Quarterly Report (10-q)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

þ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2013
Or
o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from _______ to __________

Commission File Number 000-17122

	FIRST FINANCIAL HOLDINGS, INC.

(Exact name of Registrant as specified in its charter)


Delaware		57-0866076

(State or other jurisdiction of		I.R.S. Employer
Incorporation or organization		Identification No.)

2440 Mall Drive, Charleston, South Carolina		29406

(Address of principal executive offices)		(Zip Code)


	(843) 529-5933

	Registrant’s telephone number, including area code

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes þ No o

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 filer o	Accelerated filer þ	Non-accelerated filer o	Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act).

Yes o No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class		Outstanding at May 7, 2013

Common Stock, $0.01 par value		16,543,487

FIRST FINANCIAL HOLDINGS, INC.

Index to Form 10-Q


Part I – Financial Information

Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets	3
Consolidated Statements of Income	4
Consolidated Statements of Comprehensive Income	5
Consolidated Statements of Changes in Shareholders’ Equity	6
Consolidated Statements of Cash Flows	7
Notes to Consolidated Financial Statements	9

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	37

Item 3. Quantitative and Qualitative Disclosures About Market Risk	56

Item 4. Controls and Procedures	56

Part II – Other Information

Item 1. Legal Proceedings	57

Item 1A. Risk Factors	57

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	57

Item 3. Defaults Upon Senior Securities	57

Item 4. Mine Safety Disclosures	57

Item 5. Other Information	57

Item 6. Exhibits	58

Signatures	59

FIRST FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


	As of

	March 31, 2013			December 31, 2012			March 31, 2012
(in thousands, except share data)	(unaudited)						(unaudited)

ASSETS
Cash and due from banks	$	49,190		$	60,290		$	57,645
Interest-bearing deposits with banks		80,110			57,161			5,879

Total cash and cash equivalents		129,300			117,451			63,524
Investment securities
Securities available for sale, at fair value		314,597			253,798			442,531
Securities held to maturity at amortized cost, approximate fair value $16,942, $17,867 and $22,553, respectively		14,869			15,555			19,835
Nonmarketable securities		19,245			20,914			37,965

Total investment securities		348,711			290,267			500,331
Loans
Residential		1,037,859			1,031,533			1,029,176
Commercial		663,733			681,119			606,468
Consumer		774,550			782,672			719,923

Total loans		2,476,142			2,495,324			2,355,567
Less: Allowance for loan losses		47,427			44,179			50,776

Total loans, net		2,428,715			2,451,145			2,304,791
Loans held for sale		33,752			55,201			52,339
FDIC indemnification asset		58,917			80,268			46,272
Premises and equipment, net		83,924			85,378			83,146
Bank owned life insurance		50,997			50,624			---
Other intangible assets		7,573			8,025			2,310
Other assets		74,758			77,199			92,825

Total assets	$	3,216,647		$	3,215,558		$	3,145,538


LIABILITIES
Deposits
Noninterest-bearing checking	$	431,003		$	388,259		$	307,750
Interest-bearing checking		509,295			511,647			435,320
Savings and money market		756,818			743,970			563,344
Retail time deposits		807,667			845,391			753,481
Wholesale time deposits		95,737			106,066			204,594

Total deposits		2,600,520			2,595,333			2,264,489
Advances from FHLB		233,000			233,000			533,000
Long-term debt		47,204			47,204			47,204
Other liabilities		31,234			40,380			22,802

Total liabilities		2,911,958			2,915,917			2,867,495

SHAREHOLDERS’ EQUITY
Preferred stock, Series A, $.01 par value, authorized 3,000,000 shares, issued and outstanding 65,000 shares at March 31, 2013, December 31, 2012 and March 31, 2012 (Redemption value $65,000)		1			1			1
Common stock, $.01 par value, authorized 34,000,000 shares, issued and outstanding 21,471,569 shares at March 31, 2013 and 21,465,163 shares at December 31, 2012 and March 31, 2012		215			215			215
Additional paid-in capital		197,099			196,819			196,204
Treasury stock at cost, 4,938,411 shares at March 31, 2013, December 31, 2012 and March 31, 2012		(103,563	)		(103,563	)		(103,563	)
Retained earnings		212,302			208,853			187,311
Accumulated other comprehensive loss		(1,365	)		(2,684	)		(2,125	)

Total shareholders’ equity		304,689			299,641			278,043

Total liabilities and shareholders’ equity	$	3,216,647		$	3,215,558		$	3,145,538

See accompanying notes to consolidated financial statements.

FIRST FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)


	Quarters Ended March 31,

(in thousands, except per share data)	2013				2012

INTEREST INCOME
Interest and fees on loans		$	36,993			$	32,476
Interest and dividends on investment securities
Taxable			1,931				3,529
Tax-exempt			294				338
Other			111				16

Total interest income			39,329				36,359
INTEREST EXPENSE
Interest on deposits			3,172				3,951
Interest on borrowed money			3,019				4,156

Total interest expense			6,191				8,107

NET INTEREST INCOME			33,138				28,252
Provision for loan losses			5,972				6,745

Net interest income after provision for loan losses			27,166				21,507
NONINTEREST INCOME
Service charges on deposit accounts			7,263				7,302
Mortgage and other loan income			4,435				3,435
Trust and plan administration income			1,067				1,081
Brokerage fees			714				664
Bank owned life insurance income			373				---
Other income			932				769
Other-than-temporary impairment losses on investment securities			(268	)			(69	)
FDIC true-up liability release			1,321				---

Total noninterest income			15,837				13,182
NONINTEREST EXPENSE
Salaries and employee benefits			16,335				15,142
Occupancy costs			2,214				2,267
Furniture and equipment			2,068				1,809
Other real estate expenses, net			924				530
FDIC insurance and regulatory fees			531				994
Professional services			2,070				1,465
Advertising and marketing			866				652
Other loan expense			1,372				1,351
Intangible amortization			512				90
FDIC indemnification impairment			3,806				---
Other expense			4,422				4,409

Total noninterest expense			35,120				28,709

Income before income taxes			7,883				5,980
Income tax expense			2,630				4,241

NET INCOME			5,253				1,739
Preferred stock dividends			813				813
Accretion on preferred stock discount			165				156

NET INCOME AVAILABLE TO COMMON SHAREHOLDERS		$	4,275			$	770


Net income per common share
Basic		$	0.26			$	0.05
Diluted			0.26				0.05

Average common shares outstanding
Basic			16,529				16,527
Diluted			16,547				16,528

See accompanying notes to consolidated financial statements.

FIRST FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)


	Quarters Ended March 31,

(in thousands)	2013				2012

NET INCOME		$	5,253			$	1,739
OTHER COMPREHENSIVE INCOME, BEFORE INCOME TAXES
Unrealized gain on securities available for sale			2,132				1,177
Other-than-temporary impairment losses on investment securities			268				69

			2,400				1,246
Less: Reclassification of other-than-temporary impairment losses on investment securities included in net income for the period (tax benefit to net income of $96 and $25, respectively)			(268	)			(69	)
Tax expense			(813	)			(458	)

TOTAL OTHER COMPREHENSIVE INCOME, NET OF INCOME TAXES			1,319				719

TOTAL COMPREHENSIVE INCOME		$	6,572			$	2,458

See accompanying notes to consolidated financial statements.

FIRST FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)


	Preferred Stock				Common Stock				Additional Paid- in Capital		Treasury Stock at Cost			Retained Earnings			Accumulated Other Comprehensive (Loss) Income			Total
(in thousands, except per share data)	Shares		Amount		Shares		Amount		Additional Paid- in Capital		Treasury Stock at Cost			Retained Earnings			Accumulated Other Comprehensive (Loss) Income			Total

Balance at December 31, 2011		65	$	1		16,527	$	215	$	196,002	$	(103,563	)	$	187,367		$	(2,844	)	$	277,178
Net income															1,739						1,739
Other comprehensive income, net of income taxes																		719			719
Stock based compensation expense										46											46
Accretion of preferred stock										156					(156	)					---
Cash dividends
Common stock ($0.05 per share)															(826	)					(826	)
Preferred stock ($12.50 per share)															(813	)					(813	)

Balance at March 31, 2012		65	$	1		16,527	$	215	$	196,204	$	(103,563	)	$	187,311		$	(2,125	)	$	278,043


Balance at December 31, 2012		65	$	1		16,527	$	215	$	196,819	$	(103,563	)	$	208,853		$	(2,684	)	$	299,641
Net income															5,253						5,253
Other comprehensive income, net of income taxes																		1,319			1,319
Stock based compensation expense										27											27
Accretion of preferred stock										165					(165	)					---
Stock options exercised						6				88											88
Cash dividends
Common stock ($0.05 per share)															(826	)					(826	)
Preferred stock ($12.50 per share)															(813	)					(813	)

Balance at March 31, 2013		65	$	1		16,533	$	215	$	197,099	$	(103,563	)	$	212,302		$	(1,365	)	$	304,689

See accompanying notes to consolidated financial statements.

FIRST FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)


	Quarters Ended March 31,

(in thousands)	2013				2012

Operating Activities
Net Income		$	5,253			$	1,739
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses			5,972				6,745
Depreciation			1,366				1,380
Amortization of intangibles			452				90
Net (increase) decrease in current & deferred income tax			(1,409	)			4,510
Accretion and amortization of purchase accounting adjustments			(6,278	)			(1,246	)
Fair value adjustments on other real estate owned			2,001				2,420
Amortization of unearned premiums on investments, net			302				189
Other-than-temporary impairment on investment securities			268				69
Loans originated for sale			(156,401	)			(162,244	)
Proceeds from loans held for sale			181,983				162,281
Gain on sale of loans, net			(3,420	)			(3,159	)
Gain on sale of other real estate owned, net			(214	)			(643	)
Gain on sale of premises and equipment			(288	)			(38	)
Bank owned life insurance income			(373	)			---
Recognition of stock-based compensation expense			27				46
FDIC reimbursement of covered asset losses			20,738				4,760
FDIC indemnification asset impairment			3,806				---
FDIC true-up liability release			(1,321	)			---
Other			(4,224	)			(960	)

Net cash provided by operating activities			48,240				15,939


Investing Activities
Securities available-for-sale
Proceeds from maturities, calls and payments			15,678				26,009
Purchases			(74,928	)			(63,085	)
Proceeds from maturities, calls and payments; securities held to maturity			699				666
Decrease (increase) in nonmarketable securities, net			1,669				(5,271	)
Decrease in loans, net			14,170				12,099
Proceeds from sales of other real estate owned			5,374				6,391
Decrease (increase) in premises and equipment, net			376				(1,581	)
Payment to acquire Plantation premises and equipment			(3,364	)			---

Net cash used in investing activities			(40,326	)			(24,772	)

See accompanying notes to consolidated financial statements.

FIRST FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (continued)


	Quarters Ended March 31,

(in thousands)	2013				2012

Financing Activities
Increase in demand and savings deposits, net			53,240				74,701
Decrease in time deposits, net			(47,754	)			(49,380	)
Repayments of FHLB advances, net			---				(28,000	)
Proceeds from exercise of stock options			88				---
Dividends paid on common stock			(826	)			(826	)
Dividends paid on preferred stock			(813	)			(813	)

Net cash provided by (used in) financing activities			3,935				(4,318	)


Net increase (decrease) in cash and cash equivalents			11,849				(13,151	)
Cash and cash equivalents at beginning of period			117,451				76,675

		$	129,300			$	63,524

Supplemental disclosures
Cash paid during the period for
Interest		$	6,513			$	9,017
Income taxes			4,855				16
Loans transferred to OREO			4,704				9,480
Loans securitized into mortgage-backed securities			71,131				127,401

See accompanying notes to consolidated financial statements.

FIRST FINANCIAL HOLDINGS, INC.
N OTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 2013

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 accounting principles generally accepted in the United States of America (“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 months ended March 31, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013.

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 2012 Annual Report on Form 10-K for the year ended December 31, 2012, as filed with the Securities and Exchange Commission (“SEC”) on March 18, 2013. 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 2012 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 which remains outstanding at March 31, 2013. 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 Income. 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.

Recently Adopted Accounting Pronouncements

FASB ASU 2013-02, “Comprehensive Income (Topic 220) - Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income”

The objective of this Accounting Standards Update (“ASU”) is to improve the reporting of reclassifications out of accumulated other comprehensive income. The amendments require First Financial to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required by GAAP to be reclassified in its entirety to net income. For other amounts that are not required under GAAP to be reclassified in their entirety to net income in the same reporting period, First Financial is required to cross-reference other disclosures required under GAAP that provide additional detail about those amounts. This would be the case when a portion of the amount reclassified out of accumulated other comprehensive income is reclassified to a balance sheet account instead of directly to income or expense in the same reporting period. The amendments are effective prospectively for reporting periods beginning after December 15, 2012. First Financial previously accounted for its accumulated other comprehensive income in accordance with this guidance and adoption did not have a material impact on its financial position, results of operations or cash flows.

FASB ASU 2013-01, “Balance Sheet (Topic 210) - Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities”

This ASU addresses implementation issues about the scope of ASU 2011-11, Balance Sheet Topic 210: Disclosures about Offsetting Assets and Liabilities , which requires First Financial 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. An entity is required to apply the amendments for fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the required disclosures retrospectively for all comparative periods presented. The adoption of ASU 2013-02 did not have a material impact on First Financial’s financial condition, results of operations or cash flows.

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 First Financial 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 will be effective for annual reporting periods beginning on or after January 1, 2013 and interim periods within those annual periods. The adoption of ASU 2011-11 did not have a material impact on First Financial’s financial condition, results of operations or cash flows.

Correction of a Misstatement in the Consolidated Statement of Cash Flows

First Financial has reclassified certain amounts from the original presentation in the Consolidated Statements of Cash Flows as reported in the Form 10-Q for the quarter ended March 31, 2012 to conform with current period presentation and for corrections of immaterial misstatements. The misstatements were the result of miscalculating certain activity between its operating and investing cash flows primarily related to purchased loan accounting. The effects of the correction to appropriately classify activity on the Consolidated Statements of Cash Flows had no impact to the Consolidated Balance Sheets, Statements of Income, Statements of Comprehensive Income or Statements of Changes in Shareholders’ Equity as of and for the quarter ended March 31, 2012.

The following table presents the effect of these reclassifications on the Consolidated Statements of Cash Flows.



	For the Quarter Ended March 31, 2012

(in thousands)	As Previously Reported			Adjustment			As Adjusted

Accretion and amortization of purchase accounting adjustments	$	(5,292	)	$	4,046		$	(1,246	)
Loans originated for sale		(162,090	)		(154	)		(162,244	)
Proceeds from loans held for sale		161,213			1,068			162,281
Gain on sale of premises and equipment		---			(38	)		(38	)
FDIC reimbursement of covered assets		5,368			(608	)		4,760
Other		294			(1,254	)		(960	)
Net cash provided by operating activities		12,879			3,060			15,939

Decrease in loans, net		14,969			(2,870	)		12,099
Proceeds from sale of other real estate owned		6,638			(247	)		6,391
Increase in premises and equipment, net		(1,638	)		57			(1,581	)
Net cash used in investing activities		(21,712	)		(3,060	)		(24,772	)

SCBT Merger

On February 19, 2013, First Financial entered into a merger agreement with SCBT. Subject to the terms and conditions set forth in the agreement, First Financial plans to merge with and into SCBT with SCBT continuing as the surviving corporation after the merger and First Federal will merge with and into SCBT’s bank subsidiary. The merger is expected to close in the third quarter of 2013, subject to customary closing conditions. Under the terms of the agreement, SCBT will add five First Financial board members to the combined company’s board. Robert J. Hill, Jr., president and chief executive officer of SCBT, will continue to serve as chief executive officer of the combined company and R. Wayne Hall, president and chief executive officer of First Financial, will be named president of the combined company.

NOTE 2. Investment Securities

The investment securities portfolio is comprised of securities that, at purchase, are rated in one of the four highest rating categories by at least one nationally recognized investment rating service, and where available, are rated by two rating services. The following table presents amortized cost, gross unrealized gains and losses and the estimated fair value of securities available for sale, securities held to maturity and nonmarketable securities.



	As of March 31, 2013								As of December 31, 2012

(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value

Securities available for sale
Obligations of US Government agencies and corporations	$	1,227	$	17	$	---	$	1,244	$	1,260	$	18	$	---	$	1,278
State and municipal obligations		13,378		35		150		13,263		13,460		84		61		13,483
Collateralized debt obligations		6,106		76		2,678		3,504		6,191		156		3,015		3,332
Mortgage-backed securities		143,543		1,956		191		145,308		72,527		1,928		151		74,304
Collateralized mortgage obligations		145,159		1,687		2,339		144,507		157,534		1,249		3,900		154,883
Other securities		5,656		1,281		166		6,771		5,609		1,089		180		6,518

Total securities available for sale	$	315,069	$	5,052	$	5,524	$	314,597	$	256,581	$	4,524	$	7,307	$	253,798


Securities held to maturity
State and municipal obligations	$	14,369	$	2,073	$	---	$	16,442	$	15,055	$	2,312	$	---	$	17,367
Certificates of deposit		500		---		---		500		500		---		---		500

Total securities held to maturity	$	14,869	$	2,073	$	---	$	16,942	$	15,555	$	2,312	$	---	$	17,867


Nonmarketable securities
Federal Home Loan Bank stock	$	14,674	$	---	$	---	$	14,674	$	16,343	$	---	$	---	$	16,343
Federal Reserve Bank stock		4,571		---		---		4,571		4,571		---		---		4,571

Total nonmarketable securities	$	19,245	$	---	$	---	$	19,245	$	20,914	$	---	$	---	$	20,914

Ownership of Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank of Richmond (“Federal Reserve”) stock is required for membership in these two systems. 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 and are recorded at cost (par value).

