<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1995
-----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition report from __________________ to _____________________
Commission File Number 0-11889
FIRST FINANCIAL CORPORATION
---------------------------
(Exact name of registrant as specified in its charter)
Wisconsin 39-1471963
- ------------------------------- ------------------
(State of other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1305 Main Street
Stevens Point, Wisconsin 54481
------------------------------
(Address of principal executive office)
Registrant's telephone number, including area code (715) 341-0400
-------------
Securities registered pursuant to Section 12(b) of the Act Not Applicable
--------------
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
---------------------------------------
(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 or Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Based upon the closing price of the registrant's common stock as of
March 1, 1996, the aggregate market value of the voting stock held by
non-affiliates of the registrant is: $524,968,689.
As of March 1, 1996, 29,880,322 shares of the registrant's common
stock were outstanding.
Documents Incorporated by Reference.
Part II:
Portions of First Financial Corporation's 1995 Annual Report to
Shareholders.
Part III:
Portions of definitive proxy statement for the 1996 Annual Meeting of
Shareholders.
<PAGE>
PART I
ITEM 1. BUSINESS
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FIRST FINANCIAL CORPORATION
First Financial Corporation ("FFC"), which was formed in 1984, conducts
business as a unitary savings and loan holding company. As a Wisconsin
corporation, FFC is authorized to engage in any activity permitted by the
Wisconsin Business Corporation Law.
The principal asset of FFC is all of the outstanding stock of First
Financial Bank ("FF Bank" or the "Bank"). The business of FFC is the business of
the Bank. Other activities of FFC could be funded by dividends paid by the Bank,
borrowings or the issuance of additional shares of capital stock. FFC is
headquartered at 1305 Main Street, Stevens Point, Wisconsin, 54481, telephone
number is (715) 341-0400.
FIRST FINANCIAL BANK
FF Bank is a federally-chartered, stock savings institution whose
deposits are insured by the Savings Association Insurance Fund ("SAIF"), as
administered by the Federal Deposit Insurance Corporation ("FDIC"). Business is
conducted in both Wisconsin and Illinois through 129 full-service branch offices
and one limited loan origination office. Based on total assets of $5.5 billion
at December 31, 1995, FF Bank is the largest thrift institution headquartered in
Wisconsin. The principal mortgage lending area of FF Bank is Wisconsin and
Illinois. In addition to real estate loans, FF Bank originates a significant
volume of consumer loans, credit card loans and student loans. FF Bank has a
limited volume of commercial business lending arising from a 1994 business
combination. Consumer, home equity and student lending activities are
principally conducted in Wisconsin and Illinois, while the credit card base and
resulting loans are principally centered in the Midwest. Nearly all long-term
fixed-rate real estate mortgage loans generated are sold in the secondary market
and to other financial institutions with FF Bank retaining the servicing of
those loans. FF Bank offers brokerage services and also operates a full-line
independent insurance agency and a real estate appraisal company.
FF Bank has grown significantly through mergers and acquisitions since
its stock conversion in 1980, when FF Bank had total assets of $244 million and
14 branch offices in central Wisconsin. In 1984, FF Bank and First State Savings
of Wisconsin ("First State"), concurrently with First State's stock conversion,
combined to form FFC, which operated as a multiple savings and loan holding
company from 1984 until late 1985 when FFC acquired First Savings Association of
Wisconsin ("First Savings"). At that time, all three institutions were merged
together. In 1988, FF Bank acquired National Savings and Loan Association
("National") of Milwaukee, Wisconsin through a merger conversion. By the end of
1988, FF Bank's total assets had grown to $2.3 billion and FF Bank operated 63
full-service banking offices throughout Wisconsin.
Beginning in 1990, FF Bank expanded into the southern Illinois
(suburban St. Louis) and Peoria, Illinois markets by acquiring Illini Federal
Savings and Loan Association of Fairview Heights ("Illini") in a voluntary
supervisory merger conversion and by purchasing the deposits and nine branch
banking offices of two former Peoria thrifts from the Resolution Trust
Corporation ("RTC"). Also during 1990, FF Bank acquired two western-Wisconsin
area branch banking offices from the RTC. During 1992, FF Bank acquired ten
additional
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branch banking offices in the Peoria market, including eight from LaSalle Talman
Bank, FSB ("Talman"), and two from the RTC. In 1993, FF Bank acquired
Westinghouse Federal Bank, FSB d/b/a United Federal Bank ("United") of
Galesburg, Illinois and also purchased the deposits and the four Quincy,
Illinois-area branch banking offices of Citizens Federal Bank, a FSB
("Citizens").
In 1994, FFC and FF Bank acquired NorthLand Bank of Wisconsin, SSB
("NorthLand") of Ashland, Wisconsin through an exchange of stock. Also in 1994,
FFC merged First Financial - Port Savings Bank, FSB ("Port") of Port Washington,
Wisconsin, which had been acquired by FFC in 1989 and had operated under a
separate charter since that time, into FF Bank.
In 1995, FFC and FF Bank acquired FirstRock Bancorp, Inc. ("FirstRock")
of Rockford, Illinois through an exchange of stock. The five banking offices of
FirstRock's subsidiary, First Federal Savings Bank of Rockford, Illinois were
merged into FF Bank. At the end of 1995, FFC's assets had grown to $5.5 billion.
While pursuing its strategy of expansion by acquisition in Wisconsin
and Illinois, management of FF Bank has also curtailed certain lending
activities outside of the Midwest in recent years. In 1988, FF Bank liquidated
the West Coast mortgage banking operation which FF Bank had acquired as part of
the acquisition of First Savings. This operation had incurred continuing
operating losses. Also, in 1988 and 1994, FF Bank sold a segment of its credit
card loan portfolio, consisting of loans concentrated in California, Texas, and
the Northeastern states. FF Bank's current credit card lending activities are
now focused primarily on Wisconsin, Illinois and other Midwestern states. During
1989, FF Bank also curtailed manufactured housing lending outside of the
Midwest. Subsequently, in 1994, FF Bank exited the retail manufactured housing
lending business altogether due to competitive practices in the marketplace.
FF Bank is a member of the Federal Home Loan ("FHL") Bank System. FF
Bank is subject to comprehensive examination, supervision and regulation by the
Office of Thrift Supervision (the "OTS") and the FDIC, and is also regulated by
the Board of Governors of the Federal Reserve System (the "Federal Reserve
Board") as to reserves required to be maintained against deposits and certain
other matters. See "Regulation."
RECENT DEVELOPMENTS
FF Bank's deposits are insured by the SAIF of the 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). Deposit insurance premiums for the SAIF and the BIF,
which insures deposits in national and state-chartered banks, are set to
facilitate each fund achieving its designated reserve ratio. In August 1995, the
FDIC determined that the BIF had achieved its designated reserve ratio and
lowered BIF deposit insurance premium rates for all but the riskiest
institutions. Effective January 1, 1996, BIF deposit insurance premiums for
well-capitalized banks were further reduced to the statutory minimum of $2,000
per institution per year. Because the SAIF remains significantly below its
designated reserve ratio, SAIF deposit insurance premiums were not reduced and
remain at 0.23% to 0.31% of deposits, based upon an institution's supervisory
evaluations and
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capital levels. The current discrepancy in deposit insurance premiums between
the BIF and the SAIF could place FF Bank at a competitive disadvantage to BIF
insured institutions.
The current financial condition of the SAIF has resulted in proposed
legislation to recapitalize the SAIF through a one-time special assessment (of
approximately 80 cents to 85 cents per $100 of assessable SAIF deposits as of
March 31, 1995) and in legislation to then merge the SAIF into the BIF. If the
special assessment is enacted, a special one-time assessment of approximately
$24.0 million, net of tax effect, would be imposed on FF Bank. After the special
assessment, it is expected that SAIF would achieve its designated reserve ratio
and that SAIF premium rates would then become comparable to BIF rates. The
proposed legislation also contemplates a merger of the SAIF into the BIF, which
would require separate legislation. FFC 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.
Legislation also has been proposed that could eliminate the federal
savings association charter. 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. Pending legislation may
provide relief as to recapture of the bad debt deduction for federal tax
purposes that otherwise would be applicable if FF Bank converted its charter,
provided that FF Bank meets a proposed residential loan origination requirement.
Pending legislation also may result in FFC becoming regulated at the holding
company level by the Federal Reserve Board rather than by the OTS. Regulation by
the Federal Reserve Board could subject FFC to capital requirements that are not
currently applicable to FFC as a holding company under OTS regulation and may
result in 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. FFC is unable to predict whether such legislation will be
enacted or, if enacted, whether it will contain relief as to the recapture of
bad debt deductions previously taken.
<TABLE>
<CAPTION>
FINANCIAL RATIOS
Year Ended December 31,
-------------------------------------------
1995 1994 1993
---- ---- -----
<S> <C> <C> <C>
Return on average assets 1.17% .99% .99%
Return on average equity 18.03 17.21 19.15
Average equity to average assets 6.50 5.72 5.17
Dividend payout ratio 22.64 22.47 20.35
Net interest margin:
During the period 3.51 3.46 3.43
At end of period 3.46 3.37 3.38
</TABLE>
MARKET AREA AND COMPETITION
At December 31, 1995, FF Bank conducted business from 129 full-service
branch banking offices located in 60 Wisconsin and 36 Illinois communities. The
offices are located throughout most of Wisconsin and much of Illinois, including
the Peoria, Rockford and suburban St. Louis areas. These offices include 27
locations in the Milwaukee Metropolitan Statistical Area ("MSA"), the largest in
Wisconsin, and 34 locations in the Peoria, Rockford and St. Louis MSAs,
Illinois' largest outside of Chicago.
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<PAGE>
The counties in Wisconsin and Illinois in which FF Bank has offices had
a total population of 5.3 million in 1990. Between 1980 and 1990, the population
of this area increased 1.3%, compared to 1.2% for the two-state area. The median
household income in these counties was $30,497 according to the 1990 Census,
compared to $31,402 for the two- state area. It increased 62.7% between 1980 and
1990. This area, in both states, contains a diversity of major urban and
suburban areas, smaller less-urbanized communities and predominantly rural
areas. Some of the larger companies headquartered in FF Bank's market include
Briggs & Stratton, A.O. Smith, General Electric Medical Systems, Allen Bradley,
Miller Brewing, Johnson Controls, Caterpillar and Sundstrand.
FF Bank also does business outside of Wisconsin and Illinois. At
December 31, 1995, outstanding credit card accounts of FF Bank were distributed
approximately 42% to Wisconsin residents, 11% to Illinois, 4% to California, 3%
to Texas, 3% to Michigan, 3% to New York, 2% to Minnesota, 2% to Ohio, 2% to
Florida and 28% to other states. Consumer and student loans are made principally
to Wisconsin, Illinois and other Midwestern residents.
FF Bank is subject to competition from other savings institutions as
well as commercial banks and credit unions in both attracting and retaining
deposits and in real estate and other lending activities. Competition for
deposits also comes from mutual funds, credit unions, corporate debt and
government securities. Competition for the origination of real estate loans
comes principally from other savings institutions, commercial banks and mortgage
banking companies. Consumer loan competition comes principally from other
savings institutions, commercial banks, automobile manufacturers and their
financing subsidiaries, consumer finance companies and credit unions.
The principal methods used by competing financial institutions to
attract deposit accounts include rates of return, types of accounts, convenience
of office locations, and other services. The primary factors in competing for
loans are interest rates, loan fee charges, and timing and quality of service to
the borrower.
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<PAGE>
SELECTED HISTORICAL FINANCIAL INFORMATION
The following tables present selected historical consolidated financial
information of FFC(a).
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------
1995 1994 (f) 1993 (g) 1992 (h) 1991
---------- ---------- ---------- ---------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Financial Condition and Other Data
Total assets.......................................... $5,471,108 $5,501,824 $5,181,772 $4,309,067 $3,609,917
Investments (b)....................................... 249,155 223,174 360,804 241,703 164,504
Loans receivable and mortgage-related securities...... 4,860,910 4,961,202 4,427,803 3,706,080 3,110,115
Loans held for sale-net............................... 26,651 11,736 104,653 89,003 61,685
Intangible assets..................................... 21,481 26,726 31,392 23,278 22,576
Deposits.............................................. 4,424,525 4,381,455 4,388,122 3,531,062 3,234,078
Borrowings............................................ 570,508 708,446 455,797 487,237 110,353
Shareholders' equity (substantially restricted)(c).... 384,917 327,308 280,643 239,979 190,405
Number of full-service offices........................ 129 130 123 100 92
Year Ended December 31,
---------------------------------------------------------------------
1995 1994 (f) 1993 (g) 1992(h) 1991
---------- ---------- ---------- ---------- ----------
(In thousands except per share amounts)
Operating Data
Interest income....................................... $ 417,308 $ 381,864 $ 366,711 $ 325,057 $ 333,157
Interest expense...................................... 234,171 204,222 202,493 198,058 225,992
---------- ---------- ---------- ---------- ----------
Net interest income................................... 183,137 177,642 164,218 126,999 107,165
Provision for losses on loans......................... (9,738) (6,824) (10,570) (15,779) (19,037)
Unrealized loss on impairment of mortgage-related
securities........................................... (9,000)
Loan fees and servicing income........................ 18,234 17,551 17,166 15,959 19,085
Gain on sale of loans and securities.................. 3,885 3,836 7,939 4,606 5,783
Other non-interest income............................. 22,172 20,907 19,653 17,458 16,599
Non-interest expense.................................. (118,602) (120,367) (118,964) (101,540) (93,095)
---------- ---------- ---------- ---------- ----------
Income before income taxes and the cumulative effect
of a change in accounting principle.................. 99,088 83,745 79,442 47,703 36,500
Income taxes.......................................... 35,104 30,716 29,691 17,327 14,672
---------- ---------- ---------- ---------- ----------
Income before the cumulative effect of a change in
accounting principle................................. 63,984 53,029 49,751 30,376 21,828
Cumulative effect of a change in accounting principle
(d)............................... 6,600
---------- ---------- ---------- ---------- ----------
Net income............................................ $ 63,984 $ 53,029 $ 49,751 $ 36,976 $ 21,828
========== ========== ========== ========== ==========
Earnings per share (e):
Primary:
Income before the cumulative effect of a change in
accounting principle (d) ....................... $ 2.12 $ 1.78 $ 1.72 $ 1.15 $ .80
Net income........................................ 2.12 1.78 1.72 1.42 .80
Fully diluted:
Income before the cumulative effect of a change in
accounting principle (d)........................ $ 2.11 $ 1.77 $ 1.71 $ 1.14 $ .79
Net income........................................ 2.11 1.77 1.71 1.40 .79
Cash dividends declared and paid per share (e)........ $ .48 $ .40 $ .35 $ .22 $ .16
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<PAGE>
<FN>
(a) In 1995, FFC completed the acquisition of FirstRock. This transaction
has been accounted for as a pooling-of-interests and accordingly,
results for all periods presented have been restated to include the
results of FirstRock. See Note B to FFC's consolidated financial
statements.
(b) Consists of federal funds sold, interest-earning deposits, and
investment securities.
(c) See Note L to FFC's consolidated financial statements.
(d) A $6.6 million credit was realized in 1992 from the cumulative effect
of the adoption of Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes".
(e) Per share data have been adjusted to reflect A) a two-for-one stock
split distributed in March 1993 and B) a two-for-one stock split
distributed in April 1992.
(f) In 1994, FFC completed the acquisition of NorthLand. The acquisition
of NorthLand has been accounted for as a pooling-of-interests. Since
NorthLand was not material to the balance sheet or operating results
of FFC, balances for prior years have not been restated. However, 1994
amounts have been adjusted to reflect the acquisition as if it had
occurred on January 1, 1994. See Note B to FFC's consolidated
financial statements.
(g) In 1993, FF Bank acquired United and also purchased the deposits and
the four Quincy, Illinois-area branch banking offices of Citizens.
Each transaction has been accounted for as a purchase and the related
results of operations have been included in FFC's consolidated
financial statements since the respective dates of acquisition.
(h) During the first quarter of 1992, FF Bank completed the assumption of
deposits and the purchase of branch facilities of ten Peoria,
Illinois-area branches including eight from Talman and two from the
RTC. Each of these transactions was accounted for as a purchase.
</FN>
</TABLE>
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<PAGE>
Lending Activities, Including Mortgage-Related Securities
General. FF Bank has traditionally concentrated on origination of
conventional mortgage loans secured by first liens on one- to four-family
residences. FF Bank also makes loans which are insured by the Federal Housing
Authority ("FHA"), Farmers Home Administration ("FmHA"), and the Rural Economic
Development Community ("REDC"), or partially guaranteed by the Veterans
Administration ("VA") as well as home loans on behalf of or for immediate sale
to the Wisconsin Department of Veterans Affairs ("WDVA"), the Wisconsin Housing
and Economic Development Authority ("WHEDA") and the Illinois Housing and
Development Authority ("IHDA"). At December 31, 1995, FFC's total loan
portfolio, including mortgage-related securities, amounted to $4.94 billion,
including mortgage loans totaling $2.41 billion of which $2.04 billion, or 41.3%
of the total loan portfolio, before net items, were loans secured by one- to
four-family residences. In addition, FF Bank makes long-term, first mortgage
real estate loans on multiple dwelling units and commercial properties, second
mortgages and short-term construction loans. As a means of better matching
maturities of its asset and liability products, FF Bank has also originated
other types of high-yielding loan products which have either a short term to
maturity or contain adjustable-rate features. These products include education
loans, credit card loans, home equity loans and consumer loans. At December 31,
1995, these loans amounted to $1.26 billion, or 25.5%, before net items, of the
total loan portfolio. Fixed-rate mortgage loans with terms up to 15 years and
loans with adjustable interest rates are originated for FF Bank's own portfolio,
while longer-term fixed-rate mortgage loans are originated for sale in the
secondary market. The Federal Reserve Board is authorized to promulgate
regulations limiting the maximum interest rate that may apply during the term of
adjustable-rate mortgage loans originated by savings institutions such as FF
Bank. Under the regulation adopted by the Federal Reserve Board, no specific
interest rate limit is set, but lenders are required to impose interest rate
caps on all adjustable-rate mortgage loans and all dwelling-secured consumer
loans, including home equity loans, which provide for interest rate adjustments.
