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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended March 31, 2000
OR
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-17122
FIRST FINANCIAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware
57-0866076
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer 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
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class
Outstanding Shares at
Common Stock
April 30, 2000
$.01 Par Value
13,346,911
FIRST FINANCIAL HOLDINGS, INC.
INDEX
PART I - FINANCIAL INFORMATION
PAGE NO.
Consolidated Statements of Financial Condition
1
at March 31, 2000 and September 30, 1999
Consolidated Statements of Income for the Three
2
Months Ended March 31, 2000 and 1999
Consolidated Statements of Income for the Six
3
Months Ended March 31, 2000 and 1999
Consolidated Statements of Cash Flows for the
4
Six months Ended March 31, 2000 and 1999
Notes to Consolidated Financial Statements
5-6
Management's Discussion and Analysis of Results
7-17
of Operations and Financial Condition
PART II - OTHER INFORMATION
18-20
SIGNATURES
21
SCHEDULES OMITTED
All schedules other than those indicated above are omitted because of the absence of the conditions under which they are required or because the information is included in the Financial Statements and related notes.
FIRST FINANCIAL HOLDINGS, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION March 31, September 30, 2000 1999 (Dollar amounts in thousands) (Unaudited) ASSETS Cash and cash equivalents $ 66,045 $ 60,151 Investment securities held to maturity (fair value of $257 and $258) 249 249 Investment securities available for sale, at fair value 5,418 7,569 Investment in capital stock of Federal Home Loan Bank, at cost 35,925 29,925 Loans receivable, net of allowance of $15,175 and $14,570 1,860,409 1,735,608 Loans held for sale 3,278 6,542 Mortgage-backed securities available for sale, at fair value 164,419 181,217 Mortgage-backed securities held to maturity (fair value of $26 and $31) 24 28 Accrued interest receivable 12,209 11,495 Office properties and equipment, net 25,938 21,969 Real estate and other assets acquired in settlement of loans 6,123 5,685 Other assets 10,099 10,314 Total assets $ 2,190,136 $ 2,070,752 LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposit accounts $ 1,229,097 $ 1,219,848 Advances from Federal Home Loan Bank 718,500 594,500 Securities sold under agreements to repurchase 60,013 73,991 Other short-term borrowings 8,750 8,750 Advances by borrowers for taxes and insurance 3,998 6,945 Outstanding checks 15,023 11,509 Accounts payable and other liabilities 24,561 29,328 Total liabilities 2,059,942 1,944,871 Stockholders' equity: Serial perferred stock, authorized 3,000,000 shares--none issued Common stock, $.01 par value, authorized 24,000,000 shares, issued 15,268,501 and 15,234,462 shares at March 31, 2000 and September 30, 1999, respectively 153 152 Additional paid-in capital 32,127 31,687 Retained income, substantially restricted 118,864 112,914 Accumulated other comprehensive loss (2,970) (1,631) Treasury stock at cost, 1,931,449 and 1,881,449 shares at March 31, 2000 and September 30, 1999, respectively (17,980) (17,241) Total stockholders' equity 130,194 125,881 Total liabilities and stockholders' equity $ 2,190,136 $ 2,070,752 The accompanying notes are an integral part of the statements
FIRST FINANCIAL HOLDINGS, INC. CONSOLIDATED STATEMENTS OF INCOME Three Months Ended March 31, 2000 1999 (Amounts in thousands, except per share amounts) (Unaudited) INTEREST INCOME Interest on loans and mortgage-backed securities $ 38,428 $ 33,285 Interest and dividends on investments 765 698 Other 216 159 Total interest income 39,409 34,142 INTEREST EXPENSE Interest on deposits 12,452 12,141 Interest on borrowed money 11,208 7,306 Total interest expense 23,660 19,447 NET INTEREST INCOME 15,749 14,695 Provision for loan losses 690 585 Net interest income after provision for loan losses 15,059 14,110 OTHER INCOME Net gain on sale of loans 27 652 Loan servicing fees 316 294 Service charges and fees on deposit accounts 1,801 1,536 Real estate operations, net 40 Other 2,093 1,450 Total other income 4,277 3,932 NON-INTEREST EXPENSE Salaries and employee benefits 6,938 6,371 Occupancy costs 862 791 Marketing 398 332 Depreciation, amortization, rental and maintenance of equipment 952 844 FDIC insurance premiums 74 194 Other 2,478 2,384 Total non-interest expense 11,702 10,916 Income before income taxes 7,634 7,126 Income tax expense 2,709 2,493 NET INCOME $ 4,925 $ 4,633 NET INCOME PER COMMON SHARE $ 0.37 $ 0.34 NET INCOME PER COMMON SHARE DILUTED $ 0.36 $ 0.34 The accompanying notes are an integral part of the statements.
