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, 1998
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: (843)529-5933
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, 1998 there were issued and outstanding
13,599,525 shares of the Registrant's common stock. The
registrant's common stock is traded over-the-counter and is
listed on The Nasdaq 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, 1998, was $260,090,916 (13,599,525 shares at $19.125
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 registrant's Definitive Proxy Statement for the
1999 Annual Meeting of Stockholders. (Part III)
<PAGE>
FIRST FINANCIAL HOLDINGS, INC.
1998 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
Item 1. Business 1
General 1
Discussion of Forward Looking Statements 1
Lending Activities 2
Investment Activities 7
Sources of Funds 9
Asset and Liability Management 10
Subsidiary Activities 12
Competition 13
Personnel 13
Regulation 13
Item 2. Properties 16
Item 3. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 17
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 17
Item 6. Selected Financial Data 19
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 20
Item 8. Financial Statements and Supplementary Data 36
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 65
Item 13. Certain Relationships and Related Transactions 65
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 66
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
First Financial Holdings, Inc. ("First Financial" or the
"Company") is a savings and loan holding company headquartered in
Charleston, South Carolina which owns and operates First Federal
Savings and Loan Association of Charleston ("First Federal") and
Peoples Federal Savings and Loan Association, Conway, South
Carolina ("Peoples Federal") (together, the "Associations"). The
Company also owns First Southeast Investor Services, Inc.
("FSIS"), a South Carolina corporation organized in 1998 for the
purpose of operating as a broker-dealer. At September 30, 1998,
First Financial had total assets of $1.8 billion, total deposits
of $1.2 billion and stockholders' equity of $125.2 million.
First Federal, chartered in 1934, is the largest financial
institution headquartered in the Charleston, South Carolina
metropolitan area and the largest thrift institution in South
Carolina based on assets of approximately $1.3 billion at
September 30, 1998. 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 shares of the
Company's Common Stock. The Company issued approximately 708,800
shares of Common Stock in the transaction. Peoples Federal
conducts its business through 13 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 (5), Florence (4), Conway (3) and Loris (1). Peoples
Federal had assets of approximately $583 million at September 30,
1998.
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,
certain data processing activities, trust and fiduciary services,
reinsurance of private mortgage insurance and certain passive
investment 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 Office of Thrift
Supervision ("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 -- Federal
Regulation of Savings 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, Year 2000 initiatives 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, 1998, the Company's net loan portfolio
totaled approximately $1.6 billion, or 85% 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 non-
residential 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. Loans funded
through the correspondent program totaled $77 million in fiscal
1998.
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>
As of September 30,
1998 1997 1996 1995 1994
% 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 $1,135,765 72.5% $1,040,142 71.6% $ 931,075 70.3% $ 727,900 64.5% $ 609,907 60.7%
Multi-family 43,161 2.7 54,593 3.8 57,238 4.3 57,902 5.1 59,966 6.0
Commercial real
estate and land 225,039 14.4 220,169 15.2 220,020 16.6 219,106 19.4 223,503 22.2
Commercial business loans 33,790 2.2 32,967 2.3 31,865 2.4 32,246 2.9 29,474 2.9
Consumer loans:
Home equity 73,961 4.7 58,879 4.0 48,728 3.7 47,015 4.2 51,620 5.1
Mobile homes 26,983 1.7 19,537 1.3 21,977 1.7 25,046 2.2 28,276 2.8
Credit cards 10,424 0.7 10,992 0.8 10,453 0.8 9,146 0.8 8,115 0.8
Savings account loans 5,531 0.4 5,835 0.4 5,659 0.4 5,565 0.5 4,916 0.5
Other consumer loans 55,785 3.6 51,384 3.5 37,609 2.8 31,038 2.8 22,715 2.3
Total gross loans receivable 1,610,439 102.9 1,494,498 102.9 1,364,624 103.0 1,154,964 102.4 1,038,492 103.3
Allowance for loan losses (12,781) (0.8) (12,103) (0.8) (11,639) (0.9) (10,993) (1.0) (11,043) (1.1)
Loans in process (32,360) (2.1) (30,257) (2.1) (27,082) (2.0) (14,781) (1.3) (20,536) (2.0)
Deferred loan fees and
discounts (258) 0.0 (641) 0.0 (978) (0.1) (1,391) (0.1) (2,198) (0.2)
Loans receivable, net $1,565,040 100.0% $1,451,497 100.0% $1,324,925 100.0% $1,127,799 100.0% $1,004,715 100.0%
</TABLE>
The following table shows, at September 30, 1998, 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 Three Over Ten to
Within One Over One to Over Two to to Five Over Five to Fifteen Over Fifteen
Consolidated Year Two Years Three Years Years Ten Years Years Years Total
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate mortgages:
Adjustable-rate $ 590 $ 795 $ 1,306 $ 7,417 $ 25,445 $ 64,494 $ 781,747 $ 881,794
Fixed-rate 26,653 15,597 23,142 34,992 69,214 115,853 204,360 489,811
Consumer loans:
Adjustable-rate 56,217 14,410 1,324 2,491 4,710 3,413 1,750 84,315
Fixed-rate 23,044 7,499 10,543 19,898 14,425 4,153 8,807 88,369
Commercial business loans:
Adjustable-rate 6,479 714 577 681 499 86 383 9,419
Fixed-rate 15,804 3,099 2,629 2,186 616 37 -- 24,371
Total $ 128,787 $ 42,114 $ 39,521 $ 67,665 $ 114,909 $ 188,036 $ 997,047 $ 1,578,079
</TABLE>
Residential Mortgage Lending
At September 30, 1998, the Company's real estate loans
totaled approximately $1.4 billion, or 89.6% of net loans
receivable. One- to four-family residential mortgage loans
totaled $1.1 billion, or 80.9% of the Company's real estate loans
and 72.5% of total net loans receivable. The Company offers
adjustable-rate mortgage loans ("ARMs") 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
construction loans totaled $59.4 million at September 30, 1998.
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, 1998, the Company's commercial real estate
portfolio totaled $141.2 million, or 9.0% of total net loans and
10.0% of real estate loans. Its multi-family portfolio totaled
$43.2 million, or 2.7% of total net loans and 3.1% of total real
estate loans. Loans made with land as security totaled $83.9
million, or 5.4% of total net loans and 6.0% 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. Generally the loans are adjustable in
interest and the rate is fixed for three to five years determined
by market conditions, collateral and the relationship with the
borrower. The amortization of the loans vary but will not exceed
20 years. 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 either on the prime lending
rate as the interest rate index or to fix the rate of interest
for a three year to five year period.
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 $172.7 million at
September 30, 1998, or 11.0% 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 $74.0 million, or 42.8% of all consumer loans.
Other 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, 1998, the Company's commercial
business loans outstanding were $33.8 million, which represented
2.2% 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, 1998, the Company was
servicing loans for others in the amount of $403.2 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 $173.0 million in
1998, $50.5 million in 1997 and $9.6 million in 1996. At
September 30, 1998, the Company had $14.5 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 entail greater risk than do residential
mortgage loans, particularly in the case of loans that are
unsecured or secured by rapidly depreciating assets such as
automobiles and other vehicles. In such cases, any repossessed
collateral for a defaulted consumer loan may not provide an
adequate source of repayment of the outstanding loan balance as a
result of the greater likelihood of damage, loss or depreciation.
The remaining deficiency often does not warrant further
substantial collection efforts against the borrower beyond
obtaining a deficiency judgment. In addition, consumer loan
collections are dependent on the borrower's continuing financial
stability, and thus are more likely to be adversely affected by
job loss, divorce, illness or personal bankruptcy. Furthermore,
the application of various federal and state laws, including
federal and state bankruptcy and insolvency laws, may limit the
amount that can be recovered on such loans.
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, 1998, First Federal's and Peoples Federal's lending
limits under this restriction were $13.5 million and $6.4
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, 1998, the largest aggregate amount of
loans by First Federal and Peoples Federal to any one borrower,
including related entities, was approximately $10.0 million and
$3.4 million, respectively. All of these loans were performing
according to their respective terms at September 30, 1998.
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 $21.0 million in assets as substandard and
$111,000 as loss, as of September 30, 1998.
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 $10.2 million of assets designated "special mention"
as of September 30, 1998.
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, 1998, the Company's investment and
mortgage-backed securities portfolio totaled approximately $189.0
million, which included stock in the FHLB of Atlanta of $25.0
million. Investment securities include U.S. Government and
agency obligations and corporate bonds approximating $10.5
million and $3.7 million, respectively. Mortgage-backed
securities totaled $148.6 million as of September 30, 1998. 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 -- Federal Regulation of Savings
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
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
serves 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 lower loan originations and replace
loan portfolio runoff.
The following tables set 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, 1998. The fair value of the Company's
investment securities portfolio (excluding stock in the FHLB of
Atlanta) was $164.1 million on September 30, 1998.
<TABLE>
<CAPTION>
Investment and Mortgage-backed Securities Portfolio
As of September 30,
1998 1997 1996
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
Securities Held to Maturity: (dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury and U.S. Government agencies
and corporations $ 3,499 $ 3,514 $ 12,935 $ 12,913 $ 28,335 $ 28,341
Corporate debt and other securities 649 680 1,347 1,432
Mortgage-backed securities 444 452 818 828 1,002 1,010
Total securities held to maturity $ 4,592 $ 4,646 $ 15,100 $ 15,173 $ 29,337 $ 29,351
Maturity and Yield Schedule as of September 30, 1998
Weighted
Carrying Average
Value Yield
U.S. Treasury and U.S. Government agencies (dollar amounts in thousands)
and corporations:
Within 1 year $ 3,499 5.87%
3,499 5.87
Corporate debt and other securities
After 1 but within 5 years 200 10.30
After 5 but within 10 years 449 10.52
649 10.45
Mortgage-backed securities
Within 1 year 405 7.38
After 10 years 39 9.24
444 7.54
Total securities held to maturity $ 4,592 6.68%
As of September 30,
1998 1997 1996
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
Securities Available for Sale: (dollar amounts in thousands)
U.S. Treasury and U.S. Government agencies
and corporations $ 6,981 $ 7,094 $ 15,775 $ 15,808 $ 29,755 $ 29,668
Corporate debt and other securities 3,009 3,000 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
Federated Adjustable-Rate Mortgage Fund 3,219 3,151 10,000 9,709
Other mutual funds and other 1,170 1,170 4,575 4,488 5,561 5,436
Mortgage-backed securities 144,695 148,186 147,088 148,963 82,152 82,991
Total securities available for sale $155,855 $159,450 $ 187,895 $ 189,789 $148,885 $ 149,425
Maturity and Yield Schedule as of September 30, 1998
Weighted
Carrying Average
Value Yield
U.S. Treasury and U.S. Government (dollar amounts in thousands)
agencies and corporations:
Within 1 year $ 2,000 5.72%
After 1 but within 5 years 4,981 6.42
6,981 6.22
Corporate debt and other securities:
Within 1 year 1,509 8.17
After 1 but within 5 years 507 8.58
After 10 years 993 6.36
3,009 7.64
Equity securities
Within 1 year 820 5.48
After 10 years 350 --
1,170 3.84
Mortgage-backed securities
After 1 but within 5 years 15,420 6.65
After 5 but within 10 years 22,086 7.68
After 10 years 107,189 7.08
144,695 7.13
$ 155,855 7.07%
</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
regular savings accounts, negotiable order of withdrawal
("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 frequently 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, 1998, 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, 1998. Jumbo certificates of deposit require
minimum deposits of $100,000 and have negotiable interest rates.
Maturity Period At September 30, 1998
(dollar amounts in
thousands)
Three months or less $ 37,258
Over three through six months 14,292
Over six through twelve months 14,317
Over twelve months 3,248
Total $ 69,115
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 borrowing 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, 1998, the Company had advances totaling
$471.5 million from the FHLB of Atlanta at an average rate of
5.54%. At September 30, 1998, the maturity of the Associations'
FHLB advances ranged from one to ten 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, 1998,
the Company had $29.4 million of outstanding reverse repurchase
agreements secured by mortgage-backed securities. The agreements
had a weighted average interest rate of 5.58% at September 30,
1998, and mature within three months. For more information on
other borrowings, see Note 13 of Notes to Consolidated Financial
Statements.
During 1998 the Company entered into a loan agreement with
another bank for a $25.0 million funding line. The rate on the
funding line is based on LIBOR. At September 30, 1998, $4.0
million was outstanding under this agreement with a weighted
average rate of 7.69%.
The following table sets forth certain information regarding
short-term borrowings by the Company at the end of and during the
periods indicated:
<TABLE>
<CAPTION>
At or For the Year Ended September 30,
1998 1997 1996
(dollar amounts in thousands)
<S> <C> <C> <C>
Weighted Average Rate Paid On (at end of period):
FHLB advances 5.54% 5.65% 5.61%
Securities sold under agreements to repurchase 5.58 5.62 5.69
Bank line of credit 7.69 -- --
Maximum Amount of Borrowings Outstanding (during period):
FHLB advances $ 514,000 $ 419,577 $ 312,402
Securities sold under agreements to repurchase 87,405 58,896 43,860
Bank line of credit 4,000 -- --
Approximate Average Amount of Short-term Borrowings
With Respect To:
FHLB advances 470,441 377,475 215,396
Securities sold under agreements to repurchase 45,241 27,050 37,916
Bank line of credit 373 -- --
Approximate Weighted Average Rate Paid On (during period):
FHLB advances 5.70% 5.71% 5.70%
Securities sold under agreements to repurchase 5.73 5.59 5.70
Bank line of credit 7.69 -- --
</TABLE>
During 1998, the Company retired its $19.8 million 9.375%
Senior Notes issued in fiscal 1992. The early redemption
resulted in an extraordinary loss (net of income taxes) of
$340,000 in 1998.
