UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-17122
FIRST FINANCIAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 57-0866076
(State or other of (I.R.S. Employer
jurisdiction incorporation Identification No.)
or organization)
34 Broad Street, Charleston, South Carolina 29401
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (803) 529-5933
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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of
shares outstanding of each of the issuer's classes of common stock, as
of the latest practicable date.
Class Outstanding Shares at
Common Stock April 30, 1999
$.01 Par Value 13,368,630
<PAGE>
FIRST FINANCIAL HOLDINGS, INC.
INDEX
PART I - FINANCIAL INFORMATION PAGE NO.
Consolidated Statements of Financial Condition 1
at March 31, 1999 and September 30, 1998
Consolidated Statements of Income for the Three 2
Months Ended March 31, 1999 and 1998
Consolidated Statements of Income for the Six 3
Months Ended March 31, 1999 and 1998
Consolidated Statements of Cash Flows for the 4
Six Months Ended March 31, 1999 and 1998
Notes to Financial Statements 5-6
Management's Discussion and Analysis of Results 7-16
of Operations and Financial Condition
PART II - OTHER INFORMATION 17-18
SIGNATURES 19
SCHEDULES OMITTED
All schedules other than those indicated above are omitted
because of the absence of the conditions under which they are required
or because the information is included in the Financial Statements and
related notes.
<PAGE>
FIRST FINANCIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
March 31, September 30
1999 1998
(Amounts in thousands)
(Unaudited)
ASSETS
Cash and cash equivalents $ 60,777 $ 40,392
Investments held to maturity (market value of
$1,267 and $4,194) 1,249 4,148
Investments available for sale, at fair value 9,389 11,264
Investment in capital stock of Federal Home
Loan Bank, at cost 27,575 25,000
Loans receivable, net 1,592,652 1,550,567
Loans held for sale 18,207 14,473
Mortgage-backed securities available for
sale, at fair value 209,826 148,186
Mortgage-backed securities held to maturity
(market value of $305 and $452) 299 444
Accrued interest receivable 10,943 10,631
Office properties and equipment, net 18,409 15,836
Real estate and other assets acquired in
settlement of loans 5,765 5,871
Other assets 13,917 12,896
Total assets $ 1,969,008 $ 1,839,708
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposit accounts $ 1,200,408 $ 1,164,440
Advances from Federal Home Loan Bank 546,500 471,500
Securities sold under agreements to
repurchase 49,031 29,442
Other short-term borrowings 6,750 4,000
Advances by borrowers for taxes and
insurance 3,983 6,503
Outstanding checks 14,947 15,094
Accounts payable and other liabilities 25,106 23,566
Total liabilities 1,846,725 1,714,545
Stockholders' equity:
Serial preferred stock, authorized
3,000,000 shares--none issued
Common stock, $.01 par value, authorized
24,000,000 shares, issued 15,206,782 and
15,033,853 shares at March 31, 1999 and
September 30, 1998, respectively 152 150
Additional paid-in capital 31,414 30,308
Retained income, substantially restricted 106,105 100,075
Accumulated other comprehensive income 703 2,195
Treasury stock at cost, 1,821,388 and
1,374,872 shares at March 31, 1999 and
September 30, 1998, respectively (16,091) (7,565)
Total stockholders' equity 122,283 125,163
Total liabilities and stockholders' equity $ 1,969,008 $1,839,708
The accompanying notes are an integral part of the statements.
<PAGE>
FIRST FINANCIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
March 31,
1999 1998
(Amounts in thousands,
except per share
amounts)
(Unaudited)
INTEREST INCOME
Interest on loans and mortgage-backed
securities $ 33,285 $ 32,364
Interest and dividends on investments 698 913
Other 159 554
Total interest income 34,142 33,831
INTEREST EXPENSE
Interest on deposits 12,141 12,448
Interest on borrowed money 7,306 7,924
Total interest expense 19,447 20,372
NET INTEREST INCOME 14,695 13,459
Provision for loan losses 585 600
Net interest income after provision for
loan losses 14,110 12,859
OTHER INCOME
Net gain on sale of loans 652 315
Net gain on sale of investment and
mortgage-backed securities 65
Loan servicing fees 294 323
Service charges and fees on deposit
accounts 1,536 1,371
Real estate operations, net 47
Other 1,450 1,323
Total other income 3,932 3,444
NON-INTEREST EXPENSE
Salaries and employee benefits 6,371 5,462
Occupancy costs 791 812
Marketing 332 325
Depreciation, amortization, rental and
maintenance of equipment 844 649
FDIC insurance premiums 194 178
Merger-related expenses 28
Other 2,384 2,344
Total non-interest expense 10,916 9,798
Income before income taxes 7,126 6,505
Income tax expense 2,493 2,404
NET INCOME $ 4,633 $ 4,101
NET INCOME PER COMMON SHARE $ 0.34 $ 0.30
NET INCOME PER COMMON SHARE DILUTED $ 0.34 $ 0.29
The accompanying notes are an integral part of the statements.