The following table provides the names of issuers for whom First Financial has investment securities with a fair value totaling in excess of 10% of shareholders’ equity and the fair value and amortized cost of these investments. Securities issued by Bank of America Corp. and its subsidiaries are, for the most part, collateralized mortgage obligations (“CMOs”) and not backed by Bank of America Corp. All of these securities are available for sale.



	As of March 31, 2013						As of December 31, 2012

(dollars in thousands)	Amortized Cost		Fair Value		Fair Value as % of Shareholders Equity		Amortized Cost		Fair Value		Fair Value as % of Shareholders Equity

Issuer
Fannie Mae	$	114,151	$	115,311	37.8	%	$	41,795	$	42,665	14.2	%
Bank of America Corp.		39,208		38,923	12.8			41,913		40,964	13.7

Total	$	153,359	$	154,234			$	83,708	$	83,629

The amortized cost and fair value of investment securities are shown below. 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 March 31, 2013

(in thousands)	Amortized Cost		Fair Value

Securities available for sale
Due within one year	$	1,013	$	1,019
Due after one year through five years		1,219		1,380
Due after five years through ten years		---		---
Due after ten years		21,480		18,599

Total		23,712		20,998

Mortgage-backed securities		143,543		145,308
Collateralized mortgage obligations		145,159		144,507
Other securities with no stated maturity		2,655		3,784

Total	$	315,069	$	314,597


Securities held to maturity
Due within one year	$	400	$	400
Due after one year through five years		100		100
Due after five years through ten years		1,986		2,057
Due after ten years		12,383		14,385

Total	$	14,869	$	16,942

Securities with a fair market value of $191.0 million at March 31, 2013 and $123.7 million at December 31, 2012 were pledged to secure public and certain customer deposits, repurchase agreements and advances from the FHLB and the Federal Reserve.

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. No securities held to maturity were in a loss position at March 31, 2013 or at December 31, 2012.



	Less than 12 Months						12 Months or Longer					Total

March 31, 2013 (dollars in thousands)	#		Fair Value		Unrealized Losses		#	Fair Value		Unrealized Losses		#	Fair Value		Unrealized Losses

Securities available for sale
State and municipal obligations		3	$	6,767	$	150	---	$	---	$	---	3	$	6,767	$	150
Collateralized debt obligations		---		---		---	12		3,004		2,678	12		3,004		2,678
Mortgage-backed securities		3		25,950		191	---		---		---	3		25,950		191
Collateralized mortgage obligations		1		871		---	25		83,689		2,339	26		84,560		2,339
Other securities		---		---		---	1		830		166	1		830		166

Total		7	$	33,588	$	341	38	$	87,523	$	5,183	45	$	121,111	$	5,524


	Less than 12 Months						12 Months or Longer					Total

December 31, 2012 (dollars in thousands)	#		Fair Value		Unrealized Losses		#	Fair Value		Unrealized Losses		#	Fair Value		Unrealized Losses

Securities available for sale
State and municipal obligations		2	$	6,038	$	61	---	$	---	$	---	2	$	6,038	$	61
Collateralized debt obligations		---		---		---	12		2,744		3,015	12		2,744		3,015
Mortgage-backed securities		3		26,186		150	1		454		1	4		26,640		151
Collateralized mortgage obligations		2		14,733		33	25		88,185		3,867	27		102,918		3,900
Other securities		---		---		---	2		1,815		180	2		1,815		180

Total		7	$	46,957	$	244	40	$	93,198	$	7,063	47	$	140,155	$	7,307

Other-Than-Temporary Impairment

Management evaluates securities for Other-than-temporary impairment losses on investment securities (“OTTI”) on at least a quarterly basis. In determining OTTI, investment securities are evaluated according to Accounting Standards Codification (“ASC”) 320 Investments – Debt and Equity Securities 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 March 31, 2013, the majority of unrealized losses were related to trust preferred collateralized debt obligations (“CDOs”) and private-label CMOs as discussed below. For the quarter ended March 31, 2013, credit-related OTTI of $268 thousand related to CMOs was recorded in net impairment losses recognized in earnings in the Consolidated Statements of Income. The total carrying values of securities affected by credit-related OTTI represent 7.0% of the carrying value of First Financial’s investment portfolio at March 31, 2013, and are not considered to have a significant impact on First Financial’s 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 brokered 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 resulting projected cash flows were compared to book value to determine the amount of OTTI, if any. See Note 10 to the Consolidated Financial Statements for additional information on fair value.

The following table provides information regarding the CDO portfolio.



(dollars in thousands)

										Quarter Ended March 31, 2013 OTTI ¹

Name	Single/ Pooled	Class/ Tranche	Amortized Cost		Fair Value		Unrealized Loss (Gain)			Credit Portion		Other		Total

ALESCO I	Pooled	B-1	$	520	$	327	$	193		$	---	$	---	$	---
ALESCO II	Pooled	B-1		345		320		25			---		---		---
MCAP III	Pooled	B		276		152		124			---		---		---
MCAP IX	Pooled	B-1		267		157		110			---		---		---
PRETZL IV	Pooled	MEZ		116		56		60			---		---		---
PRETZL XI	Pooled	B-1		821		306		515			---		---		---
PRETZL XII	Pooled	B-2		499		315		184			---		---		---
PRETZL XIII	Pooled	B-1		325		189		136			---		---		---
PRETZL XIV	Pooled	B-1		634		369		265			---		---		---
TRPREF II	Pooled	B		635		261		374			---		---		---
USCAP II	Pooled	B-1		947		303		644			---		---		---
USCAP III	Pooled	B-1		297		249		48			---		---		---

Subtotal - CDOs in a loss position				5,682		3,004		2,678			---		---		---
MCAP XVIII	Pooled	C-1		174		220		(46	)		---		---		---
PRETZL VII	Pooled	MEZ		250		280		(30	)		---		---		---

Total CDOs			$	6,106	$	3,504	$	2,602		$	---	$	---	$	---


		Dollar Basis						Constant Default Rate

	Lowest Rating	% Performing			% Deferrals / Defaults ²							Discount Margin ³

Name								High		Low

ALESCO I	C		83.93	%		16.07	%		0.76		0.39		11.70	%
ALESCO II	C		91.94			8.06			0.70		0.36		11.65
MCAP III	B		70.00			30.00			0.69		0.35		10.50
MCAP IX	CC		56.62			43.38			0.25		0.25		16.80
MCAP XVIII	C		71.00			29.00			0.33		0.25		11.05
PRETZL IV	CCC		72.93			27.07			0.25		0.25		11.00
PRETZL VII	C		51.08			48.92			0.84		0.43		16.80
PRETZL XI	C		68.21			31.79			0.25		0.25		11.60
PRETZL XII	C		67.45			32.55			0.39		0.25		11.62
PRETZL XIII	C		67.54			32.46			0.60		0.31		11.57
PRETZL XIV	C		63.97			36.03			0.36		0.25		11.57
TRPREF II	C		56.46			43.54			0.36		0.25		11.92
USCAP II	C		80.46			19.54			0.43		0.25		11.65
USCAP III	C		70.73			29.27			0.31		0.25		11.53

Total			68.74	%		31.26	%


¹ Recognized in other-than-temporary impairment on investment securities on the Consolidated Statements of Income
² Represents 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
³ Fair market value discount margin to LIBOR

Collateralized Mortgage Obligations

The CMO portfolio, which is comprised of agency and non-agency securities, was priced using discounted cash flow models. In making the determination of each CMOs fair value, consideration was given to recent transaction volumes, price quotations and related price volatility, available broker information and market conditions. A pricing model is utilized to estimate each security’s cash flow and adjusted price based on coupon, credit rating, estimated default rate, constant prepayment rate and required yields or spreads. A cash flow analysis is performed on each security in the CMO portfolio, regardless of the credit rating, to determine if the security has any OTTI. See Note 10 to the Consolidated Financial Statements for additional information on fair value.

The following table presents the investment grades assigned by the rating agencies for CMO securities which were in a loss position along with OTTI losses recorded as of and for the quarter ended March 31, 2013.




(dollars in thousands)	As of March 31, 2013					Quarter Ended March 31, 2013 OTTI

Moody/S&P Ratings	#	Fair Value		Unrealized Loss		Credit Portion		Other		Total

AAA	---	$	---	$	---	$	---	$	---	$	---
AA	1		11,010		36		---		---		---
A	6		15,068		372		---		---		---
BBB	8		18,068		458		---		---		---
Below investment grade	11		40,414		1,473		268		---		268

Total	26	$	84,560	$	2,339	$	268	$	---	$	268

The OTTI in the table above was related to one security with the following characteristics:




Description		2004 ARM Senior Support

		As of March 31, 2013

Credit rating		C
Rating agency		Moody’s
Twelve-month average loss severity		55.72%
Twelve-month average default rate		9.37
60 day or more delinquency rate		21.35


		As of December 31, 2012

Credit rating		C
Rating agency		Moody’s
Twelve-month average loss severity		50.53%
Twelve-month average default rate		11.05
60 day or more delinquency rate		20.56

Based on First Financial’s policy, the credit rating displayed in the above table reflects the lowest credit rating by the major rating agencies. As of March 31, 2013, management does not intend to sell this security, nor is it more likely than not that it will be required to sell the security 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.




	Quarter Ended March 31, 2013

(in thousands)	CDOs		CMOs		Other Securities		Total

Cumulative credit related losses recognized in earnings at beginning of period	$	5,823	$	1,971	$	1,100	$	8,894
Additions
Credit loss for which previous OTTI was recognized		---		268		---		268

Cumulative credit related losses recognized in earnings at end of period	$	5,823	$	2,239	$	1,100	$	9,162


	Quarter Ended March 31, 2012

	CDOs		CMOs		Other Securities		Total

Cumulative credit related losses recognized in earnings at beginning of period	$	5,782	$	1,509	$	1,100	$	8,391
Additions
Credit loss for which previous OTTI was recognized		41		28		---		69

Cumulative credit related losses recognized in earnings at end of period	$	5,823	$	1,537	$	1,100	$	8,460

NOTE 3. Loans and Other Repossessed Assets Acquired

The following table presents the loan portfolio by major category. Loans are grouped by purpose versus underlying collateral.




(in thousands)	March 31, 2013		December 31, 2012

Residential loans
Residential 1-4 family	$	963,053	$	956,355
Residential construction		25,895		22,439
Residential land		48,911		52,739

Total residential loans		1,037,859		1,031,533

Commercial loans
Commercial business		130,169		118,379
Commercial real estate		467,890		491,567
Commercial construction		1,092		1,064
Commercial land		64,582		70,109

Total commercial loans		663,733		681,119

Consumer loans
Home equity		373,108		384,664
Manufactured housing		282,114		280,100
Marine		79,328		75,736
Other consumer		40,000		42,172

Total consumer loans		774,550		782,672

Total loans		2,476,142		2,495,324
Less: Allowance for loan losses		47,427		44,179

Net loans	$	2,428,715	$	2,451,145

As of the balance sheet dates, loans to related parties did not exceed five percent of shareholders equity.

In April 2009 and April 2012, First Federal entered into purchase and assumption agreements with the Federal Deposit Insurance Corporation (“FDIC”) to acquire certain assets and liabilities of the former Cape Fear Bank (“Cape Fear”) and Plantation Federal Bank (“Plantation”), respectively, under which Cape Fear loans and certain Plantation commercial loans and other real estate owned (“OREO”) were covered under loss share agreements with the FDIC (“acquired covered loans” or “acquired covered assets”). In addition, First Federal acquired five branches from Liberty Savings Bank (“Liberty”) in April 2012. The Plantation loans

and OREO not covered under its loss share agreement and all of the Liberty loans are considered “acquired non-covered loans” or “acquired non-covered assets.” Loans that were originated through First Federal’s normal origination channels (i.e., not acquired in an acquisition) that are part of the loan portfolio or have subsequently migrated to OREO are considered “legacy loans” or “legacy assets.”

The following is a summary of changes in the accretable yields of acquired loans during the respective periods.




	As of and for the Quarter Ended March 31, 2013									As of and for the Quarter Ended March 31, 2012

(in thousands)	Non-Impaired Loans			Impaired Loans			Total Acquired Loan Portfolios			Non-Impaired Loans			Impaired Loans			Total Acquired Loan Portfolios

Balance at beginning of period	$	5,474		$	20,933		$	26,407		$	2,811		$	14,154		$	16,965
Reclass of nonaccretable difference due to reduction of expected cash flows		---			(1,111	)		(1,111	)		---			---			---
Accretion		(393	)		(5,391	)		(5,784	)		(173	)		(1,010	)		(1,183	)

Balance at end of period	$	5,081		$	14,431		$	19,512		$	2,638			13,144		$	15,782

First Federal monitors the expected cash flows for each ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality , pool on a quarterly basis. During the quarter ended March 31, 2013, First Federal determined that certain Plantation loan pools are projected to have lower cash flows than originally estimated at acquisition. As a result, First Federal recorded an impairment and decreased the accretable yield related to these pools by $1.1 million. In addition, First Federal accelerated the accretion on a Cape Fear loan pool during the March 31, 2013 quarter to align with the projected cash flows of the underlying loans.

Delinquent Loans and Nonperforming Assets

The following table presents the loan portfolio by age of delinquency.




	As of March 31, 2013

(in thousands)	30-59 Days Past Due			60-89 Days Past Due			90 Days and Greater Past Due			90 Days and Greater Accruing			Total Past Due			Current ¹			Total Loans

Residential loans
Residential 1-4 family		$	821		$	612		$	7,693		$	---		$	9,126		$	953,927		$	963,053
Residential construction			284			---			---			---			284			25,611			25,895
Residential land			585			140			576			---			1,301			47,610			48,911

Total residential loans			1,690			752			8,269			---			10,711			1,027,148			1,037,859

Commercial loans
Commercial business			1,199			56			1,813			---			3,068			127,101			130,169
Commercial real estate			3,091			1,161			18,213			---			22,465			445,425			467,890
Commercial construction			---			---			---			---			---			1,092			1,092
Commercial land			1,321			219			3,845			---			5,385			59,197			64,582

Total commercial loans			5,611			1,436			23,871			---			30,918			632,815			663,733

Consumer loans
Home equity			2,430			328			9,295			---			12,053			361,055			373,108
Manufactured housing			973			189			3,085			---			4,247			277,867			282,114
Marine			112			42			125			---			279			79,049			79,328
Other consumer			140			37			265			6			448			39,552			40,000

Total consumer loans			3,655			596			12,770			6			17,027			757,523			774,550

Total loans		$	10,956		$	2,784		$	44,910		$	6		$	58,656		$	2,417,486		$	2,476,142


Acquired non-covered loans			28			---			235			---			263			111,837			112,100
Acquired covered loans			2,951			414			8,769			---			12,134			189,052			201,186
Legacy loans			7,977			2,370			35,906			6			46,259			2,116,597			2,162,856

Total loans		$	10,956		$	2,784		$	44,910		$	6		$	58,656		$	2,417,486		$	2,476,142



¹ Included in current loans are $3.8 million of accruing performing TDRs. Accruing TDRs include $257 thousand in residential land, $683 thousand in commercial business, $1.7 million in commercial real estate, $499 thousand in commercial land, $500 thousand in home equity and $134 thousand in manufactured housing.




	As of December 31, 2012

(in thousands)	30-59 Days Past Due			60-89 Days Past Due			90 Days and Greater Past Due			90 Days and Greater Accruing			Total Past Due			Current ¹			Total Loans

Residential loans
Residential 1-4 family		$	1,943		$	857		$	7,137		$	---		$	9,937		$	946,418		$	956,355
Residential construction			---			---			---			---			---			22,439			22,439
Residential land			8			39			785			---			832			51,907			52,739

Total residential loans			1,951			896			7,922			---			10,769			1,020,764			1,031,533

Commercial loans
Commercial business			761			86			1,460			---			2,307			116,072			118,379
Commercial real estate			2,380			1,112			18,386			---			21,878			469,689			491,567
Commercial construction			---			---			247			---			247			817			1,064
Commercial land			966			607			4,058			---			5,631			64,478			70,109

Total commercial loans			4,107			1,805			24,151			---			30,063			651,056			681,119

Consumer loans
Home equity			2,328			2,086			10,049			---			14,463			370,201			384,664
Manufactured housing			2,479			762			3,355			---			6,596			273,504			280,100
Marine			216			68			139			---			423			75,313			75,736
Other consumer			261			123			275			43			702			41,470			42,172

Total consumer loans			5,284			3,039			13,818			43			22,184			760,488			782,672

Total loans		$	11,342		$	5,740		$	45,891		$	43		$	63,016		$	2,432,308			2,495,324


Acquired non-covered loans			153			329			328			---			810			117,321			118,131
Acquired covered loans			1,472			173			8,649			---			10,294			206,395			216,689
Legacy loans			9,717			5,238			36,914			43			51,912			2,108,592			2,160,504

Total loans		$	11,342		$	5,740		$	45,891		$	43		$	63,016		$	2,432,308		$	2,495,324



¹ Included in current loans are $3.5 million of accruing performing TDRs. Accruing TDRs include $687 thousand in commercial business, $1.7 million in commercial real estate, $502 thousand in home equity, $499 thousand in commercial land and $135 thousand in manufactured housing.

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 First Federal’s ability to collect all contractual principal and interest have been classified as impaired under ASC 310-10, and placed on nonaccrual status. The following table presents the composition of nonperforming assets.