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. 13A, "Interest Rate Risk Management"
("TB-13A"). 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, 1998, the Company's internal
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
by16% and reduce net portfolio value by 17% while a 200 basis
point decline in rates would increase net interest income over a
twelve-month period by 4% and increase net portfolio value by 10%
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, 1998. 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 1999 2000 2001 2002 2003 after Balance Fair Value
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-sensitive assets: (dollar amounts in thousands)
Loans receivable 7.84% $ 236,712 $ 201,205 $ 171,024 $ 145,371 $ 123,565 $ 687,163 $1,565,040 $1,588,265
Mortgage-backed securities 7.13 21,771 18,505 15,729 13,370 11,365 64,399 145,139 148,638
Investments and other
interest- earning assets 6.15 17,813 3,505 1,984 200 -- 1,791 25,293 25,443
FHLB Stock 7.50 -- -- -- -- -- 25,000 25,000 25,000
Interest-sensitive liabilities:
Checking accounts 0.58 60,036 32,712 22,244 15,126 10,285 21,857 162,260 162,260
Savings accounts 2.52 20,558 17,063 14,162 11,754 9,756 47,634 120,927 120,927
Money Market accounts 3.47 121,248 9,669 6,769 4,738 3,317 7,738 153,479 153,479
Certificate accounts 5.75 551,792 115,167 17,202 20,128 16,869 6,616 727,774 736,213
Borrowings 5.76 225,942 39,000 -- 85,000 80,000 75,000 504,942 514,108
Off-balance sheet items:
Commitments to extend credit 7.10 35,238 35,401
</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 OF THE ASSOCIATIONS
First Federal has the following wholly owned subsidiaries:
Charleston Financial Services
Incorporated on January 28, 1977, its primary operations
include the sale of data processing consulting services and
software.
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.
Broad Street Holdings
Broad Street Holdings was incorporated in 1998 as the
holding company for Broad Street Investments, Inc., which was
also formed in 1998. Broad Street Investments has been organized
as a real estate investment trust to hold mortgage-related
assets.
First Reinsurance
First Reinsurance was incorporated in 1998 as the holding
company for First Southeast Reinsurance, Inc., a company also
organized in 1998 and domiciled in Vermont. First Southeast
Reinsurance will reinsure mortgage insurance originated through
mortgage insurance companies in connection with real estate loans
originated by the Associations.
First Southeast Fiduciary and Trust
First Southeast Fiduciary and Trust Services, Inc., was
incorporated in 1998 for the purpose of extending trust and other
asset management services to customers of the Associations.
Peoples Federal has two wholly-owned subsidiaries:
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. 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.
Coastal Carolina Service Corporation
Coastal Carolina Service Corporation was incorporated in
1980 for the purpose of conducting data processing activities.
All such activities ended prior to 1992. Beginning in 1998
Coastal Carolina Service Corporation was engaged in certain
investment activities, including holding for investment purposes
mortgage loans, mortgage-backed securities and U.S. treasury and
agency securities.
COMPETITION
First Federal was the largest and Peoples Federal the fifth
largest of savings associations headquartered in South Carolina
at September 30, 1998, 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, 1998, the Company had 576 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
As federally chartered and federally insured thrift
institutions, 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. Lending activities and other investments must comply
with various statutory and regulatory capital requirements. The
Associations are regularly examined by federal regulators and
file periodic reports concerning their activities and financial
condition. In addition, the Associations' relationship with
their depositors and borrowers also is regulated to a great
extent by both federal and state laws, especially in such matters
as the ownership of deposit accounts and the form and content of
the Associations' mortgage documents.
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 FHLB system;
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 of Atlanta, are required to acquire and hold shares
of capital stock in the FHLB of 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 of Atlanta. First
Federal and Peoples Federal were in compliance with this
requirement with an investment in FHLB of Atlanta stock of $16.6
million and $8.4 million, respectively, at September 30, 1998.
Among other benefits, the FHLB of 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 of 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.
Under applicable regulations, the FDIC assigns an
institution to one of three capital categories based on the
institution's financial information, as of the reporting period
ending seven months before the assessment period. The capital
categories are: (i) well-capitalized, (ii) adequately
capitalized, or (iii) undercapitalized. An institution is also
placed in one of three supervisory subcategories within each
capital group. The supervisory subgroup to which an institution
is assigned is based on a supervisory evaluation provided to the
FDIC by the institution's primary federal regulator and
information that the FDIC determines to be relevant to the
institution's financial condition and the risk posed to the
deposit insurance funds. An institution's assessment rate
depends on the capital category and supervisory category to which
it is assigned with the most well-capitalized, healthy
institutions receiving the lowest rates.
On September 30, 1996, the Deposit Insurance Funds Act ("DIF
Act") was enacted, which, among other things, imposed a special
one-time assessment on SAIF member institutions, including the
Associations, to recapitalize the SAIF. The SAIF special
assessment was recognized by First Federal, Peoples Federal and
Investors as an expense in the quarter ended September 30, 1996
and amounted to $7.3 million on a pre-tax basis and $4.6 million
on an after-tax basis.
As a result of the DIF Act, 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 were
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 1980s to help fund the
thrift industry cleanup. BIF-assessable deposits were charged an
assessment to help pay interest on the FICO bonds at a rate of
approximately .013%. Full pro rata sharing of the FICO payments
between BIF and SAIF members will not occur until the earlier of
December 31, 1999, or the date the BIF and SAIF are merged. FICO
assessments for SAIF members are currently .058% of assessable
deposits.
The FDIC is authorized to raise the assessment rates in
certain circumstances. The FDIC has exercised this authority
several times in the past and may raise insurance premiums in the
future. If such action is taken by the FDIC, it could have an
adverse effect on the earnings of the Associations.
Under the Federal Deposit Insurance Act, insurance of
deposits may be terminated by the FDIC upon a finding that the
institution has engaged in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations or has
violated any applicable law, regulation, rule, order or condition
imposed by the FDIC or the OTS. Management of the Associations
do not know of any practice, condition or violation that might
lead to termination of deposit insurance.
Prompt Corrective Action.
Each federal banking agency is required to implement a
system of prompt corrective action for institutions that it
regulates. The federal banking agencies have promulgated
substantially similar regulations to implement this system of
prompt corrective action. Under the regulations, an institution
shall be deemed to be "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.
At September 30, 1998, First Federal and Peoples Federal were
categorized as "well capitalized" under the prompt corrective
action regulations of the OTS. See Note 18 of the Notes to
Consolidated Financial Statements.
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 ("Guidelines"). The Guidelines 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
Guidelines, the agency may require the Associations to submit to
the agency an acceptable plan to achieve compliance with the
standard. Management is aware of no conditions relating to these
safety and soundness standards which would require submission of
a plan of compliance.
Qualified Thrift Lender Test
The Qualified Thrift Lender ("QTL") test requires that a
savings association maintain at least 65% of its total tangible
assets in "qualified thrift investments" on a monthly average
basis in nine out of every 12 months. At September 30, 1998, the
Associations were in compliance with the QTL test.
Capital Requirements.
The OTS capital regulations require savings institutions to
meet three capital standards: a 1.5% tangible capital standard, a
3% leverage (core capital) ratio and an 8% risk based capital
standard. Core capital is defined as common stockholder's equity
(including retained earnings), certain non-cumulative perpetual
preferred stock and related surplus, minority interests in equity
accounts of consolidated subsidiaries less intangibles other than
certain mortgage servicing rights, and credit card relationships.
The OTS regulations require that, in meeting the leverage ratio,
tangible and risk-based capital standards institutions generally
must deduct investments in and loans to subsidiaries engaged in
activities not permissible for a national bank. In addition, the
OTS prompt corrective action regulation provides that a savings
institution that has a leverage capital 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.
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 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 in 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% could 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 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.
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, the regulation utilizes a three-tiered
approach which permits various levels of distributions based
primarily upon a savings association's capital level.
The Associations currently meet the criteria to be
designated Tier 1 associations 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 their surplus capital at the beginning of the
calendar year less any distributions previously paid during the
year.
Regulation of the Company
The Company is subject to certain restrictions under the
Home Owners' Loan Act ("HOLA") and the OTS regulations issued
thereunder. Such restrictions generally concern, among others,
acquisitions of other savings associations and savings and loan
holding companies.
As a multiple savings and loan holding company within the
meaning of HOLA, the Company's activities are generally subject
to more restrictions than those of a unitary savings and loan
holding company. Specifically, if First Federal or Peoples
Federal fail to meet the QTL test, the activities of the Company
and 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.
Additionally, the HOLA requires any savings and loan holding
company that controls a savings association that fails the QTL
test to, 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.
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 five facilities leased.
Peoples Federal leases space for certain insurance agency
operations in Charleston and in Lake City and for loan
origination functions in Ocean Isle, North Carolina. 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, 1998, the total book value of the premises
and equipment owned by the Company was $15.8 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,
1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Stock Prices and Dividends:
Cash
Dividend
High Low Declared
1998:
First Quarter $ 26.75 $ 17.06 $ 0.105
Second Quarter 27.38 23.75 0.105
Third Quarter 26.38 21.38 0.105
Fourth Quarter 24.38 16.75 0.105
1997:
First Quarter $ 12.13 $ 9.50 $ 0.09
Second Quarter 14.31 11.13 0.09
Third Quarter 16.38 11.88 0.09
Fourth Quarter 19.63 14.69 0.09
The Company's common stock is traded in the Nasdaq National
Market under the symbol "FFCH." Trading information in
newspapers is provided on the Nasdaq Stock Market quotation page
under the listing, "FSTFNHLD." As of September 30, 1998, there
were approximately 2,511 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 eleven
times with the most recent dividend paid in November 1998, at
$.12 per share. Cash dividends per share totaled $.42, $.36 and
$.32 for fiscal 1998, 1997 and 1996, respectively. These
dividends per share amounted to 34.43%, 32.73% and 56.14% of
basic 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 CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
At or For the Year Ended September 30,
1998(1) 1997(1) 1996(1) 1995(1) 1994(1)
(dollar amounts in thousands except per share amounts)
<S> <C> <C> <C> <C> <C>
Summary of Operations
Interest income $ 136,345 $126,359 $ 115,486 $ 99,230 $ 89,255
Interest expense 81,689 75,340 68,314 57,547 46,526
Net interest income 54,656 51,019 47,172 41,683 42,729
Provision for loan losses (2,405) (2,435) (1,908) (511) (1,184)
Net interest income after provision for loan 52,251 48,584 45,264 41,172 41,545
losses
Other income 13,357 12,296 10,019 8,796 9,016
Non-interest expense (40,158) (37,356) (36,203) (34,673) (33,526)
SAIF special assessment (313) (6,955)
Income tax expense (8,571) (8,501) (4,471) (5,490) (4,471)
Net income before extraordinary loss 16,879 14,710 7,654 9,805 12,564
Extraordinary loss on retirement of debt (2) (340)
Net income $ 16,539 $ 14,710 $ 7,654 $ 9,805 $ 12,564
Per Common Share
Net income before extraordinary loss $ 1.24 $ 1.10 $ 0.57 $ 0.74 $ 0.94
Net income before extraordinary loss, diluted 1.20 1.07 0.56 0.72 0.92
Extraordinary loss (0.02)
Extraordinary loss, diluted (0.03)
Net income 1.22 1.10 0.57 0.74 0.94
Net income, diluted 1.17 1.07 0.56 0.72 0.92
Book value 9.16 8.28 7.53 7.30 6.66
Dividends 0.42 0.36 0.32 0.28 0.24
Dividend payout ratio 34.43% 32.73% 56.14% 37.84% 25.53%
Core Income Data (3)
Net income before extraordinary loss $ 16,879 $ 14,710 $ 7,654 $ 9,805 $ 12,564
Investors merger related expenses 210
SAIF assessment 198 4,391
Core income $ 17,089 $ 14,908 $ 12,045 $ 9,805 $ 12,564
Core Earnings Per Share (3)
Basic:
Net income before extraordinary loss $ 1.24 $ 1.10 $ 0.57 $ 0.74 $ 0.94
Investors merger related expenses 0.02
SAIF assessment 0.01 0.33
Core income $ 1.26 $ 1.11 $ 0.90 $ 0.74 $ 0.94
Diluted:
Net income before extraordinary loss $ 1.20 $ 1.07 $ 0.56 $ 0.72 $ 0.92
Investors merger related expenses 0.01
SAIF assessment 0.01 0.32
Core income $ 1.21 $ 1.08 $ 0.88 $ 0.72 $ 0.92
At or For the Year Ended September 30,
1998(1) 1997(1) 1996(1) 1995(1) 1994(1)
(dollar amounts in thousands except per share amounts)
At September 30,
Assets $ 1,839,708 $1,774,952 $1,603,177 $1,417,592 $1,295,593
Loans receivable, net 1,565,040 1,451,497 1,324,925 1,127,799 1,004,716
Mortgage-backed securities 148,630 149,781 83,993 102,246 105,977
Investment securities 40,412 76,959 110,686 122,579 120,789
Deposits 1,164,440 1,123,988 1,111,943 1,120,546 1,108,823
Borrowings 504,942 498,236 348,970 172,120 79,267
Stockholders' equity 125,163 111,528 101,016 97,076 87,862
Number of offices 36 35 35 34 34
Full-time equivalent employees 576 564 561 530 558
Selected Ratios:
Return on average equity 13.97% 13.94% 7.60% 10.60% 14.45%
Return on average assets 0.90 0.88 0.51 0.72 0.98
Core return on average equity 14.43 14.13 11.96 10.60 14.45
Core return on average assets 0.93 0.89 0.80 0.72 0.98
Gross interest margin 2.84 2.89 2.94 2.91 3.21
Net interest margin 3.10 3.15 3.22 3.16 3.42
Efficiency ratio 59.42 59.40 63.12 68.57 65.61
Average equity as a percentage of average
assets 6.48 6.28 6.67 6.82 6.78
Asset Quality Ratios:
Allowance for loan losses to loans 0.82% 0.83% 0.88% 0.97% 1.10%
Allowance for loan losses to non-performing
loans 177.76 86.74 66.22 55.56 59.95
Non-performing assets to loans and real estate
and other assets acquired in settlement of
loans 0.83 1.75 1.51 2.03 2.15
Non-performing assets to total assets 0.71 1.44 1.25 1.62 1.68
Net charge-offs to average loans 0.11 0.14 0.10 0.05 0.11
(1) During 1998 First Financial acquired by merger Investors. This business combination was accounted for
utilizing the pooling-of-interests method of accounting, and accordingly all financial information prior
to the merger has been retroactively restated.
