First Financial Holdings (FFCH)

Results of Operations

Net Interest Income

          Our largest component of operating earnings is net interest income.  One of our strategic initiatives has been to reduce our reliance on net interest income through expansion of other sources of revenues. Net interest income totaled $79.7 million in fiscal 2006 compared with $76.5 million in fiscal 2005 and $76.6 million in fiscal 2004.  Net interest income represented approximately 59.5% of the net revenues in fiscal 2006 compared with 60.8% in fiscal 2005 and 64.5% in fiscal 2004.  The level of net interest income is determined by balances of interest-earning assets and interest-bearing liabilities and successfully managing the net interest margin.  Changes in interest rates paid on assets and liabilities, the rate of growth of the asset and liability base, the ratio of interest-earning assets to interest-bearing liabilities and management of the balance sheet’s interest rate sensitivity all factor into changes in net interest income. 

          Net interest income increased 4.3% to $79.7 million in fiscal 2006.   This increase followed a decrease in net interest income of .2% in fiscal 2005 and 2.4% in fiscal 2004.  The net interest margin increased in fiscal 2006 to 3.35% from 3.32% in fiscal 2005. The net interest margin benefited from a 68 basis point increase in the yield on average earning assets, while the average cost of interest bearing liabilities increased 65 basis points. Average earning assets increased $78.0 million during fiscal 2006 and this growth was also a contributing factor in the level of net interest income.

          The net interest margin decreased to 3.32% in 2005 from 3.38% in fiscal 2004. Our average cost of interest-bearing liabilities increased to 2.40% in fiscal 2005 from 2.24% in fiscal 2004. Average yields on interest-earning assets increased from 5.59% in fiscal 2004 to 5.67% in fiscal 2005. 

          While the net interest margin during fiscal 2006 increased by three basis points, more importantly, the net interest margin was 3.39% during the quarter ended September 30, 2006, or an increase of two-basis points from 3.37% during the quarter ended June 30, 2006.  The current inversion of the yield curve on United States Treasury Securities, more competitive pricing on deposits and a very competitive lending environment will be factors influencing the net interest margin during fiscal 2007.

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