(in thousands)	March 31, 2013			December 31, 2012

Nonaccrual loans		$	44,910		$	45,891
Loans 90+ days, still accruing			6			43
Restructured loans, still accruing			3,768			3,536

Total nonperforming loans			48,684			49,470
Other repossessed assets acquired			16,310			18,338

Total nonperforming assets		$	64,994		$	67,808


Acquired non-covered nonperforming loans		$	235		$	328
Acquired covered nonperforming loans			8,769			8,649
Legacy nonperforming loans			39,680			40,493

Total nonperforming loans		$	48,684		$	49,470


Acquired non-covered nonperforming assets		$	1,226		$	2,023
Acquired covered nonperforming assets			18,446			18,256
Legacy nonperforming assets			45,322			47,529

Total nonperforming assets		$	64,994		$	67,808

Loans acquired from Cape Fear and Plantation 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 not included since these loans were adjusted to fair value at the acquisition date and accounted for under ASC 310-30.

Impaired Loans

In accordance with ASC 310-10, 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 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 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.




(in thousands)	Unpaid Contractual Principal Balance			Recorded Investment With No Specific Allowance			Recorded Investment With Specific Allowance			Total Recorded Investment			Specific Allowance			Average Balance			Interest Income Recognized Period to Date

March 31, 2013
Residential loans
Residential 1-4 family		$	7,734		$	5,705		$	462		$	6,167		$	93		$	4,078		$	---
Residential land			675			314			16			330			5			196			4

Total residential loans			8,409			6,019			478			6,497			98			4,274			4

Commercial loans
Commercial business			2,025			1,180			829			2,009			829			1,743			9
Commercial real estate			16,883			12,024			1,726			13,750			109			12,835			28
Commercial construction			---			---			---			---			---			124			---
Commercial land			5,361			2,426			1,040			3,466			230			3,415			---

Total commercial loans			24,269			15,630			3,595			19,225			1,168			18,116			37

Consumer loans
Home equity			11,013			8,281			447			8,728			43			7,545			6
Manufactured housing			605			273			99			372			16			275			---
Marine			12			5			---			5			---			3			---

Total consumer loans			11,630			8,559			546			9,105			59			7,822			6

Total impaired loans		$	44,308		$	30,208		$	4,619		$	34,827		$	1,325		$	30,212		$	47


Acquired non-covered loans			299			154			---			154			---			77			---
Acquired covered loans			6,379			4,181			719			4,900			42			4,209			---
Legacy loans			37,630			25,873			3,900			29,773			1,283			25,926			47

Total Loans		$	44,308		$	30,208		$	4,619		$	34,827		$	1,325		$	30,212		$	47


December 31, 2012
Residential loans
Residential 1-4 family		$	2,123		$	1,988		$	---		$	1,988		$	---		$	2,117		$	---
Residential land			341			62			---			62			---			31			---

Total residential loans			2,464			2,050			---			2,050			---			2,148			---

Commercial loans
Commercial business			1,676			1,368			108			1,476			---			2,565			33
Commercial real estate			13,510			8,595			3,324			11,919			624			12,096			---
Commercial construction			311			247			---			247			---			254			125
Commercial land			5,000			2,121			1,243			3,364			271			3,546			---

Total commercial loans			20,497			12,331			4,675			17,006			895			18,461			158

Consumer loans
Home equity			8,070			6,262			99			6,361			67			5,068			28
Manufactured housing			195			177			---			177			---			155			---
Marine			---			---			---			---			---			---			---

Total consumer loans			8,265			6,439			99			6,538			67			5,223			28

Total impaired loans		$	31,226		$	20,820		$	4,774		$	25,594		$	962		$	25,832		$	186


Acquired non-covered loans			---			---			---			---			---			---			---
Acquired covered loans			4,228			3,217			300			3,517			12			8,082			---
Legacy Loans			26,998			17,603			4,474			22,077			950			17,750			186

Total Loans		$	31,226		$	20,820		$	4,774		$	25,594		$	962		$	25,832		$	186

The increase in total impaired loans from December 31, 2012 to March 31, 2013 was primarily due to $7.1 million of homogenous loans that are in the process of foreclosure and were individually evaluated for impairment, which resulted in an increase in the specific allowance of $181 thousand.

Troubled Debt Restructuring

First Federal accounts for certain loan modifications or restructurings as a Troubled Debt Restructuring (“TDR”). In general, 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. While commercial loan modifications vary depending on circumstances, the most common types of modifications for residential and consumer loans include below market rate reductions and/or maturity extensions, and generally do not include forgiveness of principal balances. Modified terms are dependent on the financial position and needs of the individual borrower.

First Federal classifies TDRs as nonaccruing loans unless the loan qualified for accruing status at the time of the restructure, or

the loan has performed according to the new contractual terms for at least six months. To qualify for accruing status at the time of the restructure, the original loan must have been less than 90 days past due at the time of the restructure and the modification must not have resulted in an impairment loss.

The following table provides a summary of TDRs that continue to accrue interest under restructured terms and TDRs that have been placed in nonaccrual status.




	As of March 31, 2013								As of December 31, 2012

(dollars in thousands)	#		Accruing		Non-accruing		Total ¹		#		Accruing		Non-accruing		Total ¹


Residential loans
Residential 1-4 family		5	$	---	$	1,816	$	1,816		4	$	---	$	1,745	$	1,745
Residential land		2		257		57		314		1		---		61		61

Residential Loans		7		257		1,873		2,130		5		---		1,806		1,806

Commercial loans
Commercial business		2		683		252		935		3		687		609		1,296
Commercial real estate		21		1,695		4,030		5,725		18		1,713		4,543		6,256
Commercial land		5		499		1,820		2,319		5		499		1,852		2,351

Total commercial loans		28		2,877		6,102		8,979		26		2,899		7,004		9,903

Consumer loans
Home equity		22		500		4,254		4,754		22		502		4,359		4,861
Manufactured housing		5		134		94		228		1		135		---		135
Marine		1		---		5		5		---		---		---		---

Total consumer loans		28		634		4,353		4,987		23		637		4,359		4,996

Total loans		63	$	3,768	$	12,328	$	16,096		54	$	3,536	$	13,169	$	16,705



Acquired covered loans included above		9	$	---	$	2,410	$	2,410		8	$	---	$	2,612	$	2,612



¹ There were no acquired non-covered TDRs in the above noted periods.

The following table provides a summary of the primary reason loan modifications were classified as TDRs and their estimated impact on the allowance for loan losses.




	As of March 31, 2013								As of December 31, 2012

			Types of Modifications ¹								Types of Modifications ¹


(dollars in thousands)	#		Rate		Structure		Increase to Allowance		#		Rate		Structure		Increase to Allowance


Residential loans
Residential 1-4		5	$	539	$	1,277	$	---		4	$	543	$	1,202	$	---
Residential Land		2		57		257		---		1		61		---		---

Total residential loans		7		596		1,534		---		5		604		1,202		---

Commercial loans
Commercial business		2		---		935		---		3		---		1,296		---
Commercial real estate		21		359		5,366		---		18		---		6,256		12
Commercial land		5		---		2,319		230		5		---		2,351		257

Total commercial loans		28		359		8,620		230		26		---		9,903		269

Consumer loans
Home equity		22		3,597		1,157		---		22		3,686		1,175		---
Manufactured housing		5		134		94		7		1		135		---		---
Marine		1		---		5		---		---		---		---		---

Total consumer loans		28		3,731		1,256		7		23		3,821		1,175		---

Total loans		63	$	4,686	$	11,410	$	237		54	$	4,425	$	12,280	$	269



Acquired covered loans included above		9	$	39	$	2,371	$	---		8	$	---	$	2,612	$	---



¹ There were no acquired non-covered TDRs in the above noted periods.

The following table provides a summary of the pre-default balance for TDRs that experienced a payment default during the respective period, that were classified as TDRs during the previous twelve months.




	As of March 31, 2013							As of December 31, 2012

(dollars in thousands)	#	Performing Restructurings		Nonperforming Restructurings		Total ¹		#	Performing Restructurings		Nonperforming Restructurings		Total ¹

Residential 1-4 family	1	$	---	$	392	$	392	---	$	---	$	---	$	---
Commercial real estate	3		---		897		897	5		662		1,289		1,951
Home equity	2		---		601		601	3		---		1,387		1,387

Total loans	6	$	---	$	1,890	$	1,890	8		662	$	2,676	$	3,338



Acquired covered loans included above	1	$	---	$	523	$	523	2	$	---	$	300	$	300



¹ There were no acquired non-covered TDRs in the above noted periods.

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 which may not necessarily manifest into future loss. Loans designated as substandard, doubtful or loss are considered “classified” by regulatory definitions. Substandard loans have a well-defined weakness and are inadequately protected by the current net worth, liquidity and paying capacity of the 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 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 tables present the risk profiles for the commercial loan portfolio by the primary categories monitored.




Commercial Credit Quality ¹	As of March 31, 2013

(in thousands)	Commercial Business		Commercial Real Estate		Commercial Construction		Commercial Land		Total Commercial Loans

Pass	$	92,495	$	337,052	$	1,092	$	18,520	$	449,159
Special mention		2,991		26,665		---		15,693		45,349
Substandard		9,714		57,024		---		8,596		75,334
Doubtful		---		---		---		---		---

Total		105,200		420,741		1,092		42,809		569,842
ASC 310-30 loans		24,969		47,149		---		21,773		93,891

Total	$	130,169	$	467,890	$	1,092	$	64,582	$	663,733


	As of December 31, 2012

(in thousands)	Commercial Business		Commercial Real Estate		Commercial Construction		Commercial Land		Total Commercial Loans

Pass	$	77,326	$	349,981	$	817	$	20,732	$	448,856
Special mention		2,608		27,523		---		16,423		46,554
Substandard		10,988		64,610		247		9,131		84,976
Doubtful		---		---		---		---		---

Total		90,922		442,114		1,064		46,286		580,386
ASC 310-30 loans		27,457		49,453		---		23,823		100,733

Total	$	118,379	$	491,567	$	1,064	$	70,109	$	681,119



¹ Credit 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, if a loan was modified from its original contractual terms, and if a loan is part of a commercial relationship.

The following tables present the risk indicators for the residential and consumer loan portfolios.




Residential Credit Quality ¹	As of March 31, 2013

(in thousands)	Residential 1-4 Family		Residential Construction		Residential Land		Total Residential Loans

Performing	$	934,014	$	25,895	$	43,230	$	1,003,139
Performing classified		10,261		---		1,111		11,372
Nonperforming		7,693		---		833		8,526

Total		951,968		25,895		45,174		1,023,037
ASC 310-30 loans		11,085		---		3,737		14,822

Total	$	963,053	$	25,895	$	48,911	$	1,037,859


	As of December 31, 2012

(in thousands)	Residential 1-4 Family		Residential Construction		Residential Land		Total Residential Loans

Performing	$	928,298	$	22,439	$	48,165	$	998,902
Performing classified		9,598		---		532		10,130
Nonperforming		7,137		---		785		7,922

Total		945,033		22,439		49,482		1,016,954
ASC 310-30 loans		11,322		---		3,257		14,579

Total	$	956,355	$	22,439	$	52,739	$	1,031,533



¹ Credit quality indicators are reviewed and updated as applicable on an ongoing basis in accordance with credit policies.




Consumer Credit Quality ¹	As of March 31, 2013

(in thousands)	Home Equity		Manufactured Housing		Marine		Other Consumer		Total Consumer Loans

Performing	$	342,164	$	278,329	$	79,153	$	39,512	$	739,158
Performing classified		10,226		566		50		93		10,935
Nonperforming		9,795		3,219		125		271		13,410

Total		362,185		282,114		79,328		39,876		763,503
ASC 310-30 loans		10,923		---		---		124		11,047

Total	$	373,108	$	282,114	$	79,328	$	40,000	$	774,550


	As of December 31, 2012

(in thousands)	Home Equity		Manufactured Housing		Marine		Other Consumer		Total Consumer Loans

Performing	$	355,983	$	276,522	$	75,544	$	41,644	$	749,693
Performing classified		6,858		87		53		59		7,057
Nonperforming		10,551		3,491		139		318		14,499

Total		373,392		280,100		75,736		42,021		771,249
ASC 310-30 loans		11,272		---		---		151		11,423

Total	$	384,664	$	280,100	$	75,736	$	42,172	$	782,672



¹ Credit 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.




	As of and for the Quarter Ended March 31, 2013

(in thousands)	Residential			Commercial Business			Commercial Real Estate			Commercial Construction			Commercial Land			Consumer			Total


Balance at beginning of period	$	7,790		$	3,066		$	10,099		$	16		$	2,805		$	20,403		$	44,179

Provision for loan losses before benefit from FDIC loss share agreements		1,669			1,833			3,068			19			574			2,148		$	9,311
Benefit from FDIC loss share agreements		(250	)		(145	)		(1,621	)		---			(1,318	)		(5	)		(3,339	)

Provision for loan losses		1,419			1,688			1,447			19			(744	)		2,143			5,972

Increase in FDIC indemnification asset		250			145			1,621			---			1,318			5			3,339

Loan charge-offs		(1,120	)		(352	)		(2,401	)		(36	)		(130	)		(3,237	)		(7,276	)
Recoveries		49			83			312			32			109			628			1,213

Net charge-offs		(1,071	)		(269	)		(2,089	)		(4	)		(21	)		(2,609	)		(6,063	)


Balance at end of period	$	8,388		$	4,630		$	11,078		$	31		$	3,358		$	19,942		$	47,427


Loans as of March 31, 2013
Individually evaluated for impairment	$	6,497		$	2,009		$	13,750		$	---		$	3,466		$	9,105		$	34,827
Collectively evaluated for impairment		1,016,540			103,191			406,991			1,092			39,343			754,398			2,321,555
ASC 310-30 loans		14,822			24,969			47,149			---			21,773			11,047			119,760

Total loans	$	1,037,859		$	130,169		$	467,890		$	1,092		$	64,582		$	774,550		$	2,476,142




	As of and for the Quarter Ended March 31, 2012

(in thousands)	Residential			Commercial Business			Commercial Real Estate			Commercial Construction		Commercial Land			Consumer			Total


Balance at beginning of period	$	8,748		$	4,106		$	11,711		$	397	$	5,981		$	22,581		$	53,524

Provision for loan losses		41			719			567			2		1,046			4,370			6,745

Loan charge-offs		(1,253	)		(887	)		(1,624	)		---		(1,505	)		(4,802	)		(10,071	)
Recoveries		45			62			162			2		66			241			578

Net charge-offs		(1,208	)		(825	)		(1,462	)		2		(1,439	)		(4,561	)		(9,493	)


Balance at end of period	$	7,581		$	4,000		$	10,816		$	401	$	5,588		$	22,390		$	50,776


Loans as of March 31, 2012
Individually evaluated for impairment	$	2,698		$	2,181		$	11,111		$	261	$	2,541		$	5,683		$	24,475
Collectively evaluated for impairment		1,026,214			85,138			430,553			16,028		50,506			713,870			2,322,309
ASC 310-30 loans		264			735			5,675			---		1,739			370			8,783

Total loans	$	1,029,176		$	88,054		$	447,339		$	16,289	$	54,786		$	719,923		$	2,355,567

In accordance with ASC 310-30, First Financial evaluates the projected cash flows of its acquired loans that were identified as nonperforming at the time of acquisition on a quarterly basis. The ASC 310-30 evaluation is made on all acquired loans, including acquired covered loans. As of March 31, 2013, a net impairment of $4.6 million was projected on certain loan pools, primarily due to several large losses which occurred during the current quarter, and was recorded as an increase to the allowance for loan losses. A portion of the higher loss estimate was related to acquired covered loans and was recorded as an adjustment to the FDIC indemnification asset, which reduced the provision for loan losses.

Other Repossessed Assets Acquired

The following table presents the components of other repossessed assets acquired, which is comprised of OREO and other consumer-related repossessed items, such as manufactured houses and boats, and is included in other assets on the Consolidated Balance Sheets.




	As of

(in thousands)	March 31, 2013		December 31, 2012

Residential real estate	$	4,146	$	4,660
Commercial real estate		5,165		5,588
Land		5,422		6,350
Consumer-related assets		1,577		1,740

Total other repossessed assets acquired	$	16,310	$	18,338

The following table presents the components of OREO expenses, net.




	Quarters Ended March 31,

(in thousands)	2013			2012

Gain on sale of other real estate, net	$	(214	)	$	(643	)
Fair value writedown		805			989
Expenses, net		674			527
Rental income		(75	)		(59	)
Covered OREO expense reimbursement		(266	)		(284	)

Total other real estate expenses, net	$	924		$	530

NOTE 4. Loans Held for Sale, Loan Servicing and Mortgage Origination

The portfolio of residential mortgages serviced for others was $1.9 billion at both March 31, 2013 and December 31, 2012. The amount of contractually specified servicing fees earned by First Federal for the quarter ended March 31, 2013 was $1.2 million, compared with $956 thousand for the quarter ended March 31, 2012. Servicing fees are recorded in mortgage and other loan income in the Consolidated Statements of Income.

Mortgage servicing rights (“MSRs”) are recorded in other assets on the Consolidated Balance Sheets at fair value with changes in fair value recorded as a component of mortgage and other loan income in the Consolidated Statements of Income. First Federal uses various free standing derivative instruments to mitigate the income statement effect of changes in fair value due to changes in valuation inputs and residential mortgage servicing rights assumptions. The following table presents the changes in the fair value of MSRs and its offsetting hedge.