(2) Loss on retirement of First Financial's 9.375% senior notes, net of income tax benefit of $173.
(3) Core income represents income exclusive of after-tax expenses related to the Investors pooling and a one
time SAIF assessment recorded in 1997 and 1996.
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
First Financial's financial results of operations continued
to improve in 1998. The information presented in the following
discussion of financial results is generally indicative of the
activities of its two thrift operating subsidiaries, First
Federal and Peoples Federal. 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 completed the acquisition of Investors on
November 7, 1997, in a transaction accounted for as a pooling of
interests. Under the terms of the agreement, Investors'
shareholders received 1.36 shares of First Financial common stock
in exchange for each share of Investors stock held, which
resulted in the issuance of approximately 709,000 shares.
Accordingly, all financial information has been restated to
reflect the Investors merger.
On February 28, 1998, the Board of Directors of First
Financial approved a two-for-one stock split in the form of a
100% stock dividend paid on March 27, 1998 to shareholders of
record on March 13, 1998. All financial statement information
presented in this report has been restated to reflect the two-
for-one stock split. The Board of Directors of First Financial
also approved on October 22, 1998, a stock repurchase program to
acquire up to 500,000 shares of common stock, representing
approximately 3.7% of outstanding shares. The program is
expected to end by June 30, 1999.
In July 1998, First Financial issued a redemption notice for
the Company's 9.375% senior notes. As of September 1, 1998,
$19.8 million was paid plus accrued interest to redeem the notes.
As a result of the redemption, an extraordinary charge of
$340,000 (net of related income taxes) was recorded. The
redemption is expected to increase future net interest income.
First Financial's net income and core operating results set
new records in 1998. Management believes that its goal-oriented
focus combined with improving efficiency ratios, positive trends
in the level of nonperforming assets and growth in average
interest-earning assets with stable margins have contributed
significantly to results in recent years. During 1998, 1997 and
1996 several events occurred which resulted in non-recurring
charges which are excluded by First Financial in determining core
operating results for the years. These items include the
following:
- - merger related expenses of $210,000 after-tax incurred in
the first and second fiscal quarters of 1998 (or $.01 per
diluted share) associated with the Investors merger.
- - an extraordinary charge of $340,000 (or $.03 per diluted
share) after-tax reflecting the loss incurred on redemption
of $19.8 million principal balance of 10-year 9.375% notes
in the final quarter of 1998.
- - a special assessment from the FDIC relating to the SAIF-
insured deposits of the banking subsidiaries - recorded as
$198,000 after tax in 1997 (or $.01 per diluted share) and
$4.4 million after tax in 1996 (or $.32 per diluted share)
First Financial's core operating income increased $2.2
million in 1998 to set a new Company record of $17.1 million
compared with $14.9 million earned in 1997 and $12.0 million in
1996. Core basic and diluted earnings per share improved to
$1.26 and $1.21 in 1998, respectively, from $1.11 and 1.08 in
1997. Core basic and diluted earnings per share totaled $.90
and $.88 in 1996, respectively.
Net income after the effect of the extraordinary charge and
other non-recurring costs was $16.5 million in 1998, $14.7
million in 1997 and $7.7 million in 1996. Basic and diluted
earnings per share on net income was $1.22 and $1.17,
respectively, in 1998 compared with $1.10 and $1.07 in 1997 and
$.57 and $.56 in 1996.
Financial Position
At September 30, 1998, First Financial's assets totaled $1.8
billion, increasing in total by 4%, or $64.8 million, from
September 30, 1997. Net asset growth was principally
attributable to growth in net loans receivable, which increased
$113.5 million during 1998, offset by a reduction in the
Company's investment portfolio which declined $36.5 million
during fiscal 1998. Average interest-earning assets increased by
8.7% in 1998.
Investment Securities and Mortgage-backed Securities
At September 30, 1998, available for sale securities totaled
$159.5 million and represented 97.2% of investment securities and
mortgage-backed securities compared to $189.8 million, or 92.6%
of comparable balances at September 30, 1997. The carrying value
of held to maturity securities totaled $4.6 million at September
30, 1998 compared with $15.1 million at the end of 1997.
The primary objective of the Company in its management of
the investment and mortgage-backed securities 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 and mortgage-backed securities
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.
Loans Receivable
Loans comprise the major portion of interest-earning assets
of the Company, accounting for 85.6% and 86.4% of average
interest-earning assets in 1998 and 1997, respectively. Compared
with balances on September 30, 1997, net loans receivable grew by
7.2% during 1998. Loans held for sale also increased by $10.0
million in 1998. Loan growth would have been even greater in
1998 had the Company not securitized $52.3 million in single-
family fixed-rate loans during the December 1997 quarter.
The Company's loan portfolio consists of real estate
mortgage and construction loans, home equity, manufactured
housing 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.
Strong housing markets in coastal South Carolina and in
markets served through its correspondent lending programs helped
the Company to achieve a 7.2% increase in net loans receivable
during fiscal 1998. Increasing by $95.6 million, the single-
family loan portfolio was a principal factor in the growth in net
loans receivable. Consumer loan growth, also, was well ahead of
management projections and further expansion of consumer lending
remains a strategic initiative of the Company. Consumer loans
increased 17.8% in fiscal 1998 and totaled $172.7 million as of
September 30, 1998.
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 multi-family 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.
<TABLE>
<CAPTION>
Problem Assets
At September 30,
1998 1997 1996 1995 1994
(dollar amounts in thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual loans $ 2,647 $ 6,609 $ 8,137 $ 7,709 $ 4,454
Accruing loans 90 days or more delinquent 50 568 1,391 974 836
Renegotiated loans 4,493 6,776 8,049 11,103 13,129
Real estate and other assets acquired in settlement of loans 5,871 11,658 2,432 3,144 3,290
$ 13,061 $ 25,611 $ 20,009 $ 22,930 $ 21,709
As a percent of loans receivable and real estate and other
assets acquired in settlement of loans 0.83% 1.75% 1.51% 2.03% 2.15%
As a percent of total assets 0.71 1.44 1.25 1.62 1.68
Allowance for loan losses as a percent of problem loans 177.76 86.74 66.22 55.56 59.95
Net charge-offs to average loans outstanding 0.11 0.14 0.10 0.05 0.11
</TABLE>
Problem assets were $13.1 million at September 30, 1998, or
.71% of assets and .83% of loans receivable and real estate and
other assets acquired in settlement of loans. At September 30,
1997, problem assets were $25.6 million, or 1.44% of assets and
1.75% of loans receivable and real estate and other assets
acquired in settlement of loans. Problem assets, which had
increased in 1997 due to the acquisition through foreclosure of
two shopping centers, declined significantly in 1998 as one of
these properties was sold in the final quarter of fiscal 1998.
Renegotiated loans declined by $2.3 million during 1998
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, 1998 covers
177.8% of reported problem loans, increasing from 86.7% as of
September 30, 1997. 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 34.4% 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 at each reporting date. 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.
<TABLE>
<CAPTION>
Allowance for Loan Losses
At or For the Year Ended September 30,
1998 1997 1996 1995 1994
(dollar amounts in thousands)
<S> <C> <C> <C> <C> <C>
Balance, beginning of period $12,103 $11,639 $10,993 $11,043 $10,985
Loans charged-off:
Real estate loans 981 682 824 530 858
Commercial business loans 122 431 188 3 461
Consumer loans 1,427 1,196 745 531 692
Total charge-offs 2,530 2,309 1,757 1,064 2,011
Recoveries:
Real estate loans 159 164 336 356 658
Commercial business loans 407 8 40 32 78
Consumer loans 237 166 119 115 149
Total recoveries 803 338 495 503 885
Net charge-offs 1,727 1,971 1,262 561 1,126
Provision for loan losses 2,405 2,435 1,908 511 1,184
Balance, end of period:
Real estate loans 8,753 9,003 9,047 8,940 9,139
Commercial business loans 1,087 1,384 1,225 947 949
Consumer loans 2,941 1,716 1,367 1,106 955
Balance, end of period $12,781 $12,103 $11,639 $10,993 $11,043
Balance as a percent of net loans:
Real estate loans 0.64% 0.70% 0.77% 0.90% 1.05%
Commercial business loans 3.22 4.20 3.84 2.94 3.22
Consumer loans (1) 1.70 1.17 1.10 0.94 0.83
Total net loans 0.82 0.83 0.88 0.97 1.10
Net charge-offs as a percent of average net loans:
Real estate loans 0.06% 0.04% 0.05% 0.02% 0.02%
Commercial business loans (0.85) 1.30 0.46 (0.09) 1.23
Consumer loans (1) 0.75 0.76 0.52 0.36 0.46
(1) Consumer loans include home equity lines of credit.
</TABLE>
On September 30, 1998, the total allowance for loan losses
was $12.8 million compared with $12.1 million at September 30,
1997. Total net loan charge-offs declined to $1.7 million in
1998 from $2.0 million in 1997. Net real estate loan charge-offs
totaled $822,000 in 1998 compared with $518,000 in 1997. Net
real estate charge-offs in 1998 included approximately $679,000
related to a $2.8 million multifamily loan on which the Company
had maintained an $800,000 specific reserve. Consumer loan net
charge-offs increased to $1.2 million in 1998 compared with $1.0
million in 1997. Management believes that a substantial portion
of the $160,000 increase in consumer loan net charge-offs is
attributable to higher numbers of personal bankruptcy filings.
Commercial loan net recoveries of $285,000 in 1998 compared
favorably with $423,000 in net charge-offs in 1997. Based on the
current economic environment and other factors, management
believes that the allowance for loan losses at September 30, 1998
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.
<TABLE>
<CAPTION>
At September 30,
1998 1997 1996 1995 1994
(dollar amounts in thousands)
<S> <C> <C> <C> <C> <C>
Allowance for loan losses applicable to:
Real estate loans $ 8,753 $ 9,003 $ 9,047 $ 8,940 $ 9,139
Commercial business loans 1,087 1,384 1,225 947 949
Consumer loans 2,941 1,716 1,367 1,106 955
Total $ 12,781 $ 12,103 $ 11,639 $ 10,993 $ 11,043
Percent of loans to total net loans:
Real estate loans 87.1% 87.8% 88.4% 86.9% 85.8%
Commercial business loans 2.1 2.2 2.3 2.8 2.8
Consumer loans 10.8 10.0 9.3 10.3 11.4
Total 100.0% 100.0% 100.0% 100.0% 100.0%
</TABLE>
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 $40.5 million during
the year ended September 30, 1998. First Financial's deposit
composition at September 30, 1998 and 1997 is as follows:
Deposits
At September 30,
1998 1997
Percent Percent
Balance of Total Balance of Total
(dollar amounts in thousands)
Checking accounts $ 162,260 13.94% $ 138,754 12.34%
Statement and other accounts 120,927 10.38 122,740 10.92
Money market accounts 153,479 13.18 141,168 12.56
Certificate accounts 727,774 62.50 721,326 64.18
Total deposits $1,164,440 100.00% $1,123,988 100.00%
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 the recent several years. As of September 30, 1998,
deposits as a percentage of liabilities were 67.9% compared with
67.6% at September 30, 1997. 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, 1998 was
4.39% compared with 4.53% at September 30, 1997.
