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, 1999
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, 1999 there were issued and outstanding
13,355,789 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 16, 1999, was $217,031,571 (13,355,789
shares at $16.25 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 2000
Annual Meeting of Stockholders. (Part III)
<PAGE>
FIRST FINANCIAL HOLDINGS, INC.
1999 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 of the Associations 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 17
Related Stockholder Matters
Item 6. Selected Financial Data 18
Item 7. Management's Discussion and Analysis of Financial 19
Condition and Results of Operations
Item 8. Financial Statements and Supplementary Data 33
Item 9. Changes in and Disagreements with Accountants on 62
Accounting and Financial Disclosure
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 64
Management
Item 13. Certain Relationships and Related Transactions 64
PART IV
Item 14. Exhibits, Financial Statement Schedules, and on 65
Reports Form 8-K
<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, 1999, First Financial had total
assets of $2.1 billion, total deposits of $1.2 billion and
stockholders' equity of $125.9 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 $1.4 billion at September 30, 1999.
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 opened a full service office in Hilton Head, South
Carolina in December 1999 after operating a private banking office on
the island for several years.
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 15 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 (6), Florence (4), Conway (4) and Loris (1). Peoples
Federal had assets of approximately $682 million at September 30,
1999.
The business of the Company consists primarily of acting as a
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 17 of
Notes to Consolidated Financial Statements.
DISCUSSION OF FORWARD-LOOKING STATEMENTS
Management's Discussion and Analysis of Financial Condition and
Results of Operations and other portions of this annual report contain
certain "forward-looking statements" concerning the future operations
of First Financial Holdings, Inc. Management desires to take
advantage of the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995 and is including this statement for the
express purpose of availing the Company of protections of such safe
harbor with respect to all "forward-looking statements" contained in
our Annual Report. We have used "forward-looking statements" to
describe future plans and strategies including our expectations of the
Company's future financial results. Management's ability to predict
results or the effect of future plans or strategies is inherently
uncertain. Factors which could affect actual results include interest
rate trends, the general economic climate in the Company's market area
and the country as a whole, the ability of the Company to control
costs and expenses, the ability of the Company to efficiently
incorporate acquisitions into its operations, the ability of the
Company to successfully address Year 2000 (Y2K) issues, competitive
products and pricing, loan delinquency rates, and changes in federal
and state regulation. These factors should be considered in
evaluating the "forward-looking statements," and undue reliance should
not be placed on such statements.
LENDING ACTIVITIES
General
At September 30, 1999, the Company's net loan portfolio totaled
approximately $1.7 billion, or 84% 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
$92 million in fiscal 1999.
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 that 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 that 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,
1999 1998 1997 1996 1995
Amount % of Amount % of Amount % of Amount % of Amount % of
Total Total Total Total Total
(dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TYPE OF LOAN
Real estate:
1- to 4-family residential $1,296,523 74.4% $1,135,765 72.5% $ 1,040,142 71.6% $ 931,075 70.3% $ 727,900 64.5%
Multi-family 46,254 2.6 43,161 2.7 54,593 3.8 57,238 4.3 57,902 5.1
Commercial real
estate and land 210,488 12.1 225,039 14.4 220,169 15.2 220,020 16.6 219,106 19.4
Commercial business loans 42,721 2.5 33,790 2.2 32,967 2.3 31,865 2.4 32,246 2.9
Consumer loans:
Home equity 86,764 5.0 73,961 4.7 58,879 4.0 48,728 3.7 47,015 4.2
Mobile homes 44,561 2.6 26,983 1.7 19,537 1.3 21,977 1.7 25,046 2.2
Credit cards 10,831 0.6 10,424 0.7 10,992 0.8 10,453 0.8 9,146 0.8
Savings account loans 5,281 0.3 5,531 0.4 5,835 0.4 5,659 0.4 5,565 0.5
Other consumer loans 69,678 4.0 55,785 3.6 51,384 3.5 37,609 2.8 31,038 2.8
Total gross loans receivable 1,813,101 104.1 1,610,439 102.9 1,494,498 102.9 1,364,624 103.0 1,154,964 102.4
Allowance for loan losses (14,570) (0.8) (12,781) (0.8) (12,103) (0.8) (11,639) (0.9) (10,993) (1.0)
Loans in process (55,409) (3.2) (32,360) (2.1) (30,257) (2.1) (27,082) (2.0) (14,781) (1.3)
Deferred loan fees and
discounts (972) (0.1) (258) -- (641) -- (978) (0.1) (1,391) (0.1)
Loans receivable, net $1,742,150 100.0% $1,565,040 100.0% $ 1,451,497 100.0% $1,324,925 100.0% $1,127,799 100.0%
</TABLE>
The following table shows, at September 30, 1999, 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>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated Within Over Over Two Over Over Five Over Ten Over
One One to to Three Three to to Ten to Fifteen Fifteen
Year Two Years Years Five Years Years Years Years Total
(in thousands)
Real estate mortgages:
Adjustable-rate $ 608 $ 827 $ 1,471 $ 6,649 $ 24,462 $ 67,422 $ 780,124 $ 881,563
Fixed-rate 50,432 36,589 22,568 38,510 96,806 137,944 233,444 616,293
Consumer loans:
Adjustable-rate 85,865 1,186 490 2,066 3,705 2,317 1,240 96,869
Fixed-rate 23,816 8,822 11,606 23,047 18,922 7,811 26,222 120,246
Commercial business loans:
Adjustable-rate 14,260 1,371 1,725 720 3 80 18,159
Fixed-rate 13,818 3,057 2,524 4,919 218 26 24,562
Total $ 188,799 $ 51,852 $ 40,384 $ 75,911 $144,116 $ 215,600 $ 1,041,030 $1,757,692
</TABLE>
Residential Mortgage Lending
At September 30, 1999, the Company's real estate loans totaled
approximately $1.6 billion, or 89.2% of net loans receivable. One-
to four-family residential mortgage loans totaled $1.3 billion, or
83.5% of the Company's real estate loans and 74.4% 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 adjust annually
after being fixed for a period of 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 $92.2 million at September 30, 1999. 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, 1999, the Company's commercial real estate
portfolio totaled $123.1 million, or 7.1% of total net loans and 7.9%
of real estate loans. Its multi-family portfolio totaled $46.3
million, or 2.6% of total net loans and 3.0% of total real estate
loans. Loans made with land as security totaled $87.4 million, or
5.0% of total net loans and 5.6% of total real estate loans. Because
of market conditions, since 1993 the Company has limited growth in
loans made on commercial real estate, multi-family properties and on
land acquisition and development projects and placed greater emphasis
on single-family real estate lending.
Interest rates charged on permanent commercial real estate loans
are determined by market conditions existing at the time of the loan
commitment. 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 $217.1 million at September 30, 1999,
or 12.5% 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 $86.8 million, or 40.0% 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, 1999, the
Company's commercial business loans outstanding were $42.7 million,
which represented 2.5% 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, 1999,
the Company was servicing loans for others in the amount of $519.7
million.
Based on the current level of market interest rates and other
factors, the Company presently intends to sell selected current
originations of conforming 30-year and 15-year conventional fixed-rate
mortgage loans. The Company's policy with respect to the sale of
fixed-rate loans is dependent to a large extent on the general level
of market interest rates. Sales of fixed-rate residential loans
totaled $200.3 million in 1999, $173.0 million in 1998 and $50.5
million in 1997. At September 30, 1999, the Company had $6.5 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, 1999, First Federal's and
Peoples Federal's lending limits under this restriction were $14.6
million and $6.9 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, 1999, the largest aggregate amount of loans by First
Federal and Peoples Federal to any one borrower, including related
entities, was approximately $9.7 million and $3.4 million,
respectively. All of these loans were performing according to their
respective terms at September 30, 1999.
Delinquencies and Nonperforming 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. 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 it is 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 $24.7 million in
assets as substandard and $230,000 as doubtful, as of September 30, 1999.
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 $6.2 million of assets
designated "special mention" as of September 30, 1999.
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 Item
7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Asset Quality," and Note 7 of Notes to
Consolidated Financial Statements contained in Item 8 herein.
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, 1999, the Company's investment and mortgage-
backed securities portfolio totaled approximately $219.0 million,
which included stock in the FHLB of Atlanta of $29.9 million.
Investment securities include U.S. Government and agency obligations,
corporate bonds and mutual funds approximating $7.8 million.
Mortgage-backed securities totaled $181.2 million as of September 30,
1999. See Note 1 of Notes to Consolidated Financial Statements,
contained in Item 8 herein for a discussion of the Company's
accounting policy for investment and mortgage-backed securities. See
Notes 3, 4 and 5 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, 1999. The fair value of the Company's
investment and mortgage-backed securities portfolio (excluding stock
in the FHLB of Atlanta) was $189.1 million on September 30, 1999.
<TABLE>
<CAPTION>
Investment and Mortgage-backed Securities Portfolio
<S> <C> <C> <C> <C> <C> <C>
As of September 30,
1999 1998 1997
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
Securities Held to Maturity: (in thousands)
U.S. Treasury and U.S. Government agencies
and corporations $ 3,499 $ 3,514 $ 12,935 $ 12,913
Corporate debt and other securities $ 249 $ 258 649 680 1,347 1,432
Mortgage-backed securities 28 31 444 452 818 828
Total securities held to maturity $ 277 $ 289 $ 4,592 $ 4,646 $ 15,100 $ 15,173
Maturity and Yield Schedule as of September 30, 1999
Weighted
Carrying Average
Value Yield
(dollar amounts in thousands)
Corporate debt and other securities
After 5 but within 10 years 249 10.57
249 10.57
Mortgage-backed securities
After 10 years 28 9.49
28 9.49
Total securities held to maturity $ 277 10.46%
As of September 30,
1999 1998 1997
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 $ 4,006 $ 4,021 $ 6,981 $ 7,094 $ 15,775 $ 15,808
Corporate debt and other securities 2,468 2,429 3,009 3,000 8,238 8,384
Equity securities
Asset Management Fund-Adjustable-Rate
Mortgage Portfolio 9,000 8,995
Federated Adjustable-Rate Mortgage Fund 3,219 3,151
Other mutual funds and other 1,119 1,119 1,170 1,170 4,575 4,488
Mortgage-backed securities 183,868 181,217 144,695 148,186 147,088 148,963
Total securities available for sale $191,461 $ 188,786 $ 155,855 $ 159,450 $ 187,895 $ 189,789
Maturity and Yield Schedule as of September 30, 1999
Weighted
Carrying Average
Value Yield
U.S. Treasury and U.S. Government (dollar amounts in thousands)
agencies and corporations:
Within 1 year $ 3,006 6.04%
After 1 but within 5 years 1,000 6.40
4,006 6.13
Corporate debt and other securities:
Within 1 year 501 8.37
After 5 but within 10 years 974 6.30
After 10 years 993 5.66
2,468 6.46
Equity securities
Within 1 year 770 5.25
After 10 years 349 --
1,119 3.61
Mortgage-backed securities
After 1 but within 5 years 11,867 6.69
After 5 but within 10 years 20,403 7.09
After 10 years 151,598 6.56
183,868 6.63
$ 191,461 6.60%
</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 10 of Notes to Consolidated
Financial Statements contained in Item 8 herein.
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, 1999, 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, 1999. Jumbo certificates of deposit require minimum
deposits of $100,000 and have negotiable interest rates.
Maturity Period At September 30, 1999
(in thousands)
Three months or less $ 37,758
Over three through six months 16,896
Over six through twelve months 13,099
Over twelve months 3,298
Total $ 71,051
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, 1999, the Company had advances totaling $594.5
million from the FHLB of Atlanta at an average rate of 5.50%. At
September 30, 1999, the maturity of the Associations' FHLB advances
ranged from one to ten years. For more information on borrowings, see
Note 11 of Notes to Consolidated Financial Statements contained in
Item 8 herein.
