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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 30, 1995
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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 (I.R.S. Employer
of incorporation or organization) Identification No.)
34 Broad Street, Charleston, South Carolina 29401
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (803)529-5800
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of December 15, 1995, there were issued and outstanding
6,308,890 shares of the Registrant's common stock. The
registrant's common stock is traded over-the-counter and is
listed on the National Association of Securities Dealers
Automated Quotation ("Nasdaq") National Stock Market under the
symbol "FFCH." The aggregate market value of the common stock
held by nonaffiliates of the registrant, based on the closing
sales price of the registrant's common stock as quoted on the
Nasdaq Stock Market on December 15, 1995, was $123,023,355
(6,308,890 shares at $19.50 per share). It is assumed for
purposes of this calculation that none of the registrant's
officers, directors and 5% stockholders are affiliates.
DOCUMENT INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 1996 Annual Meeting
of Stockholders. (Part III)
PART I
Item 1. BUSINESS
GENERAL
First Financial Holdings, Inc. ("First Financial" or the
"Company") was incorporated in the State of Delaware on September
3, 1987, for the purpose of becoming a savings and loan holding
company for First Federal Savings and Loan Association of
Charleston ("First Federal"). On January 27, 1988, the
stockholders of First Federal approved the reorganization of
First Federal into the holding company form of ownership. The
reorganization was completed on June 30, 1988, on which date
First Federal became the wholly-owned subsidiary of the Company
and stockholders of First Federal exchanged their shares of First
Federal Common Stock for shares of the Company's Common Stock.
Prior to completion of the reorganization, the Company had no
assets or liabilities and engaged in no business activities.
Subsequent to the holding company reorganization, the Company has
not engaged in any significant activity other than holding the
stock of First Federal and certain passive investment activities.
On October 9, 1992, the Company consummated the acquisition
of Peoples Federal Savings and Loan Association, Conway, South
Carolina ("Peoples Federal") upon the voluntary supervisory
conversion of Peoples Federal from a federal mutual to a federal
stock savings and loan association, resulting in Peoples Federal
being held as a wholly-owned subsidiary of First Financial. As a
result of the acquisition of Peoples Federal, First Financial
became a multiple savings and loan holding company for First
Federal and Peoples Federal (together, the "Associations").
First Federal, chartered in 1934, is the largest financial
institution headquartered in the Charleston, South Carolina
metropolitan area and the second largest thrift institution in
South Carolina. First Federal is a federally-chartered stock
savings and loan association that conducts its business through
its home office in the city's historic district, twenty-one
branch offices in the three surrounding counties and two full-
service offices in Georgetown, South Carolina. During 1995 First
Federal completed construction on a permanent facility in
Summerville, South Carolina, replacing a temporary structure.
Peoples Federal was chartered in 1914 and is a federal stock
savings and loan association headquartered in Conway, South
Carolina. Peoples Federal is the result of a merger of Peoples
Federal of Conway and Peoples Federal of Florence in 1982.
Peoples Federal conducts its business through nine branch
offices, a loan production office in Sunset Beach, North Carolina
and its main office in Conway. Branches are located in the
Myrtle Beach/Grand Strand area (3), Florence (3), Conway (2) and
Loris (1). Peoples Federal opened its third office in Florence
during 1995.
The Company consolidated its Georgetown operations in 1995,
effected through the purchase of two offices of Peoples Federal
by First Federal and then the closure by First Federal of one of
the overlapping Georgetown offices.
First Federal and Peoples Federal are members of the Federal
Home Loan Bank ("FHLB") System and their savings deposits are
insured by the Federal Deposit Insurance Corporation ("FDIC")
under the Savings Association Insurance Fund ("SAIF") up to
applicable limits. The Associations are subject to comprehensive
regulation, examination and supervision by the Office of Thrift
Supervision ("OTS") and the FDIC.
OPERATING STRATEGY
The business of the Associations consists primarily of acting
as financial intermediaries by attracting savings deposits from
the general public and originating first mortgage loans on
residential properties located in the Associations' primary
market areas. The Associations also make construction and
consumer and other non-mortgage loans and invest in mortgage-
backed securities, federal government and agency obligations,
money market obligations and certain corporate obligations.
In addition to savings accounts and other deposits, the
Associations obtain funds from scheduled loan repayments, loan
prepayments, interest payments, loan sales, FHLB advances, other
borrowings and operations. The availability of funds from loan
sales is influenced by general interest rates and other market
conditions. Scheduled loan payments and interest payments have
been relatively stable sources of funds. Borrowings may be used
on a short term basis to compensate when deposit inflows are less
than projected and may be used on a longer term basis to support
expanded lending activities.
The Associations' principal sources of income are interest on
loans and mortgage-backed securities, loan origination fees,
servicing fees on loans, service charge income on accounts and
interest and dividends on investment securities. The
Associations' principal expenses are interest paid on deposits
and borrowings and expenses from operations. Savings accounts
and other types of deposits have traditionally been the primary
source of the Associations' funds for use in lending, investment
and other business purposes. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The Associations are subject to capital requirements under
OTS regulations, and must satisfy three minimum capital
requirements: core capital, tangible capital and risk-based
capital. For more information regarding the Associations'
compliance with capital requirements, see "Regulation of the
Associations -- Capital Requirements" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Regulatory Capital" and Note 17 of Notes to
Consolidated Financial Statements.
LENDING ACTIVITIES
General
At September 30, 1995, the Associations' net loan portfolio
totaled approximately $1.1 billion, or 79.16% of the Company's
total assets. The Associations' principal investment activity is
the origination of loans secured by single-family residential
real estate. Prior to fiscal 1993, the Associations' lending
activities also included the origination of significant amounts
of income property loans secured by multi-family and non-
residential real estate. In that year, First Federal virtually
curtailed all loans made on nonresidential properties primarily
due to adverse changes in market conditions and increased levels
of nonperforming assets arising from this type of lending.
Peoples Federal had earlier curtailed such lending before its
acquisition by the Company in early fiscal 1993. Thus, in the
period since 1992, the Associations have shifted their focus to
concentrate almost exclusively on single-family residential
mortgage lending and consumer lending. The Associations also
offer commercial business loans of the type traditionally offered
by commercial banks. Although federal regulations allow the
Associations to originate loans nationwide, the Associations have
originated substantially all of their loans in their primary
market areas of Charleston, Dorchester, Berkeley, Georgetown,
Horry and Florence counties in South Carolina and Brunswick
County in North Carolina.
Effective in February 1995, First Federal implemented a
correspondent lending program allowing for the purchases of loans
originated by unaffiliated mortgage lenders and brokers. Loans
submitted to First Federal by mortgage loan brokers are accepted
for funding only after approval by First Federal's loan
underwriters using normal underwriting standards. Loans
originated by these lenders and brokers are subject to the same
underwriting standards as those used by First Federal in its own
lending and are accepted for purchase by First Federal only after
approval by First Federal's underwriters. Purchases under this
program totaled $5.8 million in fiscal 1995. Selected lenders in
Greenville, Columbia and Hilton Head, South Carolina were
approved in 1995. Future plans include the expansion of this
network to other additional lenders in South Carolina and North
Carolina.
Since the early 1980s, the Associations' policies have been
to originate long-term, fixed-rate real estate loans pursuant to
certain guidelines which will permit the sale of such loans in
the secondary market to government agencies or private investors
and to emphasize the origination of adjustable-rate mortgage
loans, short-term construction, commercial business and consumer
loans for their own portfolios. These policies have made the
Associations' loan portfolios more interest rate sensitive. At
September 30, 1995, approximately 67% of the Associations' total
gross loans consisted of adjustable-rate loans. The Associations
generally retain the servicing on loans they originate.
The Associations' primary single-family product is the
conventional loan. However, they also originate loans that are
either partially guaranteed by the Veterans Administration ("VA")
or fully insured by the Federal Housing Administration ("FHA").
Set forth below is selected data relating to the aggregate
composition of the Associations' loan and mortgage-backed
securities portfolios on the dates indicated.
At September 30,
1995 1994 1993 1992 1991
Percent of Percent of Percent of Percent of Percent of
Amount Portfolio Amount Portfolio Amount Portfolio Amount Portfolio Amount Portfolio
(dollar amounts in thousands)
TYPE OF LOAN
Conventional real estate
loans:
Loans on existing
property $889,622 75.3% $787,525 73.9% $794,953 74.4% $584,104 68.1% $665,288 75.2%
Construction loans 39,116 3.3 40,827 3.8 23,989 2.3 26,242 3.0 25,694 2.9
Insured or guaranteed real
estate loans 36,219 3.1 28,702 2.7 18,107 1.7 11,758 1.4 11,694 1.3
Commercial business loans 27,447 2.3 24,962 2.3 29,189 2.7 38,033 4.4 41,584 4.7
Consumer loans:
Home equity 47,015 4.0 51,430 4.8 58,109 5.4 61,468 7.2 59,036 6.7
Mobile homes 25,027 2.1 28,276 2.7 31,476 3.0 33,622 3.9 31,712 3.6
Savings account loans 5,262 .4 4,677 .4 4,751 0.4 1,991 0.2 1,664 0.2
Other consumer loans 37,277 3.2 27,211 2.6 23,226 2.2 16,204 1.9 18,213 2.1
Total gross loans
receivable 1,106,985 93.7 993,610 93.2 983,800 92.1 773,422 90.1 854,885 96.7
Allowance for loan losses (10,637) (.9) (10,728) (1.0) (10,742) (1.0) (4,837) (.5) (4,351) (.5)
Loans in process (14,282) (1.2) (20,213) (1.9) (7,742) (.7) (12,201) (1.4) (11,577) (1.3)
Deferred loan fees
and discounts (1,320) (.1) (2,137) (.2) (2,969) (.3) (3,107) (.4) ( 3,784) (.4)
Loans receivable,
net 1,080,746 91.59 60,532 90.1 962,347 90.1 753,277 87.8 835,173 94.5
Mortgage-backed
securities 101,126 8.5 105,620 9.9 106,021 9.9 104,882 12.2 48,843 5.5
Loans receivable, net
and mortgage-backed
securities $1,181,872 100.0% $1,066,152 100.0% $1,068,368 100.0% $858,159 100.0% $884,016 100.0%
TYPE OF SECURITY
Real estate:
Single-family
residential $ 643,791 54.5% $ 551,179 51.7% $ 497,463 46.6% $309,093 36.0% $385,901 43.6%
2- to 4-family 53,736 4.5 31,604 3.0 32,087 3.0 29,762 3.4 28,679 3.2
Other dwelling units 57,269 4.9 59,106 5.5 61,391 5.8 56,211 6.6 55,540 6.3
Commercial or
industrial 210,161 17.8 215,165 20.2 246,108 23.0 227,038 26.5 232,556 26.3
Commercial business loans 27,447 2.3 24,962 2.3 29,189 2.7 38,033 4.4 41,584 4.7
Consumer loans:
Home equity 47,015 4.0 51,430 4.8 58,109 5.4 61,468 7.2 59,036 6.7
Mobile homes 25,027 2.1 28,276 2.7 31,476 3.0 33,622 3.9 31,712 3.6
Savings account loans 5,262 .4 4,677 .4 4,751 0.4 1,991 0.2 1,664 0.2
Other consumer loans 37,277 3.2 27,211 2.6 23,226 2.2 16,204 1.9 18,213 2.1
Total gross loans
receivable 1,106,985 93.7 993,610 93.2 983,800 92.1 773,422 90.1 854,885 96.7
Allowance for loan losses (10,637) (.9) (10,728) (1.0) (10,742) (1.0) (4,837) (.5) (4,351) (.5)
Loans in process (14,282) (1.2) (20,213) (1.9) (7,742) (.7) (12,201) (1.4) (11,577) (1.3)
Deferred loan fees
and discounts (1,320) (.1) (2,137) (.2) (2,969) (.3) (3,107) (.4) (3,784) (.4)
Loans receivable,
net 1,080,746 91.5 960,532 90.1 962,347 90.1 753,277 87.8 835,173 94.5
Mortgage-backed
securities 101,126 8.5 105,620 9.9 106,021 9.9 104,882 12.2 48,843 5.5
Loans receivable, net
and mortgage-backed
securities $1,181,872 100.0% $1,066,152 100.0% $1,068,368 100.0% $858,159 100.0% $884,016 100.0%
Includes mortgage-backed securities held to maturity and mortgage-backed securities available for sale.