Borrowings
Borrowings increased $6.7 million during the current year to
$504.9 million as of September 30, 1998. Borrowings as a
percentage of total liabilities were approximately 29.5% at the
end of 1998 compared with 30% in 1997. Borrowings from the FHLB
of Atlanta increased $51.9 million while reverse repurchase
agreements declined $29.5 million.
The Company's average cost of FHLB advances and reverse
repurchase agreements declined from 5.65% at September 30, 1997
to 5.54% at September 30, 1998. Approximately $196.5 million in
FHLB advances mature or are subject to call within one year and
all of the reverse repurchase agreements mature within three
months. During September 1998 First Financial redeemed $19.8
million of 9.375% senior notes due September 1, 2002. As a
result of the redemption an extraordinary charge of $340,000 (net
of related income taxes) was recorded. The redemption is
expected to increase future net interest income.
Capital Resources
Average stockholders' equity was $118.4 million during 1998,
increasing 12.2% from $105.5 million in 1997. The primary source
of growth in stockholders' equity during 1998 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 6.80%
at September 30, 1998 compared to 6.28% September 30, 1997.
In October 1998 the Board of Directors approved a stock
repurchase program to acquire up to 500,000 shares of the
Company's Common Stock to be completed by June 30, 1999. During
1998, the Company paid out $.42 in dividends per share for a
payout ratio of 34.4%, compared with dividends of $.36 and a
payout ratio of 32.7% in 1997. In November 1998, the Board of
Directors paid a regular quarterly cash dividend of $.12 per
share, which will result in an increase of approximately 14.3%
from the previous quarterly cash dividend amount of $.105 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 require 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 1998.
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 fiscal 1998, the FHLB of Atlanta
instituted a general policy of limiting borrowing capacity to 30%
of assets, regardless of the level of advances that could be
supported by available collateral for such advances. This new
policy serves to define an upper cap for FHLB advances for each
of the banking subsidiaries. As of September 30, 1998, based on
asset size of each banking subsidiary, additional advance funding
of $80 million was available under the current FHLB of Atlanta
general policy.
During 1998, the Company experienced a net cash outflow from
investing activities of $60.9 million, consisting principally of
a net increase of $159.0 million in loans receivable and
purchased loans offset partially by $66.2 million in maturities
and sales of investment securities. Proceeds from sales of
mortgage-backed securities totaled $24.1 million in 1998 and
repayments totaled $53.4 million. The Company also purchased
$22.1 million of mortgage-backed securities. The Company
experienced net cash inflows of $10.1 million from operating
activities and $43.2 million from financing activities.
Financing activities included $51.9 million in net additions to
FHLB advances, $29.5 million in net declines in reverse
repurchase agreements, the redemption of $19.8 million of senior
notes and growth of $40.5 million in deposit balances.
Proceeds from the sale of loans totaled $173.0 million in
1998, increasing from $50.5 million in 1997. Based on recent
asset/liability management objectives, management expects to
continue its strategy of selling selected longer-term, fixed-rate
loans in fiscal 1999.
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. During 1998, the
early redemption of the remaining outstanding principal of $19.8
million was partially funded by a reduction in investment
securities of First Financial and partially by a $4.0 million
draw on a $25.0 million bank funding line. Potential sources for
First Financial's payment of principal and interest on its
borrowings and for its repurchase program 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,
1998, First Financial had cash reserves and existing marketable
securities of $2.3 million compared with $12.8 million at
September 30, 1997.
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.
Interest Rate Sensitivity Analysis at September 30, 1998
<TABLE>
<CAPTION>
Interest Rate Sensitivity Period
13 Months- Over 2
<S> <C> <C> <C> <C> <C> <S>
3 Months 4-6 Months 7-12 Months 2 years Years Total
Interest-earning assets: (dollar amounts in thousands)
Loans (1) $ 261,127 $ 167,372 $ 269,865 $ 91,692 $ 788,023 $1,578,079
Mortgage-backed securities 11,584 10,566 15,539 7 107,443 145,139
Interest-earning deposits,
investments and FHLB stock 40,297 1,000 2,509 3,505 2,982 50,293
Total interest-earning assets 313,008 178,938 287,913 95,204 898,448 1,773,511
Interest-bearing liabilities:
Deposits:
Checking accounts (2) 10,150 10,150 20,299 22,119 47,003 109,721
Savings accounts (2) 5,139 5,139 10,278 17,063 83,308 120,927
Money market accounts 153,479 -- -- -- -- 153,479
Certificate accounts 206,240 143,142 206,538 111,006 60,848 727,774
Total deposits 375,008 158,431 237,115 150,188 191,159 1,111,901
Borrowings 254,942 75,000 35,000 60,000 80,000 504,942
Total interest-bearing liabilities 629,950 233,431 272,115 210,188 271,159 1,616,843
Current period gap $ (316,942) $ (54,493) $ 15,798 $(114,984) $ 627,289 $ 156,668
Cumulative gap $ (316,942) $ (371,435) $(355,637) $(470,621) $ 156,668
Percent of total assets (17.23)% (20.19)% (19.33)% (25.58)% 8.52%
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.
(3) Borrowings include fixed-rate FHLB advances at the earlier of maturity date or potential call dates. If
FHLB advances are not called, maturities may extend.
</TABLE>
Based on the Company's September 30, 1998 static gap
position, in a one-year time period $780 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 $356 million, or
19.3% of assets. The Company's static gap position one year ago
(before restatement) was a negative 12.4% 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 $54.7
million in 1998 compared with $51.0 million in 1997 and $47.2
million in 1996. 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.
Average Yields and Rates
<TABLE>
<CAPTION>
Year Ended September 30,
1998 1997 1996
Average Average Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
(dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans (1) $1,510,008 $119,306 7.90% $1,399,917 $ 111,510 7.97% $1,231,770 $ 100,061 8.12%
Mortgage-backed
securities 168,344 11,596 6.89 108,647 7,755 7.14 98,560 7,042 7.14
Investment securities 69,122 4,479 6.48 66,894 4,263 6.37 85,379 5,400 6.32
Other interest-earning
assets (2) 16,601 964 5.81 45,750 2,831 6.19 48,734 2,983 6.12
Total interest-earning
assets 1,764,075 136,345 7.73 1,621,208 126,359 7.79 1,464,443 115,486 7.88
Non-interest-earning assets 63,981 58,894 45,942
Total assets $1,828,056 $1,680,102 $1,510,385
Interest-bearing liabilities:
Deposit accounts:
Checking accounts $ 150,976 1,190 0.79 $ 136,089 1,610 1.18 $ 127,243 1,928 1.52
Savings accounts 124,683 3,199 2.57 122,637 3,370 2.75 125,725 3,514 2.80
Money market accounts 144,331 5,157 3.57 133,030 4,684 3.52 130,532 4,789 3.67
Certificate accounts 715,210 41,002 5.73 720,341 40,771 5.66 725,221 41,745 5.76
Total deposits 1,135,200 50,548 4.45 1,112,097 50,435 4.54 1,108,721 51,976 4.69
FHLB advances 470,441 26,822 5.70 377,475 21,540 5.71 215,396 12,276 5.70
Other borrowings 63,733 4,319 6.78 46,838 3,365 7.18 58,520 4,062 6.94
Total interest-bearing
liabilities 1,669,374 81,689 4.89 1,536,410 75,340 4.90 1,382,637 68,314 4.94
Non-interest-bearing
liabilities 40,282 38,203 27,020
Total liabilities 1,709,656 1,574,613 1,409,657
Stockholders' equity 118,400 105,489 100,728
Total liabilities and
stockholders' equity $1,828,056 $1,680,102 $1,510,385
Net interest income/gross
margin $ 54,656 2.84% $ 51,019 2.89% $ 47,172 2.94%
Net yield on average interest-
earning assets 3.10% 3.15% 3.22%
Percent of average interest-
earning assets to average
interest-bearing liabilities 105.67% 105.52% 105.92%
(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 $3.6 million, or 7.1%, in
1998. As the table above illustrates, net yields on average
interest-earning assets declined by 5 basis points between
fiscal 1998 and 1997. Growth in net interest income in 1998
therefore was primarily attributable to an increase of $142.9
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 1998, the average
yield on interest-earning assets declined to 7.73% from 7.79% in
1997 and was primarily attributable to a lower average yield on
loans. The average cost of interest-bearing liabilities declined
only 1 basis point primarily due to lower deposit costs.
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
<TABLE>
<CAPTION>
Year Ended September 30, Year Ended September 30,
1998 versus 1997 1997 versus 1996
Increase (Decrease) Increase (Decrease)
Due to Due to
Volume Rate Net Volume Rate Net
(dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans $ 8,776 $ (980) $ 7,796 $ 13,339 $ (1,890) $ 11,449
Mortgage-backed securities 4,122 (281) 3,841 713 713
Investment securities 142 74 216 (1,179) 42 (1,137)
Other interest-earning assets (1,703) (164) (1,867) (186) 34 (152)
Total interest income 11,337 (1,351) 9,986 12,687 (1,814) 10,873
Interest expense:
Deposit accounts
Checking accounts 160 (580) (420) 130 (448) (318)
Savings accounts 55 (226) (171) (83) (61) (144)
Money market accounts 405 68 473 91 (196) (105)
Certificate accounts (284) 515 231 (272) (702) (974)
Total deposits 336 (223) 113 (134) (1,407) (1,541)
Borrowings 6,471 (235) 6,236 8,408 159 8,567
Total interest expense 6,807 (458) 6,349 8,274 (1,248) 7,026
Net interest income $ 4,530 $ (893) $ 3,637 $ 4,413 $ (566) $ 3,847
</TABLE>
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 1998 and 1997, the Company's provision expense was $2.4
million compared with $1.9 million in 1996. The provision was
higher in 1998 and 1997 than 1996 principally due to increased
loan charge-offs. Total loan loss reserves were $12.8 million
and $12.1 million at September 30, 1998 and 1997, respectively,
and represented .82% and 0.83% of net loans receivable.
Net charge-offs in fiscal 1998 totaled $1.7 million, or .11%
of average net loans, compared with $2.0 million in 1997, or
0.14% of average net loans. Net loan charge-offs of $1.3 million
in 1996 resulted in charge-offs to average loans of 0.10%.
Other Income
Other income in 1998 increased by $1.1 million, or 8.6%, to
$13.4 million in 1998 from $12.3 million in 1997. During 1997,
other income improved by $2.3 million, or 22.7% from 1996. The
greatest dollar increase in non-interest revenues during fiscal
1998 was in net gain on sale of loans which increased $579,000,
or 132% from 1997 levels. Gains from loan sales also improved
$383,000 from 1996 to 1997. Activity in both years reflected the
Company's asset/liability strategy during the respective periods
to sell its agency-qualifying 15- and 30-year fixed-rate single-
family loan production. The general level of market interest
rates in 1998 resulted in higher fixed-rate mortgage production
and ultimately a greater volume of loan sales occurring in 1998
than in 1997.
The rate of growth in service charges and fees on deposit
accounts slowed to 3.4% in 1998 from a rate of growth of 17.6% in
1997. The Company delayed its implementation of pricing
increases for checking and other deposit account services until
late in fiscal 1998.
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.
Comparison of Non-Interest Expense
<TABLE>
<CAPTION>
Year Ended September 30,
1998 1997 1996 1995 1994
% % % % %
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 $ 22,263 1.22% $ 20,425 1.22% $ 18,920 1.25% $ 18,216 1.34% $ 17,351 1.35%
Occupancy costs 3,316 0.18 3,113 0.18 2,949 0.19 3,138 0.23 2,846 0.22
Marketing 1,264 0.07 1,518 0.09 1,216 0.08 1,013 0.08 1,156 0.09
Depreciation, amortization, rental and
maintenance of equipment 2,717 0.15 2,779 0.16 2,588 0.17 2,495 0.19 2,299 0.18
FDIC insurance premiums 709 0.04 1,116 0.07 2,694 0.18 2,625 0.19 2,671 0.21
Other 9,572 0.52 8,405 0.50 7,836 0.52 7,186 0.53 7,203 0.56
Core expenses 39,841 2.18 37,356 2.22 36,203 2.39 34,673 2.56 33,526 2.61
SAIF Special assessment 313 0.02 6,955 0.46
Merger-related expenses 317 0.02
Total non-interest expense $ 40,158 2.20% $ 37,669 2.24% $ 43,158 2.85% $ 34,673 2.56% $ 33,526 2.61%
</TABLE>
Total non-interest expense increased $2.5 million, or 6.6%
in 1998. Comparing fiscal 1997 and 1996, total non-interest
expense declined $5.5 million. Core non-interest expense
increased $2.5 million, or 6.7% between fiscal 1998 and 1997 and
$1.2 million, or 3.2% between fiscal 1997 and 1996.
The largest component of non-interest expense, salaries and
employee benefits, increased $1.8 million, or 9.0% in 1998 due to
increased staffing for the expansion of products and services,
staffing for branch expansion and higher expenses related to
health and other employee benefits offered by the Company. In
addition, the Company incurred costs related to the
implementation of several incentive-based compensation plans. In
fiscal 1997, salaries and employee benefits increased 8.0%, or
$1.5 million from 1996.
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. During fiscal 1996 the SAIF
assessment was based on 23 basis points on assessable deposits.
