<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1994
----------------------------------------
OR
[ ] 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 0-11889
FIRST FINANCIAL CORPORATION
--------------------------------------------
(Exact name of registrant as specified in its charter)
Wisconsin 39-1471963
- -------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1305 Main Street, Stevens Point, Wisconsin 54481
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(Address of principal executive office)
(715) 341-0400
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(Registrant's telephone number, including area code)
--------------------------------------------------------------------
(Former name, address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------ ------
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date:
Common Stock, par value $1.00 per share 24,620,552 Shares
- -----------------------------------------------------------------------
Class Outstanding at April 30,
1994<PAGE>
FIRST FINANCIAL CORPORATION
Form 10-Q Index
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Page
Number
Part I - Financial Information
Consolidated Balance Sheets as of March 31, 2
1994 (Unaudited) and December 31, 1993
Unaudited Consolidated Statements of Income for 3
the Three Months Ended March 31, 1994 and 1993
Unaudited Consolidated Statement of Stockholders' 4
Equity for the Three Months Ended March 31, 1994
Unaudited Consolidated Statements of Cash Flows 5
for the Three Months Ended March 31, 1994
and 1993
Notes to Unaudited Consolidated Financial Statements 6-8
Management's Discussion and Analysis:
Comparison of the Consolidated Balance Sheets 9-21
at March 31, 1994 (Unaudited) and December 31,
1993
Comparison of the Unaudited Consolidated 22-25
Statements of Income for the Three Months
Ended March 31, 1994 and 1993
Part II -
Other Information
Item 6. Exhibits and Reports on Form 8-K 26
Signatures 27
Exhibits 28
<PAGE>
FIRST FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
March 31,
1994 December 31,
(Unaudited) 1993
(In thousands)
<S> <C> <C>
Cash $ 54,544 $ 63,241
Federal funds sold 11,348 21,873
Interest-earning deposits 8,141 25,768
Cash and cash equivalents 74,033 110,882
Securities available for sale (at fair
value):
Investment securities 30,763 84,487
Mortgage-related securities 143,823 178,362
Securities held to maturity:
Investment securities (fair value of
$133,683,000--1994 and $143,448,000
--1993) 135,864 143,568
Mortgage-related securities (fair
value of $1,245,674,000--1994
and $1,160,230,000--1993) 1,249,298 1,147,891
Loans receivable:
Held for sale 43,973 73,919
Held for investment 2,992,410 2,848,585
Foreclosed properties and
repossessed assets 6,320 6,817
Real estate held for investment
or sale 17,028 16,810
Office properties and equipment 50,371 50,120
Intangible assets, less accumulated
amortization 30,747 31,392
Other assets 88,406 81,800
$4,863,036 $4,774,633
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $4,157,773 $4,050,520
Borrowings 380,490 438,598
Advance payments by borrowers for
taxes and insurance 29,964 13,805
Other liabilities 40,576 37,025
Total liabilities 4,608,803 4,539,948
Stockholders' equity:
Serial preferred stock, $1 par value,
3,000,000 shares authorized; none
outstanding
Common stock, $1 par value, 30,000,000
shares authorized; shares issued and
outstanding: 24,602,752--1994;
23,586,827--1993 24,603 23,587
Additional paid-in capital 31,483 27,340
Net unrealized holding gain on securities
available for sale 735 2,701
Retained earnings (substantially
restricted) 197,412 181,057
Total stockholders' equity 254,233 234,685
$4,863,036 $4,774,633
</TABLE>
See notes to unaudited consolidated financial statements.
<PAGE>
FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1994 1993
(In thousands, except
per share amounts)
<S> <C> <C>
Interest income:
Mortgage loans $ 40,215 $ 38,303
Other loans 22,872 19,548
Mortgage-related securities 18,553 23,609
Investments 3,274 2,924
Total interest income 84,914 84,384
Interest expense:
Deposits 41,171 44,576
Borrowings 4,831 4,762
Total interest expense 46,002 49,338
Net interest income 38,912 35,046
Provision for losses on loans 1,380 2,844
37,532 32,202
Non-interest income:
Loan fees and service charges 2,010 1,930
Insurance and brokerage sales commissions 1,843 1,647
Deposit account service fees 1,840 1,715
Service fees on loans sold 1,316 1,619
Net gain on sale of mortgage loans 417 1,165
Net gain on sale of securities
available for sale 1,119 --
Other 1,188 592
Total non-interest income 9,733 8,668
Operating income 47,265 40,870
Non-interest expense:
Compensation, payroll taxes and benefits 11,712 11,350
Federal deposit insurance premiums 2,403 1,423
Occupancy expense 2,140 1,895
Data processing 1,815 2,187
Loan expenses 1,437 1,149
Telephone and postage 1,409 1,269
Amortization of intangible assets 1,344 1,155
Furniture and equipment 1,307 1,271
Marketing 1,042 774
Net cost of operations of foreclosed
properties 343 1,063
Other 2,507 2,146
Total non-interest expense 27,459 25,682
Income before income taxes 19,806 15,188
Income taxes 7,526 5,639
Net income $ 12,280 $ 9,549
Earnings per share:
Primary $ .49 $ .40
Fully diluted $ .49 $ .40
Cash dividend per share $ .10 $ .075
</TABLE>
See notes to unaudited consolidated financial statements.<PAGE>
FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For The Period Ended March 31, 1994
(Unaudited)
<TABLE>
<CAPTION>
Net
Unrealized
Holding
Gain On
Additional Securities Total
Common Paid-In Available Retained Stockholders'
Stock Capital For Sale Earnings Equity
(In thousands)
<S> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1993 $23,587 $27,340 $2,701 $181,057 $234,685
Net income 12,280 12,280
Cash dividend ($.10 per share) (2,538) (2,538)
Exercise of stock options 78 293 371
Issuance of common stock in
conjunction with acquisition 938 3,850 -- 6,613 11,401
Change in net unrealized holding
gain on securities available
for sale (1,966) (1,966)
BALANCES AT MARCH 31, 1994 $24,603 $31,483 $ 735 $197,412 $254,233
</TABLE>
See notes to unaudited consolidated financial statements.
