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
December 31, 2002OR
[ ]
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
January 31, 2003
$.01 Par Value
13,010,666
FIRST FINANCIAL HOLDINGS, INC.
INDEX
PART I - CONSOLIDATED FINANCIAL INFORMATION
PAGE NO.
Item
1. Consolidated Financial Statements
Consolidated Statements of Financial Condition
1
at December 31, 2002 and September 30, 2002
Consolidated Statements of Income for the Three
2
Months Ended December 31, 2002 and 2001
Consolidated Statements of Cash Flows for the
3
Three months Ended December 31, 2002 and 2001
Notes to Consolidated Financial Statements
4-8
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
8-20
3. Quantitative and Qualitative Disclosures About Market Risk
20-21
4. Controls and Procedures
21-23
PART II - OTHER INFORMATION
Item
1. Legal Proceedings
24
6. Exhibits and Report on Form 8-K
24-25
SIGNATURES
26
EXHIBIT 99.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND
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CHIEF FINANCIAL OFFICER
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 December 31, September 30, 2002 2002 (Amounts in thousands) (Unaudited) ASSETS Cash and cash equivalents $ 82,958 $ 87,884 Investments available for sale, at fair value 17,547 7,285 Investment in capital stock of FHLB, at cost 28,250 29,750 Loans receivable, net of allowance of $15,659 and $15,824 1,837,476 1,884,378 Loans held for sale 42,814 40,450 Mortgage-backed securities available for sale, at fair value 130,791 133,568 Accrued interest receivable 10,754 11,242 Office properties and equipment, net 35,644 33,545 Real estate and other assets acquired in settlement of loans 3,323 2,913 Other assets 35,280 33,659 Total assets $ 2,224,837 $ 2,264,674 LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposit accounts $ 1,442,310 $ 1,440,271 Advances from FHLB 556,000 577,000 Other short-term borrowings 26,872 26,907 Advances by borrowers for taxes and insurance 826 5,633 Outstanding checks 9,191 22,447 Other 24,582 26,768 Total liabilities 2,059,781 2,099,026 Stockholders' equity: Serial preferred stock, authorized 3,000,000 shares--none issued Common stock, $.01 par value, authorized 24,000,000 shares, issued 15,765,867 and 15,733,398 shares at December 31, 2002 and September 30, 2002, respectively 158 157 Additional paid-in capital 39,177 38,656 Retained income, substantially restricted 162,881 158,680 Accumulated other comprehensive income 2,029 2,226 Treasury stock at cost, 2,740,010 and 2,537,535 shares at December 31, 2002 and September 30, 2002, respectively (39,189) (34,071) Total stockholders' equity 65,056 165,648 Total liabilities and stockholders' equity $ 2,224,837 $ 2,264,674 The accompanying notes are an integral part of the statements. 1
FIRST FINANCIAL HOLDINGS, INC. CONSOLIDATED STATEMENTS OF INCOME Three Months Ended December 31, 2002 2001 (Amounts in thousands, except per share amounts) (Unaudited) INTEREST INCOME Interest on loans and mortgage-backed securities $ 35,434 $ 39,873 Interest and dividends on investments 441 585 Other 43 84 Total interest income 35,918 40,542 INTEREST EXPENSE Interest on deposits 8,082 12,060 Interest on borrowed money 7,451 8,006 Total interest expense 15,533 20,066 NET INTEREST INCOME 20,385 20,476 Provision for loan losses 1,485 1,516 Net interest income after provision for loan losses 18,900 18,960 OTHER INCOME Net gain on sale of loans 2,012 1,173 Net gain on sale of investment and mortgage-backed securities 326 24 Brokerage fees 395 471 Commissions on insurance 2,636 1,858 Service charges and fees on deposit accounts 2,677 2,368 Loan servicing fees 71 470 Real estate operations, net (157) (119) Other 1,245 902 Total other income 9,205 7,147 NON-INTEREST EXPENSE Salaries and employee benefits 11,103 9,474 Occupancy costs 1,324 1,319 Marketing 414 480 Depreciation, amortization, rental and maintenance of equipment 1,376 1,176 FDIC insurance premiums 62 66 Other 3,393 3,051 Total non-interest expense 17,672 15,566 Income before income taxes 10,433 10,541 Income tax expense 3,725 3,737 NET INCOME $ 6,708 $ 6,804 NET INCOME PER COMMON SHARE $ 0.51 $ 0.51 NET INCOME PER COMMON SHARE DILUTED $ 0.50 $ 0.49 The accompanying notes are an integral part of the statements. 2