FIRST FINANCIAL HOLDINGS, INC. CONSOLIDATED STATEMENTS OF INCOME Six Months Ended March 31, 2000 1999 (Amounts in thousands, except per share amounts) (Unaudited) INTEREST INCOME Interest on loans and mortgage-backed securities $ 75,457 $ 66,791 Interest and dividends on investments 1,506 1,391 Other 443 374 Total interest income 77,406 68,556 INTEREST EXPENSE Interest on deposits 24,885 24,762 Interest on borrowed money 21,155 14,451 Total interest expense 46,040 39,213 NET INTEREST INCOME 31,366 29,343 Provision for loan losses 1,530 1,245 Net interest income after provision for loan losses 29,836 28,098 OTHER INCOME Net gain on sale of loans 68 981 Net gain on sale of investment and mortgage-backed securities 18 Loan servicing fees 647 606 Service charges and fees on deposit accounts 3,713 3,176 Real estate operations, net 84 5 Other 3,876 2,709 Total other income 8,388 7,495 NON-INTEREST EXPENSE Salaries and employee benefits 13,946 12,540 Occupancy costs 1,768 1,554 Marketing 737 666 Depreciation, amortization, rental and maintenance of equipment 1,826 1,605 FDIC insurance premiums 277 363 Other 4,756 4,571 Total non-interest expense 23,310 21,299 Income before income taxes 14,914 14,294 Income tax expense 5,222 5,002 NET INCOME $ 9,692 $ 9,292 NET INCOME PER COMMON SHARE $ 0.73 $ 0.69 NET INCOME PER COMMON SHARE DILUTED $ 0.71 $ 0.67 The accompanying notes are an integral part of the statements.
FIRST FINANCIAL HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended March 31, 2000 1999 (Amounts in thousands) OPERATING ACTIVITIES (Unaudited) Net income $ 9,692 $ 9,292 Adjustments to reconcile net income to net cash provided by operating activities Depreciation 1,362 1,153 Gain on sale of investments and mortgage-backed securities, net (18) Gain on sale of real estate owned, net (6) (71) Gain on sale of fixed assets, net (95) Amortization of unearned discounts/premiums on investments 146 416 Increase in deferred loan fees and discounts 262 376 Increase in receivables and prepaid expenses (499) (1,333) Provision for loan losses 1,530 1,245 Proceeds from sales of loans held for sale 24,799 132,287 Origination of loans held for sale (21,535) (136,021) Decrease in accounts payable and other liabilities (3,343) (173) Net cash provided by operating activities 12,313 7,153 INVESTING ACTIVITIES Proceeds from maturity of investments 2,150 6,884 Net purchase of investments available for sale (2,157) Purchase of FHLB stock (6,000) (2,575) Increase in loans, net (127,237) (44,142) Repayments on mortgage-backed securities 14,462 36,299 Purchase of mortgage-backed securities available for sale (100,591) Proceeds from the sales of real estate owned 211 613 Net purchase of office properties and equipment (5,236) (3,726) Net cash used in investing activities (121,650) (109,395) FINANCING ACTIVITIES Net increase in deposit accounts 9,249 35,968 Net proceeds of FHLB advances 124,000 75,000 Increase (decrease) of securities sold under agreements to repurchase (13,978) 19,589 Increase in other borrowed money 2,750 Proceeds from sale of common stock 441 1,108 Dividends paid (3,742) (3,262) Treasury stock purchased (739) (8,526) Net cash provided by financing activities 115,231 122,627 Net increase in cash and cash equivalents 5,894 20,385 Cash and cash equivalents at beginning of period 60,151 40,392 Cash and cash equivalents at end of period $ 66,045 $ 60,777 Supplemental disclosures: Cash paid (received) during the period for: Interest $ 51,773 $ 43,375 Income taxes 4,896 (196) Loans foreclosed 661 306 Loans securitized into mortgage-backed securities Unrealized net loss on securities available for sale, net of income tax (1,339) (1,492) The accompanying notes are an integral part of the statements.
FIRST FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
(Unaudited)
A. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
The unaudited consolidated financial statements include the accounts of First Financial Holdings, Inc, ("First Financial", or the "Company") and its wholly-owned thrift subsidiaries, First Federal Savings and Loan Association of Charleston ("First Federal") and Peoples Federal Savings and Loan Association of Conway ("Peoples Federal") (together, the "Associations") and First Southeast Investor Services, Inc. All significant intercompany items related to the consolidated subsidiaries have been eliminated.
The significant accounting policies followed by First Financial for interim financial reporting are consistent with the accounting policies followed for annual financial reporting. The unaudited consolidated financial statements and notes are presented in accordance with the instructions for Form 10-Q. The information contained in the footnotes included in First Financial's latest annual report on Form 10-K should be referred to in connection with the reading of these unaudited interim consolidated financial statements. Certain fiscal 1999 amounts have been reclassified to conform with the statement presentations for fiscal 2000.