<PAGE>
FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1994 1993
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 12,280 $ 9,549
Adjustments to reconcile net income to net cash provided
by operating activities:
(Increase) decrease in accrued interest on loans (1) 991
Increase in accrued interest on deposits 269 201
Mortgage loans originated for sale (97,132) (39,141)
Proceeds from sales of mortgage loans held for sale 139,583 82,175
Provision for depreciation 1,531 1,318
Provision for losses on loans 1,380 2,844
Provision for losses on real estate and other assets 225 1,137
Amortization of cost in excess of net assets of
acquired businesses 156 139
Amortization of core deposit intangibles 1,188 1,266
Amortization of purchased mortgage servicing rights 204 196
Net gain on sales of loans and assets (2,088) (1,341)
Other-net (407) 549
Net cash provided by operating activities 57,188 59,883
INVESTING ACTIVITIES
Proceeds from sales of investment securities available for sale 45,541 --
Proceeds from maturities of investment securities held
to maturity 20,195 23,190
Purchases of investment securities held to maturity -- (17,865)
Proceeds from sales of mortgage-related securities available
for sale 12,459 81,287
Principal payments received on mortgage-related securities 97,092 89,255
Purchases of mortgage-related securities held to maturity (161,439) (138,982)
Proceeds from sale of finance company receivables 6,665 --
Principal received on loans receivable 130,080 114,083
Loans originated for portfolio (198,174) (198,721)
Additions to office properties and equipment (357) (2,167)
Proceeds from sales of foreclosed properties and
repossessed assets 1,949 2,646
Proceeds from sales of real estate held for investment -- 234
Business acquisitions (net of cash and cash equivalents
acquired of $4,593,000--1994; $186,100,000--1993):
Investment securities held to maturity (4,785) (22,775)
Mortgage-related securities available for sale -- (81,287)
Mortgage-related securities held to maturity (16,742) (145,098)
Loans receivable (96,748) (316,302)
Office properties (2,387) (7,452)
Intangible assets (699) (5,517)
Deposits and related accrued interest 114,297 702,236
Borrowings 750 71,897
Stockholders' equity 11,401 --
Other-net (494) (9,602)
Net cash provided by (used in) investing activities (41,396) 139,060
FINANCING ACTIVITIES
Net decrease in deposits (7,313) (90,819)
Net increase in advance payments by borrowers for
taxes and insurance 15,697 12,414
Proceeds from borrowings 131,000 135,000
Repayments of borrowings (189,858) (284,367)
Proceeds from exercise of stock options 371 322
Payments of cash dividends to stockholders (2,538) (1,758)
Net cash used in financing activities (52,641) (229,208)
Decrease in cash and cash equivalents (36,849) (30,265)
Cash and cash equivalents at beginning of period 110,882 122,281
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 74,033 $ 92,016
</TABLE>
See notes to unaudited consolidated financial statements.<PAGE>
FIRST FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - PRINCIPLES OF CONSOLIDATION
The unaudited consolidated financial statements include the
accounts and results of operations of First Financial Corporation
(the Corporation) and its wholly-owned subsidiaries, First
Financial Bank, FSB (First Financial) and First Financial - Port
Savings Bank, FSB (Port), (collectively, the Banks). Significant
intercompany accounts and transactions have been eliminated in
consolidation. The Corporation uses the calendar year as its
fiscal year.
The financial statements reflect adjustments all of which
are of a normal recurring nature and in the opinion of
management, necessary for a fair statement of the results for the
interim periods, and are presented on an unaudited basis. The
operating results for the three months of 1994 are not
necessarily indicative of the results which may be expected for
the entire 1994 fiscal year. The December 31, 1993 balance sheet
included herein is derived from the consolidated financial
statements included in the Corporation's 1993 Annual Report to
Shareholders. The accompanying unaudited consolidated financial
statements and related notes should be read in conjunction with
the consolidated financial statements and related notes included
in the Corporation's 1993 Annual Report to Shareholders.
NOTE B - THE CORPORATION
The Corporation conducts business as a non-diversified
multiple thrift holding company and its principal assets are all
of the capital stock of First Financial and Port. At present the
primary business of the Corporation is the business of First
Financial and Port. The Corporation's activities are currently
comprised of providing limited administrative services to First
Financial and Port.
On February 26, 1994, the Corporation completed the
acquisition of NorthLand Bank of Wisconsin, SSB ("NorthLand") of
Ashland, Wisconsin. The Corporation issued approximately 938,000
shares of common stock, valued in the aggregate at $14.2 million,
at the time of the acquisition. The acquisition of NorthLand has
been accounted for as a pooling-of-interests. NorthLand is not
material to the balance sheet or operating results of the
Corporation; therefore, balances for prior years have not been
restated. However, 1994 amounts were adjusted to reflect the
transaction as if it had occurred on January 1, 1994. Upon
closing, NorthLand, which was merged into First Financial, had
total assets and stockholders' equity of $125.6 million and
$11.6 million, respectively.
On August 20, 1993, First Financial, completed the
assumption of deposits (approximately $268.0 million) and the
purchase of the branch facilities of the four Quincy, Illinois-
area branches of Citizens Federal, a Federal Savings Bank
("Citizens") of Miami, Florida. The acquisition of Citizens'
four Quincy, Illinois-area offices, now operating as branches of
First Financial, was accounted for as a purchase.
NOTE C - EARNINGS PER SHARE
Primary and fully diluted earnings per share for the periods
ended March 31, 1994 and 1993 have been determined based on the
weighted average number of common shares outstanding during each
period and common equivalent shares, using the treasury share
method, outstanding at the end of each period. The Corporation's
common stock equivalents consist entirely of stock options. See
Exhibit 11 to this Report for a detailed computation of earnings
per share.
NOTE D - CONTINGENT LIABILITIES
The Banks have previously entered into agreements whereby,
for an annual fee, certain securities are pledged as secondary
collateral in connection with the issuance of industrial
development revenue bonds. At March 31, 1994, mortgage-related
securities and investment securities with a carrying value of
approximately $4.1 million were pledged as collateral for bonds
in the aggregate principal amount of $6.0 million. Additional
bond issues totaling $7.61 million are supported by letters of
credit issued by First Financial, in lieu of specific collateral.
At March 31, 1994, each of the outstanding collateral agreements
was current with regard to bond debt-service payments.
NOTE E - DIVIDENDS PAID OR DECLARED TO STOCKHOLDERS
The Board of Directors of the Corporation declared a $0.10
per share quarterly cash dividend for the three-month period
ended March 31, 1994 to shareholders of record of the common
stock on March 15, 1994.
NOTE F - REGULATORY CAPITAL REQUIREMENTS
Current Office of Thrift Supervision (OTS) regulatory
capital requirements for federally-insured thrift institutions
include a tangible capital to tangible assets ratio, a core
leverage capital to adjusted tangible assets ratio and a risk-
based capital measurement based upon assets weighted for their
inherent risk. As of March 31, 1994, both First Financial and
Port exceeded all OTS capital requirements as displayed below.
<TABLE>
<CAPTION>
Required Actual Actual
OTS First Financial Port
Ratio Ratio Ratio
<S> <C> <C> <C>
Tangible capital 1.50% 5.49% 7.73%
Core leverage capital 3.00 6.03 7.73
Risk-based capital 8.00 13.16 15.00
</TABLE>
The OTS has adopted a final rule which will add an interest-
rate risk component to the OTS risk-based capital requirement
effective September 30, 1994. The OTS has adopted another final
rule, which was effective on March 4, 1994, disallowing any new
core deposit intangibles, acquired after the rule's effective
date, from counting as regulatory capital. Core deposit
intangibles acquired prior to the effective date have been
grandfathered for purposes of this rule. The OTS also has
proposed to increase the minimum required core capital ratio from
the current 3.00% to a range of 4.00% to 5.00% for all but the
most healthy financial institutions. Management of the
Corporation and the Banks do not believe these rules will
significantly impact the capital requirements of the Banks or
cause the Banks to fail to meet their respective regulatory
capital requirements.
Under the terms of the Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA), the Banks are also further
regulated pursuant to the prompt corrective action (PCA)
provisions of FDICIA. Under FDICIA, thrift institutions are
assigned, based upon regulatory capital ratios and other
subjective supervisory criteria, to one of five PCA categories,
ranging from "well capitalized" to "critically undercapitalized".
Institutions assigned to the three lowest categories are subject
to PCA sanctions by the OTS. PCA sanctions include, among other
items, restrictions on dividends and capital distributions.
Under the OTS's prompt corrective action regulations, each of the
Banks was classified as well capitalized at March 31, 1994.
