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, 2004OR
[ ]
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
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
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, 2005
$.01 Par Value
12,313,243
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, 2004 and September 30, 2004 Consolidated Statements of Income for the Three 2
Months Ended December 31, 2004 and 2003 Consolidated Statements of Stockholders' Equity and
3
Comprehensive Income at December 31, 2004 and 2003
Consolidated Statements of Cash Flows for the
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Three months Ended December 31, 2004 and 2003
Notes to Consolidated Financial Statements
5-14
2. Management's Discussion and Analysis of Financial 14-29
Condition and Results of Operations 3. Quantitative and Qualitative Disclosures About Market Risk 29-30
4. Controls and Procedures 30
PART II - OTHER INFORMATION Item 1. Legal Proceedings 31
2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities 32
5. Other Information 32
6. Exhibits 32-34
SIGNATURES 35
EXHIBIT 31 -- CERTIFICATIONS 36-37
EXHIBIT 32 -- CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND 38
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.
PART I. CONSOLIDATED FINANCIAL INFORMATION
Item 1. Financial Statements
FIRST FINANCIAL HOLDINGS, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION December 31, September 30, 2004 2004 (Amounts in thousands) (Unaudited) ASSETS Cash and cash equivalents $
93,356 $ 102,310 Investments available for sale, at fair value 29,344 28,926 Investment in capital stock of FHLB, at cost 31,086 33,900 Loans receivable, net of allowance of $14,697 and $14,799 1,837,779 1,813,531 Loans held for sale 2,741 4,054 Mortgage-backed securities available for sale, at fair value 350,666 346,847 Accrued interest receivable 8,800 8,909 Office properties and equipment, net 51,529 50,574 Real estate and other assets acquired in settlement of loans 4,178 4,003 Intangible assets 22,331 22,452 Other assets 24,783 26,807 Total assets $
2,456,593 $ 2,442,313 LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposit accounts $ 1,505,251 $ 1,520,817 Advances from FHLB 584,000 658,000 Other short-term borrowings 112,566 1,262 Long-term debt 46,392 46,392 Advances by borrowers for taxes and insurance 1,665 5,557 Outstanding checks 11,136 12,850 Accounts payable and other liabilities 28,056 32,248 Total liabilities 2,289,066 2,277,126 Stockholders' equity: Serial preferred stock, authorized 3,000,000 shares--none issued Common stock, $.01 par value, authorized 24,000,000 shares, issued and outstanding 16,135,983 and 16,090,859 shares at December 31, 2004 and September 30, 2004, respectively 161 161 Additional paid-in capital 45,610 44,812 Retained income, substantially restricted 192,765 189,675 Accumulated other comprehensive loss, net of income taxes (1,688 )
(1,458 ) Treasury stock at cost, 3,829,359 and 3,787,714 shares at December 31, 2004 and September 30, 2004, respectively (69,321 )
(68,003 ) Total stockholders' equity 167,527 165,187 Total liabilities and stockholders' equity $ 2,456,593 $ 2,442,313 See accompanying notes to consolidated financial statements. 1
FIRST FINANCIAL HOLDINGS, INC. CONSOLIDATED STATEMENTS OF INCOME Three Months Ended December 31, 2004 2003 (Amounts in thousands, except per share amounts) (Unaudited) INTEREST INCOME Interest and fees on loans $ 28,094 $ 28,208 Interest on mortgage-backed securities 3,299 3,108 Interest and dividends on investments 548 427 Other 40 17 Total interest income 31,981 31,760 INTEREST EXPENSE Interest on deposits 5,880 5,759 Interest on borrowed money 6,955 6,862 Total interest expense 12,835 12,621 NET INTEREST INCOME 19,146 19,139 Provision for loan losses 1,300 1,425 Net interest income after provision for loan losses 17,846 17,714 OTHER INCOME Net gain on sale of loans 373 210 Net (loss) gain on sale of investment and mortgage-backed securities (56 )
436 Brokerage fees 634 494 Commissions on insurance 3,712 2,846 Other agency income 264 262 Service charges and fees on deposit accounts 2,947 2,757 Loan servicing operations, net 315 415 Gains on disposition of assets 1,566 247 Other 2,450 798 Total other income 12,205 8,465 NON-INTEREST EXPENSE Salaries and employee benefits 13,118 11,301 Occupancy costs 1,253 1,282 Marketing 504 350 Depreciation, rental and maintenance of equipment 1,173 1,336 Prepayment penalties on FHLB advances 964 Amortization of intangibles 121 96 Other 3,672 3,640 Total non-interest expense 20,805 18,005 Income before income taxes 9,246 8,174 Income tax expense 3,333 2,920 NET INCOME $ 5,913 $ 5,254 NET INCOME PER COMMON SHARE BASIC $ 0.48 $ 0.42 NET INCOME PER COMMON SHARE DILUTED $ 0.47 $ 0.41 See accompanying notes to consolidated financial statements. 2
FIRST FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (amounts in thousands) (unaudited) Accumulated Additional Other Common Stock Paid-in Retained Comprehensive Treasury Stock Shares Amount Capital Income Income (Loss) Shares Amount Total Balance at September 30, 2003 15,870 $ 159 $ 41,106 $ 176,111 $ 672 3,348 $ (55,042 ) $ 163,006 Net income 5,254 5,254 Other comprehensive loss: Unrealized net loss on securities available for sale, net of income tax (1,365 )
(1,365 ) Total comprehensive income 3,889 Common stock issued pursuant to stock option and employee benefit plans 73
1,288 1,288 Cash dividends ($.22 per share) (2,751 )
(2,751 ) Treasury stock purchased 20 (622 ) (622 ) Balance at December 31, 2003 15,943 $ 159 $ 42,394 $ 178,614 $ (693 )
3,368 $ (55,664 ) $ 164,810 Accumulated Additional Other Common Stock Paid-in Retained Comprehensive Treasury Stock Shares Amount Capital Income Loss Shares Amount Total Balance at September 30, 2004 16,091 $ 161 $ 44,812 $ 189,675 $ (1,458 )
3,788 $ (68,003 ) $ 165,187 Net income 5,913 5,913 Other comprehensive loss: Unrealized net loss on securities available for sale, net of income tax (230 )
(230 ) Total comprehensive income 5,683 Common stock issued pursuant to stock option and employee benefit plans 45 798 798 Cash dividends ($.23 per share) (2,823 )
(2,823 ) Treasury stock purchased 41 (1,318 ) (1,318 ) Balance at December 31, 2004 16,136 $ 161 $ 45,610 $ 192,765 $ (1,688 )
3,829 $ (69,321 ) $ 167,527 See accompanying notes to consolidated financial statements. 3
FIRST FINANCIAL HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended December 31, 2004 2003 (Amounts in thousands) OPERATING ACTIVITIES (Unaudited) Net income $ 5,913 $ 5,254 Adjustments to reconcile net income to net cash provided by (used in) operating activities Depreciation 1,153 1,119 Amortization of intangibles 121 96 Gain on sale of loans, net (373 ) (210 ) Loss (gain) on sale of investments and mortgage-backed securities, net 56 (436 ) Gain on sale of property and equipment, net (1,566 ) (247 ) (Gain) loss on sale of real estate owned, net (23 ) 7 Amortization of unearned discounts/premiums on investments, net 729 422 Prepayment penalties on FHLB advances 964 Decrease in deferred loan fees and discounts (90 ) (98 ) Decrease (increase) in receivables and other assets 2,121 (441 ) Provision for loan losses 1,300 1,425 Write down of real estate acquired in settlement of loans 49 33 Proceeds from sales of loans held for sale 43,287 76,434 Impairment loss from write-down of mortgage servicing rights 12 Origination of loans held for sale (41,601 ) (67,855 ) Decrease in accounts payable and other liabilities (5,759 ) (13,052 ) Net cash provided by operating activities 6,293 2,451 INVESTING ACTIVITIES Proceeds from maturity of investments available for sale 2,250 Proceeds from sales of investment securities available for sale 4,550 4,500 Net purchases of investment securities available for sale (5,007 ) (17,560 ) Redemption (Purchase) of FHLB stock 2,814 (4,400 ) Increase in loans, net (26,734 ) (9,685 ) Repayments on mortgage-backed securities available for sale 20,286 19,773 Proceeds from sales of mortgage-backed securities available for sale 19,768 7,164 Purchase of mortgage-backed securities available for sale (44,996 ) (128,204 ) Proceeds from the sales of real estate owned 1,075 612 Net purchase of office properties and equipment (542 ) (176 ) Net cash used in investing activities (28,786 ) (125,726 ) FINANCING ACTIVITIES Net decrease in checking, passbook and money market fund accounts (10,417 ) (46,853 ) Net decrease in certificates of deposit (5,149 ) (6,358 ) Net (repayments) proceeds of FHLB advances (74,000 ) 66,000 Prepayment penalties on FHLB advances (964 ) Net increase in securities sold under agreements to repurchase 111,570 115,127 Decrease in other borrowed money (266 ) Decrease in advances by borrowers for taxes and insurance (3,892 ) (4,601 ) Proceeds from the exercise of stock options 798 1,288 Dividends paid (2,823 ) (2,751 ) Treasury stock purchased (1,318 ) (622 ) Net cash provided by financing activities 13,539 121,230 Net decrease in cash and cash equivalents (8,954 ) (2,045 ) Cash and cash equivalents at beginning of period 102,310 85,523 Cash and cash equivalents at end of period $ 93,356 $ 83,478 Supplemental disclosures: Cash paid during the period for: Interest $ 17,210 $ 17,839 Income taxes 1,233 1,627 Loans foreclosed 567 249 Unrealized net loss on securities available for sale, net of income tax (230 ) (1,365 ) See accompanying notes to consolidated financial statements.
