UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended
June 30, 2002OR
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-17122
FIRST FINANCIAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware
57-0866076
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
34 Broad Street, Charleston, South Carolina
29401
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code
(843) 529-5933
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class
Outstanding Shares at
Common Stock
July 31, 2002
$.01 Par Value
13,364,561
FIRST FINANCIAL HOLDINGS, INC.
INDEX
PART I - FINANCIAL INFORMATION
PAGE NO.
Consolidated Statements of Financial Condition
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at June 30, 2002 and September 30, 2001
Consolidated Statements of Income for the Three
2
Months Ended June 30, 2002 and 2001
Consolidated Statements of Income for the Nine
3
Months Ended June 30, 2002 and 2001
Consolidated Statements of Cash Flows for the
4
Nine months Ended June 30, 2002 and 2001
Notes to Consolidated Financial Statements
5-9
Management's Discussion and Analysis of Financial
10-22
Condition and Results of Operations
PART II - OTHER INFORMATION
23-25
SIGNATURES
26
CEO/CFO CERTIFICATION
27
SCHEDULES OMITTED
All schedules other than those indicated above are omitted because of the absence of the conditions under which they are required or because the information is included in the Financial Statements and related notes.
FIRST FINANCIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION June 30 September 30, 2002 2001 (Amounts in thousands) (Unaudited) ASSETS Cash and cash equivalents $ 96,668 $ 97,554 Investments available for sale, at fair value 9,345 6,259 Investment in capital stock of FHLB, at cost 33,250 33,150 Loans receivable, net of allowance of $16,179 and $15,943 1,892,105 1,905,333 Mortgage-backed securities available for sale, at fair value 156,236 208,153 Accrued interest receivable 11,788 13,535 Office properties and equipment, net 32,896 32,968 Real estate and other assets acquired in settlement of loans 3,922 3,337 Other assets 27,152 25,375 Total assets $ 2,263,362 $ 2,325,664
LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposit accounts $ 1,411,895 $ 1,395,785 Advances from Federal Home Loan Bank 615,000 625,000 Securities sold under agreements to repurchase - 66,316 Other short-term borrowings 23,750 23,750 Advances by borrowers for taxes and insurance 4,177 5,896 Outstanding checks 16,230 17,454 Accounts payable and other liabilities 26,082 34,570 Total liabilities 2,097,134 2,168,771 Stockholders' equity: Serial preferred stock, authorized 3,000,000 shares--none issued Common stock, $.01 par value, authorized 24,000,000 shares, issued 15,655,003 and 15,427,872 shares at June 30, 2002 and September 30, 2001, respectively 156 154 Additional paid-in capital 36,861 34,015 Retained income, substantially restricted 154,188 139,643 Accumulated other comprehensive income 2,659 2,878 Treasury stock at cost, 2,316,722 and 2,032,009 shares at June 30, 2002 and September 30, 2001, respectively (27,636 ) (19,797 ) Total stockholders' equity 66,228 156,893 Total liabilities and stockholders' equity $ 2,263,362 $ 2,325,664
The accompanying notes are an integral part of the statements 1
FIRST FINANCIAL HOLDINGS, INC. CONSOLIDATED STATEMENTS OF INCOME Three Months Ended June 30, 2002 2001 (Amounts in thousands, except per share amounts) (Unaudited) INTEREST INCOME Interest on loans and mortgage-backed securities $ 37,147 $ 42,409 Interest and dividends on investments 493 791 Other 110 236 Total interest income 37,750 43,436 INTEREST EXPENSE Interest on deposits 9,444 14,353 Interest on borrowed money 7,745 10,797 Total interest expense 17,189 25,150 NET INTEREST INCOME 20,561 18,286 Provision for loan losses 1,472 1,350 Net interest income after provision for loan losses 19,089 16,936 OTHER INCOME Net gain on sale of loans 728 559 Net gain (loss) on sale of investment and mortgage-backed securities 303 (3 ) Brokerage fees 579 430 Commissions on insurance 2,193 1,309 Service charges and fees on deposit accounts 2,348 2,166 Loan servicing fees 400 489 Real estate operations, net (100 ) (74 ) Other 1,287 972 Total other income 7,738 5,848 NON-INTEREST EXPENSE Salaries and employee benefits 9,665 8,074 Occupancy costs 1,262 993 Marketing 487 402 Depreciation, amortization, rental and maintenance of equipment 1,261 1,130 FDIC insurance premiums 68 64 Other 3,020 2,971 Total non-interest expense 15,763 13,634 Income before income taxes 11,064 9,150 Income tax expense 3,987 3,228 NET INCOME $ 7,077 $ 5,922
NET INCOME PER COMMON SHARE $ 0.53 $ 0.44
NET INCOME PER COMMON SHARE DILUTED $ 0.51 $ 0.43
The accompanying notes are an integral part of the statements 2
FIRST FINANCIAL HOLDINGS, INC. CONSOLIDATED STATEMENTS OF INCOME Nine Months Ended June 30, 2002 2001 (Amounts in thousands, except per share amounts) (Unaudited) INTEREST INCOME Interest on loans and mortgage-backed securities $ 114,981 $ 127,731 Interest and dividends on investments 1,640 2,460 Other 262 836 Total interest income 116,883 131,027 INTEREST EXPENSE Interest on deposits 31,535 42,551 Interest on borrowed money 23,305 37,353 Total interest expense 54,840 79,904 NET INTEREST INCOME 62,043 51,123 Provision for loan losses 4,488 3,475 Net interest income after provision for loan losses 57,555 47,648 OTHER INCOME Net gain on sale of loans 2,719 1,202 Net gain on sale of investment and mortgage-backed securities 328 537 Brokerage fees 1,617 1,231 Commissions on insurance 7,189 3,036 Service charges and fees on deposit accounts 6,908 6,332 Loan servicing fees 1,383 1,520 Real estate operations, net (417 ) 1,057 Other 3,041 2,781 Total other income 22,768 17,696 NON-INTEREST EXPENSE Salaries and employee benefits 28,662 23,432 Occupancy costs 3,768 3,056 Marketing 1,297 1,134 Depreciation, amortization, rental and maintenance of equipment 3,595 3,354 FDIC insurance premiums 203 197 Other 9,545 8,533 Total non-interest expense 47,070 39,706 Income before income taxes 33,253 25,638 Income tax expense 11,864 9,051 NET INCOME $ 21,389 $ 16,587
NET INCOME PER COMMON SHARE $ 1.60 $ 1.24
NET INCOME PER COMMON SHARE DILUTED $ 1.54 $ 1.21
The accompanying notes are an integral part of the statements 3
FIRST FINANCIAL HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended June 30 2002 2001 (Amounts in thousands) OPERATING ACTIVITIES (Unaudited) Net income $ 21,389 $ 16,587 Adjustments to reconcile net income to net cash provided by operating activities Depreciation 2,926 2,657 Gain on sale of loans, net (2,719 ) (1,202 ) Gain on sale of investments and mortgage-backed securities, net (328 ) (537 ) Gain on sale of real estate owned, net (80 ) (1,054 ) (Gain) loss on sale of property and equipment, net (391 ) 29 Amortization of unearned discounts/premiums on investments 135 (11 ) Decrease in deferred loan fees and discounts (208 ) (178 ) Increase in accrued interest receivable and other assets (30 ) (11,777 ) Provision for loan losses 4,488 3,475 Write down of real estate acquired in settlement of loans 49 - Proceeds from sales of loans held for sale 263,914 168,451 Origination of loans held for sale (266,625 ) (160,431 ) Decrease in accounts payable and other liabilities (9,573 ) (44 ) Net cash provided by operating activities 12,947 15,965 INVESTING ACTIVITIES Proceeds from maturity of investments available for sale 2,247 1,000 Net (purchase) sale of investments available for sale (5,343 ) 401 (Purchase) redemption of FHLB stock (100 ) 2,225 Decrease (increase) in loans, net 12,228 (110,176 ) Repayments on mortgage-backed securities 56,567 42,769 Purchase of mortgage-backed securities (13,055 ) - Sales of mortgage-backed securities 8,250 26,442 Proceeds from the sales of real estate owned 1,596 6,184 Net purchase of office properties and equipment (2,463 ) (4,837 ) Net cash provided by (used in) investing activities 59,927 (35,992 ) FINANCING ACTIVITIES Net increase in deposit accounts 16,110 106,499 Net repayments of FHLB advances (10,000 ) (68,500 ) Decrease in securities sold under agreements to repurchase (66,316 ) (5,949 ) Increase in other borrowed money - 10,500 Decrease in advances by borrowers for taxes and insurance (1,719 ) (1,588 ) Proceeds from exercise of stock options 2,848 912 Dividends paid (6,844 ) (6,205 ) Treasury stock purchased (7,839 ) (293 ) Net cash (used in) provided by financing activities (73,760 ) 35,376 Net (decrease) increase in cash and cash equivalents (886 ) 15,349 Cash and cash equivalents at beginning of period 97,554 63,992 Cash and cash equivalents at end of period $ 96,668 $ 79,341