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,
1999, the Company had $74.0 million of outstanding reverse repurchase
agreements secured by mortgage-backed securities. The agreements had
a weighted average interest rate of 5.45% at September 30, 1999, and
mature within three months. For more information on other borrowings,
see Note 12 of Notes to Consolidated Financial Statements contained in
Item 8 herein.
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, 1999, $8.8 million
was outstanding under this agreement with a weighted average rate of
7.38%.
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>
<S> <C> <C> <C>
At or For the Year Ended
September 30,
1999 1998 1997
(dollar amounts in thousands)
Weighted Average Rate Paid On (at end of period):
FHLB advances 5.50% 5.54% 5.65%
Securities sold under agreements to repurchase 5.45 5.58 5.62
Bank line of credit 7.38 7.69 --
Maximum Amount of Borrowings Outstanding (during period):
FHLB advances $ 611,500 $ 514,000 $ 419,577
Securities sold under agreements to repurchase 73,991 87,405 58,896
Bank line of credit 8,750 4,000 --
Approximate Average Amount of Short-term Borrowings
With Respect To:
FHLB advances 540,893 470,441 377,475
Securities sold under agreements to repurchase 35,323 45,241 27,050
Bank line of credit 6,698 373 --
Approximate Weighted Average Rate Paid On (during period):
FHLB advances 5.37% 5.70% 5.71%
Securities sold under agreements to repurchase 5.39 5.73 5.59
Bank line of credit 6.38 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 Item 7, "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, 1999, 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 by 18.5% and reduce net portfolio value by
33.2% while a 200 basis point decline in rates would increase net
interest income over a twelve-month period by 5.5% and increase net
portfolio value by 32.2% 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,
1999. Market risk sensitive instruments are generally defined as on-
and off-balance sheet derivatives and other financial instruments.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Expected Maturity/Principal Repayments at September 30,
Average There-
Rate 2000 2001 2002 2003 2004 after Balance Fair Value
Interest-sensitive assets: (dollar amounts in thousands)
Loans receivable 7.61% $ 261,323 $222,124 $ 188,805 $160,485 $ 136,412 $773,001 $ 1,742,150 $ 1,742,924
Mortgage-backed securities 6.63 27,584 23,447 19,930 16,940 14,399 81,596 183,896 181,248
Investments and other interest-
earning assets 5.65 24,244 1,000 2,564 27,808 27,793
FHLB Stock 7.50 29,925 29,925 29,925
Interest-sensitive liabilities:
Checking accounts 0.50 68,321 37,226 25,314 17,213 11,705 24,873 184,652 184,652
Savings accounts 2.38 21,141 17,547 14,565 12,089 10,033 48,987 124,362 124,362
Money Market accounts 3.67 142,459 11,361 7,952 5,567 3,897 9,092 180,328 180,328
Certificate accounts 5.29 556,605 109,249 30,312 16,703 11,998 5,639 730,506 737,357
Borrowings 5.52 403,741 75,000 80,000 118,500 677,241 680,923
Off-balance sheet items:
Commitments to extend credit 7.80 21,748 21,671
</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 Item 7, "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 fourth
largest of savings associations headquartered in South Carolina at
September 30, 1999, 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, 1999, the Company had 611 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
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 $18.0
million and $11.9 million, respectively, at September 30, 1999.
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. Risk classification of all insured institutions is made by the
FDIC semi-annually. At September 30, 1999, the Associations were
classified as well-capitalized institutions.
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. As a result of the DIF Act
and the special one-time assessment, the FDIC reduced the assessment
schedule for SAIF members, effective January 1, 1997, to a range of 0%
to .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 .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%. The savings institutions assessment is
expected to be reduced to about two basis points no later than January
1, 2000, when BIF-insured institutions fully participate in the
assessment. These assessments, which may be revised based upon the
level of BIF and SAIF deposits, will continue until the bonds mature
in the year 2015.
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, 1999, First Federal and Peoples
Federal were categorized as "well capitalized" under the prompt
corrective action regulations of the OTS. See Note 17 of the Notes to
Consolidated Financial Statements contained in Item 8 herein.
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, 1999, 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 OTS risk-based requirement requires savings associations to
have total capital of at least 8% of risk-weighted assets. Total
capital consists of core capital, as defined above, and supplementary
capital. Supplementary capital consists of certain permanent and
maturing capital instruments that do not qualify as core capital and
general valuation loan and lease loss allowances up to a maximum of
1.25% of risk-weighted assets. Supplementary capital may be used to
satisfy the risk-based requirement only to the extent of core capital.
In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet items, will be multiplied by a
risk weight, ranging from 0% to 100%, based on the risk inherent in
the type of asset. For example, the OTS has assigned a risk weight of
50% for prudently underwritten permanent one- to- four family first
lien mortgage loans not more than 90 days delinquent and having a
loan-to-value ratio of not more than 80% at origination unless insured
to such ratio by an insurer approved by Fannie Mae or Freddie Mac.
The OTS is authorized to impose capital requirements in excess of
these standards on individual associations on a case-by-case basis.
The OTS and FDIC are authorized and, under certain circumstances
required, to take certain actions against savings associations that
fail to meet their capital requirements. The OTS is generally
required to take action to restrict the activities of an
"undercapitalized association" (generally defined to be one with less
than either a 4% core capital ratio, a 4% Tier 1 risk-based capital
ratio or an 8% risk-based capital ratio). Any such association must
submit a capital restoration plan and until such plan is approved by
the OTS may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may
not make capital distributions. The OTS is authorized to impose the
additional restrictions that are applicable to significantly
undercapitalized associations.
See Note 17 of Notes to Consolidated Financial Statements
contained in Item 8 herein 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. Nine of Peoples Federal's branch offices
are owned with six 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, 1999, the total book value of the premises and
equipment owned by the Company was $22.0 million. Reference is made
to Note 16 of Notes to Consolidated Financial Statements contained in
Item 8 herein for information relating to minimum rental commitments
under the Company's leases for office facilities and to Note 8 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, 1999.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Stock Prices and Dividends:
Cash
Dividend
High Low Declared
1999:
First Quarter $ 20.00 $ 14.00 $ 0.120
Second Quarter 20.75 17.88 0.120
Third Quarter 21.00 14.50 0.120
Fourth Quarter 20.25 17.00 0.120
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
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, 1999, there were approximately 2,473
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 12 times with the most
recent dividend paid in November 1999, at $.14 per share. Cash
dividends per share totaled $.48, $.42 and $.36 for fiscal 1999, 1998
and 1997, respectively. These dividends per share amounted to 33.33%.
34.43% and 32.73% of basic net income per common share, respectively.
Please refer to Item 1. "Business--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,
1999 1998(1) 1997(1) 1996(1) 1995(1)
<S> <C> <C> <C> <C> <C>
(dollar amounts in thousands, except per share amounts)
Summary of Operations
Interest income $140,832 $136,345 $126,359 $115,486 $99,230
Interest expense 80,394 81,689 75,340 68,314 57,547
Net interest income 60,438 54,656 51,019 47,172 41,683
Provision for loan losses (2,765) (2,405) (2,435) (1,908) (511)
Net interest income after provision for loan losses 57,673 52,251 48,584 45,264 41,172
Other income 15,314 13,357 12,296 10,019 8,796
Non-interest expense (43,280) (40,158) (37,356) (36,203) (34,673)
SAIF special assessment (313) (6,955)
Income tax expense (10,400) (8,571) (8,501) (4,471) (5,490)
Net income before extraordinary loss 19,307 16,879 14,710 7,654 9,805
Extraordinary loss on retirement of debt (2) (340)
Net income $19,307 $16,539 $14,710 $7,654 $9,805
Per Common Share
Net income before extraordinary loss $ 1.44 $ 1.24 $ 1.10 $ 0.57 $ 0.74
Net income before extraordinary loss, diluted 1.40 1.20 1.07 0.56 0.72
Extraordinary loss (0.02)
Extraordinary loss, diluted (0.03)
Net income 1.44 1.22 1.10 0.57 0.74
Net income, diluted 1.40 1.17 1.07 0.56 0.72
Book value 9.43 9.16 8.28 7.53 7.30
Dividends 0.48 0.42 0.36 0.32 0.28
Dividend payout ratio 33.33% 34.43% 32.73% 56.14% 37.84%
Core Earnings (3)
Net income before extraordinary loss $ 19,307 $ 16,879 $ 14,710 $ 7,654 $ 9,805
Investors merger related expenses 210
SAIF assessment 198 4,391
Core income $ 19,307 $ 17,089 $ 14,908 $ 12,045 $ 9,805
Core Earnings Per Share (3)
Basic:
Net income before extraordinary loss $ 1.44 $ 1.24 $ 1.10 $ 0.57 $ 0.74
Investors merger related expenses 0.02
SAIF assessment 0.01 0.33
Core income $ 1.44 $ 1.26 $ 1.11 $ 0.90 $ 0.74
Diluted:
Net income before extraordinary loss $ 1.40 $ 1.20 $ 1.07 $ 0.56 $ 0.72
Investors merger related expenses 0.01
SAIF assessment 0.01 0.32
Core income $ 1.40 $ 1.21 $ 1.08 $ 0.88 $ 0.72
At or For the Year Ended September 30,
1999 1998(1) 1997(1) 1996(1) 1995(1)
(dollar amounts in thousands, except per share amounts)
At September 30,
Assets $2,070,752 $1,839,708 $1,774,952 $1,603,177 $1,417,592
Loans receivable, net 1,742,150 1,565,040 1,451,497 1,324,925 1,127,799
Mortgage-backed securities 181,245 148,630 149,781 83,993 102,246
Investment securities 37,743 40,412 76,959 110,686 122,579
Deposits 1,219,848 1,164,440 1,123,988 1,111,943 1,120,546
Borrowings 677,241 504,942 498,236 348,970 172,120
Stockholders' equity 125,881 125,163 111,528 101,016 97,076
Number of offices 38 36 35 35 34
Full-time equivalent employees 611 576 564 561 530
Selected Ratios:
Return on average equity 15.38% 13.97% 13.94% 7.60% 10.60%
Return on average assets 0.99 0.90 0.88 0.51 0.72
Core return on average equity 15.38 14.43 14.13 11.96 10.60
Core return on average assets 0.99 0.93 0.89 0.80 0.72
Gross interest margin 2.99 2.84 2.89 2.94 2.91
Net interest margin 3.22 3.10 3.15 3.22 3.16
Efficiency ratio 58.30 59.42 59.40 63.12 68.57
Average equity as a percentage of average assets 6.42 6.48 6.28 6.67 6.82
Asset Quality Ratios:
Allowance for loan losses to net loans 0.84% 0.82% 0.83% 0.88% 0.97%
Allowance for loan losses to nonperforming loans 202.08 177.76 86.74 66.22 55.56
Nonperforming assets to loans and real estate
and other assets acquired in settlement of loans 0.74 0.83 1.75 1.51 2.03
Nonperforming assets to total assets 0.62 0.71 1.44 1.25 1.62
Net charge-offs to average loans 0.06 0.11 0.14 0.10 0.05
(1)During 1998 First Financial acquired 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 earnings represents net income before extraordinary loss 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 1999. 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 contained in
Item 6 of this report and the Consolidated Financial Statements and
accompanying notes contained in Item 8 of this report.
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. All financial information for prior
periods was restated in fiscal 1998 to reflect the Investors merger.
The Board of Directors of First Financial 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
at that time. The program was completed in June of 1999 with 500,000
shares repurchased at an average price of $19.10.
