UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-17122
FIRST FINANCIAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 57-0866076
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
34 BROAD STREET, CHARLESTON, SOUTH CAROLINA 29401
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (803)529-5800
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of November 30, 1997 there were issued and outstanding 6,751,538 shares
of the Registrant's common stock. The registrant's common stock is traded
over-the-counter and is listed on the Nasdaq National Stock Market under the
symbol "FFCH." The aggregate market value of the common stock held by
nonaffiliates of the registrant, based on the closing sales price of the
registrant's common stock as quoted on the Nasdaq Stock Market on December
15, 1997, was $324,073,824 (6,751,538 shares at $48.00 per share). It is
assumed for purposes of this calculation that none of the registrant's
officers, directors and 5% stockholders are affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 1998 Annual Meeting of Stockholders.
(Part III)
<PAGE>
FIRST FINANCIAL HOLDINGS, INC.
1997 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . 1
General . . . . . . . . . . . . . . . . . . . . . . . . 1
Discussion of Forward Looking Statements . . . . . . . 2
Lending Activities . . . . . . . . . . . . . . . . . . 2
Investment Activities . . . . . . . . . . . . . . . . . 7
Sources of Funds . . . . . . . . . . . . . . . . . . . 9
Asset and Liability Management . . . . . . . . . . . .11
Subsidiary Activities . . . . . . . . . . . . . . . . .12
Competition . . . . . . . . . . . . . . . . . . . . . .13
Personnel . . . . . . . . . . . . . . . . . . . . . . .13
Regulation . . . . . . . . . . . . . . . . . . . . . .13
Taxation . . . . . . . . . . . . . . . . . . . . . . .18
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . .19
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . .19
Item 4. Submission of Matters to a Vote of Security Holders . .20
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . . .20
Item 6. Selected Financial Data . . . . . . . . . . . . . . . .21
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . .22
Item 8. Financial Statements and Supplementary Data . . . . . .35
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . .63
PART III
Item 10. Directors and Executive Officers of the Registrant . .63
Item 11. Executive Compensation . . . . . . . . . . . . . . . .64
Item 12. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . .64
Item 13. Certain Relationships and Related Transactions . . . .64
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K . . . . . . . . . . . . . . . . . . . . . . .65
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
First Financial Holdings, Inc. ("First Financial" or the "Company") was
incorporated in the State of Delaware on September 3, 1987, for the purpose
of becoming a savings and loan holding company for First Federal Savings and
Loan Association of Charleston ("First Federal"). On January 27, 1988, the
stockholders of First Federal approved the reorganization of First Federal
into the holding company form of ownership. The reorganization was completed
on June 30, 1988, on which date First Federal became the wholly-owned
subsidiary of the Company and stockholders of First Federal exchanged their
shares of First Federal common stock for shares of the Company's common stock
("Common Stock"). Prior to completion of the reorganization, the Company had
no assets or liabilities and engaged in no business activities. Subsequent
to the holding company reorganization, the Company has not engaged in any
significant activity other than holding the stock of First Federal and
certain passive investment activities.
On October 9, 1992, the Company consummated the acquisition of Peoples
Federal Savings and Loan Association, Conway, South Carolina ("Peoples
Federal") upon the voluntary supervisory conversion of Peoples Federal from a
federal mutual to a federal stock savings and loan association, resulting in
Peoples Federal being held as a wholly-owned subsidiary of First Financial.
As a result of the acquisition of Peoples Federal, First Financial became a
multiple savings and loan holding company for First Federal and Peoples
Federal (together, the "Associations").
First Federal, chartered in 1934, is the largest financial institution
headquartered in the Charleston, South Carolina metropolitan area and the
second largest thrift institution in South Carolina based on asset size as
reported by the Office of Thrift Supervision ("OTS"). First Federal is a
federally-chartered stock savings and loan association that conducts its
business through its home office in the city's historic district, 20 branch
offices in the three surrounding counties and two full-service offices in
Georgetown, South Carolina. First Federal also operates a private banking
office in Hilton Head, South Carolina.
Peoples Federal was chartered in 1914 and is a federal stock savings and
loan association headquartered in Conway, South Carolina. Peoples Federal is
the result of a merger of Peoples Federal of Conway and Peoples Federal of
Florence in 1982. On November 7, 1997, the Company completed the acquisition
of Investors Savings Bank of South Carolina, Inc., ("Investors") through the
merger of Investors with Peoples Federal. Each share of Investors common
stock was exchanged for 1.36 of the Company s Common Stock. The Company
issued approximately 354,400 shares of Common Stock in the transaction.
Peoples Federal conducts its business through 10 branch offices, a loan
production office in Sunset Beach, North Carolina and its main office in
Conway. Branches are located in the Myrtle Beach/Grand Strand area
(4),Florence (3), Conway (2) and Loris (1).
The business of the Company consists primarily of acting as financial
intermediary by attracting deposits from the general public and using such
funds, together with borrowings and other funds, to originate first mortgage
loans on residential properties located in its primary market areas. The
Company also makes construction and consumer and other non-mortgage loans and
invests in mortgage-backed securities, federal government and agency
obligations, money market obligations and certain corporate obligations.
Through subsidiaries of the Associations, the Company also engages in
property and casualty insurance, brokerage of investment products and certain
data processing activities. None of the subsidiary activities is considered
to constitute a business segment.
First Federal and Peoples Federal are members of the Federal Home Loan Bank
("FHLB") System and their savings deposits are insured by the Federal Deposit
Insurance Corporation ("FDIC") under the Savings Association Insurance Fund
("SAIF") up to applicable limits. The Associations are subject to
comprehensive regulation, examination and supervision by the OTS and the
FDIC.
The Associations are subject to capital requirements under OTS regulations,
and must satisfy three minimum capital requirements: core capital, tangible
capital and risk-based capital. For more information regarding the
Associations' compliance with capital requirements, see "Regulation of the
Associations -- Capital Requirements" contained herein and Note 18 of Notes
to Consolidated Financial Statements.
DISCUSSION OF FORWARD-LOOKING STATEMENTS
Information in the enclosed report, other than historical information, may
contain forward-looking statements that involve risks and uncertainties,
including, but not limited to, timing of certain business initiatives of the
Company, the Company s interest rate risk position and future regulatory
actions of the OTS and the FDIC. It is important to note that the Company's
actual results may differ materially and adversely from those discussed in
forward-looking statements.
LENDING ACTIVITIES
General
At September 30, 1997, the Company's net loan portfolio totaled
approximately $1.4 billion, or 82.05% of the Company's total assets. The
Company's principal lending activity is the origination of loans secured by
single-family residential real estate. Prior to fiscal 1993, the Company's
lending activities also included the origination of significant amounts of
income property loans secured by multi-family and non-residential real
estate. In that year, First Federal curtailed loans made on nonresidential
properties primarily due to adverse changes in market conditions and
increased levels of nonperforming assets arising from this type of lending.
Peoples Federal had curtailed such lending before its acquisition by the
Company in early fiscal 1993. Thus, in the period since 1992, the Company
has shifted its focus to concentrate on single-family residential mortgage
lending and consumer lending. The Company also offers commercial business
loans of the type traditionally offered by commercial banks. Although
federal regulations allow the Company to originate loans nationwide, the
Company has originated substantially all of its loans in its primary market
areas of Charleston, Dorchester, Berkeley, Georgetown, Horry, Florence and
Beaufort counties in South Carolina and Brunswick County in North Carolina.
In 1995 the Company initiated a correspondent lending program allowing for
the purchase of loans originated by unaffiliated mortgage lenders and brokers
in South Carolina and North Carolina. Loans originated by these lenders and
brokers are subject to the same underwriting standards as those used by the
Company in its own lending and are accepted for purchase only after approval
by the Company's underwriters. Purchases under this program totaled $36.8
million in fiscal 1997.
The Company makes both fixed-rate and adjustable-rate loans and generally
retains the servicing on loans originated. A large percentage of single-
family loans are made pursuant to certain guidelines which will permit the
sale of such loans in the secondary market to government agencies or private
investors. The Company's primary single-family product is the conventional
loan. However, loans are also originated which are either partially
guaranteed by the Veterans Administration ("VA") or fully insured by the
Federal Housing Administration ("FHA").
Set forth below is selected data relating to the aggregate composition of
the Company's loan portfolio on the dates indicated.
<TABLE>
<CAPTION>
At September 30,
1997 1996 1995 1994 1993
% of % of % of % of % of
Amount Total Amount Total Amount Total Amount Total Amount Total
(dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TYPE OF LOAN
Real estate:
1- to 4-family
residential $1,013,608 72.1% $ 903,269 70.6% $ 698,442 64.5% $583,430 60.5% $530,945 54.9%
Multi-family 53,368 3.8 56,629 4.4 57,269 5.3 59,310 6.2 61,898 6.4
Commercial real
estate and 210,933 15.0 212,059 16.6 211,489 19.5 216,651 22.5 249,466 25.8
land
Commercial business
loans 27,195 1.9 26,634 2.1 27,825 2.6 25,403 2.7 29,189 3.0
Consumer loans:
Home equity 57,490 4.1 47,633 3.7 47,015 4.3 51,486 5.3 58,109 6.0
Mobile homes 19,455 1.4 21,925 1.7 25,027 2.3 28,276 2.9 31,476 3.2
Credit cards 10,992 0.8 10,453 0.8 9,146 0.8 8,115 0.8 7,354 0.8
Savings account
loans 5,381 0.4 5,430 0.4 5,262 0.5 4,677 0.5 4,751 0.5
Other consumer
loans 48,673 3.5 34,844 2.7 28,131 2.6 19,096 2.0 15,872 1.6
Total gross loans
receivable 1,447,095 103.0 1,318,876 103.0 1,109,606 102.4 996,444 103.4 989,060 102.2
Allowance for loan
losses (11,625)(0.8) (11,202)(0.9) (10,637)(1.0) (10,728)(1.1) (10,742)(1.1)
Loans in process (29,405)(2.1) (26,652)(2.0) (14,282)(1.3) (20,213)(2.1) (7,742)(0.8)
Deferred loan
fees and
discounts (571)(0.1) (912)(0.1) (1,320)(0.1) (2,137)(0.2) (2,969)(0.3)
Loans receiv-
able, net $1,405,494 100.0%$1,280,110 100.0% $1,083,367 100.0% $963,366 100.0% $967,607 100.0%
</TABLE>
The following table shows, at September 30, 1997, the dollar amount of
adjustable-rate loans and fixed-rate loans in the Company's portfolio based
on their contractual terms to maturity. The amounts in the table do not
include adjustments for undisbursed amounts in loans in process, deferred
loan fees and discounts or allowances for loan losses. Demand loans, loans
having no stated schedule of repayments and no stated maturity, and
overdrafts are reported as due in one year or less. Contractual principal
repayments of loans do not necessarily reflect the actual term of the
Company's loan portfolios. The average life of mortgage loans is
substantially less than their contractual terms because of loan prepayments
and because of enforcement of due-on-sale clauses, which gives the Company
the right to declare a loan immediately due and payable if, among other
things, the borrower sells the real property subject to the mortgage. The
average life of mortgage loans tends to increase when current market rates on
mortgage loans substantially exceed rates on existing mortgage loans.
Correspondingly, when market rates on mortgages decline below rates on
existing mortgage loans, the average life of these loans tends to be reduced.
<TABLE>
<CAPTION>
Over
Over One Over Two Three to Over Five Over Ten Over
Within to Two to Three Five to Ten to Fifteen Fifteen
Consolidated One Year Years Years Years Years Years Years Total
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate mortgages:
Adjustable-rate $ 2,481 $ 924 $ 1,274 $ 5,131 $ 24,827 $ 62,982 $ 743,717 $ 841,336
Fixed-rate 11,631 18,748 7,378 34,170 42,987 105,022 216,637 436,573
Consumer loans:
Adjustable-rate 56,109 168 445 1,173 6,100 4,555 2,359 70,909
Fixed-rate 20,556 6,410 9,643 18,613 13,098 2,467 295 71,082
Commercial business
loans:
Adjustable-rate 13,468 1,410 1,623 1,781 -- 91 707 19,080
Fixed-rate 6,227 880 509 470 -- 29 -- 8,115
Total $ 110,472 $ 28,540 $ 20,872 $ 61,338 $ 87,012 $ 175,146 $ 963,715 $1,447,095
</TABLE>
Residential Mortgage Lending
At September 30, 1997, the Company's real estate loans totaled
approximately $1.3 billion, or 90.9% of net loans receivable. One- to four-
family residential mortgage loans totaled $1.0 billion or 79.3% of the
Company's real estate loans and 72.1% of total net loans receivable. The
Company offers adjustable-rate ("ARM") and fixed-rate mortgage loans with
terms ranging from 10 years to 30 years.
The ARMs currently offered by the Company have up to 30-year terms and
interest rates which adjust annually or every three, five or seven years in
accordance with a designated index. ARMS may be originated with a 1% or 2%
cap on any increase or decrease in the interest rate per year, with a 4%, 5%
or 6% limit on the amount by which the interest rate can increase or decrease
over the life of the loan.
The Company emphasizes the origination of ARMs rather than long-term,
fixed-rate mortgage loans for inclusion in its portfolios. In order to
encourage the origination of ARMs with interest rates which adjust annually,
the Company, like many of its competitors, may offer a rate of interest on
such loans below the fully-indexed rate for the initial period of the loan.
The Company presently offers single-family ARMs indexed to the one year
constant maturity treasury index. While these loans are expected to adjust
more quickly to changes in market interest rates, they may not adjust as
rapidly as changes occur in the Company's cost of funds. Included in the
Company's single-family ARMs are loans originated in the past which reprice
to spreads over cost of funds indices. The Company underwrites ARMs based on
the fully-indexed rate. The Company's fixed-rate residential mortgage loans
have terms ranging from 10 to 30 years and require level monthly payments
sufficient to amortize principal over the life of the loan.
The Company originates residential mortgage loans with loan-to-value ratios
up to 95%. Generally, on mortgage loans exceeding the 80% loan-to-value
ratio, the Company requires private mortgage insurance which protects the
Company against losses of at least 20% of the mortgage loan amount. All
property securing real estate loans made by the Company is appraised either
by appraisers employed by the Company or by independent appraisers selected
by the Company. Loans are usually made pursuant to certain guidelines which
will permit the sale of such loans in the secondary market.
The Company offers various other residential lending programs, including
bi-weekly mortgage loans and two-step mortgage loans originated principally
for first-time home buyers. The Company also offers, as part of its
Community Reinvestment Act program, more flexible underwriting criteria to
broaden the availability of mortgage loans in the communities it serves.
The majority of the Company's residential construction loans are made to
finance the construction of individual owner-occupied houses with up to 90%
loan-to-value ratios. Residential constructions loans total $34.5 million at
September 30, 1997. These construction loans are generally structured to be
converted to permanent loans at the end of the construction phase. Loan
proceeds are disbursed in increments as construction progresses and as
inspections warrant. As part of its residential lending program, the
Company also offers construction loans with 75% loan-to-value ratios to
qualified builders. These construction loans are generally at a competitive
fixed rate of interest for one- or two-year periods. The Company also offers
lot loans intended for residential use. Such loans may be on a fixed-rate or
adjustable-rate basis.
Commercial Real Estate, Multi-family and Land Lending
At September 30, 1997, the Company's commercial real estate portfolio
totaled $152.7 million, or 10.9% of total net loans and 11.9% of real estate
loans. Its multi-family portfolio totaled $53.4 million, or 3.8% of total
net loans and 4.2% of total real estate loans. Loans made with land as
security totaled $58.3 million, or 4.1% of total net loans and 4.6% of total
real estate loans. Because of market conditions, since 1993 the Company has
limited growth in loans made on commercial real estate, multi-family
properties and on land acquisition and development projects and placed
greater emphasis on single-family real estate lending.
Interest rates charged on permanent commercial real estate loans are
determined by market conditions existing at the time of the loan commitment.
Such loans are generally made on an adjustable-rate basis, ranging from one-
half to two percentage points above the prime lending rate. Permanent
commercial real estate loans generally have been made for terms of ten years
with provisions for interest rate adjustments semi-annually or annually and
payments based on 30-year amortizations. Payment adjustments occur annually.
In the past the Company originated a substantial portion of its commercial
real estate loans at rates generally two to three percentage points above its
prevailing cost of funds. As such loans reach call or loan review dates or
refinance, it is the Company's current policy to negotiate most of these
loans to new terms based on the prime lending rate as the index.
Commercial and multi-family mortgage lending generally involves greater
risk than single-family lending. Such lending typically involves larger loan
balances to single borrowers or groups of related borrowers than single-
family lending. Furthermore, the repayment of loans secured by income-
producing properties is typically dependent upon the successful operation of
the related real estate project. If the cash flow from the property is
reduced (for example, if leases are not obtained or renewed), the borrower's
ability to repay the Company's loans may be impaired. These risks can be
affected significantly by supply and demand in the market for the type of
property securing the loan and by general economic conditions, and commercial
and multi-family loans may thus be subject, to a greater extent than single-
family property loans, to adverse conditions in the economy.
Consumer Lending
Federal regulations permit the Company to make secured and unsecured
consumer loans up to 35% of their assets. In addition, the Associations have
lending authority above the 35% category for certain consumer loans, such as
home equity loans, property improvement loans, mobile home loans and loans
secured by savings accounts. The Company's consumer loans totaled $142.0
million at September 30, 1997, or 10.2% of net loans receivable. The largest
component of consumer lending is comprised of single-family home equity lines
of credit and other equity loans, currently totaling $57.5 million, or 40.49%
of all consumer loans. Remaining consumer loans primarily consist of loans
secured by mobile homes, boats, automobiles and credit cards.
Commercial Business Lending
The Company is permitted under federal law to make secured or unsecured
loans for commercial, corporate business and agricultural purposes including
issuing letters of credit. The aggregate amount of such loans outstanding
generally may not exceed 20% of an institution's assets, provided that
amounts in excess of 10% of total assets may be used only for small business
loans.
The Company's commercial business loans are generally made on a secured
basis with terms that usually do not exceed five years. Most of the
Company's commercial business loans to date have interest rates that change
at periods ranging from 30 days to one year based on the Company's prime
lending rate. Some loans have fixed interest rates determined at the time of
commitment. At September 30, 1997, the Company's commercial business loans
outstanding were $27.2 million, which represented 1.9% of total net loans
receivable.
Loan Sales and Servicing
While the Company originates adjustable-rate loans for its own portfolio,
fixed-rate loans are generally made on terms that will permit their sale in
the secondary market. The Company participates in secondary market
activities by selling whole loans and participations in loans to the Federal
National Mortgage Association ("FNMA"), the Federal Home Loan Mortgage
Corporation ("FHLMC"), as well as other institutional investors. This
practice enables the Company to satisfy the demand for such loans in its
local communities, to meet asset and liability objectives of management and
to develop a source of fee income through loan servicing. At September 30,
1997, the Company was servicing loans for others of $229.7 million.
Based on the current level of market interest rates and other factors, the
Company presently intends to sell selected current originations of conforming
30-year and 15-year conventional fixed-rate mortgage loans. The Company's
policy with respect to the sale of fixed-rate loans is dependent to a large
extent on the general level of market interest rates. Sales of fixed-rate
residential loans totaled $48.6 million in 1997, $6.9 million in 1996 and
$1.5 million in 1995. At September 30, 1997, the Company had $4.5 million in
loans held for sale.
Risk Factors
Certain risks are inherent with loan portfolios which contain commercial
real estate, multi-family, commercial business and consumer loans. While
these types of loans provide benefits to the Company's asset/liability
management programs and reduce exposure to interest rate changes, such loans
may entail significant additional credit risks compared to residential
mortgage lending. Commercial real estate and multi-family loans may involve
large loan balances to single borrowers or groups of related borrowers. In
addition, the payment experience on loans secured by income-producing
properties is typically dependent on the successful operation of the
properties and thus may be subject to a greater extent to adverse conditions
in the local or regional real estate market or in the general economy.
Commercial business lending generally involves greater risk than
residential mortgage lending and involves risks that are different from those
associated with residential, commercial and multi-family real estate lending.
Real estate lending is generally considered to be collateral based lending
with loan amounts based on predetermined loan to collateral values and
liquidation of the underlying real estate collateral is viewed as the primary
source of repayment in the event of borrower default. Although commercial
business loans are often collateralized by equipment, inventory, accounts
receivable or other business assets, the liquidation of collateral in the
event of a borrower default is often not a sufficient source of repayment
because accounts receivable may be uncollectible and inventories and
equipment may be obsolete or of limited use, among other things.
Accordingly, the repayment of a commercial business loan depends primarily on
the creditworthiness of the borrower (and any guarantors), while liquidation
of collateral is a secondary and often insufficient source of repayment.
Construction loans also involve additional risks attributable to the fact
that loan funds are advanced upon the security of the project under
construction. Consumer loans have historically tended to have a higher rate
of default than residential mortgage loans.
There are, due to the nature of ARMs, unquantifiable risks resulting from
increased costs to the borrower as a result of periodic repricing. Despite
the benefits of ARMs to the Company's asset/liability management program,
they pose additional risks, primarily because as interest rates rise, the
underlying payment by the borrower rises, increasing the potential for
default. At the same time, the marketability of the underlying property may
be adversely affected by higher interest rates.
All of the above risk factors are present in the Company's loan portfolio
and could have an impact on future delinquency and charge-off rates and
levels.
Limits on Loan Concentrations
The Associations' permissible lending limits for loans to one borrower is
the greater of $500,000 or 15% of unimpaired capital and surplus (except for
loans fully secured by certain readily marketable collateral, in which case
this limit is increased to 25% of unimpaired capital and surplus). At
September 30, 1997, First Federal's and Peoples Federal's lending limits
under this restriction were $12.8 million and $5.0 million, respectively. A
broader limitation (the lesser of $30 million or 30% of unimpaired capital
and surplus) is provided under certain circumstances and subject to OTS
approval for loans to develop domestic residential housing units. In
addition, the Associations may provide purchase money financing for the sale
of any asset without regard to the loans to one borrower limitation so long
as no new funds are advanced and the Associations are not placed in a more
detrimental position than if they had held the asset. At September 30, 1997,
the largest aggregate amount of loans by First Federal and Peoples Federal to
any one borrower, including related entities, was approximately $10.2 million
and $3.4 million, respectively.
Delinquencies and Non-performing Assets
Delinquent and problem loans are a normal part of any lending activity.
When a borrower fails to make a required payment on a loan, the Company
attempts to cure the default by contacting the borrower. The Company
contacts the borrower after a payment is past due less than 20 days, and a
late charge is assessed on the loan. In most cases, defaults are cured
promptly. If the delinquency on a mortgage loan continues 60 to 90 days and
is not cured through normal collection procedures or an acceptable
arrangement is not worked out with the borrower, the Company will institute
measures to remedy the default, including commencing a foreclosure action.
The Company may accept voluntary deeds of the secured property in lieu of
foreclosure.
The Company's mortgage loans are generally secured by the use of a mortgage
instrument. Notice of default under these loans is required to be recorded
and mailed. If the default is not cured within three months, a notice of
sale is posted, mailed and advertised, and a sale is then conducted.
Real estate acquired by the Company as a result of foreclosure or by deed
in lieu of foreclosure is classified as real estate owned until it is sold.
When property is acquired, it is recorded at the lower of cost or estimated
fair value at the date of acquisition and any resulting write-down is charged
to the allowance for losses. Generally, interest accrual on a loan ceases
when the loan becomes 90 days delinquent.
OTS Asset Classification System
OTS regulations include a classification system for problem assets,
including assets that previously had been treated as "scheduled items."
Under this classification system, problem assets for insured institutions are
classified as "substandard," "doubtful" or "loss," depending on the presence
of certain characteristics discussed below.
An asset is considered "substandard" if inadequately protected by the
current net worth and paying capacity of the obligor or of the collateral
pledged, if any. "Substandard" assets include those assets characterized by
the "distinct possibility" that the institution will sustain "some loss" if
the deficiencies are not corrected. Assets classified as "doubtful" have all
of the weaknesses inherent in those classified "substandard" with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values,
"highly questionable and improbable." Assets classified "loss" are those
considered "uncollectible" and of such little value that their continuance as
assets without the establishment of a specific loss reserve is not warranted.
When an institution classifies problem assets as either substandard or
doubtful, it is required to establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risks
associated with lending activities, but which, unlike specific allowances,
have not been allocated to particular problem assets. When an institution
classifies problem assets as "loss," it is required either to establish a
specific allowance for losses equal to 100% of the amount of the asset so
classified or to charge off such amount. An institution's determination as
to the classification of its assets and the amount of its valuation
allowances is subject to review by the OTS, which can order the establishment
of additional general or specific loss allowances. The Company has
classified $35.3 million in assets as substandard and $1.2 million as loss as
of September 30, 1997.
The OTS classification of assets regulation also provides for a "special
mention" designation, in addition to the "substandard," "doubtful" and "loss"
classifications. "Special mention" assets are defined as those that do not
currently expose an institution to a sufficient degree of risk to warrant
classification as either "substandard," "doubtful" or "loss" but do possess
credit deficiencies or potential weaknesses deserving management's close
attention which, if not corrected, could weaken the asset and increase such
risk in the future. The Company had $16.0 million of assets designated
"special mention" as of September 30, 1997.
