<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 September 30, 1995
-------------------------------------
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
------------------------------------------------
(Address of principal executive office)
(715) 341-0400
--------------------------------------------------
(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 29,609,180 Shares
- --------------------------------------- -----------------------
Class Outstanding at October 31, 1995
<PAGE>
FIRST FINANCIAL CORPORATION
Form 10-Q Index
Part I - Financial Information
Consolidated Balance Sheets as of September 30, 1995
(Unaudited) and December 31, 1994
Unaudited Consolidated Statements of Income for
the Three Months and Nine Months Ended September 30,
1995 and 1994
Unaudited Consolidated Statement of Changes In
Stockholders' Equity for the Nine Months Ended
September 30, 1995
Unaudited Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 1995 and
1994
Notes to Unaudited Consolidated Financial Statements
Management's Discussion and Analysis:
Comparison of the Consolidated Balance Sheets
at September 30, 1995 (Unaudited) and December 31,
1994
Comparison of the Unaudited Consolidated Statements
of Income for the Three Months and Nine Months Ended
September 30, 1995 and 1994
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
Signatures
Exhibits
-1-
<PAGE>
FIRST FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
September 30,
1995 December 31,
(Unaudited) 1994
------------- ------------
(In thousands)
<S> <C> <C>
Cash $ 111,438 $ 94,064
Federal funds sold 14,058 23,890
Interest-earning deposits 17,638 1,024
---------- ----------
Cash and cash equivalents 143,134 118,978
Securities available for sale (at fair value):
Investment securities 59,225 68,959
Mortgage-related securities 185,328 201,373
Securities held to maturity (at amortized cost):
Investment securities (fair value
of $121,337,000--1995 and
$124,434,000--1994) 121,705 129,301
Mortgage-related securities (fair
value of $1,102,508,000--1995
and $1,263,755,000--1994) 1,123,229 1,301,118
Loans receivable:
Held for sale 19,543 11,736
Held for investment 3,574,163 3,458,711
Foreclosed properties and repossessed
assets 4,668 5,216
Real estate held for investment or sale 8,299 7,706
Office properties and equipment, at cost 51,617 53,927
Intangible assets, less accumulated
amortization 22,792 26,726
Other assets 121,587 118,073
---------- ----------
$5,435,290 $5,501,824
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $4,440,593 $4,381,455
Borrowings 527,521 708,446
Advance payments by borrowers for
taxes and insurance 62,278 15,986
Other liabilities 38,988 68,629
---------- ----------
Total liabilities 5,069,380 5,174,516
---------- ----------
Stockholders' equity:
Serial preferred stock, $1 par value,
3,000,000 shares authorized; none
outstanding
Common stock, $1 par value, 75,000,000
shares authorized; shares issued and
outstanding: 29,591,529-1995;
29,125,858-1994 29,592 29,126
Additional paid-in capital 49,279 50,129
Net unrealized loss on
securities available for sale (8,179) (8,619)
Treasury stock -- (3,669)
Common stock purchased by
employee benefit plans (1,061) (1,608)
Retained earnings (substantially
restricted) 296,279 261,949
---------- ----------
Total stockholders' equity 365,910 327,308
---------- ----------
$5,435,290 $5,501,824
========== ==========
</TABLE>
See notes to unaudited consolidated financial statements.
-2-
<PAGE>
FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ----------------
1995 1994 1995 1994
--------- --------- --------- ------
(In thousands, except
per share amounts)
<S> <C> <C> <C> <C>
Interest income:
Mortgage loans $ 45,711 $ 44,258 $137,161 $131,719
Other loans 30,912 25,735 88,719 73,932
Mortgage-related securities 24,635 23,510 75,751 65,043
Investments 3,895 3,271 11,058 11,190
-------- -------- -------- --------
Total interest income 105,153 96,774 312,689 281,884
Interest expense:
Deposits 50,939 43,518 146,055 130,128
Borrowings 8,525 7,859 29,240 19,988
-------- -------- -------- --------
Total interest expense 59,464 51,377 175,295 150,116
-------- -------- -------- --------
Net interest income 45,689 45,397 137,394 131,768
Provision for losses on loans 2,873 1,731 7,065 5,093
-------- -------- -------- --------
42,816 43,666 130,329 126,675
Non-interest income:
Deposit account service fees 3,195 2,647 8,789 7,715
Loan fees and service charges 2,943 2,489 8,201 7,174
Service fees on loans sold 1,873 1,943 5,629 5,649
Insurance and brokerage sales
commissions 1,536 1,663 5,322 5,462
Net gain on sales of loans 1,365 167 1,647 2,558
Unrealized loss on impairment of
mortgage-related securities -- -- -- (9,000)
Net gain (loss) on sales of securities
available for sale 1,173 (133) 1,184 1,104
Other 677 623 2,612 2,243
-------- -------- -------- --------
Total non-interest income 12,762 9,399 33,384 22,905
-------- -------- -------- --------
Operating income 55,578 53,065 163,713 149,580
-------- -------- -------- --------
Non-interest expense:
Compensation, payroll taxes
and benefits 11,172 12,879 35,309 39,209
Federal deposit insurance premiums 2,517 2,554 7,575 7,733
Occupancy 2,285 2,348 6,815 6,882
Acquisition-related costs -- -- 6,458 --
Marketing 1,245 1,312 5,422 3,582
Data processing 1,776 1,843 5,389 5,506
Telephone and postage 1,555 1,502 4,855 4,565
Loan expenses 1,543 1,644 4,545 4,986
Furniture and equipment 1,356 1,439 4,253 4,564
Amortization of intangible assets 1,312 1,344 3,934 4,032
Net cost from operations
of foreclosed properties 22 78 15 596
Other 2,987 2,887 8,701 8,863
-------- -------- -------- --------
Total non-interest expense 27,770 29,830 93,271 90,518
-------- -------- -------- --------
Income before income taxes 27,808 23,235 70,442 59,062
Income taxes 10,015 8,252 25,517 21,849
-------- -------- -------- --------
Net income $ 17,793 $ 14,983 $ 44,925 $ 37,213
======== ======== ======== ========
Earnings per share:
Primary $ 0.59 $ 0.50 $ 1.49 $ 1.25
Fully diluted $ 0.59 $ 0.50 $ 1.48 $ 1.24
Cash dividends per share $ 0.12 $ 0.10 $ 0.36 $ 0.30
</TABLE>
See notes to unaudited consolidated financial statements.
-3-
<PAGE>
FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For The Nine Month Period Ended September 30, 1995
(Unaudited)
<TABLE>
<CAPTION>
Net
Unrealized
Holding Common
Common Gain Stock
Stock and (Loss) On Purchased
Additional Securities by Employee
Paid-In Retained Available Treasury Benefit Stockholders'
Capital Earnings For Sale Stock Plans (1) Equity
--------- -------- ---------- -------- ----------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Balances at
December 31, 1994 $ 57,310 $226,045 $ (5,400) $ -- $ -- $277,955
Pooling-of-interests--
FirstRock Bancorp,
Inc. 21,945 35,904 (3,219) (3,669) (1,608) 49,353
-------- -------- -------- -------- -------- --------
Restated balances at
December 31, 1994 79,255 261,949 (8,619) (3,669) (1,608) 327,308
Net income for the
nine months ended
September 30, 1995 44,925 44,925
Payment for fractional
shares (5) (5)
Cash dividends
($0.36 per share) (10,595) (10,595)
Exercise of stock
options 2,270 423 2,693
Payment on ESOP loan 38 38
Amortization of Retention
and Recognition Plan
(RRP) shares 31 31
Vesting of RRP shares at
acquisition 464 464
Reversion of unallocated
RRP shares to FFC (14) 14 --
Tax benefit related to
vested RRP shares and
non-incentive options
exercised 611 611
Treasury shares retired
upon acquisition of
FirstRock Bancorp,
Inc. (3,260) 3,260 --
Change in net unrealized
holding loss on
securities available
for sale 440 440
-------- -------- -------- -------- -------- --------
Balances at September 30,
1995 $ 78,871 $296,279 $ (8,179) $ -- $ (1,061) $365,910
======== ======== ======== ======== ======== ========
<FN>
(1) Balance at September 30, 1995 consists entirely of common stock purchased
by the Employee Stock Ownership Plan (ESOP).
</FN>
</TABLE>
See notes to unaudited consolidated financial statements.
