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One bank postponed its initial public offering because of recent volatility, and others stock offerings could be delayed for weeks or months. It was bad timing for banks trying to get the jump on weakened competitors.
August 15
First Financial Holdings Inc. in Charleston, S.C., has proven its doubters wrong.
The $3.3 billion-asset company
Not only did the company pull the sale off, but it sold the assets at a higher price than it expected and will book a $20 million gain this quarter. The stock closed at $7.75 on Friday, up $2 from the beginning of the week. Its share price has risen 93% since the end of September. On Thursday, it also
"They announced that they were pursuing the loan sale in July, and then a few weeks later the market fell off and the stock got crushed. Investors were worried that they weren't going to be able to close," says Catherine Mealor, an analyst at KBW Inc.'s Keefe, Bruyette & Woods Inc. "No one was expecting they would complete it at a higher price. They've managed to completely de-risk the balance sheet without diluting shareholders."
Mealor added that the deal should help the company close the year with a tangible common equity ratio of 6.6%. The ratio dropped to about 6% at June 30.
Bulk sales of problem loans have emerged in the last year as a good way for anxious bankers to clear their balance sheet and move on. The proponents of such sales say that while marking down loans for sale is painful — for instance, First Financial marked its portfolio to 30 cents on the dollar and sold at 40 cents on the dollar — the benefits are worth it.
"This is a wonderful example of how a bank can use loan sales to reduce nonperforming assets, increase Tier 1 equity, and prove to the world that you have a handle on your marks," said Kingsley Greenland, chief executive of DebtX, which brokers loan sales. "Analysts and investors can get some comfort with the rest of the balance sheet, too."
Still, companies have to have the capital to withstand the deep haircuts associated with loan sales. Most of the major sales in the last few years have been completed alongside major capital raises.
First Financial did not raise new equity, but its sale, too, was paved by a bump in capital. On June 1, the company sold its First Southeast Insurance Services Inc. to Hub International Ltd. for $38 million.
"We loved the insurance business, but the returns had been reduced and with the bank holding company capital requirements outlined in Dodd-Frank, we had to make some decisions about capital," said Blaise B. Bettendorf, chief financial officer of First Financial, in an interview on Friday. "And it gave us the opportunity to make such a bold move with our loan portfolio."
Bettendorf added that she is "very satisfied" with the pricing of the bulk deal, which drew a handful of bidders.
Initial estimates suggested the price would range from the "high 20s to high 40s" in terms of cents on the dollar.
"We wanted to be conservative. We didn't want to be overly optimistic and have to come back and book another loss," Bettendorf said. "The competitive nature is what drove the pricing. There is a good bit of demand out there and not a lot of banks that can sell."
Now that the deal is complete, the company can focus on making consistent profits. First Financial is now focused on strengthening sources of noninterest income, such as its wealth management and mortgage division, Bettendorf said.
"The nonperforming assets were manageable, but definitely a significant distraction . and they led to some instability in earnings," Bettendorf said.
First Financial's nonperforming assets totaled $108.5 million at Sept. 30, down 4% from June 30 and down 29% from a year earlier. Nonperforming assets would have been $67.2 million had the loan sale closed before the quarter ended, the company said.
Joseph Fenech, an analyst at Sandler O'Neill & Partners LP, said he was relieved that the company's nonperforming trends are improving absent the loan sale. In addition to skepticism if the bulk sale would ever be completed, there was some fear that the hole would be filled with fresh problems, he wrote in a research note Friday.
"They didn't have a crop of new nonperfomers, so that is a big positive. I was wondering if they got it all with the sale," Fenech said in an interview Friday.
Fenech added that other companies should follow in First Financial's steps, both in laying out a plan to improve credit quality and specifically in making bulk loan sales.
"Other banks should take a look at this. They telegraphed to the street what they were going to do and they came in at that or better," Fenech said. "I hope others were watching to see how this gets done."
The company reported earnings of $113,000 for the Sept. 30 quarter, compared with a loss of $2.1 million a year earlier and a loss of $43.9 million in the previous quarter.