Management periodically reviews its loan portfolio, and has, in the opinion
of management, appropriately classified and established allowances against
all assets requiring classification under the regulation.
For further discussion of the Company's problem assets, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Asset Quality" and Note 8 of Notes to Consolidated Financial Statements.
INVESTMENT ACTIVITIES
The Associations are required under federal regulations to maintain a
minimum amount of liquid assets which may be invested in specified short-term
securities and are also permitted to invest in other types of securities.
Investment decisions are made by authorized officers of the Company and the
Associations within policies established by the Company's and the
Associations' Boards of Directors.
At September 30, 1997, the Company's investment and mortgage-backed
securities portfolio totaled approximately $223.3 million, which included
stock in the Federal Home Loan Bank ("FHLB") of Atlanta of $21.6 million.
Investment securities include U.S. Government and agency obligations and
corporate bonds approximating $27.8 million and $8.4 million, respectively.
At September 30, 1997 there were five investments in mutual funds totaling
approximately $16.6 million. Mortgage-backed securities totaled $149.0
million as of September 30, 1997. See Note 1 of Notes to Consolidated
Financial Statements for a discussion of the Company's accounting for
investment and mortgage-backed securities. See Notes 4, 5 and 6 of Notes to
Consolidated Financial Statements for additional information regarding
investment and mortgage-backed securities and FHLB of Atlanta stock.
Objectives of the investment policies of the Company are achieved through
investing in U.S. Government, federal agency, corporate debt securities,
mortgage-backed securities, short-term money market instruments, mutual
funds, loans and other investments as authorized by OTS regulations and
specifically approved by the Boards of Directors of the Company and the
Associations. Investment portfolio guidelines specifically identify those
securities eligible for purchase and describe the operations and reporting
requirements of the Investment Committees which execute investment policy.
The primary objective of the Company in its management of the investment
portfolio is to maintain a portfolio of high quality, highly liquid
investments with returns competitive with short-term treasury or agency
securities and highly rated corporate securities.
As members of the FHLB System, the Associations are required to maintain an
investment in the common stock of the FHLB of Atlanta. See "Regulation of
the Associations -- Federal Home Loan Bank System." The stock of the FHLB of
Atlanta is redeemable at par value.
Securities may differ in terms of default risk, interest risk, liquidity
risk and expected rate of return. Default risk is the risk that an issuer
will be unable to make interest payments, or to repay the principal amount on
schedule. The Company primarily invests in U.S. Government and federal
agency obligations. U.S. Government obligations are regarded as free of
default risk. The issues of most government agencies are backed by the
strength of the agency itself plus a strong implication that in the event of
financial difficulty, the agency would be assisted by the federal government.
The credit quality of corporate debt varies widely. The Company only invests
in commercial paper and corporate debt securities which are rated in either
one of the three highest categories by two nationally recognized investment
rating services.
The Company's investment in mortgage-backed securities serve several
primary functions. First, the Company has securitized whole loans for
mortgage-backed securities issued by federal agencies to use as collateral
for certain of its borrowings and to secure public agency deposits. Second,
the Company previously securitized loans with federal agencies to reduce its
credit risk exposure and to reduce regulatory risk-based capital
requirements. Third, the Company acquires mortgage-backed securities from
time to time to meet earning asset growth objectives and provide additional
interest income when necessary to augment reduced loan originations and
replace loan portfolio runoff.
The following tables sets forth the carrying value of the Company's
investment and mortgage-backed securities portfolio, excluding stock in the
FHLB of Atlanta, maturities and average yields at September 30, 1997. The
fair value of the Company's investment securities portfolio, excluding stock
in the FHLB of Atlanta, was $201.8 million on September 30, 1997.
<TABLE>
<CAPTION>
Investment and Mortgage-backed Securities Portfolio
As of September 30,
1997 1996 1995
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
(dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities Held to Maturity:
U.S. Treasury and U.S. Government agencies
and corporations $ 11,980 $ 11,970 $ 27,487 $ 27,417 $ 46,853 $ 47,028
Corporate debt and other securities 21,301 21,659
Mortgage-backed securities of FNMA, FHLMC
and GNMA 18,361 18,844
Total securities held to maturity $ 11,980 $ 11,970 $ 27,487 $ 27,417 $ 86,515 $ 87,531
Maturity and Yield Schedule as of September 30, 1997
Weighted
Carrying Average
Value Yield
U.S. Treasury and U.S. Government agencies
and corporations:
Within 1 year $ 5,496 6.34%
After 1 but within 5 years 6,484 5.91
Total securities held to maturity $ 11,980 6.11%
As of September 30,
1997 1996 1995
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
(dollar amounts in thousands)
Securities Available for Sale:
U.S. Treasury and U.S. Government agencies
and corporations $ 15,775 $ 15,808 $ 29,755 $ 29,668 $ 15,792 $ 15,874
Corporate debt and other securities 8,238 8,384 12,417 12,689
Equity securities
Asset Management Fund-Adjustable-Rate
Mortgage Portfolio 9,000 8,995 9,000 8,932 9,000 8,932
Federated Adjustable-Rate Mortgage Fund 3,219 3,151 10,000 9,709 10,000 9,689
Other mutual funds and other 4,575 4,488 5,561 5,436 5,656 5,336
Mortgage-backed securities of FNMA,
FHLMC and GNMA 147,088 148,963 82,152 82,991 82,260 82,765
Total securities available for sale $ 187,895 $ 189,789 $ 148,885 $ 149,425 $ 122,708 $122,596
Maturity and Yield Schedule as of September 30, 1997
Weighted
Carrying Average
Value Yield
U.S. Treasury and U.S. Government (dollar amounts in thousands)
agencies and corporations:
Within 1 year $ 2,909 6.32%
After 1 but within 5 years 12,899 5.93
15,808 6.00
Corporate debt and other securities:
Within 1 year 3,198 7.67
After 1 but within 5 years 5,186 8.01
8,384 7.93
Equity securities
Within 1 year 16,634 5.91
Mortgage-backed securities
After 1 but within 5 years 20,237 6.71
After 5 but within 10 years 24,515 7.69
After 10 years 104,211 7.22
148,963 7.23
$ 189,789 7.04%
</TABLE>
SOURCES OF FUNDS
Deposits have historically been the primary source of funds for lending and
investing activities. The amortization and scheduled payment of loans and
maturities of investment securities provide a stable source of funds, while
deposit fluctuations and loan prepayments are significantly influenced by the
overall interest rate environment and other market conditions. FHLB advances
and short-term borrowings provide supplemental liquidity sources based on
specific needs or if management determines that these are the best sources of
funds to meet current requirements.
Deposits
The Company offers a number of deposit accounts including passbook savings
accounts, NOW/checking, commercial checking, money market accounts,
Individual Retirement Accounts ("IRA") and certificate accounts which
generally range in maturity from three months to five years. Deposit account
terms vary, with the principal differences being the minimum balance
required, the time period the funds must remain on deposit and the interest
rate. For a schedule of the dollar amounts in each major category of the
Company's deposit accounts, see Note 11 of Notes to Consolidated Financial
Statements.
The Associations are subject to fluctuations in deposit flows because of
the influence of general interest rates, money market conditions and
competitive factors. The Asset and Liability Committees of the Associations
meet weekly and make changes relative to the mix, maturity and pricing of
assets and liabilities in order to minimize the impact on earnings from such
external conditions.
The Associations' deposits are obtained primarily from residents of South
Carolina. Management estimates that less than 1% of deposits at September
30, 1997, are obtained from customers residing outside of South Carolina.
The principal methods used by the Company to attract deposit accounts include
the offering of a wide variety of services and accounts, competitive interest
rates, and convenient office locations and service hours. The Company
utilizes traditional marketing methods to attract new customers and savings
deposits, including mass media advertising and direct mail. The Company also
provides customers access to the convenience of automated teller machines
("ATMs") through a proprietary ATM network and access to regional and
national ATM networks. The Company also enjoys an excellent reputation for
providing products and services to meet the needs of market segments, such as
seniors. For example, 50-Plus Club members benefit from a number of
advantageous programs, such as exclusive travel packages, special events and
classic movies.
Jumbo Certificates of Deposit
The following table indicates the amount of the Company's jumbo
certificates of deposit by time remaining until maturity as of September 30,
1997. Jumbo certificates of deposit require minimum deposits of $100,000 and
have negotiable interest rates.
Maturity Period At September 30, 1997
(dollar amounts in thousands)
Three months or less $ 34,556
Over three through six months 16,043
Over six through twelve months 11,423
Over twelve months 3,019
Total $ 65,041
Borrowings
The Company relies upon advances from the FHLB of Atlanta to supplement its
supply of lendable funds and to meet deposit withdrawal requirements. The
FHLB of Atlanta has served as the Company's primary borrowings source.
Advances from the FHLB of Atlanta are typically secured by the Company's
stock in the FHLB of Atlanta and a portion of the Company's first mortgage
loans. Interest rates on advances vary from time to time in response to
general economic conditions.
At September 30, 1997, the Company had advances totaling $419.6 million
from the FHLB of Atlanta at an average rate of 5.65%. At September 30, 1997,
the maturity of the Associations' FHLB advances ranged from one to 15 years.
For more information on borrowings, see Note 12 of Notes to Consolidated
Financial Statements.
The Associations have periodically entered into transactions to sell
securities under agreements to repurchase ("reverse repurchase agreements")
through broker-dealers. Reverse repurchase agreements evidence indebtedness
of the Company arising from the sale of securities that the Company is
obligated to repurchase at specified prices and dates. At the date of
repurchase, the Company will, in some cases, enter into another reverse
repurchase agreement to fund the repurchase of the maturing agreement. For
regulatory and accounting purposes these reverse repurchase agreements are
deemed to be borrowings collateralized by the securities sold. At September
30, 1997, the Company had $58.9 million of outstanding reverse repurchase
agreements secured by mortgage-backed securities. The agreements had a
weighted average interest rate of 5.62% at September 30, 1997, and mature
within three months. For more information on other borrowings, see Note 13
of Notes to Consolidated Financial Statements.
The following table sets forth certain information regarding short-term
borrowings by the Company at the end of and during the periods indicated:
At or For the Year Ended September
30,
1997 1996 1995
(dollar amounts in thousands)
Weighted Average Rate Paid On (at end of
period):
FHLB advances 5.65% 5.61% 5.88%
Securities sold under agreements to
repurchase 5.62 5.69 5.89
Maximum Amount of Borrowings Outstanding
(during period):
FHLB advances $ 419,577 $ 312,402 $ 107,853
Securities sold under agreements to
repurchase 58,896 43,860 45,217
Approximate Average Amount of Short-term
Borrowings
With Respect To:
FHLB advances 377,475 215,396 78,982
Securities sold under agreements to
repurchase 27,050 37,916 26,769
Approximate Weighted Average Rate Paid
On (during period):
FHLB advances 5.71% 5.70% 5.92%
Securities sold under agreements to
repurchase 5.59 5.70 6.08
Long-term Debt
On September 17, 1992, the Company issued $20.3 million aggregate principal
amount of Senior Notes ("Notes") due September 1, 2002. The Notes bear
interest at 9-3/8% per year. The Company received net proceeds of
approximately $19.0 million, $16.5 million of which was used to complete the
acquisition of Peoples Federal on October 9, 1992. The Company has agreed to
prepay, at a price of 100% of the principal plus accrued interest to the date
of prepayment, up to $1.0 million of the Notes tendered by noteholders for
prepayment during the period from the date of issuance through September 1,
1993, and thereafter in any 12-month period ending September 1, subject to
certain limitations. The Company's obligation to prepay Notes tendered for
prepayment is not cumulative. Although the Company is obligated to prepay in
any prepayment period up to $1.0 million of the Notes annually, it is not
required to establish a sinking fund or otherwise set aside funds for that
purpose. The ability of the Company to prepay the Notes depends, to a
substantial degree, upon interest income generated by the Company's
investment assets, the availability of alternative credit sources, and the
payment of dividends and other fees to the Company by the Associations.
Notes totaling $487,000 were redeemed on September 1, 1993. None have been
redeemed since that time. See Note 14 of Notes to Consolidated Financial
Statements for additional information on the Notes.
The principal expense of the Company is the interest due annually on the
Notes, which approximates $1.9 million, assuming certain noteholder options
to elect prepayment of the Notes are not exercised. Payments of interest and
principal on the Notes are dependent upon the ability of First Federal and
Peoples Federal to pay dividends to the Company. Dividend and other capital
distributions by the subsidiaries are restricted by regulation and may
require regulatory approval. For further information, see "Regulation of the
Associations - Limitations on Capital Distributions."
ASSET AND LIABILITY MANAGEMENT
Market Risk
Market risk is the risk of loss from adverse changes in market prices and
rates. The Company s market risk arises principally from interest rate risk
inherent in its lending, deposit and borrowing activities. Management
actively monitors and manages its interest rate risk exposure. Although the
Company manages other risks, as in credit quality and liquidity risk, in the
normal course of business, management considers interest rate risk to be its
most significant market risk and could potentially have the largest material
effect on the Company s financial condition and results of operations.
Other types of market risks, such as foreign currency exchange rate risk and
commodity price risk, do not arise in the normal course of the Company's
business activities.
The Company's profitability is affected by fluctuations in interest rates.
Management's goal is to maintain a reasonable balance between exposure to
interest rate fluctuations and earnings. A sudden and substantial increase
in interest rates may adversely impact the Company's earnings to the extent
that the interest rates on interest-earning assets and interest-bearing
liabilities do not change at the same speed, to the same extent or on the
same basis. The Company monitors the impact of changes in interest rates on
its net interest income using several tools. One measure of the Company's
exposure to differential changes in interest rates between assets and
liabilities is shown in the Company s Interest Rate Sensitivity Analysis
Table. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Asset and Liability Management."
Another measure, required to be performed by OTS-regulated institutions, is
the test specified by OTS Thrift Bulletin No. 13, "Interest Rate Risk
Management" ("TB-13"). This test measures the impact on net interest income
and net portfolio value of an immediate change in interest rates in 100 basis
point increments. Net portfolio value is defined as the net present value of
assets, liabilities and off-balance sheet contracts. At September 30, 1997,
the Company s TB-13 calculations based on the information and assumptions
produced for the analysis, suggested that a 200 basis point increase in rates
would reduce net interest income over a twelve-month period by 14% and reduce
net portfolio value by 20% while a 200 basis point decline in rates would
increase net interest income over a twelve-month period by 10% and increase
net portfolio value by 8% in the same period.
Computation of prospective effects of hypothetical interest rate changes
are based on numerous assumptions, including relative levels of market
interest rates, loan prepayments and deposit decay rates, and should not be
relied upon as indicative of actual results. Further, the computations do
not contemplate any actions the Company could undertake in response to
changes in interest rates.
The following table shows the Company's financial instruments that are
sensitive to changes in interest rates, categorized by expected maturity, and
the instruments fair values at September 30, 1997. Market risk sensitive
instruments are generally defined as on- and off-balance sheet derivatives
and other financial instruments.
<TABLE>
<CAPTION>
Expected Maturity/Principal Repayments at
September 30,
Average There-
Rate 1998 1999 2000 2001 2002 after Balance Fair Value
(dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-sensitive
assets:
Loans receivable 7.92% $141,769 $127,596 $ 114,833 $103,349 $ 93,015 $824,932 $1,405,494 $1,422,208
Mortgage-backed
securities 7.23 22,063 18,754 15,941 13,550 11,517 65,263 147,088 148,963
Investments and
other interest-
earning assets 6.30 35,936 10,419 4,009 7,976 2,022 -- 60,362 60,371
FHLB Stock 7.25 -- -- -- -- -- 21,554 21,554 21,554
Interest-sensitive
liabilities:
Checking accounts 0.92 48,000 26,154 17,784 12,093 8,224 17,475 129,730 129,730
Savings accounts 2.62 20,281 16,833 13,972 11,597 9,625 46,995 119,303 119,303
Money Market
accounts 3.67 109,618 8,742 6,119 4,283 2,999 6,996 138,757 138,757
Certificate accounts 5.71 467,821 129,489 37,452 10,977 20,590 15,134 681,463 682,888
Borrowings 5.79 282,396 25,000 35,000 10,000 75,000 70,840 498,236 498,873
Off-balance sheet
items:
Commitments to
extend credit 7.34 25,561 25,709
Unused lines of
credit 11.64 131,795 131,795
</TABLE>
Expected maturities are contractual maturities adjusted for prepayments of
principal. The Company uses certain assumptions to estimate fair values and
expected maturities. For assets, expected maturities are based upon
contractual maturity, projected repayments and prepayment of principal. The
prepayment experience reflected herein is based on the Company's historical
experience. For deposit liabilities, in accordance with standard industry
practice, the Company has used decay rates utilized by the OTS. The actual
maturities and run-off of loans could vary substantially if future
prepayments differ from the Company's historical experience.
Rate/Volume Analysis
For the Company's rate/volume analysis and information regarding the
Company's yields and costs and changes in net interest income, refer to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Net Interest Income."
SUBSIDIARY ACTIVITIES
The Associations are permitted under OTS regulations to invest up to 2% of
their assets in service corporations, with an additional investment of 1% of
assets where such investment is primarily for community, inner-city and
community development purposes. At September 30, 1997, First Federal and
Peoples Federal were authorized to invest up to $24.2 million and $9.8
million, respectively, in the stock of, or loans to, service corporations
(based upon the 2% limitation). At September 30, 1997, First Federal's
investment in stock and secured and unsecured loans in its service
corporations was $94,995. At September 30, 1997, Peoples Federal's
investment in its service corporations was $1.6 million.
First Federal has two wholly-owned subsidiaries:
Charleston Financial Services
Incorporated on January 28, 1977, its primary operations include the
conversion of computer information to a microfiche format, the sale of data
processing consulting services and software and the operation of a full-
service brokerage subsidiary, Fiserv Investor Services, Inc. At September
30, 1997, First Federal's investment in and advances to this subsidiary
totaled $82,116. Operations of Charleston Financial Services resulted in a
net loss of $55,546 for the year ended September 30, 1997.
The Carolopolis Corporation
The Carolopolis Corporation ("Carolopolis") was incorporated in 1976 for
the principal purpose of land acquisition and development and construction of
various projects for resale. Development activities began in 1981 and ended
in 1989. Carolopolis had been inactive for a number of years until 1996 when
a lower tier corporation of Carolopolis was formed to operate and market for
resale a commercial real estate property acquired through foreclosure by
First Federal. Carolopolis is currently inactive. First Federal's
investment in Carolopolis on September 30, 1997 was $12,879 and a loss of
$20,462 was incurred during 1996.
Peoples Federal has two wholly-owned subsidiaries, only one of which is
active:
First Southeast Insurance Services, Inc.
This subsidiary, formerly known as the Magrath Insurance Agency, was
purchased by Peoples Federal in 1986. In 1988, the agency purchased two
smaller insurance agencies. During 1995 an additional agency in Lake City,
South Carolina, was purchased as well as the Adams Insurance Agency in
Charleston, previously owned by a subsidiary of First Federal. Total
insurance premiums during fiscal year 1997 approximated $10.3 million. In
terms of premium dollars, the insurance agency is approximately 50%
commercial lines and 50% personal lines. The agency represents several
companies for both commercial and personal insurance products. Peoples
Federal's investment in First Southeast Insurance Services, Inc. on September
30, 1997 was $1.5 million. Operations of this subsidiary resulted in income
of $120,740 in 1997.
COMPETITION
First Federal was the second largest and Peoples Federal the fifth largest
of savings associations headquartered in South Carolina at September 30,
1997, based on asset size as reported by the OTS. The Company faces strong
competition in the attraction of savings deposits and in the origination of
real estate and other loans. The Company's most direct competition for
savings deposits has historically come from commercial banks and from other
savings institutions located throughout South Carolina. The Company also
faces competition for savings from credit unions and competition for
investors' funds from short-term money market securities and other corporate
and government securities. In the more recent past, money market, stock, and
fixed-income mutual funds have attracted an increasing share of household
savings and are significant competitors of the Company.
The Company's competition for real estate and other loans comes principally
from commercial banks, other thrift institutions, mortgage banking companies,
insurance companies, developers, and other institutional lenders. The
Company competes for loans principally through the interest rates and loan
fees charged and the efficiency and quality of the services provided
borrowers, developers, real estate brokers, and home builders.
PERSONNEL
As of September 30, 1997, the Company had 543 full-time equivalent
employees. The Company provides its full-time employees and certain part-
time employees with a comprehensive program of benefits, including medical
and dental benefits, life insurance, long-term disability coverage, a profit-
sharing plan and a 401(k) plan. The employees are not represented by a
collective bargaining agreement. The Company believes its employee relations
are excellent.
REGULATION
The Associations are subject to extensive regulation, examination and
supervision by the OTS as its chartering agency, and the FDIC, as the insurer
of their deposits. The activities of federal savings institutions are
governed by the Home Owners' Loan Act, as amended ("HOLA") and, in certain
respects, the Federal Deposit Insurance Act ("FDIA") and the regulations
issued by the OTS and the FDIC to implement these statutes. These laws and
regulations delineate the nature and extent of the activities in which
federal savings associations may engage. Lending activities and other
investments must comply with various statutory and regulatory capital
requirements. In addition, the Associations' relationship with their
depositors and borrowers is also regulated to a great extent, especially in
such matters as the ownership of deposit accounts and the form and content of
the Associations' mortgage documents. The Associations must file reports
with the OTS and the FDIC concerning their activities and financial
condition in addition to obtaining regulatory approvals prior to entering
into certain transactions such as mergers with, or acquisitions of, other
financial institutions. There are periodic examinations by the OTS and the
FDIC to review the Associations' compliance with various regulatory
requirements. The regulatory structure also gives the regulatory authorities
extensive discretion in connection with their supervisory and enforcement
activities and examination policies, including policies with respect to the
classification of assets and the establishment of adequate loan loss reserves
for regulatory purposes. Any change in such policies, whether by the OTS,
the FDIC or Congress, could have a material adverse impact on the Company,
the Associations and their operations. The Company, as a savings and loan
holding company, is also required to file certain reports with, and otherwise
comply with the rules and regulations of, the OTS and the Securities and
Exchange Commission ("SEC").
Federal Regulation of Savings Associations
Office of Thrift Supervision.
The OTS is an office in the Department of the Treasury subject to the
general oversight of the Secretary of the Treasury. Among other functions,
the OTS issues and enforces regulations affecting federally insured savings
associations and regularly examines these institutions.
Federal Home Loan Bank System.
The FHLB System, consisting of 12 FHLBs, is under the jurisdiction of the
Federal Housing Finance Board ("FHFB"). The designated duties of the FHFB
are to: supervise the FHLBs; ensure that the FHLBs carry out their housing
finance mission; ensure that the FHLBs remain adequately capitalized and able
to raise funds in the capital markets; and ensure that the FHLBs operate in a
safe and sound manner. The Associations, as members of the FHLB-Atlanta, are
required to acquire and hold shares of capital stock in the FHLB-Atlanta in
an amount equal to the greater of (i) 1.0% of the aggregate outstanding
principal amount of residential mortgage loans, home purchase contracts and
similar obligations at the beginning of each year, or (ii) 1/20 of its
advances (borrowings) from the FHLB-Atlanta. First Federal and Peoples
Federal were in compliance with this requirement with an investment in
FHLB-Atlanta stock of $13.6 million and $8.0 million, respectively, at
September 30, 1997.
Among other benefits, the FHLB-Atlanta provides a central credit facility
primarily for member institutions. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It
makes advances to members in accordance with policies and procedures
established by the FHFB and the Board of Directors of the FHLB-Atlanta.
Federal Deposit Insurance Corporation.
The FDIC is an independent federal agency that insures the deposits, up to
prescribed statutory limits, of depository institutions. The FDIC maintains
two separate insurance funds: the Bank Insurance Fund ("BIF") and the SAIF.
As insurer of the Associations' deposits, the FDIC has examination,
supervisory and enforcement authority over the Associations.
The Associations' deposit accounts are insured by the FDIC under the SAIF
to the maximum extent permitted by law. The Associations pay deposit
insurance premiums to the FDIC based on a risk-based assessment system
established by the FDIC for all SAIF-member institutions. Under applicable
regulations, institutions are assigned to one of three capital groups that
are based solely on the level of an institution's capital ("well
capitalized," "adequately capitalized" or "undercapitalized"), which are
defined in the same manner as the regulations establishing the prompt
corrective action system under the FDIA as discussed below. The matrix so
created results in nine assessment risk classifications, with rates that
until September 30, 1996 ranged from 0.23% for well capitalized, financially
sound institutions with only a few minor weaknesses to 0.31% for
undercapitalized institutions that pose a substantial risk of loss to the
SAIF unless effective corrective action is taken.