Currently the banking subsidiaries are being charged 5.8 basis
points for a FICO assessment which is approximately five times
the charge to commercial banks. The effect of reductions in FDIC
assessments between the respective periods resulted in a decline
of $407,000 from 1997 to 1998 and a decline of $1.6 million
between fiscal 1996 and 1997.
A portion of the $1.5 million increase in other expense in
1998 relates to higher professional fees of approximately
$375,000 incurred for several business initiatives and non-
recurring expenses of $317,000 related to the Investors merger.
The Company's efficiency ratio, excluding the FDIC SAIF
assessment and merger-related expenses, declined to 59.4% in 1998
and 1997, compared to 63.1% in 1996. Management continues to
target lower expense ratios as an important strategic goal of the
Company.
Income Tax Expense
Income taxes totaled $8.6 million in 1998, compared to $8.5
million in 1997 and $4.5 million in 1996. The Company's
effective tax rate was 33.7% in 1998, 36.6% in 1997 and 36.9% in
1996. During 1998 the Company implemented certain strategies
aimed at reducing the Company's effective tax rate in future
periods. The effective tax rate in future periods is expected to
range from 35% to 36%.
Regulatory and Accounting Issues
In June 1997, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income." SFAS 130
establishes standards for the 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. The Company will adopt SFAS 130 effective
October 1, 1998. The adoption of SFAS 130 is not expected to
have a material impact on the Company.
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
on September 30, 1999 is not expected to have a material impact
on the Company.
In June of 1998 the FASB issued SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS 133
establishes, for the first time, comprehensive accounting and
reporting standards for derivative instruments and hedging
activities. For accounting purposes SFAS 133 comprehensively
defines a derivative instrument. SFAS 133 requires that all
derivative instruments be recorded in the statement of financial
position at fair value. The accounting for the gain or loss due
to change in fair value of the derivative instrument depends on
whether the derivative instrument qualifies as a hedge. If the
derivative instrument does not qualify as a hedge, the gains or
losses are reported in earnings when they occur. However, if the
derivative instrument qualifies as a hedge, the accounting varies
based on the type of risk being hedged.
SFAS 133 applies to all entities and is effective as of the
beginning of the first quarter of the fiscal year beginning after
June 15, 1999. The Company does not expect the adoption of SFAS
133 to have a materially adverse impact on the consolidated
financial position or results of operations of the Company.
Year 2000 Issue
The Company recognizes the importance of ensuring that its
operations will not be adversely impacted by Year 2000 software
or hardware failures. The Company continues to work aggressively
on its comprehensive Year 2000 project. The awareness and
assessment phases of the project have been completed and the
remediation, validation and implementation phases are well
underway. The Company's core business systems (those systems
which run on its internal mainframe) are considered to be the
most critical. The Company's host hardware and operating systems
software were upgraded and compliant by September 30, 1998. The
Company utilizes an integrated banking application system from
one vendor for most of its critical banking applications. This
vendor has met the Company's expectations for delivery of Year
2000 compliant upgrades to its applications and the Company is
currently running these systems in a "test" environment.
Management expects these critical banking applications will be
moved from a test environment into production before March 31,
1999. Item processing systems were recently upgraded to be Year
2000 compliant. Throughout 1999, the Company will continue to
test for the Year 2000 and will also will be conducting tests
with external entities as they become Year 2000 compliant.
As part of a comprehensive two year project, in June of 1998
the Company selected software and hardware for new branch
automation systems. Installation of new teller systems, which
are Year 2000 compliant, commenced in September 1998 and will be
completed by December 31, 1998. Upgrades to customer service
platform systems will follow by March 31, 1999. Capitalized
costs for the new branch hardware, software and a frame relay
communications network are estimated to total approximately $2.0
million.
The Company has budgeted approximately $300,000 in estimated
operating costs for Year 2000 readiness, with approximately
$112,000 expensed to date. The costs of the Year 2000 project
and the dates scheduled by the Company for being compliant are
based on management's best estimates at this time and are not
deemed to be material to the Company's financial position and are
being expensed as incurred.
The Company continues to remediate non-critical systems and
to evaluate the readiness of its vendors and its customers as a
part of its Year 2000 project plan. The Company is also
developing a comprehensive contingency plan which will outline
options in the event that any mission-critical application or
system remediation efforts are not successful. The Company and
its subsidiaries are regulated by the OTS, and thus are subject
to supervisory reviews of Year 2000 conversion efforts.
Additionally, the vendor that provides the Company's integrated
banking application system is also subject to examinations of
their Year 2000 readiness by federal banking regulatory agencies.
Management presently believes that with modifications to
existing systems and, in certain circumstances, conversions to
new systems, the effects of the Year 2000 problem will be
minimized. There can be no assurance, however, that the systems
of other vendors upon which the Company's operations rely,
including essential utilities and telecommunications providers,
will be Year 2000 compliant in a timely manner. If the Company's
modifications and conversions of its systems are not made, or are
not completed on a timely basis, or if the Company is subject to
failure of a critical vendor to be compliant, the Year 2000 Issue
could have a material impact on the operations of the Company,
which in turn could have a materially adverse effect on the
Company's results of operations and financial condition.
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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Asset/Liability
Management."
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 four outside directors. The members of the
Committee are: Dr. D. Kent Sharples, Chairman, Mr. Gary C. Banks,
Jr., Mr. Paul G. Campbell, Jr. and Mr. Thomas E. Thornhill. The
Committee held four meetings during fiscal 1998.
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/ D. Kent Sharples
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, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the
consolidated results of their operations and their cash flows for
each of the years in the three-year period ended September 30,
1998, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Greenville, South Carolina
October 22, 1998
<TABLE>
<CAPTION>
FIRST FINANCIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30,
1998 1997
(dollar amounts in thousands)
<S> <C> <C>
Assets
Cash and cash equivalents $ 40,392 $ 48,034
Investment securities held to maturity (fair value of $4,194 and $14,345) 4,148 14,282
Investment securities available for sale, at fair value 11,264 40,826
Investment in capital stock of FHLB, at cost 25,000 21,851
Loans receivable, net of allowance of $12,781 and $12,103 1,550,567 1,446,981
Loans held for sale 14,473 4,516
Mortgage-backed securities, held to maturity (fair value of $452 and $828) 444 818
Mortgage-backed securities available for sale, at fair value 148,186 148,963
Accrued interest receivable 10,631 10,435
Office properties and equipment, net 15,836 15,944
Real estate and other assets acquired in settlement of loans 5,871 11,658
Other assets 12,896 10,644
Total assets $ 1,839,708 $ 1,774,952
Liabilities and Stockholders' Equity
Liabilities:
Deposit accounts $ 1,164,440 $ 1,123,988
Advances from FHLB 471,500 419,577
Securities sold under agreements to repurchase 29,442 58,896
Other short-term borrowings 4,000
Long-term debt 19,763
Advances by borrowers for taxes and insurance 6,503 6,521
Outstanding checks 15,094 13,826
Other 23,566 20,853
Total liabilities 1,714,545 1,663,424
Commitments and contingencies (Note 17)
Stockholders' equity:
Serial preferred stock, authorized 3,000,000 shares--none issued
Common stock, $.01 par value, authorized 24,000,000 shares, issued
15,033,853 and 14,835,218 shares at September 30, 1998 and 1997,
respectively 150 148
Additional paid-in capital 30,308 28,901
Retained income, substantially restricted 100,075 88,787
Unrealized net gain on securities available for sale, net of income tax 2,195 1,156
Treasury stock at cost, 1,374,872 shares and 1,370,254 shares at
September 30, 1998 and 1997, respectively (7,565) (7,464)
Total stockholders' equity 125,163 111,528
Total liabilities and stockholders' equity $ 1,839,708 $ 1,774,952
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
FIRST FINANCIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended September 30,
1998 1997 1996
<S> <C> <C> <C>
Interest Income (dollar amounts in thousands,
except per share amounts)
Interest on loans $ 119,306 $ 111,510 $ 100,061
Interest on mortgage-backed securities 11,596 7,755 7,042
Interest and dividends on investment securities 4,479 4,263 5,400
Other 964 2,831 2,983
Total interest income 136,345 126,359 115,486
Interest Expense
Interest on deposits
NOW accounts 1,190 1,610 1,928
Passbook, statement and other accounts 3,199 3,370 3,514
Money market accounts 5,157 4,684 4,789
Certificate accounts 41,002 40,771 41,745
Total interest on deposits 50,548 50,435 51,976
Interest on FHLB advances 26,822 21,540 12,276
Interest on short term borrowings 2,620 1,512 2,209
Interest on long-term debt 1,699 1,853 1,853
Total interest expense 81,689 75,340 68,314
Net interest income 54,656 51,019 47,172
Provision for loan losses 2,405 2,435 1,908
Net interest income after provision for loan losses 52,251 48,584 45,264
Other Income
Net gain on sale of loans 1,019 440 57
Gain on sale of investment and mortgage-backed
securities 306 125 74
Loan servicing fees 1,235 1,394 1,306
Service charges and fees on deposit accounts 5,814 5,621 4,781
Commissions on insurance 1,850 1,766 1,738
Brokerage fees 871 586 323
Bank card fees 1,601 1,403 981
Real estate operations, net (363) (142) (294)
Other 1,024 1,103 1,053
Total other income 13,357 12,296 10,019
Non-Interest Expense
Salaries and employee benefits 22,263 20,425 18,920
Occupancy costs 3,316 3,113 2,949
Marketing 1,264 1,518 1,216
Depreciation, amortization, rental and maintenance of
equipment 2,717 2,779 2,588
FDIC insurance premiums 709 1,116 2,694
FDIC SAIF Special Assessment 313 6,955
Other 9,889 8,405 7,836
Total non-interest expense 40,158 37,669 43,158
Income before income taxes 25,450 23,211 12,125
Income tax expense 8,571 8,501 4,471
Net income before extraordinary loss 16,879 14,710 7,654
Extraordinary loss on extinguishment of debt (net of
related income tax benefit of $173) (340)
Net income $ 16,879 $ 14,710 $ 7,654
Earnings Per Common Share
Income before extraordinary loss
Basic $ 1.24 $ 1.10 $ 0.57
Diluted $ 1.20 $ 1.07 $ 0.56
Extraordinary loss on extinguishment of debt, net of
related income tax
Basic $ (0.02)
Diluted $ (0.03)
Net income
Basic $ 1.22 $ 1.10 $ 0.57
Diluted $ 1.17 $ 1.07 $ 0.56
Dividends Per Common Share $ 0.42 $ 0.36 $ 0.32
Average Number of Shares Outstanding
Basic 13,572 13,380 13,384
Diluted 14,101 13,801 13,708
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
FIRST FINANCIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Unrealized
Net Gain
(Loss) on
Securities
Additional Available
Common Paid-in Retained for 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, 1995 as originally
reported $ 138 $ 23,707 $ 72,814 $(74) 1,156 $ (5,176) $ 91,409
Equity of pooled companies acquired in
year ended September 30, 1998 7 2,909 2,751 5,667
Balance at September 30, 1995, restated 145 26,616 75,565 (74) 1,156 (5,176) 97,076
Common stock issued pursuant to stock
option and employee benefit plans 2 766 768
Cash dividends ($.32 per share) (4,062) (4,062)
Treasury stock purchased 78 (763) (763)
Change in unrealized net gain (loss) on
securities available for sale, net of
income tax 415 415
Options exercised by employees of
pooled company prior to merger 30 30
Cash dividends paid by pooled
company prior to merger (95) (95)
Investors stock dividends 297 (303) (6)
Net income 7,654 7,654
Balance, September 30, 1996 147 27,709 78,759 341 1,234 (5,939) 101,017
Common stock issued pursuant to stock
option and employee benefit plans 1 1,147 1,148
Cash dividends ($.36 per share) (4,565) (4,565)
Treasury stock purchased 136 (1,525) (1,525)
Change in unrealized net gain (loss) on
securities available for sale, net of
income tax 815 815
Options exercised by employees of
pooled company prior to merger 45 45
Cash dividends paid by pooled
company prior to merger (117) (117)
Net income 14,710 14,710
Balance, September 30, 1997 148 28,901 88,787 1,156 1,370 (7,464) 111,528
Common stock issued pursuant to stock
option and employee benefit plans 2 1,407 1,409
Cash dividends ($.42 per share) (5,700) (5,700)
Treasury stock purchased 5 (101) (101)
Change in unrealized net gain (loss) on
securities available for sale, net of
income tax 1,039 1,039
Cash payment for fractional shares
related to pooling (5) (5)
Cash dividends paid by pooled
company prior to merger (117) (117)
Equity adjustment of pooled company for
the nine months ended September 30, 1997 571 571
Net income 16,539 16,539
Balance, September 30, 1998 $ 150 $ 30,308 $ 100,075 $2,195 1,375 $ (7,565) $ 125,163
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
FIRST FINANCIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended September 30,
1998 1997 1996
<S> <C> <C> <C>
Operating Activities (dollar amounts in thousands)
Net income $ 16,539 $ 14,710 $ 7,654
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation 2,002 2,008 1,903
Gain on sale of loans, net (1,019) (440) (57)
Gain on sale of investments, net (306) (125) (74)
(Gain) loss on sale of property and equipment, net 8 27 (56)
Gain on sale of real estate owned, net (23) (69) (177)
Amortization of unearned discounts/premiums on investments, net (342) (230) 360
Decrease in deferred loan fees and discounts (383) (369) (435)
