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FFCH > SEC Filings for FFCH > Form 10-Q on 9-Nov-2012All Recent SEC Filings




Quarterly Report

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Five Quarter Summary of Selected Financial Data

                                                   As of and for the Quarters Ended
(dollars in thousands,       September 30,     June 30,      March 31,     December 31,     September 30,
except per share data)           2012            2012          2012            2011             2011
------------------------- - --------------- - ----------- - ----------- - -------------- - --------------- -
Summary of Operations
Interest income             $        40,014   $    39,343   $    36,359   $       37,612   $        38,556
Interest expense                      6,817         7,630         8,107            8,713             9,492
                            -- ------------ - - --------- - - --------- - -- ----------- - -- ------------ -
Net interest income                  33,197        31,713        28,252           28,899            29,064
Provision for loan losses             4,533         4,697         6,745            7,445             8,940
                            -- ------------ - - --------- - - --------- - -- ----------- - -- ------------ -
Net interest income after
provision for loan losses            28,664        27,016        21,507           21,454            20,124
Noninterest income                   14,548        32,530        13,182           32,770            14,238
Noninterest expense                  33,029        39,250        28,709           28,886            29,588
                            -- ------------ - - --------- - - --------- - -- ----------- - -- ------------ -
Income from continuing
operations before taxes              10,183        20,296         5,980           25,338             4,774
Income tax expense from
continuing operations                 3,516         7,712         4,241            9,766             1,893
                            -- ------------ - - --------- - - --------- - -- ----------- - -- ------------ -
Net income from
continuing operations                 6,667        12,584         1,739           15,572             2,881
Loss from discontinued
operations                                -             -             -                -            (1,804 )
                            -- ------------ - - --------- - - --------- - -- ----------- - -- ------------ -
Net income                            6,667        12,584         1,739           15,572             1,077
Preferred stock dividends               813           812           813              813               813
Accretion on preferred
stock                                   160           158           156              153               151
                            -- ------------ - - --------- - - --------- - -- ----------- - -- ------------ -
Net income available to
common shareholders         $         5,694   $    11,614   $       770   $       14,606   $           113
                            -- ------------ - - --------- - - --------- - -- ----------- - -- ------------ -
Per Common Share Data
Net income per common
share from continuing
Basic                       $          0.34   $      0.70   $      0.05   $         0.88   $          0.12
Diluted                                0.34          0.70          0.05             0.88              0.12
Net loss per common share
from discontinued
Basic                       $             -   $         -   $         -   $            -   $         (0.11 )
Diluted                                   -             -             -                -             (0.11 )
Net income per common
Basic                       $          0.34   $      0.70   $      0.05   $         0.88   $          0.01
Diluted                                0.34          0.70          0.05             0.88              0.01

Market price, end of
period                      $         12.99   $     10.72   $     11.00   $         8.93   $          4.01
Book value per common
share                                 13.77         13.45         12.89            12.84             12.31
Tangible book value per
common share (non-GAAP)1              13.25         12.91         12.75            12.69             12.16
Dividends                              0.05          0.05          0.05             0.05              0.05
Shares outstanding, at
period end                           16,527        16,527        16,527           16,527            16,527
Balance Sheet Summary, at
period end
Assets                      $     3,245,487   $ 3,304,174   $ 3,145,538   $    3,146,964   $     3,206,310
Investment securities               276,633       293,400       500,331          457,730           469,561
Loans                             2,574,369     2,632,483     2,355,567        2,385,457         2,355,334
Allowance for loan losses            46,351        48,799        50,776           53,524            54,333
Deposits                          2,616,757     2,703,202     2,264,489        2,239,198         2,302,857
Advances from FHLB and
long-term debt                      300,204       280,204       580,204          608,204           605,204
Shareholders' equity                292,500       287,264       278,043          277,178           268,506
Balance Sheet Summary,
average for the quarter
Assets                      $     3,283,512   $ 3,339,705   $ 3,151,385   $    3,153,286   $     3,201,416
Investment securities               291,223       443,181       490,356          469,925           468,360
Loans                             2,673,438     2,619,409     2,420,000        2,428,743         2,442,071
Allowance for loan losses            48,329        50,547        52,282           54,178            55,503
Deposits                          2,664,207     2,596,642     2,228,613        2,272,035         2,302,518
Advances from FHLB and
long-term debt                      294,796       428,505       609,665          565,114           595,508
Shareholders' equity                290,047       285,672       277,390          279,066           267,404
Selected Ratios from
Continuing Operations
Return on average assets2              0.81 %        1.51 %        0.22 %           1.98 %            0.36 %
Return on average equity2              9.20         17.62          2.51            22.32              4.31
Net interest margin
(FTE)3                                 4.35          4.08          3.84             3.91              3.87
Efficiency ratio
(non-GAAP)1                           69.19         66.04         68.87            70.12             70.90
Pre-tax, pre-provision
earnings                    $        14,716   $    24,725   $    12,725   $       32,783   $        13,714
Selected Ratios from
Consolidated Operations
Return on average assets2              0.81 %        1.51 %        0.22 %           1.98 %            0.13 %
Return on average equity2              9.20         17.62          2.51            22.32              1.61

1 See Item 2. Management's Discussion and Anaylsis of Financial Condition and Results of Operations - Use of Non-GAAP Financial Measures
2 Annualized percentages
3 Net interest margin includes taxable equivalent adjustments to interest income based on a federal tax rate of 35%.