	Quarters Ended March 31,

(in thousands)	2013			2012


Decrease in fair value of MSRs	$	(431	)	$	(538	)
Gain (loss) related to derivatives		194			(406	)

Net effect on Consolidated Statements of Income	$	(237	)	$	(944	)

The fair value of MSRs is highly sensitive to changes in assumptions and fair value is determined by estimating the present value of the asset’s future cash flows utilizing market-based prepayment rates, discount rates and other assumptions validated through comparison to trade information, industry surveys and with the use of independent third party appraisals. Changes in prepayment speed assumptions have the most significant impact on the fair value of MSRs. Generally, as interest rates decline, mortgage loan prepayments accelerate due to increased refinance activity, which results in a decrease in the fair value of the MSR. Measurement of fair value is limited to the conditions existing and the assumptions utilized as of a particular point in time, and those assumptions may not be appropriate if they are applied at a different time.

The following table is an analysis of the activity in the MSRs.




	Quarters Ended March 31,

(in thousands)	2013			2012

Carrying value at beginning of period	$	13,910		$	10,663
Additions
Servicing assets that resulted from transfers of financial assets		1,818			1,773

Change in fair value
Due to increases (decreases) in valuation inputs or assumptions		221			(27	)
Due to increases in principal paydowns or runoff		(652	)		(511	)

Carrying value at end of period	$	15,297		$	11,898

The following table displays mortgage loan securitizations and whole loan sales during the respective periods.




	Quarters Ended March 31,

(in thousands)	2013		2012

Loan securitization with Fannie Mae	$	71,131	$	127,401
Loan sales to Fannie Mae		102,540		23,031
Loan sales to FHLB		3,521		2,678
Loan sales or securitizations to other investors		658		5,098

Total loan securitizations and loan sales	$	177,850	$	158,208

Loans held for sale have historically been comprised of residential mortgage loans awaiting sale in the secondary market, which generally settle in 45 to 60 days. Loans held for sale, which consists of residential mortgage loans to be sold in the secondary market, was $33.8 million at March 31, 2013, compared with $55.2 million at December 31, 2012.

NOTE 5. FDIC Indemnification Asset

First Federal has loss sharing 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 of losses 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 certain 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 $55.0 million up to $65.0 million; and the FDIC reimburses First Federal for 60% of all eligible losses in excess of $65.0 million.

The following table presents the change in the FDIC indemnification asset.




	As of March 31, 2013									As of March 31, 2012

(in thousands)	Gross Receivable			Discount			Net Receivable			Gross Receivable			Discount			Net Receivable

Balance at beginning of the period	$	80,801		$	(533	)	$	80,268		$	51,213		$	(192	)	$	51,021
Increase due to credit losses recorded on FDIC covered loans		3,339			---			3,339			---			---			---
Payments from FDIC for losses		(20,738	)		---			(20,738	)		(4,760	)		---			(4,760	)
Amortization of potential impairment		(3,806	)		---			(3,806	)		---			---			---
Changes due to change in cash flow assumptions on OREO		(228	)		---			(228	)		(4	)		---			(4	)
Discount accretion		---			82			82			---			15			15

Balance at end of the period	$	59,368		$	(451	)	$	58,917		$	46,449		$	(177	)	$	46,272

During 2012, First Federal began recognizing a potential impairment on the indemnification asset. The performance of an underlying Cape Fear loan pool has been better than originally projected and cumulative payments received exceeded First Federal’s initial investment in the pool. As a result, First Federal may claim lower future reimbursements than projected at the time of the Cape Fear acquisition in 2009. The impairment was recorded in noninterest expense on the Consolidated Statements of Income. Additional expected losses related to Plantation increased the FDIC indemnification asset during the quarter ended March 31, 2013. As a result of its quarterly impairment analysis in accordance with ASC 310-30, First Federal projected an impairment on certain Plantation loan pools and increased the FDIC indemnification asset by $3.3 million during the quarter ended March 31, 2013.

During the quarter ended March 31, 2013, First Federal received payments totaling $21.2 million from the FDIC, of which $488 thousand was credited to OREO expenses, net and other loan expense on the Consolidated Statements of Income. These payments satisfied all claims through December 31, 2012.

As of the March 31, 2013 quarterly reporting period, First Federal filed $8.8 million in claims with the FDIC under the terms of the loss share agreements, and payment is expected during the second quarter of 2013.

NOTE 6. Earnings Per Share, Accumulated Other Comprehensive Loss, Dividend Restrictions and Other Regulatory Matters

Earnings Per Share

Basic earnings per common share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per common share is calculated by applying the treasury stock method. Under the treasury stock method, the exercise of dilutive stock options is assumed. The sum of the assumed proceeds of (1) the stock option exercises, (2) the amount of any tax benefits that would be credited to additional paid-in capital assuming exercise of the options, and (3) the unamortized compensation expense on in-the-money options not yet recognized pursuant to GAAP for share-based payments (see Note 8 to the Consolidated Financial Statements) are assumed to be used to purchase common stock at the average market price during the period. The incremental shares (the difference between the number of shares assumed issued and the number of shares assumed purchased), if any, are included in the denominator of the diluted earnings per share calculation.




	Quarters Ended March 31,

(in thousands, except per share data)	2013		2012

Net income	$	5,253	$	1,739
Preferred stock dividends		813		813
Accretion on preferred stock discount		165		156

Net income available to common shareholders	$	4,275	$	770


Weighted average basic shares		16,529		16,527
Effect of dilutive stock options		18		1

Weighted average dilutive shares		16,547		16,528


Net income per common share
Basic	$	0.26	$	0.05
Diluted		0.26		0.05

Stock options and warrants which were not included in computing diluted earnings per share because the effects were antidilutive totaled 418,242 as of March 31, 2013, compared to 624,157 as of March 31, 2012.

Accumulated Other Comprehensive Loss

The following table summarizes the components of accumulated other comprehensive loss.




(in thousands)	Unrealized (loss) gain on securities available for sale			Change in pension liability			Total


Balance, December 31, 2011	$	(1,889	)	$	(955	)	$	(2,844	)
Net change in other comprehensive loss		719			---			719

Balance, March 31, 2012	$	(1,170	)	$	(955	)	$	(2,125	)


Balance, December 31, 2012	$	(1,709	)	$	(975	)	$	(2,684	)
Net change in other comprehensive loss		1,319			---			1,319

Balance, March 31, 2013	$	(390	)	$	(975	)	$	(1,365	)

Dividend Restrictions and Other Regulatory Matters

Since First Financial is a bank holding company, its ability to declare and pay dividends is dependent on certain federal and state regulatory considerations, including the guidelines of the Board of Governors of the Federal Reserve. In accordance with a policy statement issued by the Federal Reserve regarding the payment of dividends by bank holding companies, the Federal Reserve may generally restrict or prohibit the payment of dividends if (1) First Financial’s net income available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends; (2) First Financial’s prospective rate of earnings retention is not consistent with its capital needs and overall current and prospective financial condition; (3) First Financial will not meet, or is in danger of not meeting, its minimum regulatory capital ratios; or (4) the Federal Reserve otherwise determines that the payment of dividends would constitute an unsafe or unsound practice. The Federal Reserve’s policies also require that a bank holding company serve as a source of financial strength to its subsidiary banks by standing ready to use available resources to provide adequate capital funds during periods of financial stress or adversity and by maintaining the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks where necessary. Under the prompt corrective action regulations for a bank subsidiary, the ability of a bank holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. These regulatory policies could affect the ability of First Financial to pay dividends or otherwise engage in capital distributions. In addition, since First Financial is a legal entity

separate and distinct from First Federal and does not conduct stand-alone operations, its ability to pay dividends depends on the ability of First Federal to pay dividends to it. As a South Carolina chartered bank, First Federal is subject to limitations on the amount of dividends that it is permitted to pay. Unless otherwise instructed by the State Board of Financial Institutions (the “SC Board”) or the Commissioner of Banking, First Federal is generally permitted under South Carolina state banking regulations to pay cash dividends of up to 100% of net income in any calendar year without obtaining the prior approval of the SC Board. Under Federal Reserve regulations, a dividend cannot be paid by First Federal if it would be less than well-capitalized after the dividend. The Federal Reserve may also prevent the payment of a dividend by First Federal if it determines that the payment would be an unsafe and unsound banking practice.

Quantitative measures established by regulation to ensure capital adequacy require First Financial and First Federal to maintain minimum amounts and ratios (as defined in the regulations and set forth in the table below) of tier 1 capital to total average assets and of risk-based capital to risk-based assets. As of March 31, 2013, both First Financial and First Federal met all capital adequacy requirements to which they are subject and were categorized as well-capitalized under the regulatory framework for prompt corrective action.

As a result of First Federal’s charter conversion and Federal Reserve membership in February 2012, 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, ongoing supervision 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.

Capital amounts and ratios are presented in the following table.




(dollars in thousands)	Actual					For Capital Adequacy Purposes					To Be Well-Capitalized Under Prompt Corrective Action Provisions ¹

	Amount		Ratio			Amount		Ratio			Amount		Ratio

First Financial ¹
As of March 31, 2013
Tier 1 capital to total average assets	$	341,952		10.72	%	$	127,646		4.00	%
Tier I capital to risk-based assets		341,952		15.30			89,409		4.00
Risk-based capital to risk-based assets		370,636		16.58			178,819		8.00

As of December 31, 2012
Tier 1 capital to total average assets	$	337,908		10.54	%	$	128,287		4.00	%
Tier I capital to risk-based assets		337,908		14.89			90,804		4.00
Risk-based capital to risk-based assets		366,897		16.16			181,608		8.00

First Federal
As of March 31, 2013
Tier 1 capital to total average assets	$	326,547		10.24	%	$	127,579		4.00	%	$	159,474		5.00	%
Tier I capital to risk-based assets		326,547		14.63			89,258		4.00			133,887		6.00
Risk-based capital to risk-based assets		355,185		15.92			178,516		8.00			223,146		10.00

As of December 31, 2012
Tier 1 capital to total average assets	$	319,555		9.97	%	$	128,201		4.00	%	$	160,252		5.00	%
Tier I capital to risk-based assets		319,555		14.10			90,685		4.00			136,028		6.00
Risk-based capital to risk-based assets		348,503		15.37			181,370		8.00			226,713		10.00


¹ Bank holding companies are not subject to the prompt corrective action provision of the Federal Deposit Insurance Act.

First Federal is generally required by regulatory agencies to maintain certain minimum balances of cash or noninterest-bearing deposits with the Federal Reserve. During 2012, and the quarter ended March 31, 2013 First Federal maintained excess balances in an interest-bearing account with the Federal Reserve and as a result, there was no required balance needed at March 31, 2013 and December 31, 2012.

NOTE 7. Income Tax

The income tax expense for the three months ended March 31, 2013 was $2.6 million, compared with $4.2 million for the three months ended March 31, 2012. The quarter ended March 31, 2012 included tax expense of $2.1 million for the state deferred tax asset write-off related to a difference in applicable South Carolina tax laws for banks versus thrifts upon First Federal’s conversion to a state-chartered commercial bank. The effective tax rate for the three months ended March 31, 2013 was 33.36%, compared with 70.92% for the quarter ended March 31, 2012. The decrease in the comparable effective tax rate was principally due to the

state deferred tax asset write-off in the quarter ended March 31, 2012 as well as higher tax-exempt income resulting from purchasing bank owned life insurance during the second half of 2012. The effective tax rate for the three months ended March 31, 2012 excluding the deferred tax asset write-down was 35.62%.

At March 31, 2013, First Financial had a net deferred tax liability of $8.3 million, compared to a net deferred tax liability position of $3.6 million at December 31, 2012.

NOTE 8. Share-Based Payment Arrangements

At March 31, 2013, First Financial has one share-based compensation plan from which new awards may be granted. This plan may issue qualified and non-qualified options, restricted stock awards and other forms of equity compensation to employees and nonemployee directors. Under the active plan, the Board may issue up to 900,000 options, stock appreciation rights and restricted stock in the aggregate. At March 31, 2013, First Financial had 531,066 shares related to options and stock appreciation rights and 225,000 shares related to restricted stock awards available for grants. Stock options currently granted under the plan 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.

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 or terminated. Forfeited or expired options under the abandoned or terminated plans may not be reissued. At March 31, 2013, there were 113,293 options which remained outstanding under the four abandoned or terminated plans.

Pursuant to the merger agreement entered into with SCBT Financial Corporation on February 19, 2013, no new awards may be issued by First Financial from its share-based compensation plan noted above.

Compensation expense for stock options is recognized in salaries and employee benefits in the Consolidated Statements of Income. For the three months ended March 31, 2013 and March 31, 2012, First Financial recorded an expense of $27 thousand and $46 thousand respectively. First Financial recognized an income tax benefit of less than $100 thousand in the three months ended March 31, 2013 and March 31, 2012 respectively.

Compensation cost is measured using the Black-Scholes option pricing model. The determined cost is recognized on a straight line basis over the requisite service period of the award.

A summary of stock option activity is presented below.




	Number of Shares		Weighted- Average Exercise Price ($)		Weighted- Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value ($000)

Outstanding at December 31, 2012	259,189			22.30
Granted	---
Exercised	(6,406	)		13.78
Forfeited or expired	(1,962	)		22.47

Outstanding at March 31, 2013	250,821			22.51		1.20	622


Exercisable at March 31, 2013	233,528			23.13		1.13	505


Outstanding at December 31, 2011	404,387			23.80
Granted	---
Exercised	---
Forfeited or expired	(12,037	)		25.92

Outstanding at March 31, 2012	392,350			23.73		1.70	21


Exercisable at March 31, 2012	339,013			25.15		1.54	6

Stock options outstanding and exercisable as of March 31, 2013 are as follows.




		Options Outstanding				Options Exercisable

Range of Exercise Prices Low /High Outstanding			Number of Option Shares Outstanding	Weighted- Average Remaining Contractual Life (Years)	Weighted- Average Exercise Price ($)	Number of Option Shares Outstanding	Weighted- Average Exercise Price ($)

	$8.90 / $13.63		29,775	1.54	11.87	29,775	11.87
	$14.00 / $16.88		40,069	2.15	14.15	22,776	14.15
	$17.00 / $19.54		55,542	0.72	19.54	55,542	19.54
	$20.77 / $23.90		28,942	1.15	23.66	28,942	23.66
	$24.26/ $28.50		22,150	0.22	25.21	22,150	25.21
	$29.35 / $31.90		4,000	1.16	29.92	4,000	29.92
	$32.28 / $38.71		70,343	1.21	32.38	70,343	32.38

			250,821	1.20	22.51	233,528	23.13

As of March 31, 2013, there was $18 thousand of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the plans. That cost will be recognized in the second quarter of 2013.

NOTE 9. 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. Outstanding undisbursed closed construction loans primarily consists of permanent residential construction and commercial property construction loans.

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.

The following table presents First Federal’s loan and letter of credit commitments.




	As of

(in thousands)	March 31, 2013			December 31, 2012

Available unused lines of credit		$	372,662		$	377,473
Commitments to fund commercial real estate, construction and land development loans			31,449			26,401
Other unused commitments			48,395			39,055
Standby letters of credit			10,940			10,792

Derivative instruments

First Federal utilizes derivatives as part of its risk management strategy in conducting 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 Income 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 March 31, 2013, First Federal had derivative financial instruments outstanding with notional amounts totaling $66.0 million compared with $63.0 million at December 31, 2012. The estimated net fair value of the open contracts related to the MSRs was a gain of $313 thousand at March 31, 2013 compared with a loss of $280 thousand at December 31, 2012.

The following table presents First Federal’s obligation under forward commitments, the fair value of those obligations along with the fair value of derivative instruments associated with forward commitments.




	As of

(in thousands)	March 31, 2013			December 31, 2012

Mortgage loan pipeline		$	83,634		$	96,866
Expected pipeline closures			62,726			72,650
Fair value of mortgage loan pipeline commitments			1,304			1,943
Forward commitments			119,577			144,852
Fair value of forward commitments			489			1,347

NOTE 10. 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 at the measurement date. Where there is no active market for a financial instrument, First Financial has made estimates using discounted cash flows or other valuation techniques. Inputs to these valuation methods are subjective in nature, involve uncertainties and require significant judgment and 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 March 31, 2013				As of December 31, 2012

(in thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value

Assets
Cash and cash equivalents	$	129,300	$	129,300	$	117,451	$	117,451
Securities available for sale		314,597		314,597		253,798		253,798
Securities held to maturity		14,869		16,942		15,555		17,867
Nonmarketable securities		19,245		19,245		20,914		20,914
Total loans, net		2,428,715		2,471,335		2,451,145		2,502,376
Loans held for sale		33,752		33,752		55,201		55,201
FDIC indemnification asset		58,917		58,917		80,268		80,268
Other repossessed assets acquired ¹		16,310		16,310		18,338		18,338
Residential mortgage servicing rights ¹		15,297		15,297		13,910		13,910
Accrued interest receivable ¹		8,675		8,675		8,564		8,564
Derivative financial instruments ¹		2,140		2,140		2,561		2,561
Liabilities
Deposits		2,600,520		2,612,531		2,595,333		2,608,927
Advances from FHLB		233,000		258,517		233,000		260,409
Long-term debt		47,204		47,016		47,204		46,749
FDIC true-up liability ²		2,396		2,396		3,658		3,658
Accrued interest payable ²		5,792		5,792		6,114		6,114


¹ Included as part of other assets in the Consolidated Balance Sheets.
² Included 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 were no changes in the valuation methods used to estimate fair value from the year ended December 31, 2012.

Assets Recorded at Fair Value on a Recurring Basis

The following tables present the financial instruments measured at fair value on a recurring basis.




