-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PTjAt7LnZmN4OIXzjpH/mshFCYWrEABlwaOL00Q7DIfKWcSKZqvqCvez/1U+6FLE jy9Hz33L7+AC6BdBli4jwg== 0000787075-99-000026.txt : 19991228 0000787075-99-000026.hdr.sgml : 19991228 ACCESSION NUMBER: 0000787075-99-000026 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991227 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST FINANCIAL HOLDINGS INC /DE/ CENTRAL INDEX KEY: 0000787075 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 570866076 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-17122 FILM NUMBER: 99780425 BUSINESS ADDRESS: STREET 1: 34 BROAD STREET STREET 2: SUITE 10 CITY: CHARLESTON STATE: SC ZIP: 29401 BUSINESS PHONE: 8035295800 MAIL ADDRESS: STREET 1: 34 BROAD STREET CITY: CHARLESTON STATE: SC ZIP: 29401 10-K405 1 UNITED STATES 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, 1999 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 of (I.R.S. Employer 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: (843)529-5933 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. [X] As of November 30, 1999 there were issued and outstanding 13,355,789 shares of the registrant's common stock. The registrant's common stock is traded over-the-counter and is listed on The Nasdaq 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 16, 1999, was $217,031,571 (13,355,789 shares at $16.25 per share). It is assumed for purposes of this calculation that none of the registrant's officers, directors and 5% stockholders are affiliates. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's Definitive Proxy Statement for the 2000 Annual Meeting of Stockholders. (Part III) FIRST FINANCIAL HOLDINGS, INC. 1999 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS PART I Item 1. Business 1 General 1 Discussion of Forward Looking Statements 1 Lending Activities 2 Investment Activities 7 Sources of Funds 9 Asset and Liability Management 10 Subsidiary Activities of the Associations 12 Competition 13 Personnel 13 Regulation 13 Item 2. Properties 16 Item 3. Legal Proceedings 17 Item 4. Submission of Matters to a Vote of Security Holders 17 PART II Item 5. Market for the Registrant's Common Equity and 17 Related Stockholder Matters Item 6. Selected Financial Data 18 Item 7. Management's Discussion and Analysis of Financial 19 Condition and Results of Operations Item 8. Financial Statements and Supplementary Data 33 Item 9. Changes in and Disagreements with Accountants on 62 Accounting and Financial Disclosure PART III Item 10. Directors and Executive Officers of the Registrant 63 Item 11. Executive Compensation 64 Item 12. Security Ownership of Certain Beneficial Owners and 64 Management Item 13. Certain Relationships and Related Transactions 64 PART IV Item 14. Exhibits, Financial Statement Schedules, and on 65 Reports Form 8-K PART I ITEM 1. BUSINESS GENERAL First Financial Holdings, Inc. ("First Financial" or the "Company") is a savings and loan holding company headquartered in Charleston, South Carolina, which owns and operates First Federal Savings and Loan Association of Charleston ("First Federal") and Peoples Federal Savings and Loan Association, Conway, South Carolina ("Peoples Federal") (together, the "Associations"). The Company also owns First Southeast Investor Services, Inc. ("FSIS"), a South Carolina corporation organized in 1998 for the purpose of operating as a broker-dealer. At September 30, 1999, First Financial had total assets of $2.1 billion, total deposits of $1.2 billion and stockholders' equity of $125.9 million. First Federal, chartered in 1934, is the largest financial institution headquartered in the Charleston, South Carolina metropolitan area and the largest thrift institution in South Carolina based on assets of approximately $1.4 billion at September 30, 1999. 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, 20 branch offices in the three surrounding counties and two full-service offices in Georgetown, South Carolina. First Federal also opened a full service office in Hilton Head, South Carolina in December 1999 after operating a private banking office on the island for several years. 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. On November 7, 1997, the Company completed the acquisition of Investors Savings Bank of South Carolina, Inc. ("Investors"), through the merger of Investors with Peoples Federal. Each share of Investors common stock was exchanged for 1.36 shares of the Company s Common Stock. The Company issued approximately 708,800 shares of Common Stock in the transaction. Peoples Federal conducts its business through 15 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 (6), Florence (4), Conway (4) and Loris (1). Peoples Federal had assets of approximately $682 million at September 30, 1999. The business of the Company consists primarily of acting as a financial intermediary by attracting deposits from the general public and using such funds, together with borrowings and other funds, to originate first mortgage loans on residential properties located in its primary market areas. The Company also makes construction and consumer and other non-mortgage loans and invests in mortgage-backed securities, federal government and agency obligations, money market obligations and certain corporate obligations. Through subsidiaries of the Associations, the Company also engages in property and casualty insurance, certain data processing activities, trust and fiduciary services, reinsurance of private mortgage insurance and certain passive investment activities. None of the subsidiary activities is considered to constitute a business segment. 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. 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 -- Federal Regulation of Savings Associations -- Capital Requirements" contained herein and Note 17 of Notes to Consolidated Financial Statements. DISCUSSION OF FORWARD-LOOKING STATEMENTS Management's Discussion and Analysis of Financial Condition and Results of Operations and other portions of this annual report contain certain "forward-looking statements" concerning the future operations of First Financial Holdings, Inc. Management desires to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 and is including this statement for the express purpose of availing the Company of protections of such safe harbor with respect to all "forward-looking statements" contained in our Annual Report. We have used "forward-looking statements" to describe future plans and strategies including our expectations of the Company's future financial results. Management's ability to predict results or the effect of future plans or strategies is inherently uncertain. Factors which could affect actual results include interest rate trends, the general economic climate in the Company's market area and the country as a whole, the ability of the Company to control costs and expenses, the ability of the Company to efficiently incorporate acquisitions into its operations, the ability of the Company to successfully address Year 2000 (Y2K) issues, competitive products and pricing, loan delinquency rates, and changes in federal and state regulation. These factors should be considered in evaluating the "forward-looking statements," and undue reliance should not be placed on such statements. LENDING ACTIVITIES General At September 30, 1999, the Company's net loan portfolio totaled approximately $1.7 billion, or 84% of the Company's total assets. The Company's principal lending activity is the origination of loans secured by single-family residential real estate. Prior to fiscal 1993, the Company's 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 curtailed loans made on non-residential properties primarily due to adverse changes in market conditions and increased levels of nonperforming assets arising from this type of lending. Peoples Federal had curtailed such lending before its acquisition by the Company in early fiscal 1993. Thus, in the period since 1992, the Company has shifted its focus to concentrate on single-family residential mortgage lending and consumer lending. The Company also offers commercial business loans of the type traditionally offered by commercial banks. Although federal regulations allow the Company to originate loans nationwide, the Company has originated substantially all of its loans in its primary market areas of Charleston, Dorchester, Berkeley, Georgetown, Horry, Florence and Beaufort counties in South Carolina and Brunswick County in North Carolina. In 1995 the Company initiated a correspondent lending program allowing for the purchase of loans originated by unaffiliated mortgage lenders and brokers in South Carolina and North Carolina. Loans originated by these lenders and brokers are subject to the same underwriting standards as those used by the Company in its own lending and are accepted for purchase only after approval by the Company's underwriters. Loans funded through the correspondent program totaled $92 million in fiscal 1999. The Company makes both fixed-rate and adjustable-rate loans and generally retains the servicing on loans originated. A large percentage of single-family loans are made pursuant to certain guidelines that will permit the sale of such loans in the secondary market to government agencies or private investors. The Company's primary single-family product is the conventional loan. However, loans are also originated 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 Company's loan portfolio on the dates indicated.
As of September 30, 1999 1998 1997 1996 1995 Amount % of Amount % of Amount % of Amount % of Amount % of Total Total Total Total Total (dollar amounts in thousands) TYPE OF LOAN Real estate: 1- to 4-family residential $1,296,523 74.4% $1,135,765 72.5% $ 1,040,142 71.6% $ 931,075 70.3% $ 727,900 64.5% Multi-family 46,254 2.6 43,161 2.7 54,593 3.8 57,238 4.3 57,902 5.1 Commercial real estate and land 210,488 12.1 225,039 14.4 220,169 15.2 220,020 16.6 219,106 19.4 Commercial business loans 42,721 2.5 33,790 2.2 32,967 2.3 31,865 2.4 32,246 2.9 Consumer loans: Home equity 86,764 5.0 73,961 4.7 58,879 4.0 48,728 3.7 47,015 4.2 Mobile homes 44,561 2.6 26,983 1.7 19,537 1.3 21,977 1.7 25,046 2.2 Credit cards 10,831 0.6 10,424 0.7 10,992 0.8 10,453 0.8 9,146 0.8 Savings account loans 5,281 0.3 5,531 0.4 5,835 0.4 5,659 0.4 5,565 0.5 Other consumer loans 69,678 4.0 55,785 3.6 51,384 3.5 37,609 2.8 31,038 2.8 Total gross loans receivable 1,813,101 104.1 1,610,439 102.9 1,494,498 102.9 1,364,624 103.0 1,154,964 102.4 Allowance for loan losses (14,570) (0.8) (12,781) (0.8) (12,103) (0.8) (11,639) (0.9) (10,993) (1.0) Loans in process (55,409) (3.2) (32,360) (2.1) (30,257) (2.1) (27,082) (2.0) (14,781) (1.3) Deferred loan fees and discounts (972) (0.1) (258) -- (641) -- (978) (0.1) (1,391) (0.1) Loans receivable, net $1,742,150 100.0% $1,565,040 100.0% $ 1,451,497 100.0% $1,324,925 100.0% $1,127,799 100.0%
The following table shows, at September 30, 1999, the dollar amount of adjustable-rate loans and fixed-rate loans in the Company's portfolio 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 Company's 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 gives the Company 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. Consolidated Within Over Over Two Over Over Five Over Ten Over One One to to Three Three to to Ten to Fifteen Fifteen Year Two Years Years Five Years Years Years Years Total (in thousands) Real estate mortgages: Adjustable-rate $ 608 $ 827 $ 1,471 $ 6,649 $ 24,462 $ 67,422 $ 780,124 $ 881,563 Fixed-rate 50,432 36,589 22,568 38,510 96,806 137,944 233,444 616,293 Consumer loans: Adjustable-rate 85,865 1,186 490 2,066 3,705 2,317 1,240 96,869 Fixed-rate 23,816 8,822 11,606 23,047 18,922 7,811 26,222 120,246 Commercial business loans: Adjustable-rate 14,260 1,371 1,725 720 3 80 18,159 Fixed-rate 13,818 3,057 2,524 4,919 218 26 24,562 Total $ 188,799 $ 51,852 $ 40,384 $ 75,911 $144,116 $ 215,600 $ 1,041,030 $1,757,692
Residential Mortgage Lending At September 30, 1999, the Company's real estate loans totaled approximately $1.6 billion, or 89.2% of net loans receivable. One- to four-family residential mortgage loans totaled $1.3 billion, or 83.5% of the Company's real estate loans and 74.4% of total net loans receivable. The Company offers adjustable-rate mortgage loans ("ARMs") and fixed-rate mortgage loans with terms ranging from 10 years to 30 years. The ARMs currently offered by the Company have up to 30-year terms and interest rates which adjust annually or adjust annually after being fixed for a period of three, five or seven years in accordance with a designated index. ARMS may be originated with a 1% or 2% cap on any increase or decrease in the interest rate per year, with a 4%, 5% or 6% limit on the amount by which the interest rate can increase or decrease over the life of the loan. The Company emphasizes the origination of ARMs rather than long- term, fixed-rate mortgage loans for inclusion in its portfolios. In order to encourage the origination of ARMs with interest rates which adjust annually, the Company, like many of its competitors, may offer a rate of interest on such loans below the fully-indexed rate for the initial period of the loan. The Company presently offers 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 Company's cost of funds. Included in the Company's single- family ARMs are loans originated in the past which reprice to spreads over cost of funds indices. The Company underwrites ARMs based on the fully-indexed rate. The Company's fixed-rate residential mortgage loans have terms ranging from 10 to 30 years and require level monthly payments sufficient to amortize principal over the life of the loan. The Company originates residential mortgage loans with loan-to- value ratios up to 95%. Generally, on mortgage loans exceeding the 80% loan-to-value ratio, the Company requires private mortgage insurance which protects the Company against losses of at least 20% of the mortgage loan amount. All property securing real estate loans made by the Company is appraised either by appraisers employed by the Company or by independent appraisers selected by the Company. Loans are usually made pursuant to certain guidelines which will permit the sale of such loans in the secondary market. The Company offers various other residential lending programs, including bi-weekly mortgage loans and two-step mortgage loans originated principally for first-time home buyers. The Company also offers, as part of its Community Reinvestment Act program, more flexible underwriting criteria to broaden the availability of mortgage loans in the communities it serves. The majority of the Company's residential construction loans are made to finance the construction of individual owner-occupied houses with up to 90% loan-to-value ratios. Residential construction loans totaled $92.2 million at September 30, 1999. These construction loans are generally structured to be converted to permanent loans at the end of the construction phase. Loan proceeds are disbursed in increments as construction progresses and as inspections warrant. As part of its residential lending program, the Company also offers construction loans with 75% loan-to-value ratios to qualified builders. These construction loans are generally at a competitive fixed rate of interest for one- or two-year periods. The Company also offers lot loans intended for residential use. Such loans may be on a fixed-rate or adjustable-rate basis. Commercial Real Estate, Multi-family and Land Lending At September 30, 1999, the Company's commercial real estate portfolio totaled $123.1 million, or 7.1% of total net loans and 7.9% of real estate loans. Its multi-family portfolio totaled $46.3 million, or 2.6% of total net loans and 3.0% of total real estate loans. Loans made with land as security totaled $87.4 million, or 5.0% of total net loans and 5.6% of total real estate loans. Because of market conditions, since 1993 the Company has limited growth in loans made on commercial real estate, multi-family properties and on land acquisition and development projects and placed greater emphasis on single-family real estate lending. Interest rates charged on permanent commercial real estate loans are determined by market conditions existing at the time of the loan commitment. Generally, the loans are adjustable in interest and the rate is fixed for three to five years determined by market conditions, collateral and the relationship with the borrower. The amortization of the loans vary but will not exceed 20 years. In the past, the Company originated a substantial portion of its commercial real estate loans at rates generally two to three percentage points above its prevailing cost of funds. As such loans reach call or loan review dates or refinance, it is the Company's current policy to negotiate most of these loans to new terms based either on the prime lending rate as the interest rate index or to fix the rate of interest for a three year to five year period. Commercial and multi-family mortgage lending generally involves greater risk than single-family lending. Such lending typically involves larger loan balances to single borrowers or groups of related borrowers than single-family lending. Furthermore, the repayment of loans secured by income-producing properties is typically dependent upon the successful operation of the related real estate project. If the cash flow from the property is reduced (for example, if leases are not obtained or renewed), the borrower's ability to repay the Company's loans may be impaired. These risks can be affected significantly by supply and demand in the market for the type of property securing the loan and by general economic conditions, and commercial and multi-family loans may thus be subject, to a greater extent than single-family property loans, to adverse conditions in the economy. Consumer Lending Federal regulations permit the Company 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 Company's consumer loans totaled $217.1 million at September 30, 1999, or 12.5% of net loans receivable. The largest component of consumer lending is comprised of single-family home equity lines of credit and other equity loans, currently totaling $86.8 million, or 40.0% of all consumer loans. Other consumer loans primarily consist of loans secured by mobile homes, boats, automobiles and credit cards. Commercial Business Lending The Company is 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 20% of an institution's assets, provided that amounts in excess of 10% of total assets may be used only for small business loans. The Company's commercial business loans are generally made on a secured basis with terms that usually do not exceed five years. Most of the Company's commercial business loans to date have interest rates that change at periods ranging from 30 days to one year based on the Company's prime lending rate. Some loans have fixed interest rates determined at the time of commitment. At September 30, 1999, the Company's commercial business loans outstanding were $42.7 million, which represented 2.5% of total net loans receivable. Loan Sales and Servicing While the Company originates adjustable-rate loans for its own portfolio, fixed-rate loans are generally made on terms that will permit their sale in the secondary market. The Company participates 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 Company to satisfy the demand for such loans in its local communities, to meet asset and liability objectives of management and to develop a source of fee income through loan servicing. At September 30, 1999, the Company was servicing loans for others in the amount of $519.7 million. Based on the current level of market interest rates and other factors, the Company presently intends to sell selected current originations of conforming 30-year and 15-year conventional fixed-rate mortgage loans. The Company's policy with respect to the sale of fixed-rate loans is dependent to a large extent on the general level of market interest rates. Sales of fixed-rate residential loans totaled $200.3 million in 1999, $173.0 million in 1998 and $50.5 million in 1997. At September 30, 1999, the Company had $6.5 million in loans held for sale. Risk Factors Certain risks are inherent with loan portfolios which contain commercial real estate, multi-family, commercial business and consumer loans. While these types of loans provide benefits to the Company's 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 multi-family 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. Commercial business lending generally involves greater risk than residential mortgage lending and involves risks that are different from those associated with residential, commercial and multi-family real estate lending. Real estate lending is generally considered to be collateral based lending with loan amounts based on predetermined loan to collateral values and liquidation of the underlying real estate collateral is viewed as the primary source of repayment in the event of borrower default. Although commercial business loans are often collateralized by equipment, inventory, accounts receivable or other business assets, the liquidation of collateral in the event of a borrower default is often not a sufficient source of repayment because accounts receivable may be uncollectible and inventories and equipment may be obsolete or of limited use, among other things. Accordingly, the repayment of a commercial business loan depends primarily on the creditworthiness of the borrower (and any guarantors), while liquidation of collateral is a secondary and often insufficient source of repayment. Construction loans also involve additional risks attributable to the fact that loan funds are advanced upon the security of the project under construction. Consumer loans entail greater risk than do residential mortgage loans, particularly in the case of loans that are unsecured or secured by rapidly depreciating assets such as automobiles and other vehicles. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. The remaining deficiency often does not warrant further substantial collection efforts against the borrower beyond obtaining a deficiency judgment. In addition, consumer loan collections are dependent on the borrower's continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans. All of the above risk factors are present in the Company's loan portfolio and could have an impact on future delinquency and charge- off rates and levels. Limits on Loan Concentrations The Associations' permissible lending limits 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, 1999, First Federal's and Peoples Federal's lending limits under this restriction were $14.6 million and $6.9 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. At September 30, 1999, the largest aggregate amount of loans by First Federal and Peoples Federal to any one borrower, including related entities, was approximately $9.7 million and $3.4 million, respectively. All of these loans were performing according to their respective terms at September 30, 1999. Delinquencies and Nonperforming Assets Delinquent and problem loans are a normal part of any lending activity. When a borrower fails to make a required payment on a loan, the Company attempts to cure the default by contacting the borrower. The Company contacts 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 Company will institute measures to remedy the default, including commencing a foreclosure action. The Company may accept voluntary deeds of the secured property in lieu of foreclosure. The Company's 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. Real estate acquired by the Company as a result of foreclosure or by deed in lieu of foreclosure is classified as real estate owned until it is sold. When property is acquired, it is recorded at the lower of cost or estimated fair value at the date of acquisition and any resulting write-down is charged to the allowance for losses. Generally, interest accrual on a loan ceases when the loan becomes 90 days delinquent. OTS Asset Classification System OTS regulations include a classification system for problem assets. 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 it is 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 Company has classified $24.7 million in assets as substandard and $230,000 as doubtful, as of September 30, 1999. 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 Company had $6.2 million of assets designated "special mention" as of September 30, 1999. Management periodically reviews its loan portfolio, and has, in the opinion of management, appropriately classified and established allowances against all assets requiring classification under the regulation. For further discussion of the Company's problem assets, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Asset Quality," and Note 7 of Notes to Consolidated Financial Statements contained in Item 8 herein. 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, 1999, the Company's investment and mortgage- backed securities portfolio totaled approximately $219.0 million, which included stock in the FHLB of Atlanta of $29.9 million. Investment securities include U.S. Government and agency obligations, corporate bonds and mutual funds approximating $7.8 million. Mortgage-backed securities totaled $181.2 million as of September 30, 1999. See Note 1 of Notes to Consolidated Financial Statements, contained in Item 8 herein for a discussion of the Company's accounting policy for investment and mortgage-backed securities. See Notes 3, 4 and 5 of Notes to Consolidated Financial Statements for additional information regarding investment and mortgage-backed securities and FHLB of Atlanta stock. Objectives of the investment policies of the Company 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 -- Federal Regulation of Savings 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 Company primarily invests 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 Company only invests in corporate debt securities which are rated in either one of the three highest categories by two nationally recognized investment rating services. The Company's investment in mortgage-backed securities serves several primary functions. First, the Company has 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 Company previously securitized loans with federal agencies to reduce its credit risk exposure and to reduce regulatory risk-based capital requirements. Third, the Company acquires mortgage-backed securities from time to time to meet earning asset growth objectives and provide additional interest income when necessary to augment lower loan originations and replace loan portfolio runoff. The following tables set forth the carrying value of the Company's investment and mortgage-backed securities portfolio (excluding stock in the FHLB of Atlanta), maturities and average yields at September 30, 1999. The fair value of the Company's investment and mortgage-backed securities portfolio (excluding stock in the FHLB of Atlanta) was $189.1 million on September 30, 1999.