<PAGE>
FIRST FINANCIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
Six Months Ended
March 31,
1999 1998
(Amounts in thousands,
except per share
amounts)
(Unaudited)
INTEREST INCOME
Interest on loans and mortgage-backed $ 66,791 $ 64,456
securities
Interest and dividends on investments 1,391 1,905
Other 374 1,098
Total interest income 68,556 67,459
INTEREST EXPENSE
Interest on deposits 24,762 25,184
Interest on borrowed money 14,451 15,483
Total interest expense 39,213 40,667
NET INTEREST INCOME 29,343 26,792
Provision for loan losses 1,245 1,205
Net interest income after provision for
loan losses 28,098 25,587
OTHER INCOME
Net gain on sale of loans 981 392
Net gain on sale of investment and 18 271
mortgage-backed securities
Loan servicing fees 606 654
Service charges and fees on deposit 3,176 2,875
accounts
Real estate operations, net 5 33
Other 2,709 2,528
Total other income 7,495 6,753
NON-INTEREST EXPENSE
Salaries and employee benefits 12,540 10,961
Occupancy costs 1,554 1,560
Marketing 666 681
Depreciation, amortization, rental and 1,605 1,314
maintenance of equipment
FDIC insurance premiums 363 358
Merger-related expenses 317
Other 4,571 4,498
Total non-interest expense 21,299 19,689
Income before income taxes 14,294 12,651
Income tax expense 5,002 4,678
NET INCOME $ 9,292 $ 7,973
NET INCOME PER COMMON SHARE $ 0.69 $ 0.59
NET INCOME PER COMMON SHARE DILUTED $ 0.67 $ 0.57
The accompanying notes are an integral part of the statements.
<PAGE>
FIRST FINANCIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
March 31, 1999
1999 1998
(Amounts in thousands)
(Unaudited)
OPERATING ACTIVITIES
Net income $ 9,292 $ 7,973
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation 1,153 877
Gain on sale of investments and
mortgage-backed
securities, net (18) (271)
Gain on sale of real estate owned, net (71) (64)
Amortization of unearned discounts/
premiums on investments 416 (159)
Increase (decrease) in deferred loan
fees and discounts 376 (557)
Increase in receivables and prepaid
expenses (1,333) (1,917)
Provision for loan losses 1,245 1,205
Proceeds from sales of loans held for
sale 132,287 59,702
Origination of loans held for sale (136,021) (70,822)
Decrease in accounts payable and other
liabilities (173) (5,190)
Net cash provided by (used in) operating
activities 7,153 (9,223)
INVESTING ACTIVITIES
Proceeds from maturity of investments 6,884 11,974
Proceeds from sale of investments
available for sale 1,497
Net purchase of investments available for
sale (2,157) (5,175)
Purchase of FHLB stock (2,575) (2,453)
Increase in loans, net (44,142) (85,525)
Repayments on mortgage-backed securities 36,299 20,439
Purchase of mortgage-backed securities
available for sale (100,591) (9,876)
Sales of mortgage-backed securities 6,452
Proceeds from the sales of real estate
owned 613 452
Net purchase of office properties and
equipment (3,726) (871)
Net cash used in investing activities (109,395) (63,086)
FINANCING ACTIVITIES
Net increase in deposit accounts 35,968 23,353
Net proceeds of FHLB advances 75,000 55,500
Increase of securities sold under
agreements to repurchase 19,589 2,671
Increase in other borrowed money 2,750
Proceeds from sale of common stock 1,108 830
Dividends paid (3,262) (2,897)
Treasury stock purchased (8,526) (88)
Net cash provided by financing activities 122,627 79,369
Net increase in cash and cash equivalents 20,385 7,060
Cash and cash equivalents at beginning of
period 40,392 48,034
Cash and cash equivalents at end of period $ 60,777 $ 55,094
Supplemental disclosures:
Cash paid (received) during the period for:
Interest $ 43,375 $ 43,529
Income taxes (196) 5,120
Loans foreclosed 306 2,015
Loans securitized into mortgage-backed
securities 53,226
Unrealized net gain (loss) on securities
available for sale, net of income tax (1,492) 338
The accompanying notes are an integral part of the statements.
<PAGE>
FIRST FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(Unaudited)
A. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
The unaudited consolidated financial statements include the
accounts of First Financial Holdings, Inc, ("First Financial", or the
"Company") and its wholly-owned thrift subsidiaries, First Federal
Savings and Loan Association of Charleston ("First Federal") and
Peoples Federal Savings and Loan Association of Conway ("Peoples
Federal") (together, the "Associations") and First Southeast Investor
Services, Inc. All significant intercompany items related to the
consolidated subsidiaries have been eliminated.