Increase (decrease) in receivables and prepaid expenses (3,078) 327 (2,881)
Provision for loan losses 2,405 2,435 1,908
Write downs of real estate acquired in settlement of loans 275 106 158
Increase (decrease) in deferred taxes 7,231 3,364 (2,344)
Proceeds from sales of loans held for sale 173,042 50,453 9,555
Origination of loans held for sale (182,999) (53,616) (10,908)
Increase (decrease) in accounts payable and accrued expenses (3,913) (3,257) 15,056
Amortization of discount on long-term debt 630 126 126
Net cash provided by operating activities 10,069 15,450 19,788
Investing Activities
Proceeds from maturity of investment securities 16,226 27,384 34,800
Proceeds from sales of investments available for sale 50,013 13,797 10,730
Purchases of investments held to maturity (1,954) (9,896)
Purchases of investments available for sale (26,093) (19,966)
Purchase of FHLB stock (3,149) (5,934) (3,665)
Increase in loans, net (128,343) (115,671) (159,298)
Net (increase) decrease in credit card receivables 568 (539) (1,307)
Proceeds from sales of mortgage-backed securities available for sale 24,095 35,398 20,721
Repayments on mortgage-backed securities 53,388 17,401 20,111
Purchases of mortgage-backed securities (22,092) (100,228) (22,313)
Purchase of loans and loan participations (30,664) (36,827) (38,738)
Proceeds from sales of real estate owned 7,046 2,545 2,885
Net purchase of office properties and equipment (1,902) (1,270) (2,895)
Net cash used in investing activities (60,907) (165,898) (168,831)
Financing Activities
Net increase in NOW, passbook and money market fund accounts 34,004 13,336 1,246
Net increase (decrease) in certificates of deposit 6,448 (1,292) (9,848)
Net proceeds of FHLB advances 51,923 107,175 204,549
Net purchase (repurchase) of securities sold under agreements to repurchase (29,454) 42,091 (27,699)
Net increase in other borrowings 4,000
Retirement of Senior Notes (19,763)
Increase (decrease) in escrow accounts (18) (929) 496
Proceeds from sale of common stock 1,408 1,149 768
Dividends paid (5,700) (4,565) (4,062)
Treasury stock purchased (106) (1,525) (763)
Stock Options exercised - Investors 45 30
Equity adjustment of merged company 571
Cash dividend paid by pooled company (117) (117) (102)
Net cash provided by financing activities 43,196 155,368 164,615
Net increase (decrease) in cash and cash equivalents (7,642) 4,920 15,572
Cash and cash equivalents at beginning of period 48,034 43,114 27,542
Cash and cash equivalents at end of period $ 40,392 $ 48,034 $ 43,114
Supplemental disclosures:
Cash paid during the period for:
Interest $ 78,588 $ 72,937 $ 65,792
Income taxes 7,008 5,527 5,450
Loans foreclosed 3,162 12,391 1,920
Loans securitized into mortgage-backed securities 52,341 16,111
Unrealized net gain on securities available for sale, net of income tax 1,039 815 415
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, 1998, 1997 and 1996
(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, its wholly-owned thrift
subsidiaries, First Federal and Peoples Federal (together, the
"Associations") and First Southeast Investor Services, Inc. The
Company's consolidated financial statements also include the
assets and liabilities of service corporations and operating
subsidiaries wholly-owned by the Associations. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
Earnings Per Share
In fiscal year 1998, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share." This Statement simplifies the standards for computing
earnings per share previously found in Accounting Principles
Board ("APB") Opinion No. 15, "Earnings per Share" ("EPS"), and
makes them comparable to international EPS standards. It
replaces the presentation of primary EPS with basic EPS. It also
requires dual presentation of basic and diluted EPS on the face
of the income statement for all entities with complex capital
structures and requires a reconciliation of the numerator and
denominator of the diluted EPS computation. Basic EPS excludes
dilution and is computed by dividing income available to common
shareholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock
or resulted in the issuance of common stock that then shared in
the earnings of the entity. Diluted EPS is computed similarly to
fully diluted EPS pursuant to APB Opinion No. 15. All prior year
information has been restated upon adoption of SFAS 128.
Disclosure of Information about Capital Structure
In fiscal year 1998, the Company adopted SFAS No. 129,
"Disclosure of Information about Capital Structure." 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, such as First Financial, that were
subject to the previously existing requirements.
Stock Based Compensation
In fiscal year 1997, the Company adopted the disclosure
provisions of 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 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, 1998, 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.
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,
manufactured housing 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 90
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.
Mortgage Servicing Rights
On January 1, 1997, the Company adopted SFAS No. 125,
Accounting for Transfer and Servicing of Financial Assets and
Extinguishments of Liabilities . SFAS No. 125 supersedes, but
generally retains, the requirements of SFAS No. 122, Accounting
for Mortgage Servicing Rights , which the Company adopted on
October 1, 1995. Both Statements require the recognition of
originated and purchased mortgage servicing rights ( MSRs ) as
assets by allocating total costs incurred between the loan and
the servicing rights retained based on their relative fair value.
In addition, SFAS No. 125 eliminates the distinction between
normal and excess servicing to the extent the servicing fee does
not exceed that specified in the contract. The adoption of SFAS
No. 125 did not have a material impact on the Company's financial
position or results of operations for the year ended September 30,
1997.
Amortization of MSRs is based on the ratio of net servicing
income received in the current period to total net servicing
income projected to be realized from the MSRs. Projected net
servicing income is in turn determined on the basis of the
estimated future balance of the underlying mortgage loan
portfolio, which declines over time from prepayments and
scheduled loan amortization. The Company estimates future
prepayment rates based on current interest rate levels, other
economic conditions and market forecasts, as well as relevant
characteristics of the servicing portfolio, such as loan types,
interest rate stratification and recent prepayment experience.
SFAS No. 125 also requires that all MSRs be evaluated for
impairment based on the excess of the carrying amount of the MSRs
over their fair value. Fair values of servicing rights are
determined by estimating the present value of future net
servicing income considering the average interest rate and the
average remaining lives of the related loans being serviced.
Periodically, the Company uses an independent party to evaluate
the present values of its portfolio of mortgage servicing. This
evaluation is principally determined using discounted cash flows
of disaggregated groups of mortgage servicing rights.
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.
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 and mortgage
servicing rights.
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
On November 7, 1997, the Company issued approximately
708,800 shares of common stock for all of the outstanding common
stock of Investors Savings Bank of South Carolina, Inc.
("Investors"). The business combination was accounted for as a
pooling-of-interests combination and, accordingly, the Company's
historical consolidated financial statements were restated to
include the accounts and results of operations of Investors. The
following table shows separate company results for periods prior
to the combination. The results listed are not necessarily
indicative of future operations. The amounts for 1997 and 1996
include the results of operations for Investors for the years
ended December 31, 1996 and 1995.
September 30,
1997 1996
Total Revenue:
First Financial $ 133,653 $ 120,823
Investors 5,002 4,682
Combined $ 138,655 $ 125,505
Net Income:
First Financial $ 14,116 $ 7,028
Investors 594 626
Combined $ 14,710 $ 7,654
Earnings Per Common Share:
First Financial
Basic $ 1.11 $ 0.55
Diluted 1.08 0.53
Investors
Basic 2.30 2.46
Diluted 2.27 2.41
Combined
Basic 1.10 0.57
Diluted 1.07 0.56
3. Cash and Cash Equivalents
Cash and cash equivalents consist of the following:
September 30,
1998 1997
Cash working funds $ 13,964 $ 12,315
Non-interest-earning demand deposits 3,531 4,875
Deposits in transit 12,912 15,001
Interest-earning deposits 9,985 15,843
Total $ 40,392 $ 48,034
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 and Mortgage-backed 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:
<TABLE>
<CAPTION>
September 30, 1998
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses value
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations
of U.S. government agencies and
corporations $ 3,499 $ 15 $ 3,514
State and local government obligations
Corporate debt and other securities 649 31 680
Mortgage-backed securities
FHLMC 444 8 452
Total $ 4,592 $ 54 $ 4,646
September 30, 1997
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses value
U.S. Treasury securities and obligations
of U.S. government agencies and
corporations $ 12,935 $ 18 $ 40 $ 12,913
State and local government obligations 848 84 932
Corporate securities 499 1 500
Mortgage-backed securities
FHLMC 818 10 828
Total $ 15,100 $ 113 $ 40 $ 15,173
</TABLE>
The amortized cost and fair value of investment and
mortgage-backed securities held to maturity at September 30,
1998, by contractual maturity, are shown below.
September 30, 1998
Amortized Cost Fair Value
Due in one year or less $ 3,499 $ 3,514
Due after one year through five years 200 208
Due after five through ten years 449 472
4,148 4,194
Mortgage-backed securities 444 452
Total $ 4,592 $ 4,646
There were no sales of investment securities held to
maturity during fiscal 1998, 1997 and 1996.
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:
<TABLE>
<CAPTION>
September 30, 1998
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations
of U.S. government agencies and
corporations $ 6,981 $ 113 $ 7,094
Corporate securities 3,009 44 $53 3,000
Other 1,170 1,170
11,160 157 53 11,264
Mortgage-backed securities:
FHLMC 57,938 2,159 60,097
FNMA 46,005 1,277 234 47,048
GNMA 26,781 327 129 26,979
Other 13,971 106 15 14,062
144,695 3,869 378 148,186
Total $ 155,855 $ 4,026 $ 378 $ 159,450
</TABLE>
<TABLE>
<CAPTION>
September 30, 1997
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C> <C>
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
</TABLE>
The amortized cost and fair value of investment and
mortgage-backed securities available for sale at September 30,
1998 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, 1998
Amortized Cost Fair Value
Due in one year or less $ 4,329 $ 4,359
Due after one year through five years 5,488 5,615
Due after five years through ten years
Due after ten years 1,343 1,290
11,160 11,264
Mortgage-backed securities 144,695 148,186
Total $ 155,855 $ 159,450
Proceeds from the sale of the Company's investment and
mortgage-backed securities available for sale totaled $74,108 in
fiscal 1998 resulting in a gross realized gain of $547 and a
gross realized loss of $241. 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. Earnings per Share
Basic and diluted earnings per share have been computed
based upon net income as presented in the accompanying statements
of operations divided by the weighted average number of common
shares outstanding or assumed to be outstanding as summarized
below:
<TABLE>
<CAPTION>
Year Ended September 30,
1998 1997 1996
<S> <C> <C> <C>
Weighted average number of common shares used in basic EPS 13,571,635 13,380,152 13,384,000
Effect of dilutive stock options 529,905 421,206 324,000
Weighted average number of common shares and dilutive
potential common shares used in diluted EPS 14,101,540 13,801,358 13,708,000
</TABLE>
8. Loans Receivable
Loans receivable, including loans held for sale, consisted
of the following:
<TABLE>
<CAPTION>
September 30,
1998 1997
<S> <C> <C>
Mortgage loans $ 1,344,524 $ 1,278,851
Residential construction loans 59,441 36,053
Mobile home loans 26,983 19,537
Savings account loans 5,531 5,835
Home equity lines of credit 73,122 57,541
Commercial business loans 33,790 32,967
Credit cards 10,424 10,992
Other consumer loans 56,624 52,722
1,610,439 1,494,498
Less:
Allowance for loan losses 12,781 12,103
Loans in process 32,360 30,257
Deferred loan fees and discounts on loans 258 641
45,399 43,001
Total $ 1,565,040 $ 1,451,497
</TABLE>
First mortgage loans are net of whole loans and
participation loans sold and serviced for others in the amount of
$403,223 and $240,980 at September 30, 1998 and 1997,
respectively.
Non-accrual and renegotiated loans are summarized as
follows:
September 30,
1998 1997
Non-accrual loans $ 2,647 $ 6,609
Renegotiated loans 4,493 6,776
Total $ 7,140 $ 13,385
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 $549,
$1,131 and $1,198 for the years ended September 30, 1998, 1997
and 1996, respectively. Recorded interest income on these loans
was $327, $503 and $612 for 1998, 1997 and 1996, respectively.
An analysis of changes in the allowance for loan losses is
as follows:
Year Ended September 30,
1998 1997 1996
Balance, beginning of period $ 12,103 $ 11,639 $ 10,993
Charge-offs (2,530) (2,309) (1,757)
Recoveries 803 338 495
Net charge-offs (1,727) (1,971) (1,262)
Provision for loan losses 2,405 2,435 1,908
Balance, end of period $ 12,781 $ 12,103 $ 11,639
At September 30, 1998 and 1997 impaired loans totaled $2,987
and $7,644, respectively. Included in the allowance for loan
losses at September 30, 1997 was $800 related to $2,775 of
impaired loans. 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, 1998 and 1997
was $4,882 and $10,306, respectively. Interest income of $59 and
$126 was recognized on impaired loans in 1998 and 1997,
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
$1,135,765 and $1,040,142 at September 30, 1998 and 1997,
respectively. The Company's multi-family residential loan
portfolio of $43,161 and $54,593 at September 30, 1998 and 1997,
respectively, are highly dependent on occupancy rates for such
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 $141,182 and $159,229
and acquisition and development loans and lot loans totaled
$83,857 and $60,940 at September 30, 1998 and 1997, 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 $10,001 at September 30, 1998 and $10,233 at
September 30, 1997.
