SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 30, 1995
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-17122
FIRST FINANCIAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 57-0866076
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
34 Broad Street, Charleston, South Carolina 29401
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (803)529-5800
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of December 15, 1995, there were issued and outstanding
6,308,890 shares of the Registrant's common stock. The
registrant's common stock is traded over-the-counter and is
listed on the National Association of Securities Dealers
Automated Quotation ("Nasdaq") National Stock Market under the
symbol "FFCH." The aggregate market value of the common stock
held by nonaffiliates of the registrant, based on the closing
sales price of the registrant's common stock as quoted on the
Nasdaq Stock Market on December 15, 1995, was $123,023,355
(6,308,890 shares at $19.50 per share). It is assumed for
purposes of this calculation that none of the registrant's
officers, directors and 5% stockholders are affiliates.
DOCUMENT INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 1996 Annual Meeting
of Stockholders. (Part III)
PART I
Item 1. BUSINESS
GENERAL
First Financial Holdings, Inc. ("First Financial" or the
"Company") was incorporated in the State of Delaware on September
3, 1987, for the purpose of becoming a savings and loan holding
company for First Federal Savings and Loan Association of
Charleston ("First Federal"). On January 27, 1988, the
stockholders of First Federal approved the reorganization of
First Federal into the holding company form of ownership. The
reorganization was completed on June 30, 1988, on which date
First Federal became the wholly-owned subsidiary of the Company
and stockholders of First Federal exchanged their shares of First
Federal Common Stock for shares of the Company's Common Stock.
Prior to completion of the reorganization, the Company had no
assets or liabilities and engaged in no business activities.
Subsequent to the holding company reorganization, the Company has
not engaged in any significant activity other than holding the
stock of First Federal and certain passive investment activities.
On October 9, 1992, the Company consummated the acquisition
of Peoples Federal Savings and Loan Association, Conway, South
Carolina ("Peoples Federal") upon the voluntary supervisory
conversion of Peoples Federal from a federal mutual to a federal
stock savings and loan association, resulting in Peoples Federal
being held as a wholly-owned subsidiary of First Financial. As a
result of the acquisition of Peoples Federal, First Financial
became a multiple savings and loan holding company for First
Federal and Peoples Federal (together, the "Associations").
First Federal, chartered in 1934, is the largest financial
institution headquartered in the Charleston, South Carolina
metropolitan area and the second largest thrift institution in
South Carolina. First Federal is a federally-chartered stock
savings and loan association that conducts its business through
its home office in the city's historic district, twenty-one
branch offices in the three surrounding counties and two full-
service offices in Georgetown, South Carolina. During 1995 First
Federal completed construction on a permanent facility in
Summerville, South Carolina, replacing a temporary structure.
Peoples Federal was chartered in 1914 and is a federal stock
savings and loan association headquartered in Conway, South
Carolina. Peoples Federal is the result of a merger of Peoples
Federal of Conway and Peoples Federal of Florence in 1982.
Peoples Federal conducts its business through nine branch
offices, a loan production office in Sunset Beach, North Carolina
and its main office in Conway. Branches are located in the
Myrtle Beach/Grand Strand area (3), Florence (3), Conway (2) and
Loris (1). Peoples Federal opened its third office in Florence
during 1995.
The Company consolidated its Georgetown operations in 1995,
effected through the purchase of two offices of Peoples Federal
by First Federal and then the closure by First Federal of one of
the overlapping Georgetown offices.
First Federal and Peoples Federal are members of the Federal
Home Loan Bank ("FHLB") System and their savings deposits are
insured by the Federal Deposit Insurance Corporation ("FDIC")
under the Savings Association Insurance Fund ("SAIF") up to
applicable limits. The Associations are subject to comprehensive
regulation, examination and supervision by the Office of Thrift
Supervision ("OTS") and the FDIC.
OPERATING STRATEGY
The business of the Associations consists primarily of acting
as financial intermediaries by attracting savings deposits from
the general public and originating first mortgage loans on
residential properties located in the Associations' primary
market areas. The Associations also make construction and
consumer and other non-mortgage loans and invest in mortgage-
backed securities, federal government and agency obligations,
money market obligations and certain corporate obligations.
In addition to savings accounts and other deposits, the
Associations obtain funds from scheduled loan repayments, loan
prepayments, interest payments, loan sales, FHLB advances, other
borrowings and operations. The availability of funds from loan
sales is influenced by general interest rates and other market
conditions. Scheduled loan payments and interest payments have
been relatively stable sources of funds. Borrowings may be used
on a short term basis to compensate when deposit inflows are less
than projected and may be used on a longer term basis to support
expanded lending activities.
The Associations' principal sources of income are interest on
loans and mortgage-backed securities, loan origination fees,
servicing fees on loans, service charge income on accounts and
interest and dividends on investment securities. The
Associations' principal expenses are interest paid on deposits
and borrowings and expenses from operations. Savings accounts
and other types of deposits have traditionally been the primary
source of the Associations' funds for use in lending, investment
and other business purposes. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The Associations are subject to capital requirements under
OTS regulations, and must satisfy three minimum capital
requirements: core capital, tangible capital and risk-based
capital. For more information regarding the Associations'
compliance with capital requirements, see "Regulation of the
Associations -- Capital Requirements" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Regulatory Capital" and Note 17 of Notes to
Consolidated Financial Statements.
LENDING ACTIVITIES
General
At September 30, 1995, the Associations' net loan portfolio
totaled approximately $1.1 billion, or 79.16% of the Company's
total assets. The Associations' principal investment activity is
the origination of loans secured by single-family residential
real estate. Prior to fiscal 1993, the Associations' lending
activities also included the origination of significant amounts
of income property loans secured by multi-family and non-
residential real estate. In that year, First Federal virtually
curtailed all loans made on nonresidential properties primarily
due to adverse changes in market conditions and increased levels
of nonperforming assets arising from this type of lending.
Peoples Federal had earlier curtailed such lending before its
acquisition by the Company in early fiscal 1993. Thus, in the
period since 1992, the Associations have shifted their focus to
concentrate almost exclusively on single-family residential
mortgage lending and consumer lending. The Associations also
offer commercial business loans of the type traditionally offered
by commercial banks. Although federal regulations allow the
Associations to originate loans nationwide, the Associations have
originated substantially all of their loans in their primary
market areas of Charleston, Dorchester, Berkeley, Georgetown,
Horry and Florence counties in South Carolina and Brunswick
County in North Carolina.
Effective in February 1995, First Federal implemented a
correspondent lending program allowing for the purchases of loans
originated by unaffiliated mortgage lenders and brokers. Loans
submitted to First Federal by mortgage loan brokers are accepted
for funding only after approval by First Federal's loan
underwriters using normal underwriting standards. Loans
originated by these lenders and brokers are subject to the same
underwriting standards as those used by First Federal in its own
lending and are accepted for purchase by First Federal only after
approval by First Federal's underwriters. Purchases under this
program totaled $5.8 million in fiscal 1995. Selected lenders in
Greenville, Columbia and Hilton Head, South Carolina were
approved in 1995. Future plans include the expansion of this
network to other additional lenders in South Carolina and North
Carolina.
Since the early 1980s, the Associations' policies have been
to originate long-term, fixed-rate real estate loans pursuant to
certain guidelines which will permit the sale of such loans in
the secondary market to government agencies or private investors
and to emphasize the origination of adjustable-rate mortgage
loans, short-term construction, commercial business and consumer
loans for their own portfolios. These policies have made the
Associations' loan portfolios more interest rate sensitive. At
September 30, 1995, approximately 67% of the Associations' total
gross loans consisted of adjustable-rate loans. The Associations
generally retain the servicing on loans they originate.
The Associations' primary single-family product is the
conventional loan. However, they also originate loans that are
either partially guaranteed by the Veterans Administration ("VA")
or fully insured by the Federal Housing Administration ("FHA").
Set forth below is selected data relating to the aggregate
composition of the Associations' loan and mortgage-backed
securities portfolios on the dates indicated.
At September 30,
1995 1994 1993 1992 1991
Percent of Percent of Percent of Percent of Percent of
Amount Portfolio Amount Portfolio Amount Portfolio Amount Portfolio Amount Portfolio
(dollar amounts in thousands)
TYPE OF LOAN
Conventional real estate
loans:
Loans on existing
property $889,622 75.3% $787,525 73.9% $794,953 74.4% $584,104 68.1% $665,288 75.2%
Construction loans 39,116 3.3 40,827 3.8 23,989 2.3 26,242 3.0 25,694 2.9
Insured or guaranteed real
estate loans 36,219 3.1 28,702 2.7 18,107 1.7 11,758 1.4 11,694 1.3
Commercial business loans 27,447 2.3 24,962 2.3 29,189 2.7 38,033 4.4 41,584 4.7
Consumer loans:
Home equity 47,015 4.0 51,430 4.8 58,109 5.4 61,468 7.2 59,036 6.7
Mobile homes 25,027 2.1 28,276 2.7 31,476 3.0 33,622 3.9 31,712 3.6
Savings account loans 5,262 .4 4,677 .4 4,751 0.4 1,991 0.2 1,664 0.2
Other consumer loans 37,277 3.2 27,211 2.6 23,226 2.2 16,204 1.9 18,213 2.1
Total gross loans
receivable 1,106,985 93.7 993,610 93.2 983,800 92.1 773,422 90.1 854,885 96.7
Allowance for loan losses (10,637) (.9) (10,728) (1.0) (10,742) (1.0) (4,837) (.5) (4,351) (.5)
Loans in process (14,282) (1.2) (20,213) (1.9) (7,742) (.7) (12,201) (1.4) (11,577) (1.3)
Deferred loan fees
and discounts (1,320) (.1) (2,137) (.2) (2,969) (.3) (3,107) (.4) ( 3,784) (.4)
Loans receivable,
net 1,080,746 91.59 60,532 90.1 962,347 90.1 753,277 87.8 835,173 94.5
Mortgage-backed
securities <F1> 101,126 8.5 105,620 9.9 106,021 9.9 104,882 12.2 48,843 5.5
Loans receivable, net
and mortgage-backed
securities $1,181,872 100.0% $1,066,152 100.0% $1,068,368 100.0% $858,159 100.0% $884,016 100.0%
TYPE OF SECURITY
Real estate:
Single-family
residential $ 643,791 54.5% $ 551,179 51.7% $ 497,463 46.6% $309,093 36.0% $385,901 43.6%
2- to 4-family 53,736 4.5 31,604 3.0 32,087 3.0 29,762 3.4 28,679 3.2
Other dwelling units 57,269 4.9 59,106 5.5 61,391 5.8 56,211 6.6 55,540 6.3
Commercial or
industrial 210,161 17.8 215,165 20.2 246,108 23.0 227,038 26.5 232,556 26.3
Commercial business loans 27,447 2.3 24,962 2.3 29,189 2.7 38,033 4.4 41,584 4.7
Consumer loans:
Home equity 47,015 4.0 51,430 4.8 58,109 5.4 61,468 7.2 59,036 6.7
Mobile homes 25,027 2.1 28,276 2.7 31,476 3.0 33,622 3.9 31,712 3.6
Savings account loans 5,262 .4 4,677 .4 4,751 0.4 1,991 0.2 1,664 0.2
Other consumer loans 37,277 3.2 27,211 2.6 23,226 2.2 16,204 1.9 18,213 2.1
Total gross loans
receivable 1,106,985 93.7 993,610 93.2 983,800 92.1 773,422 90.1 854,885 96.7
Allowance for loan losses (10,637) (.9) (10,728) (1.0) (10,742) (1.0) (4,837) (.5) (4,351) (.5)
Loans in process (14,282) (1.2) (20,213) (1.9) (7,742) (.7) (12,201) (1.4) (11,577) (1.3)
Deferred loan fees
and discounts (1,320) (.1) (2,137) (.2) (2,969) (.3) (3,107) (.4) (3,784) (.4)
Loans receivable,
net 1,080,746 91.5 960,532 90.1 962,347 90.1 753,277 87.8 835,173 94.5
Mortgage-backed
securities <F1> 101,126 8.5 105,620 9.9 106,021 9.9 104,882 12.2 48,843 5.5
Loans receivable, net
and mortgage-backed
securities $1,181,872 100.0% $1,066,152 100.0% $1,068,368 100.0% $858,159 100.0% $884,016 100.0%
<F1> Includes mortgage-backed securities held to maturity and mortgage-backed securities available for sale.
Set forth below is a table showing the Associations' loan
origination, purchase and sales activity during the periods
indicated.
Year Ended September 30,
1995 1994 1993
(dollars in thousands)
Loans Originated:
Conventional Real Estate Loans:
Loans on existing property $ 123,923 $ 136,107 $ 133,055
Construction loans 55,479 54,126 22,296
Insured and guaranteed loans 7,638 16,366 8,492
Commercial business loans 25,204 18,264 16,227
Home equity lines of credit 6,477 9,086 13,394
Other loans 34,310 30,940 23,493
Total loans originated $ 253,031 $ 264,889 $ 216,957
Loans and Mortgage-backed Securities Purchased:
Real Estate Loans:
Conventional $ 6,655 $ 8 --
Insured and guaranteed
Mortgage-backed securities 5,744 45,254 --
Total loans and mortgage-backed
securities purchased $ 12,399 $ 45,262 --
Loans Sold:
Whole loans $ 1,501 $ 79,202 $ 63,196
Total loans sold $ 1,501 $ 79,202 $ 63,196
The Associations' total aggregate lending volume during 1995
declined $11.9 million, or 4.48%, from 1994. Management believes
the decline is due principally to higher mortgage interest rates
which resulted in a decline in refinancing activity. During
fiscal 1994, loans originated increased by $47.9 million over
1993 originations.
The following table shows, at September 30, 1995, the dollar
amount of adjustable-rate loans and fixed-rate loans in the
Associations' portfolios based on their contractual terms to
maturity. The amounts in the table do not include adjustments
for undisbursed amounts in loans in process, deferred loan fees
and discounts or allowances for loan losses. Demand loans, loans
having no stated schedule of repayments and no stated maturity,
and overdrafts are reported as due in one year or less.
Contractual principal repayments of loans do not necessarily
reflect the actual term of the Associations' loan portfolios.
The average life of mortgage loans is substantially less than
their contractual terms because of loan prepayments and because
of enforcement of due-on-sale clauses, which give the
Associations the right to declare a loan immediately due and
payable if, among other things, the borrower sells the real
property subject to the mortgage. The average life of mortgage
loans tends to increase when current market rates on mortgage
loans substantially exceed rates on existing mortgage loans.
Correspondingly, when market rates on mortgages decline below
rates on existing mortgage loans, the average life of these loans
tends to be reduced.
Over Over Over Over Over
Within One to Two to Three to Five to Ten to Over
One Two Three Five Ten Fifteen Fifteen
Year Years Years Years Years Years Years Total
(dollars in thousands)
Real estate mortgages:
Adjustable-rate $ 1,383 $ 1,053 $ 4,798 $ 5,965 $ 20,282 $ 61,332 $575,435 $ 670,248
Fixed-rate 14,966 10,328 3,367 21,268 28,823 69,708 146,249 294,709
Mortgage-backed
securities:
Adjustable-rate 460 52,734 53,194
Fixed-rate 264 76 6,079 18,657 22,856 47,932
Consumer loans:
Adjustable-rate 43,963 219 451 1,832 8,692 7,253 4,968 67,378
Fixed-rate 16,684 4,094 5,215 8,178 11,669 864 499 47,203
Commercial business
loans:
Adjustable-rate 14,607 1,881 1,239 1,723 159 744 20,353
Fixed-rate 4,190 1,969 596 339 7,094
Total $ 96,253 $ 19,808 $ 15,742 $ 39,305 $ 75,704 $157,814 $803,485 $1,208,111
Real Estate Lending
At September 30, 1995, the Associations' real estate loans
totaled $965.0 million, or 87.17% of gross loans receivable.
One- to four-family residential mortgage loans totaled $697.5
million or 63.01% of the Associations' gross loans receivable.
Multi-family mortgage loans totaled $57.3 million, comprising
5.17% of gross loans while non-residential and land loans totaled
$210.2 million, or approximately 18.98% of gross loans
receivable.
The Associations originate and purchase mortgage loans which
provide for periodic interest rate adjustments ("ARMs"), subject
to certain limitations. The ARMs currently offered by the
Associations have up to 30-year terms and interest rates which
adjust annually in accordance with a designated index. There is
generally a 2% cap on any increase or decrease in the interest
rate per year, with a 5% or 6% limit on the amount which the
interest rate can increase or decrease over the life of the loan.
The Associations' total ARMs were $670.2 million, or 55.48% of
the Associations' total loan portfolio, at September 30, 1995.
The Associations emphasize the origination of ARMs rather than
long-term, fixed-rate mortgage loans for inclusion in their
portfolios. In order to encourage the origination of ARMs with
interest rates which adjust annually, the Associations, like many
of their competitors, may offer a rate of interest on such loans
below the fully-indexed rate for the initial period of the loan.
The Associations presently offer single-family ARMs indexed to
the one year constant maturity treasury index. While these loans
are expected to adjust more quickly to changes in market interest
rates, they may not adjust as rapidly as changes occur in the
Associations' cost of funds. The Associations underwrite ARMs
based on the fully-indexed rate.
The Associations continue to offer long-term, fixed-rate
residential mortgage loans. Such loans are usually made pursuant
to certain guidelines which will permit the sale of such loans in
the secondary market. Based on the current level of market
interest rates and other factors, the Associations presently
intend to retain current originations of conforming 30-year and
15-year conventional fixed-rate mortgage loans in their
portfolios. This policy has been in effect since the last half
of fiscal 1994 and is dependent to a large extent on the general
level of market interest rates. The Associations originated
$63.8 million in long-term, fixed-rate residential mortgage loans
for sale during fiscal 1994. Sales of fixed-rate residential
loans totaled $79.2 million in 1994 and declined to $1.5 million
in 1995. At September 30, 1995, the Associations had no loans
held for sale.
The Associations offer a residential lending program which
provides for a bi-weekly payment to be made by the borrower
instead of a single monthly payment. This option significantly
reduces the interest payments on a typical mortgage loan by
shortening the term of the loan. The Associations' total bi-
weekly portfolio was $34.3 million, or 3.1% of gross loans
receivable, at September 30, 1995.
First Federal offers a first-time home buyers loan program
which incorporates a lower initial interest rate during the first
five years of the mortgage loan. Under this program, closing
costs, origination fees and appraisal and legal fees are reduced.
Home buyers may finance closing costs for up to five years. The
program also allows for 95% loan-to-value financing in many
cases. Current balances of first-time home buyers loans at
September 30, 1995 totaled $17.8 million.
The loan to value ratio, private mortgage insurance
requirements, maturity and other provisions of the loans made by
the Associations have generally reflected the policy of making
the maximum loan permissible consistent with applicable
regulations and guidelines, market conditions, and lending
practices and underwriting standards established by the
Associations. Mortgage loans made by the Associations are
generally long-term loans, amortized on a monthly basis with
principal and interest due each month. The initial contractual
loan payment period for residential loans typically ranges from
15 to 30 years. Borrowers may refinance or prepay loans at their
option, subject to prepayment penalty provisions when included in
the specific note. Interest rates and points charged on loans
originated by the Associations are competitive with other
financial institutions in their respective market areas.
The Associations also provide interim construction financing
for single-family dwellings and make building lot loans intended
for residential use. At September 30, 1995, the Associations'
speculative single-family construction loans totaled $12.4
million and lot loans totaled $19.2 million, or 1.12% and 1.73%
of the Associations' gross loans receivable, respectively. Other
residential construction loans on owner-occupied single-family
homes totaled $23.0 million, or 2.07% of gross loans receivable.
The Associations' policy is to grant single-family, owner-
occupied construction loans up to 90% of the appraised value.
These loans are made on both an adjustable-rate and fixed-rate
basis under a variety of lending programs offered by the
Associations. Speculative construction loans are made for one-
to two-year periods and land loans for up to a seven-year period,
both on an interest only basis. Generally, these loans may not
exceed 75% of the appraised value of the property. These periods
may be extended subject to negotiation and the payment of an
extension fee. Interest rates on adjustable-rate loans are
generally tied to the one year constant maturity treasury or the
prime lending rate and may be adjusted monthly. At the present
time, rates quoted are two and three quarters percent above the
one year constant maturity treasury, depending upon the type of
loan and its terms. Fixed-rate balloon lot loans are also
offered by the Associations. Single-family construction loans
made to builder/developers are currently at rates one and one
quarter percent above the prime lending rate and fixed for a term
of two years.
The Associations were also active in financing land
acquisition and development loans. However, due to general
economic conditions and management's assessment of the potential
for oversupply of single-family lots, the Associations have not
remained active in such lending programs. Acquisition and
development loans currently comprise $4.7 million, or .42% of
total gross loans.
The Associations have also originated both short-term
construction and permanent loans secured by industrial
warehouses, medical and professional office buildings, multi-
family apartment projects and mid-rise office buildings located
in their primary lending areas of Charleston, Dorchester,
Berkeley, Georgetown, Horry and Florence counties. Approximately
98% of the existing commercial and multifamily real estate loans
were made in these counties. Due to present market conditions,
the Associations have limited growth in loans made on non-
residential properties and placed greater emphasis on single-
family real estate lending. During fiscal 1993, management of
First Federal virtually ceased all commercial real estate lending
with a few exceptions: to refinance projects previously financed
by First Federal, to facilitate the sale of real estate owned or
to provide church financing. Generally, Peoples Federal does not
grant loans in excess of $500,000 except to finance sales of real
estate acquired in settlement of loans.
Interest rates charged on permanent commercial real estate
loans are determined by market conditions existing at the time of
the loan commitment. Such loans are generally made on an
adjustable-rate basis, ranging from three quarters to two percent
above the prime lending rate. Permanent commercial loans
generally have been made for terms of ten years with provisions
for interest rate adjustments semi-annually and payments based on
30-year amortizations. Payment adjustments occur annually.
First Federal has originated a substantial portion of its
commercial real estate loans at rates generally two to three
percent above its prevailing cost of funds. As such loans reach
call or loan review dates or refinance, it is First Federal's
current policy to negotiate most of these loans to new terms
based on the prime lending rate as the index.
Consumer Lending
Federal regulations permit the Associations to make secured
and unsecured consumer loans up to 35% of their assets. In
addition, the Associations have lending authority above the 35%
category for certain consumer loans, such as home equity loans,
property improvement loans, mobile home loans and loans secured
by savings accounts. The Associations' gross consumer loans
totaled $114.6 million at September 30, 1995, or 10.35% of gross
loans receivable at that date compared with $111.6 million, or
11.23% of total gross loans receivable at September 30, 1994.
The largest component of consumer lending is comprised of single-
family home equity lines of credit and other equity loans,
currently totaling $47.0 million, or 41.03% of all consumer
loans. Remaining consumer loans primarily consist of loans
secured by mobile homes, boats and automobiles.
Commercial Business Lending
The Associations are permitted under federal law to make
secured or unsecured loans for commercial, corporate business and
agricultural purposes including issuing letters of credit. The
aggregate amount of such loans outstanding generally may not
exceed 10% of an institution's assets.
First Federal has made commercial business loans since 1982.
These loans are generally made on a secured basis with terms that
usually do not exceed five years. Most of First Federal's
commercial business loans to date have interest rates that change
at periods ranging from 30 days to one year based on First
Federal's prime lending rate. Peoples Federal does not generally
offer loans of this type. At September 30, 1995, the
Associations' commercial business loans outstanding were $27.4
million, which represents a increase of $2.5 million, or 9.96%,
since September 30, 1994.
Mortgage-backed Securities
The Company's investment in mortgage-backed securities is a
major component of the Company's loan and mortgage-backed
securities portfolios. These investments serve several primary
functions. First, the Associations have securitized whole loans
for mortgage-backed securities issued by federal agencies to use
as collateral for certain of its borrowings and to secure public
agency deposits. Second, the Associations have previously
securitized loans with federal agencies to reduce their credit
risk exposure and to reduce regulatory risk-based capital
requirements. Third, the Associations purchase mortgage-backed
securities from time to time to meet earning asset growth
objectives and provide additional interest income when necessary
to augment reduced loan originations and replace loan portfolio
runoff. Approximately $5.7 million and $45.3 million of
adjustable-rate agency securities were purchased in 1995 and
1994, respectively. The Associations did not securitize any loans
during fiscal 1995 and 1994.
The Associations' portfolios of mortgage-backed securities
have been designated as held for investment purposes or as
available for sale in accordance with the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." The
Company's accounting for investments in mortgage-backed and other
debt securities is discussed in Note 1 of Notes to Consolidated
Financial Statements. On November 15, 1995, the Financial
Accounting Standards Board issued a Special Report that would
permit an enterprise to reassess the appropriateness of the
classifications of all securities held upon the initial adoption
of the Special Report provided that such reassessment and any
resulting reclassification is completed no later than December
31, 1995. The Company is evaluating its investment position with
respect to securities classified as held to maturity in light of
this special provision. Further information with respect to
mortgage-backed securities is provided in Notes 3 and 4 of Notes
to Consolidated Financial Statements.
Loan Solicitation, Processing and Underwriting
The Associations actively solicit loan applications from
existing customers, local real estate agents, builders, real
estate developers, and various other persons. Upon receipt of a
loan application from a prospective borrower, a credit report is
ordered to verify specific information relating to the loan
applicant's employment, income and credit standing. An appraisal
of the real estate intended to secure the proposed loan is
undertaken by an independent appraiser, who is approved by the
Association in accordance with current regulations and its
respective policies. As soon as the required information is
obtained and the appraisal is completed, the loan is submitted to
the Associations' loan underwriting officers who make a
recommendation to the Associations' Loan Committees for approval
or disapproval. One program offered by First Federal, the Quick
Close Mortgage, eliminates the requirement for a standard
appraisal and substitutes an internal property evaluation
performed by First Federal personnel. This program is only
available to loans with loan to value ratios of 90% or less and
for loan originations retained in First Federal's portfolio.
Stringent underwriting standards also apply.
First Federal's Management Loan Committee meets weekly and
approves all real estate and commercial loans for First Federal.
First Federal's Management Loan Committee is comprised of the
Senior Vice President, Lending Division; Senior Vice President,
Retail Banking Division; Community Reinvestment Act ("CRA")
officer; Vice President, Residential Lending; Vice President,
Loan Servicing; Vice President, Branch Operations; Vice President
of Commercial Lending and Vice President, Special Lending. All
supporting documentation is reviewed and decisions made by the
Committee are based on written underwriting guidelines. Loan
limits have been established by First Federal and are adhered to
strictly.
In addition to First Federal's Management Loan Committee, all
loans individually or in the aggregate that exceed $1.0 million
must be approved by the Board of Directors' Loan Committee
comprised of four First Federal Directors.
Peoples Federal's Loan Committee, which meets weekly, approves
all real estate and commercial loans for Peoples Federal. The
Loan Committee is comprised of the President, Vice President and
two members of the Board of Directors. All supporting
documentation is reviewed and decisions made by the Loan
Committee are based on written underwriting guidelines. Loan
limits have been established by Peoples Federal and are strictly
adhered to.
All loans individually or in the aggregate that exceed
$500,000 are reviewed and approved by the Board of Directors, in
addition to Peoples Federal's Loan Committee. Peoples Federal
does not grant individual loans in excess of $500,000, except to
finance sales of real estate owned.
When considering loans with a higher degree of risk,
additional collateral may be obtained or mortgage insurance or
other guarantees may be considered necessary by the Associations.
High risk loans are processed and approved in the same manner as
other loans. All related party transactions are processed
according to regulatory guidelines and normal underwriting
guidelines. The Loan Committees and full Boards of Directors of
the Associations review and approve all related party loans.
Loan applicants are promptly notified of the decision of the
Loan Committees by a letter setting forth the terms and
conditions of the loan commitment. These terms and conditions
include the amount of the loan, interest rate, amortization term,
a brief description of the real estate to be mortgaged to the
Associations, and the notice of requirement of fire and casualty
and other insurance coverage to be maintained to protect the
Associations' interests.
Certain risks are inherent with loan portfolios which contain
significant concentrations of commercial real estate,
construction, commercial business and consumer loans. While
these types of loans provide benefits to the Associations'
asset/liability management programs and reduce exposure to
interest rate changes, such loans may entail significant
additional credit risks compared to residential mortgage lending.
Commercial real estate and construction loans may involve large
loan balances to single borrowers or groups of related borrowers.
In addition, the payment experience on loans secured by income-
producing properties is typically dependent on the successful
operation of the properties and thus may be subject to a greater
extent to adverse conditions in the local or regional real estate
market or in the general economy. Construction loans may involve
additional risks attributable to the fact that loan funds are
advanced upon the security of the project under construction.
Uncertainties inherent in estimating construction costs, delays
arising from labor problems, material shortages, and other
unpredictable contingencies, make it difficult to evaluate
accurately the total loan funds required to complete a project,
and related loan to value ratios. Because of these factors, the
analysis of prospective construction loan projects requires an
expertise that is different in significant respects from the
expertise required for residential mortgage lending. Consumer
loans have historically tended to have a higher rate of default
than residential mortgage loans.
There are, due to the nature of ARMs, unquantifiable risks
resulting from increased costs to the borrower as a result of
periodic repricing. Despite the benefits of ARMs to the
Associations' asset/liability management program, they pose
additional risks, primarily because as interest rates rise, the
underlying payment by the borrower rises, increasing the
potential for default. At the same time, the marketability of
the underlying property may be adversely affected by higher
interest rates.
All of the above risk factors are present in the Company's
loan portfolio and could have an impact on future delinquency
rates and levels and charge-off rates and levels.
Limits on Loan Concentrations
First Federal's and Peoples Federal's permissible lending
limit for loans to one borrower is the greater of $500,000 or 15%
of unimpaired capital and surplus (except for loans fully secured
by certain readily marketable collateral, in which case this
limit is increased to 25% of unimpaired capital and surplus). At
September 30, 1995, First Federal's and Peoples Federal's lending
limits under this restriction were $11.9 million and $4.1
million, respectively. A broader limitation (the lesser of $30
million or 30% of unimpaired capital and surplus) is provided
under certain circumstances and subject to OTS approval for loans
to develop domestic residential housing units. In addition, the
Associations may provide purchase money financing for the sale of
any asset without regard to the loans to one borrower limitation
so long as no new funds are advanced and the Associations are not
placed in a more detrimental position than if they had held the
asset.
Loan Sales and Servicing
While the Associations originate adjustable-rate loans for
their own portfolios, fixed-rate loans are generally made on
terms that will permit their sale in the secondary market. The
Associations participate in secondary market activities by
selling whole loans and participations in loans to the Federal
National Mortgage Association ("FNMA"), the Federal Home Loan
Mortgage Corporation ("FHLMC"), as well as other institutional
investors. This practice enables the Associations to satisfy the
demand for such loans in their local communities, to meet asset
and liability objectives of management and to develop a source of
fee income through loan servicing. At September 30, 1995, the
Associations were servicing loans for others of $230.2 million.
Fiscal 1994 and 1993 loans sales totaled $79.2 million and
$63.2 million, respectively. Stimulated by consumers
refinancing higher rate mortgages, single-family fixed-rate loan
originations increased significantly during a portion of fiscal
1994 and virtually all of fiscal 1993. Long-term fixed-rate
mortgage loan originations meeting the criteria for sale totaled
$63.8 million during fiscal 1994 and $74.2 million in fiscal
1993. Loans originated and sold in 1995 of $1.5 million were
related to certain affordable housing programs of the State of
South Carolina. The remaining fixed-rate loans originated in
fiscal 1995 were retained in the Company's loan portfolio.
Loan Origination and Other Fees
In addition to interest earned on loans, the Associations
receive loan origination fees or "points" for originating loans.
Loan points are a percentage of the principal amount of the
mortgage loan charged to the borrower for originating the loan.
Loan origination fees received, if any, are offset by the
deferral of certain direct expenses associated with loans
originated. The net fees or costs are recognized as yield
adjustments by applying the interest method according to
SFAS No. 91, "Accounting for Nonrefundable Fees and Costs
Associated with Originating or Acquiring Loans and Initial Direct
Costs of Leases."
The Associations also receive other fees and charges relating
to existing loans, which include late charges and fees collected
in connection with a change in borrower or other loan
modifications. These fees and charges have not constituted a
material source of loan fee income.
NON-PERFORMING AND RISK ELEMENTS
Loan Delinquencies
When a borrower fails to make a required payment on a loan,
the Associations attempt to cure the default by contacting the
borrower. The Associations contact the borrower after a payment
is past due less than 20 days, and a late charge is assessed on
the loan. In most cases, defaults are cured promptly. If the
delinquency on a mortgage loan continues 60 to 90 days and is not
cured through normal collection procedures or an acceptable
arrangement is not worked out with the borrower, the Associations
will institute measures to remedy the default, including
commencing a foreclosure action. The Associations may accept
voluntary deeds of the secured property in lieu of foreclosure.
The Associations' mortgage loans are generally secured by the
use of a mortgage instrument. Notice of default under these
loans is required to be recorded and mailed. If the default is
not cured within three months, a notice of sale is posted, mailed
and advertised, and a sale is then conducted.
Problem Assets and Asset Classifications
Loans are reviewed on a regular basis and are placed on a non-
accrual status when, in the opinion of management, the collection
of accrued interest is doubtful. Generally, consumer loans and
commercial business loans are placed on non-accrual status when
the loans are more than 90 days delinquent. Unsecured consumer
loans are charged off when the loan becomes over 120 days
delinquent. Real estate loans are placed on non-accrual status
when management determines that the interest may not be
collectible.
Renegotiated loans are loans which the Company has agreed to
modify the terms of the loan. Such modifications may include
changing the interest rate charged and/or other concessions.
Real estate acquired by the Associations as a result of
foreclosure, in-substance foreclosure or by deed in lieu of
foreclosure is classified as real estate acquired in settlement
of loans until such time as it is sold. In-substance
foreclosures are loans accounted for as foreclosed properties
even though actual foreclosure has not occurred. When such real
property is acquired, it is recorded at fair value. Any write-
down of the property is charged to the allowance for loan losses.
The following table sets forth information with respect to the
Associations' problem assets at the dates indicated.
At September 30,
1995 1994 1993 1992 1991
(dollar amounts in thousands)
Non-accrual loans $ 5,088 $ 1,620 $ 3,705 $ 5,406 $ 7,487
Accruing loans 90 days or more delinquent 816 740 1,458 2,216 7,537
Renegotiated loans 11,103 13,129 9,001 7,210 9,036
In-substance foreclosures 2,621 2,834 5,260 4,171 5,737
Real estate and other assets acquired in
settlement of loans 3,144 3,290 5,480 7,951 6,569
$22,772 $21,613 $24,904 $26,954 $36,366
As a percent of loans receivable and real
estate and other assets acquired in
settlement of loans 2.10% 2.24% 2.56% 3.52% 4.29%
As a percent of total assets 1.67 1.74 1.98 2.73 3.69
Allowance for loan losses as a percent of
problem assets 46.71 49.64 43.13 17.95 11.96
The Company's problem assets as a percentage of total assets
over the past five years have declined from 3.69% at September
30, 1991 to 1.67% as of September 30, 1995. Although problem
asset totals may include loans which are considered to be earning
assets, there generally exists more than normal risk associated
with the severity of delinquency or the renegotiated terms of
these loans. Non-accrual loans increased approximately $3.5
million during 1995. Approximately $1.1 million of the increase
relates to two loans secured by a first mortgage on a subdivision
development and by junior liens on other residential and
commercial properties. The borrowers have experienced cash flow
problems resulting in delinquency. The Company's non-accrual
loans also increased in 1995 from the addition of two loans with
balances of approximately $1.1 million in the aggregate secured
by residential lots in a resort development. These loans were
brought current and certain terms modified in November of 1995.
