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FFCH > SEC Filings for FFCH > Form 10-K on 18-Mar-2013All Recent SEC Filings

Show all filings for FIRST FINANCIAL HOLDINGS INC /DE/ | Request a Trial to NEW EDGAR Online Pro

Form 10-K for FIRST FINANCIAL HOLDINGS INC /DE/


18-Mar-2013

Annual Report

1 See Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations - Use of Non-GAAP Financial Measures 2 Net interest margin includes taxable equivalent adjustments to interest income based on a federal tax rate of 35%.
3 The quarter ended March 31, 2012 represented the first period holding company ratios for First Financial were required to be filed with the Federal Reserve included within FR Y-9C, Consolidated Financial Statements for Bank Holding Companies .
4 Capital ratios beginning with the quarter ended March 31, 2012 for First Federal are based on reporting requirements for financial institutions filing FFIEC 041, FDIC Consolidated Reports of Condition and Income. Prior period ratios are reported based on superseded regulatory requirements previously issued by the Office of Thrift Supervision.

Summary of Selected Financial Data (continued)
                                                                    Year Ended         Quarter Ended                                        Years Ended
                                                                   December 31,        December 31,         September 30,        September 30,        September 30,        September 30,
(dollars in thousands, except per share data)                          2012                2011                 2011                 2010                 2009                 2008
Asset Quality Metrics
Allowance for loan losses as a percent of loans                             1.77 %               2.24 %               2.31 %               3.39 %               2.57 %               1.03 %
Allowance for loan losses as a percent of nonperforming loans              89.30               112.19               126.64                61.54                85.00               116.27
Nonperforming loans as a percent of loans                                   1.98                 2.00                 1.82                 5.50                 3.03                 0.88
Nonperforming assets as a percent of loans and other
repossessed assets acquired                                                                      2.83                 4.48                 5.94                 3.82                 1.07
Nonperforming assets as a percent of total assets                           2.11                 2.17                 3.38                 4.61                 2.92                 0.84
Net loans charged-off as a percent of average loans 1                       1.17                 1.39                 6.05                 4.05                 1.02                 0.37
Net loans charged-off                                              $      29,481      $         8,254      $       142,439      $       106,796      $        26,532      $         8,377
Asset Quality Metrics Excluding Nonperforming
Loans Held for Sale
Nonperforming assets excluding nonperforming loans held for
sale as a percent of loans and other repossessed assets
acquired                                                                    2.70 %               2.83 %               2.82 %               5.94 %               3.82 %               1.07 %
Nonperforming assets excluding nonperforming loans held for
sale as a percent of total assets                                           2.11                 2.17                 2.10                 4.61                 2.92                 0.84
Asset Quality Metrics Excluding Acquired Covered Loans
Allowance for loan losses as a percent of legacy loans                      1.94 %               2.39 %               2.47 %               3.66 %               2.83 %               1.02 %
Allowance for loan losses as a percent of legacy nonperforming
loans                                                                     108.23               177.35               227.09                66.15                85.58               116.27
Nonperforming loans as a percent of legacy loans                            1.79                 1.34                 1.09                 5.54                 3.31                 0.88
Nonperforming assets as a percent of legacy loans and other
repossessed assets acquired                                                 2.17                 1.91                 3.58                 5.82                 3.93                 1.07
Nonperforming assets as a percent of total assets                           1.54                 1.37                 2.52                 4.16                 2.72                 0.84
Asset Quality Metrics Excluding Acquired Covered Loans and
Nonperforming Loans Held for Sale
Nonperforming assets excluding nonperforming loans held for
sale as a percent of legacy loans and other repossessed assets
acquired                                                                    2.17 %               1.91 %               1.79 %               5.82 %               3.93 %               1.07 %
Nonperforming assets excluding nonperforming loans held for
sale as a percent of total assets                                           1.54                 1.37                 1.23                 4.16                 2.72                 0.84

1 Quarter ended December 31, 2011 data is annualized.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following presents management's discussion and analysis of First Financial's financial condition and results of operations and should be read in conjunction with the accompanying Consolidated Financial Statements and Notes. The discussion highlights the principal factors affecting earnings (loss) for the fiscal year ended December 31, 2012, the quarter ended December 31, 2011, and the fiscal year ended September 30, 2011; and the significant changes in balance sheet items from September 30, 2011 to December 31, 2012; and is intended to help the reader understand, from management's perspective, the Consolidated Financial Statements, Notes to Consolidated Financial Statements and the accompanying tables, charts and financial statistics appearing elsewhere in this report. Where applicable, this discussion also reflects management's insights regarding known events and trends that have or may reasonably be expected to have a material effect on First Financial's operations and financial condition.