Supplemental disclosures: Cash paid during the period for: Interest $ 58,437 $ 82,907 Income taxes 15,824 10,100 Loans foreclosed 1,903 1,898 Loans securitized into mortgage-backed securities - 39,877 Unrealized net (loss) gain on securities available for sale, net of income tax (219 ) 3,436 The accompanying notes are an integral part of the statements. 4
FIRST FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(Unaudited)
A. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
The unaudited consolidated financial statements include the accounts of First Financial Holdings, Inc, ("First Financial", or the "Company"), its wholly-owned thrift subsidiaries, First Federal Savings and Loan Association of Charleston ("First Federal") and Peoples Federal Savings and Loan Association of Conway ("Peoples Federal") (together, the "Associations"), First Southeast Insurance Services, Inc. and First Southeast Investor Services, Inc. All significant intercompany items related to the consolidated subsidiaries have been eliminated.
The significant accounting policies followed by First Financial for interim financial reporting are consistent with the accounting policies followed for annual financial reporting. The unaudited consolidated financial statements and notes are presented in accordance with the instructions for Form 10-Q. The information contained in the footnotes included in First Financial's latest annual report on Form 10-K should be referred to in connection with the reading of these unaudited interim consolidated financial statements. Certain fiscal 2001 amounts have been reclassified to conform with the statement presentations for fiscal 2002.
The results of operations for the nine months ended June 30, 2002 are not necessarily indicative of the results of operations that may be expected in future periods. This report may contain certain forward-looking statements with respect to financial conditions, results of operations and business of First Financial. These forward-looking statements constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements relate to, among others, expectations of the business environment in which the Company operates, projections of future performance, perceived opportunities in the market, potential future credit experience, and statements regarding the Company's mission and vision. These forward-looking statements are based upon current management expectations, and may, therefore, involve risks and uncertainties. The Company's actual results, performance or achievements may d iffer materially from those suggested, expressed or implied by forward-looking statements due to a wide range of factors including, but not limited to, the general business environment, general economic conditions nationally and in the State of South Carolina, interest rates, the South Carolina real estate market, competitive conditions between banks and non-bank financial services providers, regulatory changes and other risks detailed in the Company's reports filed with the Securities and Exchange Commission, including the Annual Report on Form 10-K for the fiscal year ended September 30, 2001. Forward-looking statements are effective only as of the date that they are made and the Company assumes no obligation to update this information.
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B. EARNINGS PER SHARE
Basic and diluted earnings per share ("EPS") have been computed based upon net income as presented in the accompanying statements of income divided by the weighted average number of common shares outstanding or assumed to be outstanding as summarized below:
C. COMPREHENSIVE INCOME
Quarter Ended June 30, 2002 2001 Weighted average number of common shares used in basic EPS 13,395,499 13,362,384 Effect of dilutive stock options 482,659 397,896 Weighted average number of common shares and dilutive potential common shares used in diluted EPS 13,878,158 13,760,280
Nine Months Ended June 30, 2002 2001 Weighted average number of common shares used in basic EPS 13,395,324 13,342,107 Effect of dilutive stock options 459,530 350,277 Weighted average number of common shares and dilutive potential common shares used in diluted EPS 13,854,854 13,692,384
Comprehensive income is the change in the Corporation's equity during the period from transactions and other events and circumstances from non-owner sources. Total comprehensive income is comprised of net income and other comprehensive income and for the nine months ended June 30, 2002 and 2001 amounted to $21,170,000 and $20,023,000, respectively.
The Corporation's "other comprehensive income (loss)" for the nine months ended June 30, 2002 and 2001 and "accumulated other comprehensive income" as of June 30, 2002 and September 30, 2001 are comprised solely of unrealized gains and losses on certain investments in debt and equity securities.
Other comprehensive income (loss) for the nine months ended June 30, 2002 and 2001 follows (in thousands):
Nine Months Ended June 30, 2002 2001 Unrealized holding (losses) gains arising during period, net of tax $ (8 ) $ 3,783 Less reclassification adjustment for gains included in net income, net of tax 211 347 Net unrealized (losses) gains on securities, net $ (219 ) $ 3,436
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D. NATURE OF OPERATIONS
First Financial is a multiple savings and loan holding company headquartered in Charleston, South Carolina. First Financial conducts its operations principally in South Carolina and has one full-service office located in North Carolina. The thrift subsidiaries, First Federal and Peoples Federal, provide a wide range of traditional banking services and also offer investment, trust and insurance services through subsidiaries or affiliated companies. The Company has a total of 44 offices in South Carolina located in the Charleston Metropolitan area and Horry, Georgetown, Florence and Beaufort counties, and Brunswick County, in coastal North Carolina.
E. MERGERS AND ACQUISITIONS
On May 31, 2001, First Financial acquired certain assets of Kinghorn Insurance Agency, a Hilton Head-based independent insurance agency. Goodwill and other intangibles approximating $8.8 million were recorded in the transaction. This acquisition is not material to the financial condition or net earnings of First Financial and proforma information is deemed not necessary.
F. DERIVATIVES AND FINANCIAL INSTRUMENTSEffective October 1, 2000, the Company adopted the provisions of Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") as amended by SFAS No. 137 and 138, which establishes accounting and reporting standards for derivatives and hedging activities. It requires an entity to recognize all derivatives as either assets or liabilities in the balance sheet, and measure those instruments at fair value. Changes in the fair value of those derivatives are reported in current earnings or other comprehensive income depending on the purpose for which the derivative is held and whether the derivative qualifies for hedge accounting. The impact of the adoption was not material to the Company.