Renegotiated loans declined $2.0 million in 1995. A $1.2 million
resort development loan renegotiated in 1983 was repaid in the
current year.
The allowance for loan losses of $10.6 million currently
covers 46.71% of reported problem assets, a significant increase
from 11.96% as of September 30, 1991. Management's long-term
goals continue to include lower ratios of problem assets to total
assets, although management expects there will always remain a
core level of delinquent loans and real estate acquired from
normal lending operations. Renegotiated loans currently comprise
approximately one half of total problem assets. All of these
loans were either current or less than 30 days delinquent at
September 30, 1995, and have an average yield of 7.85% compared
with an average yield of 7.30% one year ago.
For further discussion of the Associations' problem assets,
see "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Asset Quality" and Note 7 of the
Notes to Consolidated Financial Statements.
LOAN LOSS EXPERIENCE
The Associations' allowance for loan losses totaled $10.6
million at September 30, 1995. Management periodically evaluates
the adequacy of the allowance based upon historical delinquency
rates, the size of the Associations' loan portfolios and various
other factors. See Note 7 of Notes to the Consolidated Financial
Statements for information concerning the Associations' provision
and allowance for loan losses. For a discussion of changes in
the Company's allowance for loan losses, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Allowance for Loan Losses".
In the Spring of 1993 management learned of the initial
recommendations of the United States Department of Defense to
close numerous Naval facilities in the Charleston Metropolitan
Area. The Base Realignment and Closure Commission subsequently
voted to include the Charleston Naval Station and the Charleston
Naval Shipyard in its final list of military facilities to be
closed. The Commission also voted to consolidate the East Coast
Naval Electronics Systems Engineering Center in the Charleston
area. The provision for loan losses of $3.7 million in fiscal
1993 partially reflected increased reserves for the potential
impact on the loan portfolio of the military base closures in the
Charleston metropolitan area. The total allowance for loan
losses also increased in fiscal 1993 by $4.6 million for the
allowance on loans acquired in the Peoples Federal acquisition.
By April of 1996 most of the net reductions in employment related
to military downsizing will be completed. Management believes
the economic growth of Charleston and the surrounding counties
has been adversely impacted by base closures during the past
three fiscal years, with an adverse effect on housing demand.
Management, however, is very encouraged by recent announcements
of business expansion in the private sector which will help to
mitigate military-related job losses.
While the Associations believe they have established their
allowance for loan losses in accordance with generally accepted
accounting principles at September 30, 1995, there can be no
assurance that regulators, when reviewing the Associations'
portfolios in the future, will not request the Associations to
increase significantly their allowance for loan losses, thereby
adversely affecting the Company's financial condition and
earnings.
The following table sets forth the breakdown of the Company's
allowance for loan losses by loan category at the dates
indicated. Management believes that the allowance can be
allocated by category only on an approximate basis. The
allocation of the allowance to each category is not necessarily
indicative of future losses and does not restrict the use of the
allowance to absorb losses in any category.
At September 30,
1995 1994 1993 1992 1991
(dollar amounts in thousands)
Allowance for loan losses
applicable to:
Real estate loans $ 8,875 $ 9,074 $ 9,189 $ 3,036 $ 2,884
Commercial loans 715 750 648 698 672
Consumer loans 1,047 904 905 1,103 795
Total $10,637 $10,728 $10,742 $ 4,837 $ 4,351
At September 30,
1995 1994 1993 1992 1991
Percent of loans to
total loans:
Real estate loans 87.0% 85.9% 84.9% 80.0% 81.9%
Commercial business loans 2.5 2.6 3.0 5.0 5.0
Consumer loans 10.5 11.5 12.1 15.0 13.1
Total 100.0% 100.0% 100.0% 100.0% 100.0%
OTS Classification System
OTS regulations include a classification system for problem
assets, including assets that previously had been treated as
"scheduled items." Under this classification system, problem
assets for insured institutions are classified as "substandard,"
"doubtful" or "loss," depending on the presence of certain
characteristics discussed below.
An asset is considered "substandard" if inadequately protected
by the current net worth and paying capacity of the obligor or of
the collateral pledged, if any. "Substandard" assets include
those assets characterized by the "distinct possibility" that the
institution will sustain "some loss" if the deficiencies are not
corrected. Assets classified as "doubtful" have all of the
weaknesses inherent in those classified "substandard" with the
added characteristic that the weaknesses present make "collection
or liquidation in full," on the basis of currently existing
facts, conditions, and values, "highly questionable and
improbable." Assets classified "loss" are those considered
"uncollectible" and of such little value that their continuance
as assets without the establishment of a specific loss reserve is
not warranted.
When an institution classifies problem assets as either
substandard or doubtful, it is required to establish general
allowances for loan losses in an amount deemed prudent by
management. General allowances represent loss allowances which
have been established to recognize the inherent risks associated
with lending activities, but which, unlike specific allowances,
have not been allocated to particular problem assets. When an
institution classifies problem assets as "loss," it is required
either to establish a specific allowance for losses equal to 100%
of the amount of the asset so classified or to charge off such
amount. An institution's determination as to the classification
of its assets and the amount of its valuation allowances is
subject to review by the OTS, which can order the establishment
of additional general or specific loss allowances. The
Associations have classified $30.9 million in assets as
substandard and $612 thousand as loss, respectively, as of
September 30, 1995.
The OTS classification of assets regulation also provides for
a "special mention" designation, in addition to the
"substandard," "doubtful" and "loss" classifications. "Special
mention" assets are defined as those that do not currently expose
an institution to a sufficient degree of risk to warrant
classification as either "substandard," "doubtful" or "loss" but
do possess credit deficiencies or potential weaknesses deserving
management's close attention which, if not corrected, could
weaken the asset and increase such risk in the future. The
designation "special mention" shall be made by either the
institution or its examiner. The Associations had $32.8 million
of assets designated "special mention" as of September 30, 1995.
Loan Review and Classification Procedures
The Associations have established Asset Classification
Committees which meet to review the adequacy of the allowance for
loan losses, levels of charge-offs and loan delinquencies. In
addition, the Committees determine which loans should be
classified as substandard, doubtful or loss for regulatory
purposes. The Asset Classification Committees are comprised of
senior officers of the Associations, loan servicing, asset
management, credit review and audit department personnel. First
Federal's committee meets on a quarterly basis or more frequently
as needed. Peoples Federal's committee meets monthly.
The Committees' reviews of the adequacy of the allowance for
loan losses considers the composition and diversity of the
Associations' loan portfolios. For this review, the
Associations' loan portfolios are segmented into the following
major categories: single-family residential, multi-family
residential, commercial real estate, commercial business loans
and consumer loans by type of loan. Some of the more significant
factors that the Committees include in their reviews are
prevailing and anticipated economic conditions, the impact of
these conditions on property values, historical loan loss
experience in relationship to types of loans, the financial
status and credit standing of certain individual borrowers and
appraisals of the value of the collateral. Consideration also is
given to examinations performed by regulatory authorities and the
Associations' independent accountants. The Associations' single-
family residential real estate and consumer loans are relatively
homogeneous. Therefore, in general, management reviews
residential and consumer loan portfolios by analyzing their
performance and the composition of their collateral for the
portfolios as a whole. Additionally, the Asset Classification
Committees perform a review of the adequacy of general reserves
relative to the balances of classified loans.
INVESTMENT ACTIVITIES
The Associations are required under federal regulations to
maintain a minimum amount of liquid assets which may be invested
in specified short-term securities and are also permitted to
invest in other types of securities. Investment decisions are
made by authorized officers of the Company and the Associations
within policies established by the Company's and the
Associations' Boards of Directors. At September 30, 1995, the
Company's investment securities portfolio totaled approximately
$120.0 million which includes stock in the FHLB of Atlanta
approximating $12.0 million. Investment securities also include
U.S. Government and agency obligations and corporate bonds
approximating $62.7 million and $21.3 million, respectively. At
September 30, 1995 there were seven investments in mutual funds
totaling approximately $24.0 million. See Note 1 of Notes to
Consolidated Financial Statements for a discussion of the
Company's accounting for investment securities. See Notes 3, 4
and 5 of Notes to Consolidated Financial Statements for
additional information regarding investment securities and FHLB
of Atlanta stock.
Objectives of the investment policies of the Company and the
Associations are achieved through investing in U.S. Government,
federal agency, corporate debt securities, mortgage-backed
securities, short-term money market instruments, mutual funds,
loans and other investments as authorized by OTS regulations and
specifically approved by the Boards of Directors of the Company
and the Associations. Investment portfolio guidelines
specifically identify those securities eligible for purchase and
describe the operations and reporting requirements of the
Investment Committees which execute investment policy. The
primary objective of the Company in its management of the
investment portfolio is to maintain a portfolio of high quality,
highly liquid investments with returns competitive with short-
term treasury or agency securities and highly rated corporate
securities.
As members of the FHLB System, the Associations are required
to maintain an investment in the common stock of the FHLB of
Atlanta. See "Regulation of the Associations -- Federal Home
Loan Bank System." The stock of the FHLB of Atlanta is
redeemable at par value.
Securities may differ in terms of default risk, interest risk,
liquidity risk and expected rate of return. Default risk is the
risk that an issuer will be unable to make interest payments, or
to repay the principal amount on schedule. The Associations
primarily invest in U.S. Government and federal agency
obligations. U.S. Government obligations are regarded as free of
default risk. The issues of most government agencies are backed
by the strength of the agency itself plus a strong implication
that in the event of financial difficulty, the agency would be
assisted by the federal government. The credit quality of
corporate debt varies widely. The Associations only invest in
commercial paper and corporate debt securities which are rated in
either one of the three highest categories by two nationally
recognized investment rating services. Generally, the
Associations' investments meet the current liquidity guidelines
which necessitate that maturities of government and agency
investments fall within five years and maturities of corporate
securities fall within three years. The Associations have
generally staggered maturities within this five- or three-year
period and generally purchase medium-term securities with the
proceeds of maturing investments. Management's investment
strategy over the past several years has been one of consistently
reinvesting in high quality liquid assets for its investment
portfolio with yields which are competitive with short-term
treasury securities. The Company adopted SFAS 115 effective
September 30, 1993. Accordingly, investments are classified as
either "held to maturity", "available for sale" or as "trading
securities." At September 30, 1995 and 1994 the Company had no
"trading" securities.
The following table sets forth the carrying value of the
Company's investment securities portfolio, short-term investments
and FHLB of Atlanta stock. At September 30, 1995, the market
value of the Company's investment securities portfolio was $120.5
million.
At September 30,
1995 1994 1993
(dollars in thousands)
Investment securities:
U.S. Treasury securities and obligations
of U.S. government agencies and corporations $ 62,727 $ 67,132 $ 48,780
Corporate securities 21,301 13,565 11,049
Time deposits at FHLB of Atlanta 3,000 9,000
Asset Management Fund-Adjustable Rate
Mortgage Portfolio 8,932 8,815 8,022
Federated Adjustable Rate Mortgage Fund 9,689 9,618 10,020
Other Mutual funds and other 5,336 3,764 5,997
FHLB capital stock 11,982 11,982 11,686
Total investments 119,967 117,876 104,554
Interest bearing deposits<F1> 3,886 4,321 30,658
Federal funds sold<F1> 150
$123,853 $122,197 $135,362
<F1>Included in cash and cash equivalents in the Company's Consolidated Statements of Financial
Condition.
The following table sets forth the scheduled maturities,
carrying values, market values and average yields for the
Company's investment securities at September 30, 1995.
Year Ended September 30, 1995
One Year One to Five Five to Ten More than Total
or less Years Years Ten Years Investment Securities
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Market Average
Value Yield Value Yield Value Yield Value Yield Value Value Yield
(dollar amounts in thousands)
U.S. Treasury securities
and obligations of
U.S. government
agencies and
corporations<F1> $23,563 5.40% $32,321 6.30% $ 4,905 6.51% $ 1,938 7.50% $ 62,727 $ 62,902 6.01%
Corporate bonds 6,007 6.28 12,582 7.37 1,034 7.01 1,678 5.50 21,301 21,659 6.89
Mutual Funds 23,957 6.14 23,957 23,957 6.14
FHLB capital stock<F2> 11,982 7.25% 11,982 11,982 7.25
Total $53,527 5.83% $44,903 6.60% $ 5,939 6.60% $15,598 7.09% $119,967 $120,500 6.32%
<F1> Expected maturities may differ from contractual maturities because of call provisions.
<F2> FHLB of Atlanta stock is shown as maturing after ten years.
DEPOSITS
The Associations offer a number of deposit accounts including
passbook savings accounts, NOW/checking, commercial checking,
money market accounts, Individual Retirement Accounts ("IRA") and
certificate accounts which generally range in maturity from three
months to five years. Deposit account terms vary, with the
principal differences being the minimum balance required, the
time period the funds must remain on deposit and the interest
rate. For a schedule of the dollar amounts in each major
category of the Associations' deposit accounts, see Note 10 of
Notes to Consolidated Financial Statements.
Deposit Flow
The following table sets forth the dollar amount of deposits
in the various types of savings accounts offered by the
Associations on the dates indicated.
Balance at Balance at Balance at
September 30, % of September 30, % of September 30, % of
1995 Deposits 1994 Deposits 1993 Deposits
(dollar amounts in thousands)
NOW and checking accounts $ 117,149 10.90% $ 112,270 10.56% $ 103,412 9.84%
Passbook and
regular savings 125,588 11.69 150,693 14.17 159,242 15.15
Money market deposit accounts 131,225 12.22 140,511 13.22 154,101 14.66
Savings certificates
6 mos. or less 105,785 9.85 74,631 7.02 78,751 7.49
Savings certificates
greater than 6 mos. 406,108 37.80 406,564 38.25 385,082 36.63
Jumbo certificates 54,339 5.06 52,693 4.96 46,751 4.45
IRA accounts<F1> 134,119 12.48 125,633 11.82 123,880 11.78
Total $1,074,313 100.00% $1,062,995 100.00% $1,051,219 100.00%
<F1>Balances include different account types of varying maturities that have not been included in other categories above.
During the latter half of fiscal 1994 and for most of fiscal
1995 market interest rates increased substantially. As a result,
customers chose to move funds to certificates of deposit and
reduce balances in passbook, regular savings and money market
accounts. The preceding table reflects a decline in the
percentage of passbook and regular savings accounts to total
accounts from 15.15% of deposits at September 30, 1993, to 11.69%
of deposits at September 30, 1995. Money market balances as a
percent of deposits also declined from 14.66% to 12.22% of
deposits. Fixed term certificate of deposit accounts with
maturities of six months or less experienced growth of $31.2
million in 1995. IRA accounts also increased $8.5 million during
the year.
The Associations are subject to short-term fluctuations in
deposit flows as well as to internal shifts in deposits among the
various deposit products as customers move their funds to obtain
a better yield. The Asset and Liability Committees of the
Associations manage the mix, maturity and pricing of assets and
liabilities in order to minimize the impact on earnings as
changes in interest rates occur. During 1995 interest rates
increased in all maturities; therefore, new deposits as well as
maturing funds were at rates that resulted in an increase in the
cost of savings at the Associations. At September 30, 1995, the
average cost of savings for the Associations was 4.80% compared
to 4.01% as of September 30, 1994.
During fiscal 1995 and 1994, deposit balances increased $11.3
million and $11.8 million, respectively. After deducting
interest credited, deposit activity during fiscal 1995 and 1994
resulted in negative cash flows of $23.2 million and $18.5
million, respectively. During fiscal 1993 deposits increased
$313.6 million, primarily as a result of the inclusion of $291.1
million in deposits of Peoples Federal acquired on October 9,
1992. The Associations' deposit activity during fiscal 1993,
after deducting interest credited, produced negative cash flows
of $9.5 million. Low rates on savings and fixed term
certificates prompted many depositors to withdraw savings
deposits in favor of investments in alternative investments such
as stock and fixed income mutual funds.
The Associations' deposits are obtained primarily from
residents of South Carolina. Management estimates that less than
2% of deposits at September 30, 1995, are obtained from customers
residing outside of South Carolina. The principal methods used
by the Associations to attract deposit accounts include the
offering of a wide variety of services and accounts, competitive
interest rates, and convenient office locations and service
hours. The Associations utilize traditional marketing methods to
attract new customers and savings deposits, including mass media
advertising and direct mail. The Associations also provide
customers access to the convenience of automated teller machines
("ATMs") through a proprietary ATM network and access to regional
and national ATM networks. The Associations enjoy an excellent
reputation for providing products and services to meet the needs
of market segments, such as seniors. For example, 50-Plus Club
members benefit from a number of advantageous offerings and, with
the addition of the 50-Plus Club Coordinator, they now
participate in special programs, such as exclusive travel
packages, special events and classic movies.
Savings Deposit Activity
The following table sets forth the savings activities of the
Associations for the periods indicated.
Year Ended September 30,
1995 1994 1993
(dollars in thousands)
Net increase (decrease)
before interest
credited $(23,161) $(18,479) $ (9,499)
Deposits acquired 291,118
Interest credited 34,479 30,255 32,014
Net increase $ 11,318 $ 11,776 $ 313,633
Time Deposit Amounts
The following table sets forth the amount of the Associations'
time deposits as of the dates indicated.
At September 30,
Rate 1995 1994 1993
(dollars in thousands)
4.00% or less $ 4,836 $131,891 $265,899
4.01% - 6.00% 493,116 462,854 277,860
6.01% - 8.00% 177,626 39,350 62,381
8.01% - 10.00% 23,318 23,846 26,769
Above 10.00% 1,455 1,580 1,555
$700,351 $659,521 $634,464
Time Deposit Maturity Schedule
The following table sets forth the amounts and maturities of
the Associations' time deposits at September 30, 1995.
Amount Due
Less Than After
Rate One Year 1-2 Years 2-3 Years 3 Years Total
(dollars in thousands)
4.00% or less $ 4,833 $ 3 $ 4,836
4.01% - 6.00% 408,641 66,922 $ 11,063 $ 6,490 493,116
6.01% - 8.00% 102,952 24,459 10,062 40,153 177,626
8.01% - 10.00% 2,562 3,239 238 17,279 23,318
Above 10.00% 1,345 10 100 1,455
Total $ 520,333 $ 94,633 $ 21,363 $ 64,022 $ 700,351
Jumbo Certificates of Deposit
The following table indicates the amount of the Associations'
jumbo certificates of deposit by time remaining until maturity as
of September 30, 1995. Jumbo certificates of deposit require
minimum deposits of $100,000 and have negotiable interest rates.
Maturity Period At September 30, 1995
(dollars in thousands)
Three months or less $29,206
Over three through six months 13,624
Over six through twelve months 8,639
Over twelve months 2,870
Total $54,339
BORROWINGS
The Associations rely upon advances from the FHLB of Atlanta
to supplement their supply of lendable funds and to meet deposit
withdrawal requirements. The FHLB of Atlanta has served as the
Associations' primary borrowings source. Advances from the FHLB
of Atlanta are typically secured by the Associations' stock in
the FHLB of Atlanta and a portion of the Associations' first
mortgage loans. Interest rates on advances vary from time to
time in response to general economic conditions.
At September 30, 1995, the Associations had advances totaling
$107.9 million from the FHLB of Atlanta at interest rates ranging
from 4.65% to 6.34% and a weighted average rate of 5.88%. At
September 30, 1995, the maturity of the Associations' FHLB
advances ranged from one to 17 years. Substantially all of the
advances mature by June of 1996. See Note 11 of Notes to
Consolidated Financial Statements.
The Associations have periodically entered into transactions
to sell securities under agreements to repurchase ("reverse
repurchase agreements") through broker-dealers. Reverse
repurchase agreements evidence indebtedness of the Associations
arising from the sale of securities that the Associations are
obligated to repurchase at specified prices and dates. At the
date of repurchase, the Associations will, in some cases, enter
into another reverse repurchase agreement to fund the repurchase
of the maturing agreement. For regulatory and accounting
purposes these reverse repurchase agreements are deemed to be
borrowings collateralized by the securities sold. At September
30, 1995, the Associations had $44.5 million of outstanding
reverse repurchase agreements secured by mortgage-backed
securities. The agreements had a weighted average interest rate
of 5.89% at September 30, 1995, and mature within three months.
See Note 12 of Notes to Consolidated Financial Statements.
The following table sets forth certain information regarding
short-term borrowings by the Associations at the end of and
during the periods indicated:
At or For the Year Ended September 30,
1995 1994 1993 1992
(dollar amounts in thousands)
Weighted Average Rate Paid On
(at end of period):
FHLB advances 5.88% 5.03% 6.39% 7.14%
Securities sold under
agreements to repurchase 5.89% 5.20% 3.60% 3.63%
Maximum Amount Of Borrowings
Outstanding (during period):
FHLB advances $107,853 $ 82,962 $118,860 $164,090
Securities sold under
agreements to repurchase $ 45,217 $ 13,098 $ 53,230 $ 51,802
Approximate Average Amount Of
Short-term Borrowings With
Respect To:
FHLB advances $ 78,982 $ 57,002 $ 97,274 $138,127
Securities sold under
agreements to repurchase $ 26,769 $ 4,769 $ 22,299 $ 31,503
Approximate Weighted Average Rate
Paid On (during period):
FHLB advances 5.92% 5.23% 6.24% 6.67%
Securities sold under
agreements to repurchase 6.08% 4.40% 3.53% 4.96%
LONG-TERM DEBT
On September 17, 1992, the Company issued $20.3 million
aggregate principal amount of Senior Notes ("Notes") due
September 1, 2002. The Notes bear interest at 9-3/8% per year.
The Company received net proceeds of approximately $19.0 million,
$16.5 million of which was used to complete the acquisition of
Peoples Federal on October 9, 1992. The Company has agreed to
prepay, at a price of 100% of the principal plus accrued interest
to the date of prepayment, up to $1.0 million of the Notes
tendered by noteholders for prepayment during the period from the
date of issuance through September 1, 1993, and thereafter in any
twelve-month period ending September 1, subject to certain
limitations. The Company's obligation to prepay Notes tendered
for prepayment is not cumulative. Although the Company is
obligated to prepay in any prepayment period up to $1.0 million
of the Notes annually, it is not required to establish a sinking
fund or otherwise set aside funds for that purpose. The ability
of the Company to prepay the Notes depends, to a substantial
degree, upon interest income generated by the Company's
investment assets, the availability of alternative credit
sources, and the payment of dividends and other fees to the
Company by its subsidiaries. Notes totaling $487 thousand were
redeemed on September 1, 1993. None were redeemed during fiscal
1994 or 1995. See Note 13 of Notes to Consolidated Financial
Statements for additional information on the Notes.
The principal expense of the Company is the interest due
annually on the Notes which approximates $1.9 million, assuming
certain noteholder options to elect prepayment of the Notes are
not exercised. Payments of interest and principal on the Notes
are dependent upon the ability of First Federal and Peoples
Federal to pay dividends to the Company. Dividend and other
capital distributions by the subsidiaries are restricted by
regulation and may require regulatory approval. See --
"Regulation of the Associations - Dividend Limitations."
ASSET AND LIABILITY MANAGEMENT
Management believes that the analysis and management of
interest rate risk is crucial to the long-term profitability of
the Associations as well as the savings and loan industry
generally. During the past several years, management believes
that its balance sheet restructuring efforts have resulted in a
significant reduction in the Associations' vulnerability to
interest rate risk. The major component of this strategy has
been the origination of ARM loans, short-term construction loans,
commercial and consumer loans. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations --
Liquidity and Asset and Liability Management" for a further
discussion of the Associations' asset/liability management
strategies and for the Company's interest rate sensitivity
analysis table at September 30, 1995.
Rate/Volume Analysis
For the Company's rate/volume analysis, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Net Interest Income."
INTEREST RATE MARGIN
The following table sets forth certain information relating to
the Company's average balance sheet and reflects the average
yield on assets and average cost of liabilities for the periods
indicated and the average yields earned and rates paid at
September 30, 1995. Such yields and costs are derived by
dividing income or expense by the average balance of assets or
liabilities, respectively, for the periods presented. Certain
average balances are derived from month-end balances. Management
does not believe that the use of month-end balances instead of
daily average balances has caused any material difference in the
information presented.
The following table presents, for the periods indicated, the
total dollar amount of interest income and interest expense, as
well as the resulting yields earned and rates paid.
At September 30, Year Ended September 30,
1995 1995 1994 1993
Average Average Average Average Average Average Average
Balance Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
(dollar amounts in thousands)
Interest-earning assets:
Loans<F1><F2> $1,092,703 8.11% $1,025,034 $80,434 7.85% $ 967,732 $72,829 7.53% $ 985,165 $80,178 8.14%
Mortgage-backed
securities 101,126 7.26 103,373 7,324 7.09 93,186 6,530 7.01 128,561 10,022 7.80
Investment securities 119,967 6.32 88,227 5,314 6.02 76,107 3,904 5.13 56,947 3,110 5.47
Other interest-earning
assets<F3> 3,886 6.50 39,786 2,431 6.11 57,310 2,389 4.17 57,433 2,097 3.64
Total interest-earning
assets 1,317,682 7.88 1,256,420 95,503 7.60 1,194,335 85,652 7.17 1,228,106 95,407 7.77
Non-interest-earning
assets 47,666 48,389 39,258 58,229
Total assets $1,365,348 $1,304,809 $1,233,593 $1,286,335
Interest-bearing liabilities:
Deposit accounts:
Checking accounts $ 117,149 1.52 $ 113,519 1,857 1.64 $ 109,116 1,871 1.71 $ 100,520 2,283 2.27
Savings accounts 125,588 2.75 133,967 3,777 2.82 157,382 4,454 2.83 133,801 4,704 3.52
Money market accounts 131,225 3.91 133,112 5,060 3.80 146,798 4,305 2.93 163,288 5,270 3.23
Certificate accounts 700,351 5.89 82,318 36,947 5.41 633,821 29,080 4.59 644,059 30,690 4.77
Total deposits 1,074,313 4.80 1,062,916 47,641 4.48 1,047,117 39,710 3.79 1,041,668 42,947 4.12
FHLB advances 107,853 5.88 78,982 4,674 5.92 57,002 2,980 5.23 97,274 6,066 6.24
Other borrowings 64,267 6.96 46,533 3,479 7.48 24,532 2,065 8.41 42,549 2,683 6.31
Total interest-bearing
liabilities 1,246,433 5.00 1,188,431 55,794 4.69 1,128,651 44,755 3.96 1,181,491 51,696 4.38
Non-interest-bearing
liabilities 27,506 29,337 22,938 30,414
Total liabilities 1,273,939 1,217,768 1,151,589 1,211,905
Stockholders' equity 91,409 87,041 82,004 74,430
Total liabilities
and stockholders'
equity $1,365,348 $1,304,809 $1,233,593 $1,286,335
Net interest income/gross
margin 2.88% $39,709 2.91% $40,897 3.21% $43,711 3.39%
Net yield on average
interest-earning assets 3.16% 3.42% 3.56%
Percent of average interest-
earning assets to average
interest-bearing liabilities 105.72% 105.82% 103.95%
<F1>Average balances of loans include non-accrual loans.
<F2>The average rate at September 30, 1995 is not adjusted for the effect of deferred loan fees and costs, which are amortized to
income over the lives of the related loans as a yield adjustment.
<F3>This computation includes interest-earning deposits which are classified as cash equivalents in the Company's Consolidated
Statements of Financial Condition.
For additional information regarding the Company's yields and
costs and changes in net interest income, refer to "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Net Interest Income."
SUBSIDIARY ACTIVITIES
The Associations are permitted under OTS regulations to invest
up to 2% of their assets in service corporations, with an
additional investment of 1% of assets where such investment is
primarily for community, inner-city and community development
purposes. At September 30, 1995, First Federal and Peoples
Federal were authorized to invest up to $19.8 million and $7.3
million, respectively, in the stock of, or loans to, service
corporations (based upon the 2% limitation). At September 30,
1995, First Federal's investment in stock and secured and
unsecured loans in its service corporations was $133,496. At
September 30, 1995, Peoples Federal's investment in its service
corporations was $1.3 million.
First Federal has two wholly-owned subsidiaries:
Charleston Financial Services
Incorporated on January 28, 1977, primary operations, from the
date of its incorporation through September 1981, were the
development of resort condominiums. Since September 1981, its
primary operations have involved the conversion of computer
information to a microfiche format, the sale of data processing
consulting services, the sale of title insurance, commercial
lending and the operation of an insurance agency specializing in
personal lines of insurance, principally homeowner and auto. In
fiscal 1987, most commercial lending activities were transferred
to First Federal. During fiscal 1995, insurance operations
discontinued with the sale of Adams Insurance Agency to Magrath
Insurance Agency, Inc., a subsidiary of Peoples Federal. During
late 1995, Charleston Financial Services established Link
Investment Services, Inc., a full-service brokerage subsidiary,
to offer alternative investment products such as annuities and
stock and fixed income or bond mutual funds to customers. At
September 30, 1995, First Federal's investment in and advances to
this subsidiary totaled $133,531. Operations of Charleston
Financial Services resulted in a net loss of $83,393 for the year
ended September 30, 1995. The net loss for the year ended
September 30, 1994 was $45,357.
The Carolopolis Corporation
The Carolopolis Corporation was incorporated in 1976 for the
principal purpose of land acquisition and development and
construction of various projects for resale but was inactive
until 1981. The majority of the development was through joint
ventures. At September 30, 1989 all of the projects developed
had been sold and no new projects were under construction or
planned. First Federal's investment in the Carolopolis
Corporation on September 30, 1995 was $354. Carolopolis was not
active in fiscal 1995 and 1994.
Peoples Federal has two wholly-owned subsidiaries, only one of
which is active:
Magrath Insurance Agency, Inc.
This subsidiary was purchased by Peoples Federal in 1986. In
1988, the agency purchased two smaller insurance agencies.
During 1995 an additional agency in Lake City, South Carolina,
was purchased as well as the Adams Insurance Agency in
Charleston, previously owned by a subsidiary of First Federal.
Total insurance premiums during fiscal year 1995 approximated
$1.2 million. In terms of premium dollars, the insurance agency
is approximately 60% commercial lines and 40% personal lines.
The agency represents several companies for both commercial and
personal insurance products. Peoples Federal's investment in the
Magrath Insurance Agency on September 30, 1995 was $1.2 million.
Operations of the Magrath Insurance Agency resulted in income of
$169,173 and $196,688 during fiscal 1995 and 1994, respectively.
COMPETITION
First Federal was the second largest and Peoples Federal the
fifth largest of 33 savings associations headquartered in the
State of South Carolina at September 30, 1995, based on asset
size as reported by the OTS. The Associations face strong
competition in the attraction of savings deposits and in the
origination of real estate and other loans. The Associations'
most direct competition for savings deposits has historically
come from other savings associations and from commercial banks
located throughout South Carolina. The Associations also face
competition for savings from credit unions and competition for
investors' funds from short-term money market securities and
other corporate and government securities. In the more recent
past, money market, stock, and fixed-income mutual funds have
attracted an increasing share of household savings and are
significant competitors of financial institutions. In light of
the elimination of federal interest rate controls on savings
deposits, the Associations have faced increasing competition from
commercial banks for savings deposits. Certain legislative and
regulatory measures have further increased competition between
thrift institutions and other financial institutions, such as
commercial banks, by expanding the financial services that may be
offered by thrift institutions such as demand deposits, trust
services and consumer and commercial lending authority, while
reducing or eliminating the difference between thrift
institutions and commercial banks with respect to long-term
lending authority and taxation.
The Associations' competition for real estate and other loans
comes principally from other thrift institutions, commercial
banks, mortgage banking companies, insurance companies,
developers, and other institutional lenders. The Associations
compete for loans principally through the interest rates and loan
fees they charge and the efficiency and quality of the services
they provide borrowers, developers, real estate brokers, and home
builders.
PERSONNEL
As of September 30, 1995, the Company had 509 full-time
equivalent employees compared with 537 as of September 30, 1994.
The Company provides its full-time employees and certain part-
time employees with a comprehensive program of benefits,
including medical and dental benefits, life insurance, long-term
disability coverage, a profit-sharing plan and a 401(k) plan.
The employees are not represented by a collective bargaining
agreement. The Company believes its employee relations are
excellent.
REGULATION
As federally-chartered and federally insured savings
associations, the Associations are subject to extensive
regulation. Lending activities and other investments must comply
with various statutory and regulatory capital requirements. The
Associations are regularly examined by their federal regulators
and file periodic reports concerning their activities and
financial condition. The Associations' relationship with their
depositors and borrowers is also regulated to a great extent by
federal and state laws, especially in such matters as the
ownership of savings accounts and the form and content of the
Associations' mortgage documents.
Federal Regulation of Savings Associations
The investment and lending authority of a federally chartered
savings association is prescribed by federal laws and
regulations, and it is prohibited from engaging in any activities
not permitted by such laws and regulations. These laws and
regulations generally are applicable to all federally chartered
savings associations and many also apply to state-chartered
savings associations.
Among other things, OTS regulations provide that no savings
association may invest in corporate debt securities not rated in
one of the four highest rating categories by a nationally
recognized rating organization. In addition, the Home Owners
Loan Act of 1933 ("HOLA") provides that loans secured by
nonresidential real property may not exceed 400% of regulatory
capital, subject to increase by the OTS on a case-by-case basis.
The Associations are subject to limitations on the aggregate
amount of loans that they can make to any one borrower, including
related entities. Applicable regulations generally do not permit
loans-to-one borrower to exceed 15% of unimpaired capital and
surplus, provided that loans in an amount equal to an additional
10% of unimpaired capital and surplus also may be made to a
borrower if the loans are fully secured by readily marketable
securities. The OTS by regulation has amended the loans-to-one
borrower rule to permit savings associations meeting certain
requirements, including fully phased-in capital requirements, to
extend loans-to-one borrower in additional amounts under
circumstances limited essentially to loans to develop or complete
residential housing units. At September 30, 1995, the
Associations were in compliance with applicable loans-to-one
borrower limitations.
Proposed Federal Legislation Regarding SAIF Recapitalization,
Recapture of Bad Debt Reserves, and Other Matters
The conference agreement on the budget reconciliation
legislation currently before the U.S. Congress contains a
provision calling for a one-time assessment on all SAIF-insured
deposits for the purpose of recapitalizing the SAIF. As
currently proposed, the one-time assessment would be .80% of
SAIF-insured deposits as of March 31, 1995. Based on First
Federal's and Peoples Federal's assessable deposits of $783.5
million and $284.1 million, respectively, at March 31, 1995, such
assessment would amount to $6.3 million for First Federal and
$2.3 million for Peoples Federal. The assessment is expected to
be a tax deductible expense and have the effect of immediately
reducing the respective capital of the Associations by the amount
of their respective assessment, net of applicable taxes.
Management cannot predict whether the legislation providing for
such assessment will be enacted, or, if enacted, the final amount
of such assessment and its ultimate impact on the Associations.
The conference agreement on the budget reconciliation
legislation currently before the U.S. Congress also contains a
provision that repeals the reserve method of accounting for
thrift bad debt reserves (including the percentage-of-taxable-
income ("PTI method")) for tax years beginning after December 31,
1995. This would require all thrifts, including the
Associations, to account for bad debts using either the specific
charge-off method (available to all thrifts) or the experience
method (available only to thrifts that qualify as "small banks,"
i.e., under $500 million in assets). The Associations currently
use either the PTI method or the experience method based upon the
method which yields the greater deduction. See "Federal and
State Taxation."
Under the proposed legislation, the change in accounting
method that eliminates the reserve method would trigger bad debt
reserve recapture for post-1987 reserves over a six-year period.