The regulation is applicable to loans made after December 8, 1987.
FF Bank also periodically purchases mortgage-related securities as a lending
alternative when excess liquidity is available. At December 31, 1995, these
securities amounted to $1.27 billion, or 25.7% of the total loan portfolio,
before net items. For further discussion of the mortgage-related securities
portfolio, see "Mortgage-Related Securities" below as well as Notes A and D to
FFC's consolidated financial statements, filed as an exhibit hereto.
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<PAGE>
Loan Portfolio Composition. The following table sets forth information
concerning the composition of FFC's total loan portfolio including loans held
for sale and mortgage-related securities, on a consolidated basis, before net
items, by type of loan. Total loans receivable, including net items but
excluding loans held for sale and mortgage-related securities are set forth in
Note E to FFC's consolidated financial statements. The data presented in this
table include the accounts of FFC and FF Bank for all periods, and the balances
of interest-sensitive assets and liabilities arising from the 1992, 1993 and
1994 acquisitions are included from the respective dates of the related
transactions.
<TABLE>
<CAPTION>
December 31,
1995 1994 1993 1992 1991
----------------- ------------------ ------------------ ------------------ -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-------- ------- --------- ------- --------- ------- --------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate mortgage loans:
Conventional loans:
One- to four-family............ $2,006,575 40.6% $2,034,320 40.4% $1,915,516 41.7% $1,379,522 35.8% $1,245,546 38.5%
Multi-family................... 217,288 4.4 212,071 4.2 208,658 4.6 175,511 4.6 155,562 4.8
FHA and VA....................... 36,093 .7 34,672 .7 40,133 .9 52,214 1.3 61,455 1.9
Commercial and other real estate. 152,092 3.1 142,634 2.8 114,431 2.5 123,062 3.2 126,139 3.9
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total real estate mortgage loans.. 2,412,048 48.8 2,423,697 48.1 2,278,738 49.7 1,730,309 44.9 1,588,702 49.1
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Other loans:
Consumer loans................... 362,659 7.3 304,771 6.1 180,776 3.9 115,205 3.0 89,698 2.8
Home equity loans................ 284,700 5.8 240,915 4.8 199,463 4.3 168,434 4.4 148,042 4.6
Education loans.................. 240,650 4.9 192,542 3.8 168,980 3.7 164,149 4.3 159,207 4.9
Credit card loans................ 214,107 4.3 200,747 4.0 209,414 4.6 178,436 4.6 160,712 5.0
Manufactured housing loans....... 139,385 2.8 152,674 3.0 165,017 3.6 133,195 3.4 140,384 4.3
Other loans...................... 17,198 .4 19,023 .4 111 3,298 .1 4,831 .2
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total other loans................. 1,258,699 25.5 1,110,672 22.1 923,761 20.1 762,717 19.8 702,874 21.8
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total loans receivable before
net items...................... 3,670,747 74.3 3,534,369 70.2 3,202,499 69.8 2,493,026 64.7 2,291,576 70.9
Mortgage-related securities....... 1,270,761 25.7 1,502,491 29.8 1,387,259 30.2 1,361,068 35.3 941,626 29.1
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total loans receivable before
net items and mortgage-
related securities............... $4,941,508 100.0% $5,036,860 100.0% $4,589,758 100.0% $3,854,094 100.0% $3,233,202 100.0%
========== ===== ========== ===== ========== ===== ========== ===== ========== =====
</TABLE>
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<PAGE>
A summary of FFC's loan portfolio, before net items, including loans held
for sale and mortgage-related securities is set forth below by adjustable-rate
loans, short-term loans and fixed-rate loans.
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994 December 31, 1993
--------------------- --------------------- ----------------------
Percent Percent Percent
Balance Of Total Balance Of Total Balance Of Total
-------- --------- --------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Adjustable-rate:
Mortgage-related securities............. $ 1,130,750 $1,350,342 $1,159,035
Mortgage................................ 1,001,413 893,380 604,514
Home equity............................. 284,700 240,915 199,463
Education............................... 240,650 192,542 168,980
Consumer................................ 31,602 14,346 5,816
Manufactured housing.................... 2,987 4,125 5,857
Other................................... 11,805 13,947 --
----------- ---------- ----------
Total adjustable-rate............... 2,703,907 54.7% 2,709,597 53.8% 2,143,665 46.7%
Short-term*:
Credit card............................. 214,107 200,747 209,414
Mortgage................................ 96,932 47,973 241,669
Consumer................................ 91,190 83,730 66,239
Mortgage-related securities............. 32,121 32,737 2,522
Deposit account......................... 4,026 4,611 4,300
Manufactured housing.................... 9,021 2,869 1,443
Other................................... 4,847 3,014 --
---------- ---------- ----------
Total short-term.................... 452,244 9.2 375,681 7.5 525,587 11.5
---------- ----- ---------- ----- ---------- -----
Total adjustable-rate and
short-term........................ 3,156,151 63.9 3,085,278 61.3 2,669,252 58.2
Maturities greater than three years:
Conventional mortgage................... 1,277,610 1,447,672 1,392,422
Consumer................................ 235,841 202,084 104,421
Mortgage-related securities............. 107,890 119,412 225,702
FHA/VA manufactured housing............. 86,756 85,384 85,552
Manufactured housing.................... 40,621 60,296 72,165
FHA/VA mortgage......................... 36,093 34,672 40,133
Other................................... 546 2,062 111
---------- ---------- ----------
Total fixed-rate.................... 1,785,357 36.1 1,951,582 38.7 1,920,506 41.8
---------- ----- ---------- ----- ---------- -----
Total loan portfolio................ $4,941,508 100.0% $5,036,860 100.0% $4,589,758 100.0%
========== ===== ========== ===== ========== =====
<FN>
* Credit card and fixed-rate loans or MBSs with remaining contractual life of
three years or less.
</FN>
</TABLE>
As of December 31, 1995, the total amount of loans held by FF Bank
repricing or maturing after December 31, 1996 was $2.56 billion. Of these loans,
$1.90 billion have fixed rates of interest and $653.6 million have terms of
three years or less or adjustable interest rates.
The following table sets forth, at December 31, 1995, the dollar amount
of loans maturing in FF Bank's loan portfolios before net items, plus loans held
for sale and mortgage-related securities, based on either their contractual
terms to maturity or the remaining time before the loans can be repriced during
the periods indicated.
<TABLE>
<CAPTION>
1997 - 1999 - 2001 - 2006 - After
1996 1998 2000 2005 2015 2015 Total
---- ----- ---- ---- ---- ---- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Real estate mortgage loans.................... $ 436,145 $491,987 $ 93,985 $449,744 $784,790 $ 87,128 $2,343,779
Construction mortgage loans................... 29,413 33,495 2,345 328 2,688 -- 68,269
Mortgage-related securities................... 1,155,811 7,059 2,733 31,559 41,651 31,948 1,270,761
Credit card and home equity
loans...................................... 474,675 24,132 -- -- -- -- 498,807
Other loans*.................................. 289,871 96,891 113,083 185,368 71,596 3,083 759,892
---------- -------- -------- -------- -------- -------- ----------
Total.................................. $2,385,915 $653,564 $212,146 $666,999 $900,725 $122,159 $4,941,508
========== ======== ======== ======== ======== ======== ==========
<FN>
* Includes consumer, manufactured housing, education and small business loans.
</FN>
</TABLE>
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<PAGE>
One- to Four-Family First Mortgage Loans. The primary mortgage loan
product of FF Bank is the single family home loan with some additional volume
being secured by two- to four-family residential units. In addition to a
conventional mortgage loan program, FF Bank has available various other programs
including FHA-insured, VA-guaranteed, FmHA- guaranteed, and RECD-guaranteed,
Wisconsin and Illinois state agency and veterans programs and jumbo mortgage
loans in excess of a specified balance. These mortgage loan products are
originated using either a fixed rate, or an adjustable rate of interest indexed
primarily to one-year U.S. Treasury securities yields, three-year Treasury
securities yields or the national cost of funds index as published by the FHL
Banks. Original terms to maturity vary from 10 years to 30 years. FF Bank
currently holds in its portfolio loans for terms up to 15 years and generally
sells fixed-rate mortgage loans having maturities greater than 15 years in the
secondary mortgage market.
Income-Producing Real Estate Property Loans. FF Bank, through its
commercial mortgage real estate division, has sought to diversify its loan
portfolio through the origination of loans on selected income-producing real
estate properties which meet strict internal underwriting guidelines. FF Bank
also periodically seeks to limit its overall exposure relative to such loans
through the sale of participation interests and whole loans to other financial
institutions. FF Bank provides servicing of these loans for participants (see
"Loan Servicing").
Among the projects financed by FF Bank are apartments, office buildings,
retail centers, medical clinics, industrial buildings, elderly housing and other
commercial real estate located primarily in Wisconsin, Illinois and other
Midwestern states. FF Bank's commercial real estate division has emphasized
multi-family mortgage loans in recent years. Multi-family and commercial real
estate lending involves greater risks than does one- to four-family residential
lending. The repayment of loans collateralized by income-producing real estate
is dependent upon the successful operation of the related real estate property
and also on the credit and net worth of the borrower and thus is subject to
conditions in the real estate market, interest-rate levels and overall economic
conditions. The underwriting process for such loans is structured to ascertain
that each property has sufficient value and market appeal to provide adequate
security for the loan and that the property will produce sufficient income to
meet minimum debt service coverage ratios established by FF Bank, which vary
depending upon the property type. All properties are also inspected,
independently appraised in accordance with applicable regulatory standards, and
reviewed by a qualified engineer. Loans on such properties are generally not
permitted to exceed a loan-to-value ratio of 75%. Also, each borrower is
reviewed as to management talent, integrity, experience and available financial
resources. FF Bank generally requires the personal guarantee of the debt by all
parties holding a major equity interest in the secured property when the
owner/borrower is a business entity.
Additionally, the portfolio of income-producing properties is reviewed on
a continuing basis to identify any potential risk that exists for FF Bank
through undue concentration of the portfolio in any one borrower, property type
or geographic location. These and other underwriting standards are documented in
written policy statements, which are periodically updated, and approved by FF
Bank's Board of Directors.
Lending terms for FF Bank's income-producing real estate property loans
generally call for a maturity of five to fifteen years based upon an
amortization schedule of fifteen to thirty years and an interest rate
periodically adjustable based upon a cost of funds index.
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Borrowers may experience a cash flow from the property which is
inadequate to service the debt. This cash flow shortage may result in the
failure to make loan payments. Additionally, the repayment of loans secured by
income-producing properties is dependent on the successful operation of the
related real estate project and the financial strength of the borrower and thus
is subject to adverse conditions in the real estate market or the economy in
general.
Construction Loans. Loans made by FF Bank to provide interim financing
during the construction period for i) builder-owned residential properties and
ii) commercial properties are typically originated for periods of six to
eighteen months. These loans are generally limited to 75% of the value of the
property upon completion. Construction loans for properties intended to be
owner-occupied are typically structured as adjustable-rate permanent loans and
can be granted up to 95% of the value of the property upon completion.
Construction loan funds are periodically disbursed as construction progresses.
At any stage of construction, remaining undisbursed funds are in amounts
estimated to be adequate for completion or sale of the property.
Construction lending is generally considered to involve a higher level of
risk than lending secured by existing properties because properties securing
these loans are generally more speculative and more difficult to evaluate and
monitor. FF Bank's risk of loss on construction or development loans is
dependent upon the accuracy of the initial estimate of the property's value at
completion of the project and the estimated cost of the project. If the estimate
of construction or development costs proves to be inaccurate, FF Bank may be
required to advance funds beyond the amount originally committed to permit
completion of the project. If the estimate of the value proves to be inaccurate,
the lender may be confronted with a property having a value which is
insufficient to assure full repayment of the construction loan upon securing a
permanent mortgage loan. FF Bank had construction loans outstanding of $72.0
million at December 31, 1995, of which $56.3 million was collateralized by
residential real estate.
Manufactured Housing Loans. Through a series of dealer relationships in
Wisconsin and other Midwestern states, FF Bank had indirectly originated
manufactured housing loans until late 1994. The dealers closed the loans at
their locations after forwarding all necessary documentation to FF Bank for
underwriting, processing, and credit checks in order to receive approval to
originate the loans for purchase by FF Bank. The loans were either conventional
or originated under the FHA-insured or VA-guaranteed programs throughout the
various states. The term of such loans was usually up to 15 years at fixed
interest rates. During 1994, FF Bank ceased originating such loans due to
adverse competitive practices in this market. However, $18.3 million of such
loans were purchased in 1995 on a wholesale basis.
Consumer and Other Loans. FF Bank offers a variety of lending products to
meet the specific needs of consumers. These products include secured and
unsecured installment loans with fixed repayments, student loans, credit card
programs and home equity loans. Consumer loans are made directly to the customer
and are secured by automobiles, recreational vehicles, first or second mortgages
on real estate or deposit accounts. FF Bank provides financing on both new and
used automobiles and recreational vehicles using different rates and terms to
maturity to compensate for the difference in collateral value and credit risk.
In addition to secured consumer loans, FF Bank extends unsecured loans to
qualified borrowers based upon their financial statements and creditworthiness.
The vast majority of the consumer loan originations are made within Wisconsin
and Illinois through the extensive branch network of FF Bank.
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Several student loan programs are offered by FF Bank through three
guarantor programs, with the majority being originated within Wisconsin. The
various student lending programs meet a variety of borrower financial
qualifications with varying rate structures. Additionally, FF Bank offers a
consolidation loan plan whereby various student loans can be combined for the
convenience and benefit of the borrower.
FF Bank offers credit card programs to the general public and has also
placed additional emphasis on issuing cards through organizations whose
membership substantially meets qualifying criteria ("affinity programs").
Certain additional benefits can be linked to card usage under the affinity
programs. These affinity programs are based on the Visa/Mastercard credit card
programs which operate on a nationwide basis. In addition to the regular credit
card products, FF Bank also operates the BasiCard program which offers the
consumer a lower cost, no-frills charge card bearing an interest rate of 14.9%
applied to all balances and advances.
During the last decade FF Bank placed additional emphasis on its home
equity loan program. The new emphasis was tied to federal income tax law changes
which were brought about during 1986, causing consumers to look for a new
vehicle through which to finance future needs on a tax-deductible basis. As a
result of federal tax legislation adopted in 1987, however, interest on a home
equity line of credit is deductible only up to $100,000 of principal. The
primary home equity loan product calls for a floating interest rate which is
linked to the prime interest rate and is secured by a mortgage, either a primary
or a junior lien, on the borrower's residence. A fixed-rate home-equity product
is also offered. As an additional convenience to consumers, the home equity
lines are generally tied to a Gold or a standard Mastercard credit card account
whereby consumers can conveniently draw against their approved line through the
use of their credit card. Fixed-rate non-revolving second mortgage loans are
also offered.
Business Loans. With the acquisition of NorthLand, FFC acquired a
business loan portfolio of approximately $23 million. FF Bank, however, is
primarily a retail lender and its strategy has been to consider business loans
only to those customers who maintain acceptable deposit balances with FF Bank.
As such, FF Bank does not aggressively market business loans and year-end loans
outstanding approximated $17.2 million.
Mortgage Related Securities. FF Bank purchases mortgage-related
securities as a lending alternative when excess liquidity is available.
Mortgage-related securities include government agency mortgage-backed
securities, privately issued adjustable rate mortgage-backed securities and
shorter-term or adjustable-rate government agency collateralized mortgage
obligations. FF Bank reviews the geographic distribution of collateral when
purchasing private issue mortgage-related securities and limits the portfolio
concentration of underlying collateral located in certain states or metropolitan
areas; however, FF Bank has not purchased any private issue mortgage-backed
securities since 1992. With the exception of six non-agency securities, all
securities in the non-agency mortgage-backed securities portfolio are, at a
minimum, of investment grade quality. The securities rated below investment
grade, four of which continue to be performing, are discussed as part of "Non-
Performing MBSs" in Management's Discussion and Analysis, filed as an exhibit
hereto. For a related discussion of the accounting for debt securities,
including mortgage-related securities, see "Investment Securities". For further
discussion of the mortgage-related securities portfolio, see i)
"Mortgage-Related Securities" in Management's Discussion and Analysis and ii)
Notes A and D to FFC's consolidated financial statements, each of which is filed
as an exhibit hereto.
-12-
<PAGE>
Loan Originations, Purchases and Sales. FF Bank's loan originations come
from a number of sources. Residential mortgage loan originations are
attributable primarily to depositors, walk-in customers, referrals from real
estate brokers and builders, out-of-state originators and direct solicitations.
In addition, FF Bank also acquires refinanced residential mortgage loans which
were previously originated by FF Bank, but sold to and serviced for other
investors. Prior to acquisition, these loans are refinanced to a lower rate, as
per the borrower's request. Commercial mortgage loan originations are obtained
by direct solicitation and referrals. Prior to late 1994, VA-guaranteed,
FHA-insured and conventional manufactured housing loans were obtained from
approved dealers. Consumer loans are originated from walk-in customers, existing
depositors and mortgagors and direct solicitations. Student loans are originated
from solicitation of eligible students and from walk-in customers. FF Bank also
periodically purchases student loan portfolios from other lenders.