The results of operations for the six months ended March 31, 2000 are not necessarily indicative of the results of operations that may be expected in future periods. This report may contain certain forward-looking statements with respect to financial conditions, results of operations and business of First Financial. These forward-looking statements involve certain risks and uncertainties, including, but not limited to, timing of certain business initiatives of the Company, the Company's interest rate risk position, Year 2000 initiatives and future regulatory actions of the Office of Thrift Supervision and the Federal Deposit Insurance Corporation. It is important to note that the Company's actual results may differ materially and adversely from those discussed in forward-looking statements.
B. EARNINGS PER SHARE
Basic and diluted earnings per share ("EPS") have been computed based upon net income as presented in the accompanying statements of income divided by the weighted average number of common shares outstanding or assumed to be outstanding as summarized below:
Quarter Ended March 31, 2000 1999 Weighted average number of common shares used in basic EPS 13,357,355 13,482,872 Effect of dilutive stock options 213,373 344,815 Weighted average number of common shares and dilutive potential common shares used in diluted EPS 13,570,728 13,827,687 Six Months Ended March 31, 2000 1999 Weighted average number of common shares used in basic EPS 13,356,504 13,552,867 Effect of dilutive stock options 242,099 376,829 Weighted average number of common shares and dilutive potential common shares used in diluted EPS 13,598,603 13,929,696 C. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is the change in the Corporation's equity during the period from transactions and other events and circumstances from non-owner sources. Total comprehensive income is comprised of net income and other comprehensive loss and for the six months ended March 31, 2000 and 1999 amounted to $8,353,000 and $7,800,000, respectively.
The Corporation's "other comprehensive loss" for the six months ended March 31, 2000 and 1999 and "accumulated other comprehensive loss" as of March 31, 2000 and 1999 are comprised solely of unrealized gains and losses on certain investments in debt and equity securities.
Other comprehensive loss for the six months ended March 31, 2000 and 1999 follows (in thousands):
Six Months Ended March 31, 2000 1999 Unrealized holding losses arising during period, net of tax $ (1,339) $ (1,492) Less reclassification adjustment for gains included in net income, net of tax - - Net unrealized losses on securities, net of tax $ (1,339) $ (1,492) D. NATURE OF OPERATIONS
First Financial is a multiple savings and loan holding company headquartered in Charleston, South Carolina. First Financial conducts its operations principally in South Carolina with lending functions also in North Carolina. The thrift subsidiaries, First Federal and Peoples Federal, provide a wide range of traditional banking services and also offer trust and insurance services through subsidiaries. The Company has a total of 40 offices in South Carolina located in the Charleston Metropolitan area and Horry, Georgetown, Florence and Beaufort counties, and a loan origination office in coastal Brunswick County, North Carolina.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Net income for the quarter ended March 31, 2000 improved 6.3% to $4.9 million from net income of $4.6 million in the comparable quarter in 1999. Basic earnings per common share increased to $.37 for the current quarter compared to $.34 in the March 1999 quarter. On a diluted basis, earnings per common share increased to $.36 from $.34 in the comparable period.
In the first six months of fiscal 2000, First Financial earned $9.7 million compared with $9.3 million in the first six months of fiscal 1999. Year-to-date earnings per common share and diluted earnings per common share improved to $.73 and $.71, respectively, compared with $.69 and $.67 in 1999.
BALANCE SHEET ANALYSIS
Consolidated assets of the Company totaled approximately $2.2 billion at March 31, 2000. During the six months ended March 31, 2000 assets increased $119.4 million, or 11.5% on an annualized basis.
Cash, Investment Securities and Mortgage-backed Securities
Cash and cash equivalents increased $5.9 million during the six months ended March 31, 2000. The Company's investments and mortgage-backed securities declined by $13.0 million during the six months principally from maturities of investments and from repayments of mortgage-backed securities offset partially by an increase in the Company's investment in stock of the Federal Home Loan Bank of Atlanta.
Loans Receivable
Loans receivable, including loans held for sale, totaled $1.9 billion at March 31, 2000, increasing $121.5 million from September 30, 1999. The principal use of the Company's funds is the origination of mortgage and other loans. The Company originated $185.1 million (net of refinances) in mortgage loans, $93.2 million in consumer loans and $42.2 million in commercial business loans during the six months ending March 31, 2000. The Company also originated or purchased $9.3 million in loans through its regional correspondent originators. Growth in net loans receivable approximated 14.0% on an annualized basis during the six months. Due to higher market interest rates, the Company originated more portfolio loans and less agency-qualifying fixed-rate loans which are generally sold into the secondary market.
The following table summarizes the composition of the Company's gross loan portfolio (amounts in thousands):
March 31, 2000 September 30, 1999 March 31, 1999 Residential (1-4 family) $ 1,352,043 $ 1,296,523 $ 1,192,107 Other residential 48,066 46,254 38,901 Land and lots 87,697 87,367 85,548 Commercial real estate 131,308 123,121 125,042 Consumer 261,501 217,115 189,730 Commercial business 51,249 42,721 37,693 Total gross loans $ 1,931,864 $ 1,813,101 $ 1,669,021
Outstanding commitments to originate mortgage loans and to fund the undisbursed portion of construction loans amounted to $72.2 million at March 31, 2000. Unused lines of credit on equity loans, consumer loans, credit cards and commercial loans totaled $199.3 million as of March 31, 2000.