Nature of First Financial's Business

First Financial has two primary sources of revenue, net interest income and noninterest income. Net interest income is the difference between interest income, the income earned on loans and investments and interest expense, the interest paid on deposits and borrowings. Noninterest income represents fees and other revenue from financial services provided to customers. The majority of noninterest income comes from service charges and fees on deposit accounts and mortgage and other loan income.

First Financial's revenue tends to be influenced by overall economic factors, including market interest rates, business spending, consumer confidence, and competitive conditions within the marketplace, as well as residential housing markets in the communities it serves. First Financial's earnings and business are affected by the general economic and political conditions in the US and abroad and by the monetary and fiscal policies of various federal regulatory authorities, including the Federal Reserve. First Federal strives to manage the effects of interest rates through its asset/liability management process but the effect of fluctuating economic conditions and federal regulatory policies on First Financial's future profitability cannot be predicted with any certainty. General economic conditions in the primary markets First Financial serves have begun to show some stabilization, as evidenced by the unemployment rate for the Charleston, South Carolina metropolitan statistical area ("MSA") decreasing from 7.8% in November 2011 to 6.8% in November 2012 (most recent available data). The leading index for South Carolina (as defined by the Federal Reserve) also has improved in recent months, increasing from 2.01% in November 2011 to 3.89% in November 2012. First Financial has a credit policy in place to address credit risk, the effect of the economy on credit risk and its potential effect on future periods. One of the primary factors in determining potential loss given default is to evaluate the trend residential and commercial property values. The Case-Shiller Housing Index tracks residential home inventory, sales and prices in the twenty largest MSAs in the US. The Case-Shiller index for the Charlotte MSA (the closest market to those markets served by First Financial) has also improved in recent months, from -2.6% in October 2011 to 4.1% in October 2012 (with any value over zero displaying positive trends).

Moody's Commercial Property Price Index is a compilation of 20 indices based on commercial property type in areas throughout the US. This index also improved from 137.44 in October 2011 to 144.10 in October 2012. While all of these metrics were better than the most prior year, their improvements are relatively small yet display a general stability in the economic conditions of First Financial's primary markets.

Significant Developments

Under terms of the Agreement entered into on February 19, 2013, First Financial plans to merge with and into SCBT. First Financial common shareholders will receive 0.4237 shares of SCBT common stock for each share of First Financial common stock, subject to the payment of cash in lieu of fractional shares, which equated to an estimated deal value at announcement of $302.4 million in aggregate, based on SCBT's closing stock price on February 19, 2013. The merger is expected to close in the third quarter of 2013, subject to customary closing conditions, regulatory approval, and the approval of both First Financial and SCBT shareholders. Additional information related to the potential merger is incorporated herein by reference from Note 22 to the Consolidated Financial Statements.

During the second quarter of 2012, First Financial initiated a number of transactions to better position its balance sheet. The repositioning is expected to enhance net interest income, noninterest income and net interest margin in future periods. During the quarter ended June 30, 2012, First Financial prepaid $125.0 million of long-term FHLB advances with an average rate of 3.15%, incurring a termination charge of $8.5 million ($5.3 million after-tax). To fund the debt prepayment, mortgage-backed securities totaling $203.6 million with an average yield of 1.79% were sold, generating a $3.5 million gain ($2.2 million after-tax). In aggregate, these transactions resulted in a net charge of $3.1 million after-tax, or $(0.19) per common share. The remaining proceeds from the investment sales were reinvested during the second and third quarters of 2012 in assets with higher projected returns for the current interest rate environment and outlook. First Financial believes the balance sheet repositioning is an economically accretive transaction as the net loss is expected to have a breakeven point of less than two years.

