand), and other expenses ($1.8 million), partially offset by lower salaries and employee benefits ($2.4 million), FDIC insurance and regulatory fees ($587 thousand), and the goodwill impairment ($630 thousand). The increase in other loan expenses was primarily the result of higher foreclosure related expenses, and loan origination and servicing costs. The increase in other expenses was primarily the result of increases in deposit rewards management expenses ($808 thousand) which resulted from higher customer debit card usage. The decrease in salaries and employee benefits was primarily the result of compensation agreements entered into during the prior year. The decrease in FDIC insurance and regulatory fees was primarily the result of the new assessment methodology implemented by the FDIC during 2011. The variances in the other categories were primarily the result of the factors discussed above in the quarterly analysis.
Income Taxes
The income tax expense for the six months ended June 30, 2012 totaled $12.0 million, an increase of $38.2 million over the prior year. The increase was primarily the result of the change in pre-tax income, a $2.1 million write-down of the state deferred tax asset in the first quarter of 2012, and the establishment of a $5.6 million deferred tax liability related to the gain on the Plantation acquisition in the second quarter of 2012.
Cash Dividend Declared
On July 26, 2012, First Financial declared a quarterly cash dividend of $12.50 per share on its Fixed Rate Cumulative Perpetual Preferred Stock, Series A, payable on August 15, 2012 to preferred shareholders of record as of August 3, 2012. First Financial also declared a quarterly cash dividend of $0.05 per common share, payable on August 23, 2012 to shareholders of record as of August 9, 2012.
Conference Call
R. Wayne Hall, president and CEO; Blaise B. Bettendorf, EVP and CFO; and Joseph W. Amy, EVP and CCO; will review the quarter’s results in a conference call at 9:00 am (ET), July 27, 2012. The live audio webcast is available on First Financial’s website at www.firstfinancialholdings.com and will be available for 90 days.
About First Financial
First Financial Holdings, Inc. (“First Financial”, NASDAQ: FFCH) is a Charleston, South Carolina financial services provider with $3.3 billion in total assets as of June 30, 2012. First Financial offers integrated financial solutions, including personal, business, and wealth management services. First Federal Bank (“First Federal”), which was founded in 1934 and is the primary subsidiary, serves individuals and businesses throughout coastal South Carolina, Florence, and Greenville, South Carolina, and Wilmington, North Carolina. First Financial subsidiaries include: First Federal; First Southeast Investor Services, Inc., a registered broker-dealer; and First Southeast 401(k) Fiduciaries, Inc., a registered investment advisor. First Federal is the largest financial institution headquartered in the Charleston, South Carolina metropolitan area and the third largest financial institution headquartered in South Carolina, based on asset size. Additional information about First Financial is available at www.firstfinancialholdings.com.
First Financial Holdings, Inc. June 30, 2012 Earnings Release | Page 8 |
Discontinued Operations Financial Statement Presentation
As a result of First Financial’s sales of its insurance agency subsidiary, First Southeast Insurance Services, Inc., which was completed on June 1, 2011, and its managing general insurance agency subsidiary, Kimbrell Insurance Group, Inc., which was completed on September 30, 2011, the financial condition, operating results, and the gain or loss on the sales, net of transaction costs and taxes, for these subsidiaries have been segregated from the financial condition and operating results of First Financial’s continuing operations throughout this release and, as such, are presented as discontinued operations. While all prior periods have been revised retrospectively to align with this treatment, these changes do not affect First Financial’s reported consolidated financial condition or operating results for any of the prior periods.
Non-GAAP Financial Information
In addition to results presented in accordance with U.S. generally accepted accounting principles (“GAAP”), this press release includes non-GAAP financial measures such as the efficiency ratio, the tangible common equity to tangible assets ratio, tangible common book value per share, and pre-tax pre-provision earnings. First Financial believes these non-GAAP financial measures provide additional information that is useful to investors in understanding its underlying performance, business, and performance trends and such measures help facilitate performance comparisons with others in the banking industry. Non-GAAP measures have inherent limitations, are not required to be uniformly applied, and are not audited. Readers should be aware of these limitations and should be cautious to their use of such measures. To mitigate these limitations, First Financial has procedures in place to ensure that these measures are calculated using the appropriate GAAP or regulatory components in their entirety and to ensure that its performance is properly reflected to facilitate consistent period-to-period comparisons. Although management believes the above non-GAAP financial measures enhance investors’ understanding of First Financial’s business and performance, these non-GAAP measures should not be considered in isolation, or as a substitute for GAAP basis financial measures.
In accordance with industry standards, certain designated net interest income amounts are presented on a taxable equivalent basis, including the calculation used in the efficiency ratio.
