|
UNITED STATES |
SECURITIES AND EXCHANGE COMMISSION |
Washington, D.C. 20549 |
|
FORM 10-Q |
For the quarterly period ended June 30, 2012
Or
For the transition period from __________to __________
Commission File Number 000-17122
|
FIRST FINANCIAL HOLDINGS, INC. |
(Exact name of Registrant as specified in its charter) |
|
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|
Delaware |
| 57-0866076 |
| ||
(State or other jurisdiction of |
| I.R.S. Employer |
Incorporation or organization |
| Identification No.) |
|
|
|
2440 Mall Drive, Charleston, South Carolina |
| 29406 |
| ||
(Address of principal executive offices) |
| (Zip Code) |
|
(843) 529-5933 |
Registrant’s telephone number, including area code |
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|
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “and smaller reporting company” in Rule 12b-2 of the Exchange Act. | |||
Large accelerated filero | Accelerated filerþ | Non-accelerated filero | Smaller reporting companyo |
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act). Yeso Noþ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
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|
Class |
| Outstanding at August 3, 2012 |
| ||
Common Stock, $0.01 par value |
| 16,526,752 |
1
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FIRST FINANCIAL HOLDINGS, INC. |
Index to Form 10-Q |
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Part I – Financial Information |
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Item 1. Financial Statements (Unaudited) |
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| 3 | |
| 4 | |
| 5 | |
| 6 | |
| 7 | |
| 9 | |
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
| 33 |
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Item 3. Quantitative and Qualitative Disclosures About Market Risk |
| 52 |
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| 52 | |
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| 53 | |
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| 53 | |
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
| 53 |
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| 53 | |
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| 53 | |
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| 53 | |
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| 53 | |
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| 55 |
2
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FIRST FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
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(in thousands, except share data) |
| June 30, |
|
| December 31, |
|
| June 30, |
| |||
ASSETS |
|
|
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|
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|
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|
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Cash and due from banks |
| $ | 62,831 |
|
| $ | 61,400 |
|
| $ | 60,905 |
|
Interest-bearing deposits with banks |
|
| 7,270 |
|
|
| 15,275 |
|
|
| 4,094 |
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| |||||||||
Total cash and cash equivalents |
|
| 70,101 |
|
|
| 76,675 |
|
|
| 64,999 |
|
Investment securities |
|
|
|
|
|
|
|
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|
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Securities available for sale, at fair value |
|
| 244,059 |
|
|
| 404,550 |
|
|
| 418,967 |
|
Securities held to maturity at amortized cost, approximate fair value $22,523, $23,242, and $23,879, respectively |
|
| 20,014 |
|
|
| 20,486 |
|
|
| 21,977 |
|
Nonmarketable securities |
|
| 29,327 |
|
|
| 32,694 |
|
|
| 37,626 |
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| |||||||||
Total investment securities |
|
| 293,400 |
|
|
| 457,730 |
|
|
| 478,570 |
|
Loans |
|
| 2,632,483 |
|
|
| 2,385,457 |
|
|
| 2,372,069 |
|
Less: Allowance for loan losses |
|
| 48,799 |
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|
| 53,524 |
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|
| 55,491 |
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Net loans |
|
| 2,583,684 |
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|
| 2,331,933 |
|
|
| 2,316,578 |
|
Loans held for sale |
|
| 72,402 |
|
|
| 48,303 |
|
|
| 84,288 |
|
FDIC indemnification asset, net |
|
| 77,311 |
|
|
| 51,021 |
|
|
| 58,926 |
|
Premises and equipment, net |
|
| 82,394 |
|
|
| 79,979 |
|
|
| 81,001 |
|
Bank owned life insurance |
|
| 10,000 |
|
|
| --- |
|
|
| --- |
|
Other intangibles, net |
|
| 8,931 |
|
|
| 2,401 |
|
|
| 2,571 |
|
Other assets |
|
| 105,951 |
|
|
| 98,922 |
|
|
| 129,332 |
|
Assets of discontinued operations |
|
| --- |
|
|
| --- |
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|
| 5,279 |
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| |||||||||
Total assets |
| $ | 3,304,174 |
|
| $ | 3,146,964 |
|
| $ | 3,221,544 |
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LIABILITIES |
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Deposits |
|
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Noninterest-bearing checking |
| $ | 359,553 |
|
| $ | 279,519 |
|
| $ | 234,478 |
|
Interest-bearing checking |
|
| 502,530 |
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|
| 429,698 |
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|
| 437,179 |
|
Savings and money market |
|
| 731,428 |
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| 522,496 |
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| 506,236 |
|
Retail time deposits |
|
| 934,245 |
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| 791,544 |
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| 854,202 |
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Wholesale time deposits |
|
| 175,446 |
|
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| 215,941 |
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|
| 283,650 |
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Total deposits |
|
| 2,703,202 |
|
|
| 2,239,198 |
|
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| 2,315,745 |
|
Advances from FHLB |
|
| 233,000 |
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| 561,000 |
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| 557,500 |
|
Long-term debt |
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| 47,204 |
|
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| 47,204 |
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| 47,204 |
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Other liabilities |
|
| 33,504 |
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| 22,384 |
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| 29,432 |
|
Liabilities of discontinued operations |
|
| --- |
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|
| --- |
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| 5,099 |
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Total liabilities |
|
| 3,016,910 |
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| 2,869,786 |
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| 2,954,980 |
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SHAREHOLDERS’ EQUITY |
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Preferred stock, Series A, $.01 par value, authorized 3,000,000 shares, issued 65,000 shares at June 30, 2012, December 31, 2011, and June 30, 2011, respectively (Redemption value $65,000) |
|
| 1 |
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|
| 1 |
|
|
| 1 |
|
Common stock, $.01 par value, authorized 34,000,000 shares, issued 21,465,163 shares at June 30, 2012, December 31, 2011 and June 30, 2011, respectively |
|
| 215 |
|
|
| 215 |
|
|
| 215 |
|
Additional paid-in capital |
|
| 196,409 |
|
|
| 196,002 |
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|
| 195,597 |
|
Treasury stock at cost, 4,938,411 shares at June 30, 2012, December 31, 2011, and June 30, 2011, respectively |
|
| (103,563 | ) |
|
| (103,563 | ) |
|
| (103,563 | ) |
Retained earnings |
|
| 198,100 |
|
|
| 187,367 |
|
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| 174,300 |
|
Accumulated other comprehensive (loss) income |
|
| (3,898 | ) |
|
| (2,844 | ) |
|
| 14 |
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| |||||||||
Total shareholders’ equity |
|
| 287,264 |
|
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| 277,178 |
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| 266,564 |
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Total liabilities and shareholders’ equity |
| $ | 3,304,174 |
|
| $ | 3,146,964 |
|
| $ | 3,221,544 |
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|
See accompanying notes to consolidated financial statements. |
3
|
FIRST FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
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| Three Months Ended |
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| Six Months Ended |
| ||||||||||
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(in thousands, except per share data) |
| 2012 |
|
| 2011 |
|
| 2012 |
|
| 2011 |
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INTEREST INCOME |
|
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Interest and fees on loans |
| $ | 35,643 |
|
| $ | 34,497 |
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| $ | 68,119 |
|
| $ | 69,341 |
|
Interest and dividends on investments |
|
| 3,538 |
|
|
| 4,527 |
|
|
| 7,405 |
|
|
| 9,301 |
|
Other |
|
| 162 |
|
|
| 448 |
|
|
| 178 |
|
|
| 1,014 |
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|
|
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| ||||||||||||
Total interest income |
|
| 39,343 |
|
|
| 39,472 |
|
|
| 75,702 |
|
|
| 79,656 |
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INTEREST EXPENSE |
|
|
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|
|
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|
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Interest on deposits |
|
| 3,981 |
|
|
| 5,929 |
|
|
| 7,932 |
|
|
| 12,808 |
|
Interest on borrowed money |
|
| 3,649 |
|
|
| 4,127 |
|
|
| 7,805 |
|
|
| 8,145 |
|
|
|
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| ||||||||||||
Total interest expense |
|
| 7,630 |
|
|
| 10,056 |
|
|
| 15,737 |
|
|
| 20,953 |
|
|
|
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NET INTEREST INCOME |
|
| 31,713 |
|
|
| 29,416 |
|
|
| 59,965 |
|
|
| 58,703 |
|
Provision for loan losses |
|
| 4,697 |
|
|
| 77,803 |
|
|
| 11,442 |
|
|
| 90,478 |
|
|
|
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Net interest income (loss) after provision for loan losses |
|
| 27,016 |
|
|
| (48,387 | ) |
|
| 48,523 |
|
|
| (31,775 | ) |
NONINTEREST INCOME |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges and fees on deposit accounts |
|
| 7,558 |
|
|
| 6,982 |
|
|
| 14,860 |
|
|
| 13,363 |
|
Mortgage and other loan income |
|
| 4,372 |
|
|
| 2,051 |
|
|
| 7,807 |
|
|
| 3,175 |
|
Trust and plan administration |
|
| 1,078 |
|
|
| 1,116 |
|
|
| 2,159 |
|
|
| 2,228 |
|
Brokerage fees |
|
| 875 |
|
|
| 657 |
|
|
| 1,539 |
|
|
| 1,323 |
|
Other |
|
| 699 |
|
|
| 670 |
|
|
| 1,468 |
|
|
| 1,345 |
|
Other-than-temporary impairment on investment securities |
|
| (145 | ) |
|
| (54 | ) |
|
| (214 | ) |
|
| (176 | ) |
Gain on acquisition |
|
| 14,550 |
|
|
| --- |
|
|
| 14,550 |
|
|
| --- |
|
Gain on sale of investments |
|
| 3,543 |
|
|
| --- |
|
|
| 3,543 |
|
|
| 1,419 |
|
|
|
|
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| ||||||||||||
Total noninterest income |
|
| 32,530 |
|
|
| 11,422 |
|
|
| 45,712 |
|
|
| 22,677 |
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NONINTEREST EXPENSE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Salaries and employee benefits |
|
| 15,212 |
|
|
| 15,373 |
|
|
| 30,354 |
|
|
| 32,769 |
|
Occupancy costs |
|
| 2,933 |
|
|
| 2,117 |
|
|
| 5,200 |
|
|
| 4,325 |
|
Furniture and equipment |
|
| 1,893 |
|
|
| 1,769 |
|
|
| 3,702 |
|
|
| 3,594 |
|
Other real estate expenses, net |
|
| 134 |
|
|
| 800 |
|
|
| 664 |
|
|
| 667 |
|
FDIC insurance and regulatory fees |
|
| 761 |
|
|
| 850 |
|
|
| 1,747 |
|
|
| 2,334 |
|
Professional services |
|
| 1,816 |
|
|
| 1,094 |
|
|
| 3,247 |
|
|
| 2,420 |
|
Advertising and marketing |
|
| 972 |
|
|
| 810 |
|
|
| 1,628 |
|
|
| 1,803 |
|
Other loan expense |
|
| 1,283 |
|
|
| 1,099 |
|
|
| 2,634 |
|
|
| 2,024 |
|
Intangible amortization |
|
| 368 |
|
|
| 82 |
|
|
| 458 |
|
|
| 164 |
|
Other expense |
|
| 5,353 |
|
|
| 3,976 |
|
|
| 9,800 |
|
|
| 8,015 |
|
FHLB prepayment termination charge |
|
| 8,525 |
|
|
| --- |
|
|
| 8,525 |
|
|
| --- |
|
Goodwill impairment |
|
| --- |
|
|
| 630 |
|
|
| --- |
|
|
| 630 |
|
|
|
|
|
| ||||||||||||
Total noninterest expense |
|
| 39,250 |
|
|
| 28,600 |
|
|
| 67,959 |
|
|
| 58,745 |
|
|
|
|
|
| ||||||||||||
Net income (loss) from continuing operations before taxes |
|
| 20,296 |
|
|
| (65,565 | ) |
|
| 26,276 |
|
|
| (67,843 | ) |
Income tax expense (benefit) from continuing operations |
|
| 7,712 |
|
|
| (25,288 | ) |
|
| 11,953 |
|
|
| (26,201 | ) |
|
|
|
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| ||||||||||||
NET INCOME (LOSS) FROM CONTINUING OPERATIONS |
|
| 12,584 |
|
|
| (40,277 | ) |
|
| 14,323 |
|
|
| (41,642 | ) |
Loss from discontinued operations, net of tax |
|
| --- |
|
|
| (2,724 | ) |
|
| --- |
|
|
| (1,789 | ) |
|
|
|
|
| ||||||||||||
NET INCOME (LOSS) |
|
| 12,584 |
|
|
| (43,001 | ) |
|
| 14,323 |
|
|
| (43,431 | ) |
Preferred stock dividends |
|
| 812 |
|
|
| 813 |
|
|
| 1,625 |
|
|
| 1,625 |
|
Accretion on preferred stock discount |
|
| 158 |
|
|
| 149 |
|
|
| 314 |
|
|
| 295 |
|
|
|
|
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NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS |
| $ | 11,614 |
|
| $ | (43,963 | ) |
| $ | 12,384 |
|
| $ | (45,351 | ) |
|
|
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Net income (loss) per common share from continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Basic |
| $ | 0.70 |
|
| $ | (2.50 | ) |
| $ | 0.75 |
|
| $ | (2.64 | ) |
Diluted |
|
| 0.70 |
|
|
| (2.50 | ) |
|
| 0.75 |
|
|
| (2.64 | ) |
Net loss per common share from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | --- |
|
| $ | (0.16 | ) |
| $ | --- |
|
| $ | (0.11 | ) |
Diluted |
|
| --- |
|
|
| (0.16 | ) |
|
| --- |
|
|
| (0.11 | ) |
Net income (loss) per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.70 |
|
| $ | (2.66 | ) |
| $ | 0.75 |
|
| $ | (2.75 | ) |
Diluted |
|
| 0.70 |
|
|
| (2.66 | ) |
|
| 0.75 |
|
|
| (2.75 | ) |
Average common shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 16,527 |
|
|
| 16,527 |
|
|
| 16,527 |
|
|
| 16,527 |
|
Diluted |
|
| 16,528 |
|
|
| 16,527 |
|
|
| 16,528 |
|
|
| 16,527 |
|
See accompanying notes to consolidated financial statements. |
4
|
FIRST FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||
|
|
| ||||||||||||||
(in thousands) |
| 2012 |
|
| 2011 |
|
| 2012 |
|
| 2011 |
| ||||
| ||||||||||||||||
NET INCOME (LOSS) |
| $ | 12,584 |
|
| $ | (43,001 | ) |
| $ | 14,323 |
|
| $ | (43,431 | ) |
OTHER COMPREHENSIVE LOSS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on securities available for sale |
|
| (2,683 | ) |
|
| (606 | ) |
|
| (1,437 | ) |
|
| (3,512 | ) |
Less: Reclassification of other-than-temporary loss included in income for the period |
|
| (145 | ) |
|
| (54 | ) |
|
| (214 | ) |
|
| (176 | ) |
Tax benefit |
|
| 1,164 |
|
|
| 290 |
|
|
| 597 |
|
|
| 1,427 |
|
|
|
|
|
| ||||||||||||
TOTAL OTHER COMPREHENSIVE LOSS, NET OF TAX |
|
| (1,664 | ) |
|
| (370 | ) |
|
| (1,054 | ) |
|
| (2,261 | ) |
|
|
|
|
| ||||||||||||
TOTAL COMPREHENSIVE INCOME (LOSS) |
| $ | 10,920 |
|
| $ | (43,371 | ) |
| $ | 13,269 |
|
| $ | (45,692 | ) |
|
|
|
|
|
See accompanying notes to consolidated financial statements. |
5
|
FIRST FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Additional Paid- |
| Treasury |
| Retained |
| Accumulated |
|
|
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
|
| Preferred Stock |
| Common Stock |
|
|
|
|
|
|
| |||||||||||||||||
(in thousands, except per share data) |
| Shares |
| Amount |
| Shares |
| Amount |
|
|
|
|
| Total |
| |||||||||||||
Balance at December 31, 2010 |
|
| 65 |
| $ | 1 |
|
| 16,527 |
| $ | 215 |
| $ | 195,090 |
| $ | (103,563 | ) | $ | 221,304 |
| $ | 2,275 |
| $ | 315,322 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (43,431 | ) |
|
|
|
| (43,431 | ) |
Other comprehensive loss, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (2,261 | ) |
| (2,261 | ) |
Stock based compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 212 |
|
|
|
|
|
|
|
|
|
|
| 212 |
|
Accretion of preferred stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 295 |
|
|
|
|
| (295 | ) |
|
|
|
| --- |
|
Cash dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock ($0.05 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1,653 | ) |
|
|
|
| (1,653 | ) |
Preferred stock ($12.50 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1,625 | ) |
|
|
|
| (1,625 | ) |
|
| |||||||||||||||||||||||||||
Balance at June 30, 2011 |
|
| 65 |
| $ | 1 |
|
| 16,527 |
| $ | 215 |
| $ | 195,597 |
| $ | (103,563 | ) | $ | 174,300 |
| $ | 14 |
| $ | 266,564 |
|
|
| |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2011 |
|
| 65 |
| $ | 1 |
|
| 16,527 |
| $ | 215 |
| $ | 196,002 |
| $ | (103,563 | ) | $ | 187,367 |
| $ | (2,844 | ) | $ | 277,178 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 14,323 |
|
|
|
|
| 14,323 |
|
Other comprehensive loss, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1,054 | ) |
| (1,054 | ) |
Stock based compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 93 |
|
|
|
|
|
|
|
|
|
|
| 93 |
|
Accretion of preferred stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 314 |
|
|
|
|
| (314 | ) |
|
|
|
| --- |
|
Cash dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock ($0.05 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1,651 | ) |
|
|
|
| (1,651 | ) |
Preferred stock ($12.50 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1,625 | ) |
|
|
|
| (1,625 | ) |
|
| |||||||||||||||||||||||||||
Balance at June 30, 2012 |
|
| 65 |
| $ | 1 |
|
| 16,527 |
| $ | 215 |
| $ | 196,409 |
| $ | (103,563 | ) | $ | 198,100 |
| $ | (3,898 | ) | $ | 287,264 |
|
|
|
See accompanying notes to consolidated financial statements. |
6
|
FIRST FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
|
|
|
|
|
|
|
|
|
Six Months Ended | ||||||||
June 30, | ||||||||
(in thousands) | 2012 | 2011 | ||||||
Operating Activities | ||||||||
Net Income (loss) | $ | 14,323 | $ | (43,431 | ) | |||
Less: loss from discontinued operations | --- | (1,789 | ) | |||||
Net income (loss) from continuing operations | 14,323 | (41,642 | ) | |||||
Adjustments to reconcile net income to net cash provided by operating activities | ||||||||
Provision for loan losses | 11,442 | 90,478 | ||||||
Depreciation | 3,279 | 2,884 | ||||||
Amortization of intangibles | 458 | 164 | ||||||
Net decrease (increase) in current & deferred income tax | 9,712 | (24,873 | ) | |||||
Mark-to-market adjustments | (4,027 | ) | (3,227 | ) | ||||
Fair value of adjustments on other real estate owned | 4,372 | 2,705 | ||||||
Amortization (accretion) of unearned premiums/discounts on investments, net | 892 | (731 | ) | |||||
Other-than-temporary impairment losses | 214 | 176 | ||||||
Loans originated for sale | (373,100 | ) | (129,365 | ) | ||||
Proceeds from loans held for sale | 355,863 | 134,775 | ||||||
Gain on sale of loans, net | (6,862 | ) | (876 | ) | ||||
Gain on sale of other real estate owned, net | (1,813 | ) | (657 | ) | ||||
Gain on sale of investments | (3,543 | ) | (1,419 | ) | ||||
Gain on sale of premises and equipment | (149 | ) | (82 | ) | ||||
Gain on acquisition | (14,550 | ) | --- | |||||
Recognition of stock-based compensation expense | 93 | 212 | ||||||
Decrease in prepaid FDIC insurance premium | 1,370 | 1,883 | ||||||
FDIC reimbursement of covered asset losses | 8,124 | 10,425 | ||||||
Goodwill impairment | --- | 630 | ||||||
Other | (1,639 | ) | (784 | ) | ||||
Discontinued operations, net | --- | (6,225 | ) | |||||
Net cash provided by operating activities | 4,459 | 34,451 | ||||||
Investing Activities | ||||||||
Securities available-for-sale | ||||||||
Proceeds from sales | 207,171 | 1,419 | ||||||
Proceeds from maturities, calls and payments | 54,626 | 50,826 | ||||||
Purchases | (86,592 | ) | (100,673 | ) | ||||
Proceeds from maturities, calls and payments, securities held to maturity | 672 | --- | ||||||
Redemption of FHLB and purchase of Federal Reserve stock, net | 3,367 | 3,647 | ||||||
Purchase of life insurance cash surrender value | (10,000 | ) | --- | |||||
Plantation acquisition, net of cash received | 126,225 | --- | ||||||
Liberty branch acquisition, net of cash received | 84,194 | --- | ||||||
Decrease in loans, net | 26,724 | 11,897 | ||||||
Proceeds from sales of other real estate owned | 14,834 | 7,599 | ||||||
Proceeds from sale of business | --- | 38,000 | ||||||
Increase in property and equipment, net | (4,012 | ) | (1,997 | ) | ||||
Discontinued operations, net | --- | (33 | ) | |||||
Net cash provided by investing activities | 417,209 | 10,685 | ||||||
See accompanying notes to consolidated financial statements. |
7
|
FIRST FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (continued)
|
|
|
|
|
|
|
|
|
Six Months Ended | ||||||||
June 30, | ||||||||
(in thousands) | 2012 | 2011 | ||||||
Financing Activities | ||||||||
Increase in demand and savings deposits, net | 88,737 | 67,428 | ||||||
Decrease in time deposits, net | (157,348 | ) | (161,213 | ) | ||||
(Repayments of) proceeds from FHLB advances, net | (356,355 | ) | 60,500 | |||||
Dividends paid on common stock | (1,651 | ) | (1,653 | ) | ||||
Dividends paid on preferred stock | (1,625 | ) | (1,625 | ) | ||||
Net cash used by financing activities | (428,242 | ) | (36,563 | ) | ||||
Net (decrease) increase in cash and cash equivalents | (6,574 | ) | 8,573 | |||||
Cash and cash equivalents at beginning of period, continuing operations | 76,675 | 53,404 | ||||||
Cash and cash equivalents at beginning of period, discontinued operations | --- | 3,022 | ||||||
Cash and cash equivalents at beginning of period | 76,675 | 56,426 | ||||||
Cash and cash equivalents at end of period, continuing operations | 70,101 | 64,999 | ||||||
Cash and cash equivalents at end of period, discontinued operations | --- | --- | ||||||
Cash and cash equivalents at end of period | $ | 70,101 | $ | 64,999 | ||||
Supplemental disclosures | ||||||||
Cash paid during the period for | ||||||||
Interest | $ | 17,572 | $ | 23,682 | ||||
Income taxes | 1,651 | 3,282 | ||||||
FHLB prepayment termination charge | 8,525 | --- | ||||||
Loans foreclosed | 14,260 | 17,673 | ||||||
Loans securitized into mortgage-backed securities | 292,403 | 111,846 | ||||||
Unrealized loss on securities available for sale, net of tax | (1,054 | ) | (2,261 | ) |
8
|
FIRST FINANCIAL HOLDINGS, INC. |
June 30, 2012 |
NOTE 1. Basis of Presentation and Accounting Policies
The accompanying unaudited consolidated financial statements for First Financial Holdings, Inc. (“First Financial”) and its wholly-owned subsidiaries, including First Federal Bank (“First Federal”), a South Carolina-chartered commercial bank, have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the instructions for Form 10-Q and Article 10 of Regulation S-X pursuant to the Securities Exchange Act of 1934. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.
Certain amounts have been reclassified to conform with the current year presentation. First Financial’s significant accounting policies are described in Note 1 to the Consolidated Financial Statements included in First Financial’s 2011 Annual Report on Form 10-K for the fiscal year ended September 30, 2011, as filed with the Securities and Exchange Commission (“SEC”) on December 13, 2011. For interim reporting purposes, First Financial follows the same basic accounting policies, as updated by the information contained in this report. For further information, refer to the consolidated financial statements and footnotes included in First Financial’s 2011 Annual Report on Form 10-K.
First Financial has one active wholly-owned trust formed for the purpose of issuing securities which qualify as regulatory capital and is considered a Variable Interest Entity (“VIE”). First Financial is not the primary beneficiary, and consequently, the trust is not consolidated in the accompanying consolidated financial statements. The trust issued $46.4 million in trust preferred securities to investors in 2004 and there remains $46.4 million outstanding at June 30, 2012. The net proceeds from the issuance were used to purchase junior subordinated deferrable interest debentures issued by First Financial, which is the sole asset of the trust. The trust preferred securities held by this entity qualify as Tier 1 capital for First Financial and are classified as long-term debt on the Consolidated Balance Sheets, with the associated interest expense recorded in interest on borrowed money on the Consolidated Statements of Operations. The expected losses and residual returns for this entity are absorbed by the trust preferred security holders and, consequently, First Financial is not exposed to loss related to this VIE.
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 report 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.
Recently Adopted Accounting Pronouncements
FASB ASU 2011-05, “Comprehensive Income (Topic 220) – Presentation of Comprehensive Income” as amended by Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2011-12, “Comprehensive Income (Topic 220)-Deferral of the Effective Date for Amendments to the Presentation of Reclassification of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update (“ASU”) 2011-05.”
This ASU increases the prominence of other comprehensive income (“OCI”) in financial statements and provides two options for presenting OCI. The ASU eliminates the current placement near the statement of shareholders’ equity or detailed in the Consolidated Statement of Changes in Shareholders’ Equity. The ASU provides for an OCI statement to be included with the net income statement, and together the two will make a statement of total comprehensive income. Alternatively, businesses can have an OCI statement separate from a net income statement, but the two statements will have to appear consecutively within a financial report. The ASU does not affect the calculation of earnings per share. The adoption of ASU 2011-05 was effective December 15, 2011. First Financial elected to present a separate OCI statement which is located immediately following its Consolidated Statements of Operations.
9
FASB ASU 2011-04, “Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”
This ASU amends the wording used to describe many of the requirements in GAAP for measuring fair value and for disclosing information about fair value measurements. The ASU clarifies the application of existing fair value measurement requirements and changes principles or requirement for measuring fair value or for disclosing information about fair value measurements. The ASU will require new disclosures for any transfers between Levels 1 and 2 of the fair value hierarchy, not just significant transfers, and further expands focus on Level 3 measurements, including quantitative information about the significant unobservable inputs used for all Level 3 measurements, a qualitative discussion about the sensitivity of recurring Level 3 measurements to changes in the unobservable inputs disclosed, and a description of the valuation processes. The adoption of ASU 2011-04 was effective for reporting periods beginning on or after December 15, 2011 and is included in Note 8 to the Consolidated Financial Statements.
FASB ASU 2011-03, “Transfer and Servicing (Topic 860) – Reconsideration of Effective Control of Repurchase Agreements”
This ASU improves the accounting for repurchase agreements and other agreements that entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. ASU 2011-03 removes from the assessment of effective control: (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation related to that criterion. Other criterions applicable to the assessment of effective control are not changed by the amendments in this ASU. The adoption of ASU 2011-03 was effective December 15, 2011 and did not have a material impact on First Financial’s financial condition or results of operations.
Recently Issued Accounting Pronouncements
FASB ASU 2011-11, “Balance Sheet (Topic 210) - Disclosures about Offsetting Assets and Liabilities.”
This ASU addresses the differences in reporting between GAAP and International Financial Reporting Standards (“IFRS”) regarding offsetting (netting) assets and liabilities and enhances current disclosures. ASU 2011-11 requires entities to disclose both gross information and net information about instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The scope includes derivatives, sale and repurchase agreements and reverse sales and repurchase agreements, as well as securities borrowing and securities lending arrangements. ASU 2011-11 is effective for annual reporting periods beginning on or after January 1, 2013 and interim periods within those annual periods. First Financial does not expect the adoption of ASU 2011-11 to have a material impact on its financial condition or results of operations.
NOTE 2. Acquisitions
Acquisitions are accounted for in accordance with ASC 805,Business Combinations, and assets acquired and liabilities assumed are recorded at their estimated fair value as of acquisition date. Determining the fair value of the assets and liabilities, especially the loan portfolio and other real estate owned (“OREO”), is a complicated process involving significant judgment regarding the methods and assumptions used to calculate estimated fair values. The fair value assigned to loans and OREO, are preliminary and subject to refinement for up to one year after the closing date of the acquisition, as additional information becomes available. In addition, acquisition-related costs are recognized as period expenses as they are incurred.
Liberty Savings Bank Branch Acquisition
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. The acquired loans and time deposits were recorded at their estimated fair value based on expected contractual cash flows, which were discounted at current market rates. The estimated fair value for the loans did not include a discount for credit quality as they were all performing loans as of the acquisition date. First Federal also recorded an intangible asset totaling $5.2 million, which represented the estimated fair value of the assumed core deposits (noninterest-bearing checking, interest-bearing checking, savings, and money market accounts) as well as the estimated value of a non-compete agreement between First Federal and Liberty. The amortization of the purchase accounting adjustments for the loans and time deposits is recorded in net interest income while the amortization of the intangible asset is recorded in noninterest expense on the Consolidated Statements of Operations.
Plantation Federal Bank FDIC-Assisted Acquisition
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 Federal Deposit Insurance Corporation (“FDIC”), as receiver for Plantation (the “Transaction”). 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, entered into by First Federal and the FDIC as of April 27, 2012 (the “P&A Agreement”). The Transaction included all six branch offices of Plantation, which now operate as branches of First Federal.
10
In connection with the Transaction, the FDIC made a cash payment to First Federal of $46.0 million, and First Federal did not pay the FDIC a premium to assume the customer deposits. The P&A Agreement includes a customary loss sharing agreement with the FDIC, which covers $216.2 million at carrying value of acquired commercial loans and commercial OREO ($169.5 million at estimated fair value). First Federal will share in the losses on the covered asset pools and the FDIC is obligated to reimburse First Federal for 80% of all eligible losses with respect to covered assets, beginning with the first dollar of loss incurred through $55 million in losses. First Federal absorbs losses greater than $55 million up to $65 million. The FDIC will reimburse First Federal for 60% of all eligible losses in excess of $65 million. First Federal has a corresponding obligation to reimburse the FDIC according to the same arrangement for eligible recoveries with respect to the covered assets. The loss share agreement provides for FDIC loss sharing for five years and First Federal reimbursement to the FDIC for eight years.
The fair value of the loans acquired was estimated based on discounted cash flows, which take into consideration current portfolio interest rates and repricing characteristics as well as assumptions related to prepayment speeds. Loans with an estimated fair value of $139.8 million with credit deterioration were acquired and accounted for in accordance with ASC 310-30,Accounting for Certain Loans or Debt Securities Acquired in a Transfer. First Federal estimated the fair value of the ASC 310-30 loans based on projected cash flows, the type of loan and related collateral, risk rating classification status and current market interest rates. Loans were grouped into pools according to similar characteristics and are treated in the aggregate when applying various valuation techniques. First Federal also estimated the amount of credit losses that are expected to be realized for the loan portfolio by estimating the liquidation value of collateral securing loans on nonaccrual status or classified as substandard or doubtful. Certain amounts related to these loans were estimates, such as “as-is” and liquidation collateral values provided for by appraisers, and are highly subjective. The discount rates take into consideration the current market interest rate environment and a credit risk component based on the credit characteristics of each loan pool. The accretion of the fair value discount on the acquired loans is recorded in net interest income on the Consolidated Statements of Operations. The accretion of the fair value discount on the acquired OREO is recorded in noninterest expense on the Consolidated Statements of Operations.