Set forth below is a table showing the Associations' loan
origination, purchase and sales activity during the periods
indicated.
Year Ended September 30,
1995 1994 1993
(dollars in thousands)
Loans Originated:
Conventional Real Estate Loans:
Loans on existing property $ 123,923 $ 136,107 $ 133,055
Construction loans 55,479 54,126 22,296
Insured and guaranteed loans 7,638 16,366 8,492
Commercial business loans 25,204 18,264 16,227
Home equity lines of credit 6,477 9,086 13,394
Other loans 34,310 30,940 23,493
Total loans originated $ 253,031 $ 264,889 $ 216,957
Loans and Mortgage-backed Securities Purchased:
Real Estate Loans:
Conventional $ 6,655 $ 8 --
Insured and guaranteed
Mortgage-backed securities 5,744 45,254 --
Total loans and mortgage-backed
securities purchased $ 12,399 $ 45,262 --
Loans Sold:
Whole loans $ 1,501 $ 79,202 $ 63,196
Total loans sold $ 1,501 $ 79,202 $ 63,196
The Associations' total aggregate lending volume during 1995
declined $11.9 million, or 4.48%, from 1994. Management believes
the decline is due principally to higher mortgage interest rates
which resulted in a decline in refinancing activity. During
fiscal 1994, loans originated increased by $47.9 million over
1993 originations.
The following table shows, at September 30, 1995, the dollar
amount of adjustable-rate loans and fixed-rate loans in the
Associations' portfolios based on their contractual terms to
maturity. The amounts in the table do not include adjustments
for undisbursed amounts in loans in process, deferred loan fees
and discounts or allowances for loan losses. Demand loans, loans
having no stated schedule of repayments and no stated maturity,
and overdrafts are reported as due in one year or less.
Contractual principal repayments of loans do not necessarily
reflect the actual term of the Associations' loan portfolios.
The average life of mortgage loans is substantially less than
their contractual terms because of loan prepayments and because
of enforcement of due-on-sale clauses, which give the
Associations the right to declare a loan immediately due and
payable if, among other things, the borrower sells the real
property subject to the mortgage. The average life of mortgage
loans tends to increase when current market rates on mortgage
loans substantially exceed rates on existing mortgage loans.
Correspondingly, when market rates on mortgages decline below
rates on existing mortgage loans, the average life of these loans
tends to be reduced.
Over Over Over Over Over
Within One to Two to Three to Five to Ten to Over
One Two Three Five Ten Fifteen Fifteen
Year Years Years Years Years Years Years Total
(dollars in thousands)
Real estate mortgages:
Adjustable-rate $ 1,383 $ 1,053 $ 4,798 $ 5,965 $ 20,282 $ 61,332 $575,435 $ 670,248
Fixed-rate 14,966 10,328 3,367 21,268 28,823 69,708 146,249 294,709
Mortgage-backed
securities:
Adjustable-rate 460 52,734 53,194
Fixed-rate 264 76 6,079 18,657 22,856 47,932
Consumer loans:
Adjustable-rate 43,963 219 451 1,832 8,692 7,253 4,968 67,378
Fixed-rate 16,684 4,094 5,215 8,178 11,669 864 499 47,203
Commercial business
loans:
Adjustable-rate 14,607 1,881 1,239 1,723 159 744 20,353
Fixed-rate 4,190 1,969 596 339 7,094
Total $ 96,253 $ 19,808 $ 15,742 $ 39,305 $ 75,704 $157,814 $803,485 $1,208,111
Real Estate Lending
At September 30, 1995, the Associations' real estate loans
totaled $965.0 million, or 87.17% of gross loans receivable.
One- to four-family residential mortgage loans totaled $697.5
million or 63.01% of the Associations' gross loans receivable.
Multi-family mortgage loans totaled $57.3 million, comprising
5.17% of gross loans while non-residential and land loans totaled
$210.2 million, or approximately 18.98% of gross loans
receivable.
The Associations originate and purchase mortgage loans which
provide for periodic interest rate adjustments ("ARMs"), subject
to certain limitations. The ARMs currently offered by the
Associations have up to 30-year terms and interest rates which
adjust annually in accordance with a designated index. There is
generally a 2% cap on any increase or decrease in the interest
rate per year, with a 5% or 6% limit on the amount which the
interest rate can increase or decrease over the life of the loan.
The Associations' total ARMs were $670.2 million, or 55.48% of
the Associations' total loan portfolio, at September 30, 1995.
The Associations emphasize the origination of ARMs rather than
long-term, fixed-rate mortgage loans for inclusion in their
portfolios. In order to encourage the origination of ARMs with
interest rates which adjust annually, the Associations, like many
of their competitors, may offer a rate of interest on such loans
below the fully-indexed rate for the initial period of the loan.
The Associations presently offer single-family ARMs indexed to
the one year constant maturity treasury index. While these loans
are expected to adjust more quickly to changes in market interest
rates, they may not adjust as rapidly as changes occur in the
Associations' cost of funds. The Associations underwrite ARMs
based on the fully-indexed rate.
The Associations continue to offer long-term, fixed-rate
residential mortgage loans. Such loans are usually made pursuant
to certain guidelines which will permit the sale of such loans in
the secondary market. Based on the current level of market
interest rates and other factors, the Associations presently
intend to retain current originations of conforming 30-year and
15-year conventional fixed-rate mortgage loans in their
portfolios. This policy has been in effect since the last half
of fiscal 1994 and is dependent to a large extent on the general
level of market interest rates. The Associations originated
$63.8 million in long-term, fixed-rate residential mortgage loans
for sale during fiscal 1994. Sales of fixed-rate residential
loans totaled $79.2 million in 1994 and declined to $1.5 million
in 1995. At September 30, 1995, the Associations had no loans
held for sale.
The Associations offer a residential lending program which
provides for a bi-weekly payment to be made by the borrower
instead of a single monthly payment. This option significantly
reduces the interest payments on a typical mortgage loan by
shortening the term of the loan. The Associations' total bi-
weekly portfolio was $34.3 million, or 3.1% of gross loans
receivable, at September 30, 1995.
First Federal offers a first-time home buyers loan program
which incorporates a lower initial interest rate during the first
five years of the mortgage loan. Under this program, closing
costs, origination fees and appraisal and legal fees are reduced.
Home buyers may finance closing costs for up to five years. The
program also allows for 95% loan-to-value financing in many
cases. Current balances of first-time home buyers loans at
September 30, 1995 totaled $17.8 million.
The loan to value ratio, private mortgage insurance
requirements, maturity and other provisions of the loans made by
the Associations have generally reflected the policy of making
the maximum loan permissible consistent with applicable
regulations and guidelines, market conditions, and lending
practices and underwriting standards established by the
Associations. Mortgage loans made by the Associations are
generally long-term loans, amortized on a monthly basis with
principal and interest due each month. The initial contractual
loan payment period for residential loans typically ranges from
15 to 30 years. Borrowers may refinance or prepay loans at their
option, subject to prepayment penalty provisions when included in
the specific note. Interest rates and points charged on loans
originated by the Associations are competitive with other
financial institutions in their respective market areas.
The Associations also provide interim construction financing
for single-family dwellings and make building lot loans intended
for residential use. At September 30, 1995, the Associations'
speculative single-family construction loans totaled $12.4
million and lot loans totaled $19.2 million, or 1.12% and 1.73%
of the Associations' gross loans receivable, respectively. Other
residential construction loans on owner-occupied single-family
homes totaled $23.0 million, or 2.07% of gross loans receivable.
The Associations' policy is to grant single-family, owner-
occupied construction loans up to 90% of the appraised value.
These loans are made on both an adjustable-rate and fixed-rate
basis under a variety of lending programs offered by the
Associations. Speculative construction loans are made for one-
to two-year periods and land loans for up to a seven-year period,
both on an interest only basis. Generally, these loans may not
exceed 75% of the appraised value of the property. These periods
may be extended subject to negotiation and the payment of an
extension fee. Interest rates on adjustable-rate loans are
generally tied to the one year constant maturity treasury or the
prime lending rate and may be adjusted monthly. At the present
time, rates quoted are two and three quarters percent above the
one year constant maturity treasury, depending upon the type of
loan and its terms. Fixed-rate balloon lot loans are also
offered by the Associations. Single-family construction loans
made to builder/developers are currently at rates one and one
quarter percent above the prime lending rate and fixed for a term
of two years.
The Associations were also active in financing land
acquisition and development loans. However, due to general
economic conditions and management's assessment of the potential
for oversupply of single-family lots, the Associations have not
remained active in such lending programs. Acquisition and
development loans currently comprise $4.7 million, or .42% of
total gross loans.