First Financial s net income and core operating results continued
to set new records in 1999. First Financial s core earnings increased
$2.2 million in 1999 to set a new Company record of $19.3 million
compared with $17.1 million earned in 1998 and $14.9 million in 1997.
Results for fiscal 1998 and 1997 included several non-recurring
charges. During 1998, these non-recurring charges included after-tax
merger related expenses of $210,000 and an extraordinary charge of
$340,000 after-tax related to the retirement of the Company s 9.375%
senior notes. Net income after the effect of the extraordinary charge
and other non-recurring costs was $16.5 million in 1998 and $14.7
million in 1997.
Core basic and diluted earnings per share improved to $1.44 and
$1.40 in 1999, respectively, from $1.26 and $1.21 in 1998. Core
basic and diluted earnings per share totaled $1.11 and $1.08 in 1997,
respectively. 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.
Profitability improved during fiscal 1999 due to a number of
factors, including strong loan growth, improved net interest margins
earned and additional fee income generated from sales of loans into
the secondary market. Expense ratios for the year improved even
though the Company made extensive investments in new technology and
absorbed costs related to preparation for Year 2000. During fiscal
1999, the Company expanded its efforts to generate higher yielding
consumer loans by originating second mortgages through a network of
brokers and expanding its mobile home loan program.
Financial Position
At September 30, 1999, First Financial s assets totaled $2.1
billion, increasing by 12.6%, or $231.0 million, from September 30,
1998. Net asset growth was principally attributable to growth in net
loans receivable, which increased $177.1 million during 1999, and also
growth in mortgage-backed securities, which increased $32.6 million.
Average interest-earning assets increased by 6.4% in 1999.
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, 1999, available for sale securities totaled
$188.8 million and represented 99.9% of investment securities and
mortgage-backed securities compared to $159.5 million, or 97.2% of
comparable balances at September 30, 1998. The carrying value of held
to maturity securities totaled only $277,000 at September 30, 1999
compared with $4.6 million at the end of 1998.
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 87.4% and 85.6% of average interest-
earning assets in 1999 and 1998, respectively. Compared with balances
on September 30, 1998, net loans receivable grew by 11.9% during 1999.
Loans held for sale declined by $7.9 million in 1999 from $14.5
million at September 30, 1998.
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 an 11.3% increase in net loans receivable during fiscal
1999. Increasing by $160.8 million, the single-family loan portfolio
was a principal factor in the growth in net loans receivable.
Consumer loans also increased $44.4 million, or 25.7% in fiscal 1999
following a strong $26.1 million expansion in fiscal 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,
nonperforming 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.
The largest component of loan growth during fiscal 1999 has been
in single-family loans, which traditionally have resulted 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. The largest percentage increase in loan
growth was attributable to consumer loans, which remain the sector of
the portfolio where higher charge-off rates are experienced.
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,
1999 1998 1997 1996 1995
(dollar amounts in thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual loans $ 4,466 $ 2,647 $ 6,609 $ 8,137 $ 7,709
Accruing loans 90 days or more delinquent 20 50 568 1,391 974
Renegotiated loans 2,724 4,493 6,776 8,049 11,103
Real estate and other assets acquired in settlement
of loans 5,685 5,871 11,658 2,432 3,144
$ 12,895 $ 13,061 $ 25,611 $ 20,009 $ 22,930
As a percent of loans receivable and real estate and other
assets acquired in settlement of loans 0.74% 0.83% 1.75% 1.51% 2.03%
As a percent of total assets 0.62 0.71 1.44 1.25 1.62
Allowance for loan losses as a percent of problem loans 202.08 177.76 86.74 66.22 55.56
Net charge-offs to average loans outstanding 0.06 0.11 0.14 0.10 0.05
</TABLE>
Problem assets were $12.9 million at September 30, 1999, or .62%
of assets and .74% of loans receivable and real estate and other
assets acquired in settlement of loans. At September 30, 1998,
problem assets were $13.1 million, or .71% of assets and .83% 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 $1.8 million and non-accrual loans
increased $1.8 million during 1999. A renegotiated loan of $1.4
million collateralized by multi-family property became seriously
delinquent during the period and the Company placed the loan on non-
accrual status. Renegotiated loans currently comprise approximately
21.1% of total problem assets.
The allowance for loan losses at September 30, 1999 covers 202.1%
of reported problem loans, increasing from 177.8% as of September 30,
1998. 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.
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.
Allowance for Loan Losses
At or For the Year Ended September 30,
1999 1998 1997 1996 1995
(dollar amounts in thousands)
Balance, beginning of period $12,781 $12,103 $11,639 $ 10,993 $11,043
Loans charged-off:
Real estate loans 122 981 682 824 530
Commercial business loans 46 122 431 188 3
Consumer loans 1,428 1,427 1,196 745 531
Total charge-offs 1,596 2,530 2,309 1,757 1,064
Recoveries:
Real estate loans 245 159 164 336 356
Commercial business loans 82 407 8 40 32
Consumer loans 293 237 166 119 115
Total recoveries 620 803 338 495 503
Net charge-offs 976 1,727 1,971 1,262 561
Provision for loan losses 2,765 2,405 2,435 1,908 511
Balance, end of period:
Real estate loans 8,456 8,753 9,003 9,047 8,940
Commercial business loans 2,079 1,087 1,384 1,225 947
Consumer loans 4,035 2,941 1,716 1,367 1,106
Balance, end of period $14,570 $12,781 $12,103 $ 11,639 $10,993
Balance as a percent of net loans:
Real estate loans 0.56% 0.64% 0.70% 0.77% 0.90%
Commercial business loans 4.87 3.22 4.20 3.84 2.94
Consumer loans (1) 1.86 1.70 1.17 1.10 0.94
Total net loans 0.84 0.82 0.83 0.88 0.97
Net charge-offs as a percent of average net loans:
Real estate loans (0.01)% 0.06% 0.04% 0.05% 0.02%
Commercial business loans (0.09) (0.85) 1.30 0.46 (0.09)
Consumer loans (1) 0.58 0.75 0.76 0.52 0.36
Total net loans 0.06 0.11 0.14 0.10 0.05
(1) Consumer loans include home equity lines of credit.
On September 30, 1999, the total allowance for loan losses was
$14.6 million compared with $12.8 million at September 30, 1998.
Total net loan charge-offs declined to $1.0 million in 1999 from $1.7
million in 1998. Net real estate loan recoveries totaled $123,000 in
1999 compared with net charge-offs of $822,000 in 1998. Net real
estate charge-offs in 1998 included approximately $679,000 related to
a $2.8 million multi-family loan on which the Company had maintained
an $800,000 specific reserve. Consumer loan net charge-offs were
$1.1 million in 1999 compared with $1.2 million in 1998. Commercial
loan net recoveries of $36,000 in 1999 compared with $285,000 in net
recoveries in 1998. Based on the current economic environment and
other factors, management believes that the allowance for loan losses
at September 30, 1999 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.
The increase in the commercial business loan allowance in 1999 is
principally attributable to increased balances of classified loans
during the period. Management believes that the allowance can be
allocated by category only on an approximate basis. The allocation of
the allowance to each category is not necessarily indicative of future
losses and does not restrict the use of the allowance to absorb losses
in any category.
At September 30,
1999 1998 1997 1996 1995
(dollar amounts in thousands)
Allowance for loan losses applicable to:
Real estate loans $ 8,456 $ 8,753$ 9,003 $ 9,047 $ 8,940
Commercial business loans 2,079 1,087 1,384 1,225 947
Consumer loans 4,035 2,941 1,716 1,367 1,106
Total $ 14,570 $ 12,781$ 12,103 $ 11,639 $ 10,993
Percent of loans to total net loans:
Real estate loans 85.5% 87.1% 87.8% 88.4% 86.9%
Commercial business loans 2.3 2.1 2.2 2.3 2.8
Consumer loans 12.2 10.8 10.0 9.3 10.3
Total 100.0% 100.0% 100.0% 100.0% 100.0%
Deposits
Retail deposits have traditionally been the primary source of
funds for the Company and also provide a customer base for the sale of
additional financial products and services. The Company has set
strategic targets for net growth in transaction accounts annually and
in numbers of households served. The Company believes that its future
focus must be on increasing the number of available opportunities to
provide a broad array of products and services to retail consumers.
The Company's total deposits increased $55.4 million during the
year ended September 30, 1999. First Financial's deposit composition
at September 30, 1999 and 1998 is as follows:
At September 30,
1999 1998
Percent of Percent of
Balance Total Balance Total
(dollar amounts in thousands)
Checking accounts $ 184,652 15.14% $ 162,260 13.94%
Statement and other accounts 124,362 10.19 120,927 10.38
Money market accounts 180,328 14.78 153,479 13.18
Certificate accounts 730,506 59.89 727,774 62.50
Total deposits $ 1,219,848 100.00% $ 1,164,440 100.00%
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, 1999, deposits as a percentage of liabilities were 62.7%
compared with 67.9% at September 30, 1998. 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, 1999 was 4.01%
compared with 4.39% at September 30, 1998.
Borrowings
Borrowings increased $172.3 million during the current year to
$677.2 million as of September 30, 1999. Borrowings as a percentage
of total liabilities were approximately 34.8% at the end of 1999
compared with 29.5% in 1998. Borrowings from the FHLB of Atlanta
increased $123.0 million and reverse repurchase agreements increased
$44.5 million during 1999.
The Company's average cost of FHLB advances, reverse repurchase
agreements and other borrowings declined from 5.56% at September 30,
1998 to 5.52% at September 30, 1999. Approximately $321.0 million in
FHLB advances mature or are subject to call within one year and all of
the reverse repurchase agreements mature within three months.
Capital Resources
Average stockholders' equity was $125.5 million during 1999,
increasing 6.0% from $118.4 million in 1998. The primary source of
growth in stockholders' equity during 1999 was retained net income.
The Consolidated Statement of Stockholders' Equity and Comprehensive
Income contained in Item 8 herein details the changes in stockholders'
equity during the year. The Company's capital ratio, total capital to
total assets, was 6.08% at September 30, 1999 compared to 6.80%
September 30, 1998. A significant outflow during fiscal 1999 related
to the Company s stock repurchase program. A total of 506,000 shares
of common stock were repurchased at a cost of $9.7 million, with
500,000 shares related to the stock repurchase program.
During 1999, the Company paid $.48 in dividends per share for a
payout ratio of 33.3%, compared with dividends of $.42 and a payout
ratio of 34.4% in 1998. In November 1999, the Board of Directors paid
a regular quarterly cash dividend of $.14 per share, which will result
in an increase of approximately 16.7% from the previous quarterly cash
dividend amount of $.12 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 1999.
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.
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 has contracted 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 1999, 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,
1999, based on asset size of each banking subsidiary, additional
advance funding of $26.7 million was available under the current FHLB
of Atlanta general policy.
During 1999, the Company experienced a net cash outflow from
investing activities of $232.9 million, consisting principally of a
net increase of $188.3 million in loans receivable and $102.5 million
in purchases of mortgage-backed securities partially offset by $61.6
million in repayments to mortgage-backed securities. The Company
experienced net cash inflows of $39.2 million from operating
activities and $213.4 million from financing activities. Financing
activities included $123.0 million in net additions to FHLB advances,
$44.5 million in net additions in reverse repurchase agreements and
growth of $55.4 million in deposit balances.
Proceeds from the sale of loans totaled $203.1 million in 1999,
increasing from $173.0 million in 1998. Based on recent
asset/liability management objectives, management expects to continue
its strategy of selling selected longer-term, fixed-rate loans in
fiscal 1999, although it anticipates volume may be lower due to higher
market interest rates and their likely effect on fixed-rate loan
originations.