The fair value of the FDIC indemnification asset associated with the covered assets was estimated at $34.3 million using projected cash flows related to the loss sharing agreement, based on the expected reimbursement for loses and the applicable loss sharing percentages for each loss tranche. The expected cash flows were discounted to reflect the uncertainty of the timing and receipt of the loss sharing reimbursement from the FDIC. The amount that First Federal realizes on the FDIC indemnification asset could differ materially from the carrying value, based on the timing and amount of collections on the acquired covered assets in future periods. To the extent the actual values realized are different from the estimate, the indemnification asset will generally be affected in an offsetting manner due to the loss share support from the FDIC. There is no contractual interest rate associated with the FDIC indemnification asset; however, a present value discount was recorded against the initial balance of the FDIC indemnification asset and this discount is accreted into net interest income on the Consolidated Statement of Operations. A true-up payment related to the FDIC indemnification was established totaling $3.5 million and the estimated fair value included a present value discount. The true-up payment was recorded in other liabilities on the Consolidated Balance Sheets and the amortization of the fair value discount is recorded in noninterest expense on the Consolidated Statements of Operations.
For the other assets acquired and liabilities assumed, First Federal used various methods to estimate fair value as of the acquisition date. For the investment securities and advances from the FHLB, the fair value was estimated using quoted or current market prices, including applicable prepayment termination charges. The fair value of time deposits was estimated based on expected contractual cash flows, which were discounted at current market rates. The accretion of the discount on the time deposits is recorded in net interest income on the Consolidated Statements of Operations. First Federal recorded a core deposit intangible representing the fair value of the assumed core deposits and the amortization of this intangible is recorded in noninterest expense on the Consolidated Statements of Operations.
During the three months ended June 30, 2012 a bargain purchase gain of $14.6 million was recorded in noninterest income on the Consolidated Statements of Operations. A deferred tax liability of $5.6 million representing the difference between the financial statement and tax bases of the assets acquired and liabilities assumed was recorded in other liabilities on the Consolidated Balance Sheets. The bargain purchase gain represents the amount by which the estimated fair value of the assets acquired exceeded the estimated fair value of the liabilities assumed, adjusted for the discount bid cash payment received from the FDIC as well as the establishment of the FDIC indemnification asset and its associated true-up payment.
Due to the significant amount of fair value adjustments, the resulting accretion and amortization of those adjustments and the protection resulting from the FDIC loss share agreement, historical operating results for Plantation are not relevant to First Federal’s ongoing results of operations. The following table presents the assets acquired and liabilities assumed as of April 27, 2012, including the purchase accounting adjustments.
11
|
|
Statement of Assets Acquired and Liabilities Assumed |
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balances |
|
| Fair Value |
|
| As Recorded |
| |||
|
| |||||||||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
| $ | 71,535 |
|
| $ | --- |
|
| $ | 71,535 |
|
Interest-bearing deposits with banks |
|
| 8,690 |
|
|
| --- |
|
|
| 8,690 |
|
|
| |||||||||||
Total cash and cash equivalents |
|
| 80,225 |
|
|
| --- |
|
|
| 80,225 |
|
Investment securities |
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale, at fair value |
|
| 10,824 |
|
|
| --- |
|
|
| 10,824 |
|
Nonmarketable securities |
|
| 3,307 |
|
|
| --- |
|
|
| 3,307 |
|
|
|
|
| |||||||||
Total investment securities |
|
| 14,131 |
|
|
| --- |
|
|
| 14,131 |
|
Loans |
|
| 326,558 |
|
|
| (47,907 | ) | 1 |
| 278,651 |
|
FDIC indemnification asset, net |
|
| --- |
|
|
| 34,300 |
| 2 |
| 34,300 |
|
Other real estate owned |
|
| 25,260 |
|
|
| (14,524 | ) | 3 |
| 10,736 |
|
Other intangibles, net |
|
| --- |
|
|
| 1,710 |
| 4 |
| 1,710 |
|
Other assets |
|
| 1,263 |
|
|
| --- |
|
|
| 1,263 |
|
|
|
|
| |||||||||
Total assets acquired |
| $ | 447,437 |
|
| $ | (26,421 | ) |
| $ | 421,016 |
|
|
|
|
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing checking |
| $ | 25,942 |
|
| $ | --- |
|
| $ | 25,942 |
|
Interest-bearing checking |
|
| 34,806 |
|
|
| --- |
|
|
| 34,806 |
|
Savings and money market |
|
| 127,043 |
|
|
| --- |
|
|
| 127,043 |
|
Retail time deposits |
|
| 229,313 |
|
|
| 2,174 |
| 5 |
| 231,487 |
|
Wholesale time deposits |
|
| 651 |
|
|
| --- |
|
|
| 651 |
|
|
|
|
| |||||||||
Total deposits |
|
| 417,755 |
|
|
| 2,174 |
|
|
| 419,929 |
|
Advances from FHLB |
|
| 28,000 |
|
|
| 355 |
| 6 |
| 28,355 |
|
Deferred tax liability |
|
| --- |
|
|
| 5,583 |
| 7 |
| 5,583 |
|
Other liabilities |
|
| 533 |
|
|
| 3,500 |
| 8 |
| 4,033 |
|
|
|
|
| |||||||||
Total liabilities assumed |
|
| 446,288 |
|
| $ | 11,612 |
|
|
| 457,900 |
|
|
|
|
| |||||||||
Excess of liabilities assumed over assets acquired |
| $ | 1,149 |
|
|
|
|
|
| $ | (36,884 | ) |
|
|
|
|
|
|
|
|
|
Explanation of fair value adjustments | |
1Reflects the fair value adjustments based on First Federal’s evaluation of the acquired loan portfolio. | |
2Reflects the estimated fair value of payments First Federal anticipates receiving from the FDIC under the loss share agreement. | |
3Reflects estimated OREO losses based on First Federal’s evaluation of the acquired OREO. | |
4Reflects recording the core deposit intangible on the acquired core deposits. | |
5Adjusts for interest rates that are higher than rates available on similar deposits as of the acquistion date. | |
6Reflects the fair value as quoted by the FHLB. | |
7Establishes the deferred tax liability of the gain on acquisition. | |
8Establishes the true-up payment that may be owed to the FDIC at the end of the loss share agreement. |
As of June 30, 2012, there have been no adjustments or changes to the initial fair values.
Under the P&A Agreement, First Federal has options to acquire at fair market value any bank premises and equipment that were owned by, or assume any leases relating to bank premises leased by, Plantation and to assume or reject service provider contracts. First Federal has indicated its intention to purchase Plantation’s Pawleys Island location for $2.8 million, and the closing is expected to occur during the third quarter of 2012. First Federal will consolidate an existing financial center into the former Plantation location and will consolidate Plantation’s remaining two coastal locations into First Federal’s existing financial centers during the third quarter of 2012, for no net increase in financial centers along the South Carolina coast. First Federal will assume the leases associated with the three locations in the Greenville, South Carolina market and those financial centers will remain open. First Federal will acquire certain fixed assets totaling $625 thousand associated with the former Plantation locations during the third quarter of 2012.
Note 3. Investment Securities
The following table presents amortized cost, gross unrealized gains and losses, and estimated fair value on investment securities.
12
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| As of June 30, 2012 |
| As of December 31, 2011 |
| ||||||||||||||||||||||||||||
|
|
| |||||||||||||||||||||||||||||||
(in thousands) |
| Amortized |
|
| Gross |
|
| Gross |
|
| Estimated |
|
| Amortized |
|
| Gross |
|
| Gross |
|
| Estimated |
| |||||||||
| |||||||||||||||||||||||||||||||||
Securities available for sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Obligations of the U.S. Government agencies and corporations |
| $ | 1,490 |
|
| $ | 26 |
|
| $ | --- |
|
| $ | 1,516 |
|
| $ | 1,790 |
|
| $ | 33 |
|
| $ | --- |
|
| $ | 1,823 |
| |
State and municipal obligations |
|
| 450 |
|
|
| 31 |
|
|
| --- |
|
|
| 481 |
|
|
| 450 |
|
|
| 38 |
|
|
| --- |
|
|
| 488 |
| |
Collateralized debt obligations |
|
| 6,696 |
|
|
| 329 |
|
|
| 3,484 |
|
|
| 3,541 |
|
|
| 7,012 |
|
|
| --- |
|
|
| 3,765 |
|
|
| 3,247 |
| |
Mortgage-backed securities |
|
| 41,627 |
|
|
| 1,984 |
|
|
| 9 |
|
|
| 43,602 |
|
|
| 80,696 |
|
|
| 3,719 |
|
|
| 16 |
|
|
| 84,399 |
| |
Collateralized mortgage |
|
| 192,592 |
|
|
| 1,344 |
|
|
| 5,559 |
|
|
| 188,377 |
|
|
| 312,124 |
|
|
| 3,289 |
|
|
| 6,118 |
|
|
| 309,295 |
| |
Other securities |
|
| 5,959 |
|
|
| 828 |
|
|
| 245 |
|
|
| 6,542 |
|
|
| 5,582 |
|
|
| 56 |
|
|
| 340 |
|
|
| 5,298 |
| |
|
|
| |||||||||||||||||||||||||||||||
Total securities available for sale |
| $ | 248,814 |
|
| $ | 4,542 |
|
| $ | 9,297 |
|
| $ | 244,059 |
|
| $ | 407,654 |
|
| $ | 7,135 |
|
| $ | 10,239 |
|
| $ | 404,550 |
| |
|
|
| |||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Securities held to maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
State and municipal obligations |
| $ | 19,513 |
|
| $ | 2,509 |
|
| $ | --- |
|
| $ | 22,022 |
|
| $ | 19,978 |
|
| $ | 2,756 |
|
| $ | --- |
|
| $ | 22,734 |
| |
Certificates of deposit |
|
| 501 |
|
|
| --- |
|
|
| --- |
|
|
| 501 |
|
|
| 508 |
|
|
| --- |
|
|
| --- |
|
|
| 508 |
| |
|
|
| |||||||||||||||||||||||||||||||
Total securities held to maturity |
| $ | 20,014 |
|
| $ | 2,509 |
|
| $ | --- |
|
| $ | 22,523 |
|
| $ | 20,486 |
|
| $ | 2,756 |
|
| $ | --- |
|
| $ | 23,242 |
| |
|
|
| |||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Nonmarketable securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Federal Home Loan Bank stock |
| $ | 25,116 |
|
| $ | --- |
|
| $ | --- |
|
| $ | 25,116 |
|
| $ | 32,694 |
|
| $ | --- |
|
| $ | --- |
|
| $ | 32,694 |
| |
Federal Reserve Bank stock |
|
| 4,211 |
|
|
| --- |
|
|
| --- |
|
|
| 4,211 |
|
|
| --- |
|
|
| --- |
|
|
| --- |
|
|
| --- |
| |
|
|
| |||||||||||||||||||||||||||||||
Total nonmarketable securities |
| $ | 29,327 |
|
| $ | --- |
|
| $ | --- |
|
| $ | 29,327 |
|
| $ | 32,694 |
|
| $ | --- |
|
| $ | --- |
|
| $ | 32,694 |
| |
|
|
| |||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Securities with a fair market value of $135.4 million at June 30, 2012 and $237.8 million at December 31, 2011 were pledged to secure public and certain customer deposits, repurchase agreements, and advances from the Federal Home Loan Bank (“FHLB”) of Atlanta and the Federal Reserve Bank of Richmond. During the three months ended June 30, 2012 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). All of the sold investment securities were classified as Level 2 fair value financial instruments and had not previously recorded an other-than-temporary impairment (“OTTI”) charge. As of June 30, 2012, Bank of America was the only issuer whose investment position exceeded 10% of shareholders’ equity, representing 16.2% of shareholders’ equity.
The amortized cost and estimated fair value of investment securities by contractual maturity are presented in the following table. Expected maturities may differ from contractual maturities, as borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of June 30, 2012 |
| |||||
|
| |||||||
(in thousands) |
| Amortized Cost |
|
| Fair Value |
| ||
Securities available for sale |
|
|
|
|
|
|
|
|
Due within one year |
| $ | --- |
|
| $ | --- |
|
Due after one year through five years |
|
| 1,490 |
|
|
| 1,516 |
|
Due after five years through ten years |
|
| 1,005 |
|
|
| 1,067 |
|
Due after ten years |
|
| 9,595 |
|
|
| 6,268 |
|
|
| |||||||
|
|
| 12,090 |
|
|
| 8,851 |
|
Mortgage-backed securities |
|
| 41,627 |
|
|
| 43,602 |
|
Collateralized mortgage obligations |
|
| 192,592 |
|
|
| 188,377 |
|
Other securities with no stated maturity |
|
| 2,505 |
|
|
| 3,229 |
|
|
| |||||||
Total |
| $ | 248,814 |
|
| $ | 244,059 |
|
|
| |||||||
|
|
|
|
|
|
|
|
|
Securities held to maturity |
|
|
|
|
|
|
|
|
Due within one year |
| $ | 3,196 |
|
| $ | 3,319 |
|
Due after one year through five years |
|
| --- |
|
|
| --- |
|
Due after five years through ten years |
|
| 1,514 |
|
|
| 1,589 |
|
Due after ten years |
|
| 15,304 |
|
|
| 17,615 |
|
|
| |||||||
Total |
| $ | 20,014 |
|
| $ | 22,523 |
|
|
| |||||||
|
|
|
|
|
|
|
|
|
The following table presents gross unrealized losses on investment securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position.
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Less than 12 Months |
|
| 12 Months or Longer |
|
| Total |
| |||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||||||
June 30, 2012 |
| # |
|
| Fair Value |
|
| Unrealized |
|
| # |
|
| Fair Value |
|
| Unrealized |
|
| # |
|
| Fair Value |
|
| Unrealized |
| |||||||||
Securities available for sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized debt obligations |
|
| --- |
|
| $ | --- |
|
| $ | --- |
|
|
| 14 |
|
| $ | 2,885 |
|
| $ | 3,484 |
|
|
| 14 |
|
| $ | 2,885 |
|
| $ | 3,484 |
|
Mortgage-backed securities |
|
| 3 |
|
|
| 301 |
|
|
| 1 |
|
|
| 1 |
|
|
| 574 |
|
|
| 8 |
|
|
| 4 |
|
|
| 875 |
|
|
| 9 |
|
Collateralized mortgage obligations |
|
| 12 |
|
|
| 65,435 |
|
|
| 2,041 |
|
|
| 17 |
|
|
| 57,306 |
|
|
| 3,518 |
|
|
| 29 |
|
|
| 122,741 |
|
|
| 5,559 |
|
Other securities |
|
| 1 |
|
|
| 990 |
|
|
| 10 |
|
|
| 1 |
|
|
| 761 |
|
|
| 235 |
|
|
| 2 |
|
|
| 1,751 |
|
|
| 245 |
|
|
|
|
| |||||||||||||||||||||||||||||||||
Total |
|
| 16 |
|
| $ | 66,726 |
|
| $ | 2,052 |
|
|
| 33 |
|
| $ | 61,526 |
|
| $ | 7,245 |
|
|
| 49 |
|
| $ | 128,252 |
|
| $ | 9,297 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Less than 12 Months |
|
| 12 Months or Longer |
|
| Total |
| |||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||||||
December 31, 2011 |
| # |
|
| Fair Value |
|
| Unrealized |
|
| # |
|
| Fair Value |
|
| Unrealized |
|
| # |
|
| Fair Value |
|
| Unrealized |
| |||||||||
Securities available for sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized debt obligations |
|
| 1 |
|
| $ | 260 |
|
| $ | 47 |
|
|
| 14 |
|
| $ | 2,987 |
|
| $ | 3,718 |
|
|
| 15 |
|
| $ | 3,247 |
|
| $ | 3,765 |
|
Mortgage-backed securities |
|
| --- |
|
|
| --- |
|
|
| --- |
|
|
| 1 |
|
|
| 577 |
|
|
| 16 |
|
|
| 1 |
|
|
| 577 |
|
|
| 16 |
|
Collateralized mortgage obligations |
|
| 16 |
|
|
| 88,673 |
|
|
| 3,359 |
|
|
| 14 |
|
|
| 34,310 |
|
|
| 2,759 |
|
|
| 30 |
|
|
| 122,983 |
|
|
| 6,118 |
|
Other securities |
|
| 2 |
|
|
| 1,977 |
|
|
| 29 |
|
|
| 1 |
|
|
| 685 |
|
|
| 311 |
|
|
| 3 |
|
|
| 2,662 |
|
|
| 340 |
|
|
|
|
| |||||||||||||||||||||||||||||||||
Total |
|
| 19 |
|
| $ | 90,910 |
|
| $ | 3,435 |
|
|
| 30 |
|
| $ | 38,559 |
|
| $ | 6,804 |
|
|
| 49 |
|
| $ | 129,469 |
|
| $ | 10,239 |
|
|
|
|
| |||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-Than-Temporary Impairment
Management evaluates securities for OTTI on at least a quarterly basis. In determining OTTI, investment securities are evaluated according to Accounting Standards Codification (“ASC”) 320-10 and management considers many factors including: (1) the length of time and extent to which the fair value has been less than cost; (2) the financial condition and near-term prospects of the issuer; (3) whether the market decline was affected by macroeconomic conditions; and (4) whether First Financial has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether OTTI exists involves a high degree of subjectivity and is based on information available to management on the assessment date. In assessing the recovery of value, the key factors reviewed include the length of time and the extent the fair value has been less than the carrying cost, adverse conditions, if any, specifically related to the security, industry or geographic area, historical and implied volatility of the fair value of the security, credit quality factors affecting the issuer or the underlying collateral, payment structure of the security, payment history of the security, changes to the credit rating of the security, recoveries or declines in value subsequent to the balance sheet date or any other relevant factors. Evaluations are performed on a more frequent basis as the degree to which fair value is below carrying cost or the length of time that the fair value has been continuously below carrying cost increases.
At June 30, 2012, the majority of unrealized losses were related to trust preferred collateralized debt obligations (“CDOs”) and private-label collateralized mortgage obligations (“CMOs”) as discussed below. For the three and six months ended June 30, 2012, credit-related OTTI of $145 thousand and $214 thousand, respectively, were recorded in “Other-than-temporary-impairment on investment securities” on the Consolidated Statements of Operations. The total carrying value of securities affected by credit-related OTTI represents 10.0% of the carrying value of First Financial’s investment portfolio at June 30, 2012, which does not materially impact First Financial’s current liquidity and capital positions.
Collateralized Debt Obligations
The CDO portfolio is collateralized primarily with trust preferred securities issued by other financial institutions in pooled issuances. To determine the fair value, cash flow models for trust preferred CDOs provided by a third-party pricing service are utilized. The models estimate default vectors for the underlying issuers within each CDO security, estimate expected bank failures across the entire banking system to determine the impact on each CDO, and assign a risk rating to each individual issuer in the collateral pool. The individual risk ratings for the underlying securities in the pools were determined by a number of factors including Tier 1 capital ratio, return on assets, percent of nonperforming loans, percent of commercial and construction loans, and level of broker deposits for each underlying issuer. The risk ratings were used to determine an expected default vector for each CDO. The model assigns assumptions for constant default rate, loss severity, recovery lags, and prepayment assumptions, which were reviewed for reasonableness and consistency by management. The projected cash flows were compared to book value to determine the amount of OTTI, if any.
The following table provides information regarding the CDO portfolio characteristics and OTTI losses.
14
|
|
Collateralized Debt Obligations at June 30, 2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Six Months Ended |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Name |
| Single/ |
| Class/ |
| Amortized |
| Fair |
| Unrealized |
| Credit |
| Other |
| Total |
| ||||||
ALESCO I |
| Pooled |
| B-1 |
| $ | 531 |
| $ | 262 |
| $ | 269 |
| $ | --- |
| $ | --- |
| $ | --- |
|
ALESCO II |
| Pooled |
| B-1 |
|
| 361 |
|
| 284 |
|
| 77 |
|
| --- |
|
| --- |
|
| --- |
|
MCAP III |
| Pooled |
| B |
|
| 287 |
|
| 136 |
|
| 151 |
|
| --- |
|
| --- |
|
| --- |
|
MCAP IX |
| Pooled |
| B-1 |
|
| 306 |
|
| 148 |
|
| 158 |
|
| --- |
|
| --- |
|
| --- |
|
MCAP XVIII |
| Pooled |
| C-1 |
|
| 179 |
|
| 70 |
|
| 109 |
|
| --- |
|
| --- |
|
| --- |
|
PRETZL XI |
| Pooled |
| B-1 |
|
| 853 |
|
| 308 |
|
| 545 |
|
| --- |
|
| --- |
|
| --- |
|
PRETZL XIII |
| Pooled |
| B-1 |
|
| 325 |
|
| 122 |
|
| 203 |
|
| --- |
|
| --- |
|
| --- |
|
PRETZL IV |
| Pooled |
| MEZ |
|
| 117 |
|
| 54 |
|
| 63 |
|
| --- |
|
| --- |
|
| --- |
|
PRETZL VII |
| Pooled |
| MEZ |
|
| 325 |
|
| 205 |
|
| 120 |
|
| --- |
|
| --- |
|
| --- |
|
PRETZL XII |
| Pooled |
| B-2 |
|
| 533 |
|
| 312 |
|
| 221 |
|
| --- |
|
| --- |
|
| --- |
|
PRETZL XIV |
| Pooled |
| B-1 |
|
| 634 |
|
| 199 |
|
| 435 |
|
| 30 |
|
| --- |
|
| 30 |
|
TRPREF II |
| Pooled |
| B |
|
| 652 |
|
| 256 |
|
| 396 |
|
| --- |
|
| --- |
|
| --- |
|
USCAP II |
| Pooled |
| B-1 |
|
| 958 |
|
| 290 |
|
| 668 |
|
| 11 |
|
| --- |
|
| 11 |
|
USCAP III |
| Pooled |
| B-1 |
|
| 308 |
|
| 239 |
|
| 69 |
|
| --- |
|
| --- |
|
| --- |
|
|
|
|
|
|
| ||||||||||||||||||
Subtotal - CDOs in a loss position |
|
| 6,369 |
|
| 2,885 |
|
| 3,484 |
|
| 41 |
|
| --- |
|
| 41 |
| ||||
PRETZLVI4 |
| Pooled |
| MEZ |
|
| 327 |
|
| 656 |
|
| (329 | ) |
| --- |
|
| --- |
|
| --- |
|
|
|
|
|
|
| ||||||||||||||||||
Total CDOs |
|
|
|
|
| $ | 6,696 |
| $ | 3,541 |
| $ | 3,155 |
| $ | 41 |
| $ | --- |
| $ | 41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Dollar Basis |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
|
| Lowest |
|
| % Performing |
|
| % Deferrals / |
|
| Constant Default Rate |
|
| Discount |
| ||||||||
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Name |
|
|
|
|
|
|
|
|
| High |
|
| Low |
|
|
| |||||||
ALESCO I |
| C |
|
|
| 79.55 | % |
|
| 20.45 | % |
|
| 0.99 | % |
|
| 0.27 | % |
|
| 11.70 | % |
ALESCO II |
| C |
|
|
| 85.78 |
|
|
| 14.22 |
|
|
| 1.18 |
|
|
| 0.32 |
|
|
| 11.65 |
|
MCAP III |
| CC |
|
|
| 58.89 |
|
|
| 41.11 |
|
|
| 2.19 |
|
|
| 0.59 |
|
|
| 10.50 |
|
MCAP IX |
| D |
|
|
| 51.83 |
|
|
| 48.17 |
|
|
| 0.77 |
|
|
| 0.25 |
|
|
| 16.80 |
|
MCAP XVIII |
| C |
|
|
| 65.98 |
|
|
| 34.02 |
|
|
| 0.83 |
|
|
| 0.25 |
|
|
| 11.05 |
|
PRETZL XI |
| C |
|
|
| 67.71 |
|
|
| 32.29 |
|
|
| 0.45 |
|
|
| 0.25 |
|
|
| 11.60 |
|
PRETZL XIII |
| C |
|
|
| 59.15 |
|
|
| 40.85 |
|
|
| 0.71 |
|
|
| 0.25 |
|
|
| 11.57 |
|
PRETZL IV |
| CCC |
|
|
| 72.93 |
|
|
| 27.07 |
|
|
| 2.25 |
|
|
| 0.61 |
|
|
| 11.00 |
|
PRETZL VII |
| C |
|
|
| 36.02 |
|
|
| 63.98 |
|
|
| 1.90 |
|
|
| 0.51 |
|
|
| 16.80 |
|
PRETZL XII |
| C |
|
|
| 66.95 |
|
|
| 33.05 |
|
|
| 0.66 |
|
|
| 0.25 |
|
|
| 11.62 |
|
PRETZL XIV |
| C |
|
|
| 61.33 |
|
|
| 38.67 |
|
|
| 0.42 |
|
|
| 0.25 |
|
|
| 11.57 |
|
TRPREF II |
| C |
|
|
| 61.19 |
|
|
| 38.81 |
|
|
| 1.16 |
|
|
| 0.31 |
|
|
| 11.92 |
|
US CAP II |
| C |
|
|
| 78.73 |
|
|
| 21.27 |
|
|
| 0.39 |
|
|
| 0.25 |
|
|
| 11.65 |
|
USCAP III |
| C |
|
|
| 68.63 |
|
|
| 31.37 |
|
|
| 0.43 |
|
|
| 0.25 |
|
|
| 11.53 |
|
PRETZLVI4 |
| D |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Total |
|
|
|
|
| 65.42 | % |
|
| 34.58 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1Recognized in other-than-temporary impairment on investment securities on the Consolidated Statements of Operations | |
2Represents percentage of the underlying trust preferred collateral not currently making dividend payments or issued by financial institutions that have been placed into receivership by the FDIC | |
3Fair market value discount margin to LIBOR | |
4Subsequent to June 30, 2012, PRETZLVI had an auction call in w hich First Federal received its fair value |
As of June 30, 2012, management does not intend to sell these securities, nor is it more likely than not that First Financial will be required to sell the securities before the amortized cost basis is recovered as First Financial has adequate other sources of liquidity.
15
Collateralized Mortgage Obligations
The CMO portfolio is mainly comprised of private-label, non-agency mortgage-backed securities. To determine the fair value, cash flow models provided by a third-party pricing service are utilized. The models incorporate recent transaction volumes, price quotations and related price variability, available broker information, and market liquidity. As a result, the models estimate each security’s cash flow and adjusted price based on coupon, credit rating, constant prepayment rate, and required yields or spreads. If a private label security is rated below investment grade by a credit rating agency, a stress test is performed to determine if the security has any OTTI. See Note 8 to the Consolidated Financial Statements for additional information on fair value.
The following table presents the investment grades assigned by the rating agencies and OTTI losses for the CMO securities which were in a loss position at June 30, 2012.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
(in thousands) |
| As of June 30, 2012 |
|
| Six Months Ended |
| ||||||||||||||
| ||||||||||||||||||||
Moody/S&P Ratings |
| # |
| Fair |
|
| Unrealized |
|
| Credit |
| Other |
| Total |
| |||||
AAA |
| 1 |
| $ | 1,756 |
|
| $ | 63 |
|
| $ | --- |
| $ | --- |
| $ | --- |
|
AA |
| 5 |
|
| 33,866 |
|
|
| 680 |
|
|
| --- |
|
| --- |
|
| --- |
|
A |
| 3 |
|
| 17,664 |
|
|
| 1,091 |
|
|
| --- |
|
| --- |
|
| --- |
|
BBB |
| 9 |
|
| 20,734 |
|
|
| 1,338 |
|
|
| --- |
|
| --- |
|
| --- |
|
Below investment grade |
| 11 |
|
| 48,721 |
|
|
| 2,387 |
|
|
| 173 |
|
| --- |
|
| 173 |
|
|
|
|
| |||||||||||||||||
Total |
| 29 |
| $ | 122,741 |
|
| $ | 5,559 |
|
| $ | 173 |
| $ | --- |
| $ | 173 |
|
|
|
|
| |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1Recognized in Impairment losses on investment securities on the Consolidated Statements of Operations |
|
The OTTI in the table above was related to three securities with the following characteristics:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description |
| 2004 ARM |
| 2005 Fixed |
| 2004-2005 ARM |
|
| As of June 30, 2012 | ||||
|
| |||||
Credit rating |
| C |
| CC |
| B |
Rating agency |
| Moody’s |
| Standard & Poor’s |
| Fitch |
Twelve-month average loss severity |
| 44.48% |
| 76.71% |
| 39.06% |
Twelve-month average default rate |
| 6.25 |
| 2.21 |
| 4.00 |
60 Day or more delinquency rate |
| 24.27 |
| 19.98 |
| 8.96 |
|
|
|
|
|
|
|
|
| |||||
|
| As of December 31, 2011 | ||||
|
| |||||
Credit rating |
| C |
| CC |
| B |
Rating agency |
| Moody’s |
| Standard & Poor’s |
| Fitch |
Twelve-month average loss severity |
| 38.36% |
| 76.71% |
| 51.57% |
Twelve-month average default rate |
| 3.89 |
| 1.94 |
| 2.97 |
60 Day or more delinquency rate |
| 28.28 |
| 19.23 |
| 12.02 |
|
|
|
|
|
|
|
The credit ratings displayed in the above table reflect the lowest credit ratings by the major rating agencies. As of June 30, 2012, management does not intend to sell these securities, nor is it more likely than not that it will be required to sell these securities before the amortized cost basis is recovered as First Financial has adequate other sources of liquidity.
The following table presents the cumulative credit-related losses recognized in earnings.