-4-
<PAGE>
FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1995 1994
---------- -------
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 44,925 $ 37,213
Adjustments to reconcile net income to net cash provided by operating
activities:
Increase in accrued interest on loans (3,446) (2,164)
Increase in accrued interest on deposits 10,369 443
Mortgage loans originated for sale (142,577) (263,667)
Proceeds from sales of loans held for sale 142,861 393,650
Provision for depreciation 4,321 4,975
Provision for losses on loans 7,065 5,093
Provision for losses on real estate and other assets 659 525
Unrealized loss on impairment of mortgage-related securities -- 9,000
Amortization of cost in excess of net assets of
acquired businesses 624 740
Amortization of core deposit intangibles 3,310 3,292
Amortization of purchased mortgage servicing rights 710 784
Net gain on sales of loans and assets (2,867) (3,805)
Other-net 5,836 (33,020)
--------- ---------
Net cash provided by operating activities 71,790 153,059
INVESTING ACTIVITIES
Proceeds from sales of investment securities available for sale 18,759 65,088
Proceeds from maturities of investment securities held
to maturity 41,695 23,393
Purchases of investment securities held to maturity (34,655) (7,610)
Proceeds from maturities of investment securities available
for sale 9,351 13,591
Purchases of investment securities available for sale (15,770) (1,899)
Proceeds from sales of mortgage-related securities available
for sale -- 182,563
Principal payments received on mortgage-related securities 192,719 245,718
Purchases of mortgage-related securities held to maturity -- (594,952)
Proceeds from sale of finance company receivables -- 6,665
Principal received on loans receivable 401,879 453,858
Loans originated for portfolio (536,651) (737,627)
Additions to office properties and equipment (2,722) (2,132)
Proceeds from sales of foreclosed properties and
repossessed assets 5,341 7,502
Proceeds from sales of real estate held for investment -- 10,130
Business acquisitions (net of cash and cash equivalents acquired of
$4,593,000--1994):
Investment securities held to maturity -- (4,785)
Mortgage-related securities held to maturity -- (16,742)
Loans receivable -- (96,748)
Office properties -- (2,387)
Intangible assets -- (699)
Deposits and related accrued interest -- 114,297
Borrowings -- 750
Stockholders' equity -- 11,401
Other-net -- (494)
--------- ---------
Net cash provided by (used in) investing activities 79,946 (331,119)
FINANCING ACTIVITIES
Net increase (decrease) in deposits 48,769 (59,294)
Net increase in advance payments by borrowers for
taxes and insurance 46,292 44,217
Funding of official checks for borrower tax escrows (34,953) --
Proceeds from borrowings 1,503,354 788,887
Repayments of borrowings (1,684,279) (616,164)
Proceeds from exercise of stock options 2,693 894
Proceeds from vesting of employee benefit plans 1,139 312
Payments of cash dividends to stockholders (10,595) (7,470)
---------- ---------
Net cash provided by (used in) financing activities (127,580) 151,382
---------- ---------
Increase (decrease) in cash and cash equivalents 24,156 (26,678)
Cash and cash equivalents at beginning of period 118,978 138,018
---------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 143,134 $ 111,340
========== =========
</TABLE>
See notes to unaudited consolidated financial statements.
-5-
<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 ("FFC") and its
wholly-owned subsidiary, First Financial Bank, FSB ("FF Bank"). Significant
intercompany accounts and transactions have been eliminated in consolidation.
FFC 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 first nine months of 1995 are not
necessarily indicative of the results which may be expected for the entire 1995
fiscal year. The December 31, 1994 balance sheet included herein is derived from
the consolidated financial statements included in FFC's 1994 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 FFC's 1994 Annual Report to
Shareholders. See Note B for information relative to business combinations.
NOTE B - FIRST FINANCIAL CORPORATION
At September 30, 1995, FFC conducted business as a nondiversified
unitary thrift holding company with its principal asset being the capital stock
of FF Bank. The primary business of FFC is the business of FF Bank. FFC's
activities are currently comprised of providing limited administrative services
to FF Bank.
On February 28, 1995, FFC acquired FirstRock Bancorp, Inc. ("FirstRock")
of Rockford, Illinois. In the acquisition, 4,366,412 shares of FFC common stock
were issued to FirstRock shareholders based upon an exchange ratio of 1.7893
shares of FFC common stock for each outstanding share of FirstRock common stock.
Upon closing, FirstRock's subsidiary, First Federal Savings Bank, FSB ("First
Federal") was merged into FF Bank with First Federal's six offices now operating
as branch banking offices of FF Bank. FirstRock was merged into FFC. The
transaction was accounted for as a pooling-of-interests and, accordingly,
financial statements for all periods presented have been restated to include the
results of FirstRock.
-6-
<PAGE>
On February 28, 1995 FirstRock had assets (unaudited) of $376,473,000
and shareholders' equity (unaudited) of $48,430,000. The total income and net
income (loss) for the two-month period ended February 28, 1995 (unaudited),
which reflects the pre-merger results of FFC and FirstRock that are included in
the first quarter 1995 results of operations, are as follows:
Net
Total Income
Income (Loss)
--------- ---------
(In thousands)
FFC $69,579 $ 9,348
FirstRock 5,383 (3,091)
------- -------
$74,962 $ 6,257
======= =======
A reconciliation of total income, net income and earnings per share
(unaudited), as previously reported, with restated amounts for the three months
and nine months ended September 30, 1994 follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1994 September 30, 1994
--------------------- -------------------
Total Net Total Net
Income Income Income Income
------- ------ ------- ------
(In thousands)
<S> <C> <C> <C> <C>
Previously Reported $ 97,952 $13,746 $280,228 $ 33,555
FirstRock 8,221 1,237 24,561 3,658
-------- ------- -------- --------
As Restated $106,173 $14,983 $304,789 $ 37,213
======== ======= ======== ========
Earnings Per Share $ .50 $ 1.24
======= ========
</TABLE>
As a result of the FirstRock acquisition, FFC and FirstRock incurred
expenses i) in conjunction with the acquisition itself and ii) relative to the
reorganization of FirstRock's operations following the acquisition. The
acquisition/transaction costs and charges aggregated $6.5 million on a pre-tax
basis and $4.0 million on an after-tax basis, or $0.14 per share during the
first quarter of 1995.
On February 26, 1994, the Corporation completed the acquisition of
NorthLand Bank of Wisconsin, SSB ("NorthLand") of Ashland, Wisconsin. NorthLand
was merged into FF Bank. 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 had been accounted for as a
pooling-of-interests and 1994 amounts had been adjusted to reflect the
transaction as if it had occurred on January 1, 1994.
NOTE C - EARNINGS PER SHARE
Primary and fully diluted earnings per share for the periods ended
September 30, 1995 and 1994 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.
FFC's common stock equivalents consist entirely of stock options. Weighted
average common shares have been adjusted for all periods presented to reflect
the restatement for FirstRock shares. See Exhibit 11 to this Report for a
detailed computation of earnings per share.
-7-
<PAGE>
NOTE D - CONTINGENT LIABILITIES
FF Bank has 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 September 30, 1995,
mortgage-related securities and investment securities with a carrying value of
approximately $6.2 million were pledged as collateral for bonds in the aggregate
principal amount of $3.9 million. Additional bond issues totaling $7.2 million
are supported by letters of credit issued by FF Bank in lieu of specific
collateral. At September 30, 1995, each of the outstanding bonds for which FF
Bank has entered into collateral agreements or supported by letters of credit is
current with regard to debt service payments.
NOTE E - DIVIDENDS PAID OR DECLARED TO STOCKHOLDERS
The Board of Directors of FFC on August 16, 1995 declared a $0.12 per
share quarterly cash dividend payable on September 30, 1995 to shareholders of
record of FFC common stock on September 15, 1995.
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 September 30, 1995, FF Bank exceeded all OTS capital
requirements as displayed below:
Required Actual
OTS FF Bank
Ratio Ratio
------- -------
Tangible capital 1.50% 7.07%
Core leverage capital 3.00 7.38
Risk-based capital 8.00 15.34
The OTS also has a requirement for calculating an interest rate risk component
of capital. Under this requirement, savings institutions with "above normal"
interest rate risk exposure are subject to a deduction from total capital for
purposes of calculating their risk-based capital requirements. A savings
institution's interest rate risk is measured by the decline in the net portfolio
value of its assets (i.e., the difference between incoming and outgoing
discounted cash flows from assets, liabilities and off-balance-sheet contracts)
that would result from a hypothetical 200 basis point increase or decrease in
market interest rates (except when the three-month Treasury bond equivalent
yield falls below 4%, then the decrease will be equal to one-half of that
Treasury rate) divided by the estimated economic value of the institution's
assets. That dollar amount is deducted from the institution's total capital in
calculating risk-based capital. At September 30, 1995, FF Bank was not required
to deduct any amount from capital as a result of interest rate risk exposure.
-8-
<PAGE>
The OTS also has proposed to increase the minimum required core capital
ratio from the current 3% level to a range of 4% to 5% for all but the most
highly rated financial institutions. While the OTS has not taken final action on
such proposal, it has adopted a prompt corrective action ("PCA") regulation that
classifies any savings institution with a core capital ratio of less than 4% (3%
for the most highly rated institutions) as "undercapitalized." FF Bank is not
subject to any PCA sanctions.