The Company has identified the following derivative instruments which were recorded on the Company's balance sheet at June 30, 2002: an interest rate cap agreement, commitments to originate fixed-rate residential loans held for sale and forward sales commitments.
In September 1999, the Company purchased a $25 million interest rate cap maturing September 30, 2002 which has been designated as a cash flow hedge of its exposure to higher interest payments on $25 million of adjustable rate FHLB advances in periods where LIBOR exceeds 6.25%. The fair value of the interest rate cap has two components, one related to the LIBOR interest rate (intrinsic value) and one related to the time value. As permitted under SFAS 133, the Company has excluded from its assessment of hedge effectiveness the portion of the change in fair value of the interest rate cap representing changes in time value.
Accordingly, changes in time value of the interest rate cap are recognized in earnings and are included in interest expense in the income statement. Based on LIBOR rates at June 30, 2002, there are no amounts recorded in accumulated other comprehensive income for the interest rate cap as there was no intrinsic value.
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The Company originates certain fixed-rate residential loans with the intention of selling these loans. Between the time that the Company enters into an interest rate lock or a commitment to originate a fixed-rate residential loan with a potential borrower and the time the closed loan is sold, the Company is subject to variability in market prices related to these commitments. The Company believes that it is prudent to limit the variability of expected proceeds from the sales through forward sales of "to be issued" mortgage-backed securities and loans ("forward sales commitments"). The commitments to originate fixed-rate residential loans and forward sales commitments are freestanding derivative instruments. They do not qualify for hedge accounting treatment so their fair value adjustments are recorded through the income statement in net gains on sale of loans. The commitments to originate fixed-rate conforming loans totaled $18.5 million at June 30, 2002. The fair value of these commitments was an asse t of $262 thousand at June 30, 2002. The forward sales commitments totaled $32.6 million at June 30, 2002. The fair value of these commitments was a liability of $28 thousand at June 30, 2002.
G. ACCOUNTING STANDARDS
Effective October 1, 2001, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets," which required that goodwill and intangible assets with indefinite useful lives are no longer amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. Intangible assets with estimated useful lives are amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." A related statement, SFAS No. 141, "Business Combinations" required the Company to evaluate its existing intangible assets and goodwill that were acquired in prior purchase business combinations and make any necessary reclassifications in order to conform with the new criteria in SFAS No. 141 for recognition apart from goodwill. Upon adoption of SFAS No. 142, the Comp any reassessed the useful lives and residual values of all intangible assets acquired. The Company did not make any adjustments to amortization periods during the three months ended December 31, 2001.
In connection with SFAS No. 142's transitional goodwill impairment evaluation, the statement required the Company to perform an assessment of whether there was an indication that goodwill was impaired as of the date of adoption. To accomplish this, the Company identified its reporting units and determined the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of the date of adoption. The Company then had six months from the date of adoption to determine the fair value of each reporting unit and compare it to the reporting unit's carrying amount. The Company completed its analysis of the fair value of its insurance units with goodwill by March 31, 2002 and was not required to provide for any transitional impairment losses. The adoption of SFAS No. 142 did not have a material effect on results of operations during the first quarter.
As of the date of adoption, the Company's gross carrying amount for goodwill associated with its previous acquisitions of certain insurance operations totaled $9.1 million with accumulated amortization of $245 thousand. During the previous year, the amortization of goodwill approximated $216 thousand. In the comparable three and nine month periods ended June 30, 2001, the amortization of goodwill totaled $54 thousand and $98 thousand, respectively. The amortization of goodwill ceased effective October 1, 2001. The Company also had previously recorded intangibles associated with customer relationships acquired in those same acquisitions of
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insurance operations with a gross carrying value of approximately $2.1 million and accumulated amortization of $289 thousand at October 1, 2001. During the previous year, the amortization of intangibles approximated $113 thousand. In the comparable three and nine month periods ended June 30, 2001, the amortization of intangibles totaled $29 thousand and $51 thousand, respectively. During the three and nine month periods ended June 30, 2002, the amortization of intangibles approximated $75 thousand and $225 thousand, respectively. The Company expects to record amortization expense related to intangibles of $300 thousand during fiscal 2002 and approximates amortization expense in fiscal years 2003 through 2007 ranging from $250 thousand to $300 thousand.
The amortization expense and net income of the Company for the quarters and nine months ended June 30, 2002 and June 30, 2001 follow:
Three Months Ended June 30, 2002 2001 Net Income $ 7,077 $ 5,922 Goodwill amoritization, net of tax - 35 Adjusted net income $ 7,077 $ 5,957
Basic earnings per share $ 0.53 $ 0.44 Goodwill amoritization, net of tax - - Adjusted net income $ 0.53 $ 0.44
Diluted earnings per share $ 0.51 $ 0.43 Goodwill amoritization, net of tax - - Adjusted net income $ 0.51 $ 0.43
Nine Months Ended June 30, 2002 2001 Net Income $ 21,389 $ 16,587 Goodwill amoritization, net of tax - 64 Adjusted net income $ 21,389 $ 16,651
Basic earnings per share $ 1.60 $ 1.24 Goodwill amoritization, net of tax - 0.01 Adjusted net income $ 1.60 $ 1.25
Diluted earnings per share $ 1.54 $ 1.21 Goodwill amoritization, net of tax - 0.01 Adjusted net income $ 1.54 $ 1.22
Capitalized mortgage servicing rights ("MSRs") totaled $9.8 million, $8.2 million and $7.2 million at June 30, 2002, September 30, 2001 and June 30, 2001, respectively. Amortization expense for MSRs totaled $449 thousand and $498 thousand for the three months ended June 30, 2002 and 2001, respectively. Amortization expense for MSRs totaled $1.2 million and $973 thousand for the nine months ended June 30, 2002 and 2001, respectively.
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The estimated amortization expense for MSRs for the years ended September 30 are as follows: $1.7 million for 2002, $1.5 million for 2003, $1.3 million for 2004, $1.2 million for 2005, and $5.3 million thereafter. The estimated amortization expense is based on current information regarding loan payments and prepayments. Amortization expense could change in future periods based on changes in the volume of prepayments and other environmental factors. Prepayments could increase as a result of any further decline in market interest rates, leading to an increase in amortization expense.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Net income for the quarter ended June 30, 2002 improved 19.5% to $7.1 million from net income of $5.9 million in the comparable quarter in 2001. Basic earnings per common share increased to $.53 for the current quarter compared to $.44 in the June 2001 quarter. On a diluted basis, earnings per common share increased to $.51 from $.43 in the comparable period. Net income during the June 30, 2002 quarter improved as a result of several factors, including a $2.3 million increase in net interest income and growth of $884 thousand in insurance commissions offset partially by higher operating costs and higher provision for loan losses. Gains on the sale of loans, investments and mortgage-backed securities increased $475 thousand in the June quarter over results one year ago. Other income in the June 2002 quarter also included a gain of approximately $487 thousand related to the sale of Company property in connection with the relocation of a retail branch facility. T he primary increase in operating costs was a $1.6 million increase in salaries and employee benefits due partially to growth in insurance operations which added approximately $412 thousand in compensation and benefit costs on a comparative basis.
