Other assets totaled $95.7 million at March 31, 2012, a decrease of $3.2 million or 3.2% from December 31, 2011 and a decrease of $13.2 million or 12.1% from March 31, 2011. The decrease from December 31, 2011 was primarily the result of current tax adjustments as well as a $2.1 million write-down of the state deferred tax asset in connection with First Federal’s conversion from a thrift to a state-chartered commercial bank due to a difference in South Carolina tax laws for banks versus thrifts. The decrease from March 31, 2011 was primarily the result of the above mentioned factors as well as federal tax refunds received during the twelve month period and reductions in OREO levels.
Deposits totaled $2.3 billion at March 31, 2012, an increase of $25.3 million or 1.1% over December 31, 2011 and a decrease of $80.3 million or 3.4% from March 31, 2011. Core deposits, which include checking, savings, and money market accounts, totaled $1.3 billion at March 31, 2012, an increase of $74.7 million or 6.1% over December 31, 2011 and an increase of $134.2 million or 11.4% over March 31, 2011. The increase over December 31, 2011 was primarily the result of a net addition in the number of deposit accounts as well as a seasonal fluctuation. The increase over March 31, 2011 was primarily the result of new retail deposit products introduced during 2011 as well as several marketing initiatives during the last twelve months to attract and retain core deposits. Time deposits at March 31, 2012 totaled $958.1 million, a decrease of $49.4 million or 4.9% from December 31, 2011 and a decrease of $214.5 million or 18.3% from March 31, 2011. The decreases were primarily the result of a planned reduction in maturing high rate retail and wholesale time deposits and lower funding needs relative to asset growth during the last twelve months.
Borrowed funds are comprised of advances from the Federal Home Loan Bank (“FHLB”) and long-term debt. Borrowings totaled $580.2 million at March 31, 2012, a decrease of $28.0 million or 4.6% from December 31, 2011 and a decrease of $28.5 million or 4.7% from March 31, 2011. The decreases were primarily the result of a shift in funding mix due to the growth of core deposits.
Shareholders’ equity at March 31, 2012 was $278.0 million, essentially unchanged from December 31, 2011 and a decrease of $33.5 million or 10.7% from March 31, 2011. The decrease was primarily the result of net operating results during the last twelve months combined with a reduction in accumulated other comprehensive income during the period related to investment securities valuations. First Financial and First Federal’s regulatory capital ratios are in excess of “well-capitalized” minimums, as presented in the following table.
As a result of First Federal’s charter conversion and Federal Reserve membership, First Federal is subject to Federal Reserve Supervisory Letter SR 91-17, which provides guidance that de novo state member banks and converting thrifts maintain a Tier 1 leverage capital ratio of 9% for the first three years as a member bank unless an exception is granted. First Federal had a Tier 1 leverage capital ratio of 9.00% at March 31, 2012.
On March 29, 2012, the U.S. Treasury completed the sale of its $65 million Fixed Rate Cumulative Perpetual Preferred Stock, Series A (“preferred stock”) investment in First Financial to private investors through a registered public offering at $873.51 per share. There was no impact to First Financial’s financial condition or operating results due to the transaction. On April 30, 2012, First Financial declared a quarterly cash dividend of $12.50 per preferred share payable on May 15, 2012 to preferred shareholders of record as of May 5, 2012.
On April 30, 2012, First Financial declared a quarterly cash dividend of $0.05 per common share, payable on May 29, 2012 to common shareholders of record as of May 14, 2012.
Contractual Obligations and Off-Balance Sheet Arrangements
Contractual obligations and off-balance sheet arrangements are described in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in First Financial’s 2011 Annual Report on Form 10-K. There have been no material changes to those obligations or arrangements outside the ordinary course of business. See Note 9 to the Consolidated Financial Statements for additional information.