NOTE G - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
For The
Nine Months Ended
September 30,
-------------
1995 1994
------- -----
(In thousands)
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid or credited to accounts during
period for:
Interest on deposits and borrowings $165,325 $148,795
Income taxes 24,647 24,508
Non-cash investing activities:
Mortgage loans transferred to held for sale
portfolio 7,498 39,025
Loans receivable transferred to foreclosed
properties 4,757 5,603
Change in net unrealized holding loss
on securities available for sale (440) (9,442)
</TABLE>
NOTE H - ACCOUNTING CHANGE
During the third quarter of 1995, the Corporation adopted Statement of
Financial Accounting Standard ("S.F.A.S.") or the ("Statement") No. 122,
"Accounting for Mortgage Servicing Rights". S.F.A.S. No. 122 requires that a
mortgage banking enterprise recognize as a separate asset the rights to service
mortgage loans for others, whether those rights are purchased or originated.
In accordance with the Statement, an enterprise that acquires mortgage
servicing rights through either the origination or purchase of mortgage loans
and sells or securitizes those loans with servicing rights retained should
allocate the total cost of the mortgage loans to the mortgage servicing rights
and to the loans (without the mortgage servicing rights) based on their relative
fair values.
Upon the adoption of S.F.A.S. No. 122, FFC realized a pre-tax gain of
$1.1 million ($650,000 after tax, or $0.02 per share) during the third quarter
of 1995 as a result of the capitalization of originated mortgage servicing
rights.
-9-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following Management's Discussion and Analysis, including the
comparison of balance sheet and income statement data, reflects the restatement
of all prior period financial data to include FirstRock. See Note B to the
Financial Statements.
COMPARISON OF THE CONSOLIDATED BALANCE SHEETS
AT SEPTEMBER 30, 1995 (UNAUDITED) WITH DECEMBER 31, 1994
General:
Total assets decreased to $5.435 billion at September 30, 1995 from
$5.502 billion at December 31, 1994. The $66.5 million decrease in total assets
relates primarily to the $177.9 million decrease in mortgage-related securities
held to maturity offset by an increase of $123.3 million in loans receivable.
Deposits increased to $4.441 billion at September 30, 1995 from $4.381 billion
at year-end 1994 while borrowings decreased to $527.5 million from $708.4
million during the same time frame. Advance payments by borrowers for taxes and
insurance increased by $46.3 million between December 31, 1994 and September 30,
1995 and other liabilities decreased $29.6 million from December 31, 1994 to
September 30, 1995. Borrowers' advance payments routinely show net increases
throughout the first three quarters of the year as receipts exceed insurance
premiums and taxes paid during each quarter. The higher other liabilities
balance at year-end 1994 represented the outstanding real estate property tax
checks issued to municipalities on behalf of the borrowers and as those checks
were paid during the early months of 1995 other liabilities decreased
significantly. Stockholders' equity at September 30, 1995 was $365.9 million, up
from $327.3 million at year-end 1994.
Liquidity and Capital Resources:
At September 30, 1995, total consolidated liquidity, consisting of
cash, cash equivalents, and investment securities, represented 5.96% of FFC's
total assets compared to 5.77% at December 31, 1994. The Bank is 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
FFC'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 September 30, 1995 increased by $ 6.8 million as
compared to December 31, 1994 liquidity as a result of the net effect of
significant changes in various categories of assets and liabilities during the
nine 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 Balance
Financial Condition December 31, Increases September 30,
Classification 1994 (Decreases) 1995
- ------------------- ------------ ----------- --------
(In thousands)
<S> <C> <C> <C>
Cash and cash equivalents $ 118,978 $ 24,156 $ 143,134
Securities available for
sale:
Investment securities 68,959 (9,734) 59,225
Mortgage-related
securities 201,373 (16,045) 185,328
Securities held to
maturity:
Investment securities 129,301 (7,596) 121,705
-10-
<PAGE>
Mortgage-related
securities 1,301,118 (177,889) 1,123,229
Loans receivable, in-
cluding loans held
for sale 3,470,447 123,259 3,593,706
Office properties 53,927 (2,310) 51,617
Intangible assets 26,726 (3,934) 22,792
Deposits 4,381,455 59,138 4,440,593
Borrowings 708,446 (180,925) 527,521
Advance payments by
borrowers for taxes
and insurance 15,986 46,292 62,278
Other liabilities 68,629 (29,641) 38,988
Stockholders' equity 327,308 38,602 365,910
</TABLE>
Changes noted in the "Increases (Decreases)" column of the preceding
table are discussed below in the related sections of "Management's Discussion
and Analysis."
Management believes liquidity and capital levels are proper and that
additional capital and borrowings, if needed, 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, FFC had cash of $11.7 million and
subordinated debt of $54.9 million at September 30, 1995. The principal ongoing
sources of funds for FFC are dividends from FF Bank. Applicable rules and
regulations of the OTS impose limitations on capital distributions by savings
institutions such as FF Bank. Savings institutions such as FF Bank which have
capital in excess of all 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 capital
requirements) at the beginning of the calendar year, or (ii) 75% of its net
income over the most recent four-quarter period.
Total Loans Receivable and Held for Sale:
Total loans, including loans held for sale, increased $123.3 million
from $3.470 billion at December 31, 1994 to $3.594 billion at September 30,
1995. Total loans are summarized below as of the dates indicated.
<TABLE>
<CAPTION>
September 30, December 31, Increase
1995 1994 (Decrease)
------------- ------------ ----------
(In thousands)
<S> <C> <C> <C>
Real estate loans:
One- to four-family $2,053,482 $2,064,232 $ (10,750)
Multi-family 215,869 215,703 166
Commercial and non-residential 154,389 143,762 10,627
---------- ---------- ---------
Total real estate loans 2,423,740 2,423,697 43
Other loans:
Consumer 350,385 304,771 45,614
Home equity 280,012 240,915 39,097
Education 227,502 192,542 34,960
Credit cards 202,722 200,747 1,975
Manufactured housing 147,937 152,674 (4,737)
Business 16,126 19,023 (2,897)
Less net items to loans receivable (54,718) (63,922) 9,204
---------- ---------- ---------
Total loans (including loans held
for sale) $3,593,706 $3,470,447 $ 123,259
========== ========== =========
</TABLE>
-11-
<PAGE>
The major components of the increase in total loans during the first
nine months of 1995 were a $45.6 million increase in consumer loans, a $39.1
million increase in home equity loans and a $35.0 million increase in education
loans.
Consumer loans increased $45.6 million in 1995 due to continuing
success in marketing a second mortgage product and increased automobile
financing. Student loans have increased during the first nine months of 1995
primarily as a result of increased government guaranteed portfolio acquisitions
from other lenders. Home equity loans have increased $39.1 million in 1995 as
customer usage of this product has continued to grow. Manufactured housing loan
balances decreased $4.7 million in 1995 as FFC discontinued dealer-originated
mobile home financing in late 1994 due to unfavorable pricing practices by
competitors.
Credit card loan balances increased $2.0 million in the first nine
months of 1995. This increase in the loan balance at September 30, 1995 over
December 31, 1994 is significant because year end balances are traditionally
high due to normal seasonal increases in consumer demand in the fourth quarter.
Credit card balances have increased to $202.7 million at September 30, 1995 from
$191.0 million at September 30, 1994, reflecting the continuing year-to-year
increase in this portfolio.
Mortgage loans held for sale were $19.5 million at September 30, 1995
as compared to $11.7 million at the end of 1994. Off-balance sheet commitments
to extend credit and to sell mortgage loans totaled $37.7 million and $36.9
million, respectively, at September 30, 1995 as compared to $31.7 million and
$12.4 million, respectively, at December 31, 1994. During the nine months ended
September 30, 1995, market interest rates generally decreased as compared to
interest rate levels at the end of 1994, 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 utilizes various
methods to insulate FFC 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. Future operations may be affected by the above-discussed risk
factors.
Mortgage-Related Securities:
The mortgage-related securities ("MBS") portfolio decreased $193.9
million during the nine months ended September 30, 1995 primarily as a result of
principal repayments of $192.7 million. At the end of the third quarter, FF Bank
had no commitments to purchase MBSs. Also, see "Non-Accrual MBSs" for discussion
of non-performing MBSs.