The Company originates the majority of its loans in its primary market area located in the coastal region of South Carolina. In an effort to expand mortgage lending operations and improve earning asset growth the Company began originating mortgage loans in other markets in 1995. The Company utilizes its existing mortgage loan products and programs in establishing correspondent relationships with other lenders.
Asset Quality
The following table summarizes the Company's problem assets for the periods indicated (amounts in thousands):
March 31, 2000 September 30, 1999 March 31, 1999 Non-accrual loans $ 4,356 $ 4,466 $ 4,828 Loans 90 days or more delinquent(1) 1,404 20 27 Renegotiated loans 2,718 2,724 2,782 Real estate and other assets acquired in settlement of loans 6,123 5,685 5,765 Total $ 14,601 $ 12,895 $ 13,402 As a percent of net loans and real estate owned 0.78% 0.74% 0.83% As a percent of net total assets 0.67% 0.62% 0.68% (1) The Company continues to accrue interest on these loans Subsequent to March 31, 2000, a $1.3 million multifamily loan shown above as 90 days or more delinquent was repaid.
Allowance for Loan Losses
The allowance for loan losses represents a reserve for probable losses existing in the loan portfolio. The adequacy of the allowance for loan losses is evaluated at least quarterly based, among other factors, on a continuous review of the Company's loan portfolio, with particular emphasis on adversely classified loans.
Following is a summary of the reserve for loan losses for the six months ended March 31, 2000 and March 31, 1999 (amounts in thousands):
2000 1999 Balance at beginning of year $ 14,570 $ 12,781 Provision charged to operations 1,530 1,245 Recoveries of loans previously charged-off 297 173 Loan losses charged to reserves (1,222) (643) Balance at end of period $ 15,175 $ 13,556 Net charge-offs totaled $925 thousand in the current six months compared to $470 thousand in the comparable six months in fiscal 1999. Consumer net charge-offs increased to $829 thousand compared with $492 thousand in the prior period, principally as a result of higher charge-offs from manufactured housing loans and increased losses on credit cards. Annualized net charge-offs as a percentage of average net loans increased to .10% for the six months ended March 31, 2000 from .06% in the six months ended March 31, 1999.
The Company's impaired loans totaled $4.4 million at March 31, 2000, $4.5 million at September 30, 1999 and $4.9 million at March 31, 1999.
Deposits and Borrowings
First Financial's deposit composition at the indicated dates is as follows (amounts in thousands):
March 31, 2000 September 30, 1999 March 31, 1999 Balance %of Total Balance %of Total Balance %of Total Checking accounts $ 206,595 16.81 % $ 184,652 15.14 % $ 176,341 14.69 % Passbook, statement and other accounts 121,227 9.86 124,362 10.19 123,508 10.29 Money market accounts 179,577 14.61 180,328 14.78 172,842 14.40 Certificate accounts 721,698 58.72 730,506 59.89 727,717 60.62 Total deposits $ 1,229,097 100.00 % $ 1,219,848 100.00 % $ 1,200,408 100.00 % Deposits increased $9.2 million during the six months ended March 31, 2000, principally as a result of growth in checking accounts. A substantial portion of the growth in assets during the first half of fiscal 2000 was funded through increases in Federal Home Loan Bank of Atlanta advances, which increased $124.0 million during the six months ended March 31, 2000.
Stockholders' Equity
Stockholders' equity increased $4.3 million during the first half of fiscal 2000 to total $130.2 million at March 31, 2000. The Company's capital ratio, total capital to total assets, was 5.94% at March 31, 2000, compared to 6.08% at September 30, 1999. During the six months, the Company increased its dividend to stockholders to $.28 compared with $.24 per share in the first six months of fiscal 1999.
On February 25, 2000, the Company announced the commencement of a stock repurchase program to acquire up to 500,000 shares of the Company's common stock. Share repurchases totaled 50,000 during the quarter ended March 31, 2000.
Regulatory Capital
Under current Office of Thrift Supervision ("OTS") regulations, savings associations must satisfy three minimum capital requirements: core capital, tangible capital and risk-based capital. Savings associations must meet all of the standards in order to comply with the capital requirements. At March 31, 2000, both subsidiaries were categorized as "well capitalized" under the Prompt Corrective Action regulations adopted by the OTS pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). To remain in this status, the Associations must maintain core and risk-based capital ratios of at least 5.0% and 10.0%, respectively.