The significant accounting policies followed by First Financial
for interim financial reporting are consistent with the accounting
policies followed for annual financial reporting. The unaudited
consolidated financial statements and notes are presented in
accordance with the instructions for Form 10-Q. The information
contained in the footnotes included in First Financial's latest annual
report on Form 10-K should be referred to in connection with the
reading of these unaudited interim consolidated financial statements.
Certain fiscal 1998 amounts have been reclassified to conform with the
statement presentations for fiscal 1999.
The results of operations for the six months ended March 31, 1999
are not necessarily indicative of the results of operations that may
be expected in future periods. This report may contain certain
forward-looking statements with respect to financial conditions,
results of operations and business of First Financial. These forward-
looking statements involve certain 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 Office of Thrift
Supervision and the Federal Deposit Insurance Corporation. It is
important to note that the Company's actual results may differ
materially and adversely from those discussed in forward-looking
statements.
B. EARNINGS PER SHARE
Basic and diluted earnings per share ("EPS") have been computed
based upon net income as presented in the accompanying statements of
income divided by the weighted average number of common shares
outstanding or assumed to be outstanding as summarized below:
Quarter Ended March 31,
1999 1998
Weighted average number of common shares
used in basic EPS 13,482,872 13,549,071
Effect of dilutive stock options 344,815 585,717
Weighted average number of common shares
and dilutive potential common shares
used in diluted EPS 13,827,687 14,134,788
Six Months Ended March 31,
1999 1998
Weighted average number of common shares
used in basic EPS 13,552,867 13,587,204
Effect of dilutive stock options 376,829 509,194
Weighted average number of common shares
and dilutive potential common shares
used in diluted EPS 13,929,696 14,096,398
C. COMPREHENSIVE INCOME
Comprehensive income is the change in the Corporation's equity
during the period from transactions and other events and circumstances
from non-owner sources. Total comprehensive income is comprised of
net income and other comprehensive income and for the six months ended
March 31, 1999 and 1998 amounted to $7,800 and $8,311, respectively.
The Corporation's "other comprehensive income" for the six months
ended March 31, 1999 and 1998 and "accumulated other comprehensive
income" as of March 31, 1999 and 1998 are comprised solely of
unrealized gains and losses on certain investments in debt and equity
securities.
Other comprehensive income for the six months ended March 31, 1999
and 1998 follows (in thousands):
Six Months Ended
March 31,
1999 1998
Unrealized holding gains (losses) arising during $ (1,492) $ 364
period
Less reclassification adjustment for gains
included in net income (26)
Net unrealized gains (losses) on securities $ (1,492) $ 338
D. NATURE OF OPERATIONS
First Financial is a multiple savings and loan holding company
headquartered in Charleston, South Carolina. First Financial conducts
its operations principally in South Carolina with lending functions
also in North Carolina. The thrift subsidiaries, First Federal and
Peoples Federal, provide a wide range of traditional banking services
and also offer trust and insurance services through subsidiaries. The
Company has a total of 37 offices in South Carolina located in the
Charleston Metropolitan area and Horry, Georgetown and Florence
counties, a loan origination office in coastal Brunswick County, North
Carolina and a private banking office in Hilton Head, South Carolina.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Net income for the quarter ended March 31, 1999 improved 13% to
$4.6 million from net income of $4.1 million in the comparable quarter
in 1998. Earnings per common share increased to $.34 for the
current quarter compared to $.30 in the March 1998 quarter. On a
diluted basis, earnings per common share increased to $.34 from $.29
in the comparable period.
In the first six months of 1999, First Financial earned $9.3
million compared with $8.0 million in the first six months of 1998.
Results for the first six months of 1998 included approximately $317
thousand in non-recurring before-tax expenses related to the
acquisition of Investors Savings Bank of South Carolina, Inc.
("Investors") Year-to-date earnings per common share and diluted
earnings per common share improved to $.69 and $.67, respectively,
compared with $.59 and $.57 in 1998.
BALANCE SHEET ANALYSIS
Consolidated assets of the Company totaled approximately $2.0
billion at March 31, 1999. During the six months ended March 31, 1999
assets increased $129.3 million, or 14.1% on an annualized basis.
Cash, Investment Securities and Mortgage-backed Securities
Cash, deposits in transit and interest-bearing deposits totaled
$60.8 million at March 31, 1999. Investment balances declined in the
current six months to $38.2 million principally as a result of
maturities. The Company increased its balances in mortgage-backed
securities to $210.1 million, growing the portfolio by $61.5 million
principally due to external purchases of $100.6 million.
Loans Receivable
Loans receivable, including loans held for sale, totaled $1.6
billion at March 31, 1999, increasing $45.8 million from September 30,
1998. The principal use of the Company's funds is the origination of
mortgage and other loans. The Company originated $249 million (net of
refinances) in mortgage loans, $88 million in consumer loans and $29
million in commercial business loans during the six months ending
March 31, 1999. The Company also originated or purchased $47 million
in loans through its regional correspondent originators. Growth in
net loans receivable is principally attributable to the significantly
improved originations offset partially by fixed-rate loan sales of
$132.3 million in the six month period and higher prepayments due to
the level of market interest rates.