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FIRST FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
(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., Kimbrell Insurance Group, Inc. (see Note F, Business Combinations) and First Southeast Investor Services, Inc. All significant intercompany items related to the consolidated subsidiaries have been eliminated.
The Company determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity or a variable interest entity under accounting principles generally accepted in the United States of America. Voting interest entities are entities in which the total equity investment at risk is sufficient to enable each entity to finance itself independently and provides the equity holders with the obligation to absorb losses, the right to receive residual returns and the right to make decisions about the entity's activities. The Company consolidates voting interest entities in which it has all, or at least a majority of, the voting interest. As defined in applicable accounting standards, variable interest entities ("VIEs") are entities that lack one or more of the characteristics of a voting interest entity described above. A controlling financial interest in an entity is present when an enterprise has a variable interest, or combination of variable interests, that will absorb a majority of the entity's expected losses, receive a majority of the entity's expected residual returns, or both. The enterprise with a controlling financial interest, known as the primary beneficiary, consolidates the VIE. FFSL I LLC qualifies as a VIE of the Association as the Association is the primary beneficiary, therefore, FFSL I LLC is combined into the accounts of the Association. The Company's wholly-owned trust subsidiary, First Financial Capital Trust I, is a VIE for which the Company is not the primary beneficiary. Accordingly, the accounts of this entity are not included in the Company's consolidated financial statements.
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 2004 amounts have been reclassified to conform with the statement presentations for fiscal 2005.
The results of operations for the three months ended December 31, 2004 are not necessarily indicative of the results of operations that may be expected in future periods.
B. 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
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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 Association has a total of 48 offices in South Carolina located in the Charleston Metropolitan area and Horry, Georgetown, Florence and Beaufort counties, and Brunswick County, in coastal North Carolina.
C. ACCOUNTING ESTIMATES AND ASSUMPTIONS
Certain policies require management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ significantly from these estimates and assumptions. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, income taxes, mortgage servicing rights and accounting for acquisitions.
D. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Accounting for Stock-Based Compensation
In December 2004, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment ("FAS No. 123(R)"). FAS No. 123(R) is a revision of FASB Statement No. 123 ("FAS No. 123"), Accounting for Stock-Based Compensation. This Statement supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. FAS No.123(R) establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods and services that are based on the fair value of the entity's equity instruments or that may be settled by the issuance of those equity instruments. This Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based transactions. FAS No. 123(R) does not change the accounting guidance for share-based payment transactions with parties other than employees provided in FASB No. 123 as originally issued and EITF Issue No. 96-18, "Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services." This statement does not address the accounting for employee share ownership plans, which are subject to AICPA Statement of Position 93-6, Employers' Accounting for Employee Stock Ownership Plans.
FAS No. 123(R) requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award, usually the vesting period. No compensation cost is recognized for equity instruments for which employees do not render the requisite service. Employee share purchase plans will not result in recognition of compensation cost if certain conditions are met.
A public entity will initially measure the cost of employee services received in exchange for an award of liability instruments based on its current fair value; the fair value of that award will be remeasured subsequently at each reporting date through settlement date. Changes in fair value during the requisite service period will be recognized as compensation cost over that period.
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The grant-date fair value of employee share options and similar instruments will be estimated using option-pricing models adjusted for the unique characteristics of those instruments. If an equity award is modified after the grant-date, incremental compensation costs will be recognized in an amount equal to the excess of the fair value of the modified award over the fair value of the original award immediately before the modification.
Excess tax benefits will be recognized as an addition to paid-in capital. Cash retained as a result of those excess tax benefits will be presented in the statement of cash flows as financing cash inflows. The write-off of deferred tax assets relating to unrealized tax benefits associated with recognized compensation cost will be recognized as income tax expense unless there are excess tax benefits from previous awards remaining in paid-in capital to which it can be offset.
FAS No. 123(R) eliminates the alternative to use APB Opinion No. 25's intrinsic value method of accounting that was provided in FAS No. 123 as originally issued. Under APB Opinion No. 25, issuing stock options to employees generally resulted in recognition of no compensation cost. This Statement requires entities to recognize the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards (with limited exceptions).
This Statement is effective for public entities that do not file as small business issuers as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. FAS No. 123(R) applies to all awards granted after the required effective date and to awards modified, repurchased, or cancelled after that date. The cumulative effect of initially applying this Statement, if any, is recognized as of the required effective date.
Based on a complex set of guidelines, FAS No. 123(R) offers three ways for companies to transition to the new standard requiring the expensing of options: (1) companies can elect not to restate results for periods prior to the effective date of FAS No. 123(R); (2) companies can elect to restate results for prior quarters in the fiscal year of adoption of FAS No. 123(R) to reflect the pro forma compensation cost; or (3) companies can elect to restate results for prior periods, whether annual or quarterly, to reflect the FAS No. 123 pro forma compensation cost.
The Company will be required to adopt FAS No. 123(R) effective July 1, 2005. The Company is in the process of analyzing the complex provisions of FAS No. 123(R) and the impact that FAS No. 123(R) will have on its results of operations, including the effects of various transition rules. See Note K, Stock-Based Compensation, for a discussion of the Company's current method of accounting for stock-based compensation.
The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments
In March 2004, the FASB issued EITF No. 03-1 ("EITF 03-1"), "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments," which provided guidance for evaluating whether an investment is other-than-temporarily impaired and its application to investments classified as either available for sale or held to maturity under FASB Statement No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and investments accounted for under the cost or equity method of accounting. In September 2004, the FASB issued FASB Staff Position ("FSP") EITF
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No. 03-1, a delay of the effective date for the measurement and recognition guidance contained in paragraphs 10-20 of EITF 03-1 until FASB issues final guidance.
Paragraphs 10 through 20 of EITF 03-1 provide guidance on when impairment of debt and equity securities is considered other-than-temporary. This guidance generally states impairment is considered other-than-temporary unless the holder of the security has both the intent and ability to hold the security until the fair value recovers and evidence supporting the recovery outweighs evidence to the contrary. As a result of the effective date of this guidance being delayed the Company has not evaluated the impact of the initial adoption of this guidance on the financial condition or results of operations.
E. OTHER 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 (loss) and for the three months ended December 31, 2004 and 2003 amounted to $5.7 million and $3.9 million, respectively.
The Corporation's "other comprehensive income (loss)" for the three months ended December 31, 2004 and 2003 and "accumulated other comprehensive income (loss)" as of December 31, 2004 and 2003 are comprised solely of unrealized gains and losses on certain investments in debt and equity securities.
Other comprehensive loss for the three months ended December 31, 2004 and 2003 follows (in thousands):
Three Months Ended December 31,
2004 2003 Unrealized holding losses arising during period, net of tax $ (266 ) $ (1,085 ) Less: reclassification adjustment for realized (losses) gains, net of tax (36 ) 280 Unrealized losses on securities available for sale, net of applicable income taxes $ (230 ) $ (1,365 ) F. BUSINESS COMBINATIONS
On January 29, 2004, First Financial Holdings, Inc. acquired the following companies: The Kimbrell Company, Inc.; The Kimbrell Company, Inc./Florida; Preferred Markets, Inc.; Preferred Markets, Inc./Florida; and Atlantic Acceptance Corporation. The Kimbrell companies are a managing general agency specializing in placing coverage within the non-standard insurance market. Non-standard markets offer coverage to customers that have unusual or high-risk exposures. The Preferred Markets companies are a managing general agency specializing in placing coverage in standard insurance markets. Atlantic Acceptance Corporation is a premium finance company. The acquisition was accounted for using the purchase method of accounting, and accordingly, the assets and liabilities of the Kimbrell companies were recorded at their estimated fair values as of the merger date. The Company acquired tangible assets of $4.4 million, assumed liabilities totaling $4.4 million, recorded g oodwill of $5.2 million and recorded a customer list intangible of $908 thousand. The customer list
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intangibles are amortized on a straight-line basis over its estimated useful life of up to ten years. In addition, the principals of the Kimbrell companies have a right to receive future payments based on financial performance, which if paid would increase goodwill by $2.4 million over the next three years.