NOTE G - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
For The
Three Months Ended
March 31,
1994 1993
(In thousands)
Supplemental disclosure of cash flow information:
Cash paid or credited to accounts during
period for:
Interest on deposits and borrowings $ 45,863 $ 48,678
Income taxes 2,825 1,707
Non-cash investing activities:
Mortgage loans transferred to held
for sale portfolio 12,236 19,660
Loans receivable transferred to foreclosed
properties 1,357 1,848
NOTE H--PENDING ACCOUNTING CHANGE
In May, 1993, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 114,
("Accounting by Creditors for Impairment of a Loan"). SFAS No.
114 is effective for fiscal years beginning after December 15,
1994. Early adoption of the statement is allowed. SFAS No. 114
requires that impaired loans be measured at the present value of
expected future cash flows discounted at the loan's effective
interest rate, or, as a practical expedient, at the loan's
observable market price or the fair value of the collateral if
the loan is collateral dependent. Management does not believe
that the adoption of SFAS No. 114 will have a material impact on
the Corporation's financial condition or results of operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS
COMPARISON OF THE CONSOLIDATED BALANCE SHEETS
AT MARCH 31, 1994 (UNAUDITED) WITH DECEMBER 31, 1993
General:
Total assets increased to $4.86 billion at March 31, 1994
from $4.77 billion at December 31, 1993, primarily because of the
NorthLand acquisition completed in 1994. See Note B to the
unaudited consolidated financial statements for a discussion of
this acquisition. Total loans and deposits increased to
$4.43 billion and $4.16 billion at March 31, 1994 from
$4.25 billion and $4.05 billion, respectively, at the end of
1993. Stockholders' equity at March 31, 1994 was
$254.2 million, up from $234.7 million at year-end 1993.
Liquidity and Capital Resources:
At March 31, 1994, total consolidated liquidity, consisting
of cash, cash equivalents, and investment securities represented
4.95% of the Corporation's total assets compared with 7.10% at
December 31, 1993. Each of the Banks are in compliance with
requirements relating to minimum levels of liquid assets as
defined by OTS regulations. The ongoing management of liquid
assets is an integral part of the Corporation's overall
asset/liability management program as described below under
"Asset/Liability Management." The cash and securities portfolios
are among the most flexible assets available for shorter term
liability matching. Total consolidated liquidity at March 31,
1994 decreased by $98.3 million as compared to December 31, 1993
liquidity (including the $9.4 million of liquid assets received
in connection with the NorthLand acquisition) as a result of the
net effect of significant changes in various categories of assets
and liabilities during the three-month interim period. Some of
the more significant changes in these categories, including
liquid assets, can be summarized as follows:
<TABLE>
<CAPTION>
Consolidated
Statement Of Balance From Other Balance
Financial Condition December 31, NorthLand Increases March 31,
Classification 1993 Acquisition (Decreases) 1994
(In thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 110,882 $ 3,193 $ (40,042) $ 74,033
Securities available for
sale:
Investment securities 84,487 -- (53,724) 30,763
Mortgage-related
securities 178,362 -- (34,579) 143,783
Securities held to
maturity:
Investment securities 148,568 4,785 (17,489) 135,864
Mortgage-related
securities 1,147,891 16,742 84,705 1,249,338
Loans receivable, in-
cluding loans held
for sale 2,922,504 96,748 17,131 3,036,383
Office properties 50,120 2,387 (2,136) 50,371
Intangible assets 31,392 699 (1,344) 30,747
Deposits 4,050,520 114,297 (7,044) 4,157,773
Borrowings 438,598 750 (58,858) 380,490
Advance payments by
borrowers for taxes
and insurance 13,805 462 15,697 29,964
Stockholders' equity 234,685 11,401 8,147 254,233
</TABLE>
Changes noted in the "Other Increases (Decreases)" column of
the preceding table are discussed below in the related sections
of "Management's Discussion and Analysis."
Management believes liquidity levels are proper and that
adequate capital and borrowings are available through the capital
markets, the Federal Home Loan Bank (FHLB) and other sources.
For a discussion of regulatory capital requirements, see Note F
to the unaudited consolidated financial statements.
On an unconsolidated basis, the Corporation had cash of
$5.4 million and subordinated debt of $55.0 million at March 31,
1994. The principal ongoing sources of funds for the Corporation
are dividends from the Banks. Applicable rules and regulations
of the OTS impose limitations on capital distributions by savings
institutions such as the Banks. Savings institutions such as the
Banks which have capital in excess of all fully phased-in capital
requirements before and after a proposed capital distribution are
permitted, after giving prior notice to the OTS, to make capital
distributions during a calendar year up to the greater of (i)
100% of net income to date during the calendar year, plus the
amount that would reduce by 1/2 its "surplus capital ratio" (the
excess capital over its fully phased-in capital requirements) at
the beginning of the calendar year, or (ii) 75% of its net income
over the most recent fourth-quarter period.
Loans and Mortgage-Related Securities:
Total loans, including loans held for sale and mortgage-
related securities (MBSs), increased $180.7 million from
$4.25 billion at December 31, 1993 to $4.43 billion at March 31,
1994. Total loans are summarized below as of the dates
indicated.
<TABLE>
<CAPTION>
March 31, December 31, Increase
1994 1993 (Decrease)
(In thousands)
<S> <C> <C> <C>
Real estate loans:
One- to four-family $1,845,180 $1,797,990 $ 47,190
Multi-family 190,009 188,558 1,451
Commercial and non-residential 102,735 94,789 7,946
Total real estate loans 2,137,924 2,081,337 56,587
Other loans:
Credit cards 199,412 209,414 (10,002)
Home equity 196,547 193,291 3,256
Consumer 192,313 153,574 38,739
Education 171,554 167,385 4,169
Manufactured housing 162,425 165,017 (2,592)
Commercial business 20,672 111 20,561
Less net items to loans receivable (44,464) (47,625) 3,161
Total loans (including loans held
for sale) 3,036,383 2,922,504 113,879
MBSs 1,393,121 1,326,253 66,868
Total loans and MBSs $4,429,504 $4,248,757 $ 180,747
</TABLE>
The major components of the increase in total loans during
the three months of 1994 were a $56.6 million increase in
mortgage loans, a $38.7 million increase in consumer loans and a
$20.6 million increase in commercial business loans.
The increase in residential mortgage loans receivable at
March 31, 1994 was primarily attributable to the NorthLand
acquisition as the Banks' mortgage loan originations were
substantially offset by sales and repayments.
Consumer loans increased $38.7 million in 1994 primarily due to
the NorthLand acquisition as well as continuing success in
marketing a second mortgage product. Home equity loans have
increased $3.3 million in 1994 as customer usage of this product
has continued to grow. Credit card loans decreased $10.0 million
in 1994 reflecting a seasonal decline in this portfolio.
Manufactured housing loan balances decreased $2.6 million as the
Corporation continues to restrict new originations of such loans
to the Midwest. The $20.6 million increase in commercial
business loans reflects the acquisition of NorthLand's business
loan portfolio.
Mortgage loans held for sale were $44.0 million and
$73.9 million at March 31, 1994 and December 31, 1993,
respectively. Off-balance sheet commitments to originate and
sell mortgage loans totaled $48.5 million and $46.7 million,
respectively, at March 31, 1994. During the quarter ended
March 31, 1994, market interest rates generally increased in
excess of one percent, as compared to interest rate levels at the
end of 1993, and continue to fluctuate. The fair value of on-
balance sheet mortgage loans held for sale and off-balance sheet
commitments to originate and sell mortgage loans can vary
substantially depending upon the movement of interest rates.