The following tables set forth, at the dates indicated, the
composition of the MBS portfolio including issuer, security type and financial
statement carrying value as well as classification according to
available-for-sale or held-to-maturity status:
-12-
<PAGE>
<TABLE>
<CAPTION>
Carrying Value At
--------------------------------------
September 30, December 31,
1995 1994
------------- -----------
(In thousands)
<S> <C> <C>
Issuer/Security Type
- --------------------
U.S. Government agencies:
Mortgage-backed certificates $ 362,955 $ 395,544
Collateralized mortgage
obligations 343,051 347,817
---------- ----------
Total agencies 706,006 743,361
---------- ----------
Private issuers:
Mortgage-backed certificates
Senior position 511,743 658,508
Mezzanine position 90,144 98,507
Collateralized mortgage
obligations 664 2,115
---------- ----------
Total private issuers 602,551 759,130
---------- ----------
Totals $1,308,557 $1,502,491
========== ==========
Total carrying value per consolidated financial statements, by classification:
Available-for-sale portfolio $ 185,328 $ 201,373
Held-to-maturity portfolio 1,123,229 1,301,118
---------- ----------
Total carrying value $1,308,557 $1,502,491
========== ==========
</TABLE>
Loan Delinquencies:
FFC monitors the delinquency status of its loan portfolio on a constant
basis and initiates 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 loan is 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 in the following chart:
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994 (a)
------------- ----------
(In thousands)
<S> <C> <C>
Loans Delinquent 30-59 Days
- ---------------------------
Residential real estate $ 7,644 $ 8,796
Manufactured housing 2,111 2,886
Credit card 2,245 1,964
Commercial real estate 706 1,079
Consumer, student and other 9,034 7,219
------- -------
$21,740 $21,944
======= =======
Loans Delinquent 60-90 Days
- --------------------------
Residential real estate $ 691 $ 1,950
Manufactured housing 740 974
Credit card 1,119 883
Commercial real estate 539 1,696
Consumer, student and other 8,813 5,835
------- -------
$11,902 $11,338
======= =======
-13-
<PAGE>
Total Loans Delinquent 30-90 Days
- --------------------------------
Residential real estate $ 8,335 $10,746
Manufactured housing 2,851 3,860
Credit card 3,364 2,847
Commercial real estate 1,245 2,775
Consumer, student and other 17,847 13,054
------- -------
$33,642 $33,282
======= =======
<FN>
(a) The restated December 31, 1994 30-90 day delinquent loan balances totaling
$33.3 million have been adjusted from the $31.8 million presented in the
March 31, 1995 Form 10-Q.
</FN>
</TABLE>
At September 30, 1995, the 30-90 day delinquencies increased $300,000 to
$33.6 million from $33.3 million at year-end 1994. As a percent of total loans
receivable, loan delinquencies decreased from 0.96% at the end of 1994 to 0.94%
at September 30, 1995. The increased total relates to the net effect of i) a
decrease of $2.4 million of delinquent residential real estate loans, ii) the
return to satisfactory contractual performance of $1.6 million of commercial
real estate loans, iii) a decrease of $1.0 million in manufactured housing loans
delinquent 30-90 days, iv) an increase of $5.3 million in student loans (which
are government guaranteed) delinquent 30-90 days, and v) an increase of $600,000
in credit card delinquent balances. The overall decrease of $2.4 million in
30-90 day delinquent residential mortgages was offset by $700,000 of transfers
to non-accrual status for one- to four-family and certain multi-family
residential mortgages, reflected below. All delinquent loans have been
considered by management in its evaluation of the adequacy of the allowances for
loan losses.
Non-Accrual Loans:
FFC 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, in the
following table:
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
------------- ------------
(In thousands)
<S> <C> <C>
One- to four-family residential $ 6,141 $ 5,706
Multi-family residential 893 585
Commercial and other real estate 189 271
Manufactured housing 913 1,034
Credit cards 2,470 2,031
Consumer and other 732 937
------- -------
$11,338 $10,564
======= =======
</TABLE>
Non-accrual loans increased $700,000 to $11.3 million at September 30,
1995 from $10.6 million at December 31, 1994. As a percentage of net loans
receivable, non-accrual loans increased to 0.32% at September 30, 1995 from
0.30% at December 31, 1994. The 1995 increase in non-accrual loans relates to a
$500,000 increase in non-accrual credit card loan balances, a $400,000 increase
in non-accrual residential mortgage loans and a $300,000 increase in non-accrual
multi-family residential mortgage loans. These increases were offset partially
by various smaller net decreases in non-accrual loan balances for commercial
real estate mortgage loans, manufactured housing loans and consumer and other
loans. The increases in non-accrual loans for the various loan products are
being reviewed to better control and reduce the volume of serious delinquents
and potential future charge-offs. FFC has had no troubled debt restructurings
during 1995.
-14-
<PAGE>
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:
At September 30, 1995, FFC had two non-accrual MBS's, held as available
for sale, with an amortized cost of $12.9 million, net of applicable reserves.
At that date, the carrying value of the two non-accrual MBS's was $9.1 million.
Each of these MBSs is a mezzanine security, which is subordinate to the senior
position of that issue but still superior to other subordinate positions
designed to absorb first losses. FFC's mezzanine position is superior to
subordinate positions amounting to 2.65% of the current aggregate par value of
the securities in question. Independent national rating agencies downgraded
these two securities as well as an unrelated senior position security, having a
carrying value of $7.9 million, of the same issuer during 1994. The senior
position security continues to be a performing asset.
Also, during 1995, independent national rating agencies have downgraded,
to below investment grade, MBSs of two unrelated issuers in which FFC has senior
ownership positions having a net carrying value of $7.5 million at September 30,
1995. These senior position securities continue to be performing securities and
are superior to subordinate positions amounting to 7.54% of the current
aggregate par value of the securities in question.
The aggregate par, amortized cost (net of applicable reserves) and
carrying values of the above discussed MBSs rated below investment grade were
$37.9 million, $28.2 million and $24.5 million, respectively, at September 30,
1995.
Management believes that the loss reserves for the above referenced
securities are adequate based upon its evaluations, including information from
the rating agencies as well as discounted cash flow analyses performed by
management, which are based upon reasonable assumptions for future delinquency
levels, foreclosure rates and recovery ratios in the underlying portfolios.
Management also has the intent and ability to retain its investment in these
securities for a period of time sufficient to allow for anticipated recovery of
fair value.
FFC's portfolio of MBSs totaled approximately $1.309 billion at
September 30, 1995, and except for the two non-accrual MBSs, all of FFC's
mortgage-related securities were performing assets. Additionally, with the
exception of the downgraded securities noted above, all of FFC's
mortgage-related securities are i) rated at a minimum of investment grade by at
least one nationally recognized independent rating agency, or ii) are government
agency backed issues.
Allowances for Loan Losses:
FFC'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
-15-
<PAGE>
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 and nine months ended September 30, 1995 and 1994, follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ----------------
1995 1994 1995 1994
-------- -------- -------- ------
(In thousands)
<S> <C> <C> <C> <C>
Allowances at beginning of period $24,643 $26,508 $25,180 $25,905
From acquired bank -- -- -- 816
Provisions 2,873 1,731 7,065 5,093
Charge-offs (2,694) (2,679) (8,193) (7,175)
Recoveries 309 273 1,079 1,194
------- ------- ------- -------
Allowances at end of period $25,131 $25,833 $25,131 $25,833
======= ======= ======= =======
</TABLE>
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 Nine Months Ended September 30, 1995 and 1994." An
analysis of allowances by loan category and the percentage of such allowances by
category and in the aggregate to loans receivable at the dates indicated,
follows:
<TABLE>
<CAPTION>
September 30, 1995 December 31, 1994
------------------------- ----------------------
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 $ 6,620 3.27% $ 6,737 3.36%
Residential real estate 7,281 .33 6,990 .32
Manufactured housing 3,377 2.28 4,267 2.79
Commercial and non-resi-
dential real estate 3,826 2.48 3,632 2.53
Consumer 2,894 .83 2,444 .80
Home equity 538 .19 487 .20
Commercial business 556 3.45 577 3.03
Education 39 .02 46 .02
------- -------
$25,131 .70% $25,180 .73%
======= ===== ======= =====
</TABLE>
The allowances for loan losses were $25.1 million, or 0.70% of loans
receivable, at September 30, 1995 compared to $25.2 million, or 0.73%, at
December 31, 1994. The allowances for losses represented 222% of non-accrual
loans at September 30, 1995 as compared to 238% at the end of 1994. Management
believes that the allowances for losses are sufficient based upon current
evaluations.
-16-
<PAGE>
Foreclosed Properties and Repossessed Assets:
Foreclosed properties and other repossessed assets are summarized, for
the dates indicated, as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
------------- --------
(In thousands)
<S> <C> <C>
Foreclosed real estate properties $ 5,329 $ 6,095
Manufactured housing owned 297 171
Consumer and other repossessed assets 90 96
------- -------
5,716 6,362
Less allowances for losses (1,048) (1,146)
------- -------
$ 4,668 $ 5,216
======= =======
</TABLE>
Foreclosed properties, net of allowances for losses, decreased $500,000
to $4.7 million at September 30, 1995 from $5.2 million at December 31, 1994.
The decrease is mainly due to a lower volume of residential properties owned at
September 30, 1995.