Five Quarter Summary of Selected Financial Data (Continued)

                                                   As of and for the Quarters Ended
                             September 30,     June 30,     March 31,     December 31,       September 30,
(dollars in thousands)           2012            2012         2012            2011               2011
------------------------- - --------------- - ---------- - ----------- - -------------- --- --------------- ---
Capital Ratios
Equity to assets                       9.01 %       8.69 %        8.84 %           8.81 %              8.37 %
Tangible common equity to
tangible assets
(non-GAAP)                             6.77         6.47          6.70             6.67                6.27
Leverage capital ratio                10.12         9.79         10.22                  (1)                 (1)
Tier 1 risk-based capital
ratio                                 14.42        13.89         14.81                  (1)                 (1)
Total risk-based capital
ratio                                 15.70        15.16         16.08                  (1)                 (1)
Leverage capital ratio -
First Federal                          9.47         9.06          9.00             8.92                8.26
Tier 1 risk-based capital
ratio - First Federal                 13.50        12.86         13.05            12.35               11.26
Total risk-based capital
ratio - First Federal                 14.78        14.13         14.32            13.61               12.53
Asset Quality Metrics
Allowance for loan losses
as a percent of loans                  1.80 %       1.85 %        2.16 %           2.24 %              2.31 %
Allowance for loan losses
as a percent of
nonperforming loans                   94.53        97.72        101.75           112.19              126.64
Nonperforming loans as a
percent of loans                       1.90         1.90          2.12             2.00                1.82
Nonperforming assets as a
percent of loans and
other repossessed assets
acquired2                              2.72         2.94          3.02             2.83                4.48
Nonperforming assets as a
percent of total assets                2.18         2.36          2.28             2.17                3.38
Net loans charged-off as
a percent of average
loans3                                 1.07         1.04          1.60             1.39                1.71
Net loans charged-off       $         6,981   $    6,673   $     9,493   $        8,254     $        10,098
Asset Quality Metrics
Excluding Covered Loans
Allowance for loan losses
as a percent of
non-covered loans                      1.99 %       2.06 %        2.28 %           2.39 %              2.47 %
Allowance for loan losses
as a percent of
non-covered nonperforming
loans                                118.82       123.61        148.22           177.35              227.09
Nonperforming loans as a
percent of non-covered
loans                                  1.67         1.67          1.54             1.34                1.09
Nonperforming assets as a
percent of non-covered
loans and other
repossessed assets
acquired2                              1.97         2.01          2.00             1.91                3.58
Nonperforming assets as a
percent of total assets                1.42         1.45          1.42             1.37                2.52
------------------------- - -- ------------ - -- ------- - -- -------- - -- ----------- --- -- ------------ ---

1 The quarter ended March 31, 2012 represents the first period holding company ratios for First Financial were required to be filed with the Federal Reserve Bank included within FR Y-9C, Consolidated Financial Statements for Bank Holding Companies. The capital ratios presented above for the quarter ended September 30, 2012 at the holding company are considered preliminary until the regulatory report is filed with the Federal Reserve Bank.
2 Nonperforming loans held for sale in the amount of $39,412 are included in loans at September 30, 2011.
3 Annualized percentage

The following presents management's discussion and analysis of First Financial Holdings, Inc. ("First Financial") and its wholly-owned subsidiaries, including First Federal Bank ("First Federal"), a South Carolina-chartered commercial bank, with regard to their financial condition and results of operations for the three and nine months ended September 30, 2012. It should be read in conjunction with the unaudited Consolidated Financial Statements and Notes included elsewhere in this report and the audited Consolidated Financial Statements and Notes contained in First Financial's 2011 Annual Report on Form 10-K for the fiscal year ended September 30, 2011, as filed with the Securities Exchange Commission ("SEC") on December 13, 2011. In addition, the following discussion and analysis should be read together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in First Financial's 2011 Annual Report on Form 10-K, which contains important additional information that is necessary to understand First Financial and its financial condition and results of operations for the periods covered by this report.