Liquidity
First Federal Liquidity
An important component of First Federal’s asset/liability structure is the level of liquidity available to meet the needs of its customers and creditors. First Federal’s primary sources of funds consist of retail and commercial deposits, borrowings from the FHLB and Federal Reserve, other short term borrowings, principal repayments on loans and cash flows on investment securities, the sale of loans and securities, and brokered deposits. First Federal’s desired level of liquidity is determined by management in conjunction with the Asset/Liability Committee (“ALCO”) of First Federal. The level of liquidity is based on management’s strategic direction, commitments to make loans and the ALCO’s assessment of First Federal’s ability to generate funds. Management believes First Federal has sufficient liquidity to meet future funding needs.
As of March 31, 2012, First Federal had the capacity to borrow an additional $793.6 million with the FHLB of Atlanta, the Federal Reserve, and through federal funds lines with three unaffiliated banks. None of the federal funds lines had outstanding balances at March 31, 2012.
First Financial Liquidity
As a holding company, First Financial conducts its business through its subsidiaries. First Financial is not subject to any regulatory liquidity requirements. Potential sources for First Financial’s payment of principal and interest on its borrowings, preferred and common stock dividends and future funding needs include dividends from First Federal and other subsidiaries, payments from existing cash reserves, sales of marketable securities, and additional borrowings or stock offerings. Potential uses of First Financial’s cash and cash equivalents include divided and interest payments, operating expenses, or capital contributions to its subsidiaries including First Federal. As of March 31, 2012, First Financial had cash and cash equivalents of $35.9 million, compared with $39.0 million at December 31, 2011. The decrease was primarily the result of quarterly dividend payments to preferred and common shareholders. In April 2012, the Board of Directors approved a $10.0 million downstream of capital to First Federal to support recent acquisition activities.
Asset and Liability Management
First Federal’s treasury function manages the wholesale segments of the balance sheet, including investments, purchased funds, long-term debt and derivatives. Management’s objective is to achieve the maximum level of stable earnings over the long term, while controlling the level of interest rate risk, credit risk, market risk and liquidity risk, and optimizing capital utilization. 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. First Federal’s market risk arises primarily from interest rate risk inherent in its lending, deposit-gathering, and other funding activities. The structure of its loan, investment, deposit, and borrowing portfolios is such that a significant change in interest rates may adversely impact net market values and net interest income. In managing the investment portfolio to achieve its stated objective, First Federal invests predominately in agency securities, agency and private label mortgage-backed securities, asset-backed and collateralized debt securities including trust preferred securities, corporate bonds and municipal bonds. Treasury strategies and activities are overseen by First Federal’s ALCO and Investment Committee. ALCO activities are summarized and reviewed quarterly with the Board of Directors.
Interest Rate Risk
The nature of the banking business, which involves paying interest on deposits at varying rates and terms and charging interest on loans at other rates and terms, creates interest rate risk. As a result, net interest margin, earnings and the market value of assets and liabilities are subject to fluctuations arising from the movement of interest rates. First Federal manages several forms of interest rate risk, including asset/liability mismatch, basis risk and prepayment risk. An objective of First Federal’s asset/liability management policy is to maintain a balanced risk profile so that variations to net interest income stay within policy limits. A sudden and substantial increase or decrease in interest rates may adversely impact earnings to the extent that the interest rates on
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interest-earning assets and interest-bearing liabilities do not change at the same speed, to the same degree or on the same basis. Asset/liability management is the process by which First Federal evaluates and changes, when appropriate, the mix, maturity and pricing of assets and liabilities in an attempt to reduce a materially adverse impact on earnings resulting from the direction, frequency, and magnitude of change in market interest rates. Although the net interest income of any financial institution is perceived as being vulnerable to fluctuations in interest rates, management has attempted to maintain this vulnerability within board limits.