Investment and Mortgage-backed Securities Portfolio As of September 30, 1999 1998 1997 Amortized Fair Amortized Fair Amortized Fair Cost Value Cost Value Cost Value Securities Held to Maturity: (in thousands) U.S. Treasury and U.S. Government agencies and corporations $ 3,499 $ 3,514 $ 12,935 $ 12,913 Corporate debt and other securities $ 249 $ 258 649 680 1,347 1,432 Mortgage-backed securities 28 31 444 452 818 828 Total securities held to maturity $ 277 $ 289 $ 4,592 $ 4,646 $ 15,100 $ 15,173 Maturity and Yield Schedule as of September 30, 1999 Weighted Carrying Average Value Yield (dollar amounts in thousands) Corporate debt and other securities After 5 but within 10 years 249 10.57 249 10.57 Mortgage-backed securities After 10 years 28 9.49 28 9.49 Total securities held to maturity $ 277 10.46% As of September 30, 1999 1998 1997 Amortized Fair Amortized Fair Amortized Fair Cost Value Cost Value Cost Value Securities Available for Sale: (dollar amounts in thousands) U.S. Treasury and U.S. Government agencies and corporations $ 4,006 $ 4,021 $ 6,981 $ 7,094 $ 15,775 $ 15,808 Corporate debt and other securities 2,468 2,429 3,009 3,000 8,238 8,384 Equity securities Asset Management Fund-Adjustable-Rate Mortgage Portfolio 9,000 8,995 Federated Adjustable-Rate Mortgage Fund 3,219 3,151 Other mutual funds and other 1,119 1,119 1,170 1,170 4,575 4,488 Mortgage-backed securities 183,868 181,217 144,695 148,186 147,088 148,963 Total securities available for sale $191,461 $ 188,786 $ 155,855 $ 159,450 $ 187,895 $ 189,789 Maturity and Yield Schedule as of September 30, 1999 Weighted Carrying Average Value Yield U.S. Treasury and U.S. Government (dollar amounts in thousands) agencies and corporations: Within 1 year $ 3,006 6.04% After 1 but within 5 years 1,000 6.40 4,006 6.13 Corporate debt and other securities: Within 1 year 501 8.37 After 5 but within 10 years 974 6.30 After 10 years 993 5.66 2,468 6.46 Equity securities Within 1 year 770 5.25 After 10 years 349 -- 1,119 3.61 Mortgage-backed securities After 1 but within 5 years 11,867 6.69 After 5 but within 10 years 20,403 7.09 After 10 years 151,598 6.56 183,868 6.63 $ 191,461 6.60%
SOURCES OF FUNDS Deposits have historically been the primary source of funds for lending and investing activities. The amortization and scheduled payment of loans and maturities of investment securities provide a stable source of funds, while deposit fluctuations and loan prepayments are significantly influenced by the overall interest rate environment and other market conditions. FHLB advances and short-term borrowings provide supplemental liquidity sources based on specific needs or if management determines that these are the best sources of funds to meet current requirements. Deposits The Company offers a number of deposit accounts including regular savings accounts, negotiable order of withdrawal ("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 Company's deposit accounts, see Note 10 of Notes to Consolidated Financial Statements contained in Item 8 herein. The Associations are subject to fluctuations in deposit flows because of the influence of general interest rates, money market conditions and competitive factors. The Asset and Liability Committees of the Associations meet frequently and make changes relative to the mix, maturity and pricing of assets and liabilities in order to minimize the impact on earnings from such external conditions. The Associations' deposits are obtained primarily from residents of South Carolina. Management estimates that less than 1% of deposits at September 30, 1999, are obtained from customers residing outside of South Carolina. The principal methods used by the Company 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 Company utilizes traditional marketing methods to attract new customers and savings deposits, including mass media advertising and direct mail. The Company also provides customers access to the convenience of automated teller machines ("ATMs") through a proprietary ATM network and access to regional and national ATM networks. The Company also enjoys 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 programs, such as exclusive travel packages, special events and classic movies. Jumbo Certificates of Deposit The following table indicates the amount of the Company's jumbo certificates of deposit by time remaining until maturity as of September 30, 1999. Jumbo certificates of deposit require minimum deposits of $100,000 and have negotiable interest rates. Maturity Period At September 30, 1999 (in thousands) Three months or less $ 37,758 Over three through six months 16,896 Over six through twelve months 13,099 Over twelve months 3,298 Total $ 71,051 Borrowings The Company relies upon advances from the FHLB of Atlanta to supplement its supply of lendable funds and to meet deposit withdrawal requirements. The FHLB of Atlanta has served as the Company's primary borrowing source. Advances from the FHLB of Atlanta are typically secured by the Company's stock in the FHLB of Atlanta and a portion of the Company's first mortgage loans. Interest rates on advances vary from time to time in response to general economic conditions. At September 30, 1999, the Company had advances totaling $594.5 million from the FHLB of Atlanta at an average rate of 5.50%. At September 30, 1999, the maturity of the Associations' FHLB advances ranged from one to ten years. For more information on borrowings, see Note 11 of Notes to Consolidated Financial Statements contained in Item 8 herein. 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 Company arising from the sale of securities that the Company is obligated to repurchase at specified prices and dates. At the date of repurchase, the Company 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, 1999, the Company had $74.0 million of outstanding reverse repurchase agreements secured by mortgage-backed securities. The agreements had a weighted average interest rate of 5.45% at September 30, 1999, and mature within three months. For more information on other borrowings, see Note 12 of Notes to Consolidated Financial Statements contained in Item 8 herein. During 1998, the Company entered into a loan agreement with another bank for a $25.0 million funding line. The rate on the funding line is based on LIBOR. At September 30, 1999, $8.8 million was outstanding under this agreement with a weighted average rate of 7.38%. The following table sets forth certain information regarding short-term borrowings by the Company at the end of and during the periods indicated:
At or For the Year Ended September 30, 1999 1998 1997 (dollar amounts in thousands) Weighted Average Rate Paid On (at end of period): FHLB advances 5.50% 5.54% 5.65% Securities sold under agreements to repurchase 5.45 5.58 5.62 Bank line of credit 7.38 7.69 -- Maximum Amount of Borrowings Outstanding (during period): FHLB advances $ 611,500 $ 514,000 $ 419,577 Securities sold under agreements to repurchase 73,991 87,405 58,896 Bank line of credit 8,750 4,000 -- Approximate Average Amount of Short-term Borrowings With Respect To: FHLB advances 540,893 470,441 377,475 Securities sold under agreements to repurchase 35,323 45,241 27,050 Bank line of credit 6,698 373 -- Approximate Weighted Average Rate Paid On (during period): FHLB advances 5.37% 5.70% 5.71% Securities sold under agreements to repurchase 5.39 5.73 5.59 Bank line of credit 6.38 7.69 --
During 1998, the Company retired its $19.8 million 9.375% Senior Notes issued in fiscal 1992. The early redemption resulted in an extraordinary loss (net of income taxes) of $340,000 in 1998. ASSET AND LIABILITY MANAGEMENT Market Risk Market risk is the risk of loss from adverse changes in market prices and rates. The Company s market risk arises principally from interest rate risk inherent in its lending, deposit and borrowing activities. Management actively monitors and manages its interest rate risk exposure. Although the Company manages other risks, as in credit quality and liquidity risk, in the normal course of business, management considers interest rate risk to be its most significant market risk and could potentially have the largest material effect on the Company s financial condition and results of operations. Other types of market risks, such as foreign currency exchange rate risk and commodity price risk, do not arise in the normal course of the Company s business activities. The Company s profitability is affected by fluctuations in interest rates. Management s goal is to maintain a reasonable balance between exposure to interest rate fluctuations and earnings. A sudden and substantial increase in interest rates may adversely impact the Company s earnings to the extent that the interest rates on interest- earning assets and interest-bearing liabilities do not change at the same speed, to the same extent or on the same basis. The Company monitors the impact of changes in interest rates on its net interest income using several tools. One measure of the Company s exposure to differential changes in interest rates between assets and liabilities is shown in the Company s Interest Rate Sensitivity Analysis Table. See Item 7, "Management s Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Asset and Liability Management." Another measure, required to be performed by OTS-regulated institutions, is the test specified by OTS Thrift Bulletin No. 13A, "Interest Rate Risk Management" ("TB-13A"). This test measures the impact on net interest income and net portfolio value of an immediate change in interest rates in 100 basis point increments. Net portfolio value is defined as the net present value of assets, liabilities and off-balance sheet contracts. At September 30, 1999, the Company s internal calculations, based on the information and assumptions produced for the analysis, suggested that a 200 basis point increase in rates would reduce net interest income over a twelve-month period by 18.5% and reduce net portfolio value by 33.2% while a 200 basis point decline in rates would increase net interest income over a twelve-month period by 5.5% and increase net portfolio value by 32.2% in the same period. Computation of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan prepayments and deposit decay rates, and should not be relied upon as indicative of actual results. Further, the computations do not contemplate any actions the Company could undertake in response to changes in interest rates. The following table shows the Company s financial instruments that are sensitive to changes in interest rates, categorized by expected maturity, and the instruments fair values at September 30, 1999. Market risk sensitive instruments are generally defined as on- and off-balance sheet derivatives and other financial instruments.
Expected Maturity/Principal Repayments at September 30, Average There- Rate 2000 2001 2002 2003 2004 after Balance Fair Value Interest-sensitive assets: (dollar amounts in thousands) Loans receivable 7.61% $ 261,323 $222,124 $ 188,805 $160,485 $ 136,412 $773,001 $ 1,742,150 $ 1,742,924 Mortgage-backed securities 6.63 27,584 23,447 19,930 16,940 14,399 81,596 183,896 181,248 Investments and other interest- earning assets 5.65 24,244 1,000 2,564 27,808 27,793 FHLB Stock 7.50 29,925 29,925 29,925 Interest-sensitive liabilities: Checking accounts 0.50 68,321 37,226 25,314 17,213 11,705 24,873 184,652 184,652 Savings accounts 2.38 21,141 17,547 14,565 12,089 10,033 48,987 124,362 124,362 Money Market accounts 3.67 142,459 11,361 7,952 5,567 3,897 9,092 180,328 180,328 Certificate accounts 5.29 556,605 109,249 30,312 16,703 11,998 5,639 730,506 737,357 Borrowings 5.52 403,741 75,000 80,000 118,500 677,241 680,923 Off-balance sheet items: Commitments to extend credit 7.80 21,748 21,671
Expected maturities are contractual maturities adjusted for prepayments of principal. The Company uses certain assumptions to estimate fair values and expected maturities. For assets, expected maturities are based upon contractual maturity, projected repayments and prepayment of principal. The prepayment experience reflected herein is based on the Company s historical experience. For deposit liabilities, in accordance with standard industry practice, the Company has used decay rates utilized by the OTS. The actual maturities and run-off of loans could vary substantially if future prepayments differ from the Company s historical experience. Rate/Volume Analysis For the Company's rate/volume analysis and information regarding the Company s yields and costs and changes in net interest income, refer to Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Net Interest Income." SUBSIDIARY ACTIVITIES OF THE ASSOCIATIONS First Federal has the following wholly-owned subsidiaries: Charleston Financial Services Incorporated on January 28, 1977, its primary operations include the sale of data processing consulting services and software. The Carolopolis Corporation The Carolopolis Corporation ("Carolopolis") was incorporated in 1976 for the principal purpose of land acquisition and development and construction of various projects for resale. Development activities began in 1981 and ended in 1989. Carolopolis had been inactive for a number of years until 1996 when a lower tier corporation of Carolopolis was formed to operate and market for resale a commercial real estate property acquired through foreclosure by First Federal. Carolopolis is currently inactive. Broad Street Holdings Broad Street Holdings was incorporated in 1998 as the holding company for Broad Street Investments, Inc., which was also formed in 1998. Broad Street Investments has been organized as a real estate investment trust to hold mortgage-related assets. First Reinsurance First Reinsurance was incorporated in 1998 as the holding company for First Southeast Reinsurance, Inc., a company also organized in 1998 and domiciled in Vermont. First Southeast Reinsurance will reinsure mortgage insurance originated through mortgage insurance companies in connection with real estate loans originated by the Associations. First Southeast Fiduciary and Trust First Southeast Fiduciary and Trust Services, Inc. was incorporated in 1998 for the purpose of extending trust and other asset management services to customers of the Associations. Peoples Federal has two wholly-owned subsidiaries: First Southeast Insurance Services, Inc. This subsidiary, formerly known as the Magrath Insurance Agency, 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. In terms of premium dollars, the insurance agency is approximately 50% commercial lines and 50% personal lines. The agency represents several companies for both commercial and personal insurance products. Coastal Carolina Service Corporation Coastal Carolina Service Corporation was incorporated in 1980 for the purpose of conducting data processing activities. All such activities ended prior to 1992. Beginning in 1998 Coastal Carolina Service Corporation was engaged in certain investment activities, including holding for investment purposes mortgage loans, mortgage- backed securities and U.S. treasury and agency securities. COMPETITION First Federal was the largest and Peoples Federal the fourth largest of savings associations headquartered in South Carolina at September 30, 1999, based on asset size as reported by the OTS. The Company faces strong competition in the attraction of savings deposits and in the origination of real estate and other loans. The Company's most direct competition for savings deposits has historically come from commercial banks and from other savings institutions located throughout South Carolina. The Company also faces 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 the Company. The Company's competition for real estate and other loans comes principally from commercial banks, other thrift institutions, mortgage banking companies, insurance companies, developers, and other institutional lenders. The Company competes for loans principally through the interest rates and loan fees charged and the efficiency and quality of the services provided borrowers, developers, real estate brokers, and home builders. PERSONNEL As of September 30, 1999, the Company had 611 full-time equivalent employees. 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 thrift institutions, the Associations are subject to extensive regulation, examination and supervision by the OTS as its chartering agency, and the FDIC, as the insurer of their deposits. Lending activities and other investments must comply with various statutory and regulatory capital requirements. The Associations are regularly examined by federal regulators and file periodic reports concerning their activities and financial condition. In addition, the Associations' relationship with their depositors and borrowers also is regulated to a great extent by both federal and state laws, especially in such matters as the ownership of deposit accounts and the form and content of the Associations' mortgage documents. Federal Regulation of Savings Associations 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. Among other functions, the OTS issues and enforces regulations affecting federally insured savings associations and regularly examines these institutions. Federal Home Loan Bank System The FHLB System, consisting of 12 FHLBs, is under the jurisdiction of the Federal Housing Finance Board ("FHFB"). The Associations, as members of the FHLB of Atlanta, are required to acquire and hold shares of capital stock in the FHLB of 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 of Atlanta stock of $18.0 million and $11.9 million, respectively, at September 30, 1999. Among other benefits, the FHLB of Atlanta 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 of Atlanta. Federal Deposit Insurance Corporation The FDIC is an independent federal agency that insures the deposits, up to prescribed statutory limits, of depository institutions. The FDIC maintains two separate insurance funds: the Bank Insurance Fund ("BIF") and the SAIF. As insurer of the Associations' deposits, the FDIC has examination, supervisory and enforcement authority over the Associations. Under applicable regulations, the FDIC assigns an institution to one of three capital categories based on the institution s financial information, as of the reporting period ending seven months before the assessment period. The capital categories are: (i) well-capitalized, (ii) adequately capitalized, or (iii) undercapitalized. An institution is also placed in one of three supervisory subcategories within each capital group. The supervisory subgroup to which an institution is assigned is based on a supervisory evaluation provided to the FDIC by the institution s primary federal regulator and information that the FDIC determines to be relevant to the institution s financial condition and the risk posed to the deposit insurance funds. An institution s assessment rate depends on the capital category and supervisory category to which it is assigned with the most well-capitalized, healthy institutions receiving the lowest rates. Risk classification of all insured institutions is made by the FDIC semi-annually. At September 30, 1999, the Associations were classified as well-capitalized institutions. On September 30, 1996, the Deposit Insurance Funds Act ("DIF Act") was enacted, which, among other things, imposed a special one- time assessment on SAIF member institutions, including the Associations, to recapitalize the SAIF. As a result of the DIF Act and the special one-time assessment, the FDIC reduced the assessment schedule for SAIF members, effective January 1, 1997, to a range of 0% to .27%, with most institutions, including the Associations, paying 0%. This assessment schedule is the same as that for the BIF, which reached its designated reserve ratio in 1995. In addition, since January 1, 1997, SAIF members were charged an assessment of .065% of SAIF-assessable deposits for the purpose of paying interest on the obligations issued by the Financing Corporation ("FICO") in the 1980s to help fund the thrift industry cleanup. BIF-assessable deposits were charged an assessment to help pay interest on the FICO bonds at a rate of approximately .013%. The savings institutions assessment is expected to be reduced to about two basis points no later than January 1, 2000, when BIF-insured institutions fully participate in the assessment. These assessments, which may be revised based upon the level of BIF and SAIF deposits, will continue until the bonds mature in the year 2015. The FDIC is authorized to raise the assessment rates in certain circumstances. The FDIC has exercised this authority several times in the past and may raise insurance premiums in the future. If