At September 30, 1995, the Associations' post-1987 reserves
amounted to $700 thousand. Pre-1988 reserves would be subject to
recapture if the institution makes distributions in excess of
accumulated earnings and profits or makes a distribution in a
partial or complete liquidation. A special provision suspends
recapture of post-1987 reserves for up to two years if, during
those years, the institution satisfies a "residential loan
requirement." This requirement would be met if the principal
amount of the institution's residential loans exceeds a base year
amount, which is determined by reference to the average of the
institution's loans during the six taxable years ending before
January 1, 1996. However, notwithstanding this special
provision, recapture would be required to begin no later than the
first taxable year beginning after December 31, 1997.
The proposed legislation differs significantly from current
law, which triggers recapture upon a thrift institution's
conversion to a bank or upon failure to satisfy the tax law
definition of a thrift. In addition, under current law, a
converted thrift only recaptures the portion of the reserve
attributable to use of the PTI method. There is no recapture of
bank reserves if the converted thrift used the experience method
and continues to qualify as a small bank as defined above.
Management cannot predict whether the legislation providing for
the recapture of bad debt reserves will be enacted, or if
enacted, the final form of such legislation and its ultimate
impact on the Associations.
In addition to the above matters, separate legislation
proposing a comprehensive reform of the banking and thrift
industries is under consideration by the U.S. Congress to (i)
merge the Bank Insurance Fund "BIF" and the SAIF on January 1,
1998, at which time banks and thrifts would pay the same deposit
insurance premiums; (ii) require federal savings associations
(including the Associations) to convert to a national bank or a
state-charted thrift by January 1, 1998; (iii) require all
savings and loan holding companies (including the Company) to
become bank holding companies as of January 1, 1998; and (iv)
abolish the OTS. Management cannot predict whether such
legislation will be enacted, or, if enacted, the final form of
such legislation and its ultimate impact on the Associations.
For additional discussion of this proposed legislation, see
"Management's Discussion and Analysis of Financial Condition and
Results of Operations--Recapitalization Proposal."
Office of Thrift Supervision
The OTS is an office in the Department of the Treasury subject
to the general oversight of the Secretary of the Treasury.
Except as modified by FIRREA, the OTS possesses the supervisory
and regulatory duties and responsibilities formerly vested in the
Federal Home Loan Bank Board. Among other functions, the OTS
issues and enforces regulations affecting federally-insured
savings associations and regularly examines these institutions.
Federal Deposit Insurance Corporation
The FDIC is an independent federal agency established
originally to insure the deposits, up to prescribed statutory
limits, of federally insured banks and to preserve the safety and
soundness of the banking industry. Upon the enactment of FIRREA
on August 9, 1989, the FDIC also became the insurer, up to the
prescribed limits, of the deposit accounts held at federally
insured savings associations and established two separate funds
that are maintained and administered by the FDIC: the BIF and the
SAIF. As such, the FDIC has examination, supervisory and
enforcement authority over all savings associations.
The annual assessment for SAIF members for deposit insurance
for the period from January 1, 1991 through December 31, 1992 was
equal to .23% of insured deposits. Recent legislation eliminated
limitations on increases in federal deposit insurance premiums
and authorized the FDIC to increase the assessment rates to the
extent necessary to protect the SAIF (as well as the BIF). The
FDIC has issued a final regulation which was effective for the
first semi-annual period of 1993 and thereafter, and which is
intended to be a preliminary step toward the risk-based
assessment system required to be implemented by January 1, 1994.
Under the regulation, institutions are assigned to one of three
capital groups which are based solely on the level of an
institution's capital "well capitalized," "adequately
capitalized," and "undercapitalized" which are defined in the
same manner as the regulations establishing the prompt corrective
action system under Section 38 of the Federal Deposit Insurance
Act ("FDIA"), as discussed below. These three groups are then
divided into three subgroups which reflect varying levels of
supervisory concern, from those which are considered to be
healthy to those which are considered to of substantial
supervisory concern. The matrix so created results in nine
assessment risk classifications, with rates ranging from .23% for
well capitalized, financially sound institutions with only a few
minor weaknesses to .31% for undercapitalized institutions that
pose a substantial risk of loss to the SAIF unless effective
corrective action is taken.
On August 8, 1995, the FDIC revised the premium schedule for
BIF-insured banks to provide a range of .04% to .31% of deposits
(as compare to the current range of .23% to .31% of deposits for
SAIF-insured institutions). On November 14, 1995, the FDIC again
revised the premium schedule for BIF-insured banks to eliminate
premiums for all well-capitalized banks (except for the statutory
minimum annual assessment of $2,000) and to provide a range of
.03% to .27% of deposits for all other banks. Approximately 92%
of all BIF-insured banks are categorized as "well-capitalized."
It is anticipated that the SAIF will not be adequately
recapitalized until 2002, absent a substantial increase in
premium rates or the imposition of special assessments or other
significant developments, such as a merger of SAIF and BIF. As a
result of this disparity, a recapitalization plan is under
consideration by the Congress, which reportedly provides for a
one-time assessment of .80% to be imposed on all SAIF deposits as
of March 31, 1995, in order to recapitalize SAIF and eliminate
the disparity. Based on the Associations' assessable deposits of
approximately $1.1 billion at March 31, 1995, a one-time
assessment of .80% would equal approximately $8.6 million, before
consideration of the expected tax benefits. At this time, no
assurance can be given, as to whether the recapitalization plan
will be implemented or as to the nature or extent of any
competitive disadvantage which may be experienced by SAIF member
institutions. As the date this legislation is signed into law
would represent the recordation date of the expense, no liability
was incurred during fiscal 1995.
The FDIC may terminate the deposit insurance of any insured
depository institution if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound
practices, is in an unsafe or unsound condition to continue
operations, or has violated any applicable law, regulation, order
or any condition imposed by an agreement with the FDIC. It also
may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the
institution has no tangible capital. If insurance of accounts is
terminated, the accounts at the institution at the time of
termination, less subsequent withdrawals, shall continue to be
insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which
could result in termination of the deposit insurance of the
Associations.
Federal Home Loan Bank System
The FHLB System, consisting of 12 FHLBs, is under the
jurisdiction of the Federal Housing Finance Board ("FHFB"). The
designated duties of the FHFB are to: supervise the FHLBs;
ensure that the FHLBs carry out their housing finance mission;
ensure that the FHLBs remain adequately capitalized and able to
raise funds in the capital market; and ensure that the FHLBs
operate in a safe and sound manner.
The Associations, as members of the FHLB-Atlanta, are required
to acquire and hold shares of capital stock in the FHLB-Atlanta
in an amount equal to the greater of (i) 1.0% of the aggregate
outstanding principal amount of residential mortgage loans, home
purchase contracts and similar obligations at the beginning of
each year, or (ii) 1/20 of its advances (borrowings) from the
FHLB of Atlanta. First Federal and Peoples Federal were in
compliance with this requirement with an investment in
FHLB-Atlanta stock of $9.4 million and $2.6 million at
September 30, 1995, respectively.
Among other benefits, the FHLB provides a central credit
facility primarily for member institutions. It is funded
primarily from proceeds derived from the sale of consolidated
obligations of the FHLB System. It makes advances to members in
accordance with policies and procedures established by the FHFB
and the Board of Directors of the FHLB-Atlanta. First Federal
and Peoples Federal had FHLB advances totaling $65.4 million and
$42.4 million, respectively, at September 30, 1995.
Prompt Corrective Action
Under Section 38 of the FDIA, as added by the Federal Deposit
Insurance Corporation Improvement Act ("FDICIA"), each federal
banking agency is required to implement a system of prompt
corrective action for institutions which it regulates. In
September 1992, the federal banking agencies adopted
substantially similar regulations which are intended to implement
the system of prompt corrective action established by Section 38
of the FDIA, which became effective on December 19, 1992. Under
the regulations, an institution shall be deemed to be (i) "well-
capitalized" if it has a total risk-based capital ratio of 10.0%
or more, has a Tier I risk-based capital ratio of 6.0% or more,
has a Tier I leverage capital ratio of 5.0% or more and is not
subject to specified requirements to meet and maintain a specific
capital level for any capital measure: (ii) "adequately
capitalized" if it has a total risk-based capital ratio of 8.0%
or more, a Tier I risk-based capital ratio of 4.0% or more and a
Tier I leverage capital ratio of 4.0% or more (3.0% under certain
circumstances) and does not meet the definition of "well
capitalized," (iii) "undercapitalized" if it has a total
risk-based capital ratio that is less than 8.0%, a Tier I
risk-based capital ratio that is less than 4.0% or a Tier I
leverage capital ratio that is less than 4.0% (3.0% under certain
circumstances), (iv) "significantly undercapitalized" if it has a
total risk-based capital ratio that is less than 6.0%, a Tier I
risk-based capital ratio that is less than 3.0% or a Tier I
leverage capital ratio that is less than 3.0% and (v) "critically
undercapitalized" if it has a ratio of tangible equity to total
assets that is equal to or less than 2.0%.
Section 38 of the FDIA and the implementing regulations also
provide that a federal banking agency may, after notice and an
opportunity for a hearing, reclassify a well-capitalized
institution as adequately capitalized and may require an
adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in
the next lower category if the institution is in an unsafe or
unsound condition or engaging in an unsafe or unsound practice.
(The FDIC may not, however, reclassify a significantly
undercapitalized institution as critically undercapitalized.)
An institution generally must file a written capital
restoration plan which meets specified requirements, as well as a
performance guaranty by each company that controls the
institution, with the appropriate federal banking agency within
45 days of the date that the institution receives notice or is
deemed to have notice that it is undercapitalized, significantly
undercapitalized or critically undercapitalized. Immediately
upon becoming undercapitalized, an institution shall become
subject to the provisions of Section 38 of the FDIA, which sets
forth various mandatory and discretionary restrictions on its
operations.
At September 30, 1995, the Associations were well-capitalized
institutions under the prompt corrective action regulations of
the OTS.
Standards for Safety and Soundness
FDICIA requires the federal banking regulatory agencies to
prescribe, by regulation, standards for all insured depository
institutions and depository institution holding companies
relating to: (i) internal controls, information systems and
internal audit systems; (ii) loan documentation; (iii) loan
underwriting; (iv) interest rate risk exposure; (v) asset growth;
and (vi) compensation, fees and benefits. The compensation
standards would prohibit employment contracts, compensation or
benefit arrangements, stock options plans, fee arrangements or
other compensatory arrangements that would provide excessive
compensation, fees or benefits or could lead to material
financial loss. In addition, the federal banking regulatory
agencies would be required to prescribe by regulation standards
specifying: (i) maximum classified assets to capital ratios;
(ii) minimum earnings sufficient to absorb losses without
impairing capital; and (iii) to the extent feasible, a minimum
ratio of market value to book value for publicly traded shares of
depository institutions and depository institution holding
companies.
On July 10, 1995, the OTS and other federal banking regulatory
agencies jointly issued final safety and soundness standards.
The safety and soundness standards were issued in the form of
guidelines and cover such factors as internal controls and audit
systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, as well as compensation, fees and
benefits. The agencies may require compliance plans to be filed
by an insured depository institution for failure to meet the
safety and soundness standards.
On the same date, the agencies also published separate
proposed safety and soundness standards for asset quality and
earnings. After reviewing the comments, which were due by August
24, 1995, the agencies may add the asset quality and earnings
standards to the standards already in the guidelines.
Branching by Federally Chartered Associations
OTS rules on branching by federally chartered savings
associations permit nationwide branching to the extent allowed by
federal statute. This action, which became effective May 2,
1992, permits associations with interstate networks to diversify
their loan portfolios and lines of business. OTS authority
preempts any state law purporting to regulate branching by
federal savings associations.
The limitations that remain are statutory. An association may
not establish or operate a branch outside the state in which the
association has its home office if such branch would violate
section 5(r) of the HOLA. This section permits a federal savings
association to branch outside its home state if (i) the
association meets the domestic building and loan test of the
Code, section 7701(a)(19) or the asset composition test of
subparagraph (c) of that section, and (ii) each branch outside of
its home state also satisfies the domestic building and loan
test.
The second limitation prohibits branching that would result in
the formation of a multiple savings and loan holding company
controlling savings associations in more than one state in
violation of HOLA section 10(e)(3). There are three safe harbors
for permissible multiple holding company operations. First, a
holding company may acquire an association or operate branches in
additional states pursuant to a supervisory acquisition under
section 13(k) of the FDIA. Second, holding companies that, as of
March 5, 1987, controlled an association subsidiary that operated
an office in an additional state are permitted to acquire another
association or branch in that state. The third exception permits
interstate holding company operations if the law of the
additional state specifically authorizes acquisition of its
federally-chartered associations by federally-chartered
associations or their holding companies in the state where the
acquiring association or holding company is located.
To obtain supervisory clearance for branching, an applicant's
regulatory capital must meet or exceed the minimum requirements
established by law and by OTS regulations. Section 38(e)(4) of
the FDIA prohibits any "undercapitalized" insured association
from acquiring or establishing additional branches, unless the
OTS has accepted the institution's capital restoration plan
required by the law, the association is implementing the plan,
and the OTS determines that the proposed action is consistent
with such plan, or the FDIC Board of Directors determines that
the proposed action will further the purposes of the law. In
addition, the institution must have a satisfactory record under
the Community Reinvestment Act.
Qualified Thrift Lender Test
All savings associations are required to meet a qualified
thrift lender ("QTL") test set forth in Section 10(m) of the HOLA
and regulations of the OTS thereunder to avoid certain
restrictions on their operations. A savings institution that
fails to become or remain a QTL shall either become a national
bank or be subject to the following restrictions on its
operations: (1) the association may not make any new investment
or engage in activities that would not be permissible for
national banks; (2) the association may not establish any new
branch office where a national bank located in the savings
institution's home state would not be able to establish a branch
office; (3) the association shall not be eligible to obtain new
advances from any FHLB; and (4) the payment of dividends by the
association shall be subject to the rules regarding the statutory
and regulatory dividend restrictions applicable to national
banks. Also, beginning three years after the date on which the
savings institution ceases to be a qualified thrift lender, the
savings institution would be prohibited from retaining any
investment or engaging in any activity not permissible for a
national bank and would be required to repay any outstanding
advances to any FHLB. In addition, within one year of the date
on which a savings association controlled by a company ceases to
be a QTL, the company must register as a bank holding company and
becomes subject to the rules applicable to such companies. A
savings institution may requalify as a QTL if it thereafter
complies with the QTL test.
Currently, the QTL test requires that 65% of an institution's
"portfolio assets" (as defined) consist of certain housing and
consumer-related assets on a monthly average basis in nine out of
every 12 months. Assets that qualify without limit for inclusion
as part of the 65% requirement are loans made to purchase,
refinance, construct, improve or repair domestic residential
housing and manufactured housing; home equity loans; mortgage-
backed securities (where the mortgages are secured by domestic
residential housing or manufactured housing); FHLB stock; and
direct or indirect obligations of the FDIC. In addition, the
following assets, among others, may be included in meeting the
test subject to an overall limit of 20% of the savings
institution's portfolio assets: 50% of residential mortgage
loans originated and sold within 90 days of origination; 100% of
consumer and educational loans (limited to 10% of total portfolio
assets); and stock issued by the FHLMC or the FNMA. Portfolio
assets consist of total assets minus the sum of (i) goodwill and
other intangible assets, (ii) property used by the savings
institution to conduct its business, and (iii) liquid assets up
to 20% of the institution's total assets. At September 30, 1995,
the qualified thrift investments of the First Federal and Peoples
Federal were approximately 78% and 84% of their respective
portfolio assets.
Liquidity
Under OTS regulations, a member thrift institution is required
to maintain an average daily balance of liquid assets (cash,
certain time deposits and savings accounts, bankers' acceptances,
and specified U.S. Government, state or federal agency
obligations and certain other investments) equal to a monthly
average of not less than a specified percentage of its net
withdrawable accounts plus short-term borrowings. This liquidity
requirement, which is currently 5.0% may be changed from time to
time by the OTS depending upon economic conditions and the
deposit flows of member associations. Existing OTS regulations
also require each member institution to maintain an average daily
balance of short-term liquid assets at a specified percentage
(currently 1.0%) of the total of its net withdrawable savings
accounts and borrowings payable in one year or less. Monetary
penalties may be imposed for failure to meet liquidity
requirements. At September 30, 1995, liquidity ratios of the
Associations exceeded regulatory requirements.
Capital Requirements
Under OTS regulations a savings association 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. The
Company is not subject to any minimum capital requirements.
OTS capital regulations establish a 3% core capital ratio
(defined as the ratio of core capital to adjusted total assets).
Core capital is defined to include common stockholders' equity,
non-cumulative perpetual preferred stock and any related surplus,
and minority interests in equity accounts of consolidated
subsidiaries, less (i) any unidentifiable intangible assets; and
(ii) equity and debt investments in subsidiaries that are not
"includable subsidiaries," which is defined as subsidiaries
engaged solely in activities not impermissible for a national
bank, engaged in activities impermissible for a national bank but
only as an agent for its customers, or engaged solely in
mortgage-banking activities. In calculating adjusted total
assets, adjustments are made to total assets to give effect to
the exclusion of certain assets from capital and to appropriately
account for the investments in and assets of both includable and
nonincludable subsidiaries. Institutions that fail to meet the
core capital requirement would be required to file with the OTS a
capital plan that details the steps they will take to reach
compliance. In addition, the OTS' prompt corrective action
regulation provides that a savings institution that has a core
capital leverage ratio of less than 4% (3% for institutions
receiving the highest CAMEL examination rating) will be deemed to
be "undercapitalized" and may be subject to certain restrictions.
See "-- Prompt Corrective Action."
As required by federal law, the OTS has proposed a rule
revising its minimum core capital requirement to be no less
stringent than that imposed on national banks. The OTS has
proposed that only those savings associations rated a composite
one (the highest rating) under the CAMEL rating system for
savings associations will be permitted to operate at or near the
regulatory minimum leverage ratio of 3%. All other savings
associations will be required to maintain a minimum leverage
ratio of 4% to 5%. the OTS will assess each individual savings
association through the supervisory process on a case-by-case
basis to determine the applicable requirement. No assurance can
be given as to the final form of any such regulation, the date of
its effectiveness or the requirement applicable to the
Associations.
Savings associations also must maintain "tangible capital" not
less than 1.5% of the Association's adjusted total assets.
"Tangible capital" is defined, generally, as core capital minus
any "intangible assets."
Each savings institution must maintain total capital equal to
at least 8% of risk-weighted assets. Total capital consists of
the sum of core and supplementary capital, provided that
supplementary capital cannot exceed core capital, as previously
defined. Supplementary capital includes (i) permanent capital
instruments such as cumulative perpetual preferred stock,
perpetual subordinated debt, and mandatory convertible
subordinated debt, (ii) maturing capital instruments such as
subordinated debt, intermediate-term preferred stock and
mandatory redeemable preferred stock, subject to an amortization
schedule, and (iii) general valuation loan and lease loss
allowances up to 1.25% of risk-weighted assets.
In computing both assets and total capital for purposes of the
risk-based capital ratio, the portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-
value ratio and equity investments are each deducted. There was
a phase-out period for this deduction which began July 1, 1990
and ended July 1, 1994.
The risk-based capital regulation assigns each balance sheet
asset held by a savings institution to one of four risk
categories based on the amount of credit risk associated with
that particular class of assets. Assets not included for
purposes of calculating capital are not included in calculating
risk-weighted assets. The categories range from 0% for cash and
securities that are backed by the full faith and credit of the
U.S. Government to 100% for repossessed assets or assets more
than 90 days past due. Qualifying residential mortgage loans
(including multi-family mortgage loans) are assigned a 50% risk
weight. Consumer, commercial, home equity and residential
construction loans are assigned a 100% risk weight, as are
nonqualifying residential mortgage loans and that portion of land
loans and nonresidential construction loans which do not exceed
an 80% loan-to-value ratio. In January 1993, the OTS amended its
risk-weighting classifications to remove the 200% risk weight
category and reassign the items formerly in that category to the
100% risk-weight category. This amendment was made in connection
with the Statement of Position 92-3, "Accounting for Foreclosed
Assets," issued by the American Institute of Certified Public
Accountants which mandates the use of fair value for foreclosed
assets.
The book value of assets in each category is multiplied by the
weighing factor (from 0% to 100% assigned to that category).
These products are then totaled to arrive at total risk-weighted
assets. Off-balance sheet items are included in risk-weighted
assets by converting them to an approximate balance sheet "credit
equivalent amount" based on a conversion schedule. These credit
equivalent amounts are then assigned to risk categories in the
same manner as balance sheet assets and included risk-weighted
assets.
The OTS has incorporated an interest rate risk component into
its regulatory capital rule. Under the rule, savings
associations with "above normal" interest rate risk exposure
would be subject to a deduction from total capital for purposes
of calculating their risk-based capital requirements. A savings
association's interest rate risk is measured by the decline in
the net portfolio value of its assets (i.e., the difference
between incoming and outgoing discounted cash flows from assets,
liabilities and off-balance sheet contracts) that would result
from a hypothetical 200 basis point increase or decrease in
market interest rates divided by the estimated economic value of
the association's assets, as calculated in accordance with
guidelines set forth by the OTS. A savings association whose
measured interest rate risk exposure exceeds 2% must deduct an
interest rate risk component in calculating its total capital
under the risk-based capital rule. The interest rate risk
component is an amount equal to one-half of the difference
between the institution's measured interest rate risk and 2%,
multiplied by the estimated economic value of the association's
assets. That dollar amount is deducted from an association's
total capital in calculating compliance with its risk-based
capital requirement. Under the rule, there is a two quarter lag
between the reporting date of an institution's financial data and
the effective date for the new capital requirement based on that
data. A savings association with assets of less than $300
million and risk-based capital ratios in excess of 12% is not
subject to the interest rate risk component, unless the OTS
determines otherwise. The rule also provides that the Director
of the OTS may waive or defer an association's interest risk
component if its believes that the OTS-calculated interest rate
risk component overstates its interest rate risk exposure. In
addition, certain "well-capitalized" institutions may obtain
authorization to use their own interest rate risk exposure model
to calculate their interest rate risk component in lieu of the
OTS-calculated amount. The OTS has postponed the date that the
interest rate risk component will first be deducted from an
institution's total capital until savings associations become
familiar with the process for requesting an adjustment to its
interest rate risk component.
On December 15, 1994, the OTS and the three federal banking
agencies jointly issued final amendments to their capital
regulations that would take into account an institution's
exposure to concentrations of credit risk and risks of
nontraditional activities in assessing the institution's overall
capital adequacy. It was recognized by the federal agencies that
it would be difficult, if not impossible, to identify and
quantify the magnitude of risk associated with concentrations of
credit and nontraditional activities, as well as other types of
risks. Consequently, the OTS's final rule, instead of imposing
specific requirements for particular kinds of risks, generally
provides that the agency may establish higher individual capital
requirements for savings associations with high degrees of
exposure to interest rate risk, prepayment risk, credit risk,
concentration of credit risk, risks arising from nontraditional
activities, or off-balance sheet risks, and that have
demonstrated a poor record of monitoring and controlling such
risks. The rule was effective January 17, 1995.
The following table summarizes the capital requirements for
First Federal and Peoples Federal as well as their capital
positions at September 30, 1995 and 1994:
First Federal Peoples Federal
At September 30, At September 30,
1995 1994 1995 1994
Percent of Percent of Percent of Percent of
Amount Assets Amount Assets Amount Assets Amount Assets
(dollar amounts in thousands)
Tangible capital $72,926 7.36% $70,416 7.91% $27,244 7.49% $25,397 7.29%
Tangible capital requirement 14,861 1.50 13,348 1.50 5,457 1.50 5,227 1.50
Excess $58,065 5.86% $57,068 6.41% $21,787 5.99% $20,170 5.79%
Core capital $72,926 7.36% $70,416 7.91% $27,244 7.49% $25,397 7.29%
Core capital requirement 29,722 3.00 26,696 3.00 10,914 3.00 10,454 3.00
Excess $43,204 4.36% $43,720 4.91% $16,330 4.49% $14,943 4.29%
Risk-based capital<F1> $79,146 11.35% $76,593 12.25% $27,244 14.16% $25,397 14.11%
Minimum risk-based capital
requirement<F1> 55,801 8.00 50,021 8.00 15,391 8.00 14,403 8.00
Excess $23,345 3.35% $26,572 4.25% $11,853 6.16% $10,994 6.11%
<F1> Based on total risk-weighted assets.
Dividend Limitations
OTS regulations require the Associations to give the OTS 30
days' advance notice of any proposed declaration of dividends to
the Company, and the OTS has the authority under its supervisory
powers to prohibit the payment of dividends to the Company. In
addition, the Associations may not declare or pay a cash dividend
on its capital stock if the effect thereof would be to reduce the
regulatory capital of the Associations below the amount required
for the liquidation account.
OTS regulations impose uniform limitations on the ability of
all savings associations to engage in various distributions of
capital such as dividends, stock repurchases and cash-out
mergers. The regulation utilizes a three-tiered approach which
permits various levels of distributions based primarily upon a
savings association's capital level.
A Tier 1 savings association generally has capital in excess
of its fully phased-in capital requirement (both before and after
the proposed capital distribution) and has not been notified by
the OTS that it is in need of more than normal supervision. A
Tier 1 savings association may make (without application but upon
prior notice to, and no objection made by, the OTS) capital
distributions during a calendar year up to 100% of its net income
to date during the calendar year plus one-half its surplus
capital ratio (i.e., the amount of capital in excess of its fully
phased-in requirement) at the beginning of the calendar year.
Capital distributions in excess of such amount require advance
approval from the OTS.
A savings association with either (i) capital equal to or in
excess of its minimum capital requirement but below its fully
phased-in capital requirement (both before and after the proposed
capital distribution), or (ii) capital in excess of its fully
phased-in capital requirement (both before and after the proposed
capital distribution) but which has been notified by the OTS that
it is in need of more than normal supervision may be designated
by the OTS as a Tier 2 association. Such an association may make
(without application) capital distributions up to an amount equal
to 75% of its net income during the previous four quarters
depending on how close the association is to meeting its fully
phased-in capital requirement. Capital distributions exceeding
this amount require prior OTS approval.
Tier 3 associations include savings associations with either
(i) capital below the minimum capital requirement (either before
or after the proposed capital distribution), or (ii) capital in
excess of the fully phased-in capital requirement but which has
been notified by the OTS that it shall be treated as a Tier 3
association because it is in need of more than normal
supervision. Tier 3 associations may not make any capital
distributions without prior approval from the OTS.
The Associations currently meet the criteria to be designated
Tier 1 associations and, consequently, could at their option
(after prior notice to, and no objection made by, the OTS)
distribute up to 100% of their net income during the calendar
year plus 50% of their surplus capital ratio at the beginning of
the calendar year less any distributions previously paid during
the year.
Investment Rules
Under the HOLA, savings institutions are generally subject to
the national bank limit on loans to one borrower. Generally,
this limit is 15% of the Associations' unimpaired capital and
surplus, plus an additional 10% of unimpaired capital and
surplus, if such loan is secured by readily-marketable
collateral, which is defined to include certain financial
instruments and bullion. The OTS by regulation has amended the
loans to one borrower rule to permit savings associations meeting
certain requirements, including capital requirements, to extend
loans to one borrower in additional amounts under circumstances
limited essentially to loans to develop or complete residential
housing units. At September 30, 1995, First Federal's and
Peoples Federal's limit on loans to one borrower was $11.9
million and $4.1 million, respectively. At September 30, 1995,
the largest aggregate amount of loans by First Federal and
Peoples Federal to any one borrower, including related entities,
was approximately $11.1 million and $3.4 million, respectively,
and were secured by multi-family real estate and a golf course
facility, respectively.
Savings institutions and their subsidiaries may not acquire or
retain investments in corporate debt securities that at the time
of acquisition were not rated in one of the four highest rating
categories by at least one nationally recognized rating
organization. Investments in a savings institution's portfolio
not meeting this requirement must be divested as quickly as can
be done on a prudent basis, but not later than July 1, 1994.
Pursuant to regulatory accounting rules, securities subject to
divestment are not to be treated as "held for sale;" however,
GAAP may still require mark-to-market accounting by virtue of the
divestment requirement. The Associations do not hold any
investments that must be divested under this provision.
Activities of Associations and Their Subsidiaries
FIRREA provides that, when a savings association establishes
or acquires a subsidiary or elects to conduct any new activity
through a subsidiary that the association controls, the savings
association shall notify the FDIC and the OTS 30 days in advance
and provide the information each agency may, by regulation,
require. Savings associations also must conduct the activities
of subsidiaries in accordance with existing regulations and
orders.
The OTS may determine that the continuation by a savings
association of its ownership control of, or its relationship to,
the subsidiary constitutes a serious risk to the safety,
soundness or stability of the association or is inconsistent with
sound banking practices or with the purposes of the FDIA. Based
upon that determination, the FDIC or the OTS has the authority to
order the savings association to divest itself of control of the
subsidiary. The FDIC also may determine by regulation or order
that any specific activity poses a serious threat to the SAIF.
If so, it may require that no SAIF member engage in that activity
directly.
Transactions with Affiliates
Pursuant to FIRREA, savings associations must comply with
Sections 23A and 23B of the Federal Reserve Act ("Sections 23A
and 23B") relative to transactions with affiliates in the same
manner and to the same extent as if the savings association were
a Federal Reserve member bank. Generally, Sections 23A and 23B:
(i) limit the extent to which the insured association or its
subsidiaries may engage in certain covered transactions with an
affiliate to an amount equal to 10% of such institution's capital
and surplus and place an aggregate limit on all such transactions
with affiliates to an amount equal to 20% of such capital and
surplus, and (ii) require that all such transactions be on terms
substantially the same, or at least as favorable to the
institution or subsidiary, as those provided to a non-affiliate.
The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guaranty and similar other
types of transactions.
Three additional rules apply to savings associations under
FIRREA: (i) a savings association may not make any loan or other
extension of credit to an affiliate unless that affiliate is
engaged only in activities permissible for bank holding
companies; (ii) a savings association may not purchase or invest
in securities issued by an affiliate (other than securities of a
subsidiary); and (iii) the OTS may, for reasons of safety and
soundness, impose more stringent restrictions on savings
associations but may not exempt transactions from or otherwise
abridge Section 23A or 23B. Exemptions from Section 23A or 23B
may be granted only by the Federal Reserve Board, as is currently
the case with respect to all FDIC-insured banks. The
Associations have not been significantly affected by the rules
regarding transactions with affiliates.
Regulatory and Criminal Enforcement Provisions
FIRREA contains several changes to existing regulatory and
criminal enforcement provisions. The major applicable
provisions: expand the reach of the depository institution
regulatory agencies' civil enforcement authority to include, in
addition to directors, officers, employees and agents, any
"institution-affiliated party" of a depository institution;
clarify and enhance the authority of the agencies to order
restitution or reimbursement in a cease-and-desist order; unify
removal provisions by the regulators and allow the agencies to
proceed with a removal or prohibition action when an institution
has been harmed without requiring the agencies to quantify the
harm or prejudice; authorize the agencies to take enforcement
actions against culpable institution-affiliated parties who
depart from an institution, within six years of the departure
date; increase the maximum amount for civil money penalties
("CMPs") and expand the grounds for imposing them; increase the
criminal penalty up to $1 million and five years' imprisonment
for violations of a removal order; impose a three-tier level of
CMPs for both failure to file or the late filing of call reports
and other information and filing any false or misleading report
or information; permit the FDIC to take particular enforcement
actions against savings associations if, after the FDIC notifies
the OTS, the OTS does not itself take such action; require
publication of formal enforcement orders issued by the agencies;
shorten the period from 120 days to 30 days for agency notice for
termination of deposit insurance; and increase to 20 years the
maximum prison term for the banking-related offenses in the
Federal Criminal Code.
Regulation of the Company
First Financial is a multiple savings and loan holding company
within the meaning of the HOLA. As such, the Company is
registered with the OTS and is subject to OTS regulations,
examinations, supervision and reporting requirements. The
Company is required to file certain reports with and otherwise
comply with the regulations of the OTS and the Securities and
Exchange Commission. As subsidiaries of a savings and loan
holding company, the Associations are subject to certain
restrictions in their dealings with the Company and with other
companies affiliated with the Company and also are subject to
regulatory requirements and provisions as federal institutions.
Company Acquisitions
The HOLA and OTS regulations issued thereunder generally
prohibit a savings and loan holding company, without prior OTS
approval, from acquiring any other savings association or savings
and loan holding company or controlling the assets thereof. They
also prohibit, among other things, any director or officer of a
savings and loan holding company, or any individual who owns or
controls more than 25% of the voting shares of such holding
company, from acquiring control of any savings association not a
subsidiary of such savings and loan holding company, unless the
acquisition is approved by the OTS.
Company Activities
There generally are more restrictions on the activities of a
multiple savings and loan holding company than a unitary savings
and loan holding company. Specifically, if either federally
insured subsidiary savings association fails to meet the QTL
test, the activities of the Company and any of its subsidiaries
(other than the Associations or other federally insured
subsidiary savings associations) would thereafter be subject to
further restrictions. The HOLA provides that, among other
things, no multiple savings and loan holding company or
subsidiary thereof which is not an insured association shall
commence or continue for more than two years after becoming a
multiple savings and loan association holding company or
subsidiary thereof, any business activity other than: (i)
furnishing or performing management services for a subsidiary
insured institution, (ii) conducting an insurance agency or
escrow business, (iii) holding, managing, or liquidating assets
owned by or acquired from a subsidiary insured institution, (iv)
holding or managing properties used or occupied by a subsidiary
insured institution, (v) acting as trustee under deeds of trust,
(vi) those activities previously directly authorized by
regulation as of March 5, 1987 to be engaged in by multiple
holding companies or (vii) those activities authorized by the
Federal Reserve Board as permissible for bank holding companies,
unless the OTS by regulation, prohibits or limits such activities
for savings and loan holding companies. Those activities
described in (vii) above also must be approved by the OTS prior
to being engaged in by a multiple holding company.
Qualified Thrift Lender Test
The HOLA requires any savings and loan holding company that
controls a savings association that fails the QTL test, within
one year after the date on which the association ceases to be a
qualified thrift lender, to register as and be deemed a bank
holding company subject to all applicable laws and regulations.
FEDERAL AND STATE TAXATION
The Company and the Associations report their income on a
fiscal year basis using the accrual method of accounting and are
subject to federal income taxation in the same manner as other
corporations with some exceptions, including particularly the
Associations' reserve for bad debts discussed below. The
following discussion of tax matters is intended only as a summary
and does not purport to be a comprehensive description of the tax
rules applicable to the Associations or the Company.
Savings institutions such as the Associations which meet
certain definitional tests primarily relating to their assets and
the nature of their business ("qualifying thrifts") are permitted
to establish a reserve for bad debts and to make annual additions
thereto, which additions may, within specified formula limits, be
deducted in arriving at their taxable income. The Associations'
deduction with respect to "qualifying loans," which are generally
loans secured by certain interests in real property, may be
computed using an amount based on the Associations' actual loss
experience, or a percentage equal to 8% of the Associations'
taxable income, computed with certain modifications and reduced
by the amount of any permitted additions to the non-qualifying
reserve. The Associations' deduction with respect to non-
qualifying loans must be computed under the experience method
which essentially allows a deduction based on the Associations'
actual loss experience over a period of several years. Each year
the Associations select the most favorable way to calculate the
deduction attributable to an addition to the tax bad debt
reserve.
The Associations currently satisfy the qualifying thrift
definitional tests. If the Associations failed to satisfy such
tests in any taxable year, they would be unable to make additions
to their bad debt reserves. Instead, the Associations would be
required to deduct bad debts as they occur and would additionally
be required to recapture their bad debt reserve deductions
ratably over a multi-year period. Among other things, the
qualifying thrift definitional tests require the Associations to
hold at least 60% of their assets as "qualifying assets."