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| |||||||||||||||||||||||||||||||||
|
| Three Months Ended June 30, 2012 |
| Three Months Ended June 30, 2011 |
| ||||||||||||||||||||||||||||
|
|
| |||||||||||||||||||||||||||||||
(in thousands) |
| CDOs |
|
| CMOs |
|
| Other |
|
| Total |
|
| CDOs |
|
| CMOs |
|
| Other |
|
| Total |
| |||||||||
|
| ||||||||||||||||||||||||||||||||
Cumulative credit related losses recognized in earnings at beginning of period |
| $ | 5,823 |
|
| $ | 1,537 |
|
| $ | 1,100 |
|
| $ | 8,460 |
|
| $ | 5,533 |
|
| $ | 1,355 |
|
| $ | 1,100 |
|
| $ | 7,988 |
| |
Additions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Credit loss for which previous OTTI was recognized |
|
| --- |
|
|
| 145 |
|
|
| --- |
|
|
| 145 |
|
|
| 54 |
|
|
| --- |
|
|
| --- |
|
|
| 54 |
| |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Cumulative credit related losses recognized in earnings at end of period |
| $ | 5,823 |
|
| $ | 1,682 |
|
| $ | 1,100 |
|
| $ | 8,605 |
|
| $ | 5,587 |
|
| $ | 1,355 |
|
| $ | 1,100 |
|
| $ | 8,042 |
| |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| Six Months Ended June 30, 2012 |
| Six Months Ended June 30, 2011 |
| ||||||||||||||||||||||||||||
|
|
| |||||||||||||||||||||||||||||||
|
| CDOs |
|
| CMOs |
|
| Securities |
|
| Total |
|
| CDOs |
|
| CMOs |
|
| Securities |
|
| Total |
| |||||||||
|
|
| |||||||||||||||||||||||||||||||
Cumulative credit related losses recognized in earnings at beginning of period |
| $ | 5,782 |
|
| $ | 1,509 |
|
| $ | 1,100 |
|
| $ | 8,391 |
|
| $ | 5,411 |
|
| $ | 1,355 |
|
| $ | 1,100 |
|
| $ | 7,866 |
| |
Additions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Credit loss for which previous OTTI was recognized |
|
| 41 |
|
|
| 173 |
|
|
| --- |
|
|
| 214 |
|
|
| 176 |
|
|
| --- |
|
|
| --- |
|
|
| 176 |
| |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Cumulative credit related losses recognized in earnings at end of period |
| $ | 5,823 |
|
| $ | 1,682 |
|
| $ | 1,100 |
|
| $ | 8,605 |
|
| $ | 5,587 |
|
| $ | 1,355 |
|
| $ | 1,100 |
|
| $ | 8,042 |
| |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
NOTE 4. Loans and Other Repossessed Assets Acquired
The following table presents the loan portfolio by major category.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
LOANS |
| June 30, |
|
| December 31, |
| ||
Residential loans |
|
|
|
|
|
|
|
|
Residential 1-4 family |
| $ | 1,023,800 |
|
| $ | 975,405 |
|
Residential construction |
|
| 19,601 |
|
|
| 15,117 |
|
Residential land |
|
| 56,073 |
|
|
| 41,612 |
|
|
| |||||||
Total residential loans |
|
| 1,099,474 |
|
|
| 1,032,134 |
|
|
|
|
|
|
|
|
|
|
Commercial loans |
|
|
|
|
|
|
|
|
Commercial business |
|
| 107,804 |
|
|
| 83,814 |
|
Commercial real estate |
|
| 555,588 |
|
|
| 456,541 |
|
Commercial construction |
|
| 17,201 |
|
|
| 16,477 |
|
Commercial land |
|
| 78,011 |
|
|
| 61,238 |
|
|
| |||||||
Total commercial loans |
|
| 758,604 |
|
|
| 618,070 |
|
|
|
|
|
|
|
|
|
|
Consumer loans |
|
|
|
|
|
|
|
|
Home equity |
|
| 388,534 |
|
|
| 357,270 |
|
Manufactured housing |
|
| 276,607 |
|
|
| 275,275 |
|
Marine |
|
| 59,643 |
|
|
| 52,590 |
|
Other consumer |
|
| 49,621 |
|
|
| 50,118 |
|
|
| |||||||
Total consumer loans |
|
| 774,405 |
|
|
| 735,253 |
|
|
| |||||||
Total loans |
|
| 2,632,483 |
|
|
| 2,385,457 |
|
Less: Allowance for loan losses |
|
| 48,799 |
|
|
| 53,524 |
|
|
| |||||||
Net loans |
| $ | 2,583,684 |
|
| $ | 2,331,933 |
|
|
| |||||||
|
|
|
|
|
|
|
|
|
Loans Held For Sale |
| $ | 72,402 |
|
| $ | 48,303 |
|
|
| |||||||
|
|
|
|
|
|
|
|
|
Total loans at June 30, 2012 included $294.6 million of loans acquired at estimated fair value in the Plantation and Liberty transactions. See Note 2 to the Consolidated Financial Statements for additional information regarding acquired loans. The loans held for sale are comprised of residential mortgage loans to be sold in the secondary market, and generally settle in 45 to 60 days.
On April 10, 2009, First Federal entered into a P & A Agreement with the FDIC to acquire certain assets and liabilities of Cape Fear Bank (“Cape Fear”). For Cape Fear, the entire loan portfolio and OREO is covered under the loss sharing agreement with the FDIC, while the P & A Agreement for Plantation covers commercial loans and commercial OREO. These “covered loans” are included in the table above and totaled $265.0 million at June 30, 2012 ($107.6 million related to Cape Fear and $157.4 million related to
17
Plantation, compared with $141.4 million at December 31, 2011 (solely Cape Fear covered loans). See Note 5 to the Consolidated Financial Statements for additional information regarding the FDIC indemnification asset associated with these acquisitions.
The following table presents the loan portfolio by age of delinquency.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Age Analysis Past Due Loans |
| |||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||
|
| As of June 30, 2012 |
| |||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||
(in thousands) |
| 30-59 |
|
| 60-89 Days |
|
| 90 Days |
|
| 90 Days |
|
| Total Past |
|
| Current1 |
|
| Total Loans |
| |||||||
Residential loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential 1-4 family |
| $ | 1,047 |
|
| $ | 197 |
|
| $ | 10,460 |
|
| $ | --- |
|
| $ | 11,704 |
|
| $ | 1,012,096 |
|
| $ | 1,023,800 |
|
Residential construction |
|
| --- |
|
|
| --- |
|
|
| --- |
|
|
| --- |
|
|
| --- |
|
|
| 19,601 |
|
|
| 19,601 |
|
Residential land |
|
| 407 |
|
|
| 68 |
|
|
| 1,423 |
|
|
| --- |
|
|
| 1,898 |
|
|
| 54,175 |
|
|
| 56,073 |
|
|
|
|
|
|
|
| ||||||||||||||||||||||
Total residential loans |
|
| 1,454 |
|
|
| 265 |
|
|
| 11,883 |
|
|
| --- |
|
|
| 13,602 |
|
|
| 1,085,872 |
|
|
| 1,099,474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business |
|
| 603 |
|
|
| 300 |
|
|
| 1,198 |
|
|
| --- |
|
|
| 2,101 |
|
|
| 105,703 |
|
|
| 107,804 |
|
Commercial real estate |
|
| 2,022 |
|
|
| 992 |
|
|
| 15,918 |
|
|
| --- |
|
|
| 18,932 |
|
|
| 536,656 |
|
|
| 555,588 |
|
Commercial construction |
|
| --- |
|
|
| --- |
|
|
| 261 |
|
|
| --- |
|
|
| 261 |
|
|
| 16,940 |
|
|
| 17,201 |
|
Commercial land |
|
| 675 |
|
|
| --- |
|
|
| 4,577 |
|
|
| --- |
|
|
| 5,252 |
|
|
| 72,759 |
|
|
| 78,011 |
|
|
|
|
|
|
|
| ||||||||||||||||||||||
Total commercial loans |
|
| 3,300 |
|
|
| 1,292 |
|
|
| 21,954 |
|
|
| --- |
|
|
| 26,546 |
|
|
| 732,058 |
|
|
| 758,604 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity |
|
| 1,290 |
|
|
| 727 |
|
|
| 10,636 |
|
|
| --- |
|
|
| 12,653 |
|
|
| 375,881 |
|
|
| 388,534 |
|
Manufactured housing |
|
| 1,249 |
|
|
| 586 |
|
|
| 2,197 |
|
|
| --- |
|
|
| 4,032 |
|
|
| 272,575 |
|
|
| 276,607 |
|
Marine |
|
| 81 |
|
|
| 219 |
|
|
| 29 |
|
|
| --- |
|
|
| 329 |
|
|
| 59,314 |
|
|
| 59,643 |
|
Other consumer |
|
| 525 |
|
|
| 101 |
|
|
| 306 |
|
|
| 75 |
|
|
| 1,007 |
|
|
| 48,614 |
|
|
| 49,621 |
|
|
|
|
|
|
|
| ||||||||||||||||||||||
Total consumer loans |
|
| 3,145 |
|
|
| 1,633 |
|
|
| 13,168 |
|
|
| 75 |
|
|
| 18,021 |
|
|
| 756,384 |
|
|
| 774,405 |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Total loans |
| $ | 7,899 |
|
| $ | 3,190 |
|
| $ | 47,005 |
|
| $ | 75 |
|
| $ | 58,169 |
|
| $ | 2,574,314 |
|
| $ | 2,632,483 |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans excluding covered loans |
| $ | 5,947 |
|
| $ | 2,196 |
|
| $ | 36,646 |
|
| $ | 75 |
|
| $ | 44,864 |
|
| $ | 2,322,633 |
|
| $ | 2,367,497 |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming assets include nonaccrual loans, loans delinquent 90 days or more and still accruing, restructured loans still accruing, and other repossessed assets acquired through foreclosure. With the exception of the credit card portfolio, loans are placed on nonaccrual status when they become 90 days delinquent. In addition, loans that were not delinquent in excess of 90 days but exhibited doubt as to the borrowers’ ability to repay all contractual principal and interest have been classified as impaired under ASC 310-10-35 and placed on nonaccrual status. The following table summarizes nonperforming assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Nonperforming Assets |
| June 30, |
|
| December 31, |
| ||
Nonaccrual loans |
| $ | 47,005 |
|
| $ | 45,178 |
|
Loans 90+ days, still accruing |
|
| 75 |
|
|
| 121 |
|
Restructured loans, still accruing |
|
| 2,857 |
|
|
| 2,411 |
|
|
|
| ||||||
Total nonperforming loans |
|
| 49,937 |
|
|
| 47,710 |
|
Other repossessed assets acquired |
|
| 28,191 |
|
|
| 20,487 |
|
|
|
| ||||||
Total nonperforming assets |
| $ | 78,128 |
|
| $ | 68,197 |
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
Total nonperforming loans excluding nonperforming covered loans |
| $ | 39,478 |
|
| $ | 30,187 |
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
Total nonperforming assets excluding nonperforming covered assets |
| $ | 47,682 |
|
| $ | 43,124 |
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
Loans acquired in the Cape Fear and Plantation acquisitions that were performing at the time of acquisition, but have subsequently become nonaccrual are included in the tables above. Nonperforming loans acquired at acquisition are included in the current loan category in the “Age Analysis Past Due Loans” table above and, as such, are not included in the “Nonperforming Assets” table since these loans were adjusted to fair value at the acquisition date and accounted for under ASC 310-30.
Impaired Loans
18
In accordance with ASC 310-10-35, a loan is considered impaired when First Federal determines it is probable that the principal and interest due under the contractual terms of the loan will not be collected. Criticized and classified commercial loans (as defined in the “Criticized Loans, Classified Loans and Other Risk Characteristics” section of this Note) greater than $500,000 are reviewed for potential impairment as part of a monthly problem loan review process. In addition, homogeneous loans which have been modified are reviewed for potential impairment.
In assessing the impairment of a loan and the related reserve required for that loan, various methodologies are employed. Impairment measurement on loans that are not collateral dependent is determined primarily using the present value of expected future cash flows discounted at the loan’s effective interest rate. With respect to most real estate loans, and specifically if the loan is considered to be collected through a probable foreclosure, an approach that estimates the fair value of the underlying collateral is used. The collateral is appraised to reflect estimated realizable value (usually “as is” or liquidation value), with the market value being adjusted for estimated selling costs. First Federal’s policy is to update collateral appraisals on impaired loans at least annually, and more frequently if deemed necessary based on market conditions or specific circumstances. Significant downward trends in the real estate market can adversely affect First Federal’s collateral position. For larger credits or loans that are classified “substandard” or worse that rely primarily on real estate collateral for repayment, re-appraisal would occur earlier than the stated policy if management believes the market conditions have changed such that the existing appraisal may no longer reflect the current market value of the property. At a minimum, at the time a commercial loan with a principal balance of over $500,000 is downgraded to “substandard” or worse, or if the loan is determined to be impaired, the property securing the loan is re-appraised to update the value. In addition to updated appraisals, market bids or current offers may be utilized to estimate current value.
First Federal maintains a valuation reserve for impaired loans as part of the allowance for loan losses. Cash collected on impaired nonaccrual loans is applied to outstanding principal. A summary of impaired loans, related valuation reserves, and their effect on interest income follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Impaired Loans |
| |||||||||||||||||||||||||||
(in thousands) |
| Unpaid |
|
| Recorded |
|
| Recorded |
|
| Total |
|
| Specific |
|
| Year to Date |
|
| Interest |
| |||||||
June 30, 2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential 1-4 family |
| $ | 6,682 |
|
| $ | 5,233 |
|
| $ | 1,048 |
|
| $ | 6,281 |
|
| $ | 84 |
|
| $ | 4,263 |
|
| $ | 14 |
|
Residential land |
|
| --- |
|
|
| --- |
|
|
| --- |
|
|
| --- |
|
|
| --- |
|
|
| --- |
|
|
| --- |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Total residential loans |
|
| 6,682 |
|
|
| 5,233 |
|
|
| 1,048 |
|
|
| 6,281 |
|
|
| 84 |
|
|
| 4,263 |
|
|
| 14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans |
|
| . |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business |
|
| 1,144 |
|
|
| 1,040 |
|
|
| --- |
|
|
| 1,040 |
|
|
| --- |
|
|
| 2,347 |
|
|
| 18 |
|
Commercial real estate |
|
| 10,952 |
|
|
| 7,513 |
|
|
| 1,729 |
|
|
| 9,242 |
|
|
| 536 |
|
|
| 10,757 |
|
|
| 54 |
|
Commercial construction |
|
| 311 |
|
|
| 261 |
|
|
| --- |
|
|
| 261 |
|
|
| --- |
|
|
| 261 |
|
|
| --- |
|
Commercial land |
|
| 4,130 |
|
|
| 1,374 |
|
|
| 1,120 |
|
|
| 2,494 |
|
|
| 310 |
|
|
| 3,111 |
|
|
| --- |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Total commercial loans |
|
| 16,537 |
|
|
| 10,188 |
|
|
| 2,849 |
|
|
| 13,037 |
|
|
| 846 |
|
|
| 16,476 |
|
|
| 72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity |
|
| 7,134 |
|
|
| 5,826 |
|
|
| --- |
|
|
| 5,826 |
|
|
| --- |
|
|
| 4,801 |
|
|
| 3 |
|
Manufactured housing |
|
| 154 |
|
|
| 137 |
|
|
| --- |
|
|
| 137 |
|
|
| --- |
|
|
| 135 |
|
|
| --- |
|
Marine |
|
| --- |
|
|
| --- |
|
|
| --- |
|
|
| --- |
|
|
| --- |
|
|
| --- |
|
|
| --- |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Total consumer loans |
|
| 7,288 |
|
|
| 5,963 |
|
|
| --- |
|
|
| 5,963 |
|
|
| --- |
|
|
| 4,936 |
|
|
| 3 |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Total impaired loans |
| $ | 30,507 |
|
| $ | 21,384 |
|
| $ | 3,897 |
|
| $ | 25,281 |
|
| $ | 930 |
|
| $ | 25,674 |
|
| $ | 89 |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential 1-4 family |
| $ | 2,366 |
|
| $ | 1,957 |
|
| $ | 288 |
|
| $ | 2,245 |
|
| $ | 93 |
|
| $ | 1,637 |
|
| $ | 10 |
|
Residential land |
|
| --- |
|
|
| --- |
|
|
| --- |
|
|
| --- |
|
|
| --- |
|
|
| --- |
|
|
| --- |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Total residential loans |
|
| 2,366 |
|
|
| 1,957 |
|
|
| 288 |
|
|
| 2,245 |
|
|
| 93 |
|
|
| 1,637 |
|
|
| 10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business |
|
| 4,134 |
|
|
| 2,143 |
|
|
| 1,510 |
|
|
| 3,653 |
|
|
| 11 |
|
|
| 3,400 |
|
|
| --- |
|
Commercial real estate |
|
| 14,336 |
|
|
| 8,819 |
|
|
| 3,453 |
|
|
| 12,272 |
|
|
| 967 |
|
|
| 12,928 |
|
|
| 10 |
|
Commercial construction |
|
| 311 |
|
|
| 261 |
|
|
| --- |
|
|
| 261 |
|
|
| --- |
|
|
| 261 |
|
|
| --- |
|
Commercial land |
|
| 6,258 |
|
|
| 2,024 |
|
|
| 1,704 |
|
|
| 3,728 |
|
|
| 327 |
|
|
| 4,495 |
|
|
| --- |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Total commercial loans |
|
| 25,039 |
|
|
| 13,247 |
|
|
| 6,667 |
|
|
| 19,914 |
|
|
| 1,305 |
|
|
| 21,083 |
|
|
| 10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity |
|
| 4,356 |
|
|
| 2,978 |
|
|
| 797 |
|
|
| 3,775 |
|
|
| 1 |
|
|
| 3,017 |
|
|
| --- |
|
Manufactured housing |
|
| 155 |
|
|
| 133 |
|
|
| --- |
|
|
| 133 |
|
|
| --- |
|
|
| 134 |
|
|
| --- |
|
Marine |
|
| --- |
|
|
| --- |
|
|
| --- |
|
|
| --- |
|
|
| --- |
|
|
| --- |
|
|
| --- |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Total consumer loans |
|
| 4,511 |
|
|
| 3,111 |
|
|
| 797 |
|
|
| 3,908 |
|
|
| 1 |
|
|
| 3,151 |
|
|
| --- |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Total impaired loans |
| $ | 31,916 |
|
| $ | 18,315 |
|
| $ | 7,752 |
|
| $ | 26,067 |
|
| $ | 1,399 |
|
| $ | 25,870 |
|
| $ | 20 |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
The total recorded investment in covered impaired loans was $4.8 million as of June 30, 2012. These loans had no specific allowance as of June 30, 2012. The following table rolls forward the accretable yield associated with the ASC-310-30 Cape Fear loans. There were no material changes for the accretable yield associated with the ASC 310-30 Plantation loans.
| |||||||
(in thousands) | |||||||
| |||||||
Balance, at acquisition |
|
|
|
| $ | 10,713 |
|
2009 accretion |
| (4,305 | ) |
|
|
|
|
2010 accretion |
| (4,162 | ) |
|
|
|
|
2011 accretion |
| (2,684 | ) |
|
|
|
|
2011 reclassification from nonaccretable balance |
| 14,592 |
|
|
|
|
|
2012 accretion |
| (2,324 | ) |
|
|
|
|
|
|
|
|
|
| 1,117 |
|
Balance, at June 30, 2012 |
|
|
|
| $ | 11,830 |
|
|
During 2011, First Federal reclassified $14.6 million from the nonaccretable balance to accretable yield for the Cape Fear loans that were impaired at purchase. This reclassification was primarily the result of increased cash flow estimates due to revising loss projections based on actual performance. This amount is recognized as a prospective yield adjustment and will result in incrased interest income over the remaining life of the loan pool.
Troubled Debt Restructuring (“TDR”)
First Federal accounts for certain loan modifications or restructurings as a TDR. In general, the modification or restructuring of a loan is considered a TDR if, for economic or legal reasons related to a borrower’s financial difficulties, a concession is granted to the borrower that creditors would not otherwise consider. Concessions may relate to the contractual interest rate, maturity date, payment structure of the note or other actions. In accordance with GAAP, loans acquired under ASC 310-30 are not initially considered to be TDRs. The following table provides a summary of TDRs by accruing status. The TDRs on nonaccrual status are included in the nonperforming asset table above.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Troubled Debt Restructurings |
| |||||||||||||||||||||||
|
| As of June 30, 2012 |
|
| As of December 31, 2011 |
| ||||||||||||||||||
|
|
| ||||||||||||||||||||||
(in thousands) |
| Still |
|
| Nonaccrual |
|
| Total |
|
| Still |
|
| Nonaccrual |
|
| Total |
| ||||||
| ||||||||||||||||||||||||
Residential 1-4 family |
| $ | 330 |
|
| $ | 4,177 |
|
| $ | 4,507 |
|
| $ | 734 |
|
| $ | 1,269 |
|
| $ | 2,003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business |
|
| 693 |
|
|
| --- |
|
|
| 693 |
|
|
| 700 |
|
|
| 1,113 |
|
|
| 1,813 |
|
Commercial real estate |
|
| 1,522 |
|
|
| 3,522 |
|
|
| 5,044 |
|
|
| 977 |
|
|
| 5,293 |
|
|
| 6,270 |
|
Commercial land |
|
| --- |
|
|
| 2,144 |
|
|
| 2,144 |
|
|
| --- |
|
|
| 2,192 |
|
|
| 2,192 |
|
|
|
|
|
|
|
| ||||||||||||||||||
Total commercial loans |
|
| 2,215 |
|
|
| 5,666 |
|
|
| 7,881 |
|
|
| 1,677 |
|
|
| 8,598 |
|
|
| 10,275 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity |
|
| 176 |
|
|
| 4,886 |
|
|
| 5,062 |
|
|
| --- |
|
|
| 3,775 |
|
|
| 3,775 |
|
Manufactured housing |
|
| 136 |
|
|
| --- |
|
|
| 136 |
|
|
| --- |
|
|
| 133 |
|
|
| 133 |
|
|
|
|
|
|
|
| ||||||||||||||||||
Total consumer loans |
|
| 312 |
|
|
| 4,886 |
|
|
| 5,198 |
|
|
| --- |
|
|
| 3,908 |
|
|
| 3,908 |
|
|
|
|
|
|
|
| ||||||||||||||||||
Total loans |
| $ | 2,857 |
|
| $ | 14,729 |
|
| $ | 17,586 |
|
| $ | 2,411 |
|
| $ | 13,775 |
|
| $ | 16,186 |
|
|
|
|
|
|
|
| ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Once a loan is deemed to be a TDR, it is reviewed for potential impairment in accordance with ASC 310-10-35. The following table provides a summary of the loans that were restructured as TDRs during the three and six months ended June 30, 2012 and 2011 and displays the incremental impact to the allowance for loan losses as a result of the modification.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||
Troubled Debt Restructurings |
| ||||||||||||||||||||||
|
| As of and for the Three Months Ended June 30, 2012 |
| ||||||||||||||||||||
|
| ||||||||||||||||||||||
|
| Outstanding Recorded Investment1 |
| ||||||||||||||||||||
|
|
|
|
| |||||||||||||||||||
(dollars in thousands) |
| # |
|
| Pre-Modification |
|
| Post-Modification |
|
| Total Post- |
|
| Increase to |
| ||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||||
|
| ||||||||||||||||||||||
|
|
|
|
| Total |
|
| Rate |
|
| Structure |
|
|
|
|
|
|
| |||||
Residential 1-4 |
| 3 |
|
| $ | 1,652 |
|
| $ | 1,228 |
|
| $ | 446 |
|
| $ | 1,674 |
|
| $ | --- |
|
Commercial real estate |
| --- |
|
|
| --- |
|
|
| --- |
|
|
| --- |
|
|
| --- |
|
|
| --- |
|
Commercial land |
| --- |
|
|
| --- |
|
|
| --- |
|
|
| --- |
|
|
| --- |
|
|
| --- |
|
Home equity |
| 5 |
|
|
| 1,049 |
|
|
| 657 |
|
|
| 392 |
|
|
| 1,049 |
|
|
| --- |
|
Manufactured Housing |
| --- |
|
|
| --- |
|
|
| --- |
|
|
| --- |
|
|
| --- |
|
|
| --- |
|
|
|
|
|
|
| ||||||||||||||||||
Total Restructured Loans |
| 8 |
|
| $ | 2,701 |
|
| $ | 1,885 |
|
| $ | 838 |
|
| $ | 2,723 |
|
| $ | --- |
|
|
|
|
|
|
| ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of and for the Three Months Ended June 30, 2011 |
| ||||||||||||||||||||
|
| ||||||||||||||||||||||
|
| Outstanding Recorded Investment1 |
| ||||||||||||||||||||
|
|
|
|
|
| ||||||||||||||||||
(dollars in thousands) |
| # |
|
| Pre-Modification |
|
| Post-Modification |
|
| Total Post- |
|
| Increase to |
| ||||||||
|
| ||||||||||||||||||||||
|
|
|
|
| Total |
|
| Rate |
|
| Structure |
|
|
|
|
|
|
| |||||
Residential 1-4 |
| --- |
|
| $ | --- |
|
| $ | --- |
|
| $ | --- |
|
| $ | --- |
|
| $ | --- |
|
Commercial real estate |
| 3 |
|
|
| 1,388 |
|
|
| --- |
|
|
| 1,388 |
|
|
| 1,388 |
|
|
| 151 |
|
Commercial land |
| 1 |
|
|
| 1,274 |
|
|
| --- |
|
|
| 1,250 |
|
|
| 1,250 |
|
|
| 377 |
|
Home equity |
| 2 |
|
|
| 452 |
|
|
| 452 |
|
|
| --- |
|
|
| 452 |
|
|
| --- |
|
Manufactured Housing |
| 1 |
|
|
| 156 |
|
|
| 156 |
|
|
| --- |
|
|
| 156 |
|
|
| --- |
|
|
|
|
|
|
| ||||||||||||||||||
Total Restructured Loans |
| 7 |
|
| $ | 3,270 |
|
| $ | 608 |
|
| $ | 2,638 |
|
| $ | 3,246 |
|
| $ | 528 |
|
|
|
|
|
|
| ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1Outstanding recorded investment as defined by ASC 310-35-24, includes the loan balance, accrued interest, loan fees or costs, and unamortized premium or discount. |
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of and for the Six Months Ended June 30, 2012 |
| |||||||||||||||||||||
|
|
| ||||||||||||||||||||||
|
| Outstanding Recorded Investment1 |
| |||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||
(dollars in thousands) |
| # |
|
| Pre-Modification |
|
| Post-Modification |
|
| Total Post- |
|
| Increase to |
| |||||||||
|
| |||||||||||||||||||||||
|
|
|
|
| Total |
|
| Rate |
|
| Structure |
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Residential 1-4 |
|
| 4 |
|
| $ | 2,123 |
|
| $ | 1,699 |
|
| $ | 446 |
|
| $ | 2,145 |
|
| $ | --- |
|
Commercial business |
|
| --- |
|
|
| --- |
|
|
| --- |
|
|
| --- |
|
|
| --- |
|
|
| --- |
|
Commercial real estate |
|
| 1 |
|
|
| 558 |
|
|
| --- |
|
|
| 558 |
|
|
| 558 |
|
|
| --- |
|
Commercial land |
|
| --- |
|
|
| --- |
|
|
| --- |
|
|
| --- |
|
|
| --- |
|
|
| --- |
|
Home equity |
|
| 9 |
|
|
| 2,005 |
|
|
| 1,613 |
|
|
| 392 |
|
|
| 2,005 |
|
|
| --- |
|
Manufactured Housing |
|
| --- |
|
|
| --- |
|
|
| --- |
|
|
| --- |
|
|
| --- |
|
|
| --- |
|
|
|
|
|
|
| |||||||||||||||||||
Total Restructured Loans |
|
| 14 |
|
| $ | 4,686 |
|
| $ | 3,312 |
|
| $ | 1,396 |
|
| $ | 4,708 |
|
| $ | --- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of and for the Six Months Ended June 30, 2011 |
| |||||||||||||||||||||
|
|
| ||||||||||||||||||||||
|
| Outstanding Recorded Investment1 |
| |||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||
(dollars in thousands) |
| # |
|
| Pre-Modification |
|
| Post-Modification |
|
| Total Post- |
|
| Increase to |
| |||||||||
|
| |||||||||||||||||||||||
|
|
|
|
| Total |
|
| Rate |
|
| Structure |
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Residential 1-4 |
|
| 1 |
|
| $ | 202 |
|
| $ | 206 |
|
| $ | --- |
|
| $ | 206 |
|
| $ | --- |
|
Commercial business |
|
| 1 |
|
|
| 299 |
|
|
| --- |
|
|
| 299 |
|
|
| 299 |
|
|
| --- |
|
Commercial real estate |
|
| 9 |
|
|
| 5,103 |
|
|
| --- |
|
|
| 5,103 |
|
|
| 5,103 |
|
|
| 164 |
|
Commercial land |
|
| 4 |
|
|
| 13,447 |
|
|
| --- |
|
|
| 11,423 |
|
|
| 11,423 |
|
|
| 395 |
|
Home equity |
|
| 2 |
|
|
| 452 |
|
|
| 452 |
|
|
| --- |
|
|
| 452 |
|
|
| --- |
|
Manufactured Housing |
|
| 1 |
|
|
| 156 |
|
|
| 156 |
|
|
| --- |
|
|
| 156 |
|
|
| --- |
|
|
|
|
|
|
| |||||||||||||||||||
Total Restructured Loans |
|
| 18 |
|
| $ | 19,659 |
|
| $ | 814 |
|
| $ | 16,825 |
|
| $ | 17,639 |
|
| $ | 559 |
|
|
|
|
|
|
| |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
1Outstanding recorded investment as defined by ASC 310-35-24, includes the loan balance, accrued interest, loan fees or costs, and unamortized premium or discount. |
The following table provides a summary of the loans that were modified for rate or structure as a TDR during the twelve months ended June 30, 2012 and 2011 and which subsequently defaulted during the three and six months ended June 30, 2012 and 2011. There was no incremental impact to the allowance for loan losses as a result of the defaults as the defaulted loans were already reviewed for impairment in accordance with ASC 310-10-35.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||
Defaulted TDRs with structure or rate modifications | ||||||||||||||||||||||||||||||||
|
|
| ||||||||||||||||||||||||||||||
|
| As of and for the Three Months Ended June 30, | ||||||||||||||||||||||||||||||
|
| 2012 |
| 2011 | ||||||||||||||||||||||||||||
(dollars in thousands) |
| # |
| Recorded Investment |
| Total Recorded |
| # |
| Recorded Investment |
|
| Total Recorded |
| ||||||||||||||||||
| ||||||||||||||||||||||||||||||||
|
|
|
|
| Rate |
|
| Structure |
|
|
|
|
|
|
|
| Rate |
|
| Structure |
|
|
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Residential 1-4 |
|
| --- |
|
| $ | --- |
|
| $ | --- |
|
| $ | --- |
|
|
| --- |
|
| $ | --- |
|
| $ | --- |
|
| $ | --- |
|
Commercial Real Estate |
|
| 2 |
|
|
| --- |
|
|
| 834 |
|
|
| 834 |
|
|
| 4 |
|
|
| --- |
|
|
| 1,527 |
|
|
| 1,527 |
|
Commercial land |
|
| --- |
|
|
| --- |
|
|
| --- |
|
|
| --- |
|
|
| 2 |
|
|
| --- |
|
|
| 3,099 |
|
|
| 3,099 |
|
Home equity |
|
| 3 |
|
|
| 1,026 |
|
|
| --- |
|
|
| 1,026 |
|
|
| --- |
|
|
| --- |
|
|
| --- |
|
|
| --- |
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||
Defaulted TDRs |
|
| 5 |
|
| $ | 1,026 |
|
| $ | 834 |
|
| $ | 1,860 |
|
|
| 6 |
|
| $ | --- |
|
| $ | 4,626 |
|
| $ | 4,626 |
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of and for the Six Months Ended June 30, | ||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||
|
| 2012 |
| 2011 | ||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||
(dollars in thousands) |
| # |
| Recorded Investment |
| Total Recorded |
| # |
| Recorded Investment |
|
| Total Recorded |
| ||||||||||||||||||
| ||||||||||||||||||||||||||||||||
|
|
|
|
| Rate |
|
| Structure |
|
|
|
|
|
|
|
| Rate |
|
| Structure |
|
|
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Residential 1-4 |
|
| 1 |
|
| $ | 462 |
|
| $ | --- |
|
| $ | 462 |
|
|
| 1 |
|
| $ | --- |
|
| $ | 749 |
|
| $ | 749 |
|
Commercial Real Estate |
|
| 2 |
|
|
| --- |
|
|
| 834 |
|
|
| 834 |
|
|
| 4 |
|
|
| --- |
|
|
| 1,527 |
|
|
| 1,527 |
|
Commercial land |
|
| --- |
|
|
| --- |
|
|
| --- |
|
|
| --- |
|
|
| 2 |
|
|
| --- |
|
|
| 3,099 |
|
|
| 3,099 |
|
Home equity |
|
| 4 |
|
|
| 1,287 |
|
|
| --- |
|
|
| 1,287 |
|
|
| --- |
|
|
| --- |
|
|
| --- |
|
|
| --- |
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||
Defaulted TDRs |
|
| 7 |
|
| $ | 1,749 |
|
| $ | 834 |
|
| $ | 2,583 |
|
|
| 7 |
|
| $ | --- |
|
| $ | 5,375 |
|
| $ | 5,375 |
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Criticized Loans, Classified Loans and Other Risk Characteristics
Federal regulations provide for the designation of lower quality loans as special mention, substandard, doubtful or loss. Loans designated as special mention are considered “criticized” by regulatory definitions and possess characteristics of weakness that may not necessarily manifest into future loss. Loans designated as substandard, doubtful or loss are considered “classified” by regulatory definitions. Substandard loans are inadequately protected by the current net worth, liquidity and paying capacity of the
21
borrower or any collateral pledged and include loans characterized by the distinct possibility that some loss will occur if the deficiencies are not corrected. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable on the basis of currently existing facts, conditions and values. Loans classified as loss are those considered uncollectible and of such little value that their continuance without the establishment of a specific loss reserve is not warranted. When First Federal classifies problem loans as a loss, they are charged-off in the period in which they are deemed uncollectible. First Federal evaluates its commercial loans regularly to determine whether they are appropriately risk rated in accordance with applicable regulations and internal policies.