such action is taken by the FDIC, it could have an adverse effect on the earnings of the Associations. Under the Federal Deposit Insurance Act, insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or the OTS. Management of the Associations do not know of any practice, condition or violation that might lead to termination of deposit insurance. Prompt Corrective Action Each federal banking agency is required to implement a system of prompt corrective action for institutions that it regulates. The federal banking agencies have promulgated substantially similar regulations to implement this system of prompt corrective action. Under the regulations, an institution shall be deemed to be "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 leverage 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. At September 30, 1999, First Federal and Peoples Federal were categorized as "well capitalized" under the prompt corrective action regulations of the OTS. See Note 17 of the Notes to Consolidated Financial Statements contained in Item 8 herein. Standards for Safety and Soundness The federal banking regulatory agencies have prescribed, by regulation, standards for all insured depository institutions relating to: (i) internal controls, information systems and internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest rate risk exposure; (v) asset growth; (vi) asset quality; (vii) earnings; and (viii) compensation, fees and benefits ("Guidelines"). The Guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the OTS determines that the Associations fail to meet any standard prescribed by the Guidelines, the agency may require the Associations to submit to the agency an acceptable plan to achieve compliance with the standard. Management is aware of no conditions relating to these safety and soundness standards which would require submission of a plan of compliance. Qualified Thrift Lender Test The Qualified Thrift Lender ("QTL") test requires that a savings association maintain at least 65% of its total tangible assets in "qualified thrift investments" on a monthly average basis in nine out of every 12 months. At September 30, 1999, the Associations were in compliance with the QTL test. Capital Requirements The OTS capital regulations require savings institutions to meet three capital standards: a 1.5% tangible capital standard, a 3% leverage (core capital) ratio and an 8% risk based capital standard. Core capital is defined as common stockholder s equity (including retained earnings), certain non-cumulative perpetual preferred stock and related surplus, minority interests in equity accounts of consolidated subsidiaries less intangibles other than certain mortgage servicing rights, and credit card relationships. The OTS regulations require that, in meeting the leverage ratio, tangible and risk-based capital standards institutions generally must deduct investments in and loans to subsidiaries engaged in activities not permissible for a national bank. In addition, the OTS prompt corrective action regulation provides that a savings institution that has a leverage capital 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. The OTS risk-based requirement requires savings associations to have total capital of at least 8% of risk-weighted assets. Total capital consists of core capital, as defined above, and supplementary capital. Supplementary capital consists of certain permanent and maturing capital instruments that do not qualify as core capital and general valuation loan and lease loss allowances up to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used to satisfy the risk-based requirement only to the extent of core capital. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet items, will be multiplied by a risk weight, ranging from 0% to 100%, based on the risk inherent in the type of asset. For example, the OTS has assigned a risk weight of 50% for prudently underwritten permanent one- to- four family first lien mortgage loans not more than 90 days delinquent and having a loan-to-value ratio of not more than 80% at origination unless insured to such ratio by an insurer approved by Fannie Mae or Freddie Mac. The OTS is authorized to impose capital requirements in excess of these standards on individual associations on a case-by-case basis. The OTS and FDIC are authorized and, under certain circumstances required, to take certain actions against savings associations that fail to meet their capital requirements. The OTS is generally required to take action to restrict the activities of an "undercapitalized association" (generally defined to be one with less than either a 4% core capital ratio, a 4% Tier 1 risk-based capital ratio or an 8% risk-based capital ratio). Any such association must submit a capital restoration plan and until such plan is approved by the OTS may not increase its assets, acquire another institution, establish a branch or engage in any new activities, and generally may not make capital distributions. The OTS is authorized to impose the additional restrictions that are applicable to significantly undercapitalized associations. See Note 17 of Notes to Consolidated Financial Statements contained in Item 8 herein for a summary of all applicable capital requirements of First Federal and Peoples Federal. Limitations on Capital Distributions OTS regulations require the Associations to give the OTS 30 days' advance notice of any proposed declaration of dividends, and the OTS has the authority under its supervisory powers to prohibit the payment of dividends. 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. In addition, the regulation utilizes a three-tiered approach which permits various levels of distributions based primarily upon a savings association's capital level. 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 its net income during the calendar year plus 50% of their surplus capital at the beginning of the calendar year less any distributions previously paid during the year. Regulation of the Company The Company is subject to certain restrictions under the Home Owners Loan Act ("HOLA") and the OTS regulations issued thereunder. Such restrictions generally concern, among others, acquisitions of other savings associations and savings and loan holding companies. As a multiple savings and loan holding company within the meaning of HOLA, the Company s activities are generally subject to more restrictions than those of a unitary savings and loan holding company. Specifically, if First Federal or Peoples Federal fail to meet the QTL test, the activities of the Company and 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 savings and loan holding company. Additionally, the HOLA requires any savings and loan holding company that controls a savings association that fails the QTL test to, within one year after the date on which the association ceases to be a QTL, register as and be deemed a bank holding company subject to all applicable laws and regulations. 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 16 of its branch offices, including its home office at 34 Broad Street in downtown Charleston. A substantial portion of its home office is now leased. The remaining seven branch offices are leased properties on which First Federal has constructed banking offices. All of the leases include various renewal or purchase options. 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. Nine of Peoples Federal's branch offices are owned with six facilities leased. Peoples Federal leases space for certain insurance agency operations in Charleston and in Lake City and for loan origination functions in Ocean Isle, North Carolina. In addition, First Federal leases properties in four locations for off-site ATM facilities. First Federal also has a business partnership with Piggly Wiggly for ATM operations in supermarket locations. Both Associations also own land purchased for potential future branch locations. The Company evaluates on a continuing basis the suitability and adequacy of all of its facilities, including branch offices and service facilities, and has active programs of relocating, remodeling or closing any as necessary to maintain efficient and attractive facilities. The Company believes its present facilities are adequate for its operating purposes. At September 30, 1999, the total book value of the premises and equipment owned by the Company was $22.0 million. Reference is made to Note 16 of Notes to Consolidated Financial Statements contained in Item 8 herein for information relating to minimum rental commitments under the Company's leases for office facilities and to Note 8 for further details on the Company's 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 Associations' 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, 1999. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Stock Prices and Dividends: Cash Dividend High Low Declared 1999: First Quarter $ 20.00 $ 14.00 $ 0.120 Second Quarter 20.75 17.88 0.120 Third Quarter 21.00 14.50 0.120 Fourth Quarter 20.25 17.00 0.120 1998: First Quarter $ 26.75 $ 17.06 $ 0.105 Second Quarter 27.38 23.75 0.105 Third Quarter 26.38 21.38 0.105 Fourth Quarter 24.38 16.75 0.105 The Company's common stock is traded in the Nasdaq National Market under the symbol "FFCH." Trading information in newspapers is provided on the Nasdaq Stock Market quotation page under the listing, "FSTFNHLD." As of September 30, 1999, there were approximately 2,473 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 12 times with the most recent dividend paid in November 1999, at $.14 per share. Cash dividends per share totaled $.48, $.42 and $.36 for fiscal 1999, 1998 and 1997, respectively. These dividends per share amounted to 33.33%. 34.43% and 32.73% of basic net income per common share, respectively. Please refer to Item 1. "Business--Regulation--Federal Regulation of Savings Associations--Limitations on Capital Distributions" for information with respect to current restrictions on the Associations' ability to pay dividends to the Company. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
At or For the Year Ended September 30, 1999 1998(1) 1997(1) 1996(1) 1995(1) (dollar amounts in thousands, except per share amounts) Summary of Operations Interest income $140,832 $136,345 $126,359 $115,486 $99,230 Interest expense 80,394 81,689 75,340 68,314 57,547 Net interest income 60,438 54,656 51,019 47,172 41,683 Provision for loan losses (2,765) (2,405) (2,435) (1,908) (511) Net interest income after provision for loan losses 57,673 52,251 48,584 45,264 41,172 Other income 15,314 13,357 12,296 10,019 8,796 Non-interest expense (43,280) (40,158) (37,356) (36,203) (34,673) SAIF special assessment (313) (6,955) Income tax expense (10,400) (8,571) (8,501) (4,471) (5,490) Net income before extraordinary loss 19,307 16,879 14,710 7,654 9,805 Extraordinary loss on retirement of debt (2) (340) Net income $19,307 $16,539 $14,710 $7,654 $9,805 Per Common Share Net income before extraordinary loss $ 1.44 $ 1.24 $ 1.10 $ 0.57 $ 0.74 Net income before extraordinary loss, diluted 1.40 1.20 1.07 0.56 0.72 Extraordinary loss (0.02) Extraordinary loss, diluted (0.03) Net income 1.44 1.22 1.10 0.57 0.74 Net income, diluted 1.40 1.17 1.07 0.56 0.72 Book value 9.43 9.16 8.28 7.53 7.30 Dividends 0.48 0.42 0.36 0.32 0.28 Dividend payout ratio 33.33% 34.43% 32.73% 56.14% 37.84% Core Earnings (3) Net income before extraordinary loss $ 19,307 $ 16,879 $ 14,710 $ 7,654 $ 9,805 Investors merger related expenses 210 SAIF assessment 198 4,391 Core income $ 19,307 $ 17,089 $ 14,908 $ 12,045 $ 9,805 Core Earnings Per Share (3) Basic: Net income before extraordinary loss $ 1.44 $ 1.24 $ 1.10 $ 0.57 $ 0.74 Investors merger related expenses 0.02 SAIF assessment 0.01 0.33 Core income $ 1.44 $ 1.26 $ 1.11 $ 0.90 $ 0.74 Diluted: Net income before extraordinary loss $ 1.40 $ 1.20 $ 1.07 $ 0.56 $ 0.72 Investors merger related expenses 0.01 SAIF assessment 0.01 0.32 Core income $ 1.40 $ 1.21 $ 1.08 $ 0.88 $ 0.72 At or For the Year Ended September 30, 1999 1998(1) 1997(1) 1996(1) 1995(1) (dollar amounts in thousands, except per share amounts) At September 30, Assets $2,070,752 $1,839,708 $1,774,952 $1,603,177 $1,417,592 Loans receivable, net 1,742,150 1,565,040 1,451,497 1,324,925 1,127,799 Mortgage-backed securities 181,245 148,630 149,781 83,993 102,246 Investment securities 37,743 40,412 76,959 110,686 122,579 Deposits 1,219,848 1,164,440 1,123,988 1,111,943 1,120,546 Borrowings 677,241 504,942 498,236 348,970 172,120 Stockholders' equity 125,881 125,163 111,528 101,016 97,076 Number of offices 38 36 35 35 34 Full-time equivalent employees 611 576 564 561 530 Selected Ratios: Return on average equity 15.38% 13.97% 13.94% 7.60% 10.60% Return on average assets 0.99 0.90 0.88 0.51 0.72 Core return on average equity 15.38 14.43 14.13 11.96 10.60 Core return on average assets 0.99 0.93 0.89 0.80 0.72 Gross interest margin 2.99 2.84 2.89 2.94 2.91 Net interest margin 3.22 3.10 3.15 3.22 3.16 Efficiency ratio 58.30 59.42 59.40 63.12 68.57 Average equity as a percentage of average assets 6.42 6.48 6.28 6.67 6.82 Asset Quality Ratios: Allowance for loan losses to net loans 0.84% 0.82% 0.83% 0.88% 0.97% Allowance for loan losses to nonperforming loans 202.08 177.76 86.74 66.22 55.56 Nonperforming assets to loans and real estate and other assets acquired in settlement of loans 0.74 0.83 1.75 1.51 2.03 Nonperforming assets to total assets 0.62 0.71 1.44 1.25 1.62 Net charge-offs to average loans 0.06 0.11 0.14 0.10 0.05 (1)During 1998 First Financial acquired Investors. This business combination was accounted for utilizing the pooling-of-interests method of accounting, and accordingly all financial information prior to the merger has been retroactively restated. (2)Loss on retirement of First Financial's 9.375% senior notes, net of income tax benefit of $173. (3)Core earnings represents net income before extraordinary loss exclusive of after-tax expenses related to the Investors pooling and a one time SAIF assessment recorded in 1997 and 1996.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General First Financial's financial results of operations continued to improve in 1999. The information presented in the following discussion of financial results is generally indicative of the activities of its two thrift operating subsidiaries, First Federal and Peoples Federal. The following discussion should be read in conjunction with the Selected Consolidated Financial Data contained in Item 6 of this report and the Consolidated Financial Statements and accompanying notes contained in Item 8 of this report. First Financial completed the acquisition of Investors on November 7, 1997, in a transaction accounted for as a pooling-of- interests. Under the terms of the agreement, Investors shareholders received 1.36 shares of First Financial common stock in exchange for each share of Investors stock held, which resulted in the issuance of approximately 709,000 shares. All financial information for prior periods was restated in fiscal 1998 to reflect the Investors merger. The Board of Directors of First Financial approved on October 22, 1998, a stock repurchase program to acquire up to 500,000 shares of common stock, representing approximately 3.7% of outstanding shares at that time. The program was completed in June of 1999 with 500,000 shares repurchased at an average price of $19.10. First Financial s net income and core operating results continued to set new records in 1999. First Financial s core earnings increased $2.2 million in 1999 to set a new Company record of $19.3 million compared with $17.1 million earned in 1998 and $14.9 million in 1997. Results for fiscal 1998 and 1997 included several non-recurring charges. During 1998, these non-recurring charges included after-tax merger related expenses of $210,000 and an extraordinary charge of $340,000 after-tax related to the retirement of the Company s 9.375% senior notes. Net income after the effect of the extraordinary charge and other non-recurring costs was $16.5 million in 1998 and $14.7 million in 1997. Core basic and diluted earnings per share improved to $1.44 and $1.40 in 1999, respectively, from $1.26 and $1.21 in 1998. Core basic and diluted earnings per share totaled $1.11 and $1.08 in 1997, respectively. Basic and diluted earnings per share on net income was $1.22 and $1.17, respectively, in 1998 compared with $1.10 and $1.07 in 1997. Profitability improved during fiscal 1999 due to a number of factors, including strong loan growth, improved net interest margins earned and additional fee income generated from sales of loans into the secondary market. Expense ratios for the year improved even though the Company made extensive investments in new technology and absorbed costs related to preparation for Year 2000. During fiscal 1999, the Company expanded its efforts to generate higher yielding consumer loans by originating second mortgages through a network of brokers and expanding its mobile home loan program. Financial Position At September 30, 1999, First Financial s assets totaled $2.1 billion, increasing by 12.6%, or $231.0 million, from September 30, 1998. Net asset growth was principally attributable to growth in net loans receivable, which increased $177.1 million during 1999, and also growth in mortgage-backed securities, which increased $32.6 million. Average interest-earning assets increased by 6.4% in 1999. At September 30, 1998, First Financial s assets totaled $1.8 billion, increasing in total by 4%, or $64.8 million, from September 30, 1997. Net asset growth was principally attributable to growth in net loans receivable, which increased $113.5 million during 1998, offset by a reduction in the Company s investment portfolio which declined $36.5 million during fiscal 1998. Average interest-earning assets increased by 8.7% in 1998. Investment Securities and Mortgage-backed Securities At September 30, 1999, available for sale securities totaled $188.8 million and represented 99.9% of investment securities and mortgage-backed securities compared to $159.5 million, or 97.2% of comparable balances at September 30, 1998. The carrying value of held to maturity securities totaled only $277,000 at September 30, 1999 compared with $4.6 million at the end of 1998. The primary objective of the Company in its management of the investment and mortgage-backed securities portfolio is to maintain a portfolio of high quality, highly liquid investments with returns competitive with short-term U.S. 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 and mortgage- backed securities 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. Loans Receivable Loans comprise the major portion of interest-earning assets of the Company, accounting for 87.4% and 85.6% of average interest- earning assets in 1999 and 1998, respectively. Compared with balances on September 30, 1998, net loans receivable grew by 11.9% during 1999. Loans held for sale declined by $7.9 million in 1999 from $14.5 million at September 30, 1998. The Company's loan portfolio consists of real estate mortgage and construction loans, home equity, manufactured housing 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. Strong housing markets in coastal South Carolina and in markets served through its correspondent lending programs helped the Company to achieve an 11.3% increase in net loans receivable during fiscal 1999. Increasing by $160.8 million, the single-family loan portfolio was a principal factor in the growth in net loans receivable. Consumer loans also increased $44.4 million, or 25.7% in fiscal 1999 following a strong $26.1 million expansion in fiscal 1998. Asset Quality The Company believes it 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, nonperforming 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 loans originated are in coastal South Carolina and North Carolina and in Florence, South Carolina. The largest component of loan growth during fiscal 1999 has been in single-family loans, which traditionally have resulted in smaller problem credits and less credit risk during various economic cycles than may be experienced in other types of secured real estate lending. For several years the Company's strategy has been to reduce its exposure to commercial real estate, land acquisition and development and multi-family real estate. The largest percentage increase in loan growth was attributable to consumer loans, which remain the sector of the portfolio where higher charge-off rates are experienced. 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 and 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 illustrates trends in problem assets and other asset quality indicators over the past five years.