On April 27, 2012, First Federal assumed all deposits and substantially all assets and certain other liabilities of Plantation Federal Bank ("Plantation"), a full-service community bank headquartered in Pawleys Island, South Carolina, from the FDIC, as receiver for Plantation. Plantation operated three branches along the coast of South Carolina under the name of Plantation Federal and three branches in the Greenville, South Carolina market under the name of First Savers Bank. The transaction was made pursuant to a purchase and assumption agreement, in the FDIC's customary form and with defined loss sharing arrangements, entered into by First Federal and the FDIC as of April 27, 2012. As a result of the transaction, First Federal recorded a bargain purchase gain of $13.9 million during 2012.

On April 20, 2012, First Federal acquired five branches from Liberty Savings Bank ("Liberty") in the Hilton Head, South Carolina market and the transaction included $22.2 million of performing loans and $113.2 million of deposits, as of the transaction date. First Federal consolidated three of the acquired branches with existing First Federal financial centers, adding a net of two new financial centers in the Hilton Head market.

In February 2012, First Federal (formerly known as First Federal Savings and Loan Association of Charleston) converted from a federal savings and loan association to a South Carolina-chartered commercial bank and First Financial converted from a savings and loan holding company to a bank holding company. In addition, First Federal received approval to become a member of the Federal Reserve System and First Financial became a bank holding company. As a result of the charter conversion and membership in the Federal Reserve System, the SC Board and the Federal Reserve serve as First Federal's primary regulators. The Federal Reserve also serves as First Financial's primary regulator. In addition to retaining its bank holding company status, First Financial also became a financial holding company on December 13, 2012.

On October 25, 2011, First Financial entered into a definitive agreement to sell certain performing loans and classified assets with an aggregate contractual principal balance of $197.9 million to affiliates of Värde Partners, Inc. The loans had previously been written down to an estimated fair value of $60.3 million when they were reclassified to held for sale in June 2011. During the quarter ended December 31, 2011, First Financial completed the sale of the bulk loan pool and recorded a gain on the sale of $20.8 million. The sale was the result of First Financial's strategy to reduce its level of delinquent and nonperforming loans to reduce the inherent risk in the loan portfolio, minimize further negative migration and reduce potential future losses due to further collateral value deterioration.

During 2011, First Financial sold the stock of First Southeast, its insurance agency subsidiary, to Hub International, LLC and sold substantially all of the assets of Kimbrell, its managing general insurance agency subsidiary, to Burns and Wilcox, Ltd, a Kaufman Financial Group company. Both transactions were completed in exchange for cash. 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 Annual report and, as such, are presented as discontinued operations.

Results of Operations

First Financial recorded net income available to common shareholders of $24.9 million for the year ended December 31, 2012, compared with $14.6 million for the quarter ended December 31, 2011, and net losses available to common shareholders of $(45.0) and $(40.6) million for the years ended September 30, 2011 and 2010, respectively. Diluted net income (loss) per common share was $1.51 for the

year ended December 31, 2012, compared with $0.88, $(2.72), and $(2.46) per common share for the quarter ended December 31, 2011 and the years ended September 30, 2011 and 2010, respectively.

Net Interest Income

The following table presents an analysis of net interest income, interest spread and net interest margin with average balances and related weighted average interest rates.

Year ended December 31, 2012 compared with year ended December 31, 2011

Average Balances, Net Interest Income, Average Rates

                                                                           Years Ended
                                                  December 31, 2012                           December 31, 2011
                                          Average                     Average        Average                      Average
(dollars in thousands)                    Balance       Interest        Rate         Balance       Interest        Rate
Earning assets
Interest-bearing deposits with banks    $    17,674     $      41         0.23 %   $    10,808     $      20          0.19 %
Securities available for sale               328,076        10,612         3.24         400,020        16,060          4.02
Securities held to maturity1                 18,904         1,353        11.00          21,610         1,108          7.86
Nonmarketable securities                     29,704           730         2.46          37,943           383          1.01
Loans2
Residential                               1,070,923        42,821         4.00         987,019        41,359          4.19
Commercial                                  695,309        47,377         6.81         719,276        41,868          5.82
Consumer                                    758,579        51,996         6.85         762,784        52,639          6.90
Total loans                               2,524,811       142,194         5.63       2,469,079       135,866          5.50
Loans held for sale                          54,414         1,956         3.59          41,525           763          1.84
FDIC indemnification asset, net              67,987           379         0.56          58,969         1,626          2.76
Total earning assets                      3,041,570       157,265         5.20       3,039,954       155,826          5.15