The Associations have also originated both short-term
construction and permanent loans secured by industrial
warehouses, medical and professional office buildings, multi-
family apartment projects and mid-rise office buildings located
in their primary lending areas of Charleston, Dorchester,
Berkeley, Georgetown, Horry and Florence counties. Approximately
98% of the existing commercial and multifamily real estate loans
were made in these counties. Due to present market conditions,
the Associations have limited growth in loans made on non-
residential properties and placed greater emphasis on single-
family real estate lending. During fiscal 1993, management of
First Federal virtually ceased all commercial real estate lending
with a few exceptions: to refinance projects previously financed
by First Federal, to facilitate the sale of real estate owned or
to provide church financing. Generally, Peoples Federal does not
grant loans in excess of $500,000 except to finance sales of real
estate acquired in settlement of loans.
Interest rates charged on permanent commercial real estate
loans are determined by market conditions existing at the time of
the loan commitment. Such loans are generally made on an
adjustable-rate basis, ranging from three quarters to two percent
above the prime lending rate. Permanent commercial loans
generally have been made for terms of ten years with provisions
for interest rate adjustments semi-annually and payments based on
30-year amortizations. Payment adjustments occur annually.
First Federal has originated a substantial portion of its
commercial real estate loans at rates generally two to three
percent above its prevailing cost of funds. As such loans reach
call or loan review dates or refinance, it is First Federal's
current policy to negotiate most of these loans to new terms
based on the prime lending rate as the index.
Consumer Lending
Federal regulations permit the Associations to make secured
and unsecured consumer loans up to 35% of their assets. In
addition, the Associations have lending authority above the 35%
category for certain consumer loans, such as home equity loans,
property improvement loans, mobile home loans and loans secured
by savings accounts. The Associations' gross consumer loans
totaled $114.6 million at September 30, 1995, or 10.35% of gross
loans receivable at that date compared with $111.6 million, or
11.23% of total gross loans receivable at September 30, 1994.
The largest component of consumer lending is comprised of single-
family home equity lines of credit and other equity loans,
currently totaling $47.0 million, or 41.03% of all consumer
loans. Remaining consumer loans primarily consist of loans
secured by mobile homes, boats and automobiles.
Commercial Business Lending
The Associations are permitted under federal law to make
secured or unsecured loans for commercial, corporate business and
agricultural purposes including issuing letters of credit. The
aggregate amount of such loans outstanding generally may not
exceed 10% of an institution's assets.
First Federal has made commercial business loans since 1982.
These loans are generally made on a secured basis with terms that
usually do not exceed five years. Most of First Federal's
commercial business loans to date have interest rates that change
at periods ranging from 30 days to one year based on First
Federal's prime lending rate. Peoples Federal does not generally
offer loans of this type. At September 30, 1995, the
Associations' commercial business loans outstanding were $27.4
million, which represents a increase of $2.5 million, or 9.96%,
since September 30, 1994.
Mortgage-backed Securities
The Company's investment in mortgage-backed securities is a
major component of the Company's loan and mortgage-backed
securities portfolios. These investments serve several primary
functions. First, the Associations have securitized whole loans
for mortgage-backed securities issued by federal agencies to use
as collateral for certain of its borrowings and to secure public
agency deposits. Second, the Associations have previously
securitized loans with federal agencies to reduce their credit
risk exposure and to reduce regulatory risk-based capital
requirements. Third, the Associations purchase mortgage-backed
securities from time to time to meet earning asset growth
objectives and provide additional interest income when necessary
to augment reduced loan originations and replace loan portfolio
runoff. Approximately $5.7 million and $45.3 million of
adjustable-rate agency securities were purchased in 1995 and
1994, respectively. The Associations did not securitize any loans
during fiscal 1995 and 1994.
The Associations' portfolios of mortgage-backed securities
have been designated as held for investment purposes or as
available for sale in accordance with the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." The
Company's accounting for investments in mortgage-backed and other
debt securities is discussed in Note 1 of Notes to Consolidated
Financial Statements. On November 15, 1995, the Financial
Accounting Standards Board issued a Special Report that would
permit an enterprise to reassess the appropriateness of the
classifications of all securities held upon the initial adoption
of the Special Report provided that such reassessment and any
resulting reclassification is completed no later than December
31, 1995. The Company is evaluating its investment position with
respect to securities classified as held to maturity in light of
this special provision. Further information with respect to
mortgage-backed securities is provided in Notes 3 and 4 of Notes
to Consolidated Financial Statements.
Loan Solicitation, Processing and Underwriting
The Associations actively solicit loan applications from
existing customers, local real estate agents, builders, real
estate developers, and various other persons. Upon receipt of a
loan application from a prospective borrower, a credit report is
ordered to verify specific information relating to the loan
applicant's employment, income and credit standing. An appraisal
of the real estate intended to secure the proposed loan is
undertaken by an independent appraiser, who is approved by the
Association in accordance with current regulations and its
respective policies. As soon as the required information is
obtained and the appraisal is completed, the loan is submitted to
the Associations' loan underwriting officers who make a
recommendation to the Associations' Loan Committees for approval
or disapproval. One program offered by First Federal, the Quick
Close Mortgage, eliminates the requirement for a standard
appraisal and substitutes an internal property evaluation
performed by First Federal personnel. This program is only
available to loans with loan to value ratios of 90% or less and
for loan originations retained in First Federal's portfolio.
Stringent underwriting standards also apply.
First Federal's Management Loan Committee meets weekly and
approves all real estate and commercial loans for First Federal.
First Federal's Management Loan Committee is comprised of the
Senior Vice President, Lending Division; Senior Vice President,
Retail Banking Division; Community Reinvestment Act ("CRA")
officer; Vice President, Residential Lending; Vice President,
Loan Servicing; Vice President, Branch Operations; Vice President
of Commercial Lending and Vice President, Special Lending. All
supporting documentation is reviewed and decisions made by the
Committee are based on written underwriting guidelines. Loan
limits have been established by First Federal and are adhered to
strictly.
In addition to First Federal's Management Loan Committee, all
loans individually or in the aggregate that exceed $1.0 million
must be approved by the Board of Directors' Loan Committee
comprised of four First Federal Directors.
Peoples Federal's Loan Committee, which meets weekly, approves
all real estate and commercial loans for Peoples Federal. The
Loan Committee is comprised of the President, Vice President and
two members of the Board of Directors. All supporting
documentation is reviewed and decisions made by the Loan
Committee are based on written underwriting guidelines. Loan
limits have been established by Peoples Federal and are strictly
adhered to.
All loans individually or in the aggregate that exceed
$500,000 are reviewed and approved by the Board of Directors, in
addition to Peoples Federal's Loan Committee. Peoples Federal
does not grant individual loans in excess of $500,000, except to
finance sales of real estate owned.
When considering loans with a higher degree of risk,
additional collateral may be obtained or mortgage insurance or
other guarantees may be considered necessary by the Associations.
High risk loans are processed and approved in the same manner as
other loans. All related party transactions are processed
according to regulatory guidelines and normal underwriting
guidelines. The Loan Committees and full Boards of Directors of
the Associations review and approve all related party loans.
Loan applicants are promptly notified of the decision of the
Loan Committees by a letter setting forth the terms and
conditions of the loan commitment. These terms and conditions
include the amount of the loan, interest rate, amortization term,
a brief description of the real estate to be mortgaged to the
Associations, and the notice of requirement of fire and casualty
and other insurance coverage to be maintained to protect the
Associations' interests.
Certain risks are inherent with loan portfolios which contain
significant concentrations of commercial real estate,
construction, commercial business and consumer loans. While
these types of loans provide benefits to the Associations'
asset/liability management programs and reduce exposure to
interest rate changes, such loans may entail significant
additional credit risks compared to residential mortgage lending.
Commercial real estate and construction loans may involve large
loan balances to single borrowers or groups of related borrowers.
In addition, the payment experience on loans secured by income-
producing properties is typically dependent on the successful
operation of the properties and thus may be subject to a greater
extent to adverse conditions in the local or regional real estate
market or in the general economy. Construction loans may involve
additional risks attributable to the fact that loan funds are
advanced upon the security of the project under construction.
Uncertainties inherent in estimating construction costs, delays
arising from labor problems, material shortages, and other
unpredictable contingencies, make it difficult to evaluate
accurately the total loan funds required to complete a project,
and related loan to value ratios. Because of these factors, the
analysis of prospective construction loan projects requires an
expertise that is different in significant respects from the
expertise required for residential mortgage lending. Consumer
loans have historically tended to have a higher rate of default
than residential mortgage loans.
There are, due to the nature of ARMs, unquantifiable risks
resulting from increased costs to the borrower as a result of
periodic repricing. Despite the benefits of ARMs to the
Associations' asset/liability management program, they pose
additional risks, primarily because as interest rates rise, the
underlying payment by the borrower rises, increasing the
potential for default. At the same time, the marketability of
the underlying property may be adversely affected by higher
interest rates.
All of the above risk factors are present in the Company's
loan portfolio and could have an impact on future delinquency
rates and levels and charge-off rates and levels.
Limits on Loan Concentrations
First Federal's and Peoples Federal's permissible lending
limit for loans to one borrower is the greater of $500,000 or 15%
of unimpaired capital and surplus (except for loans fully secured
by certain readily marketable collateral, in which case this
limit is increased to 25% of unimpaired capital and surplus). At
September 30, 1995, First Federal's and Peoples Federal's lending
limits under this restriction were $11.9 million and $4.1
million, respectively. A broader limitation (the lesser of $30
million or 30% of unimpaired capital and surplus) is provided
under certain circumstances and subject to OTS approval for loans
to develop domestic residential housing units. In addition, the
Associations may provide purchase money financing for the sale of
any asset without regard to the loans to one borrower limitation
so long as no new funds are advanced and the Associations are not
placed in a more detrimental position than if they had held the
asset.
Loan Sales and Servicing
While the Associations originate adjustable-rate loans for
their own portfolios, fixed-rate loans are generally made on
terms that will permit their sale in the secondary market. The
Associations participate in secondary market activities by
selling whole loans and participations in loans to the Federal
National Mortgage Association ("FNMA"), the Federal Home Loan
Mortgage Corporation ("FHLMC"), as well as other institutional
investors. This practice enables the Associations to satisfy the
demand for such loans in their local communities, to meet asset
and liability objectives of management and to develop a source of
fee income through loan servicing. At September 30, 1995, the
Associations were servicing loans for others of $230.2 million.
Fiscal 1994 and 1993 loans sales totaled $79.2 million and
$63.2 million, respectively. Stimulated by consumers
refinancing higher rate mortgages, single-family fixed-rate loan
originations increased significantly during a portion of fiscal
1994 and virtually all of fiscal 1993. Long-term fixed-rate
mortgage loan originations meeting the criteria for sale totaled
$63.8 million during fiscal 1994 and $74.2 million in fiscal
1993. Loans originated and sold in 1995 of $1.5 million were
related to certain affordable housing programs of the State of
South Carolina. The remaining fixed-rate loans originated in
fiscal 1995 were retained in the Company's loan portfolio.