Real estate loans are primarily originated by loan officers in FF Bank's
offices. Relative to FF Bank's real estate loans, loans up to the FHLMC/FNMA
upper limit authority (currently $203,150 for single-family mortgage loans) for
one- to four-family residences are approved by an underwriter who is employed by
FF Bank. Loans in excess of this amount up to $400,000 are approved by
designated officers. Individual loans in excess of $400,000 up to $1,500,000, as
well as loans to one borrower in excess of three loans or in the amount of
$500,000, or greater, are approved by an officer loan committee. Loans in excess
of $1,500,000 require approval of the Executive Committee of the Board of
Directors of FF Bank, and loans in excess of $5,000,000 require approval of FF
Bank's full Board of Directors. The majority of conventional home mortgage loans
are written to comply with underwriting standards of FHLMC and/or FNMA to ensure
that national standards are being met and that FF Bank's loans meet or exceed
national secondary market requirements. All loans are centrally reviewed by an
underwriting staff prior to final approval to ensure compliance with loan
underwriting policies. With respect to the appraisal of properties, borrowers
may use the appraisal subsidiary of FF Bank or outside appraisers preapproved by
FF Bank's Board of Directors.
In general, FF Bank may lend up to 100% of the appraised value of real
property for residential purposes provided loans in excess of 80% have private
mortgage insurance, a government guarantee, additional collateral or a
combination thereof. In practice, most of FF Bank's mortgage loans are written
in the range of 75% to 95% loan-to-value ratio.
Real estate loans are secured by a first mortgage, subject primarily to
title insurance or an attorney's title opinion in certain areas and are covered
by fire and casualty insurance. When appropriate, flood insurance is also
required. Related costs, together with private mortgage insurance as required,
are paid by the borrower.
FF Bank encounters certain environmental risks in its lending activities.
Under federal and state environmental laws, lenders may become liable for costs
of cleaning up hazardous materials found on secured properties. Certain states
may also impose liens with higher priorities than first mortgages on properties
to recover funds used in such efforts. Although the foregoing environmental
risks are more usually associated with industrial and commercial loans,
environmental risks may be substantial for residential lenders, like FF Bank,
since environmental contamination may render the secured property unsuitable for
residential use. In addition, the value of residential properties may become
substantially diminished by
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<PAGE>
contamination of nearby properties. In accordance with the guidelines of FNMA
and FHLMC, appraisals for single-family homes on which FF Bank lends include
comments on environmental influences and conditions. FF Bank attempts to control
its exposure to environmental risks with respect to loans secured by larger
properties by monitoring available information on hazardous waste disposal sites
and requiring environmental inspections of such properties prior to closing the
loan. No assurance can be given, however, that the value of properties securing
loans in FF Bank's portfolio will not be adversely affected by the presence of
hazardous materials or that future changes in federal or state laws will not
increase FF Bank's exposure to liability for environmental cleanup.
The following table shows loan and mortgage-related securities
originations, purchases, sales and repayment activities of FF Bank on a
consolidated basis for 1995, 1994 and 1993.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1995 1994 1993
---------- ---------- -------
(In thousands)
<S> <C> <C> <C>
Loans originated:
Mortgage loans:
One- to four-family......................................... $ 476,783 $ 756,589 $1,346,350
Multi-family................................................ 34,350 55,658 91,209
Commercial real estate...................................... 31,087 63,002 16,012
Refinanced residential mortgage loans
previously sold and serviced for others.................... -- 24,643 344,862
---------- ---------- ----------
542,220 899,892 1,798,433
Consumer loans................................................. 229,697 237,651 145,474
Education loans................................................ 76,299 53,692 33,424
Home equity loans - net increase............................... 43,785 58,791 42,888
Credit card loans - net increase............................... 13,361 5,124 30,978
Manufactured housing loans..................................... 18,288 16,669 23,405
Other loans.................................................... 5,560 10,074 2,604
Refinanced manufactured housing loans pre-
viously sold and serviced for others......................... -- 475 36,953
Decrease (increase) in undisbursed
loan proceeds................................................. 7,817 (10,829) 5,920
---------- ---------- ----------
Total loans originated................................ 937,027 1,271,539 2,120,079
Mortgage-related securities purchased............................ -- 594,952 271,719
---------- ---------- ----------
Total originations and purchases...................... 937,027 1,866,491 2,391,798
---------- ---------- ----------
Add (deduct):
Loans and mortgage-related securities
from acquisitions (before net items).......................... -- 114,462 540,474
Market valuation adjustment on
available-for-sale mortgage-related
securities.................................................... 1,593 (12,470) 1,669
Unrealized loss on impairment of
mortgage-related securities................................... -- (9,000) --
Loan repayments and sales:
Repayments of loans and mortgage-
related securities........................................... (815,453) (899,405) (1,067,702)
Sales of one- to four-family real
estate loans................................................. (195,231) (393,154) (1,017,740)
Sales of multi-family and
commercial real estate loans................................. (15,471) (25,741) (25,621)
Sales of consumer-related loans............................... -- (22,712) --
Sales of mortgage-related
securities................................................... -- (182,234) (81,294)
---------- ---------- ----------
Total repayments and sales............................ (1,024,562) (1,430,254) (1,650,214)
---------- ---------- ----------
Increase (decrease) in total loans before net items (excluding change in
undisbursed loan proceeds), including loans held for sale
and mortgage-related securities............................... $ (87,535) $ 436,237 $ 741,584
========== ========== ==========
</TABLE>
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FF Bank has been actively engaged in secondary mortgage market activities
on a national basis through the sale of whole loans and participations to
pension funds, insurance companies, banks, other savings institutions and
governmental units such as FHLMC, FNMA, GNMA and special Wisconsin and Illinois
programs. On a limited basis, FF Bank and its predecessors have purchased
selected groups of loans or a portfolio of loans. FF Bank also periodically has
used its loans to securitize mortgage-related securities sold by registered
broker-dealers. Sales of loans are used to provide additional funds for lending,
to generate servicing fee income and to reduce the risk resulting from
fluctuating interest rates and loan concentrations. Under loan sales and
participation agreements, FF Bank sells mortgage loans on a non-recourse basis
and pays participants an agreed upon yield on the participant's portion of the
loan out of monthly payments received from the borrowers. FF Bank, in general,
has forward sales commitments to cover the sale of all fixed-rate mortgage loans
having maturities of greater than 15 years which are closed or approved as well
as a majority of accepted applications for such loans.
Loan Servicing. FF Bank has originated the majority of the loans it
services for others. FF Bank receives fees for those servicing activities, which
include collecting and remitting loan payments, inspecting the properties and
making certain insurance and tax payments on behalf of the borrowers. At
December 31, 1995, FF Bank was servicing $2.33 billion of mortgage and
manufactured housing loans owned by others. Mortgage loans totaling $2.30
billion were being serviced for annual fees ranging from 1/8 to 1/2 of 1% of the
unpaid principal, and $28.1 million of manufactured housing loans were being
serviced for investors. Servicing fees retained on manufactured housing loans
average approximately 2.5% of the unpaid principal, reflecting the higher costs
of servicing these loans. The following table sets forth information as to FF
Bank's loan servicing portfolio, net of loans in process, at the dates shown.
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------
1995 1994
-------------------------- ----------------------
Amount % Amount %
----------- -------- --------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Loans owned by FF Bank........................... $3,642,000 61.0% $3,498,000 59.1%
Loans serviced for others........................ 2,326,000 39.0 2,424,000 40.9
---------- ----- ---------- -----
Total loans serviced....................... $5,968,000 100.0% $5,922,000 100.0%
========== ===== ========== =====
</TABLE>
Information concerning FF Bank's servicing income from loans serviced for
others is summarized in the following table for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1995 1994 1993
-------- -------- ------
(Dollars in thousands)
<S> <C> <C> <C>
Loan servicing income........................................... $ 7,125 $7,737 $6,587
Servicing spread for the year*.................................. .300% .344% .312%
<FN>
* The servicing spread represents the average fee earned as a percentage of
average balances of loans serviced for others, net of undisbursed proceeds,
as reduced by the periodic amortization of purchased and capitalized excess
mortgage servicing rights.
</FN>
</TABLE>
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<PAGE>
Net loan servicing income has fluctuated between 1993 and 1995 as the
result of i) changes in the average volume of loans serviced during a particular
year, ii) changes in the average servicing spread maintained as new servicing is
added each year and iii) fluctuations in the periodic amortization of the cost
associated with purchased servicing rights, excess servicing rights recorded
prior to 1995 and originated servicing rights recorded beginning in 1995.
The $1.1 million increase in net servicing income from 1993 to 1994 was
primarily the result of a $2.2 million decrease in amortization of purchased and
excess servicing costs in 1994 compared to 1993. The 1993 lower interest-rate
environment resulted in higher loan prepayments and, consequently, higher
amortization of servicing costs. This was partially offset by higher 1994
servicing volume but at lower average gross servicing spreads. This additional
volume was a combination of purchased servicing and originated servicing.
The $600,000 decrease in net servicing income from 1994 to 1995 was the
result of both lower average volume of loans serviced for others during 1995
compared to 1994, as the table above demonstrates, and increased amortization of
capitalized servicing rights.
During 1995 FF Bank began recognizing as an asset the fair value of
originated servicing rights as discussed in Note A to FFC's consolidated
financial statements, filed as an exhibit hereto. Also, see Note P, similarly
referenced, for additional loan servicing information as part of mortgage
banking activities.
Fee Income From Lending Activities. Loan origination and commitment fees
and certain direct loan origination costs are being deferred and the net amounts
amortized as an adjustment of the related loan's yield. FF Bank is amortizing
these amounts, using the level yield method, over the contractual lives of the
related loans.
FF Bank also receives other fees and charges relating to existing
mortgage loans which include prepayment penalties, late charges and fees
collected in connection with a change in borrower or other loan modifications.
Other types of loans also generate fee income for FF Bank. These include annual
fees assessed on credit card accounts, transactional fees relating to credit
card usage and late charges on consumer loans and manufactured housing loans.
Collateralized Industrial Development Revenue Bonds. Additional income
has been earned by FF Bank by offering loans and securities in its portfolio to
third parties for their use as collateral. FF Bank has previously entered into
agreements under which mortgage loans and investment securities held in
portfolio are pledged as secondary collateral in connection with the issuance of
Industrial Development Revenue Bonds. The bonds were issued by municipalities to
finance multi-family or commercial real estate owned by third parties unrelated
to FF Bank. Under the terms of these agreements, FF Bank i) issues
uncollateralized letters of credit or ii) maintains, with a trustee, mortgage
loans or securities with a fair market value, as defined, aggregating up to 180%
of the outstanding principal balance of the bonds to provide security for the
payment of principal, interest and any mandatory redemption premium owing on the
bonds. FF Bank continues to receive principal and interest payments on the
mortgage loans or securities used as collateral. If any of such bonds were in
default, FF Bank would have the primary obligation to either pay any amount in
default or to acquire the bonds on which the default had occurred. If FF Bank
was required to perform under these agreements, it would foreclose on the
existing mortgage and
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security interest in the real and personal property financed with the proceeds
of the bonds. FF Bank has discontinued this line of business and does not
currently anticipate entering into any new agreements, except for the purpose of
facilitating the refinancing of existing bond issues.
At December 31, 1995, certain mortgage-related securities and investment
securities with a carrying value of approximately $6.3 million were pledged as
collateral for bonds in the aggregate of $3.9 million. Additional bond issues
totaling $7.1 million are supported by letters of credit issued by FF Bank in
lieu of specific collateral. The bond agreements have expiration dates through
2008.
At December 31, 1995, each of the outstanding agreements was current with
regard to bond debt-service payments. Management has considered these agreements
in its review of the adequacy of allowances for losses relating to contingent
liabilities.
Usury Limitations. Federal law has preempted state usury law
interest-rate limitations on first-lien residential mortgage loans unless the
state legislature acted before a certain date to override the exemption. The
Wisconsin legislature acted to override the preemption and, therefore, loans
made by FF Bank in Wisconsin are subject to Wisconsin usury limitations,
described below.
The Illinois legislature did not override the federal preemption, and at
present Illinois law imposes no ceiling on interest rates for residential real
estate loans, including junior mortgage loans. Additionally, in Illinois,
federally-insured savings institutions can charge the highest rate permitted any
other lender in Illinois. The Illinois State Legislature has allowed state banks
to charge any interest rate on any type of loan, and, thus, there are
effectively no ceilings on the interest rate which a federal savings bank may
charge on a loan in Illinois.
On November 1, 1981, Wisconsin enacted a comprehensive revision of its
usury statutes overriding federal preemption and deregulating interest rates.
After that date, maximum interest rates were eliminated for loans secured by
first lien mortgages on residential real estate. Maximum interest rates have
also been eliminated for most forms of fixed and variable rate consumer loans
made by savings institutions after October 31, 1984. Variable rate revolving
consumer loans which are not secured by real estate remain subject to a maximum
interest rate of 18%, except that the limit does not apply following notice to
the borrower if the auction yield on two-year U.S. Treasury notes exceeds 15%
per year for five consecutive weeks.
With respect to first-lien residential real estate loans, the 1981
Wisconsin usury legislation clarified the Wisconsin law requirement that
unearned interest be refunded. However, certain items are now deemed not to be
interest for purposes of calculating the rebate. These items include charges
paid to third parties, fees and other amounts required to be passed on to
secondary market purchasers of any loans, up to two points to the lender for
"loan administration", commitment fees, loan fees paid by third parties
("seller's points") and a prepayment penalty of not more than 60 days interest
on that amount of the prepayment which exceeds 20% of the original amount of the
loan, provided the prepayment is made
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<PAGE>
within five years of the date of the loan and the parties have agreed to such a
prepayment penalty.
Since November 1, 1981, savings institutions have been permitted to use
two forms of interest-rate adjustment clauses in mortgage loans secured by one-
to four-family homes. Interest rates may either be adjusted based on changes in
an "approved index" ("indexed adjustable rate") or by providing for no more than
a 1% increase in the interest rate not more than once during each six-month
period and by permitting decreases in the interest rate to be made at any time
("non-indexed adjustable rate"). An "approved index" is defined as (i) the
national average mortgage contract rate for major lenders on the purchase of
previously occupied houses, as computed by the FHL Banks; (ii) the monthly
average of weekly auction rates on U.S. Treasury bills with a maturity of three
months or six months made available by the Federal Reserve Board; (iii) the
monthly average yield on U.S. Treasury securities adjusted to a constant
maturity of one, two, three or five years, made available by the Federal Reserve
Board; or (iv) an index approved by the Wisconsin Commissioner of Savings and
Loans. Loans made after November 1, 1981, containing either form of adjustment
mechanism, are not subject to any maximum usury interest rate; however,
increases in the rate based on increases in the index are optional with the
lender. Adjustments under the non-indexed version are solely at the option of
the lender and if no increase is made during any six-month period, the lender
may accumulate such increases and impose them at any time. A notice to the
borrower is required at least 30 days prior to an interest rate adjustment
during which period the loan may be prepaid without penalty. Loans originated by
FF Bank prior to its conversion to a federal savings bank charter may be subject
to the above provisions.
Other states in which FF Bank makes loans have varying laws concerning
usury. Management believes that all loans made by FF Bank in other states are in
compliance with the applicable usury provisions.
Collection Procedures - Residential and Commercial Mortgage Loans. Under
Wisconsin and Illinois law, a mortgage loan borrower is afforded a period of
time, subsequent to the entry of judgment and prior to sale of the mortgaged
property, within which to redeem the foreclosure judgment ("equity of
redemption"). During this period, the loan is generally a non-earning asset. The
length of the equity of redemption available in any case is dependent upon the
form of legal proceeding selected by the lender at the time the suit is
initiated and can vary between two months and one year. Further delays can be
incurred if bankruptcy proceedings intervene. A judgment of foreclosure for
residential mortgage loans will normally provide for the recovery of all sums
advanced by the mortgagor including, but not limited to, insurance, repairs,
taxes, appraisals, post-judgment interest, attorneys' fees, costs and
disbursements. The majority of foreclosure actions by FF Bank follow a form
which provides for a six-month equity of redemption. Unless the equity of
redemption is exercised, FF Bank generally acquires title to the property
pursuant to public bidding at a sheriff's sale. Thereafter, FF Bank attempts to
sell the property.
Collection Procedures - Non-Mortgage Loans. Collection procedures for
manufactured housing loans, credit card loans, consumer loans and student loans
are done in accordance with state and federal Fair Debt Collection Practices
Acts and, where applicable, governmental agencies procedures. The intent of the
collection procedures is either to assist the borrower in performing in
accordance with contract terms or to work out the problem loan in a timely
manner so as to minimize FF Bank's loss. Generally, collection efforts are
started 10 to 15 days after the payment on account was due.
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<PAGE>
Procedures for Nonaccrual Loans, Delinquencies and Foreclosures.
Delinquent and problem loans are a normal part of any lending business. When a
borrower fails to make a required payment within 15 days following the date on
which the payment is due, the loan is considered delinquent and internal
collection procedures generally are instituted. The borrower is contacted by a
Bank representative who seeks to determine the reason for the delinquency, and
attempts are made to effect a cure. In most cases deficiencies are cured
promptly. The loan status is reviewed and, where appropriate, the condition of
the property and the financial circumstances of the borrower are evaluated.
Based upon the results of any such investigation, (i) a repayment program of the
arrearage from the borrower may be accepted; (ii) evidence may be sought (in the
form of a listing contract) of efforts by the borrower to sell the property if
the borrower has stated that he is seeking to sell; (iii) a deed in lieu of
foreclosure or voluntary surrender of the property may be effected in compliance
with applicable laws; or (iv) foreclosure, replevin or collection proceedings
may be initiated.
A decision as to whether and when to initiate legal proceedings is based
upon such factors as the amount of the outstanding loan in relation to the
original indebtedness, the extent of delinquency and the borrower's ability and
willingness to cooperate in curing deficiencies. At a foreclosure sale,
representatives of FF Bank will generally bid an amount reasonably equivalent to
the lower of the fair value of the foreclosed property or the amount of judgment
due to FF Bank.
If the sum of the outstanding loan principal balance and costs of
foreclosure that have been capitalized exceed the fair market value of the
property, in the judgment of management, an allowance for loss in an amount
equal to such excess is established. In such circumstances, a deficiency
judgment may be sought against the borrower.
