Business context and reporting period
First Financial Holdings, Inc. filed this Form 10-Q for the quarter ended March 31, 2014. The filing describes a South Carolina-based bank holding company operating through SCBT and its banking divisions. The company had acquired First Financial Holdings, Inc. (FFHI) in July 2013 and changed its own name to First Financial Holdings, Inc.; it later announced plans to rename the company South State Corporation and the bank South State Bank. Unless noted, figures below are in millions of dollars.
Financial results and condition
| Metric | Q1 2014 / March 31, 2014 | Comparable period / prior date |
|---|---|---|
| Net interest income | $83.3 | $53.8 in Q1 2013 |
| Net interest margin | 4.99% taxable-equivalent; 4.94% non-taxable-equivalent | 4.94% and 4.86%, respectively, in Q1 2013 |
| Noninterest income | $20.7 | $9.5 in Q1 2013 |
| Noninterest expense | $77.4 | $46.4 in Q1 2013 |
| Provision for loan losses | $0.8 | $1.1 in Q1 2013 |
| Net income / available to common shareholders | $16.9 / $15.8 | $10.6 / $10.6 in Q1 2013 |
| Diluted EPS | $0.66 | $0.63 in Q1 2013 |
| Total assets | $7,991 | $7,931 at Dec. 31, 2013; $5,142 at Mar. 31, 2013 |
| Loans, net | $5,571 | $5,645 at Dec. 31, 2013 |
| Deposits | $6,631 | $6,555 at Dec. 31, 2013 |
| Cash and cash equivalents | $613 | $479 at Dec. 31, 2013 |
| Shareholders’ equity | $934 | $981 at Dec. 31, 2013 |
| Cash flow from operations | $12.8 | $22.4 in Q1 2013 |
Reported revenue—net interest income plus noninterest income—was $104.0 million, compared with $63.3 million in Q1 2013. The company reported a 73.8% efficiency ratio (64.1% excluding OREO and merger/branding expenses), return on average assets of 0.86%, and return on average common equity of 6.89%. Annualized net charge-offs on non-acquired loans were 0.05%; the allowance was 1.16% of non-acquired loans and covered 92.59% of non-acquired nonperforming loans.
At quarter-end, federal funds purchased and repurchase agreements were $255 million and other borrowings were $101 million. Company Tier 1 risk-based capital was 12.78%, total risk-based capital 13.67%, and Tier 1 leverage 8.68%. Management said capital remained well above minimum requirements and the company remained well-capitalized.
Material changes versus comparable periods
- Q1 2014 results include FFHI since its July 2013 acquisition, so reported year-over-year growth is not a like-for-like comparison. Average earning assets rose 52.4%, and net interest income increased 54.9%, largely from the acquisition and organic loan growth.
- Net income available to common shareholders rose 48.8%, while weighted-average common shares increased 42.2%; diluted EPS increased from $0.63 to $0.66.
- Noninterest expense rose 66.7%, mainly from the expanded workforce, $6.0 million of merger and branding costs, and higher occupancy, loan-related, and intangible-amortization expenses. The efficiency ratio increased from 72.4% in Q1 2013.
- Non-acquired loans grew $375.7 million, or 14.4%, year over year; acquired loans declined $188.7 million from year-end, primarily from repayments, charge-offs, and foreclosures. Total deposits increased 57.1% year over year, mainly from FFHI.
- Non-acquired nonperforming assets fell to $49.6 million from $55.7 million at year-end and $76.4 million a year earlier. Total nonperforming assets including acquired assets were $102.6 million.
- On March 28, 2014, the company redeemed all 65,000 Series A preferred shares for $65 million. Equity declined from year-end mainly due to this redemption.
Outlook, commentary, risks, and unusual items
- No full-year earnings or financial guidance was provided. Management cautioned that quarterly results are not necessarily indicative of full-year results.
- Management expected further systems-conversion and integration costs during the rest of 2014, while anticipating additional cost savings and synergies; amounts were not specified. A South State name change was expected between June 30 and July 21, 2014.
- Management considered the loan-loss allowance adequate but emphasized that estimates are judgmental, economic conditions could require additions, and the unusually low charge-off rate may not be sustainable. It reported minor impairment adjustments in certain acquired-loan pools and no change to FFHI acquired-loan cash-flow assumptions.
- Liquidity was described as adequate. Available facilities included $376 million of federal funds lines, $250.7 million at the Federal Reserve discount window, and an $874.8 million FHLB facility; the filing reports no federal funds line or discount-window advances and $140,000 of FHLB advances at quarter-end.
- Key stated risks include credit and interest-rate risk, liquidity and market-price risk, FFHI integration and deposit attrition, regulatory and Basel III changes, cyber and compliance risks, and economic weakness. Basel III changes were expected to begin affecting the company and bank in January 2015; their ultimate impact was still under review.
- The company reported $1.3 billion of commitments to extend credit and standby letters of credit and did not anticipate material losses. Management said pending ordinary-course legal matters were not expected to have a material financial effect. Certain merger-related shareholder settlements remained subject to court approval.
- Unrealized losses on available-for-sale securities were $9.3 million. Management judged these temporary and said it did not intend, and was not more likely than not required, to sell the securities before recovery; future impairment conclusions could differ.
Important facts for investors to verify
- Separate acquisition-driven growth from organic growth, particularly in revenue, loan balances, deposits, and per-share results.
- Track integration costs, the timing and realization of expected synergies, and any effects on customer or deposit retention.
- Review asset quality across acquired and non-acquired portfolios, including acquired loans past due, the allowance, and FDIC loss-share recoveries and obligations.
- Assess whether low net charge-offs persist and whether loan growth or economic changes require higher reserves.
- Monitor capital ratios after the preferred-stock redemption and the company’s assessment of Basel III requirements.
- Verify progress and final outcomes for the disclosed shareholder litigation settlements and the planned corporate and bank name changes.