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 periodic repurchase programs 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, 1999,
First Financial had cash reserves and existing marketable securities
of $1.6 million compared with $2.3 million at September 30, 1998.
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, 1999
<TABLE>
<CAPTION>
Interest Rate Sensitivity Period
<S> <C> <C> <C> <C> <C> <C>
7-12 13 Months- Over 2
3 Months 4-6 Months Months 2 years Years Total
Interest-earning assets: (dollar amounts in thousands)
Loans (1) $ 251,019 $ 132,095 $ 228,768 $ 178,867 $ 966,943 $1,757,692
Mortgage-backed securities 46,786 6,918 10,863 1,628 117,701 183,896
Interest-earning deposits,
investments and FHLB stock 54,137 -- 1,999 1,000 597 57,733
Total interest-earning assets 351,942 139,013 241,630 181,495 1,085,241 1,999,321
Interest-bearing liabilities:
Deposits:
Checking accounts (2) 11,243 11,242 22,485 24,502 52,065 121,537
Savings accounts (2) 5,285 5,285 10,571 17,547 85,674 124,362
Money market accounts 180,328 -- -- -- -- 180,328
Certificate accounts 208,618 145,796 206,565 104,289 65,238 730,506
Total deposits 405,474 162,323 239,621 146,338 202,977 1,156,733
Borrowings (3) 433,741 138,500 -- 55,000 50,000 677,241
Total interest-bearing
liabilities 839,215 300,823 239,621 201,338 252,977 1,833,974
Current period gap $ (487,273) $(161,810) $ 2,009 $ (19,843) $ 832,264 $ 165,347
Cumulative gap $ (487,273) $(649,083) $(647,074) $(666,917) $ 165,347
Percent of total assets (23.53)% (31.35)% (31.25)% (32.21)% 7.98%
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, 1999 static gap position, in
a one-year time period $733 million in interest-sensitive assets will
reprice and approximately $1.4 billion in interest-sensitive
liabilities will reprice. This current static gap position results in
a negative mismatch of $647 million, or 31.25% of assets. The
Company's static gap position one year ago was a negative 19.3% 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. As market interest rates declined during fiscal 1999, the
Company s negative gap position was a factor in increasing the net
interest margin. Recently the Federal Reserve Open Market Committee
has raised short-term interest rates in three stages totaling seventy
five basis points. Because of the short-term nature of its liability
funding, such increases may have a detrimental effect on the net
margin in fiscal 2000.
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 $60.4 million in
1999 compared with $54.7 million in 1998 and $51.0 million in 1997.
The level of net interest income is determined by balances of earning
assets and successfully managing the net interest margin. Changes in
interest rates paid on assets and liabilities, the rate of growth of
the asset and liability base, the ratio of interest-earning assets to
interest-bearing liabilities and management of the balance sheet's
interest rate sensitivity all factor into changes in net interest
income.
<TABLE>
<CAPTION>
Average Yields and Rates
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Year Ended September 30,
1999 1998 1997
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
(dollar amounts in thousands)
Interest-earning assets:
Loans (1) $ 1,640,497 $ 125,742 7.66% $ 1,510,008 $ 119,306 7.90% $ 1,399,917 $111,510 7.97%
Mortgage-backed securities 182,585 11,519 6.31 168,344 11,596 6.89 108,647 7,755 7.14
Investment securities 39,112 2,801 7.16 69,122 4,479 6.48 66,894 4,263 6.37
Other interest-earning assets (2) 15,124 770 5.09 16,601 964 5.81 45,750 2,831 6.19
Total interest-earning assets 1,877,318 140,832 7.50 1,764,075 136,345 7.73 1,621,208 126,359 7.79
Non-interest-earning assets 77,912 63,981 58,894
Total assets $ 1,955,230 $ 1,828,056 $ 1,680,102
Interest-bearing liabilities:
Deposit accounts:
Checking accounts $ 178,374 765 0.43 $ 150,976 1,190 0.79 $ 136,089 1,610 1.18
Savings accounts 122,621 2,912 2.37 124,683 3,199 2.57 122,637 3,370 2.75
Money market accounts 168,659 6,090 3.61 144,331 5,157 3.57 133,030 4,684 3.52
Certificate accounts 727,822 39,233 5.39 715,210 41,002 5.73 720,341 40,771 5.66
Total deposits 1,197,476 49,000 4.09 1,135,200 50,548 4.45 1,112,097 50,435 4.54
FHLB advances 540,893 29,063 5.37 470,441 26,822 5.70 377,475 21,540 5.71
Other borrowings 42,021 2,331 5.55 63,733 4,319 6.78 46,838 3,365 7.18
Total interest-bearing liabilities 1,780,390 80,394 4.51 1,669,374 81,689 4.89 1,536,410 75,340 4.90
Non-interest-bearing liabilities 49,318 40,282 38,203
Total liabilities 1,829,708 1,709,656 1,574,613
Stockholders' equity 125,522 118,400 105,489
Total liabilities and
stockholders' equity $ 1,955,230 $ 1,828,056 $ 1,680,102
Net interest income/gross margin $ 60,438 2.99% $ 54,656 2.84% $ 51,019 2.89%
Net yield on average
interest-earning assets 3.22% 3.10% 3.15%
Percent of average interest-earning
assets to average interest-
bearing liabilities 105.44% 105.67% 105.52%
(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 contianed in Item 8 herein.
</TABLE>
Net interest income increased $5.8 million, or 10.6%, in 1999.
As the table above illustrates, yields on average interest-earning
assets declined by 23 basis points between fiscal 1999 and 1998 and
average cost of interest-bearing liabilities declined by 38 basis
points. Growth in net interest income in 1999 therefore was
primarily attributable to an increase of 15 basis points in the gross
interest margin and 12 basis points in the net interest margin. Growth
in average earning assets of $113.2 million also contributed to
increased net interest income. 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 1999, the average yield on interest-earning assets declined to
7.50% from 7.73% in 1998 and was primarily attributable to a lower
average yield on loans and mortgage-backed securities. The average
cost of interest-bearing liabilities declined to 4.51% from 4.89% in
1998 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.
<TABLE>
<CAPTION>
Rate/Volume Analysis
Year Ended September 30, Year Ended September 30,
1999 versus 1998 1998 versus 1997
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 $10,125 $(3,689) $ 6,436 $ 8,776 $ (980) $ 7,796
Mortgage-backed securities 940 (1,017) (77) 4,122 (281) 3,841
Investment securities (2,108) 430 (1,678) 142 74 216
Other interest-earning assets (81) (113) (194) (1,703) (164) (1,867)
Total interest income 8,876 (4,389) 4,487 11,337 (1,351) 9,986
Interest expense:
Deposit accounts
Checking accounts 189 (614) (425) 160 (580) (420)
Savings accounts (50) (237) (287) 55 (226) (171)
Money market accounts 875 58 933 405 68 473
Certificate accounts 709 (2,478) (1,769) (284) 515 231
Total deposits 1,723 (3,271) (1,548) 336 (223) 113
Borrowings 2,558 (2,305) 253 6,471 (235) 6,236
Total interest expense 4,281 (5,576) (1,295) 6,807 (458) 6,349
Net interest income $ 4,595 $ 1,187 $ 5,782 $ 4,530 $ (893) $ 3,637
</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 1999
the Company's provision expense was $2.8 million compared with $2.4
million in both 1998 and 1997. The provision was higher in 1999
principally due to the Company s strong loan growth. Total loan loss
reserves were $14.6 million and $12.8 million at September 30, 1999
and 1998, respectively, and represented .84% and .82% of net loans
receivable.
Net charge-offs in fiscal 1999 totaled $1.0 million, or .06% of
average net loans, compared with $1.7 million in 1998, or .11% of
average net loans. Net loan charge-offs of $2.0 million in 1997
resulted in charge-offs to average loans of .14%. Net charge-offs in
1998 included approximately $679,000 related to a $2.8 million multi-
family loan on which the company had maintained an $800,000 specific
reserve.
Other Income
Other income increased by $2.0 million, or 14.7%, to $15.3
million in 1999 from $13.4 million in 1998. During 1998, other income
improved by $1.1 million, or 8.6% from 1997. The greatest dollar
increase in non-interest revenues during fiscal 1999 was in brokerage
fees which increased $400,000, or 45.9% from 1998 levels. Net gain on
sale of loans also increased significantly over 1998 level, increasing
$373,000, or 36.6%. This followed a similar pattern in fiscal 1998
when gains from loan sales increased $579,000, or 131.6% from 1997
levels. 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 1999 and
1998 resulted in higher fixed-rate mortgage production and ultimately
a greater volume of loan sales occurring in fiscal 1999 and 1998 than
in 1997. The Company does not expect to achieve these levels of gains
in fiscal 2000 due to current market interest rates and their effect
on fixed-rate loan originations.
The rate of growth in service charges and fees on deposit
accounts improved to 13.3% in 1999 from 3.4% in 1998, The rate of
growth was 17.6% in 1997. The Company delayed its implementation of
pricing increases for checking and other deposit account services
until late in fiscal 1998. Additional pricing changes went into
effect in fiscal 1999. The significant growth in checking accounts in
fiscal 1999 also contributed to the growth in service charges and fees
on deposit accounts. Loan servicing fees declined $59,000, or 4.8%,
in 1999 principally due to increased amortizations of the Company's
originated servicing rights due to prepayment spreads experienced in
the servicing portfolio.
Non-Interest Expense
In the more competitive financial services market of recent
years, management has recognized the importance of controlling non-
interest expense to maintain and improve profitability. Management
also recognizes that there are operational costs which continue to
increase as a result of the present operating climate for regulated
financial institutions. The technical and operating environment for
financial institutions continues to require a well-trained and
motivated staff, superior operating systems and sophisticated
marketing efforts.
<TABLE>
<CAPTION>
Comparison of Non-Interest Expense
Year Ended September 30,
1999 1998 1997 1996 1995
% % % % %
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 $25,625 1.31% $22,263 1.22% $ 20,425 1.22% $ 18,920 1.25% $18,216 1.34%
Occupancy costs 3,203 0.16 3,316 0.18 3,113 0.18 2,949 0.19 3,138 0.23
Marketing 1,316 0.07 1,264 0.07 1,518 0.09 1,216 0.08 1,013 0.08
Depreciation, amortization,
rental and maintenance of
equipment 3,328 0.17 2,717 0.15 2,779 0.16 2,588 0.17 2,495 0.19
FDIC insurance premiums 728 0.04 709 0.04 1,116 0.07 2,694 0.18 2,625 0.19
Other 9,080 0.46 9,572 0.52 8,405 0.50 7,836 0.52 7,186 0.53
Core expenses 43,280 2.21 39,841 2.18 37,356 2.22 36,203 2.39 34,673 2.56
SAIF Special assessment 313 0.02 6,955 0.46
Merger-related expenses 317 0.02
Total non-interest expense $43,280 2.21% $40,158 2.20% $ 37,669 2.24% $ 43,158 2.85% $34,673 2.56%
</TABLE>
Total non-interest expense increased $3.1 million, or 7.8% in
fiscal 1999. This followed a $2.5 million, or 6.6%, increase in 1998.
Core non-interest expense actually increased $3.4 million or 8.6%
between fiscal 1999 and 1998 and $2.5 million or 6.7% between fiscal
1998 and 1997.
The largest component of non-interest expense, salaries and
employee benefits, increased $3.4 million, or 15.1% in 1999 due to
increased staffing for the expansion of products and services,
staffing for two additional retail sales offices, a new investment
center and expansion of trust services. The Company also incurred
significant personnel costs related to the installation, testing and
implementation of year 2000 compliant hardware and software. Higher
commission payments related to record levels of loan originations and
investor product sales and increased expenses related to health and
other employee benefits also impacted the growth of non-interest
expenses. In fiscal 1998, salaries and employee benefits increased
9.0% or $1.8 million from 1997.