Management engages in various means of insulating the Banks from
the effects of such interest-rate movements, principally by
securing forward commitments to sell loans in the secondary
mortgage market. However, there can be no assurance that these
means will be totally effective. Given the recent move in
interest rates, management believes that the Corporation may have
short term loss exposure relative to its on-balance sheet and
off-balance sheet mortgage banking activities. In addition, loan
originations resulting from refinancing transactions, and
consequently gains on sales of loans, may decrease during periods
of rising interest rates. As such, operations for the remainder
of 1994 could be negatively impacted as a result of the above-
discussed risk factors.
After giving effect to the $16.7 million of MBSs acquired
in the NorthLand acquisition, the aggregate MBS portfolio
increased $50.1 million during the quarter ended March 31, 1994
as the net result of (i) purchases of $161.4 million of U.S.
Government Agency adjustable-rate MBSs, ii) sales of available-
for-sale MBSs of $12.3 million, and (iii) repayments of
$99.0 million. At the end of the first quarter, the Banks had
commitments to purchase U.S. Government Agency adjustable-rate
MBSs totaling $284.7 million which will be funded through FHLB
advances.
Loan Delinquencies:
First Financial and Port monitor the delinquency status of
their respective loan portfolios on a constant basis and initiate
a borrower contact and additional collection procedures as
necessary at an early date. Delinquencies and past due loans
are, however, a normal part of the lending function. When the
delinquency reaches the status of greater than 90 days, the loans
are placed on a non-accrual basis until such time as the
delinquency is reduced again to 90 days or less. Non-accrual
loans are presented separately in the following section. Loan
delinquencies of 90 days or less, for the dates indicated, are
summarized on the following page:
March 31, December 31,
1994 1993
(In thousands)
Loans Delinquent 30-59 Days
Student loans $ 5,535 $ 4,014
Residential real estate loans 6,729 5,844
Manufactured housing loans 2,061 2,999
Credit card loans 1,889 1,988
Commercial real estate loans 411 3,798
Commercial business 288 --
Consumer and home equity 592 479
$17,505 $19,122
Loans Delinquent 60-90 Days
Student loans $ 5,442 $ 4,159
Residential real estate loans 1,311 1,111
Manufactured housing loans 860 1,035
Credit card loans 870 904
Commercial real estate loans 103 707
Commercial business -- --
Consumer and home equity 202 128
$ 8,788 $ 8,044
Total Loans Delinquent 30-90 Days
Student loans $10,977 $ 8,173
Residential real estate loans 8,040 6,955
Manufactured housing loans 2,921 4,034
Credit card loans 2,759 2,892
Commercial real estate loans 514 4,505
Commercial business 288 --
Consumer and home equity 794 607
$26,293 $27,166
At March 31, 1994, the 30-90 day delinquencies decreased
$900,000 to $26.3 million from $27.2 million at year-end 1993.
As a percent of total loans receivable, loan delinquencies
decreased from 0.93% at the end of 1993 to 0.87% at March 31,
1994. The $900,000 decrease, at March 31, 1994, relates to the
net effect of i) the return to satisfactory contractual
performance of a $3.4 million commercial real estate loan, ii) an
increase of $2.8 million in delinquent student loans (which are
government guaranteed) delinquent 30-90 days, iii) a decrease of
$1.1 million in manufactured housing loans delinquent 30-90 days
and iv) an increase of $1.0 million of delinquent residential
mortgage loans. The increase in residential mortgage loan
delinquencies relates to the acquisition of such loans in the
NorthLand transaction. All delinquent loans have been considered
by management in its evaluation of the adequacy of the allowances
for loan losses.
Non-Accrual Loans:
The Corporation places loans into a non-accrual status when
loans are contractually delinquent more than 90 days. If
appropriate, loans may be placed into non-accrual status prior to
becoming 90 days delinquent based upon management's analysis.
Non-accrual loans are summarized, for the dates indicated, as
follows:
March 31, December 31,
1994 1993
(In thousands)
One- to four-family residential $ 5,960 $ 5,005
Multi-family residential 76 139
Commercial and other real estate 682 --
Manufactured housing 883 1,063
Credit cards 1,880 1,836
Commercial business 1,210 --
Consumer and other 224 197
$10,915 $ 8,240
Non-accrual loans increased $2.7 million to $10.9 million at
March 31, 1994 from $8.2 million at December 31, 1993. As a
percentage of net loans receivable, non-accrual loans increased
to 0.36% at March 31, 1994 from 0.28% at December 31, 1993. The
1994 increase in non-accrual loans is related to increases of
$1.0 million and $1.2 million in the residential mortgage and
commercial business loan portfolios, respectively. The
residential mortgage and commercial business loan increases
relate primarily to such loans acquired in the NorthLand
acquisition. Non-accrual loans for the other loan portfolios
decreased or remained at the same relative level at March 31,
1994 as compared to the end of 1993. The Banks had no troubled
debt restructurings during the first quarter of 1994.
All loans included in non-accrual status have been
considered by management in its review of the adequacy of
allowances for loan losses.
Non-Accrual MBSs:
During the first quarter of 1994, First Financial placed two
privately issued second tranche adjustable rate mortgage-backed
securities, aggregating approximately $21.2 million, on non-
accrual status. First Financial has not received full monthly
payments due on these securities since late 1993. The payments
have been interrupted due to delinquencies and foreclosures in
the underlying mortgage portfolio and substantially all of the
cash flows are currently directed to owners of the senior
tranche. Both securities are serviced by a California
institution under the control of the RTC. First Financial's
second tranche position is senior to several subordinate
tranches, currently amounting to approximately 11% of the face
value of the total portfolios in question, which are designed to
absorb losses in the underlying mortgage portfolio. Discounted
cash flow analyses performed by management (based upon
assumptions for delinquency levels, foreclosure rates and
recovery ratios in underlying portfolios) indicate that the
subordinated tranches will adequately protect First Financial in
the future. As a result, management does not believe that any
material losses will be realized in connection with either of
these securities, although further delayed receipt of full
monthly principal and interest payments is probable. First
Financial's portfolio of mortgage-related securities totaled
approximately $1.4 billion at March 31, 1994, and except for one
of the referenced securities which was recently downgraded, all
of First Financial's mortgage-related securities are rated at a
minimum of investment grade by at least one nationally recognized
independent rating agency.
Allowances for Loan Losses:
The Corporation's loan portfolios and off-balance sheet
financial guarantees are evaluated on a continuing basis to
determine the additions to the allowances for losses and the
related balance in the allowances. These evaluations consider
several factors including, but not limited to, general economic
conditions, loan portfolio compositions, loan delinquencies,
prior loss experience, and management's estimation of future
potential losses. The evaluation of allowances for loan losses
includes a review of both known loan problems as well as a review
of potential problems based upon historical trends and ratios.