Qualifying assets generally include cash, obligations of the
United States or any agency or instrumentality thereof, certain
obligations of a state or political subdivision thereof, loans
secured by interests in improved residential real property or by
savings accounts, student loans and property used by the
Associations in the conduct of their banking business. The
Associations' ratios of qualifying assets to total assets
exceeded 60% through September 30, 1995. Although there can be
no assurance that the Associations will continue to satisfy the
60% test, management believes that this level of qualifying
assets can be maintained by the Associations.
The amount of the addition to the reserve for loan losses on
qualifying real property loans under the percentage-of-taxable-
income method cannot exceed the amount necessary to increase the
balance of the reserve for losses on qualifying real property
loans at the close of the taxable year to 6% of the balance of
the qualifying real property loans outstanding. Also, if the
qualifying thrift uses the percentage of taxable income method,
then the qualifying thrift's aggregate addition to its reserve
for losses on qualifying real property loans cannot, when added
to the addition to the reserve for losses on nonqualifying loans,
exceed the amount by which: (i) 12% of the amount that the total
deposits or withdrawable accounts of depositors of the qualifying
thrift at the close of the taxable year exceeds (ii) the sum of
the qualifying thrift's surplus, undivided profits and reserves
at the beginning of such year. The Associations do no expect
this overall limitation to restrict the Associations' deduction
for additions to its bad debt reserve for the year ending
September 30, 1995. At September 30, 1995, First Federal's and
Peoples Federal's total bad debt reserve for tax purposes was
approximately $11.4 million and $11.0 million respectively.
However, see "REGULATION - Proposed Federal Legislation Regarding
SAIF Recapitalization, Recapture of Bad Debt Reserves, and Other
Matters" regarding legislation which may affect the Associations'
tax bad debt reserves.
To the extent that the Associations make "nondividend
distributions" to the Company that are considered as made: (i)
from the reserve for losses on qualifying real property loans, to
the extent the reserve for such losses exceeds the amount that
would have been allowed under the experience method; or (ii) from
the supplemental reserve for losses on loans ("Excess
Distributions"), then an amount based on the amount distributed
will be included in the Associations' taxable income.
Nondividend distributions include distributions in excess of the
Associations' current and accumulated earnings and profits,
distributions in redemption of stock and distributions in partial
or complete liquidation. However, dividends paid out of the
Associations' current or accumulated earnings and profits, as
calculated for federal income tax purposes, will not be
considered to result in a distribution from the Associations' bad
debt reserve. Thus, any dividends to the Company that would
reduce amounts appropriated to the Associations' bad debt reserve
and deducted for federal income tax purposes would create a tax
liability for the Associations. The amount of additional taxable
income attributable to an Excess Distribution is an amount that,
when reduced by the tax attributable to the income, is equal to
the amount of the distribution. Thus, if, the Associations make
a "nondividend distribution," then approximately one and one-half
times the amount so used would be includable in gross income for
federal income tax purposes, assuming a 35% corporate income tax
rate (exclusive of state and local taxes). See "REGULATION" for
limits on the payment of dividends by the Associations. The
Associations do not intend to pay dividends that would result in
a recapture of any portion of their tax bad debt reserves.
The Internal Revenue Code of 1986, as amended (the "Code")
imposes a tax on alternative minimum taxable income ("AMTI") at a
rate of 20%. The excess of the tax bad debt reserve deduction
using the percentage of taxable income method over the deduction
that would have been allowable under the experience method is
treated as a preference item for purposes of computing the AMTI.
In addition, only 90% of AMTI can be offset by net operating loss
carryovers. AMTI is increased by an amount equal to 75% of the
amount by which the Associations' adjusted current earnings
exceeds its AMTI (determined without regard to this preference
and prior to reduction for net operating losses). For taxable
years beginning after December 31, 1986, and before January 1,
1996, an environmental tax of .12% of the excess of AMTI (with
certain modification) over $2.0 million is imposed on
corporations, including the Associations, whether or not an
Alternative Minimum Tax ("AMT") is paid.
The Company may exclude from its income 100% of dividend
received from the Associations as members of the same affiliated
group of corporations. The corporate dividends-received
deduction is generally 70% in the case of dividends received form
unaffiliated corporations with which the Company and the
Associations will not file a consolidated tax return, except that
if the Company or the Associations own more than 20% of the stock
of a corporation distributing a dividend, then 80% of any
dividends received may be deducted.
There have not been any Internal Revenue Service audits of the
Company's and First Federal's federal income tax returns during
the past five years.
Under the laws of South Carolina, the Associations are
required to pay an income tax at the rate of 6% of net income as
defined in the statute. This tax is imposed on financial
institutions, such as savings and loan associations, in lieu of
the general state business corporation income tax. Prior to
fiscal 1990, First Federal utilized state net operating loss
carryforwards. During fiscal 1989, First Federal became subject
to South Carolina income taxes. Peoples Federal did not incur
any South Carolina income taxes through September 30, 1992 but
became subject to South Carolina taxes in fiscal 1993. Taxes
accrued for fiscal 1995 include $510 thousand payable to South
Carolina.
Item 2. PROPERTIES
The Company's principal executive offices are located at 2440
Mall Drive, North Charleston, South Carolina, in an office
building partially leased by First Federal. The building also
serves as First Federal's Operations Center. First Federal owns
15 of its branch offices, including its home office at 34 Broad
Street in downtown Charleston. The remaining eight branch
offices are leased properties on which First Federal has
constructed banking offices. These property leases expire by
2006. All of the leases include various renewal or purchase
options. During fiscal 1994 most remaining deposit and loan
administrative support functions relocated from the downtown home
office to the Operations Center, vacating a substantial portion
of the home office. After renovations of the downtown facility
were completed in fiscal 1995, a substantial portion of the
downtown office was leased.
Peoples Federal conducts its executive and support service
functions from its 14,700 square foot Operations Center at 1601
Eleventh Avenue in Conway, South Carolina. Approximately 65% of
the building is leased to others. Eight of Peoples Federal's
branch offices are owned with one facility leased. During fiscal
1994, Peoples Federal leased space in Sunset Beach, North
Carolina for a loan production office. Peoples Federal opened
its third office in Florence, South Carolina during fiscal 1995.
In December 1994 First Federal acquired the two branch
offices, deposits and certain loans of Peoples Federal located in
Georgetown and Litchfield, South Carolina. The branch on High
Market Street in Georgetown was subsequently closed and its
accounts are now serviced out of First Federal's existing branch
on Church Street in Georgetown. First Federal has now leased
the High Market Street property to a tenant with an option to
purchase the property.
Peoples Federal leases space for certain insurance agency
operations in Charleston and in Florence. In addition, First
Federal leases properties in two locations for off-site ATM
facilities. Both Associations also own land purchased for
potential future branch locations.
The Associations evaluate on a continuing basis the
suitability and adequacy of all of their facilities, including
branch offices and service facilities, and have active programs
of relocating, remodeling or closing any as necessary to maintain
efficient and attractive facilities. First Federal will add six
ATMs in fiscal 1996 to its proprietary ATM network, with five
opened off-premises, four of which will be positioned in a major
grocery store chain. Peoples Federal will begin a proprietary
ATM network in fiscal 1996, adding seven ATMs in its market
areas. The Associations believe present facilities are adequate
for their operating purposes.
At September 30, 1995, the total book value of the premises
and equipment owned by the Company was $15.1 million. Reference
is made to Note 16 of Notes to Consolidated Financial Statements
for information relating to minimum rental commitments under the
Associations' leases for office facilities, and to Note 8 for
further details on the Associations' properties.
Item 3. LEGAL PROCEEDINGS
Periodically, there are various claims and lawsuits involving
the Associations and their subsidiaries mainly as defendants,
such as claims to enforce liens, condemnation proceedings on
properties in which the Associations hold security interests,
claims involving the making and servicing of real property loans
and other issues incident to the Association's business. In the
opinion of management and the Company's legal counsel, no
material loss is expected from any of such pending claims or
lawsuits.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during
the fourth quarter of the fiscal year ended September 30, 1995.
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Stock Prices and Dividends
Cash
Dividend
High Low Declared
1995
First Quarter $17.00 $13.00 $.14
Second Quarter 19.75 13.75 .14
Third Quarter 20.50 17.75 .14
Fourth Quarter 22.50 18.00 .14
1994
First Quarter $18.25 $13.75 .12
Second Quarter 17.75 14.00 .12
Third Quarter 16.00 13.75 .12
Fourth Quarter 17.50 14.00 .12
The Company's common stock is traded in the over-the-counter
market under the Nasdaq symbol "FFCH." Trading information in
newspapers is provided on the Nasdaq National Market quotation
page under the listing, "FSTFNHLD." As of September 30, 1995,
there were approximately 1,808 stockholders of record.
The Company has paid a cash dividend since February 1986. The
amount of the dividend to be paid is determined by the Board of
Directors dependent upon the Company's earnings, financial
condition, capital position and such other factors as the Board
may deem relevant. The dividend rate has been increased eight
times with the most recent dividend paid in November, 1995, at
$.16 per share. Cash dividends declared amounted to
approximately $3.5 million, $3.1 million and $2.2 million for
fiscal 1995, 1994 and 1993, respectively. These dividends
amounted to 38.10%, 25.53% and 16.83% of net income.
Please refer to "Regulation-Dividend Limitations" for
information with respect to current restrictions on the
Associations' ability to pay dividends to the Company.
Item 6. Selected financial data
Selected Consolidated Financial Data<F1>
At or For the Year Ended September 30,
1995 1994 1993 1992 1991
(dollar amounts in thousands except per share amounts)
Summary of Operations<F2>
Interest income $ 95,503 $ 85,652 $ 95,407 $ 86,328 $ 93,412
Interest expense 55,794 44,755 51,696 51,930 62,866
Net interest income 39,709 40,897 43,711 34,398 30,546
Provision for loan losses (451) (1,097) (3,700) (3,440) (3,393)
Net interest income after
provision for loan losses 39,258 39,800 40,011 30,958 27,153
Other income 8,575 8,681 5,493 2,248 3,296
General and administrative
expenses (33,424) (32,351) (30,745) (21,916) (20,100)
Income tax expense (5,171) (4,125) (3,481) (4,320) (4,070)
Income before change in
accounting principle 9,238 12,005 11,278 6,970 6,279
Change in accounting principle 1,584
Net income $ 9,238 $ 12,005 $ 12,862 $ 6,970 $ 6,279
Net increase in deposits $ 11,318 $ 11,776 $ 313,633<F3> $ 32,124 $ 67,508
Loans originated during the
period<F4> $ 253,031 $ 264,889 $ 216,957 $ 163,814 $177,468
Per Common Share<F5>
Earnings $ 1.47 $ 1.88 $ 2.02<F6> $ 1.10 $ .98
Book value 14.50 13.20 12.56 10.75 9.92
Dividends .56 .48 .34 .28 .28
Selected Ratios
Return on average equity 10.61% 14.64% 17.28% 10.59% 10.17%
Return on average assets .71 .97 1.00 .71 .66
Gross interest margin<F7> 2.91 3.21 3.39 3.36 2.95
Average equity as a percentage
of average assets 6.67 6.65 5.79 6.68 6.46
Problem assets as a percentage
of total assets 1.67 1.74 1.98 2.73 3.69
Dividend payout ratio 38.10% 25.53% 16.83% 25.45% 28.57%
At September 30,
Assets $1,365,348 $1,244,270 $1,259,265 $ 985,794 $985,210
Loans receivable, net<F8> 1,080,746 960,532 962,347 753,277 835,173
Mortgage-backed securities<F9> 101,126 105,620 106,021 104,882 48,843
Investment securities<F10> 119,967 117,876 104,554 35,308 39,763
Deposits 1,074,313 1,062,995 1,051,219 737,586 705,462
Borrowings 172,120 79,267 106,677 165,058 199,563
Stockholders' equity 91,409 82,672 80,546 68,314 63,362
Number of offices 32 32 32 20 20
Full-time equivalent employees 509 537 532 335 330
<F1> On October 9, 1992, the Company acquired Peoples Federal. The acquisition was accounted for under the
purchase method of accounting, and accordingly, the consolidated financial statements do not include
Peoples Federal's assets, liabilities and equity or results of operations prior to that date.
<F2> Certain amounts in prior periods have been reclassified to conform with current classifications;
however, the reclassifications had no effect on net income or stockholders' equity.
<F3> Includes $291,118 in deposits acquired in the acquisition of Peoples Federal.
<F4> Excludes loans on savings accounts.
<F5> All per share amounts have been adjusted to reflect the two-for-one Common stock split in the form of
a 100% stock dividend declared September 23, 1993, and distributed October 26, 1993.
<F6> Includes the cumulative effect of a change in accounting principle which resulted in an increase of
$.25 in earnings per common share.
<F7> Gross interest margin is the difference between the weighted average yield on all interest-earning
assets and the weighted average rate paid on all interest-bearing liabilities.
<F8> Includes loans held for sale.
<F9> Includes mortgage-backed securities held to maturity and mortgage-backed securities available for
sale.
<F10>Includes investment securities held to maturity, investment securities available for sale and
investments in capital stock of Federal Home Loan Bank.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
First Financial Holdings, Inc. ("First Financial" or the
"Company"), headquartered in Charleston, South Carolina, is the
second largest independent financial institution headquartered in
South Carolina, with assets of approximately $1.4 billion. First
Financial is a multiple savings and loan holding company with two
operating subsidiaries, First Federal Savings and Loan
Association of Charleston ("First Federal") and Peoples Federal
Savings and Loan Association of Conway, South Carolina ("Peoples
Federal") (together, the "Associations"). Most of the
information presented in the following discussion of financial
results is indicative of the activities of the Associations.
First Financial's operations resulted in consolidated net
income of $9.2 million for the year ended September 30, 1995,
which represented net income per share of $1.47. Net income was
$12.0 million for 1994 and $12.9 million for 1993. Net income
per share was $1.88 in 1994 and $2.02 in 1993. Net income in
1993 included the effect of a change in accounting principle of
$1.6 million, or $.25 per share, resulting from the adoption of
Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes."
As a result of tax benefits related to the acquisition of
Peoples Federal, 1994 and 1993 results were positively impacted
by lower effective income tax rates of 25.6% and 23.6%,
respectively, compared with 35.9% in fiscal 1995. Income before
taxes in fiscal 1994 was significantly impacted by a one-time
gain of $1.1 million on the sale of Regal Cinemas stock.
Although the Company's average earning assets increased $62.2
million during the current year, net interest income declined
2.9%, or $1.2 million, principally due to higher liability
funding costs which exceeded improvements in yields on earning
assets.
The Company pursued strategies in fiscal 1995 to reduce the
rate of growth in operating costs. Although assets grew 9.7% in
fiscal 1995, operating expenses increased only 3.3% during the
year compared with 5.2% growth in fiscal 1994. Staffing levels
declined during the period even though the Company expanded the
range of consumer products and services offered. Operational
efficiency improved during the year through additional
consolidation of back-office services and improved work flows
throughout the Company. An important strategy during the year
was the consolidation of the Georgetown operations of Peoples
Federal with those of First Federal. One branch office now
serves the Georgetown market. Construction was completed on two
full-service branches, one of which had been operating in a
temporary facility. Other branches were refurbished and/or
upgraded in 1995. Quality customer service remained a strategic
retail banking focus of the Company in 1995. Operating expense
initiatives were only undertaken after careful study and
determination that customer service and satisfaction would not be
negatively affected.
As explained more fully under "Recapitalization Proposal,"
Congress is currently addressing the problems of the Savings
Association Insurance Fund ("SAIF") which insures the deposits of
First Federal and Peoples Federal. Both the Senate and the House
of Representatives have passed budget reconciliation measures
which address banking-related issues. Included in both bills is
language requiring members of the SAIF to pay a special
assessment to recapitalize the fund and thereafter merge the SAIF
with the Bank Insurance Fund ("BIF"). Both bills call for a one-
time special assessment of approximately 80 basis points on
assessable deposits. Although the effect of such a special
assessment would be significant, both thrift subsidiaries would
then benefit from substantially reduced future deposit insurance
premiums.
The remainder of Management's Discussion and Analysis of
Financial Condition and Results of Operations of First Financial
should be read together with the Selected Consolidated Financial
Data and the Consolidated Financial Statements and accompanying
notes.
Financial Condition
At September 30, 1995, First Financial reported $1.4 billion
in assets compared to $1.2 billion at the end of 1994. Average
total assets were $1.3 billion in 1995 compared to $1.2 billion
in 1994.
Investment securities and mortgage-backed securities
The primary objective of the Company in its management of the
investment portfolio is to maintain a portfolio of high quality,
highly liquid investments with returns competitive with short-
term treasury or agency securities and highly rated corporate
securities. The Associations are required to maintain average
daily balances of liquid assets according to certain regulatory
requirements. The Associations have maintained higher than
average required balances in short-term investments based on
their continuing assessment of cash flows, the level of loan
production, current interest rate risk strategies and the
assessment of the potential direction of market interest rate
changes. Total investment securities increased only 1.8% in
fiscal 1995, with year-end balances of $120.0 million as of
September 30, 1995, including $39.8 million in investments
available for sale.
Mortgage-backed securities totaled $101.1 million at September
30, 1995, including $82.8 million available for sale. First
Financial acquired $5.7 million in mortgage-backed securities and
sold $1.2 million during 1995. Balances declined $4.5 million,
or 4.3%, during the year.
Loans Receivable
Net loans receivable totaled $1.1 billion at the end of 1995,
increasing $120.2 million during the year, or approximately
12.5%. Loan originations totaled $253.0 million in fiscal 1995
compared with $264.9 million in 1994. After a rapid rise in
market interest rates in 1994, management began to include
originations of higher-yielding fixed-rate mortgage loans in the
loan portfolio. This strategy resulted in significant net growth
in the loan portfolio during 1995.
The Company's loan portfolio consists of real estate mortgage
and construction loans, home equity and other consumer loans,
credit card receivables and commercial business loans.
Management believes it continues to reduce the risk elements of
its loan portfolio through strategies focusing on residential
mortgage and consumer loan production. Growth during 1995 was
particularly strong in single-family real estate lending, a
segment of the portfolio which fits the retail banking
orientation of the Company. Gross one- to four-family
residential loans increased $114.7 million in 1995, up 19.7% from
September 30, 1994. A large percentage of the Company's single-
family originations qualify for purchase by secondary market
agencies. There were, however, no loans held for sale as of
September 30, 1995, in keeping with management's current
retention strategy. The Company has traditionally retained
virtually all adjustable-rate loan originations in its portfolio.
Asset Quality
The Company maintains a conservative philosophy regarding its
lending mix as well as its underwriting guidelines. The Company
also maintains loan quality monitoring policies and systems that
require detailed monthly and quarterly analyses of delinquencies,
non-performing loans, real estate owned and other repossessed
assets. Reports of such loans and assets by various categories
are reviewed by management and the Boards of Directors of the
Associations. The majority of the Company's loan originations
are made in coastal markets of South Carolina and North Carolina
and in Florence, South Carolina. The Company has continued its
commitment to housing and offers a wide variety of loan products
to meet the needs of consumers. The Company currently is not
involved in any joint venture projects or real estate development
activities nor does the Company contemplate any future direct
investments in real estate.
Over the last several years, the Company has been aggressive
in acquiring and disposing of properties collateralizing former
problem loans. Improvement in problem asset ratios has been an
important business objective of the Company. Due to market
conditions, in fiscal 1993 the Company virtually curtailed all
loans made on nonresidential properties and placed greater
emphasis on single-family lending, a sector of the portfolio
which traditionally has outperformed nonresidential real estate
loans during various economic cycles. The outstanding debt
levels of several major borrowers have also been reduced.
As a result of management's ongoing review of the loan
portfolio, loans are classified as non-accruing when uncertainty
exists about the ultimate collection of principal or interest
under the original terms. The Company closely monitors trends in
problem assets which include non-accrual loans, loans 90 days or
more delinquent, renegotiated loans and real estate and other
assets acquired in settlement of loans. Renegotiated loans are
those loans on which the Company has agreed to modifications of
the terms of the loan such as changes in the interest rate
charged and/or other concessions. The following table il-
lustrates trends in problem assets over the past five years.
Problem Assets
At September 30,
1995 1994 1993 1992 1991
(dollar amounts in thousands)
Non-accrual loans $ 5,088 $ 1,620 $ 3,705 $ 5,406 $ 7,487
Accruing loans 90 days or more
deliquent 816 740 1,458 2,216 7,537
Renegotiated loans 11,103 13,129 9,001 7,210 9,036
In-substance foreclosures 2,621 2,834 5,260 4,171 5,737
Real estate and other assets
acquired in settlement
of loans 3,144 3,290 5,480 7,951 6,569
$22,772 $21,613 $24,904 $26,954 $ 36,366
As a percent of loans receivable
and real estate and other assets
acquired in settlement of loans 2.10% 2.24% 2.56% 3.52% 4.29%
As a percent of total assets 1.67 1.74 1.98 2.73 3.69
Allowance for loan losses as a
percent of problem assets 46.71 49.64 43.13 17.95 11.96
The Company's problem assets as a percentage of assets over
the past five years have declined from 3.69% at September 30,
1991 to 1.67% as of September 30, 1995. Although problem asset
totals may include loans which are considered to be earning as-
sets, there is more than normal risk associated with the severity
of delinquency or the renegotiated terms of these loans. Non-
accrual loans increased approximately $3.5 million during 1995.
Approximately $1.1 million of the increase relates to two loans
secured by a first mortgage on a subdivision development and by
junior liens on other residential and commercial properties. The
borrowers have experienced cash flow problems resulting in
delinquency. The Company's non-accrual loans also increased in
1995 from the addition of two loans with balances of
approximating $1.1 million secured by residential lots in a
resort development. These loans were brought current and certain
terms modified in November of 1995. Renegotiated loans declined
$2.0 million in 1995. A $1.2 million resort development loan
renegotiated in 1983 was repaid in the current year.
The allowance for loan losses of $10.6 million currently
covers 46.71% of reported problem assets, a significant increase
from 11.96% as of September 30, 1991. Management's long-term
goals continue to include lower ratios of problem assets to total
assets, although management expects there will always remain a
core level of delinquent loans and real estate acquired from
normal lending operations. Renegotiated loans currently comprise
approximately one half of total problem assets. All of these
loans were either current or less than 30 days delinquent at
September 30, 1995, and have an average yield of 7.85% compared
with an average yield of 7.30% one year ago.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level
sufficient to provide for estimated probable future losses in the
loan portfolio. Management reviews the adequacy of the allowance
no less frequently than each quarter, utilizing its internal
portfolio analysis system. The factors that weigh heavily in a
determination of the level of the allowance are management's as-
sessment of current economic conditions, the composition of the
loan portfolio, previous loss experience on certain types of
credit and a review of specific commercial real estate and
commercial business loans and concentrations of credit. The
value of the underlying collateral is also considered during such
reviews.
Allowance for Loan Losses
Year Ended September 30,
1995 1994 1993 1992 1991
(dollar amounts in thousands)
Balance, beginning of period $ 10,728 $10,742 $ 4,837 $ 4,351 $ 3,732
Loans charged-off:
Real estate loans 530 858 1,893 1,813 1,726
Commercial business loans 3 461 637 453 573
Consumer loans 508 673 793 908 450
Total charge-offs 1,041 1,992 3,323 3,174 2,749
Recoveries:
Real estate loans 356 658 632 122 15
Commercial business loans 32 76 176 4 33
Consumer loans 111 147 160 94 50
Total recoveries 499 881 968 220 98
Net charge-offs 542 1,111 2,355 2,954 2,651
Allowance on acquired
loans 4,560
Elimination of interest reserve (123)
Provision for loan losses 451 1,097 3,700 3,440 3,393
Balance, end of period:
Real estate loans 8,875 9,074 9,189 3,036 2,884
Commercial business loans 715 750 648 698 672
Consumer loans 1,047 904 905 1,103 795
Balance, end of period $ 10,637 $10,728 $10,742 $4,837 $4,351
Balance as a percent of net loans:
Real estate loans .93% 1.09% 1.11% .50% .42%
Commercial business loans 2.61 3.00 2.22 1.84 1.62
Consumer loans<F1> .91 .81 .77 .97 .72
Total net loans .98 1.12 1.12 .64 .52
Net charge-offs as a percent of average
net loans:
Real estate loans .02% .02% .18% .26% .26%
Commercial business loans (.11) 1.42 1.88 1.13 1.31
Consumer loans<F1> .35 .46 .40 .73 .38
<F1> Consumer loans include home equity lines of credit.
On September 30, 1995 the total allowance for loan losses was
$10.6 million compared with $10.7 million at September 30, 1994.
Net charge-offs declined over 50% in each of the last two fiscal
years and totaled $542 thousand in 1995. Charge-offs from 1991
to 1993 increased principally from declines in real estate values
brought about by weaker economic conditions, increased
bankruptcies and the continued long term effect of changes in tax
laws which have had a detrimental impact on real estate
investments.
The allowance for loan losses increased $4.6 million in fiscal
1993 as a result of management's estimate of the allowance for
loan losses for loans acquired in the Peoples Federal
acquisition. During fiscal 1993, the Company also increased
general reserves for multi-family and commercial real estate
loans which could potentially be adversely impacted by closures
of military bases in the Charleston area. Based on the current
economic environment and other factors, management believes that
the allowance for loan losses is maintained at a level adequate
to provide for inherent losses in the Company's loan portfolio.
Deposits
Retail deposits are the primary source of funding for the
Company for lending purposes and provide a customer base for
sales of additional financial services. The Company's total
deposits increased $11.3 million during the year ended
September 30, 1995. First Financial's deposit composition at
September 30, 1995, and September 30, 1994, is as follows:
Deposits
At September 30,
1995 1994
Percent of Percent of
Balance Total Balance Total
(dollar amounts in thousands)
Checking accounts $ 117,149 10.90% $ 112,270 10.56%
Passbook, statement and other accounts 125,588 11.69 150,693 14.17
Money market accounts 131,225 12.22 140,511 13.22
Retail certificate accounts 632,262 58.85 601,297 56.57
Jumbo certificates 54,339 5.06 52,693 4.96
Wholesale certificates 13,750 1.28 5,531 .52
Total deposits $1,074,313 100.00% $1,062,995 100.00%
Checking account balances increased during fiscal 1995 while
passbook, statement and money market accounts declined. Trends
over the past few years indicate customers are moving funds to
alternative investments and, particularly in 1995, into higher
yielding certificate accounts. As expected when fiscal 1995
began, the Company's average cost of deposits increased as
customers moved funds into certificate of deposit accounts and
reduced balances in short-term savings and money market accounts.
The average cost of all deposits increased to 4.80% at
September 30, 1995 compared to 4.01% at September 30, 1994.
Certificates of deposit increased $40.8 million during the year
with the average cost increasing from 4.83% at September 30, 1994
to 5.89% on September 30, 1995.
Borrowings
Borrowings increased by $92.9 million during the current year
to total $172.1 million as of September 30, 1995. Borrowings as
a percentage of total liabilities increased to 13.51% at the end
of 1995 compared to 6.82% in 1994. Borrowings from the FHLB of
Atlanta increased $61.4 million while reverse repurchase
agreements increased by $31.4 million. The net increase in
short-term borrowed funds is attributable to management's
strategy in 1995 to utilize borrowings to fund loan growth.
There were no redemptions of the $19.8 million in long-term debt
during 1995.
The Company's average cost of FHLB advances increased from
5.03% at September 30, 1994, to 5.88% at September 30, 1995. The
average cost of securities sold under agreements to repurchase
increased to 5.89% at September 30, 1995 from 5.20% at
September 30, 1994. All of the securities sold under agreements
to repurchase mature within three months. Approximately $106.4
million in FHLB advances mature within one year.
Capital Resources
Average stockholders' equity was $87.0 million during fiscal
1995, a 6.1% increase from the $82.0 million reported in 1994.
The primary source of growth in stockholders' equity during 1995
was the retention of net income. The Consolidated Statement of
Stockholders' Equity includes detailed changes in stockholders'
equity during fiscal 1995. The Company's capital ratio, total
capital to total assets, was 6.69% at September 30, 1995 compared
to 6.64% at September 30, 1994.
In January of 1995 the Board of Directors approved a stock
repurchase program to acquire up to 250,000 shares of the
Company's common stock to be completed by September 30, 1995.
During fiscal 1995, approximately 19,900 shares were repurchased
through the program at an average price of $15.53. Due to the
increase in market price for the Company's stock, shares were not
available at attractive prices to complete the repurchase
program.
On September 23, 1993, the Board of Directors declared a two-
for-one stock split in the form of a 100% stock dividend. The
additional shares were distributed on October 26, 1993. During
1995, the Company paid out $.56 in dividends per share for a
payout ratio of 38.1%, compared with dividends of $.48 and a
payout ratio of 25.5% in 1994. On October 26, 1995, the Board of
Directors declared a regular quarterly cash dividend of $.16 per
common share, an increase of approximately 14.3% from the
previous quarter's cash dividend of $.14 per common share.
Office of Thrift Supervision ("OTS") regulations impose limits
upon certain "capital distributions" by savings institutions,
including cash dividends and payments to repurchase or otherwise
acquire an institution's shares. Current regulations establish a
three-tiered system of regulation, with the greatest flexibility
being afforded to "well-capitalized" institutions. Both First
Federal and Peoples Federal were "well-capitalized" institutions
at September 30, 1995.
Regulatory Capital
The Associations are required to meet the regulatory capital
requirements of the OTS which currently include three measures of
capital: a leverage or core capital requirement, a tangible
capital requirement and a risk-based capital requirement. Of
significant importance, these requirements can be "no less
stringent than the standards for national banks." Thrift
organizations also must be in compliance with all three capital
requirements to comply with the law. Under certain conditions,
the OTS may prescribe individual capital requirements for
institutions which are more stringent than the minimum leverage,
tangible and risk-based capital requirements.
The present risk-based capital requirement is composed of
five risk categories from zero percent for cash to 100 percent
for certain types of assets. The present risk-based capital
requirement is 8.00% of risk-based assets. First Federal's and
Peoples Federal's current risk-based capital ratios of 11.35% and
14.16%, respectively, exceed the 8.00% requirement.
On September 29, 1992, the OTS issued final rules
implementing the prompt corrective action section of the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA").
The final rule separates all supervised financial institutions
into one of five capital categories: "well-capitalized,
adequately capitalized, under capitalized, significantly under
capitalized and critically under capitalized" and specifies what
actions the OTS and other banking regulators will take regarding
institutions in the lowest capital categories. Under OTS
regulations implementing the provisions of FDICIA, the
Associations currently meet the capital requirements of the
"well-capitalized" category.
LIQUIDITY AND ASSET AND LIABILITY MANAGEMENT
Liquidity
The desired level of liquidity for the Company is determined
by management in conjunction with the
Asset/Liability Committees of each Association. The level of
liquidity is based on management's strategic direction for the
Company, commitments to make loans and the Committees' assessment
of the respective Association's ability to generate funds.
Historically, sources of liquidity have included net deposits to
savings accounts, amortizations and prepayments of loans, FHLB
advances, securities sold under agreements to repurchase and
sales of securities available for sale and loans held for sale.
The Associations are subject to federal regulations which
require the maintenance of a daily average balance of liquid
assets equal to 5.00% of net withdrawable savings and borrowings
payable in one year or less. The Associations have adopted
policies in recent years of maintaining liquidity levels well
above the requirements. First Federal's average liquidity for
1995 was 7.16%, compared with 9.08% in 1994. Average liquidity
of Peoples Federal during 1995 and 1994 was 9.56% and 9.69%,
respectively.
The Company's most stable source of funding is the attraction
and retention of deposit accounts, the success of which is based
on the strength and reputation of the Associations. First
Federal has a major market share of deposits in Charleston,
Berkeley and Dorchester counties and a growing share of deposits
in the Georgetown market. Peoples Federal's deposits are
principally obtained in Horry and Florence counties. By continu-
ing to promote innovative new products, price competitively and
encourage the highest level of quality in customer service, the
Company continues to successfully meet challenges from
competitors, many of which are non-banking entities offering such
products as money market funds, annuities and stock and fixed
income mutual funds.
In addition to retail deposits, other primary sources of
funds include borrowings from the FHLB, principal repayments on
loans and mortgage-backed securities, securities sold under
agreements to repurchase and the sale of loans. As a measure of
protection, the Associations have back-up sources of funds
available, including FHLB borrowing capacity and securities
available for sale.
During 1995 the Company experienced a net cash outflow from
investing activities of $115.7 million, consisting principally of
a net increase of $114.4 million in net loans receivable. The
Company experienced net cash inflows of $14.7 million from
operating activities and $101.9 million from financing
activities. Financing activities consisted principally of $61.4
million in net additions to FHLB advances, $31.4 million in net
additions to reverse repurchase agreements and increases of $11.4
million from deposits.
Outstanding commitments for loan originations at September
30, 1995, approximated $27.7 million as compared to $9.1 million
at September 30, 1994. In addition, unused lines of credit on
equity loans and other consumer loans, credit cards and commer-
cial loans amounted to $89.4 million compared with $84.8 million
at September 30, 1994. Management anticipates the percentage of
funds drawn on existing lines of credit will not increase
substantially over levels currently utilized. Funding of
undisbursed loans in process of $14.3 million at September 30,
1995, commitments to originate loans and future advances from
lines of credit are expected to be provided by amortizations and
prepayments of loans, net deposit cash flows and short-term
borrowings.
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. The principal source of funds for the acquisition
of Peoples Federal in October 1992 was the issuance of $20.3 mil-
lion in senior notes of the Company in September 1992. Potential
sources for First Financial's payment of principal and interest
on the notes include: (i) dividends from First Federal and
Peoples Federal; (ii) payments from existing cash reserves and
sales of marketable investment securities; and (iii) interest on
its investment assets. As of September 30, 1995, First
Financial had cash reserves and existing marketable securities of
$9.7 million.
The Associations' ability to pay dividends and make other
capital contributions to First Financial is restricted by
regulation and may require regulatory approval. Such
distributions may also depend on the Associations' ability to
meet minimum regulatory capital requirements in effect during the
period. Current OTS regulations permit institutions meeting
certain capital requirements and subject to "normal supervision"
to pay out 100% of net income to date over the calendar year and
50% of surplus capital existing at the beginning of the calendar
year without supervisory approval. Both Associations are
currently subject to "normal supervision" as to the payment of
dividends.
Asset/Liability Management
Asset/liability management is the process by which the
Company constantly changes the mix, maturity and pricing of
assets and liabilities in an attempt to reduce a materially
adverse impact on earnings resulting from the direction of change
and volatility of market interest rates. Although the net
interest income of any financial institution is perceived as
being susceptible to fluctuations in interest rates, the
Company's management has attempted to minimize that
vulnerability. In the future, regulatory capital requirements of
all financial institutions will become subject to the inclusion
of additional components measured by exposure to interest rate
sensitivity.
The Company, working principally through Asset and Liability
Committees of the Associations, has established policies and
monitors 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 sheet mix assumptions.
Management may adjust the Company's interest rate sensitivity
position primarily through decisions on the pricing, maturity and
marketing of particular deposit and loan products and by
decisions regarding maturities of FHLB advances and other
borrowings. The Company's emphasis on adjustable-rate mortgage
and consumer lending and other mortgage products is evidenced by
the composition of the gross loan portfolio which includes
approximately 67% of adjustable-rate loans and mortgage-backed
securities.
The following table sets forth in summary form the repricing
attributes of the Company's interest-earning assets and interest-
bearing liabilities. The time periods in the table represent the
time before an asset or liability matures or can be repriced.