Problem Assets At September 30, 1999 1998 1997 1996 1995 (dollar amounts in thousands) Non-accrual loans $ 4,466 $ 2,647 $ 6,609 $ 8,137 $ 7,709 Accruing loans 90 days or more delinquent 20 50 568 1,391 974 Renegotiated loans 2,724 4,493 6,776 8,049 11,103 Real estate and other assets acquired in settlement of loans 5,685 5,871 11,658 2,432 3,144 $ 12,895 $ 13,061 $ 25,611 $ 20,009 $ 22,930 As a percent of loans receivable and real estate and other assets acquired in settlement of loans 0.74% 0.83% 1.75% 1.51% 2.03% As a percent of total assets 0.62 0.71 1.44 1.25 1.62 Allowance for loan losses as a percent of problem loans 202.08 177.76 86.74 66.22 55.56 Net charge-offs to average loans outstanding 0.06 0.11 0.14 0.10 0.05
Problem assets were $12.9 million at September 30, 1999, or .62% of assets and .74% of loans receivable and real estate and other assets acquired in settlement of loans. At September 30, 1998, problem assets were $13.1 million, or .71% of assets and .83% of loans receivable and real estate and other assets acquired in settlement of loans. Problem assets, which had increased in 1997 due to the acquisition through foreclosure of two shopping centers, declined significantly in 1998 as one of these properties was sold in the final quarter of fiscal 1998. Renegotiated loans declined by $1.8 million and non-accrual loans increased $1.8 million during 1999. A renegotiated loan of $1.4 million collateralized by multi-family property became seriously delinquent during the period and the Company placed the loan on non- accrual status. Renegotiated loans currently comprise approximately 21.1% of total problem assets. The allowance for loan losses at September 30, 1999 covers 202.1% of reported problem loans, increasing from 177.8% as of September 30, 1998. 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 in settlement of loans from normal lending operations. 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 at each reporting date. Management reviews the adequacy of the allowance no less frequently than each quarter, utilizing its internal portfolio analysis system. The factors that are considered in a determination of the level of the allowance are management's assessment of current economic conditions, the composition of the loan portfolio, previous loss experience on certain types of credit, a review of specific high-risk sectors of the loan portfolio, selected individual loans and concentrations of credit. The value of the underlying collateral is also considered during such reviews. Allowance for Loan Losses At or For the Year Ended September 30, 1999 1998 1997 1996 1995 (dollar amounts in thousands) Balance, beginning of period $12,781 $12,103 $11,639 $ 10,993 $11,043 Loans charged-off: Real estate loans 122 981 682 824 530 Commercial business loans 46 122 431 188 3 Consumer loans 1,428 1,427 1,196 745 531 Total charge-offs 1,596 2,530 2,309 1,757 1,064 Recoveries: Real estate loans 245 159 164 336 356 Commercial business loans 82 407 8 40 32 Consumer loans 293 237 166 119 115 Total recoveries 620 803 338 495 503 Net charge-offs 976 1,727 1,971 1,262 561 Provision for loan losses 2,765 2,405 2,435 1,908 511 Balance, end of period: Real estate loans 8,456 8,753 9,003 9,047 8,940 Commercial business loans 2,079 1,087 1,384 1,225 947 Consumer loans 4,035 2,941 1,716 1,367 1,106 Balance, end of period $14,570 $12,781 $12,103 $ 11,639 $10,993 Balance as a percent of net loans: Real estate loans 0.56% 0.64% 0.70% 0.77% 0.90% Commercial business loans 4.87 3.22 4.20 3.84 2.94 Consumer loans (1) 1.86 1.70 1.17 1.10 0.94 Total net loans 0.84 0.82 0.83 0.88 0.97 Net charge-offs as a percent of average net loans: Real estate loans (0.01)% 0.06% 0.04% 0.05% 0.02% Commercial business loans (0.09) (0.85) 1.30 0.46 (0.09) Consumer loans (1) 0.58 0.75 0.76 0.52 0.36 Total net loans 0.06 0.11 0.14 0.10 0.05 (1) Consumer loans include home equity lines of credit. On September 30, 1999, the total allowance for loan losses was $14.6 million compared with $12.8 million at September 30, 1998. Total net loan charge-offs declined to $1.0 million in 1999 from $1.7 million in 1998. Net real estate loan recoveries totaled $123,000 in 1999 compared with net charge-offs of $822,000 in 1998. Net real estate charge-offs in 1998 included approximately $679,000 related to a $2.8 million multi-family loan on which the Company had maintained an $800,000 specific reserve. Consumer loan net charge-offs were $1.1 million in 1999 compared with $1.2 million in 1998. Commercial loan net recoveries of $36,000 in 1999 compared with $285,000 in net recoveries in 1998. Based on the current economic environment and other factors, management believes that the allowance for loan losses at September 30, 1999 was maintained at a level adequate to provide for inherent losses in the Company's loan portfolio. The following table sets forth the breakdown of the Company's allowance for loan losses by loan category at the dates indicated. The increase in the commercial business loan allowance in 1999 is principally attributable to increased balances of classified loans during the period. 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, 1999 1998 1997 1996 1995 (dollar amounts in thousands) Allowance for loan losses applicable to: Real estate loans $ 8,456 $ 8,753$ 9,003 $ 9,047 $ 8,940 Commercial business loans 2,079 1,087 1,384 1,225 947 Consumer loans 4,035 2,941 1,716 1,367 1,106 Total $ 14,570 $ 12,781$ 12,103 $ 11,639 $ 10,993 Percent of loans to total net loans: Real estate loans 85.5% 87.1% 87.8% 88.4% 86.9% Commercial business loans 2.3 2.1 2.2 2.3 2.8 Consumer loans 12.2 10.8 10.0 9.3 10.3 Total 100.0% 100.0% 100.0% 100.0% 100.0% Deposits Retail deposits have traditionally been the primary source of funds for the Company and also provide a customer base for the sale of additional financial products and services. The Company has set strategic targets for net growth in transaction accounts annually and in numbers of households served. The Company believes that its future focus must be on increasing the number of available opportunities to provide a broad array of products and services to retail consumers. The Company's total deposits increased $55.4 million during the year ended September 30, 1999. First Financial's deposit composition at September 30, 1999 and 1998 is as follows: At September 30, 1999 1998 Percent of Percent of Balance Total Balance Total (dollar amounts in thousands) Checking accounts $ 184,652 15.14% $ 162,260 13.94% Statement and other accounts 124,362 10.19 120,927 10.38 Money market accounts 180,328 14.78 153,479 13.18 Certificate accounts 730,506 59.89 727,774 62.50 Total deposits $ 1,219,848 100.00% $ 1,164,440 100.00% National and local market trends over the past several years suggest that consumers are continuing to move an increasing percentage of discretionary savings funds into investments such as annuities and stock and fixed income mutual funds. While deposits remain a primary, highly stable source of funds for the Company, deposits have declined as a percentage of liabilities over the recent several years. As of September 30, 1999, deposits as a percentage of liabilities were 62.7% compared with 67.9% at September 30, 1998. The Company expects to maintain a significant portion of its overall deposits in core account relationships; however, future growth in overall deposit balances may be achieved primarily through specifically targeted programs offering higher yielding investment alternatives to consumers. Such targeted programs may increase the Company's overall cost of funds and thus impact the Company's future net margins. The Company's average cost of deposits at September 30, 1999 was 4.01% compared with 4.39% at September 30, 1998. Borrowings Borrowings increased $172.3 million during the current year to $677.2 million as of September 30, 1999. Borrowings as a percentage of total liabilities were approximately 34.8% at the end of 1999 compared with 29.5% in 1998. Borrowings from the FHLB of Atlanta increased $123.0 million and reverse repurchase agreements increased $44.5 million during 1999. The Company's average cost of FHLB advances, reverse repurchase agreements and other borrowings declined from 5.56% at September 30, 1998 to 5.52% at September 30, 1999. Approximately $321.0 million in FHLB advances mature or are subject to call within one year and all of the reverse repurchase agreements mature within three months. Capital Resources Average stockholders' equity was $125.5 million during 1999, increasing 6.0% from $118.4 million in 1998. The primary source of growth in stockholders' equity during 1999 was retained net income. The Consolidated Statement of Stockholders' Equity and Comprehensive Income contained in Item 8 herein details the changes in stockholders' equity during the year. The Company's capital ratio, total capital to total assets, was 6.08% at September 30, 1999 compared to 6.80% September 30, 1998. A significant outflow during fiscal 1999 related to the Company s stock repurchase program. A total of 506,000 shares of common stock were repurchased at a cost of $9.7 million, with 500,000 shares related to the stock repurchase program. During 1999, the Company paid $.48 in dividends per share for a payout ratio of 33.3%, compared with dividends of $.42 and a payout ratio of 34.4% in 1998. In November 1999, the Board of Directors paid a regular quarterly cash dividend of $.14 per share, which will result in an increase of approximately 16.7% from the previous quarterly cash dividend amount of $.12 per common share. 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. Under OTS regulations, the Associations both meet the requirements to be "well- capitalized." Current capital distribution regulations of the OTS allow the greatest flexibility to well-capitalized institutions. 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 the Associations. The level of liquidity is based on management's strategic direction for the Company, commitments to make loans and the Committees' assessment of each Association's ability to generate funds. Historically, sources of liquidity have included net deposits to savings accounts, amortizations and prepayments of loans, FHLB advances, reverse repurchase agreements and sales of securities and loans held for sale. The Associations are subject to federal regulations which currently require the maintenance of a daily average balance of liquid assets equal to 4.0% of net withdrawable deposits and borrowings payable in one year or less. The Associations have adopted policies to maintain liquidity levels well above the requirements. All requirements were met in 1999. The Company's most stable and traditional source of funding has been the attraction and retention of deposit accounts, the success of which the Company believes is based primarily on the strength and reputation of the Associations, effective marketing and rates paid on deposit accounts. First Federal has a major market share of deposits in Charleston, Berkeley and Dorchester counties and a significant share of deposits in the Georgetown market. Peoples Federal's deposits are principally obtained in Horry and Florence counties. By continuing to promote innovative new products, pricing competitively and encouraging 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 investment products. Due to disintermediation of traditional savings balances to other investment products, including the equity markets, annuities and mutual funds, the pool of retail deposit funds held in financial institutions has contracted over time, resulting in more reliance by the Company on other sources of funds. Other primary sources of funds include borrowings from the FHLB, principal repayments on loans and mortgage-backed securities, reverse repurchase agreements and sales 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 fiscal 1999, the FHLB of Atlanta instituted a general policy of limiting borrowing capacity to 30% of assets, regardless of the level of advances that could be supported by available collateral for such advances. This new policy serves to define an upper cap for FHLB advances for each of the banking subsidiaries. As of September 30, 1999, based on asset size of each banking subsidiary, additional advance funding of $26.7 million was available under the current FHLB of Atlanta general policy. During 1999, the Company experienced a net cash outflow from investing activities of $232.9 million, consisting principally of a net increase of $188.3 million in loans receivable and $102.5 million in purchases of mortgage-backed securities partially offset by $61.6 million in repayments to mortgage-backed securities. The Company experienced net cash inflows of $39.2 million from operating activities and $213.4 million from financing activities. Financing activities included $123.0 million in net additions to FHLB advances, $44.5 million in net additions in reverse repurchase agreements and growth of $55.4 million in deposit balances. Proceeds from the sale of loans totaled $203.1 million in 1999, increasing from $173.0 million in 1998. Based on recent asset/liability management objectives, management expects to continue its strategy of selling selected longer-term, fixed-rate loans in fiscal 1999, although it anticipates volume may be lower due to higher market interest rates and their likely effect on fixed-rate loan originations. 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 1992 was the issuance of $20.3 million in senior notes by the Company in September 1992. During 1998, the early redemption of the remaining outstanding principal of $19.8 million was partially funded by a reduction in investment securities of First Financial and partially by a $4.0 million draw on a $25.0 million bank funding line. Potential sources for First Financial's payment of principal and interest on its borrowings and for its periodic repurchase programs include (i) dividends from First Federal and Peoples Federal; (ii) payments from existing cash reserves and sales of marketable securities; and (iii) interest on its investment securities. As of September 30, 1999, First Financial had cash reserves and existing marketable securities of $1.6 million compared with $2.3 million at September 30, 1998. 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, frequency and magnitude of change in market interest rates. Although the net interest income of any financial institution is perceived as being vulnerable to fluctuations in interest rates, the Company's management has attempted to minimize that vulnerability. 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 the Asset and Liability Committees of the Associations, has established policies and monitors results to control interest rate risk. The Company utilizes measures such as static gap, which is the measurement of the difference between interest-sensitive assets and interest-sensitive liabilities repricing for a particular time period. More importantly may be the process of evaluating 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 the maturities of FHLB advances and other borrowings. The Company has continued to emphasize adjustable-rate mortgage real estate lending and short-term consumer and commercial business lending to accomplish its objectives. 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 period before an asset or liability matures or can be repriced. Interest Rate Sensitivity Analysis at September 30, 1999
Interest Rate Sensitivity Period 7-12 13 Months- Over 2 3 Months 4-6 Months Months 2 years Years Total Interest-earning assets: (dollar amounts in thousands) Loans (1) $ 251,019 $ 132,095 $ 228,768 $ 178,867 $ 966,943 $1,757,692 Mortgage-backed securities 46,786 6,918 10,863 1,628 117,701 183,896 Interest-earning deposits, investments and FHLB stock 54,137 -- 1,999 1,000 597 57,733 Total interest-earning assets 351,942 139,013 241,630 181,495 1,085,241 1,999,321 Interest-bearing liabilities: Deposits: Checking accounts (2) 11,243 11,242 22,485 24,502 52,065 121,537 Savings accounts (2) 5,285 5,285 10,571 17,547 85,674 124,362 Money market accounts 180,328 -- -- -- -- 180,328 Certificate accounts 208,618 145,796 206,565 104,289 65,238 730,506 Total deposits 405,474 162,323 239,621 146,338 202,977 1,156,733 Borrowings (3) 433,741 138,500 -- 55,000 50,000 677,241 Total interest-bearing liabilities 839,215 300,823 239,621 201,338 252,977 1,833,974 Current period gap $ (487,273) $(161,810) $ 2,009 $ (19,843) $ 832,264 $ 165,347 Cumulative gap $ (487,273) $(649,083) $(647,074) $(666,917) $ 165,347 Percent of total assets (23.53)% (31.35)% (31.25)% (32.21)% 7.98% Assumptions: (1) 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. (2) 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. (3) Borrowings include fixed-rate FHLB advances at the earlier of maturity date or potential call dates. If FHLB advances are not called, maturities may extend.
Based on the Company's September 30, 1999 static gap position, in a one-year time period $733 million in interest-sensitive assets will reprice and approximately $1.4 billion in interest-sensitive liabilities will reprice. This current static gap position results in a negative mismatch of $647 million, or 31.25% of assets. The Company's static gap position one year ago was a negative 19.3% of assets. The respective ratios and dollars repricing as shown in the above table do not take into effect prepayments to mortgage, consumer and other loans and mortgage-backed securities, which may be significant in any year, based on the level and direction of market interest rates. The above table also does not consider the repricing considerations inherent in adjustable-rate loans, such as minimum and maximum annual and lifetime interest rate adjustments and also the index utilized. During the past two years the Company extended maturities of interest-sensitive assets through retention of certain types of loans, particularly those originated under newer "hybrid" lending programs with both fixed-rate and variable-rate features. These loans have become very popular with consumers and carry a fixed rate of interest for three, five, or seven years and then adjust annually to an established index. A negative gap would normally suggest that net interest income would increase if market rates decline. A rise in market rates would normally have a detrimental effect on net interest income based on a negative gap. The opposite would occur when an institution is positively-gapped. Based on its current static gap position in the above table, which reflects dollars repricing but not movements of indices to which assets and liabilities are tied, First Financial was more biased toward a decline in interest rates over the immediate future. As market interest rates declined during fiscal 1999, the Company s negative gap position was a factor in increasing the net interest margin. Recently the Federal Reserve Open Market Committee has raised short-term interest rates in three stages totaling seventy five basis points. Because of the short-term nature of its liability funding, such increases may have a detrimental effect on the net margin in fiscal 2000. Derivative transactions may be used by the Company to better manage its interest rate sensitivity. Although not used extensively by the Company in the past, such measures may be utilized on a more frequent basis in the future. Results of Operations Net Interest Income The largest component of operating earnings for the Company is net interest income. Net interest income totaled $60.4 million in 1999 compared with $54.7 million in 1998 and $51.0 million in 1997. The level of net interest income is determined by balances of earning assets and successfully managing the net interest margin. 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 management of the balance sheet's interest rate sensitivity all factor into changes in net interest income.
Average Yields and Rates Year Ended September 30, 1999 1998 1997 Average Average Average Average Yield/ Average Yield/ Average Yield/ Balance Interest Cost Balance Interest Cost Balance Interest Cost (dollar amounts in thousands) Interest-earning assets: Loans (1) $ 1,640,497 $ 125,742 7.66% $ 1,510,008 $ 119,306 7.90% $ 1,399,917 $111,510 7.97% Mortgage-backed securities 182,585 11,519 6.31 168,344 11,596 6.89 108,647 7,755 7.14 Investment securities 39,112 2,801 7.16 69,122 4,479 6.48 66,894 4,263 6.37 Other interest-earning assets (2) 15,124 770 5.09 16,601 964 5.81 45,750 2,831 6.19 Total interest-earning assets 1,877,318 140,832 7.50 1,764,075 136,345 7.73 1,621,208 126,359 7.79 Non-interest-earning assets 77,912 63,981 58,894 Total assets $ 1,955,230 $ 1,828,056 $ 1,680,102 Interest-bearing liabilities: Deposit accounts: Checking accounts $ 178,374 765 0.43 $ 150,976 1,190 0.79 $ 136,089 1,610 1.18 Savings accounts 122,621 2,912 2.37 124,683 3,199 2.57 122,637 3,370 2.75 Money market accounts 168,659 6,090 3.61 144,331 5,157 3.57 133,030 4,684 3.52 Certificate accounts 727,822 39,233 5.39 715,210 41,002 5.73 720,341 40,771 5.66 Total deposits 1,197,476 49,000 4.09 1,135,200 50,548 4.45 1,112,097 50,435 4.54 FHLB advances 540,893 29,063 5.37 470,441 26,822 5.70 377,475 21,540 5.71 Other borrowings 42,021 2,331 5.55 63,733 4,319 6.78 46,838 3,365 7.18 Total interest-bearing liabilities 1,780,390 80,394 4.51 1,669,374 81,689 4.89 1,536,410 75,340 4.90 Non-interest-bearing liabilities 49,318 40,282 38,203 Total liabilities 1,829,708 1,709,656 1,574,613 Stockholders' equity 125,522 118,400 105,489 Total liabilities and stockholders' equity $ 1,955,230 $ 1,828,056 $ 1,680,102 Net interest income/gross margin $ 60,438 2.99% $ 54,656 2.84% $ 51,019 2.89% Net yield on average interest-earning assets 3.22% 3.10% 3.15% Percent of average interest-earning assets to average interest- bearing liabilities 105.44% 105.67% 105.52% (1) Average balances of loans include non-accrual loans. (2) This computation includes interest-earning deposits, which are classified as cash equivalents in the Company's Consolidated Statements of Financial Condition contianed in Item 8 herein.