The following table summarizes the composition of the Company's
gross loan portfolio (amounts in thousands):
March 31, September 30, March 31,
1999 1998 1998
Residential (1-4 family) $ 1,192,107 $ 1,135,765 $ 1,075,037
Other residential 38,901 43,161 49,794
Land and lots 85,548 83,857 68,776
Commercial real estate 125,042 141,182 150,867
Consumer 189,730 172,684 156,087
Commercial business 37,693 33,790 34,276
Total gross loans $ 1,669,021 $ 1,610,439 $ 1,534,837
Outstanding commitments to originate mortgage loans and to fund
the undisbursed portion of construction loans amounted to $89.5
million at March 31, 1999. Unused lines of credit on equity loans,
consumer loans, credit cards and commercial loans totaled $167.1
million as of March 31, 1999.
The Company originates the majority of its loans in its primary
market area located in the coastal region of South Carolina. In an
effort to expand mortgage lending operations and improve earning asset
growth the Company began originating mortgage loans in other markets
in 1995. The Company utilizes its existing mortgage loan products and
programs in establishing correspondent relationships with other
lenders.
Asset Quality
The following table summarizes the Company's problem assets for
the periods indicated (amounts in thousands):
March 31, September 30, March 31,
1999 1998 1998
Non-accrual loans $ 4,828 $ 2,647 $ 4,445
Loans 90 days or more delinquent (1) 27 50 56
Renegotiated loans 2,782 4,493 6,215
Real estate and other assets
acquired in settlement of loans 5,765 5,871 12,638
Total $ 8,574 $ 10,414 $ 18,909
As a percent of net loans and
real estate owned 0.83% 0.83% 1.55%
As a percent of total assets 0.68% 0.71% 1.26%
(1) The Company continues to accrue interest on these loans.
Problem assets declined approximately 43% from one year ago
principally due to the August 1998 sale of a shopping center acquired
by foreclosure. Renegotiated loans declined by $1.7 million and non-
accrual loans increased $2.2 million in the six months ended March 31,
1999. A renegotiated loan of $1.4 million collateralized by
multifamily property became seriously delinquent during the period and
the Company placed the loan on non-accrual status.
Allowance for Loan Losses
The allowance for loan losses represents a reserve for probable
inherent losses existing in the loan portfolio. The adequacy of the
allowance for loan losses is evaluated at least quarterly based, among
other factors, on a continuous review of the Company's loan portfolio,
with particular emphasis on adversely classified loans.
Following is a summary of the reserve for loan losses for the six
months ended March 31, 1999 and March 31, 1998 (amounts in thousands).
1999 1998
Balance at beginning of year $ 12,781 $ 12,103
Provision charged to operations 1,245 1,205
Recoveries of loans previously charged-off 173 592
Loan losses charged to reserves (643) (1,830)
Balance at end of period $ 13,556 $ 12,070
The Company's impaired loans totaled $4.9 million at March 31,
1999, $3.0 million at September 30, 1998 and $5.2 million at March
31, 1998.
Deposits and Borrowings
First Financial's deposit composition at the indicated dates is as
follows (amounts in thousands):
<TABLE>
<CAPTION>
March 31, 1999 September 30, 1998 March 31, 1998
% of % of % of
Balance Total Balance Total Balance Total
<S> <C> <C> <C> <C> <C> <C>
Checking accounts $ 176,341 14.69% $ 162,260 13.93% $ 153,024 13.34%
Passbook, statement
and other accounts 123,508 10.29 120,927 10.39 122,549 10.68
Money market accounts 172,842 14.40 153,479 13.18 154,138 13.43
Certificate accounts 727,717 60.62 727,774 62.50 717,630 62.55
Total deposits $1,200,408 100.00% $1,164,440 100.00% $1,147,341 100.00%
</TABLE>
Deposits increased $36.0 million during the six months ended March
31, 1999, principally as a result of growth in checking and money
market accounts. Total borrowings also increased $97.3 million to
$602.3 million at March 31, 1999.
Stockholders' Equity
Stockholders' equity declined $2.9 million during the six months of
fiscal 1999 to total $122.3 million at March 31, 1999. The Company's
capital ratio, total capital to total assets, was 6.21% at March 31,
1999, compared to 6.80% at September 30, 1998. During the six months,
the Company increased its dividend to stockholders to $.24 compared
with $.21 per share in the first six months of fiscal 1998. During
the first half of fiscal 1999 the Company also repurchased approximately
440,200 shares of its common stock for $8,405,069 as part of its stock
repurchase program initiated in October 1998 to acquire 500,000 shares
by June 30, 1999.
Regulatory Capital
Under current Office of Thrift Supervision ("OTS") regulations,
savings associations must satisfy three minimum capital requirements:
core capital, tangible capital and risk-based capital. Savings
associations must meet all of the standards in order to comply with
the capital requirements. At March 31, 1999, both subsidiaries were
categorized as "well capitalized" under the Prompt Corrective Action
regulations adopted by the OTS pursuant to the Federal deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"). To remain
in this status, the Associations must maintain core and risk-based
capital ratios of at least 5.0% and 10.0%, respectively.