Loan Origination and Other Fees
In addition to interest earned on loans, the Associations
receive loan origination fees or "points" for originating loans.
Loan points are a percentage of the principal amount of the
mortgage loan charged to the borrower for originating the loan.
Loan origination fees received, if any, are offset by the
deferral of certain direct expenses associated with loans
originated. The net fees or costs are recognized as yield
adjustments by applying the interest method according to
SFAS No. 91, "Accounting for Nonrefundable Fees and Costs
Associated with Originating or Acquiring Loans and Initial Direct
Costs of Leases."
The Associations also receive other fees and charges relating
to existing loans, which include late charges and fees collected
in connection with a change in borrower or other loan
modifications. These fees and charges have not constituted a
material source of loan fee income.
NON-PERFORMING AND RISK ELEMENTS
Loan Delinquencies
When a borrower fails to make a required payment on a loan,
the Associations attempt to cure the default by contacting the
borrower. The Associations contact the borrower after a payment
is past due less than 20 days, and a late charge is assessed on
the loan. In most cases, defaults are cured promptly. If the
delinquency on a mortgage loan continues 60 to 90 days and is not
cured through normal collection procedures or an acceptable
arrangement is not worked out with the borrower, the Associations
will institute measures to remedy the default, including
commencing a foreclosure action. The Associations may accept
voluntary deeds of the secured property in lieu of foreclosure.
The Associations' mortgage loans are generally secured by the
use of a mortgage instrument. Notice of default under these
loans is required to be recorded and mailed. If the default is
not cured within three months, a notice of sale is posted, mailed
and advertised, and a sale is then conducted.
Problem Assets and Asset Classifications
Loans are reviewed on a regular basis and are placed on a non-
accrual status when, in the opinion of management, the collection
of accrued interest is doubtful. Generally, consumer loans and
commercial business loans are placed on non-accrual status when
the loans are more than 90 days delinquent. Unsecured consumer
loans are charged off when the loan becomes over 120 days
delinquent. Real estate loans are placed on non-accrual status
when management determines that the interest may not be
collectible.
Renegotiated loans are loans which the Company has agreed to
modify the terms of the loan. Such modifications may include
changing the interest rate charged and/or other concessions.
Real estate acquired by the Associations as a result of
foreclosure, in-substance foreclosure or by deed in lieu of
foreclosure is classified as real estate acquired in settlement
of loans until such time as it is sold. In-substance
foreclosures are loans accounted for as foreclosed properties
even though actual foreclosure has not occurred. When such real
property is acquired, it is recorded at fair value. Any write-
down of the property is charged to the allowance for loan losses.
The following table sets forth information with respect to the
Associations' problem assets at the dates indicated.
At September 30,
1995 1994 1993 1992 1991
(dollar amounts in thousands)
Non-accrual loans $ 5,088 $ 1,620 $ 3,705 $ 5,406 $ 7,487
Accruing loans 90 days or more delinquent 816 740 1,458 2,216 7,537
Renegotiated loans 11,103 13,129 9,001 7,210 9,036
In-substance foreclosures 2,621 2,834 5,260 4,171 5,737
Real estate and other assets acquired in
settlement of loans 3,144 3,290 5,480 7,951 6,569
$22,772 $21,613 $24,904 $26,954 $36,366
As a percent of loans receivable and real
estate and other assets acquired in
settlement of loans 2.10% 2.24% 2.56% 3.52% 4.29%
As a percent of total assets 1.67 1.74 1.98 2.73 3.69
Allowance for loan losses as a percent of
problem assets 46.71 49.64 43.13 17.95 11.96
The Company's problem assets as a percentage of total assets
over the past five years have declined from 3.69% at September
30, 1991 to 1.67% as of September 30, 1995. Although problem
asset totals may include loans which are considered to be earning
assets, there generally exists more than normal risk associated
with the severity of delinquency or the renegotiated terms of
these loans. Non-accrual loans increased approximately $3.5
million during 1995. Approximately $1.1 million of the increase
relates to two loans secured by a first mortgage on a subdivision
development and by junior liens on other residential and
commercial properties. The borrowers have experienced cash flow
problems resulting in delinquency. The Company's non-accrual
loans also increased in 1995 from the addition of two loans with
balances of approximately $1.1 million in the aggregate secured
by residential lots in a resort development. These loans were
brought current and certain terms modified in November of 1995.
Renegotiated loans declined $2.0 million in 1995. A $1.2 million
resort development loan renegotiated in 1983 was repaid in the
current year.
The allowance for loan losses of $10.6 million currently
covers 46.71% of reported problem assets, a significant increase
from 11.96% as of September 30, 1991. Management's long-term
goals continue to include lower ratios of problem assets to total
assets, although management expects there will always remain a
core level of delinquent loans and real estate acquired from
normal lending operations. Renegotiated loans currently comprise
approximately one half of total problem assets. All of these
loans were either current or less than 30 days delinquent at
September 30, 1995, and have an average yield of 7.85% compared
with an average yield of 7.30% one year ago.
For further discussion of the Associations' problem assets,
see "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Asset Quality" and Note 7 of the
Notes to Consolidated Financial Statements.
LOAN LOSS EXPERIENCE
The Associations' allowance for loan losses totaled $10.6
million at September 30, 1995. Management periodically evaluates
the adequacy of the allowance based upon historical delinquency
rates, the size of the Associations' loan portfolios and various
other factors. See Note 7 of Notes to the Consolidated Financial
Statements for information concerning the Associations' provision
and allowance for loan losses. For a discussion of changes in
the Company's allowance for loan losses, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Allowance for Loan Losses".
In the Spring of 1993 management learned of the initial
recommendations of the United States Department of Defense to
close numerous Naval facilities in the Charleston Metropolitan
Area. The Base Realignment and Closure Commission subsequently
voted to include the Charleston Naval Station and the Charleston
Naval Shipyard in its final list of military facilities to be
closed. The Commission also voted to consolidate the East Coast
Naval Electronics Systems Engineering Center in the Charleston
area. The provision for loan losses of $3.7 million in fiscal
1993 partially reflected increased reserves for the potential
impact on the loan portfolio of the military base closures in the
Charleston metropolitan area. The total allowance for loan
losses also increased in fiscal 1993 by $4.6 million for the
allowance on loans acquired in the Peoples Federal acquisition.
By April of 1996 most of the net reductions in employment related
to military downsizing will be completed. Management believes
the economic growth of Charleston and the surrounding counties
has been adversely impacted by base closures during the past
three fiscal years, with an adverse effect on housing demand.
Management, however, is very encouraged by recent announcements
of business expansion in the private sector which will help to
mitigate military-related job losses.
While the Associations believe they have established their
allowance for loan losses in accordance with generally accepted
accounting principles at September 30, 1995, there can be no
assurance that regulators, when reviewing the Associations'
portfolios in the future, will not request the Associations to
increase significantly their allowance for loan losses, thereby
adversely affecting the Company's financial condition and
earnings.
The following table sets forth the breakdown of the Company's
allowance for loan losses by loan category at the dates
indicated. Management believes that the allowance can be
allocated by category only on an approximate basis. The
allocation of the allowance to each category is not necessarily
indicative of future losses and does not restrict the use of the
allowance to absorb losses in any category.
At September 30,
1995 1994 1993 1992 1991
(dollar amounts in thousands)
Allowance for loan losses
applicable to:
Real estate loans $ 8,875 $ 9,074 $ 9,189 $ 3,036 $ 2,884
Commercial loans 715 750 648 698 672
Consumer loans 1,047 904 905 1,103 795
Total $10,637 $10,728 $10,742 $ 4,837 $ 4,351
At September 30,
1995 1994 1993 1992 1991
Percent of loans to
total loans:
Real estate loans 87.0% 85.9% 84.9% 80.0% 81.9%
Commercial business loans 2.5 2.6 3.0 5.0 5.0
Consumer loans 10.5 11.5 12.1 15.0 13.1
Total 100.0% 100.0% 100.0% 100.0% 100.0%
OTS Classification System
OTS regulations include a classification system for problem
assets, including assets that previously had been treated as
"scheduled items." Under this classification system, problem
assets for insured institutions are classified as "substandard,"
"doubtful" or "loss," depending on the presence of certain
characteristics discussed below.
An asset is considered "substandard" if inadequately protected
by the current net worth and paying capacity of the obligor or of
the collateral pledged, if any. "Substandard" assets include
those assets characterized by the "distinct possibility" that the
institution will sustain "some loss" if the deficiencies are not
corrected. Assets classified as "doubtful" have all of the
weaknesses inherent in those classified "substandard" with the
added characteristic that the weaknesses present make "collection
or liquidation in full," on the basis of currently existing
facts, conditions, and values, "highly questionable and
improbable." Assets classified "loss" are those considered
"uncollectible" and of such little value that their continuance
as assets without the establishment of a specific loss reserve is
not warranted.
When an institution classifies problem assets as either
substandard or doubtful, it is required to establish general
allowances for loan losses in an amount deemed prudent by
management. General allowances represent loss allowances which
have been established to recognize the inherent risks associated
with lending activities, but which, unlike specific allowances,
have not been allocated to particular problem assets. When an
institution classifies problem assets as "loss," it is required
either to establish a specific allowance for losses equal to 100%
of the amount of the asset so classified or to charge off such
amount. An institution's determination as to the classification
of its assets and the amount of its valuation allowances is
subject to review by the OTS, which can order the establishment
of additional general or specific loss allowances. The
Associations have classified $30.9 million in assets as
substandard and $612 thousand as loss, respectively, as of
September 30, 1995.
The OTS classification of assets regulation also provides for
a "special mention" designation, in addition to the
"substandard," "doubtful" and "loss" classifications. "Special
mention" assets are defined as those that do not currently expose
an institution to a sufficient degree of risk to warrant
classification as either "substandard," "doubtful" or "loss" but
do possess credit deficiencies or potential weaknesses deserving
management's close attention which, if not corrected, could
weaken the asset and increase such risk in the future. The
designation "special mention" shall be made by either the
institution or its examiner. The Associations had $32.8 million
of assets designated "special mention" as of September 30, 1995.
Loan Review and Classification Procedures
The Associations have established Asset Classification
Committees which meet to review the adequacy of the allowance for
loan losses, levels of charge-offs and loan delinquencies. In
addition, the Committees determine which loans should be
classified as substandard, doubtful or loss for regulatory
purposes. The Asset Classification Committees are comprised of
senior officers of the Associations, loan servicing, asset
management, credit review and audit department personnel. First
Federal's committee meets on a quarterly basis or more frequently
as needed. Peoples Federal's committee meets monthly.