Net interest income increased $5.8 million, or 10.6%, in 1999. As the table above illustrates, yields on average interest-earning assets declined by 23 basis points between fiscal 1999 and 1998 and average cost of interest-bearing liabilities declined by 38 basis points. Growth in net interest income in 1999 therefore was primarily attributable to an increase of 15 basis points in the gross interest margin and 12 basis points in the net interest margin. Growth in average earning assets of $113.2 million also contributed to increased net interest income. The Company's weighted average yield on assets and weighted average cost of liabilities are shown 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. In 1999, the average yield on interest-earning assets declined to 7.50% from 7.73% in 1998 and was primarily attributable to a lower average yield on loans and mortgage-backed securities. The average cost of interest-bearing liabilities declined to 4.51% from 4.89% in 1998 primarily due to lower deposit costs. 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 due to rate.
Rate/Volume Analysis Year Ended September 30, Year Ended September 30, 1999 versus 1998 1998 versus 1997 Increase (Decrease) Increase (Decrease) Due to Due to Volume Rate Net Volume Rate Net (dollar amounts in thousands) Interest income: Loans $10,125 $(3,689) $ 6,436 $ 8,776 $ (980) $ 7,796 Mortgage-backed securities 940 (1,017) (77) 4,122 (281) 3,841 Investment securities (2,108) 430 (1,678) 142 74 216 Other interest-earning assets (81) (113) (194) (1,703) (164) (1,867) Total interest income 8,876 (4,389) 4,487 11,337 (1,351) 9,986 Interest expense: Deposit accounts Checking accounts 189 (614) (425) 160 (580) (420) Savings accounts (50) (237) (287) 55 (226) (171) Money market accounts 875 58 933 405 68 473 Certificate accounts 709 (2,478) (1,769) (284) 515 231 Total deposits 1,723 (3,271) (1,548) 336 (223) 113 Borrowings 2,558 (2,305) 253 6,471 (235) 6,236 Total interest expense 4,281 (5,576) (1,295) 6,807 (458) 6,349 Net interest income $ 4,595 $ 1,187 $ 5,782 $ 4,530 $ (893) $ 3,637
Provision for Loan Losses The provision for loan losses is a charge to earnings in a given period to maintain the allowance at an adequate level. In fiscal 1999 the Company's provision expense was $2.8 million compared with $2.4 million in both 1998 and 1997. The provision was higher in 1999 principally due to the Company s strong loan growth. Total loan loss reserves were $14.6 million and $12.8 million at September 30, 1999 and 1998, respectively, and represented .84% and .82% of net loans receivable. Net charge-offs in fiscal 1999 totaled $1.0 million, or .06% of average net loans, compared with $1.7 million in 1998, or .11% of average net loans. Net loan charge-offs of $2.0 million in 1997 resulted in charge-offs to average loans of .14%. Net charge-offs in 1998 included approximately $679,000 related to a $2.8 million multi- family loan on which the company had maintained an $800,000 specific reserve. Other Income Other income increased by $2.0 million, or 14.7%, to $15.3 million in 1999 from $13.4 million in 1998. During 1998, other income improved by $1.1 million, or 8.6% from 1997. The greatest dollar increase in non-interest revenues during fiscal 1999 was in brokerage fees which increased $400,000, or 45.9% from 1998 levels. Net gain on sale of loans also increased significantly over 1998 level, increasing $373,000, or 36.6%. This followed a similar pattern in fiscal 1998 when gains from loan sales increased $579,000, or 131.6% from 1997 levels. Activity in both years reflected the Company's asset/liability strategy during the respective periods to sell its agency-qualifying 15- and 30-year fixed-rate single-family loan production. The general level of market interest rates in 1999 and 1998 resulted in higher fixed-rate mortgage production and ultimately a greater volume of loan sales occurring in fiscal 1999 and 1998 than in 1997. The Company does not expect to achieve these levels of gains in fiscal 2000 due to current market interest rates and their effect on fixed-rate loan originations. The rate of growth in service charges and fees on deposit accounts improved to 13.3% in 1999 from 3.4% in 1998, The rate of growth was 17.6% in 1997. The Company delayed its implementation of pricing increases for checking and other deposit account services until late in fiscal 1998. Additional pricing changes went into effect in fiscal 1999. The significant growth in checking accounts in fiscal 1999 also contributed to the growth in service charges and fees on deposit accounts. Loan servicing fees declined $59,000, or 4.8%, in 1999 principally due to increased amortizations of the Company's originated servicing rights due to prepayment spreads experienced in the servicing portfolio. Non-Interest Expense 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 financial institutions. The technical and operating environment for financial institutions continues to require a well-trained and motivated staff, superior operating systems and sophisticated marketing efforts.
Comparison of Non-Interest Expense Year Ended September 30, 1999 1998 1997 1996 1995 % % % % % Average Average Average Average Average Amount Assets Amount Assets Amount Assets Amount Assets Amount Assets (dollar amounts in thousands) Salaries and employee benefits $25,625 1.31% $22,263 1.22% $ 20,425 1.22% $ 18,920 1.25% $18,216 1.34% Occupancy costs 3,203 0.16 3,316 0.18 3,113 0.18 2,949 0.19 3,138 0.23 Marketing 1,316 0.07 1,264 0.07 1,518 0.09 1,216 0.08 1,013 0.08 Depreciation, amortization, rental and maintenance of equipment 3,328 0.17 2,717 0.15 2,779 0.16 2,588 0.17 2,495 0.19 FDIC insurance premiums 728 0.04 709 0.04 1,116 0.07 2,694 0.18 2,625 0.19 Other 9,080 0.46 9,572 0.52 8,405 0.50 7,836 0.52 7,186 0.53 Core expenses 43,280 2.21 39,841 2.18 37,356 2.22 36,203 2.39 34,673 2.56 SAIF Special assessment 313 0.02 6,955 0.46 Merger-related expenses 317 0.02 Total non-interest expense $43,280 2.21% $40,158 2.20% $ 37,669 2.24% $ 43,158 2.85% $34,673 2.56%
Total non-interest expense increased $3.1 million, or 7.8% in fiscal 1999. This followed a $2.5 million, or 6.6%, increase in 1998. Core non-interest expense actually increased $3.4 million or 8.6% between fiscal 1999 and 1998 and $2.5 million or 6.7% between fiscal 1998 and 1997. The largest component of non-interest expense, salaries and employee benefits, increased $3.4 million, or 15.1% in 1999 due to increased staffing for the expansion of products and services, staffing for two additional retail sales offices, a new investment center and expansion of trust services. The Company also incurred significant personnel costs related to the installation, testing and implementation of year 2000 compliant hardware and software. Higher commission payments related to record levels of loan originations and investor product sales and increased expenses related to health and other employee benefits also impacted the growth of non-interest expenses. In fiscal 1998, salaries and employee benefits increased 9.0% or $1.8 million from 1997. In late 1998 and continuing in fiscal 1999, the Company began the implementation of a new sales office automation system and improved telecommunication systems throughout its retail banking system. These investments in new technology and other upgrades contributed significantly to the increase of $611,000, or approximately 22.5%, in equipment costs in fiscal 1999 compared to 1998. Other non-interest costs were stable in fiscal 1999. The effect of significant reductions in FDIC assessment rates resulted in a decline of $407,000 in FDIC insurance costs from 1997 to 1998. Annual FDIC SAIF assessment rates declined to 18 basis points in the first quarter of 1997 and then further declined to 6.5 basis points effective January 1, 1997. Currently, the banking subsidiaries are being charged 6.1 basis points for a Financing Corporation assessment which is approximately five times the charge to commercial banks. Effective January 1, 2000, the Financing Corporation assessment will be equalized among all FDIC insured banks and thrifts, resulting in a reduction in the assessment rate to 2.1 basis points. Included in the $1.5 million increase in other expense in 1998 were higher professional fees of approximately $375,000 incurred for several business initiatives and non-recurring expenses of $317,000 related to the Investors merger. The Company s efficiency ratio, excluding the effect of merger- related expenses in 1998, declined to 58.3% in 1999 from 59.4% in 1998 and 1997. Management continues to target lower expense ratios as an important strategic goal of the Company. Income Tax Expense Income taxes totaled $10.4 million in 1999, compared to $8.6 million in 1998 and $8.5 million in 1997. The Company s effective tax rate was 35.0% in 1999, 33.7% in 1998 and 36.6% in 1997. The effective tax rate in future periods is expected to range from 35% to 36%. Regulatory and Accounting Issues In June of 1998 the FASB issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 establishes, for the first time, comprehensive accounting and reporting standards for derivative instruments and hedging activities. For accounting purposes SFAS 133 comprehensively defines a derivative instrument. SFAS 133 requires that all derivative instruments be recorded in the statement of financial position at fair value. The accounting for the gain or loss due to change in fair value of the derivative instrument depends on whether the derivative instrument qualifies as a hedge. If the derivative instrument does not qualify as a hedge, the gains or losses are reported in earnings when they occur. However, if the derivative instrument qualifies as a hedge, the accounting varies based on the type of risk being hedged. SFAS 137 "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133 - -- and amendment of FASB No. 133" delayed the effective date of this statement for one year. This Statement is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company does not expect the adoption of SFAS 133 to have a materially adverse impact on the consolidated financial position or results of operations of the Company. Year 2000 Issue The Company continues to work aggressively on its comprehensive project concerning the impact of the Year 2000. The Year 2000 "problem" or the "millennium bug" has arisen because many computer programs were written to store years as two digits instead of four. By saving storage space by using a two digit year, a program which reads the year 00 could interpret the year to be 1900 when in fact the year 2000 is meant. The Company is very aware of the Year 2000 issue and has actively taken steps to address it. "Year 2000 Readiness" is the ability of the Company s internal computer systems (hardware, software and embedded microchips) to process data involving dates or portions of dates before, during and after January 1, 2000, including leap year calculations, without malfunction. As federally chartered thrifts, the Company's banking subsidiaries fall under the regulatory guidelines published by the Federal Financial Institutions Examination Council ("FFIEC"). In fiscal 1998 and 1999, periodic audits of the Company s Year 2000 activities were performed by the OTS. The FFIEC considers five general Year 2000 phases: Awareness, Assessment, Renovation, Validation and Implementation. Management completed all phases for its mission-critical applications during fiscal 1999. Mission critical applications include those that 1) directly affect delivery of primary services to First Financial s customers; 2) directly affect First Financial s recognition and collection; 3) would create noncompliance with any statutes or laws; and 4) would require significant costs to address in the event of noncompliance. Another FFIEC area addressed by the Company is contingency planning. The Company has considered alternative measures throughout the organization in the event of a Year 2000-caused problem. Business areas have identified Year 2000 departmental risks and have incorporated changes to their existing contingency plans. Business resumption contingency plans were also completed in fiscal 1999, with further refinement and testing completed in November 1999. The Company s core business systems (those systems which run on its internal mainframe computer) are considered to be the most critical. The Company s host hardware and operating systems software were upgraded where necessary and deemed compliant by September 30, 1998. The Company utilizes an integrated banking application system from one vendor for most of its critical banking applications. Compliant versions of these systems have been in place since March 1999. Although the Company has performed in depth date testing on all systems placed into production, it will continue to conduct periodic date testing throughout the remainder of the year, particularly to test any other modifications to software received from its integrated banking application vendor. Item processing systems were upgraded to Year 2000 compliance by December 1998. As part of a comprehensive two-year project, in June of 1998 the Company selected software and hardware for new branch automation systems. Installation of new teller systems, which are Year 2000 compliant, commenced in September 1998 and was completed in December 1998. Capitalized costs for the new branch hardware, software and a frame relay communication network totaled approximately $2.4 million. The Company has budgeted approximately $300,000 in estimated operating costs for Year 2000. These costs do not include the cost of internal staff time spent on the Year 2000 project which the Company does not track separately. The Company has also evaluated the readiness of its vendors and its customers as a part of its Year 2000 project plan. The Company has tested extensively with the Federal Reserve, the FHLB of Atlanta, secondary marketing firms such as FHLMC and FNMA and a host of other suppliers and software providers. Additionally, the vendor that provides the Company s integrated banking application system as well as its credit card servicer are also subject to examinations of their Year 2000 readiness by federal banking regulatory agencies. In addition to technology issues, the Company has planned to respond to liquidity problems which could surface should market disruptions occur at the end of 1999. An evaluation of likely customer behavior has been conducted and the banking subsidiaries are maintaining higher levels of cash on hand to respond to customer needs. In addition to its normal funding sources, both of the banking subsidiaries have also arranged with the Federal Reserve to borrow on a short-term basis from the Federal Reserve s Century Date Change Special Liquidity Facility and also the Discount Window should normal lending sources be temporarily unavailable. Senior management will continue to closely monitor market conditions as the end of 1999 approaches. Management presently believes that it has responded to the Year 2000 problem so that the effects of the Year 2000 problem will be minimized. There can be no assurance, however, that the systems of other vendors upon which the Company s operations rely, including essential utilities and telecommunications providers, will be Year 2000 compliant in a timely manner. If the Company is exposed to a problem with a critical system which it has remediated or if the Company is subject to failure of a critical vendor to be compliant, the Year 2000 Issue could have a material impact on the operations of the Company, which in turn could have a materially adverse effect on the Company s results of operations and financial condition. Impact of Inflation and Changing Prices The Consolidated Financial Statements contained in Item 8 herein and related data 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Asset/Liability Management." ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. 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 Summary 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 LLP, independent auditors, have audited the Company's consolidated financial statements as described in their report. /s/ A. Thomas Hood 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: Mrs. Paula Harper Bethea, Chairman, Mr. Gary C. Banks, Jr., Mr. Thomas J. Johnson and Mr. James C. Murray. The Committee held four meetings during fiscal 1999. 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/ Paula Harper Bethea Chairman, Audit Committee 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, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity and comprehensive income and cash flows for each of the years in the three-year period ended September 30, 1999. 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 as of September 30, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended September 30, 1999, in conformity with generally accepted accounting principles. /s/KPMG LLP Greenville, South Carolina October 21, 1999
FIRST FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION September 30, 1999 1998 (dollar amounts in thousands) Assets Cash and cash equivalents $ 60,151 $ 40,392 Investment securities held to maturity (fair value of $258 and $4,194) 249 4,148 Investment securities available for sale, at fair value 7,569 11,264 Investment in capital stock of FHLB, at cost 29,925 25,000 Loans receivable, net of allowance of $14,570 and $12,781 1,735,608 1,550,567 Loans held for sale 6,542 14,473 Mortgage-backed securities, held to maturity (fair value of $31 and $452) 28 444 Mortgage-backed securities available for sale, at fair value 181,217 148,186 Accrued interest receivable 11,495 10,631 Office properties and equipment, net 21,969 15,836 Real estate and other assets acquired in settlement of loans 5,685 5,871 Other assets 10,314 12,896 Total assets $ 2,070,752 $ 1,839,708 Liabilities and Stockholders' Equity Liabilities: Deposit accounts $ 1,219,848 $ 1,164,440 Advances from FHLB 594,500 471,500 Securities sold under agreements to repurchase 73,991 29,442 Other short-term borrowings 8,750 4,000 Advances by borrowers for taxes and insurance 6,945 6,503 Outstanding checks 11,509 15,094 Other 29,328 23,566 Total liabilities 1,944,871 1,714,545 Commitments and contingencies (Note 16) Stockholders' equity: Serial preferred stock, authorized 3,000,000 shares--none issued Common stock, $.01 par value, authorized 24,000,000 shares, issued 15,234,462 and 15,033,853 shares at September 30, 1999 and 1998, respectively 152 150 Additional paid-in capital 31,687 30,308 Retained income, substantially restricted 112,914 100,075 Accumulated other comprehensive income (loss) (1,631) 2,195 Treasury stock at cost, 1,881,449 shares and 1,374,872 shares at September 30, 1999 and 1998, respectively (17,241) (7,565) Total stockholders' equity 125,881 125,163 Total liabilities and stockholders' equity $ 2,070,752 $ 1,839,708
See accompanying notes to consolidated financial statements.