	As of March 31, 2013

(in thousands)	Level 1			Level 2			Level 3			Total

Obligations of US government agencies and corporations		$	1,019		$	225		$	---		$	1,244
State and municipal obligations			---			13,263			---			13,263
Collateralized debt obligations			---			---			3,504			3,504
Mortgage-backed securities			---			145,308			---			145,308
Collateralized mortgage obligations			---			144,507			---			144,507
Other securities			2,147			2,987			1,637			6,771

Securities available for sale			3,166			306,290			5,141			314,597

Residential mortgage servicing rights			---			---			15,297			15,297
Derivative financial instruments			2,140			---			---			2,140

Total assets at fair value		$	5,306		$	306,290		$	20,438		$	332,034


	As of December 31, 2012

(in thousands)	Level 1			Level 2			Level 3			Total

Obligations of US government agencies and corporations		$	---		$	1,278		$	---		$	1,278
State and municipal obligations			---			13,483			---			13,483
Collateralized debt obligations			---			---			3,332			3,332
Mortgage-backed securities			---			74,304			---			74,304
Collateralized mortgage obligations			---			154,883			---			154,883
Other securities			1,929			2,999			1,590			6,518

Securities available for sale			1,929			246,947			4,922			253,798

Residential mortgage servicing rights			---			---			13,910			13,910
Derivative financial instruments			2,561			---			---			2,561

Total assets at fair value		$	4,490		$	246,947		$	18,832		$	270,269

Securities Available for Sale

Securities available for sale include obligations of the US government agencies and corporations, state and municipal obligations, CDOs, mortgage-backed securities, CMOs and other securities. For securities classified as 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, such as cash flow models, for which all significant assumptions are observable in the market.

To determine the fair value of securities available for sale that are classified as level 2, cash flow models provided by a third-party pricing service and other observable inputs are utilized. The cash flow models incorporate market participant data and knowledge of the structures of each 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.

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. A cash flow analysis is performed on each security in the CMO portfolio, regardless of the credit rating, to determine if the security has any OTTI.

The fair value of securities available for sale that are classified as level 3 primarily include 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. 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. If a security is rated below investment grade by a credit agency, a stress test is performed to determine OTTI.

With respect to third party pricing services used to value both level 2 and level 3 securities, valuations are reviewed by management noting the extent to which the pricing service is gathering observable market information as opposed to using unobservable inputs. Review and oversight procedures are performed to ensure that securities available for sale are properly classified in the fair value hierarchy.

Residential mortgage servicing rights

The estimated fair value of residential 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. MSRs are classified as level 3.

With respect to third party pricing services used to value MSRs, valuations are reviewed by management noting the extent to which the pricing service is gathering observable market information as opposed to using unobservable inputs. Review and oversight procedures are performed to ensure that MSRs are properly classified in the fair value hierarchy.

Derivative financial instruments

The fair values of derivative financial instruments are determined based on quoted market prices, dealer quotes and internal pricing models that are primarily sensitive to market observable data.

The following table presents quantitative information regarding the assumptions used for valuing level 3 assets.

(dollars in thousands)

Fair Value as of
March 31, 2013 ¹

Valuation

Unobservable Input

Range (Weighted Average)

Collateralized debt obligations

3,504

Discounted

Discount margin to LIBOR

10.50% - 16.80% (12.19%)

cash flow

Constant default rate

0.25% - 0.84% (0.39%)

Default percentage

8.06% - 48.92% (31.26%)

MSRs

15,297

Discounted

Constant prepayment rate

14.60%

cash flow

Discount rate

10.43%

Delinquency percentage

1.63%

¹ Other level 3 securities totaling $1.6 million are valued based on data provided by the issuer

Changes in Fair Value Measurement Levels

The table below includes changes in level 3 fair value measurements based on the hierarchy levels previously discussed. The gains (losses) in the following table may include changes to fair value due in part to observable factors that may be part of the

valuation methodology.



	Quarter Ended March 31, 2013					Quarter Ended March 31, 2012

(in thousands)	Securities Available For Sale		Residential Mortgage Servicing Rights			Securities Available For Sale			Residential Mortgage Servicing Rights

Balance, beginning of period	$	4,922	$	13,910		$	57,028		$	10,663
Total net losses for the year included in
Other-than-temporary impairment losses on investment securities		---		---			(69	)		---
Mortgage and other loan income		---		(431	)		---			(538	)
Other comprehensive income, gross		172		---			274			---
Purchases		47		---			215			---
Servicing assets that resulted from transfers of financial assets		---		1,818			---			1,773
Paydowns		---		---			(3,424	)		---

Balance, end of period	$	5,141	$	15,297		$	54,024		$	11,898

Financial Instruments Recorded at Fair Value on a Nonrecurring Basis

The table below presents the assets measured at fair value on a nonrecurring basis categorized by the level of inputs used in the valuation of each asset and the corresponding realized loss.



(in thousands)	As of March 31, 2013		Level 1		Level 2		Level 3		Year to Date Losses

Assets
Loans held for sale	$	33,752	$	---	$	33,752	$	---	$	---
Impaired loans, net of specific allowance		33,502		---		---		33,502		3,752
Other repossessed assets acquired		16,310		---		---		16,310		408

Total	$	83,564	$	---	$	33,752	$	49,812	$	4,160


(in thousands)	As of December 31, 2012		Level 1		Level 2		Level 3		Year to Date Losses

Assets
Loans held for sale	$	55,201	$	---	$	55,201	$	---	$	---
Impaired loans, net of specific allowance		24,632		---		---		24,632		3,511
Other repossessed assets acquired		18,338		---		---		18,338		1,138

Total	$	98,171	$	---	$	55,201	$	42,970	$	4,649

Loans held for sale

Loans held for sale is comprised of residential mortgage loans originated for sale in the secondary market. The fair value of residential mortgage loans originated for sale in the secondary market is based on purchase commitments or quoted prices for the same or similar loans and classified as nonrecurring level 2.

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 measured based on the value of the collateral securing these loans. Certain assumptions and unobservable inputs are currently being used by appraisers, therefore qualifying these assets as level 3. Specific reserves for impaired loans were $1.3 million and $1.0 million at March 31, 2013 and December 31, 2012, respectively.

Other repossessed assets acquired

Other repossessed assets acquired in settlement of loans are recorded at the lower of the principal balance of the loan or fair value of the property less estimated selling expenses. Certain assumptions and unobservable inputs are currently being used by

appraisers, therefore qualifying these assets as level 3.

Assets Not Recorded at Fair Value

Additionally, accounting standards require the disclosure of the estimated fair value of financial instruments that are not recorded at fair value. The following table presents the financial instruments not recorded at fair value categorized by the level of inputs.



	As of March 31, 2013

(in thousands)	Level 1		Level 2		Level 3		Total

Assets
Cash and cash equivalents	$	129,300	$	---	$	---	$	129,300
Securities held to maturity		---		16,942		---		16,942
Nonmarketable securities		---		---		19,245		19,245
Total loans, net ¹		---		---		2,437,833		2,437,833
FDIC indemnification asset		---		---		58,917		58,917
Accrued interest receivable ²		8,675		---		---		8,675
Liabilities
Deposits		---		---		2,612,531		2,612,531
Advances from FHLB		---		---		258,517		258,517
Long term debt		---		---		47,016		47,016
FDIC true-up liability ³		2,396		---		---		2,396
Accrued interest payable ³		5,792		---		---		5,792


	As of December 31, 2012

(in thousands)	Level 1		Level 2		Level 3		Total

Assets
Cash and cash equivalents	$	117,451	$	---	$	---	$	117,451
Securities held to maturity		---		17,867		---		17,867
Nonmarketable securities		---		---		20,914		20,914
Total loans, net ¹		---		---		2,477,744		2,477,744
FDIC indemnification asset		---		---		80,268		80,268
Accrued interest receivable ²		8,564		---		---		8,564
Liabilities
Deposits		---		---		2,608,927		2,608,927
Advances from FHLB		---		---		260,409		260,409
Long term debt		---		---		46,749		46,749
FDIC true-up liability ³		3,658		---		---		3,658
Accrued interest payable ³		6,114		---		---		6,114


¹ Excludes impaired loans
² Included as part of other assets in the Consolidated Balance Sheets.
³ Included as part of other liabilities in the Consolidated Balance Sheets.

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

For these short-term instruments, 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 investments in FHLB and Federal Reserve stock are ultimately recoverable at par.

Total loans, net

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 receivable approximates fair value.

FDIC indemnification asset

The fair value is determined by the projected cash flows from the FDIC loss-share agreements based on expected reimbursements for losses at the applicable loss sharing percentages pursuant to the terms of the loss-share agreements. Cash flows are discounted to reflect the timing and receipt of the loss-sharing reimbursements from the FDIC.

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 payable 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.

FDIC true-up liability

The fair value of the FDIC true-up liability is determined by the projected cash flows based on expected payments for recoveries in accordance with the Plantation loss share agreement with the FDIC. Cash flows are discounted to reflect the timing and payment of recoveries due to the FDIC.

I tem 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations


	As of and for the Quarters Ended

(dollars in thousands, except per share data)	March 31, 2013			December 31, 2012			September 30, 2012			June 30, 2012			March 31, 2012

Summary of Operations
Interest income	$	39,329		$	41,549		$	40,014		$	39,343		$	36,359
Interest expense		6,191			6,460			6,817			7,630			8,107

Net interest income		33,138			35,089			33,197			31,713			28,252
Provision for loan losses		5,972			4,161			4,533			4,697			6,745

Net interest income after provision for loan losses		27,166			30,928			28,664			27,016			21,507
Noninterest income		15,837			16,173			14,548			32,530			13,182
Noninterest expense		35,120			35,357			33,029			39,250			28,709

Income from operations before income taxes		7,883			11,744			10,183			20,296			5,980
Income tax expense		2,630			3,921			3,516			7,712			4,241

Net income		5,253			7,823			6,667			12,584			1,739
Preferred stock dividends		813			812			813			812			813
Accretion on preferred stock		165			163			160			158			156

Net income available to common shareholders	$	4,275		$	6,848		$	5,694		$	11,614		$	770

Per Common Share Data
Net income per common share
Basic	$	0.26		$	0.41		$	0.34		$	0.70		$	0.05
Diluted		0.26			0.41			0.34			0.70			0.05
Market price, end of period		20.96			13.08			12.99			10.72			11.00
Book value per common share		14.50			14.20			13.77			13.45			12.89
Tangible book value per common share (non-GAAP) ¹		14.04			13.71			13.25			12.91			12.75
Dividends		0.05			0.05			0.05			0.05			0.05
Shares outstanding, end of period (000s)		16,533			16,527			16,527			16,527			16,527
Balance Sheet Summary, at period end
Assets	$	3,216,647		$	3,215,558		$	3,245,487		$	3,304,174		$	3,145,538
Investment securities		348,711			290,267			276,633			293,400			500,331
Loans		2,476,142			2,495,324			2,574,369			2,632,483			2,355,567
Allowance for loan losses		47,427			44,179			46,351			48,799			50,776
Deposits		2,600,520			2,595,333			2,616,757			2,703,202			2,264,489
Borrowings		280,204			280,204			300,204			280,204			580,204
Shareholders’ equity		304,689			299,641			292,500			287,264			278,043
Balance Sheet Summary, average for the quarter
Assets	$	3,200,485		$	3,216,018		$	3,283,512		$	3,339,705		$	3,151,385
Investment securities		316,426			283,929			291,223			443,181			490,356
Loans		2,481,410			2,545,956			2,608,522			2,564,789			2,378,789
Allowance for loan losses		44,375			45,997			48,329			50,547			52,282
Deposits		2,576,968			2,594,112			2,664,207			2,596,642			2,228,613
Borrowings		280,229			282,122			294,796			428,505			609,665
Shareholders’ equity		301,921			296,851			290,047			285,672			277,390
Performance Metrics
Return on average assets ²		0.67	%		0.97	%		0.81	%		1.52	%		0.22	%
Return on average shareholders’ equity ²		7.06			10.48			9.14			17.72			2.52
Net interest margin (FTE) ³		4.51			4.69			4.35			4.08			3.84
Net interest margin, adjusted (non-GAAP) ¹		3.99			4.15			4.29			4.08			3.84
Efficiency ratio (non-GAAP) ^1,2		71.09			67.69			69.19			66.05			68.87
Pre-tax pre-provision earnings (non-GAAP) ¹	$	13,855		$	15,905		$	14,716		$	24,993		$	12,725



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




Five Quarter Summary of Selected Financial Data (Continued)
	As of and for the Quarters Ended

(dollars in thousands)	March 31, 2013			December 31, 2012			September 30, 2012			June 30, 2012			March 31, 2012

Capital Ratios
Equity to assets		9.47	%		9.32	%		9.01	%		8.69	%		8.84	%
Tangible common equity to tangible assets (non-GAAP) ¹		7.23			7.07			6.77			6.47			6.70
Dividend payout ratio		19.23			12.20			14.71			7.14			100.00
Tier 1 leverage capital ratio		10.72			10.54			10.12			9.79			10.22
Tier 1 risk-based capital ratio		15.30			14.89			14.42			13.89			14.81
Total risk-based capital ratio		16.58			16.16			15.70			15.16			16.08
Tier 1 leverage capital ratio (First Federal)		10.24			9.97			9.47			9.06			9.00
Tier 1 risk-based capital ratio (First Federal)		14.63			14.10			13.50			12.86			13.05
Total risk-based capital ratio (First Federal)		15.92			15.37			14.78			14.13			14.32
Asset Quality Metrics
Allowance for loan losses as a percent of loans		1.92	%		1.77	%		1.80	%		1.85	%		2.16	%
Allowance for loan losses as a percent of nonperforming loans		97.42			89.30			94.53			97.72			101.75
Nonperforming loans as a percent of loans		1.97			1.98			1.90			1.90			2.12
Nonperforming assets as a percent of loans and other repossessed assets acquired		2.61			2.70			2.72			2.94			3.02
Nonperforming assets as a percent of total assets		2.02			2.11			2.18			2.36			2.28
Net loans charged-off as a percent of average loans ²		0.98			0.99			1.07			1.04			1.60
Net loans charged-off	$	6,063		$	6,333		$	6,981		$	6,673		$	9,493
Asset Quality Metrics Excluding Acquired Covered Loans
Allowance for loan losses as a percent of legacy loans		2.08	%		1.94	%		1.99	%		2.06	%		2.28	%
Allowance for loan losses as a percent of legacy nonperforming loans		118.82			108.23			118.82			123.30			148.22
Nonperforming loans as a percent of legacy loans		1.75			1.79			1.67			1.67			1.54
Nonperforming assets as a percent of legacy loans and other repossessed assets acquired		2.04			2.17			1.97			2.01			2.00
Nonperforming assets as a percent of total assets		1.45			1.54			1.42			1.45			1.42



¹	See Item 2. Management’s Discussion and Anaylsis of Financial Condition and Results of Operations - Use of Non-GAAP Financial Measures
²	Represents an annualized rate

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 months ended March 31, 2013. 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 2012 Annual Report on Form 10-K for the year ended December 31, 2012, as filed with the Securities Exchange Commission (“SEC”) on March 18, 2013. 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 2012 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 at www.sec.gov .

Forward-Looking Statements

Statements in this Quarterly Report on Form 10-Q, 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 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: the general business environment; general economic conditions nationally and in the States of North and South Carolina; interest rates; the North and South Carolina real estate markets; the demand for mortgage loans; the credit risk of lending activities, including changes in the level and trend of delinquent and nonperforming loans and charge-offs; changes in First Federal’s allowance for loan losses and provision for loan losses that may be affected by deterioration in the housing and real estate markets; results of examinations by banking regulators, including the possibility that any such regulatory authority may, among other things, require First Federal to increase its allowance for loan losses, write-down assets, change First Federal’s regulatory capital position or affect its ability to borrow funds or maintain or increase deposits, which could adversely affect liquidity and earnings; First Financial’s ability to control operating costs and expenses; First Financial’s ability to successfully integrate any assets, liabilities, customers, systems, and management personnel acquired or may in the future acquire into its operations and its ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto; competitive conditions between banks and

non-bank financial services providers; regulatory changes, including new or revised rules and regulations implemented pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act; and closing conditions related to the proposed merger with SCBT, including regulatory and shareholder approvals required for the consummation of the proposed merger with SCBT Financial Corporation (“SCBT”). Other risks, that could cause or contribute to such differences, are also detailed in First Financial’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and current reports on Form 8-K that are filed with the Securities and Exchange Commission, which are available at the SEC’s website www.sec.gov . 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.

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 2012 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.

SCBT Merger

On February 19, 2013, First Financial entered into an Agreement and Plan of Merger (the “Agreement’) with SCBT. Subject to the terms and conditions set forth in the Agreement, First Financial plans to merge with and into SCBT with SCBT continuing as the surviving corporation in the merger. The Agreement also provides that, immediately following the closing of the merger, First Federal will merge with and into SCBT (“SCBT Bank”), a South Carolina banking corporation and wholly owned subsidiary of SCBT, with SCBT Bank continuing as the surviving bank in the merger.

Subject to the terms and conditions of the Agreement, at the closing of the merger, each outstanding share of First Financial common stock will be converted into the right to receive 0.4237 shares of common stock of SCBT, subject to the payment of cash in lieu of fractional shares. Each outstanding share of First Financial’s Fixed Rate Cumulative Perpetual Preferred Stock Series A (“Series A Preferred Stock”) will be converted into the right to receive one share of preferred stock of SCBT, to be designated Series A Fixed Rate Cumulative Perpetual Preferred Stock and having such rights, preferences and privileges as are not materially less favorable than the rights, preferences and privileges of the First Financial Series A Preferred Stock.