First Financial believes the exclusion of goodwill and other intangible assets facilitates the comparison of results for ongoing business operations. The tangible common equity (“TCE”) ratio and tangible book value per common share (“TBV”) have become a focus of some investors, analysts and banking regulators. Management believes these measures may assist investors in analyzing First Financial’s capital position absent the effects of intangible assets and preferred stock. Because TCE and TBV are not formally defined by GAAP or codified in the federal banking regulations, these measures are considered to be non-GAAP financial measures. However, analysts and banking regulators may assess First Financial’s capital adequacy using TCE or TBV, therefore, management believes that it is useful to provide investors the ability to assess its capital adequacy on the same basis.
First Financial believes that pre-tax, pre-provision earnings are a useful measure in assessing its core operating performance, particularly during times of economic stress. This measurement, as defined by management, represents total revenue (net interest income plus noninterest income) less noninterest expense. As recent results for the banking industry demonstrate, credit write-downs, loan charge-offs, and related provisions for loan losses can vary significantly from period to period, making a measure that helps isolate the impact of credit costs on profitability important to investors.
Please refer to the Selected Financial Information table and the Non-GAAP Reconciliation table later in this release for additional information.
Forward-Looking Statements
Statements in this release that are not statements of historical fact, including without limitation, statements that include terms such as “believes,” “expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,” “targets,” “potentially,” “probably,” “projects,” “outlook,” or similar expressions or future conditional verbs such as “may,” “will,” “should,” “would,” or “could” constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements regarding First Financial’s future financial and operating results, plans, objectives, expectations and intentions involve risks and uncertainties, many of which are beyond First Financial’s control or are subject to change. No forward-looking statement is a guarantee of future performance and actual results could differ materially from those anticipated by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, the general business environment, general economic conditions nationally and in the States of North and South Carolina, interest rates, the North and South Carolina real estate markets, the demand for
First Financial Holdings, Inc. June 30, 2012 Earnings Release | Page 9 |
mortgage loans, the credit risk of lending activities, including changes in the level and trend of delinquent and nonperforming loans and charge-offs, changes in First Federal’s allowance for loan losses and provision for loan losses that may be affected by deterioration in the housing and real estate markets; results of examinations by banking regulators, including the possibility that any such regulatory authority may, among other things, require First Federal to increase its allowance for loan losses, write-down assets, change First Federal’s regulatory capital position or affect its ability to borrow funds or maintain or increase deposits, which could adversely affect liquidity and earnings; First Financial’s ability to control operating costs and expenses, First Financial’s ability to successfully integrate any assets, liabilities, customers, systems, and management personnel acquired or may in the future acquire into its operations and its ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto, competitive conditions between banks and non-bank financial services providers, and regulatory changes including the Dodd-Frank Wall Street Reform and Consumer Protection Act. Other risks are also detailed in First Financial’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and current reports on Form 8-K filings with the Securities and Exchange Commission (“SEC”), which are available at the SEC’s website www.sec.gov. Other factors not currently anticipated may also materially and adversely affect First Financial’s results of operations, financial position, and cash flows. There can be no assurance that future results will meet expectations. While First Financial believes that the forward-looking statements in this release are reasonable, the reader should not place undue reliance on any forward-looking statement. In addition, these statements speak only as of the date made. First Financial does not undertake, and expressly disclaims any obligation to update or alter any statements, whether as a result of new information, future events or otherwise, except as required by applicable law.