FIRST FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended September 30, 1999 1998 1997 (dollar amounts in thousands, Interest Income except per share amounts) Interest on loans $ 125,742 $ 119,306 $ 111,510 Interest on mortgage-backed securities 11,519 11,596 7,755 Interest and dividends on investment securities 2,801 4,479 4,263 Other 770 964 2,831 Total interest income 140,832 136,345 126,359 Interest Expense Interest on deposits NOW accounts 765 1,190 1,610 Passbook, statement and other accounts 2,912 3,199 3,370 Money market accounts 6,090 5,157 4,684 Certificate accounts 39,233 41,002 40,771 Total interest on deposits 49,000 50,548 50,435 Interest on FHLB advances 29,063 26,822 21,540 Interest on short term borrowings 2,331 2,620 1,512 Interest on long-term debt 1,699 1,853 Total interest expense 80,394 81,689 75,340 Net interest income 60,438 54,656 51,019 Provision for loan losses 2,765 2,405 2,435 Net interest income after provision for loan losses 57,673 52,251 48,584 Other Income Net gain on sale of loans 1,392 1,019 440 Gain on sale of investment and mortgage-backed securities 37 306 125 Brokerage fees 1,271 871 586 Commissions on insurance 1,951 1,850 1,766 Service charges and fees on deposit accounts 6,586 5,814 5,621 Loan servicing fees 1,176 1,235 1,394 Real estate operations, net 88 (363) (142) Other 2,813 2,625 2,506 Total other income 15,314 13,357 12,296 Non-Interest Expense Salaries and employee benefits 25,625 22,263 20,425 Occupancy costs 3,203 3,316 3,113 Marketing 1,316 1,264 1,518 Depreciation, amortization, rental and maintenance of equipment 3,328 2,717 2,779 FDIC insurance premiums 728 709 1,116 FDIC SAIF special assessment 313 Other 9,080 9,889 8,405 Total non-interest expense 43,280 40,158 37,669 Income before income taxes 29,707 25,450 23,211 Income tax expense 10,400 8,571 8,501 Net income before extraordinary loss 19,307 16,879 14,710 Extraordinary loss on extinguishment of debt (net of related income tax benefit of $173) (340) Net income $ 19,307 $ 16,539 $ 14,710
FIRST FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS, CONTINUED Year Ended September 30, 1999 1998 1997 (dollar amounts in thousands, except per share amounts) Earnings Per Common Share Income before extraordinary loss Basic $ 1.44 $ 1.24 $ 1.10 Diluted $ 1.40 $ 1.20 $ 1.07 Extraordinary loss on extinguishment of debt, net of related income tax Basic $ (0.02) Diluted $ (0.03) Net income Basic $ 1.44 $ 1.22 $ 1.10 Diluted $ 1.40 $ 1.17 $ 1.07 Average Number of Shares Outstanding Basic 13,451 13,572 13,380 Diluted 13,786 14,101 13,801 Dividends Per Common Share $ 0.48 $ 0.42 $ 0.36
See accompanying notes to consolidated financial statements.
FIRST FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME Accumulated Additional Other Treasury Stock Common Paid-in Retained Comprehensive Stock Capital Income Income (Loss) Shares Amount Total (dollar amounts in thousands) Balance at September 30, 1996 $ 147 $ 27,709 $ 78,759 $ 341 1,234 $ (5,939) $ 101,017 Net income 14,710 14,710 Other comprehensive income: Unrealized net gain on securities available for sale, net of income tax 815 815 Total comprehensive income 15,525 Common stock issued pursuant to stock option and employee benefit plans 1 1,147 1,148 Cash dividends ($.36 per share) (4,565) (4,565) Treasury stock purchased 136 (1,525) (1,525) Options exercised by employees of pooled company prior to merger 45 45 Cash dividends paid by pooled company prior to merger (117) (117) Balance at September 30, 1997 148 28,901 88,787 1,156 1,370 (7,464) 111,528 Net income 16,539 16,539 Other comprehensive income: Unrealized net gain on securities available for sale, net of income tax 1,039 1,039 Total comprehensive income 17,578 Common stock issued pursuant to stock option and employee benefit plans 2 1,407 1,409 Cash dividends ($.42 per share) (5,700) (5,700) Treasury stock purchased 5 (101) (101) Cash payment for fractional shares related to pooling (5) (5) Cash dividends paid by pooled company prior to merger (117) (117) Equity adjustment of pooled company for the nine months ended September 30, 1997 571 571 Balance at September 30, 1998 150 30,308 100,075 2,195 1,375 (7,565) 125,163 Net income 19,307 19,307 Other comprehensive income: Unrealized net loss on securities available for sale, net of income tax (3,826) (3,826) Total comprehensive income 15,481 Common stock issued pursuant to stock option and employee benefit plans 2 1,379 1,381 Cash dividends ($.48 per share) (6,468) (6,468) Treasury stock purchased 506 (9,676) (9,676) Balance at September 30, 1999 $ 152 $ 31,687 $ 112,914 $ (1,631) 1,881 $ (17,241) $ 125,881
See accompanying notes to consolidated financial statements.
FIRST FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended September 30, 1999 1998 1997 Operating Activities (dollar amounts in thousands) Net income $ 19,307 $ 16,539 $ 14,710 Adjustments to reconcile net income to net cash provided by operating activities Depreciation 2,450 2,002 2,008 Gain on sale of loans, net (1,392) (1,019) (440) Gain on sale of investments and mortgage-backed securities, net (37) (306) (125) (Gain) loss on sale of property and equipment, net 4 8 27 Gain on sale of real estate owned, net (102) (23) (69) Amortization of unearned discounts/premiums on investments, net 689 (342) (230) Increase (decrease) in deferred loan fees and discounts 714 (383) (369) (Increase) decrease in receivables and prepaid expenses 880 (3,079) 328 Provision for loan losses 2,765 2,405 2,435 Write downs of real estate acquired in settlement of loans 13 275 106 Deferred tax expense 6,835 7,231 3,364 Proceeds from sales of loans held for sale 203,117 173,042 50,453 Origination of loans held for sale (193,794) (182,999) (53,616) Decrease in accounts payable and accrued expenses (2,219) (3,913) (3,257) Amortization of discount on long-term debt 630 126 Net cash provided by operating activities 39,230 10,068 15,451 Investing Activities Proceeds from maturity of investments 9,434 16,226 27,384 Proceeds from sales of investment securities available for sale 50,013 13,797 Purchases of investment securities held to maturity (1,954) Purchases of investment securities available for sale (2,007) (26,093) Purchase of FHLB stock (4,925) (3,149) (5,934) Increase in loans, net (188,262) (158,439) (153,037) Proceeds from sales of mortgage-backed securities available for sale 1,625 24,095 35,398 Repayments on mortgage-backed securities available for sale 61,552 53,388 17,401 Purchases of mortgage-backed securities available for sale (102,542) (22,092) (100,228) Proceeds from sales of real estate owned 855 7,046 2,545 Net purchase of office properties and equipment (8,587) (1,902) (1,270) Net cash used in investing activities (232,857) (60,907) (165,898) Financing Activities Net increase in checking, passbook and money market fund accounts 52,676 34,004 13,336 Net increase (decrease) in certificates of deposit 2,732 6,448 (1,292) Net proceeds of FHLB advances 123,000 51,923 107,175 Net increase (decrease) in securities sold under agreements to repurchase 44,549 (29,454) 42,091 Net increase in other borrowings 4,750 4,000 Retirement of Senior Notes (19,763) Increase (decrease) in advances by borrowers for taxes and insurance 442 (18) (929) Proceeds from exercise of stock options 1,381 1,409 1,193 Dividends paid (6,468) (5,700) (4,565) Treasury stock purchased (9,676) (106) (1,525) Equity adjustment of merged company 571 Cash dividend paid by pooled company (117) (117) Net cash provided by financing activities 213,386 43,197 155,367 Net increase (decrease) in cash and cash equivalents 19,759 (7,642) 4,920 Cash and cash equivalents at beginning of period 40,392 48,034 43,114 Cash and cash equivalents at end of period $ 60,151 $ 40,392 $ 48,034 Supplemental disclosures: Cash paid during the period for: Interest $ 80,362 $ 78,588 $ 72,937 Income taxes (495) 7,008 5,527 Loans foreclosed 635 3,162 12,391 Loans securitized into mortgage-backed securities 52,341 16,111 Unrealized net gain (loss) on securities available for sale, net of income tax (3,826) 1,039 815
See accompanying notes to consolidated financial statements. FIRST FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1999, 1998 and 1997 (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, its wholly-owned thrift subsidiaries, First Federal and Peoples Federal (together, the "Associations") and First Southeast Investor Services, Inc. The Company's consolidated financial statements also include the assets and liabilities of service corporations and operating subsidiaries wholly-owned by the Associations. All significant intercompany accounts and transactions have been eliminated in consolidation. The Company operates as one business segment. Comprehensive Income On October 1, 1998, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income". SFAS No. 130 establishes standards for reporting and presentation of comprehensive income and its components in a full set of financial statements. Comprehensive income consists of net income and net unrealized gains (losses) on securities and is presented in the statements of stockholders' equity and comprehensive income. The statement requires only additional disclosures in the consolidated financial statements; it does not affect the Company's financial position or results of operations. Prior year financial statements have been reclassified to conform to the requirements of SFAS No. 130. The Company's other comprehensive income for the years ended September 30, 1999, 1998 and 1997 and accumulated other comprehensive income as of September 30, 1999, 1998 and 1997 are comprised solely of unrealized gains and losses on certain investments in debt and equity securities. Other comprehensive income for the years ended September 30, 1999, 1998 and 1997 follows:
1999 1998 1997 Unrealized holding gains (losses) arising during period $ (3,803) $ 1,226 $ 891 Less: reclassification adjustment for realized gains, net of tax 23 187 76 Unrealized gains (losses) on securities available for sale, net of applicable income taxes $ (3,826) $ 1,039 $ 815
Employee Benefit Plans Also in 1999, the Company adopted SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits". SFAS No. 132 provides additional information to facilitate financial analysis and eliminates certain disclosures which are no longer useful. In accordance with SFAS No. 132, the disclosures regarding the Company's pension plan obligation in note 15 have been revised for all periods presented. Earnings Per Share Basic earnings per share ("EPS") excludes dilution and is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Stock Based Compensation SFAS No. 123, "Accounting for Stock-Based Compensation," allows a company to either adopt the fair value method of valuation or continue using the intrinsic valuation method presented under APB Opinion 25, "Accounting for stock Issued to Employees" ("APB Opinion 25") to account for stock-based compensation. The Company has elected to continue using APB Opinion 25 and has disclosed in the footnotes proforma net income and earnings per share information as if the fair value method had been applied. Impaired Loans SFAS No. 114, "Accounting by Creditors for Impairment of a Loan", as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan -- Income Recognition and Disclosure" requires that all creditors value all specifically reviewed loans for which it is probable that the creditor will be unable to collect all amounts due according to the terms of the loan agreement at the loan s fair value. Fair value may be determined based upon the present value of expected cash flows, market price of the loan, if available, or the value of the underlying collateral. Expected cash flows are required to be discounted at the loan s effective interest rate. SFAS 114 was amended by SFAS 118 to allow a creditor to use existing methods for recognizing interest income on an impaired loan and by requiring additional disclosures about how a creditor recognizes interest income related to impaired loans. 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 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 fair value. Changes in the fair value of debt and equity securities available for sale are included in stockholders' 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 Statements of Operations. Realized gains or losses on available for sale securities are computed on the specific identification basis. Fair Value of Financial Instruments SFAS 107, "Disclosures about Fair Values of Financial Instruments," 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 presented 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 product for portfolio lending purposes. The Company's consumer loans include lines of credit, auto loans, marine loans, manufactured housing loans and loans on various other types of consumer products. The Company also makes shorter term commercial business loans on a secured and unsecured 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 90 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 brought current and ultimate collectibility of principal and 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. Mortgage Servicing Rights On January 1, 1997, the Company adopted SFAS No. 125, "Accounting for Transfer and Servicing of Financial Assets and Extinguishments of Liabilities". SFAS No. 125 requires the recognition of originated mortgage servicing rights ("MSRs") as assets by allocating total costs incurred between the originated loan and the servicing rights retained based on their relative fair values. In addition, SFAS No. 125 eliminates the distinction between normal and excess servicing to the extent the servicing fee does not exceed that specified in the contract. SFAS 125 also required the recognition of purchased mortgage servicing rights at fair value, which is presumed to be the price paid for the rights. The adoption of SFAS No. 125 did not have a material impact on the Company s financial position or results of operations for the year ended September 30, 1997. Amortization of MSRs is based on the ratio of net servicing income received in the current period to total net servicing income projected to be realized from the MSRs. Projected net servicing income is in turn determined on the basis of the estimated future balance of the underlying mortgage loan portfolio, which declines over time from prepayments and scheduled loan amortization. The Company estimates future prepayment rates based on current interest rate levels, other economic conditions and market forecasts, as well as relevant characteristics of the servicing portfolio, such as loan types, interest rate stratification and recent prepayment experience. SFAS No. 125 also requires that all MSRs be evaluated for impairment based on the excess of the carrying amount of the MSRs over their fair value. Fair values of servicing rights are determined by estimating the present value of future net servicing income considering the average interest rate and the average remaining lives of the related loans being serviced. Periodically, the Company uses an independent party to evaluate the present values of its portfolio of mortgage servicing. This evaluation is principally determined using discounted cash flows of disaggregated groups of mortgage servicing rights. Allowance for Loan Losses The Company provides for loan losses on the allowance method. Accordingly, all loan losses are charged to the related allowance and all recoveries are credited to the allowance. Additions to the allowance for loan losses are provided by charges to operations based on various factors which, in management's judgment, deserve current recognition in estimating losses. Such factors considered by management include the fair value of the underlying collateral, growth and composition of the loan portfolios, loss experience, delinquency trends and economic conditions. Management evaluates the carrying value of loans periodically and the allowance is adjusted accordingly. While management uses the best information available to make evaluations, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluations. The allowance for loan losses is subject to periodic evaluation by various regulatory authorities and may be subject to adjustment upon their examination. The Company considers a loan to be impaired when, based upon current information and events, it believes it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement on a timely basis. The Company's impaired loans include loans identified as impaired through review of the non-homogeneous portfolio and troubled debt restructurings. Specific valuation allowances are established on impaired loans for the difference between the loan amount and the fair value less estimated selling costs. Impaired loans may be left on accrual status during the period the Company is pursuing repayment of the loan. Such loans are placed on non-accrual status at the point either: (1) they become 90 days delinquent; or (2) the Company determines the borrower is incapable of, or has ceased efforts toward, continuing performance under the terms of the loan. Impairment losses are recognized through an increase in the allowance for loan losses and a corresponding charge to the provision for loan losses. Adjustments to impairment losses due to changes in the fair value of the collateral properties for impaired loans are included in provision for loan losses. When an impaired loan is either sold, transferred to real estate owned or written down, any related valuation allowance is charged off. Increases to the allowance for loan losses are charged by recording a provision for loan losses. Charge-offs to the allowance are made when all, or a portion, of the loan is confirmed as a loss based upon management's review of the loan or through possession of the underlying security or through a troubled debt restructuring transaction. Recoveries are credited to the allowance. 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 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. Risk Management Instruments Risk management instruments are utilized to modify the interest rate characteristics of related assets or liabilities or hedge against changes in interest rates or other exposures as part of the Company's asset and liability management process. Instruments must be designated as hedges and must be effective throughout the hedge period. Gains and losses associated with futures and forward contracts used as effective hedges of existing risk positions or anticipated transactions are deferred as an adjustment to the carrying value of the related asset and liability and recognized in income over the remaining term of the related asset or liability. The Company also utilizes forward delivery contracts and options for the sale of mortgage-backed securities to reduce the interest rate risk inherent in mortgage loans held for sale and the commitments made to borrowers for mortgage loans which have not been funded. These financial instruments are considered in the Company's valuation of its mortgage loans held for sale which are carried at the lower of cost or market. Risks and Uncertainties In the normal course of its business the Company encounters two significant types of risk: economic and regulatory. There are three main components of economic risk: interest rate risk, credit risk and market risk. The Company is subject to interest rate risk to the degree that its interest-bearing liabilities mature or reprice at different speeds, or on different bases, than its interest-earning assets. Credit risk is the risk of default on the Company's loan portfolio that results from borrowers' inability or unwillingness to make contractually required payments. Market risk reflects changes in the value of collateral underlying loans receivable, the valuation of real estate held by the Company, and the valuation of loans held for sale, mortgage-backed securities available for sale and mortgage servicing rights. The Company is subject to the regulations of various government agencies. These regulations can and do change significantly from period to period. The Company also undergoes periodic examinations by the regulatory agencies, which may subject it to further changes with respect to asset valuations, amounts of required loss allowances and operating restrictions resulting from the regulators' judgments based on information available to them at the time of their examination. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the dates of the Consolidated Statements of Financial Condition and the Consolidated Statements of Operations for the periods covered. Actual results could differ significantly from those estimates and assumptions. Income Taxes Because some income and expense items are recognized in different periods for financial reporting purposes and for purposes of computing currently payable income taxes, a provision or credit for deferred income taxes is made for such temporary differences at currently enacted income tax rates applicable to the period in which realization or settlement is expected. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. 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, 1999 1998 Cash working funds $ 18,323 $ 13,964 Non-interest-earning demand deposits 2,003 3,531 Deposits in transit 19,859 12,912 Interest-earning deposits 19,966 9,985 Total $ 60,151 $ 40,392 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 fair value of investment securities held to maturity are as follows:
September 30, 1999 Gross Gross AmortizedUnrealized Unrealized Fair Cost Gains Losses value State and local government obligations $ 249 $ 9 $ 258 Mortgage-backed securities FHLMC 28 3 31 Total $ 277 $ 12 $ 289 September 30, 1998 Amortized Gross Gross Cost Unrealized Unrealized Fair Gains Losses value U.S. Treasury securities and obligations of U.S. government agencies and corporations $ 3,499 $ 15 $ 3,514 Corporate debt and other securities 649 31 680 Mortgage-backed securities FHLMC 444 8 452 Total $ 4,592 $ 54 $ 4,646
The amortized cost and fair value of investment and mortgage- backed securities held to maturity at September 30, 1999, by contractual maturity, are shown below. September 30, 1999 Amortized Fair Cost Value Due after five through ten years $ 249 $ 258 Mortgage-backed securities 28 31 Total $ 277 $ 289 There were no sales of investment or mortgage-backed securities held to maturity during fiscal 1999, 1998 and 1997. 4. Investment and Mortgage-backed Securities Available for Sale The amortized cost, gross unrealized gains, gross unrealized losses and fair value of investment and mortgage-backed securities available for sale are as follows:
September 30, 1999 Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value U.S. Treasury securities and obligations of U.S. government agencies and corporations $ 4,006 $ 16 $ 1 $ 4,021 Corporate securities 2,468 5 44 2,429 Mutual funds 1,119 1,119 7,593 21 45 7,569 Mortgage-backed securities: FHLMC 46,938 969 474 47,433 FNMA 23,548 190 358 23,380 GNMA 18,435 161 121 18,475 CMO's 94,947 19 3,037 91,929 183,868 1,339 3,990 181,217 Total $191,461 $ 1,360 $ 4,035 $188,786 September 30, 1998 Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value U.S. Treasury securities and obligations of U.S. government agencies and corporations $ 6,981 $ 113 $ 7,094 Corporate securities 3,009 44 $ 53 3,000 Other 1,170 1,170 11,160 157 53 11,264 Mortgage-backed securities: FHLMC 57,938 2,159 60,097 FNMA 46,005 1,277 234 47,048 GNMA 26,781 327 129 26,979 CMO's 13,971 106 15 14,062 144,695 3,869 378 148,186 Total $155,855 $ 4,026 $ 431 $159,450