In the first nine months of fiscal 2002, First Financial earned $21.4 million compared with $16.6 million in the first nine months of fiscal 2001. Year-to-date earnings per common share and diluted earnings per common share improved to $1.60 and $1.54, respectively, compared with $1.24 and $1.21 in 2001.
A nonrecurring gain on the sale of real estate owned increased after tax income in the March, 2001 quarter and nine months ended June 30, 2001 by approximately $645 thousand, or $.05 per basic and diluted earnings per common share.
During the quarter ended March 31, 2002, the Company announced the adoption of a plan to consolidate its wholly-owned banking subsidiaries, First Federal and Peoples Federal, into one entity to operate under the name of "First Federal." Applications related to the consolidation have been filed with the regulators. The consolidation is expected to occur prior to the end of the fiscal year.
SIGNIFICANT ACCOUNTING POLICIES
The Company considers its policy regarding the allowance for loan and lease losses to be its most critical accounting policy due to the significant degree of management judgment. The Company has developed policies and procedures for assessing the adequacy of the allowance,
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recognizing that this process requires a number of assumptions and estimates with respect to its loan portfolio. The Company assessments may be impacted in future periods by changes in economic conditions, the impact of regulatory examinations, and the discovery of information with respect to borrowers, which is not known to management at the time of the issuance of the consolidated financial statements.
OFF-BALANCE SHEET ARRANGEMENTS
In the normal course of operations, the Company engages in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in the financial statements or are recorded in amounts that differ from the notional amounts. These transactions involve, to varying degrees, elements of credit, interest rate, and liquidity risk. Such transactions are used by the Company for general corporate purposes or for customer needs. Corporate purpose transactions are used to help manage customers' requests for funding.
The Company's off-balance sheet arrangements, which principally include lending commitments and derivatives, are described below. At June 30, 2002, the Company had no interests in non-consolidated special purpose entities.
Lending Commitments. Lending Commitments include loan commitments, standby letters of credit, unused business and consumer credit lines, and documentary letters of credit. These instruments are not recorded in the consolidated balance sheet until funds are advanced under the commitments. The Company provides these lending commitments to customers in the course of business.
For commercial customers, loan commitments generally take the form of revolving credit arrangements to finance customers' working capital requirements. For retail customers, loan commitments are generally lines of credit secured by residential property. At June 30, 2002, commercial and retail loan commitments totaled $313.5 million. Standby letters of credit are conditional commitments to guarantee performance, typically contract or financial integrity, of a customer to a third party and totaled $2.4 million at June 30, 2002. Unused business credit lines, which totaled $26.1 million at June 30, 2002, are generally for short-term borrowings. The Company applies essentially the same credit policies and standards as it does in the lending process when making these commitments.
Derivatives. In accordance with SFAS No. 133, the Company records derivatives at fair value, as either assets or liabilities, on the consolidated balance sheets. Derivative transactions are measured in terms of the notional amount, but this amount is not recorded on the balance sheet and is not, when viewed in isolation, a meaningful measure of the risk profile of the instrument. The notional amount is not exchanged, but is used only as the basis upon which interest and other payments are calculated. Also see Note F to Notes to Consolidated Financial Statements.
BALANCE SHEET ANALYSIS
Consolidated assets of the Company totaled approximately $2.3 billion at June 30, 2002. During the nine months ended June 30, 2002 assets decreased $62.3 million, or 3.6% on an annualized basis.
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Cash, Investment Securities and Mortgage-backed Securities
Cash, deposits in transit and interest-bearing deposits totaled $96.7 million at June 30, 2002. Investment balances increased in the current nine months by $3.1 million principally due to purchases exceeding maturities. The Company's balances in mortgage-backed securities decreased to $156.2 million, principally due to $56.6 million in repayments and $8.3 million sale of the mortgage-backed securities. The decrease was off set by a $13.1 million purchase of mortgage-backed securities.
Loans Receivable
Net loans receivable, including loans held for sale, totaled $1.9 billion at June 30, 2002, decreasing $13.2 million from September 30, 2001. Due principally to strong loan originations of fixed-rate, residential mortgage loans earmarked for sale into the secondary market, approximately $100 million more loans were originated and sold than the same period last year. The principal use of the Company's funds has traditionally been the origination of mortgage and other loans for its loan portfolio. The Company's net decrease in loan balances due to cash flows totaled $12.2 million during the nine months ended June 30, 2002. Approximately $266.6 million of single-family loans were also originated for sale in the secondary market during the nine months ended June 30, 2002. Sales of mortgage loans totaled $263.9 million in the first nine months of fiscal 2002.
The following table summarizes the composition of the Company's gross loan portfolio, including loans in process (amounts in thousands):
June 30, 2002 September 30, 2001 June 30, 2001 Residential (1-4 family) $ 1,203,643 $ 1,239,806 $ 1,248,937 Other residential 42,311 50,195 54,226 Land and lots 78,081 90,186 91,590 Commercial real estate 139,579 132,116 131,901 Consumer 365,881 350,443 342,237 Commercial business 103,977 93,081 86,451 Total gross loans $ 1,933,472 $ 1,955,827 $ 1,955,342
The Company continues to emphasize the origination of consumer and small business loans. Outstanding commitments to originate mortgage loans and to fund the undisbursed portion of construction loans amounted to $79.7 million at June 30, 2002. Unused lines of credit on equity loans, consumer loans, credit cards and commercial loans totaled $259.9 million as of June 30, 2002.
The Company originates the majority of its loans in its primary market area located in the coastal region of South Carolina. Since 1995, the Company has operated a correspondent lending program allowing for the purchase of first mortgage loans originated by unaffiliated mortgage lenders and brokers in South Carolina and North Carolina. In recent years, the Company also added second mortgage and mobile home lending programs on a correspondent basis.
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Asset Quality
The following table summarizes the Company's problem assets for the periods indicated (amounts in thousands):
June 30, 2002 September 30, 2001 June 30, 2001 Non-accrual loans $ 14,259 $ 8,547 $ 8,504 Loans 90 days or more delinquent (1) 39 25 26 Renegotiated loans 2,675 2,700 2,703 Real estate and other assets acquired in settlement of loans 3,922 3,337 2,644 Total $ 20,895 $ 14,609 $ 13,877
As a percent of net loans and real estate owned 1.10 % 0.77 % 0.73 % As a percent of total assets 0.92 % 0.63 % 0.60 % (1) The Company continues to accrue interest on these loans. Problem assets increased $6.3 million during the nine months ended June 30, 2002. The majority of the increase was in non-accrual loans, which increased $5.7 million. A significant portion of the increase was related to an increase in seriously delinquent residential real estate loans, which are collateral based loans and generally well-secured. Similar to other parts of the country, the markets served by the Company are experiencing a moderately slowing economy with higher bankruptcy filings and higher delinquency rates.
Allowance for Loan Losses
The allowance for loan losses represents a reserve for probable losses existing in the loan portfolio. The adequacy of the allowance for loan losses is evaluated at least quarterly based, among other factors, on a continuous review of the Company's loan portfolio, with particular emphasis on adversely classified loans.