The merger is expected to close in the third quarter of 2013, subject to customary closing conditions, including (1) approval of the Agreement by First Financial’s shareholders and by SCBT’s shareholders, (2) receipt of required regulatory approvals without the imposition of a condition that would have or be reasonably likely to have a material adverse effect on First Financial or SCBT, (3) the absence of any law or order prohibiting the consummation of the merger, (4) approval of the listing on the NASDAQ Global Select Market of the common stock of SCBT to be issued in the merger and (5) the effectiveness of the registration statement for the common stock of SCBT to be issued in the merger. Each party’s obligation to complete the merger is also subject to certain additional customary conditions, including (i) subject to certain exceptions, the accuracy of the representations and warranties of the other party, (ii) performance in all material respects by the other party of its obligations under the Agreement and (iii) receipt by such party of an opinion from its counsel to the effect that the merger will qualify as a reorganization within the meaning of the Internal Revenue Code of 1986. SCBT’s obligation to complete the merger is further subject to additional customary conditions, including (1) the imminent occurrence of the First Federal merger into SCBT Bank, (2) the execution and delivery of an Advisory Board Member Agreement by each of the then-sitting members of the board of directors of First Financial who desires to join the advisory board, and (3) the transfer of First Financial’s shared loss contracts with the FDIC from First Financial to SCBT without adverse modification or amendment to such contracts and without cost to SCBT.

The Agreement provides certain termination rights for both First Financial and SCBT shareholders and further provides that upon termination of the Agreement under certain circumstances, First Financial and SCBT will be obligated to pay the other party a termination fee of $14.9 million.

Under the terms of the Agreement, SCBT will add five First Financial board members to the combined company’s board. Robert J. Hill, Jr., president and chief executive officer of SCBT, will continue to serve as chief executive officer of the combined company and R. Wayne Hall, president and chief executive officer of First Financial and First Federal, will be named president of the combined company. Robert R. Horger, the current chairman of SCBT, will remain the chairman and Paula Harper Bethea, the current chair of First Financial, will assume the role of vice chair of the board.

The foregoing description of the merger and the Agreement does not purport to be complete and is qualified in its entirety by reference to the merger agreement, which is Exhibit 2.1 to this Form 10-Q and is incorporated by reference herein. The Agreement provides investors and security holders with information regarding its terms. It is not intended to provide any other financial information about First Financial, SCBT or their respective subsidiaries and affiliates. The representations, warranties and covenants contained in the Agreement were made only for purposes of that agreement and as of specific dates, are solely for the benefit of the parties to the Agreement, may be subject to limitations agreed upon by the parties, including being qualified by confidential disclosures made for the purposes of allocating contractual risk between the parties to the Agreement instead of establishing these matters as facts, and may be subject to standards of materiality applicable to the parties that differ from those applicable to investors. Investors should not rely on the representations, warranties or covenants or any description thereof as characterizations of the actual state of facts or condition of First Financial, SCBT or any of their respective subsidiaries or affiliates. Moreover, information concerning the subject matter of the representations, warranties and covenants may have changed after the date of the Agreement, which subsequent information may or may not be fully reflected in public disclosures by First Financial or SCBT.

Results of Operations

First Financial recorded net income available to common shareholders of $4.3 million for the quarter ended March 31, 2013, compared with $770 thousand for the quarter ended March 31, 2012. Diluted net income per common share was $0.26 for the quarter ended March 31, 2013, compared with $0.05 per common share for the quarter ended March 31, 2012.

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.




Average Balances, Net Interest Income, Average Rates
	Quarters Ended March 31,

	2013								2012

(dollars in thousands)	Average Balance			Interest		Average Rate			Average Balance			Interest		Average Rate

Earning assets
Interest-bearing deposits with banks	$	62,441		$	29		0.19	%	$	8,484		$	1		0.05	%
Securities available for sale		280,293			1,828		2.65			434,798			3,378		3.11
Securities held to maturity ¹		15,345			238		9.54			20,247			334		10.25
Nonmarketable securities		20,788			159		3.10			35,311			155		1.77
Loans ²
Residential		1,036,799			10,297		3.97			1,033,877			10,506		4.06
Commercial		666,730			12,846		7.81			618,032			9,167		5.97
Consumer		777,881			13,470		7.02			726,970			12,453		6.89

Total loans		2,481,410			36,613		5.98			2,378,879			32,126		5.43
Loans held for sale		47,156			380		3.22			41,121			350		3.40
FDIC indemnification asset, net		70,794			82		0.47			48,774			15		0.12

Total earning assets		2,978,227			39,329		5.35			2,967,614			36,359		4.94

Nonearning assets
Cash and due from banks		49,530								53,821
Allowance for loan losses		(44,375	)							(52,282	)
Other assets		217,103								182,232

Total assets	$	3,200,485							$	3,151,385


Interest-bearing liabilities
Interest-bearing deposits
Interest-bearing checking	$	498,742		$	154		0.13	%	$	421,543		$	125		0.12	%
Savings		274,888			70		0.10			215,523			84		0.16
Money market		477,928			406		0.34			329,420			313		0.38
Time deposits		929,183			2,542		1.11			979,831			3,429		1.41

Total interest-bearing deposits		2,180,741			3,172		0.59			1,946,317			3,951		0.82
Advances from FHLB		233,000			2,222		3.87			563,759			3,359		2.40
Long-term debt		47,229			797		6.75			45,906			797		6.95

Total interest-bearing liabilities		2,460,970			6,191		1.02			2,555,982			8,107		1.28

Noninterest-bearing liabilities
Noninterest-bearing deposits		396,227								282,296
Other liabilities		41,367								35,717

Total liabilities		2,898,564								2,873,995
Shareholders’ equity		301,921								277,390

Total liabilities and shareholders’ equity	$	3,200,485							$	3,151,385

Net interest income/interest spread				$	33,138		4.33					$	28,252		3.66

Contribution of noninterest-bearing sources of funds ³							0.18								0.18

Net interest margin (FTE) ⁴							4.51	%							3.84	%



¹	Interest income used in the average rate calculation includes the tax equivalent adjustment of $158 thousand and $182 thousand for the quarters ended March 31, 2013 and 2012, respectively, calculated based on a federal tax rate of 35%.
²	Total loans include nonaccrual loans. Loan fees, which are not material for any of the periods, have been included in loan interest income for the rate calculation.
³	Equates to total cost of funds of 0.88% and 1.15% for the quarters ended March 31, 2013 and 2012, respectively.
⁴	Net interest margin exceeds the interest spread due to noninterest-bearing funding sources supporting earning assets.

Net interest margin adjusted for the cash received and the incremental loan accretion on the former Cape Fear Bank (“Cape Fear”) loan pool was 3.99% for the March 31, 2013 quarter, a 15 basis point increase over the March 31, 2012 quarter. The increase was principally caused by the accretion and amortization of purchase accounting adjustments resulting from the acquisition of certain former Plantation Federal Savings Bank (“Plantation”) assets and liabilities from the FDIC in April 2012. In addition, improved performance on a Cape Fear loan pool, a lower cost of funds as maturing time deposits have been replaced with core deposits and the continued funding mix shift from borrowings to core deposits have positively impacted net interest margin as compared with the same quarter of the prior year.

Net interest income for the quarter ended March 31, 2013 was $33.1 million, an increase of $4.9 million or 17.3% over the same quarter last year. The increase was primarily the effect of the improved performance of a Cape Fear loan pool as well as higher levels of average earning assets from the Plantation acquisition and Liberty Savings Bank (“Liberty”) branch purchase in April 2012.

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.




	Quarter Ended March 31, 2013 Versus 2012 Increase (Decrease) due to

(in thousands)	Volume			Rate			Net

Interest income
Interest-bearing deposits with banks	$	19		$	9		$	28
Securities available for sale		(1,094	)		(456	)		(1,550	)
Securities held to maturity		(75	)		(21	)		(96	)
Nonmarketable securities		(82	)		86			4
Loans
Residential		30			(239	)		(209	)
Commercial		746			2,933			3,679
Consumer		797			220			1,017

Total loans		1,573			2,914			4,487
Loans held for sale		49			(19	)		30
FDIC indemnification asset		10			57			67

Total interest income		400			2,570			2,970

Interest expense
Interest-bearing deposits
Interest-bearing checking		23			6			29
Savings		20			(34	)		(14	)
Money market		128			(35	)		93
Time deposits		(166	)		(721	)		(887	)

Total interest-bearing deposits		5			(784	)		(779	)
Advances from FHLB		(2,577	)		1,440			(1,137	)
Long-term debt		3			(3	)		---

Total interest expense		(2,569	)		653			(1,916	)

Net interest income	$	2,969		$	1,917		$	4,886



Note: The change in interest not solely due to changes in volume or rates has been allocated in proportion to the absolute dollar amounts of the change in each.

The increase in net interest income for the three month period reflects 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 completed in the second quarter of 2012. The three month period reflects a positive loan rate and volume variance due primarily to the acquisition of Plantation loans, the related purchase accounting, and the improved performance of loans acquired from the former Cape Fear Bank. The effects of the acquisitions were partially offset by negative volume and rate variances on investment securities available for sale as well as negative rate variances on advances from Federal Home Loan Bank of Atlanta (“FHLB”) due to the balance sheet repositioning in the second quarter of 2012. The change in interest expense also reflects a positive rate variance on deposits due to the continued decline in rates paid on core and time deposits resulting from an ongoing strategy to reduce maturing high rate retail and wholesale time deposits and a shift in funding to core deposits.

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 $6.0 million for the quarter ended March 31, 2013, which included $1.3 million due to recognizing impairment on certain Plantation loan pools which have lower cash flows than originally projected. In accordance with Accounting Standards Codification (“ASC”) 310-30, First Financial evaluates the projected cash flows of its acquired loans that were identified as nonperforming at the time of acquisition on a quarterly basis. The ASC 310-30 evaluation is made on all acquired loans, including those loans covered by loss share agreements with the FDIC (“acquired covered”). As of March 31, 2013, a net impairment of $4.6 million was projected on certain loan pools, primarily due to several large losses which occurred during the current quarter, and was recorded as an increase to the allowance for loan losses. A portion of the higher loss estimate was related to acquired covered loans and was recorded as an adjustment to the FDIC indemnification asset, which reduced the provision for loan losses. Excluding the impact from the ASC 310-30 evaluation, the provision for loan losses for the quarter ended March 31, 2013 was $4.7 million, a decrease of $2.0 million or 30.1% from the same quarter last year. The decrease was related to the continued improvement in historical loss trends and general stabilization of credit metrics through March 31, 2013. See “Allowance for Loan Losses” 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.




	Quarters Ended March 31,						Change

(in thousands)	2013			2012			$			% ¹

Service charges on deposit accounts	$	7,263		$	7,302		$	(39	)		(0.5	)%
Mortgage and other loan income		4,435			3,435			1,000			29.1
Trust and plan administration income		1,067			1,081			(14	)		(1.3	)
Brokerage fees		714			664			50			7.5
Bank owned life insurance income		373			---			373			NM
Other income		932			769			163			21.2
Other-than-temporary impairment losses on investment securities		(268	)		(69	)		(199	)		NM
FDIC true-up liability release		1,321			---			1,321			NM

Total noninterest income	$	15,837		$	13,182		$	2,655			20.1	%

¹ Any variance greater than +/- 250% has been designated as “Not Meaningful” (NM) .

Noninterest income for the quarter ended March 31, 2013 included a release on the FDIC true-up liability, which was recorded in conjunction with the ASC 310-30 quarterly evaluation discussed above as the higher projected losses will reduce the amount that First Federal might have to potentially remit to the FDIC based on the initial purchase bid.

The increase in noninterest income was primarily the result of higher mortgage and other loan income, bank owned life insurance and the FDIC true-up liability release discussed above. The increase in mortgage and other loan income was due in large part to more favorable hedge adjustments on both the mortgage servicing rights and the mortgage pipeline hedges in the current quarter due to the continued low interest rate environment and higher volumes related to the addition of correspondent lenders. The increase in bank owned life insurance was the result of purchasing these policies during the second half of 2012.

Noninterest Expense

The following table summarizes the components of noninterest expense.




	Quarters Ended March 31,				Change

(in thousands)	2013		2012		$			% ¹

Salaries and employee benefits	$	16,335	$	15,142	$	1,193			7.9	%
Occupancy costs		2,214		2,267		(53	)		(2.3	)
Furniture and equipment		2,068		1,809		259			14.3
Other real estate expenses, net		924		530		394			74.3
FDIC insurance and regulatory fees		531		994		(463	)		(46.6	)
Professional services		2,070		1,465		605			41.3
Advertising and marketing		866		652		214			32.8
Other loan expense		1,372		1,351		21			1.6
Intangible amortization		512		90		422			NM
FDIC indemnification impairment		3,806		---		3,806			NM
Other expense		4,422		4,409		13			0.3

Total noninterest expense	$	35,120	$	28,709	$	6,411			22.3	%



¹ Any variance greater than +/- 250% has been designated as “Not Meaningful” (NM).

The increase in noninterest expense was primarily related to the impact of the Plantation and Liberty acquisitions and the FDIC indemnification impairment related to improved performance on a Cape Fear loan pool, as well as higher Other Real Estate Owned (“OREO”) expenses, net and professional services, partially offset by lower FDIC insurance and regulatory fees. OREO expenses increased primarily as the result of lower gains recognized on sold properties. The increase in professional fees was the result of merger-related expenses during the current quarter. The decrease in FDIC insurance and regulatory fees was the result of lower regulatory fees after becoming a Federal Reserve Bank of Richmond (“Federal Reserve”) member bank.

Income Taxes

The income tax expense for the three months ended March 31, 2013 totaled $2.6 million a decrease of $1.6 million or 38.0% from the same quarter last year. The quarter ended March 31, 2012 included a tax expense of $2.1 million for the state deferred tax asset write-off related to a difference in applicable South Carolina tax laws for banks versus thrifts upon First Federal’s conversion to a state-chartered commercial bank. In addition, the variance was the result of the change in pre-tax income. The effective tax rate for the three months ended March 31, 2013 was 33.36%, compared with 70.92% for the quarter ended March 31, 2012. The decrease in the effective tax rate was principally due to higher tax-exempt income resulting from purchasing bank owned life insurance during the second half of 2012 and the write-off of the state deferred tax asset in the first quarter of 2012. The effective tax rate for the three months ended March 31, 2012 excluding the deferred tax asset write-down was 35.62%. Refer to Note 7 to the Consolidated Financial Statements for additional information.

Financial Condition

Total assets at March 31, 2013 were $3.2 billion, essentially unchanged from December 31, 2012 and an increase of $71.1 million or 2.3% over March 31, 2012. While total assets were essentially unchanged from December 31, 2012, decreases in total loans, loans held for sale and the FDIC indemnification asset from December 31, 2012 were substantially offset by increases in interest-bearing deposits with banks and securities available for sale. The increase in total assets over March 31, 2012 was principally due to the Plantation and Liberty acquisitions, partially offset by a decrease in investment securities as part of repositioning the balance sheet during the second quarter of 2012.

Cash and Cash Equivalents

Cash and cash equivalents totaled $129.3 million at March 31, 2013, an increase of $11.8 million or 10.1% over December 31, 2012 and an increase of $65.8 million or 103.6% over March 31, 2012. The variance was primarily the result of holding short-term excess funds at the Federal Reserve in an interest-bearing account.

Investment Securities

Investment securities at March 31, 2013 totaled $348.7 million, an increase of $58.4 million or 20.1% over December 31, 2012 and a decrease of $151.6 million or 30.3% from March 31, 2012. The increase over December 31, 2012 was due to new security purchases, partially offset by normal principal reductions and cash flows from called securities. The decrease from March 31, 2012 was primarily the result of the sale of $203.6 million of mortgage-backed securities during the quarter ended June 30, 2012 as part of repositioning the balance sheet, partially offset by new security purchases since the repositioning. See Note 2 to the Consolidated Financial Statements for additional information regarding investment securities.

Loans

The following table summarizes the loan portfolio by major categories.

FIRST FINANCIAL HOLDINGS, INC.
LOANS

(in thousands)	March 31, 2013		December 31, 2012		September 30, 2012		June 30, 2012		March 31, 2012
Residential loans
Residential 1-4 family	$	963,053	$	956,355	$	1,008,130	$	1,023,800	$	972,881
Residential construction		25,895		22,439		19,660		19,601		15,501
Residential land		48,911		52,739		52,616		56,073		40,794
Total residential loans		1,037,859		1,031,533		1,080,406		1,099,474		1,029,176

Commercial loans
Commercial business		130,169		118,379		125,345		107,804		88,054
Commercial real estate		467,890		491,567		520,135		555,588		447,339
Commercial construction		1,092		1,064		1,801		17,201		16,289
Commercial land		64,582		70,109		74,306		78,011		54,786
Total commercial loans		663,733		681,119		721,587		758,604		606,468

Consumer loans
Home equity		373,108		384,664		380,000		388,534		347,825
Manufactured housing		282,114		280,100		277,744		276,607		275,845
Marine		79,328		75,736		69,314		59,643		50,458
Other consumer		40,000		42,172		45,318		49,621		45,795
Total consumer loans		774,550		782,672		772,376		774,405		719,923
Total loans		2,476,142		2,495,324		2,574,369		2,632,483		2,355,567
Less: Allowance for loan losses		47,427		44,179		46,351		48,799		50,776
Total loans, net	$	2,428,715	$	2,451,145	$	2,528,018	$	2,583,684	$	2,304,791

Total loans at March 31, 2013 decreased $19.2 million or 0.8% from December 31, 2012 and increased $120.6 million or 5.1% over March 31, 2012. The decrease from December 31, 2012 was a result of reductions in the commercial and consumer loan categories due to several large payoffs and paydowns on commercial real estate and commercial land loans, higher loss claims on the Plantation portfolio and normal cash flows. The decline in commercial loans is consistent with a strategy to reduce problem and criticized loan balances, both legacy as well as those in acquired portfolios. The increase in total loans over March 31, 2012 was primarily the result of the Plantation and Liberty acquisitions which occurred during the quarter ended June 30, 2012, partially offset by normal loan portfolio activity.