All of First Financial's electronic filings with the SEC, including the Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other documents filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, are accessible at no cost on First Financial's website, The information on the website does not constitute a part of this report and is not incorporated herein by reference. First Financial's filings are also available through the SEC's website at

Change in Fiscal Year

On December 20, 2011, First Financial's Board of Directors approved an amendment to Article VIII of First Financial's bylaws to change First Financial's fiscal year end from September 30th to December 31st of each year. The change was effective December 31, 2011 and the current fiscal year began on January 1, 2012 and will end on December 31, 2012. The change in fiscal year end resulted in a three-month transition period which began on October 1, 2011 and ended on December 31, 2011. As a result of its change in fiscal year, First Financial filed a Transition Report on Form 10-Q with the SEC on February 9, 2012 which covered the transition period from October 1, 2011 to December 31, 2011.

Discontinued Operations

As a result of First Financial's sale of its insurance agency subsidiary, First Southeast Insurance Services, Inc., which was completed on June 1, 2011, and its managing general insurance agency subsidiary, Kimbrell Insurance Group, Inc., which was completed on September 30, 2011, the financial condition, operating results, and the gain or loss on the sales, net of transaction costs and taxes, for these subsidiaries have been segregated from the financial condition and operating results of First Financial's continuing operations throughout this document and, as such, are presented as discontinued operations. While all prior periods have been revised retrospectively to align with this treatment, these changes do not affect First Financial's reported consolidated financial condition or operating results for any of the prior periods.

Forward-Looking Statements

Statements in this report that are not statements of historical fact, including without limitation, statements that include terms such as "believes," "expects," "anticipates," "estimates," "forecasts," "intends," "plans," "targets," "potentially," "probably," "projects," "outlook," or similar expressions or future conditional verbs such as "may," "will," "should," "would," or "could" constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements regarding First Financial's future financial and operating results, plans, objectives, expectations and intentions involve risks and uncertainties, many of which are beyond First Financial's control or are subject to change. No forward-looking statement is a guarantee of future performance and actual results could differ materially from those anticipated by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to:

A large portion of First Financial's loan portfolio is secured by residential and commercial real estate. Continued deterioration in residential and commercial real estate values could lead to additional losses, which may cause First Financial's net income to decline and could have a negative impact on its capital, financial condition, and results of operations.
Repayment of First Financial's commercial business loans is often dependent on the cash flows of the borrower, which may be unpredictable, and the collateral securing these loans, which may fluctuate in value due to, among other things, current national and local economic conditions.
First Financial's allowance for loan losses may not be sufficient to absorb losses in its loan portfolio. Additions to the allowance for loan losses may be required by increasing the provision for loan losses, which would cause net income to decline and could have a negative impact on First Financial's capital and financial position.
Negative developments in the financial industry, the domestic and international credit markets, and the economy in general may continue to adversely impact First Financial's earnings and could increase its credit risk associated with the loan portfolios, and these adverse impacts could be exacerbated by potential negative economic developments that may occur if certain federal tax reductions expire and spending cuts go into effect as currently scheduled.
First Financial's business is predominately conducted throughout coastal South Carolina, as well as in the Florence and Greenville, South Carolina and Wilmington, North Carolina markets; continuation of the economic downturn in First Financial's primary market area could negatively impact its results of operations and its financial position.
First Financial's net interest income may decline based on the interest rate environment.
First Financial may not be able to adequately anticipate and respond to changes in market interest rates.
Further economic downturns may adversely affect First Financial's investment securities portfolio and profitability.
If First Financial is unable to continue to attract or retain core deposits, to obtain third party borrowings on favorable terms, or to have access to interbank or other liquidity sources, its cost of funds will increase, adversely affecting its ability to generate funds necessary for lending operations, reducing net interest margin and negatively affecting results of operations.
Economic and other circumstances may require First Financial to raise capital at times or in amounts that are unfavorable. If First Financial has to issue shares of stock, such additional shares will dilute the percentage ownership interest of existing shareholders and may dilute the book value per share of common stock and adversely affect the terms on which First Financial may obtain additional capital.
The terms of First Financial's Series A Preferred Stock impose restrictions and obligations that may limit First Financial's ability to pay or increase dividends, repurchase shares of preferred or common stock, and access the equity capital markets.
If First Financial is unable or chooses not to redeem its Series A Preferred Stock within five years from the issuance date, the cost of this capital will increase.
First Financial is subject to extensive and evolving regulations, which could restrict its activities, have an adverse impact on its operations, and impose financial requirements or limitations on the conduct of its business.
First Financial may become subject to more stringent capital requirements.
Financial reform legislation enacted by the U.S. Congress, and further changes in regulation to which First Financial is exposed, will result in additional laws and regulations that are expected to increase costs of operations.
Competition with other financial institutions may have an adverse effect on First Financial's ability to retain and grow its client base, which could have a negative effect on its financial condition and results of operations.
First Financial may be adversely affected by the soundness of other financial institutions.
First Financial depends on the accuracy and completeness of information about its clients and counterparties.
The accuracy of First Financial's financial statements and related disclosures could be affected because it is exposed to conditions or assumptions different from the judgments, assumptions, or estimates used in its critical accounting policies.
First Financial's potential inability to integrate companies it may acquire in the future could expose it to financial, execution, and operational risks that could negatively affect its financial condition and results of operations. Acquisitions may be dilutive