Nonearning assets
Cash and due from banks                      62,488                                     64,153
Allowance for loan losses                   (49,277 )                                  (69,566 )
Other assets                                192,885                                    187,169
Assets of discontinued operations                 -                                     17,714
Total assets                            $ 3,247,666                                $ 3,239,424

Interest-bearing liabilities
Interest-bearing deposits
Interest-bearing checking               $   479,869     $     632         0.13 %   $   429,037     $   1,252          0.29 %
Savings                                     247,417           337         0.14         187,643           429          0.23
Money market                                425,726         1,739         0.41         320,092         1,397          0.44
Time deposits                             1,021,439        12,359         1.21       1,145,041        19,607          1.71
Total interest-bearing deposits           2,174,451        15,067         0.69       2,081,813        22,685          1.09
Advances from FHLB                          357,260        10,759         3.01         531,567        13,286          2.50
Long-term debt                               45,882         3,188         6.95          45,872         3,188          6.95
Total interest-bearing liabilities        2,577,593        29,014         1.13       2,659,252        39,159          1.47

Noninterest-bearing liabilities
Noninterest-bearing checking                347,093                                    249,731
Other liabilities                            35,457                                     36,426
Liabilities of discontinued
operations                                        -                                      3,293
Total liabilities                         2,960,143                                  2,948,702
Shareholders' equity                        287,523                                    290,722
Total liabilities and shareholders'
equity                                  $ 3,247,666                                $ 3,239,424
Net interest income/interest spread                     $ 128,251         4.07 %                   $ 116,667          3.68 %
Contribution of noninterest bearing
sources of funds3                                                         0.17                                        0.18
Net interest margin (FTE)4                                                4.24 %                                      3.86 %

1 Interest income used in the average rate calculation includes the tax equivalent adjustment of $760 thousand and $593 thousand for the years ended December 31, 2012 and 2011 respectively, calculated based on a federal tax rate of 35%. 2 Total loans include nonaccrual loans. Loan fees, which are not material for any of the periods, have been included in loan interest income for the rate calculation.
3 Equates to total cost of funds of 0.99% and 1.35% for the years ended December 31, 2012 and 2011, respectively. 4 Net interest margin exceeds the interest spread due to noninterest-bearing funding sources supporting earning assets.

The increase in net interest margin was primarily the result of (1) a lower cost of deposits related to organic growth in core deposits and acquired deposits from Liberty and Plantation; (2) a balance sheet repositioning strategy completed in the second quarter of 2012; (3) improved performance on the former Cape Fear Bank ("Cape Fear") nonperforming loans, which resulted in a shift to accretable yield as well as recognizing cash payments in interest income; and
(4) the accretion and amortization of purchase accounting adjustments, which resulted from the Plantation and Liberty acquisitions. During 2012, the performance of the Cape

Fear loan pools acquired from the FDIC was better than originally projected. As a result, the cumulative cash payments received have exceeded First Federal's initial investment in one of the pools and $3.6 million was recognized in interest income. The net interest margin for 2012, adjusted for the cash received in excess of the initial investment and recorded to interest income as well as incremental loan accretion, was 4.09%.

The increase in net interest income was principally caused by the $3.6 million excess cash payments recognized in interest income due to the improved performance of a Cape Fear loan pool and increases in earning assets from the Plantation and Liberty transactions, partially offset by the impact of the balance sheet repositioning.