G. INTANGIBLE ASSETS
Intangible assets, net of accumulated amortization, at December 31, 2004, September 30, 2004 and December 31, 2003 are summarized as follows (in thousands):
December 31, September 30, December 31, 2004 2004 2003 Goodwill $ 20,224 $ 20,224 $ 14,570 Customer list 3,574 3,574 2,672 Less accumulated amortization (1,467 ) (1,346 ) (987 ) 2,107 2,228 1,685 Total
$ 22,331 $ 22,452 $ 16,255 At December 31, 2004, the Company had one reportable segment with goodwill, insurance operations. There were no changes in the carrying amount of goodwill related to insurance operations for the three months ended December 31, 2004.
Amortization of intangibles totaled $121 thousand, $455 thousand and $96 thousand for the three months ended December 31, 2004, fiscal year ended September 30, 2004 and the three months ended December 31, 2003, respectively.
The Company expects to record amortization expense related to intangibles of $482 thousand for fiscal year 2005, $470 thousand for fiscal 2006, $391 thousand for fiscal 2007, $322 thousand for fiscal 2008, $153 thousand for fiscal 2009 and an aggregate of $410 thousand for all years thereafter.
H. MORTGAGE SERVICING RIGHTS
The following summarizes the changes in the carrying amount of capitalized mortgage servicing rights ("MSRs"), which are included in other assets, for the quarter ended December 31, 2004, the fiscal year ended September 30, 2004 and the quarter ended December 31, 2003 (in thousands):
December 31, 2004 September 30, 2004 December 31, 2003 Balance at beginning of period $ 11,938 $ 12,300 $ 12,300 Capitalized mortgage servicing right 476 2,852 965 Amortization (553 ) (2,296 ) (590 ) Change in valuation allowance (12 ) (918 ) Balance at end of period $ 11,849 $ 11,938 $ 12,675 The aggregate fair value of capitalized mortgage servicing rights at December 31, 2004, September 30, 2004 and December 31, 2003 was $11.8 million, $11.9 million and $12.7 million, respectively. At December 31, 2004, September 30, 2004 and December 31, 2003, respectively, the valuation allowance for capitalized MSRs totaled $1.752 million, $1.740 million and $822 thousand, respectively. In the quarter ended December 31, 2004 the Company recorded an impairment loss of $12 thousand. For fiscal
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year ended September 30, 2004 the Company recorded an impairment loss of $918 thousand. At December 31, 2004, September 30, 2004 and December 31, 2003, the Company was servicing loans for others in the amount of $952.5 million, $952.6 million and $940.9 million, respectively.
The estimated amortization expense for mortgage servicing rights for future years ending September 30 is as follows: $2.2 million for 2005, $2.0 million for 2006, $1.9 million for 2007, $1.7 million for 2008, $1.5 million for 2009 and $4.9 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 economic factors.
I. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
The Company uses derivatives as part of its interest rate management activities. Prior to the implementation of SAB 105, the Company recognized a servicing value at the time the commitment was made. After implementation, the Company recognizes the servicing value when the loan is sold. Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS 133") as amended by SFAS Nos. 137, 138 and 149, establishes accounting and reporting standards for derivatives and hedging activities. SFAS No. 133 requires an entity to recognize all derivatives as either assets or liabilities in the balance sheet, and to 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 does not currently engage in any activities that qualify for hedge accounting under SFAS No. 133. All changes in the fair value of derivative instruments are recorded as non-interest income in the consolidated statements of operations.
The Company has identified the following derivative instruments which were recorded on the Company's balance sheet at December 31, 2004: commitments to originate fixed-rate and certain other residential loans held for sale and forward sales commitments.
The Company originates certain fixed rate and adjustable-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 conforming loans totaled $15.4 million at December 31, 2004. It is anticipated 90% of these loans will close totaling $13.9 million. The fair value of derivative assets related to commitments to originate fixed rate loans held for sale and forward sales commitments was not significant at December 31, 2004.
J. 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:
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Three Months Ended December 31, 2004 2003 Weighted average number of common shares used in basic EPS 12,300,919 12,542,142 Effect of dilutive stock options 304,663 407,063 Weighted average number of common shares and dilutive potential common shares used in diluted EPS 12,605,582 12,949,205 For the quarters ended December 31, 2004 and 2003 there were 220,595 and 95,870 option shares, respectively, that were excluded from the calculation of diluted earnings per share because the exercise prices of $32.30 and $32.28 at December 31, 2004 and $32.28 for the quarter December 31, 2003, were greater than the average market price of the common shares.
K. STOCK-BASED COMPENSATION
At December 31, 2004, the Company has five stock-based employee and non-employee compensation option plans, which are described more fully in Note 18 of the Notes To Consolidated Financial Statements included in the Company's 10-K for September 30, 2004. SFAS No. 123, "Accounting for Stock-Based Compensation," allows a company to either adopt the fair value method of valuation or continue using the intrinsic valuation method presented under Accounting Principles Bulletin ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees", to account for stock-based compensation. The Company has elected to continue using APB Opinion 25. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions to the plans for the three months ended December 31, 2004 and 2003. (amounts in thousands except for per share amounts).
For The Three Months Ended December 31, 2004
2003 Net income, as reported $ 5,913 $ 5,254 Deduct: Total stock-based employee and director compensation expense determined under fair value based method for all rewards, net of related tax effects. (249 )
(218 ) Pro forma net income $ 5,664 $ 5,036 Earnings per share: Basic - as reported $ 0.48 $ 0.42 Basic - pro forma $ 0.46 $ 0.40 Diluted - as reported $ 0.47 $ 0.41 Diluted - pro forma $ 0.45 $ 0.39 The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for the grants in the
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quarters ended December 31, 2004 and 2003, respectively: dividend yield of 2.86% and 2.84%, expected volatility of 38% and 39%, average risk-free interest rate of 4.03% and 3.04%, expected lives of 6 years and a vesting period ranging from one to five years. The weighted average fair value of options granted approximated $10.38 for the quarter ended December 31, 2004 and $10.77 for the quarter ended December 31, 2003. For purposes of the pro forma calculation, compensation expense is recognized on a straight-line basis over the vesting period.
The Company's directors also participate in a stock awards plan providing non-employee directors with an opportunity to increase their equity interests in the Company based on the attainment of specific performance criteria for the Company and the Association. Shares awarded under the stock awards plan are expensed in the appropriate periods.
See Footnote D above for description of FAS No. 123(R).
L. BUSINESS SEGMENTS
The Company has two principal operating segments, banking and insurance operations, which are evaluated regularly by Management and the Board of Directors in deciding how to allocate resources and assess performance. Both of these operating segments are reportable segments by virtue of exceeding certain quantitative thresholds.
First Federal, the Company's primary operating segment, engages in general banking business focusing on mortgage, consumer and commercial lending to small and middle market businesses and consumers in its markets. First Federal also provides demand transaction accounts and time deposit accounts to businesses and individuals. First Federal offers products and services primarily to customers in its market areas, consisting of counties in Coastal South Carolina and North Carolina from the Hilton Head area of Beaufort County to the Sunset Beach area of Brunswick County and Florence County. Revenues for First Federal are derived primarily from interest and fees on loans, interest on investment securities, service charges on deposits and other customer service fees.
First Southeast Insurance Services, Inc. operates as an independent insurance agency and brokerage through eleven offices, seven located throughout the coastal region of South Carolina, two offices in Florence County and one office each in Columbia and Lake Wylie, South Carolina, with revenues consisting principally of commissions paid by insurance companies. The Kimbrell Insurance Group, Inc. (acquired in January 2004) operates as a managing general agency and brokerage through its primary office, located in Horry County, South Carolina, with revenues consisting principally of commissions paid by insurance companies. Also part of The Kimbrell Insurance Group, Inc. is Atlantic Acceptance Corporation, Inc., which finances insurance premiums. No single customer accounts for a significant amount of the revenues of either reportable segment. The Company evaluates performance based on budget to actual comparisons and segment profits. The accounting policies of the reportable segments are the same as those described in Note 1 of the Company's latest annual report on Form 10-K.
Segment information is shown in the tables below. The "Other" column includes all other business activities that did not meet the quantitative thresholds and therefore are not shown as a reportable segment. Certain passive activities of First Financial are also included in the "Other" column as well as inter-company elimination entries required for consolidation (in thousands).