The following table summarizes the capital requirements for First Federal and Peoples Federal as well as their capital positions at March 31, 2000:
First Federal Peoples Federal Amount Percent of Assets Amount Percent of Assets (Amounts in thousands) Tangible capital $ 93,461 6.35 % $ 47,408 6.57 % Tangible capital requirement 22,070 1.50 10,831 1.50 Excess $ 71,391 4.85 % $ 36,577 5.07 % Core capital $ 93,461 6.35 % $ 47,408 6.57 % Core capital requirement 58,852 4.00 28,884 4.00 Excess $ 34,609 2.35 % $ 18,524 2.57 % Risk-based capital $ 102,552 10.49 % $ 48,793 10.28 % Minimum risk-based capital requirement(a) 78,205 8.00 37,955 8.00 Excess(a) $ 24,347 2.49 % $ 10,838 2.28 % (a) Based on total risk-weighted assets. For a complete discussion of capital issues, refer to "Capital Requirements" and "Limitations on Capital Distributions" in the Company's 10-K for the fiscal year ending September 30, 1999.
LIQUIDITY AND ASSET AND LIABILITY MANAGEMENT
Liquidity
The Associations are subject to federal regulations which require the maintenance of a daily average balance of liquid assets equal to 4.00% of net withdrawable savings and borrowings payable in one year. The liquidity ratios of the Associations, based on revised regulations issued by the Office of Thrift Supervision in November 1997, exceed the required levels.
The Associations' primary sources of funds consist of retail and commercial deposits, borrowings from the FHLB, principal repayments on loans and mortgage-backed securities, securities sold under agreements to repurchase and the sale of loans. Each of the Association's sources of liquidity is subject to various uncertainties beyond the control of the Associations. As a measure of protection, the Associations have back-up sources of funds available, including excess borrowing capacity and excess liquidity in securities available for sale.
During the current six months the Company experienced a net cash outflow from investing activities of $121.7 million, consisting principally of loans originated and purchased for investment, which were partially offset by maturities of investment and mortgage-backed securities. Included in investing activities was $5.2 million in net purchases of office properties and equipment. The Company had two branch offices in Hilton Head, South Carolina, under construction during the six months and also made additional investments in branch automation systems and potential branch sites. The Company experienced cash inflows of $12.3 million from operating activities and $115.2 million from financing activities. Financing activities consisted principally of $124.0 million in FHLB advances and $9.2 million in increased deposit account balances, which were partially offset by a $14.0 million reduction in securities sold under agreements to repurchase.
Parent Company Liquidity
As a holding company, First Financial conducts its business through its subsidiaries. Unlike the Associations, First Financial is not subject to any regulatory liquidity requirements. Potential sources for First Financial's payment of principal and interest on its borrowings and for its future funding needs include (i) dividends from First Federal and Peoples Federal; (ii) payments from existing cash reserves and sales of marketable securities; (iii) interest on its investment securities; and (iv) advances on a bank line of credit. As of March 31, 2000, First Financial had cash reserves and existing marketable securities of $676 thousand compared with $1.6 million at September 30, 1999.
First Federal's and Peoples Federal's ability to pay dividends and make other capital contributions to First Financial is restricted by regulation and may require regulatory approval. First Federal's and Peoples Federal's ability to make distributions may also depend on each institution's ability to meet minimum regulatory capital requirements in effect during the period. For a complete discussion of capital distribution regulations, refer to "Limitations on Capital Distributions" in the Company's 10-K for the fiscal year ending September 30, 1999.
Asset/Liability Management
The Company's Asset and Liability Committees establish policies and monitor results to control interest rate sensitivity. Although the Company utilizes measures such as static gap, which is simply the measurement of the difference between interest-sensitive assets and interest-sensitive liabilities repricing for a particular time period, just as important a process is the evaluation of how particular assets and liabilities are impacted by changes in interest rates or selected indices as they reprice. Asset/liability modeling is performed by the Company to assess varying interest rate and balance mix assumptions. These projections enable the Company to adjust its strategies to lessen the impact of significant interest rate fluctuations.
The following table is a summary of First Financial's one year gap at March 31, 2000 (amounts in thousands):
March 31, 2000 Interest-earning assets maturing or repricing within one year $ 760,497 Interest-bearing liabilities maturing or repricing within one year 1,386,011 Cumulative gap $ (625,514) Gap as a percent of total assets (28.56%)
The Company's one year gap as a percent of total assets changed from (31.25%) to (28.56%) during the current six months. The respective ratios and dollars repricing as shown in the above table do not take into effect prepayments to mortgage, consumer and other loans and mortgage-backed securities.
A negative gap indicates that cumulative interest-sensitive liabilities exceed cumulative interest-sensitive assets and suggests that net interest income would decline if market interest rates increased. A positive gap would suggest the reverse. This relationship is not always ensured due to the repricing attributes of both interest-sensitive assets and interest-sensitive liabilities.