A summary of activity in the allowances for loan losses, for
the three months ended March 31, 1994 and 1993, follows:
Three Months Ended
March 31,
1994 1993
(In thousands)
Allowances at beginning of period $23,266 $17,067
From acquired banks 816 4,885
Provisions 1,380 2,844
Charge-offs (2,164) (2,491)
Recoveries 665 317
Allowances at end of period $23,963 $22,622
A discussion of loan loss provisions and charge-offs is
presented in "Management's Discussion and Analysis-Comparison of
the Unaudited Consolidated Statements of Income for the Three
Months Ended March 31, 1994 and 1993." An analysis of
allowances, by loan category and percent of loans in each
category to total loans receivable, at the dates indicated,
follows:
<PAGE>
<TABLE>
<CAPTION>
March 31, 1994 December 31, 1993
As Percentage As Percentage
Allowance Of Total Loans Allowance Of Total Loans
Amount In Category Amount In Category
(Dollars in thousands)
<S> <C> <C> <C> <C>
Credit cards $ 6,775 3.40% $ 6,502 3.10%
Residential real estate 5,910 .29 5,877 .30
Manufactured housing 4,724 2.91 4,668 2.83
Commercial and non-residential
real estate 3,698 3.60 4,010 4.23
Consumer 2,049 1.07 1,728 1.12
Home equity 454 .23 429 .22
Commercial business 309 1.50 -- --
Education 44 .03 52 .03
$23,963 .79% $23,266 .80%
</TABLE>
The allowances for loan losses increased to $24.0 million,
or 0.79% of loans receivable, at March 31, 1994 from
$23.3 million, or 0.80%, at December 31, 1993. The allowances
for losses also represented 220% of non-accrual loans at
March 31, 1994. Management of the Corporation and the Banks
believe that the allowances for losses are sufficient based upon
their current evaluations.
Foreclosed Properties and Repossessed Assets:
Foreclosed properties and other repossessed assets are
summarized, for the dates indicated, as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1994 1993
(In thousands)
<S> <C> <C>
Foreclosed real estate properties $ 7,433 $ 8,040
Manufactured housing owned 223 115
Consumer and other repossessed assets 50 48
7,706 8,203
Less allowances for losses (1,386) (1,386)
$ 6,320 $ 6,817
</TABLE>
Foreclosed properties, net of allowances for losses,
decreased $500,000 to $6.3 million at March 31, 1994 from $6.8
million at December 31, 1993 due to the sale of a large
foreclosed commercial real estate property in 1994 (see below).
A summary of the activity in allowances for losses on
foreclosed properties, for the three months ended March 31, 1994
and 1993, is presented below.
Three Months Ended
March 31,
1994 1993
(In thousands)
Allowances at beginning of period $1,386 $ 552
Provisions 225 1,137
Charge-offs (225) (175)
Allowances at end of period $1,386 $1,514
A list of the larger commercial real estate properties
(having a carrying amount of $500,000 or greater) included in
foreclosed properties, for the dates indicated, is presented
below. These properties are carried at the lower of cost or fair
value.
Carrying Value At
Property March 31, December 31,
Type Property Location 1994 1993
(In thousands)
Office Madison, Wisconsin $ 1,500 $ 1,500
Retail Milwaukee, Wisconsin 1,089 1,089
Office Phoenix, Arizona -- 700
The Arizona property was sold in 1994 and financed by First
Financial at market terms.
All of the above foreclosed real estate properties and
repossessed assets have been considered by management in its
evaluation of the adequacy of allowances for losses.
Classified Assets, Including Non-Performing Assets:
For regulatory purposes, the Banks utilize a comprehensive
classification system for thrift institution problem assets.
This classification system requires that problem assets be
classified as "substandard", "doubtful" or "loss," depending upon
certain characteristics of the particular asset or group of
assets as defined by supervisory regulations.
An asset is classified "substandard" if management believes
it contains defined characteristics relating to borrower net
worth, paying capacity or value of collateral which indicate that
some loss is distinctly possible if noted deficiencies are not
corrected. "Doubtful" assets have the same characteristics
present in substandard assets but to a more serious degree, to
the belief of management, such that it is improbable that the
asset could be collected or liquidated in full. "Loss" assets
are deemed to be uncollectible or of such minimal value that
their continuance as assets without being specifically reserved
is not warranted. Substandard and doubtful classifications
require the establishment of prudent general allowance for loss
amounts while loss assets, to the extent that such assets are
classified as a "loss", require a 100% specific allowance or that
the asset be charged off.
In general, classified assets include non-performing assets
plus other loans and assets, including contingent liabilities
(see Note D), meeting the criteria for classification. Non-
performing assets include loans or assets i) which were
previously loans which are not performing to a serious degree
under the contractual terms of the original notes, or ii) for
which known information about possible credit problems of
borrowers causes management to have serious doubts as to the
ability of such borrowers to comply with current contractual
terms. This non-performing characteristic impacts directly upon
the interest income normally expected from such assets.
Specifically included are the loans held on a non-accrual basis,
real estate judgments subject to redemption and foreclosed
properties for which one of the Banks has obtained title.
Classified assets, including non-performing assets, for the
Banks, categorized by type of asset are set forth in the
following table:
March 31, December 31,
1994 1993
(In thousands)
Classified assets:
Non-performing assets:
Non-accrual loans $10,915 $ 8,240
Non-accrual MBSs 21,199 --
Foreclosed properties and other
repossessed assets 6,320 6,817
Total Non-Performing Assets 38,434 15,057
Less non-accrual MBSs included above but
not adversely classified for regulatory
purposes (21,199) --
Add back general valuation allowances
netted against foreclosed properties
above 1,386 1,386
Adjustment for non-performing residential
loans not classified due to low
loan-to-appraisal value (1,141) (707)
Additional classified performing loans:
Residential real estate 2,873 1,919
Commercial real estate 9,960 9,747
Consumer and other 596 241
Other adversely classified assets 718 757
Total Classified Assets $31,627 $28,400
During the three months ended March 31, 1994, classified
assets increased $3.2 million to $31.6 million from $28.4 million
at December 31, 1993 primarily as a result of the $2.7 million
increase in non-accrual loans. As a percentage of total assets,
classified assets increased from 0.60% at year-end 1993 to 0.65%
at March 31, 1994.
The increase in non-accrual loans and the $500,000 decrease
in foreclosed properties during the first three months of 1994
have been discussed above (see "Non-Accrual Loans" and
"Foreclosed Properties").
The non-accrual MBSs of $21.2 million listed above (see
"Non-Accrual MBSs") in non-performing assets have been included
in a "special mention" category and have been excluded in
determining adversely classified assets. As noted above,
management does not believe that any material losses will be
realized in connection with these MBSs based upon discounted cash
flow analyses performed relative to these securities.
Performing commercial real estate mortgage loans (in excess
of $1.0 million) included in classified assets, due to the
possible adverse effects of identifiable future events, are noted
on the following page at the dates indicated.
<TABLE>
<CAPTION>
Loan Amount Classified
Property Type Of Property March 31, December 31,
Loan Collateral Location 1994 1993
(In thousands)
<S> <C> <C> <C>
Office/Land Sheboygan, Wisconsin $ 3,661 $3,670
Motels Various-Tennessee 2,560 (a) 2,600 (a)
Office Independence, Missouri -- 1,091 (b)
<FN>
(a) Represents a 20% interest in loans, aggregating $12.3 million, for which
First Financial is the lead lender.
(b) Represents loan to finance the 1993 sale of a former foreclosed real
estate property. The loan had been classified pending future performance
by the borrower.
</TABLE>
Other assets adversely classified remained relatively
unchanged during the first three months of 1994.
All adversely classified assets and "special mention"
assets at March 31, 1994, have been considered by management in
its evaluation of the adequacy of allowances for losses.
Deposits and Other Liabilities:
Deposits, excluding the $114.1 million resulting from the
NorthLand acquisition, decreased $6.8 million during the three
months ended March 31, 1994. Although interest rates rose during
1994, the weighted average cost of deposits of 4.06% at March 31,
1994 was the same as reported at December 31, 1993 due to the
repricing of higher rate certificates of deposit renewing during
the first quarter of 1994.