In late 1998 and continuing in fiscal 1999, the Company began the
implementation of a new sales office automation system and improved
telecommunication systems throughout its retail banking system. These
investments in new technology and other upgrades contributed
significantly to the increase of $611,000, or approximately 22.5%, in
equipment costs in fiscal 1999 compared to 1998.
Other non-interest costs were stable in fiscal 1999. The effect
of significant reductions in FDIC assessment rates resulted in a
decline of $407,000 in FDIC insurance costs from 1997 to 1998. Annual
FDIC SAIF assessment rates declined to 18 basis points in the first
quarter of 1997 and then further declined to 6.5 basis points
effective January 1, 1997. Currently, the banking subsidiaries are
being charged 6.1 basis points for a Financing Corporation assessment
which is approximately five times the charge to commercial banks.
Effective January 1, 2000, the Financing Corporation assessment will
be equalized among all FDIC insured banks and thrifts, resulting in a
reduction in the assessment rate to 2.1 basis points.
Included in the $1.5 million increase in other expense in 1998
were 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 effect of merger-
related expenses in 1998, declined to 58.3% in 1999 from 59.4% in 1998
and 1997. Management continues to target lower expense ratios as an
important strategic goal of the Company.
Income Tax Expense
Income taxes totaled $10.4 million in 1999, compared to $8.6
million in 1998 and $8.5 million in 1997. The Company s effective tax
rate was 35.0% in 1999, 33.7% in 1998 and 36.6% in 1997. The
effective tax rate in future periods is expected to range from 35% to
36%.
Regulatory and Accounting Issues
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 137 "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133
- -- and amendment of FASB No. 133" delayed the effective date of this
statement for one year. This Statement is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. 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 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 has actively taken 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"). In
fiscal 1998 and 1999, periodic audits of the Company s Year 2000
activities were performed by the OTS. The FFIEC considers five
general Year 2000 phases: Awareness, Assessment, Renovation,
Validation and Implementation. Management completed all phases for
its mission-critical applications during fiscal 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 addressed by the Company is contingency
planning. The Company has considered alternative measures throughout
the organization in the event of a Year 2000-caused problem. Business
areas have identified Year 2000 departmental risks and have
incorporated changes to their existing contingency plans. Business
resumption contingency plans were also completed in fiscal 1999, with
further refinement and testing completed in November 1999.
The Company s core business systems (those systems which run on
its internal mainframe computer) 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.
Compliant versions of these systems have been in place since 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 totaled approximately $2.4 million.
The Company has budgeted approximately $300,000 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 Company has also evaluated 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 FHLB of Atlanta,
secondary marketing firms such as FHLMC and FNMA 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.
In addition to technology issues, the Company has planned to
respond to liquidity problems which could surface should market
disruptions occur at the end of 1999. An evaluation of likely
customer behavior has been conducted and the banking subsidiaries are
maintaining higher levels of cash on hand to respond to customer
needs. In addition to its normal funding sources, both of the banking
subsidiaries have also arranged with the Federal Reserve to borrow on
a short-term basis from the Federal Reserve s Century Date Change
Special Liquidity Facility and also the Discount Window should normal
lending sources be temporarily unavailable. Senior management will
continue to closely monitor market conditions as the end of 1999
approaches.
Management presently believes that it has responded to the Year
2000 problem so that 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 is exposed to a
problem with a critical system which it has remediated 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 contained in Item 8 herein
and related data 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 Item 7, "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 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: Mrs. Paula Harper Bethea, Chairman, Mr. Gary C. Banks, Jr., Mr.
Thomas J. Johnson and Mr. James C. Murray. The Committee held four
meetings during fiscal 1999.
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/ Paula Harper Bethea
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, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity and comprehensive
income and cash flows for each of the years in the three-year period
ended September 30, 1999. 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
as of September 30, 1999 and 1998, and the results of their operations
and their cash flows for each of the years in the three-year period
ended September 30, 1999, in conformity with generally accepted
accounting principles.
/s/KPMG LLP
Greenville, South Carolina
October 21, 1999
<TABLE>
<CAPTION>
FIRST FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30,
1999 1998
(dollar amounts in thousands)
<S> <C> <C>
Assets
Cash and cash equivalents $ 60,151 $ 40,392
Investment securities held to maturity (fair value of $258 and $4,194) 249 4,148
Investment securities available for sale, at fair value 7,569 11,264
Investment in capital stock of FHLB, at cost 29,925 25,000
Loans receivable, net of allowance of $14,570 and $12,781 1,735,608 1,550,567
Loans held for sale 6,542 14,473
Mortgage-backed securities, held to maturity (fair value of $31 and $452) 28 444
Mortgage-backed securities available for sale, at fair value 181,217 148,186
Accrued interest receivable 11,495 10,631
Office properties and equipment, net 21,969 15,836
Real estate and other assets acquired in settlement of loans 5,685 5,871
Other assets 10,314 12,896
Total assets $ 2,070,752 $ 1,839,708
Liabilities and Stockholders' Equity
Liabilities:
Deposit accounts $ 1,219,848 $ 1,164,440
Advances from FHLB 594,500 471,500
Securities sold under agreements to repurchase 73,991 29,442
Other short-term borrowings 8,750 4,000
Advances by borrowers for taxes and insurance 6,945 6,503
Outstanding checks 11,509 15,094
Other 29,328 23,566
Total liabilities 1,944,871 1,714,545
Commitments and contingencies (Note 16)
Stockholders' equity:
Serial preferred stock, authorized 3,000,000 shares--none issued
Common stock, $.01 par value, authorized 24,000,000 shares, issued
15,234,462 and 15,033,853 shares at September 30, 1999 and 1998,
respectively 152 150
Additional paid-in capital 31,687 30,308
Retained income, substantially restricted 112,914 100,075
Accumulated other comprehensive income (loss) (1,631) 2,195
Treasury stock at cost, 1,881,449 shares and 1,374,872 shares at
September 30, 1999 and 1998, respectively (17,241) (7,565)
Total stockholders' equity 125,881 125,163
Total liabilities and stockholders' equity $ 2,070,752 $ 1,839,708
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
FIRST FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<S> <C> <C> <C>
Year Ended September 30,
1999 1998 1997
(dollar amounts in thousands,
Interest Income except per share amounts)
Interest on loans $ 125,742 $ 119,306 $ 111,510
Interest on mortgage-backed securities 11,519 11,596 7,755
Interest and dividends on investment securities 2,801 4,479 4,263
Other 770 964 2,831
Total interest income 140,832 136,345 126,359
Interest Expense
Interest on deposits
NOW accounts 765 1,190 1,610
Passbook, statement and other accounts 2,912 3,199 3,370
Money market accounts 6,090 5,157 4,684
Certificate accounts 39,233 41,002 40,771
Total interest on deposits 49,000 50,548 50,435
Interest on FHLB advances 29,063 26,822 21,540
Interest on short term borrowings 2,331 2,620 1,512
Interest on long-term debt 1,699 1,853
Total interest expense 80,394 81,689 75,340
Net interest income 60,438 54,656 51,019
Provision for loan losses 2,765 2,405 2,435
Net interest income after provision for loan losses 57,673 52,251 48,584
Other Income
Net gain on sale of loans 1,392 1,019 440
Gain on sale of investment and mortgage-backed securities 37 306 125
Brokerage fees 1,271 871 586
Commissions on insurance 1,951 1,850 1,766
Service charges and fees on deposit accounts 6,586 5,814 5,621
Loan servicing fees 1,176 1,235 1,394
Real estate operations, net 88 (363) (142)
Other 2,813 2,625 2,506
Total other income 15,314 13,357 12,296
Non-Interest Expense
Salaries and employee benefits 25,625 22,263 20,425
Occupancy costs 3,203 3,316 3,113
Marketing 1,316 1,264 1,518
Depreciation, amortization, rental and maintenance of equipment 3,328 2,717 2,779
FDIC insurance premiums 728 709 1,116
FDIC SAIF special assessment 313
Other 9,080 9,889 8,405
Total non-interest expense 43,280 40,158 37,669
Income before income taxes 29,707 25,450 23,211
Income tax expense 10,400 8,571 8,501
Net income before extraordinary loss 19,307 16,879 14,710
Extraordinary loss on extinguishment of debt (net of related
income tax benefit of $173) (340)
Net income $ 19,307 $ 16,539 $ 14,710
</TABLE>
<TABLE>
<CAPTION>
FIRST FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS, CONTINUED
Year Ended September 30,
1999 1998 1997
(dollar amounts in thousands,
except per share amounts)
<S> <C> <C> <C>
Earnings Per Common Share
Income before extraordinary loss
Basic $ 1.44 $ 1.24 $ 1.10
Diluted $ 1.40 $ 1.20 $ 1.07
Extraordinary loss on extinguishment of debt, net of related income tax
Basic $ (0.02)
Diluted $ (0.03)
Net income
Basic $ 1.44 $ 1.22 $ 1.10
Diluted $ 1.40 $ 1.17 $ 1.07
Average Number of Shares Outstanding
Basic 13,451 13,572 13,380
Diluted 13,786 14,101 13,801
Dividends Per Common Share $ 0.48 $ 0.42 $ 0.36
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
FIRST FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Accumulated
Additional Other Treasury Stock
Common Paid-in Retained Comprehensive
Stock Capital Income Income (Loss) Shares Amount Total
(dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1996 $ 147 $ 27,709 $ 78,759 $ 341 1,234 $ (5,939) $ 101,017
Net income 14,710 14,710
Other comprehensive income:
Unrealized net gain on securities
available for sale, net of income tax 815 815
Total comprehensive income 15,525
Common stock issued pursuant to stock
option and employee benefit plans 1 1,147 1,148
Cash dividends ($.36 per share) (4,565) (4,565)
Treasury stock purchased 136 (1,525) (1,525)
Options exercised by employees of
pooled company prior to merger 45 45
Cash dividends paid by pooled
company prior to merger (117) (117)
Balance at September 30, 1997 148 28,901 88,787 1,156 1,370 (7,464) 111,528
Net income 16,539 16,539
Other comprehensive income:
Unrealized net gain on securities
available for sale, net of income tax 1,039 1,039
Total comprehensive income 17,578
Common stock issued pursuant to stock
option and employee benefit plans 2 1,407 1,409
Cash dividends ($.42 per share) (5,700) (5,700)
Treasury stock purchased 5 (101) (101)
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
Balance at September 30, 1998 150 30,308 100,075 2,195 1,375 (7,565) 125,163
Net income 19,307 19,307
Other comprehensive income:
Unrealized net loss on securities
available for sale, net of income tax (3,826) (3,826)
Total comprehensive income 15,481
Common stock issued pursuant to stock
option and employee benefit plans 2 1,379 1,381
Cash dividends ($.48 per share) (6,468) (6,468)
Treasury stock purchased 506 (9,676) (9,676)
Balance at September 30, 1999 $ 152 $ 31,687 $ 112,914 $ (1,631) 1,881 $ (17,241) $ 125,881
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
FIRST FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<S> <C> <C> <C>
Year Ended September 30,
1999 1998 1997
Operating Activities (dollar amounts in thousands)
Net income $ 19,307 $ 16,539 $ 14,710
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation 2,450 2,002 2,008
Gain on sale of loans, net (1,392) (1,019) (440)
Gain on sale of investments and mortgage-backed securities, net (37) (306) (125)
(Gain) loss on sale of property and equipment, net 4 8 27
Gain on sale of real estate owned, net (102) (23) (69)
Amortization of unearned discounts/premiums on investments, net 689 (342) (230)
Increase (decrease) in deferred loan fees and discounts 714 (383) (369)
(Increase) decrease in receivables and prepaid expenses 880 (3,079) 328
Provision for loan losses 2,765 2,405 2,435
Write downs of real estate acquired in settlement of loans 13 275 106
Deferred tax expense 6,835 7,231 3,364
Proceeds from sales of loans held for sale 203,117 173,042 50,453
Origination of loans held for sale (193,794) (182,999) (53,616)
Decrease in accounts payable and accrued expenses (2,219) (3,913) (3,257)
Amortization of discount on long-term debt 630 126
Net cash provided by operating activities 39,230 10,068 15,451
Investing Activities
Proceeds from maturity of investments 9,434 16,226 27,384
Proceeds from sales of investment securities available for sale 50,013 13,797
Purchases of investment securities held to maturity (1,954)
Purchases of investment securities available for sale (2,007) (26,093)
Purchase of FHLB stock (4,925) (3,149) (5,934)
Increase in loans, net (188,262) (158,439) (153,037)
Proceeds from sales of mortgage-backed securities available for sale 1,625 24,095 35,398
Repayments on mortgage-backed securities available for sale 61,552 53,388 17,401
Purchases of mortgage-backed securities available for sale (102,542) (22,092) (100,228)
Proceeds from sales of real estate owned 855 7,046 2,545
Net purchase of office properties and equipment (8,587) (1,902) (1,270)
Net cash used in investing activities (232,857) (60,907) (165,898)
Financing Activities
Net increase in checking, passbook and money market fund accounts 52,676 34,004 13,336
Net increase (decrease) in certificates of deposit 2,732 6,448 (1,292)
Net proceeds of FHLB advances 123,000 51,923 107,175
Net increase (decrease) in securities sold under agreements to repurchase 44,549 (29,454) 42,091
Net increase in other borrowings 4,750 4,000
Retirement of Senior Notes (19,763)
Increase (decrease) in advances by borrowers for taxes and insurance 442 (18) (929)
Proceeds from exercise of stock options 1,381 1,409 1,193
Dividends paid (6,468) (5,700) (4,565)
Treasury stock purchased (9,676) (106) (1,525)
Equity adjustment of merged company 571
Cash dividend paid by pooled company (117) (117)
Net cash provided by financing activities 213,386 43,197 155,367
Net increase (decrease) in cash and cash equivalents 19,759 (7,642) 4,920
Cash and cash equivalents at beginning of period 40,392 48,034 43,114
Cash and cash equivalents at end of period $ 60,151 $ 40,392 $ 48,034
Supplemental disclosures:
Cash paid during the period for:
Interest $ 80,362 $ 78,588 $ 72,937
Income taxes (495) 7,008 5,527
Loans foreclosed 635 3,162 12,391
Loans securitized into mortgage-backed securities 52,341 16,111
Unrealized net gain (loss) on securities available for sale, net of
income tax (3,826) 1,039 815
</TABLE>
See accompanying notes to consolidated financial statements.