COMPARISON OF OPERATING RESULTS
QUARTERS ENDING MARCH 31, 2000 AND 1999Net Interest Income
First Financial's net interest income for the three months ending March 31, 2000 was $15.7 million compared with $14.7 million for the comparable quarter in fiscal 1999. The gross interest margin declined from 2.92% in the prior quarter to 2.84% in the current quarter. The net yield on earning assets also declined to 3.04% from 3.20% in the prior year's quarter. Beginning in June of 1999, the Federal Reserve Open Market Committee has raised short-term interest rates in five stages totaling one hundred and twenty-five basis points. Because of the short-term nature of the Company's liability funding, the average cost of interest-bearing liabilities increased 24 basis points when comparing the two periods. The average yield on interest-earning assets increased from 7.44% in the quarter ended March 31, 1999 to 7.60% in the current quarter, or 16 basis points, indicating the Company's lag in repricing of interest-earning assets compared to the repricing of interest-earning liabilities.
The following table summarizes rates, yields and average earning asset and costing liability balances for the respective quarters (amounts in thousands):
Quarter Ended March 31, 2000 1999 Average Balance Average Yield/Rate Average Balance Average Yield/Rate Loans $ 1,847,952 7.71 % $ 1,604,680 7.59 % Mortgage-backed securities 172,816 6.50 179,499 6.29 Investments and other earning assets 54,242 7.20 51,382 6.74 Total interest-earning assets $ 2,075,010 7.60 % $ 1,835,561 7.44 % Deposits $ 1,225,150 4.09 % $ 1,190,993 4.13 % Borrowings 759,059 5.84 554,074 5.35 Total interest-bearing liabilities $ 1,984,209 4.76 % $ 1,745,067 4.52 % Gross interest margin 2.84 % 2.92 % Net interest margin 3.04 % 3.20 % The following rate/volume analysis depicts the increase (decrease) in net interest income attributable to interest rate and volume fluctuations compared to the prior period (amounts in thousands):
Quarter Ended March 31 2000 versus 1999 Volume Rate Total Interest income: Loans $ 4,665 $ 487 $ 5,152 Mortgage-backed securities (104) 95 (9) Investments and other interest-earning assets 56 68 124 Total interest income 4,617 650 5,267 Interest expense: Deposit accounts 410 (99) 311 Borrowings 3,128 774 3,902 Total interest expense 3,538 675 4,213 Net interest income $ 1,079 $ (25) $ 1,054 Average balances of interest-earning assets increased $239.4 million, or 13%, in the March 2000 quarter compared with the March 1999 quarter, contributing to a $1.1 million increase in net interest income due to changes in volume. A decline in the Company's net interest margin from 3.20% in the March 1999 quarter to 3.04% in the March 2000 quarter reduced net interest income by approximately $27 thousand. There can be no assurance that the Company's net margin will not decline further based on the current spread between short and long-term treasury interest rates, the Company's current asset/liability structure and competitive forces within its markets.
Provision for Loan Losses
During the current quarter, First Financial's provision for loan losses totaled $690 thousand, compared to $585 thousand during the same period in the previous year. Net charge-offs for the current quarter totaled $301 thousand compared with $280 thousand in the comparable quarter in fiscal 1999. Total loan loss reserves as of March 31, 2000 were $15.2 million, or .81% of the total net loan portfolio compared with $13.6 million, or .84 % of the total net loan portfolio at March 31, 1999.
Other Income/Non-Interest Expenses
Total other income increased $345 thousand, or 8.8%, in the March 2000 quarter compared to the March 31, 1999 quarter. Proceeds from the sales of loans held for sale totaled $11.0 million in the March 2000 quarter, resulting in gains of $27 thousand on sales. Loan sales of $69.5 million in the comparable quarter in fiscal 1999 resulted in gains of $652 thousand. Fees on deposit accounts improved by 17.3% to $1.8 million in the quarter ended March 31, 2000 as compared with the quarter ended March 31, 1999. Brokerage and insurance fees improved $401 thousand, or approximately 50.7%, during the current quarter compared to the comparable quarter ended March 31, 1999.
Non-interest expense increased $786 thousand, or 7.2%, during the current quarter. Included in the increase in the current quarter are higher personnel costs which increased $567 thousand and higher occupancy and equipment expenses which increased $71 thousand and $108 thousand, respectively, in the current period. The increase in personnel costs was principally due to expansion of customer services, the staffing of two additional retail offices, and increased staffing and overtime costs related to Year 2000 initiatives.
FDIC deposit insurance costs were $74 thousand in the current quarter compared with $194 thousand in the quarter ended March 31, 1999. The FICO assessment for thrifts was lowered to the same rate as commercial banks effective January 1, 2000.
Income Tax Expense
During the second quarter of fiscal 2000 and 1999 the Company's effective tax rate approximated 35.5% and 35.0%, respectively. The actual tax provision was $2.7 million and $2.5 million in the two periods.
COMPARISON OF OPERATING RESULTS
SIX MONTHS ENDING March 31, 2000 AND 1999Net Interest Income
First Financial's net interest income for the six months ending March 31, 2000 of $31.4 million increased 6.9% over the $29.3 million recorded in the comparable six months in fiscal 1999. Growth in net interest income was primarily attributable to a 12.8% increase in the average balances of interest-earning assets offset by the effect of declining margins. The gross interest margin declined to 2.88% from 2.98% in the prior six months. The net margin also declined to 3.07% versus 3.23% in the six months ended March 31, 1999.