Advance payments by borrowers for taxes and insurance,
excluding $500,000 of such liabilities assumed in the NorthLand
acquisition, increased by $15.7 million during the first three
months of 1994 as a result of the normal cumulative monthly
deposits made by borrowers less interim payments of taxes and
insurance premiums.
Borrowings:
At March 31, 1994, the Corporation's consolidated
borrowings decreased to $380.5 million at March 31, 1994 from
$438.6 million at December 31, 1993. The decrease in borrowings
is primarily attributable to the net effect of (i) $750,000 of
borrowings assumed by the Corporation when it acquired NorthLand,
offset by (ii) repayments of $10.0 million in longer-term FHLB
advances and (iii) a net reduction of $49.0 million in shorter-
term FHLB advances in 1994.
Stockholders' Equity:
Stockholders' equity at March 31, 1994 was $254.2 million,
or 5.23% of total assets, as compared to $234.7 million, or 4.92%
of total assets, at December 31, 1993. The major changes in
stockholders' equity included i) net income of $12.3 million
earned during the first three months of 1994, ii) cash dividend
payments to stockholders of $2.5 million, iii) $11.4 million
additional equity realized in the NorthLand acquisition, which
was accounted for as a pooling-of-interests, and iv) a decrease
of $2.0 million in unrealized gains on securities available for
sale. See Note B to the unaudited consolidated financial
statements for a discussion of the accounting treatment of this
acquisition. Stockholders' equity per share increased from $9.95
per share at year-end 1993 to $10.33 per share at March 31, 1994.
Regulatory Capital:
As set forth in Note F to the unaudited consolidated
financial statements, both First Financial and Port exceed all
fully phased-in regulatory capital requirements mandated by the
OTS. The Banks have been classified as "well capitalized"
institutions by the Federal Deposit Insurance Corporation (FDIC)
under applicable insurance of accounts regulations.
Loan Originations:
A comparison of loan originations for the first three
months of 1994 and 1993, including loans originated for sale (but
excluding MBSs), follows:
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended March 31,
1994 Percent 1993 Percent
(Dollars in thousands)
<S> <C> <C> <C> <C>
Loan Type
Mortgage:
One- to four-family $ 208,958 71.6% $116,265 51.0%
Multi-family 10,123 3.5 15,667 6.9
Commercial/non-residential 5,677 1.9 1,278 0.6
Refinanced one- to four-
family loans previously
sold and serviced for others 52 -- 59,325 26.0
224,810 77.0 192,535 84.5
Consumer 54,025 18.5 21,251 9.3
Student 4,856 1.7 6,643 2.9
Home equity-net 3,256 1.1 4,743 2.1
Manufactured housing 3,449 1.2 2,715 1.2
Commercial business 1,030 0.3 -- --
Refinanced manufactured
housing loans previously
sold and serviced for others 475 0.2 -- --
Credit cards-net -- -- -- --
Total loans originated 291,901 100.0% 227,887 100.0%
Decrease in undisbursed loan
proceeds 3,405 9,975
Total loans disbursed $ 295,306 $237,862
</TABLE>
Total loan originations increased to $291.9 million for the
first three months of 1994 from $227.9 million for the same
period in 1993. The 1994 increase of $64.0 million was primarily
attributable to a $32.3 million increase in mortgage loan
originations and a $32.7 million increase in consumer lending.
One- to four-family mortgage loan originations and
refinancings increased $33.4 million to $209.0 million for the
first three months of 1994 as compared to $175.6 million for the
same period in 1993 as i) the momentum of mortgage loan
refinancings carried into 1994 and also, ii) the Illinois regions
of First Financial continue to provide increased levels of
lending. At March 31, 1994, one- to four-family mortgage loan
applications in process and commitments totaled $68.1 million and
$44.0 million as compared to $84.2 million and $50.0 million at
December 31, 1993. The decrease in applications and commitments
reflects the rise in interest rates in 1994 as borrower demand
for refinancings has slowed down.
Originations of multi-family residential mortgage loans were
$5.5 million under the 1993 level. Commercial real estate loan
originations remained at relatively low levels again in 1994 due
to regional market conditions.
Consumer loan originations increased $32.7 million to
$54.0 million in the first three months of 1994 primarily due to
the continued success of a second mortgage product and the
expansion of Illinois markets after the 1993 acquisitions.
Student loan and manufactured housing loan originations remained
in line with 1993 production levels.
Home equity loan balances increased $3.3 million for the
first three months of 1994 to $196.5 million as customer usage of
this product continues to grow.
Credit card loans decreased $10.0 million in the first
quarter of 1994. This net decrease is included in loan
repayments in the Corporation's consolidated statement of cash
flows. Credit card balances traditionally decrease in the first
part of the year due to normal seasonal reductions of consumer
demand for such loans after calendar year-end. Credit card loan
balances totaled $199.4 million at March 31, 1994 compared to
$209.4 million at the end of 1993 and $172.3 million at March 31,
1993, reflecting continued growth in this portfolio excluding the
seasonal downturn.
Asset/Liability Management:
The objective of the Banks' asset/liability policy is to
manage interest rate risk so as to maximize net interest income
over time in changing interest-rate environments. To this end,
management believes that strategies for managing interest-rate
risk must be responsive to changes in the interest-rate
environment and must recognize and accommodate the market demands
for particular types of deposit and loan products.
Interest-bearing assets and liabilities can be analyzed by
measuring the magnitude by which such assets and liabilities are
interest-rate sensitive and by monitoring an institution's
interest-rate sensitivity "gap". An asset or liability is
determined to be interest-rate sensitive within a specific time
frame if it matures or reprices within that time period. An
interest-rate sensitivity "gap" is defined as the difference
between the amount of interest-earning assets anticipated to
mature or reprice within a specific time period and the amount of
interest-costing liabilities anticipated to mature or reprice
within the same time period. A gap is considered positive when
the amount of interest-rate sensitive assets exceeds the amount
of interest-rate sensitive liabilities that mature or reprice
within a given time frame. A gap is considered negative when the
amount of interest-rate sensitive liabilities exceeds the amount
of interest-rate sensitive assets that mature or reprice within a
specified time period.
The table on page 21 sets forth the combined estimated
maturity/repricing structure of the Corporation's consolidated
interest-earning assets (including net items) and interest-
costing liabilities at March 31, 1994. Assumptions regarding
prepayment and withdrawal rates are based upon the Banks'
historical experience, and management believes such assumptions
are reasonable. The table does not necessarily indicate the
impact of general interest rate movements on the Banks' net
interest income because repricing of certain categories of assets
and liabilities through, for example, prepayments of loans and
withdrawals of deposits, is beyond the Banks' control. As a
result, certain assets and liabilities indicated as repricing
within a stated period may in fact reprice at different times and
at different rate levels. Further, in the event of a change in
interest rates, prepayment and early withdrawal levels may
deviate significantly from those assumed in calculating the data
in the table.
The Corporation's consolidated positive one-year interest-
rate sensitivity gap at March 31, 1994 was $300.8 million or
6.18% of total assets. The one-year positive gap increased
$10.0 million from the December 31, 1993 positive gap of $290.8
million or 6.09% of total assets at that date.
The Corporation's consolidated one-year positive gap
position of 6.18% at March 31, 1994 falls within management's
current operating range of a 10% positive gap position to a 10%
negative gap position. In view of the current interest-rate
environment and the related impact on customer behavior,
management believes that it is extremely important to weigh and
balance the effect of asset/liability management decisions in the
short-term in its efforts to maintain net interest margins and
acceptable future profitability. As such, management believes
that it has been able to achieve a consistent net interest margin
while still meeting its asset/liability management objectives.