FIRST FINANCIAL HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended December 31, 2002 2001 (Amounts in thousands) OPERATING ACTIVITIES (Unaudited) Net income $ 6,708 $ 6,804 Adjustments to reconcile net income to net cash used in operating activities Depreciation 1,033 975 Gain on sale of loans, net (2,012) (1,173) Gain on sale of investments and mortgage-backed securities, net (326) (24) (Gain) loss on sale of property and equipment, net (271) 8 Loss on sale of real estate owned, net 49 5 Amortization of unearned discounts/premiums on investments 45 (45) Decrease in deferred loan fees and discounts (587) (94) (Increase) decrease in receivables and prepaid expenses (1,133) 388 Provision for loan losses 1,485 1,516 Proceeds from sales of loans held for sale 128,793 84,033 Origination of loans held for sale (129,145) (87,689) Decrease in accounts payable and other liabilities (15,312) (10,085) Net cash used in operating activities (10,673) (5,381) INVESTING ACTIVITIES Proceeds from maturity of investments available for sale 2,250 Purchase of investment securities available for sale (10,289) (2,493) Redemption (purchase) of FHLB stock 1,500 (2,000) Decrease (increase) in loans, net 44,479 (22,600) Repayments on mortgage-backed securities available for sale 22,520 20,730 Proceeds from sales of mortgage-backed securities available for sale 4,976 1,314 Purchase of mortgage-backed securities available for sale (24,738) Proceeds from the sales of real estate owned 1,066 177 Net purchase of office properties and equipment (2,861) (488) Net cash provided by (used in) investing activities 36,653 (3,110) FINANCING ACTIVITIES Net increase in deposit accounts 2,039 12,716 Net (repayments) proceeds of FHLB advances (21,000) 58,000 Decrease in securities sold under agreements to repurchase (66,316) Decrease in other borrowed money (35) Decrease in advances by borrowers for taxes and insurance (4,807) (4,903) Proceeds from the exercise of stock options 522 681 Dividends paid (2,507) (2,281) Treasury stock purchased (5,118) (1,533) Net cash used in financing activities (30,906) (3,636) Net decrease in cash and cash equivalents (4,926) (12,127) Cash and cash equivalents at beginning of period 87,884 97,554 Cash and cash equivalents at end of period $ 82,958 $ 85,427 Supplemental disclosures:
Cash paid during the period for: Interest $ 20,771 $ 27,469 Income taxes 100 5,602 Loans foreclosed 1,525 485 Unrealized net (loss) gain on securities available for sale, net of income tax (197) 76 The accompanying notes are an integral part of the statements.
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FIRST FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
(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"), its wholly-owned thrift subsidiary, First Federal Savings and Loan Association of Charleston ("First Federal" or the "Association"), First Southeast Insurance Services, Inc. and First Southeast Investor Services, Inc. Peoples Federal Savings and Loan Association, Conway, South Carolina, ("Peoples Federal"), a former subsidiary, was consolidated into First Federal on August 30, 2002. 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 2002 amounts have been reclassified to conform with the statement presentations for fiscal 2003.
The results of operations for the three months ended December 31, 2002 are not necessarily indicative of the results of operations that may be expected in future periods.