The following table summarizes rates, yields and average earning asset and costing liability balances for the respective periods (amounts in thousands):
Six Months Ended March 31, 2000 1999 Average Balance Average Yield/Rate Average Balance Average Yield/Rate Loans $ 1,815,689 7.68 % $ 1,591,982 7.71 % Mortgage-backed securities 176,059 6.45 167,907 6.45 Investments and other earning assets 54,649 7.09 54,757 6.45 Total interest-earning assets $ 2,046,397 7.56 % $ 1,814,646 7.56 % Deposits $ 1,225,154 4.06 % $ 1,182,738 4.20 % Borrowings 726,226 5.73 534,830 5.42 Total interest-bearing liabilities $ 1,951,380 4.68 % $ 1,717,568 4.58 % Gross interest margin 2.88 % 2.98 % Net interest margin 3.07 % 3.23 % The following rate/volume analysis depicts the increase (decrease) in net interest income attributable to interest rate and volume fluctuations compared to the prior period (amounts in thousands):
Six Months Ended March 31 2000 versus 1999 Volume Rate Total Interest income: Loans $ 8,617 $ (239) $ 8,378 Mortgage-backed securities 288 - 288 Investments and other interest-earning assets (3) 187 184 Total interest income 8,902 (52) 8,850 Interest expense: Deposit accounts 922 (799) 123 Borrowings 5,780 924 6,704 Total interest expense 6,702 125 6,827 Net interest income $ 2,200 $ (177) $ 2,023 Provision for Loan Losses
During the six months ended March 31, 2000 First Financial's provision for loan losses totaled $1.5 million compared with $1.2 million in the first half of fiscal 1999. Net charge-offs for the current six months totaled $925 thousand compared with $470 thousand in the comparable period in fiscal 1999.
Other Income/Non-interest Expense
Total other income improved $893 thousand, or 11.9%, in the current six months. Fees on deposit accounts increased $537 thousand during the current six months. The Company recorded gains of $68 thousand on loan sales during the current six months compared with gains of $981 thousand in the six months ended March 31, 1999. Volume of loan sales declined 81% between the two periods, reflecting less fixed rate mortgage originations in the six months ended March 31, 2000 due to increases in market interest rates.
Brokerage revenues increased $454 thousand, or 99%, in the six months ended March 31, 2000 compared with the prior period. Insurance revenues also increased $224 thousand, or 24.8%, between the comparable periods.
Non-interest expense increased $2.0 million or 9.4% during the current six months. The increase is attributable principally to higher personnel costs, higher equipment expenses related to new technology investments and the effect of higher expenses related to Year 2000 project. Deposit insurance costs declined during the period, although balances increased, as thrift FICO assessments declined effective January 1, 2000.
Income Tax Expense
During the first six months of both fiscal years, the Company's effective tax rate was 35%. The actual tax provision of $5.2 million resulted in an increase of $220 thousand in fiscal 2000 from the prior period.
YEAR 2000 READINESS DISCLOSURE
The Company continues to monitor its performance in relationship to its comprehensive project concerning the impact of the Year 2000. "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. A comprehensive discussion of the Company's Year 2000 project is included in the Company's Annual Report on Form 10-K for the year ended September 30, 1999. Year 2000 compliance is critical to the Company's results of operations and financial condition.
The Company is pleased to report that its hardware and software systems and those of its critical vendors performed as expected over the end of the year and have continued to process well in Year 2000. There were additional critical dates associated with the Year 2000 project in the second quarter of fiscal 2000, including February 29, 2000 and March 31, 2000. Other critical dates remaining for the Year 2000 project include the following: December 31, 2000 and January 1, 2001. The Company will continue to test its automated systems and confirm critical vendor performance as these dates approach.
IMPACT OF REGULATORY AND ACCOUNTING ISSUES
For a comprehensive discussion of regulatory and accounting issues, refer to "Regulatory and Accounting Issues" in the Company's 10-K for the fiscal year ending September 30, 1999.
Part II - OTHER INFORMATION
Item 1 - Legal Proceedings
Periodically, there are various claims and lawsuits involving the Associations and their subsidiaries mainly as defendants, such as claims to enforce liens, condemnation proceedings on properties in which the Associations hold security interests, claims involving the making and servicing of real property loans and other issues incident to the 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 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk reflects the risk of economic loss resulting from adverse changes in market price and interest rates. This risk of loss can be reflected in diminished current market values and/or reduced potential net interest income in future periods.
The Corporation's market risk arises primarily from interest rate risk inherent in its lending, deposit-taking and other funding activities. The structure of the Corporation's loan, investment, deposit and borrowing portfolios is such that a significant increase in interest rates may adversely impact net market values and net interest income. The Corporation does not maintain a trading account nor is the Corporation subject to currency exchange risk or commodity price risk. Responsibility for monitoring interest rate risk rests with the Asset/Liability Management Committee ("ALCO"), which is comprised of senior management. ALCO regularly reviews the Corporation's interest rate risk position and adopts balance sheet strategies that are intended to optimize net interest income while maintaining market risk within a set of Board-approved guidelines.