In this regard, the Banks also measure and evaluate interest
rate risk via a separate methodology. The net market value of
interest-sensitive assets and liabilities is determined by
measuring the net present value of future cash flows under
varying interest rate scenarios in which interest rates would
theoretically increase or decrease up to 400 basis points on a
sudden and prolonged basis. This theoretical analysis at March
31, 1994 indicates that the Banks' current financial position
should adequately protect the Banks, and thus the Corporation,
from the effects of rapid rate changes. The OTS has issued a
final regulation that calls for further regulatory capital
requirements based upon this market value methodology effective
September 30, 1994. See Note F to the unaudited consolidated
financial statements. Management of the Corporation anticipates
that current asset/liability management practices should place
the Banks in compliance with this regulation and that further
capital will not be required as a result thereof.
<PAGE>
FIRST FINANCIAL CORPORATION CONSOLIDATED GAP ANALYSIS AT MARCH 31, 1994
<TABLE>
<CAPTION>
Greater Greater Greater Greater
Than One Than Three Than Five Than Ten Greater
Under Through Through Through Through Than
One Year Three Years Five Years Ten Years 20 Years 20 Years Total
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Rate-sensitive assets:
Investments and interest-
earning deposits (a)(b) $ 97,406 $ 82,248 $ 5,774 $ 589 $ 32,791 $ -- $ 218,808
Mortgage-related securities (b) 1,306,044 72,456 14,585 8 28 -- 1,393,121
Mortgage loans (c)(d):
Fixed-rate 240,004 387,725 331,083 545,484 5,012 177 1,509,485
Adjustable-rate 418,504 193,972 2,959 50 -- -- 615,485
Other loans 649,789 163,172 62,705 35,694 53 -- 911,413
2,711,747 899,573 417,106 581,825 37,884 177 4,648,312
Rate-sensitive liabilities:
Deposits (e)(f) 2,168,193 1,248,068 356,631 234,401 130,531 46,249 4,184,073
Borrowings (g) 242,783 74,114 1,849 59,513 -- 2,231 380,490
2,410,976 1,322,182 358,480 293,914 130,531 48,480 4,564,563
GAP (repricing difference) $ 300,771 $ (422,609) $ 58,626 $ 287,911 $(92,647) $(48,303) $ 83,749
Cumulative GAP $ 300,771 $ (121,838) $ (63,212) $ 224,699 $132,052 $ 83,749
Cumulative GAP/Total assets 6.18% (2.51)% (1.30)% 4.62% 2.72% 1.72%
<FN>
(a) Investments are adjusted to include FHLB stock and other items totaling $32.7 million as investments in the
"Greater Than Ten Through 20 Years" category.
(b) Investment and mortgage-related securities are presented at carrying value, including net unrealized gain
or loss on available-for-sale securities.
(c) Based upon 1) contractual maturity, 2) repricing date, if applicable, 3) scheduled repayments of principal
and 4) projected prepayments of principal based upon the Corporation's historical experience as modified
for current market conditions.
(d) Includes loans held for sale.
(e) Deposits include $30.0 million of tax and insurance accounts and exclude accrued interest on deposits
of $3.7 million.
(f) The Corporation has assumed that its passbook savings, NOW accounts and money market accounts would have
projected annual withdrawal rates, based upon the Corporation's historical experience, of 26%, 34% and 42%,
respectively.
(g) Collateralized mortgage obligations totaling $4.5 million are included in the "Greater Than Five Through
Ten Years" category.
/TABLE
<PAGE>
COMPARISON OF THE
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED
MARCH 31, 1994 AND 1993
Selected Income Statement Information:
Net income of $12.3 million for the first quarter of 1994
was up $2.8 million, or a 29.5% increase, from the $9.5 million
reported for the first quarter of 1993. Momentum from low
interest rates in 1993 and the 1993 acquisitions were the major
factors contributing to the improved 1994 results. The
annualized returns on average assets and average stockholders'
equity increased to 1.01% and 19.55%, respectively, for the first
quarter of 1994 as compared to 0.86% and 19.24%, respectively,
for the same period in 1993. Primary and fully diluted earnings
per share increased to $0.49 per share for the first quarter of
1994 from $0.40 per share in 1993.
Net Interest Income:
Net interest income increased $3.9 million to $38.9 million
during the first quarter of 1994 from $35.0 million for the first
quarter of 1993. The net interest margin of 3.30% for the first
quarter of 1994 was the same as reported during the first quarter
of 1993. Interest income and interest expense increased $500,000
and $3.3 million, respectively, for the first quarter of 1994 as
compared to 1993. The average balances of interest-earning
assets and interest-bearing liabilities increased from
$4.244 billion and $4.194 billion, respectively, in 1993 to
$4.646 billion and $4.542 billion in 1994, respectively. The
ratio of average interest-earning assets to average interest-
bearing liabilities increased to 102.29% for the first quarter of
1994 as compared to 101.21% for the 1993 quarter. The 1994
increases in average balances are primarily due to the Citizens
and NorthLand acquisitions. The increase in average interest-
earning assets, as well as the improved earning-asset ratio noted
above, was complemented by a slightly greater decrease in the
average cost of interest-bearing liabilities (4.77% in 1993
versus 4.11% in 1994) than in the average yield on interest-
earning assets (7.95% in 1993 versus 7.31% in 1994). As
discussed in the "Non-accrual MBS" section, two MBSs were placed
on non-accrual status during the first quarter of 1994. As a
result of this action, interest income and net interest income
were reduced by approximately $700,000 upon the reversal of
interest accruals relating to these securities. Future earnings
will be negatively affected by approximately $400,000 per
quarter, or approximately 0.03% of earning assets, until payments
on these securities resume.
Interest Spread:
The table on the following page sets forth the weighted
average yield earned on the Corporation's consolidated loan and
investment portfolios, the weighted average interest rate paid on
deposits and borrowings, the net spread between yield earned and
rates paid and the net interest margin during the three months
ended March 31, 1994 and 1993. A comparison of similar data as
of March 31, 1994 and 1993 is also shown. Balances of interest-
sensitive assets and liabilities arising from the Citizens
acquisition are included from the date of acquisition and the
balances relating to the NorthLand acquisition are included from
January 1, 1994. See Note B to the unaudited financial
statements for further discussion of these acquisitions.
For the
Three Months Ended At
March 31, March 31,
1994 1993 1994 1993
Weighted average yield on
interest-earning assets 7.31% 7.95% 7.35% 7.91%
Weighted average rate paid
on deposit accounts and
borrowings 4.11 4.77 4.14 4.62
Interest spread 3.20% 3.18% 3.21% 3.29%
Net interest margin (net
interest income divided
by earning assets) 3.30% 3.30% 3.30% 3.37%
The interest spread increased slightly to 3.20% for the three
months ended March 31, 1994 from 3.18% for the same period in
1993 due to the factors noted above. The interest spread and the
net interest margin were 3.21% and 3.30%, respectively, at March
31, 1994 as compared to 3.29% and 3.37%, respectively, at
March 31, 1993. Although the net interest margin at March 31,
1994 is somewhat lower than at the end of recent periods due to
market factors and the MBS non-accrual situation, the increase in
average earning assets should positively impact net interest
income during the remainder of 1994 and offset, to some extent,
the negative effects of a potential lower net interest margin
should rates continue to rise.