9. Office Properties and Equipment
Office properties and equipment are summarized as follows:
September 30,
1998 1997
Land $ 3,161 $ 3,616
Buildings and improvements 9,913 10,309
Furniture and equipment 14,515 12,887
Leasehold improvements 4,152 3,899
31,741 30,711
Less, accumulated depreciation and amortization (15,905) (14,767)
Total $ 15,836 $ 15,944
10. Real Estate
Real estate and other assets acquired in settlement of loans
held by the Company are summarized as follows:
September 30,
1998 1997
Real estate acquired in settlement of loans $ 5,790 $ 11,526
Other assets acquired in settlement of loans 81 132
Total $ 5,871 $ 11,658
Real estate operations are summarized as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
1998 1997 1996
<S> <C> <C> <C>
Gain on sale of real estate $ 23 $ 69 $ 177
Provision charged as a write-down to real estate (275) (106) (158)
Expenses (126) (122) (372)
Rental income 15 17 59
Total $ (363) $ (142) $ (294)
</TABLE>
11. Deposit Accounts
The deposit balances and related nominal rates were as
follows:
<TABLE>
<CAPTION>
September 30,
1998 1997
Weighted Weighted
Average Average
Balance Rate Balance Rate
<S> <C> <C> <C> <C>
Non-interest-bearing demand accounts $ 52,539 $ 38,441
NOW accounts 109,721 0.85% 100,313 1.28%
Passbook, statement and other accounts 120,927 2.52 122,740 2.63
Money market accounts 153,479 3.47 141,168 3.64
436,666 2.13 402,662 2.40
Certificate accounts:
Fixed-rate 697,349 5.77 676,659 5.74
Variable-rate 30,425 5.18 44,667 5.45
727,774 5.75 721,326 5.72
Total $1,164,440 4.39% $ 1,123,988 4.53%
</TABLE>
Scheduled maturities of certificate accounts were as
follows:
September 30,
1998 1997
Within one year $ 551,792 $ 497,147
After one but within two years 115,167 137,867
After two but within three years 17,202 38,979
Thereafter 43,613 47,333
Total $ 727,774 $ 721,326
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 $16,305 and $31,823 at
September 30, 1998 and 1997, respectively, to secure deposits by
various entities.
Certificates of deposit with balances equal to or exceeding
$100,000 totaled $181,361 and $158,510, at September 30, 1998 and
1997, respectively.
12. Advances From Federal Home Loan Bank
Advances from the FHLB of Atlanta consisted of the
following:
September 30,
1998 1997
Weighted Weighted
Average Average
Maturity Balance Rate Balance Rate
One year $ 196,500 5.62% $ 223,500 5.72%
Two years 35,000 5.57 25,000 5.64
Three years 35,000 5.57
Four years 85,000 5.84 10,000 5.75
Five years 80,000 5.32 75,000 5.85
Nine years 50,000 5.10
Ten years 25,000 5.57 50,000 5.10
Fifteen years 1,077 6.00
Total $ 471,500 5.54% $ 419,577 5.65%
As collateral for its advances, the Company has pledged
qualifying first mortgage loans in the amount of $628,667 and
$559,436 as of September 30, 1998 and 1997, 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 and Other
Short-term Borrowings
Securities sold under agreements to repurchase consisted of
the following:
<TABLE>
<CAPTION>
September 30,
1998 1997
<S> <C> <C>
Investment and mortgage-backed securities with an amortized cost of $31,341
and $62,396 and fair value of $32,079 and $62,655 at September 30, 1998
and 1997, respectively $29,442 $58,896
</TABLE>
The agreements had a weighted average interest rate of 5.58%
and 5.62% at September 30, 1998 and 1997, respectively, and
mature within three months. The securities underlying the
agreements were delivered to the dealers who arranged the
transactions. At September 30, 1998 and 1997, the agreements
were to repurchase identical securities. Securities sold under
agreements to repurchase averaged $45,241 and $27,050 during 1998
and 1997, respectively, and the maximum amount outstanding at any
month-end during 1998 and 1997 was $87,405 and $58,896,
respectively.
Other short-term borrowings consisted of the following:
September 30,
1998 1997
Line of credit - 7.69% variable rate $ 4,000 --
14. Long-term Debt
The $19,763 of senior notes at September 30, 1997 were
unsecured debt obligations of the Company which were to mature
September 1, 2002. In July 1998 the Company issued a redemption
notice for the 9.375% notes. As of September 1, 1998, $19,763 in
principal was paid plus accrued interest to redeem the notes. As
a result of the redemption, an extraordinary charge of $340 (net
of related income taxes) was recorded.
15. Income Taxes
Income tax expense attributable to continuing operations for
the years ended September 30, 1998, 1997 and 1996, is comprised
of the following:
Federal State Total
1998:
Current $ 1,218 $ 122 $ 1,340
Deferred 7,244 (13) 7,231
Total $ 8,462 $ 109 $ 8,571
1997:
Current $ 4,386 $ 751 $ 5,137
Deferred 2,820 544 3,364
Total $ 7,206 $1,295 $ 8,501
1996:
Current $ 5,891 $ 924 $ 6,815
Deferred (1,994) (350) (2,344)
Total $ 3,897 $ 574 $ 4,471
Total income taxes included in net income were $8,398 and
were composed of $8,571 attributable to continuing operations and
$173 of income tax benefit resulting from extraordinary items.
A reconciliation from expected federal tax expense to
consolidated effective income tax expense for the periods
indicated follows:
<TABLE>
<CAPTION>
Year Ended September 30,
1998 1997 1996
<S> <C> <C> <C>
Expected federal income tax expense $ 8,907 $ 8,124 $ 4,243
Increases (reductions) in income taxes resulting from:
Change in the beginning-of-the-year valuation allowance for deferred tax (429) 74 69
assets allocated to income tax expense
Tax exempt income (54) (93) (97)
South Carolina income tax expense, net of federal income tax effect 71 842 373
Other, net 76 (446) (117)
Total $ 8,571 $ 8,501 $ 4,471
Effective tax rate 33.7% 36.6% 36.9%
</TABLE>
As a result of recent tax legislation in the Small Business
Job Protection Act of 1996 ("SBJPA '96"), Peoples Federal and
First Federal were 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 1998
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, 1998, suspending
the six-year recapture for the 1997 tax year. The Associations
have recorded the related deferred tax liability 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 year ended
September 30, 1996. 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 while First Federal
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, 1998 and 1997 are presented below.
<TABLE>
<CAPTION>
September 30,
1998 1997
<S> <C> <C>
Deferred tax assets:
Loan loss allowances deferred for tax purposes $ 4,589 $ 4,099
Net operating loss carryforward 866 1,005
Other 687 836
Total gross deferred tax assets 6,142 5,940
Less valuation allowance (429)
Net deferred tax assets 6,142 5,511
Deferred tax liabilities:
Loan fee income adjustments for tax purposes 2,482 1,821
FHLB stock dividends deferred for tax purposes 1,704 1,704
Expenses deducted under economic performance rules 477 396
Excess carrying value of assets acquired for financial reporting
purposes over tax basis 1,244 443
Tax bad debt reserve in excess of base year amount 634 574
Unrealized gain on securities available for sale 1,399 738
Book over tax basis in subsidiary 6,197
Other 486 424
Total gross deferred tax liabilities 14,623 6,100
Net deferred liability (included in other liabilities) $ (8,481) $ (589)
</TABLE>
A portion of the change in the net deferred tax liability
relates to unrealized gains and losses on securities available
for sale. The related current period tax expense of $661 has
been recorded directly to stockholders' equity. The balance of
the change in the net deferred tax liability results from current
period deferred tax expense of $7,231.
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, 1998
and 1997 did not include a tax liability of $8,468 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
The Company's 1983 Incentive Stock Option Plan provided for
the granting of incentive stock options to officers and
employees. This plan expired November 3, 1993. Options of
63,985 granted under the 1983 Stock Option Plan are outstanding
at September 30, 1998 and expire 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.
The 1990 plan provided 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 provided for the grant of Non-
Incentive Stock Options. Options of 466,630 granted under the
1990 Stock Option Plan expire at various dates with the maximum
date of October 23, 2007.
On September 25, 1997, the Company's Board of Directors
approved the 1997 Stock Option and Incentive Plan which was
subsequently approved by the stockholders on January 28, 1998.
An aggregate of 600,000 shares was reserved for future issuance
by the Company upon the exercise of stock options under this
Plan. The 1997 plan provides 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 1997 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 43,664 granted under the 1997 Stock Option
Plan expire at various dates with the maximum date of May 28,
2008.
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. 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
21,512, 50,418 and 48,194 shares of common stock at an exercise
price of $14.06, $7.45 and $7.36 were granted in lieu of
otherwise payable cash compensation of $100, $73 and $118 for the
Company's fiscal years ending September 30, 1998, 1997 and 1996,
respectively.
During 1998 the Company, as part of its acquisition of
Investors, converted all stock options of Investors outstanding
at the time of the merger into options to acquire common stock of
the Company. The stock option plan of Investors expired in May
of 1996.
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):
1998 1997 1996
Net Income As reported $ 16,539 $14,710 $7,654
Pro-forma 16,108 14,425 7,424
Earnings per share As reported
Basic $ 1.22 $ 1.10 $ 0.57
Diluted 1.17 1.07 0.56
Pro-forma
Basic 1.19 1.08 0.55
Diluted 1.14 1.05 0.54
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
1998, 1997 and 1996 respectively: dividend yield of 2.50%, 2.90%
and 2.90%, expected volatility of 29%, risk-fee interest rate of
5.55%, 6.08% and 6.08%, 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, 1998, 1997
and 1996.
<TABLE>
<CAPTION>
1998 1997 1996
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning of year 881,078 $ 7.46 879,486 $ 6.72 917,669 $ 5.81
Options exercised (192,814) 6.81 (162,496) 5.55 (177,923) 4.06
Options forfeited (7,202) 10.46 (3,500) 9.56 (11,994) 7.11
Options granted 138,918 19.24 167,588 9.53 151,734 9.14
Outstanding, September 30 819,980 $ 9.58 881,078 $ 7.46 879,486 $ 6.72
</TABLE>
Stock options outstanding and exercisable as of September 30,
1998, are as follows:
Range of Weighted Average Weighted Average Remaining
Exercise Prices Shares Exercise Price Contractual Life
$ 2.69 - 5.82 93,255 $ 3.65 1.55 years
6.09 - 7.63 311,063 7.30 6.05
8.02 - 9.75 139,886 9.44 6.42
10.13 - 12.63 74,924 10.67 7.43
14.06 - 22.75 80,067 18.17 8.60
$ 2.69 - 22.75 699,195
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
26,371 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 1997 and 1996
year resulted in the awarding of 884 and 7,152 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, 1998, 1997 and 1996, was $723, $527
and $457, 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 1998, 1997 and 1996 totaled
$993, $727 and $635, 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 1998,
1997 and 1996 consisted of the following components:
<TABLE>
<CAPTION>
Year Ended September 30,
1998 1997 1996
<S> <C> <C> <C>
Interest cost $ 98 $ 94 $ 85
Amortization of transition obligation 79 79 79
Other amortizations and net deferrals (24) (139) (207)
Net periodic postretirement benefit cost $ 153 $ 34 $ (43)
Reconciliation of Funded Status: September 30,
1998 1997 1996
Accumulated postretirement benefit obligation $(1,560) $(1,355) $(1,210)
Unrecognized transition obligation 1,103 1,182 1,261
Unrecognized net gains 17 (181) (409)
Accrued postretirement benefit cost $ (440) $ (354) $ (358)
Assumptions Used:
Weighted average discount rate 6.50% 7.50% 8.00%
Medical/Medicare trend rate (initial)(pre-65 employees) 7.25 8.00 8.75
Medical/Medicare trend rate after 3 years (pre-65 employees) 5.00 5.75 5.75
Medical/Medicare trend rate (initial)(post-65 employees) 6.75 7.25 7.75
Medical/Medicare trend rate after 3 years (post-65 employees) 5.00 5.75 5.75
</TABLE>
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, 1998 and
1997, by $146 and $127 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 $35,238 at September 30, 1998. These were
principally single-family loan commitments. Other loan
commitments totaled $600 at September 30, 1998.
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
$153,161, $133,012 and $117,607 at September 30, 1998, 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, 1998 the strike price was 5.625 percent versus
three month LIBOR. Unamortized fees related to the cap as of
September 30, 1998 totaled $87 and the fair value of the interest
rate cap was $2. Amortized cost of $87 was incurred during the
year ended September 30, 1998.
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,
1998
One year $ 1,112
Two years 1,071
Three years 1,043
Four years 958
Five years 911
Thereafter 1,114
Total $ 6,209
Rental expenses under operating leases were $1,022, $1,027
and $944 in 1998, 1997 and 1996, 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,
1998, that the Associations meet all capital adequacy
requirements to which they are subject.