First Federal’s prepayment risk arises from the loans originated and investment securities purchased in which the underlying assets are real estate secured mortgage loans and may payoff prior to their contractual maturities. Both of these types of assets are subject to principal reduction due to principal prepayments resulting from borrowers’ elections to refinance the underlying mortgages based on market and other conditions. Prepayment rate projections utilize actual prepayment speed experience and available market information on similar instruments. The prepayment rates form the basis for income recognition of premiums or discounts on the related assets. Changes in prepayment estimates may cause the earnings recognized on these assets to vary over the term that the assets are held, creating volatility in the net interest margin. Prepayment rate assumptions are monitored and updated monthly to reflect actual activity and the most recent market projections.
First Federal’s ALCO has established policies and monitors results to manage interest rate risk and utilizes measures such as gap analysis, which is a measurement of the differences between interest-sensitive assets and interest-sensitive liabilities repricing for a particular time period and includes loan prepayment assumptions. Particular assets and liabilities, such as adjustable rate mortgages, are also evaluated for the manner in which changes in interest rates or selected indices may affect their repricing. Asset/liability modeling is performed to assess varying interest rate and balance sheet mix assumptions. First Federal adjusts its interest rate sensitivity position primarily through decisions on the pricing, maturity, and marketing of particular deposit and loan products and by decisions regarding the structure of maturities of FHLB advances and other borrowings or wholesale funding options.
Based on gap analysis, rate-sensitive assets repricing within one year exceeded rate-sensitive liabilities repricing within one year by $197.2 million or 6.27% of total assets as of March 31, 2012, compared with rate-sensitive liabilities repricing within one year exceeding rate-sensitive assets repricing within one year by $66.0 million or 2.10% of total assets as of December 31, 2011. The change reflects a more asset-sensitive position than at December 31, 2011 primarily the result of shortening the maturity profile of assets due to higher loan prepayments. Repricing gap analysis is limited in its ability to measure interest rate sensitivity. The repricing characteristics of assets, liabilities, and off-balance sheet derivatives can change in different interest rate scenarios, thereby changing the repricing position from that outlined above. Further, basis risk is not captured by repricing gap analysis. Basis risk is the risk that changes in interest rates will reprice interest-bearing liabilities differently from interest-earning assets, thus causing an asset/liability mismatch. This analysis does not take into consideration the repricing dynamics in adjustable-rate loans, such as minimum and maximum annual and lifetime interest rate adjustments and also the index utilized and whether the index is a current or lagging index. Included in the analysis are estimates of prepayments on fixed-rate loans and mortgage-backed securities in a one-year period and expectations that under current interest rates, certain advances from the FHLB of Atlanta will not be called and loans will not reprice due to floors. Also included in the analysis are estimates of core deposit decay rates, based on recent studies and regression analysis of core deposits.
First Federal is slightly asset sensitive and a positive gap normally indicates that a rise in market rates would have a positive effect on net interest income. The opposite would generally occur when an institution has a negative gap position.
Net interest income simulations were performed as of March 31, 2012 to evaluate the impact of market rate changes on net interest income over the subsequent 12 months assuming a static balance sheet composition. If market interest rates were to increase immediately by 100 basis points, net interest income would be expected to be essentially unchanged from what it would be if rates were to remain at March 31, 2012 levels. If market interest rates were to increase immediately by 200 basis points, net interest income would be expected to decrease by 0.61% from what it would be if rates were to remain at March 31, 2012 levels. The projected decrease is the result of some of the shorter term liabilities repricing immediately while the loans will reprice over a longer period based on contractual repricing dates at a smaller rate increment due to interest rate floors. Net interest income simulation for 100 and 200 basis point declines in market rates were not performed at March 31, 2012 as the results would not have been meaningful given the current levels of short-term market interest rates. Net interest income is not only affected by the level and direction of interest rates, but also by the shape of the yield curve, pricing spreads in relation to market rates, balance sheet growth, the mix of different types of assets and liabilities, and the timing of changes in these variables. Another test measures the economic value of equity at risk by analyzing the impact of an immediate change in interest rates on the market value of portfolio equity. If market interest rates were to increase immediately by 100 or 200 basis points (a parallel and immediate shift in the yield curve), the economic value of equity would increase by 7.77% and increase by 10.00%, respectively, from where it would be if rates were to remain at March 31, 2012 levels. The increases are primarily the result of the core deposit intangibles, which increase in value as interest rates rise. Scenarios different from those outlined above, whether different by timing, level, or a combination of factors, could produce different results.