First Financial Holdings, Inc. June 30, 2012 Earnings Release | Page 10 |
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| FIRST FINANCIAL HOLDINGS, INC. | |
| CONSOLIDATED BALANCE SHEETS (Unaudited) | |
| | | | | | | | | | | | | | | | |
| (in thousands) | | June 30, 2012 | | | March 31, 2012 | | | December 31, 2011 | | | September 30, 2011 | | | June 30, 2011 | |
| | | | | | | | | | | | | | | | |
| ASSETS | | | | | | | | | | | | | | | |
| Cash and due from banks | | $ | 62,831 | | | $ | 57,645 | | | $ | 61,400 | | | $ | 54,307 | | | $ | 60,905 | |
| Interest-bearing deposits with banks | | | 7,270 | | | | 5,879 | | | | 15,275 | | | | 31,630 | | | | 4,094 | |
| Total cash and cash equivalents | | | 70,101 | | | | 63,524 | | | | 76,675 | | | | 85,937 | | | | 64,999 | |
| Investment securities | | | | | | | | | | | | | | | | | | | | |
| Securities available for sale, at fair value | | | 244,059 | | | | 442,531 | | | | 404,550 | | | | 412,108 | | | | 418,967 | |
| Securities held to maturity, at amortized cost | | | 20,014 | | | | 19,835 | | | | 20,486 | | | | 21,671 | | | | 21,977 | |
| Nonmarketable securities | | | 29,327 | | | | 37,965 | | | | 32,694 | | | | 35,782 | | | | 37,626 | |
| Total investment securities | | | 293,400 | | | | 500,331 | | | | 457,730 | | | | 469,561 | | | | 478,570 | |
| Loans | | | 2,632,483 | | | | 2,355,567 | | | | 2,385,457 | | | | 2,355,280 | | | | 2,372,069 | |
| Less: Allowance for loan losses | | | 48,799 | | | | 50,776 | | | | 53,524 | | | | 54,333 | | | | 55,491 | |
| Net loans | | | 2,583,684 | | | | 2,304,791 | | | | 2,331,933 | | | | 2,300,947 | | | | 2,316,578 | |
| Loans held for sale | | | 72,402 | | | | 52,339 | | | | 48,303 | | | | 94,872 | | | | 84,288 | |
| FDIC indemnification asset, net | | | 77,311 | | | | 46,272 | | | | 51,021 | | | | 50,465 | | | | 58,926 | |
| Premises and equipment, net | | | 82,394 | | | | 80,237 | | | | 79,979 | | | | 80,477 | | | | 81,001 | |
| Other intangible assets, net | | | 8,931 | | | | 2,310 | | | | 2,401 | | | | 2,491 | | | | 2,571 | |
| Bank owned life insurance | | | 10,000 | | | | --- | | | | --- | | | | --- | | | | --- | |
| Other assets | | | 105,951 | | | | 95,734 | | | | 98,922 | | | | 121,560 | | | | 129,332 | |
| Assets of discontinued operations | | | --- | | | | --- | | | | --- | | | | --- | | | | 5,279 | |
| Total assets | | $ | 3,304,174 | | | $ | 3,145,538 | | | $ | 3,146,964 | | | $ | 3,206,310 | | | $ | 3,221,544 | |
| | | | | | | | | | | | | | | | | | | | | |
| LIABILITIES | | | | | | | | | | | | | | | | | | | | |
| Deposits | | | | | | | | | | | | | | | | | | | | |
| Noninterest-bearing checking | | $ | 359,553 | | | $ | 308,007 | | | $ | 279,519 | | | $ | 279,151 | | | $ | 234,478 | |
| Interest-bearing checking | | | 502,530 | | | | 435,063 | | | | 429,698 | | | | 440,377 | | | | 437,179 | |
| Savings and money market | | | 731,428 | | | | 563,344 | | | | 522,496 | | | | 505,059 | | | | 506,236 | |
| Retail time deposits | | | 934,245 | | | | 753,481 | | | | 791,544 | | | | 824,875 | | | | 854,202 | |
| Wholesale time deposits | | | 175,446 | | | | 204,594 | | | | 215,941 | | | | 253,395 | | | | 283,650 | |
| Total deposits | | | 2,703,202 | | | | 2,264,489 | | | | 2,239,198 | | | | 2,302,857 | | | | 2,315,745 | |
| Advances from FHLB | | | 233,000 | | | | 533,000 | | | | 561,000 | | | | 558,000 | | | | 557,500 | |
| Long-term debt | | | 47,204 | | | | 47,204 | | | | 47,204 | | | | 47,204 | | | | 47,204 | |
| Other liabilities | | | 33,504 | | | | 22,802 | | | | 22,384 | | | | 29,743 | | | | 29,432 | |
| Liabilities of discontinued operations | | | --- | | | | --- | | | | --- | | | | --- | | | | 5,099 | |
| Total liabilities | | | 3,016,910 | | | | 2,867,495 | | | | 2,869,786 | | | | 2,937,804 | | | | 2,954,980 | |
| | | | | | | | | | | | | | | | | | | | | |
| SHAREHOLDERS' EQUITY | | | | | | | | | | | | | | | | | | | | |
| Preferred stock | | | 1 | | | | 1 | | | | 1 | | | | 1 | | | | 1 | |
| Common stock | | | 215 | | | | 215 | | | | 215 | | | | 215 | | | | 215 | |
| Additional paid-in capital | | | 196,409 | | | | 196,204 | | | | 196,002 | | | | 195,790 | | | | 195,597 | |
| Treasury stock, at cost | | | (103,563 | ) | | | (103,563 | ) | | | (103,563 | ) | | | (103,563 | ) | | | (103,563 | ) |
| Retained earnings | | | 198,100 | | | | 187,311 | | | | 187,367 | | | | 173,587 | | | | 174,300 | |
| Accumulated other comprehensive (loss) income | | | (3,898 | ) | | | (2,125 | ) | | | (2,844 | ) | | | 2,476 | | | | 14 | |
| Total shareholders’ equity | | | 287,264 | | | | 278,043 | | | | 277,178 | | | | 268,506 | | | | 266,564 | |
| Total liabilities and shareholders' equity | | $ | 3,304,174 | | | $ | 3,145,538 | | | $ | 3,146,964 | | | $ | 3,206,310 | | | $ | 3,221,544 | |
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