When FF Bank acquires real estate through foreclosure or deed in lieu of
foreclosure, such real estate is placed on its books at the lower of the
carrying value of the loan or the fair market value of the real estate based
upon a current appraisal. Any reduction from the value previously recorded on
the books is charged against the appropriate allowance for loan losses.
Loan Delinquencies. FF Bank monitors the delinquency status of its loan
portfolio on a regular basis and initiates 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 at December 31, 1995 have been presented separately as
-19-
<PAGE>
a part of the discussion of Non-Performing Assets in Management's Discussion and
Analysis, filed as an exhibit hereto. Delinquencies of 30 to 90 days are
summarized as follows:
<TABLE>
<CAPTION>
Balance At December 31,
------------------------
1995 1994
------ -----
(In thousands)
<S> <C> <C>
30 - 59 Days Delinquent
- -----------------------
Residential real estate loans $ 7,945 $ 8,796
Manufactured housing loans 2,888 2,886
Credit card loans 2,555 1,964
Commercial real estate loans 303 1,079
Consumer, student and other loans 9,519 7,219
------- --------
$23,210 $ 21,944
======= ========
60 - 90 Days Delinquent
- -----------------------
Residential real estate loans $ 1,193 $ 1,950
Manufactured housing loans 766 974
Credit card loans 1,315 883
Commercial real estate loans 606 1,696
Consumer, student and other loans 9,734 5,835
------- --------
$13,614 $ 11,338
======= ========
Total 30 - 90 Day Delinquent Loans
- ----------------------------------
Residential real estate loans $ 9,138 $ 10,746
Manufactured housing loans 3,654 3,860
Credit card loans 3,870 2,847
Commercial real estate loans 909 2,775
Consumer, student and other loans 19,253 13,054
------- --------
$36,824 $ 33,282
======= ========
</TABLE>
At December 31, 1995, the 30-90 day delinquencies increased approximately
$3.5 million to $36.8 million from $33.3 million at year-end 1994. As a percent
of total loans receivable, loan delinquencies increased from 0.96% at the end of
1994 to 1.02% at December 31, 1995.
The most significant factor in the overall increase was the increase of
$6.8 million in student loan delinquencies of 30-90 days from year-end 1994 to
December 31, 1995. These loans are government guaranteed and the servicing of
this portfolio is performed by a third-party under contract. Credit card loan
30-90 day delinquencies have also increased from year-end 1994 to year-end 1995
by $1.1 million. This increase is reflective of the national trend of higher
delinquencies for this product as further discussed in the Non-Performing Asset
section of Management's Discussion and Analysis, referred to above. Despite the
increase, the delinquency levels in FF Bank's credit card portfolio are lower
than national averages.
Decreases in 30-90 day delinquencies were experienced in certain loan
categories from year-end 1994 to December 31, 1995. The more significant
decreases were i) a $1.9 million decrease for commercial real estate mortgage
loans, ii) a $1.6 million decrease for residential mortgage loans and iii) a
$500,000 decrease for commercial business loans.
All of these delinquent loans have been considered by management in its
evaluation of the adequacy of the allowances for loan losses.
-20-
<PAGE>
Foreclosed Properties and Real Estate Investments Held For Sale.
Non-performing assets of $29.8 million and $32.3 million at December 31, 1995
and 1994, respectively, are discussed as a part of Management's Discussion and
Analysis, filed as an exhibit hereto. In that discussion, it is noted that a
portion of the balances of foreclosed properties and real estate investments
held for sale included in the non-performing assets at December 31, 1995 and
1994 are comprised of large (having a carrying value of $1.0 million or greater)
commercial real estate properties. A list of the properties referred to in that
discussion is presented below.
<TABLE>
<CAPTION>
Carrying Value At December 31,
-------------------------------
Property Type Location 1995 1994
- ------------- -------- -------- ------
(In thousands)
<S> <C> <C>
Retail Milwaukee, Wisconsin $ 1,089 $1,089
Retail Fort Worth, Texas 1,000 1,012
</TABLE>
The retail property in Milwaukee, Wisconsin had previously been developed
and owned by a wholly-owned subsidiary of FF Bank. The subsidiary carried the
property as real estate held for investment prior to foreclosure in 1994 by FF
Bank. At December 31, 1994 the property was transferred to FFC and is now
classified as a real estate investment held for sale. At December 31, 1995 the
occupancy level was 78%. Management will continue efforts to both increase the
occupancy level and sell the property during 1996. The Milwaukee property fair
value is considered to approximate the carrying value.
The second property, acquired in the FirstRock acquisition, is a retail
shopping strip center which is approximately 39% leased at December 31, 1995. At
that date, the fair value is considered to be the carrying value.
Foreclosed properties are valued at the lower of cost or fair value.
The above listed foreclosed properties, as well as all other
non-performing assets, have been considered in the evaluation of the adequacy of
allowances for losses. See Management's Discussion and Analysis referred to
above for management's review of adequacy of allowances for losses relative to
these properties.
Classified 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 regulators.
An asset is classified "substandard" if 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 so 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
-21-
<PAGE>
establishment of prudent general allowances for loss amounts while loss assets
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, meeting the criteria for
classification. Non-performing assets include loans or assets which were
previously loans i) 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-performance 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 and FFC,
are set forth in the following table, as of December 31, 1995 and 1994,
respectively.
<TABLE>
<CAPTION>
December 31,
------------------------
1995 1994
-------- ------
(In thousands)
<S> <C> <C>
Classified assets:
Non-performing assets:
Non-accrual loans $ 12,246 $ 10,564
Non-performing MBSs 12,858 15,455
Real estate held for sale by FFC 1,309 1,089
Foreclosed properties and other
repossessed assets 3,379 5,216
-------- --------
Total Non-Performing Assets 29,792 32,324
Add back valuation allowances netted against
foreclosed properties above 993 1,146
Adjustment for non-performing residential loans
not classified due to low loan-to-
appraisal value (584) (414)
Adjustment for real estate held for sale
not included in FFB classified assets (1,309) (1,089)
Additional classified performing loans:
Residential real estate 1,013 1,858
Commercial real estate 5,890 8,057
Consumer (including manufactured housing
and credit cards) 280 453
Commercial business 418 219
Other assets 135
-------- --------
Total Classified Assets $ 36,493 $ 42,689
======== ========
</TABLE>
During the year ended December 31, 1995, classified assets decreased $
6.2 million to $36.5 million from the December 31, 1994 total of $42.7 million
as the net result of various 1995 events. As a percentage of total assets,
classified assets decreased from 0.78% at December 31, 1994 to 0.67% at December
31, 1995.
The non-performing asset segment of classified assets similarly
decreased $2.5 million during 1995. For further discussions of such
non-performing assets, see Management's Discussion and Analysis, filed as an
exhibit hereto, as well as the "Foreclosed Properties" review immediately
preceding this discussion of classified assets. Other significant changes in the
remaining classified asset categories are discussed below.
-22-
<PAGE>
Performing commercial real estate loans which had been classified due
to the possible adverse effects of identifiable future events decreased $2.2
million in 1995. This decrease is due to the net effect of i) the removal from
classified asset status of a contractually performing loan totaling $2.6 million
which had previously been classified due to cash flow problems which have been
resolved, ii) principal payments received on performing loans and offset by iii)
the inclusion in this category of a $500,000 group of loans purchased from
another financial institution.
Classified performing residential real estate mortgage loans also
decreased from 1994 year-end by $900,000 to $1.0 million at December 31, 1995.
The reduction was primarily the result of efforts involving certain borrowers
with groups of loans requiring intensive monitoring and some charge-offs.
At December 31, 1995, exclusive of non-performing assets, the major
concentration of classified assets consists of the approximately $5.9 million of
currently performing commercial real estate loans that have been classified due
to prior delinquency and/or the potential adverse effects of possible
identifiable future events or other factors. Loans in excess of $1.0 million
included in this category are noted below (in thousands):
<TABLE>
<CAPTION>
Loan Amount Classified
-----------------------------------
Property Type Of Property December 31, December 31,
Loan Collateral Location 1995 1994
- ---------------- ---------------- ------------ ------------
<S> <C> <C> <C>
Office/Land Sheboygan, Wisconsin $ 3,596 $ 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 during 1995 based upon the receipt of
certain contractual principal payments in early 1995.
</FN>
</TABLE>
All adversely classified assets at December 31, 1995 have been considered by
management in its evaluation of the adequacy of allowances for losses.
Investment Activities
In addition to lending activities, FF Bank conducts other investment
activities on an ongoing basis in order to diversify assets, obtain maximum
yield and meet levels of liquid assets required by regulatory authorities.
Investment decisions are made by authorized officers in accordance with policies
established by the Board of Directors. In addition to satisfying regulatory
liquidity requirements, investments are used as part of FF Bank's asset and
liability program to minimize FF Bank's vulnerability to changing interest
rates. At December 31, 1995, 71.6% of FF Bank's investments mature or reprice
within one year or less.
Certain of FF Bank's investment policies relate to the term of the
investment. For example, FF Bank invests in U.S. government, agency and
instrumentality obligations maturing in three years or less; obligations of
state and other political subdivisions maturing in two years or less;
certificates of deposits of insured institutions which will mature in nine
months or less; negotiable federal funds which will mature in nine months or
less; nonnegotiable federal funds which will mature in 30 days or less;
corporate debt obligations maturing in three years or less; and commercial paper
maturing in 270 days or less.
-23-
<PAGE>
Additionally, corporate debt obligations must be rated in one of the four
highest categories by a nationally recognized investment rating service, and
commercial paper must be rated in one of the two highest categories by two
nationally recognized rating services.
Other investment policies relate to the aggregate amount of certain
investments. For example, state and municipal general obligations and revenue
bonds are limited to 1% of assets; industrial revenue bonds to 2% of assets in
the aggregate and 1% of assets for any single issue; repurchase agreements to
10% of stockholders' equity plus an additional 10% if secured by readily
marketable collateral; banker's acceptances to no more than 1/4 of 1% of such
institution's total deposits; and all other obligations, except those of the
U.S. or guaranteed thereby, to the lesser of 10% of stockholders' equity or 1%
of total assets.
Management determines the appropriate classification of debt securities
(including mortgage-related securities) at the time of purchase in accordance
with its investment policy. Debt securities are classified as held to maturity
when FFC has the positive intent and ability to hold the securities to maturity.
Held-to-maturity securities are stated at amortized cost.
Debt securities not classified as held to maturity are classified as
available for sale. Available-for-sale securities are stated at fair value with
the unrealized gains and losses (net of income tax effect), which are believed
to be other than permanent, reported as a separate component of stockholders'
equity.
The cost of debt securities classified as held to maturity or available for
sale is adjusted for amortization of premiums and accretion of discounts to
maturity, or, in the case of mortgage-related securities, over the estimated
life of the security. Such amortization is included in interest income from the
related security. Interest and dividends are included in interest income from
the related securities. Realized gains and losses, and declines in value judged
to be other than temporary are included in net securities gains (losses). The
costs of securities sold is based on the specific identification method.
For a breakdown of investment securities held by FF Bank at certain dates,
see Note C to FFC's consolidated financial statements, filed as an exhibit
hereto.
-24-
<PAGE>
The following table sets forth the maturity/repricing characteristics of FF
Bank's investment securities at December 31, 1995 and the weighted average
yields of such securities.
<TABLE>
<CAPTION>
After One, But After Five, But
Within One Year Within Five Years Within 10 Years After 10 Years
----------------- ------------------ ----------------- ---------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Yield Amount Yield Amount Yield Amount Yield
------ ------ ------- -------- ------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and agency
obligations.................. $ 78,121 5.01% $67,833 5.84% $ 242 7.02% $ -- --%
Interest-earning deposits
in banks..................... 13,801 5.26
Federal funds sold............... 34,929 4.86
Corporate and bank notes
receivable................... 4,303 5.39 1,615 6.81
State and municipal
obligations.................. 718 5.85 330 8.00
Adjustable-rate mortgage
mutual fund.................. 47,263 6.06
-------- ------- ------ -----
Total........................ $178,417 5.29% $70,166 5.86% $ 572 7.59% $ -- --%
======== ======= ====== ======
</TABLE>
At December 31, 1995, FF Bank had no investments in any issuer in excess
of 10% of net worth.
The following table sets forth the aggregate amortized cost and estimated
fair value of investment securities at the dates indicated.
<TABLE>
<CAPTION>
December 31,
------------------------------------
1995 1994 1993
-------- -------- ------
(In thousands)
<S> <C> <C> <C>
U.S. Government and agency obligations.......................... $145,331 $107,250 $161,494
Adjustable-rate mortgage mutual fund............................ 47,905 47,227 77,532
Interest-earning deposits....................................... 13,801 1,024 40,838
Federal funds sold.............................................. 34,929 23,890 21,873
Corporate and bank notes
(investment grade).......................................... 5,856 38,952 50,807
State and municipal obligations................................. 1,048 4,433 4,453
Certificates of deposit......................................... -- 504 --
Real estate investment trust.................................... -- 2,371 2,243
-------- -------- --------
Total amortized cost........................................ $248,870 $225,651 $359,240
======== ======== ========
Total estimated fair value.................................. $248,792 $218,307 $360,684
======== ======== ========
</TABLE>
Sources of Funds
General. Deposit accounts, sales of loans in the secondary market and
loan repayments are the primary sources of funds for use in lending and for
other general business purposes. In addition, FF Bank derives funds from
maturity of investments, advances from the FHL Bank and other borrowings.
Repayments of loans and mortgage-related securities are a relatively stable
source of funds, while deposit inflows and outflows are significantly influenced
by general interest rates and money market and economic conditions. Borrowings
may be used on a short-term basis to compensate for reduction in normal sources
of funds, such as deposit inflows, at less than projected levels. They may also
be used on a longer-term basis to support expanded lending and investment
activities. FF Bank has not generally
-25-
<PAGE>
solicited deposits outside the market area served by its offices or used brokers
to obtain deposits and has no brokered deposits at December 31, 1995.
Deposit Activities. FF Bank offers a variety of deposits having a wide
range of interest rates and terms.
The following table presents, by various interest-rate intervals, FF
Bank's long-term (one year and over) certificates as of the date indicated.
<TABLE>
<CAPTION>
December 31,
------------------------------------------
Interest Rate 1995 1994 1993
------------- -------- -------- ------
(In thousands)
<C> <C> <C> <C>
3.50 - 4.00%........................................... $ -- $ 157,220 $ 237,407
4.01 - 6.00%........................................... 1,672,639 1,979,280 1,507,747
6.01 - 8.00%........................................... 568,953 186,950 287,107
8.01 - 10.00%........................................... 4,977 125,603 246,888
---------- ---------- ----------
$2,246,569 $2,449,053 $2,279,149
========== ========== ==========
</TABLE>
The following table presents, by various similar interest-rate intervals,
the amounts of long-term (one year and over) time deposits at December 31, 1995
maturing during the period indicated.
<TABLE>
<CAPTION>
Interest Rates
--------------------------------------------------------------
4.01-6.00% 6.01-8.00% 8.01-10.00% Total
---------- ---------- ----------- -----
(In thousands)
Certificate accounts
maturing in the twelve
months ending:
<S> <C> <C> <C> <C>
December 31, 1996...........................$1,058,826 $157,995 $ 1,717 $1,218,538
December 31, 1997........................... 406,279 240,238 133 646,650
December 31, 1998........................... 147,552 53,389 323 201,264
After December 31, 1998..................... 59,982 117,331 2,804 180,117
---------- -------- -------- ----------
$1,672,639 $568,953 $ 4,977 $2,246,569
========== ======== ======== ==========
</TABLE>
The following table presents the maturities of FF Bank's certificates in
amounts of $100,000 or more at December 31, 1995 by time remaining to maturity.
<TABLE>
<CAPTION>
December 31,
Maturities 1995
- ---------- --------------
(In thousands)
<S> <C>
January 1, 1996 through March 31, 1996.............................................. $ 72,790
April 1, 1996 through June 30, 1996................................................. 34,745
July 1, 1996 through December 31, 1996.............................................. 41,598
January 1, 1997 and after........................................................... 65,810
--------
$214,943
========
</TABLE>
FF Bank's deposit base at December 31, 1995 included $2.945 billion of
certificates of deposit with a weighted average rate of 5.72%. Of these
certificates of deposit, $1.917 billion with a weighted average rate of 5.63%
will mature during the 12 months
-26-
<PAGE>
ending December 31, 1996. FF Bank will seek to retain these deposits to the
extent consistent with its long-term objective of maintaining positive interest
rate spreads. Depending upon interest rates existing at the time such
certificates mature, FF Bank's cost of funds may be significantly affected by
the rollover of these funds.
Other Sources of Funds. The following table sets forth certain
information as to FFC's advances and other borrowings at the dates and for the
periods indicated. See Note J to FFC's consolidated financial statements,
incorporated herein by reference.
<TABLE>
<CAPTION>
December 31,
------------------------------------------
1995 1994 1993
-------- -------- ------
(In thousands)
<S> <C> <C> <C>
Short-term borrowings.......................................... $ 25,972 $ 13,127 $ --
FHL Bank advances.............................................. 475,368 622,209 372,381
Subordinated notes............................................. 54,925 54,977 54,997
Industrial development revenue bonds........................... 6,219 6,315 6,410
Collateralized mortgage obligations............................ 8,024 11,818 22,009
-------- -------- --------
Total borrowings........................................ $570,508 $708,446 $455,797
======== ======== ========
Weighted average interest cost of total
borrowings during the year................................. 6.45% 5.58% 5.71%
Average month-end balance of short-term
borrowings................................................. $ 59,092 $ 14,006 $ --
Weighted average interest rate of short-term
borrowings during the year................................. 5.91% 6.02% --%
Weighted average interest rate of short-term
borrowings at end of year.................................. 5.89% 5.76% --%
</TABLE>
Service Corporations and Operating/Finance Subsidiaries
FF Bank has i) five active, wholly-owned service corporations, ii) an
operating subsidiary, and iii) two limited-purpose finance subsidiaries. The net
book value of FF Bank's aggregate investment in active service corporations at
December 31, 1995 was as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Wisconsin Insurance Management, Inc..................................... $1,169
Appraisal Services, Inc................................................. 150
First Service Corporation of Wisconsin.................................. 4
Illini Service Corporation.............................................. --
Mortgage Finance Corporation............................................ --
------
Total............................................................... $1,323
======
</TABLE>
Wisconsin Insurance Management, Inc. ("WIM") is a full-service,
independent insurance agency. This subsidiary offers a broad range of insurance
products, including hazard, mortgage, life and disability policies, to FF Bank's
customers, as well as a full line of commercial and personal coverages to the
general public. Brokerage services are also provided through this subsidiary.