The Committees' reviews of the adequacy of the allowance for
loan losses considers the composition and diversity of the
Associations' loan portfolios. For this review, the
Associations' loan portfolios are segmented into the following
major categories: single-family residential, multi-family
residential, commercial real estate, commercial business loans
and consumer loans by type of loan. Some of the more significant
factors that the Committees include in their reviews are
prevailing and anticipated economic conditions, the impact of
these conditions on property values, historical loan loss
experience in relationship to types of loans, the financial
status and credit standing of certain individual borrowers and
appraisals of the value of the collateral. Consideration also is
given to examinations performed by regulatory authorities and the
Associations' independent accountants. The Associations' single-
family residential real estate and consumer loans are relatively
homogeneous. Therefore, in general, management reviews
residential and consumer loan portfolios by analyzing their
performance and the composition of their collateral for the
portfolios as a whole. Additionally, the Asset Classification
Committees perform a review of the adequacy of general reserves
relative to the balances of classified loans.
INVESTMENT ACTIVITIES
The Associations are required under federal regulations to
maintain a minimum amount of liquid assets which may be invested
in specified short-term securities and are also permitted to
invest in other types of securities. Investment decisions are
made by authorized officers of the Company and the Associations
within policies established by the Company's and the
Associations' Boards of Directors. At September 30, 1995, the
Company's investment securities portfolio totaled approximately
$120.0 million which includes stock in the FHLB of Atlanta
approximating $12.0 million. Investment securities also include
U.S. Government and agency obligations and corporate bonds
approximating $62.7 million and $21.3 million, respectively. At
September 30, 1995 there were seven investments in mutual funds
totaling approximately $24.0 million. See Note 1 of Notes to
Consolidated Financial Statements for a discussion of the
Company's accounting for investment securities. See Notes 3, 4
and 5 of Notes to Consolidated Financial Statements for
additional information regarding investment securities and FHLB
of Atlanta stock.
Objectives of the investment policies of the Company and the
Associations are achieved through investing in U.S. Government,
federal agency, corporate debt securities, mortgage-backed
securities, short-term money market instruments, mutual funds,
loans and other investments as authorized by OTS regulations and
specifically approved by the Boards of Directors of the Company
and the Associations. Investment portfolio guidelines
specifically identify those securities eligible for purchase and
describe the operations and reporting requirements of the
Investment Committees which execute investment policy. The
primary objective of the Company in its management of the
investment portfolio is to maintain a portfolio of high quality,
highly liquid investments with returns competitive with short-
term treasury or agency securities and highly rated corporate
securities.
As members of the FHLB System, the Associations are required
to maintain an investment in the common stock of the FHLB of
Atlanta. See "Regulation of the Associations -- Federal Home
Loan Bank System." The stock of the FHLB of Atlanta is
redeemable at par value.
Securities may differ in terms of default risk, interest risk,
liquidity risk and expected rate of return. Default risk is the
risk that an issuer will be unable to make interest payments, or
to repay the principal amount on schedule. The Associations
primarily invest in U.S. Government and federal agency
obligations. U.S. Government obligations are regarded as free of
default risk. The issues of most government agencies are backed
by the strength of the agency itself plus a strong implication
that in the event of financial difficulty, the agency would be
assisted by the federal government. The credit quality of
corporate debt varies widely. The Associations only invest in
commercial paper and corporate debt securities which are rated in
either one of the three highest categories by two nationally
recognized investment rating services. Generally, the
Associations' investments meet the current liquidity guidelines
which necessitate that maturities of government and agency
investments fall within five years and maturities of corporate
securities fall within three years. The Associations have
generally staggered maturities within this five- or three-year
period and generally purchase medium-term securities with the
proceeds of maturing investments. Management's investment
strategy over the past several years has been one of consistently
reinvesting in high quality liquid assets for its investment
portfolio with yields which are competitive with short-term
treasury securities. The Company adopted SFAS 115 effective
September 30, 1993. Accordingly, investments are classified as
either "held to maturity", "available for sale" or as "trading
securities." At September 30, 1995 and 1994 the Company had no
"trading" securities.
The following table sets forth the carrying value of the
Company's investment securities portfolio, short-term investments
and FHLB of Atlanta stock. At September 30, 1995, the market
value of the Company's investment securities portfolio was $120.5
million.
At September 30,
1995 1994 1993
(dollars in thousands)
Investment securities:
U.S. Treasury securities and obligations
of U.S. government agencies and corporations $ 62,727 $ 67,132 $ 48,780
Corporate securities 21,301 13,565 11,049
Time deposits at FHLB of Atlanta 3,000 9,000
Asset Management Fund-Adjustable Rate
Mortgage Portfolio 8,932 8,815 8,022
Federated Adjustable Rate Mortgage Fund 9,689 9,618 10,020
Other Mutual funds and other 5,336 3,764 5,997
FHLB capital stock 11,982 11,982 11,686
Total investments 119,967 117,876 104,554
Interest bearing deposits 3,886 4,321 30,658
Federal funds sold 150
$123,853 $122,197 $135,362
Included in cash and cash equivalents in the Company's Consolidated Statements of Financial
Condition.
The following table sets forth the scheduled maturities,
carrying values, market values and average yields for the
Company's investment securities at September 30, 1995.
Year Ended September 30, 1995
One Year One to Five Five to Ten More than Total
or less Years Years Ten Years Investment Securities
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Market Average
Value Yield Value Yield Value Yield Value Yield Value Value Yield
(dollar amounts in thousands)
U.S. Treasury securities
and obligations of
U.S. government
agencies and
corporations $23,563 5.40% $32,321 6.30% $ 4,905 6.51% $ 1,938 7.50% $ 62,727 $ 62,902 6.01%
Corporate bonds 6,007 6.28 12,582 7.37 1,034 7.01 1,678 5.50 21,301 21,659 6.89
Mutual Funds 23,957 6.14 23,957 23,957 6.14
FHLB capital stock 11,982 7.25% 11,982 11,982 7.25
Total $53,527 5.83% $44,903 6.60% $ 5,939 6.60% $15,598 7.09% $119,967 $120,500 6.32%
Expected maturities may differ from contractual maturities because of call provisions.
FHLB of Atlanta stock is shown as maturing after ten years.
DEPOSITS
The Associations offer a number of deposit accounts including
passbook savings accounts, NOW/checking, commercial checking,
money market accounts, Individual Retirement Accounts ("IRA") and
certificate accounts which generally range in maturity from three
months to five years. Deposit account terms vary, with the
principal differences being the minimum balance required, the
time period the funds must remain on deposit and the interest
rate. For a schedule of the dollar amounts in each major
category of the Associations' deposit accounts, see Note 10 of
Notes to Consolidated Financial Statements.
Deposit Flow
The following table sets forth the dollar amount of deposits
in the various types of savings accounts offered by the
Associations on the dates indicated.
Balance at Balance at Balance at
September 30, % of September 30, % of September 30, % of
1995 Deposits 1994 Deposits 1993 Deposits
(dollar amounts in thousands)
NOW and checking accounts $ 117,149 10.90% $ 112,270 10.56% $ 103,412 9.84%
Passbook and
regular savings 125,588 11.69 150,693 14.17 159,242 15.15
Money market deposit accounts 131,225 12.22 140,511 13.22 154,101 14.66
Savings certificates
6 mos. or less 105,785 9.85 74,631 7.02 78,751 7.49
Savings certificates
greater than 6 mos. 406,108 37.80 406,564 38.25 385,082 36.63
Jumbo certificates 54,339 5.06 52,693 4.96 46,751 4.45
IRA accounts 134,119 12.48 125,633 11.82 123,880 11.78
Total $1,074,313 100.00% $1,062,995 100.00% $1,051,219 100.00%
Balances include different account types of varying maturities that have not been included in other categories above.
During the latter half of fiscal 1994 and for most of fiscal
1995 market interest rates increased substantially. As a result,
customers chose to move funds to certificates of deposit and
reduce balances in passbook, regular savings and money market
accounts. The preceding table reflects a decline in the
percentage of passbook and regular savings accounts to total
accounts from 15.15% of deposits at September 30, 1993, to 11.69%
of deposits at September 30, 1995. Money market balances as a
percent of deposits also declined from 14.66% to 12.22% of
deposits. Fixed term certificate of deposit accounts with
maturities of six months or less experienced growth of $31.2
million in 1995. IRA accounts also increased $8.5 million during
the year.
The Associations are subject to short-term fluctuations in
deposit flows as well as to internal shifts in deposits among the
various deposit products as customers move their funds to obtain
a better yield. The Asset and Liability Committees of the
Associations manage the mix, maturity and pricing of assets and
liabilities in order to minimize the impact on earnings as
changes in interest rates occur. During 1995 interest rates
increased in all maturities; therefore, new deposits as well as
maturing funds were at rates that resulted in an increase in the
cost of savings at the Associations. At September 30, 1995, the
average cost of savings for the Associations was 4.80% compared
to 4.01% as of September 30, 1994.
During fiscal 1995 and 1994, deposit balances increased $11.3
million and $11.8 million, respectively. After deducting
interest credited, deposit activity during fiscal 1995 and 1994
resulted in negative cash flows of $23.2 million and $18.5
million, respectively. During fiscal 1993 deposits increased
$313.6 million, primarily as a result of the inclusion of $291.1
million in deposits of Peoples Federal acquired on October 9,
1992. The Associations' deposit activity during fiscal 1993,
after deducting interest credited, produced negative cash flows
of $9.5 million. Low rates on savings and fixed term
certificates prompted many depositors to withdraw savings
deposits in favor of investments in alternative investments such
as stock and fixed income mutual funds.
The Associations' deposits are obtained primarily from
residents of South Carolina. Management estimates that less than
2% of deposits at September 30, 1995, are obtained from customers
residing outside of South Carolina. The principal methods used
by the Associations to attract deposit accounts include the
offering of a wide variety of services and accounts, competitive
interest rates, and convenient office locations and service
hours. The Associations utilize traditional marketing methods to
attract new customers and savings deposits, including mass media
advertising and direct mail. The Associations also provide
customers access to the convenience of automated teller machines
("ATMs") through a proprietary ATM network and access to regional
and national ATM networks. The Associations enjoy an excellent
reputation for providing products and services to meet the needs
of market segments, such as seniors. For example, 50-Plus Club
members benefit from a number of advantageous offerings and, with
the addition of the 50-Plus Club Coordinator, they now
participate in special programs, such as exclusive travel
packages, special events and classic movies.
Savings Deposit Activity
The following table sets forth the savings activities of the
Associations for the periods indicated.