Computation of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan prepayments and deposit decay rates, and should not be relied upon as indicative of actual results. Further, the computations do not contemplate any actions that may be taken in response to changes in interest rates.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
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There has been no material change in the information concerning quantitative and qualitative disclosures about market risk contained in Item 7A of First Financial’s 2011 Annual Report on Form 10-K, except as set forth in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Interest Rate Risk” of this Form 10-Q.
Item 4. Controls and Procedures
a) An evaluation of First Financial’s disclosure controls and procedures (as defined in Section 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934 (the “Act”) was carried out under the supervision and with the participation of First Financial’s Chief Executive Officer, Chief Financial Officer and First Financial’s Disclosure Committee as of the end of the period covered by this quarterly report. In designing and evaluating First Financial’s disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. Based on their evaluation, First Financial’s Chief Executive Officer and its Chief Financial Officer concluded that First Financial’s disclosure controls and procedures as of March 31, 2012, are effective in ensuring that the information required to be disclosed by First Financial in the reports it files or submits under the Act is (i) accumulated and communicated to First Financial’s management (including the Chief Executive Officer and the Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
b) There have been no changes in First Financial’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Act) that occurred during the quarter ended March 31, 2012 that have materially affected, or are reasonably likely to materially affect, First Financial’s internal control over financial reporting. First Financial does not expect that its internal control over financial reporting will prevent all error and all fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within First Financial have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any control procedure also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions regardless of how remote. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in cost-effective control procedures, misstatements due to error or fraud may occur and not be detected.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, First Financial is subject to various legal proceedings and claims which arise in the ordinary course of business. As of March 31, 2012, First Financial believes that such litigation will not materially affect First Financial’s consolidated financial position or results of operations.
Item 1A. Risk Factors
There have been no material changes to the risk factors disclosed in First Financial’s 2011 Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
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None.
Item 6. Exhibits
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| | |
Exhibit
Number | | Description |
| |
| | |
2.1 | | Purchase and Assumption Agreement, dated as of April 27, 2012, by and among the Federal Deposit Insurance Corporation, receiver of Plantation Federal Bank, Paw leys Island, South Carolina, First Federal Bank and the Federal Deposit Insurance Corporation acting in its corporate capacity |
| | |
3.1 | | First Financial’s Amended and Restated Bylaws (incorporated by reference to First Financial’s Form 8-K filed on March 23, 2012) |
| | |
31.1 | | Rule 13a-14(a)/15(d)-149a) Certificate of Chief Executive Officer |
| | |
31.2 | | Rule 13a-14(a)/15(d)-149a) Certificate of Chief Financial Officer |
| | |
32 | | Section 1350 Certificate of Chief Executive Officer and Chief Financial Officer |
| | |
101* | | The following material from First Financial’s Form 10-Q for the quarterly period ended March 31, 2012, formatted in Extensible Business Reporting Language (“XBRL”): 1) Consolidated Balance Sheets, 2) Consolidated Statements of Operations, 3) Consolidated Statement of Comprehensive Income, 4) Consolidated Statements of Changes in Shareholders’ Equity, 5) Consolidated Statements of Cash Flows, and 6) Notes to Consolidated Financial Statements |
| |
* | In accordance with Regulation S-T, the XBRL-related information in Exhibit 101 to this Form 10-Q shall be deemed to be “furnished” and not “filed.” |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, First Financial Holdings, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| |
| FIRST FINANCIAL HOLDINGS, INC. |
| |
Date: May 9, 2012 | /s/ Blaise B. Bettendorf |
| Blaise B. Bettendorf |
| Executive Vice President and Chief Financial Officer |
| (Duly Authorized Officer and Principal Financial and Accounting Officer) |
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