Business context and reporting period
The filing is a Form 10-Q for the quarter and six months ended June 30, 2013. The registrant is First Financial Holdings, Inc.; the financial results principally reflect the SCBT banking organization before its July 26, 2013 merger, after which SCBT Financial Corporation changed its name to First Financial Holdings, Inc. Unless noted, amounts below are in millions of dollars.
Financial performance and condition
| Metric | Q2 2013 | Q2 2012 | Change / context |
|---|---|---|---|
| Net interest income | $55.3 | $42.5 | Up 30.0%; higher acquired-loan income and earning assets were key drivers. |
| Provision for loan losses | $0.2 | $4.6 | Lower by $4.5. |
| Noninterest income | $8.5 | $11.7 | Down $3.3, including greater negative accretion on the FDIC indemnification asset. |
| Noninterest expense | $44.9 | $37.5 | Up $7.4, principally salaries and benefits, partly reflecting acquisitions. |
| Net income | $12.5 | $8.0 | Up 56.0%. |
| Diluted EPS | $0.74 | $0.55 | Up $0.19. |
| Net interest margin | 4.93% non-tax-equivalent; 5.01% tax-equivalent | 4.62% non-tax-equivalent; 4.69% tax-equivalent | Tax-equivalent margin up 32 basis points year over year. |
| Efficiency ratio | 69.5% | 68.3% | Worsened year over year; improved from 72.4% in Q1 2013. |
For the six months ended June 30, 2013, net income was $23.2 million versus $15.1 million in 2012; diluted EPS was $1.36 versus $1.05. Net cash provided by operating activities was $45.3 million, investing activities provided $108.4 million, and financing activities used $97.9 million. Cash and cash equivalents ended the period at $436.5 million.
At June 30, 2013, total assets were $5.04 billion, down from $5.14 billion at year-end 2012 and up from $4.37 billion a year earlier. Net loans were $3.52 billion; total deposits were $4.18 billion; total shareholders’ equity was $516.6 million. Deposits declined $115.4 million in the first half, while federal funds purchased and repurchase-agreement balances were $262.4 million and other borrowings were $54.4 million. The filing does not provide a single consolidated debt total beyond these reported borrowing categories.
Regulatory capital ratios remained well above stated minimums: holding-company Tier 1 risk-based capital was 13.61%, total risk-based capital 14.87%, and Tier 1 leverage 9.22%. The equity-to-assets ratio was 10.24%. Management described liquidity as adequate; available sources included $376.0 million of federal funds credit lines, $81.3 million of Federal Reserve discount-window capacity, and a $355.5 million FHLB facility, with no advances outstanding on those facilities at quarter-end.
Material changes and asset quality
- Non-acquired loans grew 7.4% year over year to $2.67 billion; commercial and industrial loans increased 29.2% to $294.6 million. Total loans, including acquired loans but excluding mortgage loans held for sale, were $3.59 billion.
- Non-acquired nonperforming assets declined to $68.7 million from $83.1 million a year earlier; total nonperforming assets including acquired assets were $121.4 million. Non-accrual loans, including restructured loans, were $52.7 million.
- Annualized Q2 net charge-offs were 0.40% of average non-acquired loans, versus 0.77% a year earlier. The allowance was $38.6 million, or 1.45% of non-acquired loans, and covered 73.2% of non-acquired nonperforming loans.
- Total OREO was $68.6 million, including $35.1 million covered by FDIC loss-share agreements. Classified non-acquired assets were $123.6 million, down from $160.6 million a year earlier.
- Available-for-sale securities had $9.0 million of gross unrealized losses at quarter-end versus $0.2 million at December 31, 2012. The resulting six-month other comprehensive loss was $10.0 million after tax, largely reflecting the rise in market interest rates. Management considered the losses temporary and said it did not expect to need to sell the securities before recovery.
Outlook, commentary, risks, and unusual items
- The filing gives no specific earnings or financial guidance. Management said six-month results are not necessarily indicative of full-year results.
- On July 26, 2013, the company completed the acquisition of First Financial Holdings, whose June 30 reported assets, loans, and deposits were $3.2 billion, $2.4 billion, and $2.5 billion, respectively. Consideration was approximately $446.9 million, including $65.0 million in preferred stock. The company also repaid $233.0 million of FHLB borrowings for $255.9 million, including a $21.8 million prepayment fee and $1.1 million accrued interest. Purchase accounting was incomplete; goodwill and acquired fair values were not yet determinable.
- FDIC indemnification-asset amortization reduced Q2 noninterest income by $7.3 million, compared with $4.4 million in Q2 2012. The asset’s carrying value was $104.0 million; projected cash flows were approximately $47.7 million below that carrying value. Management expected $8.0 million of subsequent loss-share claim receipts.
- Key risks cited include credit quality and loan-loss estimates, interest-rate and liquidity exposure, merger integration and deposit retention, regulatory and Basel III changes, cybersecurity, economic conditions, and noninterest-income pressure. Commitments to extend credit and standby letters of credit totaled $878.4 million.
- Several shareholder lawsuits relating to prior or pending mergers were subject to settlement memoranda and court approval; management did not expect ordinary-course litigation to have a material effect. The filing reports effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the issuer and transaction chronology: this quarter’s results precede the July 26 merger and the subsequent name change.
- Review the completed merger’s purchase accounting, final goodwill, acquired loan marks, integration costs, and post-merger capital and funding position when reported.
- Track whether improving non-acquired credit metrics persist, and assess the allowance’s 73.2% coverage of non-acquired nonperforming loans alongside acquired-loan risks.
- Monitor FDIC indemnification-asset cash-flow estimates and negative accretion, as well as any changes in securities’ unrealized losses or impairment conclusions.
- Assess deposit trends, liquidity capacity, interest-rate sensitivity, and the impact of the FHLB repayment and prepayment fee.