The following table summarizes the capital requirements for First
Federal and Peoples Federal as well as their capital positions at
March 31, 1999:
First Federal Peoples Federal
Percent Percent
of of
Amount Assets Amount Assets
(Amounts in thousands)
Tangible capital $ 84,348 6.39% $ 42,242 6.55%
Tangible capital requirement 19,815 1.50 9,648 1.50
Excess $ 64,533 4.89% $ 32,594 5.05%
Core capital $ 84,348 6.39% $ 42,242 6.55%
Core capital requirement 52,841 4.00 25,782 4.00
Excess $ 31,507 2.39% $ 16,460 2.55%
Risk-based capital(a) $ 92,395 10.36% $ 43,092 10.69%
Minimum risk-based capital
requirement(a) 71,370 8.00 32,243 8.00
Excess(a) $ 21,025 2.36% $ 10,849 2.69%
(a) Based on total risk-weighted assets.
For a complete discussion of capital issues, refer to "Capital
Requirements" and "Limitations on Capital Distributions" in the
Company's 10-K for the fiscal year ending September 30, 1998.
LIQUIDITY AND ASSET AND LIABILITY MANAGEMENT
Liquidity
The Associations are subject to federal regulations which require
the maintenance of a daily average balance of liquid assets equal to
4.00% of net withdrawable savings and borrowings payable in one year.
The liquidity ratios of the Associations, based on revised regulations
issued by the Office of Thrift Supervision in November 1997, exceed
the required levels.
The Associations' primary sources of funds consist of retail and
commercial deposits, borrowings from the FHLB, principal repayments on
loans and mortgage-backed securities, securities sold under agreements
to repurchase and the sale of loans. Each of the Association's
sources of liquidity are subject to various uncertainties beyond the
control of the Associations. As a measure of protection, the
Associations have back-up sources of funds available, including excess
FHLB borrowing capacity and excess liquidity in 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 March 31, 1999, based on asset size of each
banking subsidiary, additional borrowings of $42 million were
available under the current FHLB of Atlanta general policy.
During the current six months the Company experienced a net cash
outflow from investing activities of $109.4 million, consisting
principally of loans originated and purchased for investment, and
mortgage-backed securities purchased, which were partially offset by
maturities of investment and mortgage-backed securities. Included in
investing activities was $3.7 million in purchases of office
properties and equipment. The Company has three branch offices under
construction and has also made additional investments in branch
automation and communication systems. The Company experienced cash
inflows of $7.2 million from operating activities and $122.6 million
from financing activities. Financing activities consisted principally
of $75.0 million in FHLB advances, $36.0 million in increased deposit
account balances and $22.3 million in other borrowings.
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. Potential
sources for First Financial's payment of principal and interest on its
borrowings and for its stock repurchase program include (i) dividends
from First Federal and Peoples Federal; (ii) payments from existing
cash reserves and sales of marketable securities; (iii) interest on
its investment securities; and (iv) advances on a bank line of credit.
As of March 31, 1999, First Financial had cash reserves and existing
marketable securities of $2.0 million compared with $2.3 million at
September 30, 1998.
First Federal's and Peoples Federal's ability to pay dividends and
make other capital contributions to First Financial is restricted by
regulation and may require regulatory approval. First Federal's and
Peoples Federal's ability to make distributions may also depend on
each institution's ability to meet minimum regulatory capital
requirements in effect during the period. For a complete discussion
of capital distribution regulations, refer to "Limitations on Capital
Distributions" in the Company's 10-K for the fiscal year ending
September 30, 1998.
Asset/Liability Management
The Company's Asset and Liability Committees establish policies
and monitor results to control interest rate sensitivity. Although
the Company utilizes measures such as static gap, which is simply the
measurement of the difference between interest-sensitive assets and
interest-sensitive liabilities repricing for a particular time period,
just as important a process is the evaluation of 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 mix assumptions.
These projections enable the Company to adjust its strategies to
lessen the impact of significant interest rate fluctuations.
The following table is a summary of First Financial's one year gap
at March 31, 1999 (amounts in thousands):
March 31, 1999
Interest-earning assets maturing or repricing within
one year $ 764,019
Interest-bearing liabilities maturing or repricing
within one year 1,327,247
Cumulative gap $ (563,228)
Gap as a percent of total assets
The Company's one year gap as a percent of total assets changed
from (19.33)% to (28.60)% during the current six months. 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.
A negative gap indicates that cumulative interest-sensitive
liabilities exceed cumulative interest-sensitive assets and suggests
that net interest income would decline if market interest rates
increased. A positive gap would suggest the reverse. This
relationship is not always ensured due to the repricing attributes of
both interest-sensitive assets and interest-sensitive liabilities.