WIM had net income of $1.7 million, $1.6 million and $1.3 million for 1995, 1994
and 1993, respectively.
-27-
<PAGE>
Appraisal Services, Inc. performs real estate appraisals for FF Bank's
loan customers, governmental agencies and the general public. Insurance
valuations and ad valorem tax services for outside sources are also performed.
Appraisal Services, Inc. had net income of $121,000, $69,000 and $111,000 for
1995, 1994 and 1993, respectively.
First Service Corporation of Wisconsin ("FSC") previously engaged in the
management and sale of commercial real estate and apartments for FF Bank and
others, as well as acting as general partner for several real estate
partnerships. In 1993, FSC's activities were sharply cut back and its principal
assets were transferred to FF Bank. This subsidiary had a net loss of $207,000
for 1993. FSC's remaining function is to serve as general partner for a real
estate partnership.
Illini Service Corporation ("ISC") was acquired in conjunction with the
Illini transaction and acts as nominal trustee on deeds of trust in Missouri.
ISC's sole corporate function is to provide the trustee's signature capability.
Mortgage Finance Corporation ("MFC") was a subsidiary of a former
mortgage banking affiliate of FF Bank and acts as a nominal trustee on deeds of
trust in California and other states. MFC's sole corporate function is to
provide the trustee's signature capability on such deeds of trust acquired by FF
Bank from the former affiliate.
First Financial Investments, Inc. ("FFII") is an operating subsidiary of
FF Bank and was incorporated in 1991. FFII, which is located in the state of
Nevada, was formed for the purpose of managing a portion of FF Bank's investment
portfolio (primarily mortgage-related securities purchased subsequent to the
recent Illinois-area acquisitions) having primarily long-term maturities. As an
operating subsidiary, FFII's results of operations are combined with FF Bank's
for financial and regulatory reporting purposes.
UFS Capital Corporation ("UFSCC") and FFS Funding Corp., Inc. ("FFS"),
which were acquired in conjunction with the United and FirstRock acquisitions,
respectively, are limited-purpose finance subsidiaries of FF Bank and function
as issuers of certain collateralized mortgage obligation bonds. As finance
subsidiaries, UFSCC's and FFS's results of operations are combined with FF
Bank's for financial and regulatory reporting purposes.
Employees of FFC
At December 31, 1995, FFC and its subsidiaries employed 1,377 full-time
employees and 404 part-time employees. FFC promotes equal employment opportunity
and considers its employee relations to be good. FFC's employees are not
represented by any collective bargaining group.
FFC sponsors retirement plans covering all full-time employees with one
or more years of service who are at least 21 years old. Additionally, FFC
maintains an employee benefit program providing, among other items,
hospitalization and major medical insurance, limited dental and life insurance,
and educational assistance. Such employee benefits are considered by management
to be competitive with employee benefits provided by other financial
institutions and major employers in the counties in which FF Bank has offices.
-28-
<PAGE>
Executive Officers
The following table sets forth information regarding each of the
executive officers of FFC and FF Bank:
<TABLE>
<CAPTION>
Age At
Executive December 31, Business Experience
Officer 1995 During Past Five Years
- --------------- ------------- --------------------------
<S> <C> <C>
John C. Seramur 53 Mr. Seramur joined FF Bank in 1966 and serves
as Director, President, Chief Executive Officer
and Chief Operating Officer of FFC and FF
Bank.
Robert M. Salinger 45 Mr. Salinger joined FFC as Corporate Secretary
and General Counsel in 1985. He also serves as
an Executive Vice President of FF Bank. In
1984, he had served as General Counsel and
Corporate Secretary for an institution acquired by
FFC. Prior to 1984, he was a partner in the law
firm of Petrie & Stocking, S.C., and associated
with the law firm of Whyte, Hirschboeck &
Dudek, S.C.
Thomas H. Neuschaefer 49 Mr. Neuschaefer joined FF Bank in 1988 and
serves as Vice President, Treasurer and Chief
Financial Officer of FFC. He also serves as
Executive Vice President-Finance of FF Bank.
From 1978 to 1988, he served as Chief Financial
Officer of National. Prior to 1978, he was
associated with the national accounting firm of
Ernst & Young LLP.
Donald E. Peters 46 Mr. Peters joined FF Bank in 1982 and serves as
Executive Vice President - Retail Banking of FF
Bank. Prior to 1982, he was an officer of
another thrift institution.
Harry K. Hammerling 45 Mr. Hammerling joined FF Bank in 1984 and
serves as Executive Vice President -
Administration and Servicing for FF Bank.
From 1972 to 1984, he served as an officer of
First State.
Kenneth F. Csinicsek 56 Mr. Csinicsek joined FF Bank in 1987 and serves
as Senior Vice President of Marketing and
Investor Relations. Prior to joining FF Bank, he
served as president of another thrift institution for
two years and operated two financial institution
consulting firms over a thirteen year period.
</TABLE>
-29-
<PAGE>
REGULATION
FFC, as a savings and loan holding company, and FF Bank, as a federally
chartered savings bank, are subject to regulation, supervision and examination
by the OTS as their primary federal regulator. FF Bank also is subject to
regulation, supervision and examination by the FDIC and as to certain matters by
the Federal Reserve Board. See "Management's Discussion and Analysis" and "Notes
to Consolidated Financial Statements" as to the impact of certain laws, rules
and regulations on the operations of FFC and FF Bank. Set forth below is a
description of certain recent regulatory developments.
During 1995, the OTS, along with the other federal banking agencies,
adopted safety and soundness guidelines relating to (i) internal controls,
information systems and internal audit systems; (ii) loan documentation; (iii)
credit underwriting; (iv) interest rate exposure; (v) asset growth and (vi)
compensation and benefit standards for officers, directors, employees and
principal shareholders. Such guidelines set out standards that the agencies will
use to identify and address problems at institutions before capital becomes
impaired. Pursuant to such guidelines FF Bank is required to establish and
maintain a system to identify problem assets and prevent deterioration of those
assets in a manner commensurate with its size and the nature and scope of its
operations. FF Bank also must establish and maintain a system to evaluate and
monitor earnings and ensure that earnings are sufficient to maintain adequate
capital and reserves in a manner commensurate with its size and the nature and
scope of its operations.
If FF Bank does not meet one or more of the safety and soundness
standards set forth in the guidelines, it is required to file a compliance plan
with the OTS. In the event that FF Bank fails to submit an acceptable compliance
plan or fails in any material respect to implement an accepted compliance plan
within the time allowed by the OTS, FF Bank would be required to correct the
deficiency and the OTS would be authorized to: (i) restrict FF Bank's asset
growth; (ii) require FF Bank to increase its ratio of tangible equity to assets;
(iii) restrict the rates of interest that FF Bank may pay; or (iv) take any
other action that would better carry out the purpose of the corrective action.
FF Bank believes it currently is in compliance with the safety and soundness
standards set forth by the OTS.
During 1995, in accordance with changes mandated by the Community
Development and Regulatory Improvement Act of 1994 (the "Community Development
Act"), the OTS and the other federal banking agencies proposed certain
amendments to the regulations implementing the Depository Institutions
Management Interlocks Act (the "Interlocks Act"), which restricts management
interlocks in order to foster competition between unaffiliated institutions. The
proposed amendments would narrow the circumstances under which an exception to
the prohibitions of the Interlocks Act could be granted by agency order and
would clarify certain language as used within the regulations. Management
officials at FFC and FF Bank are in full compliance with the Interlocks Act.
The Community Development Act, also requires that each banking agency
implement a comprehensive review of its regulations to eliminate duplicative,
unduly burdensome and unnecessary regulations. During 1995 the OTS announced
that it will review each of its regulations to determine if: (i) the regulations
are current; (ii) the regulation could be eliminated without endangering safety
and soundness, diminishing consumer protection or violating statutory
requirements; (iii) the regulation's subject matter is more suited for a
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<PAGE>
policy statement or handbook guidance; (iv) the regulation is consistent with
the regulation of the other federal banking agencies; and (v) the regulation is
easily understood. Based upon the first part of this review, the OTS formally
deleted eight percent of its regulations including outdated, duplicative and
otherwise unnecessary regulations.
The OTS also recently issued a notice of proposed rulemaking concerning
a comprehensive revision to its regulations and policy statements concerning
lending and investments. Under the proposal certain loan documentation
requirements will be replaced by general safety and soundness standards,
commercial loans made by a service corporation will be exempted from an
institution's overall 10% limit on commercial loans, an institution will be able
to use its own cost-of-funds index in structuring adjustable rate mortgages, and
the 35% of assets limitation on credit card lending will be eliminated. The OTS
has announced that it expects to issue proposals that will reduce the burdens
imposed by its regulations governing, among other things, subsidiaries,
corporate governance and preemption. Similarly, the FDIC has issued a notice of
opportunity for comment with respect to its review of all of its regulations and
written policies.
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<PAGE>
TAXATION
Federal
FFC files on behalf of itself, FF Bank, and its subsidiaries a calendar
tax year consolidated federal income tax return. Income and expense are reported
on the accrual method of accounting.
Savings institutions, such as FF Bank, are generally taxed in the same
manner as other corporations. Unlike other corporations, however, qualifying
savings institutions that meet certain definitional tests relating to the nature
of their supervision, income, assets and business operations are allowed to
establish a reserve for bad debts and each tax year are permitted to deduct
additions to that reserve on qualifying real property loans using the more
favorable of the following two alternative methods: (i) a method based on the
institution's actual loss experience (the "experience" method) or (ii) a method
based upon a specified percentage of the institution's taxable income (the
"percentage of taxable income" method). Qualifying real property loans are, in
general, loans secured by interests in improved real property. The addition to
the reserve for nonqualifying loans must be computed under the experience
method. In recent years, FF Bank generally has computed additions to its
reserves for losses on qualifying loans using the experience method. It is
anticipated that FF Bank will continue to use this method in future years.
To the extent that FF Bank makes distributions to its stockholders that
are considered withdrawals from that excess bad debt reserve, the amounts
withdrawn will be included in FF Bank's taxable income. The amount considered to
be withdrawn by such a distribution will be the amount of the distribution, plus
the amount necessary to pay the tax with respect to the withdrawal. Dividends
paid out of FF Bank's current or accumulated earnings and profits as calculated
for federal income tax purposes, however, will not be considered to result in
withdrawals from their bad debt reserves. Distributions in excess of FF Bank's
current and accumulated earnings and profits, distributions in redemptions of
stock, and distributions in partial or complete liquidation of FF Bank will be
considered to result in withdrawals from the Bank's bad debt reserves. At
December 31, 1995, FF Bank had $79.2 million in accumulated federal income tax
bad debt reserves that would not be available for distribution to FFC without
the imposition of additional tax.
Depending on the composition of its items of income and expense, a savings
institution may be subject to the alternative minimum tax ("AMT") to the extent
the AMT exceeds the regular tax liability. AMT is calculated by multiplying
alternative minimum taxable income ("AMTI") by 20%. AMTI equals regular taxable
income increased by certain tax preferences, including depreciation deductions
in excess of that allowable for alternative minimum tax purposes, the amount of
the bad debt reserve deduction claimed in excess of the deduction based on the
experience method, and 75% of the excess of adjusted current earnings ("ACE")
over AMTI. ACE is defined as AMTI adjusted for certain items such as accelerated
tax depreciation, tax exempt interest, the dividends received deduction, and
other tax preferences. Only 90% of AMTI may be reduced by net operating loss
carryovers and most alternative minimum tax paid may be used as a credit against
regular tax paid in future years.
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State
FFC and FF Bank are headquartered in Wisconsin and have significant
operations in Illinois. The State of Wisconsin imposes a corporate franchise tax
measured by the separate Wisconsin taxable income of each of the members. The
State of Illinois imposes a corporate income tax based on the apportionment of
Illinois taxable income by the entire group to their Illinois activities. The
current corporate tax rates imposed by Wisconsin and Illinois are 7.9% and 7.3%,
respectively. FF Bank also has an operating subsidiary (FFII) located in Nevada
which manages a portion of FF Bank's investment portfolio. The income of FFII is
only subject to taxation in Nevada which currently does not impose a corporate
income or franchise tax other than a nominal registration fee.
Examinations
The Internal Revenue Service has examined the consolidated federal income
tax returns of FFC and FF Bank through 1991. The separate Wisconsin state income
tax returns of the members of the group have been examined by the Wisconsin
Department of Revenue through 1990. The Illinois Department of Revenue is
currently engaged in an examination of the years 1991, 1992 and 1993.
ITEM 2. PROPERTIES
At December 31, 1995, FF Bank operated through 129 full-service savings
bank branch offices, one loan origination limited office and one insurance
agency office, located in Wisconsin and Illinois. The aggregate net book value
at December 31, 1995 of the properties owned or leased, including headquarters,
properties and leasehold improvements at the leased offices, was $42.4 million.
The leases expire between 1996 and 2021. See Note H to FFC's consolidated
financial statements, filed as an exhibit hereto, for information regarding FF
Bank's premises and equipment. Management believes that all of these properties
are in good condition. The following tables set forth the location of FFC's
banking and other offices.