The following table presents the risk profiles for the commercial loan portfolio by the primary categories monitored.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Commercial Credit Quality1 |
| As of June 30, 2012 |
| |||||||||||||||||
|
| |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
(in thousands) |
| Commercial |
| Commercial |
| Commercial |
| Commercial |
| Total Commercial |
| |||||||||
Pass |
| $ | 77,852 |
|
| $ | 396,546 |
|
| $ | 14,285 |
|
| $ | 25,435 |
|
| $ | 514,118 |
|
Special mention |
|
| 4,150 |
|
|
| 36,447 |
|
|
| --- |
|
|
| 16,592 |
|
|
| 57,189 |
|
Substandard |
|
| 10,662 |
|
|
| 53,626 |
|
|
| 261 |
|
|
| 11,042 |
|
|
| 75,591 |
|
Doubtful |
|
| --- |
|
|
| 338 |
|
|
| --- |
|
|
| --- |
|
|
| 338 |
|
|
|
|
|
|
| |||||||||||||||
Total |
|
| 92,664 |
|
|
| 486,957 |
|
|
| 14,546 |
|
|
| 53,069 |
|
|
| 647,236 |
|
ASC 310-30 loans |
|
| 15,140 |
|
|
| 68,631 |
|
|
| 2,655 |
|
|
| 24,942 |
|
|
| 111,368 |
|
|
|
|
|
|
| |||||||||||||||
Total |
| $ | 107,804 |
|
| $ | 555,588 |
|
| $ | 17,201 |
|
| $ | 78,011 |
|
| $ | 758,604 |
|
|
|
|
|
|
| |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1Credit quality indicators are reviewed and updated as applicable on an ongoing basis in accordance with credit policies. |
For residential and consumer loans, First Federal evaluates credit quality based on payment activity, accrual status, and if a loan was modified from its original contractual terms. In addition, residential and consumer loans that are part of a classified commercial relationship (i.e., the non-commercial loans in that borrower’s relationship) are also rated as classified loans unless the underlying facts support otherwise.
The following tables present the risk indicators for the residential and consumer loan portfolios.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Residential Credit Quality1 |
| As of June 30, 2012 |
| |||||||||||||
|
| |||||||||||||||
(in thousands) |
| Residential |
| Residential |
| Residential |
| Total |
| |||||||
Performing |
| $ | 995,038 |
|
| $ | 19,151 |
|
| $ | 46,503 |
|
| $ | 1,060,692 |
|
Performing classified |
|
| 5,459 |
|
|
| --- |
|
|
| 462 |
|
|
| 5,921 |
|
Nonperforming |
|
| 10,790 |
|
|
| --- |
|
|
| 1,423 |
|
|
| 12,213 |
|
|
|
|
|
| ||||||||||||
Total |
|
| 1,011,287 |
|
|
| 19,151 |
|
|
| 48,388 |
|
|
| 1,078,826 |
|
ASC 310-30 loans |
|
| 12,513 |
|
|
| 450 |
|
|
| 7,685 |
|
|
| 20,648 |
|
|
|
|
|
| ||||||||||||
Total |
| $ | 1,023,800 |
|
| $ | 19,601 |
|
| $ | 56,073 |
|
| $ | 1,099,474 |
|
|
|
|
|
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1Credit quality indicators are reviewed and updated as applicable on an ongoing basis in accordance with credit policies. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Consumer Credit Quality1 |
| As of June 30, 2012 |
| |||||||||||||||||
|
| |||||||||||||||||||
(in thousands) |
| Home |
| Manufactured |
| Marine |
| Other |
| Total |
| |||||||||
Performing |
| $ | 362,300 |
|
| $ | 274,274 |
|
| $ | 59,614 |
|
| $ | 47,728 |
|
| $ | 743,916 |
|
Performing classified |
|
| 5,746 |
|
|
| --- |
|
|
| --- |
|
|
| 154 |
|
|
| 5,900 |
|
Nonperforming |
|
| 10,812 |
|
|
| 2,333 |
|
|
| 29 |
|
|
| 306 |
|
|
| 13,480 |
|
|
|
|
|
|
| |||||||||||||||
Total |
|
| 378,858 |
|
|
| 276,607 |
|
|
| 59,643 |
|
|
| 48,188 |
|
|
| 763,296 |
|
ASC 310-30 loans |
|
| 9,676 |
|
|
| --- |
|
|
| --- |
|
|
| 1,433 |
|
|
| 11,109 |
|
|
|
|
|
| ||||||||||||||||
Total |
| $ | 388,534 |
|
| $ | 276,607 |
|
| $ | 59,643 |
|
| $ | 49,621 |
|
| $ | 774,405 |
|
|
|
|
|
|
| |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1Credit quality indicators are reviewed and updated as applicable on an ongoing basis in accordance with credit policies. |
An analysis of changes in the allowance for loan losses follows.
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Allowance for Loan Losses |
|
|
| |||||||||||||||||||||||||
|
| As of and for the Three Months Ended June 30, 2012 |
| |||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||
(in thousands) |
| Residential |
| Commercial |
| Commercial |
| Commercial |
| Commercial |
| Consumer |
| Total |
| |||||||||||||
Allowance for Loan Losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period |
| $ | 7,581 |
|
| $ | 4,000 |
|
| $ | 10,816 |
|
| $ | 401 |
|
| $ | 5,588 |
|
| $ | 22,390 |
|
| $ | 50,776 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses |
|
| 1,496 |
|
|
| 322 |
|
|
| 171 |
|
|
| (172 | ) |
|
| (67 | ) |
|
| 2,947 |
|
|
| 4,697 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan charge-offs |
|
| (1,376 | ) |
|
| (425 | ) |
|
| (1,142 | ) |
|
| --- |
|
|
| (739 | ) |
|
| (3,973 | ) |
|
| (7,655 | ) |
Recoveries |
|
| 228 |
|
|
| 91 |
|
|
| 427 |
|
|
| 2 |
|
|
| 16 |
|
|
| 217 |
|
|
| 981 |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Net charge-offs |
|
| (1,148 | ) |
|
| (334 | ) |
|
| (715 | ) |
|
| 2 |
|
|
| (723 | ) |
|
| (3,756 | ) |
|
| (6,674 | ) |
|
|
|
|
|
|
|
| |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
| $ | 7,929 |
|
| $ | 3,988 |
|
| $ | 10,272 |
|
| $ | 231 |
|
| $ | 4,798 |
|
| $ | 21,581 |
|
| $ | 48,799 |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
| ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
|
| As of and for the Three Months Ended June 30, 2011 |
| |||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||
(in thousands) |
| Residential |
| Commercial |
| Commercial |
| Commercial |
| Commercial |
| Consumer |
| Total |
| |||||||||||||
Allowance for Loan Losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period |
| $ | 9,831 |
|
| $ | 8,060 |
|
| $ | 25,277 |
|
| $ | 1,984 |
|
| $ | 17,052 |
|
| $ | 22,934 |
|
| $ | 85,138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses |
|
| 14,094 |
|
|
| 3,105 |
|
|
| 27,789 |
|
|
| 2,147 |
|
|
| 24,502 |
|
|
| 6,166 |
|
|
| 77,803 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan charge-offs |
|
| (16,493 | ) |
|
| (6,882 | ) |
|
| (41,033 | ) |
|
| (3,098 | ) |
|
| (34,191 | ) |
|
| (6,506 | ) |
|
| (108,203 | ) |
Recoveries |
|
| 217 |
|
|
| 56 |
|
|
| 11 |
|
|
| 31 |
|
|
| 196 |
|
|
| 242 |
|
|
| 753 |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Net charge-offs |
|
| (16,276 | ) |
|
| (6,826 | ) |
|
| (41,022 | ) |
|
| (3,067 | ) |
|
| (33,995 | ) |
|
| (6,264 | ) |
|
| (107,450 | ) |
|
|
|
|
|
|
|
| |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
| $ | 7,649 |
|
| $ | 4,339 |
|
| $ | 12,044 |
|
| $ | 1,064 |
|
| $ | 7,559 |
|
| $ | 22,836 |
|
| $ | 55,491 |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
| ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
|
| As of and for the Six Months Ended June 30, 2012 |
| |||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||
(in thousands) |
| Residential |
| Commercial |
| Commercial |
| Commercial |
| Commercial |
| Consumer |
| Total |
| |||||||||||||
Allowance for Loan Losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period |
| $ | 8,748 |
|
| $ | 4,106 |
|
| $ | 11,711 |
|
| $ | 397 |
|
| $ | 5,981 |
|
| $ | 22,581 |
|
| $ | 53,524 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses |
|
| 1,537 |
|
|
| 1,041 |
|
|
| 738 |
|
|
| (170 | ) |
|
| 979 |
|
|
| 7,317 |
|
|
| 11,442 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan charge-offs |
|
| (2,630 | ) |
|
| (1,312 | ) |
|
| (2,766 | ) |
|
| --- |
|
|
| (2,245 | ) |
|
| (8,776 | ) |
|
| (17,729 | ) |
Recoveries |
|
| 274 |
|
|
| 153 |
|
|
| 589 |
|
|
| 4 |
|
|
| 83 |
|
|
| 459 |
|
|
| 1,562 |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Net charge-offs |
|
| (2,356 | ) |
|
| (1,159 | ) |
|
| (2,177 | ) |
|
| 4 |
|
|
| (2,162 | ) |
|
| (8,317 | ) |
|
| (16,167 | ) |
|
|
|
|
|
|
|
| |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
| $ | 7,929 |
|
| $ | 3,988 |
|
| $ | 10,272 |
|
| $ | 231 |
|
| $ | 4,798 |
|
| $ | 21,581 |
|
| $ | 48,799 |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans as of June 30, 2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment |
| $ | 6,281 |
|
| $ | 1,040 |
|
| $ | 9,242 |
|
| $ | 261 |
|
| $ | 2,494 |
|
| $ | 5,963 |
|
| $ | 25,281 |
|
Collectively evaluated for impairment |
|
| 1,072,545 |
|
|
| 91,624 |
|
|
| 477,715 |
|
|
| 14,285 |
|
|
| 50,575 |
|
|
| 757,333 |
|
|
| 2,464,077 |
|
ASC 310-30 loans |
|
| 20,648 |
|
|
| 15,140 |
|
|
| 68,631 |
|
|
| 2,655 |
|
|
| 24,942 |
|
|
| 11,109 |
|
|
| 143,125 |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Total loans |
| $ | 1,099,474 |
|
| $ | 107,804 |
|
| $ | 555,588 |
|
| $ | 17,201 |
|
| $ | 78,011 |
|
| $ | 774,405 |
|
| $ | 2,632,483 |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
| ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
|
| As of and for the Six Months Ended June 30, 2011 |
| |||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||
(in thousands) |
| Residential |
| Commercial |
| Commercial |
| Commercial |
| Commercial |
| Consumer |
| Total |
| |||||||||||||
Allowance for Loan Losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period |
| $ | 9,955 |
|
| $ | 8,558 |
|
| $ | 25,159 |
|
| $ | 1,723 |
|
| $ | 20,940 |
|
| $ | 22,014 |
|
| $ | 88,349 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses |
|
| 15,566 |
|
|
| 4,435 |
|
|
| 30,103 |
|
|
| 2,405 |
|
|
| 25,438 |
|
|
| 12,531 |
|
|
| 90,478 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan charge-offs |
|
| (18,194 | ) |
|
| (8,785 | ) |
|
| (43,370 | ) |
|
| (3,098 | ) |
|
| (39,472 | ) |
|
| (12,263 | ) |
|
| (125,182 | ) |
Recoveries |
|
| 322 |
|
|
| 131 |
|
|
| 152 |
|
|
| 34 |
|
|
| 653 |
|
|
| 554 |
|
|
| 1,846 |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Net charge-offs |
|
| (17,872 | ) |
|
| (8,654 | ) |
|
| (43,218 | ) |
|
| (3,064 | ) |
|
| (38,819 | ) |
|
| (11,709 | ) |
|
| (123,336 | ) |
|
|
|
|
|
|
|
| |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
| $ | 7,649 |
|
| $ | 4,339 |
|
| $ | 12,044 |
|
| $ | 1,064 |
|
| $ | 7,559 |
|
| $ | 22,836 |
|
| $ | 55,491 |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans as of June 30, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment |
| $ | 1,334 |
|
| $ | 3,088 |
|
| $ | 12,346 |
|
| $ | 1,451 |
|
| $ | 4,356 |
|
| $ | 2,589 |
|
| $ | 25,164 |
|
Collectively evaluated for impairment |
|
| 956,084 |
|
|
| 75,097 |
|
|
| 458,108 |
|
|
| 13,583 |
|
|
| 59,855 |
|
|
| 761,344 |
|
|
| 2,324,071 |
|
ASC 310-30 loans |
|
| 598 |
|
|
| 2,381 |
|
|
| 11,861 |
|
|
| 1,003 |
|
|
| 6,351 |
|
|
| 640 |
|
|
| 22,834 |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Total loans |
| $ | 958,016 |
|
| $ | 80,566 |
|
| $ | 482,315 |
|
| $ | 16,037 |
|
| $ | 70,562 |
|
| $ | 764,573 |
|
| $ | 2,372,069 |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
| ||||||||||||||||||||||||||||
23
Other Repossessed Assets Acquired
The following table presents the components of other repossessed assets acquired, comprised of OREO and other consumer-related repossessed items, such as manufactured houses and boats, which is included in other assets on the Consolidated Balance Sheets.
|
|
|
|
|
|
|
|
|
| ||||||||
(in thousands) |
| June 30, |
|
| December 31, |
| ||
Residential real estate |
| $ | 5,736 |
|
| $ | 7,753 |
|
Commercial real estate |
|
| 6,486 |
|
|
| 5,382 |
|
Land |
|
| 14,282 |
|
|
| 5,824 |
|
Consumer related assets |
|
| 1,687 |
|
|
| 1,528 |
|
Total other repossessed assets acquired |
| $ | 28,191 |
|
| $ | 20,487 |
|
|
|
|
|
|
|
|
|
|
Total covered other repossessed assets acquired |
| $ | 19,986 |
|
| $ | 7,550 |
|
|
The following table presents the components of other real estate expenses, net.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||
(in thousands) |
| 2012 |
|
| 2011 |
|
| 2012 |
|
| 2011 |
| ||||
Gain on sale of other real estate, net |
| $ | (485 | ) |
| $ | (532 | ) |
| $ | (1,127 | ) |
| $ | (597 | ) |
Fair value writedown |
|
| 395 |
|
|
| 894 |
|
|
| 1,384 |
|
|
| 1,509 |
|
Expenses, net |
|
| 646 |
|
|
| 583 |
|
|
| 1,173 |
|
|
| 1,216 |
|
Rental income |
|
| (23 | ) |
|
| (32 | ) |
|
| (83 | ) |
|
| (104 | ) |
Covered OREO expense reimbursement |
|
| (399 | ) |
|
| (113 | ) |
|
| (683 | ) |
|
| (1,357 | ) |
Total other real estate expenses, net |
| $ | 134 |
|
| $ | 800 |
|
| $ | 664 |
|
| $ | 667 |
|
|
NOTE 5. FDIC Indemnification Asset
First Federal has loss share agreements with the FDIC related to the Cape Fear and Plantation acquisitions which afford First Federal significant protection regarding certain acquired assets. Under the loss sharing agreement for Cape Fear, First Federal assumes the first $32.4 million and the FDIC reimburses First Federal for 80% of the losses greater than $32.4 million and up to $110.0 million. On losses exceeding $110.0 million, the FDIC will reimburse First Federal for 95% of the losses. The expected reimbursements under the loss sharing agreement were recorded as an indemnification asset at the time of the Cape Fear acquisition in April 2009.
Under the loss sharing agreement for Plantation, First Federal shares in the losses on the covered asset pools (including commercial loans and commercial OREO) in three tranches. On losses up to $55.0 million, the FDIC reimburses First Federal for 80% of all eligible losses, First Federal absorbs losses greater than $55 million up to $65 million, and the FDIC will reimburse First Federal for 60% of all eligible losses in excess of $65 million. The expected reimbursements under the loss sharing agreement were recorded as an addition to the indemnification asset during the quarter ended June 30, 2012. See Note 2 to the Consolidated Financial Statements for additional details.
The following table presents the change in the FDIC indemnification asset during the current year.
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
(in thousands) |
| Gross |
|
| Discount |
|
| Net |
| |||
Balance at December 31, 2011 |
| $ | 51,213 |
|
| $ | (192 | ) |
| $ | 51,021 |
|
Establish indemnification asset related to Plantation |
|
| 35,021 |
|
|
| (721 | ) |
|
| 34,300 |
|
Payments from FDIC for losses on covered assets |
|
| (8,124 | ) |
|
| --- |
|
|
| (8,124 | ) |
Valuation adjustment on covered assets |
|
| (45 | ) |
|
| --- |
|
|
| (45 | ) |
Discount accretion |
|
| --- |
|
|
| 159 |
|
|
| 159 |
|
Balance at June 30, 2012 |
| $ | 78,065 |
|
| $ | (754 | ) |
| $ | 77,311 |
|
|
During the six months ended June 30, 2012, First Federal received payments totaling $9.3 million from the FDIC for loss claims on loans, of which $8.1 million was credited to the FDIC indemnification asset and the remaining balance was credited to OREO expenses, net and other loan expense on the Consolidated Statements of Operations. As of the June 30, 2012 quarterly reporting
24
period, First Federal filed a $3.9 million claim with the FDIC under the terms of the Cape Fear loss share agreement, and payment is expected during the third quarter of 2012. First Federal anticipates filing a claim for $16.2 million with the FDIC during the third quarter of 2012 for the Plantation loss share agreement.
NOTE 6. Advances from the FHLB
During the three months ended June 30, 2012, FHLB advances totaling $125.0 million with an average yield of 3.15% were prepaid, incurring a prepayment termination charge of $8.5 million ($5.3 million after-tax). The following table presents the contractual maturity schedule for the remaining FHLB advances. Expected maturities may differ from contractual maturities, as the FHLB has the right to call certain advances.
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
|
|
|
|
|
| As of June 30, |
| ||||
|
| 2012 |
| ||||
|
| ||||||
Due in |
| Balance |
| Average |
| ||
1 year |
| $ | --- |
|
| --- | % |
2 years |
|
| --- |
|
| --- |
|
3 years |
|
| --- |
|
| --- |
|
4 years |
|
| 83,000 |
|
| 3.94 |
|
5 years |
|
| 75,000 |
|
| 3.66 |
|
Thereafter |
|
| 75,000 |
|
| 3.82 |
|
|
| ||||||
Total due FHLB |
| $ | 233,000 |
|
| 3.81 | % |
|
| ||||||
|
|
|
|
|
|
|
|
NOTE 7. Earnings Per Share
The following table displays the components of the numerators and denominators for the basic and diluted earnings per common share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||
|
|
| ||||||||||||||
(in thousands, except per share data) |
| 2012 |
|
| 2011 |
|
| 2012 |
|
| 2011 |
| ||||
| ||||||||||||||||
Net income (loss) from continuing operations |
| $ | 12,584 |
|
| $ | (40,277 | ) |
| $ | 14,323 |
|
| $ | (41,642 | ) |
Preferred stock dividends |
|
| 812 |
|
|
| 813 |
|
|
| 1,625 |
|
|
| 1,625 |
|
Accretion on preferred stock discount |
|
| 158 |
|
|
| 149 |
|
|
| 314 |
|
|
| 295 |
|
|
|
|
|
| ||||||||||||
Net income (loss) from continuing operations available to common shareholders |
|
| 11,614 |
|
|
| (41,239 | ) |
|
| 12,384 |
|
|
| (43,562 | ) |
Loss from discontinued operations, net of tax |
|
| --- |
|
|
| (2,724 | ) |
|
| --- |
|
|
| (1,789 | ) |
|
|
|
|
| ||||||||||||
Net income (loss) available to common shareholders |
| $ | 11,614 |
|
| $ | (43,963 | ) |
| $ | 12,384 |
|
| $ | (45,351 | ) |
|
|
|
|
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic shares |
|
| 16,527 |
|
|
| 16,527 |
|
|
| 16,527 |
|
|
| 16,527 |
|
Effect of dilutive stock options |
|
| 1 |
|
|
| --- |
|
|
| 1 |
|
|
| --- |
|
|
|
|
|
| ||||||||||||
Weighted average dilutive shares |
|
| 16,528 |
|
|
| 16,527 |
|
|
| 16,528 |
|
|
| 16,527 |
|
|
|
|
|
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share from continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.70 |
|
| $ | (2.50 | ) |
| $ | 0.75 |
|
| $ | (2.64 | ) |
Diluted |
|
| 0.70 |
|
|
| (2.50 | ) |
|
| 0.75 |
|
|
| (2.64 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | --- |
|
| $ | (0.16 | ) |
| $ | --- |
|
| $ | (0.11 | ) |
Diluted |
|
| --- |
|
|
| (0.16 | ) |
|
| --- |
|
|
| (0.11 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.70 |
|
| $ | (2.66 | ) |
| $ | 0.75 |
|
| $ | (2.75 | ) |
Diluted |
|
| 0.70 |
|
|
| (2.66 | ) |
|
| 0.75 |
|
|
| (2.75 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2012 and 2011, there were 606,620 and 683,791 potential additional shares issued through the exercise of stock options and warrants, respectively, which were excluded from the calculation of diluted earnings per share as a result of being anti-dilutive.
25
NOTE 8. Fair Value of Financial Instruments
Fair value estimates are intended to represent the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. Where there is no active market for a financial instrument, First Financial has made estimates using discounted cash flow or other valuation techniques. Inputs to these valuation methods are subjective in nature, involve uncertainties, and require significant judgment and therefore cannot be determined with precision. Accordingly, the derived fair value estimates presented below are not necessarily indicative of the amounts First Financial could realize in a current market exchange.
Assets and liabilities are recorded at fair value according to a fair value hierarchy comprised of three levels. The levels are based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. The level of an asset or liability within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement (with Level 1 considered highest and Level 3 considered lowest). A brief description of each level follows.
|
|
• | Level 1 – Valuation is based on quoted prices for identical instruments in active markets. |
• | Level 2 – Valuation is based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. |
• | Level 3 – Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates that market participants would use in pricing the asset or liability. Valuation techniques include the use of discounted cash flow models and similar techniques. |
The following table presents the carrying value and fair value of the financial instruments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of June 30, 2012 |
| As of December 31, 2011 |
| ||||||||
|
| ||||||||||||
(in thousands) |
| Carrying Value |
| Fair Value |
| Carrying Value |
| Fair Value |
| ||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 70,101 |
| $ | 70,101 |
| $ | 76,675 |
| $ | 76,675 |
|
Securities available for sale |
|
| 244,059 |
|
| 244,059 |
|
| 404,550 |
|
| 404,550 |
|
Securities held to maturity |
|
| 20,014 |
|
| 22,523 |
|
| 20,486 |
|
| 23,242 |
|
Nonmarketable securities |
|
| 29,327 |
|
| 29,327 |
|
| 32,694 |
|
| 32,694 |
|
Net loans |
|
| 2,583,684 |
|
| 2,659,945 |
|
| 2,331,933 |
|
| 2,427,526 |
|
Loans held for sale |
|
| 72,402 |
|
| 72,402 |
|
| 48,303 |
|
| 48,303 |
|
FDIC indemnification asset, net |
|
| 77,311 |
|
| 77,311 |
|
| 51,021 |
|
| 51,021 |
|
Other repossessed assets acquired1 |
|
| 28,191 |
|
| 28,191 |
|
| 20,487 |
|
| 20,487 |
|
Residential mortgage servicing rights1 |
|
| 11,764 |
|
| 11,764 |
|
| 10,663 |
|
| 10,663 |
|
Accrued interest receivable1 |
|
| 9,303 |
|
| 9,303 |
|
| 8,759 |
|
| 8,759 |
|
Derivative financial instruments1 |
|
| 3,421 |
|
| 3,421 |
|
| 2,238 |
|
| 2,238 |
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
| 2,703,202 |
|
| 2,718,203 |
|
| 2,239,198 |
|
| 2,253,138 |
|
Advances from FHLB |
|
| 233,000 |
|
| 261,787 |
|
| 561,000 |
|
| 598,616 |
|
Long-term debt |
|
| 47,204 |
|
| 45,848 |
|
| 47,204 |
|
| 43,487 |
|
FDIC true-up payment2 |
|
| 3,540 |
|
| 3,540 |
|
| --- |
|
| --- |
|
Accrued interest payable2 |
|
| 6,260 |
|
| 6,260 |
|
| 8,095 |
|
| 8,095 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1Included as part of Other Assets in the Consolidated Balance Sheets. | |||||||||||||
2Included as part of Other Liabilities in the Consolidated Balance Sheets. |
The methods and assumptions used to estimate the fair value of financial instruments are set forth below. There have been no changes to the valuation methods used to estimate fair value since December 31, 2011.
Assets Recorded at Fair Value on a Recurring Basis
The following tables present the financial instruments measured at fair value on a recurring basis.
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of June 30, 2012 |
| |||||||||||||
|
|
| ||||||||||||||
(in thousands) |
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
| ||||
Obligations of the U.S. government agencies and corporations |
| $ | --- |
|
| $ | 1,516 |
|
| $ | --- |
|
| $ | 1,516 |
|
State and municipal obligations |
|
| --- |
|
|
| 481 |
|
|
| --- |
|
|
| 481 |
|
Collateralized debt obligations |
|
| --- |
|
|
| --- |
|
|
| 3,541 |
|
|
| 3,541 |
|
Mortgage-backed securities |
|
| --- |
|
|
| 43,602 |
|
|
| --- |
|
|
| 43,602 |
|
Collateralized mortgage obligations |
|
| --- |
|
|
| 143,518 |
|
|
| 44,859 |
|
|
| 188,377 |
|
Other securities |
|
| 1,723 |
|
|
| 3,341 |
|
|
| 1,478 |
|
|
| 6,542 |
|
|
|
|
|
| ||||||||||||
Securities available for sale |
|
| 1,723 |
|
|
| 192,458 |
|
|
| 49,878 |
|
|
| 244,059 |
|
|
|
|
|
| ||||||||||||
Residential mortgage servicing rights |
|
| --- |
|
|
| --- |
|
|
| 11,764 |
|
|
| 11,764 |
|
Derivative financial instruments |
|
| 3,421 |
|
|
| --- |
|
|
| --- |
|
|
| 3,421 |
|
|
|
|
|
| ||||||||||||
Total assets at fair value |
| $ | 5,144 |
|
| $ | 192,458 |
|
| $ | 61,642 |
|
| $ | 259,244 |
|
|
|
|
|
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of December 31, 2011 |
| |||||||||||||
|
|
| ||||||||||||||
(in thousands) |
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
| ||||
Obligations of the U.S. government agencies and corporations |
| $ | --- |
|
| $ | 1,823 |
|
| $ | --- |
|
| $ | 1,823 |
|
State and municipal obligations |
|
| --- |
|
|
| 488 |
|
|
| --- |
|
|
| 488 |
|
Collateralized debt obligations |
|
| --- |
|
|
| --- |
|
|
| 3,247 |
|
|
| 3,247 |
|
Mortgage-backed securities |
|
| --- |
|
|
| 84,399 |
|
|
| --- |
|
|
| 84,399 |
|
Collateralized mortgage obligations |
|
| --- |
|
|
| 256,615 |
|
|
| 52,680 |
|
|
| 309,295 |
|
Other securities |
|
| 1,000 |
|
|
| 3,197 |
|
|
| 1,101 |
|
|
| 5,298 |
|
|
|
|
|
| ||||||||||||
Securities available for sale |
|
| 1,000 |
|
|
| 346,522 |
|
|
| 57,028 |
|
|
| 404,550 |
|
|
|
|
|
| ||||||||||||
Residential mortgage servicing rights |
|
| --- |
|
|
| --- |
|
|
| 10,663 |
|
|
| 10,663 |
|
Derivative financial instruments |
|
| 2,238 |
|
|
| --- |
|
|
| --- |
|
|
| 2,238 |
|
|
|
|
|
| ||||||||||||
Total assets at fair value |
| $ | 3,238 |
|
| $ | 346,522 |
|
| $ | 67,691 |
|
| $ | 417,451 |
|
|
|
|
|
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Available for Sale
The fair value of securities available for sale that are classified as Level 3 primarily include private-label mortgage-backed securities and trust preferred CDOs. In the absence of observable or corroborated market data, estimates that incorporate market-based assumptions are used when such information is available. These values take into account recent market activity as well as other market observable data such as interest rate, spread and prepayment information. When market observable data is not available, the valuation of the security is subjective and may involve substantial judgment. To determine the fair value, cash flow models provided by a third-party pricing service are utilized. The models incorporate market participant data and knowledge of the structures of each individual security to develop cash flows specific to each security and apply appropriate discount rates. The discount rates are developed by determining credit spreads above a benchmark rate, such as LIBOR, and adding premiums based on a comparison of initial issuance spread to LIBOR versus a financial sector curve for recently issued debt to LIBOR. Specific securities that have increased uncertainty regarding the receipt of cash flows are discounted at higher rates due to the addition of a security-specific credit premium. Pricing is reviewed for reasonableness based on the direction of the specific markets and the general economic indicators.