At March 31, 2013, loans held for sale totaled $33.8 million, a decrease of $21.4 million or 38.9% from December 31, 2012 and a decrease of $18.6 million or 35.5% from March 31, 2012. The decreases were the result of the timing of sales into the secondary market, with a primary contributor being the shift to cash loan sales which generally settle more quickly than loan securitization sales. Secondary market sales generally settle in 45-60 days.

In April 2009 and April 2012, First Federal entered into purchase and assumption agreements with the FDIC to acquire certain assets and liabilities of Cape Fear and Plantation, respectively, under which all Cape Fear loans and certain Plantation commercial loans and OREO were covered under loss share agreements with the FDIC (“acquired covered loans” or “acquired covered assets”). In addition, First Federal acquired five branches from Liberty in April 2012. The Plantation loans and OREO not covered under its loss share agreement and all of the Liberty loans are considered “acquired non-covered loans” or “acquired non-covered assets.” Loans that were originated through First Federal’s normal origination channels (i.e., not acquired in an acquisition) that are part of the loan portfolio or have subsequently migrated to OREO are considered “legacy loans” or “legacy assets.” See Notes 3 and 4 to the Consolidated Financial Statements for additional information.

The following tables summarize acquired loans.




	As of

	As of March 31, 2013						As of December 31, 2012


Acquired non-covered loans (in thousands)	Loans Outstanding		Delinquent Loans		Nonperforming Loans		Loans Outstanding		Delinquent Loans		Nonperforming Loans

Residential loans
Residential 1-4 family	$	40,460	$	---	$	59	$	42,171	$	---	$	59
Residential Construction		---		---		---		237		---		---
Residential land		412		---		---		419		2		---

Total residential loans		40,872		---		59		42,827		2		59

Commercial loans
Commercial business		18,864		---		---		19,469		53		---
Commercial real estate		5,282		---		---		5,585		58		---
Commercial land		1,057		---		---		1,443		---		---

Total commercial loans		25,203		---		---		26,497		111		---

Consumer loans
Home equity		45,434		27		176		48,108		369		269
Other consumer		591		1		---		699		---		---

Total consumer loans		46,025		28		176		48,807		369		269

Total loans	$	112,100	$	28	$	235	$	118,131	$	482	$	328

Other repossessed assets acquired	$	991					$	1,457
Criticized loans ¹		---						---
Classified loans ¹		525						744


¹ See Note 3 to the Consolidated Financial Statements for the regulatory definition of criticized and classified.




	As of

	March 31, 2013						December 31, 2012


Acquired covered loans (in thousands)	Loans Outstanding		Delinquent Loans		Nonperforming Loans		Loans Outstanding		Delinquent Loans		Nonperforming Loans

Residential loans
Residential 1-4 family	$	---	$	---	$	---	$	1,911	$	355	$	---
Residential land		11,803		140		8		11,748		---		8

Total residential loans		11,803		140		8		13,659		355		8

Commercial loans
Commercial business		18,322		133		285		21,496		404		220
Commercial real estate		118,958		1,130		6,792		127,274		473		6,573
Commercial land		27,293		726		630		30,588		45		785

Total commercial loans		164,573		1,989		7,707		179,358		922		7,578

Consumer loans
Home equity		23,732		1,236		1,024		22,531		366		1,033
Other consumer		1,078		---		30		1,141		2		30

Total consumer loans		24,810		1,236		1,054		23,672		368		1,063

Total loans	$	201,186	$	3,365	$	8,769	$	216,689	$	1,645	$	8,649

Other repossessed assets acquired	$	9,677					$	9,608
Criticized loans ¹		3,666						4,254
Classified loans ¹		18,684						17,869


¹ See Note 3 to the Consolidated Financial Statements for the regulatory definition of criticized and classified.

Asset Quality

Because lending activities comprise such a significant source of revenue, First Federal seeks to adhere to sound lending practices. First Federal’s Management Loan Committee, which consists of the Chief Credit Officer and senior lending personnel, is authorized to approve loans to one borrower or a group of related borrowers up to $5.0 million in the aggregate. Loan requests for relationships in excess of $5.0 million in

aggregate credit exposure are presented to the loan committee of First Federal’s Board for review and approval.

First Federal monitors the loan portfolio regularly 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 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 review varies by asset type, depending on the nature of the 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 advantage 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.

In addition to monitoring individual loans during the monthly loan review process, First Federal management meets on a monthly basis to review historical portfolio performance and discuss emerging trends for delinquency, nonperforming and charge-off levels. The monthly credit quality meeting is comprised of senior credit, lending and accounting personnel who discuss current loss mitigation efforts as well as strategies to improve the success of ongoing efforts.

Measuring Asset Quality for Acquired Loans

Acquired loans are carried at fair value in accordance with ASC 805, Business Combinations . In addition, loans that displayed deteriorated credit quality at acquisition are accounted for in accordance with ASC 310-30, Accounting for Certain Loans or Debt Securities Acquired in a Transfer , are deemed to be performing loans, and are not included in First Federal’s delinquent and nonperforming credit metrics. Acquired loans that were considered performing at acquisition but have subsequently become delinquent, impaired or nonperforming (as defined below) are included in the appropriate credit metric. As discussed in Note 5 to the Consolidated Financial Statements, some of the acquired loans are covered under loss share agreements with the FDIC and, as such, have a lower risk of loss if they are deemed uncollectible as First Federal will file a loss claim with the FDIC to be reimbursed in accordance with their agreement. The outstanding loan balance and credit metrics as of March 31, 2013 for the acquired loan portfolios are displayed in two tables in the “Loans” section above.

Delinquent Loans

The following table presents loans that were past due 30-89 days which were not otherwise on nonaccrual status.

FIRST FINANCIAL HOLDINGS, INC.
DELINQUENT LOANS

	March 31, 2013					December 31, 2012					September 30, 2012					June 30, 2012					March 31, 2012
(dollars in thousands)	$		% of Portfolio			$		% of Portfolio			$		% of Portfolio			$		% of Portfolio			$		% of Portfolio
Residential loans
Residential 1-4 family	$	1,433		0.15	%	$	2,800		0.29	%	$	2,361		0.23	%	$	1,244		0.12	%	$	1,889		0.19	%
Residential construction		284		1.10			---		---			---		---			---		---			---		---
Residential land		725		1.48			47		0.09			157		0.30			475		0.85			123		0.30
Total residential loans		2,442		0.24			2,847		0.28			2,518		0.23			1,719		0.16			2,012		0.20

Commercial loans
Commercial business		1,255		0.96			847		0.72			582		0.46			903		0.84			1,677		1.90
Commercial real estate		4,252		0.91			3,492		0.71			2,397		0.46			3,014		0.54			3,065		0.69
Commercial land		1,540		2.38			1,573		2.24			318		0.43			675		0.87			2,271		4.15
Total commercial loans		7,047		1.06			5,912		0.87			3,297		0.46			4,592		0.61			7,013		1.16

Consumer loans
Home equity		2,758		0.74			4,414		1.15			2,204		0.58			2,017		0.52			3,315		0.95
Manufactured housing		1,162		0.41			3,241		1.16			2,506		0.90			1,835		0.66			1,502		0.54
Marine		154		0.19			284		0.37			227		0.33			300		0.50			358		0.71
Other consumer		177		0.44			384		0.91			742		1.64			626		1.26			445		0.97
Total consumer loans		4,251		0.55			8,323		1.06			5,679		0.74			4,778		0.62			5,620		0.78
Total delinquent loans	$	13,740		0.55	%	$	17,082		0.68	%	$	11,494		0.45	%	$	11,089		0.42	%	$	14,645		0.62	%

First Federal’s credit quality metrics at March 31, 2013 reflect seasonal decreases normally experienced in the first calendar quarter of each year as well as improved performance over the same quarter last year. Delinquent loans at March 31, 2013 decreased $3.3 million or 19.6% from December 31, 2012 and decreased $905 thousand or 6.2% from March 31, 2012. The decrease from the prior quarter was driven by lower delinquent consumer loans due to normal seasonal fluctuations, partially offset

by higher delinquent commercial loans, of which several larger loans are in the process of resolution. The decrease from the same quarter last year was primarily the result of continued collection efforts. Total delinquent loans at March 31, 2013 included $3.4 million in acquired covered loans, as compared with $1.6 million and $3.1 million at December 31, 2012 and March 31, 2012, respectively.

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 First Federal’s ability to collect all contractual principal and interest have been classified as impaired under ASC 310-10, as discussed further below, and placed on nonaccrual status. The following table presents the composition of nonperforming assets.

FIRST FINANCIAL HOLDINGS, INC.

NONPERFORMING ASSETS

	March 31, 2013					December 31, 2012					September 30, 2012					June 30, 2012					March 31, 2012
(dollars in thousands)	$		% of Portfolio			$		% of Portfolio			$		% of Portfolio			$		% of Portfolio			$		% of Portfolio
Residential loans
Residential 1-4 family	$	7,693		0.80	%	$	7,137		0.75	%	$	10,881		1.08	%	$	10,460		1.02	%	$	6,649		0.68	%
Residential land		576		1.18			785		1.49			1,558		2.96			1,423		2.54			1,398		3.43
Total residential loans		8,269		0.80			7,922		0.77			12,439		1.15			11,883		1.08			8,047		0.78

Commercial loans
Commercial business		1,813		1.39			1,460		1.23			1,407		1.12			1,198		1.11			1,931		2.19
Commercial real estate		18,213		3.89			18,386		3.74			15,853		3.05			15,918		2.87			18,474		4.13
Commercial construction		---		---			247		23.21			247		13.71			261		1.52			261		1.60
Commercial land		3,845		5.95			4,058		5.79			2,990		4.02			4,577		5.87			5,240		9.56
Total commercial loans		23,871		3.60			24,151		3.55			20,497		2.84			21,954		2.89			25,906		4.27

Consumer loans
Home equity		9,295		2.49			10,049		2.61			10,145		2.67			10,636		2.74			9,779		2.81
Manufactured housing		3,085		1.09			3,355		1.20			2,221		0.80			2,197		0.79			2,648		0.96
Marine		125		0.16			139		0.18			90		0.13			29		0.05			63		0.12
Other consumer		265		0.66			275		0.65			228		0.50			306		0.62			131		0.29
Total consumer loans		12,770		1.65			13,818		1.77			12,684		1.64			13,168		1.70			12,621		1.75
Total nonaccrual loans		44,910		1.81			45,891		1.84			45,620		1.77			47,005		1.79			46,574		1.98
Loans 90+ days still accruing		6					43					74					75					51
Restructured loans, still accruing		3,768					3,536					3,340					2,857					3,276
Total nonperforming loans		48,684		1.97	%		49,470		1.98	%		49,034		1.90	%		49,937		1.90	%		49,901		2.12	%
Other repossessed assets acquired		16,310					18,338					21,579					28,191					21,818
Total nonperforming assets	$	64,994				$	67,808				$	70,613				$	78,128				$	71,719

Nonperforming assets at March 31, 2013 decreased $2.8 million or 4.2% from December 31, 2012 and decreased $6.7 million or 9.4% from March 31, 2012. The decreases were principally the result of OREO sales outpacing new foreclosures. Acquired covered nonperforming loans totaled $8.8 million at March 31, 2013, compared with $8.6 million and $15.6 million at December 31, 2012 and March 31, 2012, respectively. Acquired covered OREO totaled $9.7 million at March 31, 2013, compared with $9.6 million and $11.4 million at December 31, 2012 and March 31, 2012, respectively.

In accordance with ASC 310-10, 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. Loans classified as impaired are placed on nonaccrual status and are included in the tables above as nonaccrual loans. First Federal accounts for certain loan modifications or restructuring as a troubled debt restructuring (“TDR”). In general, the modification or restructuring of a debt is considered a TDR if First Federal, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to the borrower that First Federal would not otherwise consider. TDRs are included in the tables above, with nonaccruing TDRs incorporated into their respective loan category and accruing TDRs identified separately. See Note 3 to the Consolidated Financial Statements for additional details on impaired loans and TDRs.

The following table presents net charge-offs by loan category.

FIRST FINANCIAL HOLDINGS, INC.

NET CHARGE-OFFS

	March 31, 2013						December 31, 2012						September 30, 2012					June 30, 2012						March 31, 2012
(dollars in thousands)	$			% of Portfolio*			$			% of Portfolio*			$		% of Portfolio*			$			% of Portfolio*			$			% of Portfolio*
Residential loans
Residential 1-4 family	$	1,215			0.50	%	$	2,756			1.10	%	$	294		0.12	%	$	1,070			0.42	%	$	507			0.21	%
Residential land		(144	)		(1.13	)		257			1.89			403		2.91			78			0.59			701			6.75
Total residential loans		1,071			0.41			3,013			1.13			697		0.26			1,148			0.42			1,208			0.47

Commercial loans
Commercial business		268			0.90			126			0.42			924		3.22			334			1.34			825			3.60
Commercial real estate		2,089			1.74			588			0.46			1,994		1.47			714			0.54			1,462			1.30
Commercial construction		5			1.67			(1	)		(0.41	)		11		0.56			(2	)		(0.05	)		(2	)		(0.05	)
Commercial land		21			0.13			89			0.48			1,037		5.43			723			4.00			1,439			9.87
Total commercial loans		2,383			1.43			802			0.46			3,966		2.14			1,769			0.99			3,724			2.41

Consumer loans
Home equity		1,346			1.42			1,343			1.44			1,125		1.17			2,580			2.71			2,264			2.57
Manufactured housing		1,019			1.45			899			1.29			778		1.12			666			0.97			1,467			2.13
Marine		74			0.38			(19	)		(0.11	)		146		0.88			82			0.60			361			2.83
Other consumer		170			1.64			295			2.51			269		2.22			428			3.48			469			3.90
Total consumer loans		2,609			1.34			2,518			1.31			2,318		1.20			3,756			1.98			4,561			2.51
Total net charge-offs	$	6,063			0.98	%	$	6,333			0.99	%	$	6,981		1.07	%	$	6,673			1.04	%	$	9,493			1.60	%

Total net charge-offs for the quarter ended March 31, 2013 decreased $270 thousand or 4.3% and decreased $3.4 million or 36.1% from the quarters ended December 31, 2012 and March 31, 2012, respectively. However, 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.

	March 31, 2013								December 31, 2012
CLASSIFIED ASSETS (dollars in thousands)	Covered Classified		Non-covered Classified			Total Classified			Covered Classified		Non-covered Classified			Total Classified

Residential loans
Residential 1-4 family	$	---	$	17,954		$	17,954		$	1,208	$	15,527		$	16,735
Residential land		752		1,192			1,944			246		1,071			1,317
Total residential loans		752		19,146			19,898			1,454		16,598			18,052

Commercial loans
Commercial business		1,262		8,452			9,714			1,334		9,654			10,988
Commercial real estate		12,023		45,001			57,024			11,763		52,847			64,610
Commercial construction		---		---			---			---		247			247
Commercial land		1,125		7,471			8,596			1,387		7,744			9,131
Total commercial loans		14,410		60,924			75,334			14,484		70,492			84,976

Consumer loans
Home equity		3,443		16,578			20,021			1,897		15,512			17,409
Manufactured housing		---		3,785			3,785			---		3,578			3,578
Marine		---		175			175			---		192			192
Other consumer		79		285			364			34		343			377
Total consumer loans		3,522		20,823			24,345			1,931		19,625			21,556
Total classified loans		18,684		100,893			119,577			17,869		106,715			124,584
Other repossessed assets acquired		9,677		6,633			16,310			9,608		8,730			18,338
Total classified assets	$	28,361	$	107,526		$	135,887		$	27,477	$	115,445		$	142,922

Classified assets/FFCH tier 1 capital + ALLL				27.61	%		34.90	%				30.21	%		37.41	%

Classified loans at March 31, 2013 decreased $5.0 million or 4.0% from December 31, 2012. The decrease was driven by the continued improvement in credit quality in non-covered classified commercial loans. Acquired covered classified loans increased as a result of continued deterioration in the home equity portfolio.

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 loan portfolio. The allowance is decreased by actual loan charge-offs, net of recoveries, and is increased by charges to current period operating results through the provision for loan losses. During the monthly loan review process, losses are identified and addressed as they are incurred. In addition, First Federal utilizes an external firm to review loan quality and it reports the results of its reviews to executive management and the Board on a quarterly basis. Such reviews also assist management in validating the accuracy of the risk rating process and establishing the level of the allowance.

A committee consisting of members of lending management, credit risk management, executive management and accounting meets at least quarterly to review the credit quality of the loan portfolios and to evaluate the allowance. The portfolio evaluation and allowance calculation process determines specific reserves for impaired loans and general reserves for pools of homogeneous loans to arrive at the required allowance. In addition to being used to categorize risk, First Federal’s internal risk rating system is used as one of the factors 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. While allocations of the allowance may be made for specific loans, the entire allowance is available for any loan that, in management’s judgment, should be charged-off. In addition, an unallocated or non-specific reserve may be deemed necessary based on the committee’s judgment. As of March 31, 2013, there was no unallocated portion of the allowance for loan losses.

A primary component of determining the reserve factors utilized 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 one-year and the most recent quarter historical loss ratios, to determine probable losses inherent in the portfolio. 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 economic conditions;
	•	changes in the nature and volume of the loan portfolios;
	•	experience, ability and depth of management;
	•	past due, nonaccrual and classified loan trends;
	•	quality of the loan review process;
	•	collateral value changes for collateral dependent loans;
	•	changes in credit concentrations; and
	•	the competitive, legal and regulatory environment.

