UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended:
September 30, 2002
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
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 [ ]
Check whether the registrant is an accelerated filer (as defined in Rule 126-2 of the Exchange Act): 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, 2002 there were issued and outstanding 13,159,915 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 13, 2002, was $324,799,862 (13,159,915 shares at $24.681 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 2003 Annual Meeting of Stockholders. (Part III)
FIRST FINANCIAL HOLDINGS, INC.
2002 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
8
Insurance Activities
10
Sources of Funds
10
Asset and Liability Management
12
Subsidiary Activities of the Association
13
Subsidiary Activities of the Company
14
Competition
14
Personnel
14
Regulation
15
Item 2.
Properties
20
Item 3.
Legal Proceedings
20
Item 4.
Submission of Matters to a Vote of Security Holders
20
PART II
Item 5.
Market for the Registrant's Common Equity and Related Stockholder Matters
21
Item 6.
Selected Consolidated Financial Data
22
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
23
Item 8.
Financial Statements and Supplementary Data
41
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
69
PART III
Item 10.
Directors and Executive Officers of the Registrant
70
Item 11.
Executive Compensation
71
Item 12.
Security Ownership of Certain Beneficial Owners and Management
71
Item 13.
Certain Relationships and Related Transactions
71
Item 14. Controls and Procedures 71
PART IV
Item 15.
Exhibits, Financial Statement Schedules, and Reports on Form 8-K
75
PART I
ITEM 1. BUSINESS
GENERAL
First Financial Holdings, Inc. ("First Financial" or the "Company") is a savings and loan holding company incorporated under the laws of Delaware in 1987. The Company is headquartered in Charleston, South Carolina and operates First Federal Savings and Loan Association of Charleston ("First Federal" or the "Association"). Peoples Federal Savings and Loan Association, Conway, South Carolina ("Peoples Federal"), a former subsidiary, was consolidated into First Federal on August 30, 2002. 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. Insurance agency operations are conducted under another First Financial subsidiary, First Southeast Insurance Services, Inc. ("FSIns."). At September 30, 2002, First Financial had total assets of $2.3 billion, total deposits of $1.4 billi on and stockholders' equity of $165.6 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 asset size at September 30, 2002. First Federal is a federally-chartered stock savings and loan association that conducts its business through operation centers located in Charleston and Conway along with 44 full retail branch sales offices located in the following counties: Charleston County (16), Berkeley County (2), Dorchester County (4), Hilton Head area of Beaufort County (3), Georgetown County (2), Horry County (11), Florence County (5) and the Sunset Beach area of Brunswick County North Carolina (1).
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, consumer, non-residential mortgage and commercial business loans and invests in mortgage-backed securities, federal government and agency obligations, money market obligations and certain corporate obligations. Through its own subsidiaries or subsidiaries of the Association, the Company also engages in full-service brokerage activities, property, casualty, life and health insurance, third party administrative services, trust and fiduciary services, reinsurance of private mortgage insurance and certain passive investment activities.
First Federal is a member of the Federal Home Loan Bank ("FHLB") System. The Association's deposits are insured by the Federal Deposit Insurance Corporation ("FDIC") under the Savings Association Insurance Fund ("SAIF") up to applicable limits. The Association is subject to comprehensive regulation, examination and supervision by the Office of Thrift Supervision ("OTS") and the FDIC.
The Association is 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 Association's compliance with capital requirements, see "Regulation -- Federal Regulation of Savings Associations -- Capital Requirements" contained herein and Note 16 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 the Company. Management desires to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 (the "Act") 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 this Annual Report. These forward-looking statements include, among others, statements regarding management's belief concerning the adequacy of the allowance for loan losses, the ability of the Company to meet its contractual commitments, management's belief with respect to the economic and interest rate environments and their impact on the Company, management's belief with respect to the resolut ion of certain loan delinquencies and the inclusion of all material loans in which doubt exists as to collectibility in nonperforming assets and impaired loans and the expected impact on the Company of recent accounting pronouncements. In addition, certain statements in future filings by the
1
Company with the Securities and Exchange Commission, in press releases, and in oral and written statements made by or with the approval of the Company which are not statements of historical fact constitute forward-looking statements within the meaning of the Act.
Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements. Management's ability to predict results or the effect of future plans or strategies is inherently uncertain. A number of factors could cause actual results to differ materially from those contemplated by the forward-looking statements in the Annual Report. These factors include, but are not limited to: (i) changes in the levels of general interest rates, deposit interest rates, the net interest margin, and funding sources; (ii) the strength of the U.S. economy and the strength of the local economies in which the Company's operations are conducted; (iii) the ability of the Company to control costs and expenses; (iv) the ability of the Company to efficiently incorporate acquisitions into its operations; (v) t he ability of the Company to successfully complete consolidation and conversion activities; (vi) the ability of the Company to offer competitive products and pricing; (vii) the ability of the Company to resolve outstanding credit issues and manage loan delinquency rates; (viii) costs and effects of litigation; (ix) the effect of changes in federal and state regulation; and (x) the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, the Financial Accounting Standards Board, or other authoritative bodies. These factors should be considered in evaluating the "forward-looking statements," and undue reliance should not be placed on such statements. Such forward-looking statements speak only as of the date on which such statements are made, and the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made to reflect the occurrence of unanticipated events.
LENDING ACTIVITIES
General
The Company strives toward maintaining a diversified loan portfolio to spread risk and reduce exposure to economic downturns that may occur in different segments of the economy, geographic locations or in particular industries. The table below shows the composition of the loan portfolio at the end of the past five years. At September 30, 2002, the Company's net loan portfolio totaled approximately $1.9 billion, or 83.0% of the Company's total assets. Since lending activities comprise such a significant source of revenue, our main objective is to adhere to sound lending practices. Management also emphasizes lending in the local markets served. The Company's principal lending activity is the origination of loans secured by single-family residential real estate. However, the Company has, in recent periods, focused more on the origination of consumer and commercial business loans. In addition, the Company selectively originates non-residential real estate loans. 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.
Since 1995, the Company has operated a correspondent lending program allowing for the purchase of first mortgage 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 $78.4 million in fiscal 2002. In recent years the Company added second mortgage and mobile home lending programs on a correspondent basis, funding approximately $48.0 million of these types of originations during fiscal 2002.
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 these 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").
2
Set forth below is selected data relating to the aggregate composition of the Company's loan portfolio on the dates indicated.
| September 30, | |||||||||||||||||
| 2002 | 2001 | 2000 | 1999 | 1998 | |||||||||||||
| Amount | % of Total | Amount | % of Total | Amount | % of Total | Amount | % of Total | Amount | % of Total | ||||||||
| (dollar amounts in thousands) | |||||||||||||||||
| TYPE OF LOAN | |||||||||||||||||
| Real estate: | |||||||||||||||||
| 1- to 4-family residential | $ 1,220,461 | 63.4 | % | $ 1,234,937 | 64.8 | % | $ 1,266,025 | 68.9 | % | $ 1,296,523 | 74.4 | % | $ 1,135,765 | 72.5 | % | ||
| Multi-family | 39,255 | 2.0 | 50,195 | 2.6 | 48,937 | 2.7 | 46,254 | 2.6 | 43,161 | 2.7 | |||||||
| Commercial real | |||||||||||||||||
| estate and land | 216,481 | 11.2 | 222,303 | 11.7 | 222,424 | 12.1 | 210,488 | 12.1 | 225,039 | 14.4 | |||||||
| Commercial business loans | 114,684 | 6.0 | 93,081 | 4.9 | 57,381 | 3.1 | 42,721 | 2.5 | 33,790 | 2.2 | |||||||
| Consumer loans: | |||||||||||||||||
| Home equity | 157,477 | 8.2 | 145,146 | 7.6 | 121,993 | 6.6 | 86,764 | 5.0 | 73,961 | 4.7 | |||||||
| Mobile homes | 111,830 | 5.8 | 90,262 | 4.7 | 63,016 | 3.4 | 44,561 | 2.6 | 26,983 | 1.7 | |||||||
| Credit cards | 11,473 | 0.6 | 11,767 | 0.6 | 11,643 | 0.6 | 10,831 | 0.6 | 10,424 | 0.7 | |||||||
| Other consumer loans | 92,927 | 4.8 | 103,267 | 5.4 | 115,339 | 6.3 | 74,959 | 4.3 | 61,316 | 4.0 | |||||||
| Total gross loans receivable | 1,964,588 | 102.0 | 1,950,958 | 102.3 | 1,906,758 | 103.7 | 1,813,101 | 104.1 | 1,610,439 | 102.9 | |||||||
| Allowance for loan losses | (15,824) | (0.8 |
) |
(15,943) | (0.8) | (15,403) | (0.8 | ) | (14,570) | (0.8 | ) | (12,781) | (0.8 | ) | |||
| Loans in process | (23,832) | (1.2 |
) |
(28,755) | (1.5) | (51,658) | (2.8 | ) | (55,409) | (3.2 | ) | (32,360) | (2.1 | ) | |||
| Deferred loan fees and | |||||||||||||||||
| discounts | (104) | - | (927) | - | (1,200) | (0.1 | ) | (972) | (0.1 | ) | (258) | - | |||||
| Loans receivable, net | $ 1,924,828 | 100.0% | $ 1,905,333 | 100.0% | $ 1,838,497 | 100.0 | % | $ 1,742,150 | 100.0 | % | $ 1,565,040 | 100.0 | % | ||||
The following table shows, at September 30, 2002, 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 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.