COMPARISON OF OPERATING RESULTS
QUARTERS ENDING MARCH 31, 1999 AND 1998
Net Interest Income
First Financial's net interest income for the three months ending
March 31, 1999 was $14.7 million compared with $13.4 million for the
comparable quarter in fiscal 1998. The gross interest margin
increased from 2.79% in the prior quarter to 2.92% in the current
quarter. The net yield on earning assets also improved to 3.20% from
3.06% in the prior quarter.
The following table summarizes rates, yields and average earning
asset and costing liability balances for the respective quarters
(amounts in thousands):
Quarter Ended March 31,
1999 1998
Average Average
Average Yield/ Average Yield/
Balance Rate Balance Rate
Loans and mortgage-backed
securities $ 1,784,179 7.46% $ 1,663,452 7.78%
Investments and other
interest-earning assets 51,382 6.74 93,348 6.37
Total interest-earning
assets $ 1,835,561 7.44% $ 1,756,800 7.71%
Deposits $ 1,190,993 4.13% $ 1,131,888 4.46%
Borrowings 554,074 5.35 546,866 5.87
Total interest-bearing
liabilities $ 1,745,067 4.52% $ 1,678,754 4.92%
Gross interest margin 2.92% 2.79%
Net interest margin 3.20% 3.06%
The following rate/volume analysis depicts the increase (decrease)
in net interest income attributable to interest rate and volume
fluctuations compared to the prior period (amounts in thousands):
Quarter Ended March 31
1999 versus 1998
Volume Rate Total
Interest income:
Loans and mortgage-backed securities $ 2,263 $ (1,342) $ 921
Investments and other interest-
earning assets (691) 81 (610)
Total interest income 1,572 (1,261) 311
Interest expense:
Deposits 635 (942) (307)
Borrowings 102 (720) (618)
Total interest expense 737 (1,662) (925)
Net interest income $ 835 $ 401 $ 1,236
Average balances of interest-earning assets increased $78.8
million, or 4.5%, in the March 1999 quarter compared with the March
1998 quarter, contributing to a $835 thousand increase in net interest
income due to changes in volume. An increase in the Company's net
interest margin from 3.06% in the March 1998 quarter to 3.20% in the
March 1999 quarter also improved net interest income by approximately
$401 thousand. There can be no assurance that the Company's net
margin will not decline based on the current spread between short
and long-term treasury interest rates, the likelihood that
prepayments of higher yielding earning assets may increase under
current interest rates, the Company's current asset/liability
structure and competitive forces within its markets.
Provision for Loan Losses
During the current quarter, First Financial's provision for loan
losses totaled $585 thousand, compared to $600 thousand during the
same period in the previous year. Net charge-offs for the current
quarter totaled $280 thousand compared with $362 thousand in the
comparable quarter in fiscal 1998. Total loan loss reserves as of
March 31, 1999 were $13.6 million, or .84% of the total net loan
portfolio compared with $12.1 million, or .81% of the total net loan
portfolio at March 31, 1998.
Other Income/Non-Interest Expenses
Other income increased $488 thousand, or 14.2%, in the March 1999
quarter compared to the March 31, 1998 quarter. Sales of loans held
for sale increased $28.6 million, or approximately 70%, between the
two periods and increased net gains to $652 thousand in the current
quarter from net gains of $315 thousand recorded in the March 1998
quarter. Fees on deposit accounts improved by 12% to $1.5 million in
the quarter ended March 31, 1999 as compared with the quarter ended
March 31, 1998.
Non-interest expense increased $1.1 million, or 11.4%, during the
current quarter. The increase in the current quarter is primarily
attributable to higher personnel costs which increased $909 thousand
and higher equipment expenses which increased $195 thousand in the
current period. The increase in personnel costs was principally due
to expansion of customer services, higher commission payments related
to lending volumes and increased staffing and overtime costs related
to Year 2000 initiatives.
COMPARISON OF OPERATING RESULTS
SIX MONTHS ENDING March 31, 1999 AND 1998
Net Interest Income
First Financial's net interest income for the six months ending
March 31, 1999 of $29.3 million increased 9.5% over the $26.8 million
recorded in the comparable six months in fiscal 1998. Growth in net
interest income was attributable to a 4.3% increase in the average
balances of interest-earning assets and to improved margins. The
gross interest margin improved to 2.98% from 2.82% in the prior six
months. The net margin also improved to 3.23% versus 3.08% in the
six months ended March 31, 1998.