A summary of the activity in allowances for losses on foreclosed
properties, for the three months and the nine months ended September 30, 1995
and 1994, is presented below.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- --------------------
1995 1994 1995 1994
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Allowances at beginning
of period $1,086 $1,331 $1,146 $1,386
Provisions 15 75 45 407
Charge-offs (53) (64) (143) (451)
------ ------ ------ ------
Allowances at end of
period $1,048 $1,342 $1,048 $1,342
====== ====== ====== ======
</TABLE>
The larger commercial real estate properties (having a carrying amount
of $1.0 million or greater) included in foreclosed properties, for the dates
indicated, are presented below. These properties are carried at the lower of
cost or fair value.
<TABLE>
<CAPTION>
Carrying Value At
------------------------------------
Property September 30, December 31,
Type Property Location 1995 1994
- -------- ----------------- ------------- --------
(In thousands)
<S> <C> <C>
Retail Milwaukee, Wisconsin $ 1,089 $ 1,089
Retail Fort Worth, Texas 1,012 1,012
</TABLE>
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, FF Bank utilizes 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.
-17-
<PAGE>
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 substantially performing 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 FF Bank has obtained title.
Classified assets, including non-performing assets, for FF Bank,
categorized by type of asset are set forth in the following table:
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
------------- --------
(In thousands)
<S> <C> <C>
Classified assets:
Non-performing assets:
Non-accrual loans $11,338 $10,564
Non-accrual MBSs 12,889 15,455
Real estate held for sale by FFC 1,327 1,089
Foreclosed properties and other
repossessed assets 4,668 5,216
------- -------
Total Non-Performing Assets 30,222 32,324
Add back general valuation allowances net-
ted against foreclosed properties above 1,048 1,146
Adjustment for non-performing residential
loans not classified due to low
loan-to-appraisal value (600) (414)
Adjustment for real estate held for sale not
included in FF Bank classified assets (1,327) (1,089)
Additional classified performing loans:
Residential real estate 260 1,858
Commercial real estate 5,177 8,057
Consumer and other 705 672
Other adversely classified assets -- 135
------- -------
Total Classified Assets $35,485 $42,689
======= =======
</TABLE>
During the nine months ended September 30, 1995, classified assets
decreased $7.2 million to $35.5 million from $42.7 million at December 31, 1994
primarily as a result of i) a $2.9 million decrease in classified performing
commercial real estate loans, ii) a $2.6 million decrease in the carrying value
of two non-accrual mortgage-backed securities referred to previously (see
"Non-Accrual MBSs") and iii) a $1.6 million decrease in classified performing
residential real estate mortgage loans. As a percentage of total
-18-
<PAGE>
assets, classified assets decreased from 0.78% at year-end 1994 to 0.65% at
September 30, 1995.
The decrease in non-accrual loans and the decrease in foreclosed
properties during the first nine months of 1995 have been discussed above (see
"Non-Accrual Loans" and "Foreclosed Properties").
The following table sets forth, at the dates indicated, 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.
<TABLE>
<CAPTION>
Loan Amount Classified
--------------------------
Property Type Of Property September 30, December 31,
Loan Collateral Location 1995 1994
- ---------------- ---------- ------------- --------
(In thousands)
<S> <C> <C> <C>
Office/Land Sheboygan, Wisconsin $ 3,606 $3,633
Motels Various-Tennessee -- 2,553 (a)
<FN>
(a) Represented FF Bank's 20% interest in loans, aggregating $12.3 million,
for which FF Bank is also the lead lender. The loans have been removed
from the classification listing as of September 30, 1995 based upon the
receipt of certain contractual principal payments in early 1995.
</FN>
</TABLE>
Other adversely classified assets remained relatively unchanged during
the first nine months of 1995.
All adversely classified assets at September 30, 1995, have been
considered by management in its evaluation of the adequacy of allowances for
losses.
Deposits and Other Liabilities:
Deposits increased $59.1 million during the nine months ended
September 30, 1995, primarily due to the success of new programs for short-term
certificates of deposit and no-cost checking accounts. The weighted average cost
of deposits of 4.53% at September 30, 1995 was higher than the 4.15% reported at
December 31, 1994 due to rising certificate of deposit rates and more aggressive
pricing of certain certificate of deposit products during 1995.
Advance payments by borrowers for taxes and insurance increased by
$46.3 million during the first nine months of 1995 as a result of the normal
cumulative monthly deposits made by borrowers less interim payments of taxes and
insurance premiums.
Borrowings:
At September 30, 1995, FFC's consolidated borrowings decreased $180.9
million to $527.5 million from $708.4 million at December 31, 1994. The decrease
in borrowings is primarily attributable to the net effect of i) repayments of
$125.8 million in long-term and $85.1 million in short-term FHLB advances and
ii) a net increase in short-term reverse repurchase agreements of $33.6 million.
Stockholders' Equity:
Stockholders' equity at September 30, 1995 was $365.9 million, or
6.73% of total assets, as compared to $327.3 million, or 5.95% of total assets,
at December 31, 1994. The
-19-
<PAGE>
major changes in stockholders' equity included i) net income of $44.9 million
earned during the first nine months of 1995 and ii) cash dividend payments to
stockholders of $10.6 million. Stockholders' equity per share increased from
$11.24 per share at year-end 1994 to $12.37 per share at September 30, 1995.
Regulatory Capital:
As set forth in Note F to the unaudited consolidated financial
statements, FF Bank exceeds all regulatory capital requirements mandated by the
OTS.
Loan Originations:
A comparison of loan originations for the first nine months of 1995
and 1994, including loans originated for sale (but excluding MBSs), is set forth
below:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
------------------------------------
1995 Percent 1994 Percent
------ --------- ------ ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Loan Type
Mortgage:
One- to four-family $ 343,731 51.1% $ 613,648 60.8%
Multi-family 18,540 2.8 42,721 4.2
Commercial/non-residential 21,546 3.2 35,082 3.5
Refinanced one- to four-
family loans previously
sold and serviced for others -- -- 23,413 2.3
---------- ----- ---------- -----
383,817 57.1 714,864 70.8
Consumer 170,316 25.4 186,656 18.5
Education 56,037 8.3 40,646 4.0
Home equity-net 39,097 5.8 45,231 4.5
Manufactured housing 18,288 2.7 14,817 1.5
Business 2,536 .4 6,877 .7
Refinanced manufactured
housing loans previously
sold and serviced for others -- -- 475 --
Credit cards-net 1,975 .3 -- --
---------- ----- ---------- -----
Total loans originated 672,066 100.0% 1,009,566 100.0%
===== =====
(Increase) decrease in undisbursed
loan proceeds 7,162 (8,272)
---------- ----------
Total loans disbursed $ 679,228 $1,001,294
========== ==========
</TABLE>
Total loan originations decreased to $672.1 million for the first nine
months of 1995 from $1.010 billion for the same period in 1994. This net 1995
decrease of $337.5 million was primarily attributable to a $331.0 million
decrease in mortgage loan originations.
One- to four-family mortgage loan originations and refinancings
decreased $293.4 million to $343.7 million for the first nine months of 1995 as
compared to $637.1 million for the same period in 1994. At September 30, 1995,
one- to four-family mortgage loan applications in process and commitments
totaled $75.9 million and $25.4 million as compared to $42.6 million and $23.3
million at December 31, 1994. The decrease in originations and refinancings
reflects reduced borrower demand as interest rates have risen during 1994 and
early 1995. The recent decline in interest rates has led to the increase in
commitments and applications in process. Approximately 51% of originations for
the first nine months of 1995 were adjustable-rate mortgage loans which are held
for investment purposes. With the decrease in interest rates, borrower
preference has recently turned toward fixed-rate mortgage loans. Longer term
fixed-rate mortgages are normally sold into the secondary market.
-20-
<PAGE>
Originations of multi-family and commercial/non-residential loans
decreased $37.7 million to $40.1 million for the first nine months of 1995 as
compared to $77.8 million for the same period in 1994. Commercial real estate
loan originations remain at relatively low levels in 1995 due to regional market
conditions and the competitive environment.
Consumer loan originations decreased $16.3 million to $170.3 million in
the first nine months of 1995 as compared to the same period in 1994, primarily
due to decreased volumes of refinancings through FF Bank's short-term consumer
first mortgage product.
Student loan originations increased $15.4 million to $56.0 million
during the first nine months of 1995 as a result of increased government
guaranteed portfolio acquisitions and subsequent origination referrals from
other smaller lenders who are exiting this product line because of costly audit
requirements recently imposed by the Department of Education.
Home equity loan balances increased $39.1 million for the first nine
months of 1995 to $280.0 million as customer usage of this product continues to
grow.
Credit card loan balances increased $2.0 million to $202.7 million in
the first nine months of 1995. The increase in credit card loan balances at
September 30, 1995 over traditionally high calendar year-end balances is due to
the positive effect of marketing a usage incentive program and to continued
success in new account production.