Year Ended September 30,
1995 1994 1993
(dollars in thousands)
Net increase (decrease)
before interest
credited $(23,161) $(18,479) $ (9,499)
Deposits acquired 291,118
Interest credited 34,479 30,255 32,014
Net increase $ 11,318 $ 11,776 $ 313,633
Time Deposit Amounts
The following table sets forth the amount of the Associations'
time deposits as of the dates indicated.
At September 30,
Rate 1995 1994 1993
(dollars in thousands)
4.00% or less $ 4,836 $131,891 $265,899
4.01% - 6.00% 493,116 462,854 277,860
6.01% - 8.00% 177,626 39,350 62,381
8.01% - 10.00% 23,318 23,846 26,769
Above 10.00% 1,455 1,580 1,555
$700,351 $659,521 $634,464
Time Deposit Maturity Schedule
The following table sets forth the amounts and maturities of
the Associations' time deposits at September 30, 1995.
Amount Due
Less Than After
Rate One Year 1-2 Years 2-3 Years 3 Years Total
(dollars in thousands)
4.00% or less $ 4,833 $ 3 $ 4,836
4.01% - 6.00% 408,641 66,922 $ 11,063 $ 6,490 493,116
6.01% - 8.00% 102,952 24,459 10,062 40,153 177,626
8.01% - 10.00% 2,562 3,239 238 17,279 23,318
Above 10.00% 1,345 10 100 1,455
Total $ 520,333 $ 94,633 $ 21,363 $ 64,022 $ 700,351
Jumbo Certificates of Deposit
The following table indicates the amount of the Associations'
jumbo certificates of deposit by time remaining until maturity as
of September 30, 1995. Jumbo certificates of deposit require
minimum deposits of $100,000 and have negotiable interest rates.
Maturity Period At September 30, 1995
(dollars in thousands)
Three months or less $29,206
Over three through six months 13,624
Over six through twelve months 8,639
Over twelve months 2,870
Total $54,339
BORROWINGS
The Associations rely upon advances from the FHLB of Atlanta
to supplement their supply of lendable funds and to meet deposit
withdrawal requirements. The FHLB of Atlanta has served as the
Associations' primary borrowings source. Advances from the FHLB
of Atlanta are typically secured by the Associations' stock in
the FHLB of Atlanta and a portion of the Associations' first
mortgage loans. Interest rates on advances vary from time to
time in response to general economic conditions.
At September 30, 1995, the Associations had advances totaling
$107.9 million from the FHLB of Atlanta at interest rates ranging
from 4.65% to 6.34% and a weighted average rate of 5.88%. At
September 30, 1995, the maturity of the Associations' FHLB
advances ranged from one to 17 years. Substantially all of the
advances mature by June of 1996. See Note 11 of Notes to
Consolidated Financial Statements.
The Associations have periodically entered into transactions
to sell securities under agreements to repurchase ("reverse
repurchase agreements") through broker-dealers. Reverse
repurchase agreements evidence indebtedness of the Associations
arising from the sale of securities that the Associations are
obligated to repurchase at specified prices and dates. At the
date of repurchase, the Associations will, in some cases, enter
into another reverse repurchase agreement to fund the repurchase
of the maturing agreement. For regulatory and accounting
purposes these reverse repurchase agreements are deemed to be
borrowings collateralized by the securities sold. At September
30, 1995, the Associations had $44.5 million of outstanding
reverse repurchase agreements secured by mortgage-backed
securities. The agreements had a weighted average interest rate
of 5.89% at September 30, 1995, and mature within three months.
See Note 12 of Notes to Consolidated Financial Statements.
The following table sets forth certain information regarding
short-term borrowings by the Associations at the end of and
during the periods indicated:
At or For the Year Ended September 30,
1995 1994 1993 1992
(dollar amounts in thousands)
Weighted Average Rate Paid On
(at end of period):
FHLB advances 5.88% 5.03% 6.39% 7.14%
Securities sold under
agreements to repurchase 5.89% 5.20% 3.60% 3.63%
Maximum Amount Of Borrowings
Outstanding (during period):
FHLB advances $107,853 $ 82,962 $118,860 $164,090
Securities sold under
agreements to repurchase $ 45,217 $ 13,098 $ 53,230 $ 51,802
Approximate Average Amount Of
Short-term Borrowings With
Respect To:
FHLB advances $ 78,982 $ 57,002 $ 97,274 $138,127
Securities sold under
agreements to repurchase $ 26,769 $ 4,769 $ 22,299 $ 31,503
Approximate Weighted Average Rate
Paid On (during period):
FHLB advances 5.92% 5.23% 6.24% 6.67%
Securities sold under
agreements to repurchase 6.08% 4.40% 3.53% 4.96%
LONG-TERM DEBT
On September 17, 1992, the Company issued $20.3 million
aggregate principal amount of Senior Notes ("Notes") due
September 1, 2002. The Notes bear interest at 9-3/8% per year.
The Company received net proceeds of approximately $19.0 million,
$16.5 million of which was used to complete the acquisition of
Peoples Federal on October 9, 1992. The Company has agreed to
prepay, at a price of 100% of the principal plus accrued interest
to the date of prepayment, up to $1.0 million of the Notes
tendered by noteholders for prepayment during the period from the
date of issuance through September 1, 1993, and thereafter in any
twelve-month period ending September 1, subject to certain
limitations. The Company's obligation to prepay Notes tendered
for prepayment is not cumulative. Although the Company is
obligated to prepay in any prepayment period up to $1.0 million
of the Notes annually, it is not required to establish a sinking
fund or otherwise set aside funds for that purpose. The ability
of the Company to prepay the Notes depends, to a substantial
degree, upon interest income generated by the Company's
investment assets, the availability of alternative credit
sources, and the payment of dividends and other fees to the
Company by its subsidiaries. Notes totaling $487 thousand were
redeemed on September 1, 1993. None were redeemed during fiscal
1994 or 1995. See Note 13 of Notes to Consolidated Financial
Statements for additional information on the Notes.
The principal expense of the Company is the interest due
annually on the Notes which approximates $1.9 million, assuming
certain noteholder options to elect prepayment of the Notes are
not exercised. Payments of interest and principal on the Notes
are dependent upon the ability of First Federal and Peoples
Federal to pay dividends to the Company. Dividend and other
capital distributions by the subsidiaries are restricted by
regulation and may require regulatory approval. See --
"Regulation of the Associations - Dividend Limitations."
ASSET AND LIABILITY MANAGEMENT
Management believes that the analysis and management of
interest rate risk is crucial to the long-term profitability of
the Associations as well as the savings and loan industry
generally. During the past several years, management believes
that its balance sheet restructuring efforts have resulted in a
significant reduction in the Associations' vulnerability to
interest rate risk. The major component of this strategy has
been the origination of ARM loans, short-term construction loans,
commercial and consumer loans. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations --
Liquidity and Asset and Liability Management" for a further
discussion of the Associations' asset/liability management
strategies and for the Company's interest rate sensitivity
analysis table at September 30, 1995.
Rate/Volume Analysis
For the Company's rate/volume analysis, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Net Interest Income."
INTEREST RATE MARGIN
The following table sets forth certain information relating to
the Company's average balance sheet and reflects the average
yield on assets and average cost of liabilities for the periods
indicated and the average yields earned and rates paid at
September 30, 1995. Such yields and costs are derived by
dividing income or expense by the average balance of assets or
liabilities, respectively, for the periods presented. Certain
average balances are derived from month-end balances. Management
does not believe that the use of month-end balances instead of
daily average balances has caused any material difference in the
information presented.
The following table presents, for the periods indicated, the
total dollar amount of interest income and interest expense, as
well as the resulting yields earned and rates paid.
At September 30, Year Ended September 30,
1995 1995 1994 1993
Average Average Average Average Average Average Average
Balance Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
(dollar amounts in thousands)
Interest-earning assets:
Loans $1,092,703 8.11% $1,025,034 $80,434 7.85% $ 967,732 $72,829 7.53% $ 985,165 $80,178 8.14%
Mortgage-backed
securities 101,126 7.26 103,373 7,324 7.09 93,186 6,530 7.01 128,561 10,022 7.80
Investment securities 119,967 6.32 88,227 5,314 6.02 76,107 3,904 5.13 56,947 3,110 5.47
Other interest-earning
assets 3,886 6.50 39,786 2,431 6.11 57,310 2,389 4.17 57,433 2,097 3.64
Total interest-earning
assets 1,317,682 7.88 1,256,420 95,503 7.60 1,194,335 85,652 7.17 1,228,106 95,407 7.77
Non-interest-earning
assets 47,666 48,389 39,258 58,229
Total assets $1,365,348 $1,304,809 $1,233,593 $1,286,335
Interest-bearing liabilities:
Deposit accounts:
Checking accounts $ 117,149 1.52 $ 113,519 1,857 1.64 $ 109,116 1,871 1.71 $ 100,520 2,283 2.27
Savings accounts 125,588 2.75 133,967 3,777 2.82 157,382 4,454 2.83 133,801 4,704 3.52
Money market accounts 131,225 3.91 133,112 5,060 3.80 146,798 4,305 2.93 163,288 5,270 3.23
Certificate accounts 700,351 5.89 82,318 36,947 5.41 633,821 29,080 4.59 644,059 30,690 4.77
Total deposits 1,074,313 4.80 1,062,916 47,641 4.48 1,047,117 39,710 3.79 1,041,668 42,947 4.12
FHLB advances 107,853 5.88 78,982 4,674 5.92 57,002 2,980 5.23 97,274 6,066 6.24
Other borrowings 64,267 6.96 46,533 3,479 7.48 24,532 2,065 8.41 42,549 2,683 6.31
Total interest-bearing
liabilities 1,246,433 5.00 1,188,431 55,794 4.69 1,128,651 44,755 3.96 1,181,491 51,696 4.38
Non-interest-bearing
liabilities 27,506 29,337 22,938 30,414
Total liabilities 1,273,939 1,217,768 1,151,589 1,211,905
Stockholders' equity 91,409 87,041 82,004 74,430
Total liabilities
and stockholders'
equity $1,365,348 $1,304,809 $1,233,593 $1,286,335
Net interest income/gross
margin 2.88% $39,709 2.91% $40,897 3.21% $43,711 3.39%
Net yield on average
interest-earning assets 3.16% 3.42% 3.56%
Percent of average interest-
earning assets to average
interest-bearing liabilities 105.72% 105.82% 103.95%
Average balances of loans include non-accrual loans.
The average rate at September 30, 1995 is not adjusted for the effect of deferred loan fees and costs, which are amortized to
income over the lives of the related loans as a yield adjustment.
This computation includes interest-earning deposits which are classified as cash equivalents in the Company's Consolidated
Statements of Financial Condition.
For additional information regarding the Company's yields and
costs and changes in net interest income, refer to "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Net Interest Income."