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 December 31, 2002 2001 Weighted average number of common shares used in basic EPS 13,156,952 13,394,854 Effect of dilutive stock options 348,899 439,265 Weighted average number of common shares and dilutive potential common shares used in diluted EPS 13,505,851 13,834,119 At December 31, 2002 there were 20,855 option shares that were excluded from the calculation of diluted earnings per share because the exercise price of $29.35 was greater than the average market price of the common shares.
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C. COMPREHENSIVE INCOME
Comprehensive income is the change in the Corporation's equity during the period from transactions and other events and circumstances from non-owner sources. Total comprehensive income is comprised of net income and other comprehensive income and for the three months ended December 31, 2002 and 2001 amounted to $6,511,000 and $6,880,000, respectively.
The Corporation's "other comprehensive income (loss)" for the three months ended December 31, 2002 and 2001 and "accumulated other comprehensive income" as of December 31, 2002 and 2001 are comprised solely of unrealized gains and losses on certain investments in debt and equity securities.
Other comprehensive income (loss) for the three months ended December 31, 2002 and 2001 follows (in thousands):
Three Months Ended December 31, 2002 2001 Unrealized holding gains arising during period, net of tax $ 13 $ 91 Less reclassification adjustment for realized gains, net of tax 210 15 Unrealized (losses) gains on securities available for sale, net of applicable income taxes $ (197) $ 76
D. NATURE OF OPERATIONS
First Financial is a savings and loan holding company headquartered in Charleston, South Carolina. First Financial conducts its operations principally in South Carolina and has one full-service office located in North Carolina. The thrift subsidiary, First Federal, provides a wide range of traditional banking services and also offers investment, trust and insurance services through subsidiaries or affiliated companies. The Company has a total of 44 offices in South Carolina located in the Charleston Metropolitan area and Horry, Georgetown, Florence and Beaufort counties, and Brunswick County, in coastal North Carolina.
E. MERGERS AND ACQUISITIONS
On August 12, 2002, First Financial acquired Johnson Insurance Associates, Inc., an independent insurance agency based in Columbia, South Carolina. The Company also acquired Benefit Administrators, Inc., an affiliated company providing third party administrative services for self-insured health insurance plans. Goodwill and other intangibles approximating $4.3 million were recorded in this transaction. This acquisition is not material to the financial condition or net earnings of First Financial and proforma information is not deemed necessary.
On May 31, 2001, First Financial acquired certain assets of Kinghorn Insurance Agency, a Hilton Head-based independent insurance agency. Goodwill and other intangibles approximating $8.8 million were recorded in the transaction. This acquisition is not material to the financial condition or net earnings of First Financial and proforma information is not deemed necessary.
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F. DERIVATIVES AND FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") as amended by SFAS No. 137 and 138, establishes accounting and reporting standards for derivatives and hedging activities. It requires an entity to recognize all derivatives as either assets or liabilities in the balance sheet, and measure those instruments at fair value. Changes in the fair value of those derivatives are reported in current earnings or other comprehensive income depending on the purpose for which the derivative is held and whether the derivative qualifies for hedge accounting.
The Company has identified the following derivative instruments which were recorded on the Company's balance sheet at December 31, 2002: commitments to originate fixed-rate residential loans held for sale and forward sales commitments.
The Company originates certain fixed-rate residential loans with the intention of selling these loans. Between the time that the Company enters into an interest rate lock or a commitment to originate a fixed-rate residential loan with a potential borrower and the time the closed loan is sold, the Company is subject to variability in market prices related to these commitments. The Company believes that it is prudent to limit the variability of expected proceeds from the sales through forward sales of "to be issued" mortgage-backed securities and loans ("forward sales commitments"). The commitments to originate fixed-rate residential loans and forward sales commitments are freestanding derivative instruments. They do not qualify for hedge accounting treatment so their fair value adjustments are recorded through the income statement in net gains on sale of loans. The commitments to originate fixed-rate conforming loans totaled $60.7 million at December 31, 2002. The fair value of these commitments was an asset of $1.3 million at December 31, 2002. The forward sales commitments totaled $116.9 million at December 31, 2002. The fair value of these commitments was an asset of $349 thousand at December 31, 2002.