Wisconsin
Address City
- ---------------------- -----------------------
609 East Spruce Street Abbotsford, Wisconsin
103 West Cleveland Arcadia, Wisconsin
926 West College Avenue Appleton, Wisconsin
221 Fourth Avenue West Ashland, Wisconsin
117 South Broad Street Bayfield, Wisconsin
201 Park Avenue Beaver Dam, Wisconsin
203 Main Street Black River Falls, Wisconsin
- ----------
(a) Leased
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Wisconsin (Continued)
Address City
- ----------------------- -----------------------
1 North Moorland Road Brookfield, Wisconsin (a)
197 West Chestnut Street Burlington, Wisconsin
709 East Geneva Street Delavan, Wisconsin
308 Third Avenue West Durand, Wisconsin
3292 Main Street East Troy, Wisconsin (a)
130 South Barstow Commons Eau Claire, Wisconsin
806 South Hastings Way Eau Claire, Wisconsin
23 South Washington Elkhorn, Wisconsin
One North Madison Street Evansville, Wisconsin
211 North Highland Drive Fredonia, Wisconsin
1930 Wisconsin Avenue Grafton, Wisconsin (a)
1482 West Mason Street Green Bay, Wisconsin
2235 Main Street Green Bay, Wisconsin
5651 Broad Street Greendale, Wisconsin
4981 South 76th Street Greenfield, Wisconsin
10 Main Street Hayward, Wisconsin
Holmen Square Holmen, Wisconsin
117 Second Avenue North Hurley, Wisconsin (a)
420 South Main Street Iron River, Wisconsin
2525 Milton Avenue Janesville, Wisconsin (a)
620 Main Street LaCrosse, Wisconsin
300 East Lake Street Lake Mills, Wisconsin
205 North Eighth Street Manitowoc, Wisconsin
630 South Central Avenue Marshfield, Wisconsin (a)
705 North Center Avenue Merrill, Wisconsin
200 East Wisconsin Avenue Milwaukee, Wisconsin (a)
829 West Mitchell Street Milwaukee, Wisconsin
3027 West Lincoln Avenue Milwaukee, Wisconsin
3432 South 27th Street Milwaukee, Wisconsin (a)
5350 West Fond du Lac Avenue Milwaukee, Wisconsin
5900 West North Avenue Milwaukee, Wisconsin
7900 West Brown Deer Road Milwaukee, Wisconsin
Highways 51 & 70 West Minocqua, Wisconsin (a)
600 East Main Street Mondovi, Wisconsin
306 North Rochester Street Mukwonago, Wisconsin
600 Hewett Street Neillsville, Wisconsin
15665 West National Avenue New Berlin, Wisconsin
1093 Summit Avenue Oconomowoc, Wisconsin (a)
1101 Main Street Onalaska, Wisconsin
429 North Sawyer Street Oshkosh, Wisconsin
- ----------
(a) Leased
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<PAGE>
Wisconsin (Continued)
Address City
- ----------------------- ---------------------------
1414 South Fourth Avenue Park Falls, Wisconsin
Post Road & South Drive Plover, Wisconsin
222 North Wisconsin Street Port Washington, Wisconsin
1733 Douglas Avenue Racine, Wisconsin
140 South Brown Rhinelander, Wisconsin
135 South Mill Street Saukville, Wisconsin
1230 North Taylor Drive Sheboygan, Wisconsin
2815 South Chicago Avenue South Milwaukee, Wisconsin (a)
1325 Church Street Stevens Point, Wisconsin
108 West Prospect Thorp, Wisconsin (a)
213 North Lake Avenue Twin Lakes, Wisconsin
104 South Washington Avenue Washburn, Wisconsin
600 Main Street Watertown, Wisconsin
633 South Church Street Watertown, Wisconsin (a)
100 East Sunset Drive Waukesha, Wisconsin (a)
300 Wisconsin Avenue* Waukesha, Wisconsin
704 North Grand Avenue Waukesha, Wisconsin
1200 Delafield Street Waukesha, Wisconsin (a)
2306 West St. Paul Avenue Waukesha, Wisconsin (a)
2831 North Grandview Boulevard Waukesha, Wisconsin (a)
330 Third Street Wausau, Wisconsin (a)
2711 West Stewart Avenue Wausau, Wisconsin
2645 North Mayfair Road Wauwatosa, Wisconsin
2825 South 108th Street West Allis, Wisconsin (a)
7101 West Greenfield Avenue West Allis, Wisconsin (a)
430 East Silver Spring Drive Whitefish Bay, Wisconsin
1714 Scranton Street Whitehall, Wisconsin
219 Center Street Whitewater, Wisconsin
711 West Grand Avenue Wisconsin Rapids, Wisconsin (a)
- ----------
(a) Leased
* Insurance Agency Office
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Illinois
Address City
- ------------------------ --------------------
104 Southeast 3rd Avenue Aledo, Illinois
104 Homer Adams Parkway Alton, Illinois
301 West Galena Boulevard Aurora, Illinois
100 East Washington Belleville, Illinois
6902 West Main Belleville, Illinois (a)
1007 North Fourth Street Chillicothe, Illinois
238 North Main Columbia, Illinois
305 East Locust DeKalb, Illinois (a)
1325 Sycamore Road DeKalb, Illinois (a)
12200 North Route 88 Dunlap, Illinois (a)
300 East Washington Street East Peoria, Illinois
326 Missouri Avenue East St. Louis, Illinois
101 East Evergreen Elmwood, Illinois
6550 North Illinois Fairview Heights, Illinois
10280 Lincoln Trail Fairview Heights, Illinois
16 East Fort Street Farmington, Illinois (a)
50 East Main Street Galesburg, Illinois
1865 North Henderson Galesburg, Illinois
#1 Junction Drive West Glen Carbon, Illinois
318 West College Greenville, Illinois
1035 Broadway Hamilton, Illinois
333 West Main Havana, Illinois
313 Fifth Street Lacon, Illinois
143 South Main Street Lewistown, Illinois
622 Machesney Road Machesney Park, Illinois
217 West Washington Millstadt, Illinois
119 West 5th Street Minonk, Illinois
122 West Boston Avenue Monmouth, Illinois
21 Boulder Hill Pass Montgomery, Illinois (a)
1645 State Highway 121 Mount Zion, Illinois
300 South 4th Street Pekin, Illinois
3500 Court Street Pekin, Illinois (a)
103 West Forrest Hill Peoria, Illinois
111 North Jefferson Avenue Peoria, Illinois
201B Northwoods Mall Peoria, Illinois (a)
700 Main Street Peoria, Illinois (a)
2515 West Lake Avenue Peoria, Illinois
3222 West Harmon Highway Peoria, Illinois
4125 North Sheridan Road Peoria, Illinois (a)
4600 Brandywine Drive Peoria, Illinois
7620 North University Peoria, Illinois (a)
525 West Washington Street Pittsfield, Illinois
- ----------
(a) Leased
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<PAGE>
Illinois (Continued)
Address City
- -------------------- ----------------------
116 East Main Street Princeville, Illinois
706 Maine Street Quincy, Illinois (a)
24th and Broadway Quincy, Illinois
416 West Front Street Roanoke, Illinois
308 Eagle Drive Rochelle, Illinois (a)
612 North Main Street Rockford, Illinois (a)
1601 North Alpine Road Rockford, Illinois
4400 Center Terrace Rockford, Illinois
3333 North Rockton Avenue Rockford, Illinois
116 South Congress Rushville, Illinois
2659 Farragut Drive** Springfield, Illinois (a)
1881 Washington Road Washington, Illinois
200 South Market Waterloo, Illinois
- ----------
(a) Leased
** Loan Origination Office
ITEM 3. LEGAL PROCEEDINGS
FFC and FF Bank are involved as plaintiff or defendant in various legal
actions incidental to their business, all of which in the aggregate are believed
by management of FFC not to represent an adverse risk of loss which would be
material to the financial condition or operations of FFC. See Note Q to FFC's
consolidated financial statements, filed at Exhibit 13(a) hereto, for further
discussion.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated herein by reference
from Management's Discussion and Analysis filed at Exhibit 13(b) hereto. FFC's
Board of Directors has discretion to declare and pay dividends on FFC's common
stock from time to time under Wisconsin law, unless such payment would render
FFC insolvent. Also, see Exhibit 10(k), "Form of Indenture", for further
limitations on payment of dividends on FFC's common stock.
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<PAGE>
Also, relative to OTS restrictions on the payment of dividends by FF Bank
to FFC, see Note L to FFC's consolidated financial statements filed at Exhibit
13(a) hereto. Also, see Item 1, "Business - Regulation".
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data required by this item is incorporated herein
by reference from "Management's Discussion and Analysis" filed at Exhibit 13(b)
hereto.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" is filed at Exhibit 13(b) hereto.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FFC's consolidated financial statements are filed at Exhibit 13(a)
hereto. Quarterly financial information is included as a part of "Management's
Discussion and Analysis of Financial Condition and Results of Operations" filed
at Exhibit 13(b) hereto. Schedule II, filed as an exhibit hereto, includes the
required schedule for "Guarantees of Securities of Other Issuers".
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item regarding directors is incorporated by
reference from pages 5 to 9 and 16 of the proxy statement for FFC's 1996 annual
meeting of shareholders, filed with the Securities and Exchange Commission on
March 12, 1996. Information required by this item regarding executive officers
is included herein at page 28 and regarding directors at pages 5 - 7 of the
proxy statement.
ITEM 11. EXECUTIVE COMPENSATION
The information regarding executive compensation required by this item is
incorporated herein by reference from pages 9 - 15 of the proxy statement for
FFC's 1996 annual meeting of shareholders, filed with the Securities and
Exchange Commission on March 12, 1996.
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<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference
from pages 3 - 4 of the proxy statement for FFC's 1996 annual meeting of
shareholders, filed with the Securities and Exchange Commission on March 12,
1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference
from page 17 of the proxy statement for FFC's 1996 annual meeting of
shareholders, filed with the Securities and Exchange Commission on March 12,
1996.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The following consolidated financial statements of the Registrant
and its subsidiaries for the year ended December 31, 1995, including the related
notes and the report of the independent auditors are incorporated herein by
reference from Exhibit 13(a) of this Report.
Report of Independent Auditors
Consolidated Balance Sheets - December 31, 1995 and 1994.
Consolidated Statements of Income - Years ended December 31, 1995, 1994
and 1993.
Consolidated Statements of Stockholders' Equity - Years Ended December
31, 1995, 1994 and 1993.
Consolidated Statements of Cash Flows - Years Ended December 31, 1995,
1994 and 1993.
Notes to Consolidated Financial Statements.
(a)(2) The following consolidated financial statement schedule of the
Registrant is filed at Exhibit 13(a) to this Report in response to the
requirement of Items 8 and 14(d) of this Report and should be read in
conjunction with the consolidated financial statements incorporated herein by
reference to Item 8 of this Report:
Schedule II - Guarantees of Securities of Other Issuers
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore, have
been omitted.
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<PAGE>
(a)(3) The following exhibits are either filed as part of this Report on
Form 10-K or are incorporated herein by reference.
3(a) Articles of Incorporation of Registrant dated February 21, 1984,
as amended, and restated on January 18, 1995. (Incorporated
herein by reference to Exhibit 3.1 to Pre-Effective Amendment
No. 1 to Registrant's Registration Statement on Form S-4
[Registration No. 33-56823] filed on January 26, 1995).
3(b) Bylaws of the Registrant, as amended (incorporated herein by
reference to the Registrant's Annual Report on Form 10-K filed
on March 25, 1985).
4(b) Form of Certificate of Common Stock (incorporated herein by
reference to Exhibit 4.3 of the Registrant's Registration
Statement on Form S-1 [Registration No. 2-88289] filed on
December 7, 1983).
10(a) Employment Contract of Registrant with John C. Seramur dated
January 1, 1989, (incorporated by reference from Annual Report
on Form 10-K for 1989 filed on March 26, 1990).
10(b) Employment Agreement between Registrant and Robert M. Salinger
dated August 16, 1989, (incorporated by reference from Annual
Report on Form 10-K for 1989 filed on March 26, 1990).
10(c) Deferred Compensation Agreement between First State Savings of
Wisconsin and Paul C. Kehrer (incorporated herein by reference
to Exhibit 10.8 to Amendment No. 2 to Registrant's Registration
Statement on Form S-1 [Registration No. 2-88289] filed on
February 14, 1984).
10(d) Stock Option Plan of Registrant (incorporated herein by
reference to Exhibit 10.4 to Amendment No. 2 to Registrant's
Registration Statement on Form S-1 [Registration No. 2-88289]
filed on February 14, 1984).
10(e) Supplemental Executive Profit Sharing Plan dated December 21,
1987 (incorporated herein by reference to Exhibit 10(q) to
Post-Effective Amendment No. 2 to Registrant's Registration
Statement on Form S-1 [Registration No. 33- 16948] filed on
February 29, 1988).
10(f) Form of Executive Supplemental Life Insurance Plan dated April
10, 1989 (incorporated herein by reference from Annual Report on
Form 10-K for 1989 filed on March 26, 1990).
10(g) Form of Supplemental Executive Retirement Plan dated August 1,
1989, and amended on November 1, 1991 (incorporated herein by
reference from Annual Report on Form 10-K for 1991 filed on
March 27, 1992).
10(h) Employment Agreement between Registrant and Donald E. Peters
dated August 16, 1989 and amended August 19, 1992. (Incorporated
herein by reference from Annual Report on Form 10-K for 1992
filed on March 26, 1993.)
10(i) Employment Agreement between Registrant and Harry K. Hammerling
dated
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<PAGE>
August 16, 1989 and amended August 19, 1992. (Incorporated
herein by reference from Annual Report on Form 10-K for 1992
filed on March 26, 1993.)
10(j) Acquisition Agreement among Westinghouse Financial Services,
Inc., Westinghouse Savings Corporation and FF Bank dated
September 14, 1992 (incorporated herein by reference to the
Current Report filed by the Registrant on Form 8-K on September
29, 1992).
10(k) Form of Indenture between the Registrant and Norwest Bank
Wisconsin, N.A. as trustee relative to issuance of 8.0%
Subordinated Notes due November 1, 1999 (incorporated herein by
reference to Exhibit 4.2 to Amendment No. 1 to Registrant's
Registration Statement on Form S-3 [Registration No. 33-52638]
on October 9, 1992).
10(l) Directors' Retirement Plan dated November 18, 1992.
(Incorporated herein by reference from Annual Report on Form
10-K for 1992 filed on March 26, 1993.)
10(m) Consulting Agreement between Registrant and Robert S.
Gaiswinkler dated January 1, 1993. (Incorporated herein by
reference from Annual Report on Form 10-K for 1992 filed on
March 26, 1993.)
10(n) Agreement and Plan of Merger by and among NorthLand Bank of
Wisconsin, SSB, First Financial Corporation and FF Bank dated
October 13, 1993 (incorporated herein by reference to Exhibit 2
to the Registrant's Registration Statement on Form S-4
[Registration No. 33-51487] filed on December 16, 1993.)
10(o) Deferred Compensation Plan and Trust, dated January 1, 1988 and
amended January 1, 1993. (Incorporated herein by reference from
Annual Report on Form 10-K for 1993 filed on March 29, 1994.)
10(p) Agreement and Plan of Reorganization among First Financial
Corporation, First Financial Acquisition Company, and FirstRock
Bancorp, Inc. dated October 26, 1994 and amended December 5,
1994 (incorporated herein by reference to Exhibits 2.1 and 2.2
to the Registrant's Registration Statement on Form S-4
[Registration No. 33-56823] filed on December 12, 1994).
10(q) Employment Agreement between Registrant and Thomas H.
Neuschaefer dated June 14, 1994. (Incorporated herein by
reference from Annual Report on Form 10-K for 1994 filed on
March 28, 1995.)
10(r) Employment Agreement between Registrant and Kenneth F. Csinicsek
dated June 14, 1994. (Incorporated herein by reference from
Annual Report on Form 10-K for 1994 filed on March 28, 1995.)
10(s) Promissory Note relating to Registrant's commercial bank
line-of-credit agreement dated April 30, 1995.
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<PAGE>
10(t) First Financial Corporation Stock Option Plan III dated April
24, 1991 and restated August 16, 1995.
10(u) First Federal Savings Bank of Rockford, Illinois Employee Stock
Ownership Plan and Trust, amended February 28, 1995 to reflect
a) adoption by FF Bank as successor plan sponsor and b) related
amendments thereto.
11 Computation of Earnings Per Share
13(a) Consolidated Financial Statements
13(b) Management's Discussion and Analysis of Financial Condition and
Results of Operations
22 Subsidiaries of the Registrant
24 Consent of Ernst & Young LLP for Registration Statement No.
2-90005 as filed with the Securities and Exchange Commission
("SEC") on March 16, 1984, Registration Statement No. 33-17304
as filed with the SEC on September 17, 1987, Post-Effective
Amendment No. 5 to Form S-1 on Form S-8 [Registration No.
33-16948] as filed with the SEC on May 12, 1988, Registration
Statement No. 33-36295 as filed with the SEC on August 9, 1990,
Registration Statement No. 33-69856 as filed with the SEC on
October 1, 1993, Registration Statement No. 33-51487 filed with
the SEC on January 13, 1994 and Registration Statement No.
33-55823 filed with the SEC on January 27, 1995.
27 Financial Data Schedule
(b) Reports on Form 8-K.
None.
(c) Exhibits to this Report on Form 10-K required by Item 601 of
Regulation S-K are attached or incorporated herein by reference
as stated in the Index to Exhibits.
(d) The report of independent auditors and the financial statement
schedules listed in subsections (a)(1) and (2) above are filed
at Exhibits 13(a) to this Report on Form 10-K in response to the
requirements of Items 8 and 14(d) of this Report on Form 10-K.
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By: /s/ John C. Seramur
----------------------------------
John C. Seramur
President
Chief Executive Officer
Date: March 20, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
By: /s/ John C. Seramur By: /s/ Thomas H. Neuschaefer
------------------------------ ----------------------------
John C. Seramur Thomas H. Neuschaefer
President Vice President, Treasurer and
Chief Executive Officer Chief Financial Officer
Director Date: March 20, 1996
Date: March 20, 1996
By: /s/ Robert S. Gaiswinkler
----------------------------
Robert S. Gaiswinkler
Chairman of the Board
Director
Date: March 20, 1996
By: /s/ Gordon M. Haferbecker By: /s/ James O. Heinecke
------------------------------ ------------------------
Gordon M. Haferbecker James O. Heinecke
Director Director
Date: March 20, 1996 Date: March 20, 1996
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<PAGE>
By: /s/ Robert T. Kehr By: /s/ Paul C. Kehrer
------------------------------- ---------------------
Robert T. Kehr Paul C. Kehrer
Director Director
Date: March 20, 1996 Date: March 20, 1996
By: /s/ Robert P. Konopacky By: /s/ Dr. George R. Leach
-------------------------------- --------------------------
Robert P. Konopacky Dr. George R. Leach
Director Director
Date: March 20, 1996 Date: March 20, 1996
By: /s/ Ignatius H. Robers By: /s/ John H. Sproule
-------------------------------- ----------------------
Ignatius H. Robers John H. Sproule
Director Director
Date: March 20, 1996 Date: March 20, 1996
By: /s/ Ralph R. Staven By: /s/ Norman L. Wanta
-------------------------------- ---------------------
Ralph R. Staven Norman L. Wanta
Director Director
Date: March 20, 1996 Date: March 20, 1996
By: /s/ Arlyn G. West
--------------------------------
Arlyn G. West
Director
Date: March 20, 1996
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<PAGE>
EXHIBIT INDEX
Schedule II Guarantees of Securities of Other Issuers
3(a) Articles of Incorporation of Registrant dated February 21, 1984,
as amended, and restated on January 18, 1995. (Incorporated
herein by reference to Exhibit 3.1 to Pre-Effective Amendment
No. 1 to Registrant's Registration Statement on Form S-4
[Registration No. 33-56823] filed on January 26, 1995).
3(b) Bylaws of the Registrant, as amended (incorporated herein by
reference to the Registrant's Annual Report on Form 10-K filed
on March 25, 1985).
4(b) Form of Certificate of Common Stock (incorporated herein by
reference to Exhibit 4.3 of the Registrant's Registration
Statement on Form S-1 [Registration No. 2-88289] filed on
December 7, 1983).
10(a) Employment Contract of Registrant with John C. Seramur dated
January 1, 1989, (incorporated by reference from Annual Report
on Form 10-K for 1989 filed on March 26, 1990).
10(b) Employment Agreement between Registrant and Robert M. Salinger
dated August 16, 1989, (incorporated by reference from Annual
Report on Form 10-K for 1989 filed on March 26, 1990).
10(c) Deferred Compensation Agreement between First State Savings of
Wisconsin and Paul C. Kehrer (incorporated herein by reference
to Exhibit 10.8 to Amendment No. 2 to Registrant's Registration
Statement on Form S-1 [Registration No. 2-88289] filed on
February 14, 1984).
10(d) Stock Option Plan of Registrant (incorporated herein by
reference to Exhibit 10.4 to Amendment No. 2 to Registrant's
Registration Statement on Form S-1 [Registration No. 2-88289]
filed on February 14, 1984).
10(e) Supplemental Executive Profit Sharing Plan dated December 21,
1987 (incorporated herein by reference to Exhibit 10(q) to
Post-Effective Amendment No. 2 to Registrant's Registration
Statement on Form S-1 [Registration No. 33- 16948] filed on
February 29, 1988).
10(f) Form of Executive Supplemental Life Insurance Plan dated April
10, 1989 (incorporated herein by reference from Annual Report on
Form 10-K for 1989 filed on March 26, 1990).
10(g) Form of Supplemental Executive Retirement Plan dated August 1,
1989, and amended on November 1, 1991 (incorporated herein by
reference from Annual Report on Form 10-K for 1991 filed on
March 27, 1992).
