UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended:
September 30, 2003
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 126-2): 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. [ ]
As of November 30, 2003 there were issued and outstanding 12,549,221 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 1, 2003, was $401,575,072 (12,549,221 shares at $32.00 per share). It is assumed for purposes of this calculation that none of the registrant's officers, directors and 5% shareholders are affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Definitive Proxy Statement for the 2004 Annual Meeting of Shareholders. (Part III)
FIRST FINANCIAL HOLDINGS, INC.
2003 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
9
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
14
Item 2.
Properties
19
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
20
Item 6.
Selected Financial Data
21
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
22
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
39
Item 8.
Financial Statements and Supplementary Data
40
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
70
Item 9A.
Controls and Procedures
70
PART III
Item 10.
Directors and Executive Officers of the Registrant
71
Item 11.
Executive Compensation
72
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
72
Item 13.
Certain Relationships and Related Transactions
72
Item 14.
Principal Accountant Fees and Services 72
PART IV
Item 15.
Exhibits, Financial Statement Schedules, and Reports on Form 8-K
73
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, 2003, First Financial had total assets of $2.3 billion, total deposits of $1.5 billion and stockholders' equity of $163.0 million.
First Federal, chartered in 1934, is the largest financial institution headquartered in the Charleston, South Carolina metropolitan area and the third largest financial institution headquartered in South Carolina based on asset size at September 30, 2003. 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 38 full service retail branch sales offices, four in-store (Wal-Mart Supercenters) retail branch sales offices, and three limited service branches 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 (12), 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 18 of Notes to Consolidated Financial Statements contained in Item 8.
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 resolution 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 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.
1
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) the 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 by type of collateral at the end of the past five years. At September 30, 2003, the Company's net loan portfolio totaled approximately $1.8 billion, or 77.6% of the Company's total assets. Since lending activities comprise such a significant source of revenue, the Company's 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 originat es 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 $110.8 million in fiscal 2003. In recent years the Company added second mortgage and mobile home lending programs on a correspondent basis. During fiscal 2003, the Company funded approximately $43.5 million of these types of originations, substantially all of which were loans on manufactured homes. The second mortgage program was discontinued 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").
The following table summarizes outstanding loans by collateral type for real estate secured loans and by borrower type for all other loans. Collateral type represents the underlying assets securing the loan, rather than the purpose of the loan.
2
Table 1
LOAN PORTFOLIO COMPOSITION
(dollars in thousands)
September 30, 2003 2002 2001 2000 1999 Real estate - residential mortgages (1-4 family) $ 1,104,578 $ 1,196,066 $ 1,181,916 $ 1,185,219 $ 1,232,029 Real estate - residential construction 35,518 54,437 74,867 80,806 64,494 Commercial secured by real estate including multi-family 210,315 199,393 196,083 199,592 183,236 Commercial financial and agricultural 43,621 39,227 38,142 29,891 21,764 Land 87,844 100,854 107,582 99,259 94,463 Home equity loans 154,787 157,477 145,170 121,993 86,764 Mobile home loans 129,934 111,830 90,262 63,016 44,561 Credit cards 11,601 11,473 11,767 11,643 10,831 Other consumer loans 81,000 93,831 105,169 115,339 74,959 Total gross loans receivable $ 1,859,198 $ 1,964,588 $ 1,950,958 $ 1,906,758 $ 1,813,101 Allowance for loan losses (14,957 ) (15,824 ) (15,943 ) (15,403 ) (14,570 ) Loans in process (42,448 ) (23,832 ) (28,755 ) (51,658 ) (55,409 ) Deferred loan fees and discounts 139 (104 ) (927 ) (1,200 ) (972 ) Loans receivable, net $ 1,801,932 $ 1,924,828 $ 1,905,333 $ 1,838,497 $ 1,742,150 Percentage of Loans Receivable, net Real estate - residential mortgages (1-4 family) 61.3 %
62.1 %
62.0 %
64.5 %
70.7 % Real estate - residential construction 2.0 2.8 3.9 4.4 3.7 Commercial secured by real estate including multi-family 11.7 10.4 10.3 10.9 10.5 Commercial financial and agricultural 2.4 2.0 2.0 1.6 1.2 Land 4.9 5.2 5.6 5.4 5.4 Home equity loans 8.6 8.2 7.6 6.6 5.0 Mobile home loans 7.2 5.8 4.7 3.4 2.6 Credit cards 0.6 0.6 0.6 0.6 0.6 Other consumer loans 4.5 4.9 5.6 6.3 4.4 Total gross loans receivable 103.2 % 102.0 % 102.3 % 103.7 % 104.1 % Allowance for loan losses (0.8 ) (0.8 ) (0.8 ) (0.8 ) (0.8 ) Loans in process (2.4 ) (1.2 ) (1.5 ) (2.8 ) (3.2 ) Deferred loan fees and discounts (0.1 ) Loans receivable, net 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % The following table shows, at September 30, 2003, 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 rat es 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.
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Table 2
SELECTED LOAN MATURITIES AND INTEREST SENSITIVITY
(in thousands)
After One One Year Year Through Over Five Consolidated or Less Five Years Years Total Real estate mortgages Adjustable-rate $ 47,371 $ 36,698 $ 614,172 $ 698,241 Fixed-rate 46,454 100,766 550,346 697,566 Consumer loans Adjustable-rate 5,752 13,384 143,367 162,503 Fixed-rate 17,057 31,681 166,081 214,819 Commercial financial and agricultural Adjustable-rate 17,858 3,518 952 22,328 Fixed-rate 5,487 15,011 795 21,293 Total $ 139,979 $ 201,058 $ 1,475,713 $ 1,816,750 Residential Mortgage Lending
At September 30, 2003, one- to four-family residential mortgage loans, including residential construction loans, totaled $1.14 billion, or 63.3% 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 portfolio. 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 97%. 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 fo