Following is a summary of the reserve for loan losses for the nine months ended June 30, 2002 and June 30, 2001 (amounts in thousands):
2002 2001 Balance at beginning of year $ 15,943 $ 15,403 Provision charged to operations 4,488 3,475 Recoveries of loans previously charged-off 451 319 Loan losses charged to reserves (4,703 ) (3,311 ) Balance at end of period $ 16,179 $ 15,886 13
Net charge-offs totaled $4.3 million in the current nine months compared to $3.0 million in the comparable nine months in fiscal 2001. Consumer net charge-offs increased to $3.5 million compared with $2.5 million in the prior period. Real Estate and Commercial loan net charge-offs increased to $397 thousand and $362 thousand, respectively, in the current nine months, compared with $321 thousand and $182 thousand, respectively, in the nine months ended June 30, 2001. Annualized net charge-offs as a percentage of average net loans increased to .30% for the nine months ended June 30, 2002 from .21% in the nine months ended June 30, 2001. The Company has been successful in increasing originations of consumer and commercial business loans which typically have higher rates of delinquency and greater risk of loss than do single-family real estate loans. As balances of these loans increase in the Company's loan portfolio, management expects the provision for loan losses and net charge-offs will increase.
The Company's impaired loans totaled $5.5 million at June 30, 2002, $2.2 million at September 30, 2001 and $2.9 million at June 30, 2001. The increase in the current nine months is principally attributable to several slow speculative construction loans.
Deposits and Borrowings
First Financial's deposit composition at the indicated dates is as follows (amounts in thousands):
June 30, 2002 September 30, 2001 June 30, 2001 Balance % of Total Balance % of Total Balance % of Total Checking accounts $ 323,955 22.94 % $ 308,784 22.12 % $ 254,188 18.86 % Statement and other accounts 129,961 9.20 120,676 8.65 117,215 8.70 Money market account 314,649 22.29 220,802 15.82 223,528 16.58 Certificate accounts 643,330 45.57 745,523 53.41 752,863 55.86 Total deposits $ 1,411,895 100.00 % $ 1,395,785 100.00 % $ 1,347,794 100.00 %
Deposits increased $16.1 million during the nine months ended June 30, 2002, principally as a result of net deposits to checking accounts and money market accounts with an offset from decreases in certificate accounts. This growth in deposits along with less growth in loans has enabled the Company to reduce net borrowed funds by $76.3 million during fiscal 2002.
Stockholders' Equity
Stockholders' equity increased $9.3 million during the first three quarters of fiscal 2002 to total $166.2 million at June 30, 2002. The Company's capital ratio, total capital to total assets, was 7.34% at June 30, 2002, compared to 6.75% at September 30, 2001. During the nine months, the Company increased its dividend to stockholders to $.51 compared with $.465 per share in the first nine months of fiscal 2001. During the second quarter of this fiscal year, the Company announced an extension of its previously announced 600,000 share common stock repurchase program to September 30, 2002. Approximately 284 thousand shares of common stock have been repurchased under the program since inception through June 30, 2002 at a cost of approximately $7.8 million.
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Regulatory Capital
Under current Office of Thrift Supervision ("OTS") regulations, savings associations must satisfy three minimum capital requirements: core capital, tangible capital and risk-based capital. Savings associations must meet all of the standards in order to comply with the capital requirements. At June 30, 2002, both subsidiaries were categorized as "well capitalized" under the Prompt Corrective Action regulations adopted by the OTS pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). To remain in this status, the Associations must maintain core and risk-based capital ratios of at least 5.0% and 10.0%, respectively.
The following table summarizes the capital requirements for First Federal and Peoples Federal as well as their capital positions at June 30, 2002:
First Federal Peoples Federal Percent of Percent of Amount Assets Amount Assets (Amounts in thousands) Tangible capital $ 119,024 7.48 % $ 49,447 7.61 % Tangible capital requirement 23,868 1.50 9,745 1.50 Excess $ 95,156 5.98 % $ 39,702 6.11 %
Core capital $ 119,024 7.48 % $ 49,447 7.61 % Core capital requirement 63,648 4.00 25,987 4.00 Excess $ 55,376 3.48 % $ 23,460 3.61 %
Risk-based capital(a) $ 128,369 11.10 % $ 50,805 11.57 % Minimum risk-based capital requirement(a) 92,469 8.00 35,116 8.00 Excess(a) $ 35,900 3.10 % $ 15,689 3.57 % (a) Based on total risk-weighted assets.
For a complete discussion of capital issues, refer to "Capital Requirements" and "Limitations on Capital Distributions" in the Company's 10-K for the fiscal year ending September 30, 2001.
LIQUIDITY AND ASSET AND LIABILITY MANAGEMENT
Liquidity
The Associations are subject to federal regulations requiring them to maintain adequate liquidity to assure safe and sound operations.
The Associations' primary sources of funds consist of retail and commercial deposits, borrowings from the FHLB, principal repayments on loans and mortgage-backed securities, securities sold under agreements to repurchase and the sale of loans. Each of the Association's sources of liquidity is subject to various uncertainties beyond the control of the Associations. As a measure of protection, the Associations have back-up sources of funds available, including excess borrowing capacity and excess liquidity in securities available for sale.
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The Company's use of FHLB advances is limited by the policies of the FHLB. Based on the current level of advances, asset size and available collateral under the FHLB programs, the Associations at June 30, 2002, estimate that an additional $177 million of funding is available. At June 30, 2002, the Company has approximately $103.5 million of unpledged investments and mortgage-backed securities available for sale. These investments are available should deposit cash flows and other funding be reduced in any given period.
During the current nine months the Company experienced a net cash inflow from investing activities of $59.9 million, consisting principally of repayments of mortgage-backed securities of $56.6 million. Investing activities included purchases of $13.0 million of mortgage-backed securities and $5.3 million of investments. The Company experienced cash inflows of $12.9 million from operating activities and cash outflows of $73.8 million from financing activities. Financing activities consisted principally of $66.3 million decrease in securities sold under agreement to repurchase, decrease in advances of $10.0 million and deposit balances increasing $16.1 million during the first three quarters of the 2002 fiscal year.
Parent Company Liquidity
As a holding company, First Financial conducts its business through its subsidiaries. Unlike the Associations, First Financial is not subject to any regulatory liquidity requirements. Potential sources for First Financial's payment of principal and interest on its borrowings and for its future funding needs include (i) dividends from First Federal and Peoples Federal; (ii) payments from existing cash reserves and sales of marketable securities; (iii) interest on its investment securities; and (iv) advances on a bank line of credit.
First Federal's and Peoples Federal's ability to pay dividends and make other capital contributions to First Financial is restricted by regulation and may require regulatory approval. First Federal's and Peoples Federal's ability to make distributions may also depend on each institution's ability to meet minimum regulatory capital requirements in effect during the period. For a complete discussion of capital distribution regulations, refer to "Limitations on Capital Distributions" in the Company's 10-K for the fiscal year ending September 30, 2001.