First Financial's one year cumulative gap declined to a negative
.06% of assets at September 30, 1995 from a positive gap of
12.94% of assets at September 30, 1994. A positive gap indicates
that cumulative interest-sensitive assets exceed cumulative
interest-sensitive liabilities and suggests that net interest
income would increase if market rates increased. A negative gap
would suggest the reverse. Because adjustments to interest rates
on adjustable-rate loans and mortgage-backed securities tend to
lag changes in market rates, the benefit attributed to a positive
gap in a rising rate environment and a negative gap in a
declining rate environment will be experienced over a longer
period of time depending on how fast the indices rise or fall and
the frequency of repricing of the assets. The Company also has a
significant portion of its adjustable-loan portfolio indexed to
various cost of funds indices, which tend to lag the market to a
greater extent than Treasury-related indices. The Company
generally considers plus or minus 10% of assets to be its
preferred gap position. The Company extended maturities of
interest-earning assets through retention of more fixed-rate
loans in 1995, which reduced its positive one year gap from
$161.0 million at September 30, 1994 to a negative gap of $853
thousand as of September 30, 1995.
The interest sensitivity gap is only a general indication of
interest rate sensitivity. Consequently, the table below is only
a simplistic measure of the Company's asset/liability structure.
It does not consider the impact of early loan repayments on
interest sensitivity. It also does not consider the repricing
considerations inherent in adjustable-rate loans, such as minimum
and maximum annual and life interest rate adjustments and also
the type of index utilized. The Company presently does not
utilize the purchase of derivative products in its
asset/liability management program.
Interest Rate Sensitivity Analysis at September 30, 1995
Interest Rate Sensitivity Period
13 months Over
3 Months 4-6 Months 7-12 Months 2 Years 2 Years Total
(dollar amounts in thousands)
Interest-earning assets:
Loans<F1> $273,658 $ 199,851 $293,324 $ 37,332 $288,538 $1,092,703
Mortgage-backed securities 21,034 2,349 26,168 51,575 101,126
Interest-earning deposits
and investments 36,042 8,582 13,881 19,956 45,392 123,853
Total interest-earning assets 330,734 210,782 333,373 57,288 385,505 1,317,682
Interest-bearing liabilities:
Deposits:
Checking accounts<F2> 8,753 8,753 17,506 19,076 40,537 94,625
Savings accounts<F2> 5,338 5,337 10,675 17,720 86,518 125,588
Money market accounts 117,428 3,395 6,791 397 3,214 131,225
Certificate accounts 217,276 150,359 173,181 71,153 88,382 700,351
Total deposits 348,795 167,844 208,153 108,346 218,651 1,051,789
Borrowings 127,450 18,500 5,000 21,170 172,120
Total interest-bearing
liabilities 476,245 186,344 213,153 108,346 239,821 1,223,909
Current period gap $(145,511) $ 24,438 $120,220 $(51,058) $145,684 $ 93,773
Cumulative gap $(145,511) $(121,073) $ (853) $(51,911) $ 93,773
Percent of total assets (10.66)% (8.87)% (.06)% (3.80)% 6.87%
Assumptions:
<F1> Fixed-rate loans are shown in the time frame corresponding to contractual principal amortization
schedules. Adjustable-rate loans are shown in the time frame corresponding to the next contractual
interest rate adjustment date.
<F2> Interest-bearing checking accounts and savings accounts are assumed to reprice in periods estimated by
the Company's principal regulator, the OTS. Decay rates for savings accounts approximate 17% in the
first year and 14% in the second year. Decay rates for checking accounts approximate 37% in the first
year and 20% in the second year.
RESULTS OF OPERATIONS
Net Interest Income
The following table contains information relating to the
Company's weighted average yield on assets and weighted average
cost of liabilities for the periods indicated. Such yields and
costs are derived by dividing annualized interest income and
expense by the weighted average balances of interest-earning
assets or interest-bearing liabilities. Tax exempt interest
income is not significant and the table is not presented on a tax
equivalent basis.
Average Yields and Rates
For the Year Ended September 30,
1995 1994 1993 1992 1991
Loans 7.84% 7.53% 8.14% 9.44% 10.42%
Mortgage-backed securities 7.09 7.01 7.80 8.44 8.31
Interest-earning deposits and investments 6.05 4.72 4.55 6.04 7.51
Total interest-earning assets 7.06 7.17 7.77 9.16 10.12
Deposits 4.48 3.79 4.12 5.66 6.94
Borrowings 6.50 6.19 6.26 6.37 7.85
Total interest-bearing liabilities 4.69 3.96 4.38 5.80 7.17
Gross interest margin 2.91% 3.21% 3.39% 3.36% 2.95%
Net yield on earning assets 3.16% 3.42% 3.56% 3.65% 3.31%
The level of net interest income is determined by balances of
earning assets and successfully managing the net interest margin.
Net interest income declined 2.9% in fiscal 1995 compared with
fiscal 1994. Net interest income totaled $39.7 million compared
to $40.9 million for the prior year. The Company's net yield on
average interest-earning assets for the year ending September 30,
1995 declined to 3.16% from 3.42% during fiscal 1994 while the
gross interest margin declined to 2.91% for the current year
compared with 3.21% in the prior year. The gross interest margin
is the difference between the average yield on interest-earning
assets and the average cost of interest-bearing liabilities. The
net interest margin is calculated by dividing net interest income
by total average interest-earning assets. Contraction of the
Company's net interest margin in fiscal 1995 resulted from a
greater increase in the Company's average cost of funds than in
its average yield on earning assets. Growth in earning assets
served to offset some of the decline in net interest income
attributable to rate differences between 1995 and 1994.
In fiscal 1994, net interest income dropped by $2.8 million
from fiscal 1993 levels. Declines in average yields of interest-
earning assets outpaced declines in the average costs of
interest-bearing liabilities. As actions taken by the Board of
Governors of the Federal Reserve System ("Federal Reserve") led
to increased interest rates during the latter half of 1994, the
average cost of interest-bearing liabilities leveled off and then
began to rise, while the average yields on earning assets
continued to decline slightly. The Company attributes this
continued decline in earning asset yields during 1994 to its use
of cost of funds indices on mortgage loans which tend to lag
changes in market interest rates.
As evidenced by trends in 1995, cost of funds indices used to
reprice adjustable rate loans increased from levels one year ago,
while other market interest rates declined slightly. The Fourth
District Cost of Funds increased from 3.98% on September 30, 1994
to 5.07% on September 30, 1995. The one year Constant Maturity
Treasury, the most prevalent adjustable-rate residential mortgage
loan index, declined from 5.92% on September 30, 1994 to 5.69% on
September 30, 1995. First Federal's primary residential
adjustable-rate loan products since the early 1980s have been
indexed to various cost of funds indices. In the second quarter
of fiscal 1995, First Federal changed its primary adjustable-rate
loan products to the One Year Constant Maturity Treasury index.
The OTS recently sought comment from institutions on the
continued reporting of cost of funds indices. Management
decided to change its index after determining that uncertainty
exists over the future viability of the index as well as its
continuation as an index which closely parallels First Federal's
own internal cost of funds.
Management expects some stabilization in its average cost of
deposits and borrowings, with the potential for short-term
improvements in asset yields due to the lagged nature of cost of
funds indices. Thus, the gross interest margin is not expected
in the short-term to continue to decline to the extent
experienced in 1995 and 1994. As illustrated in the preceding
table, the average yield on interest-earning assets increased by
.43% during fiscal 1995 while the average cost of interest-
bearing liabilities increased by .73%, resulting in an overall
decline in the gross margin of .30% to 2.91%.
Changes in net interest income result from several factors,
the most important of which are the changes in interest rates
paid on assets and liabilities, the rate of growth of the asset
and liability base, the ratio of interest-earning assets to
interest-bearing liabilities and the management of the balance
sheet's interest rate sensitivity.
The following table presents the dollar amount of changes in
interest income and interest expense attributable to changes in
volume and the amount attributable to changes in rate. The
combined effect of changes in both volume and rate which cannot
be separately identified has been allocated proportionately to
the change due to volume and the change due to rate.
Rate/Volume Analysis
1995 versus 1994 1994 versus 1993
Increase (Decrease) Increase (Decrease)
Due to Due to
Volume Rate Net Volume Rate Net
(dollar amounts in thousands)
Interest income:
Loans $4,427 $ 3,178 $ 7,605 $(1,404) $(5,945) $(7,349)
Mortgage-backed securities 719 75 794 (2,552) (940) (3,492)
Investment securities 675 735 1,410 997 (203) 794
Other interest-earning assets (865) 907 42 (5) 297 292
Total interest income 4,956 4,895 9,851 (2,964) (6,791) (9,755)
Interest expense:
Deposit accounts
Checking accounts 69 (83) (14) 184 (596) (412)
Savings accounts (661) (16) (677) 756 (1,006) (250)
Money market accounts (430) 1,185 755 (503) (462) (965)
Certificate accounts 2,359 5,508 7,867 (477) (1,133) (1,610)
Total deposits 1,337 6,594 7,931 (40) (3,197) (3,237)
Borrowings 2,927 181 3,108 (3,566) (138) (3,704)
Total interest expense 4,264 6,775 11,039 (3,606) (3,335) (6,941)
Net interest income $ 692 $(1,880) $(1,188) $ 642 $(3,456) $(2,814)
Comparing 1995 and 1994, the decline of $1.2 million in net
interest income was primarily attributable to an increase of $6.8
million in total interest expense during the year as a result of
higher average rates paid for deposits and borrowings, with only
an improvement of $4.9 million in interest income due to an
increase in the average yield on interest-earning assets.
As the above table illustrates, during 1994 the decline of
$2.8 million in net interest income was primarily attributable to
a reduction of $6.8 million in total interest income as a result
of lower average yields on interest-earning assets, which was
only partially offset by a decline of $3.3 million in total
interest expense due to lower average costs of interest-bearing
liabilities.
Provision for Loan Losses
The provision for loan losses is a charge to earnings in the
current period to maintain the allowance at an adequate level.
In fiscal 1995, the Company's provision expense was $451 thousand
compared with $1.1 million in the prior year. The provision was
lower because of a significant reduction in net loan charge-offs
and a decline in balances in certain segments of the loan
portfolio against which higher reserve allocations are typically
maintained. Total loan loss reserves as of September 30, 1995
and 1994 were $10.6 million and $10.7 million, respectively. The
level of loan loss reserves as of September 30, 1995, equates to
19.6 times net charge-offs in fiscal 1995 and 8.0 times average
net charge-offs in the last three fiscal years.
Other Income
Another strategic initiative of the Company is improved non-
interest income. Management recognizes that an increase in non-
interest revenues is a priority in the highly competitive
environment facing financial institutions today. Checking and
other deposit account fees increased 11.9% and totaled $4.0
million in fiscal 1995. In the year ended September 30, 1994,
checking and deposit account fees increased 17.1%, totaling $3.5
million.
During fiscal 1994, other income included a gain on trading
securities of $1.1 million on Regal Cinemas common stock. The
Regal Cinemas stock was obtained in exchange for the common stock
of Litchfield Theatres, which had been received by Peoples
Federal after Litchfield filed for bankruptcy protection. The
Litchfield Theatres stock did not have an active market prior to
its acquisition by Regal Cinemas. The sale occurred in July
1994. The Regal Cinemas stock was the only trading security
recorded on the Company's books during fiscal 1994. Net gains on
sales of investment securities totaled $102 thousand in 1995.
Loan servicing fee income declined $177 thousand and $226
thousand, respectively, during fiscal 1995 and 1994, primarily as
a result of lower balances of loans serviced. The Company
currently services $230.2 million in loans with capacity to add
additional servicing assets. However, the Company's current
strategy does not include any significant increase in balances of
serviced loans.
Commissions on sales of insurance products improved 30.0%
during 1995, increasing $355 thousand. During 1995 the Magrath
Insurance Agency, a subsidiary of Peoples Federal, purchased an
agency in Lake City, South Carolina. In July of 1995, Magrath
also purchased the Adams Insurance Agency, which had been
previously owned by Charleston Financial Services, a subsidiary
of First Federal. This consolidation as well as the additional
purchase in 1995 are expected to improve efficiency at the agency
and enhance future business opportunities.
In the last quarter of 1995, the Company added to its sources
of revenue the operation of Link Investment Services, Inc., a
full service brokerage subsidiary, established to offer
alternative investment products such as annuities and stock and
fixed income or bond mutual funds to customers. Operations of
Link Investment Services did not add significantly to revenues in
1995. Future plans include the expansion of Link Investment
Services to several other locations.
Real estate operations, net, produced losses of $196 thousand,
$348 thousand and $3.1 million in fiscal 1995, 1994 and 1993,
respectively. The Company has no investments in real estate and
results are indicative of net operating expenses related to the
acquisition of real estate owned and to increased write-downs
taken to encourage early sale of these properties. The general
level of problem assets has declined significantly during the
past five years as indicated under "Asset Quality" above. Real
estate owned, including in-substance foreclosures, totaled $5.8
million at September 30, 1995 compared with $6.1 million and
$10.7 million at September 30, 1994 and 1993, respectively.
Management believes that real estate owned at September 30, 1995,
is properly valued at fair value less estimated selling costs.
General and Administrative Expenses
In the more competitive financial services market of recent
years, management has recognized the importance of controlling
non-interest expense to maintain and improve profitability.
Management also recognizes that there are operational costs which
continue to increase as a result of the present operating climate
for regulated depository institutions. The following table
compares the components of the Company's general and
administrative expenses and total expenses as a percent of
average assets. This measurement, commonly used to compare the
operating efficiency of financial institutions, has increased
steadily over the past several years. The technical and operating
environment for financial institutions continues to require a
well-trained and motivated staff, superior operating systems and
sophisticated marketing efforts. The Company's strategic plan
includes objectives for reducing the ratio of operating expenses
to average assets. Although expenses prior to fiscal 1993 are
not comparable due to the acquisition of Peoples Federal, the
percentage of general and administrative costs to average assets
as shown in the following table for the components of operating
expenses is helpful in understanding activity for the periods
indicated.
Comparison of General and Administrative Expenses
Year Ended September 30,
1995 1994 1993 1992 1991
% Average % Average % Average % Average % Average
Amount Assets Amount Assets Amount Assets Amount Assets Amount Assets
(dollar amounts in thousands)
Salaries and employee
benefits $17,542 1.34% $16,726 1.36% $15,686 1.22% $10,184 1.03% $ 9,587 1.00%
Occupancy costs 3,040 .23 2,745 .22 2,616 .20 1,940 .20 1,897 .20
Marketing 1,013 .08 1,156 .09 1,039 .08 1,093 .11 905 .09
Depreciation, amortization,
rental and maintenance
of equipment 2,422 .19 2,223 .18 2,171 .17 1,738 .18 1,676 .18
FDIC insurance premiums 2,503 .19 2,558 .21 2,381 .19 1,583 .16 1,403 .15
Other 6,904 .53 6,943 .56 6,852 .53 5,378 .54 4,632 .48
Total general and
administrative expenses $33,424 2.56% $32,351 2.62% $30,745 2.39% $21,916 2.22% $20,100 2.10%
As a percent of average assets
and assets serviced for others 2.16% 2.16% 1.99% 2.00% 1.94%
General and administrative expenses for fiscal 1995 totaled
$33.4 million, an increase of $1.1 million, or 3.3% from fiscal
1994. Salaries and employee benefits, the largest component of
general and administrative expenses, totaled $17.5 million, and
increased 4.9% over fiscal 1994. In 1995, salary and benefit
expenses were higher due to normal annual merit wage adjustments
and higher health insurance costs for staff. Salaries and
employee benefits comprised over 52% of total general and
administrative expenses of the Company in 1995. Management
recognizes that the long-term stability and profitability of the
Company are due in part to the loyalty and dedication of a
superior staff with much longer than average tenure when compared
with other competing financial institutions. Since January of
1991, the Company has funded its health benefit programs through
self-insurance. Although this option reduced employee benefit
costs during the initial years, higher claims experience over the
past two years has resulted in higher costs for the Company. The
Company has studied various alternatives, particularly managed
health care systems, and expects to outsource these services
effective January 1, 1996.
Occupancy costs increased by $295 thousand, or 10.7%, during
fiscal 1995. Additional space was leased in stages in fiscal
1994 to expand First Federal's Operations Center to accommodate
the consolidation of all back-office functions of this subsidiary
into one location. Management feels that the consolidation,
which was completed late in fiscal 1994, resulted in significant
improved efficiencies and enhanced customer service during 1995
and was a major catalyst for staff reductions. Vacated space in
First Federal's home office in historic downtown Charleston was
renovated in 1995 and approximately 18,000 square feet leased in
late 1995. Revenues of approximately $204 thousand will be
generated from lease income in fiscal 1996.
Equipment expenses also increased $199 thousand, or
approximately 9.0%, from levels in fiscal 1994. Included are
expenses related to depreciation, rental and maintenance of
equipment. Growth in expenses is attributable to higher capital
investments in equipment in 1995 and 1994. A major undertaking in
fiscal 1996 will be the selection of a new branch automation
system. A new system is expected to be installed and operational
by the final quarter of fiscal 1996.
Federal Deposit Insurance Corporation ("FDIC") insurance
premiums were stable in 1995 and 1994 with dollar amounts
indicative of assessable balances on the dates used for premium
assessments. Both Associations are currently assessed at a rate
of $.23 per $100 in deposit balances, which is the lowest premium
rate in the FDIC's risk-based insurance assessment system for
SAIF-insured institutions. Insurance premiums for banks with
deposits insured by the BIF were reduced August 8, 1995, with
well-capitalized banks paying $.04 per $100 in deposit balances,
substantially lower that SAIF rates. On November 14, 1995, the
FDIC again revised the premium schedule for BIF-insured banks,
reducing premiums to zero for well-capitalized banks. As
explained under "Recapitalization Proposal," if a compromise
budget reconciliation bill passes as expected, deposit insurance
premiums for First Federal and Peoples Federal could drop to
comparable BIF rates as early as January 1, 1996, but only after
the payment of approximately of 80 basis points to recapitalize
the SAIF.
Fiscal 1994 general and administrative expenses increased $1.6
million compared with fiscal 1993. Salaries and employee
benefits increased $1.0 million, or 6.6% from levels in 1993.
Salary and benefit costs increased due to normal annual merit
wage adjustments, an increase of seven full-time equivalent
employees and the inclusion of Peoples Federal's employees in the
profit-sharing and 401(k) programs for a full year. FDIC
insurance premiums increased due to increased deposit balances on
the dates used for premium assessments.
Adoption of SFAS 109
In the first quarter of fiscal 1993, the Company adopted SFAS
No. 109, "Accounting for Income Taxes." First Financial had
previously adopted SFAS No. 96, the prior accounting standard for
income taxes, in fiscal 1988. As a result of the adoption of
SFAS 109, income of $1.6 million, or $.25 per share, was recorded
as the cumulative adjustment related to the adoption. Peoples
Federal's cumulative net deferred tax asset of approximately $4.5
million was offset by a 100% valuation allowance due to Peoples
Federal's past operating experience and higher level of problem
assets. The valuation allowance has been reduced in subsequent
periods based on the establishment of profitable operations at
Peoples Federal, reduced levels of problem assets and improved
interest rate risk.
Income Tax Expense
Income taxes totaled $5.2 million or 35.9% of pre-tax income
during 1995 compared to $4.1 million or 25.6% of pre-tax income
during 1994. In 1993, the effective rate was 23.6%, dropping
from 38.3% in 1992. The lower effective income tax rate in
fiscal 1994 and 1993 resulted from the reduction of the deferred
tax asset valuation allowance at Peoples Federal due to Peoples
Federal's positive operating results and the positive impact of
the adoption of SFAS 109. The effective tax rate in future
periods is expected to approximate 36%.
RECAPITALIZATION PROPOSAL
The SAIF, which was created six years ago following the
collapse of the Federal Savings and Loan Insurance Corporation,
has not met its statutorily required reserve level of 1.25% of
deposits. The BIF, in contrast, has now reached the 1.25%
reserve level and as a result, institutions insured by the BIF
are now paying reduced insurance premiums which range from $.00
to $.27 per $100 in deposits, with an average rate of $.0043
cents per $100. The current deposit rate premium disparity
between BIF-insured institutions and SAIF-insured institutions
resulting from the recently implemented BIF reduction places
SAIF-insured institutions at a competitive disadvantage due to
higher premium costs and could ultimately weaken the financial
condition of the SAIF by leading to a shrinkage in its deposit
base.
In hearings beginning in the Summer of 1995, the FDIC and other
major banking regulatory agencies pushed for Congressional
action, which ultimately led to the inclusion of banking-related
issues in bills passed by the United States House of
Representatives and the Senate as part of the budget
reconciliation process. Each bill contains provisions that will
require SAIF-insured institutions to pay a one-time special
assessment on deposits to increase the SAIF's reserves and
provides for pro rata sharing by all federally insured
institutions of the obligation, now borne solely by SAIF-insured
institutions, to pay interest on bonds that were issued to
resolve failed savings institutions. Portions of the bills and
other proposals would also enact further changes, including
merger of the SAIF and the BIF, elimination of the separate
federal thrift charter and other provisions intended to combine
the savings and banking industries. Such provisions raise
significant questions such as the amount and timing of any
special assessment and whether the investment and operating
powers of thrifts and thrift holding companies and current
capital rules applicable to such entities will be conformed to
those applicable to banks and bank holding companies.
The work of the House/Senate conferees may continue for some
time with certain of the banking-related issues potentially being
delayed. The charter issues will likely be addressed by Congress
next year and the Company is unable to predict the effects that
such developments would have on the Company's future operations.
The Company, however, is able to provide information on the
potential impact of a special one-time assessment. Conferees to
date have often mentioned the assessable deposits as of March 31,
1995 as the base expected to be used in calculating a special
assessment. First Federal's and Peoples Federal's assessable
deposit base at March 31, 1995, totaled $783.5 million and $284.1
million, respectively. Based on an estimated one-time assessment
of 80 basis points, the special premium would total $6.3 million
and $2.3 million, respectively, for First Federal and Peoples
Federal. Using the Company's effective tax rate in fiscal 1995
and assuming the deductibility of the expense, an after-tax
combined charge of $5.5 million would result. If deposit premium
rates for thrifts are reduced to those of the BIF, as is
currently proposed in both bills, after-tax net income would
improve annually by approximately $1.6 million.
REGULATORY AND ACCOUNTING ISSUES
The Community Reinvestment Act ("CRA") requires each savings
institution, as well as commercial banks and certain other
lenders, to identify the communities served by the institution
and the types of credit the institution is prepared to extend
within those communities. The CRA also requires the OTS to
assess an institution's performance in meeting the credit needs
of its identified communities as part of its examination of the
institution and to take such assessments into consideration in
reviewing applications with respect to branches, mergers, other
business combinations and savings and loan holding company
acquisitions. An unsatisfactory CRA rating may be the basis for
denying such applications and community groups have successfully
protested applications on CRA grounds. The OTS assigns CRA
ratings of "outstanding", "satisfactory", "needs to improve" or
"substantial noncompliance." Both First Federal and Peoples
Federal were rate "outstanding" in their most recent CRA
examinations.
The federal banking agencies have jointly revised CRA
regulations in an effort to emphasize performance, rather than
documentation of CRA compliance. The revision eliminates the
existing regulation's twelve assessment factors and substitutes a
performance-based evaluation system. Assessments will consider
community demographics, characteristics and needs; information
about the institution's capacity and constraints, product
offerings and business strategy; data on the institution's prior
performance; and data on the performance of similarly-situated
lenders. The agencies, rather than the institution, will develop
the assessment context for each institution. Particular
attention will be paid to an institution's record of helping to
meet credit needs in low- and moderate-income areas.
Institutions and affiliates of holding companies with at least
$250 million in assets will be assessed by lending, service and
investment tests, with more weight given to lending performance.
In May 1993, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan". The statement is applicable to all creditors and to all
loans, uncollateralized as well as collateralized, except large
groups of smaller-balance homogeneous loans that are collectively
evaluated for impairment, loans that are measured at fair value
or at the lower of cost of fair value, leases and debt
securities. It also applies to all loans that are restructured
in a troubled debt restructuring involving a modification of
terms. In October 1994, FASB issued SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and
Disclosures." This statement amends SFAS 114 to allow a creditor
to use existing methods for recognizing interest income on
impaired loans and eliminates the income recognition provisions
in SFAS 114. SFAS 118 also requires disclosure of certain
information about the recorded investment in impaired loans and
how the creditor recognizes interest income related to impaired
loans.
SFAS 114 requires that impaired loans that are within its scope
be measured based on the present value of expected cash flows
discounted at the loan's effective interest rate or, as a
practical expedient, at the loan's observable market price or the
fair value of the collateral if the loan is collateral-dependent.
SFAS 114 and SFAS 118 are effective for financial statements
issued for fiscal years beginning after December 15, 1994. The
Company does not anticipate any significant change from its
present accounting practices related to problem assets upon
adoption of SFAS 114 and SFAS 118 effective October 1, 1995.
Management does not believe the adoption of this statement will
have a material adverse effect on the Company.
On May 12, 1995, the FASB issued SFAS No. 122, "Accounting for
Mortgage Servicing Rights," which amends SFAS No. 65, "Accounting
for Mortgage Banking Activities." This rule allows financial
institutions to capitalize servicing-related costs associated
with mortgage loans that are originated for sale, and to create
servicing assets for such loans. Prior to this rule, originated
mortgage servicing rights were generally accorded off-balance-
sheet treatment. While the rule is to be applied prospectively,
financial institutions may apply the new accounting to mortgage
loans that were originated and sold in fiscal years or interim
periods for which financial statements or information has not
been issued. All financial institutions will be required to
adopt the rule after December 15, 1995. It is the Company's
intent to adopt SFAS No. 122 on October 1, 1995.
The FASB issued SFAS No. 123, "Accounting for Stock-based
Compensation," in October 1995. This statement supersedes APB
Opinion No. 25, "Accounting for Stock Issued to Employees" and
establishes financial accounting and reporting standards for
stock-based employee compensation plans. Those plans include all
arrangements by which employees receive shares of stock or other
equity instruments of the employer or the employer incurs
liabilities to employees in amounts based on the price of the
employer's stock. The statement also applies to transactions in
which an entity issues its equity instruments to acquire goods or
services from nonemployees.
A new method of accounting for stock-based compensation
arrangements with employees is established by SFAS 123. The new
method is a fair value based method rather than the intrinsic
value based method that is contained in APB Opinion 25. However,
SFAS 123 does not require an entity to adopt the new fair value
based method for purposes of preparing its basic financial
statements. Entities are allowed (1) to continue to use the APB
Opinion 25 method or (2) adopt the SFAS 123 fair value based
method. The selected method would apply to all of an entity's
compensation plans and transactions.
SFAS 123 requires that an employer's financial statements
include certain disclosures about stock-based employee
compensation arrangements regardless of the method used to
account for them. The accounting requirements of this statement
are effective for transactions entered into in fiscal years that
begin after December 15, 1995, though they may be adopted at
issuance. The disclosure requirements are effective for
financial statements for fiscal years beginning after December
15, 1995, or for an earlier fiscal year for which this statement
is initially adopted for recognizing compensation cost. The
Company has not determined the impact of adopting SFAS 123.
The FASB issued on October 24, 1995, a proposed statement of
financial accounting standards "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities." FASB's objective is to develop consistent
accounting standards for those transactions, including
determining when financial assets should be considered sold and
derecognized from the statement of financial position and when
related revenues and expenses should be recognized. The approach
focuses on analyzing the components of financial asset transfers
and requires each party to a transfer to recognize the financial
assets it controls and liabilities it has incurred and
derecognize assets when control over them has been relinquished.
In its present form, the proposed statement will have minimal
impact on the accounting practices of the Company.
On November 15, 1995, the FASB issued a Special Report, "A
Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities," that would
permit an enterprise to reassess the appropriateness of the
classifications of all securities held upon the initial adoption
of the Special Report provided that such reassessment and any
resulting reclassification is completed no later than December
31, 1995. Any reclassifications from the held to maturity
category resulting from this one-time reassessment will not call
into question the intent of that enterprise to hold other debt
securities to maturity in the future. The Company is evaluating
its investment position with respect to securities classified as
held to maturity in light of this special provision.
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and related data
presented herein have been prepared in accordance with generally
accepted accounting principles which require the measurement of
financial position and operating results in terms of historical
dollars, without considering changes in the relative purchasing
power of money over time because of inflation.
Unlike most industrial companies, virtually all of the assets
and liabilities of a financial institution are monetary. As a
result, interest rates have a more significant impact on a
financial institution's performance than the effect of general
levels of inflation. Interest rates do not necessarily move in
the same direction or in the same magnitude as the price of goods
and services since such prices are affected by inflation. The
Company is committed to continue its efforts to manage the gap
between its interest-sensitive assets and interest-sensitive
liabilities.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30,
1995 1994
(dollar amounts in thousands)
ASSETS
Cash and cash equivalents $ 24,486 $ 23,568
Investment securities held to maturity
(market value of $68,687 and $66,974) 68,154 67,997
Investment securities available for sale, at fair value 39,831 37,897
Investment in capital stock of Federal Home Loan Bank, at cost 11,982 11,982
Loans receivable, net 1,080,746 960,532
Mortgage-backed securities held to maturity (market value
of $18,844 and $22,291) 18,361 22,483
Mortgage-backed securities available for sale, at fair value 82,765 83,137
Accrued interest receivable--loans 6,868 5,820
Accrued interest receivable--mortgage-backed securities 741 761
Accrued interest receivable--investment securities 1,666 1,281
Office properties and equipment, net 15,058 14,229
Real estate and other assets acquired in settlement of loans 5,764 6,124
Other assets 8,926 8,459
Total assets $1,365,348 $1,244,270
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposit accounts $1,074,313 $1,062,995
Advances from Federal Home Loan Bank 107,853 46,406
Securities sold under agreements to repurchase 44,504 13,098
Long-term debt 19,763 19,763
Advances by borrowers for taxes and insurance 6,872 5,864
Outstanding checks 8,187 6,080
Other 12,447 7,392
Total liabilities 1,273,939 1,161,598
Commitments and contingencies (Note 16)
Stockholders' equity:
Serial preferred stock, authorized 3,000,000 shares--
none issued
Common stock, $.01 par value, authorized 12,000,000 shares,
issued 6,884,438 and 6,822,574 shares at
September 30, 1995 and 1994, respectively 69 68
Additional paid-in capital 23,776 23,237
Retained income, substantially restricted 72,814 67,098
Unrealized net gain (loss) on securities available for sale,
net of income tax (74) (2,872)
Treasury stock at cost, 578,534 shares and 558,214 shares
at September 30, 1995 and 1994, respectively (5,176) (4,859)
Total stockholders' equity 91,409 82,672
Total liabilities and stockholders' equity $1,365,348 $1,244,270
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended September 30,
1995 1994 1993
(dollar amounts in thousands,
except per share amounts)
INTEREST INCOME
Interest on loans $80,434 $72,829 $80,178
Interest on mortgage-backed securities 7,324 6,530 10,022
Interest and dividends on investment
securities 5,314 3,904 3,110
Other 2,431 2,389 2,097
Total interest income 95,503 85,652 95,407
INTEREST EXPENSE
Interest on deposits:
NOW accounts 1,857 1,871 2,283
Passbook, statement and other accounts 3,777 4,454 4,704
Money market accounts 5,060 4,305 5,270
Certificate accounts 36,947 29,080 30,690
Total interest on deposits 47,641 39,710 42,947
Interest on FHLB advances 4,674 2,980 6,066
Interest on securities sold under
agreements to repurchase 1,626 212 788
Interest on long-term debt 1,853 1,853 1,895
Total interest expense 55,794 44,755 51,696
NET INTEREST INCOME 39,709 40,897 43,711
Provision for loan losses 451 1,097 3,700
Net interest income after provision
for loan losses 39,258 39,800 40,011
OTHER INCOME
Net gain (loss) on sale of loans 9 (62) 1,103
Gain on investment securities 102 1,059
Loan servicing fees 1,217 1,394 1,620
Service charges and fees on deposit
accounts 3,950 3,529 3,014
Commissions on insurance 1,539 1,184 1,187
Real estate operations, net (196) (348) (3,121)
Other 1,954 1,925 1,690
Total other income 8,575 8,681 5,493
GENERAL AND ADMINISTRATIVE EXPENSES
Salaries and employee benefits 17,542 16,726 15,686
Occupancy costs 3,040 2,745 2,616
Marketing 1,013 1,156 1,039
Depreciation, amortization, rental and
maintenance of equipment 2,422 2,223 2,171
FDIC insurance premiums 2,503 2,558 2,381
Other 6,904 6,943 6,852
Total general and administrative expenses 33,424 32,351 30,745
Income before income taxes and cumulative
effect of change in accounting principle 14,409 16,130 14,759
Income tax expense 5,171 4,125 3,481
Income before cumulative effect of change
in accounting principle 9,238 12,005 11,278
Cumulative effect of change in accounting
principle 1,584
NET INCOME $ 9,238 $12,005 $12,862
Income per common share before cumulative
effect of change in accounting principle $ 1.47 $ 1.88 $ 1.77
Cumulative effect of change in accounting
principle .25
NET INCOME PER COMMON SHARE $ 1.47 $ 1.88 $ 2.02
Cash dividends per common share $ .56 $ .48 $ .34
Weighted average shares outstanding 6,286 6,372 6,371
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Unrealized
Net Gain
(Loss) on
Securities
Additional Available
Common Paid-in Retained for Sale, Treasury Stock
Stock Capital Income Net Shares Amount Total
(dollar amounts in thousands)
Balance, September 30, 1992 $67 $22,654 $47,463 362 $(1,870) $68,314
Common stock issued pursuant to
stock option and employee
benefit plans 1 340 341
Cash dividends ($.34 per share) (2,166) (2,166)
Treasury stock purchased 7 (80) (80)
Unrealized net gain on securities
available for sale, net of
income tax upon adoption $1,275 1,275
Net income 12,862 12,862
Balance, September 30, 1993 68 22,994 58,159 1,275 369 (1,950) 80,546
Common stock issued pursuant to
stock option and employee
benefit plans 243 243
Cash dividends ($.48 per share) (3,066) (3,066)
Treasury stock purchased 189 (2,909) (2,909)
Change in unrealized net gain
(loss) on securities available
for sale, net of income tax (4,147) (4,147)
Net income 12,005 12,005
Balance, September 30, 1994 68 23,237 67,098 (2,872) 558 (4,859) 82,672
Common stock issued pursuant to
stock option and employee
benefit plans 1 539 540
Cash dividends ($.56 per share) (3,522) (3,522)
Treasury stock purchased 20 (317) (317)
Change in unrealized net gain
(loss) on securities available
for sale, net of income tax 2,798 2,798
Net income 9,238 9,238
Balance, September 30, 1995 $69 $ 23,776 $72,814 $ (74) 578 $(5,176) $91,409
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended September 30,
1995 1994 1993
(dollar amounts in thousands)
OPERATING ACTIVITIES
Net income $ 9,238 $ 12,005 $ 12,862
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation 1,807 1,621 1,524
(Gain) loss on sale of loans, net (9) 62 (1,103)
(Gain) loss on sale of investments, net (102) 3
Gain on trading securities (1,059)
Loss on sale of property and equipment, net 29 19 25
Gain on sale of real estate owned, net (154) (374) (507)
Amortization of unearned discounts/premiums
on investments, net 4 (18) 98
Decrease in deferred loan fees and discounts (817) (666) (492)
(Increase) decrease in receivables and
prepaid expenses (1,990) (1,671) 2,161
Provision for loan losses 451 1,097 3,700
Write downs of real estate acquired in
settlement of loans 155 362 2,763
Increase (decrease) in deferred taxes 1,903 (1,352) (2,027)
FHLB stock dividends (296) (625)
Proceeds from sales of loans held for sale 1,501 79,202 63,196
Origination of loans held for sale (1,501) (63,794) (74,228)
Increase in accounts payable and accrued
expenses 3,833 781 3,676
Cumulative effect of change in accounting
principle (1,584)
Amortization of discount on long-term debt 126 126 125
Amortization of purchase accounting
adjustments, net 216 (114) (297)
Net cash provided by operating activities 14,690 25,931 9,270
INVESTING ACTIVITIES
Proceeds from maturity of investments held
to maturity 19,593 29,988 25,387
Proceeds from maturity of investments
available for sale 2,502
Proceeds, at par, of redemption of mutual funds
available for sale 1,900 5,000
Principal collected on investments held to
maturity 1,792 328 641
Proceeds from sales of investments held to
maturity 3,999 5,991
Proceeds from sales of investments available
for sale 7,303 2,999
Proceeds from sales of trading securities 1,178
Purchases of investments held to maturity (23,224) (36,640) (83,848)
Purchases of investments available for sale (9,227) (14,858)
Purchases of mutual funds available for sale (3,525) (4,000)
(Increase) decrease in loans, net (114,357) (13,200) 30,967
Net (increase) decrease in credit card
receivables (1,031) (762) 200
Proceeds from sales of mortgage-backed
securities, available for sale 1,162
Repayments on mortgage-backed securities 12,311 40,567 49,983
Purchases of mortgage-backed securities
available for sale (5,744) (45,254)
Purchase of loans and loan participations (6,655) (8)
Proceeds from the sales of real estate owned 2,656 4,435 13,101
Net purchase of office properties and
equipment (2,665) (1,829) (1,553)
Increase in cash from Peoples Federal
acquisition 3,694
Net cash provided by (used in) investing
activities (115,712) (29,554) 44,563
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
Year Ended September 30,
1995 1994 1993
(dollar amounts in thousands)
FINANCING ACTIVITIES
Net increase (decrease) in NOW, passbook
and money market fund accounts (29,512) (13,281) 30,149
Net increase Net increase (decrease) in
certificates of deposit 40,890 25,300 (6,186)
Proceeds from FHLB advances 232,000 45,500 6,000
Repayment of FHLB advances (170,553) (82,000) (41,600)
Net purchase (repurchase) of securities
sold under agreements to repurchase 31,406 9,146 (52,472)
Increase in escrow accounts 1,008 117 541
Proceeds from sale of common stock 540 243 341
Dividends paid (3,522) (3,066) (2,166)
Treasury stock purchased (317) (2,909) (80)
Redemption of senior notes (487)
Net cash provided by (used in) financing
activities 101,940 (20,950) (65,960)
Net increase (decrease) in cash and cash
equivalents 918 (24,573) (12,127)
Cash and cash equivalents at beginning of
period 23,568 48,141 60,268
Cash and cash equivalents at end of period $ 24,486 $ 23,568 $ 48,141
Supplemental disclosures:
Cash paid during the period for:
Interest $ 54,221 $44,858 $ 52,566
Income taxes 4,631 6,253 3,954
Loans foreclosed or insubstance foreclosed 3,517 3,248 10,004
Loans securitized into mortgage-backed
securities 7,466
Unrealized net gain (loss) on securities available
for sale, net of income tax 2,798 (4,147) 1,275
Transfers of securities held to maturity to
available for sale 92,644
Assets acquired from Peoples Federal,
including cash of $3,694 324,581
Liabilities assumed from Peoples Federal 324,581
See accompanying notes to consolidated financial statements.