Pursuant to the Deposit Insurance Fund Act ("DIF Act"), which was enacted
on September 30, 1996, the FDIC imposed a special assessment on each
depository institution with SAIF-assessable deposits which resulted in the
SAIF achieving its designated reserve ratio. In connection therewith, the
FDIC reduced the assessment schedule for SAIF members, effective January 1,
1997, to a range of 0% to 0.27%, with most institutions, including the
Associations, paying 0%. This assessment schedule is the same as that for
the BIF, which reached its designated reserve ratio in 1995. In addition,
since January 1, 1997, SAIF members are charged an assessment of 0.065% of
SAIF-assessable deposits for the purpose of paying interest on the
obligations issued by the Financing Corporation ("FICO") in the 1980's to
help fund the thrift industry cleanup. BIF-assessable deposits will be
charged an assessment to help pay interest on the FICO bonds at a rate of
approximately .013% until the earlier of December 31, 1999 or the date upon
which the last savings association ceases to exist, after which time the
assessment will be the same for all insured deposits.
The DIF Act provides for the merger of the BIF and the SAIF into the
Deposit Insurance Fund on January 1, 1999, but only if no insured depository
institution is a savings association on that date. The DIF Act contemplates
the development of a common charter for all federally chartered depository
institutions and the abolition of separate charters for national banks and
federal savings associations. It is not known what form the common charter
may take and what effect, if any, the adoption of a new charter would have on
the operation of the Associations.
Prompt Corrective Action.
Under the FDIA, each federal banking agency is required to implement a
system of prompt corrective action for institutions that it regulates. Under
the regulations, an institution shall be deemed to be (I) "well capitalized"
if it has a total risk-based capital ratio of 10.0% or more, has a Tier I
risk-based capital ratio of 6.0% or more, has a leverage ratio of 5.0% or
more and is not subject to specified requirements to meet and maintain a
specific capital level for any capital measure; (ii) "adequately capitalized"
if it has a total risk-based capital ratio of 8.0% or more, has a Tier I
risk-based capital ratio of 4.0% or more, has a leverage ratio of 4.0% or
more (3.0% under certain circumstances) and does not meet the definition of
"well capitalized;" (iii) "undercapitalized" if it has a total risk-based
capital ratio that is less than 8.0%, has a Tier I risk-based capital ratio
that is less than 4.0% or a leverage ratio that is less than 4.0% (3.0% under
certain circumstances); (iv) "significantly undercapitalized" if it has a
total risk-based capital ratio that is less than 6.0%, has a Tier I
risk-based capital ratio that is less than 3.0% or a leverage ratio that is
less than 3.0%; and (v) "critically undercapitalized" if it has a ratio of
tangible equity to total assets that is equal to or less than 2.0%.
A federal banking agency may, after notice and an opportunity for a
hearing, reclassify a well capitalized institution as adequately capitalized
and may require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next
lower category if the institution is in an unsafe or unsound condition or has
received in its most recent examination, and has not corrected, a less than
satisfactory rating for asset quality, management, earnings or liquidity.
The OTS may not, however, reclassify a significantly undercapitalized
institution as critically undercapitalized.
An institution generally must file a written capital restoration plan that
meets specified requirements, as well as a performance guaranty by each
company that controls the institution, with the appropriate federal banking
agency within 45 days of the date that the institution receives notice or is
deemed to have notice that it is undercapitalized, significantly
undercapitalized or critically undercapitalized. Immediately upon becoming
undercapitalized, an institution shall become subject to various mandatory
and discretionary restrictions on its operations.
At September 30, 1997, the First Federal and Peoples Federal were
categorized as "well capitalized" under the prompt corrective action
regulations of the OTS.
Standards for Safety and Soundness
The federal banking regulatory agencies have prescribed, by regulation,
standards for all insured depository institutions relating to: (I) internal
controls, information systems and internal audit systems; (ii) loan
documentation; (iii) credit underwriting; (iv) interest rate risk exposure;
(v) asset growth (vi) asset quality; (vii) earnings; and (viii) compensation,
fees and benefits. The regulations set forth the safety and soundness
standards that the federal banking agencies use to identify and address
problems at insured depository institutions before capital becomes impaired.
If the OTS determines that the Associations fail to meet any standard
prescribed by the regulations, the agency may require the Associations to
submit to the agency an acceptable plan to achieve compliance with the
standard. OTS regulations establish deadlines for the submission and review
of such safety and soundness compliance plans.
Qualified Thrift Lender Test
All savings associations are required to meet a qualified thrift lender
("QTL") test to avoid certain restrictions on their operations. A savings
institution that fails to become or remain a QTL shall either convert to a
national bank or be subject to the following restrictions on its operations:
(I) the association may not make any new investment or engage in activities
that would not be permissible for national banks; (ii) the association may
not establish any new branch office where a national bank located in the
savings institution's home state would not be able to establish a branch
office; (iii) the association shall be ineligible to obtain new advances from
any FHLB; and (iv) the payment of dividends by the association shall be
subject to the statutory and regulatory dividend restrictions applicable to
national banks. Also, beginning three years after the date on which the
savings institution ceases to be a QTL, the savings institution would be
prohibited from retaining any investment or engaging in any activity not
permissible for a national bank and would be required to repay any
outstanding advances to any FHLB. In addition, within one year of the date
on which a savings association controlled by a company ceases to be a QTL,
the company must register as a bank holding company and become subject to the
rules applicable to such companies. A savings institution may requalify as a
QTL if it thereafter complies with the QTL test.
Currently, the QTL test requires that either an institution qualify as a
domestic building and loan association under the Internal Revenue Code of
1986, as amended ("Code"), or that 65% of an institution's "portfolio
assets," as defined in the test, consist of certain housing and consumer-
related assets on a monthly average basis in nine out of every 12 months.
At September 30, 1997, the Associations were in compliance with the QTL test.
Capital Requirements.
Under OTS regulations a savings association must satisfy three minimum
capital requirements: core capital, tangible capital and risk-based capital.
Savings associations must meet all of the standards in order to comply with
the capital requirements. The Company is not subject to any minimum capital
requirements.
OTS capital regulations establish a 3% core capital or leverage ratio
(defined as the ratio of core capital to adjusted total assets). Core
capital is defined to include common stockholders' equity, noncumulative
perpetual preferred stock and any related surplus, and minority interests in
equity accounts of consolidated subsidiaries, less (I) any intangible assets,
except for certain qualifying intangible assets; (ii) certain mortgage
servicing rights; and (iii) equity and debt investments in subsidiaries that
are not "includable subsidiaries," which is defined as subsidiaries engaged
solely in activities not impermissible for a national bank, engaged in
activities impermissible for a national bank but only as an agent for its
customers, or engaged solely in mortgage-banking activities. An institution
that fails to meet the core capital requirement would be required to file
with the OTS a capital plan that details the steps they will take to reach
compliance. In addition, the OTS's prompt corrective action regulation
provides that a savings institution that has a leverage ratio of less than 4%
(3% for institutions receiving the highest CAMEL examination rating) will be
deemed to be "undercapitalized" and may be subject to certain restrictions.
See "-- Prompt Corrective Action."
Savings associations also must maintain "tangible capital" not less than
1.5% of the association's adjusted total assets. "Tangible capital" is
defined, generally, as core capital minus any "intangible assets" other than
purchased mortgage servicing rights.
Each savings institution must maintain total risk-based capital equal to at
least 8% of risk-weighted assets. Total risk-based capital consists of the
sum of core and supplementary capital, provided that supplementary capital
cannot exceed core capital, as previously defined. Supplementary capital
includes (I) permanent capital instruments such as cumulative perpetual
preferred stock, perpetual subordinated debt and mandatory convertible
subordinated debt, (ii) maturing capital instruments such as subordinated
debt, intermediate-term preferred stock and mandatory convertible
subordinated debt, subject to an amortization schedule, and (iii) general
valuation loan and lease loss allowances up to 1.25% of risk-weighted assets.
The risk-based capital regulation assigns each balance sheet asset held by
a savings institution to one of four risk categories based on the amount of
credit risk associated with that particular class of assets. Assets not
included for purposes of calculating capital are not included in calculating
risk-weighted assets. The categories range from 0% for cash and securities
that are backed by the full faith and credit of the U.S. Government to 100%
for repossessed assets or assets more than 90 days past due. Qualifying
residential mortgage loans (including multi-family mortgage loans) are
assigned a 50% risk weight. Consumer, commercial, home equity and
residential construction loans are assigned a 100% risk weight, as are
nonqualifying residential mortgage loans and that portion of land loans and
nonresidential construction loans that do not exceed an 80% loan-to-value
ratio. The book value of assets in each category is multiplied by the
weighing factor (from 0% to 100%) assigned to that category. These products
are then totaled to arrive at total risk-weighted assets. Off-balance sheet
items are included in risk-weighted assets by converting them to an
approximate balance sheet "credit equivalent amount" based on a conversion
schedule. These credit equivalent amounts are then assigned to risk
categories in the same manner as balance sheet assets and included risk-
weighted assets.
The OTS has incorporated an interest rate risk component into its
regulatory capital rule. Under the rule, savings associations with "above
normal" interest rate risk exposure would be subject to a deduction from
total capital for purposes of calculating their risk-based capital
requirements. A savings association's interest rate risk is measured by the
decline in the net portfolio value of its assets (i.e., the difference
between incoming and outgoing discounted cash flows from assets, liabilities
and off-balance sheet contracts) that would result from a hypothetical 200
basis point increase or decrease in market interest rates divided by the
estimated economic value of the association's assets, as calculated in
accordance with guidelines set forth by the OTS. A savings association whose
measured interest rate risk exposure exceeds 2% must deduct an interest rate
risk component in calculating its total capital under the risk-based capital
rule. The interest rate risk component is an amount equal to one-half of the
difference between the institution's measured interest rate risk and 2%,
multiplied by the estimated economic value of the association's assets. That
dollar amount is deducted from an association's total capital in calculating
compliance with its risk-based capital requirement. Under the rule, there is
a two quarter lag between the reporting date of an institution's financial
data and the effective date for the new capital requirement based on that
data. Under certain circumstances, a savings association may request an
adjustment to its interest rate risk component if it believes that the OTS-
calculated interest rate risk component overstates its interest rate risk
exposure. In addition, certain "well-capitalized" institutions may obtain
authorization to use their own interest rate risk model to calculate their
interest rate risk component in lieu of the OTS-calculated amount. The OTS
has postponed the date that the component will first be deducted from an
institution's total capital.
See Note 18 of Notes to Consolidated Financial Statements for a summary of
all applicable capital requirements of First Federal and Peoples Federal.
Limitations on Capital Distributions
OTS regulations impose uniform limitations on the ability of all savings
associations to engage in various distributions of capital such as dividends,
stock repurchases and cash-out mergers. In addition, OTS regulations require
the Associations to give the OTS 30 days' advance notice of any proposed
declaration of dividends, and the OTS has the authority under its supervisory
powers to prohibit the payment of dividends. The regulation utilizes a
three-tiered approach which permits various levels of distributions based
primarily upon a savings association's capital level.
A Tier 1 savings association has capital in excess of its fully phased-in
capital requirement (both before and after the proposed capital
distribution). A Tier 1 savings association may make (without application
but upon prior notice to, and no objection made by, the OTS) capital
distributions during a calendar year up to 100% of its net income to date
during the calendar year plus one-half its surplus capital ratio (i.e., the
amount of capital in excess of its fully phased-in requirement) at the
beginning of the calendar year or the amount authorized for a Tier 2
association. Capital distributions in excess of such amount require advance
notice to the OTS. A Tier 2 savings association has capital equal to or in
excess of its minimum capital requirement but below its fully phased-in
capital requirement (both before and after the proposed capital
distribution). Such an association may make (without application) capital
distributions up to an amount equal to 75% of its net income during the
previous four quarters depending on how close the association is to meeting
its fully phased-in capital requirement. Capital distributions exceeding
this amount require prior OTS approval. A Tier 3 savings association has
capital below the minimum capital requirement (either before or after the
proposed capital distribution). A Tier 3 savings association may not make
any capital distributions without prior approval from the OTS.
The Associations currently meet the criteria to be designated a Tier 1
association and, consequently, could at their option (after prior notice to,
and no objection made by, the OTS) distribute up to 100% of its net income
during the calendar year plus 50% of its surplus capital ratio at the
beginning of the calendar year less any distributions previously paid during
the year.
Regulation of the Company
First Financial is a multiple savings and loan holding company within the
meaning of the HOLA. As such, the Company is registered with the OTS and is
subject to OTS regulations, examinations, supervision and reporting
requirements. The Company is required to file certain reports with and
otherwise comply with the regulations of the OTS and the SEC. As
subsidiaries of a savings and loan holding company, the Associations are
subject to certain restrictions in their dealings with the Company and with
other companies affiliated with the Company and also are subject to
regulatory requirements and provisions as federal institutions.
The HOLA and OTS regulations issued thereunder generally prohibit a savings
and loan holding company, without prior OTS approval, from acquiring more
than 5% of the voting stock of any other savings association or savings and
loan holding company or controlling the assets thereof. They also prohibit,
among other things, any director or officer of a savings and loan holding
company, or any individual who owns or controls more than 25% of the voting
shares of such holding company, from acquiring control of any savings
association not a subsidiary of such savings and loan holding company, unless
the acquisition is approved by the OTS.
There generally are more restrictions on the activities of a multiple
savings and loan holding company than a unitary savings and loan holding
company. Specifically, if either federally insured subsidiary savings
association fails to meet the QTL test, the activities of the Company any of
its subsidiaries (other than the Associations or other federally insured
subsidiary savings associations) would thereafter be subject to further
restrictions. The HOLA provides that, among other things, no multiple
savings and loan holding company or subsidiary thereof which is not an
insured association shall commence or continue for more than two years after
becoming a multiple savings and loan association holding company or
subsidiary thereof, any business activity other than: (i) furnishing or
performing management services for a subsidiary insured institution, (ii)
conducting an insurance agency or escrow business, (iii) holding, managing,
or liquidating assets owned by or acquired from a subsidiary insured
institution, (iv) holding or managing properties used or occupied by a
subsidiary insured institution, (v) acting as trustee under deeds of trust,
(vi) those activities previously directly authorized by regulation as of
March 5, 1987 to be engaged in by multiple holding companies or (vii) those
activities authorized by the Federal Reserve Board as permissible for bank
holding companies, unless the OTS by regulation, prohibits or limits such
activities for savings and loan holding companies. Those activities
described in (vii) above also must be approved by the OTS prior to being
engaged in by a multiple savings and loan holding company.
The HOLA requires any savings and loan holding company that controls a
savings association that fails the QTL test, as explained under "-- Federal
Regulation of Savings Associations -- Qualified Thrift Lender Test," must,
within one year after the date on which the association ceases to be a QTL,
register as and be deemed a bank holding company subject to all applicable
laws and regulations.
TAXATION
Federal Taxation
The Company and the Associations report their income on a fiscal year basis
using the accrual method of accounting and are subject to federal income
taxation in the same manner as other corporations with some exceptions,
including particularly the Associations' reserve for bad debts discussed
below. The following discussion of tax matters is intended only as a summary
and does not purport to be a comprehensive description of the tax rules
applicable to the Associations or the Company.
Historically, savings institutions such as the Associations which met
certain definitional tests primarily related to their assets and the nature
of their business ("qualifying thrift") were permitted to establish a reserve
for bad debts and to make annual additions thereto, which may have been
deducted in arriving at their taxable income. The Associations' deductions
with respect to "qualifying real property loans," which are generally loans
secured by certain interest in real property, were computed using an amount
based on the Associations' actual loss experience, or a percentage equal to
8% of the Associations' taxable income, computed with certain modifications
and reduced by the amount of any permitted additions to the non-qualifying
reserve. Due to the Associations' loss experience, the Associations
generally recognized a bad debt deduction equal to 8% of taxable income.
In August 1996, the provisions repealing the current thrift bad debt rules
were passed by Congress as part of "The Small Business Job Protection Act of
1996." The new rules eliminate the 8% of taxable income method for deducting
additions to the tax bad debt reserves for all thrifts for tax years
beginning after December 31, 1995. These rules also require that all
institutions recapture all or a portion of their bad debt reserves added
since the base year (last taxable year beginning before January 1, 1988).
The Associations have previously recorded a deferred tax liability equal to
the bad debt recapture and as such the new rules will have no effect on the
net income or federal income tax expense. For taxable years beginning after
December 31, 1995, the Associations' bad debt deduction will be determined
under the specific charge-off method of Section 166. The new rules allow an
institution to suspend bad debt reserve recapture for the 1996 and 1997 tax
years if the institution's lending activity for those years is equal to or
greater than the institutions average mortgage lending activity for the six
taxable years preceding 1996. For this purpose, only home purchase or home
improvement loans are included and the institution can elect during the tax
year ending September 30, 1997, to have the tax years with the highest and
lowest lending activity removed from the average calculation. If an
institution is permitted to postpone the reserve recapture, it must begin its
six year recapture no later than the 1998 tax year. The Associations
currently meet these lending criteria for the year ending September 30, 1997,
suspending recapture of approximately $1.5 million in bad debt reserves over
a six-year period for the 1996 tax year. The unrecaptured base year reserves
will not be subject to recapture as long as the institution continues to meet
the tax definition of a bank. In addition, the balance of the pre-1988 bad
debt reserves continue to be subject to provisions of present law referred to
below that require recapture in the case of certain excess distributions to
shareholders.
To the extent that the Associations make "nondividend distributions" to the
Company, such distributions will be considered to result in distributions
from the balance of its bad debt reserve as of September 30, 1988 (or a
lesser amount if the Associations' loan portfolio decreased since September
30, 1988) and then from the supplemental reserve for losses on loans ("Excess
Distributions"), and an amount based on the Excess Distributions will be
included in the Associations' taxable income. Nondividend distributions
include distributions in excess of the Associations' current and accumulated
earnings and profits, distributions in redemption of stock and distributions
in partial or complete liquidation. However, dividends paid out of the
Associations' current or accumulated earnings and profits, as calculated for
federal income tax purposes, will not be considered to result in a
distribution from the Associations' bad debt reserve. The amount of
additional taxable income created from an Excess Distribution is an amount
that, when reduced by the tax attributable to the income, is equal to the
amount of the distribution. Thus, if the Associations make a "nondividend
distribution," then approximately one and one-half times the Excess
Distribution would be includable in gross income for federal income tax
purposes, assuming a 35% corporate income tax rate (exclusive of state and
local taxes). See "REGULATION" for limits on the payment of dividends by the
Associations. First Federal and Peoples Federal do not intend to pay
dividends that would result in a recapture of any portion of its tax bad debt
reserve.
The Code imposes a tax on alternative minimum taxable income ("AMTI") at a
rate of 20%. The excess of the tax bad debt reserve deduction using the
percentage of taxable income method over the deduction that would have been
allowable under the experience method is treated as a preference item for
purposes of computing the AMTI. In addition, only 90% of AMTI can be offset
by net operating loss carryovers. AMTI is increased by an amount equal to
75% of the amount by which the Associations' adjusted current earnings
exceeds their AMTI (determined without regard to this preference and prior to
reduction for net operating losses). For taxable years beginning after
December 31, 1986, and before January 1, 1996, an environmental tax of 0.12%
of the excess of AMTI (with certain modification) over $2.0 million is
imposed on corporations, including the Associations, whether or not an
Alternative Minimum Tax is paid.
The Company may exclude from its income 100% of dividends received from the
Associations as members of the same affiliated group of corporations. The
corporate dividends-received deduction is generally 70% in the case of
dividends received from unaffiliated corporations with which the Company and
the Associations will not file a consolidated tax return, except that if the
Company or the Associations own more than 20% of the stock of a corporation
distributing a dividend, then 80% of any dividends received may be deducted.
During fiscal 1996, the IRS completed its examination of the Company's
federal income tax return for the years ended September 30, 1994 and 1995.
There have been no audits of the Company's state income tax returns during
the past five years.
State Taxation
Under the laws of South Carolina, the Associations are required to pay an
income tax at the rate of 6% of net income as defined in the statute. This
tax is imposed on financial institutions, such as savings and loan
associations, in lieu of the general state business corporation income tax.
Prior to fiscal 1990, First Federal utilized state net operating loss
carryforwards. During fiscal 1989, First Federal became subject to South
Carolina income taxes. Peoples Federal did not incur any South Carolina
income taxes through September 30, 1992 but became subject to South Carolina
taxes in fiscal 1993. Taxes accrued for fiscal 1997 include $723,000 payable
to South Carolina.
As a Delaware holding company not earning income in Delaware, the Company
is exempt from Delaware corporate income tax, but is required to file an
annual report with and pay an annual franchise tax to the State of Delaware.
For additional information, see Note 15 of Notes to Consolidated Financial
Statements.
ITEM 2. PROPERTIES
The Company's principal executive offices are located at 2440 Mall Drive,
North Charleston, South Carolina, in an office building partially leased by
First Federal. The building also serves as First Federal's Operations
Center. First Federal owns 16 of its branch offices, including its home
office at 34 Broad Street in downtown Charleston. A substantial portion of
its home office is now leased. The remaining seven branch offices are leased
properties on which First Federal has constructed banking offices. All of
the leases include various renewal or purchase options.
Peoples Federal conducts its executive and support service functions from
its 14,700 square foot Operations Center at 1601 Eleventh Avenue in Conway,
South Carolina. Approximately 65% of the building is leased to others.
Eight of Peoples Federal's branch offices are owned with two facilities
leased.
Peoples Federal leases space for certain insurance agency operations in
Charleston and in Lake City. In addition, First Federal leases properties in
four locations for off-site ATM facilities. First Federal also has a
business partnership with Piggly Wiggly for ATM operations in supermarket
locations. Both Associations also own land purchased for potential future
branch locations.
The Company evaluates on a continuing basis the suitability and adequacy of
all of its facilities, including branch offices and service facilities, and
has active programs of relocating, remodeling or closing any as necessary to
maintain efficient and attractive facilities. The Company believes its
present facilities are adequate for its operating purposes.
At September 30, 1997, the total book value of the premises and equipment
owned by the Company was $15.3 million. Reference is made to Note 17 of
Notes to Consolidated Financial Statements for information relating to
minimum rental commitments under the Company's leases for office facilities,
and to Note 9 for further details on the Company's properties.
ITEM 3. LEGAL PROCEEDINGS
Periodically, there are various claims and lawsuits involving the
Associations and their subsidiaries mainly as defendants, such as claims to
enforce liens, condemnation proceedings on properties in which the
Associations hold security interests, claims involving the making and
servicing of real property loans and other issues incident to the
Associations' business. In the opinion of management and the Company's legal
counsel, no material loss is expected from any of such pending claims or
lawsuits.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended September 30, 1997.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Stock Prices and Dividends:
Cash Dividend
High Low Declared
1997:
First Quarter $ 24.25 $19.00 $ 0.18
Second Quarter 28.63 22.25 0.18
Third Quarter 32.75 23.75 0.18
Fourth Quarter 39.25 29.38 0.18
1996:
First Quarter $ 20.50 $18.00 $ 0.16
Second Quarter 22.75 19.25 0.16
Third Quarter 21.75 17.75 0.16
Fourth Quarter 20.25 17.50 0.16
The Company's common stock is traded in the over-the-counter market under
the Nasdaq symbol "FFCH." Trading information in newspapers is provided on
the Nasdaq Stock Market quotation page under the listing, "FSTFNHLD." As of
September 30, 1997, there were approximately 2,086 stockholders of record.
The Company has paid a cash dividend since February 1986. The amount of
the dividend to be paid is determined by the Board of Directors dependent
upon the Company's earnings, financial condition, capital position and such
other factors as the Board may deem relevant. The dividend rate has been
increased ten times with the most recent dividend paid in November, 1997, at
$.21 per share. Cash dividends per share totaled $.72, $.64 and $.56 for
fiscal 1997, 1996 and 1995, respectively. These dividends per share amounted
to 32.29%, 57.66% and 38.10% of net income per common share, respectively.
Please refer to "Regulation-Federal Regulation of Savings Associations
Limitations on Capital Distributions" for information with respect to current
restrictions on the Associations' ability to pay dividends to the Company.
ITEM 6. SELECTED FINANCIAL DATA
Selected Consolidated Financial Data
<TABLE>
<CAPTION>
At or For the Year Ended September 30,
1997 1996 1995 1994 1993
(dollar amounts in thousands except per share amounts)
<S> <C> <C> <C> <C> <C>
Summary of Operations
Interest income $ 121,762 $ 111,118 $ 95,503 $ 85,652 $ 95,407
Interest expense 72,909 65,997 55,794 44,755 51,696
Net interest income 48,853 45,121 39,709 40,897 43,711
Provision for loan losses (2,375) (1,823) (451) (1,097) (3,700)
Net interest income after
provision for loan losses 46,478 43,298 39,258 39,800 40,011
Other income 12,252 10,052 8,575 8,681 5,493
Non-interest expense (36,372) (35,249) (33,424) (32,351) (30,745)
SAIF Special Assessment (6,955)
Income tax expense (8,242) (4,118) (5,171) (4,125) (3,481)
Income before change in
accounting principle 14,116 7,028 9,238 12,005 11,278
Change in accounting principle 1,584
Net income $ 14,116 $ 7,028 $ 9,238 $ 12,005 $ 12,862
Per Common Share
Net income $ 2.23 $ 1.11(1) $ 1.47 $ 1.88 $ 2.02(2)
Book value 16.43 14.91 14.50 13.20 12.56
Dividends 0.72 0.64 0.56 0.48 0.34
Dividend payout ratio 32.29% 57.66% 38.10% 25.53% 16.83%
Selected Ratios
Return on average equity 14.22% 7.41(3) 10.61% 14.64% 17.28%
Return on average assets 0.87 0.48(4) 0.71 0.97 1.00
Gross interest margin 2.87 2.93 2.91 3.21 3.39
Net interest margin 3.12 3.19 3.16 3.42 3.56
Average equity as a percentage of
average assets 6.12 6.51 6.67 6.65 5.79
Problem assets as a percentage of
total assets 1.49 1.28 1.67 1.74 1.98
At September 30,
Assets $ 1,712,931 $ 1,546,149 $ 1,365,348 $ 1,244,270 $1,259,265
Loans receivable, net 1,405,494 1,280,110 1,083,367 963,366 967,607
Mortgage-backed securities 148,963 82,991 101,126 105,620 106,021
Investment securities 74,360 109,541 119,967 117,876 104,554
Deposits 1,069,253 1,061,617 1,074,313 1,062,995 1,051,219
Borrowings 498,236 348,970 172,120 79,267 106,677
Stockholders' equity 104,785 94,795 91,409 82,672 80,546
Number of offices 33 33 32 32 32
Full-time equivalent employees 543 540 509 537 532
__________________
(1) Includes the effect of the SAIF special assessment which resulted in a
decrease of $.69 in earnings per common share.