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Three months ended December 31, 2004 Insurance Banking
Activities Other
Total Interest income $ 31,810 $ 125 $ 46
$ 31,981 Interest expense 12,033 16 786
12,835 Net interest income 19,777 109 (740 ) 19,146 Provision for loan losses 1,300 1,300 Other income 7,624 39 566 8,229 Commissions on insurance and other agency income 63 3,944 (31 ) 3,976 Non-interest expenses 16,541 3,394 749 20,684 Amortization of intangibles 121 121 Income tax expense 3,448 208 (323 ) 3,333 Net income $ 6,175 $ 369 $ (631 ) $ 5,913 December 31, 2004 Total assets $ 2,412,603 $ 34,627 $ 9,363 $ 2,456,593 Loans $ 1,838,901 1,619 $ 1,840,520 Deposits $ 1,509,987 (4,736 ) $ 1,505,251 Three months ended December 31, 2003 Insurance Banking
Activities Other
Total Interest income $ 31,719 $ 1
$ 40 $ 31,760 Interest expense 12,432 189 12,621 Net interest income 19,287 1 (149 ) 19,139 Provision for loan losses 1,425 1,425 Other income 4,906 14 437 5,357 Commissions on insurance and other agency income 114 2,994 3,108 Non-interest expenses 14,354 2,691 864 17,909 Amortization of intangibles 96 96 Income tax expense 3,036 92 (208 ) 2,920 Net income $ 5,492 $ 130 $ (368 ) $ 5,254 December 31, 2003 Total assets $ 2,402,767 $ 22,522 $ 8,792 $ 2,434,081 Loans $ 1,801,672 $ 1,801,672 Deposits $ 1,431,926 $ (3,486 ) $ 1,428,440
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M. GUARANTEES
Standby letters of credit represent an obligation of the Company to a third party contingent upon the failure of the Company's customer to perform under the terms of an underlying contract with the third party or obligate the Company to guarantee or stand as surety for the benefit of the third party. The underlying contract may entail either financial or nonfinancial obligations and may involve such things as the customer's delivery of merchandise, completion of a construction contract, release of a lien, or repayment of an obligation. Under the terms of a standby letter, drafts will generally be drawn only when the underlying event fails to occur as intended. The Company can seek recovery of the amounts paid from the borrower. In addition, some of these standby letters of credit are collateralized. Commitments under standby letters of credit are usually for one year or less. No contingent liability was determined to be necessary relating to the Company's obli gation to perform as a guarantor, since such amounts are not considered material. The maximum potential amount of undiscounted future payments related to standby letters of credit at December 31, 2004 was $3.1 million.
N. COMMITMENTS AND CONTINGENCIES
The Company is currently subject to various legal proceedings and claims that have arisen in the ordinary course of its business. In the opinion of management based on consultation with external legal counsel, any reasonably foreseeable outcome of such current litigation would not materially affect the Company's consolidated financial position or results of operations.
O. OTHER INCOME
Included in Other Income is the receipt of a judgment totaling $1.3 million. See PART II, Item 1 - -- Legal Proceedings for additional information.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
WEBSITE AVAILABILITY OF REPORTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
All of the Company's electronic filings with the Securities and Exchange Commission ("SEC"), including its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other documents filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, are made available at no cost on the Company's web site, www.firstfinancialholdings.com, using the First Financial SEC Reports link.
DISCUSSION OF FORWARD-LOOKING STATEMENTS
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 constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements relate to, among others, expectations of the business environment in which the Company operates, projections of future performance, perceived opportunities in the market,
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potential future credit experience, and statements regarding the Company's mission and vision. These forward-looking statements are based upon current management expectations, and may, therefore, involve risks and uncertainties. The Company's actual results, performance or achievements may differ materially from those suggested, expressed or implied by forward-looking statements due to a wide range of factors including, but not limited to, the general business environment, general economic conditions nationally and in the State of South Carolina, interest rates, the South Carolina real estate market, competitive conditions between banks and non-bank financial services providers, regulatory changes and other risks detailed in the Company's reports filed with the Securities and Exchange Commission, including the Annual Report on Form 10-K for the fiscal year ended September 30, 2004. Forward-looking statements are effective only as of the date that they are made and the Company assumes no obligation to u pdate this information.
OVERVIEW
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"). Insurance operations are conducted under other First Financial subsidiaries, First Southeast Insurance Services, Inc. ("FSIns.") and Kimbrell Insurance Group, Inc. ("Kimbrell"). 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.
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. 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, seven in-store (Wal-Mart Supercenters) retail branch sales offices, and three limited service branches located in the following counties: Charleston County (16), Berkeley County (3), Dorchester County (4), Hilton Head area of Beaufort County (3), Georgetown County (2), Horry County (14), 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 direct 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, premium finance activities and certain passive investment activities.
The Company continues to move forward with many strategic initiatives. In the first quarter of fiscal 2005, the seventh Wal-Mart in-store retail sales office was opened. This new office is located in Myrtle Beach, South Carolina. This new office will enhance our coverage of higher growth markets in South Carolina.
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FIRST QUARTER HIGHLIGHTS
Net income for the quarter ended December 31, 2004 increased 12.5% to $5.9 million from net income of $5.3 million in the comparable quarter in fiscal 2004. Basic earnings per common share increased to $.48 per common share for the quarter ended December 31, 2004 compared to $.42 per common share for the quarter ended December 31, 2003. On a diluted basis, earnings per common share increased to $.47 from $.41 in the comparable period.
Net income during the December 31, 2004 quarter in comparison to the December 31, 2003 quarter increased by $659 thousand. Non-interest income increased by $3.7 million between the quarters ended December 31, 2004 and December 31, 2003. Included in the current quarter's results were gains from property sales of $1.6 million and the receipt of a judgment totaling $1.3 million. The receipt of the judgment was reported as Other Income in the Consolidated Statements of Income for the quarter ended December 31, 2004. In the quarter ended December 31, 2003, the Company recorded gains on property sales of $247 thousand. The Company also recorded a net loss of $56 thousand from sales of securities during the quarter ended December 31, 2004 compared with net gains of $436 thousand a year ago. Insurance revenues increased by $866 thousand during the current quarter with deposit account fee income also increasing by $190 thousand. Insurance revenue growth was attributabl e to the purchase of the Kimbrell Insurance Group in early January 2004.
Total non-interest expense increased substantially, by $2.8 million, during the quarter ended December 31, 2004 compared with the comparable quarter ended December 31, 2003. The Company incurred a $964 thousand prepayment fee related to the early prepayment of a $15 million Federal Home Loan Bank advance. The Company was able to maintain approximately the same duration on replacement funding and will recoup the charge over a 32-month period as a result of a lower interest rate on the borrowing. Salaries and employee benefit costs were higher in the current quarter, increasing by $1.8 million, due partially to the addition of staff for three additional in-store sales offices opened over the past year, increased accruals related to the Company's defined contribution plan and incentive payments, and growth from employee costs related to the acquisition of the Kimbrell Insurance Group in January 2004. In addition, costs during the quarter included discretionary bonuses of approximately $658 thousand.
On a comparative basis, net interest income increased slightly between the quarters ended December 31, 2004 and December 31, 2003. The Company's net interest margin in the quarter ended December 31, 2004 declined to 3.38% compared with 3.44% during the quarter ended December 31, 2003. However, the net interest margin increased by six basis points from 3.32% in the September 2004 quarter. The Company's average earning assets increased $39.8 million between the quarters ended December 31, 2004 and the quarter ended December 31, 2003.
CRITICAL ACCOUNTING POLICIES
The Company's accounting policies are discussed in Item 8, Note 1 to the Consolidated Financial Statements of the 10K for September 30, 2004. Of these significant accounting policies, the Company has determined that accounting for allowance for loan losses, income taxes, mortgage servicing rights and accounting for acquisitions are deemed critical because of the valuation techniques used, and the
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sensitivity of these financial statement amounts to the methods, assumptions and estimates underlying these balances. Accounting for these critical areas requires the most subjective and complex judgments that could be subject to revision as new information becomes available.
OFF-BALANCE SHEET ARRANGEMENTS
In the normal course of operations, the Company engages in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in the financial statements or are recorded in amounts that differ from the notional amounts. These transactions involve, to varying degrees, elements of credit, interest rate, and liquidity risk. The Company uses such transactions for general corporate purposes or for customer needs. Corporate purpose transactions are used to help manage credit, interest rate, and liquidity risk or to optimize capital. Customer transactions are used to manage customers' requests for funding.
The Company's off-balance sheet arrangements, which principally include lending commitments and derivatives, are described below.