10(h) Employment Agreement between Registrant and Donald E. Peters
dated August 16, 1989 and amended August 19, 1992. (Incorporated
herein by reference from Annual Report on Form 10-K for 1992
filed on March 26, 1993.)
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<PAGE>
10(i) Employment Agreement between Registrant and Harry K. Hammerling
dated August 16, 1989 and amended August 19, 1992. (Incorporated
herein by reference from Annual Report on Form 10-K for 1992
filed on March 26, 1993.)
10(j) Acquisition Agreement among Westinghouse Financial Services,
Inc., Westinghouse Savings Corporation and FF Bank dated
September 14, 1992 (incorporated herein by reference to the
Current Report filed by the Registrant on Form 8-K on September
29, 1992).
10(k) Form of Indenture between the Registrant and Norwest Bank
Wisconsin, N.A. as trustee relative to issuance of 8.0%
Subordinated Notes due November 1, 1999 (incorporated herein by
reference to Exhibit 4.2 to Amendment No. 1 to Registrant's
Registration Statement on Form S-3 [Registration No. 33-52638]
on October 9, 1992).
10(l) Directors' Retirement Plan dated November 18, 1992.
(Incorporated herein by reference from Annual Report on Form
10-K for 1992 filed on March 26, 1993.)
10(m) Consulting Agreement between Registrant and Robert S.
Gaiswinkler dated January 1, 1993. (Incorporated herein by
reference from Annual Report on Form 10-K for 1992 filed on
March 26, 1993.)
10(n) Agreement and Plan of Merger by and among NorthLand Bank of
Wisconsin, SSB, First Financial Corporation and FF Bank dated
October 13, 1993 (incorporated herein by reference to Exhibit 2
to the Registrant's Registration Statement on Form S-4
[Registration No. 33-51487] filed on December 16, 1993.)
10(o) Deferred Compensation Plan and Trust, dated January 1, 1988 and
amended January 1, 1993. (Incorporated herein by reference from
Annual Report on Form 10-K for 1993 filed on March 29, 1994.)
10(p) Agreement and Plan of Reorganization among First Financial
Corporation, First Financial Acquisition Company, and FirstRock
Bancorp, Inc. dated October 26, 1994 and amended December 5,
1994 (incorporated herein by reference to Exhibits 2.1 and 2.2
to the Registrant's Registration Statement on Form S-4
[Registration No. 33-56823] filed on December 12, 1994).
10(q) Employment Agreement between Registrant and Thomas H.
Neuschaefer dated June 14, 1994. (Incorporated herein by
reference from Annual Report on Form 10-K for 1994 filed on
March 28, 1995.)
10(r) Employment Agreement between Registrant and Kenneth F. Csinicsek
dated June 14, 1994. (Incorporated herein by reference from
Annual Report on Form 10-K for 1994 filed on March 28, 1995.)
10(s) Promissory Note relating to Registrant's commercial bank
line-of-credit agreement dated April 30, 1995.
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<PAGE>
10(t) First Financial Corporation Stock Option Plan III dated April
24, 1991 and restated August 16, 1995.
10(u) First Federal Savings Bank of Rockford, Illinois Employee Stock
Ownership Plan and Trust, amended February 28, 1995 to reflect
a) adoption by FF Bank as successor plan sponsor and b) related
amendments thereto.
11 Computation of Earnings Per Share
13(a) Consolidated Financial Statements
13(b) Management's Discussion and Analysis of Financial Condition and
Results of Operations
22 Subsidiaries of the Registrant
24 Consent of Ernst & Young LLP for Registration Statement No.
2-90005 as filed with the SEC on March 16, 1984, Registration
Statement No. 33-17304 as filed with the SEC on September 17,
1987, Post-Effective Amendment No. 5 to Form S-1 on Form S-8
[Registration No. 33-16948] as filed with the SEC on May 12,
1988, Registration Statement No. 33-36295 as filed with the SEC
on August 9, 1990, Registration Statement No. 33-69856 as filed
with the SEC on October 1, 1993, Registration Statement No.
33-51487 filed with the SEC on January 13, 1994 and Registration
Statement No. 33-55823 filed with the SEC on January 27, 1995.
27 Financial Data Schedule
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<PAGE>
SCHEDULE II - GUARANTEES OF SECURITIES OF OTHER ISSUERS
-48-
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II - GUARANTEES OF SECURITIES OF OTHER ISSUERS
FIRST FINANCIAL CORPORATION
DECEMBER 31, 1995
Column A Column B Column C Column D Column E Column F Column G
Amount Default By Issuer
Owned By Of Securities
Person Amount In Guaranteed
Total Or Treasury In Principal,
Name Of Amount Persons Of Interest, Sinking
Issuer of Securities Title Of Issue Guaranteed For Which Issuer Of Fund or Redemption
Guaranteed By Person For Of Each Class Of And Statement Securities Nature Of Provisions, or
Which Statement Is Filed Securities Guaranteed Outstanding Is Filed Guaranteed Guarantee Payment Of
<S> <C> <C> <C> <C> <C> <C>
Industrial Development Revenue Bonds:
City of Greenfield, WI $3,185,000 Industrial
Edgewood Plaza Joint Development Revenue
Venture Refunding Bonds,
Series 1992 $ 2,580,000 None None P&I None
City of Maplewood, MN $4,525,000 Variable
Angeles Partners 16, A Rate Demand Multi-
California Limited family Housing Revenue
Partnership Refunding Bonds,
Series 1993 4,525,000 None None P&I None
City of Maple Grove, MN
Maple Investments, a $2,300,000 Industrial
Minnesota General Part- Revenue Bonds, Series
nership 1986 2,000,000 None None P&I None
Housing Authority For $7,000,000 Convertible
The City of Waukesha, Variable Rate Demand
WI, Caroline Apart- Multifamily Housing
ments Limited Part- Revenue Bonds,
nership Series A 1,890,000(1) None None P&I None
TOTAL $10,995,000
<FN>
P&I = Principal and Interest Payments on Securities Guaranteed.
(1) Refinanced on February 5, 1996 without the guarantee of FF Bank.
</FN>
</TABLE>
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<PAGE>
EXHIBIT 10(s) - PROMISSORY NOTE
<PAGE>
FIRST FINANCIAL CORPORATION
PROMISSORY NOTE
$18,000,000.00 Milwaukee, Wisconsin
April 30, 1995
SECTION 1. FOR VALUE RECEIVED, FIRST FINANCIAL CORPORATION, a
Wisconsin corporation (the "Company"), hereby promises to pay to the order of
M&I MARSHALL & ILSLEY BANK, a Wisconsin banking corporation ("M&I"), the
principal sum of EIGHTEEN MILLION AND 00/100 DOLLARS ($18,000,000.00) or such
lesser amount of loans which remain outstanding under this Note on April 30,
1996. The unpaid principal shall bear interest from the date hereof until paid,
computed on the basis of a 360 day year, at an annual rate equal to the prime
rate of interest (the "Prime Rate") adopted by M&I from time to time as the base
rate for interest rate determinations, changing on each day that the Prime Rate
changes. Interest shall be payable monthly in arrears on the first day of each
month in each year, commencing on June 1, 1995 and continuing thereafter until
the principal is paid in full, with a final payment of interest due at maturity.
The Company agrees to pay interest on any overdue amounts at the Prime Rate plus
2%. Each loan shall be in an integral multiple of One Hundred Thousand and
00/100 Dollars ($100,000.00) and shall be made on telephonic notice from an
authorized officer of the Company to M&I. The Company may reborrow any amounts
paid or prepaid on this Note, provided, however, that the aggregate amount of
loans outstanding hereunder shall never exceed $18,000,000.00. All interest
under this Note shall be computed for the actual number of days elapsed on the
basis of a 360 day year.
Payments of both principal and interest are to be made in lawful
money of the United States of America at the offices of M&I Marshall & Ilsley
Bank, Attention: Loan and Discount Department, 770 North Water Street,
Milwaukee, Wisconsin 53201, or at such other place as the holder shall designate
in writing to the maker.
SECTION 2. PREPAYMENT. The Company may, at any time and from time
to time, prepay the loan in whole or in part without premium or penalty. At the
time of making any prepayment, the Company shall pay all accrued interest upon
the amount prepaid.
SECTION 3. The Company hereby waives presentment for payment,
protest and demand, notice of protest, demand and of dishonor and nonpayment of
this Note.
SECTION 4. DEFINITIONS. When used in this Note, the following
terms shall have the meanings specified:
Automatic Event of Default. "Automatic Event of Default" shall
mean any one or more of the following:
(a) the Company or FFB, shall: (i) become insolvent or take or
fail to take any action which constitutes an admission of inability to pay its
debts as they mature, (ii) make a general assignment for the benefit of
creditors or to an agent authorized to liquidate any substantial amount of its
assets, (iii) become the subject of an "order for relief" within the meaning of
the United State Bankruptcy Code, (iv) file a petition in bankruptcy, or for
reorganization, or to effect a plan or other arrangement with creditors, (v)
file an answer to a creditor's petition, admitting the material allegations
thereof, for an adjudication of bankruptcy
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<PAGE>
or for reorganization or to effect a plan or other arrangement with creditors,
(vi) apply to a court for the appointment of a receiver or custodian for any of
its assets or properties, or (vii) have a receiver or custodian appointed for
any of its assets or properties, with or without consent, and such receiver
shall be discharged within sixty (60) days after his appointment; or
(b) the Company or FFB adopts a plan of complete liquidation of
its assets.
Consolidated Assets. "Consolidated Assets" shall mean all
consolidated assets of the Company and all Subsidiaries but shall not include
goodwill, patents, trademarks, trade names, copyrights and other assets properly
classified as intangible assets.
Event of Default. "Event of Default" shall mean any automatic
Event of Default and any Notice Event of Default.
FFB. "FFB" means First Financial Bank, F.S.B.
Indebtedness. "Indebtedness" shall mean, as to any Person, all
liabilities or obligations of that Person, whether primary or secondary or
absolute or contingent: (a) for borrowed money, whether secured or unsecured;
(b) evidenced by notes, bonds, debentures, guarantees, endorsements or similar
obligations; (c) for capital lease obligations; (d) secured by any Liens or (e)
for deferred indebtedness whether secured or unsecured, incurred in connection
with the acquisition or carrying of property.
Lien. "Lien" shall mean, with respect to any asset: (a) any
mortgage, pledge, lien, charge, security interest or encumbrance of any kind;
and (b) the interest of a vendor or lessor under any conditional sale agreement,
financing lease or other title retention agreement relating to such asset.
Notice Event of Default. "Notice Event of default" shall mean any
one or more of the following and such failure or default remains uncured for a
period of thirty (30) days after notice of such occurrence is given by M&I to
the Company:
(a) the Company shall fail to pay when due any installment of the
principal of or interest upon this Note;
(b) there shall be a default in the performance or observance of
any of the covenants and agreements contained in this Note;
(c) there shall be a default in the performance or observance of
any of the covenants and agreements contained in the Pledge Agreement or
contained in other instruments delivered by the Company to M&I;
(d) any representation or warranty made by the Company in this
Note or in any document or financial statement delivered to M&I pursuant to this
Note shall prove to have been false in any material respect as of the time when
made or given;
(e) the amount of any final judgment entered against the Company
or any Subsidiary, when added to the amount of all other final judgments against
the Company and all Subsidiaries, exceeds the aggregate amount of $1,000,000 and
such final judgments shall remain outstanding and unsatisfied, unbonded or
unstayed after thirty (30) days from the date of entry thereof; or
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<PAGE>
(f) the Company or FFB defaults on any Indebtedness in excess of
$500,000 other than the loans represented by the Note, or the Company's or FFB's
failure to perform or observe any term, covenant or condition for other
Indebtedness in excess of $500,000 if the effect of such failure is to
accelerate such Indebtedness and require such Indebtedness to be prepaid prior
to maturity.
Person. "Person" shall mean and include an individual,
partnership, corporation, trust, incorporated organization and a government or
any department or agency thereof.
Pledge Agreement. "Pledge Agreement" shall mean the Collateral
Pledge Agreement between the Company and M&I dated June 29, 1990, as amended by
the First Amendment to Collateral Pledge Agreement dated as of May 1, 1991
between the Company and M&I, a Second Amendment to Collateral Pledge Agreement
dated as of April 30, 1992, a Third Amendment to Collateral Pledge Agreement
dated as of November 30, 1992, a Fourth Amendment to Collateral Pledge Agreement
dated April 30, 1993, a Fifth Amendment to Collateral Pledge Agreement dated
April 30, 1994, and a Sixth Amendment to Collateral Pledge Agreement dated April
30, 1995, and as further amended from time to time.
Subsidiary. "Subsidiary" shall mean any corporation at least fifty
percent (50%) of the outstanding stock of which (of any class or classes,
however designated, having ordinary voting power for the election of at least a
majority of the members of the board of directors of such corporation, other
than stock having such power only by reason of the happening of a contingency)
shall at the time be owned by the Company directly or through FFB; provided,
however, that an affiliate of FFB shall only be considered a Subsidiary if such
entity is reflected in the annual consolidated and consolidating financial
statements of the Company and all Subsidiaries described in Section 5.5(b)
hereof or in any footnotes to such financial statements.
SECTION 5. Covenants. From and after the date of this Note and
until the entire amount of principal and interest due under the Note and the
entire amounts of fees and payments due under this Note and the Collateral
Pledge Agreement are paid in full:
5.1 Indebtedness. The Company will not, and will cause each
Subsidiary to not, at any time permit the sum of the following described
Indebtedness to exceed 15% of Consolidated Assets:
(a) Indebtedness of the Company and all Subsidiaries to the
Federal Home Loan Bank System; plus
(b) the maximum amount of Indebtedness which the Company and all
Subsidiaries could incur under commitments made by M&I; plus
(c) all other Indebtedness of the Company and all Subsidiaries.
5.2 Asset/Liability Ratio. The Company, on a consolidated basis,
will not at any time allow earning assets that mature or are repriced within one
year to fall below 84% or rise above 116% of liabilities that mature or are
repriced within one year, such assets and liabilities being classified according
to regulatory requirements as reported by the Subsidiaries to the Office of
Thrift Supervision.
5.3 Risk-Based Capital Ratio. The Company shall cause FFB to
maintain at all times Risk-Based Capital, as measured by the Office of Thrift
Supervision, of at least 8% of
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<PAGE>
Risk Weighted Assets, as measured by the Office of Thrift Supervision.
5.4 Liquidity. The Company and its Subsidiaries shall maintain
Cash and Interest- earning Deposits, as defined in accordance with generally
accepted accounting principles, of at least 4.5% of Consolidated Assets.
5.5 Reporting Requirements. The Company shall furnish to M&I such
information respecting the business, assets and financial condition of the
Company and the Subsidiaries as M&I may reasonably request and without request
furnish to M&I:
(a) within 45 days after the end of each fiscal quarter in each
fiscal year, a consolidated and consolidating balance sheet of the Company and
all Subsidiaries as of the end of each such fiscal quarter and of the comparable
fiscal quarter in the preceding fiscal year and consolidated and consolidating
statements of income, stockholders equity and cash flow of the Company and all
Subsidiaries for each such fiscal quarter and for that part of the fiscal year
ending with each fiscal quarter and for the corresponding periods of the
preceding fiscal year, all in reasonable detail and certified as true and
correct, subject to audit and normal year-end adjustments, by the chief
financial officer of the Company; and
(b) as soon as available, and in any event within 120 days after
the close of each fiscal year, a copy of the detailed annual audit report for
such year and accompanying consolidated and consolidating financial statements
of the Company and all Subsidiaries prepared in reasonable detail and in
accordance with generally accepted accounting principles consistently applied by
public accountants of recognized standing selected by the Company, and
reasonably satisfactory to M&I, which audit report shall be accompanied by: (i)
an opinion of such accountants, in form and substance reasonably satisfactory to
M&I to the effect that the same fairly presents the consolidated financial
condition and the consolidated results of operations of the Company and all
Subsidiaries for the periods and as of the relevant dates thereof, and (ii) a
certificate of such accountants setting forth their computations as to the
Company's compliance with Sections 5.1, 5.2, 5.3 and 5.4 of this Note and
stating that in the ordinary course of their audit, conducted in accordance with
generally accepted auditing practices, they did not become aware of any Event of
Default or, if their audit disclosed an Event of Default, a specification of the
Event of Default and the actions taken or proposed to be taken by the Company
with respect thereto; and
(c) promptly after the same are available, copies of all such
proxy statements, reports and financial statements as the Company shall send to
its stockholders; and
(d) together with each delivery required by Sections 5.5(a) and
(b) of this Note, a certificate of the Company in form reasonably satisfactory
to M&I as to the Company's compliance with the covenants contained in this Note;
and
(e) promptly after the same are available, copies of all reports
submitted to the Company or any Subsidiary by independent certified public
accountants in connection with any annual or special audit made of the books and
records of the Company or any Subsidiary or relating to the management,
operation, accounting procedures or internal controls of the Company or any
Subsidiary.
5.6 Inspection of Properties and Records. The Company shall, and
shall cause each Subsidiary to, permit representatives of M&I to visit any of
its properties and examine any of its books and records at any reasonable time
and as often as may be reasonably desired and
-4-
<PAGE>
facilitate such inspection and examination.
SECTION 6. REMEDIES.
6.1 Acceleration. (a) Upon the occurrence of an Automatic Event of
Default, then, without notice, demand or action of any kind by M&I, the entire
amount of unpaid principal and accrued and unpaid interest under this Note and
the entire amount of unpaid fees and expenses under this Note shall be
automatically and immediately due and payable.
(b) Upon the occurrence of a Notice Event of Default, M&I may, by
written notice to the Company, declare that the entire amount of unpaid
principal and accrued and unpaid interest under this Note and the entire amount
of unpaid fees and expenses under this Note are immediately due and payable.