(2) Includes the cumulative effect of a change in accounting principle
which resulted in an increase of $.25 in earnings per common share.
(3) Return on average equity excluding the effect of the SAIF special
assessment was 12.04%.
(4) Return on average assets excluding the effect of the SAIF special
assessment was .78%.
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
First Financial Holdings, Inc., headquartered in Charleston, South
Carolina, is a multiple savings and loan holding company with two operating
subsidiaries, First Federal Savings and Loan Association of Charleston, South
Carolina and Peoples Federal Savings and Loan Association, Conway, South
Carolina. The information presented in the following discussion of financial
results is generally indicative of the activities of the Associations. The
following discussion should be read in conjunction with the Selected
Consolidated Financial Data and the Consolidated Financial Statements and
accompanying notes contained herein.
First Financial s net income increased $7.1 million in 1997 to a new
company record of $14.1 million. Earnings per share increased to $2.23 in
1997 from $1.11 in 1996. Net income for fiscal 1996 reflected the after-tax
effect of a $4.4 million non-recurring FDIC special assessment. This one-
time charge was assessed against thrift institutions whose deposits were
insured by the SAIF of the FDIC. The Company recorded a non-recurring
expense of $7.0 million in 1996 for this special assessment. The
recapitalization of the SAIF provided for an eventual reduction in SAIF
deposit insurance premiums, which reduced non-interest expense in fiscal
1997. Excluding the one time assessment, net income in 1996 totaled $11.4
million, or $1.80 per share. Thus, net income from core earnings and
earnings per share on a more comparable basis increased 23.7% and 23.9%,
respectively, in 1997 compared with 1996.
Net income in 1997 resulted in a return on average equity of 14.22%
compared with a return on average equity, excluding the effect of the non-
recurring special assessment, of 12.04% in 1996. Return on average assets in
1997 was 0.87%. This compares with a return on average assets in 1996,
excluding the special assessment, of 0.78%. Including the effect of the
non-recurring special assessment, return on average equity and return on
average assets in 1996 were 7.41% and 0.48%, respectively.
Operating results in 1997 improved principally due to higher net interest
income, continued moderation in the rate of increase in operating costs and
significant growth in non-interest income, partially offset by a higher
provision for loan losses.
Net income in 1995 was $9.2 million, or $1.47 per share. Return on average
equity and return on average assets totaled 10.61% and 0.71%, respectively,
in fiscal 1995.
The Company announced on June 25, 1997 the signing of a definitive
agreement to acquire Investors Savings Bank of South Carolina, Inc. The
transaction was completed on November 7, 1997, and each share of Investors
common stock was exchanged for 1.36 shares of First Financial Common Stock.
The transaction was accounted for as a pooling of interests with the
operations of Investors being merged into those of Peoples Federal. Founded
in 1984, Investors had assets of $62.7 million, $47.1 million in loans,
deposits of $55.0 million and stockholders equity of $7.3 million at
September 30, 1997.
Financial Position
At September 30, 1997, First Financial s assets totaled $1.7 billion,
compared with $1.5 billion at September 30, 1996. Average assets and average
interest-earning assets increased by 11.4% and 10.9%, respectively, in 1997.
Asset growth was principally attributable to an increase of $125.4 million in
net loans receivable, including loans held for sale, during 1997. The
Company pursued a strategy in 1997 to increase balances of mortgage-backed
securities to improve yields, which led to a decline in other investment
securities. This strategy resulted in an increase of $66.0 million in
mortgage-backed securities and a $35.2 million decline in other investment
securities. Stockholders' equity totaled $104.8 million at September 30,
1997, increasing from $94.8 million at September 30, 1996.
The proportion of average earning assets to total average assets was 96.56%
in 1997 and 97.05% in 1996. The slight decline in fiscal 1997 was primarily
attributable to an increase in real estate owned during the year.
Investment Securities and Mortgage-backed Securities
At September 30, 1997, available for sale securities totaled $189.8 million
and represented 94.1% of investment securities and mortgage-backed securities
compared to $149.4 million, or 84.4% of comparable balances at September 30,
1996. Held to maturity securities totaled $12.0 million at September 30,
1997 compared with $27.5 million at the end of 1996.
The primary objective of the Company in its management of the investment
portfolio is to maintain a portfolio of high quality, highly liquid
investments with returns competitive with short-term U.S. Treasury or agency
securities and highly rated corporate securities. The Associations are
required to maintain average daily balances of liquid assets according to
certain regulatory requirements. The Associations have maintained higher
than average required balances in short-term investments based on their
continuing assessment of cash flows, the level of loan production, current
interest rate risk strategies and the assessment of the potential direction
of market interest rate changes.
On November 15, 1995, the Financial Accounting Standards Board ("FASB")
issued a Special Report, "A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities," that
permitted companies to reassess the appropriateness of the classifications of
all securities previously made. The Company elected to reclassify certain of
its previously classified "held to maturity" securities to "available for
sale." In December 1995, approximately $18.0 million of the Company's
mortgage-backed securities were transferred from "held to maturity" to
"available for sale" and approximately $32.2 million of investment
securities were also reclassified to "available for sale" from "held to
maturity" as a result of guidance provided in the Special Report.
Loans Receivable
Loans comprise the major portion of interest-earning assets of the Company,
accounting for 86.5% and 84.0% of average interest-earning assets in 1997 and
1996, respectively. Compared with balances on September 30, 1996, net loans
receivable grew by 9.8% during 1997. Loan growth would have been even
greater in 1997 had the Company not securitized $16.1 million in single-
family fixed-rate loans during the September 1997 quarter.
The Company's loan portfolio consists of real estate mortgage and
construction loans, home equity and other consumer loans, credit card
receivables and commercial business loans. Management believes it continues
to reduce the risk elements of its loan portfolio through strategies focusing
on residential mortgage and consumer loan production.
Loan originations set a record in 1997, increasing to $397 million from
$389 million in 1996. Demand for all types of loans was strong in 1997,
with particularly significant origination increases achieved in consumer
lending over levels in 1996. Consumer loan originations increased by $24.5
million, or 47.8%, over consumer loan originations in 1996. Total consumer
loans increased from $120.3 million on September 30, 1996 to $142.0 million
on September 30, 1997. The Company experienced strong growth in home equity,
marine and auto loan originations due principally to increased marketing for
these products, more competitive interest rates and increased staffing
levels.
Asset Quality
The Company believes it maintains a conservative philosophy regarding its
lending mix as well as its underwriting guidelines. The Company also
maintains loan quality monitoring policies and systems that require detailed
monthly and quarterly analyses of delinquencies, non-performing loans, real
estate owned and other repossessed assets. Reports of such loans and assets
by various categories are reviewed by management and the Boards of Directors
of the Associations. The majority of the Company's loans originated are in
coastal South Carolina and North Carolina and in Florence, South Carolina.
Although the Company's loan portfolio grew significantly during the year,
management does not believe that the risk inherent in its loan portfolio has
increased. The largest component of growth has been in single-family loans,
which traditionally are expected to result in smaller problem credits and
less credit risk during various economic cycles than may be experienced in
other types of secured real estate lending. For several years the Company's
strategy has been to reduce its exposure to commercial real estate, land
acquisition and development and multifamily real estate.
As a result of management's ongoing review of the loan portfolio, loans are
classified as non-accruing when uncertainty exists about the ultimate
collection of principal and interest under the original terms. The Company
closely monitors trends in problem assets which include non-accrual loans,
loans 90 days or more delinquent, renegotiated loans, and real estate and
other assets acquired in settlement of loans. Renegotiated loans are those
loans on which the Company has agreed to modifications of the terms of the
loan such as changes in the interest rate charged and/or other concessions.
The following table illustrates trends in problem assets and other asset
quality indicators over the past five years.
Problem Assets
At September 30,
1997 1996 1995 1994 1993
(dollar amounts in thousands)
Non-accrual loans $ 6,609 $ 8,129 $ 7,709 $ 4,454 $ 8,965
Accruing loans 90 days or
more delinquent 405 1,278 816 740 1,458
Renegotiated loans 6,776 8,049 11,103 13,129 9,001
Real estate and other
assets acquired in
settlement of loans 11,658 2,326 3,144 3,290 5,480
$ 25,448 $ 19,782 $ 22,772 $ 21,613 $ 24,904
As a percent of loans
receivable and real
estate and other assets
acquired in settlement
of loans 1.80% 1.54% 2.10% 2.24% 2.56%
As a percent of total
assets 1.49 1.28 1.67 1.74 1.98
Allowance for loan losses
as a percent of problem
assets 45.68 56.63 46.71 49.64 43.13
Net charge-offs to average
loans outstanding 0.14 0.11 0.05 0.11 0.24
Problem assets were $25.4 million at September 30, 1997, or 1.49% of assets
and 1.80% of loans receivable and real estate and other assets acquired in
settlement of loans. At September 30, 1996, problem assets were $19.8
million, or 1.28% of assets and 1.54% of loans receivable and real estate and
other assets acquired in settlement of loans. The increase during 1997 was
primarily attributable to the Company s acquisition, through foreclosure, of
two retail shopping centers in the Charleston Trident area. These two
properties with carrying values of $10.8 million comprised 43% of problem
assets and 93% of real estate owned balances, respectively, at September 30,
1997.
Non-accrual loans at September 30, 1997, include a $2.8 million loan
collateralized by an apartment complex in Charleston, South Carolina. Based
on occupancy levels and the delinquency status of the loan, the Company has
allocated a specific reserve of approximately $800,000 against this property,
resulting in a carrying value of approximately $2.0 million. Also included
in non-accrual loans at September 30, 1997, 1996 and 1995 are two loans with
balances of approximately $1.1 million secured by residential lots in a
resort development in South Carolina. Renegotiated loans declined by $1.3
million during 1997 primarily due to the deletion of loans which have been
returned to market rates of interest and terms.
The allowance for loan losses at September 30, 1997 covers 45.68% of
reported problem assets, declining from 56.63% as of September 30, 1996.
Management's long-term goals continue to include lower ratios of problem
assets to total assets, although management expects there will always remain
a core level of delinquent loans and real estate acquired in settlement of
loans from normal lending operations. Renegotiated loans currently comprise
approximately 27% of total problem assets.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level sufficient to
provide for estimated probable future losses in the loan portfolio.
Management reviews the adequacy of the allowance no less frequently than each
quarter, utilizing its internal portfolio analysis system. The factors that
are considered in a determination of the level of the allowance are
management's assessment of current economic conditions, the composition of
the loan portfolio, previous loss experience on certain types of credit, a
review of specific high-risk sectors of the loan portfolio, selected
individual loans and concentrations of credit. The value of the underlying
collateral is also considered during such reviews.
Allowance for Loan Losses
At or For the Year Ended September 30,
1997 1996 1995 1994 1993
(dollar amounts in thousands)
Balance, beginning of
period $11,202 $10,637 $10,728 $10,742 $ 4,837
Loans charged-off:
Real estate loans 678 824 530 858 1,893
Commercial business
loans 431 188 3 461 637
Consumer loans 1,175 732 508 673 793
Total charge-offs 2,284 1,744 1,041 1,992 3,323
Recoveries:
Real estate loans 164 336 356 658 632
Commercial business
loans 2 31 32 76 176
Consumer loans 166 119 111 147 160
Total recoveries 332 486 499 881 968
Net charge-offs 1,952 1,258 542 1,111 2,355
Allowance on acquired
loans 4,560
Provision for loan
losses 2,375 1,823 451 1,097 3,700
Balance, end of period:
Real estate loans 8,946 8,987 8,875 9,074 9,189
Commercial business
loans 1,046 925 715 750 648
Consumer loans 1,633 1,290 1,047 904 905
Balance, end of period $11,625 $11,202 $10,637 $10,728 $10,742
Balance as a percent of
net loans:
Real estate loans 0.72% 0.79% 0.93% 1.09% 1.11%
Commercial business
loans 3.85 3.47 2.61 3.00 2.22
Consumer loans (1) 1.15 1.07 0.91 0.81 0.77
Total net loans .83 0.88 0.98 1.12 1.12
Net charge-offs as a percent
of average net loans:
Real estate loans .04% 0.05% 0.02% 0.02% 0.18%
Commercial business
loans 1.59 0.58 (0.11) 1.42 1.88
Consumer loans (1) .77 0.52 0.35 0.46 0.40
(1) Consumer loans include home equity lines of credit.
On September 30, 1997, the total allowance for loan losses was $11.6
million compared with $11.2 million at September 30, 1996. Net real estate
loan charge-offs totaled $514,000 in 1997 compared with $488,000 in 1996.
Consumer loan net charge-offs increased to $1.0 million in 1997 compared
with $613,000 in 1996. Management believes that a substantial portion of
the $396,000 increase in consumer loan net charge-offs is attributable to
higher numbers of personal bankruptcy filings. Commercial loan net charge-
offs increased to $429,000 in 1997 compared with $157,000 in 1996. Based on
the current economic environment and other factors, management believes that
the allowance for loan losses at September 30, 1997 was maintained at a level
adequate to provide for inherent losses in the Company's loan portfolio.
The following table sets forth the breakdown of the Company's allowance for
loan losses by loan category at the dates indicated. Management believes
that the allowance can be allocated by category only on an approximate basis.
The allocation of the allowance to each category is not necessarily
indicative of future losses and does not restrict the use of the allowance to
absorb losses in any category.
At September 30,
1997 1996 1995 1994 1993
(dollar amounts in thousands)
Allowance for loan losses
applicable to:
Real estate loans $ 8,946 $ 8,987 $ 8,875 $ 9,074 $ 9,189
Commercial business
loans 1,046 925 715 750 648
Consumer loans 1,633 1,290 1,047 904 905
Total $11,625 $11,202 $10,637 $10,728 $10,742
Percent of loans to total
net loans:
Real estate loans 88.1% 88.7% 87.0% 85.9% 84.9%
Commercial business
loans 1.9 2.0 2.5 2.6 3.0
Consumer loans 10.0 9.3 10.5 11.5 12.1
Total 100.0% 100.0% 100.0% 100.0% 100.0%
Deposits
Retail deposits have traditionally been the primary source of funds for
the Company and also provide a customer base for the sale of additional
financial products and services. The Company has set strategic targets for
net growth in transaction accounts annually and in numbers of households
served. The Company believes that its future focus must be on increasing the
number of available opportunities to provide a broad array of products and
services to retail consumers.
The Company's total deposits increased $7.6 million during the year ended
September 30, 1997. First Financial's deposit composition at September 30,
1997 and 1996 is as follows:
Deposits
At September 30,
1997 1996
Percent Percent
Balance of Total Balance of Total
(dollar amounts in thousands)
Checking accounts $ 129,730 12.13% $ 123,907 11.67%
Passbook, statement and other
accounts 119,303 11.16 119,509 11.26
Money market accounts 138,757 12.98 131,393 12.38
Retail certificate accounts 616,123 57.62 617,893 58.20
Jumbo certificates 65,041 6.08 68,218 6.42
Wholesale certificates 299 0.03 697 .07
Total deposits $1,069,253 100.00% $1,061,617 100.00%
National and local market trends over the past several years suggest that
consumers are continuing to move an increasing percentage of discretionary
savings funds into investments such as annuities and stock and fixed income
mutual funds. While deposits remain a primary, highly stable source of funds
for the Company, deposits have declined as a percentage of liabilities over
recent years. As of September 30, 1997, deposits as a percentage of
liabilities declined to 66% from 73% at September 30, 1996. The Company
expects to maintain a significant portion of its overall deposits in core
account relationships; however, future growth in overall deposit balances
may be achieved primarily through specifically targeted programs offering
higher yielding investment alternatives to consumers. Such targeted programs
may increase the Company's overall cost of funds and thus impact the
Company's future net margins. The Company's average cost of deposits at
September 30, 1997 was 4.52% compared with 4.60% at September 30, 1996.
Borrowings
Borrowings increased $149.3 million during the current year to $498.2
million as of September 30, 1997. Borrowings as a percentage of total
liabilities increased to approximately 31% at the end of 1997 compared with
24% in 1996. Borrowings from the FHLB of Atlanta increased $107.2 million
while reverse repurchase agreements increased $42.1 million. The net
increase in borrowings in 1997 is attributable to management's strategy to
utilize borrowings to fund a significant portion of its loan portfolio
growth. With strong growth in single-family conforming loans, a large
portion of which were adjustable-rate loans, management believes it has
improved its current liquidity capacity because of the acceptance of such
loans as collateral for existing and future FHLB borrowings and the potential
usage of such loans in securitizations of loans for mortgage-backed
securities.
The Company's average cost of FHLB advances and reverse repurchase
agreements increased from 5.61% at September 30, 1996 to 5.65% at September
30, 1997. Approximately $224 million in FHLB advances mature within one year
and all of the reverse repurchase agreements mature within three months.
There were no redemptions of the $19.8 million in 9.375% long-term debt of
the Company during 1997. Since September 1, 1997, the notes have been
redeemable at par at the option of the Company.
Capital Resources
Average stockholders' equity was $99.3 million during 1997, increasing 4.7%
from $94.8 million in 1996. The primary source of growth in stockholders'
equity during 1997 was retained net income. The Consolidated Statement of
Stockholders' Equity details the changes in stockholders' equity during the
year. The Company's capital ratio, total capital to total assets, was 6.12%
at September 30, 1997 compared to 6.13% September 30, 1996.
In July of 1996 the Board of Directors approved a stock repurchase program
to acquire up to 250,000 shares of the Company's Common Stock to be completed
by March 31, 1997. During fiscal 1996, approximately 26,000 shares were
repurchased at an average price of $19.73. An additional 67,000 shares were
repurchased in 1997 at an average price of $22.45 through the conclusion of
the program. During 1997, the Company paid out $.72 in dividends per share
for a payout ratio of 32.3%, compared with dividends of $.64 and a payout
ratio of 57.7% in 1996. Excluding the effect of the special SAIF assessment,
the payout ratio in 1996 would have approximated 35.6%. In October 1997, the
Board of Directors declared a regular quarterly cash dividend of $.21 per
share, which will result in an increase of approximately 16.7 % from the
previous quarterly cash dividend amount of $.18 per common share.
The Associations are required to meet the regulatory capital requirements
of the OTS which currently include three measures of capital: a leverage or
core capital requirement, a tangible capital requirement and a risk-based
capital requirement. Under OTS regulations, the Associations both meet the
requirements to be "well-capitalized." Current capital distribution
regulations of the OTS allow the greatest flexibility to well-capitalized
institutions.
Liquidity and Asset and Liability Management
Liquidity
The desired level of liquidity for the Company is determined by management
in conjunction with the Asset/Liability Committees of the Associations. The
level of liquidity is based on management's strategic direction for the
Company, commitments to make loans and the Committees' assessment of each
Association's ability to generate funds. Historically, sources of liquidity
have included net deposits to savings accounts, amortizations and prepayments
of loans, FHLB advances, reverse repurchase agreements and sales of
securities and loans held for sale.
The Associations are subject to federal regulations which currently
required the maintenance of a daily average balance of liquid assets equal to
4.0% of net withdrawable deposits and borrowings payable in one year or less.
The Associations have adopted policies to maintain liquidity levels well
above the requirements. All requirements were met in 1997.
The Company's most stable and traditional source of funding has been the
attraction and retention of deposit accounts, the success of which the
Company believes is based primarily on the strength and reputation of the
Associations, effective marketing and rates paid on deposit accounts. First
Federal has a major market share of deposits in Charleston, Berkeley and
Dorchester counties and a significant share of deposits in the Georgetown
market. Peoples Federal's deposits are principally obtained in Horry and
Florence counties. By continuing to promote innovative new products, pricing
competitively and encouraging the highest level of quality in customer
service, the Company continues to successfully meet challenges from
competitors, many of which are non-banking entities offering investment
products. Management does recognize, however, that due to disintermediation
of traditional savings balances to other investment products, including the
equity markets, annuities and mutual funds, the pool of retail deposit funds
held in financial institutions will likely continue to contract over time,
resulting in more reliance by the Company on other sources of funds.
Other primary sources of funds include borrowings from the FHLB, principal
repayments on loans and mortgage-backed securities, reverse repurchase
agreements and sales of loans. As a measure of protection, the Associations
have back-up sources of funds available, including FHLB borrowing capacity
and securities available for sale.
During 1997, the Company experienced a net cash outflow from investing
activities of $163.4 million, consisting principally of a net increase of
$151.3 million in loans receivable and purchased loans. The Company
experienced net cash inflows of $14.9 million from operating activities and
$151.1 million from financing activities. Financing activities consisted
principally of $107.2 million in net additions to FHLB advances, $42.1
million in net increases in reverse repurchase agreements and growth of $7.6
million in deposit balances.
Proceeds from the sale of loans totaled $48.6 million in 1997, increasing
from $6.9 million in 1996. Based on recent asset/liability management
objectives, management expects to continue its strategy of selling selected
longer-term, fixed-rate loans in fiscal 1998.
Parent Company Liquidity
As a holding company, First Financial conducts its business through its
subsidiaries. Unlike the Associations, First Financial is not subject to any
regulatory liquidity requirements. The principal source of funds for the
acquisition of Peoples Federal in 1992 was the issuance of $20.3 million in
senior notes by the Company in September 1992. Potential sources for First
Financial's payment of principal and interest on the notes include : (i)
dividends from First Federal and Peoples Federal; (ii) payments from existing
cash reserves and sales of marketable securities; and (iii) interest on its
investment securities. As of September 30, 1997, First Financial had cash
reserves and existing marketable securities of $12.8 million.
The Associations' ability to pay dividends and make other capital
contributions to First Financial is restricted by regulation and may require
regulatory approval. Such distributions may also depend on the Associations'
ability to meet minimum regulatory capital requirements in effect during the
period. Current OTS regulations permit institutions meeting certain capital
requirements and subject to "normal supervision" to pay out 100% of net
income to date over the calendar year and 50% of surplus capital existing at
the beginning of the calendar year without supervisory approval. Both
Associations are currently subject to "normal supervision" as to the payment
of dividends.
Asset/Liability Management
Asset/liability management is the process by which the Company constantly
changes the mix, maturity and pricing of assets and liabilities in an attempt
to reduce a materially adverse impact on earnings resulting from the
direction, frequency and magnitude of change in market interest rates.
Although the net interest income of any financial institution is perceived as
being vulnerable to fluctuations in interest rates, the Company's management
has attempted to minimize that vulnerability. The future regulatory capital
requirements of all financial institutions will become subject to the
inclusion of additional components measured by exposure to interest rate
sensitivity.
The Company, working principally through the Asset and Liability Committees
of the Associations, has established policies and monitors results to control
interest rate risk. The Company utilizes measures such as static gap, which
is the measurement of the difference between interest-sensitive assets and
interest-sensitive liabilities repricing for a particular time period. More
importantly may be the process of evaluating how particular assets and
liabilities are impacted by changes in interest rates or selected indices as
they reprice. Asset/liability modeling is performed by the Company to assess
varying interest rate and balance sheet mix assumptions.
Management may adjust the Company's interest rate sensitivity position
primarily through decisions on the pricing, maturity and marketing of
particular deposit and loan products and by decisions regarding the
maturities of FHLB advances and other borrowings. The Company has continued
to emphasize adjustable-rate mortgage real estate lending and short-term
consumer and commercial business lending to accomplish its objectives.
The following table sets forth in summary form the repricing attributes of
the Company's interest-earning assets and interest-bearing liabilities. The
time periods in the table represent the time period before an asset or
liability matures or can be repriced.