For trust preferred CDOs, the models estimate default vectors for the underlying issuers within each CDO security, estimate expected bank failures across the entire banking system to determine the impact on each CDO, and assign a risk rating to each individual issuer in the collateral pool. For private-label CMOs, the pricing model estimates each security’s cash flows and adjusted price based on coupon, constant prepayment rate, default rate, and required yields or spreads. If a security is rated below investment grade by a credit agency, a stress test is performed to determine OTTI.
Residential Mortgage Servicing Rights
The estimated fair value of residential mortgage servicing rights (“MSRs”) is obtained through an independent third party analysis of future cash flows. The evaluation utilizes assumptions market participants would use in determining fair value including market discount rates, prepayment speeds, servicing income, servicing costs, default rates and other market driven data, as well as the market’s perception of future interest rate movements.
Derivative Financial Instruments
The fair value of derivative instruments is based on quoted market prices.
The following table presents quantitative information regarding the assumptions used for valuing Level 3 assets.
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
(dollars in thousands) |
| Fair Value as of |
|
| Valuation |
| Unobservable |
| Range | |
|
|
| ||||||||
Collateralized debt obligations |
| $ | 3,541 |
|
| Discounted |
| Discount margin to LIBOR |
| 10.50% - 16.80% (12.20%) |
|
|
|
|
|
| cash flow |
| Constant Default Rate |
| 0.25% - 2.25% (0.60%) |
|
|
|
|
|
|
|
| Default Percentage |
| 14.22% - 63.98% (34.58%) |
|
|
|
| |||||||
Collateralized mortgage obligations |
| $ | 44,859 |
|
| Discounted |
| Constant prepayment rate |
| 5.00% - 28.00% (15.26%) |
|
|
|
|
|
| cash flow |
| Constant default rate |
| 1.00% - 9.00% (3.52%) |
|
|
|
|
|
|
|
| Loss severity |
| 30.00% - 55.00% (46.79%) |
|
|
|
| |||||||
MSRs |
| $ | 11,764 |
|
| Discounted |
| Constant prepayment rate |
| 18.50% |
|
|
|
|
|
| cash flow |
| Discount rate |
| 10.46% |
|
|
|
|
|
|
|
| Delinquency percentage |
| 1.94% |
|
|
|
|
|
|
|
|
|
|
|
1Other level 3 securities totaling $1.5 million are valued based on data provided by the issuer |
Changes in Fair Value Measurement Levels
First Financial evaluates the holdings within its investment portfolio on a quarterly basis to determine the most appropriate pricing level based on current economic and market conditions and credit trends. Transfers between levels are recorded during the quarter in which the transfer was deemed necessary. No securities were transferred between levels during the six months ended June 30, 2012.
The following table includes changes in Level 3 fair value measurements based on the hierarchy levels previously discussed.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||
|
|
| ||||||||||||||
(in thousands) |
| Securities |
|
| Residential |
|
| Securities |
|
| Residential |
| ||||
| ||||||||||||||||
Balance, beginning of period |
| $ | 54,024 |
|
| $ | 11,898 |
|
| $ | 57,028 |
|
| $ | 10,663 |
|
Total net losses for the year included in Income |
|
| (145 | ) |
|
| (2,122 | ) |
|
| (214 | ) |
|
| (2,660 | ) |
Other comprehensive income, gross |
|
| (224 | ) |
|
| --- |
|
|
| 19 |
|
|
| --- |
|
Purchases |
|
| 162 |
|
|
| --- |
|
|
| 377 |
|
|
| --- |
|
Sales |
|
| --- |
|
|
| --- |
|
|
| --- |
|
|
| --- |
|
Servicing assets that resulted from transfers of financial assets |
|
| --- |
|
|
| 1,988 |
|
|
| --- |
|
|
| 3,761 |
|
Paydowns |
|
| (3,939 | ) |
|
| --- |
|
|
| (7,332 | ) |
|
| --- |
|
|
|
|
|
| ||||||||||||
Balance, end of period |
| $ | 49,878 |
|
| $ | 11,764 |
|
| $ | 49,878 |
|
| $ | 11,764 |
|
|
|
|
|
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Instruments Recorded at Fair Value on a Nonrecurring Basis
The following table presents the assets measured at fair value on a nonrecurring basis categorized by the level of inputs used in the valuation for each asset and the corresponding realized loss.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
| As of |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Year |
| |||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale |
| $ | 72,402 |
|
| $ | --- |
|
| $ | 72,402 |
|
| $ | --- |
|
| $ | --- |
|
Impaired loans, net of specific allowance |
|
| 24,351 |
|
|
| --- |
|
|
| --- |
|
|
| 24,351 |
|
|
| 1,818 |
|
FDIC indemnification asset, net |
|
| 77,311 |
|
|
| --- |
|
|
| --- |
|
|
| 77,311 |
|
|
| --- |
|
Other repossessed assets acquired |
|
| 28,191 |
|
|
| --- |
|
|
| --- |
|
|
| 28,191 |
|
|
| 1,121 |
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FDIC true-up payment |
|
| 3,540 |
|
|
| --- |
|
|
| --- |
|
|
| 3,540 |
|
|
| --- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans Held for Sale
Loans held for sale are comprised of residential mortgage loans originated for sale in the secondary market. The fair value is based on purchase commitments or quoted prices for the same or similar loans.
28
Impaired Loans, net of Specific Allowance
Impaired loans are evaluated and valued at the time the loan is identified as impaired, at the lower of cost or fair value. These loans are generally collateral dependent and their value is usually measured based on the “as is” or liquidation value of the collateral securing these loans. Certain assumptions and unobservable inputs are currently being used by appraisers. Year-to-date losses include charge-offs which had a specific reserve established in prior quarters. Specific reserves for impaired loans were $930 thousand at June 30, 2012.
FDIC Indemnification Asset, net
The fair value of the FDIC indemnification asset is determined by the projected cash flows based on expected reimbursements for losses in accordance with the loss share agreements with the FDIC. Cash flows are discounted to reflect the timing and receipt of reimbursements from the FDIC.
Other Repossessed Assets Acquired
Other repossessed assets acquired in the settlement of loans are recorded at the lower of the principal balance of the loan at the time of foreclosure or fair value of the property less estimated selling expenses. Certain assumptions and unobservable inputs are currently being used by appraisers.
FDIC True-Up Payment
The fair value of the FDIC true-up payment to the FDIC is determined by the projected cash flows based on expected payments for recoveries in accordance with the loss share agreements with the FDIC. Cash flows are discounted to reflect the timing and payment of recoveries due to the FDIC.
Financial Instruments Not Recorded at Fair Value
The following table presents the assets not recorded at fair value categorized by the level of inputs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
|
| As of June 30, 2012 |
| |||||||||||||
|
| |||||||||||||||
(in thousands) |
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
| ||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 70,101 |
|
| $ | --- |
|
| $ | --- |
|
| $ | 70,101 |
|
Securities held to maturity |
|
| --- |
|
|
| 22,523 |
|
|
| --- |
|
|
| 22,523 |
|
Nonmarketable securities |
|
| --- |
|
|
| --- |
|
|
| 29,327 |
|
|
| 29,327 |
|
Net loans |
|
| --- |
|
|
| --- |
|
|
| 2,659,945 |
|
|
| 2,659,945 |
|
Accrued interest receivable |
|
| 9,303 |
|
|
| --- |
|
|
| --- |
|
|
| 9,303 |
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
| --- |
|
|
| --- |
|
|
| 2,718,203 |
|
|
| 2,718,203 |
|
Advances from FHLB |
|
| --- |
|
|
| --- |
|
|
| 261,787 |
|
|
| 261,787 |
|
Long term debt |
|
| --- |
|
|
| --- |
|
|
| 45,848 |
|
|
| 45,848 |
|
Accrued interest payable |
|
| 6,260 |
|
|
| --- |
|
|
| --- |
|
|
| 6,260 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounting standards require the disclosure of the estimated fair value of financial instruments that are not recorded at fair value. A financial instrument is defined as cash, evidence of an ownership interest in an entity or a contract that creates a contractual obligation or right to deliver or receive cash or another financial instrument from a second entity. For the financial instruments that First Financial does not record at fair value, estimates of fair value are calculated based on the value of one trading unit without regard to any premium or discount that may result from concentrations of ownership of a financial instrument, possible tax ramifications, estimated transaction costs that may result from bulk sales or the relationship between various financial instruments. No readily available market exists for a significant portion of First Financial’s financial instruments. Fair value estimates for these instruments are based on current economic conditions, currency and interest rate characteristics, loss experience and other factors. Many of these estimates involve uncertainties and matters of significant judgment and cannot be determined with precision. Therefore, the calculated fair value estimates in many instances cannot be sustained by comparison to independent markets, and may not be realizable in a current sale of the instrument. In addition, changes in assumptions could significantly affect these fair value estimates. The following methods and assumptions were used by First Financial in estimating the fair value of these financial instruments.
Cash and Cash Equivalents
The carrying amounts are a reasonable estimate of their fair values.
Securities Held to Maturity
The fair value of securities classified as held to maturity is based on quoted prices for similar assets.
Nonmarketable Securities
The carrying amount of FHLB and Federal Reserve stock is used to approximate the fair value of these securities as they are not readily marketable, are recorded at cost (par value), and are evaluated for impairment based on the ultimate recoverability of the par value. First Financial considers positive and negative evidence, including the profitability and asset quality of the issuer, dividend payment history and recent redemption experience, when determining the ultimate recoverability of the par value. First Financial believes its investment in FHLB and Federal Reserve stock is ultimately recoverable at par.
29
Net Loans
The fair value of net loans is estimated based on discounted cash flows. The cash flows take into consideration current portfolio interest rates and repricing characteristics as well as assumptions relating to prepayment speeds. The discount rates take into consideration the current market interest rate environment, a credit risk component based on the credit characteristics of each loan portfolio, and a liquidity premium reflecting the liquidity or illiquidity of the market. The carrying amount of accrued interest approximates fair value.
Deposits
The fair value of core deposits, which include checking, savings and money market accounts, are, by definition, equal to the amount payable on demand as of the valuation date (i.e. their carrying amounts). Fair values for time deposits are based on the discounted value of contractual cash flows at current interest rates. The estimated fair value of deposits does not take into account the value of First Financial’s long-term relationships with depositors, commonly known as core deposit intangibles, which are separate intangible assets, and not considered financial instruments. The carrying amount of accrued interest approximates fair value.
Advances from FHLB and Long-Term Debt
The fair value of these financial instruments is estimated using observable market prices and by discounting future cash flows using current interest rates for similar financial instruments.
NOTE 9. Income Tax
The income tax expense for the three months ended June 30, 2012 was $7.7 million, compared with an income tax benefit of $(25.3) million for the three months ended June 30, 2011. The income tax expense for the six months ended June 30, 2012 was $12.0 million, compared with an income tax benefit of $(26.2) million for the same period of 2011. The quarter ended June 30, 2012 included the establishment of a $5.6 million deferred tax liability related to the gain on the Plantation acquisition. The quarter ended March 31, 2012 included a $2.1 million write-down of the state deferred tax asset in connection with First Federal’s conversion from a thrift to a state-chartered commercial bank due to a difference in South Carolina income tax laws for banks versus thrifts. The effective tax rate for the three months ended June 30, 2012, was 38.00%, compared with 38.57% for the same period of the prior year. The effective tax rate for the six months ended June 30, 2012 was 45.49%, compared with 38.62% for the same period of the prior year. The increase over the six month period of 2011 was primarily the result of the write-down of the state deferred tax asset as discussed above.
First Financial regularly monitors its deferred tax position. At June 30, 2012, First Financial had a net deferred tax liability of $5.1 million, as compared with a deferred tax asset of $3.2 million at December 31, 2011. While currently in a net liability position, First Financial continues to evaluate its deferred tax assets and considers the cumulative three-year pretax operating results as well as the timing, nature and amount of future taxable income, various plans to maximize the realization of deferred tax assets and taxable income within the carryback and carryforward periods, the reversal of taxable temporary differences as well as future events and uncertainties. After evaluating all positive and negative evidence available as of June 30, 2012, First Financial concluded that it is more likely than not that it will be able to realize all remaining deferred tax assets and that a valuation allowance was not needed at June 30, 2012.
NOTE 10. Share-Based Payment Arrangements
First Financial has two share-based compensation plans from which new awards may be granted. These plans may issue qualified and non-qualified options, restricted stock awards, and stock appreciation rights to employees and nonemployee directors. First Financial also has four plans that currently have option grants outstanding, but no new issuances may be made since these plans have been abandoned. Forfeited or expired options under the abandoned plans cannot be reissued. At June 30, 2012, there were 164,713 options which remained outstanding under the four abandoned plans. Stock options currently granted under the plans generally expire five years from the date of grant. Restrictions on non-vested stock generally lapse in three annual installments beginning on the first anniversary of the grant date.
Compensation expense for stock options is recognized in salaries and employee benefits in the Consolidated Statements of Operations. First Financial recorded share-based compensation expense of $47 thousand and $93 thousand for the three and six months ended June 30, 2012, respectively, and $87 thousand and $212 thousand for the three and six months ended June 30 2011, respectively. First Financial recognized an income tax benefit of less than $100 thousand in each of the three and six months ended June 30, 2012 and 2011.
A summary of stock option activity is presented below.
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
| Number of |
|
| Weighted- |
|
| Weighted- |
|
| Aggregate |
| ||||
Outstanding at December 31, 2011 |
|
| 404,387 |
|
| $ | 23.80 |
|
|
|
|
|
|
|
|
|
Granted |
|
| --- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
| --- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
| (29,574 | ) |
|
| 28.49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Outstanding at June 30, 2012 |
|
| 374,813 |
|
| $ | 23.43 |
|
| 1.5 |
|
| $ | 18 |
| |
|
|
|
|
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2012 |
|
| 340,449 |
|
| $ | 24.17 |
|
| 1.4 |
|
| $ | 18 |
| |
|
|
|
|
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2012, there was $117 thousand of total unrecognized compensation cost related to non-vested share-based compensation arrangements (share options) granted under the plans.
NOTE 11. Commitments and Contingencies
Loan Commitments
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. First Federal evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary 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. Outstanding commitments on loans not yet closed include commitments issued to correspondent lenders and are principally commitments for loans on single-family residential and commercial property. Available unused lines of credit include revolving home equity lines and credit cards, while other unused commitments includes commercial and industrial loan commitments
Standby Letters of Credit
Standby letters of credit represent First Federal’s obligations to a third party contingent on the failure of its customer to perform under the terms of an underlying contract with the third party or obligate First Federal to stand as surety for the benefit of the third party. The underlying contract may entail either financial or non-financial obligations and may involve such things as the customer’s delivery of merchandise, completion of a construction contract, release of a lien, or repayment of an obligation. Under the terms of a standby letter, drafts will generally be drawn only when the underlying event fails to occur as intended. First Federal can seek recovery from the borrower for the amounts paid. In addition, some of these standby letters of credit are collateralized. Commitments under standby letters of credit are usually for one year or less. As of June 30, 2012 and December 31, 2011, there was no recorded liability associated with these standby letters of credit.
The following table presents First Federal’s loan commitments and standby letters of credit.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
| June 30, |
|
| December 31, |
| ||
Available unused lines of credit |
| $ | 388,873 |
|
| $ | 345,734 |
|
Commitments to fund commercial real estate, construction and land development loans |
|
| 22,970 |
|
|
| 30,531 |
|
Other unused commitments |
|
| 46,774 |
|
|
| 73,835 |
|
Standby letters of credit |
|
| 5,913 |
|
|
| 574 |
|
|
|
|
|
|
|
|
|
|
Derivative Instruments
First Federal utilizes derivatives as part of its risk management strategy for its mortgage activities. These instruments may consist of financial forward and future contracts, when-issued securities and options written and purchased. A derivative is a financial instrument that derives its cash flows, and therefore its value, by reference to an underlying instrument, index or referenced interest rate. First Federal does not elect hedge accounting treatment for any of its derivative transactions; consequently, changes in fair value, both gains and losses, of the instrument are recorded in the Consolidated Statements of Operations in mortgage and other loan income.
Derivative contracts related to MSRs are used to offset changes in fair value and are written in amounts referred to as notional amounts. Notional amounts only provide the basis for calculating payments between counterparties and do not represent amounts to be exchanged between the parties, and are not a measure of financial risk. On June 30, 2012 and December 31, 2011, First
31
Federal had derivative financial instruments outstanding with notional amounts totaling $48.0 million. The estimated net fair value of the open contracts related to the MSRs was a gain of $93 thousand at June 30, 2012, compared with a gain of $354 thousand at December 31, 2011.
The following table presents First Federal’s mortgage loan pipeline and obligations under forward commitments along with the fair value of those obligations.
|
|
|
|
|
|
|
|
| |||||||
(in thousands) |
| June 30, |
| December 31, |
| ||
Mortgage loan pipeline |
| $ | 165,018 |
| $ | 85,460 |
|
Expected pipeline closures |
|
| 115,513 |
|
| 63,945 |
|
Fair value of mortgage loan pipeline |
|
| 3,152 |
|
| 1,104 |
|
Forward commitments |
|
| 233,994 |
|
| 148,902 |
|
Fair value of forward commitments |
|
| 629 |
|
| 358 |
|
|
|
|
|
|
|
|
|
32
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
|
Five Quarter Summary of Selected Financial Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Quarters Ended |
| |||||||||||||
|
| |||||||||||||||
(dollars in thousands, except per share data) |
| June 30, |
| March 31, |
| December 31, |
| September 30, |
| June 30, |
| |||||
Summary of Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
| $ | 39,343 |
| $ | 36,359 |
| $ | 37,612 |
| $ | 38,556 |
| $ | 39,472 |
|
Interest expense |
|
| 7,630 |
|
| 8,107 |
|
| 8,713 |
|
| 9,492 |
|
| 10,056 |
|
|
| |||||||||||||||
Net interest income |
|
| 31,713 |
|
| 28,252 |
|
| 28,899 |
|
| 29,064 |
|
| 29,416 |
|
Provision for loan losses |
|
| 4,697 |
|
| 6,745 |
|
| 7,445 |
|
| 8,940 |
|
| 77,803 |
|
|
| |||||||||||||||
Net interest income (loss) after provision for loan losses |
|
| 27,016 |
|
| 21,507 |
|
| 21,454 |
|
| 20,124 |
|
| (48,387 | ) |
Noninterest income |
|
| 32,530 |
|
| 13,182 |
|
| 32,770 |
|
| 14,238 |
|
| 11,422 |
|
Noninterest expense |
|
| 39,250 |
|
| 28,709 |
|
| 28,886 |
|
| 29,588 |
|
| 28,600 |
|
|
| |||||||||||||||
Income (loss) from continuing operations before taxes |
|
| 20,296 |
|
| 5,980 |
|
| 25,338 |
|
| 4,774 |
|
| (65,565 | ) |
Income tax expense (benefit) from continuing operations |
|
| 7,712 |
|
| 4,241 |
|
| 9,766 |
|
| 1,893 |
|
| (25,288 | ) |
|
| |||||||||||||||
Net income (loss) from continuing operations |
|
| 12,584 |
|
| 1,739 |
|
| 15,572 |
|
| 2,881 |
|
| (40,277 | ) |
Loss from discontinued operations |
|
| --- |
|
| --- |
|
| --- |
|
| (1,804 | ) |
| (2,724 | ) |
|
| |||||||||||||||
Net income (loss) |
|
| 12,584 |
|
| 1,739 |
|
| 15,572 |
|
| 1,077 |
|
| (43,001 | ) |
Preferred stock dividends |
|
| 812 |
|
| 813 |
|
| 813 |
|
| 813 |
|
| 813 |
|
Accretion on preferred stock |
|
| 158 |
|
| 156 |
|
| 153 |
|
| 151 |
|
| 149 |
|
|
| |||||||||||||||
Net income (loss) available to common shareholders |
| $ | 11,614 |
| $ | 770 |
| $ | 14,606 |
| $ | 113 |
| $ | (43,963 | ) |
|
| |||||||||||||||
Per Common Share Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share from continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.70 |
| $ | 0.05 |
| $ | 0.88 |
| $ | 0.12 |
| $ | (2.50 | ) |
Diluted |
|
| 0.70 |
|
| 0.05 |
|
| 0.88 |
|
| 0.12 |
|
| (2.50 | ) |
Net loss per common share from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | --- |
| $ | --- |
| $ | --- |
| $ | (0.11 | ) | $ | (0.16 | ) |
Diluted |
|
| --- |
|
| --- |
|
| --- |
|
| (0.11 | ) |
| (0.16 | ) |
Net income (loss) per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.70 |
| $ | 0.05 |
| $ | 0.88 |
| $ | 0.01 |
| $ | (2.66 | ) |
Diluted |
|
| 0.70 |
|
| 0.05 |
|
| 0.88 |
|
| 0.01 |
|
| (2.66 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market price, end of period |
| $ | 10.72 |
| $ | 11.00 |
| $ | 8.93 |
| $ | 4.01 |
| $ | 8.97 |
|
Book value per common share |
|
| 13.45 |
|
| 12.89 |
|
| 12.84 |
|
| 12.31 |
|
| 12.20 |
|
Tangible book value per common share (non-GAAP)1 |
|
| 12.91 |
|
| 12.75 |
|
| 12.69 |
|
| 12.16 |
|
| 11.83 |
|
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 |
| $ | 3,304,174 |
| $ | 3,145,538 |
| $ | 3,146,964 |
| $ | 3,206,310 |
| $ | 3,221,544 |
|
Investment securities |
|
| 293,400 |
|
| 500,331 |
|
| 457,730 |
|
| 469,561 |
|
| 478,570 |
|
Loans |
|
| 2,632,483 |
|
| 2,355,567 |
|
| 2,385,457 |
|
| 2,355,280 |
|
| 2,372,069 |
|
Allowance for loan losses |
|
| 48,799 |
|
| 50,776 |
|
| 53,524 |
|
| 54,333 |
|
| 55,491 |
|
Deposits |
|
| 2,703,202 |
|
| 2,264,489 |
|
| 2,239,198 |
|
| 2,302,857 |
|
| 2,315,745 |
|
Advances from FHLB and long-term debt |
|
| 280,204 |
|
| 580,204 |
|
| 608,204 |
|
| 605,204 |
|
| 604,704 |
|
Shareholders’ equity |
|
| 287,264 |
|
| 278,043 |
|
| 277,178 |
|
| 268,506 |
|
| 266,564 |
|
Balance Sheet Summary, average for the quarter |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
| $ | 3,339,705 |
| $ | 3,151,385 |
| $ | 3,153,286 |
| $ | 3,201,416 |
| $ | 3,294,350 |
|
Investment securities |
|
| 443,181 |
|
| 490,356 |
|
| 469,925 |
|
| 468,360 |
|
| 464,277 |
|
Loans |
|
| 2,619,409 |
|
| 2,420,000 |
|
| 2,428,743 |
|
| 2,442,071 |
|
| 2,566,827 |
|
Allowance for loan losses |
|
| 50,547 |
|
| 52,282 |
|
| 54,178 |
|
| 55,503 |
|
| 81,025 |
|
Deposits |
|
| 2,596,642 |
|
| 2,228,613 |
|
| 2,272,036 |
|
| 2,302,518 |
|
| 2,360,572 |
|
Advances from FHLB and long-term debt |
|
| 428,505 |
|
| 609,665 |
|
| 565,114 |
|
| 595,508 |
|
| 593,103 |
|
Shareholders’ equity |
|
| 285,672 |
|
| 277,390 |
|
| 279,066 |
|
| 267,404 |
|
| 302,996 |
|
Selected Ratios from Continuing Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets2 |
|
| 1.51 | % |
| 0.22 | % |
| 1.98 | % |
| 0.36 | % |
| (4.89 | )% |
Return on average equity2 |
|
| 17.62 |
|
| 2.51 |
|
| 22.32 |
|
| 4.31 |
|
| (53.17 | ) |
Net interest margin (FTE)3 |
|
| 4.08 |
|
| 3.84 |
|
| 3.91 |
|
| 3.87 |
|
| 3.83 |
|
Efficiency ratio (non-GAAP)1 |
|
| 66.05 |
|
| 68.87 |
|
| 70.12 |
|
| 70.90 |
|
| 69.69 |
|
Selected Ratios from Consolidated Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets2 |
|
| 1.51 | % |
| 0.22 | % |
| 1.98 | % |
| 0.13 | % |
| (5.22 | )% |
Return on average equity2 |
|
| 17.62 |
|
| 2.51 |
|
| 22.32 |
|
| 1.61 |
|
| (56.77 | ) |
|
|
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%. |
33
|
|
Five Quarter Summary of Selected Financial Data (Continued) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Quarters Ended |
| |||||||||||||
|
| |||||||||||||||
| ||||||||||||||||
(dollars in thousands) |
| June 30, |
| March 31, |
| December 31, |
| September 30, |
| June 30, |
| |||||
Capital Ratios |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity to assets |
|
| 8.69 | % |
| 8.84 | % |
| 8.81 | % |
| 8.37 | % |
| 8.27 | % |
Tangible common equity to tangible assets (non-GAAP) |
|
| 6.47 |
|
| 6.70 |
|
| 6.67 |
|
| 6.27 |
|
| 6.08 |
|
Tier 1 leverage capital ratio |
|
| 9.79 |
|
| 10.22 |
|
|
| (1) |
|
| (1) |
|
| (1) |
Tier 1 risk-based capital ratio |
|
| 13.89 |
|
| 14.81 |
|
|
| (1) |
|
| (1) |
|
| (1) |
Total risk-based capital ratio |
|
| 15.16 |
|
| 16.08 |
|
|
| (1) |
|
| (1) |
|
| (1) |
Tier 1 leverage capital ratio - First Federal |
|
| 9.06 |
|
| 9.00 |
|
| 8.92 |
|
| 8.26 |
|
| 7.48 |
|
Tier 1 risk-based capital ratio - First Federal |
|
| 12.86 |
|
| 13.05 |
|
| 12.35 |
|
| 11.26 |
|
| 10.07 |
|
Total risk-based capital ratio - First Federal |
|
| 14.13 |
|
| 14.32 |
|
| 13.61 |
|
| 12.53 |
|
| 11.33 |
|
Asset Quality Metrics |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses as a percent of loans |
|
| 1.85 | % |
| 2.16 | % |
| 2.24 | % |
| 2.31 | % |
| 2.34 | % |
Allowance for loan losses as a percent of nonperforming loans |
|
| 97.72 |
|
| 101.75 |
|
| 112.19 |
|
| 126.64 |
|
| 130.36 |
|
Nonperforming loans as a percent of loans |
|
| 1.90 |
|
| 2.12 |
|
| 2.00 |
|
| 1.82 |
|
| 1.79 |
|
Nonperforming assets as a percent of loans and other repossessed assets acquired2 |
|
| 2.94 |
|
| 3.02 |
|
| 2.83 |
|
| 4.48 |
|
| 4.63 |
|
Nonperforming assets as a percent of total assets |
|
| 2.36 |
|
| 2.28 |
|
| 2.17 |
|
| 3.38 |
|
| 3.51 |
|
Net loans charged-off as a percent of average loans3 |
|
| 1.04 |
|
| 1.60 |
|
| 1.39 |
|
| 1.71 |
|
| 16.87 |
|
Net loans charged-off |
| $ | 6,674 |
| $ | 9,493 |
| $ | 8,254 |
| $ | 10,098 |
| $ | 107,450 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Quality Metrics Excluding Covered Loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses as a percent of non-covered loans |
|
| 2.06 | % |
| 2.28 | % |
| 2.39 | % |
| 2.47 | % |
| 2.51 | % |
Allowance for loan losses as a percent of non-covered nonperforming loans |
|
| 123.61 |
|
| 148.22 |
|
| 177.35 |
|
| 227.09 |
|
| 216.35 |
|
Nonperforming loans as a percent of non-covered loans |
|
| 1.67 |
|
| 1.54 |
|
| 1.34 |
|
| 1.09 |
|
| 1.16 |
|
Nonperforming assets as a percent of non-covered loans and other repossessed assets acquired2 |
|
| 2.01 |
|
| 2.00 |
|
| 1.91 |
|
| 3.58 |
|
| 3.91 |
|
Nonperforming assets as a percent of total assets |
|
| 1.45 |
|
| 1.42 |
|
| 1.37 |
|
| 2.52 |
|
| 2.76 |
|
|
|
1 | The quarter ended March 31, 2012 represents the first period holding company ratios for First Financial are 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 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 and $42,656 thousand is included in loans at September 30, 2011 and June 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 six months ended June 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,www.firstfinancialholdings.com. 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 atwww.sec.gov.
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
34
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 may fluctuate in value. |
• | 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. |
• | The recent 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. |
• | 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 regulation, which could restrict its activities, have an adverse impact on its operations, and impose financial requirements or limitations on the conduct of its business. |
• | 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 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 generally 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. |
35
|
|
• | 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” 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 represented by both taxable and tax-exempt investments.
First Financial believes that the exclusion of goodwill and other intangible assets facilitates the comparison of results for ongoing business operations. The tangible common equity (“TCE”) ratio and tangible common book value (“TBV”) have become a focus of some investors, analysts and banking regulators. Management believes these measures may assist in analyzing First Financial’s capital position absent the effects of intangible assets and preferred stock. Because TCE and TBV are not formally defined by GAAP or codified in federal banking regulations, these measures are considered to be non-GAAP financial measures. However, analysts and banking regulators may assess First Financial’s capital adequacy using TCE or TBV and, therefore, management believes that it is useful to provide investors the ability to assess its capital adequacy on the same basis.
First Financial believes that pre-tax pre-provision earnings are a useful measure in assessing its core operating performance, particularly during times of economic stress. This measurement, as defined by management, represents total revenue (net interest income plus noninterest income) less noninterest expense. As recent results for the banking industry demonstrate, credit write-downs, loan charge-offs, and related provisions for loan losses can vary significantly from period to period, making a measure that helps isolate the impact of credit costs on profitability important to investors.