FIRST FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Dollar Amounts, Except Per Share And Where Otherwise
Indicated, In Thousands.)
1. Summary of Significant Accounting Policies
First Financial Holdings, Inc. ("First Financial" or the
"Company") is incorporated under the laws of the State of
Delaware and became a multiple savings and loan holding company
upon the acquisition of Peoples Federal Savings and Loan
Association ("Peoples Federal") on October 9, 1992. Prior to
that date, First Financial was a unitary savings and loan holding
company with First Federal Savings and Loan Association of
Charleston ("First Federal") as its only subsidiary.
Consolidation
The accompanying consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries, First
Federal and Peoples Federal (together, the "Associations"). The
Company's consolidated financial statements also include the
assets and liabilities of service corporations wholly-owned by
the Associations, two of which are currently active. Charleston
Financial Services, Inc., is primarily engaged in data processing
consulting, the sale of computer output microfiche services and
related equipment and the operation of Link Investment Services,
Inc. Magrath Insurance Agency, Inc., is a property and casualty
insurance agency with offices in Florence, Conway, Lake City and
Charleston. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Investments in Debt and Equity Securities
The Company's investments in debt securities principally
consist of U.S. Treasury securities and mortgage-backed
securities purchased by the Company or created when the Company
exchanges pools of loans for mortgage-backed securities. The
Company adopted Statement of Financial Accounting Standards
("SFAS") No. 115 as of September 30, 1993. In accordance with
SFAS 115, the Company classifies its investments in debt
securities as held to maturity securities, trading securities and
available for sale securities as applicable.
Debt securities are designated as held to maturity if the
Company has the positive intent and the ability to hold the
securities to maturity. Held to maturity securities are carried
at amortized cost, adjusted for the amortization of any related
premiums or the accretion of any related discounts into interest
income using a methodology which approximates a level yield of
interest over the estimated remaining period until maturity.
Unrealized losses on held to maturity securities, reflecting a
decline in value judged by the Company to be other than
temporary, are charged to income in the Consolidated Statements
of Operations.
Debt and equity securities that are purchased and held
principally for the purpose of selling in the near term are
reported as trading securities. Trading securities are carried
at fair value with unrealized holding gains and losses included
in earnings.
The Company classifies debt and equity securities as available
for sale when at the time of purchase it determines that such
securities may be sold at a future date or if the Company does
not have the intent or ability to hold such securities to
maturity.
Securities designated as available for sale are recorded at
market value. Changes in the market value of debt and equity
securities available for sale are included in shareholders'
equity as unrealized gains or losses, net of the related tax
effect. Unrealized losses on available for sale securities,
reflecting a decline in value judged to be other than temporary,
are charged to income in the Consolidated Statement of Operations
of the Company. Realized gains or losses on available for sale
securities are computed on the specific identification basis.
Fair Value of Financial Instruments
The Financial Accounting Standards Board issued SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments," in
December 1991. SFAS 107 requires disclosures about the fair
value of all financial instruments whether or not recognized in
the balance sheet, for which it is practicable to estimate that
value. In cases where quoted market prices are not available,
fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly
affected by the assumptions used, including the discount rate and
estimates of future cash flows. In that regard, the derived fair
value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized
through immediate settlement of the instrument. SFAS 107
excludes certain financial instruments and all non-financial
instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts represented do not represent the
underlying value of the Company.
Securities Sold Under Agreements to Repurchase
The Company enters into sales of securities under agreements to
repurchase (reverse repurchase agreements). Fixed coupon reverse
repurchase agreements are treated as financings. The obligations
to repurchase securities sold are reflected as a liability and
the securities underlying the agreements continue to be reflected
as assets in the Consolidated Statements of Financial Condition.
Loans Receivable and Loans Held for Sale
The Company's real estate loan portfolio consists primarily of
long-term loans secured by first mortgages on single-family
residences, other residential property, commercial property and
land. The adjustable-rate mortgage loan is the Company's primary
loan offering for portfolio lending purposes. The Company's
consumer loans include lines of credit, auto loans, marine loans,
mobile home loans and loans on various other types of consumer
products. The Company also makes shorter term commercial
business loans oecured basis.
Fees are charged for originating loans at the time the loan is
granted. Loan origination fees received, if any, are deferred
and offset by the deferral of certain direct expenses associated
with loans originated. The net deferred fees or costs are
recognized as yield adjustments by applying the interest method.
Interest on loans is accrued and credited to income based on
the principal amount and contract rate on the loan. The accrual
of interest is discontinued when, in the opinion of management,
there is an indication that the borrower may be unable to meet
future payments as they become due, generally when a loan is
ninety days past due. When interest accrual is discontinued, all
unpaid accrued interest is reversed. While a loan is on non-
accrual status, interest is recognized only as cash is received.
Loans are returned to accrual status only when the loan is
reinstated and ultimate collectibility of future interest is no
longer in doubt.
Mortgage loans originated and intended for sale in the
secondary market are carried at the lower of cost or estimated
market value in the aggregate. Net unrealized losses are
provided for in a valuation allowance by charges to operations.
There were no loans held for sale at year end 1995 or 1994.
Allowance for Loan Losses
The Company provides for loan losses on the allowance method.
Accordingly, all loan losses are charged to related allowances
and all recoveries are credited to the allowances. Additions to
the allowance for loan losses are provided by charges to
operations based on various factors which, in management's
judgment, deserve current recognition in estimating losses. Such
factors considered by management include the fair value of the
underlying collateral, growth and composition of the loan
portfolios, the relationship of the allowance for loan losses to
outstanding loans, loss experience, delinquency trends and
economic conditions. Management evaluates the carrying value of
loans periodically and the allowances are adjusted accordingly.
While management uses the best information available to make
evaluations, future adjustments to the allowances may be
necessary if economic conditions differ substantially from the
assumptions used in making the evaluations. Allowances for loan
losses are subject to periodic evaluation by various regulatory
authorities and may be subject to adjustment upon their
examination.
Office Properties and Equipment
Office properties and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation is
provided generally on the straight-line method over the estimated
life of the related asset for financial reporting purposes.
Estimated lives range up to thirty years for buildings and
improvements and up to ten years for furniture, fixtures and
equipment. Maintenance and repairs are charged to expense as
incurred. Improvements which extend the useful lives of the
respective assets are capitalized. Accelerated depreciation is
utilized on certain assets for income tax purposes.
Real Estate
Real estate acquired through foreclosure is initially recorded
at the lower of cost or estimated fair value. Subsequent to the
date of acquisition, it is carried at the lower of cost or fair
value, adjusted for net selling costs. Fair values of real
estate owned are reviewed regularly and writedowns are recorded
when it is determined that the carrying value of real estate
exceeds the fair value less estimated costs to sell. Costs
relating to the development and improvement of such property are
capitalized, whereas those costs relating to holding the property
are charged to expense.
The Company records loans as in-substance foreclosures, if the
borrower has little or no equity in the collateral based upon its
current fair value; proceeds for repayment of the loan can be
expected to be generated only through the operation or sale of
the collateral; and the borrower has effectively abandoned
control of the collateral or has continued to retain control of
the collateral but, because of the current financial status of
the borrower, it is doubtful the borrower will be able to repay
the loan in the foreseeable future. In-substance foreclosures
are included in real estate and other assets acquired in
settlement of loans in the accompanying Consolidated Statements
of Financial Condition and are accounted for as real estate
acquired through foreclosure. In-substance foreclosures amounted
to approximately $2,621 and $2,834 at September 30, 1995 and
1994, respectively.
Long-term Debt
The costs of issuing the senior notes were capitalized and are
being amortized on the straight-line method over the term of the
notes, which is ten years.
Income Taxes
Effective October 1, 1992, the Company prospectively adopted
SFAS 109, "Accounting for Income Taxes," which requires an asset
and liability approach to accounting for income taxes. Under
SFAS 109, deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used
for income tax purposes..
Reclassifications
Certain amounts previously presented in the consolidated
financial statements for prior periods have been reclassified to
conform to current classifications. All such reclassifications
had no effect on the prior periods' net income or retained income
as previously reported.
2. Cash and Cash Equivalents
Cash and cash equivalents consist of the following:
September 30,
1995 1994
Cash working funds $ 6,052 $ 5,921
Non-interest-earning demand deposits 2,853 1,056
Deposits in transit 11,695 12,270
Interest-earning deposits 3,886 4,321
Total $24,486 $23,568
The Company considers all highly liquid investments with a
maturity of 90 days or less at the time of purchase to be cash
equivalents.
3. Investment and Mortgage-backed Securities Held to Maturity
The amortized cost, gross unrealized gains, gross unrealized
losses and market value of investment and mortgage-backed
securities held to maturity are as follows:
September 30, 1995
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
U.S. Treasury securities and obligations
of U.S. government agencies and
corporations $46,853 $ 338 $163 $47,028
Corporate securities 21,301 404 46 21,659
68,154 742 209 68,687
Mortgage-backed securities:
FHLMC fixed-rate 14,716 592 2 15,306
FNMA fixed-rate 2,987 137 2,850
GNMA fixed-rate 642 30 672
Other 16 16
18,361 622 139 18,844
Total $86,515 $1,364 $348 $87,531
September 30, 1994
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
U.S. Treasury securities and obligations
of U.S. government agencies and
corporations $51,432 $ 78 $ 874 $50,636
FHLB term deposits 3,000 3,000
Corporate securities 13,565 10 237 13,338
67,997 88 1,111 66,974
Mortgage-backed securities:
FHLMC fixed-rate 17,991 183 91 18,083
FNMA fixed-rate 3,748 293 3,455
GNMA fixed-rate 725 25 16 734
Other 19 19
22,483 208 400 22,291
Total $90,480 $296 $1,511 $89,265
The amortized cost and market value of investment and mortgage-
backed securities held to maturity at September 30, 1995, by
contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or
prepayment penalties.
September 30, 1995
Amortized Market
Cost Value
Due in one year or less $25,346 $25,368
Due after one year through five years 39,471 39,978
Due after five years through ten years 3,526 3,535
Due after ten years 18,172 18,650
Total $86,515 $87,531
Proceeds from the sale of investment and mortgage-backed
securities held to maturity during fiscal 1995 and 1993 were
$3,999 and $5,991, respectively. A gross realized gain of $37
and a gross realized loss of $6 resulted in 1995. A gross
realized loss of $3 resulted in 1993. There were no sales of
investment securities held to maturity during fiscal 1994.
4. Investment and Mortgage-backed Securities Available for Sale
The amortized cost, gross unrealized gains, gross unrealized
losses and market value of investment and mortgage-backed
securities available for sale are as follows:
September 30, 1995
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
U.S. Treasury securities and
obligations of U.S. government
agencies and corporations $ 15,792 $ 178 $ 96 $ 15,874
Mutual funds and others 24,656 699 23,957
40,448 178 795 39,831
Mortgage-backed securities:
FHLMC fixed-rate 15,411 298 21 15,688
FNMA fixed-rate 12,810 95 184 12,721
GNMA fixed-rate 1,048 2 1,050
FHLMC adjustable-rate 5,159 91 119 5,131
FNMA adjustable-rate 5,372 17 22 5,367
GNMA adjustable-rate 42,460 63 115 42,808
82,260 966 461 82,765
Total $122,708 $1,144 $1,256 $122,596
September 30, 1994
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
U.S. Treasury securities and obligations
of U.S. government agencies and
corporations $ 16,270 $ 570 $ 15,700
Mutual funds 23,000 803 22,197
39,270 1,373 37,897
Mortgage-backed securities:
FHLMC fixed-rate 18,009 $ 45 396 17,658
FNMA fixed-rate 14,942 731 14,211
FHLMC adjustable-rate 2,293 179 2,114
FNMA adjustable-rate 6,062 149 5,913
GNMA adjustable-rate 44,810 1,569 43,241
86,116 45 3,024 83,137
Total $125,386 $ 45 $4,397 $121,034
The amortized cost and market value of investment and mortgage-
backed securities available for sale at September 30, 1995 by
contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or
prepayment penalties.
Proceeds from the sale of the Company's investment and mortgage-
backed securities available for sale totaled $8,465 in fiscal
1995 resulting in a gross realized gain of $74 and a gross
realized loss of $3. Proceeds from the sale of the Company's
investment securities available for sale during fiscal 1994 were
$2,999 resulting in a gross realized gain of $2 and a gross
realized loss of $2. The Company adopted SFAS 115 effective
September 30, 1993. Accordingly, there were no "available for
sale" securities sold in fiscal 1993.
5. Federal Home Loan Bank Capital Stock
The Associations, as member institutions of the Federal Home
Loan Bank ("FHLB") of Atlanta, are required to own capital stock
in the FHLB of Atlanta based generally upon the Associations'
balances of residential mortgage loans and FHLB advances. FHLB
capital stock is pledged to secure FHLB advances. No ready
market exists for this stock and it has no quoted market value.
However, redemption of this stock has historically been at par
value.
6. Net Income Per Common Share
Net income per common share is based on the weighted average
number of shares outstanding. Such weighted average outstanding
shares were 6,285,803, 6,372,441, and 6,371,076 for the years
ended September 30, 1995, 1994 and 1993, respectively.
Outstanding stock options are common stock equivalents but have
no material dilutive effect on net income per common share.
7. Loans Receivable
Loans receivable, including loans held for sale, consisted of
the following:
September 30,
1995 1994
First mortgage loans $925,841 $816,227
Residential construction loans 39,116 40,827
Mobile home loans 25,027 28,276
Savings account loans 5,262 4,677
Home equity lines of credit 43,852 47,308
Second mortgage consumer loans 3,163 4,122
Commercial business loans 27,447 24,962
Other consumer loans 37,277 27,211
1,106,985 993,610
Less:
Allowance for loan losses 10,637 10,728
Loans in process 14,282 20,213
Deferred loan fees and discounts
on loans 1,320 2,137
26,239 33,078
Total $1,080,746 $960,532
First mortgage loans are net of whole loans and participation
loans sold and serviced for others in the amount of $230,238 and
$261,007 at September 30, 1995 and 1994, respectively.
Non-accrual and renegotiated loans are summarized as follows:
September 30,
1995 1994
Non-accrual loans $ 5,088 $ 1,620
Renegotiated loans 11,103 13,129
Total $16,191 $14,749
Interest income related to non-accrual and renegotiated loans
that would have been recorded if such loans had been current in
accordance with their original terms amounted to $1,409, $1,295
and $1,031 for the years ended September 30, 1995, 1994 and 1993,
respectively. Recorded interest income on these loans was $944,
$826 and $702 for 1995, 1994 and 1993, respectively.
An analysis of changes in the allowance for loan losses is as
follows:
Year Ended September 30,
1995 1994 1993
Balance, beginning of period $10,728 $10,742 $ 4,837
Charge-offs (1,041) (1,992) (3,323)
Recoveries 499 881 968
Net charge-offs (542) (1,111) (2,355)
Allowance on acquired loans 4,560
Provision for loan losses 451 1,097 3,700
Balance, end of period $10,637 $10,728 $10,742
The Company principally originates residential and commercial
real estate loans throughout its primary market area located in
the coastal region of South Carolina and Florence County.
Although this region has a diverse economy, much of the area is
heavily dependent on the tourism industry and military
installations. A substantial portion of its debtors' ability to
honor their contracts is dependent upon the stability of the real
estate market and these economic sectors.
Residential one-to-four family real estate loans amounted to
$697,527 and $582,783 at September 30, 1995 and 1994,
respectively. Included in this portfolio are loans in the amount
of $112,551 and $115,598 made to various non-owner-occupied
investors. These loans, as well as the Company's multi-family
residential loan portfolio of $57,269 at September 30, 1995 and
$59,106 at September 30, 1994, are highly dependent on occupancy
rates for residential properties throughout the Company's market
area. The Company generally maintains loan to value ratios of no
greater than 80 percent on these loans.
Commercial real estate loans totaled $186,286 and $192,179 and
acquisition and development loans and lot loans totaled $23,875
and $22,986 at September 30, 1995 and 1994, respectively. These
loans include amounts used for acquisition, development and
construction as well as permanent financing of commercial income-
producing properties. Such loans generally are associated with a
higher degree of credit risk than residential one-to-four family
loans due to the dependency on income production or future
development and sale of real estate.
Management closely monitors its credit concentrations and
attempts to diversify the portfolio within its primary market
area. Before the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 ("FIRREA") was enacted, the Company was
allowed to lend substantially higher amounts to any one borrower
than the current regulatory limitations. However, the Company's
internal loan policy placed lower limits on loans to any major
borrower. Currently, there are no borrowers which exceed the
current general regulatory limitation of 15 percent of each
Association's capital. The maximum amount outstanding to any one
borrower was $11,116 at September 30, 1995 and $11,500 at
September 30, 1994.
8. Office Properties and Equipment
Office properties and equipment are summarized as follows:
September 30,
1995 1994
Land $3,517 $3,576
Buildings and improvements 9,107 8,026
Furniture and equipment 10,709 10,090
Leasehold improvements 3,608 3,178
26,941 24,870
Less, accumulated depreciation
and amortization (11,883) (10,641)
Total $ 15,058 $14,229
9. Real Estate
Real estate and other assets acquired in settlement of loans
held by the Company are summarized as follows:
September 30,
1995 1994
Real estate acquired in settlement
of loans $ 3,123 $ 3,251
Real estate acquired in settlement
of loans-insubstance 2,621 2,834
Other assets acquired in settlement of loans 20 39
Total $ 5,764 $ 6,124
Real estate operations are summarized as follows:
Year Ended September 30,
1995 1994 1993
Gain on sale of real estate $ 154 $ 374 $ 507
Provision charged as a write-down
to real estate (155) (362) (2,763)
Expenses (235) (455) (1,174)
Rental income 40 95 309
Total $(196) $(348) $(3,121)
10. Deposit Accounts
The deposit balances and related nominal rates were as follows:
September 30,
1995 1994
Weighted Weighted
Balance Average Rate Balance Average Rate
Non-interest-bearing demand
accounts $ 22,524 $ 19,967
NOW accounts 94,625 1.88% 92,303 2.00%
Passbook, statement and
other accounts 125,588 2.75 150,693 2.80
Money market accounts 131,225 3.91 140,511 3.34
373,962 2.77 403,474 2.67
Certificate accounts:
Fixed-rate 645,041 5.89 626,876 4.83
Variable-rate 55,310 5.88 32,645 4.87
700,351 5.89 659,521 4.83
Total $1,074,313 4.80% $1,062,995 4.01%
Scheduled maturities of certificate accounts were as follows:
September 30,
1995 1994
Within one year $ 520,333 $ 424,058
After one but within two years 94,633 141,842
After two but within three years 21,363 41,179
Thereafter 64,022 52,442
Total $ 700,351 $ 659,521
The Company has pledged certain interest-earning deposits and
investment and mortgage-backed securities available for sale or
held to maturity with a carrying value of $33,960 and $23,913 at
September 30, 1995 and 1994, respectively, to secure deposits by
various entities. Market values of the deposits, investments and
mortgage-backed securities pledged were $34,469 and $23,942 at
September 30, 1995 and 1994, respectively.
Certificates of deposit with balances equal to or exceeding
$100 thousand totaled $134,234 and $124,585, at September 30,
1995 and 1994, respectively.
11. Advances From Federal Home Loan Bank
Advances from the FHLB of Atlanta consisted of the following:
September 30,
1995 1994
Weighted Weighted
Maturity Balance Average Rate Balance Average Rate
One year $ 106,446 5.88% $37,500 5.07%
Two years 7,500 4.65
Sixteen years 330 6.00
Seventeen years 1,077 6.00 330 6.00
Eighteen years 1,076 6.00
Total $ 107,853 5.88% $ 46,406 5.03%
As collateral for its advances, the Company has pledged
qualifying first mortgage loans and investment and mortgage-
backed securities available for sale and held to maturity in the
amount of $138,011 and $60,754 as of September 30, 1995 and 1994,
respectively. In addition, all of its FHLB stock is pledged as
collateral for these advances. Advances are subject to
prepayment penalties.
12. Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase consisted of the
following:
September 30,
1995 1994
Mortgage-backed securities and investments
with an amortized cost of $45,195 and
$13,790 and market value of $45,965
and $13,672 at September 30, 1995 and 1994,
respectively $ 44,504 $ 13,098
The agreements had a weighted average interest rate of 5.89
percent and 5.20 percent at September 30, 1995 and 1994,
respectively, and mature within one year. The securities
underlying the agreements were delivered to the dealers who
arranged the transactions. At September 30, 1995 and 1994, the
agreements were to repurchase identical securities. Securities
sold under agreements to repurchase averaged $26,769 and $4,768
during 1995 and 1994, respectively, and the maximum amount
outstanding at any month-end during 1995 and 1994, was $45,217
and $13,098, respectively.
13. Long-term Debt
The $19,763 of senior notes at September 30, 1995 and 1994, are
unsecured debt obligations of the Company which mature on
September 1, 2002, and bear annual interest at 9.375%, payable
quarterly on December 1, March 1, June 1 and September 1. The
Company will redeem, at any time, at par plus accrued interest,
notes tendered by the personal representative or surviving joint
tenant or tenant by the entirety of a deceased holder within 60
days of presentation of the necessary documents, up to an annual
maximum of $25 per holder or $1,000 in the aggregate. The
Company will redeem notes tendered by other beneficial holders
commencing September 1, 1993, and on each anniversary thereof
subject to per holder and aggregate limitations. Notes totaling
$487 were redeemed on September 1, 1993. The notes are callable
at the option of the Company, in whole or in part, at any time on
or after September 1, 1995. If called during the twelve months
beginning September 1, 1995, 1996, and after 1997 the redemption
price is 104.0%, 102.0%, and 100.0%, respectively.
In the Indenture Agreement, the Company has agreed to certain
limitations on cash dividends and additional indebtedness. The
Company has also agreed to maintain certain levels of cash or
marketable investment securities, and unless certain conditions
are met to redeem notes tendered by noteholders, in the event of
certain acquisition transactions related to the Company or the
sale or pledge of shares of the subsidiaries.
The Company has agreed to maintain investment securities with a
fair market value equal to or in excess of the next three
scheduled, and at certain dates, next four scheduled interest
payments on the notes. The Company may not declare or pay any
cash dividends unless it is in compliance with these liquidity
requirements.
The Company has also agreed to repurchase the notes at 100% of
the principal amount plus accrued interest if, after certain
acquisition transactions related to the Company or the sale or
pledge of shares of the subsidiaries, the notes are not rated in
certain investment grades by either of two rating services.
Additionally, the Company has agreed that it will not permit
any subsidiary to issue additional indebtedness unless the
Company is in compliance with the terms and conditions of the
Indenture Agreement and the amount of any such indebtedness does
not, when aggregated with all other indebtedness, exceed 40% of
the consolidated stockholders' equity of the Company. The
Company believes it is in compliance with all covenants of the
Indenture Agreement at September 30, 1995.
14. Income Taxes
As discussed in Note 1, the Company adopted SFAS 109 as of
October 1, 1992. The cumulative effect of the change in
accounting for income taxes of $1,584 was determined as of
October 1, 1992 and is reported separately in the Consolidated
Statement of Operations for the year ended September 30, 1993.
Prior years' financial statements were not restated to apply the
provisions of SFAS 109.
Income tax expense for the years ended September 30, 1995, 1994
and 1993, is comprised of the following:
Federal State Total
1995:
Current $ 2,758 $ 510 $ 3,268
Deferred 1,606 297 1,903
Total $ 4,364 $ 807 $ 5,171
1994:
Current $ 4,241 $ 1,236 $ 5,477
Deferred (962) (390) (1,352)
Total $ 3,279 $ 846 $ 4,125
1993:
Current $ 4,705 $ 803 $ 5,508
Deferred (1,787) (240) (2,027)
Total $ 2,918 $ 563 $ 3,481
Under SFAS 109, deferred tax assets or liabilities are
initially recognized for differences between the financial
statement carrying amount and the tax bases of assets and
liabilities which will result in future deductible or taxable
amounts and operating loss and tax credit carryforwards. A
valuation allowance is then established to reduce the deferred
tax asset to the level at which it is "more likely than not" that
the tax benefits will be realized. Realization of tax benefits
of deductible temporary differences and operating loss or credit
carryforwards depends on having sufficient taxable income of an
appropriate character within the carryback and carryforward
periods. Sources of taxable income that may allow for the
realization of tax benefits include (1) taxable income in the
current year or prior years that is available through carryback,
(2) future taxable income that will result from the reversal of
existing taxable temporary differences, and (3) taxable income
generated by future operations. As a result of the earnings of
Peoples Federal, the valuation allowance of Peoples Federal was
reduced and a tax benefit of $2,544 and $2,280 was recognized in
the years ended September 30, 1994 and 1993, respectively.
A reconciliation from expected federal tax expense to
consolidated effective income tax expense for the periods
indicated follows. The statutory federal income tax rate for the
year 1995, 1994 and 1993 is approximately 35%, 35% and 34.25%,
respectively.
Year ended September 30,
1995 1994 1993
Expected federal income tax expense $ 5,043 $ 5,646 $ 5,055
Increases (reductions) in income taxes
resulting from:
Change in the beginning-of-the-year
valuation allowance for deferred tax
assets allocated to income tax expense 76 (2,544) (2,280)
Tax exempt income (81) (91) (98)
South Carolina income tax expense, net
of federal income tax effect 525 536 370
Other, net (392) 578 434
Total $ 5,171 $ 4,125 $ 3,481
Effective tax rate 35.9% 25.6% 23.6%
Savings associations that meet certain definitional tests and
other conditions prescribed by the Internal Revenue Code are
allowed to deduct, within limitations, a bad debt deduction
computed as a percentage of taxable income before such deduction
(the "Percentage of Taxable Income Method"). The deduction
percentage was 8% for the years ended September 30, 1995, 1994
and 1993. Alternately, a qualified savings association may
compute its bad debt deduction based upon actual loan loss
experience (the "Experience Method"). Peoples Federal computed
its bad debt deduction utilizing the Experience Method in all
years presented while First Federal used the Percentage of
Taxable Income Method to compute its bad debt deduction for the
year ended September 30, 1995 and used the Experience Method for
the years ended September 30, 1994 and 1993.
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities at September 30, 1995 and 1994 are presented below.
September 30,
1995 1994
Deferred tax assets:
Loan loss allowances deferred for tax purposes $ 3,852 $ 3,816
Real estate writedowns for financial statement
purposes not recognized for tax purposes 316
Excess tax basis of assets acquired over carrying
value for financial reporting purposes
related to Peoples Federal acquisition 55
Net operating loss carryforward 1,231 1,374
Unrealized loss on securities available for sale 37 1,423
Other 275
Total gross deferred tax assets 5,395 6,984
Less valuation allowance (286) (210)
Net deferred tax assets 5,109 6,774
Deferred tax liabilities:
Loan fee income adjustments for tax purposes 1,045 38
FHLB stock dividends deferred for tax purposes 1,663 1,611
Expenses deducted under economic performance rules 728 429
Real estate writedowns for financial statement
purposes not recognized for tax purposes 238
Excess carrying value of assets acquired for
financial reporting purposes over tax basis 210
Other 182
Total gross deferred tax liabilities 3,884 2,260
Net deferred tax asset (included in other
assets) $ 1,225 $ 4,514
It is management's conclusion that realization of the net
deferred asset is more likely than not. This conclusion is based
upon taxable income in carryback years and conservative
projections of taxable income in future years. The valuation
allowance relates to certain temporary differences in state
income taxes. The net change in the total valuation allowance
for the year ended September 30, 1995 and 1994 was an increase of
$76 and a decrease of $2,544, respectively. A portion of the
change in the net deferred tax asset relates to unrealized gains
and losses on securities available for sale. The related fiscal
1995 deferred tax expense of $1,386 has been recorded directly to
shareholder's equity. The balance of the change in the net
deferred tax asset results from the fiscal 1995 deferred tax
expense of $1,903.
At September 30, 1995, the Company had net operating loss
carryforwards ("NOLs") for federal income tax purposes of $2,066,
which are available to offset future federal taxable income
through 2007.
The consolidated financial statements at September 30, 1995 and
1994, did not include a tax liability of $8,190 related to the
base year bad debt reserve amounts since these reserves are not
expected to reverse until indefinite future periods, and may
never reverse. Circumstances that would require an accrual of a
portion or all of this unrecorded tax liability are a reduction
in qualifying loan levels relative to the end of 1987, failure to
meet the tax definition of a savings institution, dividend
payments in excess of current year or accumulated tax earnings
and profits, or other distributions in dissolution, liquidation
or redemption of the Association's stock.
15. Benefit Plans
Stock Option Plans
The Company's 1983 Incentive Stock Option Plan provides for the
granting of incentive stock options for 636,824 shares of the
Company's common stock. This plan expired November 3, 1993.
On September 27, 1990, the Company's Board of Directors
approved the 1990 Stock Option and Incentive Plan which was
subsequently approved by the stockholders on January 23, 1991.
An aggregate of 440,000 shares have been reserved for future
issuance by the Company upon the exercise of stock options under
this Plan. Both plans provide for the granting of Incentive
Stock Options to key officers and employees to purchase the stock
at the fair market value on the date of the grant. The 1990
Stock Option and Incentive Plan also provides for Non-Incentive
Stock Options to be granted at a price to be determined by the
Stock Option Committee. Officers may select an exercise period
of one to ten years and other employees may exercise options
within five years.
Stock option activity is summarized below:
Available Option Price Option Price
for Per Share Per Share
Grant Outstanding Range Average
1983 Stock Option Plan
Balance, September 30, 1993 97,312 195,220 $5.38 $5.38
Options exercised (39,870) 5.38 5.38
Options forfeited 900 (900) 5.38 5.38
Plan expired (98,212)
Subtotal, September 30, 1994 154,450 5.38 5.38
Options exercised (33,313) 5.38 5.38
Options forfeited (270) 5.38 5.38
Subtotal, September 30, 1995 120,867 5.38 5.38
1990 Stock Option Plan
Balance, September 30, 1993 292,970 144,336 5.25-11.63 11.29
Options exercised (2,808) 7.375-15.25 10.56
Options forfeited 3,900 (3,900) 7.375-11.625 11.19
Options granted (137,700) 137,700 15.25 15.25
Subtotal, September 30, 1994 159,170 275,328 5.25-15.25 13.28
Options exercised (26,093) 5.25-19.50 12.35
Options forfeited 4,689 (4,689) 5.25-16.25 13.33
Options granted (40,725) 40,725 16.25-19.50 18.75
Subtotal, September 30, 1995 123,134 285,271 5.25-19.50 14.17
Balance, September 30, 1995 123,134 406,138 $5.25-19.50 $11.55
Options of 120,867 granted under the 1983 Stock Option Plan
expire by February 21, 1999. Options of 285,271 granted under
the 1990 Stock Option Plan expire at various dates with the
maximum date of April 24, 2005.
On July 28, 1994, the Company's Board of Directors approved the
1994 Outside Directors Stock Options-for-Fees Plan (the "1994
Director Plan") which was subsequently approved by the
stockholders on January 25, 1995. Under the 1994 Director Plan,
options to purchase up to 200,000 shares of the Company's common
stock may be granted. The formula for computing the options
awarded considers the percentage of annual fees each director
wished to allocate to the 1994 Director Plan, the market price of
the common stock of the Company on the first business day of
October of each fiscal year and the difference between the market
price and an option price. The option price is based on 75% of
the market value of the common stock. Options covering 30,598
shares of common stock at an exercise price of $12.19 were
granted in lieu of otherwise payable cash compensation of $124
for the Company's fiscal year ending September 30, 1995. All of
the options granted in 1995 remained outstanding on September 30,
1995, and are available for exercise before October 1, 2004.
Sharing Thrift Plan
The Company has established the Sharing Thrift Plan which
includes a deferred compensation plan (401(k)) for all full-time
and certain part-time employees. The Plan permits eligible
participants to contribute a maximum of 15 percent of their
annual salary (not to exceed limitations prescribed by law).
Part-time employees who work at least 1,000 hours in a calendar
year may also contribute to the Plan. The Company will match the
employee's contribution up to 5 percent of the employee's salary
based on the attainment of certain profit goals.
The Company's matching contribution charged to expense for the
years ended September 30, 1995, 1994 and 1993, was $343, $399,
and $359, respectively. The employees of Peoples Federal were
included in the Company's 401(k) plan effective July 1, 1993.