<TABLE>
<CAPTION>
Interest Rate Sensitivity Analysis at September 30, 1997
Interest Rate Sensitivity Period
13
7-12 Months-2 Over 2
3 Months 4-6 Months Months years Years Total
Interest-earning assets: (dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans (1) $ 259,579 $195,761 $283,356 $ 81,620 $597,374 $1,417,690
Mortgage-backed securities 11,447 13,485 21,176 100,980 147,088
Interest-earning deposits,
investments and FHLB stock 48,901 7,598 1,992 9,418 14,007 81,916
Total interest-earning assets 319,927 216,844 306,524 91,038 712,361 1,646,694
Interest-bearing liabilities:
Deposits:
Checking accounts (2) 8,840 8,839 17,680 19,265 40,940 95,564
Savings accounts (2) 5,070 5,071 10,141 16,833 82,188 119,303
Money market accounts 138,757 138,757
Certificate accounts 216,963 126,573 134,788 118,980 84,159 681,463
Total deposits 369,630 140,483 162,609 155,078 207,287 1,035,087
Borrowings 357,397 25,000 50,000 65,840 498,237
Total interest-bearing liabilities 727,027 165,483 162,609 205,078 273,127 1,533,324
Current period gap $(407,100) $ 51,361 $143,915 $(114,040) $439,234 $ 113,370
Cumulative gap $(407,100) $(355,739) $(211,824) $(325,864) $113,370
Percent of total assets (23.77)% (20.77)% (12.37)% (19.02)% 6.62%
</TABLE>
Assumptions:
(1) Fixed-rate loans are shown in the time frame corresponding to
contractual principal amortization schedules. Adjustable-rate loans are
shown in the time frame corresponding to the next contractual interest
rate adjustment date.
(2) Decay rates for savings accounts approximate 17% in the first year and
14% in the second year. Decay rates for checking accounts approximate
37% in the first year and 20% in the second year.
Based on the Company's September 30, 1997 static gap position, in a one-
year time period $843.3 million in interest-sensitive assets will reprice and
approximately $1.1 billion in interest-sensitive liabilities will reprice.
This current static gap position results in a negative mismatch of $211.8
million, or 12.4% of assets. The Company's static gap position one year ago
was a negative 10.7% of assets. The respective ratios and dollars repricing
as shown in the above table do not take into effect prepayments to mortgage,
consumer and other loans and mortgage-backed securities, which may be
significant in any year, based on the level and direction of market interest
rates. The above table also does not consider the repricing considerations
inherent in adjustable-rate loans, such as minimum and maximum annual and
lifetime interest rate adjustments and also the index utilized.
During the past two years the Company extended maturities of interest-
sensitive assets through retention of certain types of loans, particularly
those originated under newer "hybrid" lending programs with both fixed-rate
and variable-rate features. These loans have become very popular with
consumers and carry a fixed rate of interest for three, five, or seven years
and then adjust annually to an established index.
A negative gap would normally suggest that net interest income would
increase if market rates decline. A rise in market rates would normally have
a detrimental effect on net interest income based on a negative gap. The
opposite would occur when an institution is positively-gapped. Based on its
current static gap position in the above table, which reflects dollars
repricing but not movements of indices to which assets and liabilities are
tied, First Financial was more biased toward a decline in interest rates
over the immediate future.
Derivative transactions may be used by the Company to better manage its
interest rate sensitivity. Although not used extensively by the Company in
the past, such measures may be utilized on a more frequent basis in the
future.
Results of Operations
Net Interest Income
The largest component of operating earnings for the Company is net interest
income. Net interest income totaled $48.9 million in 1997 compared with
$45.1 million in 1996 and $39.7 million in 1995. The level of net interest
income is determined by balances of earning assets 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.
<TABLE>
<CAPTION>
Average Yields and Rates
Year Ended September 30,
1997 1996 1995
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
(dollar amounts in thousands)
Interest-earning
assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans (1) $1,354,877 $107,498 7.93% $1,187,353 $ 96,142 8.10% $1,025,034 $ 80,434 7.85%
Mortgage-backed
securities 107,731 7,692 7.14 97,493 6,969 7.15 103,373 7,324 7.09
Investment
securities 65,319 4,160 6.37 83,717 5,306 6.34 88,227 5,314 6.02
Other interest-
earning assets(2) 38,360 2,412 6.29 44,253 2,701 6.10 39,786 2,431 6.11
Total interest-
earning assets 1,566,287 121,762 7.77 1,412,816 111,118 7.86 1,256,420 95,503 7.60
Non-interest-earning
assets 55,823 42,933 48,389
Total assets $1,622,110 $1,455,749 $1,304,809
Interest-bearing
liabilities:
Deposit accounts:
Checking
accounts $ 129,086 1,426 1.10 $ 120,905 1,730 1.43 $ 113,519 1,857 1.64
Savings accounts 118,843 3,256 2.74 121,606 3,369 2.77 133,967 3,777 2.82
Money market
accounts 133,030 4,684 3.52 130,532 4,789 3.67 133,112 5,060 3.80
Certificate
accounts 683,415 38,638 5.65 690,955 39,771 5.76 682,318 36,947 5.41
Total deposits 1,064,374 48,004 4.51 1,063,998 49,659 4.67 1,062,916 47,641 4.48
FHLB advances 377,475 21,540 5.71 215,396 12,276 5.70 78,982 4,674 5.92
Other borrowings 46,838 3,365 7.18 58,520 4,062 6.94 46,533 3,479 7.48
Total interest-
bearing liabilities 1,488,687 72,909 4.90 1,337,914 65,997 4.93 1,188,431 55,794 4.69
Non-interest-bearing
liabilities 34,167 23,051 29,337
Total liabilities 1,522,854 1,360,965 1,217,768
Stockholders' equity 99,256 94,784 87,041
Total liabilities
and stockholders'
equity $1,622,110 $1,455,749 $1,304,809
Net interest
income/gross margin $ 48,853 2.87% $ 45,121 2.93% $ 39,709 2.91%
Net yield on average
interest-earning
assets 3.12% 3.19% 3.16%
Percent of average
interest-earning
assets to average
interest-bearing
liabilities 105.21% 105.60% 105.72%
(1) Average balances of loans include non-accrual loans.
(2) This computation includes interest-earning deposits, which are
classified as cash equivalents in the Company's Consolidated Statements
of Financial Condition.
</TABLE>
Net interest income increased $3.7 million, or 8.3%, in 1997. As the
table above illustrates, net yields on average interest-earning assets
declined by 0.07% between fiscal 1997 and 1996. Growth in net interest
income in 1997 therefore was primarily attributable to an increase of $153.5
million in average interest-earning assets. The Company's weighted average
yield on assets and weighted average cost of liabilities are shown for the
periods indicated. Such yields and costs are derived by dividing annualized
interest income and expense by the weighted average balances of interest-
earning assets or interest-bearing liabilities. In 1997, the average yield
on interest-earning assets declined to 7.77% from 7.86% in 1996 and was
primarily attributable to a lower average yield on loans. While the average
cost of interest-bearing liabilities also declined primarily due to lower
deposit costs, the company's average cost of borrowings increased slightly in
1997 compared with 1996. Higher average balances in borrowings coupled with
the higher average cost of borrowings contributed to a decline of .06% in the
gross margin.
The following table presents the dollar amount of changes in interest
income and interest expense attributable to changes in volume and the amount
attributable to changes in rate. The combined effect of changes in both
volume and rate, which cannot be separately identified, has been allocated
proportionately to the change due to volume and due to rate.
Rate/Volume Analysis
Year Ended Year Ended
1997 versus 1996 1996 versus 1995
Increase (Decrease) Increase (Decrease)
Due to Due to
Volume Rate Net Volume Rate Net
(dollar amounts in thousands)
Interest income:
Loans $13,400 $(2,044) $11,356 $13,078 $ 2,630 $15,708
Mortgage-backed
securities 733 (10) 723 (417) 62 (355)
Investment
securities (1,171) 25 (1,146) (281) 273 (8)
Other interest-
earning assets (371) 82 (289) 274 (4) 270
Total interest
income 12,591 (1,947) 10,644 12,654 2,961 15,615
Interest expense:
Deposit accounts
Checking
accounts 112 (416) (304) 118 (245) (127)
Savings
accounts (77) (36) (113) (342) (66) (408)
Money market
accounts 91 (196) (105) (98) (173) (271)
Certificate
accounts (412) (721) (1,133) 462 2,362 2,824
Total deposits (286) (1,369) (1,655) 140 1,878 2,018
Borrowings 8,408 159 8,567 8,630 (445) 8,185
Total interest
expense 8,122 (1,210) 6,912 8,770 1,433 10,203
Net interest income $ 4,469 $ (737) $ 3,732 $ 3,884 $ 1,528 $ 5,412
Provision for Loan Losses
The provision for loan losses is a charge to earnings in a given period to
maintain the allowance at an adequate level. In fiscal 1997, the Company's
provision expense was $2.4 million compared with $1.8 million in 1996 and
$451,000 in 1995. The provision was higher in 1997 and 1996 principally due
to increased loan charge-offs. Total loan loss reserves were $11.6 million
and $11.2 million at September 30, 1997 and 1996, respectively, and
represented 0.83% and 0.88% of net loans receivable.
Net charge-offs in fiscal 1997 totaled $2.0 million, or 0.14% of average
net loans, compared with $1.3 million in 1995, or 0.11% of average net loans.
Net loan charge-offs of $542,000 in 1995 resulted in charge-offs to average
loans of 0.05%.
Non-Interest Income
A strategic initiative of the Company is to increase non-interest income.
Traditionally, non-interest income for the Company has been principally
related to checking and deposit account fees and mortgage servicing fees.
Management recognizes that an increase in both traditional as well as non-
traditional sources of non-interest revenues is a priority in the highly-
competitive environment facing financial institutions today.
Non-interest income in 1997 improved to $12.3 million, increasing $2.2
million, or 21.9%, over non-interest income recorded in 1996. During 1996,
non-interest income improved by $1.5 million, or 17.2%, from 1995. While all
major components of non-interest income increased in 1997, service charges
and fees on deposits accounts accounted for the largest variance. Such fees
increased by $729,000, or 15.6%, over 1996. Bank card fees increased
$422,000, or 43.0% in 1997, principally due to the implementation of ATM
surcharges in the first quarter of 1997. Established in the last quarter of
1995, the operations of Fiserv Investor Services, Inc., a full-service
brokerage subsidiary, expanded during 1997 and brokerage fees increased
$263,000, or 81.4 %, over the prior year.
Gains on sales of loans may fluctuate depending on the Company s intention
to sell a portion of its loan production. Based on factors such as the
current interest rate environment and the Company s asset and liability
strategies, the Company began to originate loans for sale in late 1996 and
continued this strategy in 1997, resulting in higher sales occurring in 1997
and an increase of $383,000 thousand in gains on sales. It is presently the
Company s intent to continue to originate agency-qualifying 15-year and 30-
year fixed-rate mortgages for sale in 1998. Gains on sales were not a
significant portion of non-interest income in 1996 and 1995.
Non-Interest Expense
In the more competitive financial services market of recent years,
management has recognized the importance of controlling non-interest expense
to maintain and improve profitability. Management also recognizes that there
are operational costs which continue to increase as a result of the present
operating climate for regulated financial institutions. The technical and
operating environment for financial institutions continues to require a well-
trained and motivated staff, superior operating systems and sophisticated
marketing efforts.
<TABLE>
<CAPTION>
Comparison of Non-Interest Expense
Year Ended September 30,
1997 1996 1995 1994 1993
% % % % %
Average Average Average Average Average
Amount Assets Amount Assets Amount Assets Amount Assets Amount Assets
(dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Salaries and employee
benefits $ 19,687 1.21% $18,225 1.25% $17,542 1.34% $16,726 1.36% $15,686 1.22%
Occupancy costs 3,373 0.21 3,194 0.22 3,040 0.23 2,745 0.22 2,616 0.20
Marketing 1,498 0.09 1,216 0.08 1,013 0.08 1,156 0.09 1,039 0.08
Depreciation,
amortization, rental
and maintenance of
equipment 2,628 0.16 2,520 0.17 2,422 0.19 2,223 0.18 2,171 0.17
FDIC insurance premiums 990 0.06 2,570 0.18 2,503 0.19 2,558 0.21 2,381 0.19
Other 8,196 0.51 7,524 0.52 6,904 0.53 6,943 0.56 6,852 0.53
Sub-total 36,372 2.24 35,249 2.42 33,424 2.56 32,351 2.62 30,745 2.39
SAIF Special assessment 6,955 0.48
Total non-interest
expense $ 36,372 2.24% $42,204 2.90% $33,424 2.56% $32,351 2.62% $30,745 2.39%
</TABLE>
Total non-interest expense declined $5.8 million, or 13.8%, in 1997 to
$36.4 million, reflecting the absence of the SAIF non-recurring expense from
1997 expenses. The special one-time SAIF assessment, which was recorded as a
non-recurring other expense in the fourth quarter of 1996, totaled $7.0
million and resulted in total non-interest expense increasing to $42.2
million for the year. Excluding the effect of the special assessment, non-
interest expense in 1997 increased 3.2%. One of the major factors affecting
operating expenses in 1997 was a $1.6 million decline in FDIC deposit
insurance costs. Non-interest expense in 1996, excluding the SAIF special
assessment, totaled $35.2 million, an increase of $1.8 million, or 5.5%,
over 1995 non-interest expenses.
The ratio of non-interest expense to average assets, excluding the special
assessment, declined to 2.24% in 1997, improving from 2.42% in 1996 and 2.56%
in 1995. Another important measure of operating efficiency, the Company's
efficiency ratio, also declined to 59.94% in 1996 from 63.7% in 1996 and
69.1% in 1995. The decline experienced in both of these measures of expense
control is evidence of management's concentrated efforts to exert more
effective control over staffing and operating expenses. Management continues
to target lower expense ratios as an important strategic goal of the Company.
The largest component of non-interest expense, salaries and employee
benefits, increased $1.5 million or 8.0%, in 1997 due to increased staffing
for the expansion of products and services, normal annual merit increases and
higher contributions to 401(k) and profit-sharing employee benefit plans. In
fiscal 1996, salaries and employee benefits increased $683,000, or 3.9%,
from 1995. Full-time equivalent employees numbered 543, 540 and 509 as of
September 30, 1997, 1996 and 1995, respectively.
Occupancy expenses increased $179,000, or 5.6%, in 1997 and $154,000, or
5.1%, in 1996. Equipment expenses also increased $108,000 and $98,000 in
1997 and 1996, increasing 4.3% and 4.0%, respectively, over the previous
years. Marketing expenses increased 23.2% in 1997, or $282,000, primarily due
to production costs associated with new television commercials.
Annual FDIC SAIF assessments declined to 18 basis points in the first
quarter of 1997 and then further declined to 6.5 basis points effective
January 1, 1997. There is currently no premium charged to well-capitalized
banks and thrifts. However, thrifts are being assessed a FICO assessment at
a rate of 6.3 basis points which is approximately five times that of
commercial banks. During 1996 the SAIF assessment was 23 basis points on
assessable deposits. The effect of changes discussed above resulted in
lowering FDIC charges by $1.6 million, or 61.5%, to $990,000 1997.
Other expenses in 1997 of $8.2 million reflect an increase of $672,000, or
8.9% over 1997. Over one-half of the $620,000 increase in other expenses in
1996 from totals in 1995 resulted from a non-recurring charge of
approximately $348,000 in the first quarter of 1996, related to a checking
account loss.
Income Tax Expense
Income taxes totaled $8.2 million in 1997, compared to $4.1 million in 1996
and $5.2 million in 1995. The Company s effective tax rate was 36.9% in 1997
and 1996 and 35.9% in 1995. The effective tax rate in future periods is
expected to approximate 37%.
Regulatory and Accounting Issues
Congress enacted and President Clinton signed the Omnibus Consolidated
Appropriations Act on September 30, 1996. Among the law's many provisions is
a resolution of the BIF-SAIF deposit insurance premium disparity, many
regulatory burden relief provisions and other bank-related legislation. The
BIF-SAIF provisions are contained in the Deposit Insurance Funds Act of 1996.
The BIF and SAIF will be merged on January 1, 1999 into a new Deposit
Insurance Fund, provided "no insured depository institution is a savings
association on that date." Currently there is no assurance that Congress
will act on charter issues in time for a merger of the funds by the date
prescribed in the legislation.
In an effort to simplify the current standards in the United States for
computing earnings per share ("EPS") and make them more compatible with
international standards, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings per Share" in February 1997. SFAS 128
applies to entities with publicly traded common stock or potential common
stock and is effective for financial statements for periods ending after
December 15, 1997, including interim periods. SFAS 128 simplifies the
standards for computing EPS previously found in APB Opinion 15, "Earnings per
Share." It replaces the presentation of primary EPS with a presentation of
basic EPS. It also requires dual presentation of basic and diluted EPS on
the face of the income statement for all companies with complex capital
structures and requires a reconciliation of the numerator and denominator of
the basic EPS computation to the numerator and denominator of the diluted EPS
computation. The Company s present computation of diluted EPS under APB
Opinion 15 is applied against a materiality test of 3%. For financial
statements issued by the Company after December 15, 1997, the materiality
test will no longer apply and the Company will report basic and diluted EPS
for each period presented as well as the further reconciliation required by
SFAS 128. Although earlier application is not permitted, SFAS 128 will
require restatement of all prior-period EPS data presented.
The FASB also issued SFAS No. 129, "Disclosure of Information about Capital
Structure" in February 1997. The purpose of SFAS 129 is to consolidate
existing disclosure requirements for ease of retrieval. SFAS 129 contains no
change in disclosure requirements for companies that were subject to the
previously existing requirements. It applies to all entities and is
effective for financial statements for periods ending after December 15,
1997.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income. SFAS 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and
losses) in a full set of general purpose financial statements. SFAS 130
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. SFAS 130 requires that companies (i) classify items of other
comprehensive income by their nature in a financial statement and (ii)
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of the
statement of financial condition. SFAS 130 is effective for fiscal years
beginning after December 15, 1997. Reclassification of financial statements
for earlier periods provided for comprehensive purposes is required.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS 131 establishes
standards for the way public enterprises are to report information about
operating segments in annual financial statements and requires those
enterprises to report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes
standards for related disclosures about products and services, geographic
areas, and major customers. SFAS 131 supersedes SFAS No. 14, "Financial
Reporting for Segments of a Business Enterprise." SFAS 131 becomes effective
for financial statements for periods beginning after December 15, 1997 and
requires that comparative information from earlier years be restated to
conform to its requirements. The adoption of the provisions of SFAS 131 is
not expected to have a material impact on the Company.
In June of 1996 the FASB issued an exposure draft of a proposed statement,
"Accounting for Derivatives and Similar Financial Instruments and for Hedging
Activities." In August 1997 the FASB distributed a draft of the standards
section of the final statement, together with related implementation guidance
and examples to members of the Financial Instruments Task Force and other
identified parties for comment on the draft s clarity and operationality.
Under the proposed standard, all derivatives would be measured at fair value
and recognized in the statement of financial position as assets or
liabilities. Although the final standard has not been issued, the FASB has
expressed publicly that a final statement would be effective for fiscal years
beginning after December 15, 1998. Because the Company has limited use of
derivative transactions at this time, management does not expect that this
standard, if adopted in its present proposed form, would have a significant
effect on the Company.
Year 2000
The Company recognizes that there is a business risk in computerized
systems as the calendar rolls over into the next century. The Federal
Financial Institutions Examination Council ("FFIEC") issued an interagency
statement on May 5, 1997, outlining five phases for institutions to
effectively manage the Year 2000 challenge. The phases were: Awareness;
Assessment; Renovation; Validation; and, Implementation. The FFIEC
encouraged institutions to have all critical applications identified and
priorities set by September 30, 1997 and to have renovation work largely
completed and testing well underway by December 31, 1998. The Company has an
ongoing program designed to ensure that its operational and financial systems
will not be adversely affected by year 2000 software failures, due to
processing errors arising from calculations using the year 2000 date. The
Company has an internal task force assigned to this project and the Board of
Directors and management of the Company have established year 2000 compliance
as a strategic initiative. The Company is well into the assessment phase of
the project. While the Company believes that it has available resources to
assure year 2000 compliance, it is to some extent dependent on vendor
cooperation. At the present time, the Company expects its most critical
application software vendor to have all of its systems compliant by March 31,
1998. The Company expects to install the necessary software releases in
fiscal 1998 and have testing of such systems substantially completed by
December 31, 1998. The Company has established time lines for testing all
ancillary systems, such as telephone systems and security devices by
September 30, 1998. At this time, the Company has not determined the cost of
making any modifications to correct any year 2000 problems; however,
equipment and software expenses are not expected to materially differ from
past results. The Company routinely upgrades and purchases technologically
advanced software and hardware on a continual basis and expects to
specifically evaluate and test such purchases for year 2000 compliance.
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and related data presented herein
have been prepared in accordance with generally accepted accounting
principles which require the measurement of financial position and operating
results in terms of historical dollars, without considering changes in the
relative purchasing power of money over time because of inflation.
Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary. As a result, interest
rates have a more significant impact on a financial institution's performance
than the effect of general levels of inflation. Interest rates do not
necessarily move in the same direction or in the same magnitude as the price
of goods and services since such prices are affected by inflation. The
Company is committed to continue its efforts to manage the gap between its
interest-sensitive assets and interest-sensitive liabilities.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
MANAGEMENT'S REPORT
Primary responsibility for the integrity and objectivity of the Company's
consolidated financial statements rests with management. The accompanying
consolidated financial statements are prepared in conformity with generally
accepted accounting principles and accordingly include amounts that are based
on management's best estimates and judgements. Non-financial information
included in the Summary Annual Report to Stockholders has also been prepared
by management and is consistent with the consolidated financial statements.
To assure that financial information is reliable and assets are
safeguarded, management maintains an effective system of internal controls
and procedures, important elements of which include: careful selection,
training, and development of operating personnel and management; an
organization that provides appropriate division of responsibility; and
communications aimed at assuring that Company policies and procedures are
understood throughout the organization. In establishing internal controls,
management weighs the costs of such systems against the benefits it believes
such systems will provide. An important element of the system is an ongoing
internal audit program.
To assure the effective administration of the system of internal controls,
the Company develops and widely disseminates written policies and procedures,
provides adequate communications channels and fosters an environment
conducive to the effective functioning of internal controls. All employees
of the Company are informed of the need to conduct our business affairs in
accordance with the highest ethical standards. The Company has set forth a
written corporate code of conduct and communicated it to all employees.
KPMG Peat Marwick LLP, independent auditors, have audited the Company's
consolidated financial statements as described in their report.
/s/ A. Thomas Hood
President and Chief Executive Officer
AUDIT COMMITTEE'S REPORT
The Audit Committee of the Board of Directors of the Company is comprised
of three outside directors. The members of the Committee are: Mr. Joseph A.
Baroody, Chairman, Mr. Thomas E. Thornhill and Mrs. Paula Harper Bethea. The
Committee held four meetings during fiscal 1997.
The Audit Committee meets with the independent auditors, management, and
internal auditors to assure that all are carrying out their respective
responsibilities. The Audit Committee reviews the performance of the
independent auditors prior to recommending their appointment and meets with
them, without management present, to discuss the scope and results of their
audit work, including the adequacy of internal controls and the quality of
financial reporting. Both the independent auditors and the internal auditors
have full access to the Audit Committee.