Asset/Liability Management
The Company's Asset and Liability Committees establish policies and monitor results to control interest rate sensitivity. Although the Company utilizes measures such as static gap, which is simply the measurement of the difference between interest-sensitive assets and interest-sensitive liabilities repricing for a particular time period, just as important a process is the evaluation of how particular assets and liabilities are impacted by changes in interest rates or selected indices as they reprice. Asset/liability modeling is performed by the Company to assess varying interest rate and balance mix assumptions. These projections enable the Company to adjust its strategies to lessen the impact of significant interest rate fluctuations.
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The following table is a summary of First Financial's one year gap at June 30, 2002 (amounts in thousands):
June 30, 2002 Interest-earning assets maturing or repricing within one year $ 825,854 Interest-bearing liabilities maturing or repricing within one year 1,257,484 Cumulative gap $ (431,630 )
Gap as a percent of total assets (19.07% )
The Company's one year gap as a percent of total assets changed from (24.2%) to (19.1%) during the current nine months. The respective ratios and dollars repricing as shown in the above table do not take into effect prepayments to mortgage, consumer and other loans and mortgage-backed securities. In addition, convertible advances are shown in the table at the earliest of potential call date or maturity date.
A negative gap indicates that cumulative interest-sensitive liabilities exceed cumulative interest-sensitive assets and suggests that net interest income would decline if market interest rates increased. A positive gap would suggest the reverse. This relationship is not always ensured due to the repricing attributes of both interest-sensitive assets and interest-sensitive liabilities.
COMPARISON OF OPERATING RESULTS
QUARTERS ENDING JUNE 30, 2002 AND 2001
Net Interest Income
First Financial's net interest income for the three months ending June 30, 2002 was $20.6 million compared with $18.3 million for the comparable quarter in fiscal 2001. The gross interest margin increased from 3.08% during the quarter ended June 30, 2001 to 3.69% during the quarter ended June 30, 2002. The net yield on earning assets increased to 3.82% from 3.28% in the prior year's quarter. Beginning in June of 1999, the Federal Reserve Open Market Committee ("FOMC") raised short-term interest rates in six stages totaling 175 basis points. Beginning in January 2001 and through the end of the December 2001 quarter, the FOMC reversed its course and cut interest rates 475 basis points. These actions have resulted in a more favorable interest rate environment for the operations of the Company. During the quarter ended June 30, 2002, there were no changes in short-term rates by the FMOC.
Because of the short-term nature of the Company's liability funding, recent declines in interest rates have beneficially affected the average cost of interest-bearing liabilities, leading to a decline of 140 basis points when comparing the two periods. The average yield on interest-earning assets also decreased 79 basis points when comparing these same two periods. The Company expects that its average yields on earning assets will continue to decline in future quarters as adjustable loans reprice to lower indices.
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The following table summarizes rates, yields and average earning asset and costing liability balances for the respective quarters (amounts in thousands):
Quarter Ended June 30, 2002 2001 Average Average Average Average Balance Yield/Rate Balance Yield/Rate Loans and mortgage-backed securities $ 2,086,200 7.12 % $ 2,160,966 7.85 % Investments and other interest-earning assets 65,983 3.58 65,673 6.27 Total interest-earning assets $ 2,152,183 7.01 % $ 2,226,639 7.80 %
Deposits $ 1,424,089 2.66 % $ 1,326,843 4.34 % Borrowings 647,860 4.79 810,692 5.34 Total interest-bearing liabilities $ 2,071,949 3.32 % $ 2,137,535 4.72 %
Gross interest margin 3.69 % 3.08 % Net interest margin 3.82 % 3.28 % The following rate/volume analysis depicts the increase (decrease) in net interest income attributable to interest rate and volume fluctuations compared to the prior period (amounts in thousands):
Quarter Ended June 30, 2002 versus 2001 Volume Rate Total Interest income: Loans and mortgage-backed securities $ (1,135 ) $ (4,127 ) $ (5,262 ) Investments and other interest-earning assets (22 ) (402 ) (424 ) Total interest income (1,157 ) (4,529 ) (5,686 ) Interest expense: Deposits 987 (5,896 ) (4,909 ) Borrowings (2,022 ) (1,030 ) (3,052 ) Total interest expense (1,035 ) (6,926 ) (7,961 ) Net interest income $ (122 ) $ 2,397 $ 2,275 Average balances of interest-earning assets decreased $74.5 million, or 3.3%, in the June 2002 quarter compared with the June 2001 quarter, contributing to a $1.2 million decrease in net interest income due to changes in volume. A corresponding decline of $65.6 million in average balances of interest-bearing liabilities resulted in a $1.0 million reduction in interest expense during the quarter. Coupled with changing average balances, an increase in the Company's gross interest spread from 3.08% in the June 2001 quarter to 3.69% in the June 2002 quarter increased net interest income by approximately $2.4 million. The Company's average cost of funds declined at a rate almost twice as fast as its average yield on earning assets. There can be no assurance that the Company's net margin will increase further based on the current spread between short and long-term treasury interest rates, the Company's current asset/liability structure and competitive forces within its markets.
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Provision for Loan Losses
During the current quarter, First Financial's provision for loan losses totaled $1.5 million, compared to $1.4 million during the same period in the previous year. Net charge-offs for the current quarter totaled $1.6 million compared with $1.1 million in the comparable quarter in fiscal 2001. Total loan loss reserves as of June 30, 2002 were $16.2 million, or .86% of the total net loan portfolio compared with $15.9 million, or .84% of the total net loan portfolio at June 30, 2001.
Other Income/Non-Interest Expenses
Total other income increased $1.9 million, or 32.3%, in the June 30, 2002 quarter compared to the June 30, 2001 quarter. Gains from the sales of loans held for sale totaled $728 thousand during the quarter as compared with $559 thousand for the same period a year ago. The increase in gains on sales of loans in the current quarter and higher levels of gains in several previous quarters are directly attributable to the increased originations of fixed-rate mortgages and the level of mortgage refinances resulting from low mortgage loan interest rates. Should interest rates increase, the level of originations and refinances of fixed-rate mortgages may decline and gains on sales of such loans may be significantly lower than recent results. Fees on deposit accounts improved by 8.4% to $2.3 million in the quarter ended June 30, 2002 as compared with the quarter ended June 30, 2001. Commissions on insurance improved $.9 million, or approximately 67.5%, during the current quarter compared to the comparable quarter ended June 30, 2001. This increase was principally attributable to the acquisition of the operations in June 2001 of Kinghorn Insurance of Hilton Head, South Carolina. Other income increased $315 thousand during the current quarter as a gain of approximately $487 thousand related to the sale of Company property in connection with the relocation of a retail branch facility was recorded during the quarter.
Non-interest expense increased $2.1 million, or 15.6%, during the current quarter. Included in the increase in the current quarter are higher personnel costs of $1.6 million. This increase was principally due to the acquisition of Kinghorn Insurance and the staffing of additional retail offices.
Income Tax Expense
During the third quarter of fiscal 2002 and 2001 the Company's effective tax rate approximated 36.0% and 35.3%, respectively. The actual tax provision was $4.0 million and $3.2 million in the two periods.