As of September 30, 1998, 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 Under
Prompt Corrective
For Capital Action
Actual Adequacy Purposes Provisions:
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C>
As of September 30, 1998:
Tangible capital (to Total Assets) $ 82,568 6.58% $ 18,814 1.50%
Core capital (to Total Assets) 82,568 6.58 50,193 4.00 $ 62,713 5.00%
Tier I capital (to Risk-based Assets) 82,568 9.49 52,223 6.00
Risk-based capital (to Risk-based Assets) 90,052 10.35 69,630 8.00 87,038 10.00
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 48,288 4.00 $ 60,374 5.00%
Tier I capital (to Risk-based Assets) 78,106 9.41 49,802 6.00
Risk-based capital (to Risk-based Assets) 84,793 10.22 66,373 8.00 82,966 10.00
Peoples Federal: To Be Well
Capitalized Under
Prompt Corrective
For Capital Action
Actual Adequacy Purposes Provisions:
Amount Ratio Amount Ratio Amount Ratio
As of September 30, 1998:
Tangible capital (to Total Assets) $ 41,378 7.10% $ 8,738 1.50%
Core capital (to Total Assets) 41,378 7.10 23,312 4.00 $ 29,128 5.00%
Tier I capital (to Risk-based Assets) 41,378 11.40 21,771 6.00
Risk-based capital (to Risk-based Assets) 42,332 11.67 29,028 8.00 36,285 10.00
As of September 30, 1997:
Tangible capital (to Total Assets) $ 38,537 6.96% $ 8,306 1.50%
Core capital (to Total Assets) 38,537 6.96 22,148 4.00 $ 27,687 5.00%
Tier I capital (to Risk-based Assets) 38,537 12.13 19,068 6.00
Risk-based capital (to Risk-based Assets) 40,470 12.73 25,425 8.00 31,781 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, 1998 and 1997:
<TABLE>
<CAPTION>
September 30,
1998 1997
Carrying Value Fair Value Carrying Value Fair Value
<S> <C> <C> <C> <C>
Financial instruments:
Assets:
Cash and cash equivalents $ 40,392 $ 40,392 $ 48,034 $ 48,034
Investments held to maturity 4,148 4,194 14,282 14,345
Investments available for sale 11,264 11,264 40,826 40,826
Investment in capital stock of FHLB 25,000 25,000 21,851 21,851
Loans receivable, net 1,550,567 1,573,792 1,446,981 1,465,402
Loans held for sale 14,473 14,473 4,516 4,560
Mortgage-backed securities held to
maturity 444 452 818 828
Mortgage-backed securities available
for sale 148,186 148,186 148,963 148,963
Liabilities:
Deposits:
Demand deposits, savings accounts
and money market accounts 436,666 436,666 402,662 402,662
Certificate accounts 727,774 736,213 721,326 722,959
Advances from FHLB 471,500 480,666 419,577 420,165
Securities sold under agreements to
repurchase 29,442 29,442 58,896 58,896
Other short-term borrowings 4,000 4,000
Long-term debt 19,763 19,812
Off-balance sheet items:
Mortgage loan commitments 35,238 35,401 25,561 25,709
</TABLE>
Financial instruments of the Company for which fair value
approximates the carrying amount at September 30, 1998, 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 regular savings 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.
<TABLE>
<CAPTION>
Statements of Financial Condition
September 30,
1998 1997
<S> <C> <C>
Assets
Cash and cash equivalents $ 399 $ 896
U.S. Government and agency obligations available for sale, at fair value 893 9,379
Mortgage-backed securities available for sale, at fair value 1,053 2,503
Investment in subsidiaries 126,459 117,885
Other 684 1,046
Total assets $ 129,488 $ 131,709
Liabilities and Stockholders' Equity
Accrued expenses $ 325 $ 418
Other borrowings 4,000
Long-term debt 19,763
Stockholders' equity 125,163 111,528
Total liabilities and stockholders' equity $ 129,488 $ 131,709
</TABLE>
<TABLE>
<CAPTION>
Statements of Operations
Year Ended September 30,
1998 1997 1996
<S> <C> <C> <C>
Income
Equity in undistributed earnings of subsidiaries $ 6,724 $ 8,959 $ (454)
Dividend income 12,400 8,100 10,250
Interest income 795 765 726
(Gain) loss on sale of investments available for sale 52 55
Total income 19,971 17,879 10,522
Expenses
Interest expense 1,727 1,853 1,853
Salaries and employee benefits 922 753 546
Stockholder relations and other 1,258 563 469
Total expense 3,907 3,169 2,868
Net income before tax 16,064 14,710 7,654
Income tax benefit (475)
Net income $ 16,539 $ 14,710 $ 7,654
</TABLE>
<TABLE>
<CAPTION>
Statements of Cash Flows
Year Ended September 30,
1998 1997 1996
<S> <C> <C> <C>
Operating Activities
Net income $ 16,539 $ 14,710 $ 7,654
Adjustments to reconcile net income to net cash provided by
operating activities
Equity in undistributed earnings of subsidiaries (6,724) (8,959) 454
Depreciation 15 4 1
Amortization 10 (23) (24)
(Increase) decrease in accrued income and deferred expenses 340 (40) 122
Increase (decrease) in accrued expenses (95) 59 47
Net cash provided by operating activities 10,085 5,751 8,254
Investing Activities
Repayments to mortgage-backed securities 637 201 3
Purchase of mortgage-backed securities available for sale (2,520) (3,127)
Proceeds from sale of mortgage-backed securities available for sale 816 2,984
Proceeds from sale of investments 5,794
Proceeds from maturing investments available for sale 1,000 2,000 4,239
Purchase of investments available for sale (4,992)
Net (purchase) redemption of mutual funds 1,755 (775) (175)
Net purchase of equipment (37)
Equity investment in subsidiary (350) (2,000)
Net cash provided by (used in) investing activities 9,652 (147) (4,052)
Financing Activities
Retirement of senior notes (19,763)
Year Ended September 30,
1998 1997 1996
Net increase in other borrowings 4,000
Proceeds from sale of common stock 1,408 1,149 768
Treasury stock purchased (106) (1,525) (763)
Purchase of stock (73)
Dividends paid (5,700) (4,565) (4,062)
Net cash provided by (used in) financing activities (20,234) (4,941) (4,057)
Net increase (decrease) in cash and cash equivalents (497) 663 145
Cash and cash equivalents at beginning of period 896 233 88
Cash and cash equivalents at end of period $ 399 $ 896 $ 233
Supplemental disclosures:
Cash paid during the period for:
Interest $ 1,882 $ 1,853 $ 1,853
Income taxes 6,430 4,335 4,448
Unrealized net gain (loss) on securities available for sale,
net of income tax 3 52 (32)
</TABLE>
21. Dividend Reinvestment and Direct Purchase Plan
The Company has a Dividend Reinvestment and Direct Purchase
Plan, as amended December 1, 1998, for which shares are purchased
only on the open market. At September 30, 1998, 1,295,993 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:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
<S> <C> <C> <C> <C> <C>
1998
Total interest income $ 33,628 $ 33,831 $ 34,413 $ 34,473 $ 136,345
Net interest income 13,333 13,459 13,844 14,020 54,656
Provision for loan losses 605 600 600 600 2,405
Income before income taxes 6,146 6,505 6,072 6,727 25,450
Net income before extraordinary loss 3,872 4,101 4,203 4,703 16,879
Extraordinary loss on extinguishment of debt 340 340
Net income 3,872 4,101 4,203 4,363 16,539
Earnings per common share:
Income before extraordinary loss
Basic $ 0.29 $ 0.30 $ 0.31 $ 0.34 $ 1.24
Diluted 0.28 0.29 0.30 0.33 1.20
Net income
Basic 0.29 0.30 0.31 0.32 1.22
Diluted 0.28 0.29 0.30 0.31 1.17
1997
Total interest income $ 30,804 $ 30,982 $ 31,802 $ 32,771 $ 126,359
Net interest income 12,646 12,612 12,809 12,952 51,019
Provision for loan losses 540 540 615 740 2,435
Income before income taxes 5,644 5,866 5,679 6,022 23,211
Net income 3,555 3,729 3,587 3,839 14,710
Earnings per common share:
Basic 0.27 0.28 0.27 0.29 1.10
Diluted $ 0.26 $ 0.27 $ 0.26 $ 0.28 $ 1.07
</TABLE>
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.
<TABLE>
<CAPTION>
Name Age (1) Position
<S> <C> <C>
A. Thomas Hood 52 President and Chief Executive Officer of the Company and
President and Chief Executive Officer of First Federal
John L. Ott, Jr. 50 Senior Vice President of the Company and Senior Vice
President/Retail Banking Division of First Federal
Charles F. Baarcke, Jr. 51 Senior Vice President of the Company and Senior Vice
President/Lending Division of First Federal
George N. Magrath, Jr. 45 President and Chief Executive Officer of Peoples Federal
Susan E. Baham 48 Senior Vice President and Chief Financial Officer of the
Company and First Federal
______________
(1) At September 30, 1998.
</TABLE>
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 8-K
Form 8-K was filed on October 27, 1998 regarding the
announcement of the commencement of a stock repurchase program.
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 23, 1998 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 Director
Executive Officer)
Date: December 23, 1998 Date: December 23, 1998
By: /s/ Susan E. Baham By: /s/ Gary C. Banks, Jr.
Susan E. Baham Gary C. Banks, Jr.
Senior Vice President Director
Principal Financial
and Accounting Officer
Date: December 23, 1998 Date: December 23, 1998
By: /s/Paula Harper Bethea By: /s/ Paul G. Campbell, Jr.
Paula Harper Bethea Paul G. Campbell, Jr.
Director Director
Date: December 23, 1998 Date: December 23, 1998
By: /s/ A. L. Hutchinson, Jr. By: /s/ Thomas J. Johnson
A. L. Hutchinson, Jr. Thomas J. Johnson
Director Director
Date: December 23, 1998 Date: December 23, 1998
By: /s/ James C. Murray By: /s/ D. Kent Sharples
James C. Murray D. Kent Sharples
Director Director
Date: December 23, 1998 Date: December 23, 1998
By: /s/ Thomas E. Thornhill
Thomas E. Thornhill
Director
Date: December 23, 1998
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
First Southeast Investor 100% South Carolina
Services, Inc.
Charleston Financial Services (b) 100% South Carolina
The Carolopolis Corporation (b) 100% South Carolina
Broad Street Holdings, Inc. (b) 100% North Carolina
Broad Street Investments, Inc. (c) 100% North Carolina
First Southeast Fiduciary and 100% South Carolina
Trust Services, Inc. (b)
First Reinsurance Holdings, 100% South Carolina
Inc. (b)
First Southeast Reinsurance, 100% Vermont
Inc. (d)
First Southeast Insurance 100% South Carolina
Services, Inc. (e)
Coastal Carolina Corporation (e) 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) Third-tier subsidiary of the Registrant. Wholly-owned by Broad
Street Holdings, Inc.
(d) Third-tier subsidiary of the Registrant. Wholly-owned by First
Reinsurance Holdings, Inc.
(e) Second-tier subsidiaries of the Registrant. 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 the registration statement
on Form S-8 of First Financial Holdings, Inc. and subsidiaries
(the "Company") of our report dated October 22, 1998, relating to the
consolidated statements of financial condition of the Company as of
September 30, 1998 and 1997, and the related consolidatedstatements of
operations, stockholders' equity and cash flows for each of the years
in the three-year period ended September 30, 1998, which report appears
in the September 30, 1998, annual report on Form 10-K of the Company.
KPMG PEAT MARWICK LLP
Greenville, South Carolina
December 23, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 30,407
<INT-BEARING-DEPOSITS> 9,985
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 159,450
<INVESTMENTS-CARRYING> 29,592
<INVESTMENTS-MARKET> 29,646
<LOANS> 1,577,821
<ALLOWANCE> 12,781
<TOTAL-ASSETS> 1,839,708
<DEPOSITS> 1,164,440
<SHORT-TERM> 504,942
<LIABILITIES-OTHER> 0
<LONG-TERM> 0
<COMMON> 150
0
0
<OTHER-SE> 125,013
<TOTAL-LIABILITIES-AND-EQUITY> 1,839,708
<INTEREST-LOAN> 119,306
<INTEREST-INVEST> 16,075
<INTEREST-OTHER> 964
<INTEREST-TOTAL> 136,345
<INTEREST-DEPOSIT> 50,548
<INTEREST-EXPENSE> 81,689
<INTEREST-INCOME-NET> 54,656
<LOAN-LOSSES> 2,405
<SECURITIES-GAINS> 306
<EXPENSE-OTHER> 9,889
<INCOME-PRETAX> 25,450
<INCOME-PRE-EXTRAORDINARY> 16,879
<EXTRAORDINARY> (340)
<CHANGES> 0
<NET-INCOME> 16,539
<EPS-PRIMARY> 1.22
<EPS-DILUTED> 1.17
<YIELD-ACTUAL> 3.10
<LOANS-NON> 2,647
<LOANS-PAST> 50
<LOANS-TROUBLED> 4,493
<LOANS-PROBLEM> 7,190
<ALLOWANCE-OPEN> 12,103
<CHARGE-OFFS> 2,530
<RECOVERIES> 803
<ALLOWANCE-CLOSE> 12,781
<ALLOWANCE-DOMESTIC> 12,781
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