The amortized cost and fair value of investment and mortgage- backed securities available for sale at September 30, 1999 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, 1999 Amortized Fair Value Due in one year or less $ 4,277 $ 4,293 Due after one year through five years 1,000 1,001 Due after five years through ten years 974 978 Due after ten years 1,342 1,297 7,593 7,569 Mortgage-backed securities 183,868 181,217 Total $ 191,461 $ 188,786 Proceeds from the sale of the Company's investment and mortgage- backed securities available for sale totaled $1,625 in fiscal 1999 resulting in a gross realized gain of $37. Proceeds from the sale of the Company's investment and mortgage-backed securities available for sale totaled $74,108 in fiscal 1998 resulting in a gross realized gain of $547 and a gross realized loss of $241. Proceeds from the sale of the Company's investment and mortgage-backed securities available for sale totaled $49,195 in fiscal 1997 resulting in a gross realized gain of $307 and a gross realized loss of $182. 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. Earnings per Share Basic and diluted earnings per share have been computed based upon net income as presented in the accompanying statements of operations divided by the weighted average number of common shares outstanding or assumed to be outstanding as summarized below:
Year Ended September 30, 1999 1998 1997 Weighted average number of common shares used in basic EPS 13,451,027 13,571,635 13,380,152 Effect of dilutive stock options 335,044 529,905 421,206 Weighted average number of common shares and dilutive potential common shares used in diluted EPS 13,786,071 14,101,540 13,801,358
7. Loans Receivable Loans receivable, including loans held for sale, consisted of the following: September 30, 1999 1998 Mortgage loans $ 1,461,104 $1,344,524 Residential construction loans 92,161 59,441 Mobile home loans 44,561 26,983 Savings account loans 5,281 5,531 Home equity lines of credit 86,764 73,122 Commercial business loans 42,721 33,790 Credit cards 10,831 10,424 Other consumer loans 69,678 56,624 1,813,101 1,610,439 Less: Allowance for loan losses 14,570 12,781 Loans in process 55,409 32,360 Deferred loan fees and discounts on loans 972 258 70,951 45,399 Total $ 1,742,150 $1,565,040 First mortgage loans are net of whole loans and participation loans sold and serviced for others in the amount of $519,682 and $403,223 at September 30, 1999 and 1998, respectively. Mortgage servicing rights totaled $4,668 and $2,904 at September 30, 1999 and 1998, respectively, and are included in "other assets" on the Consolidated Statements of Financial Condition. The fair value of mortgage servicing rights was $5,847 at September 30, 1999 and $3,109 at September 30, 1998. No valuation allowance was required at September 30, 1999. Non-accrual and renegotiated loans are summarized as follows: September 30, 1999 1998 Non-accrual loans $4,466 $2,647 Renegotiated loans 2,724 4,493 Total $7,190 $7,140 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 $544, $549 and $1,131 for the years ended September 30, 1999, 1998 and 1997, respectively. Recorded interest income on these loans was $268, $327 and $503 for 1999, 1998 and 1997, respectively. An analysis of changes in the allowance for loan losses is as follows: Year Ended September 30, 1999 1998 1997 Balance, beginning of period $ 12,781 $ 12,103 $ 11,639 Charge-offs (1,596) (2,530) (2,309) Recoveries 620 803 338 Net charge-offs (976) (1,727) (1,971) Provision for loan losses 2,765 2,405 2,435 Balance, end of period $ 14,570 $ 12,781 $ 12,103 At September 30, 1999 and 1998 impaired loans totaled $4,466 and $2,987, respectively. Included in the allowance for loan losses at September 30, 1999 was $59 related to $1,402 of impaired loans. The remainder of the impaired loans at September 30, 1999 and 1998 were recorded at or below fair value. The average recorded investment in impaired loans for the years ended September 30, 1999, 1998 and 1997 was $3,933, $4,882 and $10,306, respectively. Interest income of $7, $59 and $126 was recognized on impaired loans in 1999, 1998 and 1,997 respectively, while they were impaired. 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 the coastal region has a diverse economy, much of the area is heavily dependent on the tourism industry and industrial and manufacturing companies. 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 $1,296,523 and $1,135,765 at September 30, 1999 and 1998, respectively. The Company's multi-family residential loan portfolio of $46,254 and $43,161 at September 30, 1999 and 1998, respectively, are highly dependent on occupancy rates for such 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 $123,121 and $141,182 and acquisition and development loans and lot loans totaled $87,367 and $83,857 at September 30, 1999 and 1998, 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 $9,748 at September 30, 1999 and $10,001 at September 30, 1998. 8. Office Properties and Equipment Office properties and equipment are summarized as follows: September 30, 1999 1998 Land $ 5,675 $ 3,161 Buildings and improvements 12,688 9,913 Furniture and equipment 16,372 14,515 Leasehold improvements 4,618 4,152 39,353 31,741 Less, accumulated depreciation and amortization (17,384) (15,905) Total $ 21,969 $ 15,836 9. Real Estate Real estate and other assets acquired in settlement of loans held by the Company are summarized as follows: September 30, 1999 1998 Real estate acquired in settlement of loans $ 5,443 $ 5,790 Other assets acquired in settlement of loans 242 81 Total $ 5,685 $ 5,871 Real estate operations are summarized as follows: Year Ended September 30, 1999 1998 1997 Gain on sale of real estate $ 102 $ 23 $ 69 Provision charged as a write-down to real estate (13) (275) (106) Expenses (119) (126) (122) Rental income 118 15 17 Total $ 88 $ (363) $ (142) 10. Deposit Accounts The deposit balances and related rates were as follows: September 30, 1999 1998 Weighted Weighted Average Average Balance Rate Balance Rate Non-interest-bearing demand accounts $ 63,115 $ 52,539 NOW accounts 121,537 0.50% 109,721 0.85% Passbook, statement and other accounts 124,362 2.38 120,927 2.52 Money market accounts 180,328 3.67 153,479 3.47 489,342 2.08 436,666 2.13 Certificate accounts: Fixed-rate 703,752 5.31 697,349 5.77 Variable-rate 26,754 4.85 30,425 5.18 730,506 5.29 727,774 5.75 Total $1,219,848 4.01% $ 1,164,440 4.39% Scheduled maturities of certificate accounts were as follows: September 30, 1999 1998 Within one year $ 556,605 $ 551,792 After one but within two years 109,249 115,167 After two but within three years 30,312 17,202 Thereafter 34,340 43,613 Total $ 730,506 $ 727,774 The Company has pledged certain interest-earning deposits and investment and mortgage-backed securities available for sale or held to maturity with a fair value of $23,702 and $16,305 at September 30, 1999 and 1998, respectively, to secure deposits by various entities. Certificates of deposit with balances equal to or exceeding $100,000 totaled $157,055 and $181,361, at September 30, 1999 and 1998, respectively. 11. Advances From Federal Home Loan Bank Advances from the FHLB of Atlanta consisted of the following: September 30, 1999 1998 Weighted Weighted Average Average Maturity Balance Rate Balance Rate One year $321,000 5.59% $196,500 5.62% Two years 35,000 5.57 Three years 75,000 5.85 Four years 80,000 5.32 85,000 5.84 Five years 80,000 5.32 Eight years 50,000 5.10 Nine years 25,000 5.57 50,000 5.10 Ten years 43,500 5.02 25,000 5.57 Total $594,500 5.50% $471,500 5.54% As collateral for its advances, the Company has pledged qualifying first mortgage loans in the amount of $792,667 and $628,667 as of September 30, 1999 and 1998, respectively. In addition, all of its FHLB stock is pledged as collateral for these advances. Advances are subject to prepayment penalties. Certain of the advances are subject to calls at the option of the FHLB of Atlanta. 12. Securities Sold Under Agreements to Repurchase and Other Short- term Borrowings Securities sold under agreements to repurchase consisted of the following: September 30, 1999 1998 Investment and mortgage-backed securities with an amortized cost of $80,112 and $31,341 and fair value of $78,062 and $32,079 at September 30, 1999 and 1998, respectively $ 73,991 $ 29,442 The agreements had a weighted average interest rate of 5.45% and 5.58% at September 30, 1999 and 1998, respectively, and mature within three months. The securities underlying the agreements were delivered to the dealers who arranged the transactions. At September 30, 1999 and 1998, the agreements were to repurchase identical securities. Securities sold under agreements to repurchase averaged $35,323 and $45,241 during 1999 and 1998, respectively, and the maximum amount outstanding at any month-end during 1999 and 1998 was $73,991 and $87,405, respectively. Other short-term borrowings consisted of the following: September 30, 1999 1998 Balance Rate Balance Rate Line of credit $ 8,750 7.38% $ 4,000 7.69% 13. Long-term Debt At September 30, 1997 the Company had $19,763 of senior notes which were unsecured debt obligations, with a maturity date of September 1, 2002. In July 1998 the Company issued a redemption notice for the 9.375% notes. As of September 1, 1998, $19,763 in principal was paid plus accrued interest to redeem the notes. As a result of the redemption, an extraordinary charge of $340 (net of related income taxes) was recorded. 14. Income Taxes Income tax expense attributable to continuing operations for the years ended September 30, 1999, 1998 and 1997, is comprised of the following: Federal State Total 1999: Current $ 3,549 $ 16 $ 3,565 Deferred 6,829 6 6,835 Total $ 10,378 $ 22 $10,400 1998: Current $ 1,218 $ 122 $ 1,340 Deferred 7,244 (13) 7,231 Total $ 8,462 $ 109 $ 8,571 1997: Current $ 4,386 $ 751 $ 5,137 Deferred 2,820 544 3,364 Total $ 7,206 $ 1,295 $ 8,501 A reconciliation from expected federal tax expense to consolidated effective income tax expense for the periods indicated follows:
Year Ended September 30, 1999 1998 1997 Expected federal income tax expense $ 10,397 $ 8,907 $ 8,124 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 (429) 74 Tax exempt income (25) (54) (93) South Carolina income tax expense, net of federal income tax effect 14 71 842 Other, net 14 76 (446) Total $ 10,400 $ 8,571 $ 8,501 Effective tax rate 35.0% 33.7% 36.6%
As a result of recent tax legislation in the Small Business Job Protection Act of 1996 ("SBJPA '96"), Peoples Federal and First Federal were required for the year ended September 30, 1997 to recapture bad debt tax reserves in excess of pre-1988 base year amounts of approximately $1,476 over an eight year period and to change their overall tax method of accounting for bad debts to the specific charge-off method. This legislation allows the Associations to defer recapture of this amount for the 1998 and 1997 tax years provided the "residential loan requirement" is met for both years. The Associations currently meet this requirement for the year ending September 30, 1998, suspending the six-year recapture for the 1997 tax year. The Associations have recorded the related deferred tax liability in other liabilities. During the year ended September 30, 1999, the Associations have begun to recapture bad debt reserves in excess of pre-1988 base year. This amortization will occur through year 2003. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at September 30, 1999 and 1998 are presented below. September 30, 1999 1998 Deferred tax assets: Loan loss allowances deferred for tax purposes $ 5,412 $ 4,589 Net operating loss carryforward 505 866 Unrealized loss on securities available for sale 1,040 Other 727 687 Total gross deferred tax assets 7,684 6,142 Less valuation allowance Net deferred tax assets 7,684 6,142 Deferred tax liabilities: Loan fee income adjustments for tax purposes 2,593 2,482 FHLB stock dividends deferred for tax purposes 1,704 1,704 Expenses deducted under economic performance rules 315 477 Excess carrying value of assets acquired for financial reporting purposes over tax basis 1,913 1,244 Tax bad debt reserve in excess of base year amount 518 634 Unrealized gain on securities available for sale -- 1,399 Book over tax basis in subsidiary 13,283 6,197 Other 235 486 Total gross deferred tax liabilities 20,561 14,623 Net deferred liability (included in other liabilities) $ (12,877)$ (8,481) A portion of the change in the net deferred tax liability relates to unrealized gains and losses on securities available for sale. The related current period tax benefit of $2,439 has been recorded directly to stockholders' equity. The balance of the change in the net deferred tax liability results from current period deferred tax expense of $6,835. 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. Management has determined that it is more likely than not that the net deferred tax asset can be supported based upon these criteria. The consolidated financial statements at September 30, 1999 and 1998 did not include a tax liability of $8,468 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 failure to meet the tax definition of a bank, dividend payments in excess of current year or accumulated tax earnings and profits, or other distributions in dissolution, liquidation or redemption of the Associations' stock. 15. Benefit Plans Stock Option Plans 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. The 1990 plan provided 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 provided for the grant of Non-Incentive Stock Options. Options of 357,960 granted under the 1990 Stock Option Plan expire at various dates through October 23, 2007. On September 25, 1997, the Company's Board of Directors approved the 1997 Stock Option and Incentive Plan which was subsequently approved by the stockholders on January 28, 1998. An aggregate of 600,000 shares was reserved for future issuance by the Company upon the exercise of stock options under this Plan. The 1997 plan provides 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 1997 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 have an exercise period of ten years and other employees must exercise options within five years. Options of 191,473 granted under the 1997 Stock Option Plan expire at various dates through May 27, 2009. 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. 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 35,444, 21,512 and 50,418 shares of common stock at an exercise price of $12.66, $14.06 and $7.45 were granted in lieu of otherwise payable cash compensation of $161, $100 and $73 for the Company's fiscal years ending September 30, 1999, 1998 and 1997, respectively. During 1998 the Company, as part of its acquisition of Investors Savings Bank of South Carolina ("Investors"), converted all stock options of Investors outstanding at the time of the merger into options to acquire common stock of the Company. The stock option plan of Investors expired in May of 1996. Options remaining under the plan of Investors expire at various dates through September 19, 2006. The Company applies APB Opinion No. 25 and related interpretations in accounting for its plans. Had compensation cost for the Company's stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method prescribed by SFAS 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below (in thousands except per share data): 1999 1998 1997 Net Income As reported $ 19,307 $ 16,539 $ 14,710 Pro-forma 18,751 16,108 14,425 Earnings per share As reported Basic $ 1.44 $ 1.22 $ 1.10 Diluted 1.40 1.17 1.07 Pro-forma Basic 1.39 1.19 1.08 Diluted 1.36 1.14 1.05 The effects of applying SFAS 123 may not be representative of the effects on reported net income in future years. The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1999, 1998 and 1997, respectively: dividend yield of 2.50%, 2.50% and 2.90%, expected volatility of 29%, average risk-free interest rate of 4.78%, 5.55% and 6.08%, and expected lives of 6 years. The following is a summary of the activity under the stock-based option plans for the years ended September 30, 1999, 1998 and 1997.
1999 1998 1997 Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price Balance, beginning of year 819,980 $ 9.58 881,078 $ 7.46 879,486 $ 6.72 Options exercised (188,835) 6.18 (192,814) 6.81 (162,496) 5.55 Options forfeited (5,882) 16.74 (7,202) 10.46 (3,500) 9.56 Options granted 187,879 17.96 138,918 19.24 167,588 9.53 Outstanding, September 30 813,142 $ 12.31 819,980 $ 9.58 881,078 $ 7.46
Stock options outstanding and exercisable as of September 30, 1999, are as follows: Range of Weighted Average Weighted Average Remaining Exercise Prices Shares Exercise Price Contractual Life $ 5.82 - 7.63 272,474 $ 7.24 5.34 years 8.02 - 9.75 135,809 9.45 5.47 10.13 -14.06 123,332 11.83 7.40 18.63 -22.75 176,344 19.46 8.02 $ 5.82 -22.75 707,959 Stock Purchase Plan On January 25, 1995, the stockholders approved the Employee Stock Purchase Plan ("ESPP"). The ESPP allows employees to purchase stock of the Company at a discounted price. Purchases are made subject to various guidelines which allow the plan to qualify as an employee stock purchase plan under Section 423 of the Internal Revenue Code of 1986, as amended. Purchases of 23,589 shares of common stock have been made under the plan. Performance Equity Plan On January 22, 1997, the stockholders approved the Performance Equity Plan for Non-Employee Directors. The purpose of the Plan is to provide non-employee directors with an opportunity to increase their equity interest in the Company if the Company and the Associations attain specific financial performance criteria. Performance targets for the 1998, 1997 and 1996 year resulted in the awarding of 3,230, 884 and 7,152 shares to the directors serving the Corporation and the Associations. 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, 1999, 1998 and 1997, was $745, $723 and $527, respectively. 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. Contributions to the Plan during 1999, 1998 and 1997 totaled $1,109, $993 and $727, 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. The combined change in benefit obligation, change in plan assets and funded status of the Company's postretirement benefit plan and the amounts included in "other liabilities" on the Consolidated Financial Statements at September 30, 1999 and 1998 are shown below: 1999 1998 Change in benefit obligation: Benefit obligation at October 1 $1,560 $1,355 Service cost Interest cost 99 98 Actuarial (gain) loss (13) 169 Benefit payments (65) (62) Benefit obligation at September 30 1,581 1,560 Change in plan assets: Fair value of plan assets at October 1 -- -- Actual return on plan assets -- -- Employer contributions 65 62 Plan participants' contributions 20 8 Benefit payments (85) (70) Fair value of plan assets at September 30 -- -- Funded status: As of end of year (1,581) (1,560) Unrecognized transition (asset) obligation 1,024 1,103 Unrecognized prior-service cost -- -- Unrecognized net (gain) loss 3 17 Accrued postretirement benefit expense $ (554) $ (440) 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, 1999 and 1998, by $163 and $146 and the aggregate of service and interest cost by $11 and $10, respectively. The combined postretirement benefit expense components for the Company's plan for the years ended September 30, 1999, 1998 and 1997 are shown below: 1999 1998 1997 Service cost of benefits earned during the period $ 99 $ 98 $ 94 Amortization of transition (asset) obligation 79 79 79 Amortization of net (gain) loss (24) (139) Net pension expense $ 178 $ 153 $ 34 Assumptions used in computing the actuarial present value of the Company's postretirement benefit obligation were as follows: 1999 1998 Discount rate 7.50% 6.50% 16. Commitments and Contingencies Loan Commitments Outstanding commitments on mortgage loans not yet closed, including commitments issued to correspondent lenders, amounted to approximately $21,748 at September 30, 1999. These were principally single-family loan commitments. Other loan commitments totaled $150 at September 30, 1999. 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. Unused lines of credit on equity loans, credit cards, other consumer and commercial loans amounted to $196,283, $153,161 and $133,012 at September 30, 1999, 1998 and 1997, 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. Interest Rate Cap In connection with its asset/liability management program the Company purchased an interest rate cap agreement with a counterparty on September 30, 1999. The purchase was made at a premium of $338 for the purpose of hedging potential increases in interest rates on short- term liabilities. The Company is not a dealer, does not make a market in cap agreements and will not trade the instrument. The Board of Directors' approved policy governing the use of these instruments strictly forbids speculation of any kind. The cap agreement has a notional principal amount of $25,000 and matures September 30, 2002. As of September 30, 1999 the strike price was 6.25 percent versus three month LIBOR. Unamortized fees related to the cap as of September 30, 1999 totaled $338 and the fair value of the interest rate cap was $385. Lease Commitments The Company occupies office space and land under leases expiring on various dates through 2011. Minimum rental commitments under noncancelable operating leases were as follows: September 30, 1999 One year $ 1,116 Two years 1,081 Three years 996 Four years 949 Five years 807 Thereafter 324 Total $ 5,273 Rental expenses under operating leases were $1,104, $1,022 and $1,027 in 1999, 1998 and 1997, respectively. 17. Stockholders' Equity and Dividend Restrictions The ability of the Company to pay dividends depends primarily on the ability of the Associations to pay dividends to the Company. The Associations are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory--and possibly additional discretionary--actions by regulators that, if undertaken, could have a direct material effect on the Associations' financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Associations must meet specific capital guidelines that involve quantitative measures of the Associations' assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Associations' capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Associations to maintain minimum amounts and ratios (set forth in the table below) of tangible and core capital (as defined in the regulations) to total assets (as defined), and of risk- based capital (as defined) to risk-based assets (as defined). Management believes, as of September 30, 1999, that the Associations meet all capital adequacy requirements to which they are subject. As of September 30, 1999, the Associations were categorized as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized the Associations must maintain minimum total risk-based, Tier I risk-based, and Tier I core ("leverage") ratios as set forth in the table. There are no conditions or events since that date that management believes have changed the institutions' category. The Associations' actual capital amounts and ratios are also presented in the table.