Lending Commitments. Lending Commitments include loan commitments, standby letters of credit, unused business and consumer credit lines, and documentary letters of credit. These instruments are not recorded in the consolidated balance sheet until funds are advanced under the commitments. The Company provides these lending commitments to customers in the course of business. The Company applies essentially the same credit policies and standards as it does in the lending process when making these commitments.
For commercial customers, loan commitments generally take the form of revolving credit arrangements to finance customers' working capital requirements. For retail customers, loan commitments are generally lines of credit secured by residential property. At December 31, 2004, commercial and retail loan commitments and the undisbursed portion of construction loans totaled $133.1 million. Unused business, personal and credit card lines, which totaled $275.7 million at December 31, 2004, are generally for short-term borrowings.
Derivatives. In accordance with SFAS No. 133, the Company records derivatives at fair value, as either assets or liabilities, on the consolidated balance sheets. Derivative transactions are measured in terms of the notional amount, but this amount is not recorded on the balance sheet and is not, when viewed in isolation, a meaningful measure of the risk profile of the instrument. The notional amount is not exchanged, but is used only as the basis upon which interest and other payments are calculated. See Note I in the Notes to Consolidated Financial Statements.
OTHER POSTRETIREMENT BENEFITS
The Company sponsors postretirement benefit plans that provide health care, life insurance and other postretirement benefits to retired employees. The health care plans generally include participant contributions, co-insurance provisions, limitations on the Company's obligation and service-related eligibility requirements. The Company pays these benefits as they are incurred. Postretirement benefits for employees hired after January 1, 1989 and those electing early retirement or normal retirement after January 1, 1999, were substantially curtailed. The Company's other postretirement benefits are discussed
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more fully in Item 8, Note 18 to the Consolidated Financial Statements of the 10K for September 30, 2004.
On December 8, 2003, the President signed the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the "Act") into law. The Act introduces a voluntary prescription drug benefit under Medicare as well as a federal subsidy to sponsors of retiree health care plans that provide at least an actuarially equivalent benefit. The Financial Accounting Standards Board issued a Staff Position, FAS 106-2, on May 9, 2004, effective for the first interim or annual reporting period beginning after June 15, 2004. The Company adopted FAS 106-2 effective July 1, 2004. The Company believes that the drug benefit under its postretirement benefit plan is actuarially equivalent to Medicare Part D and that it will qualify for the subsidy starting in 2006. The Company began to recognize a reduction in postretirement benefit costs during the first quarter of fiscal 2005.
The components of net periodic benefit costs are shown in the following statement (in thousands):
Other Postretirement Benefits Three months ended December 31, 2004 2003 Interest Cost $ 27 $ 30 Amortization of transition obligation 24 25 $ 51 $ 55 The Company previously disclosed in its financial statements for the year ended September 30, 2004, that it expected to contribute $128 thousand for postretirement benefit payments in fiscal year 2005. As of December 31, 2004, $34 thousand of contributions had been required for the first quarter.
BALANCE SHEET ANALYSIS
Total assets of First Financial increased $14.3 million, or .6%, during the quarter ended December 31, 2004. The following table shows the variances in dollars and percent change between the Consolidated Statements of Financial Condition for First Financial at December 31, 2004 and September 30, 2004:
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FIRST FINANCIAL HOLDINGS, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION December 31, September 30, 2004
2004 (Amounts in thousands) (Unaudited) Variance % Change ASSETS Cash and cash equivalents $ 93,356 $ 102,310 $ (8,954 ) (8.75 )% Investments available for sale, at fair value 29,344 28,926 418 1.45 Investment in capital stock of FHLB, at cost 31,086 33,900 (2,814 ) (8.30 ) Loans receivable, net of allowance of $14,809 and $14,957 1,837,779 1,813,531 24,248 1.34 Loans held for sale 2,741 4,054 (1,313 ) (32.39 ) Mortgage-backed securities available for sale, at fair value 350,666 346,847 3,819 1.10 Intangible assets 22,331 22,452 (121 ) (0.54 ) Other assets 89,290 90,293 (1,003 ) (1.11 ) Total assets $ 2,456,593 $ 2,442,313 $ 14,280 0.58 % LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposit accounts $ 1,505,251 $ 1,520,817 $ (15,566 ) (1.02 )% Advances from Federal Home Loan Bank 584,000 658,000 (74,000 ) (11.25 ) Other short-term borrowings 112,566 1,262 111,304 8,819.65 Long-term debt 46,392 46,392 Other liabilities 40,857 50,655 (9,798 ) (19.34 ) Total liabilities 2,289,066 2,277,126 11,940 0.52 % Stockholders' equity 167,527 165,187 2,340 1.42 Total liabilities and stockholders' equity $ 2,456,593 $ 2,442,313 $ 14,280 0.58 % Investment Securities and Mortgage-backed Securities
Investments available for sale, investment in capital stock of FHLB and mortgage-backed securities available for sale increased $1.4 million in the current three months ended December 31, 2004. Purchases of mortgage-backed securities available for sale totaled $45.0 million during the December 2004 quarter. The Company also sold $19.8 million of mortgage-backed securities available for sale and repayments during the quarter totaled $20.3 million.
Loans Receivable
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 loans (in thousands):
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December 31, September 30, December 31, 2004 2004 2003 Real estate - residential mortgages (1-4 family) $ 975,650 $ 987,825 $ 1,069,180 Real estate - residential construction 81,785 73,542 63,080 Commercial secured by real estate including multi-family 250,903 223,994 204,474 Commercial financial and agricultural 62,851 57,594 45,754 Land 108,502 101,263 91,282 Home equity loans 196,734 189,232 159,158 Mobile home loans 145,116 143,502 134,129 Credit cards 12,697 11,747 12,173 Other consumer loans 89,991 91,370 78,119 Total gross loans 1,924,229 1,880,069 1,857,349 Less: Allowance for loan losses 14,697 14,799 14,809 Loans in process 69,840 48,423 41,106 Deferred loan fees and discounts on loans (828 )
(738 )
(238 )
83,709 62,484 55,677 Total $ 1,840,520 $ 1,817,585 $ 1,801,672 Net loans increased $22.9 million during the quarter ended December 31, 2004. As a result of historically low interest rates, consumer preference for mortgage products has shifted in recent quarters to fixed-rate residential loan products resulting in higher repayments of certain of the Company's normal portfolio loan products, such as adjustable rate mortgage loans. As interest rates began to stabilize during the December 2004 quarter, refinance activity abated resulting in slowing repayments of residential 1-4 family loans. Proceeds from sales of loans held for sale declined by $33.1 million, or 43.4%, during the quarter ended December 31, 2004.Gross residential mortgage loans (1-4 family) declined $93.5 million during the twelve months ended December 31, 2004. Most other categories of loans exhibited growth, particularly commercial and home equity loans during the quarter ended December 31, 2004. The Company continues to place increased emphasis on the origination of commercial business and consumer loans.
Asset Quality
The following table summarizes the Company's problem assets for the periods indicated (amounts in thousands):
December 31,
September 30, December 31, 2004
2004
2003 Non-accrual loans $ 7,763 $ 8,439 $ 11,520 Loans 90 days or more delinquent (1) 34 63 29 Renegotiated loans 292 Real estate and other assets acquired in settlement of loans 4,178 4,003 3,606 Total $ 11,975 $ 12,505 $ 15,447 As a percent of net loans and real estate owned 0.65 % 0.69 % 0.86 % As a percent of total assets 0.49 % 0.51 % 0.63 % (1) The Company continues to accrue interest on these loans. 20
Problem assets decreased $530 thousand during the three months ended December 31, 2004 from September 30, 2004. The majority of the decrease was in non-accrual loans, which decreased $676 thousand from September 30, 2004, offset by a net increase in real estate and other assets acquired in the settlement of loans of $175 thousand.
Similar to other parts of the country, some of the markets served by the Company are experiencing slower economic growth, sectors with higher levels of unemployment, higher bankruptcy filings and higher delinquency rates. The Company's largest concentration of loans is in the Residential (1-4 family) market. There is no concentration of loans in any particular industry or group of industries. Most of the Company's residential and business loans are with customers located within the coastal counties of South Carolina, Florence County and Brunswick County in North Carolina.
Allowance for Loan Losses
The Company provides for loan losses on the allowance method. Accordingly, all loan losses are charged to the related allowance and all recoveries are credited to the allowance. Additions to the allowance for loan losses are provided by charges to operations based on various factors which, in management's judgment, deserve current recognition in estimating losses. Such factors considered by management include the fair value of the underlying collateral, growth and composition of the loan portfolios, loss experience, delinquency trends and economic conditions. Management evaluates the carrying value of loans periodically and the allowance is adjusted accordingly. While management uses the best information available to make evaluations, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluations. The allowance for loan losses is subject to periodi c evaluation by various regulatory authorities and may be subject to adjustment upon their examination.