FIRST FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997
(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. The Company operates as one
business segment.
Comprehensive Income
On October 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income". SFAS No. 130 establishes standards for reporting and
presentation of comprehensive income and its components in a full set
of financial statements. Comprehensive income consists of net income
and net unrealized gains (losses) on securities and is presented in
the statements of stockholders' equity and comprehensive income. The
statement requires only additional disclosures in the consolidated
financial statements; it does not affect the Company's financial
position or results of operations. Prior year financial statements
have been reclassified to conform to the requirements of SFAS No. 130.
The Company's other comprehensive income for the years ended
September 30, 1999, 1998 and 1997 and accumulated other comprehensive
income as of September 30, 1999, 1998 and 1997 are comprised solely of
unrealized gains and losses on certain investments in debt and equity
securities. Other comprehensive income for the years ended September
30, 1999, 1998 and 1997 follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Unrealized holding gains (losses) arising during period $ (3,803) $ 1,226 $ 891
Less: reclassification adjustment for realized gains,
net of tax 23 187 76
Unrealized gains (losses) on securities available for
sale, net of applicable income taxes $ (3,826) $ 1,039 $ 815
</TABLE>
Employee Benefit Plans
Also in 1999, the Company adopted SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits". SFAS
No. 132 provides additional information to facilitate financial
analysis and eliminates certain disclosures which are no longer
useful. In accordance with SFAS No. 132, the disclosures regarding
the Company's pension plan obligation in note 15 have been revised for
all periods presented.
Earnings Per Share
Basic earnings per share ("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.
Stock Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation," allows a
company to either adopt the fair value method of valuation or continue
using the intrinsic valuation method presented under APB Opinion 25,
"Accounting for stock Issued to Employees" ("APB Opinion 25") to
account for stock-based compensation. 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.
Impaired Loans
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" 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.
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 brought current and ultimate
collectibility of principal and 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 requires the recognition of originated
mortgage servicing rights ("MSRs") as assets by allocating total costs
incurred between the originated loan and the servicing rights retained
based on their relative fair values. 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. SFAS 125 also required the recognition of purchased
mortgage servicing rights at fair value, which is presumed to be the
price paid for the rights. 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, loss experience, delinquency
trends and economic conditions. Management evaluates the carrying
value of loans periodically and the allowance is adjusted accordingly.
While management uses the best information available to make
evaluations, future adjustments to the allowance 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 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. Cash and Cash Equivalents
Cash and cash equivalents consist of the following:
September 30,
1999 1998
Cash working funds $ 18,323 $ 13,964
Non-interest-earning demand deposits 2,003 3,531
Deposits in transit 19,859 12,912
Interest-earning deposits 19,966 9,985
Total $ 60,151 $ 40,392
The Company considers all highly liquid investments with a
maturity of 90 days or less at the time of purchase to be cash
equivalents.
3. 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, 1999
Gross Gross
AmortizedUnrealized Unrealized Fair
Cost Gains Losses value
<S> <C> <C> <C> <C>
State and local government obligations $ 249 $ 9 $ 258
Mortgage-backed securities
FHLMC 28 3 31
Total $ 277 $ 12 $ 289
September 30, 1998
Amortized Gross Gross
Cost Unrealized Unrealized Fair
Gains Losses value
U.S. Treasury securities and obligations of
U.S. government agencies and corporations $ 3,499 $ 15 $ 3,514
Corporate debt and other securities 649 31 680
Mortgage-backed securities
FHLMC 444 8 452
Total $ 4,592 $ 54 $ 4,646
</TABLE>
The amortized cost and fair value of investment and mortgage-
backed securities held to maturity at September 30, 1999, by
contractual maturity, are shown below.
September 30, 1999
Amortized Fair
Cost Value
Due after five through ten years $ 249 $ 258
Mortgage-backed securities 28 31
Total $ 277 $ 289
There were no sales of investment or mortgage-backed securities
held to maturity during fiscal 1999, 1998 and 1997.
4. 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, 1999
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 $ 4,006 $ 16 $ 1 $ 4,021
Corporate securities 2,468 5 44 2,429
Mutual funds 1,119 1,119
7,593 21 45 7,569
Mortgage-backed securities:
FHLMC 46,938 969 474 47,433
FNMA 23,548 190 358 23,380
GNMA 18,435 161 121 18,475
CMO's 94,947 19 3,037 91,929
183,868 1,339 3,990 181,217
Total $191,461 $ 1,360 $ 4,035 $188,786
September 30, 1998
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
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
CMO's 13,971 106 15 14,062
144,695 3,869 378 148,186
Total $155,855 $ 4,026 $ 431 $159,450
</TABLE>
The amortized cost and fair value of investment and mortgage-
backed securities available for sale at September 30, 1999 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, 1999
Amortized Fair Value
Due in one year or less $ 4,277 $ 4,293
Due after one year through five years 1,000 1,001
Due after five years through ten years 974 978
Due after ten years 1,342 1,297
7,593 7,569
Mortgage-backed securities 183,868 181,217
Total $ 191,461 $ 188,786
Proceeds from the sale of the Company's investment and mortgage-
backed securities available for sale totaled $1,625 in fiscal 1999
resulting in a gross realized gain of $37. 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.
5. 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.
6. 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,
1999 1998 1997
<S> <C> <C> <C>
Weighted average number of common shares used in basic EPS 13,451,027 13,571,635 13,380,152
Effect of dilutive stock options 335,044 529,905 421,206
Weighted average number of common shares and dilutive
potential common shares used in diluted EPS 13,786,071 14,101,540 13,801,358
</TABLE>
7. Loans Receivable
Loans receivable, including loans held for sale, consisted of the
following:
September 30,
1999 1998
Mortgage loans $ 1,461,104 $1,344,524
Residential construction loans 92,161 59,441
Mobile home loans 44,561 26,983
Savings account loans 5,281 5,531
Home equity lines of credit 86,764 73,122
Commercial business loans 42,721 33,790
Credit cards 10,831 10,424
Other consumer loans 69,678 56,624
1,813,101 1,610,439
Less:
Allowance for loan losses 14,570 12,781
Loans in process 55,409 32,360
Deferred loan fees and discounts on loans 972 258
70,951 45,399
Total $ 1,742,150 $1,565,040
First mortgage loans are net of whole loans and participation
loans sold and serviced for others in the amount of $519,682 and
$403,223 at September 30, 1999 and 1998, respectively. Mortgage
servicing rights totaled $4,668 and $2,904 at September 30, 1999 and
1998, respectively, and are included in "other assets" on the
Consolidated Statements of Financial Condition. The fair value of
mortgage servicing rights was $5,847 at September 30, 1999 and $3,109
at September 30, 1998. No valuation allowance was required at
September 30, 1999.
Non-accrual and renegotiated loans are summarized as follows:
September 30,
1999 1998
Non-accrual loans $4,466 $2,647
Renegotiated loans 2,724 4,493
Total $7,190 $7,140
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 $544, $549 and $1,131
for the years ended September 30, 1999, 1998 and 1997, respectively.
Recorded interest income on these loans was $268, $327 and $503 for
1999, 1998 and 1997, respectively.
An analysis of changes in the allowance for loan losses is as
follows:
Year Ended September 30,
1999 1998 1997
Balance, beginning of period $ 12,781 $ 12,103 $ 11,639
Charge-offs (1,596) (2,530) (2,309)
Recoveries 620 803 338
Net charge-offs (976) (1,727) (1,971)
Provision for loan losses 2,765 2,405 2,435
Balance, end of period $ 14,570 $ 12,781 $ 12,103
At September 30, 1999 and 1998 impaired loans totaled $4,466 and
$2,987, respectively. Included in the allowance for loan losses at
September 30, 1999 was $59 related to $1,402 of impaired loans. The
remainder of the impaired loans at September 30, 1999 and 1998 were
recorded at or below fair value. The average recorded investment in
impaired loans for the years ended September 30, 1999, 1998 and 1997
was $3,933, $4,882 and $10,306, respectively. Interest income of $7,
$59 and $126 was recognized on impaired loans in 1999, 1998 and 1,997
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
$1,296,523 and $1,135,765 at September 30, 1999 and 1998,
respectively. The Company's multi-family residential loan portfolio
of $46,254 and $43,161 at September 30, 1999 and 1998, 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 $123,121 and $141,182 and
acquisition and development loans and lot loans totaled $87,367 and
$83,857 at September 30, 1999 and 1998, 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 $9,748 at September 30,
1999 and $10,001 at September 30, 1998.