/s/ Joseph A. Baroody
Chairman, Audit Committee
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
First Financial Holdings, Inc. and Subsidiaries
We have audited the accompanying consolidated statements of financial
condition of First Financial Holdings, Inc. and Subsidiaries as of September
30, 1997 and 1996, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the years in the three-year
period ended September 30, 1997. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of First Financial Holdings, Inc. and Subsidiaries at September 30, 1997 and
1996, and the consolidated results of their operations and their cash flows
for each of the years in the three-year period ended September 30, 1997, in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Greenville, South Carolina
October 24, 1997
<PAGE>
<TABLE>
<CAPTION>
FIRST FINANCIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30,
1997 1996
(dollar amounts in thousands)
<S> <C> <C>
Assets
Cash and cash equivalents $ 36,672 $ 34,124
Investment securities held to maturity (fair value of $11,970 and
$27,417) 11,980 27,487
Investment securities available for sale, at fair value 40,826 66,434
Investment in capital stock of Federal Home Loan Bank, at cost 21,554 15,620
Loans receivable, net of allowance of $11,625 and $11,202 1,400,978 1,278,757
Loans held for sale 4,516 1,353
Mortgage-backed securities available for sale, at fair value 148,963 82,991
Accrued interest receivable--loans 8,374 7,711
Accrued interest receivable--mortgage-backed securities 1,003 639
Accrued interest receivable--investment securities 700 1,449
Office properties and equipment, net 15,305 16,125
Real estate and other assets acquired in settlement of loans 11,658 2,326
Other assets 10,402 11,133
Total assets $ 1,712,931 $ 1,546,149
Liabilities and Stockholders' Equity
Liabilities:
Deposit accounts $ 1,069,253 $ 1,061,617
Advances from Federal Home Loan Bank 419,577 312,402
Securities sold under agreements to repurchase 58,896 16,805
Long-term debt 19,763 19,763
Advances by borrowers for taxes and insurance 6,467 7,341
Outstanding checks 13,826 12,911
Due FDIC for SAIF Special Assessment 6,955
Other 20,364 13,560
Total liabilities 1,608,146 1,451,354
Commitments and contingencies (Note 16)
Stockholders' equity:
Serial preferred stock, authorized 3,000,000 shares--none issued
Common stock, $.01 par value, authorized 12,000,000 shares, issued
7,063,209 and 6,974,645 shares at September 30, 1997 and 1996,
respectively 71 70
Additional paid-in capital 25,691 24,543
Retained income, substantially restricted 85,331 75,780
Unrealized net gain on securities available for sale, net of
income tax 1,156 341
Treasury stock at cost, 685,127 shares and 617,096 shares at
September 30, 1997 and 1996, respectively (7,464) (5,939)
Total stockholders' equity 104,785 94,795
Total liabilities and stockholders' equity $ 1,712,931 $ 1,546,149
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
FIRST FINANCIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended September 30,
1997 1996 1995
(dollar amounts in thousands,
except per share amounts)
<S> <C> <C> <C>
Interest Income
Interest on loans $ 107,498 $ 96,142 $ 80,434
Interest on mortgage-backed securities 7,692 6,969 7,324
Interest and dividends on investment securities 4,160 5,306 5,314
Other 2,412 2,701 2,431
Total interest income 121,762 111,118 95,503
Interest Expense
Interest on deposits
NOW accounts 1,426 1,730 1,857
Passbook, statement and other accounts 3,256 3,369 3,777
Money market accounts 4,684 4,789 5,060
Certificate accounts 38,638 39,771 36,947
Total interest on deposits 48,004 49,659 47,641
Interest on FHLB advances 21,540 12,276 4,674
Interest on securities sold under agreements to repurchase 1,512 2,209 1,626
Interest on long-term debt 1,853 1,853 1,853
Total interest expense 72,909 65,997 55,794
Net interest income 48,853 45,121 39,709
Provision for loan losses 2,375 1,823 451
Net interest income after provision for loan losses 46,478 43,298 39,258
Other Income
Net gain on sale of loans 440 57 9
Gain on sale of investment and mortgage-backed securities 125 74 102
Loan servicing fees 1,242 1,169 1,217
Service charges and fees on deposit accounts 5,400 4,671 3,950
Commissions on insurance 1,766 1,738 1,539
Brokerage fees 586 323 31
Bank card fees 1,403 981 779
Real estate operations, net (142) (294) (196)
Other 1,432 1,333 1,144
Total other income 12,252 10,052 8,575
Non-Interest Expense
Salaries and employee benefits 19,687 18,225 17,542
Occupancy costs 3,373 3,194 3,040
Marketing 1,498 1,216 1,013
Depreciation, amortization, rental and maintenance of
equipment 2,628 2,520 2,422
FDIC insurance premiums 990 2,570 2,503
FDIC SAIF Special Assessment 6,955
Other 8,196 7,524 6,904
Total non-interest expense 36,372 42,204 33,424
Income before income taxes 22,358 11,146 14,409
Income tax expense 8,242 4,118 5,171
Net income $ 14,116 $ 7,028 $ 9,238
Net income per common share $ 2.23 $ 1.11 $ 1.47
Cash dividends per common share $ 0.72 $ 0.64 $ 0.56
Weighted average shares outstanding 6,339 6,345 6,286
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
FIRST FINANCIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Unrealized
Net Gain
(Loss) on
Securities
Additional Available for
Common Paid-in Retained Sale Treasury Stock
Stock Capital Income Net Shares Amount Total
(dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1994 $ 68 $ 23,237 $ 67,098 $ (2,872) 558 $(4,859) $ 82,672
Common stock issued pursuant to
stock option and employee
benefit plans 1 539 540
Cash dividends ($.56 per share) (3,522) (3,522)
Treasury stock purchased 20 (317) (317)
Change in unrealized net gain
(loss) on securities available
for sale, net of income tax 2,798 2,798
Net income 9,238 9,238
Balance, September 30, 1995 $ 69 $ 23,776 $ 72,814 $ (74) 578 $(5,176) $ 91,409
Common stock issued pursuant to
stock option and employee
benefit plans 1 767 768
Cash dividends ($.64 per share) (4,062) (4,062)
Treasury stock purchased 39 (763) (763)
Change in unrealized net gain
(loss) on securities available
for sale, net of income tax 415 415
Net income 7,028 7,028
Balance, September 30, 1996 $ 70 $ 24,543 $ 75,780 $ 341 617 $(5,939) $ 94,795
Common stock issued pursuant to
stock option and employee
benefit plans 1 1,148 1,149
Cash dividends ($.72 per share) (4,565) (4,565)
Treasury stock purchased 68 (1,525) (1,525)
Change in unrealized net gain
(loss) on securities available
for sale, net of income tax 815 815
Net income 14,116 14,116
Balance, September 30, 1997 $ 71 $ 25,691 $ 85,331 $ 1,156 685 $(7,464) $104,785
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
FIRST FINANCIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended September 30,
1997 1996 1995
(dollar amounts in thousands)
Operating Activities
<S> <C> <C> <C>
Net income $ 14,116 $ 7,028 $ 9,238
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation 1,946 1,845 1,807
Gain on sale of loans, net (440) (57) (9)
Gain on sale of investments, net (125) (74) (102)
(Gain) loss on sale of property and equipment, net 26 (57) 29
Gain on sale of real estate owned, net (69) (177) (154)
Amortization of unearned discounts/premiums on investments, net (230) 360 220
Decrease in deferred loan fees and discounts (341) (408) (817)
Increase (decrease) in receivables and prepaid expenses 327 (2,881) (1,990)
Provision for loan losses 2,375 1,823 451
Write downs of real estate acquired in settlement of loans 106 158 155
Increase (decrease) in deferred taxes 3,537 (2,348) 1,903
Proceeds from sales of loans held for sale 48,622 6,915 1,501
Origination of loans held for sale (51,785) (8,268) (1,501)
Increase in accounts payable and accrued expenses (3,335) 14,927 3,833
Amortization of discount on long-term debt 126 126 126
Net cash provided by operating activities 14,856 18,912 14,690
Investing Activities
Proceeds from maturity of investments 26,700 33,178 21,385
Proceeds from sales of investments held to maturity 3,999
Proceeds from sales of investments available for sale 13,797 10,730 5,678
Purchases of investments held to maturity (9,896) (23,224)
Purchases of investments available for sale (19,966) (9,227)
Purchase of FHLB stock (5,934) (3,638)
Increase in loans, net (114,451) (158,752) (114,357)
Net increase in credit card receivables (539) (1,307) (1,031)
Proceeds from sales of mortgage-backed securities available for
sale 35,398 20,721 1,162
Repayments on mortgage-backed securities 17,401 20,111 12,311
Purchases of mortgage-backed securities (100,228) (22,313) (5,744)
Purchase of loans and loan participations (36,827) (38,738) (6,655)
Proceeds from the sales of real estate owned 2,440 2,885 2,656
Net purchase of office properties and equipment (1,152) (2,855) (2,665)
Net cash used in investing activities (163,395) (169,840) (115,712)
Financing Activities
Net increase (decrease) in NOW, passbook and money market fund
accounts $ 12,981 $ 847 $(29,512)
Net increase (decrease) in certificates of deposit (5,345) (13,543) 40,890
Net proceeds of FHLB advances 107,175 204,549 61,447
Net purchase (repurchase) of securities sold under agreements to
repurchase 42,091 (27,699) 31,406
Increase (decrease) in escrow accounts (874) 469 1,008
Proceeds from sale of common stock 1,149 768 540
Dividends paid (4,565) (4,062) (3,522)
Treasury stock purchased (1,525) (763) (317)
Net cash provided by financing activities 151,087 160,566 101,940
Net increase in cash and cash equivalents 2,548 9,638 918
Cash and cash equivalents at beginning of period 34,124 24,486 23,568
Cash and cash equivalents at end of period $ 36,672 $ 34,124 $ 24,486
Supplemental disclosures:
Cash paid during the period for:
Interest $ 70,505 $ 63,475 $ 54,221
Income taxes 5,185 5,140 4,631
Loans foreclosed 12,391 1,814 3,517
Loans securitized into mortgage-backed securities 16,111
Unrealized net gain (loss) on securities available for sale,
net of income tax 815 415 2,798
Transfers of securities held to maturity to available for sale 50,185
See accompanying notes to consolidated financial statements.
</TABLE>
FIRST FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
(All Dollar Amounts, Except Per Share And Where Otherwise Indicated, In
Thousands.)
1. Summary of Significant Accounting Policies
First Financial Holdings, Inc. ("First Financial" or the "Company") is
incorporated under the laws of the State of Delaware and became a multiple
savings and loan holding company upon the acquisition of Peoples Federal
Savings and Loan Association ("Peoples Federal") on October 9, 1992. Prior
to that date, First Financial was a unitary savings and loan holding company
with First Federal Savings and Loan Association of Charleston ("First
Federal") as its only subsidiary.
Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries, First Federal and Peoples
Federal (together, the "Associations"). The Company's consolidated financial
statements also include the assets and liabilities of service corporations
wholly-owned by the Associations, two of which are currently active.
Charleston Financial Services, Inc. is primarily engaged in data processing
consulting, the sale of computer output microfiche services and related
equipment and the operation of Fiserv Investor Services, Inc. First
Southeast Insurance Services, Inc. is a property and casualty insurance
agency with offices in Florence, Conway, Lake City and Charleston. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Stock Based Compensation
In fiscal year 1997, the Company adopted the disclosure provisions of
Statement of Financial Accounting Standards ("SFAS") No. 123 "Accounting for
Stock-Based Compensation." SFAS 123, issued in October 1995, allows a
company to either adopt the fair value method of valuation or continue using
the intrinsic valuation method presented under Accounting Principles Board
("APB") Opinion 25 to account for stock-based compensation. This statement
permits the Company to continue accounting for stock based compensation as
set forth in APB Opinion 25, "Accounting for Stock Issued to Employees,"
provided the Company discloses the proforma effect on net income and earnings
per share of adopting the full provisions of SFAS 123. Accordingly, the
Company has elected to continue using APB Opinion 25 and has disclosed in the
footnotes proforma net income and earnings per share information as if the
fair value method had been applied.
Adoption of SFAS 114 and SFAS 118
The Company adopted the provisions of SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan", as amended by SFAS No. 118, "Accounting
by Creditors for Impairment of a Loan -- Income Recognition and Disclosure"
on October 1, 1995. SFAS 114 requires that all creditors value all
specifically reviewed loans for which it is probable that the creditor will
be unable to collect all amounts due according to the terms of the loan
agreement at the loan s fair value. Fair value may be determined based upon
the present value of expected cash flows, market price of the loan, if
available, or the value of the underlying collateral. Expected cash flows
are required to be discounted at the loan s effective interest rate. SFAS
114 was amended by SFAS 118 to allow a creditor to use existing methods for
recognizing interest income on an impaired loan and by requiring additional
disclosures about how a creditor recognizes interest income related to
impaired loans.
A loan is considered impaired if its terms are modified in a troubled debt
restructuring after October 1, 1995. For these accruing impaired loans, cash
receipts are typically applied to principal and interest receivable in
accordance with the terms of the restructured loan agreement. Interest
income is recognized on these loans using the accrual method of accounting.
The adoption of SFAS 114 and 118 required no increase to the allowance for
loan losses and had no impact on net income for the years ended September 30,
1997 and 1996.
Investments in Debt and Equity Securities
The Company's investments in debt securities principally consist of U.S.
Treasury securities and mortgage-backed securities purchased by the Company
or created when the Company exchanges pools of loans for mortgage-backed
securities. The Company classifies its investments in debt securities as
held to maturity securities, trading securities and available for sale
securities as applicable.
Debt securities are designated as held to maturity if the Company has the
positive intent and the ability to hold the securities to maturity. Held to
maturity securities are carried at amortized cost, adjusted for the
amortization of any related premiums or the accretion of any related
discounts into interest income using a methodology which approximates a level
yield of interest over the estimated remaining period until maturity.
Unrealized losses on held to maturity securities, reflecting a decline in
value judged by the Company to be other than temporary, are charged to income
in the Consolidated Statements of Operations.
Debt and equity securities that are purchased and held principally for the
purpose of selling in the near term are reported as trading securities.
Trading securities are carried at fair value with unrealized holding gains
and losses included in earnings.
The Company classifies debt and equity securities as available for sale
when at the time of purchase it determines that such securities may be sold
at a future date or if the Company does not have the intent or ability to
hold such securities to maturity.
Securities designated as available for sale are recorded at fair value.
Changes in the fair value of debt and equity securities available for sale
are included in stockholders' equity as unrealized gains or losses, net of
the related tax effect. Unrealized losses on available for sale securities,
reflecting a decline in value judged to be other than temporary, are charged
to income in the Consolidated Statements of Operations. Realized gains or
losses on available for sale securities are computed on the specific
identification basis.
In November 1995 the FASB issued a Special Report as an aid in
understanding and implementing SFAS 115. The Special Report included
guidance that caused the Company to reassess the appropriateness of the
classifications of all securities held and account for any resulting
reclassifications at fair value in accordance with SFAS 115. During the
first quarter of fiscal 1996, the Company reclassified $32,161 of investment
securities and $18,024 of mortgage-backed securities from held to maturity to
available for sale.
Fair Value of Financial Instruments
SFAS 107, "Disclosures about Fair Values of Financial Instruments,"
requires disclosures about the fair value of all financial instruments
whether or not recognized in the balance sheet, for which it is practicable
to estimate that value. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could
not be realized through immediate settlement of the instrument. SFAS 107
excludes certain financial instruments and all non-financial instruments from
its disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Company.
Securities Sold Under Agreements to Repurchase
The Company enters into sales of securities under agreements to repurchase
(reverse repurchase agreements). Fixed coupon reverse repurchase agreements
are treated as financings. The obligations to repurchase securities sold are
reflected as a liability and the securities underlying the agreements
continue to be reflected as assets in the Consolidated Statements of
Financial Condition.
Loans Receivable and Loans Held for Sale
The Company's real estate loan portfolio consists primarily of long-term
loans secured by first mortgages on single-family residences, other
residential property, commercial property and land. The adjustable-rate
mortgage loan is the Company's primary loan product for portfolio lending
purposes. The Company's consumer loans include lines of credit, auto loans,
marine loans, mobile home loans and loans on various other types of consumer
products. The Company also makes shorter term commercial business loans on a
secured and unsecured basis.
Fees are charged for originating loans at the time the loan is granted.
Loan origination fees received, if any, are deferred and offset by the
deferral of certain direct expenses associated with loans originated. The
net deferred fees or costs are recognized as yield adjustments by applying
the interest method.
Interest on loans is accrued and credited to income based on the principal
amount and contract rate on the loan. The accrual of interest is
discontinued when, in the opinion of management, there is an indication that
the borrower may be unable to meet future payments as they become due,
generally when a loan is ninety days past due. When interest accrual is
discontinued, all unpaid accrued interest is reversed. While a loan is on
non-accrual status, interest is recognized only as cash is received. Loans
are returned to accrual status only when the loan is reinstated and ultimate
collectibility of future interest is no longer in doubt.
Mortgage loans originated and intended for sale in the secondary market
are carried at the lower of cost or estimated market value in the aggregate.
Net unrealized losses are provided for in a valuation allowance by charges to
operations.
Allowance for Loan Losses
The Company provides for loan losses on the allowance method.
Accordingly, all loan losses are charged to the related allowance and all
recoveries are credited to the allowance. Additions to the allowance for
loan losses are provided by charges to operations based on various factors
which, in management's judgment, deserve current recognition in estimating
losses. Such factors considered by management include the fair value of the
underlying collateral, growth and composition of the loan portfolios, the
relationship of the allowance for loan losses to outstanding loans, loss
experience, delinquency trends and economic conditions. Management evaluates
the carrying value of loans periodically and the allowances are adjusted
accordingly. While management uses the best information available to make
evaluations, future adjustments to the allowances may be necessary if
economic conditions differ substantially from the assumptions used in making
the evaluations. The allowance for loan losses is subject to periodic
evaluation by various regulatory authorities and may be subject to adjustment
upon their examination.
The Company considers a loan to be impaired when, based upon current
information and events, it believes it is probable that the Company will be
unable to collect all amounts due according to the contractual terms of the
loan agreement on a timely basis. The Company's impaired loans include loans
identified as impaired through review of the non-homogeneous portfolio and
troubled debt restructurings. Specific valuation allowances are established
on impaired loans for the difference between the loan amount and the fair
value less estimated selling costs. Impaired loans may be left on accrual
status during the period the Company is pursuing repayment of the loan. Such
loans are placed on non-accrual status at the point either: (1) they become
90 days delinquent; or (2) the Company determines the borrower is incapable
of, or has ceased efforts toward, continuing performance under the terms of
the loan. Impairment losses are recognized through an increase in the
allowance for loan losses and a corresponding charge to the provision for
loan losses. Adjustments to impairment losses due to changes in the fair
value of the collateral properties for impaired loans are included in
provision for loan losses. When an impaired loan is either sold, transferred
to real estate owned or written down, any related valuation allowance is
charged off.
Increases to the allowance for loan losses are charged by recording a
provision for loan losses. Charge-offs to the allowance are made when all,
or a portion, of the loan is confirmed as a loss based upon management's
review of the loan or through possession of the underlying security or
through a troubled debt restructuring transaction. Recoveries are credited
to the allowance.
Office Properties and Equipment
Office properties and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation is provided generally on the
straight-line method over the estimated life of the related asset for
financial reporting purposes. Estimated lives range up to thirty years for
buildings and improvements and up to ten years for furniture, fixtures and
equipment. Maintenance and repairs are charged to expense as incurred.
Improvements, which extend the useful lives of the respective assets, are
capitalized. Accelerated depreciation is utilized on certain assets for
income tax purposes.
Real Estate
Real estate acquired through foreclosure is initially recorded at the
lower of cost or estimated fair value. Subsequent to the date of
acquisition, it is carried at the lower of cost or fair value, adjusted for
net selling costs. Fair values of real estate owned are reviewed regularly
and writedowns are recorded when it is determined that the carrying value of
real estate exceeds the fair value less estimated costs to sell. Costs
relating to the development and improvement of such property are capitalized,
whereas those costs relating to holding the property are charged to expense.
Long-term Debt
The costs of issuing the senior notes were capitalized and are being
amortized on the straight-line method over the term of the notes, which is
ten years.
Risk Management Instruments
Risk management instruments are utilized to modify the interest rate
characteristics of related assets or liabilities or hedge against changes in
interest rates or other exposures as part of the Company's asset and
liability management process. Instruments must be designated as hedges and
must be effective throughout the hedge period.
Gains and losses associated with futures and forward contracts used as
effective hedges of existing risk positions or anticipated transactions are
deferred as an adjustment to the carrying value of the related asset and
liability and recognized in income over the remaining term of the related
asset or liability.
The Company also utilizes forward delivery contracts and options for the
sale of mortgage-backed securities to reduce the interest rate risk inherent
in mortgage loans held for sale and the commitments made to borrowers for
mortgage loans which have not been funded. These financial instruments are
considered in the Company's valuation of its mortgage loans held for sale
which are carried at the lower of cost or market.
Risks and Uncertainties
In the normal course of its business the Company encounters two
significant types of risk: economic and regulatory. There are three main
components of economic risk: interest rate risk, credit risk and market
risk. The Company is subject to interest rate risk to the degree that its
interest-bearing liabilities mature or reprice at different speeds, or on
different bases, than its interest-earning assets. Credit risk is the risk
of default on the Company's loan portfolio that results from borrowers'
inability or unwillingness to make contractually required payments. Market
risk reflects changes in the value of collateral underlying loans receivable,
the valuation of real estate held by the Company, and the valuation of loans
held for sale, mortgage-backed securities available for sale, purchased
mortgage servicing rights, and capitalized servicing fees receivable.
The Company is subject to the regulations of various government agencies.
These regulations can and do change significantly from period to period. The
Company also undergoes periodic examinations by the regulatory agencies,
which may subject it to further changes with respect to asset valuations,
amounts of required loss allowances and operating restrictions resulting from
the regulators' judgments based on information available to them at the time
of their examination.
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities as of the
dates of the Consolidated Statements of Financial Condition and the
Consolidated Statements of Operations for the periods covered. Actual
results could differ significantly from those estimates and assumptions.
Income Taxes
Because some income and expense items are recognized in different periods
for financial reporting purposes and for purposes of computing currently
payable income taxes, a provision or credit for deferred income taxes is made
for such temporary differences at currently enacted income tax rates
applicable to the period in which realization or settlement is expected. As
changes in tax laws or rates are enacted, deferred tax assets and liabilities
are adjusted through the provision for income taxes.
Reclassifications
Certain amounts previously presented in the consolidated financial
statements for prior periods have been reclassified to conform to current
classifications. All such reclassifications had no effect on the prior
periods' net income or retained income as previously reported.
2. Business Combinations (Unaudited)
On November 7, 1997, the Company issued approximately 354,400 shares of
common stock for all of the outstanding common stock of Investors Savings
Bank of South Carolina ("Investors"). The business combination will be
accounted for as a pooling-of-interests combination and, accordingly, the
Company's historical consolidated financial statements presented in future
reports will be restated to include the accounts and results of operations of
Investors.
The following proforma data summarizes the combined results of operations
of the Company and Investors as if the combination had been consummated on
September 30, 1997. Prior to the combination, Investors' fiscal year ended
December 31. In recording the pooling-of-interests combination, Investors'
financial statements for the twelve months ended December 31, 1996, 1995 and
1994 will be combined with the Company's financial statements for the twelve
months ended September 30, 1997, 1996 and 1995.
Years Ended September 30
1997 1996 1995
Net income $ 14,710 $ 7,654 $ 9,805
Earnings per share $ 2.20 $ 1.14 $ 1.48
3. Cash and Cash Equivalents
Cash and cash equivalents consist of the following:
September 30,
1997 1996
Cash working funds $ 11,882 $ 11,339
Non-interest-earning demand deposits 2,214 3,332
Deposits in transit 15,001 13,016
Interest-earning deposits 7,575 6,437
Total $ 36,672 $ 34,124
The Company considers all highly liquid investments with a maturity of 90
days or less at the time of purchase to be cash equivalents.
4. Investment Securities Held to Maturity
The amortized cost, gross unrealized gains, gross unrealized losses and
fair value of investment securities held to maturity are as follows:
September 30, 1997
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair value
U.S. Treasury
securities and
obligations of U.S.
government agencies
and corporations $ 11,980 $ 18 $ 28 $ 11,970
Total $ 11,980 $ 18 $ 28 $ 11,970
September 30, 1996
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair value
U.S. Treasury
securities and
obligations of U.S.
government agencies
and corporations $ 27,487 $ 40 $ 110 $ 27,417
Total $ 27,487 $ 40 $ 110 $ 27,417
The amortized cost and fair value of investment securities held to maturity
at September 30, 1997, by contractual maturity, are shown below.
September 30, 1997
Amortized Cost Fair Value
Due in one year or less $ 5,496 $ 5,496
Due after one year through five years 6,484 6,474
Total $ 11,980 $ 11,970
Proceeds from the sale of investment and mortgage-backed securities held to
maturity during fiscal 1995 was $3,999. A gross realized gain of $37 and a
gross realized loss of $6 resulted in 1995. There were no sales of
investment securities held to maturity during fiscal 1997 and 1996. The
sales in fiscal 1995 were of securities scheduled to mature in three months
or less at the time of the sale.
5. Investment and Mortgage-backed Securities Available for Sale
The amortized cost, gross unrealized gains, gross unrealized losses and
fair value of investment and mortgage-backed securities available for sale
are as follows:
September 30, 1997
Gross Gross
Amortized UnrealizedUnrealized
Cost Gains Losses Fair Value
U.S. Treasury securities and
obligations of U.S. government
agencies and corporations $ 15,775 $ 78 $ 45 $ 15,808
Corporate securities 8,238 146 8,384
Mutual funds 16,794 3 163 16,634
40,807 227 208 40,826
Mortgage-backed securities:
FHLMC 41,271 1,192 19 42,444
FNMA 46,221 395 99 46,517
GNMA 35,986 499 15 36,470
Other 23,610 61 139 23,532
147,088 2,147 272 148,963
Total $ 187,895 $ 2,374 $ 480 $ 189,789
September 30, 1996
Gross Gross
Amortized UnrealizedUnrealized
Cost Gains Losses Fair Value
U.S. Treasury securities and
obligations of U.S. government
agencies and corporations $ 29,755 $ 116 $ 203 $ 29,668
Corporate securities 12,417 296 24 12,689
Mutual funds 24,561 484 24,077
66,733 412 711 66,434
Mortgage-backed securities:
FHLMC 35,276 904 96 36,084
FNMA 18,520 187 314 18,393
GNMA 28,356 203 45 28,514
82,152 1,294 455 82,991
Total $ 148,885 $ 1,706 $ 1,166 $ 149,425
The amortized cost and fair value of investment and mortgage-backed
securities available for sale at September 30, 1997 by contractual maturity,
are shown below. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
September 30, 1997
Amortized Fair
Cost Value
Due in one year or less $ 22,865 $ 22,741
Due after one year through five years 38,039 38,322
Due after five years through ten years 24,373 24,515
Due after ten years 102,618 104,211
Total $ 187,895 $ 189,789
Proceeds from the sale of the Company's investment and mortgage-backed
securities available for sale totaled $49,195 in fiscal 1997 resulting in a
gross realized gain of $307 and a gross realized loss of $182. Proceeds from
the sale of the Company's investment and mortgage-backed securities available
for sale totaled $31,451 in fiscal 1996 resulting in a gross realized gain of
$302 and a gross realized loss of $10.