Following is a summary of the reserve for loan losses (in thousands):
At and for the three months ended December 31, 2004 2003 Balance at beginning of year $ 14,799 $ 14,957 Provision charged to operations 1,300 1,425 Recoveries of loans previously charged-off 111 162 Loan losses charged to reserves (1,513 )
(1,735 )
Balance at end of period $ 14,697 $ 14,809 Net charge-offs totaled $1.4 million in the current three months ended December 31, 2004 compared to $1.6 million in the comparable three months in fiscal 2004. Consumer net charge-offs totaled $1.1 million in the current three months compared to $1.3 million in the comparable three months in fiscal 2004. Real Estate (residential and commercial) and commercial loan net charge-offs increased to $344 thousand in the current three months, compared to $301 thousand in the three months ended December 31, 2003. Annualized net charge-offs as a percentage of average net loans decreased to .31% for the three months ended December 31, 2004 as compared to .35% for the quarter ended December 31, 2003.
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Over recent years the Company has been successful in increasing originations of consumer and commercial business loans which typically have higher rates of delinquency and greater risk of loss than do single-family real estate loans but are shorter in duration and have less interest rate risk.
The Company's impaired loans totaled $974 thousand at December 31, 2004, $363 thousand at September 30, 2004 and $2.4 million at December 31, 2003.
Deposits and Borrowings
First Financial's deposit composition at the indicated dates is as follows (amounts in thousands):
December 31, 2004 September 30, 2004 December 31, 2003 Balance % of Total Balance % of Total Balance % of Total Checking accounts $ 438,462 29.13 % $ 439,051 28.87 % $ 376,695 26.37 % Statement and other accounts 168,277 11.18 166,990 10.98 150,738 10.55 Money market accounts 232,058 15.42 243,173 15.99 253,894 17.78 Certificate accounts 666,454 44.27 671,603 44.16 647,113 45.30 Total deposits $ 1,505,251 100.00 % $ 1,520,817 100.00 % $ 1,428,440 100.00 % Deposits decreased $15.6 million during the three months ended December 31, 2004. Of the total, $5.6 million was attributable to lower account balances maintained for investors in the servicing of loans previously sold in the secondary market. As the refinancing of loans continued to slow down during the past three months, funds due to investors have decreased accordingly. Several business account-holders also draw down funds during the December calendar quarter each year.
As a result of higher loan growth and lower deposit balances, the Company's borrowings increased $37.3 million during the quarter ended December 31, 2004. FHLB advances declined $74 million and other short-term borrowings increased $111.3 million during the first quarter of fiscal 2005.
The Company incurred a $964 thousand prepayment fee related to the early prepayment of a $15 million Federal Home Loan Bank advance. The Company continues to evaluate the relative cost and benefit of incurring prepayment penalties from early prepayment of FHLB advances.
Stockholders' Equity
The Company's capital ratio, total capital to total assets, was 6.82% at December 31, 2004, compared to 6.76% at September 30, 2004. During the three months ended December 31, 2004, the Company increased its dividend to stockholders to $.23 compared with $.22 per share in the first three months of fiscal 2004. During the quarter ended June 30, 2003 the Company announced approval of a stock repurchase program to acquire up to 650 thousand shares of Common Stock that was subsequently extended until November 30, 2004. During the first quarter of fiscal 2005 the Company purchased approximately 34 thousand shares at a cost of approximately $1.1 million. At the time the plan expired the Company had purchased approximately 594 thousand shares at a total cost of approximately $17.5 million.
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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 December 31, 2004, the Association was 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 Association must maintain core and risk-based, Tier 1 risk-based, and Tier 1 core ("leverage") ratios as set forth in the table. There are no conditions or events since that date that management believes have changed the institution's category.
The following table summarizes the capital requirements for First Federal as well as its capital position at December 31, 2004 (amounts in thousands):
To Be Well Capitalized For Capital Adequacy Under Prompt Corrective Actual Purposes Action Provisions Amount Ratio Amount Ratio Amount Ratio As of December 31, 2004 Tangible capital (to Total Assets) $ 175,352 7.26 % $ 36,231 1.50 % Core capital (to Total Assets) 175,352 7.26 96,615 4.00 $ 120,769 5.00 % Tier I capital (to Risk-based Assets) 175,352 10.73 96,817 6.00 Risk-based capital (to Risk-based Assets) 187,800 11.64 129,089 8.00 161,361 10.00 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, 2004.
LIQUIDITY AND ASSET AND LIABILITY MANAGEMENT
Liquidity
The Association is subject to federal regulations requiring it to maintain adequate liquidity to assure safe and sound operations.
The Association's 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 and securities. Each of the Association's sources of liquidity is subject to various uncertainties beyond the control of the Association. As a measure of protection, the Association has back-up sources of funds available, including excess borrowing capacity and excess liquidity in securities available for sale. The table below summarizes future contractual obligations as of December 31, 2004 (in thousands).
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At December 31, 2004 Payments Due by Period Within Over One Over Two Over Three After One to Two to Three to Five Five Year Years Years Years Years Total Certificate accounts $ 384,527 $ 88,934 $ 138,141 $ 51,621 $ 3,231 $ 666,454 Borrowings 396,566 50,000 75,000 221,392 742,958 Operating leases 734 664 608 1,006 2,646 5,658 Total contractual obligations $ 781,827 $ 139,598 $ 213,749 $ 52,627 $ 227,269 $ 1,415,070 The Association's use of FHLB advances is limited by the policies of the FHLB. Based on the current level of advances, asset size and available collateral under the FHLB programs, the Association at December 31, 2004, estimates that an additional $130.4 million of funding is available. At December 31, 2004, the Association has approximately $126.0 million of unpledged investments and mortgage-backed securities available for sale. At December 31, 2004, the Association maintained collateral at the Federal Reserve of Richmond, sufficient to ensure that approximately $18.6 million is available from the "Discount Window". All of the above liquidity sources except cash and cash equivalents give the Association approximately $275.1 million capacity to meet future funding demands. These sources are available should deposit cash flows and other funding be reduced in any given period. Should the Association so desire, it may request additional availability at the FHLB, subject to standard lending policies in effect at the FHLB.
During the current three months the Company experienced a net cash outflow from investing activities of $28.8 million consisting principally of purchases of investments and mortgage-backed securities available for sale of $50.0 million and a net increase of $26.7 million in loan growth, offset by repayments of mortgage-backed securities of $20.3 million, proceeds from sales of investments and mortgage-backed securities available for sale of $24.3 million and net redemption of FHLB stock of $2.8 million. The Company experienced cash inflows of $6.3 million and $13.5 million from operating activities and financing activities, respectively. Financing activities consisted principally of increases of $111.6 million in securities sold under agreements to repurchase and proceeds from exercise of stock options of $798 thousand offset by decreases in deposits of $15.6 million, decreases in FHLB advances of $74.0 million, advances by borrowers for taxes and insu rance of $3.9 million, prepayment penalties on FHLB advances of $964 thousand, dividends paid of $2.8 million and purchase of treasury stock of $1.3 million during the first quarter of the 2005 fiscal year.
Parent Company Liquidity
As a holding company, First Financial conducts its business through its subsidiaries. Unlike the Association, 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 other subsidiaries; (ii) payments from existing cash reserves and sales of marketable securities; and (iii) interest on its investment securities.
First 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 ability to make distributions may also depend on its ability to meet minimum regulatory capital requirements in effect during the
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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, 2004.
Asset/Liability Management
The Company's Asset and Liability Committee establishes policies and monitors results to control interest rate sensitivity. Although the Company utilizes measures such as static and dynamic gap, which are measurements of the differences between interest-sensitive assets and interest-sensitive liabilities repricing for a particular time period including modeling that includes and excludes loan prepayment assumptions. More important may be the process of evaluating how particular assets and liabilities are affected 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.
The following table is a summary of the Company's one-year dynamic gap at December 31, 2004 (amounts in thousands):
December 31, 2004
Interest-earning assets maturing or repricing within one year $ 973,908 Interest-bearing liabilities maturing or repricing within one year 1,091,463 Cumulative gap $ (117,555 )
Gap as a percent of total assets (4.79 )% Based on the Company's December 31, 2004 dynamic gap position, which considers expected prepayments of loans and mortgage-backed securities, in a one-year time period $973.9 million in interest-earning assets will reprice and approximately $1.1 billion in interest-bearing liabilities will reprice. This current dynamic gap position results in a negative one-year gap position of $117.6 million, or 4.8% of assets. The Company's one year dynamic gap position at December 31, 2003 was a negative $167.8 million, or 6.9% of assets. At the end of the most recent quarter ended September 30, 2004, the dynamic gap was a negative $143.4 million or 5.9% of assets. The above table does not take into consideration the repricing dynamics in adjustable-rate loans, such as minimum and maximum annual and lifetime interest rate adjustments and also the index utilized and whether the index is a current or lagging index. Included in the above numbers are the Company's estimates of prepayments of fixed-rate loans and mortgage-backed securities in a one-year period and the Company's expectation that under current interest rates, certain advances of the FHLB will not be called. Changes between the periods were related to differing prepayment speeds expected, levels of loans held for sale, increased rate sensitive assets, and changing liability funding.