Upon completion of the qualitative adjustments, the allowance is allocated to the components of the portfolio based on the adjusted loss rates. The specific reserve associated with impaired loans is primarily determined by estimating loss inherent in each problem credit based on the value of the underlying collateral or by utilizing a discounted cash flow methodology.

The following table sets forth the changes in the allowance.




	As of and for the Quarters Ended

(in thousands)	March 31, 2013			March 31, 2012

Balance at beginning of period	$	44,179		$	53,524

Provision for loan losses before benefit from FDIC loss share agreements		9,311			6,745
Benefit from FDIC loss share agreements		(3,339	)		---

Provision for loan losses		5,972			6,745

Increase in FDIC Indemnification asset		3,339			---

Charge-offs:
Residential		(1,120	)		(1,253	)
Commercial		(2,919	)		(4,016	)
Consumer		(3,237	)		(4,802	)

Total charge-offs		(7,276	)		(10,071	)

Recoveries:
Residential		49			45
Commercial		536			292
Consumer		628			241

Total recoveries		1,213			578

Net charge-offs		(6,063	)		(9,493	)

Balance at end of period	$	47,427		$	50,776

The allowance for loan losses was 1.92% of total loans at March 31, 2013, compared with 1.77% of total loans at December 31, 2012 and 2.16% of total loans at March 31, 2012. The increase in the allowance ratio over December 31, 2012 was due to establishing a $4.6 million reserve related to estimated higher losses on acquired Plantation loans based on the ASC 310-30 review discussed previously. Of this amount, $3.3 million was related to acquired covered loans and was recorded as an increase to the FDIC indemnification asset. The increase was partially offset by the continued improvement in historical loss factors and stable credit metrics over the past twelve months. In addition, the change in the allowance ratio from March 31, 2012 was affected by acquiring loans in the Plantation and Liberty acquisitions that are carried at fair value and did not have an associated allowance at acquisition.

First Federal believes that it uses relevant information available to make determinations about the allowance and that it has established its allowance in accordance with accounting principles general accepted in the United States of America (“GAAP”). Management and the Board have implemented policies surrounding loan loss identification, loan monitoring and allowance for loan loss methodologies, have consistently applied its processes, and have determined that the controls in place are adequate to ensure that the allowance is appropriate as of each balance sheet date. Management believes that the allowance is adequate and sufficient for the risk inherent in the portfolio as of each balance sheet date. If circumstances differ substantially from the assumptions used in determining the allowance, future 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.

FDIC Indemnification Asset

The FDIC indemnification asset at March 31, 2013 was $58.9 million, a decrease of $21.4 million or 26.6% from December 31, 2012 and an increase of $12.6 million or 27.3% over March 31, 2012. The decrease from December 31, 2012 was due to the receipt of $20.7 million in claims reimbursement from the FDIC during the quarter as well as recognizing a potential impairment of $3.8 million on the FDIC indemnification asset related to the Cape Fear acquired portfolio, partially offset by recognizing $3.3 million of potential additional claims to the FDIC related to the Plantation loss share agreement. The increase over March 31, 2012 was the result of establishing a $35.9 million indemnification asset during 2012 to recognize the loss share agreement associated with the Plantation transaction, the $3.3 million added to the FDIC indemnification asset this quarter, and normal accretion, partially offset by the claims reimbursement and amortization of the potential impairment.

Bank Owned Life Insurance

Bank owned life insurance totaled $51.0 million at March 31, 2013, essentially unchanged from December 31, 2012 and an increase of $51.0 million over March 31, 2012. The increase was the result of establishing a bank owned life insurance program on certain corporate officers as part of a strategy to offset the costs of existing employee benefit plans.

Other Assets

Other assets totaled $74.8 million at March 31, 2013, a decrease of $2.4 million or 3.2% from December 31, 2012 and a decrease of $18.1 million or 19.5% from March 31, 2012. The decrease from December 31, 2012 was principally the result of a $2.0 million decline in OREO as sales of properties continue to outpace foreclosures, combined with miscellaneous reductions in other asset categories. The decrease from March 31, 2012 was principally due to current tax adjustments recorded and federal tax refunds received during 2012.

Deposits

Core deposits, which include checking, savings, and money market accounts, totaled $1.7 billion at March 31, 2013, an increase of $53.2 million or 3.2% over December 31, 2012 and an increase of $390.7 million or 29.9% over March 31, 2012. The increases were primarily the result of the Plantation and Liberty acquisitions as well as the continued promotion of retail deposit products and sales processes introduced during 2011 and into 2012. Time deposits at March 31, 2013 totaled $903.4 million, a decrease of $48.1 million or 5.1% from December 31, 2012 and a decrease of $54.7 million or 5.7% from March 31, 2012. The decreases were due to a strategy to focus on core transaction accounts and to reduce high rate retail and wholesale time deposits as they matured.

Borrowed Funds

Borrowed funds are comprised of advances from the FHLB and long-term debt. Borrowings totaled $280.2 million at March 31, 2013, unchanged from December 31, 2012 and a decrease of $300.0 million or 51.7% from March 31, 2012. The decrease from March 31, 2012 was primarily the effect of prepaying $125.0 million of long-term FHLB advances during the June 30, 2012 quarter as part of the balance sheet repositioning strategy, as well as a shift in funding mix due to the organic growth of core deposits and the acquisition of low-cost deposits from Plantation and Liberty.

Shareholders’ Equity

Shareholders’ equity at March 31, 2013 was $304.7 million, an increase of $5.0 million or 1.7% over December 31, 2012 and an increase of $26.6 million or 9.6% over March 31, 2012. The increases were due to the effect of net operating results. First Federal’s regulatory capital ratios are in excess of “well-capitalized” minimums, presented in the following table.




	For the Quarters Ended

	March 31, 2013			December 31, 2012			September 30, 2012			June 30, 2012			March 31, 2012

First Financial
Equity to assets		9.47	%		9.32	%		9.01	%		8.69	%		8.84	%
Tangible common equity to tangible assets (non-GAAP)		7.23			7.07			6.77			6.47			6.70
Book value per common share	$	14.50		$	14.20		$	13.77		$	13.45		$	12.89
Tangible book value per common share (non-GAAP)		14.04			13.71			13.25			12.91			12.75
Dividends		0.05			0.05			0.05			0.05			0.05
Shares outstanding, end of period (000s)		16,533			16,527			16,527			16,527			16,527


First Financial ¹	Regulatory Minimum for Capital Adequacy Purposes

Tier 1 leverage capital ratio		4.00	%	10.72	%	10.54	%	10.12	%	9.79	%	10.22	%
Tier 1 risk-based capital ratio		4.00		15.30		14.89		14.42		13.89		14.81
Total risk-based capital ratio		8.00		16.58		16.16		15.70		15.16		16.08


	Regulatory Minimum for “Well-Capitalized”

First Federal
Tier 1 leverage capital ratio		5.00	%	10.24	%	9.97	%	9.47	%	9.06	%	9.00	%
Tier 1 risk-based capital ratio		6.00		14.63		14.10		13.50		12.86		13.05
Total risk-based capital ratio		10.00		15.92		15.37		14.78		14.13		14.32


1 Bank holding companies are not subject to the prompt corrective action provisions of the Federal Deposit Insurance Act.

As a result of First Federal’s charter conversion and Federal Reserve membership in February 2012, 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.

On April 25, 2013, First Financial declared a quarterly cash dividend of $12.50 per share on its Fixed Rate Cumulative Perpetual Preferred Stock, Series A, payable on May 15, 2013 to preferred shareholders of record as of May 3, 2013. First Financial also declared a quarterly cash dividend of $0.05 per common share, payable on May 23, 2013 to shareholders of record as of May 9, 2013.

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 2012 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 9 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 March 31, 2013, First Federal had the capacity to borrow an additional $714.6 million from the FHLB of Atlanta, the Federal Reserve, 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 March 31, 2013.

First Financial Liquidity

As a holding company, First Financial conducts its business through its subsidiaries and 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 March 31, 2013, First Financial had cash and cash equivalents of $14.1 million, compared with $18.1 million at December 31, 2012. The decrease was primarily the result of quarterly dividend payments to preferred and common shareholders and merger related expenses.

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 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 slightly liability-sensitive within one year, with rate-sensitive liabilities exceeding rate-sensitive assets by $68.8 million or 2.14% of total assets as of March 31, 2013. This is compared with a liability-sensitive position of $119.8 million or 3.73% of total assets as of December 31, 2012. The decrease in the liability-sensitive position was primarily the result of the reduction in certificates of deposit during the current quarter and the addition of core deposits which were placed in repricing periods greater than one year based on their respective historical price sensitivity as discussed above.

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.

An institution which is liability-sensitive would normally have a negative effect on net interest income in a rising rate environment. 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 March 31, 2013 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, while First Federal is slightly liability-sensitive, net interest income would be expected to increase from what it would be if rates were to remain at March 31, 2013 levels by 1.29% if market interest rates were to increase immediately by 100 basis points in a parallel shift, while the increase in net interest income would be expected to be approximately 2.12% if market interest rates were to increase immediately by 200 basis points in a parallel shift. While the anticipated increase in net interest income is contrary for an institution with a negative gap, the nominal movement is primarily related to the lag matrix on the repricing of liabilities and the timing and magnitude of asset repricing relative to liabilities. There are fewer assets adjusting immediately, however loans generally move fully with the related index or yield curve change, while deposits may not change on a one-to-one correlation with the index or yield curve. The difference in the rate of change for assets relative to liabilities and the lagged timing of the liability changes has resulted in the projected slight increase in net interest income in a rising rate environment.

Net interest income simulation for 100 and 200 basis point declines in market rates were not performed at March 31, 2013 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 1.80% and increase by 2.90%, respectively, from where it would be if rates were to remain at March 31, 2013 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.

Critical Accounting Policies and Estimates

First Financial’s Consolidated Financial Statements are prepared in accordance with 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 the determination of the allowance for loan losses; fair value measurements; income taxes; and business combinations, including the method of accounting for loans acquired and estimating the FDIC indemnification asset. First Financial believes that these estimates and the related policies discussed below 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 2012 Annual Report on Form 10-K, and the more significant assumptions and estimates made by management are more fully described in “Management’s Discussion and Results of Operations – Critical Accounting Policies and Estimates” in First Financial’s 2012 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 GAAP, this report includes non-GAAP financial measures such as the efficiency ratio, tangible common equity (“TCE”) to tangible assets ratio, tangible common book value (“TBV”) per share, pre-tax pre-provision earnings and adjusted net interest margin. 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 these non-

GAAP financial measures enhance readers’ understanding of its business and performance, they should not be considered in isolation, or as a substitute for GAAP basis financial measures. Readers 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% 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 other intangible assets facilitates the comparison of results for ongoing business operations. The TCE ratio and 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 is 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.

The performance of the Cape Fear loans acquired from the FDIC in April 2009 has been better than originally projected. During 2012, cash payments received exceeded First Federal’s initial investment in the pool and, in accordance with GAAP, First Federal began recognizing the cash payments in net interest income. As the amount and frequency of cash payments for the Cape Fear loan pool are not predictable, this creates volatility in net interest margin. First Financial believes that adjusting net interest margin to remove the effect of the incremental loan accretion and interest income associated with the Cape Fear loan pool provides a more consistent trend to compare First Federal’s historical performance against itself as well as its net interest margin with its peers.

The following table presents the calculation of these non-GAAP measures.



	As of and for the Quarters Ended

(dollars in thousands, except per share data)	March 31, 2013			December 31, 2012			September 30, 2012			June 30, 2012			March 31, 2012

Efficiency Ratio
Net interest income (A)	$	33,138		$	35,089		$	33,197		$	31,713		$	28,252
Taxable equivalent adjustment (B)		158			168			184			226			182
Noninterest income (C)		15,837			16,173			14,548			32,530			13,182
(Loss) gain on acquisition (D)		---			(661	)		---			14,550			---
Net securities (losses) gains (E)		(268	)		(144	)		189			3,398			(69	)
Noninterest expense (F)		35,120			35,357			33,029			39,250			28,709
FHLB prepayment termination charge (G)		---			---			---			8,525			---
Efficiency ratio: (F-G)/(A+B+C-D-E) (non-GAAP)		71.09	%		67.69	%		69.19	%		66.05	%		68.87	%

Tangible Assets and Tangible Common Equity
Total assets	$	3,216,647		$	3,215,558		$	3,245,487		$	3,304,174		$	3,145,538
Other intangible assets		(7,573	)		(8,025	)		(8,478	)		(8,931	)		(2,310	)

Tangible assets (non-GAAP)	$	3,209,074		$	3,207,533		$	3,237,009		$	3,295,243		$	3,143,228


Total shareholders’ equity	$	304,689		$	299,641		$	292,500		$	287,264		$	278,043
Preferred stock		(65,000	)		(65,000	)		(65,000	)		(65,000	)		(65,000	)
Other intangible assets		(7,573	)		(8,025	)		(8,478	)		(8,931	)		(2,310	)

Tangible common equity (non-GAAP)	$	232,116		$	226,616		$	219,022		$	213,333		$	210,733


Shares outstanding, end of period (000s)		16,533			16,527			16,527			16,527			16,527

Tangible common equity to tangible assets (non-GAAP)		7.23	%		7.07	%		6.77	%		6.47	%		6.70	%
Book value per common share	$	14.50		$	14.20		$	13.77		$	13.45		$	12.89
Tangible common book value per share (non-GAAP)		14.04			13.71			13.25			12.91			12.75

Pre-tax Pre-provision Earnings
Income before income taxes	$	7,883		$	11,744		$	10,183		$	20,296		$	5,980
Provision for loan losses		5,972			4,161			4,533			4,697			6,745

Pre-tax pre-provision earnings (non-GAAP)	$	13,855		$	15,905		$	14,716		$	24,993		$	12,725


Impact of Improved Performance of Cape Fear Loan Pool
Net interest income	$	33,138		$	35,089		$	33,197		$	31,713		$	28,252
Tax equivalent adjustment		158			168			184			226			182

Net interest income on taxable equivalent basis (A)		33,296			35,257			33,381			31,939			28,434
Effect of Cape Fear incremental accretion		(3,849	)		(4,048	)		(472	)		---			---

Net interest income, adjusted (B) (non-GAAP)	$	29,447		$	31,209		$	32,909		$	31,939		$	28,434


Average earning assets (C)	$	2,978,227		$	2,994,982		$	3,061,432		$	3,142,597		$	2,967,614
Net interest margin (A)/(C) ¹		4.51	%		4.69	%		4.35	%		4.08	%		3.84	%
Net interest margin, adjusted (B)/(C) (non-GAAP) ¹		3.99	%		4.15	%		4.29	%		4.08	%		3.84	%


¹ Represents an annualized rate; calculation is approximate due to differences in industry standards for annualizing underlying average earning assets.

I tem 3. 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 2012 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.

I tem 4. 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 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 March 31, 2013, 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 March 31, 2013 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.

P ART II – OTHER INFORMATION

I tem 1. 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 March 31, 2013, First Financial believes that such litigation will not materially affect First Financial’s consolidated financial position or results of operations.

On March 5, 2013, a purported shareholder of First Financial filed a lawsuit in the Court of Chancery of the State of Delaware captioned Arthur Walter v. R. Wayne Hall et al. , No. 8386. On March 25, 2013, another purported shareholder of First Financial filed a lawsuit in the Court of Chancery of the State of Delaware captioned Emmy Moore v. R. Wayne Hall et al ., No. 8434. Both lawsuits name First Financial, members of First Financial’ s board of directors and SCBT as defendants, are purportedly brought on behalf of a putative class of First Financial’ s common shareholders and seek a declaration that the lawsuits are properly maintainable as a class action with the named plaintiffs as the proper class representatives. The lawsuits allege that First Financial, First Financial’s board of directors and SCBT breached duties and/or aided and abetted such breaches by failing to properly value the shares of First Financial and agreeing to certain terms of the transaction. First Financial believes that the claims are without merit.

I tem 1A. Risk Factors

There have been no material changes to the risk factors disclosed in First Financial’s 2012 Annual Report on Form 10-K.

I tem 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

I tem 3. Defaults Upon Senior Securities

None.

I tem 4. Mine Safety Disclosures

Not applicable.

I tem 5. Other Information

None.

I tem 6. Exhibits



EXHIBIT INDEX

Exhibit Number	Description

2.1	Agreement and Plan of Merger, dated as of February 19, 2013, by and between SCBT Financial Corporation and First Financial’s Holdings, Inc. (incorporated by reference to First Financial’s Form 8-K filed on February 22, 2013).

31.1	Rule 13a-14(a)/15d-14(a) Certification of the Principal Executive Officer.

31.2	Rule 13a-14(a)/15d-14(a) Certification of the Principal Financial Officer.

32	Section 1350 Certifications of the Principal Executive Officer and Principal Financial Officer.

101*	The following materials from the Quarterly Report on Form 10-Q of First Financial for the quarter ended March 31, 2013, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statement of Comprehensive Income, (iv) Consolidated Statements of Changes in Shareholders' Equity, (v) Consolidated Statements of Cash Flows and (vi) Notes to Consolidated Financial Statements.

*Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

S IGNATURES

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.


	FIRST FINANCIAL HOLDINGS, INC.

Date: May 8, 2013	/s/ Blaise B. Bettendorf

	Blaise B. Bettendorf
	Executive Vice President and Chief Financial Officer
	(Duly Authorized Officer and Principal Financial and Accounting Officer)