36
The following table presents the calculation of these non-GAAP measures for the past five quarters.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FIRST FINANCIAL HOLDINGS, INC. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-GAAP RECONCILIATION (UNAUDITED) |
| For the Quarters Ended |
| |||||||||||||||||
|
| |||||||||||||||||||
(dollars in thousands, except per share data) |
| June 30, |
|
| March 31, |
|
| December 31, |
|
| September 30, |
|
| June 30, |
| |||||
Efficiency Ratio from Continuing Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (A) |
| $ | 31,713 |
|
| $ | 28,252 |
|
| $ | 28,899 |
|
| $ | 29,064 |
|
| $ | 29,416 |
|
Taxable equivalent adjustment (B) |
|
| 226 |
|
|
| 182 |
|
|
| 145 |
|
|
| 159 |
|
|
| 144 |
|
Noninterest income (C) |
|
| 32,530 |
|
|
| 13,182 |
|
|
| 32,770 |
|
|
| 14,238 |
|
|
| 11,422 |
|
Gain on sold loan pool, net (D) |
|
| --- |
|
|
| --- |
|
|
| 20,796 |
|
|
| 1,900 |
|
|
| --- |
|
Gain on acquisition (E) |
|
| 14,550 |
|
|
| --- |
|
|
| --- |
|
|
| --- |
|
|
| --- |
|
Net securities gains (losses) (F) |
|
| 3,398 |
|
|
| (69 | ) |
|
| (180 | ) |
|
| (169 | ) |
|
| (54 | ) |
FHLB prepayment termination charge (G) |
|
| 8,525 |
|
|
| --- |
|
|
| --- |
|
|
| --- |
|
|
| --- |
|
Noninterest expense (H) |
|
| 39,250 |
|
|
| 28,709 |
|
|
| 28,886 |
|
|
| 29,588 |
|
|
| 28,600 |
|
Efficiency Ratio: (H-G)/(A+B+C-D-E-F) (non-GAAP) |
|
| 66.05 | % |
|
| 68.87 | % |
|
| 70.12 | % |
|
| 70.90 | % |
|
| 69.69 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible Assets and Tangible Common Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
| $ | 3,304,174 |
|
| $ | 3,145,538 |
|
| $ | 3,146,964 |
|
| $ | 3,206,310 |
|
| $ | 3,221,544 |
|
Goodwill1 |
|
| --- |
|
|
| --- |
|
|
| --- |
|
|
| --- |
|
|
| (3,250 | ) |
Other intangible assets, net2 |
|
| (8,931 | ) |
|
| (2,310 | ) |
|
| (2,401 | ) |
|
| (2,491 | ) |
|
| (2,776 | ) |
|
|
|
|
|
| |||||||||||||||
Tangible assets (non-GAAP) |
| $ | 3,295,243 |
|
| $ | 3,143,228 |
|
| $ | 3,144,563 |
|
| $ | 3,203,819 |
|
| $ | 3,215,518 |
|
|
|
|
|
|
| |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders’ equity |
| $ | 287,264 |
|
| $ | 278,043 |
|
| $ | 277,178 |
|
| $ | 268,506 |
|
| $ | 266,564 |
|
Preferred stock |
|
| (65,000 | ) |
|
| (65,000 | ) |
|
| (65,000 | ) |
|
| (65,000 | ) |
|
| (65,000 | ) |
Goodwill1 |
|
| --- |
|
|
| --- |
|
|
| --- |
|
|
| --- |
|
|
| (3,250 | ) |
Other intangible assets, net2 |
|
| (8,931 | ) |
|
| (2,310 | ) |
|
| (2,401 | ) |
|
| (2,491 | ) |
|
| (2,776 | ) |
|
|
|
|
|
| |||||||||||||||
Tangible common equity (non-GAAP) |
| $ | 213,333 |
|
| $ | 210,733 |
|
| $ | 209,777 |
|
| $ | 201,015 |
|
| $ | 195,538 |
|
|
|
|
|
|
| |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares outstanding, end of period (000s) |
|
| 16,527 |
|
|
| 16,527 |
|
|
| 16,527 |
|
|
| 16,527 |
|
|
| 16,527 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible common equity to tangible assets (non-GAAP) |
|
| 6.47 | % |
|
| 6.70 | % |
|
| 6.67 | % |
|
| 6.27 | % |
|
| 6.08 | % |
Book value per common share |
| $ | 13.45 |
|
| $ | 12.89 |
|
| $ | 12.84 |
|
| $ | 12.31 |
|
| $ | 12.20 |
|
Tangible book value per common share (non-GAAP) |
|
| 12.91 |
|
|
| 12.75 |
|
|
| 12.69 |
|
|
| 12.16 |
|
|
| 11.83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax Pre-provision Earnings from Continuing Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
| $ | 20,296 |
|
| $ | 5,980 |
|
| $ | 25,338 |
|
| $ | 4,774 |
|
| $ | (65,565 | ) |
Provision for loan losses |
|
| 4,697 |
|
|
| 6,745 |
|
|
| 7,445 |
|
|
| 8,940 |
|
|
| 77,803 |
|
|
|
|
|
|
| |||||||||||||||
Pre-tax pre-provision earnings (non-GAAP) |
| $ | 24,993 |
|
| $ | 12,725 |
|
| $ | 32,783 |
|
| $ | 13,714 |
|
| $ | 12,238 |
|
|
|
|
|
|
|
|
|
1 | Goodwill represents goodwill for Continuing Operations, as shown on the balance sheet, and includes goodw ill for Discontinued Operations of $3,250 for the quarter ended June 30, 2011. |
|
|
2 | Intangible assets represents intangible assets for Continuing Operations, as shown on the balance sheet, and includes intangible assets for Discontinued Operations of $205 for the quarter ended June 30, 2011. |
Charter Conversion
On February 3, 2012, First Financial received approval from the Board of Governors of the Federal Reserve (the “Federal Reserve”) to convert from a savings and loan holding company to a bank holding company and First Federal received approval to become a member of the Federal Reserve System. On February 22, 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 became a member of the Federal Reserve System. In connection with First Federal’s conversion, First Financial registered with the Federal Reserve as a bank holding company. As a result of the charter conversion and membership in the Federal Reserve System, the South Carolina State Board of Financial Institutions and the Federal Reserve serve as First Federal’s primary regulators. The Federal Reserve also serves as First Financial’s primary regulator.
As a result of First Federal’s charter conversion and Federal Reserve membership, First Federal is subject to Federal Reserve Supervisory Letter SR 91-17, which provides application and supervision standards for de novo state member banks and converting thrifts. The guidance includes standards for senior management and directors, policies, cash flows between the bank and the holding company, and capital levels, among other things. With respect to capital levels, the guidance provides that de novo state member banks and converting thrifts maintain a Tier 1 leverage capital ratio of 9.00% for the first three years as a state member bank unless an exception is granted. First Federal had a Tier 1 leverage capital ratio of 9.06% at June 30, 2012.
37
Acquisitions
Liberty Savings Bank Branch Acquisition
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. First Federal also recorded an intangible asset totaling $5.2 million, which represented the estimated fair value of the assumed core deposits (noninterest-bearing checking, interest-bearing checking, savings, and money market accounts) as well as the estimated fair value of a non-compete agreement between First Federal and Liberty.
Plantation Federal Bank FDIC-Assisted Transaction
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, as receiver for Plantation (the “Transaction”). 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, entered into by First Federal and the FDIC as of April 27, 2012 (the “P&A Agreement”). The Transaction included all six branch offices of Plantation, which now operate as branches of First Federal.
In connection with the Transaction, the FDIC made a cash payment to First Federal of $46.0 million, and First Federal did not pay the FDIC a premium to assume the customer deposits. The P&A Agreement includes a customary loss sharing agreement with the FDIC, which covers $216.2 million at carrying value of acquired commercial loans and commercial other real estate owned (“OREO”) ($169.5 million at estimated fair value). First Federal will share in the losses on the covered asset pools and the FDIC is obligated to reimburse First Federal for 80% of all eligible losses with respect to covered assets, beginning with the first dollar of loss incurred through $55 million in losses. First Federal absorbs losses greater than $55 million up to $65 million. The FDIC will reimburse First Federal for 60% of all eligible losses in excess of $65 million. First Federal has a corresponding obligation to reimburse the FDIC according to the same arrangement for eligible recoveries with respect to the covered assets. The loss share agreement provides for FDIC loss sharing for five years and First Federal reimbursement to the FDIC for eight years.
First Federal established an FDIC indemnification asset associated with the covered assets and the fair value was estimated at $34.3 million using projected cash flows related to the loss sharing agreement, based on the expected reimbursement for loses and the applicable loss sharing percentages for each loss tranche. A true-up payment related to the FDIC indemnification was established totaling $3.5 million and the estimated fair value included a present value discount.
During the three months ended June 30, 2012 a bargain purchase gain of $14.6 million was recorded in noninterest income on the Consolidated Statement of Operations. A deferred tax liability of $5.6 million representing the difference between the financial statement and tax bases was recorded in other liabilities on the Consolidated Balance Sheets. The bargain purchase gain represents the amount by which the estimated fair value of the assets acquired exceeded the estimated fair value of the liabilities assumed, adjusted for the discount bid cash payment received from the FDIC as well as the establishment of the FDIC indemnification asset and its associated true-up payment.
Due to the significant amount of fair value adjustments, the resulting accretion and amortization of those adjustments and the protection resulting from the FDIC loss share agreement, historical operating results for Plantation are not relevant to First Federal’s ongoing results of operations. In accordance with the relief granted in a letter dated May 21, 2012, from the staff of the Division of Corporate Finance of the SEC to First Financial and the guidance provided by Staff Accounting Bulletin Topic 1:K,Financial Statements of Acquired Troubled Financial Institutions, no pro forma financial information has been presented.
As of June 30, 2012, there have been no adjustments or changes to the initial fair values.
Under the P&A Agreement, First Federal has options, exercisable for various defined periods, to acquire at fair market value any bank premises and equipment that were owned by, or assume any leases relating to bank premises leased by, Plantation and to assume or reject service provider contracts. First Federal has indicated its intention to purchase Plantation’s Pawleys Island location for $2.8 million, and the closing is expected to occur during the third quarter of 2012. First Federal will consolidate an existing financial center into the former Plantation location and will consolidate Plantation’s remaining two coastal locations into First Federal’s existing financial centers during the third quarter of 2012, for no net increase in financial centers along the South Carolina coast. First Federal will assume the leases associated with the three locations in the Greenville, South Carolina market and those financial centers will remain open. First Federal will acquire certain fixed assets totaling $625 thousand associated with the former Plantation locations during the third quarter of 2012.
See Note 2 to the Consolidated Financial Statements for additional details regarding the acquisitions.
Results of Operations
First Financial recorded net income available to common shareholders of $11.6 million for the three months ended June 30, 2012, compared with $14.6 million for the three months ended December 31, 2011 and a net loss of $(44.0) million for the three months ended June 30, 2011. Diluted net income per common share was $0.70 for the quarter ended June 30, 2012, compared with $0.05 for the prior quarter and a net loss per common share of $(2.50) for the same quarter last year. The quarter ended June
38
30, 2012 included a $9.0 million after-tax gain on the acquisition of Plantation and a $3.1 million after-tax net charge related to repositioning the balance sheet, as described below. The quarter ended June 30, 2011 included additional provision for loan losses of $65.7 million after-tax related to reclassifying $155.3 million of portfolio loans to loans held for sale.
For the six months ended June 30, 2012, net income available to common shareholders was $12.4 million, compared with a net loss of $(45.4) million for the same period of 2011. Diluted net income per common share from continuing operations was $0.75 for the first six months of 2012, compared with a net loss per common share of $(2.64) for the first six months of 2011.
Balance Sheet Repositioning
In conjunction with the acquisition strategies completed 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. First Financial prepaid $125.0 million of long-term Federal Home Loan Bank (“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 will be reinvested during the third quarter 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. In addition to the future enhancements, deleveraging the balance sheet created capital capacity to support the recent acquisitions.
Net Interest Income
The following tables present an analysis of net interest income, interest spread and net interest margin with average balances and related weighted average interest rates.
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Average Balances, Net Interest Income, Average Rates |
| ||||||||||||||||||
|
| Three Months Ended June 30, |
| ||||||||||||||||
|
| 2012 |
| 2011 |
| ||||||||||||||
|
|
| |||||||||||||||||
(dollars in thousands) |
| Average |
| Interest |
| Average |
| Average |
| Interest |
| Average |
| ||||||
| |||||||||||||||||||
Earning assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits with banks |
| $ | 10,191 |
| $ | 19 |
| 0.75 | % |
| $ | 4,258 |
| $ | 1 |
| 0.09 | % |
|
Securities available for sale |
|
| 387,957 |
|
| 2,921 |
| 3.01 |
|
|
| 403,052 |
|
| 4,178 |
| 4.16 |
|
|
Securities held to maturity1 |
|
| 19,866 |
|
| 416 |
| 12.93 |
|
|
| 21,968 |
|
| 272 |
| 7.60 |
|
|
Nonmarketable securities |
|
| 35,358 |
|
| 201 |
| 2.29 |
|
|
| 39,257 |
|
| 77 |
| 0.80 |
|
|
Loans2 |
|
| 2,619,409 |
|
| 35,643 |
| 5.46 |
|
|
| 2,566,827 |
|
| 34,497 |
| 5.39 |
|
|
FDIC indemnification asset, net |
|
| 69,816 |
|
| 143 |
| 0.82 |
|
|
| 61,261 |
|
| 447 |
| 2.93 |
|
|
|
|
|
| ||||||||||||||||
Total earning assets |
|
| 3,142,597 |
|
| 39,343 |
| 5.05 | % |
|
| 3,096,623 |
|
| 39,472 |
| 5.13 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonearning assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
| 85,951 |
|
|
|
|
|
|
|
| 57,411 |
|
|
|
|
|
|
|
Allowance for loan losses |
|
| (50,547 | ) |
|
|
|
|
|
|
| (81,025 | ) |
|
|
|
|
|
|
Assets from discontinued operations |
|
| --- |
|
|
|
|
|
|
|
| 23,715 |
|
|
|
|
|
|
|
Other assets |
|
| 161,704 |
|
|
|
|
|
|
|
| 197,626 |
|
|
|
|
|
|
|
Total assets |
| $ | 3,339,705 |
|
|
|
|
|
|
| $ | 3,294,350 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposit accounts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing checking |
| $ | 480,964 |
| $ | 159 |
| 0.13 | % |
| $ | 440,905 |
| $ | 372 |
| 0.34 | % |
|
Savings |
|
| 245,480 |
|
| 96 |
| 0.16 |
|
|
| 186,386 |
|
| 122 |
| 0.26 |
|
|
Money market |
|
| 434,187 |
|
| 468 |
| 0.43 |
|
|
| 321,236 |
|
| 364 |
| 0.45 |
|
|
Time deposits |
|
| 1,093,659 |
|
| 3,258 |
| 1.20 |
|
|
| 1,167,749 |
|
| 5,071 |
| 1.74 |
|
|
|
|
|
| ||||||||||||||||
Total deposits |
|
| 2,254,290 |
|
| 3,981 |
| 0.71 | % |
|
| 2,116,276 |
|
| 5,929 |
| 1.12 | % |
|
Advances from FHLB |
|
| 382,555 |
|
| 2,852 |
| 3.00 |
|
|
| 547,291 |
|
| 3,330 |
| 2.44 |
|
|
Long-term debt |
|
| 45,950 |
|
| 797 |
| 6.94 |
|
|
| 45,812 |
|
| 797 |
| 6.98 |
|
|
|
|
|
| ||||||||||||||||
Total interest-bearing liabilities |
|
| 2,682,795 |
|
| 7,630 |
| 1.14 | % |
|
| 2,709,379 |
|
| 10,056 |
| 1.49 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits |
|
| 342,352 |
|
|
|
|
|
|
|
| 244,296 |
|
|
|
|
|
|
|
Liabilities from discontinued operations |
|
| --- |
|
|
|
|
|
|
|
| 5,777 |
|
|
|
|
|
|
|
Other liabilities |
|
| 28,886 |
|
|
|
|
|
|
|
| 31,902 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total liabilities |
|
| 3,054,033 |
|
|
|
|
|
|
|
| 2,991,354 |
|
|
|
|
|
|
|
Shareholders’ equity |
|
| 285,672 |
|
|
|
|
|
|
|
| 302,996 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total liabilities and shareholders’ equity |
| $ | 3,339,705 |
|
|
|
|
|
|
| $ | 3,294,350 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net interest income/interest spread |
|
|
|
| $ | 31,713 |
| 3.91 | % |
|
|
|
| $ | 29,416 |
| 3.64 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Contribution of noninterest-bearing sources of funds3 |
|
|
|
|
|
|
| 0.17 |
|
|
|
|
|
|
|
| 0.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net interest margin (FTE)4 |
|
|
|
|
|
|
| 4.08 | % |
|
|
|
|
|
|
| 3.83 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 | Interest income used in the average rate calculation includes the tax equivalent adjustment of $226 thousand, and $144 thousand for the quarters ended June 30, 2012 and 2011, respectively, calculated based on a federal tax rate of 35%. |
2 | Average balances of loans include loans held for sale and nonaccrual loans. |
3 | Equates to total cost of funds of 1.01% and 1.37% for the quarters ended June 30, 2012 and 2011, respectively. |
4 | Net interest margin exceeds the interest spread due to noninterest-bearing funding sources supporting earning assets. |
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Balances, Net Interest Income, Average Rates |
| ||||||||||||||||||
|
| Six Months Ended June 30, |
| ||||||||||||||||
|
| 2012 |
| 2011 |
| ||||||||||||||
|
|
| |||||||||||||||||
(dollars in thousands) |
| Average |
| Interest |
| Average |
| Average |
| Interest |
| Average |
| ||||||
Earning assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits with banks |
| $ | 9,337 |
| $ | 20 |
| 0.43 | % |
| $ | 4,996 |
| $ | 3 |
| 0.12 | % |
|
Securities available for sale |
|
| 411,378 |
|
| 6,300 |
| 3.06 |
|
|
| 387,782 |
|
| 8,527 |
| 4.40 |
|
|
Securities held to maturity1 |
|
| 20,057 |
|
| 750 |
| 11.55 |
|
|
| 21,960 |
|
| 544 |
| 7.58 |
|
|
Nonmarketable securities - FHLB stock |
|
| 35,334 |
|
| 355 |
| 2.02 |
|
|
| 40,260 |
|
| 230 |
| 1.15 |
|
|
Loans2 |
|
| 2,519,705 |
|
| 68,119 |
| 5.43 |
|
|
| 2,587,000 |
|
| 69,341 |
| 5.39 |
|
|
FDIC indemnification asset, net |
|
| 59,295 |
|
| 158 |
| 0.54 |
|
|
| 63,461 |
|
| 1,011 |
| 3.21 |
|
|
|
|
|
| ||||||||||||||||
Total earning assets |
|
| 3,055,106 |
|
| 75,702 |
| 5.00 | % |
|
| 3,105,459 |
|
| 79,656 |
| 5.18 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonearning assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
| 69,886 |
|
|
|
|
|
|
|
| 56,531 |
|
|
|
|
|
|
|
Allowance for loan losses |
|
| (51,415 | ) |
|
|
|
|
|
|
| (84,536 | ) |
|
|
|
|
|
|
Assets from discontinued operations |
|
| --- |
|
|
|
|
|
|
|
| 29,523 |
|
|
|
|
|
|
|
Other assets |
|
| 171,968 |
|
|
|
|
|
|
|
| 195,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total assets |
| $ | 3,245,545 |
|
|
|
|
|
|
| $ | 3,302,527 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposit accounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing checking |
| $ | 451,254 |
| $ | 284 |
| 0.13 | % |
| $ | 427,693 |
| $ | 782 |
| 0.37 | % |
|
Savings |
|
| 229,562 |
|
| 180 |
| 0.16 |
|
|
| 179,801 |
|
| 235 |
| 0.26 |
|
|
Money market |
|
| 381,804 |
|
| 781 |
| 0.41 |
|
|
| 318,870 |
|
| 729 |
| 0.46 |
|
|
Time deposits |
|
| 1,036,744 |
|
| 6,687 |
| 1.30 |
|
|
| 1,217,800 |
|
| 11,062 |
| 1.83 |
|
|
|
|
|
| ||||||||||||||||
Total deposits |
|
| 2,099,364 |
|
| 7,932 |
| 0.76 | % |
|
| 2,144,164 |
|
| 12,808 |
| 1.20 | % |
|
Advances from FHLB |
|
| 473,157 |
|
| 6,212 |
| 2.64 |
|
|
| 528,658 |
|
| 6,551 |
| 2.50 |
|
|
Long-term debt |
|
| 45,928 |
|
| 1,593 |
| 6.94 |
|
|
| 45,862 |
|
| 1,594 |
| 6.95 |
|
|
|
|
|
| ||||||||||||||||
Total interest-bearing liabilities |
|
| 2,618,449 |
|
| 15,737 |
| 1.21 | % |
|
| 2,718,684 |
|
| 20,953 |
| 1.55 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits |
|
| 313,381 |
|
|
|
|
|
|
|
| 236,333 |
|
|
|
|
|
|
|
Liabilities from discontinued operations |
|
| --- |
|
|
|
|
|
|
|
| 5,488 |
|
|
|
|
|
|
|
Other liabilities |
|
| 32,184 |
|
|
|
|
|
|
|
| 33,722 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total liabilities |
|
| 2,964,014 |
|
|
|
|
|
|
|
| 2,994,227 |
|
|
|
|
|
|
|
Shareholders’ equity |
|
| 281,531 |
|
|
|
|
|
|
|
| 308,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total liabilities and shareholder’s equity |
| $ | 3,245,545 |
|
|
|
|
|
|
| $ | 3,302,527 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net interest income/interest spread |
|
|
|
| $ | 59,965 |
| 3.79 | % |
|
|
|
| $ | 58,703 |
| 3.63 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Contribution of noninterest bearing sources of funds3 |
|
|
|
|
|
|
| 0.17 |
|
|
|
|
|
|
|
| 0.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net interest margin (FTE)4 |
|
|
|
|
|
|
| 3.96 | % |
|
|
|
|
|
|
| 3.83 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 | Interest income used in the average rate calculation includes the tax equivalent adjustment of $408 thousand, and $288 thousand for the six months ended June 30, 2012, and 2011, respectively, calculated based on a federal tax rate of 35%. |
2 | Average balances of loans include loans held for sale and nonaccrual loans. |
3 | Equates to total cost of funds of 1.08% and 1.43% for the six months ended June 30, 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 over the three month period of 2011 was primarily the result of a 14 basis point improvement due to the low-cost core deposits acquired in the Liberty transaction, the balance sheet repositioning, and better performance on the Cape Fear nonperforming loans, as well as a 10 basis point improvement due to the accretion and amortization of purchase accounting adjustments resulting from the Plantation acquisition. The increase in net interest margin over the six month period of 2011 was primarily the result of average rates paid on interest-bearing liabilities declining 34 basis points while interest-earning asset yields declined only 18 basis points. The impact of the acquisitions contributed to the improved margin, as well as organic growth in low-cost core deposits during the twelve month period.
Net interest income can be analyzed in terms of the impact of changes in volume as well as changes to interest rates. The following table presents changes in interest income, interest expense and net interest income due to volume and rate variances for major categories of earning assets and interest-bearing liabilities.
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| ||||||||||||||
|
|
| ||||||||||||||||||
(in thousands) |
| Volume |
| Rate |
| Net |
|
| Volume |
| Rate |
| Net |
| ||||||
Interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits with banks |
| $ | 3 |
| $ | 15 |
| $ | 18 |
|
| $ | 4 |
| $ | 13 |
| $ | 17 |
|
Securities available for sale |
|
| (151 | ) |
| (1,106 | ) |
| (1,257 | ) |
|
| 493 |
|
| (2,720 | ) |
| (2,227 | ) |
Securities held to maturity |
|
| (30 | ) |
| 174 |
|
| 144 |
|
|
| (48 | ) |
| 254 |
|
| 206 |
|
Nonmarketable securities |
|
| (8 | ) |
| 132 |
|
| 124 |
|
|
| (31 | ) |
| 156 |
|
| 125 |
|
Loans |
|
| 243 |
|
| 903 |
|
| 1,146 |
|
|
| (1,764 | ) |
| 542 |
|
| (1,222 | ) |
FDIC indemnification asset, net |
|
| 56 |
|
| (360 | ) |
| (304 | ) |
|
| (62 | ) |
| (791 | ) |
| (853 | ) |
|
|
| ||||||||||||||||||
Total interest income |
| $ | 113 |
| $ | (242 | ) | $ | (129 | ) |
| $ | (1,408 | ) | $ | (2,546 | ) | $ | (3,954 | ) |
|
|
| ||||||||||||||||||
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing checking |
| $ | 31 |
| $ | (246 | ) | $ | (215 | ) |
| $ | 41 |
| $ | (539 | ) | $ | (498 | ) |
Savings and money market |
|
| 153 |
|
| (75 | ) |
| 78 |
|
|
| 187 |
|
| (190 | ) |
| (3 | ) |
Time deposits |
|
| (306 | ) |
| (1,505 | ) |
| (1,811 | ) |
|
| (1,476 | ) |
| (2,899 | ) |
| (4,375 | ) |
|
|
| ||||||||||||||||||
Total interest-bearing deposits |
|
| (122 | ) |
| (1,826 | ) |
| (1,948 | ) |
|
| (1,248 | ) |
| (3,628 | ) |
| (4,876 | ) |
Advances from FHLB and long-term debt |
|
| (1,225 | ) |
| 747 |
|
| (478 | ) |
|
| (729 | ) |
| 389 |
|
| (340 | ) |
|
|
| ||||||||||||||||||
Total interest expense |
|
| (1,347 | ) |
| (1,079 | ) |
| (2,426 | ) |
|
| (1,977 | ) |
| (3,239 | ) |
| (5,216 | ) |
|
|
| ||||||||||||||||||
Net interest income |
| $ | 1,460 |
| $ | 837 |
| $ | 2,297 |
|
| $ | 569 |
| $ | 693 |
| $ | 1,262 |
|
|
|
| ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note: The change in interest not solely due to changes in volume or rate has been allocated in proportion to the absolute dollar amounts of the change in each. | ||||||||||||||||||||
The increases in net interest income for the three and six month periods reflect volume and rate variances that were positive in the aggregate. The positive volume and rate variances were primarily the result of the Plantation and Liberty acquisitions. The effects of the acquisitions were partially offset by negative volume and rate variances on investment securities available for sale and advances from FHLB and long-term debt due to the balance sheet repositioning. Both periods also reflect a negative volume variance and a positive rate variance due to the continued decline in time deposits from an ongoing strategy to reduce maturing high rate retail and wholesale time deposits and a shift in funding to core deposits. In addition, the six month period reflects a negative volume variance due to a decrease in the loan portfolio as a result of the bulk loan sale as well as declines due to generally lower loan demand from creditworthy borrowers and loan payments and paydowns.
Provision for Loan Losses
After determining what First Financial believes is an adequate allowance for loan losses based on the estimated risk inherent in the loan portfolio, the provision for loan losses is calculated based on the net effect of the change in the allowance for loan losses and net charge-offs. The provision for loan losses was $4.7 million for the quarter ended June 30, 2012, compared with $77.8 million for the same quarter last year. For the six months ended June 30, 2012, the provision for loan losses totaled $11.4 million, compared with $90.5 million for the same period of the prior year. The decreases were primarily the result of $65.7 million in additional provision associated with reclassifying $155.3 million of portfolio loans to loans held for sale in June 2011, as well as continued stabilization of historical loss trends and credit metrics through June 30, 2012. See the “Asset Quality” and “Allowance for Loan Losses” sections below for additional discussion regarding the calculation of the allowance for loan losses and information related to loan charge-offs.
Noninterest Income
The following table summarizes the components of noninterest income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||
Noninterest Income | ||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
|
| Three Months Ended |
|
| Six Months Ended |
|
| Three Month Change |
|
| Six Month Change |
| ||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||
(in thousands) |
| 2012 |
|
| 2011 |
|
| 2012 |
|
| 2011 |
|
| $ |
|
| % |
|
| $ |
|
| % |
| ||||||||
Service charges and fees on deposit accounts |
| $ | 7,558 |
|
| $ | 6,982 |
|
| $ | 14,860 |
|
| $ | 13,363 |
|
| $ | 576 |
|
|
| 8.2 | % |
| $ | 1,497 |
|
|
| 11.2 | % |
Mortgage and other loan income |
|
| 4,372 |
|
|
| 2,051 |
|
|
| 7,807 |
|
|
| 3,175 |
|
|
| 2,321 |
|
|
| 113.2 |
|
|
| 4,632 |
|
|
| 145.9 |
|
Trust and plan administration |
|
| 1,078 |
|
|
| 1,116 |
|
|
| 2,159 |
|
|
| 2,228 |
|
|
| (38 | ) |
|
| (3.4 | ) |
|
| (69 | ) |
|
| (3.1 | ) |
Brokerage fees |
|
| 875 |
|
|
| 657 |
|
|
| 1,539 |
|
|
| 1,323 |
|
|
| 218 |
|
|
| 33.2 |
|
|
| 216 |
|
|
| 16.3 |
|
Other |
|
| 699 |
|
|
| 670 |
|
|
| 1,468 |
|
|
| 1,345 |
|
|
| 29 |
|
|
| 4.3 |
|
|
| 123 |
|
|
| 9.1 |
|
Other-than-temporary impairment on investment securities |
|
| (145 | ) |
|
| (54 | ) |
|
| (214 | ) |
|
| (176 | ) |
|
| (91 | ) |
|
| 168.5 |
|
|
| (38 | ) |
|
| 21.6 |
|
Gain on acquisition |
|
| 14,550 |
|
|
| --- |
|
|
| 14,550 |
|
|
| --- |
|
|
| 14,550 |
|
|
| NM |
|
|
| 14,550 |
|
|
| NM |
|
Gain on sale of investment securities |
|
| 3,543 |
|
|
| --- |
|
|
| 3,543 |
|
|
| 1,419 |
|
|
| 3,543 |
|
|
| NM |
|
|
| 2,124 |
|
|
| 149.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
Total noninterest income |
| $ | 32,530 |
|
| $ | 11,422 |
|
| $ | 45,712 |
|
| $ | 22,677 |
|
| $ | 21,108 |
|
|
| 184.8 | % |
| $ | 23,035 |
|
|
| 101.6 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM - Not meaningful. |
42
The increases in noninterest income over both prior periods were primarily the result of the gain on the Plantation acquisition and the gain on sale of investment securities related to the balance sheet repositioning strategy. The increases were also the result of additional mortgage and other loan income due to higher volume of residential mortgage loans sold into the secondary market as a result of expanding the correspondent lending channel during 2012, and additional service charges on deposit accounts due to more transaction accounts as well as a higher volume of transaction-based fees due to new complementary products introduced in late 2011.