to common shareholders and Federal Deposit Insurance Corporation ("FDIC")-assisted transactions have additional compliance risk that other acquisitions do not have.
Negative public opinion regarding First Financial and the financial institutions industry in general could damage First Financial's reputation and adversely impact earnings.
First Financial is exposed to a possible loss of its senior management team and key employees. If First Financial were to lose key employees, it may experience a disruption in its relationships with certain customers.
First Financial is party to various lawsuits incidental to its business. Litigation is subject to many uncertainties such that the expenses and ultimate exposure with respect to many of these matters cannot be ascertained.
First Financial's business continuity plans or data security systems could prove to be inadequate, resulting in a material interruption in, or disruption to, business and a negative impact on results of operations.
First Financial's controls and procedures may fail or be circumvented, which could have a material adverse effect on business, results of operations, and financial condition.
First Financial's stock price may be volatile, which could result in losses to our investors and litigation against First Financial.
Future sales of First Financial's stock by its shareholders or the perception that those sales could occur may cause its stock price to decline.
Anti-takeover provisions could negatively impact First Financial shareholders.

These factors also include risks and uncertainties detailed from time to time in First Financial's other filings with the SEC, such as the risk factors listed in "Item 1A. Risk Factors," of First Financial's 2011 Annual Report on Form 10-K and subsequent Forms 10-Q (including this Form 10-Q). Other factors not currently anticipated may also materially and adversely affect First Financial's results of operations, cash flows, and financial condition. There can be no assurance that future results will meet expectations. While First Financial believes that the forward-looking statements in this report are reasonable, the reader should not place undue reliance on any forward-looking statement. In addition, these statements speak only as of the date made. First Financial does not undertake, and expressly disclaims any obligation to update or alter any statements, whether as a result of new information, future events or otherwise, except as required by applicable law.

Critical Accounting Policies

First Financial's Consolidated Financial Statements are prepared in accordance with U.S. generally accepted accounting principles ("GAAP") and follow general practices within the financial institutions industry. Application of these principles requires management to make estimates, assumptions, and complex judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements. Accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments. Actual results could differ significantly from these estimates. Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. Estimates that are particularly susceptible to significant change include those relating to the allowance for loan losses, fair value measurements, and income taxes. First Financial believes that these estimates and the related accounting policies are important to the portrayal of its financial condition and results of operations. Therefore, management considers them to be critical accounting policies and discusses them directly with the Audit Committee of the Board of Directors. First Financial's accounting policies are more fully described in Note 1 to the Consolidated Financial Statements contained in First Financial's 2011 Annual Report on Form 10-K, and the more significant assumptions and estimates made by management are more fully described in "Management's Discussion and Results of Operations - Critical Accounting Policies and Estimates" in First Financial's 2011 Annual Report on Form 10-K. For additional information regarding updates, see Note 1 to the Consolidated Financial Statements in this report.

Use of Non-GAAP Financial Measures

In addition to results presented in accordance with U.S. GAAP, this report includes non-GAAP financial measures such as the efficiency ratio, tangible common equity to tangible assets ratio, tangible common book value, and pre-tax pre-provision earnings. First Financial believes these non-GAAP financial measures provide additional information that is useful to investors in understanding its underlying performance, business and performance trends, and such measures help facilitate performance comparisons with others in the banking industry. Non-GAAP measures have inherent limitations, are not required to be uniformly applied and are not audited. Readers should be aware of these limitations and should be cautious in their use of such measures. To mitigate these limitations, First Financial has procedures in place to ensure that these measures are calculated using the appropriate GAAP or regulatory components in their entirety and to ensure that its performance is properly reflected to facilitate consistent period-to-period comparisons. Although First Financial believes the above non-GAAP financial measures enhance investors' understanding of its business and performance, these non-GAAP measures should not be considered in isolation, or as a substitute for GAAP basis financial measures. Investors should consider First Financial's performance and financial condition as reported under GAAP and all other relevant information when assessing First Financial's performance or financial condition.

The efficiency ratio measures the amount of revenue (defined as the sum of net interest income on a fully tax-equivalent basis and noninterest income) needed to cover noninterest expenses. In accordance with industry standards, First Financial believes that presenting net interest income on a taxable equivalent basis when calculating the efficiency ratio, using a 35% effective federal tax rate, allows comparability with industry peers by eliminating the effect of the differences in portfolios attributable to the proportion . . .

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