FFC discontinued dealer-originated mobile home financing in late 1994
due to pricing practices by competitors. However, in the third quarter of 1995,
an $18.3 million portfolio of seasoned FHA insured and VA guaranteed mobile home
loans was purchased from GNMA.
Asset/Liability Management:
The objective of FFC's 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 23 sets forth the combined estimated
maturity/repricing structure of FFC's consolidated interest-earning assets
(including net items) and interest-costing liabilities at September 30, 1995.
Assumptions regarding prepayment and withdrawal rates are based upon FFC's
historical experience, and management believes such assumptions are reasonable.
The table does not necessarily indicate the impact of general interest rate
movements on
-21-
<PAGE>
FFC's net interest income because repricing of certain categories of assets and
liabilities through, for example, prepayments of loans and withdrawals of
deposits, is beyond FFC's 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 from those
assumed in calculating the data in the table.
FFC's consolidated negative one-year interest-rate sensitivity gap at
September 30, 1995 was $195.9 million or 3.60% of total assets. The one-year
negative gap increased $89.8 million from the December 31, 1994 negative gap of
$106.1 million or 1.93% of total assets at that date.
FFC's consolidated one-year negative gap position of 3.60% at September
30, 1995 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 and in compliance with OTS regulations, FF Bank also
measures and evaluates 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
the end of the third quarter of 1995 indicated that FF Bank's current financial
position should adequately protect FF Bank, and thus FFC, from the effects of
rapid rate changes. The OTS also requires an interest-rate risk capital
measurement such that an institution with a measured interest-rate risk exposure
greater than specified levels must deduct an interest-rate risk component when
calculating the OTS risk-based capital requirement. See Note F to the unaudited
consolidated financial statements for further information. At September 30,
1995, FF Bank was not required to deduct an interest-rate risk component under
the OTS regulations.
-22-
<PAGE>
FIRST FINANCIAL CORPORATION CONSOLIDATED GAP ANALYSIS AT SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Three Greater Greater
Months Four Months Than One Than Three
and Through Through Through
Under One Year Three Years Five Years
--------- ---------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Rate-sensitive assets:
Investments and interest-
earning deposits, including
federal funds (a)(b) $ 105,442 $ 56,804 $ 49,637 $ 106
Mortgage-related securities (b) 551,230 661,889 37,393 21,726
Mortgage loans (c)(d):
Fixed-rate 53,455 153,844 363,556 254,913
Adjustable-rate 193,394 386,422 418,079 --
Other loans 655,731 180,592 201,948 82,951
---------- ---------- ---------- ----------
1,559,252 1,439,551 1,070,613 359,696
Rate-sensitive liabilities:
Deposits (e)(f):
Checking 108,648 25,261 63,070 49,224
MMDA 105,002 42,336 97,280 50,586
Savings (passbook) 281,074 200,343 64,550 46,476
Certificates of deposit 827,253 1,147,559 813,412 185,698
Borrowings 436,708 20,476 3,829 59,723
---------- ---------- ---------- ----------
1,758,685 1,435,975 1,042,141 391,707
---------- ---------- ---------- ----------
GAP (repricing difference) $ (199,433) $ 3,576 $ 28,472 $ (32,011)
========== ========== ========== ==========
Cumulative GAP $ (199,433) $ (195,857) $ (167,385) $ (199,396)
========== ========== ========== ==========
Cumulative GAP/Total assets (3.67)% (3.60)% (3.08)% (3.67)%
========== ========== ========== ==========
</TABLE>
<PAGE>
THE PREVIOUS TABLE CONTINUED HERE
FIRST FINANCIAL CORPORATION CONSOLIDATED GAP ANALYSIS AT SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Greater Greater
Than Five Than Ten Greater
Through Through Than
Ten Years 20 Years 20 Years Total
---------- ---------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Rate-sensitive assets:
Investments and interest-
earning deposits, including
federal funds (a)(b) $ 636 $ 35,456 $ -- $ 248,081
Mortgage-related securities (b) 26,985 8,904 430 1,308,557
Mortgage loans (c)(d):
Fixed-rate 400,346 143,639 10,401 1,380,154
Adjustable-rate -- -- -- 997,895
Other loans 74,220 20,216 -- 1,215,658
-------- -------- ---------- -----------
502,187 208,215 10,831 5,150,345
Rate-sensitive liabilities:
Deposits (e)(f):
Checking 76,994 69,168 37,989 430,354
MMDA 42,745 10,850 1,206 350,005
Savings (passbook) 66,926 42,593 9,991 711,953
Certificates of deposit 22,175 -- -- 2,996,097
Borrowings 1,554 1,910 3,321 527,521
-------- -------- ---------- -----------
210,394 124,521 52,507 5,015,930
-------- -------- ---------- -----------
GAP (repricing difference) $291,793 $ 83,694 $ (41,676) $ 134,415
======== ======== ========== ===========
Cumulative GAP $ 92,397 $176,091 $ 134,415
========== ======== ==========
Cumulative GAP/Total assets 1.70% 3.24% 2.47%
========== ======== ==========
<FN>
(a) Investments are adjusted to include FHLB stock and other items
totaling $35.5 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 FFC's historical experience as modified for current market
conditions.
(d) Includes loans held for sale.
(e) Deposits include $62.2 million of tax and insurance accounts and
exclude accrued interest on deposits of $14.5 million.
(f) FFC has assumed that its passbook savings, NOW accounts and money
market deposit accounts would have projected annual withdrawal rates, based upon
FFC's historical experience, of 26%, 34% and 42%, respectively.
</FN>
</TABLE>
-23-
<PAGE>
COMPARISON OF THE
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS AND NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND 1994
Selected Income Statement Information:
Net income of $17.8 million for the third quarter of 1995 represents an
increase of $2.8 million from the $15.0 million reported for the third quarter
of 1994. The annualized returns on average assets and average equity for the
third quarter of 1995 were 1.30% and 19.69%, respectively, as compared to 1.10%
and 19.25%, respectively for the 1994 period. Fully diluted earnings per share
increased to $0.59 per share for the 1995 quarter as compared to the restated
$0.50 per share reported for the third quarter of 1994.
Net income of $44.9 million for the nine months ended September 30,
1995 represents an increase of $7.7 million from the $37.2 million reported for
the same period in 1994. Net income for 1995 includes a charge for acquisition
costs incurred relative to the acquisition of FirstRock during the first quarter
of 1995. The acquisition charge aggregated $6.5 million on a pre-tax basis and
$4.0 million on an after-tax basis, or $0.14 per share. Earnings for the first
nine months of 1994 were affected by an after-tax charge of $5.9 million, or
$0.20 per share, relating to reserves established to cover possible losses on a
portion of FFC's MBS portfolio. The annualized returns on average assets and
average equity for the first nine months of 1995, excluding the acquisition
charge, were 1.19% and 18.76%, respectively, as compared to 0.93% and 16.35%,
respectively, for the restated 1994 period. Fully diluted earnings per share
increased to $1.48 per share for the first nine months of 1995 as compared to
the restated $1.24 per share reported for the first nine months of 1994.
Excluding the acquisition charge, fully diluted earnings per share would have
been $1.62 per share for the first nine months of 1995.
Net Interest Income:
Net interest income increased $300,000 to $45.7 million during the
third quarter of 1995 from $45.4 million for the third quarter of 1994. The net
interest margin of 3.55% for the third quarter of 1995 was up from the 3.54%
reported for the third quarter of 1994. Interest income and interest expense
increased $ 8.4 million and $8.1 million, respectively, for the third quarter of
1995 as compared to 1994. The average balances of interest-earning assets
increased from $5.176 billion in 1994 to $5.208 billion in 1995, while average
balances of interest-bearing liabilities decreased to $5.013 billion in 1995
from $5.021 billion in 1994. The increase in average interest-earning assets was
offset by a slightly greater increase in the average cost on interest-bearing
liabilities (4.06% in 1994 versus 4.71% in 1995) than in the average yield of
interest-earning assets (7.48% in 1994 versus 8.08% in 1995).
Net interest income increased $5.6 million to $137.4 million during the
nine months ended September 30, 1995 from $131.8 million for the same period in
1994. The net interest margin of 3.49% for the first nine months of 1995 was up
from the 3.43% reported for the nine months of 1994. Interest income increased
$30.8 million for the first nine months of 1995 as compared to 1994. Interest
expense increased $25.2 million for the first nine months of 1995 as compared to
the same period in 1994. The average balances of interest-earning assets and
interest-bearing liabilities increased from $5.105 billion and $4.950 billion,
respectively, in 1994 to $5.225 billion and $5.050 billion in 1995,
respectively. The ratio of average interest-earning assets to average
interest-bearing
-24-
<PAGE>
liabilities increased to 103.47% for the nine months of 1995 as compared to
103.13% for the 1994 period.