6. Federal Home Loan Bank Capital Stock
The Associations, as member institutions of the Federal Home Loan Bank
("FHLB") of Atlanta, are required to own capital stock in the FHLB of Atlanta
based generally upon the Associations' balances of residential mortgage loans
and FHLB advances. FHLB capital stock is pledged to secure FHLB advances. No
ready market exists for this stock and it has no quoted market value.
However, redemption of this stock has historically been at par value.
7. Net Income Per Common Share
Net income per common share is based on the weighted average number of
shares outstanding. Such weighted average outstanding shares were 6,338,569,
6,344,575 and 6,285,803 for the years ended September 30, 1997, 1996 and
1995, respectively. Outstanding stock options are common stock equivalents
but have no material dilutive effect on net income per common share for the
years presented.
8. Loans Receivable
Loans receivable, including loans held for sale, consisted of the
following:
September 30,
1997 1996
Mortgage loans $ 1,243,401 $ 1,129,046
Residential construction loans 34,508 42,911
Mobile home loans 19,455 21,925
Savings account loans 5,381 5,430
Home equity lines of credit 56,152 45,353
Commercial business loans 27,195 26,634
Credit cards 10,992 10,453
Other consumer loans 50,011 37,124
1,447,095 1,318,876
Less:
Allowance for loan losses 11,625 11,202
Loans in process 29,405 26,652
Deferred loan fees and discounts on loans 571 912
41,601 38,766
Total $ 1,405,494 $ 1,280,110
First mortgage loans are net of whole loans and participation loans sold
and serviced for others in the amount of $229,737 and $216,128 at September
30, 1997 and 1996, respectively.
Non-accrual and renegotiated loans are summarized as follows:
September 30,
1997 1996
Non-accrual loans $ 6,609 $ 8,129
Renegotiated loans 6,776 8,049
Total $ 13,385 $ 16,178
Interest income related to non-accrual and renegotiated loans that would
have been recorded if such loans had been current in accordance with their
original terms amounted to $1,131, $1,198 and $1,409 for the years ended
September 30, 1997, 1996 and 1995, respectively. Recorded interest income on
these loans was $503, $612 and $944 for 1997, 1996 and 1995, respectively.
An analysis of changes in the allowance for loan losses is as follows:
Year Ended September 30,
1997 1996 1995
Balance, beginning of period $ 11,202 $ 10,637 $ 10,728
Charge-offs (2,284) (1,744) (1,041)
Recoveries 332 486 499
Net charge-offs (1,952) (1,258) (542)
Provision for loan losses 2,375 1,823 451
Balance, end of period $ 11,625 $ 11,202 $ 10,637
At September 30, 1997 and 1996 impaired loans totaled $7,644 and $6,277,
respectively. Included in the allowance for loan losses is $800 related to
$2,775 of impaired loans at September 30, 1997 and $1,049 related to impaired
loans of $3,049 at September 30, 1996. The remainder of the impaired loans
are recorded at or below fair value. The average recorded investment in
impaired loans for the years ended September 30, 1997 and 1996 was $10,306
and $5,385, respectively. Interest income of $126 and $26 was recognized on
impaired loans in 1997 and 1996, respectively, while they were impaired.
The Company principally originates residential and commercial real estate
loans throughout its primary market area located in the coastal region of
South Carolina and Florence County. Although the coastal region has a
diverse economy, much of the area is heavily dependent on the tourism
industry and industrial and manufacturing companies. A substantial portion
of its debtors' ability to honor their contracts is dependent upon the
stability of the real estate market and these economic sectors.
Residential one-to-four family real estate loans amounted to $1,013,608 and
$903,269 at September 30, 1997 and 1996, respectively. Included in this
portfolio are loans in the amount of $103,501 and $114,101 made to various
non-owner-occupied investors. These loans, as well as the Company's multi-
family residential loan portfolio of $53,368 and $56,629 at September 30,
1997 and 1996, respectively, are highly dependent on occupancy rates for
residential properties throughout the Company's market area. The Company
generally maintains loan to value ratios of no greater than 80 percent on
these loans.
Commercial real estate loans totaled $152,683 and $173,692 and acquisition
and development loans and lot loans totaled $58,251 and $38,367 at September
30, 1997 and 1996, respectively. These loans include amounts used for
acquisition, development and construction as well as permanent financing of
commercial income-producing properties. Such loans generally are associated
with a higher degree of credit risk than residential one-to-four family loans
due to the dependency on income production or future development and sale of
real estate.
Management closely monitors its credit concentrations and attempts to
diversify the portfolio within its primary market area. Before the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA") was
enacted, the Company was allowed to lend substantially higher amounts to any
one borrower than the current regulatory limitations. However, the Company's
internal loan policy placed lower limits on loans to any major borrower.
Currently, there are no borrowers which exceed the current general regulatory
limitation of 15 percent of each Association's capital. The maximum amount
outstanding to any one borrower was $10,233 at September 30, 1997 and $11,056
at September 30, 1996.
9. Office Properties and Equipment
Office properties and equipment are summarized as follows:
September 30,
1997 1996
Land $ 3,438 $ 3,597
Buildings and improvements 9,754 9,933
Furniture and equipment 12,440 11,770
Leasehold improvements 3,884 3,826
29,516 29,126
Less, accumulated depreciation and amortization (14,211) (13,001)
Total $ 15,305 $ 16,125
10. Real Estate
Real estate and other assets acquired in settlement of loans held by the
Company are summarized as follows:
September 30,
1997 1996
Real estate acquired in settlement of loans $ 11,526 $ 2,242
Other assets acquired in settlement of loans 132 84
Total $ 11,658 $ 2,326
Real estate operations are summarized as follows:
Year Ended September 30,
1997 1996 1995
Gain on sale of real estate $ 69 $ 177 $ 154
Provision charged as a write-down to real
estate (106) (158) (155)
Expenses (122) (372) (235)
Rental income 17 59 40
Total $(142) $(294) $(196)
11. Deposit Accounts
The deposit balances and related nominal rates were as follows:
September 30,
1997 1996
Weighted Weighted
Average Average
Balance Rate Balance Rate
Non-interest-bearing demand
accounts $ 34,166 $ 29,399
NOW accounts 95,564 1.25% 94,508 1.70%
Passbook, statement and other
accounts 119,303 2.62 119,509 2.75
Money market accounts 138,757 3.67 131,393 3.53
387,790 2.43 374,809 2.54
Certificate accounts:
Fixed-rate 636,796 5.73 616,361 5.73
Variable-rate 44,667 5.45 70,447 5.67
681,463 5.71 686,808 5.72
Total $ 1,069,253 4.52% $1,061,617 4.60%
Scheduled maturities of certificate accounts were as follows:
September 30,
1997 1996
Within one year $ 467,821 $ 489,139
After one but within two years 129,489 95,133
After two but within three years 37,452 44,671
Thereafter 46,701 57,865
Total $ 681,463 $ 686,808
The Company has pledged certain interest-earning deposits and investment
and mortgage-backed securities available for sale or held to maturity with a
fair value of $29,307 and $39,034 at September 30, 1997 and 1996,
respectively, to secure deposits by various entities.
Certificates of deposit with balances equal to or exceeding $100 thousand
totaled $149,743 and $141,513, at September 30, 1997 and 1996, respectively.
12. Advances From Federal Home Loan Bank
Advances from the FHLB of Atlanta consisted of the following:
September 30,
1997 1996
Weighted Weighted
Average Average
Maturity Balance Rate Balance Rate
One year $ 223,500 5.72% $310,995 5.61%
Two years 25,000 5.64
Three years 35,000 5.57
Four years 10,000 5.75
Five years 75,000 5.85
Ten years 50,000 5.10
Fifteen years 1,077 6.00 330 6.00
Sixteen years 1,077 6.00
Total $ 419,577 5.65% $312,402 5.61%
As collateral for its advances, the Company has pledged qualifying first
mortgage loans and investment and mortgage-backed securities available for
sale and held to maturity in the amount of $559,436 and $416,535 as of
September 30, 1997 and 1996, respectively. In addition, all of its FHLB
stock is pledged as collateral for these advances. Advances are subject to
prepayment penalties. Certain of the advances are subject to calls at the
option of the FHLB of Atlanta.
13. Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase consisted of the following:
September 30,
1997 1996
Investment and mortgage-backed securities with an
amortized cost of $62,396 and $17,597 and fair
value of $62,655 and $17,565 at September 30, 1997
and 1996, respectively $58,896 $16,805
The agreements had a weighted average interest rate of 5.62 percent and
5.69 percent at September 30, 1997 and 1996, respectively, and mature within
three months. The securities underlying the agreements were delivered to the
dealers who arranged the transactions. At September 30, 1997 and 1996, the
agreements were to repurchase identical securities. Securities sold under
agreements to repurchase averaged $27,050 and $37,916 during 1997 and 1996,
respectively, and the maximum amount outstanding at any month-end during 1997
and 1996 was $58,896 and $43,860, respectively.
14. Long-term Debt
The $19,763 of senior notes at September 30, 1997 and 1996, are unsecured
debt obligations of the Company which mature on September 1, 2002, and bear
annual interest at 9.375%, payable quarterly on December 1, March 1, June 1
and September 1. The Company will redeem, at any time, at par plus accrued
interest, notes tendered by the personal representative or surviving joint
tenant or tenant by the entirety of a deceased holder within 60 days of
presentation of the necessary documents, up to an annual maximum of $25 per
holder or $1,000 in the aggregate. The Company will redeem notes tendered by
other beneficial holders commencing September 1, 1993, and on each
anniversary thereof subject to per holder and aggregate limitations. Notes
totaling $487 were redeemed on September 1, 1993. Currently the notes are
callable at the option of the Company, in whole or in part, at a redemption
price of par.
In the Indenture Agreement, the Company has agreed to certain limitations
on cash dividends and additional indebtedness. The Company has also agreed
to maintain certain levels of cash or marketable investment securities, and
unless certain conditions are met to redeem notes tendered by noteholders, in
the event of certain acquisition transactions related to the Company or the
sale or pledge of shares of the subsidiaries.
The Company has agreed to maintain investment securities with a fair market
value equal to or in excess of the next three scheduled, and at certain
dates, next four scheduled interest payments on the notes. The Company may
not declare or pay any cash dividends unless it is in compliance with these
liquidity requirements.
The Company has also agreed to repurchase the notes at 100% of the
principal amount plus accrued interest if, after certain acquisition
transactions related to the Company or the sale or pledge of shares of the
subsidiaries, the notes are not rated in certain investment grades by either
of two rating services.
Additionally, the Company has agreed that it will not permit any subsidiary
to issue additional indebtedness unless the Company is in compliance with the
terms and conditions of the Indenture Agreement and the amount of any such
indebtedness does not, when aggregated with all other indebtedness, exceed
40% of the consolidated stockholders' equity of the Company. The Company
believes it was in compliance with all covenants of the Indenture Agreement
at September 30, 1997.
15. Income Taxes
Income tax expense for the years ended September 30, 1997, 1996 and 1995,
is comprised of the following:
Federal State Total
1997:
Current $ 3,982 $ 723 $ 4,705
Deferred 2,993 544 3,537
Total $ 6,975 $ 1,267 $ 8,242
1996:
Current $ 5,580 $ 886 $ 6,466
Deferred (1,998) (350) (2,348)
Total $ 3,582 $ 536 $ 4,118
1995:
Current $ 2,758 $ 510 $ 3,268
Deferred 1,606 297 1,903
Total $ 4,364 $ 807 $ 5,171
A reconciliation from expected federal tax expense to consolidated
effective income tax expense for the periods indicated follows:
Year Ended September 30,
1997 1996 1995
Expected federal income tax expense $ 7,825 $ 3,901 $ 5,043
Increases (reductions) in income taxes
resulting from:
Change in the beginning-of-the-year
valuation allowance for deferred
tax assets allocated to income tax
expense 74 69 76
Tax exempt income (74) (78) (81)
South Carolina income tax expense, net
of federal income tax effect 824 348 525
Other, net (407) (122) (392)
Total $ 8,242 $ 4,118 $ 5,171
Effective tax rate 36.9% 36.9% 35.9%
As a result of recent tax legislation in the Small Business Job Protection
Act of 1996 ("SBJPA '96"), Peoples Federal and First Federal will be required
for the year ended September 30, 1997 to recapture bad debt tax reserves in
excess of pre-1988 base year amounts of approximately $1,476 over an eight
year period and to change their overall tax method of accounting for bad
debts to the specific charge-off method. This legislation allows the
Associations to defer recapture of this amount for the 1996 and 1997 tax
years provided the "residential loan requirement" is met for both years. The
Associations currently meet this requirement for the year ending September
30, 1997, suspending the six-year recapture for the 1996 tax year. The
Associations have previously recorded the related deferred tax liability of
$574 in other liabilities.
Prior to SBJPA '96 effective beginning with the tax year ending September
30, 1997, savings associations that met certain definitional tests and other
conditions prescribed by the Internal Revenue Code were allowed to deduct,
within limitations, a bad debt deduction computed as a percentage of taxable
income before such deduction (the "Percentage of Taxable Income Method").
The deduction percentage was 8% for the years ended September 30, 1996 and
1995. Alternately, a qualified savings association could compute its bad
debt deduction based upon actual loan loss experience (the "Experience
Method"). Peoples Federal computed its bad debt deduction utilizing the
Percentage of Taxable Income Method for the year ended September 30, 1996 and
utilized the Experience Method in the year ended September 30, 1995 while
First Federal used the Percentage of Taxable Income Method to compute its bad
debt deduction for the year ended September 30, 1995 and used the Experience
Method for the year ended September 30, 1996.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at September
30, 1997 and 1996 are presented below.
September 30,
1997 1996
Deferred tax assets:
Loan loss allowances deferred for tax purposes $ 4,099 $ 3,753
Expenses deducted under economic performance
rules -- 2,198
Net operating loss carryforward 1,005 1,115
Other 643 542
Total gross deferred tax assets 5,747 7,608
Less valuation allowance (429) (355)
Net deferred tax assets 5,318 7,253
Deferred tax liabilities:
Loan fee income adjustments for tax purposes 1,821 937
FHLB stock dividends deferred for tax purposes 1,663 1,663
Expenses deducted under economic performance
rules 396
Excess carrying value of assets acquired for
financial reporting purposes over tax basis 196 189
Tax bad debt reserve in excess of base year
amount 574 571
Unrealized gain on securities available for sale 738 209
Other 669 357
Total gross deferred tax liabilities 6,057 3,926
Net deferred tax asset (liability) (included in
other assets, liabilities) $ (739) $ 3,327
A portion of the change in the net deferred tax asset (liability) relates
to unrealized gains and losses on securities available for sale. The related
current period tax expense of $529 has been recorded directly to
stockholders' equity. The balance of the change in the net deferred tax
asset (liability) results from current period deferred tax expense of $3,537.
Under SFAS 109, deferred tax assets or liabilities are initially recognized
for differences between the financial statement carrying amount and the tax
bases of assets and liabilities which will result in future deductible or
taxable amounts and operating loss and tax credit carryforwards. A valuation
allowance is then established to reduce the deferred tax asset to the level
at which it is "more likely than not" that the tax benefits will be realized.
Realization of tax benefits of deductible temporary differences and operating
loss or credit carryforwards depends on having sufficient taxable income of
an appropriate character within the carryback and carryforward periods.
Sources of taxable income that may allow for the realization of tax benefits
include (1) taxable income in the current year or prior years that is
available through carryback, (2) future taxable income that will result from
the reversal of existing taxable temporary differences, and (3) taxable
income generated by future operations.
The consolidated financial statements at September 30, 1997 and 1996 did
not include a tax liability of $8,393 related to the base year bad debt
reserve amounts since these reserves are not expected to reverse until
indefinite future periods, and may never reverse. Circumstances that would
require an accrual of a portion or all of this unrecorded tax liability are
failure to meet the tax definition of a bank, dividend payments in excess of
current year or accumulated tax earnings and profits, or other distributions
in dissolution, liquidation or redemption of the Associations' stock.
16. Benefit Plans
Stock Option Plans
At September 30, 1997 the Company has three stock-based option compensation
plans (employees and directors), which are described below.
The Company's 1983 Incentive Stock Option Plan provided for the granting of
incentive stock options for 636,824 shares of the Company's common stock.
This plan expired November 3, 1993. Options of 51,210 granted under the 1983
Stock Option Plan are outstanding at September 30, 1997. The exercise price
of the remaining options is $5.375 and all are exercisable at any time until
their expiration on February 16, 1999.
On September 27, 1990, the Company's Board of Directors approved the 1990
Stock Option and Incentive Plan which was subsequently approved by the
stockholders on January 23, 1991. An aggregate of 440,000 shares was
reserved for future issuance by the Company upon the exercise of stock
options under this Plan. Both the 1983 and 1990 plans provide for the
granting of Incentive Stock Options to key officers and employees to purchase
the stock at the fair market value on the date of the grant. The 1990 Stock
Option and Incentive Plan also provides for Non-Incentive Stock Options to be
granted at a price to be determined by the Stock Option Committee. Officers
may select an exercise period of one to ten years and other employees may
exercise options within five years. Options of 270,414 granted under the
1990 Stock Option Plan expire at various dates with the maximum date of April
24, 2007.
On July 28, 1994, the Company's Board of Directors approved the 1994
Outside Directors Stock Options-for-Fees Plan (the "1994 Director Plan")
which was subsequently approved by the stockholders on January 25, 1995.
Under the 1994 Director Plan, options to purchase up to 200,000 shares of the
Company's common stock may be granted. The formula for computing the options
awarded considers the percentage of annual fees each director wished to
allocate to the 1994 Director Plan, the market price of the common stock of
the Company on the first business day of October of each fiscal year and the
difference between the market price and an option price. The option price is
based on 75% of the market value of the common stock. Options covering
25,209, 24,097 and 30,598 shares of common stock at an exercise price of
$14.91, $14.72 and $12.19 were granted in lieu of otherwise payable cash
compensation of $73, $118 and $124 for the Company's fiscal years ending
September 30, 1997, 1996 and 1995, respectively. Options of 79,904 under the
"1994 Director Plan" expire by October 1, 2006.
The Company applies APB No. 25 and related interpretations in accounting
for its plans. Accordingly, no compensation cost has been recognized for the
stock-based option plans. Had compensation cost for the Company's stock-
based compensation plans been determined based on the fair value at the grant
dates for awards under those plans consistent with the method prescribed by
SFAS 123, the Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated below (in thousands except per
share data):
1997 1996
Net Income As reported $ 14,116 $ 7,028
Pro-forma 13,887 6,803
Earnings per share As reported $ 2.23 $ 1.11
Pro-forma 2.19 1.07
The effects of applying SFAS 123 may not be representative of the effects on
reported net income in future years.
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-
average assumptions used for grants in 1997 and 1996, respectively: dividend
yield of 2.90%, expected volatility of 29%, risk-fee interest rate of 6.08%
and 6.26%, and expected lives of 6 years.
The following is a summary of the activity under the stock-based option
plans for the years ended September 30, 1997, 1996 and 1995.
1997 1996 1995
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Balance, beginning
of year 418,904 $ 13.45 436,736 $ 11.60 429,778 $ 10.44
Options exercised (76,300) 11.23 (85,662) 8.08 (59,406) 8.44
Options forfeited (1,750) 19.11 (5,997) 14.22 (4,959) 12.90
Options granted 60,674 18.99 73,827 18.25 71,323 15.94
Outstanding,
September 30 401,528 14.69 418,904 13.45 436,736 11.60
Stock options outstanding and exercisable as of September 30, 1997, are as
follows:
Weighted Average
Range of Weighted Average Remaining
Exercise Prices Shares Exercise Price Contractual Life
$ 5.38 - 11.63 98,215 $ 8.37 2.35 years
12.19 - 15.25 174,133 14.59 6.76
16.25 - 19.50 45,416 19.18 5.65
20.25 - 25.25 37,849 21.41 8.48
$ 5.38 - 25.25 355,613 $14.18 5.58
Stock Purchase Plan
On January 25, 1995, the stockholders approved the Employee Stock Purchase
Plan ("ESPP"). The ESPP allows employees to purchase stock of the Company at
a discounted price. Purchases are made subject to various guidelines which
allow the plan to qualify as an employee stock purchase plan under Section
423 of the Internal Revenue Code of 1986, as amended. Purchases of 10,595
shares of common stock have been made under the plan.
Performance Equity Plan
On January 22, 1997, the stockholders approved the Performance Equity Plan
for Non-Employee Directors ("Plan"). The purpose of the Plan is to provide
non-employee directors with an opportunity to increase their equity interest
in the Company if the Company and the Associations attain specific financial
performance criteria. Performance targets for the initial plan year resulted
in the awarding of 3,576 shares to the 15 directors serving the Corporation
and the Associations.
Sharing Thrift Plan
The Company has established the Sharing Thrift Plan which includes a
deferred compensation plan (401(k)) for all full-time and certain part-time
employees. The Plan permits eligible participants to contribute a maximum of
15 percent of their annual salary (not to exceed limitations prescribed by
law). Part-time employees who work at least 1,000 hours in a calendar year
may also contribute to the Plan. The Company will match the employee's
contribution up to 5 percent of the employee's salary based on the attainment
of certain profit goals.
The Company's matching contribution charged to expense for the years ended
September 30, 1997, 1996 and 1995, was $527, $457 and $343, respectively.
The Sharing Thrift Plan provides that all employees who have completed a
year of service with the Company in which they have worked at least 1,000
hours are entitled to receive a quarterly Profit Sharing Contribution of from
0% to 100% of 6% of their base pay during such quarter depending upon the
amount of each subsidiary's return on equity for that quarter. The Plan
provides that regardless of the return on equity each eligible employee will
receive a Profit Sharing Contribution equal to at least 1% of his base
compensation on an annual basis. Employees become vested in Profit Sharing
Contributions made to their accounts over a seven-year period or upon their
earlier death, disability or retirement at age 65 or over. Employees are
able to direct the investment of Profit Sharing Contributions made to their
accounts to any of the Plan investment funds. Contributions to the Plan
during 1997, 1996 and 1995 totaled $727, $635 and $516, respectively.
Other Postretirement Benefits
The Company sponsors postretirement benefit plans that provide health care,
life insurance and other postretirement benefits to retired employees. The
health care plans generally include participant contributions, co-insurance
provisions, limitations on the Company's obligation and service-related
eligibility requirements. The Company pays these benefits as they are
incurred. Postretirement benefits for employees hired after January 1, 1989
and those electing early retirement or normal retirement after January 1,
1999, were substantially curtailed.
In the first quarter of fiscal 1993, the Company adopted SFAS 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions,"
effective October 1, 1992, for the Company's retiree health and other welfare
benefit plans. SFAS 106 requires the accrual method of accounting for these
benefits, rather than the Company's previous policy, which was to record
these benefits as they were paid.
Net periodic postretirement benefit cost for fiscal 1997, 1996 and 1995
consisted of the following components:
Year Ended September 30,
1997 1996 1995
Service cost $ 7
Interest cost $ 94 $ 85 114
Amortization of transition obligation 79 79 79
Other amortizations and net deferrals (139) (207) (85)
Net periodic postretirement benefit cost $ 34 $ (43) $ 115
Reconciliation of Funded Status: September 30,
1997 1996 1995
Accumulated postretirement benefit obligation $ (1,355) $ (1,210) $ (1,582)
Unrecognized transition obligation 1,182 1,261 1,340
Unrecognized net gains (181) (409) (198)
Accrued postretirement benefit cost $ (354) $ (358) $ (440)
Assumptions Used:
Weighted average discount rate 7.50% 8.00% 7.50%
Medical/Medicare trend rate (initial)(pre-
65 employees) 8.00 8.75 9.50
Medical/Medicare trend rate after 3 years
(pre-65 employees) 5.75 5.75 5.75
Medical/Medicare trend rate (initial)(post-
65 employees) 7.25 7.75 8.25
Medical/Medicare trend(post-65 employees)
rate after 3 years 5.75 5.75 5.75
An increase in the assumed health care cost trend rate by one percentage
point in each year would increase the accumulated postretirement benefit
obligation as of September 30, 1997 and 1996, by $127 and $124 and the
aggregate of service and interest cost by $10 and $10, respectively.
17. Commitments and Contingencies
Loan Commitments
Outstanding commitments on mortgage loans not yet closed, including
commitments issued to correspondent lenders, amounted to approximately
$25,561 at September 30, 1997. These were principally single-family loan
commitments. Other loan commitments totaled $449 at September 30, 1997.
Commitments to extend credit are agreements to lend to borrowers as long as
there is no violation of any condition established by the commitment letter.
Commitments generally have fixed expiration dates or other termination
clauses. The majority of the commitments will be funded within a twelve
month period. The Company evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary
by the Company upon extension of credit, is based on management's credit
evaluation of the borrower. Collateral held varies but primarily consists of
residential or income producing commercial properties.
The Company originates and services mortgage loans. Substantially all of
the Company's loan sales have been without provision for recourse. Unused
lines of credit on equity loans, credit cards, other consumer and commercial
loans amounted to $131,795 and $116,587 at September 30, 1997 and 1996,
respectively. Based on historical trends, it is not expected that the
percentage of funds drawn on existing lines of credit will increase
substantially over levels currently utilized.