Quarter ended December 31, 2011 compared with quarter ended December 31, 2010

Average Balances, Net Interest Income, Average Rates

                                                                          Three Months Ended
                                                     December 31, 2011                           December 31, 2010
                                            Average                      Average        Average                      Average
(dollars in thousands)                      Balance       Interest        Rate          Balance       Interest        Rate
Earning assets
Interest-bearing deposits with banks      $    10,212     $       4          0.16 %   $    11,587     $       6          0.21 %
Securities available for sale                 414,694         3,511          3.39         388,375         4,716          4.82
Securities held to maturity1                   20,926           266          7.86          22,454           296          8.01
Nonmarketable securities                       34,305            82          0.95          42,071            11          0.09
Loans2
Residential                                 1,010,396        10,638          4.21         932,380        13,310          5.71
Commercial                                    624,024         9,628          6.12         863,972         9,266          4.25
Consumer                                      743,963        12,910          6.88         790,102        13,573          6.82
Total loans                                 2,378,383        33,176          5.55       2,586,454        36,149          5.54
Loans held for sale                            50,360           284          2.26          28,464           217          3.06
FDIC indemnification asset, net                50,700           289          2.27          67,854           677          3.96
Total earning assets                        2,959,580        37,612          5.06       3,147,259        42,072          5.32

Nonearning assets
Cash and due from banks                        54,365                                      56,693
Allowance for loan losses                     (54,178 )                                   (87,605 )
Other assets                                  193,519                                     165,327
Assets of discontinued operations                   -                                      42,151
Total assets                              $ 3,153,286                                 $ 3,323,825

Interest-bearing liabilities
Interest-bearing deposits
Interest-bearing checking                 $   427,277     $     185          0.17 %   $   395,997     $     454          0.45 %
Savings                                       200,736            88          0.17         168,157           112          0.26
Money market                                  324,267           317          0.39         338,094           466          0.55
Time deposits                               1,040,677         3,964          1.52       1,295,400         6,568          2.01
Total interest-bearing deposits             1,992,957         4,554          0.91       2,197,648         7,600          1.37
Advances from FHLB                            519,174         3,362          2.58         497,226         3,427          2.73
Long-term debt                                 45,940           797          6.90          45,812           797          6.90
Total interest-bearing liabilities          2,558,071         8,713          1.35       2,740,686        11,824          1.71

Noninterest-bearing liabilities
Noninterest-bearing checking                  279,079                                     227,160
Other liabilities                              37,070                                      32,558
Liabilities of discontinued operations              -                                       5,219
Total liabilities                           2,874,220                                   3,005,623
Shareholders' equity                          279,066                                     318,202
Total liabilities and shareholders'
equity                                    $ 3,153,286                                 $ 3,323,825
Net interest income/interest spread                       $  28,899          3.71 %                   $  30,248          3.61 %
Contribution of noninterest bearing
sources of funds3                                                            0.20                                        0.22
Net interest margin (FTE)4                                                   3.91 %                                      3.83 %

1 Interest income used in the average rate calculation includes the tax equivalent adjustment of $145 thousand and $157 thousand for the quarters ended December 31, 2011 and 2010, respectively, calculated based on a federal tax rate of 35%.
2 Total loans include nonaccrual loans. Loan fees, which are not material for any of the periods, have been included in loan iterest income for the rate calculation.
3 Equates to total cost of funds of 1.23% and 1.58% for the quarters ended December 31, 2011 and 2010, respectively. 4 Net interest margin exceeds the interest spread due to noninterest-bearing funding sources supporting earning assets.

The increase in net interest margin was primarily the result of the decrease in the yield on interest-bearing liabilities exceeding the decrease in the yield on earning assets as First Financial continued to grow core deposits, especially noninterest-bearing deposits. The decrease in net interest income was primarily the result of a decline in average earning assets due to the bulk loan sale, combined with the decline in loans due to the generally lower demand from creditworthy borrowers and loan charge-offs.

Year ended September 30, 2011 compared with year ended September 30, 2010

Average Balances, Net Interest Income, Average Rates

                                                                                   Years Ended
                                                    September 30, 2011                                     September 30, 2010
(dollars in thousands)               Average Balance      Interest       Average Rate       Average Balance      Interest       Average Rate
Earning assets
Interest-bearing deposits with
banks                               $          11,931     $      20               0.17 %   $           6,938     $      12               0.17 %
Securities available for sale                 393,580        17,265               4.39               440,048        23,238               5.28
. . .
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