Provisions For Losses on Loans:
Provisions for loan losses decreased $1.4 million to
$1.4 million for the first quarter of 1994 as compared to
$2.8 million for the 1993 period. The 1994 decrease in
provisions for loan losses reflects the lower 1994 charge-off
experience as well as a recovery received in the first quarter of
1994, relating to the settlement of a lawsuit brought by the
Corporation regarding purchased mortgage loans acquired in a 1990
acquisition.
The following table summarizes the Corporation's net charge-
off experience by category for the quarters ended March 31, 1994
and 1993.
For The Quarters Ended March 31,
1994 1993
Net Net
Charge-offs Charge-offs
(Recoveries) (Recoveries)
Loan Type (Dollars in thousands)
Credit cards $1,427 $1,236
Manufactured housing 369 675
Residential real estate (341) 157
Consumer and other 44 106
Commercial real estate -- --
Commercial business -- --
$1,499 $2,174
Net charge-offs as a
percent of average loans
outstanding (annualized) .20% .34%
The OTS and the FDIC, as an integral part of their
supervisory examination process, periodically review the Banks'
allowances for losses. These agencies may require the Banks to
recognize additions to the allowances based upon their judgment
of information available to them at the time of their examination.
The regularly scheduled 1993 supervisory examinations of the Banks
were completed in the fourth quarter of 1993 and no material
corrective actions were required.
Management of the Corporation and the Banks believe that the
current level of provisions for losses are sufficient based upon
its allowance criteria. See "Allowances for Loan Losses" for
further discussion.
Non-Interest Income:
Non-interest income increased $1.0 million to $9.7 million
for the first quarter of 1994 compared to $8.7 million for the
same period in 1993 as the net result of several significant
factors. Deposit fee income increased $100,000 in 1994 as
compared to 1993 due to increased levels of transaction-related
accounts acquired in the recent acquisitions. Insurance and
brokerage sales commissions increased $200,000 as First
Financial's insurance agency subsidiary continues to perform
well. The major increase in non-interest income in 1994 relates
to gains of $1.1 million on the sale of fixed-rate securities
available for sale as the Corporation acted to protect the value
of that portfolio as interest rates rose during 1994. Gains
realized from the sale of long-term fixed-rate mortgage loans in
the secondary mortgage market decreased $800,000 to $400,000 in
1994, including a writedown of $250,000 representing a lower of
cost or market adjustment relative to the mortgage loans held-
for-sale portfolio at March 31, 1994. The Banks sell long-term,
fixed-rate mortgage loans in the normal course of interest-rate
risk management. Gains or losses realized from the sale of
mortgage loans held for sale can fluctuate significantly from
period to period depending upon the volatility of interest rates
and the volume of loan originations. Thus, results of sales in
any one period may not be indicative of future results. As a
result of the recent rise in interest rates, management believes
it is unlikely that gains on sales of loans for the remainder of
1994 will be at levels reported in 1993.
Non-Interest Expense:
Non-interest expenses increased approximately $1.8 million
for the quarter ended March 31, 1994 as compared to 1993. The
higher level of non-interest expenses reflects inherent increases
in the expanded scope of operations as a result of the 1993 and
1994 acquisitions. The major categories of non-interest expense
affected by acquisitions are compensation, occupancy, federal
deposit insurance and amortization of intangible assets.
Federal deposit insurance expense increased $1.0 million in
the first quarter of 1994 as compared to 1993 due in part to the
increase in insured deposits as a result of the recent
acquisitions. However, also affecting this comparison was a
reduction in the level of premiums assessed to the Banks in 1993
as the FDIC allowed a one-time premium reduction (approximately
$1.5 million) representing the Banks' previously unutilized
credits, from the dissolved Secondary Reserve of the Federal
Savings and Loan Insurance Corporation. The Banks' credits in
the Secondary Reserve had been written-off in 1987 due to the
uncertainty of recoverability. In addition, each of the Banks
qualifies for the lowest FDIC assessment rate and management of
the Corporation believes that the Banks will continue to qualify
for the lowest FDIC assessment rate, thus enabling the Banks to
keep deposit insurance expense under control. The Banks,
however, do not have control over potential future rate increases
by the FDIC.
The increase of $300,000 in loan expenses for the three
months ended March 31, 1994 represent the impact of higher 1994
mortgage loan production as well as the cost of an ongoing
program to attract new credit card accounts through affinity
groups.
The net cost of operations of foreclosed properties
decreased $800,000 for the three months of 1994 as compared to
1993 when a higher level of writedowns was experienced relative
to foreclosed commercial real estate properties.
Non-interest expenses decreased as a percentage of average
assets to 2.26% for the first quarter of 1994 as compared to
2.31% for the first quarter of 1993 due to the increased asset
level of the Corporation resulting from acquisitions. The
improvement in this ratio is reflective of the effectiveness of
the consolidation of operations after the acquisitions in 1993
and 1994 as well as ongoing expense control measures.
Controllable non-interest expenses, which exclude the
amortization of intangible assets and the net cost of operations
of foreclosed properties, remained stable at 2.12% of average
assets for the three months ended March 31, 1994 as compared to
2.11% for the same period in 1993. In addition, the
Corporation's efficiency ratio (which represents the ratio of
controllable expenses to net interest income plus recurring non-
interest income) improved to 54.71% for the quarter ended March
31, 1994 as compared to 55.37% for the same period in 1993.
Income Taxes:
Income tax expense increased $1.9 million for the first
quarter of 1994 as compared to the same period in 1993 primarily
due to the increase in pre-tax income in 1994. As a percent of
pre-tax income, the effective income tax rate increased slightly
from 37.1% for the first quarter of 1993 to 38.0% in 1994. The
increase in the effective income tax rate primarily relates to
1993 legislation increasing the federal tax rate from 34% to 35%
for taxable income in excess of $10.0 million.
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits:
Exhibit 11 - Computation of Earnings Per Share.
b. Reports on Form 8-K.
On January 19, 1994, the Registrant filed a Current Report
on Form 8-K with the Securities and Exchange Commission
(SEC) reporting that the Corporation had released earnings
as well as other related financial and operating data for
the quarter and the year ended December 31, 1993.
On March 11, 1994, the Registrant filed a Current Report on
Form 8-K with the SEC announcing that the Corporation
completed the acquisition of NorthLand. See Note B to the
unaudited consolidated financial statements for further
details.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
FIRST FINANCIAL CORPORATION
Date: May 9, 1994 ---------------------------
John C. Seramur, President
(Chief Executive Officer) and
Director
Date: May 9, 1994 ---------------------------
Thomas H. Neuschaefer
Treasurer
<PAGE>
EXHIBIT 11
FIRST FINANCIAL CORPORATION
COMPUTATION OF EARNINGS PER SHARE
For The
Three Months Ended
March 31,
1994 1993
(In thousands, except
per share data)
PRIMARY EARNINGS PER SHARE
Net income $12,280 $ 9,549
Shares:
Weighted average common shares
outstanding 24,555 23,350
Shares from assumed exercise of options
(as determined by the treasury stock
method) 739 305
Common and common equivalent shares 25,294 23,655
Primary Earnings Per Common Share $ .49 $ .40
FULLY DILUTED EARNINGS PER SHARE
Net income $12,280 $ 9,549
Shares:
Weighted average common shares outstanding 24,555 23,350
Shares from assumed exercise of options
(as determined by the treasury stock
method) 744 701
Common and common equivalent shares 25,299 24,051
Fully Diluted Earnings Per Common Share $ .49 $ .40
<PAGE>