Consolidated Within One Year Over One to Two Years Over Two to Three Years Over Three to Five Years Over Five to Ten Years Over Ten to Fifteen Years Over Fifteen Years Total (in thousands) Real estate mortgages: Adjustable-rate $ 12,170 $ 3,984 $ 1,015 $ 5,833 $ 25,366 $ 88,664 $ 688,987 $ 826,019 Fixed-rate 47,177 27,053 18,845 42,130 74,310 132,331 284,500 626,346 Consumer loans: Adjustable-rate 157,041 131 240 574 1,436 667 - 160,089 Fixed-rate 24,412 8,220 14,188 21,934 36,825 19,490 88,549 213,618 Commercial business loans: Adjustable-rate 49,473 4,330 4,084 6,464 663 - - 65,014 Fixed-rate 24,138 7,591 7,516 10,153 272 - - 49,670 Total $ 314,411 $ 51,309 $ 45,888 $ 87,088 $ 138,872 $ 241,152 $ 1,062,036 $ 1,940,756
3
Residential Mortgage Lending
At September 30, 2002, the Company's real estate loans totaled approximately $1.5 billion, or 76.6% of net loans receivable. One- to four-family residential mortgage loans totaled $1.2 billion, or 82.7% of the Company's real estate loans and 63.4% of total net loans receivable. The Company offers adjustable-rate mortgage loans ("ARMs") and fixed-rate mortgage loans with terms generally 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 loan 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. These loans are underwritten on the basis of the fully-indexed rate. 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.
The Company originates residential mortgage loans with loan-to-value ratios up to 95%. Generally, on mortgage loans exceeding an 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 these 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 homebuyers. 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 $64.2 million at September 30, 2002. 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, which may be on a fixed-rate or adjustable-rate basis.
Commercial Real Estate, Multi-family and Land Lending
At September 30, 2002, the Company's commercial real estate portfolio totaled $140.0 million, or 7.3% of total net loans. Its multi-family portfolio totaled $39.3 million, or 2.0% of total net loans. Loans made with land as security totaled $76.5 million, or 4.0% of total net loans. In recent years 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 may 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 these loans reach call or loan review dates or refinance, it is the Company's current policy to negotiate most of these
4
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. Thus, commercial and multi-family loans may 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 assets. In addition, the Association had 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 $373.7 million at September 30, 2002, or 19.4% 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 $157.5 million, or 42.1% of all consumer loans. Mobile home loans comprise $111.8 million, or 29.9% of consumer loans. Other consumer loans primarily consist of loans secured by 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, 2002, the Company's commercial business loans outstanding were $114.7 million, which represented 6.0% 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 Home Loan Bank ("FHLB") of Atlanta, 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, 2002, the Company was servicing loans for others in the amount of $877.5 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 $353.7 million in fiscal 2002, $237.1 million in fiscal 2001 and $48.4 million in fiscal 2000.
5
Risk Factors
Certain risks are inherent with loan portfolios containing 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 suffic