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COMPARISON OF OPERATING RESULTS
NINE MONTHS ENDING JUNE 30, 2002 AND 2001
Net Interest Income
First Financial's net interest income for the nine months ending June 30, 2002 of $62.0 million increased 21.4% over $51.1 million recorded in the comparable nine months in fiscal 2001. Growth in net interest income was primarily attributable to the decline in interest rates as this factor alone contributed $9.6 million, or 87.8%, of the increase. The gross interest margin increased to 3.67% from 2.87% in the prior nine months. The net margin also increased to 3.81% versus 3.09% in the nine months ended June 30, 2001.
The following table summarizes rates, yields and average earning asset and costing liability balances for the respective periods (amounts in thousands):
Nine months Ended June 30, 2002 2001 Average Balance Average Yield/Rate Average Balance Average Yield/Rate Loans and mortgage-backed securities $ 2,109,250 7.27 % $ 2,140,074 7.96 % Investments and other interest-earning assets 59,374 4.23 63,752 6.83 Total interest-earning assets $ 2,168,624 7.18 % $ 2,203,826 7.93 % Deposits $ 1,413,313 2.98 % $ 1,275,260 4.46 % Borrowings 673,707 4.62 836,551 5.97 Total interest-bearing liabilities $ 2,087,020 3.51 % $ 2,111,811 5.06 % Gross interest margin 3.67 % 2.87 % Net interest margin 3.81 % 3.09 % The following rate/volume analysis depicts the increase (decrease) in net interest income attributable to interest rate and volume fluctuations compared to the prior period (amounts in thousands):
Nine months Ended June 30, 2002 versus 2001 Volume Rate Total Interest income: Loans and mortgage-backed securities $ (717 ) $ (12,033 ) $ (12,750 ) Investments and other interest-earning assets (213 ) (1,181 ) (1,394 ) Total interest income (930 ) (13,214 ) (14,144 ) Interest expense: Deposit accounts 4,231 (15,247 ) (11,016 ) Borrowings (6,488 ) (7,560 ) (14,048 ) Total interest expense (2,257 ) (22,807 ) (25,064 ) Net interest income $ 1,327 $ 9,593 $ 10,920
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Provision for Loan Losses
During the nine months ended June 30, 2002 First Financial's provision for loan losses totaled $4.5 million compared with $3.5 million in the first three quarters of fiscal 2001. Net charge-offs for the current nine months totaled $4.3 million compared with $3.0 million in the comparable period in fiscal 2001. The increase in charge-offs was attributable to higher auto and other consumer loan losses.
Other Income/Non-interest Expense
Total other income improved $5.1 million, or 28.7%, in the current nine months. Major factors contributing to the net increase included improved gains on the sale of loans which increased $1.5 million, a $4.2 million increase in commissions on insurance off set by a decrease in real estate operations of $1.5 million. Increased gains on loan sales are attributable to higher loan originations of fixed-rate saleable products due to a reduction in market interest rates. The increase in commissions on insurance is the result of the purchase of Kinghorn Insurance in June 2001 and approximately $1.2 million of annual performance-based contingent payments received in March 2002. The decrease in real estate operations reflects a nonrecurring gain of $1.1 million on the sale of a commercial property recorded in the quarter ended March 31, 2001. Brokerage fees also increased $386 thousand, or 31.4%, in the current nine months. A gain of approximately $487 thousand related to the sale of Company property in connection with the relocation of a retail branch facility was recorded during the nine months ended June 30, 2002.
Non-interest expense increased $7.4 million or 18.5% during the current nine months. The increase is attributable principally to higher personnel costs, higher occupancy costs and increased equipment expenses related to expansion of retail banking offices, and the purchase of Kinghorn Insurance.
Income Tax Expense
During the first nine months of fiscal 2002, the Company's effective tax rate was 35.7% compared with 35.3% in the prior period. The actual tax provision of $11.9 million resulted in an increase of $2.8 million in fiscal 2002 from the prior period.
IMPACT OF REGULATORY AND ACCOUNTING ISSUES
For a comprehensive discussion of regulatory and accounting issues, refer to "Regulatory and Accounting Issues" in the Company's 10-K for the fiscal year ending September 30, 2001.
Effective October 1, 2001, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets," which required that goodwill and intangible assets with indefinite useful lives are no longer amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. Intangible assets with estimated useful lives are amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." A related statement, SFAS No. 141, "Business Combinations" required the Company to evaluate its existing intangible assets and goodwill that were acquired in prior purchase business combinations and make any necessary reclassifications in
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order to conform with the new criteria in SFAS No. 141 for recognition apart from goodwill. Upon adoption of SFAS No. 142, the Company reassessed the useful lives and residual values of all intangible assets acquired. The Company did not make any adjustments to amortization periods during the three months ended December 31, 2001.
In connection with SFAS No. 142's transitional goodwill impairment evaluation, the statement required the Company to perform an assessment of whether there was an indication that goodwill was impaired as of the date of adoption. To accomplish this, the Company identified its reporting units and determined the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of the date of adoption. The Company then had six months from the date of adoption to determine the fair value of each reporting unit and compare it to the reporting unit's carrying amount. The Company completed its analysis of the fair value of its insurance units with goodwill by March 31, 2002 and was not required to provide for any transitional impairment losses. The adoption of SFAS No. 142 did not have a material effect on results of operations during the first quarter.
As of the date of adoption, the Company's gross carrying amount for goodwill associated with its previous acquisitions of certain insurance operations totaled $9.1 million with accumulated amortization of $245 thousand. During the previous year, the amortization of goodwill approximated $216 thousand. In the comparable three and nine months ended June 30, 2001, the amortization of goodwill totaled $54 thousand and $98 thousand, respectively. The amortization of goodwill ceased effective October 1, 2001. The Company also had previously recorded intangibles associated with customer relationships acquired in those same acquisitions of insurance operations with a gross carrying value of approximately $2.1 million and accumulated amortization of $289 thousand at October 1, 2001. During the previous year, the amortization of intangibles approximated $113 thousand. In the comparable three and nine months ended June 30, 2001, the amortization of intangibles totaled $29 thousand and $51 thousand, respectively. During the three and nine months ended June 30, 2002, the amortization of intangibles approximated $75 thousand and $225 thousand, respectively. The Company expects to record amortization expense related to intangibles of $300 thousand during fiscal 2002 and approximates amortization expense in fiscal years 2003 through 2007 ranging from $250 thousand to $300 thousand.
Capitalized mortgage servicing rights ("MSRs") totaled $9.8 million, $7.7 million and $7.3 million at June 30, 2002, September 30, 2001 and June 30, 2001, respectively. Amortization expense for MSRs totaled $449 thousand and $498 thousand for the three months ended June 30, 2002 and 2001, respectively. Amortization expense for MSRs totaled $1.2 million and $973 thousand for the nine months ended June 30, 2002 and 2001, respectively.
The estimated amortization expense for MSRs for the years ended September 30 are as follows: $1.7 million for 2002, $1.5 million for 2003, $1.3 million for 2004, $1.2 million for 2005, andnone $5.3 million thereafter. The estimated amortization expense is based on current information regarding loan payments and prepayments. Amortization expense could change in future periods based on changes in the volume of prepayments and other environmental factors.
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FIRST FINANCIAL HOLDINGS, INC.
OTHER INFORMATIONItem 1 - Legal Proceedings
The Company is subject to various legal proceedings and claims arising in the ordinary course of its business. Any litigation is vigorously defended by the Company, and, in the opinion of management based on consultation with external legal counsel, any outcome of such litigation would not materially affect the Company's consolidated financial position or results of operations.