Noninterest Expense
The following table summarizes the components of noninterest expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest Expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
| Six Months Ended |
|
| Quarter Change |
|
| Six Month Change |
| ||||||||||||||||||||
|
|
|
|
| ||||||||||||||||||||||||||||
(in thousands) |
| 2012 |
|
| 2011 |
|
| 2012 |
|
| 2011 |
|
| $ |
|
| % |
|
| $ |
|
| % |
| ||||||||
Salaries and employee benefits |
| $ | 15,212 |
|
| $ | 15,373 |
|
| $ | 30,354 |
|
| $ | 32,769 |
|
| $ | (161 | ) |
|
| (1.0 | )% |
| $ | (2,415 | ) |
|
| (7.4 | )% |
Occupancy costs |
|
| 2,933 |
|
|
| 2,117 |
|
|
| 5,200 |
|
|
| 4,325 |
|
|
| 816 |
|
|
| 38.5 |
|
|
| 875 |
|
|
| 20.2 |
|
Furniture and equipment |
|
| 1,893 |
|
|
| 1,769 |
|
|
| 3,702 |
|
|
| 3,594 |
|
|
| 124 |
|
|
| 7.0 |
|
|
| 108 |
|
|
| 3.0 |
|
Other real estate expenses, net |
|
| 134 |
|
|
| 800 |
|
|
| 664 |
|
|
| 667 |
|
|
| (666 | ) |
|
| (83.3 | ) |
|
| (3 | ) |
|
| (0.4 | ) |
FDIC insurance and regulatory fees |
|
| 761 |
|
|
| 850 |
|
|
| 1,747 |
|
|
| 2,334 |
|
|
| (89 | ) |
|
| (10.5 | ) |
|
| (587 | ) |
|
| (25.1 | ) |
Professional services |
|
| 1,816 |
|
|
| 1,094 |
|
|
| 3,247 |
|
|
| 2,420 |
|
|
| 722 |
|
|
| 66.0 |
|
|
| 827 |
|
|
| 34.2 |
|
Advertising and marketing |
|
| 972 |
|
|
| 810 |
|
|
| 1,628 |
|
|
| 1,803 |
|
|
| 162 |
|
|
| 20.0 |
|
|
| (175 | ) |
|
| (9.7 | ) |
Other loan expense |
|
| 1,283 |
|
|
| 1,099 |
|
|
| 2,634 |
|
|
| 2,024 |
|
|
| 184 |
|
|
| 16.7 |
|
|
| 610 |
|
|
| 30.1 |
|
Intangible amortization |
|
| 368 |
|
|
| 82 |
|
|
| 458 |
|
|
| 164 |
|
|
| 286 |
|
|
| NM |
|
|
| 294 |
|
|
| 179.3 |
|
Other expense |
|
| 5,353 |
|
|
| 3,976 |
|
|
| 9,800 |
|
|
| 8,015 |
|
|
| 1,377 |
|
|
| 34.6 |
|
|
| 1,785 |
|
|
| 22.3 |
|
FHLB prepayment termination charge |
|
| 8,525 |
|
|
| --- |
|
|
| 8,525 |
|
|
| --- |
|
|
| 8,525 |
|
|
| NM |
|
|
| 8,525 |
|
|
| NM |
|
Goodwill impairment |
|
| --- |
|
|
| 630 |
|
|
| --- |
|
|
| 630 |
|
|
| (630 | ) |
|
| (100.0 | ) |
|
| (630 | ) |
|
| (100.0 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
Total noninterest expense |
| $ | 39,250 |
|
| $ | 28,600 |
|
| $ | 67,959 |
|
| $ | 58,745 |
|
| $ | 10,650 |
|
|
| 37.2 | % |
| $ | 9,214 |
|
|
| 15.7 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM - Not meaningful. |
The increases in noninterest expense over both prior periods were primarily the result of the termination charge on the prepayment of FHLB advances as part of the balance sheet repositioning. In addition, the increase over the three month period of 2011 was the result of higher occupancy costs, professional services, intangible amortization, and other expense, partially offset by lower OREO expenses, net, and goodwill impairment. Occupancy costs increased primarily the result of expenses associated with closing four unprofitable in-store branches during the three months ended June 30, 2012. Professional services increased primarily the result of conversion, accounting, and consulting expenses related to the Plantation and Liberty acquisitions and other strategic initiatives. Intangible amortization increased primarily the result of establishing intangibles related to the Plantation and Liberty acquisitions. The key factors contributing to the increase in other expense were additional deposit rewards management expenses related to higher customer debit card usage, losses related to FNMA put-back charges, data processing costs related to Liberty and Plantation system conversions, as well as higher travel and training related to the Plantation and Liberty system conversions. During the second quarter of 2012, First Federal incurred $284 thousand in losses related to FNMA and FHLMC put-back charges and penalties on defaulted and foreclosed mortgage loans previously sold in the secondary markets. FNMA or other investors may seek to put-back additional loans to First Federal in future periods. OREO expenses, net decreased primarily the result of fewer write-downs of OREO properties, recognition of more gains on the sales of properties, and less OREO related expense. First Financial wrote-off the goodwill associated with its insurance premium financing operations during the second quarter of 2011.
In addition to the FHLB prepayment termination charge, the increase in noninterest expense over the six month period of 2011 was principally the result of higher occupancy costs. professional services, other loan expense, and other expense, partially offset by lower salaries and employee benefits, FDIC insurance and regulatory fees, and goodwill impairment. Other loan expenses increased primarily the result of higher foreclosure related expenses, and loan origination and servicing costs. Salaries and employee benefits decreased primarily the result of compensation agreements entered into during the prior year, partially offset by severance and retention recorded during the June 30, 2012 quarter related to the Plantation acquisition. FDIC insurance and regulatory fees decreased primarily the result of the new assessment methodology implemented by the FDIC during 2011. The key factors contributing to the variances in the other categories were the same as those discussed above.
Income Taxes
The income tax expense for the three months ended June 30, 2012 was $7.7 million, compared with an income tax benefit of $(25.3) million for the same period of the prior year. For the six months ended June 30, 2012, the income tax expense was $12.0 million, compared with an income tax benefit of $(26.2) million for the same period of 2011. The increases over both prior years were primarily the result of the change in pre-tax income, a $2.1 million write-down of the state deferred tax asset during the first quarter of 2012 in connection with First Federal’s conversion from a thrift to a South Carolina state-chartered commercial bank due to a difference in South Carolina tax laws for banks versus thrifts, and the establishment of a $5.6 million deferred tax liability related to the gain on the Plantation acquisition during the second quarter of 2012.
The effective tax rate for the three months ended June 30, 2012, was 38.00%, compared with 38.57% for the same period of the prior year. The effective tax rate for the six months ended June 30, 2012 was 45.49%, compared with 38.62% for the same period of the prior year. The increase over the six month period of 2011 was primarily the result of the write-down of the state deferred tax
43
asset as discussed above. See Note 9 to the Consolidated Financial Statements for additional information regarding income taxes.
Financial Condition
Total assets at June 30, 2012 were $3.3 billion, an increase of $157.2 million or 5.0% over December 31, 2011 and an increase of $82.6 million or 2.6% over June 30, 2011. The increases were primarily the result of the Plantation and Liberty acquisitions, partially offset by a decrease in investment securities due to the balance sheet repositioning.
Cash and Cash Equivalents
Cash and cash equivalents totaled $70.1 million at June 30, 2012, a decrease of $6.6 million or 8.6% from December 31, 2011 and an increase of $5.1 million or 7.8% over June 30, 2011. The variances were primarily the result of normal fluctuations in transaction accounts and a higher volume of cash items in process on the last business day of the December 31, 2011 quarter.
Investment Securities
Investment securities at June 30, 2012 totaled $293.4 million, a decrease of $164.3 million or 35.9% from December 31, 2011 and a decrease of $185.2 million or 38.7% from June 30, 2011. The decreases were primarily the result of selling $203.6 million of mortgage-backed securities yielding 1.79% during the three months ended June 30, 2012 as part of the balance sheet repositioning. See Note 3 to the Consolidated Financial Statements and the “Balance Sheet Repositioning” section above for additional information regarding investment securities.
Loans
The following table summarizes the loan portfolio by major categories.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
LOANS |
| June 30, |
|
| March 31, |
|
| December 31, |
|
| September 30, |
|
| June 30, |
| |||||
Residential loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential 1-4 family |
| $ | 1,023,800 |
|
| $ | 972,881 |
|
| $ | 975,405 |
|
| $ | 909,907 |
|
| $ | 895,650 |
|
Residential construction |
|
| 19,601 |
|
|
| 15,501 |
|
|
| 15,117 |
|
|
| 16,431 |
|
|
| 19,603 |
|
Residential land |
|
| 56,073 |
|
|
| 40,794 |
|
|
| 41,612 |
|
|
| 40,725 |
|
|
| 42,763 |
|
|
|
|
|
|
| |||||||||||||||
Total residential loans |
|
| 1,099,474 |
|
|
| 1,029,176 |
|
|
| 1,032,134 |
|
|
| 967,063 |
|
|
| 958,016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business |
|
| 107,804 |
|
|
| 88,054 |
|
|
| 83,814 |
|
|
| 80,871 |
|
|
| 80,566 |
|
Commercial real estate |
|
| 555,588 |
|
|
| 447,339 |
|
|
| 456,541 |
|
|
| 471,296 |
|
|
| 482,315 |
|
Commercial construction |
|
| 17,201 |
|
|
| 16,289 |
|
|
| 16,477 |
|
|
| 15,051 |
|
|
| 16,037 |
|
Commercial land |
|
| 78,011 |
|
|
| 54,786 |
|
|
| 61,238 |
|
|
| 67,432 |
|
|
| 70,562 |
|
|
|
|
|
|
| |||||||||||||||
Total commercial loans |
|
| 758,604 |
|
|
| 606,468 |
|
|
| 618,070 |
|
|
| 634,650 |
|
|
| 649,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity |
|
| 388,534 |
|
|
| 347,825 |
|
|
| 357,270 |
|
|
| 369,213 |
|
|
| 379,122 |
|
Manufactured housing |
|
| 276,607 |
|
|
| 275,845 |
|
|
| 275,275 |
|
|
| 276,047 |
|
|
| 274,192 |
|
Marine |
|
| 59,643 |
|
|
| 50,458 |
|
|
| 52,590 |
|
|
| 55,243 |
|
|
| 57,406 |
|
Other consumer |
|
| 49,621 |
|
|
| 45,795 |
|
|
| 50,118 |
|
|
| 53,064 |
|
|
| 53,853 |
|
|
|
|
|
|
| |||||||||||||||
Total consumer loans |
|
| 774,405 |
|
|
| 719,923 |
|
|
| 735,253 |
|
|
| 753,567 |
|
|
| 764,573 |
|
|
|
|
|
|
| |||||||||||||||
Total loans |
|
| 2,632,483 |
|
|
| 2,355,567 |
|
|
| 2,385,457 |
|
|
| 2,355,280 |
|
|
| 2,372,069 |
|
Less: Allowance for loan losses |
|
| 48,799 |
|
|
| 50,776 |
|
|
| 53,524 |
|
|
| 54,333 |
|
|
| 55,491 |
|
|
|
|
|
|
| |||||||||||||||
Net loans |
| $ | 2,583,684 |
|
| $ | 2,304,791 |
|
| $ | 2,331,933 |
|
| $ | 2,300,947 |
|
| $ | 2,316,578 |
|
|
|
|
|
|
| |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans at June 30, 2012 increased $247.0 million or 10.4% over December 31, 2011 and increased $260.4 million or 11.0% over June 30, 2011. The increases were primarily the result of the Plantation and Liberty acquisitions.
At June 30, 2012, loans held for sale totaled $72.4 million, an increase of $24.1 million or 49.9% over December 31, 2011 and a decrease of $11.9 million or 14.1% from June 30, 2011. The increase over December 31, 2011 was primarily the result of higher levels of residential mortgage loans to be sold in the secondary market due to an expansion of First Federal’s correspondent lending channel. Secondary market sales generally settle in 45 to 60 days. Loans held for sale at June 30, 2011 were comprised of $24.0 million in residential mortgage loans awaiting sale in the secondary market and $60.3 million of loans in the bulk loan sale pool. The decrease from June 30, 2011 was primarily the result of completing the bulk loan sale in October 2011, partially offset by the correspondent lending expansion.
44
Included in the portfolio loans table above are loans covered under loss share agreements with the FDIC (“covered loans”), as discussed in Notes 4 and 5 to the Consolidated Financial Statements. The following table provides a summary of the covered loans as well as several credit metrics by loan type.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
|
| As of June 30, 2012 |
|
| As of December 31, 2011 |
| ||||||||||||||
|
|
| ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Loans Covered Under |
| Loans |
| Covered |
| Covered |
|
| Loans |
| Covered |
| Covered |
| ||||||
| ||||||||||||||||||||
Residential loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential 1-4 family |
| $ | 2,284 |
| $ | --- |
| $ | 725 |
|
| $ | 2,796 |
| $ | --- |
| $ | 734 |
|
Residential land |
|
| 19,664 |
|
| 68 |
|
| 8 |
|
|
| 7,464 |
|
| 53 |
|
| 253 |
|
|
|
| ||||||||||||||||||
Total residential loans |
|
| 21,948 |
|
| 68 |
|
| 733 |
|
|
| 10,260 |
|
| 53 |
|
| 987 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business |
|
| 24,625 |
|
| 300 |
|
| 342 |
|
|
| 11,127 |
|
| 148 |
|
| 2,851 |
|
Commercial real estate |
|
| 155,068 |
|
| 1,799 |
|
| 7,410 |
|
|
| 77,834 |
|
| 1,149 |
|
| 10,661 |
|
Commercial construction |
|
| 2,507 |
|
| --- |
|
| --- |
|
|
| 1,036 |
|
| --- |
|
| 312 |
|
Commercial land |
|
| 34,775 |
|
| 302 |
|
| 925 |
|
|
| 13,951 |
|
| 274 |
|
| 2,102 |
|
|
|
| ||||||||||||||||||
Total commercial loans |
|
| 216,975 |
|
| 2,401 |
|
| 8,677 |
|
|
| 103,948 |
|
| 1,571 |
|
| 15,926 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity |
|
| 24,556 |
|
| 477 |
|
| 858 |
|
|
| 25,493 |
|
| 637 |
|
| 506 |
|
Other consumer |
|
| 1,507 |
|
| --- |
|
| 91 |
|
|
| 1,685 |
|
| 42 |
|
| 104 |
|
|
|
| ||||||||||||||||||
Total consumer loans |
|
| 26,063 |
|
| 477 |
|
| 949 |
|
|
| 27,178 |
|
| 679 |
|
| 610 |
|
|
|
| ||||||||||||||||||
Total loans |
| $ | 264,986 |
| $ | 2,946 |
| $ | 10,359 |
|
| $ | 141,386 |
| $ | 2,303 |
| $ | 17,523 |
|
|
|
| ||||||||||||||||||
Other repossessed assets acquired |
| $ | 19,986 |
|
|
|
|
|
|
|
| $ | 7,550 |
|
|
|
|
|
|
|
Criticized loans1 |
|
| 5,136 |
|
|
|
|
|
|
|
|
| 6,902 |
|
|
|
|
|
|
|
Classified loans1 |
|
| 21,082 |
|
|
|
|
|
|
|
|
| 33,509 |
|
|
|
|
|
|
|
| ||||||||||||||||||||
1 See Note 4 to the Consolidated Financial Statements for the regulatory definition of criticized and classified. |
|
The table above includes $157.4 million of covered loans related to the Plantation acquisition as of June 30, 2012. Covered delinquent loans and covered nonperforming loans related to Plantation totaled $112 thousand and $24 thousand, respectively, as of June 30, 2012.
Asset Quality
National credit conditions have contributed to the historical high credit costs realized by the financial industry over the last several years. The markets in which First Financial operates are not immune to these conditions, which have been a factor in the higher levels of nonperforming assets and charge-offs First Financial has reported since fiscal 2009.
Loan Monitoring
Management monitors the loan portfolio on a regular basis to determine where risk mitigation efforts can be utilized to assist in preventing or mitigating future losses. An element of the credit risk management process is monthly loan reviews to determine risk levels and exposure to loss. The monthly problem loan review process evaluates all commercial loans greater than $200,000 that are more than 30 days past due and all criticized and classified loans over $500,000. The depth of the review varies by asset type, depending on the nature of those assets and their risk characteristics. While certain assets may represent a substantial investment and warrant individual reviews, other assets may have less risk because the asset size is small, the risk is spread over a large number of obligors or the obligations are well collateralized and further analysis of individual assets would expand the review process without measurable improvement to risk assessment. Asset types with these characteristics may be reviewed as a total homogenous portfolio (as is the case with residential and consumer loans) on the basis of risk indicators such as delinquency or credit rating. In addition, a formal review process may be conducted on individual assets within the homogenous pool that represent potential risk. For the larger credits, action plans to address the credit weaknesses are presented and approved plans are monitored. Loan reviews emphasize the borrower’s and guarantor’s global cash flow analysis as a key determinant in the credit quality risk rating and to identify deterioration in the financial condition of the borrowers that may limit their ability to continue to service their debt or to carry their obligations to contractual term. In addition, reviews may include evaluations of collateral values as determined necessary based on credit policies and credit risk rating. First Federal’s policy is to update real estate collateral appraisals on problem loans at least annually, or more frequently if deterioration in market value is observed.
Delinquent Loans
45
The following table presents loans that were past due 30-89 days which were not otherwise on nonaccrual status. The table includes covered loans which became delinquent since acquisition and which were not acquired with deteriorated credit quality and accounted for in accordance with ASC 310-30. Details of delinquent covered loans are presented in the “Loans Covered Under Loss Share Agreements” table in the “Loans” section above.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||
DELINQUENT LOANS |
| June 30, 2012 |
|
| March 31, 2012 |
|
| December 31, 2011 |
|
| September 30, 2011 |
|
| June 30, 2011 |
| |||||||||||||||
(30-89 days past due) |
| $ |
| % of |
|
| $ |
| % of |
|
| $ |
| % of |
|
| $ |
| % of |
|
| $ |
| % of |
| |||||
Residential loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential 1-4 family |
| $ | 1,244 |
| 0.12 | % |
| $ | 1,889 |
| 0.19 | % |
| $ | 2,986 |
| 0.31 | % |
| $ | 1,722 |
| 0.19 | % |
| $ | 1,404 |
| 0.16 | % |
Residential land |
|
| 475 |
| 0.85 |
|
|
| 123 |
| 0.30 |
|
|
| 561 |
| 1.35 |
|
|
| 65 |
| 0.16 |
|
|
| 325 |
| 0.76 |
|
|
|
|
|
|
| |||||||||||||||||||||||||
Total residential loans |
|
| 1,719 |
| 0.16 |
|
|
| 2,012 |
| 0.20 |
|
|
| 3,547 |
| 0.34 |
|
|
| 1,787 |
| 0.18 |
|
|
| 1,729 |
| 0.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business |
|
| 903 |
| 0.84 |
|
|
| 1,677 |
| 1.90 |
|
|
| 908 |
| 1.08 |
|
|
| 868 |
| 1.07 |
|
|
| 2,387 |
| 2.96 |
|
Commercial real estate |
|
| 3,014 |
| 0.54 |
|
|
| 3,065 |
| 0.69 |
|
|
| 3,514 |
| 0.77 |
|
|
| 3,394 |
| 0.72 |
|
|
| 2,703 |
| 0.56 |
|
Commercial construction |
|
| --- |
| --- |
|
|
| --- |
| --- |
|
|
| --- |
| --- |
|
|
| 595 |
| 3.95 |
|
|
| --- |
| --- |
|
Commercial land |
|
| 675 |
| 0.87 |
|
|
| 2,271 |
| 4.15 |
|
|
| 1,185 |
| 1.94 |
|
|
| 537 |
| 0.80 |
|
|
| 821 |
| 1.16 |
|
|
|
|
|
|
| |||||||||||||||||||||||||
Total commercial loans |
|
| 4,592 |
| 0.61 |
|
|
| 7,013 |
| 1.16 |
|
|
| 5,607 |
| 0.91 |
|
|
| 5,394 |
| 0.85 |
|
|
| 5,911 |
| 0.91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity |
|
| 2,017 |
| 0.52 |
|
|
| 3,315 |
| 0.95 |
|
|
| 4,525 |
| 1.27 |
|
|
| 3,408 |
| 0.92 |
|
|
| 3,266 |
| 0.86 |
|
Manufactured housing |
|
| 1,835 |
| 0.66 |
|
|
| 1,502 |
| 0.54 |
|
|
| 3,267 |
| 1.19 |
|
|
| 2,600 |
| 0.94 |
|
|
| 2,298 |
| 0.84 |
|
Marine |
|
| 300 |
| 0.50 |
|
|
| 358 |
| 0.71 |
|
|
| 597 |
| 1.14 |
|
|
| 980 |
| 1.77 |
|
|
| 264 |
| 0.46 |
|
Other consumer |
|
| 626 |
| 1.26 |
|
|
| 445 |
| 0.97 |
|
|
| 831 |
| 1.66 |
|
|
| 629 |
| 1.19 |
|
|
| 589 |
| 1.09 |
|
|
|
|
|
|
| |||||||||||||||||||||||||
Total consumer loans |
|
| 4,778 |
| 0.62 |
|
|
| 5,620 |
| 0.78 |
|
|
| 9,220 |
| 1.25 |
|
|
| 7,617 |
| 1.01 |
|
|
| 6,417 |
| 0.84 |
|
|
|
|
|
|
| |||||||||||||||||||||||||
Total delinquent loans |
| $ | 11,089 |
| 0.42 | % |
| $ | 14,645 |
| 0.62 | % |
| $ | 18,374 |
| 0.77 | % |
| $ | 14,798 |
| 0.63 | % |
| $ | 14,057 |
| 0.59 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total delinquent loans at June 30, 2012 decreased $7.3 million or 39.6% from December 31, 2011 and decreased $3.0 million or 21.2% from June 30, 2011. The decreases were primarily the result of continued focused collection efforts.
Nonperforming Assets
Nonperforming assets include nonaccrual loans, loans delinquent 90 days or more and still accruing, restructured loans still accruing, and other repossessed assets acquired through foreclosure. With the exception of the credit card portfolio, loans are placed on nonaccrual status when they become 90 days delinquent. In addition, loans that were not delinquent in excess of 90 days but exhibited doubt as to their ability to repay all contractual principal and interest have been classified as impaired under ASC 310-10-35 and placed on nonaccrual status, as discussed further below.
The following table presents the composition of nonperforming assets. The table includes covered loans which have migrated to nonaccrual status since acquisition and which were not acquired with deteriorated credit quality and accounted for in accordance with ASC 310-30. Loans classified as nonperforming at acquisition are not included below since these loans were adjusted to fair value, which included estimates of credit loss at acquisition date. Details of nonperforming covered loans are presented in the “Loans Covered Under Loss Share Agreements” table in the “Loans” section above.
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||
|
| June 30, 2012 |
| March 31, 2012 |
| December 31, 2011 |
| September 30, 2011 |
| June 30, 2011 |
| |||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||
NONPERFORMING ASSETS |
| $ |
| % of |
|
| $ |
| % of |
|
| $ |
| % of |
|
| $ |
| % of |
|
| $ |
| % of |
| |||||
Residential loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential 1-4 family |
| $ | 10,460 |
| 1.02 | % |
| $ | 6,649 |
| 0.68 | % |
| $ | 4,977 |
| 0.51 | % |
| $ | 1,595 |
| 0.18 | % |
| $ | 1,242 |
| 0.14 | % |
Residential land |
|
| 1,423 |
| 2.54 |
|
|
| 1,398 |
| 3.43 |
|
|
| 1,448 |
| 3.48 |
|
|
| 1,140 |
| 2.80 |
|
|
| 451 |
| 1.05 |
|
|
|
|
|
|
| |||||||||||||||||||||||||
Total residential loans |
|
| 11,883 |
| 1.08 |
|
|
| 8,047 |
| 0.78 |
|
|
| 6,425 |
| 0.62 |
|
|
| 2,735 |
| 0.28 |
|
|
| 1,693 |
| 0.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business |
|
| 1,198 |
| 1.11 |
|
|
| 1,931 |
| 2.19 |
|
|
| 3,665 |
| 4.37 |
|
|
| 4,322 |
| 5.34 |
|
|
| 3,664 |
| 4.55 |
|
Commercial real estate |
|
| 15,918 |
| 2.87 |
|
|
| 18,474 |
| 4.13 |
|
|
| 17,160 |
| 3.76 |
|
|
| 18,400 |
| 3.90 |
|
|
| 16,396 |
| 3.40 |
|
Commercial construction |
|
| 261 |
| 1.52 |
|
|
| 261 |
| 1.60 |
|
|
| 573 |
| 3.48 |
|
|
| 266 |
| 1.77 |
|
|
| 1,451 |
| 9.05 |
|
Commercial land |
|
| 4,577 |
| 5.87 |
|
|
| 5,240 |
| 9.56 |
|
|
| 5,232 |
| 8.54 |
|
|
| 6,310 |
| 9.36 |
|
|
| 5,411 |
| 7.67 |
|
|
|
|
|
|
| |||||||||||||||||||||||||
Total commercial loans |
|
| 21,954 |
| 2.89 |
|
|
| 25,906 |
| 4.27 |
|
|
| 26,630 |
| 4.31 |
|
|
| 29,298 |
| 4.62 |
|
|
| 26,922 |
| 4.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity |
|
| 10,636 |
| 2.74 |
|
|
| 9,779 |
| 2.81 |
|
|
| 8,192 |
| 2.29 |
|
|
| 6,871 |
| 1.86 |
|
|
| 9,165 |
| 2.42 |
|
Manufactured housing |
|
| 2,197 |
| 0.79 |
|
|
| 2,648 |
| 0.96 |
|
|
| 3,461 |
| 1.26 |
|
|
| 2,922 |
| 1.06 |
|
|
| 2,953 |
| 1.08 |
|
Marine |
|
| 29 |
| 0.05 |
|
|
| 63 |
| 0.12 |
|
|
| 246 |
| 0.47 |
|
|
| 47 |
| 0.09 |
|
|
| 94 |
| 0.16 |
|
Other consumer |
|
| 306 |
| 0.62 |
|
|
| 131 |
| 0.29 |
|
|
| 224 |
| 0.45 |
|
|
| 127 |
| 0.24 |
|
|
| 129 |
| 0.24 |
|
|
|
|
|
|
| |||||||||||||||||||||||||
Total consumer loans |
|
| 13,168 |
| 1.70 |
|
|
| 12,621 |
| 1.75 |
|
|
| 12,123 |
| 1.65 |
|
|
| 9,967 |
| 1.32 |
|
|
| 12,341 |
| 1.61 |
|
|
|
|
|
|
| |||||||||||||||||||||||||
Total nonaccrual loans |
|
| 47,005 |
| 1.79 |
|
|
| 46,574 |
| 1.98 |
|
|
| 45,178 |
| 1.89 |
|
|
| 42,000 |
| 1.78 |
|
|
| 40,956 |
| 1.73 |
|
Loans 90+ days still accruing |
|
| 75 |
|
|
|
|
| 51 |
|
|
|
|
| 121 |
|
|
|
|
| 171 |
|
|
|
|
| 76 |
|
|
|
Restructured loans, still accruing |
|
| 2,857 |
|
|
|
|
| 3,276 |
|
|
|
|
| 2,411 |
|
|
|
|
| 734 |
|
|
|
|
| 1,535 |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Total nonperforming loans |
|
| 49,937 |
| 1.90 | % |
|
| 49,901 |
| 2.12 | % |
|
| 47,710 |
| 2.00 | % |
|
| 42,905 |
| 1.82 | % |
|
| 42,567 |
| 1.79 | % |
Nonperforming loans held for sale |
|
| --- |
|
|
|
|
| --- |
|
|
|
|
| --- |
|
|
|
|
| 39,412 |
|
|
|
|
| 42,656 |
|
|
|
Other repossessed assets acquired |
|
| 28,191 |
|
|
|
|
| 21,818 |
|
|
|
|
| 20,487 |
|
|
|
|
| 26,212 |
|
|
|
|
| 27,812 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total nonperforming assets |
| $ | 78,128 |
|
|
|
| $ | 71,719 |
|
|
|
| $ | 68,197 |
|
|
|
| $ | 108,529 |
|
|
|
| $ | 113,035 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
| ||||||||||||||||||||||||||||||
Total nonperforming assets at June 30, 2012 increased $9.9 million or 14.6% over December 31, 2011 and decreased $34.9 million or 30.9% from June 30, 2011. The increase over December 31, 2011 was primarily the result of $10.2 million of OREO acquired as part of the Plantation transaction, which was partially offset by $2.5 million in OREO reductions due to legacy First Federal OREO sales and write-downs. In addition, the effects of higher nonperforming residential loans and higher nonperforming home equity loans due to prolonged foreclosure processes were partially offset by lower nonperforming commercial loans. Covered nonperforming loans decreased $7.2 million from December 31, 2011 to $10.4 million at June 30, 2012. Covered OREO totaled $20.0 million at June 30, 2012, an increase of $12.4 million over December 31, 2011.
First Federal accounts for certain loan modifications or restructurings as a troubled debt restructuring (“TDR”). In general, the modification or restructuring of a loan is considered a TDR if, for economic or legal reasons related to a borrower’s financial difficulties, a concession is granted to the borrower that First Federal would not otherwise consider. Concessions may relate to the contractual interest rate, maturity date, payment structure of the note or other actions. As part of First Federal’s action plan for individual loan relationships, First Federal may restructure loan terms to assist borrowers facing challenges in the current economic environment. See Note 4 to the Consolidated Financial Statements for additional details on TDRs.
The following table presents net charge-offs by loan category.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, 2012 |
| March 31, 2012 |
| December 31, 2011 |
| September 30, 2011 |
| June 30, 2011 |
| |||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CHARGE-OFFS |
| $ |
| % of |
|
| $ |
| % of |
|
| $ |
| % of |
|
| $ |
| % of |
|
| $ |
| % of |
| |||||
Residential loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential 1-4 family |
| $ | 1,070 |
| 0.42 | % |
| $ | 507 |
| 0.21 | % |
| $ | 391 |
| 0.16 | % |
| $ | 414 |
| 0.18 | % |
| $ | 12,177 |
| 5.28 | % |
Residential land |
|
| 78 |
| 0.59 |
|
|
| 701 |
| 6.75 |
|
|
| 532 |
| 5.31 |
|
|
| 165 |
| 1.58 |
|
|
| 4,099 |
| 34.79 |
|
|
|
|
|
|
| |||||||||||||||||||||||||
Total residential loans |
|
| 1,148 |
| 0.42 |
|
|
| 1,208 |
| 0.47 |
|
|
| 923 |
| 0.37 |
|
|
| 579 |
| 0.24 |
|
|
| 16,276 |
| 6.59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business |
|
| 334 |
| 1.34 |
|
|
| 825 |
| 3.60 |
|
|
| 640 |
| 3.22 |
|
|
| 136 |
| 0.69 |
|
|
| 6,826 |
| 30.60 |
|
Commercial real estate |
|
| 715 |
| 0.54 |
|
|
| 1,462 |
| 1.30 |
|
|
| 1,417 |
| 1.22 |
|
|
| 433 |
| 0.36 |
|
|
| 41,022 |
| 29.15 |
|
Commercial construction |
|
| (2 | ) | (0.05 | ) |
|
| (2 | ) | (0.05 | ) |
|
| (3 | ) | (0.07 | ) |
|
| 635 |
| 16.12 |
|
|
| 3,067 |
| 53.06 |
|
Commercial land |
|
| 723 |
| 4.00 |
|
|
| 1,439 |
| 9.87 |
|
|
| 804 |
| 4.94 |
|
|
| 2,052 |
| 12.15 |
|
|
| 33,995 |
| 118.23 |
|
|
|
|
|
|
| |||||||||||||||||||||||||
Total commercial loans |
|
| 1,770 |
| 0.99 |
|
|
| 3,724 |
| 2.41 |
|
|
| 2,858 |
| 1.83 |
|
|
| 3,256 |
| 2.04 |
|
|
| 84,910 |
| 42.98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity |
|
| 2,580 |
| 2.71 |
|
|
| 2,264 |
| 2.57 |
|
|
| 2,955 |
| 3.26 |
|
|
| 4,910 |
| 5.28 |
|
|
| 4,725 |
| 4.91 |
|
Manufactured housing |
|
| 666 |
| 0.97 |
|
|
| 1,467 |
| 2.13 |
|
|
| 845 |
| 1.23 |
|
|
| 978 |
| 1.42 |
|
|
| 1,049 |
| 1.54 |
|
Marine |
|
| 82 |
| 0.60 |
|
|
| 361 |
| 2.83 |
|
|
| 142 |
| 1.05 |
|
|
| 158 |
| 1.12 |
|
|
| 44 |
| 0.30 |
|
Other consumer |
|
| 428 |
| 3.48 |
|
|
| 469 |
| 3.90 |
|
|
| 531 |
| 4.09 |
|
|
| 217 |
| 1.61 |
|
|
| 446 |
| 3.28 |
|
|
|
|
|
|
| |||||||||||||||||||||||||
Total consumer loans |
|
| 3,756 |
| 1.98 |
|
|
| 4,561 |
| 2.51 |
|
|
| 4,473 |
| 2.41 |
|
|
| 6,263 |
| 3.31 |
|
|
| 6,264 |
| 3.26 |
|
|
|
|
|
|
| |||||||||||||||||||||||||
Total net charge-offs |
| $ | 6,674 |
| 1.04 | % |
| $ | 9,493 |
| 1.60 | % |
| $ | 8,254 |
| 1.39 | % |
| $ | 10,098 |
| 1.71 | % |
| $ | 107,450 |
| 16.87 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*Represents an annualized rate |
47
The decrease in net charge-offs for the quarter ended June 30, 2012 as compared with the prior quarters was the result of lower charge-offs in all loan categories as credit metric trends continue to stabilize. The quarter ended June 30, 2011 included $95.0 million in charge-offs related to reclassifying $155.3 million of portfolio loans to loans held for sale. The level of future net charge-offs is expected to fluctuate, primarily as residential and home equity problem loans are worked through their credit cycle.