As of March 31, 2000, Management believes that there have been no significant changes in market risk as disclosed in the Corporation's Annual Report on Form 10-K for the year ended September 30, 1999.
Item 4 - Submission of Matters to a Vote of Security Holders
At the 2000 First Financial Annual Meeting of Shareholders held January 26, 2000, there were 11,103,823 shares present in person or in proxy of the 13,355,789 shares of common stock entitled to vote at the Annual Meeting.
Proposal I - Election of Directors. The shareholders elected A. Thomas Hood and A. L. Hutchinson, Jr. as directors of the Company for three year terms ending in 2003. Pursuant to Regulation 14 of the Securities and Exchange Act of 1934, as amended, management solicited proxies for the Annual Meeting and there were no solicitations in opposition to management's nominees. The director nominees received the following votes:
For
Withheld
A. Thomas Hood.
11,001,529
102,294
A. L. Hutchinson, Jr.
11,001,791
102,032
The continuing directors for the Company are: Gary C. Banks, Jr., Paula Harper Bethea and Paul G. Campbell, Jr., Thomas J. Johnson, James C. Murray, D. Kent Sharples and D. Van Smith.
Proposal II B. Ratification of the amendment to the 1994 Employee Stock Purchase Plan extending the termination date to July 27, 2004, as adopted by the Board of Directors on May 27, 1999. The shareholders approved the ratification of the amendment with the totals votes as follows:
For
10,804,263
Withheld
299,560
Item 6 - Exhibits and Report on Form 8-K.
Exhibits
(3.1)
Certificate of Incorporation, as amended, of Registrant (1)
(3.2)
Bylaws, as amended, of Registrant (2)
(3.4)
Amendment to Registrant's Certificate of Incorporation (3)
(3.6)
Amendment to Registrant's Bylaws (4)
(4)
Indenture, dated September 10, 1992, with respect to the Registrant's 9.375% Senior Notes, due September 1, 2001 (5)
(10.1)
Acquisition Agreement dated as of December 9, 1991 by and among the Registrant, First Federal Savings and Loan Association of Charleston and Peoples Federal Savings and Loan Association of Conway (5)
(10.3)
Employment Agreement with A. Thomas Hood, as amended (6)
(10.4)
Employment Agreement with Charles F. Baarcke, Jr. (7)
(10.5)
Employment Agreement with John L. Ott, Jr. (7)
(10.6)
1990 Stock Option and Incentive Plan (8)
(10.7)
1994 Outside Directors Stock Options-for-Fees Plan (9)
(10.8)
1994 Employee Stock Purchase Plan (9)
(10.9)
1996 Performance Equity Plan for Non-Employee Directors (10)
(10.10)
Employment Agreement with Susan E. Baham (6)
(10.11)
1997 Stock Option and Incentive Plan (11)
(10.12)
Investors Savings Bank of South Carolina, Inc. Incentive Stock Option Plan (12)
(10.13)
Borrowing Agreement with Bankers Bank (13)
(10.14)
Amendment to the 1994 Employee Stock Purchase Plan (14)
(22)
Subsidiaries of the Registrant (4)
(27)
Financial Data Schedule
(1)
Incorporated by reference to Exhibit 3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1993
(2)
Incorporated by reference to Exhibit 3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995
(3)
Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1997
(4)
Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended September 30, 1999
(5)
Incorporated by reference to the Registrant's Registration Statement on Form S-8 File No. 33-55067.
(6)
Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended September 30, 1996.
(7)
Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended September 30, 1995.
(8)
Incorporated by reference to the Registrant's Registration Statement on Form S-8 File No. 33-57855.
(9)
Incorporated by reference to the Registrant's Proxy Statement for the Annual Meeting of Stockholders held on January 25, 1995
(10)
Incorporated by reference to the Registrant's Proxy Statement for the Annual Meeting of Stockholders held on January 22, 1997.
(11)
Incorporated by reference to the Registrant's Preliminary Proxy Statement for the Annual Meeting of Stockholders to be held on January 28, 1998.
(12)
Incorporated by reference to the Registrant's Registration Statement on Form S-8 File No. 333-45033.
(13)
Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.
(14)
Incorporated by reference to the Registrant's Preliminary Proxy Statement for the Annual Meeting of Stockholders to be held on January 26, 2000.
Reports on Form 8-K
On February 28, 2000, the Company announced the commencement of a stock repurchase program to acquire up to approximately 500,000 shares of the Company's common stock. The repurchases were expected to be completed by September 30, 2000.
FIRST FINANCIAL HOLDINGS, INC.
SIGNATURES
Pursuant to the requirements 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: May 15, 2000
By:
/s/ Susan E. Baham
Susan E. Baham
Senior Vice President and
Chief Financial Officer
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