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 DECEMBER 31, 2004 AND 2003The following table shows the variances in dollars and percentages between the Consolidated Statements of Income for First Financial for the quarters ended December 31, 2004 and 2003:
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CONSOLIDATED STATEMENTS OF INCOME Three Months Ended
December 31,
2004 2003 (Amounts in thousands,
except per share amounts)
(Unaudited)
Variance % change INTEREST INCOME Interest and fees on loans $ 28,094 $ 28,208 $ (114 ) (0.40 )% Interest on mortgage-backed securities 3,299 3,108 191 6.15 Interest and dividends on investments 548 427 121 28.34 Other 40 17 23 135.29 Total interest income 31,981 31,760 221 0.70 INTEREST EXPENSE Interest on deposits 5,880 5,759 121 2.10 Interest on borrowed money 6,955 6,862 93 1.36 Total interest expense 12,835 12,621 214 1.70 NET INTEREST INCOME 19,146 19,139 7 0.04 Provision for loan losses 1,300 1,425 (125 ) (8.77 ) Net interest income after provision for loan losses 17,846 17,714 132 0.75 OTHER INCOME Net gain on sale of loans 373 210 163 77.62 Net (loss) gain on sale of investment and mortgage-backed securities (56 )
436 (492 ) (112.84 ) Brokerage fees 634 494 140 28.34 Commissions on insurance 3,712 2,846 866 30.43 Other agency income 264 262 2 0.76 Service charges and fees on deposit accounts 2,947 2,757 190 6.89 Loan servicing operations, net 315 415 (100 ) (24.10 ) Gain on disposition of assets 1,566 247 1,319 534.01 Other 2,450 798 1,652 207.02 Total other income 12,205 8,465 3,740 44.18 NON-INTEREST EXPENSE Salaries and employee benefits 13,118 11,301 1,817 16.08 Occupancy costs 1,253 1,282 (29 ) (2.26 ) Marketing 504 350 154 44.00 Depreciation, rental and maintenance of equipment 1,173 1,336 (163 ) (12.20 ) Prepayment penalties on FHLB advances 964 964 100.00 Amortization of intangibles 121 96 25 26.04 Other 3,672 3,640 32 0.88 Total non-interest expense 20,805 18,005 2,800 15.55 Income before income taxes 9,246 8,174 1,072 13.11 Income tax expense 3,333 2,920 413 14.14 NET INCOME $ 5,913 $ 5,254 $ 659 12.54 % NET INCOME PER COMMON SHARE BASIC $ 0.48 $ 0.42 $ 0.06 14.29 % NET INCOME PER COMMON SHARE DILUTED $ 0.47 $ 0.41 $ 0.06 14.63 % 26
Net Interest Income
Net interest income was $19.1 million during the quarters ended December 31, 2004 and December 31, 2003. The net interest margin for the quarter ended December 31, 2004 was 3.38% compared with 3.44% during the quarter ended December 31, 2003. Average earnings assets increased 1.8% to $2.3 billion during the quarter ended December 31, 2004 compared to $2.2 billion in the December 2003 quarter. As a result of these variances, net interest income declined .04%, or $7 thousand, between the two quarters. The gross interest margin decreased from 3.40% during the quarter ended December 31, 2003 to 3.35% during the quarter ended December 31, 2004.
The following table summarizes rates, yields and average earning asset and costing liability balances for the respective quarters (amounts in thousands):
Three Months Ended December 31, 2004 2003 Average Average Average Average Balance Yield/Rate Balance Yield/Rate Loans $ 1,846,603 6.09 % $ 1,812,243 6.23 % Mortgage-backed securities 351,634 3.75 345,973 3.59 Investments and other interest-earning assets 64,654 3.31 64,925 2.71 Total interest-earning assets $ 2,262,891 5.64 % $ 2,223,141 5.72 % Deposits $ 1,517,898 1.54 % $ 1,463,772 1.56 % Borrowings 705,106 3.92 696,388 3.91 Total interest-bearing liabilities $ 2,223,004 2.29 % $ 2,160,160 2.32 % Gross interest margin 3.35 % 3.40 % Net interest margin 3.38 % 3.44 % Management expects continued pressure on its net interest margin as a result of the amortization and maturities of loans and investment and mortgage-backed securities and the need to reinvest those funds at current market interest rates. The Federal Reserve increased the federal funds target rate by 25 basis points in five moves starting in June of 2004 and ending in December 2004. However, the Treasury yield curve would indicate an increase in short-term rates over this time period while long-term rates have declined. A continuation of this trend for a longer period would be detrimental to the Company's net interest margin.
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 (in thousands):
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Three Months Ended December 31,
2004 versus 2003
Volume
Rate Total Interest income: Loans $ 534 $ (648 ) $ (114 ) Mortgage-backed securities 51 140 191 Investments and other interest-earning assets 22 122 144 Total interest income 607 (386 ) 221 Interest expense: Deposits 214 (93 ) 121 Borrowings 80 13 93 Total interest expense 294 (80 ) 214 Net interest income $ 313 $ (306 ) $ 7 Provision for Loan Losses
The provision for loan losses is recorded in amounts sufficient to bring the allowance for loan losses to a level deemed appropriate by management. Management determines this amount based on many factors, including its assessment of loan portfolio quality, loan growth, changes in loan portfolio composition, net loan charge-off levels, and expected economic conditions. The lower provision for loan losses in the December 2004 quarter was principally attributable to lower problem asset levels and lower net loan charge-offs trends. Net loan charge-offs totaled $1.4 million and $1.6 million for the quarters ended December 31, 2004 and 2003, respectively. Problem assets were $12.0 million at December 31, 2004 compared to $15.4 at December 31, 2003. Total loan loss reserves as of December 31, 2004 were $14.7 million, or .80% of the total net loan portfolio compared with $14.8 million, or .82% of the total net loan portfolio at December 31, 2003.
Other Income/Non-Interest Expenses
Total other income increased 44.2% or $3.7 million, during the quarter ended December 31, 2004 compared with the quarter ended December 31, 2003. Included in the current quarter's results were gains from property sales of $1.6 million and the receipt of a judgment settlement of $1.25 million. The Company recorded a net loss of $56 thousand from sales of securities during the quarter ended December 31, 2004 compared with net gains of $436 thousand a year ago. The purchase of Kimbrell Insurance Group in January 2004 contributed materially to higher total commissions received from insurance agency operations, which increased $866 thousand, or 30.4%, during the quarter ended December 31, 2004 compared with the quarter ended December 31, 2003. Net gains from loan sales also increased by $163 thousand in the current period compared with the comparable period in fiscal 2004. After excluding gains from securities and loan sales, commissions from insurance agency operations, gains on disposition of assets and the receipt of the judgment settlement, from other revenues during the respective quarters ended December 31, 2004 and 2003, all other sources of other income increased by $632 thousand, or 13.4%, during the current quarter. Fees on deposit accounts grew by 6.9%, attributable to continued growth in the number of retail and business checking accounts. Brokerage fees increased 28.3% in comparison to the December 31, 2003 quarter mainly as a result of increased revenues that partly was attributable to an additional office being added.
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Total non-interest expenses increased substantially, by $2.8 million during the quarter ended December 31, 2004 compared with the comparable quarter ended December 31, 2003. The Company incurred a $964 thousand prepayment fee related to the early prepayment of a $15 million Federal Home Loan Bank advance. Salaries and employee benefit costs were higher in the current quarter, increasing by $1.8 million, due partially to the addition of staff for three additional in-store sales offices opened over the past year, increased accruals related to the Company's defined contribution plan and incentive payments, and growth from employee costs related to the acquisition of the Kimbrell Insurance Group in January 2004. In addition, costs during the quarter included discretionary bonuses of approximately $658 thousand.