SUBSIDIARY ACTIVITIES
The Associations are permitted under OTS regulations to invest
up to 2% of their assets in service corporations, with an
additional investment of 1% of assets where such investment is
primarily for community, inner-city and community development
purposes. At September 30, 1995, First Federal and Peoples
Federal were authorized to invest up to $19.8 million and $7.3
million, respectively, in the stock of, or loans to, service
corporations (based upon the 2% limitation). At September 30,
1995, First Federal's investment in stock and secured and
unsecured loans in its service corporations was $133,496. At
September 30, 1995, Peoples Federal's investment in its service
corporations was $1.3 million.
First Federal has two wholly-owned subsidiaries:
Charleston Financial Services
Incorporated on January 28, 1977, primary operations, from the
date of its incorporation through September 1981, were the
development of resort condominiums. Since September 1981, its
primary operations have involved the conversion of computer
information to a microfiche format, the sale of data processing
consulting services, the sale of title insurance, commercial
lending and the operation of an insurance agency specializing in
personal lines of insurance, principally homeowner and auto. In
fiscal 1987, most commercial lending activities were transferred
to First Federal. During fiscal 1995, insurance operations
discontinued with the sale of Adams Insurance Agency to Magrath
Insurance Agency, Inc., a subsidiary of Peoples Federal. During
late 1995, Charleston Financial Services established Link
Investment Services, Inc., a full-service brokerage subsidiary,
to offer alternative investment products such as annuities and
stock and fixed income or bond mutual funds to customers. At
September 30, 1995, First Federal's investment in and advances to
this subsidiary totaled $133,531. Operations of Charleston
Financial Services resulted in a net loss of $83,393 for the year
ended September 30, 1995. The net loss for the year ended
September 30, 1994 was $45,357.
The Carolopolis Corporation
The Carolopolis Corporation was incorporated in 1976 for the
principal purpose of land acquisition and development and
construction of various projects for resale but was inactive
until 1981. The majority of the development was through joint
ventures. At September 30, 1989 all of the projects developed
had been sold and no new projects were under construction or
planned. First Federal's investment in the Carolopolis
Corporation on September 30, 1995 was $354. Carolopolis was not
active in fiscal 1995 and 1994.
Peoples Federal has two wholly-owned subsidiaries, only one of
which is active:
Magrath Insurance Agency, Inc.
This subsidiary was purchased by Peoples Federal in 1986. In
1988, the agency purchased two smaller insurance agencies.
During 1995 an additional agency in Lake City, South Carolina,
was purchased as well as the Adams Insurance Agency in
Charleston, previously owned by a subsidiary of First Federal.
Total insurance premiums during fiscal year 1995 approximated
$1.2 million. In terms of premium dollars, the insurance agency
is approximately 60% commercial lines and 40% personal lines.
The agency represents several companies for both commercial and
personal insurance products. Peoples Federal's investment in the
Magrath Insurance Agency on September 30, 1995 was $1.2 million.
Operations of the Magrath Insurance Agency resulted in income of
$169,173 and $196,688 during fiscal 1995 and 1994, respectively.
COMPETITION
First Federal was the second largest and Peoples Federal the
fifth largest of 33 savings associations headquartered in the
State of South Carolina at September 30, 1995, based on asset
size as reported by the OTS. The Associations face strong
competition in the attraction of savings deposits and in the
origination of real estate and other loans. The Associations'
most direct competition for savings deposits has historically
come from other savings associations and from commercial banks
located throughout South Carolina. The Associations also face
competition for savings from credit unions and competition for
investors' funds from short-term money market securities and
other corporate and government securities. In the more recent
past, money market, stock, and fixed-income mutual funds have
attracted an increasing share of household savings and are
significant competitors of financial institutions. In light of
the elimination of federal interest rate controls on savings
deposits, the Associations have faced increasing competition from
commercial banks for savings deposits. Certain legislative and
regulatory measures have further increased competition between
thrift institutions and other financial institutions, such as
commercial banks, by expanding the financial services that may be
offered by thrift institutions such as demand deposits, trust
services and consumer and commercial lending authority, while
reducing or eliminating the difference between thrift
institutions and commercial banks with respect to long-term
lending authority and taxation.
The Associations' competition for real estate and other loans
comes principally from other thrift institutions, commercial
banks, mortgage banking companies, insurance companies,
developers, and other institutional lenders. The Associations
compete for loans principally through the interest rates and loan
fees they charge and the efficiency and quality of the services
they provide borrowers, developers, real estate brokers, and home
builders.
PERSONNEL
As of September 30, 1995, the Company had 509 full-time
equivalent employees compared with 537 as of September 30, 1994.
The Company provides its full-time employees and certain part-
time employees with a comprehensive program of benefits,
including medical and dental benefits, life insurance, long-term
disability coverage, a profit-sharing plan and a 401(k) plan.
The employees are not represented by a collective bargaining
agreement. The Company believes its employee relations are
excellent.
REGULATION
As federally-chartered and federally insured savings
associations, the Associations are subject to extensive
regulation. Lending activities and other investments must comply
with various statutory and regulatory capital requirements. The
Associations are regularly examined by their federal regulators
and file periodic reports concerning their activities and
financial condition. The Associations' relationship with their
depositors and borrowers is also regulated to a great extent by
federal and state laws, especially in such matters as the
ownership of savings accounts and the form and content of the
Associations' mortgage documents.
Federal Regulation of Savings Associations
The investment and lending authority of a federally chartered
savings association is prescribed by federal laws and
regulations, and it is prohibited from engaging in any activities
not permitted by such laws and regulations. These laws and
regulations generally are applicable to all federally chartered
savings associations and many also apply to state-chartered
savings associations.
Among other things, OTS regulations provide that no savings
association may invest in corporate debt securities not rated in
one of the four highest rating categories by a nationally
recognized rating organization. In addition, the Home Owners
Loan Act of 1933 ("HOLA") provides that loans secured by
nonresidential real property may not exceed 400% of regulatory
capital, subject to increase by the OTS on a case-by-case basis.
The Associations are subject to limitations on the aggregate
amount of loans that they can make to any one borrower, including
related entities. Applicable regulations generally do not permit
loans-to-one borrower to exceed 15% of unimpaired capital and
surplus, provided that loans in an amount equal to an additional
10% of unimpaired capital and surplus also may be made to a
borrower if the loans are fully secured by readily marketable
securities. The OTS by regulation has amended the loans-to-one
borrower rule to permit savings associations meeting certain
requirements, including fully phased-in capital requirements, to
extend loans-to-one borrower in additional amounts under
circumstances limited essentially to loans to develop or complete
residential housing units. At September 30, 1995, the
Associations were in compliance with applicable loans-to-one
borrower limitations.
Proposed Federal Legislation Regarding SAIF Recapitalization,
Recapture of Bad Debt Reserves, and Other Matters
The conference agreement on the budget reconciliation
legislation currently before the U.S. Congress contains a
provision calling for a one-time assessment on all SAIF-insured
deposits for the purpose of recapitalizing the SAIF. As
currently proposed, the one-time assessment would be .80% of
SAIF-insured deposits as of March 31, 1995. Based on First
Federal's and Peoples Federal's assessable deposits of $783.5
million and $284.1 million, respectively, at March 31, 1995, such
assessment would amount to $6.3 million for First Federal and
$2.3 million for Peoples Federal. The assessment is expected to
be a tax deductible expense and have the effect of immediately
reducing the respective capital of the Associations by the amount
of their respective assessment, net of applicable taxes.
Management cannot predict whether the legislation providing for
such assessment will be enacted, or, if enacted, the final amount
of such assessment and its ultimate impact on the Associations.
The conference agreement on the budget reconciliation
legislation currently before the U.S. Congress also contains a
provision that repeals the reserve method of accounting for
thrift bad debt reserves (including the percentage-of-taxable-
income ("PTI method")) for tax years beginning after December 31,
1995. This would require all thrifts, including the
Associations, to account for bad debts using either the specific
charge-off method (available to all thrifts) or the experience
method (available only to thrifts that qualify as "small banks,"
i.e., under $500 million in assets). The Associations currently
use either the PTI method or the experience method based upon the
method which yields the greater deduction. See "Federal and
State Taxation."
Under the proposed legislation, the change in accounting
method that eliminates the reserve method would trigger bad debt
reserve recapture for post-1987 reserves over a six-year period.
At September 30, 1995, the Associations' post-1987 reserves
amounted to $700 thousand. Pre-1988 reserves would be subject to
recapture if the institution makes distributions in excess of
accumulated earnings and profits or makes a distribution in a
partial or complete liquidation. A special provision suspends
recapture of post-1987 reserves for up to two years if, during
those years, the institution satisfies a "residential loan
requirement." This requirement would be met if the principal
amount of the institution's residential loans exceeds a base year
amount, which is determined by reference to the average of the
institution's loans during the six taxable years ending before
January 1, 1996. However, notwithstanding this special
provision, recapture would be required to begin no later than the
first taxable year beginning after December 31, 1997.
The proposed legislation differs significantly from current
law, which triggers recapture upon a thrift institution's
conversion to a bank or upon failure to satisfy the tax law
definition of a thrift. In addition, under current law, a
converted thrift only recaptures the portion of the reserve
attributable to use of the PTI method. There is no recapture of
bank reserves if the converted thrift used the experience method
and continues to qualify as a small bank as defined above.
Management cannot predict whether the legislation providing for
the recapture of bad debt reserves will be enacted, or if
enacted, the final form of such legislation and its ultimate
impact on the Associations.
In addition to the above matters, separate legislation
proposing a comprehensive reform of the banking and thrift
industries is under consideration by the U.S. Congress to (i)
merge the Bank Insurance Fund "BIF" and the SAIF on January 1,
1998, at which time banks and thrifts would pay the same deposit
insurance premiums; (ii) require federal savings associations
(including the Associations) to convert to a national bank or a
state-charted thrift by January 1, 1998; (iii) require all
savings and loan holding companies (including the Company) to
become bank holding companies as of January 1, 1998; and (iv)
abolish the OTS. Management cannot predict whether such
legislation will be enacted, or, if enacted, the final form of
such legislation and its ultimate impact on the Associations.
For additional discussion of this proposed legislation, see
"Management's Discussion and Analysis of Financial Condition and
Results of Operations--Recapitalization Proposal."
Office of Thrift Supervision
The OTS is an office in the Department of the Treasury subject
to the general oversight of the Secretary of the Treasury.
Except as modified by FIRREA, the OTS possesses the supervisory
and regulatory duties and responsibilities formerly vested in the
Federal Home Loan Bank Board. Among other functions, the OTS
issues and enforces regulations affecting federally-insured
savings associations and regularly examines these institutions.