Interest Spread:
The following table sets forth the weighted average yield earned on
FFC's interest-earning assets, 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 and nine months ended September
30, 1995 and 1994. A comparison of similar data as of September 30, 1995 and
1994 is also shown.
<TABLE>
<CAPTION>
For the For the
Three Months Ended Nine Months Ended At
September 30, September 30, September 30,
------------------- ----------------- -------------
1995 1994 1995 1994 1995 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Weighted average yield on
interest-earning assets 8.08% 7.48% 7.98% 7.36% 8.06% 7.46%
Weighted average rate paid
on deposit accounts and
borrowings 4.71 4.06 4.64 4.05 4.74 4.14
----- ----- ----- ----- ----- -----
Interest spread 3.37% 3.42% 3.34% 3.31% 3.32% 3.32%
===== ===== ===== ===== ===== =====
Net interest margin (net
interest income as a
percentage of earning
assets) 3.55% 3.54% 3.49% 3.43% 3.46% 3.42%
===== ===== ===== ===== ===== =====
</TABLE>
The interest spread was 3.37% and 3.34% for the three and nine months
ended September 30, 1995, as compared to 3.42% and 3.31% for the same periods in
1994 due to the factors noted above. The interest margin increased to 3.55% and
3.49% for the three-month and nine-month periods ended September 30, 1995 as
compared to 3.54% and 3.43% for the same periods in 1994. The interest spread
and the net interest margin were 3.32% and 3.46%, respectively, at September 30,
1995 as compared to 3.32% and 3.42%, respectively, at September 30, 1994.
Provisions For Losses on Loans:
Provisions for loan losses increased $1.2 million and $2.0 million for
the third quarter and the first nine months of 1995, respectively, as compared
to the 1994 periods. The 1995 increase in provisions for loan losses represents
primarily the growth in FFC's loan portfolio as average loans receivable
increased from $3.351 billion and $3.294 billion for the quarter and nine months
ended September 30, 1994, respectively, as compared to $3.581 billion and $3.544
billion for the 1995 periods.
-25-
<PAGE>
The following table summarizes FFC's net charge-off experience by
category for the three months and nine months ended September 30, 1995 and 1994.
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
----------------------- -----------------------
1995 1994 1995 1994
------------ --------- ---------- -------
Net Net Net Net
Charge-offs Charge-offs Charge-offs Charge-offs
(Recoveries) (Recoveries) (Recoveries) (Recoveries)
------------- -------------- -------------- ------------
Loan Type (Dollars in thousands)
<S> <C> <C> <C> <C>
Credit cards $1,832 $1,454 $5,006 $4,589
Manufactured housing 233 292 924 870
Residential real estate 172 286 736 64
Consumer and other 139 269 232 353
Commercial business 9 105 216 105
------ ------ ------ ------
$2,385 $2,406 $7,114 $5,981
====== ====== ====== ======
Net charge-offs as a
percent of average loans
outstanding (annualized) 0.27% 0.29% 0.27% 0.24%
====== ====== ====== ======
</TABLE>
The net charge-offs of $2.4 million for the quarter ended September 30,
1995 were $500,000 less than the provisions of $2.9 million added to the
allowances for the quarter. The comparison of the nine-month activity shows that
net charge-offs of $7.1 million equalled the $7.1 million provisions added to
the allowances for losses for the nine months ended September 30, 1995. While
certain loan products experience fluctuations from period to period, management
supports the overall balance of provisions versus net charge-offs to maintain
stable allowances relative to loans.
The increase in net charge-offs for the nine months ended September 30,
1995 versus 1994 approximates $1.1 million. An increase of $400,000 relates to
credit card loans and $600,000 relates to residential real estate loans.
Although credit card delinquencies continue at levels below national averages,
credit card loan collection efforts are being analyzed to determine the required
action to reduce write-offs. The residential real estate loan increase relates
to abnormally high recoveries during the 1994 period.
The OTS and the FDIC, as an integral part of their supervisory
examination process, periodically review FF Bank's allowances for losses. These
agencies may require FF Bank to recognize additions to the allowances based upon
their judgment of information available to them at the time of their
examination. A regularly scheduled supervisory examination was completed in late
1994 and no material corrective actions were required.
Management of FFC and FF Bank 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 $3.4 million during the third quarter of
1995 as compared to the same period in 1994 due to several factors. The $1.3
million increase in gain on sales of available-for-sale securities in 1995
relates to the third quarter purchase and sale of a security in the
available-for-sale account as interest rates declined during the
-26-
<PAGE>
quarter. Gains realized from the sale of loans increased $1.2 million in 1995
from 1994 due to the net effect of i) a higher level of gains on secondary
mortgage market sales in 1995 and ii) a pre-tax $1.1 million gain realized in
the third quarter of 1995 as a result of the capitalization of originated
mortgage servicing rights upon FFC's adoption of S.F.A.S. No. 122. See Note H to
the unaudited consolidated financial statements for further information. FFC
sells long-term, fixed-rate mortgage loans in the normal course of interest-rate
risk management. Gains or losses realized from the sale of 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. Deposit fee income
increased $600,000 in 1995 from the same period in 1994, primarily due to the
introduction of an "Absolutely Free Checking" product in 1994 and 1995. Loan
fees increased $400,000 to $2.9 million for the third quarter of 1995 from the
same period in 1994 due to increased levels of activity-related credit card and
debit card fees.
Non-interest income increased $10.5 million to $33.4 million in the
first nine months of 1995 from $22.9 million for the nine months of 1994,
primarily due to the second quarter 1994 $9.0 million MBS loss reserve. For the
first nine months of 1995, deposit fee income and loan related fee income
increased $ 1.1 million and $1.0 million respectively, compared to the same
period in 1994. Net gains on sales of loans decreased $1.0 million in the nine
months of 1995 for the reasons noted above net of i) a $1.2 million gain
realized in 1994 as a result of the sale of credit card loans upon the
termination of a credit card affinity group relationship and ii) a $400,000 gain
realized on the sale of finance company receivables of NorthLand during the
first quarter of 1994. Net gains on sales of available-for-sale securities
increased $100,000 in 1995 from 1994 due to the year-to-year net effect of i) a
$1.2 million gain on the above discussed third quarter 1995 transaction and ii)
1994 gains of $1.1 million realized on sales of available-for-sale securities as
FFC acted to protect the value of the available-for-sale portfolio as interest
rates rose during early 1994.
Non-Interest Expense:
Non-interest expenses decreased approximately $2.0 million for the
quarter ended September 30, 1995 as compared to the same period in 1994,
primarily due to consolidation of operations in the second quarter of 1995
following the FirstRock acquisition. Non-interest expenses increased $2.8
million to $93.3 million for the first nine months of 1995 as compared to 1994
due to the net effect of i) acquisition costs and charges, totaling $6.5
million, incurred relative to the FirstRock acquisition and ii) the cost savings
resulting from the consolidation of operations following that acquisition. The
acquisition costs include i) transaction-related costs, including investment
banker fees, attorneys fees and accounting fees, ii) payments relating to
employment/change-in-control agreements upon termination of certain FirstRock
senior officers, iii) retention bonuses and severance payments made to other
FirstRock employees, iv) writedowns of assets not needed by FFC in the conduct
of FirstRock's business following the acquisition, and v) other
writeoffs/accruals relating to those contracts and business practices of
FirstRock not having future value to FFC.
The 1995 decreases in non-interest expense resulting from the
consolidation of FirstRock operations are most noticeably apparent in the
compensation and benefits expense category, which declined $1.7 million and $3.9
million, respectively, for the quarter and nine months ended September 30, 1995.
Employee benefits expense has also been reduced $1.4
-27-
<PAGE>
million through the first nine months of 1995 due to the anticipated use of the
Employee Stock Ownership Plan ("ESOP"), acquired with FirstRock, in place of or
in conjunction with FFC's normal retirement plan contributions for 1995. The
ESOP shares, which were purchased in 1992, are grandfathered from Statement of
Position ("S.O.P.") No. 93-6 issued by the American Institute of Certified
Public Accountants. As such, expense for ESOP shares to be allocated to FFC
employees will be at cost as opposed to market value as required by S.O.P. No.
93-6 for shares acquired after 1992.
Non-interest expenses decreased as a percentage of average assets to
2.04% and 2.12%, respectively, for the quarter and nine months ended September
30, 1995 as compared to 2.20% and 2.26 %, respectively, for the same periods in
1994. The improvement in this ratio is reflective of i) the effectiveness of the
consolidation of operations after the FirstRock and NorthLand acquisitions, ii)
decreases in writedowns on foreclosed commercial real estate and iii) ongoing
expense control measures.