The following table summarizes rates, yields and average earning
asset and costing liability balances for the respective periods
(amounts in thousands):
Six Months Ended March 31,
1999 1998
Average Average
Average Yield/ Average Yield/
Balance Rate Balance Rate
Loans and mortgage-backed
securities $1,759,889 7.59% $1,645,324 7.82%
Other interest-earning
assets 54,757 6.45 94,559 6.37
Total interest-earning
assets $1,814,646 7.56% $1,739,883 7.74%
Deposits $1,182,738 4.20% $1,129,281 4.47%
Borrowings 534,830 5.42 528,510 5.87
Total interest-bearing
liabilities $1,717,568 4.58% $1,657,791 4.92%
Gross interest margin 2.98% 2.82%
Net interest margin 3.23% 3.08%
The following rate/volume analysis depicts the increase (decrease)
in net interest income attributable to interest rate and volume
fluctuations compared to the prior period (amounts in thousands):
Six Months Ended March 31,
1999 versus 1998
Volume Rate Total
Interest income:
Loans and mortgage-backed securities $ 4,295 $ (1,960)$ 2,335
Investments and other interest-
earning assets (1,275) 37 (1,238)
Total interest income 3,020 (1,923) 1,097
Interest expense:
Deposit accounts 1,151 (1,573) (422)
Borrowings 181 (1,213) (1,032)
Total interest expense 1,332 (2,786) (1,454)
Net interest income $ 1,688 $ 863 $ 2,551
Provision for Loan Losses
During the both the six months ended March 31, 1999 and March 31,
1998, First Financial's provision for loan losses totaled $1.2
million. Net charge-offs for the current six months totaled $470
thousand compared with $1.2 million in the comparable period in fiscal
1998. Charge-offs in the prior six months included $679 thousand
related to a $2.8 million multifamily loan on which the Company had
maintained an $800,000 specific reserve.
Other Income/Non-interest Expense
Total other income improved $742 thousand, or 11.0%, in the
current six months. Fees on deposit accounts increased $301 thousand
during the current six months. The Company recorded gains of $981
thousand on loan sales during the current six months compared with
gains of $392 thousand in the six months ended March 31, 1998. During
the six months ended March 31, 1998, the Company recorded gains of
$271 thousand on the sale of investment and mortgage backed securities
compared to only $18 thousand in the current six months.
Non-interest expense increased $1.6 million or 8.2% during the
current six months. Non-interest expense in the prior six months
included non-recurring expenses of $317 thousand related to the
Investors merger. Excluding the effect of non-recurring expenses
related to the merger, total non-interest expense increased $1.9
million, or approximately 9.9%. The increase is attributable
principally to higher personnel costs, higher equipment expenses
related to new technology investments and the effect of higher
expenses related to Year 2000 project.
Income Tax Expense
During the first six months, the Company's effective tax rate was
35% compared to 37% in the comparable period. The actual tax
provision of $5.0 million resulted in an increase of $324 thousand
from the prior period. The decline in the effective tax rate was
principally a result of various tax initiatives undertaken in fiscal 1998.
Year 2000 Issue
The Company continues to work aggressively on its comprehensive
project concerning the impact of the Year 2000. The Year 2000
"problem" or the "millennium bug" has arisen because many computer
programs were written to store years as two digits instead of four.
By saving storage space by using a two digit year, a program which
reads the year 00 could interpret the year to be 1900 when in fact the
year 2000 is meant. The Company is very aware of the Year 2000 issue
and is actively taking steps to address it.
"Year 2000 Readiness" is the ability of the Company's internal
computer systems (hardware, software and embedded microchips) to
process data involving dates or portions of dates before, during and
after January 1, 2000, including leap year calculations, without
malfunction.
As federally chartered thrifts, the Company's banking subsidiaries
fall under the regulatory guidelines published by the Federal
Financial Institutions Examination Council ("FFIEC"). Periodic audits
of the Company's Year 2000 activities are performed by the Office of
Thrift Supervision. The FFIEC considers five general Year 2000
phases: 1) Awareness - define the Year 2000 issues, gain executive
level support, establish a project team, develop a strategy to address
all internal and external systems and discuss the Year 2000 issue with
vendors; 2) Assessment - Assess the size and complexity of the issues
and detail the magnitude of the effort necessary to address them; 3)
Renovation - Convert, replace or eliminate software, hardware and date
sensitive items as necessary and monitor vendors renovation
activities; 4) Validation - Test and verify software, systems
component, other applicable date sensitive items and contingency
plans; and 5) Implementation - Put tested date sensitive items into
production, monitor implementation with vendors, and execute
contingency plans as necessary. Management's target dates for
completion of all phases for its mission-critical applications is June
30, 1999. Mission critical applications include those that: 1)
directly affect delivery of primary services to First Financial's
customers; 2) directly affect First Financial's recognition and
collection; 3) would create noncompliance with any statutes or laws;
and 4) would require significant costs to address in the event of
noncompliance.
Another FFIEC area to be addressed is contingency planning. The
Company is considering alternative measures throughout the
organization in the event of a Year 2000-caused problem. Business
areas have identified Year 2000 departmental risks and are
incorporating changes to their existing contingency plans. Business
resumption contingency plans were substantially complete at March 31,
1999. A methodology for testing all plans is currently being
developed.
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
where necessary and deemed compliant by September 30, 1998. The
Company utilizes an integrated banking application system from one
vendor for most of its critical banking applications. These systems
were moved from a "test" environment into production in March 1999.