Income Tax Expense
During the first quarter of fiscal 2005 the Company's effective tax rate approximated 36.0% as compared to 35.7% during the first quarter of fiscal 2004.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
Accounting for Prescription-Drug Subsidy
On December 8, 2003, the President signed the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the "Act") into law. The Act introduces a voluntary prescription drug benefit under Medicare as well as a federal subsidy to sponsors of retiree health care plans that provide at least an actuarially equivalent benefit. The Financial Accounting Standards Board (FASB) issued a Staff Position, FAS 106-2, on May 9, 2004, which is effective for the first interim or annual reporting period beginning after June 15, 2004. The Company adopted FAS 106-2 effective July 1, 2004. The Company believes that the drug benefit under its postretirement benefit plan is actuarially equivalent to Medicare part D and that it will qualify for the subsidy starting in 2006. The Company began to recognize a reduction in postretirement benefit costs during the first quarter of fiscal 2005.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
See Footnote D for further discussion on Recently Issued Accounting Pronouncements.
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
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balance sheet strategies that are intended to optimize net interest income while maintaining market risk within a set of Board-approved guidelines.
As of December 31, 2004, 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, 2004.
In addition to regulatory calculations, the Company performs additional analyses assuming that interest rates increase or decrease by specified amounts in equal increments over the next four quarters. Combined with internal assumptions of new business activity and assumptions of changes in product pricing relative to rate changes, these analyses indicate that from a base rate scenario assuming no change in rates a gradual increase of 100 basis points over the next twelve months would decrease net interest income by 3.7%. Should rates gradually decline over the next twelve months by 100 basis points from the base rate scenario, net interest income would decrease by .3% over that period.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was carried out under the supervision and with the participation of the Company's management, including chief executive officer ("CEO") and chief financial officer ("CFO"), of the effectiveness of the Company's disclosure controls and procedures as of December 31, 2004. Based on that evaluation, the Company's management, including the CEO and CFO, has concluded that the Company's disclosure controls and procedures are effective. During the first quarter of fiscal 2005, there was no change in the Company's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
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FIRST FINANCIAL HOLDINGS, INC.
PART II - OTHER INFORMATIONItem 1 - Legal Proceedings
The Company is subject to various legal proceedings and claims arising in the ordinary course of its business. Any litigation is vigorously defended by the Company, and, in the opinion of management based on consultation with external legal counsel, any outcome of such litigation would not materially affect the Company's consolidated financial position or results of operations.
In September 1998, Peoples Federal filed a declaratory judgment action in Georgetown County, which named certain mortgage debtor defendants from a prior foreclosure and others, seeking a judicial determination of claims made by the former mortgage debtors against Peoples Federal as purchaser of the property foreclosed. A final order was issued in October 2001. The ruling resulted in a net money judgment in Peoples Federal's favor for conspiracy to devalue the foreclosed property. There were other rulings pertaining to such issues as declaration of developers' rights, future assessments, restrictive covenants and density designation, which were varied. Both sides appealed. Peoples Federal was consolidated into First Federal on August 30, 2002.
In April 2004, the South Carolina Supreme Court ruled in favor of Peoples Federal. The Court upheld the conspiracy finding, upheld the punitive damages ($600 thousand) awarded to Peoples Federal for the conspiracy, reversed an award of assessments and attorney's fees against Peoples Federal, and ruled Peoples Federal has developer's rights on the foreclosed property under the restrictive covenants as amended. The Court remanded the case for re-determination of the actual damages awarded to Peoples Federal for the conspiracy, due to an apparent double recovery. Peoples Federal was also awarded costs on the appeal as prevailing party.
A petition for rehearing of the appeal filed by the former mortgage debtors and others was denied by the Supreme Court. Following motions on the remand, an order was entered in August 2004, setting the actual conspiracy damage award to Peoples Federal at approximately $455 thousand, plus the $600 thousand punitive damages previously awarded and affirmed on appeal. Motion for reconsideration of that award was denied.
The former mortgage debtors and others also filed motions for supplemental relief for developers' assessments, fees, and costs of approximately $850 thousand, and for further determination of development rights. That motion was denied. A motion to refer the supplemental relief issues to the Special Referee who entered the conspiracy award on remand was also denied and denial of that motion to refer remains under reconsideration. The judgment debtors paid the conspiracy judgment in October 2004. The amount of the payment was approximately $1.25 million and was recorded in the first quarter of fiscal year 2005.
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Item 2 -- Changes in Securities, Use of Proceeds and Issuer and Issuer Purchases of Equity Securities
The following table summarizes the total number of shares repurchased by the Company as part of a publicly announced plan or as part of exercising outstanding stock options:
For the Three Months Ended December 31, 2004 Total Number Maximum Number of Shares of Shares that Total Number Average Purchased as May Yet Be of Shares Price paid Part of Publicly Purchased Under Purchased Per Share Announced Plan the Announced Plan 10/1/2004 thru 10/31/2004 1,674 $ 30.60 89,600 11/1/2004 thru 11/30/2004 35,930 31.57 31,300 58,300 12/1/2004 thru 12/31/2004 4,041 32.72 2,283 56,017 41,645 31.64 33,583 On May 27, 2003, the Company announced that the Board of Directors had authorized a stock repurchase program to acquire up to 650,000 shares of the Company's common stock. On April 20, 2004, the Company announced that the Board of Directors extended the expiration date from March 31, 2004 until November 30, 2004. At the time of expiration the Company had purchased approximately 594 thousand shares under the repurchase program at a total cost of $17.5 million.
In addition to the repurchase program described above, the Company's employee and outside directors stock options plans contain provisions allowing the repurchase of shares as part or the full payment for exercising outstanding options. For the three months ended December 31, 2004, 8,062 shares were repurchased under these provisions.
Item 5 -- Other Information
There was no information required to be disclosed by the Company in a report on Form 8-K during the first quarter of fiscal 2005 that was not so disclosed.
Item 6 -- Listing of Exhibits.
Exhibit No.
Description of Exhibit
Location
3.1
Certificate of Incorporation, as amended, of Registrant
Incorporated by reference to Exhibit 3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1993.
3.2
Bylaws, as amended, of Registrant
Incorporated by reference to Exhibit 3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995.
3.4
Amendment to Registrant's Certificate of Incorporation
Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1997.
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Exhibit No.
Description of Exhibit
Location
3.7
Amendment to Registrant's Bylaws
Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 2003.
3.8
Amendment to Registrant's Bylaws
Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1997.
3.9
Amendment to Registrant's Bylaws
Incorporated by reference to the Registrant's Form 8-K filed October 29, 2004
3.10
Amendment to Registrant's Bylaws
Incorporated by reference to the Registrant's Form 8-K filed December 1, 2004
3.11
Amendment to Registrant's Bylaws
Incorporated by reference to the Registrant's Form 8-K filed December 1, 2004
4
The Registrant hereby agrees to furnish to the Commission, upon request, the instruments defining the rights of the holders of each issue of long-term debt of the Registrant and its consolidated subsidiaries
N/A
10.3
Employment Agreement with A. Thomas Hood, as amended
Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended September 30, 1996.
10.4
Employment Agreement with Charles F. Baarcke, Jr.
Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended September 30, 1995.
10.5
Employment Agreement with John L. Ott, Jr.
Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended September 30, 1995.
10.6
1990 Stock Option and Incentive Plan
Incorporated by reference to the Registrant's Registration Statement on Form S-8 File No. 33-57855.
10.9
1996 Performance Equity Plan for Non-Employee Directors
Incorporated by reference to the Registrant's Proxy Statement for the Annual Meeting of Stockholders held on January 22, 1997.
10.10
Employment Agreement with Susan E. Baham
Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended September 30, 1996.
10.11
1997 Stock Option and Incentive Plan
Incorporated by reference to the Registrant's Preliminary Proxy Statement for the Annual Meeting of Stockholders held on January 28, 1998.
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Exhibit No.
Description of Exhibit
Location
10.16
2001 Stock Option Plan
Incorporated by reference to the Registrant's Proxy Statement for the Annual Meeting of Stockholders held on January 31, 2001.
10.17
2004 Outside Directors Stock Options-For-Fees Plan
Incorporated by reference to the Registrant's Proxy Statement for the Annual Meeting of Stockholders held on January 29, 2004.
10.18
2004 Employee Stock Purchase Plan
Incorporated by reference to the Registrant's Proxy Statement for the Annual Meeting of Stockholders held on January 29, 2004.
10.19
2005 Stock Option Plan
Incorporated by reference to the Registrant's Proxy Statement for the Annual Meeting of Stockholders held on January 27, 2005.
10.20
2005 Performance Equity Plan for Non-Employee Directors
Incorporated by reference to the Registrant's Proxy Statement for the Annual Meeting of Stockholders held on January 27, 2005.
31.1
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer
Filed herewith
31.2
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Financial Officer
Filed herewith
32
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer and Chief Financial Officer
Filed herewith
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FIRST FINANCIAL HOLDINGS, INC.
SIGNATURESPursuant 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: February 9, 2005
By:
/s/ Susan E. Baham
Susan E. Baham
Executive Vice President
Chief Financial Officer and Principal Accounting Officer
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