On December 15, 1997, various plaintiffs filed an action against Peoples Federal and First Financial in the Court of Common Pleas for Charleston County, seeking unspecified damages, including treble damages, based upon a variety of causes of action, which arose out of alleged wrongful actions during the course of a foreclosure action brought by Peoples Federal against the plaintiffs in Georgetown County. This foreclosure action had resulted in a judicial sale held on January 5, 1998. By order dated December 28, 2000, the Circuit Court granted Peoples Federal's and First Financial's motion for Summary Judgment and dismissed all causes of action in their entirety. The plaintiffs appealed and that appeal was decided recently in the favor of Peoples Federal and First Financial. We have received notice that the plaintiffs have filed for rehearing with the Court of Appeals.
On September 3, 1998, Peoples Federal filed a declaratory judgment action in Georgetown County, which named certain of the original plaintiffs in the previous litigation and others, seeking a judicial determination of claims made against its rights as purchasers of the property foreclosed. The civil action has been tried and the judge's final amended order was issued October 29, 2001. The ruling resulted in a net money judgment in Peoples Federals' favor. There were other rulings pertaining to such issues as declaration of developers' rights, future assessments, restrictive covenants and density designation which were varied. The recent ruling was appealed by Peoples Federal on November 23, 2001, to increase the net award to Peoples Federal by challenging the offsetting awards to the opposing parties. Briefs are expected to be concluded by fall, 2002. It is unlikely that the case will be decided within the next year. Peoples Federal intends to vigorously pursue this appeal.
Item 3 - Quantitative and Qualitative Disclosures about Market Risk
Market risk reflects the risk of economic loss resulting from adverse changes in market price and interest rates. This risk of loss can be reflected in diminished current market values and/or reduced potential net interest income in future periods.
The Corporation's market risk arises primarily from interest rate risk inherent in its lending, deposit-taking and other funding activities. The structure of the Corporation's loan, investment, deposit and borrowing portfolios is such that a significant increase in interest rates may adversely impact net market values and net interest income. The Corporation does not maintain a trading account nor is the Corporation subject to currency exchange risk or commodity price risk. Responsibility for monitoring interest rate risk rests with the Asset/Liability Management Committee ("ALCO"), which is comprised of senior management. ALCO regularly reviews the Corporation's interest rate risk position and adopts balance sheet strategies that are intended to optimize net interest income while maintaining market risk within a set of Board-approved guidelines.
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As of June 30, 2002, Management believes that there have been no significant changes in market risk as disclosed in the Corporation's Annual Report on Form 10-K for the year ended September 30, 2001.
Item 6 - Exhibits and Report on Form 8-K.
Exhibits
(3.1)
Certificate of Incorporation, as amended, of Registrant (1)
(3.2)
Bylaws, as amended, of Registrant (2)
(3.4)
Amendment to Registrant's Certificate of Incorporation (3)
(3.7)
Amendment to Registrant's Bylaws (4)
(4)
Indenture, dated September 10, 1992, with respect to the Registrant's 9.375% Senior Notes, due September 1, 2001 (5)
(10.1)
Acquisition Agreement dated as of December 9, 1991 by and among the Registrant, First Federal Savings and Loan Association of Charleston and Peoples Federal Savings and Loan Association of Conway (5)
(10.3)
Employment Agreement with A. Thomas Hood, as amended (6)
(10.4)
Employment Agreement with Charles F. Baarcke, Jr. (7)
(10.5)
Employment Agreement with John L. Ott, Jr. (7)
(10.6)
1990 Stock Option and Incentive Plan (8)
(10.7)
1994 Outside Directors Stock Options-for-Fees Plan (9)
(10.8)
1994 Employee Stock Purchase Plan (9)
(10.9)
1996 Performance Equity Plan for Non-Employee Directors (10)
(10.10)
Employment Agreement with Susan E. Baham (6)
(10.11)
1997 Stock Option and Incentive Plan (11)
(10.12)
Investors Savings Bank of South Carolina, Inc. Incentive Stock Option Plan (12)
(10.13)
Borrowing Agreement with Bankers Bank (13)
(10.14)
Amendment to the 1994 Employee Stock Purchase Plan (14)
(10.15)
Amended Borrowing Agreement with Bankers Bank (15)
(10.16)
2001 Stock Option Plan (16)
(22)
Subsidiaries of the Registrant (4)
(1)
Incorporated by reference to Exhibit 3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1993
(2)
Incorporated by reference to Exhibit 3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995
(3)
Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1997
(4)
Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended September 30, 2001
(5)
Incorporated by reference to the Registrant's Registration Statement on Form S-8 File No. 33-55067.
(6)
Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended September 30, 1996.
(7)
Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended September 30, 1995.
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(8)
Incorporated by reference to the Registrant's Registration Statement on Form S-8 File No. 33-57855.
(9)
Incorporated by reference to the Registrant's Proxy Statement for the Annual Meeting of Stockholders held on January 25, 1995
(10)
Incorporated by reference to the Registrant's Proxy Statement for the Annual Meeting of Stockholders held on January 22, 1997.
(11)
Incorporated by reference to the Registrant's Preliminary Proxy Statement for the Annual Meeting of Stockholders to be held on January 28, 1998.
(12)
Incorporated by reference to the Registrant's Registration Statement on Form S-8 File No. 333-45033.
(13)
Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.
(14)
Incorporated by reference to the Registrant's Preliminary Proxy Statement for the Annual Meeting of Stockholders to be held on January 26, 2000.
(15)
Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended September 30, 2000.
(16)
Incorporated by reference to the Registrant's Proxy Statement for the annual Meeting of Stockholders held on January 31, 2001.
Reports on Form 8-K
On April 3, 2002, the Company filed a Form 8-K announcing that the Board of Directors authorized the extension of the expiration date of its current stock repurchase program to September 310, 2002.
On April 18, 2002, the Company filed a Form 8-K announcing the earnings release dated April 18, 2002, which included selected financial data for the quarter ended March 31, 2002 and for other selected periods.
On June 17, 2002, the Company filed a Form 8-K related to a press release filed on June 17, 2002, announcing that the U.S. Bankers Magazine, in releasing its performance rankings on the top 100 mid-sized banks and thrifts (Assets $1.8 billion to $5.0 billion), included First Financial as 21st.
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FIRST FINANCIAL HOLDINGS, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
First Financial Holdings, Inc.
Date: August 14, 2002
By:
/s/ Susan E. Baham
Susan E. Baham
Senior Vice President
Chief Financial Officer and Principal Accounting Officer
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CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
OF FIRST FINANCIAL HOLDINGS, INC.
The undersigned hereby certify, pursuant to Section 906 of the Sarvanes-Oxley Act of 2002 and in connection with this Quarterly Report on Form 10-Q, that:
the report fully complies with the requirements of Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, and
- the information contained in the report fairly presents, in all material respects, the company's financial condition and results of operations.
By: /s/ A. Thomas Hood
By: /s/ Susan E. Baham
A. Thomas Hood
Susan E. Baham
Chief Executive Officer
Chief Financial Officer
Dated: August 14, 2002
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