Although the Company has performed in depth date testing on all
systems placed into production, it will continue to conduct periodic
date testing throughout the remainder of the year, particularly to
test any other modifications to software received from its integrated
banking application vendor. Item processing systems were upgraded to
Year 2000 compliance by December 1998.
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 was completed in December
1998. Capitalized costs for the new branch hardware, software and a
frame relay communication network are expected to total approximately
$2.0 million.
The Company has budgeted approximately $300 thousand in estimated
operating costs for Year 2000. These costs do not include the cost
of internal staff time spent on the Year 2000 project which the Company
does not track separately. 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.
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 has tested extensively with
the Federal Reserve, the Federal Home Loan Bank of Atlanta, secondary
marketing firms such as Freddie Mac and Fannie Mae and a host of other
suppliers and software providers. Additionally, the vendor that
provides the Company's integrated banking application system as well
as its credit card servicer are 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 REGULATORY AND ACCOUNTING ISSUES
For a comprehensive discussion of regulatory and accounting
issues, refer to "Regulatory and Accounting Issues" in the Company's
10-K for the fiscal year ending September 30, 1998.
<PAGE>
FIRST FINANCIAL HOLDINGS, INC.
OTHER INFORMATION
Item 1 - 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 Association's 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 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk reflects the risk of economic loss resulting from
adverse changes in market price and interest rates. This risk of loss
can be reflected in diminished current market values and/or reduced
potential net interest income in future periods.
The Corporation's market risk arises primarily from interest rate
risk inherent in its lending, deposit-taking and other funding
activities. The structure of the Corporation's loan, investment,
deposit and borrowing portfolios is such that a significant increase
in interest rates may adversely impact net market values and net
interest income. The Corporation does not maintain a trading account
nor is the Corporation subject to currency exchange risk or commodity
price risk. Responsibility for monitoring interest rate risk rests
with the Asset/Liability Management Committee ("ALCO"), which is
comprised of senior management. ALCO regularly reviews the
Corporation's interest rate risk position and adopts balance sheet
strategies that are intended to optimize net interest income while
maintaining market risk within a set of Board-approved guidelines.
As of March 31, 1999, Management believes that there have been
no significant changes in market risk as disclosed in the
Corporation's Annual Report on Form 10-K for the year ended September
30, 1998.
Item 6 - Exhibits and Report on Form 8-K.
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 (3)
(3.4)Amendment to Registrant's Certificate of Incorporation (4)
(4)Indenture, dated September 10, 1992, with respect to the
Registrant's 9.375% Senior Notes, due September 1, 2001 (5)
(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 (5)
(10.3)Employment Agreement with A. Thomas Hood, as amended (6)
(10.4)Employment Agreement with Charles F. Baarcke, Jr. (7)
(10.5)Employment Agreement with John L. Ott, Jr. (7)
(10.6)1990 Stock Option and Incentive Plan (8)
(10.7)1994 Outside Directors Stock Options-for-Fees Plan (9)
(10.8)1994 Employee Stock Purchase Plan (9)
(10.9)1996 Performance Equity Plan for Non-Employee Directors (10)
(10.10)Employment Agreement with Susan E. Baham (6)
(10.11)1997 Stock Option and Incentive Plan (11)
(10.12)Investors Savings Bank of South Carolina, Inc. Incentive
Stock Option Plan (12)
(10.13)Borrowing Agreement with Bankers Bank (13)
(22)Subsidiaries of the Registrant
(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 Registrant's Annual Report on Form
10-K for the year ended September 30, 1997
(4) Incorporated by reference to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended December 31, 1997
(5) Incorporated by reference to the Registrant's Registration
Statement on Form S-8 File No. 33-55067.
(6) Incorporated by reference to the Registrant s Annual Report on
Form 10-K for the year ended September 30, 1996.
(7) Incorporated by reference to the Registrant's Annual Report on
Form 10-K
(8) Incorporated by reference to the Registrant's Registration
Statement on Form S-8 File No. 33-57855.
(9) Incorporated by reference to the Registrant's Proxy Statement
for the Annual Meeting of Stockholders held on January 25, 1995
(10) Incorporated by reference to the Registrant's Proxy Statement
for the Annual Meeting of Stockholders held on January 22,
1997.
(11) Incorporated by reference to the Registrant's Preliminary Proxy
Statement for the Annual Meeting of Stockholders to be held on
January 28, 1998.
(12) Incorporated by reference to the Registrant's Registration
Statement on Form S-8 File No. 333-45033.
(13) Incorporated by reference to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1998.
Reports on Form 8-K
None
<PAGE>
FIRST FINANCIAL HOLDINGS, INC.
SIGNATURES
Pursuant to the requirements of the Securities and 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: May 17, 1999 By: /s/ A. Thomas Hood
A. Thomas Hood
President and Chief Executive Officer
Duly Authorized Representative
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