The Sharing Thrift Plan provides that all employees who have
completed a year of service with the Company in which they have
worked at least 1,000 hours are entitled to receive a quarterly
Profit Sharing Contribution of from 0% to 100% of 6% of their
base pay during such quarter depending upon the amount of each
subsidiary's return on equity for that quarter. The Plan
provides that regardless of the return on equity each eligible
employee will receive a Profit Sharing Contribution equal to at
least 1% of his base compensation on an annual basis. Employees
become vested in Profit Sharing Contributions made to their
accounts over a seven-year period or upon their earlier death,
disability or retirement at age 65 or over. Employees are able
to direct the investment of Profit Sharing Contributions made to
their accounts to any of the Plan investment funds. Effective
July 1, 1993, the employees of Peoples Federal were included in
the Profit Sharing Plan. Contributions to the Plan during 1995,
1994 and 1993 totaled $516, $561, and $373, respectively.
Other Postretirement Benefits
The Company sponsors postretirement benefit plans that provide
health care, life insurance and other postretirement benefits to
retired employees. The health care plans generally include
participant contributions, co-insurance provisions, limitations
on the Company's obligation and service-related eligibility
requirements. The Company pays these benefits as they are
incurred. Postretirement benefits for employees hired after
January 1, 1989 and those electing early retirement or normal
retirement after January 1, 1999, were substantially curtailed.
In the first quarter of fiscal 1993, the Company adopted SFAS
106, "Employers' Accounting for Postretirement Benefits Other
Than Pensions," effective October 1, 1992, for the Company's
retiree health and other welfare benefit plans. SFAS 106
requires the accrual method of accounting for these benefits,
rather than the Company's previous policy, which was to record
these benefits as they were paid.
Net periodic postretirement benefit cost for fiscal 1995, 1994
and 1993 consisted of the following components:
Year Ended September 30,
1995 1994 1993
Service cost $ 7 $ 16 $ 12
Interest cost 114 112 126
Amortization of transition obligation 79 79 79
Other amortizations and net deferrals(85)
Net periodic postretirement benefit cost $ 115 $ 207 $ 217
Reconciliation of Funded Status: September 30,
1995 1994 1993
Accumulated postretirement benefit
obligation $(1,582) $(1,358) $(1,642)
Unrecognized transition obligation 1,340 1,418 1,497
Unrecognized net gains (198) (412) (16)
Accrued postretirement benefit cost $ (440) $ (352) $ (161)
Assumptions Used:
Weighted average discount rate 7.50% 8.50% 7.00%
Medical/Medicare trend rate (initial)
(pre-65 employees) 9.50 10.50 11.50
Medical/Medicare trend rate after 7 years
(pre-65 employees) 5.75 6.00 5.50
Medical/Medicare trend rate (initial)
(post-65 employees) 8.25 9.00 10.00
Medical/Medicare trend rate after 7 years
(post-65 employees) 5.75 6.00 5.50
An increase in the assumed health care cost trend rate by one
percentage point in each year would increase the accumulated
postretirement benefit obligation as of September 30, 1995, and
September 30, 1994, by $147 and $135 and the aggregate of service
and interest cost by $12 and $13, respectively.
16. Commitments and Contingencies
Loan Commitments
Outstanding commitments on mortgage loans not yet closed
amounted to approximately $25,908 at September 30, 1995. These
were principally single-family loan commitments. Other loan
commitmints totaled $1,776 at September 30, 1995.
Commitments to extend credit are agreements to lend to
borrowers as long as there is no violation of any condition
established by the commitment letter. Commitments generally have
fixed expiration dates or other termination clauses. The
majority of the commitments will be funded within a twelve month
period. The Company evaluates each customer's creditworthiness
on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Company upon extension of credit, is
based on management's credit evaluation of the borrower.
Collateral held varies but primarily consists of residential or
income producing commercial properties.
The Company originates and services mortgage loans.
Substantially all of the Company's loan sales have been without
provision for recourse. Included in the $230,238 in whole loans
and participation loans sold and serviced for others at September
30, 1995 are recourse loans totaling $148. Unused lines of
credit on equity loans, credit cards, other consumer and
commercial loans amounted to $89,414 and $84,827 at
September 30, 1995 and 1994, respectively. Based on historical
trends, it is not expected that the percentage of funds drawn on
existing lines of credit will increase substantially over levels
currently utilized.
Lease Commitments
The Company occupies office space and land under leases
expiring on various dates through 2006.
Minimum rental commitments under noncancelable operating leases
were as follows:
September 30,
1995
One year $ 857
Two years 847
Three years 847
Four years 830
Five years 81
Thereafter 279
Total $ 3,741
Rental expenses under operating leases were $844, $651 and $584
in 1995, 1994 and 1993, respectively.
Contingencies
Legislative efforts to resolve the problems of the Saving
Association Insurance Fund ("SAIF") and the related deposit
insurance premium disparity between SAIF-insured institutions and
institutions insured by the Bank Insurance Fund ("BIF") are
expected to result in a one-time special assessment on SAIF
deposits. The special assessment is expected to approximate 80
basis points on the total of assessable deposits as of March 31,
1995 and would result in a charge of approximately $6,268 and
$2,273, respectively on a pre-tax basis for First Federal and
Peoples Federal. Legislation covering this assessment and other
banking-related matters is included in separate budget
reconciliation bills passed by the United States House of
Representatives and the Senate. Institutions will not accrue a
liability for a potential assessment of deposit insurance
premiums until the period in which legislation is enacted, i.e.,
signed by the President. It is expected that both First Federal
and Peoples Federal will remain well-capitalized institutions
after such a special assessment and will be subject to a
substantial reduction in future risk-based deposit insurance
premiums. Effective November 14, 1995, premium rates for well-
capitalized BIF-insured institutions were zero per hundred
dollars of deposits while well-capitalized SAIF-insured
institutions were assessed at 23 cents per hundred dollars of
deposits.
17. Stockholders' Equity and Dividend Restrictions
The regulations of the OTS require savings institutions to
maintain certain minimum levels of regulatory capital. An
institution that fails to comply with its regulatory capital
requirements must obtain OTS approval of a capital plan and can
be subject to a capital directive and certain restrictions on its
operations. At September 30, 1995, the minimum regulatory
capital requirements were:
- - Tangible capital of 1.5 percent, consisting principally of
stockholders' equity, but excluding most intangible assets such
as goodwill.
- - A leverage ratio requiring core capital of 3 percent,
consisting of tangible capital plus certain other intangible
assets.
- - Risk-based capital consisting of core capital plus certain
subordinated debt and other capital instruments and, subject to
certain limitations, general valuation allowances on loans
receivable, equal to 8 percent of the value of risk-weighted
assets.
At September 30, 1995, the Associations were deemed to be
"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.
At September 30, 1995, the Associations were in compliance with
these regulatory capital requirements as follows (unaudited):
Tangible Core Risk-Based
FIRST FEDERAL Capital Capital Capital
Actual capital of the Association $73,557 $73,557 $73,557
Regulatory adjustments (631) (631) 5,589
Total adjusted capital 72,926 72,926 79,146
Less-minimum capital requirement 14,861 29,722 55,801
Regulatory capital excess $58,065 $43,204 $23,345
PEOPLES FEDERAL
Actual capital of the Association $27,091 $27,091 $27,091
Regulatory adjustments 153 153 153
Total adjusted capital 27,244 27,244 27,244
Less-minimum capital requirement 5,457 10,914 15,391
Regulatory capital excess $21,787 $16,330 $11,853
OTS capital distribution regulations specify the conditions
relative to an institution's ability to pay dividends. The new
regulations permit institutions meeting fully phased-in capital
requirements and subject only to normal supervision to pay out
100 percent of net income to date over the calendar year and 50
percent of surplus capital existing at the beginning of the
calendar year without supervisory approval. The regulations
state that an institution subject to more stringent restrictions
may make request through the OTS to be subject to the new
regulations. The Company has received approval from the OTS to
be subject to the requirements of the new regulations.
The Company may not declare or pay a cash dividend on, or
purchase, any of its common stock, if the effect thereof would
cause the capital of the Associations to be reduced below the
minimum regulatory capital requirements.
18. Fair Value of Financial Instruments
The following table sets forth the fair value of the Company's
financial instruments at September 30, 1995 and 1994:
September 30,
1995 1994
Carrying Fair Carrying Fair
Value Value Value Value
Financial instruments:
Assets:
Cash and cash equivalents $ 24,486 $ 24,486 $ 23,568 $ 23,568
Investments held to maturity 68,154 68,687 67,997 66,974
Investments available for sale 39,831 39,831 37,897 37,897
Investment in capital stock
of FHLB 11,982 11,982 11,982 11,982
Loans receivable, net 1,080,746 1,088,276 960,532 949,108
Mortgage-backed securities held
to maturity 18,361 18,844 22,483 22,291
Mortgage-backed securities
available for sale 82,765 82,765 83,137 83,137
Liabilities:
Deposits:
Demand deposits, savings accounts
and money market accounts 373,962 373,962 403,474 403,474
Certificates of deposit 700,351 697,917 659,521 661,042
Advances from FHLB 107,853 107,571 46,406 45,806
Securities sold under agreements
to repurchase 44,504 44,504 13,098 13,098
Long-term debt 19,763 19,714 19,763 19,812
Off-balance sheet items:
Mortgage loan commitments 25,908 25,414 8,938 8,892
Financial instruments of the Company for which fair value
approximates the carrying amount at September 30, 1995, include
cash and cash equivalents and investment in the capital stock of
the FHLB. The fair value of investments, mortgage-backed
securities, loans held for sale and long-term debt is estimated
based on bid prices published in financial newspapers or bid
quotations received from independent securities dealers.
Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type such as
single-family residential, multi-family, non-residential,
commercial and consumer. Each loan category is further segmented
into fixed- and adjustable-rate interest terms and by performing
and nonperforming categories.
The fair value of performing loans, except single-family
residential mortgage loans, is calculated by discounting
scheduled cash flows through the estimated maturity using
estimated market discount rates that reflect the credit and
interest rate risk inherent in the loan. The estimate of
maturity is based on the Company's historical experience with
repayments for each loan classification, modified, as required,
by an estimate of the effect of current economic and lending
conditions. For performing single-family residential mortgage
loans, fair value is derived from quoted market prices for
securities backed by similar loans, adjusted for differences
between the market for the securities and the loans being valued
and an estimate of credit losses inherent in the portfolio.
Under SFAS 107, the fair value of deposits with no stated
maturity, such as passbook accounts, checking and NOW accounts,
and money market accounts, is equal to the amount payable on
demand as of September 30, 1995. The fair value of certificates
of deposit is estimated using the rates currently offered for
deposits of similar remaining terms. No value has been estimated
for the Company's long-term relationships with customers
(commonly known as the core deposit intangible) since such
intangible asset is not a financial instrument pursuant to the
definitions contained in SFAS 107. The fair value of FHLB
advances is estimated based on current rates for borrowings with
similar terms. The fair value of securities sold under
agreements to repurchase approximates the carrying value. The
fair value of mortgage loan commitments is estimated based on
current levels of interest rates versus the committed interest
rates.
Management uses its best judgment in estimating the fair value
of non-traded financial instruments but there are inherent
limitations in any estimation technique. For example, liquid
markets do not exist for many categories of loans held by the
Company. By definition, the function of a financial intermediary
is, in large part, to provide liquidity where organized markets
do not exist. Therefore, the fair value estimates presented
herein are not necessarily indicative of the amounts which the
Company could realize in a current transaction.
The information presented is based on pertinent information
available to management as of September 30, 1995. Although
management is not aware of any factors, other than changes in
interest rates, that would significantly affect the estimated
fair values, the current estimated fair value of these
instruments may have changed significantly since that point in
time.
19. First Financial Holdings, Inc. (Parent Company Only)
Condensed Financial Information
At fiscal year end, the Company's principal asset was its
investment in the Associations, and the principal source of
income for the Company was dividends and equity in undistributed
earnings from the Associations. The following is condensed
financial information for the Company.
Statements of Financial Condition
September 30,
1995 1994
ASSETS
Cash and cash equivalents $ 88 $ 222
U.S. Government and agency obligations
available for sale (market value
of $9,640 and $5,329) 9,640 5,329
Investment in Associations 100,648 95,970
Other 1,095 1,083
Total assets $111,471 $102,604
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses $ 299 $ 169
Long-term debt 19,763 19,763
Stockholders' equity 91,409 82,672
Total liabilities and stockholders'
equity 111,471 $102,604
Statements of Operations
Year Ended September 30,
1995 1994 1993
INCOME
Equity in undistributed earnings of
Associations $ 1,989 $ 6,922 $10,211
Dividend income 9,500 7,400 5,100
Interest income 403 262 242
(Gain) loss on sale of investments
available for sale (3) 2
Total income 11,889 14,586 15,553
EXPENSES
Interest expense 1,853 1,853 1,895
Salaries and employee benefits 335 245 258
Stockholder relations and other 463 483 538
Total expense 2,651 2,581 2,691
Net income $ 9,238 $12,005 $12,862
Statements of Cash Flows
Year Ended September 30,
1995 1994 1993
OPERATING ACTIVITIES
Net income $ 9,238 $12,005 $12,862
Adjustments to reconcile net income
to net cash provided by operating
activities
Equity in undistributed earnings
of Associations (1,989) (6,922) (10,211)
Amortization (25) (9) 13
(Increase) decrease in accrued income
and deferred expenses (12) 166 (72)
Increase in accrued expenses 74 40
Net cash provided by operating activities 7,286 5,240 2,632
INVESTING ACTIVITIES
Acquisition of Peoples Federal (16,500)
Proceeds from sale of investments available
for sale 500 2,999
Proceeds from maturing investments
available for sale 2,502 3,399
Purchase of investments available for sale (2,996) (4,996) (7,305)
Purchase of mutual funds (3,525)
Proceeds of redemption of mutual funds 1,900
Net cash provided by (used in) investing
activities (4,121) 505 (20,406)
FINANCING ACTIVITIES
Redemption of notes (487)
Proceeds from sale of common stock 540 243 341
Treasury stock purchased (317) (2,909) (80)
Dividends paid (3,522) (3,066) (2,166)
Net cash provided by (used in) financing
activities (3,299) (5,732) (2,392)
Net increase (decrease) in cash and cash
equivalents (134) 13 (20,166)
Cash and cash equivalents at beginning of
period 222 209 20,375
Cash and cash equivalents at end of
period $ 88 $ 222 $ 209
Supplemental disclosures:
Cash paid during the period for:
Interest $ 1,853 $ 1,853 $ 1,814
Income taxes 3,911 5,387 3,293
Unrealized net gain (loss) on
securities available for sale,
net of income tax 109 (137) 27
Transfers of securities held for
investment to available for sale 6,033
20. Dividend Reinvestment and Stock Purchase Plan
The Company has a Dividend Reinvestment and Stock Purchase
Plan, as amended May 26, 1988, for which shares are purchased
only on the open market. At September 30, 1995, 231,681 shares
had been purchased and remain in the plan.
21. Quarterly Results (Unaudited):
Summarized below are selected financial data regarding results
of operations for the periods indicated:
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
1995
Total interest income $22,352 $23,230 $24,375 $25,546 $95,503
Net interest income 10,072 9,705 9,694 10,238 39,709
Provision for loan losses 107 26 47 271 451
Income before income taxes 3,512 3,374 3,491 4,032 14,409
Net income 2,197 2,131 2,284 2,626 9,238
Weighted average shares
outstanding<F1> 6,271 6,277 6,292 6,303 6,286
Net income per common share $ .35 $ .34 $ .36 $ .42 $ 1.47
1994
Total interest income $22,105 $20,948 $21,081 $21,518 $85,652
Net interest income 10,605 10,119 10,192 9,981 40,897
Provision for loan losses 585 118 255 139 1,097
Income before income taxes 4,082 3,863 4,585 3,600 16,130
Net income 3,025 2,763 3,576 2,641 12,005
Weighted average shares
outstanding<F1> 6,417 6,415 6,397 6,301 6,372
Net income per common share $ .47 $ .43 $ .56 $ .42 $ 1.88
1993
Total interest income $24,904 $24,319 $23,490 $22,694 $95,407
Net interest income 11,291 11,212 10,787 10,421 43,711
Provision for loan losses 925 1,590 758 427 3,700
Income before income taxes 3,907 2,847 3,944 4,061 14,759
Effect of change in accounting
principle 1,584 1,584
Net income 4,598 2,200 3,051 3,013 12,862
Weighted average shares
outstanding<F1> 6,354 6,359 6,374 6,397 6,371
Net income per common share $ .72 $ .35 $ .48 $ .47 $ 2.02
<F1> Average shares in thousands.
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
First Financial Holdings, Inc. and Subsidiaries
We have audited the accompanying consolidated statements of
financial condition of First Financial Holdings, Inc. and
Subsidiaries as of September 30, 1995 and 1994, and the related
consolidated statements of operations, stockholders' equity and
cash flows for each of the years in the three-year period ended
September 30, 1995. These consolidated financial statements are
the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of First Financial Holdings, Inc.
and Subsidiaries at September 30, 1995 and 1994, and the
consolidated results of their operations and their cash flows for
each of the years in the three-year period ended September 30,
1995, in conformity with generally accepted accounting
principles.
As discussed in Note 1 of the Notes to Consolidated Financial
Statements, in 1993 the Company changed its method of accounting
for income taxes, for debt and equity securities and for
postretirement benefits other than pensions.
KPMG PEAT MARWICK LLP
Greenville, South Carolina
October 27, 1995
MANAGEMENT'S REPORT
Primary responsibility for the integrity and objectivity of the
Company's consolidated financial statements rests with
management. The accompanying consolidated financial statements
are prepared in conformity with generally accepted accounting
principles and accordingly include amounts that are based on
management's best estimates and judgements. Non-financial
information included in the Annual Report to Stockholders has
also been prepared by management and is consistent with the
consolidated financial statements.
To assure that financial information is reliable and assets are
safeguarded, management maintains an effective system of internal
controls and procedures, important elements of which include:
careful selection, training, and development of operating
personnel and management; an organization that provides
appropriate division of responsibility; and communications aimed
at assuring that Company policies and procedures are understood
throughout the organization. In establishing internal controls,
management weighs the costs of such systems against the benefits
it believes such systems will provide. An important element of
the system is an ongoing internal audit program.
To assure the effective administration of the system of
internal controls, the Company develops and widely disseminates
written policies and procedures, provides adequate communications
channels and fosters an environment conducive to the effective
functioning of internal controls. All employees of the Company
are informed of the need to conduct our business affairs in
accordance with the highest ethical standards. The Company has
set forth a written corporate code of conduct and communicated it
to all employees.
KPMG Peat Marwick LLP, independent auditors, have audited the
Company's consolidated financial statements as described in their
report.
/s/ A. L. Hutchinson, Jr.
President and Chief Executive Officer
AUDIT COMMITTEE'S REPORT
The Audit Committee of the Board of Directors of the Company is
comprised of four outside directors. The members of the
Committee are: Mr. Herman B. Speissegger, Jr., Chairman, Mr.
Joseph A. Baroody, Dr. D. Kent Sharples, and Mr. Thomas E.
Thornhill. The Committee held four meetings during fiscal 1995.
The Audit Committee meets with the independent auditors,
management, and internal auditors to assure that all are carrying
out their respective responsibilities. The Audit Committee
reviews the performance of the independent auditors prior to
recommending their appointment and meets with them, without
management present, to discuss the scope and results of their
audit work, including the adequacy of internal controls and the
quality of financial reporting. Both the independent auditors
and the internal auditors have full access to the Audit
Committee.
/s/ Herman B. Speissegger, Jr.
Chairman, Audit Committee
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
The Company has not, within the 24 months before the date of
the most recent financial statements, changed its accountants.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained under the section captioned "Proposal
I Election of Directors" in the Company's definitive proxy
statement for the Company's 1996 Annual Meeting of Stockholders
(the "Proxy Statement") is incorporated herein by reference.
The following table sets forth certain information with respect
to the executive officers of the Company and the Associations.
The individuals listed below are executive officers of the
Company and the Associations, as indicated.
The executive officers of the Company and the Associations are
as follows:
Name Age<F1> Position
A. L. Hutchinson, Jr. 61 President and Chief Executive
Officer of the Company; Vice
Chairman of the Company and
First Federal
A. Thomas Hood 49 Executive Vice President and
Chief Operating Officer of the
Company and President and Chief
Executive Officer of First
Federal
John L. Ott, Jr. 47 Senior Vice President of the
Company and Senior Vice
President/Retail Banking
Division of First Federal
Charles F. Baarcke, Jr. 48 Senior Vice President of the
Company and Senior Vice
President/Lending Division of
First Federal
George N. Magrath, Jr. 42 President and Chief Executive
Officer of Peoples Federal
<F1> At September 30, 1995.
The following is a description of the principal occupation and
employment of the executive officers of the Company and the
Associations during at least the past five years:
A. L. Hutchinson, Jr. has served as Vice Chairman of the Board
of Directors of the Company and of First Federal since February
1, 1995. Mr. Hutchinson has served as President and Chief
Executive Officer of the Company since 1988. Mr. Hutchinson
served as President and Chief Executive Office of First Federal
from 1988 until February 1, 1995, when he became Vice-Chairman of
the Board. Previously, Mr. Hutchinson was the Executive Vice
President of the Production Division of First Federal where he
was responsible for all lending operations, loan servicing and
sales. As President and Chief Executive Officer, Mr. Hutchinson
is responsible for the daily business operations of the Company
under policies and procedures established by the Board of
Directors. He joined First Federal in 1961.
A. Thomas Hood has been the Executive Vice President and Chief
Operating Officer of the Company since February 1, 1995. Mr.
Hood has also served as Treasurer of the Company and its Chief
Financial Officer since 1984. Mr. Hood was named President and
Chief Executive Officer of First Federal effective February 1,
1995. Prior to that time, he had been Executive Vice President
and Treasurer of First Federal since 1984. In these positions he
is responsible for First Financial's treasury, finance, investor
relations, human resources, strategic planning and other business
operations and is responsible for the daily business operations
of First Federal under policies and procedures established by the
Board of Directors. In addition, Mr. Hood is President of
Charleston Financial Services, Inc., First Federal's wholly-owned
subsidiary. Mr. Hood joined First Federal in 1975.
John L. Ott, Jr. is the Senior Vice President of the Company
and First Federal in which capacity he directs and coordinates
all branch operations, special savings and retirement programs
and savings services of First Federal. He joined First Federal
in 1971 and prior to becoming Senior Vice President of Retail
Banking in 1985, he was the Senior Vice President for Branch
Operations.
Charles F. Baarcke, Jr. is the Senior Vice President of the
Company and First Federal. He is responsible for all lending
operations, loan servicing and sales. He joined First Federal in
1975 and prior to becoming Senior Vice President in 1985, he was
the Vice President of Lending Operations.
George N. Magrath, Jr., became the President and Chief
Executive Officer of Peoples Federal in 1993. Previously, Mr.
Magrath was the Executive Vice President of Peoples Federal and
was responsible for general operations of Peoples Federal. Prior
to serving as Executive Vice President, Mr. Magrath served as
Senior Vice President, Lending.
Pursuant to the Company's Bylaws, officers are elected on an
annual basis. Directors of the Company are elected for a term of
three years with approximately one-third of the directors
standing for election each year.
Item 11. EXECUTIVE COMPENSATION
The information contained under the Section captioned "Proposal
I -- Election of Directors" in the Proxy Statement is
incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the Section captioned "Voting Securities and
Principal Holders Thereof" of the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the Sections captioned "Proposal I -- Election
of Directors" and "Voting Securities and Principal Holders
Thereof" of the Proxy Statement.
(c) Changes in Control
The Company is not aware of any arrangements, including any
pledge by any person of securities of the Company, the
operation of which may at a subsequent date result in a
change of control of the Company.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by
reference to the Section captioned "Proposal I Election of
Directors" and "Voting Securities and Principal Holders Thereof"
of the Proxy Statement.
PART IV
Item 14. Exhibits, financial statement schedules, and reports on
form 8-K
1. Consolidated Financial Statements and Report of Independent
Auditors - see Item 8 for reference.
All other schedules have been omitted as the required
information is either inapplicable or included in the Notes to
Consolidated Financial Statements.
2. Exhibit
(3.1) Certificate of Incorporation, as amended, of Registrant<F1>
(3.2) Bylaws, as amended, of Registrant <F2>
(4) Indenture, dated September 10, 1992, with respect to the
Registrant's 9.375% Senior Notes, due September 1, 2002 <F3>
(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 (3)
(10.2) Employment Agreement with A. L. Hutchinson, Jr., as
amended
(10.3) Employment Agreement with A. Thomas Hood, as amended
(10.4) Employment Agreement with Charles F. Baarcke, Jr.
(10.5) Employment Agreement with John L. Ott, Jr.
(10.6) 1990 Stock Option and Incentive Plan<F4>
(10.7) 1994 Outside Directors Stock Options-for-Fees Plan<F5>
(10.8) 1994 Employee Stock Purchase Plan<F5>
(22) Subsidiaries of the Registrant
(23) Consent of Independent Auditors
(28) Financial Data Schedule
<F1> Incorporated by reference to Exhibit 3 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended December
31, 1993
<F2> Incorporated by reference to Exhibit 3 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March
31, 1995
<F3> Incorporated by reference to the Registrant's Registration
Statement on Form S-8 File No. 33-55067
<F4> Incorporated by reference to the Registrant's Registration
Statement on Form S-8 File No. 33-57855
<F5> Incorporated by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders held on
January 25, 1995
3. No current reports on Form 8-K were filed during the quarter
ending September 30, 1995.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: December 27, 1995 By: /s/ A. L. Hutchinson, Jr.
A. L. Hutchinson, Jr.,
President and Chief Executive
Officer
(Duly Authorized
Representative)
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated.
By: /s/ A. L. Hutchinson, Jr. By: /s/ D. Van Smith
A. L. Hutchinson, Jr. D. Van Smith
Director (Principal Director
Executive Officer)
Date: December 27, 1995 Date: December 27, 1995
By: /s/ A. Thomas Hood By: /s/Herman B. Speissegger Jr.
A. Thomas Hood Herman B. Speissegger, Jr.
Executive Vice President Director
and Director (Principal
Financial Officer)
Date: December 27, 1995 Date: December 27, 1995
By: /s/ Susan E. Baham By: /s/ Paul G. Campbell, Jr.
Susan E. Baham Paul G. Campbell, Jr.
Vice President (Principal Director
Accounting Officer)
Date: December 27, 1995 Date: December 27, 1995
By: By: /s/ D. Kent Sharples
Thomas E. Thornhill D. Kent Sharples
Director Director
Date: December 27, 1995 Date: December 27, 1995
By: /s/ Gary C. Banks, Jr. By: /s/ Joseph A. Baroody
Gary C. Banks, Jr. Joseph A. Baroody
Director Director
Date: December 27, 1995 Date: December 27, 1995
By: /s/James C. Murray
James C. Murray
Director
Date: December 27, 1995
Exhibit 10.2
Amendments to Employment Agreement
with A. L. Hutchinson, Jr.
The following amendments to the employment agreement of A. L.
Hutchinson, Jr., were effective October 1, 1993:
Original text:
Section 5. Term. The period of Executive's employment under this
Agreement shall be deemed to have commenced as of August 1, 1987,
and shall continue for a period of thirty-six (36) full calendar
months thereafter and any extensions thereafter. The said
thirty-six (36) month period of employment has been extended by
the Board of Directors through July 31, 1993. The said
thirty-six (36) month period of employment may be extended for an
additional twelve (12) full calendar months by action of the
Board of Directors beginning August 1, 1993 and each succeeding
August 1 thereafter respectively, unless either party shall have
served written notice upon the other prior to July 1, 1993, or
prior to July 1 or each succeeding year, as the case may be, of
its intention that this Agreement shall terminate at the end of
the thirty-six (36) month period that begins with the first day
of the month following such date of written notice.
Amended text:
Section 5. Term. The period of the Executive's employment under
this Agreement shall be deemed to have commenced as of August 1,
1987, and shall continue for a period of thirty-six (36) full
calendar months thereafter and any extensions thereafter. As of
the date of this second amendment hereto, the Executive's period
of employment under this Agreement has been extended by the Board
of Directors through September 30, 1996. The said thirty-six
(36) month period of employment may be extended for an additional
twelve (12) full calendar months by action of the Board of
Directors at the September, 1994 meeting of the Board of
Directors and at each succeeding September meeting of the Board
of Directors.
Original text:
Section 6. Loyalty. During the period of his employment
hereunder and except for illnesses, reasonable vacation period
and reasonable leaves of absence, Executive shall devote his full
business time, attention, skill, and best efforts to the faithful
performance of his duties hereunder; provided, however, that with
the approval of the Board of Directors of the Association, from
time to time, Executive may serve, or continue to serve, on the
boards of directors of, and hold any other offices or positions
in, companies or organizations, which, in such Board's judgment,
will not present any material conflict of interest with the As-
sociation or any of its subsidiaries or affiliates or divisions,
or unfavorably affect the performance of Executive's duties pur-
suant to this Agreement, or will not violate any applicable
statute or regulation.
Amended text:
Section 6. Loyalty; Noncompetition. (a) During the period of
his employment hereunder and except for illnesses, reasonable
vacation period and reasonable leaves of absence, Executive shall
devote his full business time, attention, skill, and best efforts
to the faithful performance of his duties hereunder; provided,
however, that with the approval of the Board of Directors of the
Association, from time to time, Executive may serve, or continue
to serve, on the boards of directors of, and hold any other
offices or positions in, companies or organizations, which, in
such Board's judgment, will not present any material conflict of
interest with the Association or any of its subsidiaries or
affiliates or divisions, or unfavorably affect the performance of
Executive's duties pursuant to this Agreement, or will not
violate any applicable statute or regulation.
(b) Upon the termination of this Agreement for any reason,
other than the reasons set forth in paragraph 9 of this
Agreement, for a period of three (3) years from the termination
of this Agreement, the Executive shall not at any time or place,
either directly or indirectly, engage in any business or activity
in competition with the business affairs or interests of the
Association or be a director, officer or employee of or
consultant to any bank, savings and loan association, credit
union or similar thrift, savings bank or institution in an area
within a fifty (50) mile radius of any office of any subsidiary
or affiliate of the Holding Company.
(c) During the term of the Executive's employment, nothing in
the foregoing subparagraphs in paragraph 6 shall apply to
subsidiaries and affiliates of the Holding Company or shall be
determined to prevent or limit the right of Executive to invest
in the capital stock or other securities of any business
dissimilar from that of employer or solely as a passive investor
in any business.
(d) Directly or indirectly engaging in any business or
activity in competition with the business affairs or interests of
the Association shall include engaging in business as owner,
partner, agent or employee of any person, firm or corporation
engaged in such business individually or as beneficiary by
interest in any partnership, corporation or other business entity
or in being interested directly or indirectly in any such
business conducted by any person, firm or corporation.
(e) In the event of violation by the Executive of this
agreement for loyalty and noncompetition, the Executive will be
subject to damages and because of the relationship of employer
and employee, it is hereby agreed injunctive relief is necessary
for employer to enforce these provisions of the agreement to
protect its business and good will.
Exhibit 10.3
Amendments to Employment Agreement
with A. Thomas Hood
The following amendments to the employment agreement of A.
Thomas Hood were effective October 1, 1993:
Original text:
Section 5. Term. The period of Executive's employment under this
Agreement shall be deemed to have commenced as of August 1, 1987,
and shall continue for a period of thirty-six (36) full calendar
months thereafter and any extensions thereafter. The said
thirty-six (36) month period of employment has been extended by
the Board of Directors through July 31, 1993. The said
thirty-six (36) month period of employment may be extended for an
additional twelve (12) full calendar months by action of the
Board of Directors beginning August 1, 1993 and each succeeding
August 1 thereafter respectively, unless either party shall have
served written notice upon the other prior to July 1, 1993, or
prior to July 1 or each succeeding year, as the case may be, of
its intention that this Agreement shall terminate at the end of
the thirty-six (36) month period that begins with the first day
of the month following such date of written notice.
Amended text:
Section 5. Term. The period of the Executive's employment under
this Agreement shall be deemed to have commenced as of August 1,
1987, and shall continue for a period of thirty-six (36) full
calendar months thereafter and any extensions thereafter. As of
the date of this second amendment hereto, the Executive's period
of employment under this Agreement has been extended by the Board
of Directors through September 30, 1996. The said thirty-six
(36) month period of employment may be extended for an additional
twelve (12) full calendar months by action of the Board of
Directors at the September, 1994 meeting of the Board of
Directors and at each succeeding September meeting of the Board
of Directors.
Original text:
Section 6. Loyalty. During the period of his employment
hereunder and except for illnesses, reasonable vacation period
and reasonable leaves of absence, Executive shall devote his full
business time, attention, skill, and best efforts to the faithful
performance of his duties hereunder; provided, however, that with
the approval of the Board of Directors of the Association, from
time to time, Executive may serve, or continue to serve, on the
boards of directors of, and hold any other offices or positions
in, companies or organizations, which, in such Board's judgment,
will not present any material conflict of interest with the As-
sociation or any of its subsidiaries or affiliates or divisions,
or unfavorably affect the performance of Executive's duties pur-
suant to this Agreement, or will not violate any applicable
statute or regulation.
Amended text:
Section 6. Loyalty; Noncompetition. (a) During the period of his
employment hereunder and except for illnesses, reasonable
vacation period and reasonable leaves of absence, Executive shall
devote his full business time, attention, skill, and best efforts
to the faithful performance of his duties hereunder; provided,
however, that with the approval of the Board of Directors of the
Association, from time to time, Executive may serve, or continue
to serve, on the boards of directors of, and hold any other
offices or positions in, companies or organizations, which, in
such Board's judgment, will not present any material conflict of
interest with the Association or any of its subsidiaries or
affiliates or divisions, or unfavorably affect the performance of
Executive's duties pursuant to this Agreement, or will not
violate any applicable statute or regulation.
(b) Upon the termination of this Agreement for any reason,
other than the reasons set forth in paragraph 9 of this
Agreement, for a period of three (3) years from the termination
of this Agreement, the Executive shall not at any time or place,
either directly or indirectly, engage in any business or activity
in competition with the business affairs or interests of the
Association or be a director, officer or employee of or
consultant to any bank, savings and loan association, credit
union or similar thrift, savings bank or institution in an area
within a fifty (50) mile radius of any office of any subsidiary
or affiliate of the Holding Company.
(c) During the term of the Executive's employment, nothing in
the foregoing subparagraphs in paragraph 6 shall apply to
subsidiaries and affiliates of the Holding Company or shall be
determined to prevent or limit the right of Executive to invest
in the capital stock or other securities of any business
dissimilar from that of employer or solely as a passive investor
in any business.
(d) Directly or indirectly engaging in any business or
activity in competition with the business affairs or interests of
the Association shall include engaging in business as owner,
partner, agent or employee of any person, firm or corporation
engaged in such business individually or as beneficiary by
interest in any partnership, corporation or other business entity
or in being interested directly or indirectly in any such
business conducted by any person, firm or corporation.
(e) In the event of violation by the Executive of this
agreement for loyalty and noncompetition, the Executive will be
subject to damages and because of the relationship of employer
and employee, it is hereby agreed injunctive relief is necessary
for employer to enforce these provisions of the agreement to
protect its business and good will.
Exhibit 10.4
Employment Agreement
with Charles F. Baarcke, Jr.
EMPLOYMENT AGREEMENT
THIS AGREEMENT entered into this 1st day of October, 1993 by
and between FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF
CHARLESTON, (the "Association"), FIRST FINANCIAL HOLDINGS, INC.
(the "Holding Company") and CHARLES F. BAARCKE, JR. (the
"Employee").