The following table details classified assets by category.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||
|
| June 30, 2012 |
|
| December 31, 2011 |
| ||||||||||||||||
CLASSIFIED ASSETS |
| Covered |
| Non-covered |
|
| Total |
|
| Covered |
| Non-covered |
|
| Total |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential 1-4 family |
| $ | 725 |
| $ | 15,524 |
|
| $ | 16,249 |
|
| $ | 734 |
| $ | 7,232 |
|
| $ | 7,966 |
|
Residential land |
|
| 8 |
|
| 1,877 |
|
|
| 1,885 |
|
|
| 253 |
|
| 1,518 |
|
|
| 1,771 |
|
Total residential loans |
|
| 733 |
|
| 17,401 |
|
|
| 18,134 |
|
|
| 987 |
|
| 8,750 |
|
|
| 9,737 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business |
|
| 1,543 |
|
| 9,119 |
|
|
| 10,662 |
|
|
| 4,386 |
|
| 9,466 |
|
|
| 13,852 |
|
Commercial real estate |
|
| 14,568 |
|
| 39,396 |
|
|
| 53,964 |
|
|
| 22,569 |
|
| 39,936 |
|
|
| 62,505 |
|
Commercial construction |
|
| --- |
|
| 261 |
|
|
| 261 |
|
|
| 588 |
|
| 261 |
|
|
| 849 |
|
Commercial land |
|
| 1,605 |
|
| 9,437 |
|
|
| 11,042 |
|
|
| 3,516 |
|
| 10,697 |
|
|
| 14,213 |
|
Total commercial loans |
|
| 17,716 |
|
| 58,213 |
|
|
| 75,929 |
|
|
| 31,059 |
|
| 60,360 |
|
|
| 91,419 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity |
|
| 2,536 |
|
| 14,022 |
|
|
| 16,558 |
|
|
| 1,359 |
|
| 8,087 |
|
|
| 9,446 |
|
Manufactured housing |
|
| --- |
|
| 2,333 |
|
|
| 2,333 |
|
|
| --- |
|
| 3,461 |
|
|
| 3,461 |
|
Marine |
|
| --- |
|
| 29 |
|
|
| 29 |
|
|
| 15 |
|
| 231 |
|
|
| 246 |
|
Other consumer |
|
| 97 |
|
| 363 |
|
|
| 460 |
|
|
| 89 |
|
| 256 |
|
|
| 345 |
|
Total consumer loans |
|
| 2,633 |
|
| 16,747 |
|
|
| 19,380 |
|
|
| 1,463 |
|
| 12,035 |
|
|
| 13,498 |
|
Total classified loans |
|
| 21,082 |
|
| 92,361 |
|
|
| 113,443 |
|
|
| 33,509 |
|
| 81,145 |
|
|
| 114,654 |
|
Other repossessed assets acquired |
|
| 19,986 |
|
| 8,205 |
|
|
| 28,191 |
|
|
| 7,550 |
|
| 12,937 |
|
|
| 20,487 |
|
Total classified assets |
| $ | 41,068 |
| $ | 100,566 |
|
| $ | 141,634 |
|
| $ | 41,059 |
| $ | 94,082 |
|
| $ | 135,141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classified assets/FFCH tier 1 capital + ALLL |
|
|
|
|
| 26.83 | % |
|
| 37.78 | % |
|
|
|
|
| 25.15 | % |
|
| 36.12 | % |
|
The increases in classified residential loans and home equity loans were essentially the result of inflows related to nonperforming loans not being offset by outflows due to the current prolonged foreclosure process.
Allowance for Loan Losses
First Federal maintains an allowance for loan losses (the “allowance”) which is management’s best estimate of probable losses inherent in the outstanding loan portfolio. The allowance is decreased by actual loan charge-offs, net of recoveries, and is increased as necessary by charges to current period operating results through the provision for loan losses. The allowance is based on management’s continuing review and credit risk evaluation of the loan portfolio. The factors that are considered in determining the level of the allowance include First Federal’s assessment of current economic conditions, the composition of the loan portfolio, historical trends in the loan portfolio, historical loss experience by categories of loans, ongoing loan monitoring and reviews, impaired loan values and trends, the value of underlying collateral, concentrations of credit, regulatory examination results, and other factors indicative of potential losses remaining in the portfolio.
A committee consisting of members of lending management, credit risk management, and accounting meets at least quarterly with executive management to review the credit quality of the loan portfolios and to evaluate the allowance. First Federal utilizes an external firm to review the credit quality of the loan portfolio and reports the results of its reviews to executive management and the Audit Committee of Board of Directors on a quarterly basis. Such reviews also assist management in validating the accuracy of the credit risk rating process and establishing the level of the allowance.
The portfolio evaluation and allowance calculation process segregates the allowance into two components, allocated and unallocated, as appropriate. To arrive at the allocated component of the allowance, First Federal combines estimates of the allowance needed for loans analyzed individually and on a pooled basis. While the result of the calculation may determine that there is an unallocated portion, as of June 30, 2012, there was no unallocated portion in the allowance for loan losses. In addition to being used to categorize risk, First Federal’s internal credit risk rating system is used to determine the allocated allowance for the loan portfolio. Loans are segmented into categories for analysis based in part on the risk profile inherent in each category. Loans are further segmented into risk rating pools within each category to appropriately recognize changes in inherent risk.
A primary component of determining appropriate reserve factors in the allowance calculation is the actual loss history tracked by major loan category. First Federal currently estimates the losses inherent in the loan portfolio based on a rolling eighteen month historical loss period to evaluate the allowance. The loss history is reviewed by loan sector along with more recent trends, such as
48
one-year and the most recent quarter historical loss ratios to determine the direction and anticipation of probable future losses. First Federal’s policy is to adjust the loss history with internal and external qualitative factors at each period end, as appropriate, given the facts available at the time. The following qualitative factors that are likely to cause estimated credit losses in First Federal’s existing portfolio to differ from historical loss experience include, but are not limited to:
|
|
• | Changes in lending policies and procedures; |
• | Changes in regional and local economic and business conditions and developments that affect the collectability of the portfolio; |
• | Changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of classified loans; |
• | Changes in the quality of First Federal’s loan review system; and |
• | Changes in the value of underlying collateral for collateral-dependent loans. |
Upon completion of the qualitative adjustments, the allowance is allocated to the components of the portfolio based on the adjusted loss rates. The portion of the allowance that is allocated to impaired loans is primarily determined by estimating the loss inherent in each problem credit through a discounted cash flow methodology or based on the value of the underlying collateral.
The following table sets forth the changes in the allowance.
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| ||||||||||||||||
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||
(in thousands) |
| June 30, 2012 |
|
| June 30, 2011 |
|
| June 30, 2012 |
|
| June 30, 2011 |
| ||||
Balance, beginning of period |
| $ | 50,776 |
|
| $ | 85,138 |
|
| $ | 53,524 |
|
| $ | 88,349 |
|
Provision for loan losses |
|
| 4,697 |
|
|
| 77,803 |
|
|
| 11,442 |
|
|
| 90,478 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs |
|
| (7,655 | ) |
|
| (108,203 | ) |
|
| (17,729 | ) |
|
| (125,182 | ) |
Recoveries |
|
| 981 |
|
|
| 753 |
|
|
| 1,562 |
|
|
| 1,846 |
|
Net charge-offs |
|
| (6,674 | ) |
|
| (107,450 | ) |
|
| (16,167 | ) |
|
| (123,336 | ) |
Balance, end of period |
| $ | 48,799 |
|
| $ | 55,491 |
|
| $ | 48,799 |
|
| $ | 55,491 |
|
|
The allowance for loan losses at June 30, 2012 represented 1.85% of total loans, compared with 2.34% of total loans at June 30, 2011. The decrease in the allowance ratio was primarily the result of acquiring loans that are carried at fair value and do not currently have an associated allowance. Excluding the impact related to the $294.6 million of loans acquired from Plantation and Liberty during the June 30, 2012 quarter, the allowance for loan losses was 2.09% and the decrease was primarily the result of the continued improvement in historical loss factors and stable credit metrics since the bulk loan sale in October 2011. The allowance for loan losses at June 30, 2012 was 2.06% of loans excluding covered loans, and represented 1.23 times coverage of the non-covered nonperforming loans.
First Federal believes that it uses relevant information available to make determinations about the allowance and that it has established its existing allowance in accordance with GAAP. Management and the Board of Directors have implemented appropriate policies surrounding loan loss identification, loan monitoring and allowance for loan loss methodologies, have consistently applied processes implemented, and have determined that the controls in place are adequate to ensure that the allowance is appropriate at each balance sheet date. If circumstances differ substantially from the assumptions used in making determinations, adjustments to the allowance may be necessary and results of operations could be affected. Because events affecting borrowers and collateral charge-offs cannot be predicted with certainty, there can be no assurance that increases to the allowance will not be necessary should the quality of any loans deteriorate. Management believes that the allowance is adequate for the risk inherent in the portfolio as of each balance sheet date.
Other Intangible Assets
Other intangible assets, net totaled $8.9 million at June 30, 2012, an increase of $6.5 million over December 31, 2011 and an increase of $6.4 million over June 30, 2011. The increases were the result of establishing intangibles related to the Liberty and Plantation acquisitions of $5.2 million and $1.7 million, respectively. These increases were partially offset by the ongoing amortization of the existing and new intangibles. See Note 2 to the Consolidated Financial Statements for additional information regarding the establishment of the intangible assets associated with the acquisitions.
Other Assets
Other assets totaled $106.0 million at June 30, 2012, an increase of $7.0 million or 7.1% over December 31, 2011 and a decrease of $23.4 million or 18.1% from June 30, 2011. The increase over December 31, 2011 was primarily the result of a higher OREO and mortgage servicing rights, partially offset by a reduction in tax assets. The increase in OREO was primarily the result of $10.2 million acquired in the Plantation transaction, partially offset by a $2.5 million reduction in legacy OREO due to sales and write-downs exceeding inflows. The increase in mortgage servicing rights was primarily the result of expanding the sold loan portfolio due to recent residential mortgage origination levels. The decrease in tax assets was primarily the result of current tax adjustments and the $2.1 million write-down of the state deferred tax asset. The decrease from June 30, 2011 was primarily the result of current tax adjustments recorded and federal tax refunds received during the twelve month period and the $2.1 million write-down of the state deferred tax asset. OREO balances are essentially unchanged from June 30, 2011 as increase due to the OREO acquired in the Plantation transaction was substantially offset by reductions in the legacy OREO portfolio.
Deposits
Deposits totaled $2.7 billion at June 30, 2012, an increase of $464.0 million or 20.7% over December 31, 2011 and an increase of $387.5 million or 16.7% over June 30, 2011. Core deposits, which include checking, savings, and money market accounts, totaled $1.6 billion at June, 2012, an increase of $361.8 million or 29.4% over December 31, 2011 and an increase of $415.6
49
million or 35.3% over June 30, 2011. The increases were primarily the result of the Plantation and Liberty acquisitions as well as the introduction of new retail deposit products and sales processes during 2011. Time deposits at June 30, 2012 totaled $1.1 billion, an increase of $102.2 million or 10.1% over December 31, 2011 and a decrease of $28.2 million or 2.5% from June 30, 2011. The increase over December 31, 2011 was primarily the result of the Plantation and Liberty acquisitions, partially offset by the continued planned reductions in maturing high rate retail and wholesale time deposits. The decrease from June 30, 2011 was primarily the result of the continued planned reductions in maturing high rate time deposits, partially offset by the additional time deposits acquired in the Plantation and Liberty transactions.
Borrowed Funds
Borrowed funds are comprised of advances from the FHLB and long-term debt. Borrowings totaled $280.2 million at June 30, 2012, a decrease of $328.0 million or 53.9% from December 31, 2011 and a decrease of $324.5 million or 53.7% from June 30, 2011. The decreases were primarily the result of prepaying $125.0 million of long-term FHLB advances, yielding 3.15%, during the three months ended June 30, 2012 as part of the balance sheet repositioning strategy as well as paydowns of advances from the FHLB during the last twelve months. The paydowns during the last twelve months reflects a shift in funding mix to core deposits due to organic deposit growth as well as the deposits acquired in the Plantation and Liberty transactions. See Note 6 to the Consolidated Financial Statements and in the “Balance Sheet Repositioning” section above for additional information regarding the FHLB paydown.
Capital
Shareholders’ equity at June 30, 2012 was $287.2 million, an increase of $10.1 million or 3.6% over December 31, 2011 and an increase of $20.7 million or 7.8% over June 30, 2011. The increases were primarily the result of net operating results, partially offset by a reduction in accumulated other comprehensive income related to investment securities valuations during the last twelve months. Both First Financial and First Federal’s regulatory capital ratios are in excess of “well-capitalized” minimums, as presented in the following table.
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| |||||||||||||||||||
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| For the Quarters Ended |
| ||||||||||||||
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|
| June 30, |
| March 31, |
| December 31, |
| September 30, |
| June 30, |
| ||||||
First Financial |
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|
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|
Equity to assets |
|
|
|
|
| 8.69 | % |
| 8.84 | % |
| 8.81 | % |
| 8.37 | % |
| 8.27 | % |
Tangible common equity to tangible assets (non-GAAP) |
|
| 6.47 |
|
| 6.70 |
|
| 6.67 |
|
| 6.27 |
|
| 6.08 |
| |||
Book value per common share |
|
|
|
| $ | 13.45 |
| $ | 12.89 |
| $ | 12.84 |
| $ | 12.31 |
| $ | 12.20 |
|
Tangible book value per common share (non-GAAP) |
|
| 12.91 |
|
| 12.75 |
|
| 12.69 |
|
| 12.16 |
|
| 11.83 |
| |||
Dividends paid per common share, authorized |
|
| 0.05 |
|
| 0.05 |
|
| 0.05 |
|
| 0.05 |
|
| 0.05 |
| |||
Common shares outstanding, end of period (000s) |
|
| 16,527 |
|
| 16,527 |
|
| 16,527 |
|
| 16,527 |
|
| 16,527 |
| |||
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| Regulatory |
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| |
Tier 1 leverage capital ratio |
|
| 5.00 | % |
| 9.79 | % |
| 10.22 | % |
|
| (1) |
|
| (1) |
|
| (1) |
Tier 1 risk-based capital ratio |
|
| 6.00 |
|
| 13.89 |
|
| 14.81 |
|
|
| (1) |
|
| (1) |
|
| (1) |
Total risk-based capital ratio |
|
| 10.00 |
|
| 15.16 |
|
| 16.08 |
|
|
| (1) |
|
| (1) |
|
| (1) |
|
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First Federal2 |
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|
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|
|
|
|
Tier 1 leverage capital ratio |
|
| 5.00 | % |
| 9.06 | % |
| 9.00 | % |
| 8.92 | % |
| 8.26 | % |
| 7.48 | % |
Tier 1 risk-based capital ratio |
|
| 6.00 |
|
| 12.86 |
|
| 13.05 |
|
| 12.35 |
|
| 11.26 |
|
| 10.07 |
|
Total risk-based capital ratio |
|
| 10.00 |
|
| 14.13 |
|
| 14.32 |
|
| 13.61 |
|
| 12.53 |
|
| 11.33 |
|
|
|
|
1 | 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 Bank included within FR Y-9C,Consolidated Financial Statements for Bank Holding Companies. The capital ratios presented above for the holding company are considered preliminary until the regulatory report is filed with the Federal Reserve Bank. |
2 | Capital ratios beginning with the quarter ended March 31, 2012 for First Federal Bank are based on reporting requirements for financial institutions filing FFIEC 041,FDIC Consolidated Reports of Condition and Income(the “Call Report”). Prior period ratios are reported based on superseded regulatory requirements previously issued by the Office of Thrift Supervision. |
As a result of First Federal’s charter conversion and Federal Reserve membership, First Federal is subject to Federal Reserve Supervisory Letter SR 91-17, which provides guidance that de novo state member banks and converting thrifts maintain a Tier 1 leverage capital ratio of 9.00% for the first three years as a member bank unless an exception is granted. First Federal had a Tier 1 leverage capital ratio of 9.06% at June 30, 2012.
On March 29, 2012, the U.S. Treasury completed the sale of its $65 million Fixed Rate Cumulative Perpetual Preferred Stock, Series A (“preferred stock”) investment in First Financial to private investors through a registered public offering. There was no impact to First Financial’s financial condition or operating results due to the transaction. On July 26, 2012, First Financial declared a quarterly cash dividend of $12.50 per preferred share payable on August 15, 2012 to preferred shareholders of record as of August 3, 2012.
On July 26, 2012, First Financial declared a quarterly cash dividend of $0.05 per common share, payable on August 23, 2012 to common shareholders of record as of August 9, 2012.
50
Contractual Obligations and Off-Balance Sheet Arrangements
Contractual obligations and off-balance sheet arrangements are described in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in First Financial’s 2011 Annual Report on Form 10-K. There have been no material changes to those obligations or arrangements outside the ordinary course of business. See Note 11 to the Consolidated Financial Statements for additional information.
Liquidity
First Federal Liquidity
An important component of First Federal’s asset/liability structure is the level of liquidity available to meet the needs of its customers and creditors. First Federal’s primary sources of funds consist of retail and commercial deposits, borrowings from the FHLB and Federal Reserve, other short term borrowings, principal repayments on loans and cash flows on investment securities, the sale of loans and securities, and brokered deposits. First Federal’s desired level of liquidity is determined by management in conjunction with the Asset/Liability Committee (“ALCO”) of First Federal. The level of liquidity is based on management’s strategic direction, commitments to make loans and the ALCO’s assessment of First Federal’s ability to generate funds. Management believes First Federal has sufficient liquidity to meet future funding needs.
As of June 30, 2012, First Federal had the capacity to borrow an additional $778.2 million with the FHLB of Atlanta, the Federal Reserve of Richmond, and through federal funds lines with three unaffiliated banks. Neither the line with the Federal Reserve nor the Federal Funds lines had outstanding balances at June 30, 2012.
First Financial Liquidity
As a holding company, First Financial conducts its business through its subsidiaries. First Financial is not subject to any regulatory liquidity requirements. Potential sources for First Financial’s payment of principal and interest on its borrowings, preferred and common stock dividends and future funding needs include dividends from First Federal and other subsidiaries, payments from existing cash reserves, sales of marketable securities, and additional borrowings or stock offerings.Potential uses of First Financial’s cash and cash equivalents include dividend and interest payments, operating expenses, or capital contributions to its subsidiaries, including First Federal. As of June 30, 2012, First Financial had cash and cash equivalents of $22.4 million, compared with $39.0 million at December 31, 2011. The decrease was primarily the result of quarterly dividend payments to preferred and common shareholders. In April 2012 and June 2012, the Board of Directors approved a total of $12.0 million downstream of capital to First Federal to support recent acquisition activities.
Asset and Liability Management
First Federal’s treasury function manages the wholesale segments of the balance sheet, including investments, purchased funds, long-term debt and derivatives. Management’s objective is to achieve the maximum level of stable earnings over the long term, while controlling the level of interest rate risk, credit risk, market risk and liquidity risk, and optimizing capital utilization. Market risk reflects the risk of economic loss resulting from adverse changes in market price and interest rates. This risk of loss can be reflected in diminished current market values and/or reduced potential net interest income in future periods. First Federal’s market risk arises primarily from interest rate risk inherent in its lending, deposit-gathering, and other funding activities. The structure of its loan, investment, deposit, and borrowing portfolios is such that a significant change in interest rates may adversely impact net market values and net interest income. In managing the investment portfolio to achieve its stated objective, First Federal invests predominately in agency securities, agency and private label mortgage-backed securities, asset-backed and collateralized debt securities including trust preferred securities, corporate bonds and municipal bonds. Treasury strategies and activities are overseen by First Federal’s ALCO and Investment Committee. ALCO activities are summarized and reviewed quarterly with the Board of Directors.
Interest Rate Risk
The nature of the banking business, which involves paying interest on deposits at varying rates and terms and charging interest on loans at other rates and terms, creates interest rate risk. As a result, net interest margin, earnings and the market value of assets and liabilities are subject to fluctuations arising from the movement of interest rates. First Federal manages several forms of interest rate risk, including asset/liability mismatch, basis risk and prepayment risk. An objective of First Federal’s asset/liability management policy is to maintain a balanced risk profile so that variations to net interest income stay within policy limits. A sudden and substantial increase or decrease in interest rates may adversely impact earnings to the extent that the interest rates on interest-earning assets and interest-bearing liabilities do not change at the same speed, to the same degree or on the same basis. Asset/liability management is the process by which First Federal evaluates and changes, when appropriate, the mix, maturity and pricing of assets and liabilities in an attempt to reduce a materially adverse impact on earnings resulting from the direction, frequency, and magnitude of change in market interest rates. Although the net interest income of any financial institution is perceived as being vulnerable to fluctuations in interest rates, management has attempted to maintain this vulnerability within board limits.
First Federal’s prepayment risk arises from the loans originated and investment securities purchased in which the underlying assets are real estate secured mortgage loans and may payoff prior to their contractual maturities. Both of these types of assets are subject to principal reduction due to principal prepayments resulting from borrowers’ elections to refinance the underlying
51
mortgages based on market and other conditions. Prepayment rate projections utilize actual prepayment speed experience and available market information on similar instruments. The prepayment rates form the basis for income recognition of premiums or discounts on the related assets. Changes in prepayment estimates may cause the earnings recognized on these assets to vary over the term that the assets are held, creating volatility in the net interest margin. Prepayment rate assumptions are monitored and updated monthly to reflect actual activity and the most recent market projections.
First Federal’s ALCO has established policies and monitors results to manage interest rate risk. The dynamic repricing gap analysis provides a measurement of repricing risk as of a point in time by allocating rate sensitive assets and liabilities to repricing periods. The sum of assets and liabilities maturing or repricing in each of these periods is compared for mismatches within each period. Core deposits lacking contractual maturities or repricing frequencies are placed into repricing and maturity periods based on the historical price sensitivity of such liabilities to interest rate movements. Repricing periods for assets include the effects of expected prepayments on cash flows. Particular assets and liabilities, such as adjustable rate mortgages, are also evaluated for the manner in which changes in interest rates or selected indices may affect their repricing. Another measurement is asset/liability modeling and interest income simulation to assess varying interest rate and balance sheet mix assumptions. First Federal utilizes various balance sheet strategies to adjust its interest rate sensitivity position as necessary, including decisions on the pricing, maturity, and marketing of particular loan or deposit products, and to make decisions regarding the structure of maturities for borrowings or wholesale funding options.
Based on the dynamic gap analysis, First Federal is liability-sensitive within one year, with rate-sensitive liabilities exceeding rate-sensitive assets by $102.4 million or 3.10% of total assets as of June 30, 2012. This is compared with a liability-sensitive position of $201.4 million or 6.40% of total assets as of December 31, 2011. The decrease in the liability-sensitive position was primarily the result of the combination of the recent acquisitions and the balance sheet repositioning. Acquired loans with variable rates and short-term repricing more than offset the investment securities sold in the repositioning, resulting in a $97.6 million increase in assets repricing within one year. In addition, there was no significant change in liabilities repricing within one year, as the acquisition resulted in a shift in funding due to the replacement of short-term borrowed funds with liability-sensitive core deposits
Repricing gap analysis is limited in its ability to measure interest rate sensitivity. The repricing characteristics of assets, liabilities, and off-balance sheet derivatives can change in different interest rate scenarios, thereby changing the repricing position from that outlined above. Further, basis risk is not captured by repricing gap analysis. Basis risk is the risk that changes in interest rates will reprice interest-bearing liabilities differently from interest-earning assets, thus causing an asset/liability mismatch. This analysis does not take into consideration the repricing dynamics in adjustable-rate loans, such as minimum and maximum annual and lifetime interest rate adjustments and also the index utilized and whether the index is a current or lagging index. Included in the analysis are estimates of prepayments on fixed-rate loans and mortgage-backed securities in a one-year period and expectations that under current interest rates, certain advances from the FHLB will not be called and loans will not reprice due to floors. Also included in the analysis are estimates of core deposit decay rates, based on recent studies and regression analysis of core deposits.
First Federal is currently liability-sensitive, which normally indicates that a rise in market rates would have a negative effect on net interest income. The opposite would generally occur when an institution has a positive gap position, or is asset-sensitive. Net interest income simulations were performed as of June 30, 2012 to evaluate the impact of market rate changes on net interest income over the subsequent 12 months assuming a static balance sheet composition. Based on the simulations, if market interest rates were to increase immediately by 100 basis points, net interest income would be expected to decrease by 0.74%. If market interest rates were to increase immediately by 200 basis points, net interest income would be expected to decrease by 0.43% from what it would be if rates were to remain at June 30, 2012 levels. In a rising rate environment, the projected decline in net interest income is due to the immediate repricing of short-term liabilities, while the majority of the loans will adjust over a longer period and at specific increments based on contractual terms.
Net interest income simulation for 100 and 200 basis point declines in market rates were not performed at June 30, 2012 as the results would not have been meaningful given the current levels of short-term market interest rates. Net interest income is not only affected by the level and direction of interest rates, but also by the shape of the yield curve, pricing spreads in relation to market rates, balance sheet growth, the mix of different types of assets and liabilities, and the timing of changes in these variables. Another test measures the economic value of equity at risk by analyzing the impact of an immediate change in interest rates on the market value of portfolio equity. If market interest rates were to increase immediately by 100 or 200 basis points (a parallel and immediate shift in the yield curve), the economic value of equity would increase by 11.17% and increase by 17.24%, respectively, from where it would be if rates were to remain at June 30, 2012 levels. The increases are primarily the result of the core deposit intangibles, which increase in value as interest rates rise. Scenarios different from those outlined above, whether different by timing, level, or a combination of factors, could produce different results.
Computation of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan prepayments and deposit decay rates, and should not be relied upon as indicative of actual results. Further, the computations do not contemplate any actions that may be taken in response to changes in interest rates.
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Quantitative and Qualitative Disclosures About Market Risk |
There has been no material change in the information concerning quantitative and qualitative disclosures about market risk contained in Item 7A of First Financial’s 2011 Annual Report on Form 10-K, except as set forth in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Interest Rate Risk” of this Form 10-Q.
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|
Controls and Procedures |
a) An evaluation of First Financial’s disclosure controls and procedures (as defined in Section 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934 (the “Act”) was carried out under the supervision and with the participation of First Financial’s Chief Executive Officer, Chief Financial Officer and First Financial’s Disclosure Committee as of the end of the period covered by this quarterly report. In designing and evaluating First Financial’s disclosure controls and procedures, management recognized that disclosure controls and
52
procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. Based on their evaluation, First Financial’s Chief Executive Officer and its Chief Financial Officer concluded that First Financial’s disclosure controls and procedures as of June 30, 2012, are effective in ensuring that the information required to be disclosed by First Financial in the reports it files or submits under the Act is (i) accumulated and communicated to First Financial’s management (including the Chief Executive Officer and the Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
b) There have been no changes in First Financial’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Act) that occurred during the quarter ended June 30, 2012 that have materially affected, or are reasonably likely to materially affect, First Financial’s internal control over financial reporting. First Financial does not expect that its internal control over financial reporting will prevent all error and all fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within First Financial have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any control procedure also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions regardless of how remote. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in cost-effective control procedures, misstatements due to error or fraud may occur and not be detected.
|
|
Legal Proceedings |
From time to time, First Financial is subject to various legal proceedings and claims which arise in the ordinary course of business. As of June 30, 2012, First Financial believes that such litigation will not materially affect First Financial’s consolidated financial position or results of operations.
|
|
Risk Factors |
There have been no material changes to the risk factors disclosed in First Financial’s 2011 Annual Report on Form 10-K.
|
|
Unregistered Sales of Equity Securities and Use of Proceeds |
None.
|
|
Defaults Upon Senior Securities |
None.
|
|
Mine Safety Disclosures |
Not applicable.
|
|
Other Information |
None.
|
|
Exhibits |
53
|
|
EXHIBIT INDEX | |
|
|
Exhibit | Description |
|
|
31.1 | Rule 13a-14(a)/15(d)-149a) Certificate of Chief Executive Officer |
|
|
31.2 | Rule 13a-14(a)/15(d)-149a) Certificate of Chief Financial Officer |
|
|
32 | Section 1350 Certificate of Chief Executive Officer and Chief Financial Officer |
|
|
101* | The following material from First Financial’s Form 10-Q for the quarterly period ended June 30, 2012, formatted in Extensible Business Reporting Language (“XBRL”): 1) Consolidated Balance Sheets, 2) Consolidated Statements of Operations, 3) Consolidated Statement of Comprehensive Income, 4) Consolidated Statements of Changes in Shareholders’ Equity, 5) Consolidated Statements of Cash Flows, and 6) Notes to Consolidated Financial Statements |
|
|
* | In accordance with Regulation S-T, the XBRL-related information in Exhibit 101 to this Form 10-Q shall be deemed to be “furnished” and not “filed.” |
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, First Financial Holdings, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| FIRST FINANCIAL HOLDINGS, INC. | |
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Date: August 9, 2012 | /s/ Blaise B. Bettendorf |
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Blaise B. Bettendorf |
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| Executive Vice President and Chief Financial Officer |
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| (Duly Authorized Officer and Principal Financial and Accounting Officer) |
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