Controllable non-interest expenses, which exclude the 1995 acquisition
charge, the amortization of intangible assets and the net cost of operations of
foreclosed properties, decreased to 1.94% and 2.02%, respectively, of average
assets for the quarter and nine months ended September 30, 1995 as compared to
2.09% and 2.14% for the same periods in 1994. In addition, FFC's efficiency
ratio (which represents the ratio of controllable expenses to net interest
income plus recurring non-interest income) improved to 47.28% and 49.34%,
respectively, for the three months and nine months ended September 30, 1995, as
compared to 51.88% and 53.52%, respectively, for the corresponding 1994 periods.
FF Bank's deposits are insured by the Savings Association Insurance Fund
("SAIF") of the Federal Deposit Insurance Corporation ("FDIC"). Deposit
insurance premiums to both the SAIF and the Bank Insurance Fund ("BIF") of the
FDIC were identical when both funds were created in 1989, with an eight cent
differential between the premiums paid by well- capitalized institutions and the
premiums paid by under-capitalized institutions (23 cents to 31 cents per $100
of assessable deposits). Such premiums were set to facilitate each fund
achieving its designated reserve ratios. As each fund achieves its designated
reserve ratio, however, the FDIC has the authority to lower the premium
assessments for that fund to a rate that would be sufficient to maintain the
designated reserve ratio. In August 1995, the FDIC determined that the BIF had
achieved its designated reserve ratio and approved lower BIF premium rates for
deposit insurance by the BIF for all but the riskiest institutions. Under the
new BIF deposit insurance premium schedule, deposit insurance premiums range
from a low of four cents per $100 of assessable deposits for well-capitalized
institutions to 31 cents per $100 of assessable deposits for under-capitalized
institutions. Because the SAIF remains significantly below its designated
reserve ratio, insurance premiums for assessable SAIF deposits were not reduced
by this recent FDIC action.
The current financial condition of the SAIF has resulted in the
introduction of various legislation in both the United States Senate ("Senate")
and the United States House of Representatives ("House") to recapitalize the
SAIF and then to merge the SAIF into the BIF. Both the Senate and the House
legislation, as currently proposed, would generally impose a special one-time
assessment of approximately 85 cents to 90 cents per $100 of assessable SAIF
deposits, which would apply retroactively to approximately $4.4 billion of
assessable SAIF deposits at FF Bank (e.g., a special assessment, net of tax
effect, of $24 million to $25 million). After the special assessment, it is
proposed that SAIF premium rates would then become the same as BIF rates until
the funds are merged. FF Bank is unable to predict whether this legislation will
be enacted or the amount or applicable retroactive date of any one-time
assessment or the rates that would then apply to assessable SAIF deposits.
-28-
<PAGE>
In this regard, FFC has filed an application with the Wisconsin
Commissioner of Savings and Loans to organize a de novo stock savings bank,
First Financial Savings Bank, SSB ("FFSB"). Applications also were filed with
the OTS and FDIC to obtain necessary regulatory approvals and federal deposit
insurance for FFSB. It is expected that the savings accounts of FFSB will be
insured by the BIF. FFSB is being organized to take advantage of the lower
insurance of accounts assessments for BIF-insured institutions compared to SAIF-
insured institutions if the current premium disparity is not cured. The
application filed with the Wisconsin Commissioner has been conditionally
approved, subject to FDIC approval. The FDIC and OTS applications are pending.
However, processing of those applications apparently has been suspended as the
OTS and FDIC await further regulatory and/or legislative action with respect to
the BIF-SAIF assessment disparity. If a legislative solution to the current
premium disparity were enacted into law, the implementation of FFSB would be
unnecessary. However, there can be no assurance that a regulatory or legislative
solution to the BIF-SAIF assessment disparity will be adopted, and if not,
whether FFC will receive regulatory approval to organize FFSB.
Legislation has been introduced in the House that would eliminate the
federal savings bank charter by January 1, 1998. If such legislation is enacted
FF Bank would be required to convert its federal savings bank charter to either
a national bank charter or to a state depository institution charter. Under
current law, if FF Bank were to become a national or state bank, FFC would be
required to become regulated at the holding company level by the Board of
Governors of the Federal Reserve Board ("Federal Reserve Board") rather than by
the OTS. Current rules and regulations of the Federal Reserve Board would
subject FFC to capital requirements that are not currently applicable to FFC as
a holding company under OTS regulation and impose statutory limitations on the
type of business activities in which FFC may engage at the holding company
level, which business activities currently are not restricted. Also under
current law, if FF Bank were to become a national or state bank, it would be
subject to recapture of its bad debt reserve ($81.8 million at September 30,
1995). However, additional legislation has been introduced which would provide
relief from such recapture if FF Bank otherwise continued to meet certain
conditions analogous to its current qualified savings institution status for
federal tax purposes. FFC is unable to predict whether any such legislation will
be enacted in its current or any other form.
Income Taxes:
Income tax expense increased $1.7 million to $10.0 million for the third
quarter of 1995 as compared to $8.3 million for 1994 due to the increased
pre-tax income in 1995 as a result of continuing improved earnings in 1995. The
effective income tax rate increased to 36.0% in 1995 from 35.5% in 1994.
Income tax expense increased $3.7 million to $25.5 million for the first
nine months of 1995 from $21.8 million for the same period in 1994. The
effective income tax rate decreased to 36.22% in 1995 from 36.99% in 1994. The
1994 effective tax rate was negatively affected by the treatment of deferred
state income tax provisions relative to the 1994 $9.0 million MBS loss reserve.
-29-
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits:
Exhibit 11 - Computation of Earnings Per Share.
Exhibit 27 - Financial Data Schedules
b. Reports on Form 8-K - none.
-30-
<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: November 10, 1995 /s/ John C. Seramur
--------------------
John C. Seramur, President
(Chief Executive Officer) and Director
Date: November 10, 1995 /s/ Thomas H. Neuschaefer
--------------------------
Thomas H. Neuschaefer
Vice President, Treasurer and Chief
Financial Officer
-31-
<PAGE>
EXHIBIT 11
FIRST FINANCIAL CORPORATION
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
For The For The
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -----------------
1995 1994 1995 1994
------ ------ ------ -----
(In thousands, except
per share data)
<S> <C> <C> <C> <C>
PRIMARY EARNINGS PER SHARE
Net income $17,793 $14,983 $44,925 $37,213
======= ======= ======= =======
Shares:
Weighted average common shares
outstanding 29,542 28,941 29,362 28,889
Shares from assumed exercise of options
(as determined by the treasury stock
method) 711 944 742 955
------- ------- ------- -------
Common and common equivalent shares 30,253 29,885 30,104 29,844
======= ======= ======= =======
Primary Earnings Per Common Share $ .59 $ .50 $ 1.49 $ 1.25
======= ======= ======= =======
FULLY DILUTED EARNINGS PER SHARE
Net income $17,793 $14,983 $44,925 $37,213
======= ======= ======= =======
Shares:
Weighted average common shares
outstanding 29,542 28,941 29,362 28,889
Shares from assumed exercise of options
(as determined by the treasury stock
method) 794 1,015 902 1,053
------- ------- ------- -------
Common and common equivalent shares 30,336 29,956 30,264 29,942
======= ======= ======= =======
Fully Diluted Earnings Per Common Share $ .59 $ .50 $ 1.48 $ 1.24
======= ======= ======= =======
</TABLE>
-32-
<PAGE>
Exhibit 27
First Financial Corporation
Article 9 of Regulation S-X
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 111,438
<INT-BEARING-DEPOSITS> 17,638
<FED-FUNDS-SOLD> 14,058
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 244,553
<INVESTMENTS-CARRYING> 1,244,934
<INVESTMENTS-MARKET> 1,223,845
<LOANS> 3,574,163
<ALLOWANCE> 25,131
<TOTAL-ASSETS> 5,435,290
<DEPOSITS> 4,440,593
<SHORT-TERM> 46,709
<LIABILITIES-OTHER> 101,266
<LONG-TERM> 480,812
<COMMON> 29,592
0
0
<OTHER-SE> 336,318
<TOTAL-LIABILITIES-AND-EQUITY> 5,435,290
<INTEREST-LOAN> 225,880
<INTEREST-INVEST> 86,809
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 312,689
<INTEREST-DEPOSIT> 146,055
<INTEREST-EXPENSE> 175,295
<INTEREST-INCOME-NET> 137,394
<LOAN-LOSSES> 7,065
<SECURITIES-GAINS> 1,184
<EXPENSE-OTHER> 93,271
<INCOME-PRETAX> 70,442
<INCOME-PRE-EXTRAORDINARY> 44,925
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 44,925
<EPS-PRIMARY> 1.49
<EPS-DILUTED> 1.48
<YIELD-ACTUAL> 3.34
<LOANS-NON> 11,338
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 6,142
<ALLOWANCE-OPEN> 25,180
<CHARGE-OFFS> 8,193
<RECOVERIES> 1,079
<ALLOWANCE-CLOSE> 25,131
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 25,131
<PAGE>
</TABLE>