G. GOODWILL AND OTHER INTANGIBLE ASSETS
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS 141 requires that all business combinations initiated after June 30, 2001, be accounted for using the purchase method. Also under SFAS 141, identified intangible assets acquired in a purchase business combination must be separately valued and recognized on the balance sheet if they meet certain requirements. Under SFAS 142, goodwill and identified intangible assets with indefinite useful lives are not subject to amortization, but are tested for impairment on an annual basis. The Company adopted SFAS 141 and the provisions of SFAS 142 relating to non-amortization and amortization of intangible assets on July 1, 2001.
Effective October 1, 2001, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets," which required that goodwill and intangible assets with indefinite useful lives are no longer amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. Intangible assets with estimated useful lives are amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." A related statement, SFAS No. 141, "Business Combinations" required the Company to evaluate its existing intangible assets and goodwill that
6
were acquired in prior purchase business combinations and make any necessary reclassifications in order to conform with the new criteria in SFAS No. 141 for recognition apart from goodwill. Upon adoption of SFAS No. 142, the Company reassessed the useful lives and residual values of all intangible assets acquired. The Company did not make any adjustments to amortization periods during the three months ended December 31, 2001.
Intangible assets which are comprised of customer list intangibles, are summarized as follows:
For the Quarter Ended December 31,
2002
2001
Balance at the beginning of period $ 1,979 $ 1,852 Customer list intangible - - Amortization (66) (75) Balance at end of period 1,913 1,777
The Company expects to record amortization expense related to intangibles of $360 thousand during fiscal 2003 and approximates amortization expense in fiscal years 2004 through 2009 ranging from $360 thousand to $60 thousand.
The following summarizes the changes in the carrying amount of goodwill related to insurance operations acquired for the quarters ended December 31, 2002 and 2001:
For the Quarter Ended December 31,
2002
2001
Balance at the beginning of period $ 13,240 $ 8,833 Goodwill acquired during the period 82 - Amortization - - Balance at end of period 13,322 8,833
H. MORTGAGE SERVICING RIGHTS
Capitalized mortgage servicing rights ("MSRs") totaled $9.9 million, $9.1 million and $8.4 million at December 31, 2002, September 30, 2002 and December 31, 2001, respectively. Amortization expense for MSRs totaled $658 thousand and $382 thousand for the three months ended December 31, 2002 and 2001, respectively. The impairment adjustments to MSRs for the three months ended December 31, 2002 and 2001 were $192 thousand and $0, respectively. A valuation allowance for impairment totaling $1.1 million was required at December 31, 2002, increasing from a valuation allowance of $879 thousand required at September 30, 2002. No valuation allowance for impairment was required at December 31, 2001.
The estimated amortization expense for MSRs for the years ended September 30 are as follows: $2.4 million for 2003, $2.4 million for 2004, $2.0 million for 2005, $1.5 million for 2006, and $3.3 million thereafter. The estimated amortization expense is based on current information regarding loan payments and prepayments. Amortization expense could change in future periods based on changes in the volume of prepayments and other environmental factors. Prepayments could increase as a result of any further decline in market interest rates, leading to an increase in amortization expense.
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I. STOCK-BASED COMPENSATION
At December 31, 2002, the Company had four stock-based employee and director option plans, which are described more fully in Note 14 of the Notes To Consolidated Financial Statements included in the Company's 10-K for September 30, 2002. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations. No stock-based employee or director compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement 123, "Accounting for Stock-Based Compensation", to stock-based employee and non-employee compensation.
December 31,
2002
December 31, 2001
Net income, as reported $ 6,708 $ 6,804 Deduct: Total stock-based employee and director compensation expense