8. Office Properties and Equipment
Office properties and equipment are summarized as follows:
September 30,
1999 1998
Land $ 5,675 $ 3,161
Buildings and improvements 12,688 9,913
Furniture and equipment 16,372 14,515
Leasehold improvements 4,618 4,152
39,353 31,741
Less, accumulated depreciation and amortization (17,384) (15,905)
Total $ 21,969 $ 15,836
9. Real Estate
Real estate and other assets acquired in settlement of loans held
by the Company are summarized as follows:
September 30,
1999 1998
Real estate acquired in settlement of loans $ 5,443 $ 5,790
Other assets acquired in settlement of loans 242 81
Total $ 5,685 $ 5,871
Real estate operations are summarized as follows:
Year Ended September 30,
1999 1998 1997
Gain on sale of real estate $ 102 $ 23 $ 69
Provision charged as a write-down to real estate (13) (275) (106)
Expenses (119) (126) (122)
Rental income 118 15 17
Total $ 88 $ (363) $ (142)
10. Deposit Accounts
The deposit balances and related rates were as follows:
September 30,
1999 1998
Weighted Weighted
Average Average
Balance Rate Balance Rate
Non-interest-bearing demand accounts $ 63,115 $ 52,539
NOW accounts 121,537 0.50% 109,721 0.85%
Passbook, statement and other accounts 124,362 2.38 120,927 2.52
Money market accounts 180,328 3.67 153,479 3.47
489,342 2.08 436,666 2.13
Certificate accounts:
Fixed-rate 703,752 5.31 697,349 5.77
Variable-rate 26,754 4.85 30,425 5.18
730,506 5.29 727,774 5.75
Total $1,219,848 4.01% $ 1,164,440 4.39%
Scheduled maturities of certificate accounts were as follows:
September 30,
1999 1998
Within one year $ 556,605 $ 551,792
After one but within two years 109,249 115,167
After two but within three years 30,312 17,202
Thereafter 34,340 43,613
Total $ 730,506 $ 727,774
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 $23,702 and $16,305 at September 30,
1999 and 1998, respectively, to secure deposits by various entities.
Certificates of deposit with balances equal to or exceeding
$100,000 totaled $157,055 and $181,361, at September 30, 1999 and
1998, respectively.
11. Advances From Federal Home Loan Bank
Advances from the FHLB of Atlanta consisted of the following:
September 30,
1999 1998
Weighted Weighted
Average Average
Maturity Balance Rate Balance Rate
One year $321,000 5.59% $196,500 5.62%
Two years 35,000 5.57
Three years 75,000 5.85
Four years 80,000 5.32 85,000 5.84
Five years 80,000 5.32
Eight years 50,000 5.10
Nine years 25,000 5.57 50,000 5.10
Ten years 43,500 5.02 25,000 5.57
Total $594,500 5.50% $471,500 5.54%
As collateral for its advances, the Company has pledged
qualifying first mortgage loans in the amount of $792,667 and $628,667
as of September 30, 1999 and 1998, 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.
12. Securities Sold Under Agreements to Repurchase and Other Short-
term Borrowings
Securities sold under agreements to repurchase consisted of the
following:
September 30,
1999 1998
Investment and mortgage-backed securities with an amortized
cost of $80,112 and $31,341 and fair value of $78,062 and
$32,079 at September 30, 1999 and 1998, respectively $ 73,991 $ 29,442
The agreements had a weighted average interest rate of 5.45% and
5.58% at September 30, 1999 and 1998, respectively, and mature within
three months. The securities underlying the agreements were delivered
to the dealers who arranged the transactions. At September 30, 1999
and 1998, the agreements were to repurchase identical securities.
Securities sold under agreements to repurchase averaged $35,323 and
$45,241 during 1999 and 1998, respectively, and the maximum amount
outstanding at any month-end during 1999 and 1998 was $73,991 and
$87,405, respectively.
<PAGE>
Other short-term borrowings consisted of the following:
September 30,
1999 1998
Balance Rate Balance Rate
Line of credit $ 8,750 7.38% $ 4,000 7.69%
13. Long-term Debt
At September 30, 1997 the Company had $19,763 of senior notes
which were unsecured debt obligations, with a maturity date of
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.
14. Income Taxes
Income tax expense attributable to continuing operations for the
years ended September 30, 1999, 1998 and 1997, is comprised of the
following:
Federal State Total
1999:
Current $ 3,549 $ 16 $ 3,565
Deferred 6,829 6 6,835
Total $ 10,378 $ 22 $10,400
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
A reconciliation from expected federal tax expense to
consolidated effective income tax expense for the periods indicated
follows:
<TABLE>
<CAPTION>
Year Ended September 30,
1999 1998 1997
<S> <C> <C> <C>
Expected federal income tax expense $ 10,397 $ 8,907 $ 8,124
Increases (reductions) in income taxes resulting from:
Change in the beginning-of-the-year valuation allowance for
deferred tax assets allocated to income tax expense (429) 74
Tax exempt income (25) (54) (93)
South Carolina income tax expense, net of federal income
tax effect 14 71 842
Other, net 14 76 (446)
Total $ 10,400 $ 8,571 $ 8,501
Effective tax rate 35.0% 33.7% 36.6%
</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.
During the year ended September 30, 1999, the Associations have
begun to recapture bad debt reserves in excess of pre-1988 base year.
This amortization will occur through year 2003.
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities at September 30, 1999 and 1998 are presented below.
September 30,
1999 1998
Deferred tax assets:
Loan loss allowances deferred for tax purposes $ 5,412 $ 4,589
Net operating loss carryforward 505 866
Unrealized loss on securities available for sale 1,040
Other 727 687
Total gross deferred tax assets 7,684 6,142
Less valuation allowance
Net deferred tax assets 7,684 6,142
Deferred tax liabilities:
Loan fee income adjustments for tax purposes 2,593 2,482
FHLB stock dividends deferred for tax purposes 1,704 1,704
Expenses deducted under economic performance rules 315 477
Excess carrying value of assets acquired for financial
reporting purposes over tax basis 1,913 1,244
Tax bad debt reserve in excess of base year amount 518 634
Unrealized gain on securities available for sale -- 1,399
Book over tax basis in subsidiary 13,283 6,197
Other 235 486
Total gross deferred tax liabilities 20,561 14,623
Net deferred liability (included in other liabilities) $ (12,877)$ (8,481)
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 benefit of $2,439 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 $6,835.
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.
Management has determined that it is more likely than not that the net
deferred tax asset can be supported based upon these criteria.
The consolidated financial statements at September 30, 1999 and
1998 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.
15. Benefit Plans
Stock Option Plans
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
357,960 granted under the 1990 Stock Option Plan expire at various
dates through 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 have an exercise
period of ten years and other employees must exercise options within
five years. Options of 191,473 granted under the 1997 Stock Option
Plan expire at various dates through May 27, 2009.
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 35,444, 21,512 and 50,418 shares of common stock at
an exercise price of $12.66, $14.06 and $7.45 were granted in lieu of
otherwise payable cash compensation of $161, $100 and $73 for the
Company's fiscal years ending September 30, 1999, 1998 and 1997,
respectively.
During 1998 the Company, as part of its acquisition of Investors
Savings Bank of South Carolina ("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. Options remaining under the plan
of Investors expire at various dates through September 19, 2006.
The Company applies APB Opinion No. 25 and related
interpretations in accounting for its 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):
1999 1998 1997
Net Income As reported $ 19,307 $ 16,539 $ 14,710
Pro-forma 18,751 16,108 14,425
Earnings per share As reported
Basic $ 1.44 $ 1.22 $ 1.10
Diluted 1.40 1.17 1.07
Pro-forma
Basic 1.39 1.19 1.08
Diluted 1.36 1.14 1.05
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 1999, 1998 and 1997,
respectively: dividend yield of 2.50%, 2.50% and 2.90%, expected
volatility of 29%, average risk-free interest rate of 4.78%, 5.55%
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, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
1999 1998 1997
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 819,980 $ 9.58 881,078 $ 7.46 879,486 $ 6.72
Options exercised (188,835) 6.18 (192,814) 6.81 (162,496) 5.55
Options forfeited (5,882) 16.74 (7,202) 10.46 (3,500) 9.56
Options granted 187,879 17.96 138,918 19.24 167,588 9.53
Outstanding, September 30 813,142 $ 12.31 819,980 $ 9.58 881,078 $ 7.46
</TABLE>
Stock options outstanding and exercisable as of September 30, 1999,
are as follows:
Range of Weighted Average Weighted Average Remaining
Exercise Prices Shares Exercise Price Contractual Life
$ 5.82 - 7.63 272,474 $ 7.24 5.34 years
8.02 - 9.75 135,809 9.45 5.47
10.13 -14.06 123,332 11.83 7.40
18.63 -22.75 176,344 19.46 8.02
$ 5.82 -22.75 707,959
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 23,589 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. 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 1998, 1997 and 1996 year resulted in the awarding of 3,230,
884 and 7,152 shares to the 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, 1999, 1998 and 1997, was $745, $723 and
$527, 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 1999, 1998 and 1997 totaled $1,109, $993 and $727,
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.
The combined change in benefit obligation, change in plan assets
and funded status of the Company's postretirement benefit plan and the
amounts included in "other liabilities" on the Consolidated Financial
Statements at September 30, 1999 and 1998 are shown below:
1999 1998
Change in benefit obligation:
Benefit obligation at October 1 $1,560 $1,355
Service cost
Interest cost 99 98
Actuarial (gain) loss (13) 169
Benefit payments (65) (62)
Benefit obligation at September 30 1,581 1,560
Change in plan assets:
Fair value of plan assets at October 1 -- --
Actual return on plan assets -- --
Employer contributions 65 62
Plan participants' contributions 20 8
Benefit payments (85) (70)
Fair value of plan assets at September 30 -- --
Funded status:
As of end of year (1,581) (1,560)
Unrecognized transition (asset) obligation 1,024 1,103
Unrecognized prior-service cost -- --
Unrecognized net (gain) loss 3 17
Accrued postretirement benefit expense $ (554) $ (440)
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, 1999 and 1998,
by $163 and $146 and the aggregate of service and interest cost by $11
and $10, respectively.
The combined postretirement benefit expense components for the
Company's plan for the years ended September 30, 1999, 1998 and 1997
are shown below:
1999 1998 1997
Service cost of benefits earned during the period $ 99 $ 98 $ 94
Amortization of transition (asset) obligation 79 79 79
Amortization of net (gain) loss (24) (139)
Net pension expense $ 178 $ 153 $ 34
Assumptions used in computing the actuarial present value of the
Company's postretirement benefit obligation were as follows:
1999 1998
Discount rate 7.50% 6.50%
16. Commitments and Contingencies
Loan Commitments
Outstanding commitments on mortgage loans not yet closed,
including commitments issued to correspondent lenders, amounted to
approximately $21,748 at September 30, 1999. These were principally
single-family loan commitments. Other loan commitments totaled $150
at September 30, 1999.
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
$196,283, $153,161 and $133,012 at September 30, 1999, 1998 and 1997,
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, 1999. The purchase was made at a premium of $338 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 $25,000 and matures September 30, 2002.
As of September 30, 1999 the strike price was 6.25 percent versus
three month LIBOR. Unamortized fees related to the cap as of
September 30, 1999 totaled $338 and the fair value of the interest
rate cap was $385.
Lease Commitments
The Company occupies office space and land under leases expiring
on various dates through 2011. Minimum rental commitments under
noncancelable operating leases were as follows:
September 30,
1999
One year $ 1,116
Two years 1,081
Three years 996
Four years 949
Five years 807
Thereafter 324
Total $ 5,273
Rental expenses under operating leases were $1,104, $1,022 and
$1,027 in 1999, 1998 and 1997, respectively.
17. 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, 1999, that the Associations
meet all capital adequacy requirements to which they are subject.