Federal Deposit Insurance Corporation
The FDIC is an independent federal agency established
originally to insure the deposits, up to prescribed statutory
limits, of federally insured banks and to preserve the safety and
soundness of the banking industry. Upon the enactment of FIRREA
on August 9, 1989, the FDIC also became the insurer, up to the
prescribed limits, of the deposit accounts held at federally
insured savings associations and established two separate funds
that are maintained and administered by the FDIC: the BIF and the
SAIF. As such, the FDIC has examination, supervisory and
enforcement authority over all savings associations.
The annual assessment for SAIF members for deposit insurance
for the period from January 1, 1991 through December 31, 1992 was
equal to .23% of insured deposits. Recent legislation eliminated
limitations on increases in federal deposit insurance premiums
and authorized the FDIC to increase the assessment rates to the
extent necessary to protect the SAIF (as well as the BIF). The
FDIC has issued a final regulation which was effective for the
first semi-annual period of 1993 and thereafter, and which is
intended to be a preliminary step toward the risk-based
assessment system required to be implemented by January 1, 1994.
Under the regulation, institutions are assigned to one of three
capital groups which are based solely on the level of an
institution's capital "well capitalized," "adequately
capitalized," and "undercapitalized" which are defined in the
same manner as the regulations establishing the prompt corrective
action system under Section 38 of the Federal Deposit Insurance
Act ("FDIA"), as discussed below. These three groups are then
divided into three subgroups which reflect varying levels of
supervisory concern, from those which are considered to be
healthy to those which are considered to of substantial
supervisory concern. The matrix so created results in nine
assessment risk classifications, with rates ranging from .23% for
well capitalized, financially sound institutions with only a few
minor weaknesses to .31% for undercapitalized institutions that
pose a substantial risk of loss to the SAIF unless effective
corrective action is taken.
On August 8, 1995, the FDIC revised the premium schedule for
BIF-insured banks to provide a range of .04% to .31% of deposits
(as compare to the current range of .23% to .31% of deposits for
SAIF-insured institutions). On November 14, 1995, the FDIC again
revised the premium schedule for BIF-insured banks to eliminate
premiums for all well-capitalized banks (except for the statutory
minimum annual assessment of $2,000) and to provide a range of
.03% to .27% of deposits for all other banks. Approximately 92%
of all BIF-insured banks are categorized as "well-capitalized."
It is anticipated that the SAIF will not be adequately
recapitalized until 2002, absent a substantial increase in
premium rates or the imposition of special assessments or other
significant developments, such as a merger of SAIF and BIF. As a
result of this disparity, a recapitalization plan is under
consideration by the Congress, which reportedly provides for a
one-time assessment of .80% to be imposed on all SAIF deposits as
of March 31, 1995, in order to recapitalize SAIF and eliminate
the disparity. Based on the Associations' assessable deposits of
approximately $1.1 billion at March 31, 1995, a one-time
assessment of .80% would equal approximately $8.6 million, before
consideration of the expected tax benefits. At this time, no
assurance can be given, as to whether the recapitalization plan
will be implemented or as to the nature or extent of any
competitive disadvantage which may be experienced by SAIF member
institutions. As the date this legislation is signed into law
would represent the recordation date of the expense, no liability
was incurred during fiscal 1995.
The FDIC may terminate the deposit insurance of any insured
depository institution if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound
practices, is in an unsafe or unsound condition to continue
operations, or has violated any applicable law, regulation, order
or any condition imposed by an agreement with the FDIC. It also
may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the
institution has no tangible capital. If insurance of accounts is
terminated, the accounts at the institution at the time of
termination, less subsequent withdrawals, shall continue to be
insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which
could result in termination of the deposit insurance of the
Associations.
Federal Home Loan Bank System
The FHLB System, consisting of 12 FHLBs, is under the
jurisdiction of the Federal Housing Finance Board ("FHFB"). The
designated duties of the FHFB are to: supervise the FHLBs;
ensure that the FHLBs carry out their housing finance mission;
ensure that the FHLBs remain adequately capitalized and able to
raise funds in the capital market; and ensure that the FHLBs
operate in a safe and sound manner.
The Associations, as members of the FHLB-Atlanta, are required
to acquire and hold shares of capital stock in the FHLB-Atlanta
in an amount equal to the greater of (i) 1.0% of the aggregate
outstanding principal amount of residential mortgage loans, home
purchase contracts and similar obligations at the beginning of
each year, or (ii) 1/20 of its advances (borrowings) from the
FHLB of Atlanta. First Federal and Peoples Federal were in
compliance with this requirement with an investment in
FHLB-Atlanta stock of $9.4 million and $2.6 million at
September 30, 1995, respectively.
Among other benefits, the FHLB provides a central credit
facility primarily for member institutions. It is funded
primarily from proceeds derived from the sale of consolidated
obligations of the FHLB System. It makes advances to members in
accordance with policies and procedures established by the FHFB
and the Board of Directors of the FHLB-Atlanta. First Federal
and Peoples Federal had FHLB advances totaling $65.4 million and
$42.4 million, respectively, at September 30, 1995.
Prompt Corrective Action
Under Section 38 of the FDIA, as added by the Federal Deposit
Insurance Corporation Improvement Act ("FDICIA"), each federal
banking agency is required to implement a system of prompt
corrective action for institutions which it regulates. In
September 1992, the federal banking agencies adopted
substantially similar regulations which are intended to implement
the system of prompt corrective action established by Section 38
of the FDIA, which became effective on December 19, 1992. Under
the regulations, an institution shall be deemed to be (i) "well-
capitalized" if it has a total risk-based capital ratio of 10.0%
or more, has a Tier I risk-based capital ratio of 6.0% or more,
has a Tier I leverage capital ratio of 5.0% or more and is not
subject to specified requirements to meet and maintain a specific
capital level for any capital measure: (ii) "adequately
capitalized" if it has a total risk-based capital ratio of 8.0%
or more, a Tier I risk-based capital ratio of 4.0% or more and a
Tier I leverage capital ratio of 4.0% or more (3.0% under certain
circumstances) and does not meet the definition of "well
capitalized," (iii) "undercapitalized" if it has a total
risk-based capital ratio that is less than 8.0%, a Tier I
risk-based capital ratio that is less than 4.0% or a Tier I
leverage capital ratio that is less than 4.0% (3.0% under certain
circumstances), (iv) "significantly undercapitalized" if it has a
total risk-based capital ratio that is less than 6.0%, a Tier I
risk-based capital ratio that is less than 3.0% or a Tier I
leverage capital ratio that is less than 3.0% and (v) "critically
undercapitalized" if it has a ratio of tangible equity to total
assets that is equal to or less than 2.0%.
Section 38 of the FDIA and the implementing regulations also
provide that a federal banking agency may, after notice and an
opportunity for a hearing, reclassify a well-capitalized
institution as adequately capitalized and may require an
adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in
the next lower category if the institution is in an unsafe or
unsound condition or engaging in an unsafe or unsound practice.
(The FDIC may not, however, reclassify a significantly
undercapitalized institution as critically undercapitalized.)
An institution generally must file a written capital
restoration plan which meets specified requirements, as well as a
performance guaranty by each company that controls the
institution, with the appropriate federal banking agency within
45 days of the date that the institution receives notice or is
deemed to have notice that it is undercapitalized, significantly
undercapitalized or critically undercapitalized. Immediately
upon becoming undercapitalized, an institution shall become
subject to the provisions of Section 38 of the FDIA, which sets
forth various mandatory and discretionary restrictions on its
operations.
At September 30, 1995, the Associations were well-capitalized
institutions under the prompt corrective action regulations of
the OTS.
Standards for Safety and Soundness
FDICIA requires the federal banking regulatory agencies to
prescribe, by regulation, standards for all insured depository
institutions and depository institution holding companies
relating to: (i) internal controls, information systems and
internal audit systems; (ii) loan documentation; (iii) loan
underwriting; (iv) interest rate risk exposure; (v) asset growth;
and (vi) compensation, fees and benefits. The compensation
standards would prohibit employment contracts, compensation or
benefit arrangements, stock options plans, fee arrangements or
other compensatory arrangements that would provide excessive
compensation, fees or benefits or could lead to material
financial loss. In addition, the federal banking regulatory
agencies would be required to prescribe by regulation standards
specifying: (i) maximum classified assets to capital ratios;
(ii) minimum earnings sufficient to absorb losses without
impairing capital; and (iii) to the extent feasible, a minimum
ratio of market value to book value for publicly traded shares of
depository institutions and depository institution holding
companies.
On July 10, 1995, the OTS and other federal banking regulatory
agencies jointly issued final safety and soundness standards.
The safety and soundness standards were issued in the form of
guidelines and cover such factors as internal controls and audit
systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, as well as compensation, fees and
benefits. The agencies may require compliance plans to be filed
by an insured depository institution for failure to meet the
safety and soundness standards.
On the same date, the agencies also published separate
proposed safety and soundness standards for asset quality and
earnings. After reviewing the comments, which were due by August
24, 1995, the agencies may add the asset quality and earnings
standards to the standards already in the guidelines.
Branching by Federally Chartered Associations
OTS rules on branching by federally chartered savings
associations permit nationwide branching to the extent allowed by
federal statute. This action, which became effective May 2,
1992, permits associations with interstate networks to diversify
their loan portfolios and lines of business. OTS authority
preempts any state law purporting to regulate branching by
federal savings associations.
The limitations that remain are statutory. An association may
not establish or operate a branch outside the state in which the
association has its home office if such branch would violate
section 5(r) of the HOLA. This section permits a federal savings
association to branch outside its home state if (i) the
association meets the domestic building and loan test of the
Code, section 7701(a)(19) or the asset composition test of
subparagraph (c) of that section, and (ii) each branch outside of
its home state also satisfies the domestic building and loan
test.
The second limitation prohibits branching that would result in
the formation of a multiple savings and loan holding company
controlling savings associations in more than one state in
violation of HOLA section 10(e)(3). There are three safe harbors
for permissible multiple holding company operations. First, a
holding company may acquire an association or operate branches in
additional states pursuant to a supervisory acquisition under
section 13(k) of the FDIA. Second, holding companies that, as of
March 5, 1987, controlled an association subsidiary that operated
an office in an additional state are permitted to acquire another
association or branch in that state. The third exception permits
interstate holding company operations if the law of the
additional state specifically authorizes acquisition of its
federally-chartered associations by federally-chartered
associations or their holding companies in the state where the
acquiring association or holding company is located.
To obtain supervisory clearance for branching, an applicant's
regulatory capital must meet or exceed the minimum requirements
established by law and by OTS regulations. Section 38(e)(4) of
the FDIA prohibit