Interest Rate Cap
In connection with its asset/liability management program the Company
purchased an interest rate cap agreement with a counterparty on September 30,
1996. The purchase was made at a premium of $261 for the purpose of hedging
potential increases in interest rates on short-term liabilities. The Company
is not a dealer, does not make a market in cap agreements, and will not trade
the instrument. The Board of Directors' approved policy governing the use of
these instruments strictly forbids speculation of any kind. The cap
agreement has a notional principal amount of $10,000 and matures October 2,
1999. As of September 30, 1997 the strike price was 5.625 percent versus
three month LIBOR. Unamortized fees related to the cap as of September 30,
1997 totaled $174. Amortized cost of $87 was incurred during the year ended
September 30, 1997.
Lease Commitments
The Company occupies office space and land under leases expiring on various
dates through 2008.
Minimum rental commitments under noncancelable operating leases were as
follows:
September 30,
1997
One year $ 992
Two years 984
Three years 938
Four years 911
Five years 863
Thereafter 2,425
Total $ 7,113
Rental expenses under operating leases were $980, $897 and $844 in 1997,
1996 and 1995, respectively.
18. Stockholders' Equity and Dividend Restrictions
The ability of the Company to pay dividends depends primarily on the
ability of the Associations to pay dividends to the Company. The
Associations are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory--and possibly additional
discretionary--actions by regulators that, if undertaken, could have a direct
material effect on the Associations' financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Associations must meet specific capital guidelines that involve
quantitative measures of the Associations' assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting practices.
The Associations' capital amounts and classifications are also subject to
qualitative judgments by the regulators about components, risk weightings and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Associations to maintain minimum amounts and ratios (set forth in
the table below) of tangible and core capital (as defined in the regulations)
to total assets (as defined), and of risk-based capital (as defined) to risk-
based assets (as defined). Management believes, as of September 30, 1997,
that the Associations meet all capital adequacy requirements to which they
are subject.
As of September 30, 1997, the Associations were categorized as well-
capitalized under the regulatory framework for prompt corrective action. To
be categorized as well-capitalized the Associations must maintain minimum
total risk-based, Tier I risk-based, and Tier I core ("leverage") ratios as
set forth in the table. There are no conditions or events since that date
that management believes have changed the institutions' category.
The Associations' actual capital amounts and ratios are also presented in
the table.
<TABLE>
<CAPTION>
First Federal: To Be Well Capitalized
For Capital Adequacy Under Prompt Corrective
Actual Purposes Action Provisions:
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1997:
Tangible capital
(to Total Assets) $ 78,106 6.47% $ 18,112 1.50%
Core capital
(to Total Assets) 78,106 6.47 36,224 3.00 $ 60,374 5.00%
Tier I capital
(to Risk-based Assets) 78,106 9.41 72,449 6.00
Risk-based capital
(to Risk-based Assets) 84,793 10.22 66,373 8.00 82,966 10.00
As of September 30, 1996:
Tangible capital
(to Total Assets) $ 72,049 6.65% $ 16,256 1.50%
Core capital
(to Total Assets) 72,049 6.65 32,526 3.00 $ 54,187 5.00%
Tier I capital
(to Risk-based Assets) 72,049 9.54 45,334 6.00
Risk-based capital
(to Risk-based Assets) 78,288 10.36 60,445 8.00 75,556 10.00
To Be Well Capitalized
For Capital Adequacy Under Prompt Corrective
Peoples Federal: Actual Purposes Action Provisions:
Amount Ratio Amount Ratio Amount Ratio
As of September 30, 1997:
Tangible capital
(to Total Assets) $ 31,794 6.47% $ 7,376 1.50%
Core capital
(to Total Assets) 31,794 6.47 14,752 3.00 $ 24,586 5.00%
Tier I capital
(to Risk-based Assets) 31,794 11.43 16,691 6.00
Risk-based capital
(to Risk-based Assets) 33,249 11.95 22,254 8.00 27,818 10.00
As of September 30, 1996:
Tangible capital
(to Total Assets) $ 27,115 6.10% $ 6,670 1.50%
Core capital
(to Total Assets) 27,115 6.10 13,340 3.00 $ 22,232 5.00%
Tier I capital
(to Risk-based Assets) 27,115 11.33 14,358 6.00
Risk-based capital
(to Risk-based Assets) 30,089 12.57 19,144 8.00 23,931 10.00
</TABLE>
Under the framework, the Associations' capital levels allow the
Associations to accept brokered deposits without prior approval from
regulators.
OTS capital distribution regulations specify the conditions relative to an
institution's ability to pay dividends. The new regulations permit
institutions meeting fully phased-in capital requirements and subject only to
normal supervision to pay out 100 percent of net income to date over the
calendar year and 50 percent of surplus capital existing at the beginning of
the calendar year without supervisory approval. The regulations state that
an institution subject to more stringent restrictions may make request
through the OTS to be subject to the new regulations. The Company has
received approval from the OTS to be subject to the requirements of the new
regulations.
The Company may not declare or pay a cash dividend on, or purchase, any of
its common stock, if the effect thereof would cause the capital of the
Associations to be reduced below the minimum regulatory capital requirements.
Under Delaware law, the Company may declare and pay dividends on its common
stock either out of its surplus, as defined under Delaware law, or, if there
is no surplus, out of its net profits for the fiscal year in which the
dividend is declared and/or the preceding fiscal year.
19. Fair Value of Financial Instruments
The following table sets forth the fair value of the Company's financial
instruments at September 30, 1997 and 1996:
<TABLE>
<CAPTION>
September 30,
1997 1996
Carrying Fair Carrying Fair
Value Value Value Value
<S> <C> <C> <C> <C>
Financial instruments:
Assets:
Cash and cash equivalents $ 36,672 $ 36,672 $ 34,124 $ 34,124
Investments held to maturity 11,980 11,970 27,487 27,417
Investments available for sale 40,826 40,826 66,434 66,434
Investment in capital stock of FHLB 21,554 21,554 15,620 15,620
Loans receivable, net 1,400,978 1,417,648 1,278,757 1,285,089
Loans held for sale 4,516 4,560 1,353 1,362
Mortgage-backed securities available
for sale 148,963 148,963 82,991 82,991
Liabilities:
Deposits:
Demand deposits, savings accounts
and money market accounts 387,790 387,790 374,809 374,809
Certificate accounts 681,463 682,888 686,808 687,840
Advances from FHLB 419,577 420,165 312,402 312,042
Securities sold under agreements to
repurchase 58,896 58,896 16,805 16,805
Long-term debt 19,763 19,812 19,763 19,714
Off-balance sheet items:
Mortgage loan commitments 25,561 25,709 20,432 20,499
</TABLE>
Financial instruments of the Company for which fair value approximates the
carrying amount at September 30, 1997, include cash and cash equivalents and
investment in the capital stock of the FHLB. The fair value of investments,
mortgage-backed securities, loans held for sale and long-term debt is
estimated based on bid prices published in financial newspapers or bid
quotations received from independent securities dealers.
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as single-family
residential, multi-family, non-residential, commercial and consumer. Each
loan category is further segmented into fixed- and adjustable-rate interest
terms and by performing and nonperforming categories.
The fair value of performing loans, except single-family residential
mortgage loans, is calculated by discounting scheduled cash flows through the
estimated maturity using estimated market discount rates that reflect the
credit and interest rate risk inherent in the loan. The estimate of maturity
is based on the Company's historical experience with repayments for each loan
classification, modified, as required, by an estimate of the effect of
current economic and lending conditions. For performing single-family
residential mortgage loans, fair value is derived from quoted market prices
for securities backed by similar loans, adjusted for differences between the
market for the securities and the loans being valued and an estimate of
credit losses inherent in the portfolio.
Under SFAS 107, the fair value of deposits with no stated maturity, such as
passbook accounts, checking and NOW accounts and money market accounts, is
equal to the amount payable on demand. The fair value of certificate
accounts is estimated using the rates currently offered for deposits of
similar remaining terms. No value has been estimated for the Company's long-
term relationships with customers (commonly known as the core deposit
intangible) since such intangible asset is not a financial instrument
pursuant to the definitions contained in SFAS 107. The fair value of FHLB
advances is estimated based on current rates for borrowings with similar
terms. The fair value of securities sold under agreements to repurchase
approximates the carrying value. The fair value of mortgage loan commitments
is estimated based on current levels of interest rates versus the committed
interest rates.
Management uses its best judgment in estimating the fair value of non-
traded financial instruments but there are inherent limitations in any
estimation technique. For example, liquid markets do not exist for many
categories of loans held by the Company. By definition, the function of a
financial intermediary is, in large part, to provide liquidity where
organized markets do not exist. Therefore, the fair value estimates
presented herein are not necessarily indicative of the amounts which the
Company could realize in a current transaction.
The information presented is based on pertinent information available to
management as of September 30, 1997. Although management is not aware of any
factors, other than changes in interest rates, that would significantly
affect the estimated fair values, the current estimated fair value of these
instruments may have changed significantly since that point in time.
20. First Financial Holdings, Inc. (Parent Company Only) Condensed Financial
Information
At fiscal year end, the Company's principal asset was its investment in the
Associations, and the principal source of income for the Company was
dividends and equity in undistributed earnings from the Associations. The
following is condensed financial information for the Company.
Statements of Financial Condition
September 30,
1997 1996
Assets
Cash and cash equivalents $ 896 $ 233
U.S. Government and agency obligations available for
sale, at fair value 9,379 10,535
Mortgage-backed securities available for sale, at
fair value 2,503 3,134
Investment in Associations 111,142 100,014
Other 1,046 972
Total assets $ 124,966 $ 114,888
Liabilities and Stockholders' Equity
Accrued expenses $ 418 $ 330
Long-term debt 19,763 19,763
Stockholders' equity 104,785 94,795
Total liabilities and stockholders' equity $ 124,966 $ 114,888
Statements of Operations
Year Ended September 30,
1997 1996 1995
Income
Equity in undistributed earnings of
Associations $ 8,365 $(1,080) $ 1,989
Dividend income 8,100 10,250 9,500
Interest income 765 726 403
(Gain) loss on sale of investments available
for sale 55 (3)
Total income 17,285 9,896 11,889
Expenses
Interest expense 1,853 1,853 1,853
Salaries and employee benefits 753 546 335
Stockholder relations and other 563 469 463
Total expense 3,169 2,868 2,651
Net income $14,116 $7,028 $ 9,238
Statements of Cash Flows
Year Ended September 30,
1997 1996 1995
Operating Activities
Net income $ 14,116 $ 7,028 $ 9,238
Adjustments to reconcile net income to net
cash provided by operating activities
Equity in undistributed earnings of
Associations (8,365) 1,080 (1,989)
Depreciation 4 1
Amortization (23) (24) (25)
(Increase) decrease in accrued income and
deferred expenses (40) 122 (12)
Increase in accrued expenses 59 47 74
Net cash provided by operating activities 5,751 8,254 7,286
Investing Activities
Repayments to mortgage-backed securities 201 3
Purchase of mortgage-backed securities
available for sale (2,520) (3,127)
Proceeds from sale of mortgage-backed
securities available for sale 2,984 500
Proceeds from maturing investments available
for sale 2,000 4,239
Purchase of investments available for sale (4,992) (2,996)
Net (purchase) redemption of mutual funds (775) (175) (1,625)
Net purchase of equipment (37)
Equity investment in subsidiary (2,000)
Net cash provided by (used in) investing
activities (147) (4,052) (4,121)
Financing Activities
Proceeds from sale of common stock 1,149 768 540
Treasury stock purchased (1,525) (763) (317)
Dividends paid (4,565) (4,062) (3,522)
Net cash provided by (used in) financing
activities (4,941) (4,057) (3,299)
Net increase (decrease) in cash and cash
equivalents 663 145 (134)
Cash and cash equivalents at beginning of
period 233 88 222
Cash and cash equivalents at end of period $ 896 $ 233 $ 88
Supplemental disclosures:
Cash paid during the period for:
Interest $ 1,853 $ 1,853 $ 1,853
Income taxes 4,335 4,448 3,911
Unrealized net gain (loss) on securities
available for sale, net of income tax 52 (32) 109
21. Dividend Reinvestment and Direct Purchase Plan
The Company has a Dividend Reinvestment and Direct Purchase Plan, as
amended August 25, 1997, for which shares are purchased only on the open
market. At September 30, 1997, 267,044 shares had been purchased and remain
in the plan.
22. Quarterly Results (Unaudited):
Summarized below are selected financial data regarding results of
operations for the periods indicated:
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
1997
Total interest income $ 29,685 $ 29,841 $ 30,665 $ 31,571 $121,762
Net interest income 12,129 12,066 12,266 12,392 48,853
Provision for loan losses 525 525 600 725 2,375
Income before income 5,364 5,555 5,712 5,727 22,358
taxes
Net income 3,375 3,531 3,603 3,607 14,116
Weighted average shares 6,337 6,310 6,340 6,367 6,339
outstanding (1)
Net income per common $ 0.53 $ 0.56 $ 0.57 $ 0.57 $ 2.23
share
1996
Total interest income $ 26,556 $ 27,481 $ 27,987 $ 29,094 $111,118
Net interest income 10,612 11,263 11,504 11,742 45,121
Provision for loan losses 305 420 498 600 1,823
Income before income 3,928 4,582 4,738 (2,102) 11,146
taxes
Net income 2,505 2,917 3,024 (1,418) 7,028
Weighted average shares 6,308 6,332 6,370 6,368 6,345
outstanding (1)
Net income per common $ 0.40 $ 0.46 $ 0.47 $ (0.22) $ 1.11
share
1995
Total interest income $ 22,352 $ 23,230 $ 24,375 $ 25,546 $ 95,503
Net interest income 10,072 9,705 9,694 10,238 39,709
Provision for loan losses 107 26 47 271 451
Income before income 3,512 3,374 3,491 4,032 14,409
taxes
Net income 2,197 2,131 2,284 2,626 9,238
Weighted average shares 6,271 6,277 6,292 6,303 6,286
outstanding (1)
Net income per common $ 0.35 $ 0.34 $ 0.36 $ 0.42 $ 1.47
share
(1) Average shares in thousands.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company has not, within the 24 months before the date of the most
recent financial statements, changed its accountants.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained under the section captioned "Proposal I Election
of Directors" in the Company's Proxy Statement is incorporated herein by
reference.
The following table sets forth certain information with respect to the
executive officers of the Company and the Associations. The individuals
listed below are executive officers of the Company and the Associations, as
indicated.
Name Age (1) Position
A. Thomas Hood 51 President and Chief Executive Officer of
the Company and President and Chief
Executive Officer of First Federal
John L. Ott, Jr. 49 Senior Vice President of the Company and
Senior Vice President/Retail Banking
Division of First Federal
Charles F. Baarcke, Jr. 50 Senior Vice President of the Company and
Senior Vice President/Lending Division
of First Federal
George N. Magrath, Jr. 44 President and Chief Executive Officer of
Peoples Federal
Susan E. Baham 47 Senior Vice President and Chief Financial
Officer of the Company and First Federal
_______________
(1) At September 30, 1997.
The following is a description of the principal occupation and employment
of the executive officers of the Company and the Associations during at least
the past five years.
A. Thomas Hood has been the President and Chief Executive Officer of the
Company since July 1, 1996. Mr. Hood had served as Executive Vice President
and Chief Operating Officer of the Company from February 1, 1995 through June
30, 1996. Mr. Hood has also served as Treasurer of the Company and its Chief
Financial Officer since 1984. Mr. Hood was named President and Chief
Executive Officer of First Federal effective February 1, 1995. Prior to that
time, he had been Executive Vice President and Treasurer of First Federal
since 1984. As President and Chief Executive Officer of the Company and of
First Federal, Mr. Hood is responsible for the daily business operations of
the Company and of First Federal under policies and procedures established by
the Board of Directors. Mr. Hood joined First Federal in 1975.
John L. Ott, Jr. is the Senior Vice President of the Company and First
Federal in which capacity he directs and coordinates all retail banking
operations, special savings and retirement programs and the sale of non-
deposit investment products. He joined First Federal in 1971 and prior to
becoming Senior Vice President of Retail Banking in 1985, he was the Senior
Vice President for Branch Operations.
Charles F. Baarcke, Jr. is the Senior Vice President of the Company and
First Federal. He is responsible for all lending operations, loan servicing
and sales. He joined First Federal in 1975 and prior to becoming Senior Vice
President for Lending Operations in 1985, he was the Vice President of
Lending Operations.
George N. Magrath, Jr., became the President and Chief Executive Officer of
Peoples Federal in 1993. Previously, Mr. Magrath was the Executive Vice
President of Peoples Federal and was responsible for general operations of
Peoples Federal. Prior to serving as Executive Vice President, Mr. Magrath
served as Senior Vice President, Lending.
Susan E. Baham became the Senior Vice President and Chief Financial Officer
of the Company and of First Federal on July 1, 1996. Previously, Mrs. Baham
served as Vice President and Chief Accounting Officer of the Company since
1988 and as Vice President of Finance of First Federal since 1984. Mrs.
Baham is responsible for First Financial's treasury, finance, investor
relations and strategic planning functions.
Pursuant to the Company's Bylaws, officers are elected on an annual basis.
Directors of the Company are elected for a term of three years with
approximately one-third of the directors standing for election each year.
ITEM 11. EXECUTIVE COMPENSATION
The information contained under the Section captioned "Proposal I --
Election of Directors" in the Proxy Statement is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by reference to
the Section captioned "Voting Securities and Principal Holders Thereof"
of the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by reference to
the Sections captioned "Proposal I -- Election of Directors" and "Voting
Securities and Principal Holders Thereof" of the Proxy Statement.
(c) Changes in Control
The Company is not aware of any arrangements, including any pledge by
any person of securities of the Company, the operation of which may at a
subsequent date result in a change of control of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference
to the Section captioned "Proposal I Election of Directors" and "Voting
Securities and Principal Holders Thereof" of the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
1. Consolidated Financial Statements and Report of Independent Auditors -
see Item 8 for reference.
All other schedules have been omitted as the required information is
either inapplicable or included in the Notes to Consolidated Financial
Statements.
2. Exhibits
(3.1)Certificate of Incorporation, as amended, of Registrant (1)
(3.2)Bylaws, as amended, of Registrant (2)
(3.3)Amendment to Registrant's Bylaws
(4)Indenture, dated September 10, 1992,
with respect to the Registrant's 9.375% Senior Notes, due September
1, 2001 (3)
(10.1)Acquisition Agreement dated as of December 9, 1991 by and among the
Registrant, First Federal Savings and Loan Association of Charleston
and Peoples Federal Savings and Loan Association of Conway (3)
(10.3)Employment Agreement with A. Thomas Hood, as amended (4)
(10.4)Employment Agreement with Charles F. Baarcke, Jr. (5)
(10.5)Employment Agreement with John L. Ott, Jr. (5)
(10.6)1990 Stock Option and Incentive Plan (6)
(10.7)1994 Outside Directors Stock Options-for-Fees Plan (7)
(10.8)1994 Employee Stock Purchase Plan (7)
(10.9)1996 Performance Equity Plan for Non-Employee Directors (8)
(10.10)Employment Agreement with Susan E. Baham (4)
(10.11)1997 Stock Option and Incentive Plan (9)
(22)Subsidiaries of the Registrant
(23)Consent of Independent Auditors
(27)Financial Data Schedule
(1) Incorporated by reference to Exhibit 3 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended December 31, 1993
(2) Incorporated by reference to Exhibit 3 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1995
(3) Incorporated by reference to the Registrant's Registration Statement on
Form S-8 File No. 33-55067.
(4) Incorporated by reference to the Registrant s Annual Report on Form 10-
K for the year ended September 30, 1996.
(5) Incorporated by reference to the Registrant's Annual Report on Form 10-
K for the year ended September 30, 1995.
(6) Incorporated by reference to the Registrant's Registration Statement on
Form S-8 File No. 33-57855.
(7) Incorporated by reference to the Registrant's Proxy Statement for the
Annual Meeting of Stockholders held on January 25, 1995
(8) Incorporated by reference to the Registrant's Proxy Statement for the
Annual Meeting of Stockholders held on January 22, 1997.
(9) Incorporated by reference to the Registrant s Preliminary Proxy
Statement for the Annual Meeting of Stockholders to be held on January
28, 1998.
3. Reports on Form 10-K
No current reports on Form 10-K were filed for the three months ended
September 30, 1997.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
FIRST FINANCIAL HOLDINGS, INC.
Date: December 22, 1997 By: /s/ A. Thomas Hood
A. Thomas Hood
President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ A. Thomas Hood By: /s/ D. Van Smith
A. Thomas Hood D. Van Smith
Director (Principal Executive Director
Officer)
Date: December 22, 1997 Date: December 22, 1997
By: /s/ Susan E. Baham By: /s/ Gary C. Banks, Jr.
Susan E. Baham Gary C. Banks, Jr.
Senior Vice President Director
(Principal Financial Officer)
Date: December 22, 1997 Date: December 22, 1997
By: /s/ Joseph A. Baroody By: /s/ Paula Harper Bethea
Joseph A. Baroody Paula Harper Bethea
Director Director
Date: December 22, 1997 Date: December 22, 1997
By: /s/ Paul G. Campbell, Jr. By: /s/ A. L. Hutchinson, Jr.
Paul G. Campbell, Jr. A. L. Hutchinson, Jr.
Director Director
Date: December 22, 1997 Date: December 22, 1997
By: /s/ James C. Murray By: /s/ D. Kent Sharples
James C. Murray D. Kent Sharples
Director Director
Date: December 22, 1997 Date: December 22, 1997
By: /s/ Thomas E. Thornhill
Thomas E. Thornhill
Director
Date: December 22, 1997
EXHIBIT 3.3
At their November 25, 1997 board meeting, the Board of Directors of
First Financial Holdings, Inc. amended Article III, Section 2 of the First
Financial Holdings, Inc. Bylaws to read as follows:
"SECTION 2. Number, Term and Election. The board of Directors shall
consist of nine members and shall be divided into three classes as
nearly equal in number as possible. The members of each class shall
be elected for a term of three years and until their successors are
elected or qualified. One class shall be elected by ballot annually.
The board of directors shall be classified in accordance with the
provisions of the Corporation's Certificate of Incorporation."
EXHIBIT 22
Subsidiaries of the Registrant
PARENT
First Financial Holdings, Inc.
Percentage Jurisdiction or State
Subsidiaries (a) of Ownership of Incorporation
First Federal Savings and Loan 100% United States
Association of Charleston
Peoples Federal Savings and 100% United States
and Loan Association
Charleston Financial Services (b) 100% South Carolina
The Carolopolis Corporation (b) 100% South Carolina
First Southeast Insurance
Services, Inc.(c) 100% South Carolina
Coastal Carolina Corporation (c) 100% South Carolina
(a) The operations of the Company's wholly-owned subsidiaries are included
in the Company's consolidated financial statements.
(b) Second-tier subsidiaries of the Registrant. Wholly-owned by First
Federal.
(c) Became second-tier subsidiaries of the Registrant on October 9, 1992.
Wholly-owned by Peoples Federal.
EXHIBIT 23
INDEPENDENT ACCOUNTANTS CONSENT
The Board of Directors
First Financial Holdings, Inc.
We consent to incorporation by reference in registration statements No.
33-55067 and 33-57855 on Form S-8 of First Financial Holdings, Inc. and
Subsidiaries (the "Company") of our report dated October 24, 1997, relating
to the consolidated statements of financial condition of the Company as of
September 30, 1997 and 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the years in
the three-year period ended September 30, 1997, which report appears in the
September 30, 1997 annual report on Form 10-K of the Company.
KPMG PEAT MARWICK LLP
Greenville, South Carolina
December 24, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 29,097
<INT-BEARING-DEPOSITS> 7,575
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 189,789
<INVESTMENTS-CARRYING> 33,534
<INVESTMENTS-MARKET> 33,524
<LOANS> 1,417,119
<ALLOWANCE> 11,625
<TOTAL-ASSETS> 1,712,931
<DEPOSITS> 1,069,253
<SHORT-TERM> 478,473
<LIABILITIES-OTHER> 0
<LONG-TERM> 19,763
<COMMON> 71
0
0
<OTHER-SE> 104,714
<TOTAL-LIABILITIES-AND-EQUITY> 1,712,931
<INTEREST-LOAN> 107,498
<INTEREST-INVEST> 11,852
<INTEREST-OTHER> 2,412
<INTEREST-TOTAL> 121,762
<INTEREST-DEPOSIT> 48,004
<INTEREST-EXPENSE> 72,909
<INTEREST-INCOME-NET> 48,853
<LOAN-LOSSES> 2,375
<SECURITIES-GAINS> 125
<EXPENSE-OTHER> 8,196
<INCOME-PRETAX> 22,358
<INCOME-PRE-EXTRAORDINARY> 14,116
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,116
<EPS-PRIMARY> 2.23
<EPS-DILUTED> 2.23
<YIELD-ACTUAL> 3.12
<LOANS-NON> 6,609
<LOANS-PAST> 405
<LOANS-TROUBLED> 6,776
<LOANS-PROBLEM> 13,790
<ALLOWANCE-OPEN> 11,202
<CHARGE-OFFS> 2,284
<RECOVERIES> 332
<ALLOWANCE-CLOSE> 11,625
<ALLOWANCE-DOMESTIC> 11,625
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