First Federal: To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions: Amount Ratio Amount Ratio Amount Ratio As of September 30, 1999: Tangible capital (to Total Assets) $ 88,522 6.37% $ 20,837 1.50% Core capital (to Total Assets) 88,522 6.37 55,567 4.00 $ 69,458 5.00% Tier I capital (to Risk-based Assets) 88,522 9.55 55,597 6.00 Risk-based capital (to Risk-based Assets) 97,543 10.53 74,129 8.00 92,661 10.00 As of September 30, 1998: Tangible capital (to Total Assets) $ 82,568 6.58% $ 18,814 1.50% Core capital (to Total Assets) 82,568 6.58 50,193 4.00 $ 62,713 5.00% Tier I capital (to Risk-based Assets) 82,568 9.49 52,223 6.00 Risk-based capital (to Risk-based Assets) 90,052 10.35 69,630 8.00 87,038 10.00 Peoples Federal: To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions: Amount Ratio Amount Ratio Amount Ratio As of September 30, 1999: Tangible capital (to Total Assets) $ 45,062 6.60% $ 10,235 1.50% Core capital (to Total Assets) 45,062 6.60 27,293 4.00 $ 34,116 5.00% Tier I capital (to Risk-based Assets) 45,062 10.40 26,002 6.00 Risk-based capital (to Risk-based Assets) 46,290 10.68 34,669 8.00 43,336 10.00 As of September 30, 1998: Tangible capital (to Total Assets) $ 41,378 7.10% $ 8,738 1.50% Core capital (to Total Assets) 41,378 7.10 23,312 4.00 $ 29,128 5.00% Tier I capital (to Risk-based Assets) 41,378 11.40 21,771 6.00 Risk-based capital (to Risk-based Assets) 42,332 11.67 29,028 8.00 36,285 10.00
Under the framework, the Associations' capital levels allow the Associations to accept brokered deposits without prior approval from regulators. 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 a 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. Under Delaware law, the Company may declare and pay dividends on its common stock either out of its surplus, as defined under Delaware law, or, if there is no surplus, out of its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. 18. Fair Value of Financial Instruments The following table sets forth the fair value of the Company's financial instruments at September 30, 1999 and 1998:
September 30, 1999 1998 Carrying Fair Carrying Fair Value Value Value Value Financial instruments: Assets: Cash and cash equivalents $ 60,151 $ 60,151 $ 40,392 $ 40,392 Investments held to maturity 249 258 4,148 4,194 Investments available for sale 7,569 7,569 11,264 11,264 Investment in capital stock of FHLB 29,925 29,925 25,000 25,000 Loans receivable, net 1,735,608 1,736,355 1,550,567 1,573,792 Loans held for sale 6,542 6,569 14,473 14,473 Mortgage-backed securities held to maturity 28 31 444 452 Mortgage-backed securities available for sale 181,217 181,217 148,186 148,186 Liabilities: Deposits: Demand deposits, savings accounts and money market accounts 489,342 489,342 436,666 436,666 Certificate accounts 730,506 737,357 727,774 736,213 Advances from FHLB 594,500 598,182 471,500 480,666 Securities sold under agreements to repurchase 73,991 73,991 29,442 29,442 Other short-term borrowings 8,750 8,750 4,000 4,000 Off-balance sheet items: Mortgage loan commitments 21,748 21,671 35,238 35,401
Financial instruments of the Company for which fair value approximates the carrying amount at September 30, 1999, 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 regular savings accounts, checking and NOW accounts and money market accounts, is equal to the amount payable on demand. The fair value of certificate accounts 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, 1999. 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, 1999 1998 Assets Cash and cash equivalents $ 205 $ 399 Investments 843 893 Mortgage-backed securities available for sale, at fair value 510 1,053 Investment in subsidiaries 132,410 126,459 Other 1,010 684 Total assets $ 134,978 $ 129,488 Liabilities and Stockholders' Equity Accrued expenses $ 347 $ 325 Other borrowings 8,750 4,000 Stockholders' equity 125,881 125,163 Total liabilities and stockholders' equity $ 134,978 $ 129,488
Statements of Operations Year Ended September 30, 1999 1998 1997 Income Equity in undistributed earnings of subsidiaries $ 8,246 $ 6,724 $ 8,959 Dividend income 12,200 12,400 8,100 Interest income 145 795 765 Gain on sale of investments available for sale 52 55 Total income 20,591 19,971 17,879 Expenses Interest expense 449 1,727 1,853 Salaries and employee benefits 855 922 753 Stockholder relations and other 593 1,258 563 Total expense 1,897 3,907 3,169 Net income before tax 18,694 16,064 14,710 Income tax benefit (613) (475) Net income $ 19,307 $ 16,539 $ 14,710
Statements of Cash Flows Year Ended September 30, 1999 1998 1997 Operating Activities Net income $ 19,307 $ 16,539 $ 14,710 Adjustments to reconcile net income to net cash provided by operating activities Equity in undistributed earnings of subsidiaries (8,246) (6,724) (8,959) Depreciation 15 15 4 Amortization 10 (23) (Increase) decrease in accrued income and deferred expenses (341) 339 (39) Increase (decrease) in accrued expenses 35 (95) 59 Net cash provided by operating activities 10,770 10,084 5,752 Investing Activities Repayments on mortgage-backed securities 509 637 201 Purchase of mortgage-backed securities available for sale (2,520) Proceeds from sale of mortgage-backed securities available for sale 816 2,984 Proceeds from sale of investments 5,794 Proceeds from maturing investments available for sale 1,000 2,000 Net (purchase) redemption of mutual funds 50 1,755 (775) Net purchase of equipment (37) Equity investment in subsidiary (1,510) (350) (2,000) Net cash provided by (used in) investing activities (951) 9,652 (147) Financing Activities Retirement of senior notes (19,763) Net increase in other borrowings 4,750 4,000 Proceeds from exercise of stock options 1,381 1,409 1,148 Treasury stock purchased (9,676) (106) (1,525) Purchase of stock (73) Dividends paid (6,468) (5,700) (4,565) Net cash used in financing activities (10,013) (20,233) (4,942) Net increase (decrease) in cash and cash equivalents (194) (497) 663 Cash and cash equivalents at beginning of period 399 896 233 Cash and cash equivalents at end of period $ 205 $ 399 $ 896 Supplemental disclosures: Cash paid during the period for: Interest $ 449 $ 1,882 $ 1,853 Income taxes (150) 6,430 4,335 Unrealized net gain (loss) on securities available for sale, net of income tax (21) 3 52
20. Dividend Reinvestment and Direct Purchase Plan The Company has a Dividend Reinvestment and Direct Purchase Plan, as amended December 1, 1998, for which shares are purchased only on the open market. At September 30, 1999, 1,285,688 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 1999 Total interest income $ 34,414 $ 34,142 $ 35,637 $ 36,639 $140,832 Net interest income 14,648 14,695 15,548 15,547 60,438 Provision for loan losses 660 585 760 760 2,765 Income before income taxes 7,168 7,126 7,600 7,813 29,707 Net income 4,659 4,633 4,941 5,074 19,307 Earnings per common share: Basic $ 0.34 $ 0.34 $ 0.37 $ 0.38 $ 1.44 Diluted 0.33 0.34 0.36 0.37 1.40 1998 Total interest income $ 33,628 $ 33,831 $ 34,413 $ 34,473 $136,345 Net interest income 13,333 13,459 13,844 14,020 54,656 Provision for loan losses 605 600 600 600 2,405 Income before income taxes 6,146 6,505 6,072 6,727 25,450 Net income before extraordinary loss 3,872 4,101 4,203 4,703 16,879 Extraordinary loss on extinguishment of debt 340 340 Net income 3,872 4,101 4,203 4,363 16,539 Earnings per common share: Income before extraordinary loss Basic $ 0.29 $ 0.30 $ 0.31 $ 0.34 $ 1.24 Diluted 0.28 0.29 0.30 0.33 1.20 Net income Basic 0.29 0.30 0.31 0.32 1.22 Diluted 0.28 0.29 0.30 0.31 1.17
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 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. Name Age (1) Position A. Thomas Hood 53 President and Chief Executive Officer of the Company and President and Chief Executive Officer of First Federal John L. Ott, Jr. 51 Senior Vice President of the Company and Senior Vice President/Retail Banking Division of First Federal Charles F. Baarcke, Jr. 52 Senior Vice President of the Company and Senior Vice President/Lending Division of First Federal George N. Magrath, Jr. 46 President and Chief Executive Officer of Peoples Federal Susan E. Baham 49 Senior Vice President and Chief Financial Officer of the Company and First Federal (1) At September 30, 1999. 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. Thomas Hood has been the President and Chief Executive Officer of the Company since July 1, 1996. Mr. Hood had served as Executive Vice President and Chief Operating Officer of the Company from February 1, 1995 through June 30, 1996. 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. As President and Chief Executive Officer of the Company and of First Federal, Mr. Hood is responsible for the daily business operations of the Company and of First Federal under policies and procedures established by the Board of Directors. 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 retail banking operations, special savings and retirement programs and the sale of non-deposit investment products. 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 for Lending Operations 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. Susan E. Baham became the Senior Vice President and Chief Financial Officer of the Company and of First Federal on July 1, 1996. Previously, Mrs. Baham served as Vice President and Chief Accounting Officer of the Company since 1988 and as Vice President of Finance of First Federal since 1984. Mrs. Baham is responsible for First Financial's treasury, finance, investor relations and strategic planning functions. 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. Exhibits (3.1)Certificate of Incorporation, as amended, of Registrant (1) (3.2)Bylaws, as amended, of Registrant (2) (3.4)Amendment to Certificate of Incorporation(3) (3.6)Amendment to Registrant s Bylaws (4)Indenture, dated September 10, 1992, with respect to the Registrant's 9.375% Senior Notes, due September 1, 2001 (4) (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 (4) (10.3)Employment Agreement with A. Thomas Hood, as amended (5) (10.4)Employment Agreement with Charles F. Baarcke, Jr. (6) (10.5)Employment Agreement with John L. Ott, Jr. (6) (10.6)1990 Stock Option and Incentive Plan (7) (10.7)1994 Outside Directors Stock Options-for-Fees Plan (8) (10.8)1994 Employee Stock Purchase Plan (8) (10.9)1996 Performance Equity Plan for Non-Employee Directors (9) (10.10)Employment Agreement with Susan E. Baham (5) (10.11)1997 Stock Option and Incentive Plan (10) (10.12)Investors Savings Bank of South Carolina, Inc. Incentive Stock Option Plan (11) (10.13)Borrowing Agreement with Bankers Bank (12) (22)Subsidiaries of the Registrant (23)Consent of Independent Auditors (27)Financial Data Schedule (1)Incorporated by reference to Exhibit 3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1993 (2)Incorporated by reference to Exhibit 3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995 (3)Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 1997. (4)Incorporated by reference to the Registrant's Registration Statement on Form S-8 File No. 33-55067. (5)Incorporated by reference to the Registrant s Annual Report on Form 10-K for the year ended September 30, 1996. (6)Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended September 30, 1995. (7)Incorporated by reference to the Registrant's Registration Statement on Form S-8 File No. 33-57855. (8)Incorporated by reference to the Registrant's Proxy Statement for the Annual Meeting of Stockholders held on January 25, 1995 (9)Incorporated by reference to the Registrant's Proxy Statement for the Annual Meeting of Stockholders held on January 22, 1997. (10)Incorporated by reference to the Registrant s Preliminary Proxy Statement for the Annual Meeting of Stockholders held on January 28, 1998. (11)Incorporated by reference to the Registrant's Registration Statement on Form S-8 File No. 333-45033. (12)Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998. 3. Reports on Form 8-K No current reports on Form 8-K were filed during the quarter ended September 30, 1999. 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 23, 1999 By: /s/ A. Thomas Hood A. Thomas Hood 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. Thomas Hood By: /s/ D. Van Smith A. Thomas Hood D. Van Smith Director (Principal Executive Director Officer) Date:December 23, 1999 Date:December 23, 1999 By: /s/ Susan E. Baham By: /s/ Gary C. Banks, Jr. Susan E. Baham Gary C. Banks, Jr. Senior Vice President Director (Principal Financial Officer) Date:December 23, 1999 Date:December 23, 1999 By: /s/Paula Harper Bethea By: /s/ Paul G. Campbell, Jr. Paula Harper Bethea Paul G. Campbell, Jr. Director Director Date:December 23, 1999 Date:December 23, 1999 By: /s/ A. L. Hutchinson, Jr. By: /s/ Thomas J. Johnson A. L. Hutchinson, Jr. Thomas J. Johnson Director Director Date:December 23, 1999 Date:December 23, 1999 By: /s/ James C. Murray By: /s/ D. Kent Sharples James C. Murray D. Kent Sharples Director Director Date:December 23, 1999 Date:December 23, 1999 EX-3.6 2 EXHIBIT 3.6 Amendment to Registrant s Bylaws RESOLUTION WHEREAS, the number of directors on the First Federal Savings and Loan Association of Charleston Board will be reduced from ten to nine upon the retirement of a director on January 27, 1999; be it, therefore, RESOLVED, that the Bylaws of First Federal Savings and Loan Association of Charleston Article III, Section 2 be amended to read as follows, effective January 27, 1999: "SECTION 2. Number and Term. The board of directors shall consist of nine members and shall be divided into three classes as nearly equal in number as possible. The members of each class shall be elected for a term of three years and until their successors are elected or qualified. One class shall be elected by ballot annually." I, the undersigned Secretary of First Federal Savings and Loan Association of Charleston, do hereby certify that the above resolution was adopted by unanimous vote of the Board of Directors at a meeting of said Board held on the 17th day of December, 1998, a quorum being present. /s/ Phyllis B. Ainsworth Phyllis B. Ainsworth, Corporate Secretary December 17, 1998 (SEAL) EX-22 3 EXHIBIT 22 Subsidiaries of the Registrant PARENT First Financial Holdings, Inc. Jurisdiction or Percentage State of Subsidiaries (a) of Ownership Incorporation First Federal Savings and Loan 100% United States Association of Charleston Peoples Federal Savings and 100% United States and Loan Association First Southeast Investor 100% South Carolina Services, Inc. Charleston Financial Services (b) 100% South Carolina The Carolopolis Corporation (b) 100% South Carolina Broad Street Holdings, Inc. (b) 100% North Carolina Broad Street Investments, Inc. (c) 100% North Carolina First Southeast Fiduciary and 100% South Carolina Trust Services, Inc. (b) First Reinsurance Holdings, 100% South Carolina Inc. (b) First Southeast Reinsurance, 100% Vermont Inc. (d) First Southeast Insurance 100% South Carolina Services, Inc. (e) Coastal Carolina Corporation (e) 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) Third-tier subsidiary of the Registrant. Wholly-owned by Broad Street Holdings, Inc. (d) Third-tier subsidiary of the Registrant. Wholly-owned by First Reinsurance Holdings, Inc. (e) Second-tier subsidiaries of the Registrant. Wholly-owned by Peoples Federal. EX-23 4 EXHIBIT 23 INDEPENDENT ACCOUNTANTS CONSENT The Board of Directors First Financial Holdings, Inc.: We consent to incorporation by reference in the registration statement (No.33-57855) on Form S-8 of First Financial Holdings, Inc. of our report dated October 21, 1999, relating to the consolidated statements of financial condition of First Financial Holdings, Inc. and subsidiaries as of September 30, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended September 30, 1999, which report appears in the September 30, 1999, annual report on Form 10-K of First Financial Holdings, Inc. KPMG LLP Greenville, South Carolina December 22, 1999 EX-27 5
9 1000 YEAR SEP-30-1999 SEP-30-1999 40,185 19,966 0 0 188,786 30,202 30,214 1,756,720 14,570 2,070,752 1,219,848 677,241 0 0 152 0 0 125,729 2,070,752 125,742 14,320 770 140,832 49,000 80,394 60,438 2,765 37 9,080 29,707 19,307 0 0 19,307 1.44 1.40 3.22 4,466 20 2,724 7,210 12,781 1,596 620 14,570 14,570 0 0
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