As of September 30, 1999, 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
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions:
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1999:
Tangible capital
(to Total Assets) $ 88,522 6.37% $ 20,837 1.50%
Core capital
(to Total Assets) 88,522 6.37 55,567 4.00 $ 69,458 5.00%
Tier I capital
(to Risk-based Assets) 88,522 9.55 55,597 6.00
Risk-based capital
(to Risk-based Assets) 97,543 10.53 74,129 8.00 92,661 10.00
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
Peoples Federal: To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions:
Amount Ratio Amount Ratio Amount Ratio
As of September 30, 1999:
Tangible capital
(to Total Assets) $ 45,062 6.60% $ 10,235 1.50%
Core capital
(to Total Assets) 45,062 6.60 27,293 4.00 $ 34,116 5.00%
Tier I capital
(to Risk-based Assets) 45,062 10.40 26,002 6.00
Risk-based capital
(to Risk-based Assets) 46,290 10.68 34,669 8.00 43,336 10.00
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
</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 a 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.
18. Fair Value of Financial Instruments
The following table sets forth the fair value of the Company's
financial instruments at September 30, 1999 and 1998:
<TABLE>
<CAPTION>
September 30,
1999 1998
Carrying Fair Carrying Fair
Value Value Value Value
<S> <C> <C> <C> <C>
Financial instruments:
Assets:
Cash and cash equivalents $ 60,151 $ 60,151 $ 40,392 $ 40,392
Investments held to maturity 249 258 4,148 4,194
Investments available for sale 7,569 7,569 11,264 11,264
Investment in capital stock of FHLB 29,925 29,925 25,000 25,000
Loans receivable, net 1,735,608 1,736,355 1,550,567 1,573,792
Loans held for sale 6,542 6,569 14,473 14,473
Mortgage-backed securities held to maturity 28 31 444 452
Mortgage-backed securities available for sale 181,217 181,217 148,186 148,186
Liabilities:
Deposits:
Demand deposits, savings accounts and money
market accounts 489,342 489,342 436,666 436,666
Certificate accounts 730,506 737,357 727,774 736,213
Advances from FHLB 594,500 598,182 471,500 480,666
Securities sold under agreements to repurchase 73,991 73,991 29,442 29,442
Other short-term borrowings 8,750 8,750 4,000 4,000
Off-balance sheet items:
Mortgage loan commitments 21,748 21,671 35,238 35,401
</TABLE>
Financial instruments of the Company for which fair value
approximates the carrying amount at September 30, 1999, 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, 1999. 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.
19. 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,
1999 1998
<S> <C> <C>
Assets
Cash and cash equivalents $ 205 $ 399
Investments 843 893
Mortgage-backed securities available for sale, at fair value 510 1,053
Investment in subsidiaries 132,410 126,459
Other 1,010 684
Total assets $ 134,978 $ 129,488
Liabilities and Stockholders' Equity
Accrued expenses $ 347 $ 325
Other borrowings 8,750 4,000
Stockholders' equity 125,881 125,163
Total liabilities and stockholders' equity $ 134,978 $ 129,488
</TABLE>
<TABLE>
<CAPTION>
Statements of Operations
Year Ended September 30,
1999 1998 1997
<S> <C> <C> <C>
Income
Equity in undistributed earnings of subsidiaries $ 8,246 $ 6,724 $ 8,959
Dividend income 12,200 12,400 8,100
Interest income 145 795 765
Gain on sale of investments available for sale 52 55
Total income 20,591 19,971 17,879
Expenses
Interest expense 449 1,727 1,853
Salaries and employee benefits 855 922 753
Stockholder relations and other 593 1,258 563
Total expense 1,897 3,907 3,169
Net income before tax 18,694 16,064 14,710
Income tax benefit (613) (475)
Net income $ 19,307 $ 16,539 $ 14,710
</TABLE>
<TABLE>
<CAPTION>
Statements of Cash Flows
Year Ended September 30,
1999 1998 1997
<S> <C> <C> <C>
Operating Activities
Net income $ 19,307 $ 16,539 $ 14,710
Adjustments to reconcile net income to net cash provided by
operating activities
Equity in undistributed earnings of subsidiaries (8,246) (6,724) (8,959)
Depreciation 15 15 4
Amortization 10 (23)
(Increase) decrease in accrued income and deferred expenses (341) 339 (39)
Increase (decrease) in accrued expenses 35 (95) 59
Net cash provided by operating activities 10,770 10,084 5,752
Investing Activities
Repayments on mortgage-backed securities 509 637 201
Purchase of mortgage-backed securities available for sale (2,520)
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
Net (purchase) redemption of mutual funds 50 1,755 (775)
Net purchase of equipment (37)
Equity investment in subsidiary (1,510) (350) (2,000)
Net cash provided by (used in) investing activities (951) 9,652 (147)
Financing Activities
Retirement of senior notes (19,763)
Net increase in other borrowings 4,750 4,000
Proceeds from exercise of stock options 1,381 1,409 1,148
Treasury stock purchased (9,676) (106) (1,525)
Purchase of stock (73)
Dividends paid (6,468) (5,700) (4,565)
Net cash used in financing activities (10,013) (20,233) (4,942)
Net increase (decrease) in cash and cash equivalents (194) (497) 663
Cash and cash equivalents at beginning of period 399 896 233
Cash and cash equivalents at end of period $ 205 $ 399 $ 896
Supplemental disclosures:
Cash paid during the period for:
Interest $ 449 $ 1,882 $ 1,853
Income taxes (150) 6,430 4,335
Unrealized net gain (loss) on securities available for sale,
net of income tax (21) 3 52
</TABLE>
20. 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, 1999, 1,285,688 shares had been
purchased and remain in the plan.
21. 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>
1999
Total interest income $ 34,414 $ 34,142 $ 35,637 $ 36,639 $140,832
Net interest income 14,648 14,695 15,548 15,547 60,438
Provision for loan losses 660 585 760 760 2,765
Income before income taxes 7,168 7,126 7,600 7,813 29,707
Net income 4,659 4,633 4,941 5,074 19,307
Earnings per common share:
Basic $ 0.34 $ 0.34 $ 0.37 $ 0.38 $ 1.44
Diluted 0.33 0.34 0.36 0.37 1.40
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
</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.
Name Age (1) Position
A. Thomas Hood 53 President and Chief Executive Officer of the
Company and President and Chief Executive
Officer of First Federal
John L. Ott, Jr. 51 Senior Vice President of the Company and
Senior Vice President/Retail Banking Division
of First Federal
Charles F. Baarcke, Jr. 52 Senior Vice President of the Company and
Senior Vice President/Lending Division of
First Federal
George N. Magrath, Jr. 46 President and Chief Executive Officer of
Peoples Federal
Susan E. Baham 49 Senior Vice President and Chief Financial
Officer of the Company and First Federal
(1) At September 30, 1999.
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)
(3.4)Amendment to Certificate of Incorporation(3)
(3.6)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 (4)
(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 (4)
(10.3)Employment Agreement with A. Thomas Hood, as amended (5)
(10.4)Employment Agreement with Charles F. Baarcke, Jr. (6)
(10.5)Employment Agreement with John L. Ott, Jr. (6)
(10.6)1990 Stock Option and Incentive Plan (7)
(10.7)1994 Outside Directors Stock Options-for-Fees Plan (8)
(10.8)1994 Employee Stock Purchase Plan (8)
(10.9)1996 Performance Equity Plan for Non-Employee Directors (9)
(10.10)Employment Agreement with Susan E. Baham (5)
(10.11)1997 Stock Option and Incentive Plan (10)
(10.12)Investors Savings Bank of South Carolina, Inc. Incentive
Stock Option Plan (11)
(10.13)Borrowing Agreement with Bankers Bank (12)
(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 Quarterly Report
on Form 10-Q for the quarter ended December 31, 1997.
(4)Incorporated by reference to the Registrant's Registration
Statement on Form S-8 File No. 33-55067.
(5)Incorporated by reference to the Registrant s Annual Report on
Form 10-K for the year ended September 30, 1996.
(6)Incorporated by reference to the Registrant's Annual Report on
Form 10-K for the year ended September 30, 1995.
(7)Incorporated by reference to the Registrant's Registration
Statement on Form S-8 File No. 33-57855.
(8)Incorporated by reference to the Registrant's Proxy Statement
for the Annual Meeting of Stockholders held on January 25, 1995
(9)Incorporated by reference to the Registrant's Proxy Statement
for the Annual Meeting of Stockholders held on January 22, 1997.
(10)Incorporated by reference to the Registrant s Preliminary Proxy
Statement for the Annual Meeting of Stockholders held on
January 28, 1998.
(11)Incorporated by reference to the Registrant's Registration
Statement on Form S-8 File No. 333-45033.
(12)Incorporated by reference to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1998.
3. Reports on Form 8-K
No current reports on Form 8-K were filed during the quarter
ended September 30, 1999.
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, 1999 By: /s/ A. Thomas Hood
A. Thomas Hood
President and Chief Executive
Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ A. Thomas Hood By: /s/ D. Van Smith
A. Thomas Hood D. Van Smith
Director (Principal Executive Director
Officer)
Date:December 23, 1999 Date:December 23, 1999
By: /s/ Susan E. Baham By: /s/ Gary C. Banks, Jr.
Susan E. Baham Gary C. Banks, Jr.
Senior Vice President Director
(Principal Financial Officer)
Date:December 23, 1999 Date:December 23, 1999
By: /s/Paula Harper Bethea By: /s/ Paul G. Campbell, Jr.
Paula Harper Bethea Paul G. Campbell, Jr.
Director Director
Date:December 23, 1999 Date:December 23, 1999
By: /s/ A. L. Hutchinson, Jr. By: /s/ Thomas J. Johnson
A. L. Hutchinson, Jr. Thomas J. Johnson
Director Director
Date:December 23, 1999 Date:December 23, 1999
By: /s/ James C. Murray By: /s/ D. Kent Sharples
James C. Murray D. Kent Sharples
Director Director
Date:December 23, 1999 Date:December 23, 1999
EXHIBIT 3.6
Amendment to Registrant s Bylaws
RESOLUTION
WHEREAS, the number of directors on the First Federal Savings and
Loan Association of Charleston Board will be reduced from ten to nine
upon the retirement of a director on January 27, 1999; be it,
therefore,
RESOLVED, that the Bylaws of First Federal Savings and Loan
Association of Charleston Article III, Section 2 be amended to read as
follows, effective January 27, 1999:
"SECTION 2. Number and Term. The board of directors shall
consist of nine members and shall be divided into three classes as
nearly equal in number as possible. The members of each class shall
be elected for a term of three years and until their successors are
elected or qualified. One class shall be elected by ballot annually."
I, the undersigned Secretary of First Federal Savings and Loan
Association of Charleston, do hereby certify that the above resolution
was adopted by unanimous vote of the Board of Directors at a meeting
of said Board held on the 17th day of December, 1998, a quorum being
present.
/s/ Phyllis B. Ainsworth
Phyllis B. Ainsworth, Corporate Secretary
December 17, 1998
(SEAL)
EXHIBIT 22
Subsidiaries of the Registrant
PARENT
First Financial Holdings, Inc.
Jurisdiction or
Percentage State of
Subsidiaries (a) of Ownership 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
(No.33-57855) on Form S-8 of First Financial Holdings, Inc. of our
report dated October 21, 1999, relating to the consolidated statements
of financial condition of First Financial Holdings, Inc. and
subsidiaries as of September 30, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity and
comprehensive income, and cash flows for each of the years in the
three-year period ended September 30, 1999, which report appears in
the September 30, 1999, annual report on Form 10-K of First Financial
Holdings, Inc.
KPMG LLP
Greenville, South Carolina
December 22, 1999
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<ARTICLE> 9
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> SEP-30-1999
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0
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