WHEREAS, the Employee has heretofore been employed by the
Association as Senior Vice President/Production Division and is
experienced in all phases of the business of the Association; and
WHEREAS, the parties desire by this writing to set forth the
continued employment relationship of the Association and the
Employee;
NOW THEREFORE, it is AGREED as follows:
1. Employment. The Employee is employed as the Senior Vice
President/Production Division of the Association. The Employee
shall render administrative and management services to the
Association such as are customarily performed by persons situated
in a similar executive capacity. He shall also promote, by
entertainment or otherwise, as and to the extent permitted by
law, the business of the Association. The Employee's other
duties shall be such as the Board of Directors may from time to
time reasonably direct, including normal duties as an officer of
the Association.
2. Base Compensation. The Association agrees to pay the
Employee during the term of this Agreement a salary at the rate
of $104,220 per annum, payable in cash not less frequently than
monthly. Such rate of salary, or increased rate of salary, if
any, as the case may be, shall be reviewed by the Board of
Directors of the Association no less often than annually.
3. Discretionary Bonuses. The Employee shall be entitled to
participate in an equitable manner with all other key management
personnel of the Association in discretionary bonuses authorized
and declared by the Board of Directors of the Association to its
key management employees. No other compensation provided for in
this Agreement shall be deemed a substitute for the Employee's
right to participate in such discretionary bonuses when and as
declared by the Board of Directors. Any such bonus shall take
into account the Association's current financial condition,
operations, and the Board of Directors' evaluation of the
performance of the Employee.
4. (a) Participation in Retirement and Medical Plans. The
Employee shall be entitled to participate in any plan of the
Association relating to pension, profit-sharing, or other
retirement benefits and medical coverage or reimbursement plans
that the Association may adopt for the benefit of its employees.
(b) Employee Benefits; Expenses. The Employee shall be
eligible to participate in any fringe benefits that may be or
become applicable to the Association's executive employees,
including participation in a stock option or incentive plan
adopted by the Board of Directors, and any other benefits that
are commensurate with the responsibilities and functions to be
performed by the Employee under this Agreement. The Association
shall reimburse Employee for all out-of-pocket expenses that
Employee shall incur in connection with his services for the
Association.
5. Term. The initial term of employment under this Agreement
shall be for the period commencing October 1, 1993 and ending
September 30, 1996. The said 36-month period of employment may
be extended for an additional 12 full calendar months by action
of the Board of Directors at the September, 1994 meeting of the
Board of Directors and at each succeeding September meeting of
the Board of Directors.
6. Loyalty; Noncompetition. (a) The Employee shall devote
his full time and best efforts to the performance of his
employment under this Agreement. During the term of this
Agreement, the Employee shall not, at any time or place, either
directly or indirectly, engage in any business or activity in
competition with the business affairs or interests of the
Association or be a director, officer or employee of or
consultant to any bank, savings and loan association, credit
union or similar thrift, savings bank or institution.
(b) Upon termination of this Agreement for any reason other
than the reasons set forth in paragraph 9 of this Agreement, for
a period of three (3) years from the termination of this
Agreement, the employee shall not at any time or place, either
directly or indirectly, engage in any business or activity in
competition with the business affairs or interests of the
Association or be a director, officer or employee of or
consultant to any bank, savings and loan association, credit
union or similar thrift, savings bank or institution in an area
within a fifty (50) mile radius of any office of any subsidiary
or affiliate of the Holding Company.
(c) During the term of this Agreement, nothing in the
foregoing subparagraphs in paragraph 6 shall apply to
subsidiaries and affiliates of the Holding Company or shall be
determined to prevent or limit the right of Employee to invest in
the capital stock or other securities of any business dissimilar
from that of employer or solely as a passive investor in any
business.
(d) Directly or indirectly engaging in any business or
activity in competition with the business affairs or interests of
the Association shall include engaging in business as owner,
partner, agent or employee of any person, firm or corporation
engaged in such business individually or as beneficiary by
interest in any partnership, corporation or other business entity
or in being interested directly or indirectly in any such
business conducted by any person, firm or corporation.
(e) In the event of violation by Employee of this agreement
for loyalty and noncompetition, the Employee will be subject to
damages and because of the relationship of employer and employee,
it is hereby agreed injunctive relief is necessary for employer
to enforce these provisions of the agreement to protect its
business and good will.
7. Standards. The Employee shall perform his duties under
this Agreement in accordance with such reasonable standards
expected of employees with comparable positions in comparable
organizations and as may be established from time to time by the
Boards of Directors of the Association and the Holding Company
and its subsidiaries.
8. Vacation and Sick Leave. At such reasonable times as the
Board of Directors of the Association shall in its discretion
permit, the Employee shall be entitled, without loss of pay, to
absent himself voluntarily from the performance of his employment
under this Agreement, all such voluntary absences to count as
vacation time; provided that:
(a) The Employee shall be entitled to any annual vacation in
accordance with the policies as periodically established by the
Board of Directors for senior management officials of the
Association, which shall in no event be less than the current
policies of the Association.
(b) The timing of vacations shall be scheduled in a reasonable
manner by the Employee. The Employee shall not be entitled to
receive any additional compensation from the Association on
account of his failure to take a vacation; nor shall he be
entitled to accumulate unused vacation from one fiscal year to
the next except to the extent authorized by the Board of
Directors for senior management officials of the Association.
(c) In addition to the aforesaid paid vacations, the Employee
shall be entitled without loss of pay, to absent himself
voluntarily from the performance of his employment with the
Association for such additional period of time and for such valid
and legitimate reasons as the Board of Directors in its
discretion may determine. Further, the Board of Directors shall
be entitled to grant to the Employee a leave or leaves of absence
with or without pay at such time or times and upon such terms and
conditions as the Board in its discretion may determine.
(d) In addition, the Employee shall be entitled to an annual
sick leave as established by the Board of Directors for senior
management officials of the Association. In the event any sick
leave time shall not have been used during any year, such leave
shall accrue to subsequent years only to the extent authorized by
the Board of Directors. Upon termination of his employment, the
Employee shall not be entitled to receive any additional
compensation from the Association for unused sick leave.
9. Termination and Termination Pay.
This Agreement shall be terminated upon the following
occurrences:
(a) The death of the Employee during the term of this
Agreement, in which event the Employee's estate shall be entitled
to receive the compensation due the Employee through the last day
of the calendar month in which his death shall have occurred.
(b) This Agreement may be terminated at any time by a decision
of the Board of Directors of the Association for conduct not
constituting termination for "Just Cause," or by the Employee
upon sixty (60) days written notice to the Association, as the
case may be. In the event this Agreement is terminated by the
Board of Directors without Just Cause, the Association shall be
obligated to continue to pay the Employee his salary up to the
date of termination of the term (including any renewal term) of
this Agreement. In the event this Agreement is terminated by the
Employee, the compensation and benefits will be terminated upon
the effective date of the employment termination or as may
otherwise be determined by the Board of Directors.
(c) The Association reserves the right to terminate this
Agreement at any time for Just Cause. Termination for "Just
Cause" shall mean termination for personal dishonesty,
incompetence, willful misconduct, breach of a fiduciary duty
involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule or regulation (other
than a law, rule or regulation relating to a traffic violation or
similar offense), final cease-and-desist order, termination under
the provisions of subparagraphs (d) and (e) below, or material
breach of any provision of this Agreement. Subject to the
provisions of paragraph 12 hereof, in the event this Agreement is
terminated for Just Cause, the Association shall only be
obligated to continue to pay the Employee his salary up to the
date of termination.
(d) (i) If the Employee is suspended and/or temporarily
prohibited from participating in the conduct of the Association's
affairs by a notice served under Section 8(e)(3) or (g)(1) of the
Federal Deposit Insurance Act ("FDIA") (12 U.S.C. 1818(e)(3) and
(g)(1)), the Association's obligations under the Agreement shall
be suspended as of the date of service, unless stayed by
appropriate proceedings. If the charges in the notice are
dismissed, the Association may in its discretion (a) pay the
Employee all or part of the compensation withheld while its
contract obligations were suspended and (b) reinstate (in whole
or in part) any of its obligations that were suspended.
(ii) If the Employee is removed and/or permanently
prohibited from participating in the conduct of the Association's
affairs by an order issued under Section 8(e)(4) or (g)(1) of the
FDIA (12 U.S.C. 1818(e)(4) or (g)(1)), all obligations of the
Association under the Agreement shall terminate as of the
effective date of the order, but vested rights of the contracting
parties shall not be affected.
(e) If the Association is in default (as defined in Section
3(x)(1) of the FDIA), all obligations under this Agreement shall
terminate as of the date of default, but this paragraph shall not
affect any vested rights of the parties.
(f) All obligations under this Agreement may be terminated:
(i) by the Director of the Office of Thrift Supervision (the
"Director") or his or her designee at the time the Federal
Deposit Insurance Corporation or the Resolution Trust Corporation
enters into an agreement to provide assistance to or on behalf of
the Association under the authority contained in Section 13(c) of
the FDIA or (ii) by the Director, or his or her designee at the
time the Director or such designee approves a supervisory merger
to resolve problems related to operation of the Association or
when the Association is determined by the Director to be in an
unsafe or unsound condition. Any rights of the parties that have
already vested, however, shall not be affected by such action.
(g) If, after a "Change of Control" (as hereinafter defined)
of the Association or the Holding Company, the Association shall
terminate the employment of the Employee during the period of
employment under this Agreement for any reason other than Just
Cause, as defined in paragraph 9(c), or otherwise change the
present capacity or circumstances in which the Employee is
employed as set forth in paragraph 1 of this Agreement, or cause
a reduction in the Employee's responsibilities or authority or
compensation or other benefits provided under this Agreement
without the Employee's written consent, then the Association
shall pay to the Employee and provide the Employee, or to his
beneficiaries, dependents and estate, as the case may be, with
the following:
(i) The Association shall promptly pay to the Employee an
amount equal to the product of 2.99 times the Employee's "base
amount" as defined in Section 280G(b)(3) of the Internal Revenue
Code of 1986, as amended.
(ii) During the period of 36 calendar months beginning with
the event of termination, the Employee, his dependents,
beneficiaries and estate shall continue to be covered under all
employee benefit plans of the Association, including without
limitation the Association's pension plan, life insurance and
health insurance as if the Employee was still employed during
such period under this Agreement.
(iii) If and to the extent that benefits or service credit
for benefits provided by paragraph 9(g)(ii) shall not be payable
or provided under any such plans to the Employee, his dependents,
beneficiaries and estate, by reason of his no longer being an
employee of the Association as a result of termination of
employment, the Association shall itself pay or provide for
payment of such benefits and service credit for benefits to the
Employee, his dependents, beneficiaries and estate. Any such
payment relating to retirement shall commence on a date selected
by the Employee which must be a date on which payments under the
Association's qualified pension plan or successor plan may
commence.
(iv) If the Employee elects to have benefits commence prior
to the normal retirement age under the qualified pension plan or
any successor plan maintained by the Association and thereby
incurs an actuarial reduction in his monthly benefits under such
plan, the Association shall itself pay or provide for payment to
the Employee of the difference between the amount that would have
been paid if the benefits commenced at normal retirement age and
the actuarially reduced amount paid upon the early commencement
of benefits.
(v) The Association shall pay all legal fees and expenses
which the Employee may incur as a result of the Association's
contesting the validity or enforceability of this Agreement that
results in a legal judgement in his favor or legal settlement and
the Employee shall be entitled to receive interest thereon for
the period of any delay in payment from the date such payment was
due at the rate determined by adding two hundred basis points to
the six month Treasury Bill rate.
(vi) The Employee shall not be required to mitigate the
amount of any payment provided for in this Agreement by seeking
other employment or otherwise nor shall any amounts received from
other employment or otherwise by the Employee offset in any
manner the obligations of the Association hereunder.
10. Change of Control. A "Change of Control" shall be deemed
to have occurred, if:
(i) Any person becomes the beneficial owner, directly or
indirectly, of 25% or more of the outstanding shares of any class
of voting stock issued by the Association or the Holding Company;
(ii) Any person becomes the beneficial owner, directly or
indirectly, of 10% or more, but less than 25%, of the outstanding
shares of any class of voting stock issued by the Association or
the Holding Company, if the Board of Directors of the Association
or the Holding Company, or the Office of Thrift Supervision
("OTS"), or other appropriate regulatory authority, has made a
determination that such beneficial ownership constitutes or will
constitute control of the Association or the Holding Company;
(iii) Any person (other than the persons named as proxies
solicited on behalf of the Board of Directors of the Association
or the Holding Company) holds revocable or irrevocable proxies as
to the election or removal of two or more directors of the
Association or the Holding Company, or for 25% or more of the
total number of voting shares of the Association or the Holding
Company;
(iv) The OTS or other appropriate regulatory authority has
given the required approval of non-objection to the acquisition
or control of the Association or the Holding Company by any
person;
(v) Any person has commenced a tender or exchange offer, or
entered into an agreement or received an option, to acquire
beneficial ownership of 25% or more of the total number of voting
shares of the Association or the Holding Company, whether or not
the required approval or non-objection for such acquisition has
been received from the OTS, or other appropriate regulatory
authority, if the Association's or the Holding Company's Board of
Directors has made a determination that such action constitutes
or will constitute a Change in Control; or
(vi) During any period of 24 consecutive months,
individuals who at the beginning of such period constitute the
Association's or the Holding Company's Board of Directors cease
for any reason to constitute at least a majority of the Board,
unless the election of each director who was not a director at
the beginning of such period has been approved in advance by
directors representing at least two-thirds of the directors then
in office who were directors at the beginning of the period.
11. Disability. If the Executive shall become disabled or
incapacitated to the extent that he is unable to perform the
duties of Senior Vice President/Production Division, he shall be
eligible to participate in the Association's long-term disability
plan as established by the Board of Directors for employees and
management personnel, or any other disability plan which may be
established by the Board of Directors for management personnel.
Upon returning to active full-time employment, the Executive's
full compensation as set forth in the paragraphs of this
Agreement entitled "Compensation" and "Discretionary Bonuses"
shall be reinstated. In the event that said Executive returns to
active employment on other than a full-time basis, then his
compensation (as set forth in the paragraph of this Agreement
entitled "Compensation") shall be reduced in proportion to the
time spent in said employment. However, if he is again unable to
perform the duties of Senior Vice President/Production Division
hereunder due to illness or other incapacity, he must have been
engaged in active full-time employment for at least twelve (12)
consecutive months immediately prior to such later absence or
inability in order to qualify for the full or partial continuance
of his salary under the paragraph entitled "Disability."
12. Expenses to Enforce Agreement. In the event any dispute
shall arise between the Employee and the Association or the
Holding Company as to the terms or interpretation of this
Agreement, whether instituted by formal legal proceedings or
otherwise, including any action taken by Employee in defending
against any action taken by the Association or the Holding
Company, the prevailing party shall be reimbursed for all costs
and expenses, including reasonable attorney's fees, arising from
such dispute, proceedings or actions. Such reimbursement shall
be paid within 10 days of the furnishing to the non-prevailing
party of written evidence, which may be in the form of a
cancelled check or receipt, among other things, of any costs or
expenses incurred by the prevailing party. Any such request for
reimbursement shall be made no more frequently than at 60-day
intervals.
13. Successor and Assigns. (a) This Agreement shall inure to
the benefit of and be binding upon any corporate or other
successor of the Association and the Holding Company which shall
acquire, directly or indirectly, by merger, consolidation,
purchase or otherwise, all or substantially all of the assets of
the Association.
(b) Since the Association is contracting for the unique and
personal skills of the Employee, the Employee shall be precluded
from assigning or delegating his rights or duties hereunder
without first obtaining the written consent of the Association.
14. Amendments. No amendments or additions to this Agreement
shall be binding unless in writing and signed by the parties
hereto, except as herein otherwise provided.
15. Applicable Law. This Agreement shall be governed in all
respects whether as to validity, construction, capacity,
performance or otherwise, by the laws of South Carolina, except
to the extent that Federal law shall be deemed to apply. This
Agreement is intended to comply with the requirements of 12 CFR
Section 563.39 and to the extent it conflicts with the provisions
of that Section, Section 563.39 shall control. Any payments made
to the employee pursuant to this Agreement, or otherwise, shall
be subject to and conditioned upon compliance with 12 U.S.C.
Section 1828(k) and any regulations promulgated thereunder.
16. Severability. The provisions of this Agreement shall be
deemed severable and the invalidity or unenforceability of any
provision shall not affect the validity or enforceability of the
other provisions hereof.
IN WITNESS WHEREOF, the parties have executed this Agreement on
the day and year first hereinabove written.
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF CHARLESTON
By: /s/ D. Van Smith
Chairman, Board of Directors
FIRST FINANCIAL HOLDINGS, INC.
By: /s/ D. Van Smith
Chairman, Board of Directors
ATTEST:
/s/ Marilyn C. Shokes
WITNESS:
/s/ Sonia L. Smith /s/ Charles F. Baarcke, Jr.
Charles F. Baarcke, Jr.
Exhibit 10.5
Employment Agreement
with John L. Ott, Jr.
EMPLOYMENT AGREEMENT
THIS AGREEMENT entered into this 1st day of October, 1993 by
and between FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF
CHARLESTON, (the "Association"), FIRST FINANCIAL HOLDINGS, INC.
(the "Holding Company"), and JOHN L. OTT, JR. (the "Employee").
WHEREAS, the Employee has heretofore been employed by the
Association as Senior Vice President/Funds Acquisition Division
and is experienced in all phases of the business of the
Association; and
WHEREAS, the parties desire by this writing to set forth the
continued employment relationship of the Association and the
Employee;
NOW THEREFORE, it is AGREED as follows:
1. Employment. The Employee is employed as the Senior Vice
President/Funds Acquisition Division of the Association. The
Employee shall render administrative and management services to
the Association such as are customarily performed by persons
situated in a similar executive capacity. He shall also promote,
by entertainment or otherwise, as and to the extent permitted by
law, the business of the Association. The Employee's other
duties shall be such as the Board of Directors may from time to
time reasonably direct, including normal duties as an officer of
the Association.
2. Base Compensation. The Association agrees to pay the
Employee during the term of this Agreement a salary at the rate
of $112,080 per annum, payable in cash not less frequently than
monthly. Such rate of salary, or increased rate of salary, if
any, as the case may be, shall be reviewed by the Board of
Directors of the Association no less often than annually.
3. Discretionary Bonuses. The Employee shall be entitled to
participate in an equitable manner with all other key management
personnel of the Association in discretionary bonuses authorized
and declared by the Board of Directors of the Association to its
key management employees. No other compensation provided for in
this Agreement shall be deemed a substitute for the Employee's
right to participate in such discretionary bonuses when and as
declared by the Board of Directors. Any such bonus shall take
into account the Association's current financial condition,
operations, and the Board of Directors' evaluation of the
performance of the Employee.
4. (a) Participation in Retirement and Medical Plans. The
Employee shall be entitled to participate in any plan of the
Association relating to pension, profit-sharing, or other
retirement benefits and medical coverage or reimbursement plans
that the Association may adopt for the benefit of its employees.
(b) Employee Benefits; Expenses. The Employee shall be
eligible to participate in any fringe benefits that may be or
become applicable to the Association's executive employees,
including participation in a stock option or incentive plan
adopted by the Board of Directors, and any other benefits that
are commensurate with the responsibilities and functions to be
performed by the Employee under this Agreement. The Association
shall reimburse Employee for all out-of-pocket expenses that
Employee shall incur in connection with his services for the
Association.
5. Term. The initial term of employment under this Agreement
shall be for the period commencing October 1, 1993 and ending
September 30, 1996. The said 36-month period of employment may
be extended for an additional 12 full calendar months by action
of the Board of Directors at the September, 1994 meeting of the
Board of Directors and at each succeeding September meeting of
the Board of Directors.
6. Loyalty; Noncompetition. (a) The Employee shall devote
his full time and best efforts to the performance of his
employment under this Agreement. During the term of this
Agreement, the Employee shall not, at any time or place, either
directly or indirectly, engage in any business or activity in
competition with the business affairs or interests of the
Association or be a director, officer or employee of or
consultant to any bank, savings and loan association, credit
union or similar thrift, savings bank or institution.
(b) Upon termination of this Agreement for any reason other
than the reasons set forth in paragraph 9 of this Agreement, for
a period of three (3) years from the termination of this
Agreement, the employee shall not at any time or place, either
directly or indirectly, engage in any business or activity in
competition with the business affairs or interests of the
Association or be a director, officer or employee of or
consultant to any bank, savings and loan association, credit
union or similar thrift, savings bank or institution in an area
within a fifty (50) mile radius of any office of any subsidiary
or affiliate of the Holding Company.
(c) During the term of this Agreement, nothing in the
foregoing subparagraphs in paragraph 6 shall apply to
subsidiaries and affiliates of the Holding Company or shall be
determined to prevent or limit the right of Employee to invest in
the capital stock or other securities of any business dissimilar
from that of employer or solely as a passive investor in any
business.
(d) Directly or indirectly engaging in any business or
activity in competition with the business affairs or interests of
the Association shall include engaging in business as owner,
partner, agent or employee of any person, firm or corporation
engaged in such business individually or as beneficiary by
interest in any partnership, corporation or other business entity
or in being interested directly or indirectly in any such
business conducted by any person, firm or corporation.
(e) In the event of violation by Employee of this agreement
for loyalty and noncompetition, the Employee will be subject to
damages and because of the relationship of employer and employee,
it is hereby agreed injunctive relief is necessary for employer
to enforce these provisions of the agreement to protect its
business and good will.
7. Standards. The Employee shall perform his duties under
this Agreement in accordance with such reasonable standards
expected of employees with comparable positions in comparable
organizations and as may be established from time to time by the
Boards of Directors of the Association and the Holding Company
and its subsidiaries.
8. Vacation and Sick Leave. At such reasonable times as the
Board of Directors of the Association shall in its discretion
permit, the Employee shall be entitled, without loss of pay, to
absent himself voluntarily from the performance of his employment
under this Agreement, all such voluntary absences to count as
vacation time; provided that:
(a) The Employee shall be entitled to any annual vacation in
accordance with the policies as periodically established by the
Board of Directors for senior management officials of the
Association, which shall in no event be less than the current
policies of the Association.
(b) The timing of vacations shall be scheduled in a reasonable
manner by the Employee. The Employee shall not be entitled to
receive any additional compensation from the Association on
account of his failure to take a vacation; nor shall he be
entitled to accumulate unused vacation from one fiscal year to
the next except to the extent authorized by the Board of
Directors for senior management officials of the Association.
(c) In addition to the aforesaid paid vacations, the Employee
shall be entitled without loss of pay, to absent himself
voluntarily from the performance of his employment with the
Association for such additional period of time and for such valid
and legitimate reasons as the Board of Directors in its
discretion may determine. Further, the Board of Directors shall
be entitled to grant to the Employee a leave or leaves of absence
with or without pay at such time or times and upon such terms and
conditions as the Board in its discretion may determine.
(d) In addition, the Employee shall be entitled to an annual
sick leave as established by the Board of Directors for senior
management officials of the Association. In the event any sick
leave time shall not have been used during any year, such leave
shall accrue to subsequent years only to the extent authorized by
the Board of Directors. Upon termination of his employment, the
Employee shall not be entitled to receive any additional
compensation from the Association for unused sick leave.
9. Termination and Termination Pay.
This Agreement shall be terminated upon the following
occurrences:
(a) The death of the Employee during the term of this
Agreement, in which event the Employee's estate shall be entitled
to receive the compensation due the Employee through the last day
of the calendar month in which his death shall have occurred.
(b) This Agreement may be terminated at any time by a decision
of the Board of Directors of the Association for conduct not
constituting termination for "Just Cause," or by the Employee
upon sixty (60) days written notice to the Association, as the
case may be. In the event this Agreement is terminated by the
Board of Directors without Just Cause, the Association shall be
obligated to continue to pay the Employee his salary up to the
date of termination of the term (including any renewal term) of
this Agreement. In the event this Agreement is terminated by the
Employee, the compensation and benefits will be terminated upon
the effective date of the employment termination or as may
otherwise be determined by the Board of Directors.
(c) The Association reserves the right to terminate this
Agreement at any time for Just Cause. Termination for "Just
Cause" shall mean termination for personal dishonesty,
incompetence, willful misconduct, breach of a fiduciary duty
involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule or regulation (other
than a law, rule or regulation relating to a traffic violation or
similar offense), final cease-and-desist order, termination under
the provisions of subparagraphs (d) and (e) below, or material
breach of any provision of this Agreement. Subject to the
provisions of paragraph 12 hereof, in the event this Agreement is
terminated for Just Cause, the Association shall only be
obligated to continue to pay the Employee his salary up to the
date of termination.
(d) (i) If the Employee is suspended and/or temporarily
prohibited from participating in the conduct of the Association's
affairs by a notice served under Section 8(e)(3) or (g)(1) of the
Federal Deposit Insurance Act ("FDIA") (12 U.S.C. 1818(e)(3) and
(g)(1)), the Association's obligations under the Agreement shall
be suspended as of the date of service, unless stayed by
appropriate proceedings. If the charges in the notice are
dismissed, the Association may in its discretion (a) pay the
Employee all or part of the compensation withheld while its
contract obligations were suspended and (b) reinstate (in whole
or in part) any of its obligations that were suspended.
(ii) If the Employee is removed and/or permanently
prohibited from participating in the conduct of the Association's
affairs by an order issued under Section 8(e)(4) or (g)(1) of the
FDIA (12 U.S.C. 1818(e)(4) or (g)(1)), all obligations of the
Association under the Agreement shall terminate as of the
effective date of the order, but vested rights of the contracting
parties shall not be affected.
(e) the Association is in default (as defined in Section
3(x)(1) of the FDIA), all obligations under this Agreement shall
terminate as of the date of default, but this paragraph shall not
affect any vested rights of the parties.
(f) All obligations under this Agreement may be terminated:
(i) by the Director of the Office of Thrift Supervision (the
"Director") or his or her designee at the time the Federal
Deposit Insurance Corporation or the Resolution Trust Corporation
enters into an agreement to provide assistance to or on behalf of
the Association under the authority contained in Section 13(c) of
the FDIA or (ii) by the Director, or his or her designee at the
time the Director or such designee approves a supervisory merger
to resolve problems related to operation of the Association or
when the Association is determined by the Director to be in an
unsafe or unsound condition. Any rights of the parties that have
already vested, however, shall not be affected by such action.
(g) If, after a "Change of Control" (as hereinafter defined)
of the Association or the Holding Company, the Association shall
terminate the employment of the Employee during the period of
employment under this Agreement for any reason other than Just
Cause, as defined in paragraph 9(c), or otherwise change the
present capacity or circumstances in which the Employee is
employed as set forth in paragraph 1 of this Agreement, or cause
a reduction in the Employee's responsibilities or authority or
compensation or other benefits provided under this Agreement
without the Employee's written consent, then the Association
shall pay to the Employee and provide the Employee, or to his
beneficiaries, dependents and estate, as the case may be, with
the following:
(i) The Association shall promptly pay to the Employee an
amount equal to the product of 2.99 times the Employee's "base
amount" as defined in Section 280G(b)(3) of the Internal Revenue
Code of 1986, as amended.
(ii) During the period of 36 calendar months beginning with
the event of termination, the Employee, his dependents,
beneficiaries and estate shall continue to be covered under all
employee benefit plans of the Association, including without
limitation the Association's pension plan, life insurance and
health insurance as if the Employee was still employed during
such period under this Agreement.
(iii) If and to the extent that benefits or service credit
for benefits provided by paragraph 9(g)(ii) shall not be payable
or provided under any such plans to the Employee, his dependents,
beneficiaries and estate, by reason of his no longer being an
employee of the Association as a result of termination of
employment, the Association shall itself pay or provide for
payment of such benefits and service credit for benefits to the
Employee, his dependents, beneficiaries and estate. Any such
payment relating to retirement shall commence on a date selected
by the Employee which must be a date on which payments under the
Association's qualified pension plan or successor plan may
commence.
(iv) If the Employee elects to have benefits commence prior
to the normal retirement age under the qualified pension plan or
any successor plan maintained by the Association and thereby
incurs an actuarial reduction in his monthly benefits under such
plan, the Association shall itself pay or provide for payment to
the Employee of the difference between the amount that would have
been paid if the benefits commenced at normal retirement age and
the actuarially reduced amount paid upon the early commencement
of benefits.
(v) The Association shall pay all legal fees and expenses
which the Employee may incur as a result of the Association's
contesting the validity or enforceability of this Agreement that
results in a legal judgement in his favor or legal settlement and
the Employee shall be entitled to receive interest thereon for
the period of any delay in payment from the date such payment was
due at the rate determined by adding two hundred basis points to
the six month Treasury Bill rate.
(vi) The Employee shall not be required to mitigate the
amount of any payment provided for in this Agreement by seeking
other employment or otherwise nor shall any amounts received from
other employment or otherwise by the Employee offset in any
manner the obligations of the Association hereunder.
10. Change of Control. A "Change of Control" shall be
deemed to have occurred, if:
(i) Any person becomes the beneficial owner, directly or
indirectly, of 25% or more of the outstanding shares of any class
of voting stock issued by the Association or the Holding Company;
(ii) Any person becomes the beneficial owner, directly or
indirectly, of 10% or more, but less than 25%, of the outstanding
shares of any class of voting stock issued by the Association or
the Holding Company, if the Board of Directors of the Association
or the Holding Company, or the Office of Thrift Supervision
("OTS"), or other appropriate regulatory authority, has made a
determination that such beneficial ownership constitutes or will
constitute control of the Association or the Holding Company;
(iii) Any person (other than the persons named as proxies
solicited on behalf of the Board of Directors of the Association
or the Holding Company) holds revocable or irrevocable proxies as
to the election or removal of two or more directors of the
Association or the Holding Company, or for 25% or more of the
total number of voting shares of the Association or the Holding
Company;
(iv) The OTS or other appropriate regulatory authority has
given the required approval of non-objection to the acquisition
or control of the Association or the Holding Company by any
person;
(v) Any person has commenced a tender or exchange offer, or
entered into an agreement or received an option, to acquire
beneficial ownership of 25% or more of the total number of voting
shares of the Association or the Holding Company, whether or not
the required approval or non-objection for such acquisition has
been received from the OTS, or other appropriate regulatory
authority, if the Association's or the Holding Company's Board of
Directors has made a determination that such action constitutes
or will constitute a Change in Control; or
(vi) During any period of 24 consecutive months,
individuals who at the beginning of such period constitute the
Association's or the Holding Company's Board of Directors cease
for any reason to constitute at least a majority of the Board,
unless the election of each director who was not a director at
the beginning of such period has been approved in advance by
directors representing at least two-thirds of the directors then
in office who were directors at the beginning of the period.
11. Disability. If the Executive shall become disabled or
incapacitated to the extent that he is unable to perform the
duties of Senior Vice President/Funds Acquisition Division, he
shall be eligible to participate in the Association's long-term
disability plan as established by the Board of Directors for
employees and management personnel, or any other disability plan
which may be established by the Board of Directors for management
personnel. Upon returning to active full-time employment, the
Executive's full compensation as set forth in the paragraphs of
this Agreement entitled "Compensation" and "Discretionary
Bonuses" shall be reinstated. In the event that said Executive
returns to active employment on other than a full-time basis,
then his compensation (as set forth in the paragraph of this
Agreement entitled "Compensation") shall be reduced in proportion
to the time spent in said employment. However, if he is again
unable to perform the duties of Senior Vice President/Funds
Acquisition Division hereunder due to illness or other
incapacity, he must have been engaged in active full-time
employment for at least twelve (12) consecutive months
immediately prior to such later absence or inability in order to
qualify for the full or partial continuance of his salary under
the paragraph entitled "Disability."
12. Expenses to Enforce Agreement. In the event any dispute
shall arise between the Employee and the Association or the
Holding Company as to the terms or interpretation of this
Agreement, whether instituted by formal legal proceedings or
otherwise, including any action taken by Employee in defending
against any action taken by the Association or the Holding
Company, the prevailing party shall be reimbursed for all costs
and expenses, including reasonable attorney's fees, arising from
such dispute, proceedings or actions. Such reimbursement shall
be paid within 10 days of the furnishing to the non-prevailing
party of written evidence, which may be in the form of a
cancelled check or receipt, among other things, of any costs or
expenses incurred by the prevailing party. Any such request for
reimbursement shall be made no more frequently than at 60-day
intervals.
13. Successor and Assigns. (a) This Agreement shall inure to
the benefit of and be binding upon any corporate or other
successor of the Association and the Holding Company which shall
acquire, directly or indirectly, by merger, consolidation,
purchase or otherwise, all or substantially all of the assets of
the Association.
(b) Since the Association is contracting for the unique and
personal skills of the Employee, the Employee shall be precluded
from assigning or delegating his rights or duties hereunder
without first obtaining the written consent of the Association.
14. Amendments. No amendments or additions to this Agreement
shall be binding unless in writing and signed by the parties
hereto, except as herein otherwise provided.
15. Applicable Law. This Agreement shall be governed in all
respects whether as to validity, construction, capacity,
performance or otherwise, by the laws of South Carolina, except
to the extent that Federal law shall be deemed to apply. This
Agreement is intended to comply with the requirements of 12 CFR
Section 563.39 and to the extent it conflicts with the provisions
of that Section, Section 563.39 shall control. Any payments made
to the employee pursuant to this Agreement, or otherwise, shall
be subject to and conditioned upon compliance with 12 U.S.C.
Section 1828(k) and any regulations promulgated thereunder.
16. Severability. The provisions of this Agreement shall be
deemed severable and the invalidity or unenforceability of any
provision shall not affect the validity or enforceability of the
other provisions hereof.
IN WITNESS WHEREOF, the parties have executed this Agreement on
the day and year first hereinabove written.
FIRST FEDERAL SAVINGS AND LOAN
ASSOCIATION OF CHARLESTON
By: /s/ D. Van Smith
Chairman, Board of Directors
FIRST FINANCIAL HOLDINGS, INC.
By: /s/ D. Van Smith
Chairman, Board of Directors
ATTEST:
/s/ Marilyn C. Shokes
WITNESS:
/s/ Joyce Ferguson /s/ John L. Ott, Jr.
John L. Ott, Jr.
EXHIBIT 22
Subsidiaries of the Registrant
PARENT
First Financial Holdings, Inc.
Percentage Jurisdiction or State
Subsidiaries (a) of Ownership of Incorporation
First Federal Savings and Loan 100% United States
Association of Charleston
Peoples Federal Savings and 100% United States
and Loan Association
Charleston Financial Services (b) 100% South Carolina
The Carolopolis Corporation (b) 100% South Carolina
Magrath Insurance Agency, Inc.(c) 100% South Carolina
Coastal Carolina Corporation (c) 100% South Carolina
(a) The operations of the Company's wholly-owned subsidiaries
are included in the Company's consolidated financial
statements.
(b) Second-tier subsidiaries of the Registrant. Wholly-owned by
First Federal.
(c) Became second-tier subsidiaries of the Registrant on October
9, 1992. Wholly-owned by Peoples Federal.
EXHIBIT 23
INDEPENDENT ACCOUNTANTS CONSENT
The Board of Directors
First Financial Holdings, Inc.
We consent to incorporation by reference in registration statements
No. 33-55067 and 33-57855 on Form S-8s of First Financial Holdings,
Inc. of our report dated October 27, 1995, relating to the
consolidated balance sheets of First Financial Holdings, Inc. and
subsidiaries as of September 30, 1995 and 1994, and the related
consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended September
30, 1995, which report appears in the September 30, 1995 annual
report on Form 10-K of First Financial Holdings, Inc. Our report
refers to the fact that in 1993 First Financial Holdings, Inc.
changed its method of accounting for income taxes, for debt and
equity securities and for postretirement benefits other than
pensions.
KPMG PEAT MARWICK LLP
Greenville, South Carolina
December 26, 1995