(c) No remedy herein conferred upon M&I is intended to be
exclusive of any other remedy and each and every such remedy shall be cumulative
and shall be in addition to every other remedy given under this Note or the
Pledge Agreement or now or hereafter existing by law. No failure or delay on the
part of M&I in exercising any right or remedy shall operate as a waiver thereof
nor shall any single or partial exercise of any right preclude other or further
exercise thereof or the exercise of any other right or remedy.
6.2 Fees, Expenses and Attorney's Fees. The Company shall pay all
reasonable fees and expenses incurred by M&I, including the reasonable fees of
counsel, in connection with the maintenance, reissuance and amendment of this
Note, the Pledge Agreement and the consummation of the transactions contemplated
by this Note and the administration, protection or enforcement of M&I's rights
under this Note and the Pledge Agreement.
FIRST FINANCIAL CORPORATION
(CORPORATE SEAL)
By /s/John C. Seramur
--------------------------
John C. Seramur, President
Attest:
/s/Robert M. Salinger
------------------------------
Robert M. Salinger, Secretary
-5-
<PAGE>
EXHIBIT 10(T)
STOCK OPTION PLAN III
<PAGE>
RESTATED
FIRST FINANCIAL CORPORATION
STOCK OPTION PLAN III
1. PURPOSE
This Stock Option Plan III (the "Option Plan") is intended as a
performance incentive and to encourage stock ownership by officers, other
employees and directors of First Financial Corporation (the "Corporation") or of
other corporations in which stock possessing 50 percent or more of the total
combined voting power is owned directly or indirectly by the Corporation (the
"Subsidiaries"), so that the person to whom the option is granted (the
"Optionee") may acquire or increase his or her proprietary interest in the
success of the Corporation, and to encourage the Optionee to remain in the
employ or service of the Corporation or of its Subsidiaries. It is intended that
options granted under the Option Plan will qualify as incentive stock options
("Incentive Options") within the meaning of Section 422 of the Internal Revenue
Code of 1986, or the corresponding provision of any subsequently-enacted tax
statute, as amended from time to time (the "Code"), except for (i) options
specifically designated at the time of grant as not being Incentive Options,
(ii) options granted to employees in excess of the limitations provided in
Section 4(d) hereof, and (iii) options granted to directors who are not
employees of the Corporation or its Subsidiaries.
2. ADMINISTRATION
(a) The Option Plan shall be administered by a committee of not less than
two directors of the Corporation, none of whom is an officer or other salaried
employee of the Corporation or any Subsidiary. The members of this committee
(the "Option Committee") shall be appointed by the Board of Directors. A
majority vote of the members of the full Option Committee shall be required for
all its actions.
(b) The Option Committee shall have the power, subject to, and within the
limits of, the express provisions of the Option Plan:
(i) To determine from time to time which of the eligible persons
(other than members of the Option Committee) shall be granted
options under the Option Plan, and the time or times when, and
the number of shares for which, an option or options shall be
granted to such persons;
(ii) To prescribe the other terms and provisions (which need not
be identical) of each option granted under the Option Plan to
eligible persons (other than members of the Option Committee);
(iii) To construe and interpret the Option Plan and options
granted under it, and to establish, amend, and revoke rules and
regulations for administration. The Option Committee, in the
exercise of this power, may correct any defect or supply any
omission, or reconcile any inconsistency in the Option Plan, or
in any option agreement, in the manner and to the extent it shall
deem necessary or expedient to make the Option Plan fully
effective. In exercising this power, the Option Committee may
retain counsel at the expense of the Corporation. All
Restated August 16, 1995
decisions and determinations by the Option Committee in
exercising this power
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<PAGE>
shall be final and binding upon the Corporation and the Optionees;
(iv) To determine the duration and purposes of leaves of absence
which may be granted to an Optionee (other than a member of the
Option Committee) without constituting a termination of his or
her employment or service for purposes of the Option Plan; and
(v) Generally, to exercise such powers and to perform such acts
as are deemed necessary or expedient to promote the best
interests of the Corporation with respect to the Option Plan.
(c) The Board of Directors (with members of the Option Committee not
voting) shall administer the Option Plan with respect to options granted to
members of the Option Committee in accordance with the provisions of Section 4.
3. STOCK
(a) The stock subject to the options shall be shares of the Corporation's
authorized but unissued common stock, par value $1.00 per share (the "Common
Stock"). The number of shares for which options may be granted, excluding the
shares covered by the unexercised portion of any cancelled, terminated or
expired options shall not exceed an aggregate of 550,000 shares of Common Stock.
Such number shall be subject to adjustment as provided in Section 8 hereof.
(b) Whenever any outstanding option under the Option Plan expires, is
cancelled or is otherwise terminated, the shares of Common Stock allocable to
the unexercised portion of such option may again be subjected to options under
the Option Plan.
4. ELIGIBILITY
(a) The persons who shall be eligible to receive options shall be
officers, other full-time employees (i.e., persons employed 1,000 or more hours
per year) and directors of the Corporation or its direct or indirect
Subsidiaries. The Option Committee may from time to time grant options to one or
more eligible persons (other than members of the Option Committee). The Board of
Directors (with members of the Option Committee not voting) may from time to
time grant options to one or more members of the Option Committee. An optionee
may hold more than one option.
(b) No person shall be granted an Incentive Option if, at the time of the
grant, such person owns, directly or indirectly, more than ten percent of the
total combined voting power of the Corporation or of its parent or subsidiary
[as defined in Sections 424(e) and (f) of the Code] unless the option price is
at least 110 percent of the fair market value of the Common Stock and the
exercise period of such Incentive Option is by its terms limited to five years.
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<PAGE>
(c) The maximum number of shares of Common Stock for which options may be
granted to any director, who is not a full-time salaried employee of the
Corporation or any Subsidiary, shall not exceed two percent of the shares of
Common Stock covered by the Option Plan. The total number of shares of Common
Stock which may be granted under the Option Plan to all eligible persons not
employed on a full-time salaried basis by the Corporation or any Subsidiary,
shall not in the aggregate exceed 20 percent of the shares of Common Stock
covered by the Option Plan. The maximum number of shares of Common Stock for
which options may be granted to any employee director shall not exceed four
percent of the outstanding Common Stock.
(d) To the extent required by Section 422A of the Code, the aggregate fair
market value (determined at the time the option is granted) of the stock with
respect to which Incentive Options are exercisable for the first time by an
Optionee during any calendar year (under the Plan and all other plans of the
Optionee's employer corporation and its parent and subsidiary corporations
within the meaning of Section 422(d) of the Code) shall not exceed $100,000. Any
options granted in excess of the foregoing limitations shall be clearly and
specifically designated as not being Incentive Options and shall be separately
issued. Nothing contained herein shall prohibit a grant of non-qualified
options, regardless of whether Incentive Options are granted to such person in
such year.
5. TERMS OF THE OPTION AGREEMENTS
Each option agreement shall contain such provisions as the Option
Committee (or the Board of Directors with respect to members of the Option
Committee) shall from time to time deem appropriate. Option agreements need not
be identical, but each option agreement by appropriate language shall include
the substance of all of the following provisions:
(a) Any option shall expire on the date specified in the option agreement,
which date shall not be later than the tenth anniversary of the date on which
the option was granted. All options must be granted by the tenth anniversary of
the date the Option Plan was adopted.
(b) The minimum number of shares with respect to which an option may be
exercised at any one time shall be 100 shares, unless the number purchased is
the total number at the time available for purchase under the option.
(c) Each option shall be exercisable in such installments (which need not
be equal) and at such times as designated by the Option Committee (or the Board
of Directors with respect to the Option Committee). To the extent not exercised,
installments shall accumulate and be exercisable, in whole or in part, at any
time after becoming exercisable, but not later than the date the option expires.
Unless otherwise designated in accordance with applicable laws, no option shall
be exercisable within two years of the date on which the option was granted
except in the event of a change in control or threatened change in control of
the Corporation. In such event, all options granted prior to such change in
control or threatened change in control shall become immediately exercisable.
The term "change in control" shall refer to the acquisition of 10 percent or
more of the voting securities of the Corporation by any person or persons acting
as a group within the meaning of Section 13(d) of the Securities Exchange Act of
1934; provided, however, that for purposes of the Option Plan no change in
control or threatened change in control shall be deemed to have occurred if
prior to the acquisition of, or offer to acquire, 10 percent or more of the
voting securities of the Corporation, the full Board of Directors shall have
adopted by not less than a two-thirds vote a resolution specifically approving
such acquisition or offer. The term "person" refers to an
-3-
<PAGE>
individual or a corporation, partnership, trust, association, joint venture,
pool syndicate, sole proprietorship, unincorporated organization or any other
form of entity not specifically listed herein.
(d) The purchase price per share of Common Stock under each option shall
not be less than the fair market value of the Common Stock subject to the option
on the date the option is granted and shall otherwise comply with applicable
state law. For this purpose, the fair market value of the Common Stock shall be
determined by the Option Committee (or the Board of Directors with respect to
the Option Committee); provided, however, that (i) if the Common Stock is
admitted to quotation on the National Association of Securities Dealers
Automated Quotation System on the date the option is granted, fair market value
shall not be less than the average of the highest bid and lowest asked prices of
the Common Stock on such System on such date, or (ii) if the Common Stock is
admitted to trading on a national securities exchange on the date the option is
granted, fair market value shall not be less than the last sale price reported
for the Common Stock on such exchange on such date or on the last date preceding
such date on which a sale was reported.
(e) The Optionee shall not be deemed to be the holder of, or to have any
of the rights of a holder with respect to, any shares of Common Stock subject to
such option unless and until the option shall have been exercised pursuant to
the terms thereof, the Corporation shall have issued and delivered the shares to
the Optionee, and the Optionee's name shall have been entered as a stockholder
of record on the books of the Corporation. Thereupon, the Optionee shall have
full voting, dividend and other ownership rights with respect to such shares of
Common Stock. A separate stock certificate or certificates shall be issued for
any shares purchased pursuant to the exercise of an option that is an Incentive
Option which certificate or certificates shall not include any shares that were
purchased pursuant to the exercise of an option that is not an Incentive Option.
(f) Except as provided in Section 9 hereof,
(i) Subject to Section 5(f)(iii), all options granted pursuant to
the Option Plan shall not be transferable except by will or the
laws of descent and distribution, and shall be exercisable during
the Optionee's lifetime only by the Optionee;
(ii) Subject to Section 5(f)(iii), no assignment or transfer of
the option, or of the rights represented thereby, whether
voluntary or involuntary, by operation of law or otherwise, shall
vest in the assignee or transferee any interest or right in the
option whatsoever, but immediately upon any attempt to assign or
transfer the option the same shall terminate and be of no force
and effect; and
(iii) In addition to nontransferable options, the Option
Committee may grant nonqualified stock options that are
transferable, without payment of consideration, to immediate
family members of the optionee or to trusts or partnerships for
such family members; the Committee may also amend outstanding
nonqualified stock options to permit for such transferability.
(g) The option shall be subject to any provision necessary to assure
compliance with federal and state securities laws.
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<PAGE>
6. METHOD OF EXERCISE AND PAYMENT OF PURCHASE PRICE
(a) An option may be exercised by the Optionee delivering to the Option
Committee (or the Board of Directors with respect to the Option Committee) on
any business day a written notice specifying the number of shares of Common
Stock the Optionee then desires to purchase (the "Notice"), accompanied by
payment in full of the option price for such shares.
(b) Payment for the shares of Common Stock purchased pursuant to the
exercise of an option shall be made, in the discretion of the Option Committee
(or the Board of Directors with respect to the Option Committee) as set forth in
the option agreement related to an option, in either (i) cash equal to the
option price for the number of shares specified in Notice (the "Total Option
Price"), or (ii) in shares of Common Stock of the Corporation with a fair market
value, determined as provided in Section 5 hereof, equal to or less than the
Total Option Price, plus cash in an amount equal to the excess, if any, of the
Total Option Price over the fair market value of the tendered shares.
(c) The Corporation will accept as payment for the exercise of an option
the delivery of an irrevocable option exercise notice coupled with irrevocable
instructions to a designated broker to simultaneously sell the stock and deliver
to the Corporation on the settlement date that portion of the sales proceeds
representing the exercise price.
7. USE OF PROCEEDS FROM STOCK
Proceeds from the sale of Common Stock pursuant to options granted under
the Option Plan shall constitute general funds of the Corporation to be used
primarily for home mortgage and consumer lending.
8. ADJUSTMENT UPON CHANGES IN CAPITALIZATION
(a) If the shares of the Corporation's Common Stock as a whole are
increased, decreased or changed into, or exchanged for a different number or
kind of shares or securities of the Corporation, whether through merger,
consolidation, reorganization, recapitalization, reclassification, stock
dividend, stock split, combination of shares, exchange of shares, change in
corporate structure or the like, an appropriate and proportionate adjustment
shall be made in the number and kinds of shares subject to the Option Plan, and
in the number, kinds, and per share exercise price of shares subject to
unexercised options or portions thereof granted prior to any such change. Any
such adjustment in an outstanding option, however, shall be made without a
change in the total price applicable to the unexercised portion of the option
but with corresponding adjustment in the price for each share of Common Stock
covered by the option.
(b) Upon dissolution or liquidation of the Corporation, or upon a
reorganization, merger or consolidation in which the Corporation is not the
surviving corporation, or in which the Corporation becomes a subsidiary of
another corporation, or upon the sale of substantially all of the property of
the Corporation to another corporation, the Option Plan and the options issued
thereunder shall terminate, unless provision is made in connection with such
transaction for the assumption of options theretofore granted, or the
substitution for such options of new options of the successor employer
corporation or a parent or subsidiary thereof, with appropriate adjustments as
to the number and kinds of shares and the per share exercise prices. In the
event of such termination, all outstanding options shall be exercisable in full
for at least 30 days prior to the termination date whether or not otherwise
-5-
<PAGE>
exercisable during such period, but not later than the date the option expires.
(c) Adjustments under this Section shall be made by the Option Committee,
whose determination as to what adjustment shall be made, and the extent thereof,
shall be conclusive. The Option Committee shall have the discretion and power in
any such event to determine and to make effective provision for the acceleration
of the time during which the option may be exercised, notwithstanding the
provisions of the option setting forth the date or dates on which all or any
part of it may be exercised. No fractional shares of Common Stock shall be
issued under the Option Plan on account of any adjustment specified above.
9. TERMINATION OF EMPLOYMENT OR SERVICE
(a) In the event of the death of an Optionee while in the employ or
service of the Corporation or its Subsidiaries, the option, whether or not then
exercisable, may be exercised, as provided in Section 6 hereof, by the estate of
the Optionee or by a person who acquired the right to exercise such option by
bequest or inheritance from such Optionee, within one year after the date of
such death but not later than the date on which the option would otherwise
expire.
(b) If the employment or service of an Optionee is terminated by reason of
disability as defined in Section 22(e)(3) of the Code, the options held by such
Optionee may be exercised, whether or not exercisable at the time of such
termination, within one year after such termination but not later than the date
on which the options would otherwise expire.
(c) If the employment or service of an Optionee is terminated for any
reason other than such death or disability, options held by such Optionee shall,
to the extent not theretofore exercised, be cancelled upon such termination and
shall not thereafter be exercisable; provided, however, that an Optionee whose
employment is terminated by retirement in accordance with the Corporation's
normal retirement policies, as determined by the Option Committee, or the Board
of Directors with respect to the Option Committee, shall be permitted to
exercise Incentive Options, whether or not exercisable at the time of such
termination, within three months after the date of such termination, but not
later than the date on which the Incentive Options would otherwise expire, and
shall be permitted to exercise any options which are not Incentive Options not
later than the date on which options would otherwise expire; and provided
further, that an Optionee whose employment or service is voluntary or
involuntarily terminated within six months after a change in control of the
Corporation, as defined in Section 5(c) hereof, shall be permitted to exercise
options, whether or not exercisable at the time of such termination, within
three months after the date of such termination but not later than the date on
which the options would otherwise expire.
(d) A change in employment or service from the Corporation to a
Subsidiary, or vice versa, shall not constitute termination of employment or
service for purposes of the Option Plan.
10. AMENDMENT OF THE OPTION PLAN
The Board of Directors at any time, and from time to time, may amend the
Option Plan, subject to any required regulatory approval and to the limitation
that, except as provided in Section 8 hereof, no amendment shall be effective
unless approved by the affirmative vote of the holders of a majority of the
outstanding shares of the Corporation at a duly held annual or special meeting
held within twelve months before or after the date of such amendment's
-6-
<PAGE>
adoption, where such amendment will:
(a) Increase the number of shares of Common Stock as to which options may
be granted under the Option Plan;
(b) Change in substance Section 4 hereof relating to eligibility to
participate in the Option Plan;
(c) Change the minimum option price; or
(d) Increase the maximum term of the options provided for herein.
Except as provided in Section 8 hereof, rights and obligations under any
option granted before amendment of the Option Plan shall not be altered or
impaired by amendment of the Option Plan, except with the consent of the person
to whom the option was granted.
11. TERMINATION OR SUSPENSION OF OPTION PLAN
The Board of Directors at any time may terminate or suspend the Option
Plan. Unless sooner terminated, the Option Plan shall terminate on the tenth
anniversary of the effective date specified in Section 14 hereof, but such
termination shall not affect any option theretofore granted. An option may not
be granted while the Option Plan is suspended or after it is terminated.
Rights and obligations under any option granted while the Option Plan is
in effect shall not be altered nor impaired by suspension or termination of the
Option Plan except with the consent of the Optionee. An option may be terminated
by agreement between an Optionee and the Corporation and, in lieu of the
terminated option, a new option may be granted with an exercise price which may
be higher or lower than the exercise price of the terminated option.
12. NONEXCLUSIVITY OF THE PLAN
Neither the adoption of the Option Plan by the Board of Directors nor the
submission of the Plan to the members of the Corporation for approval shall be
construed as creating any limitations on the power of the Board of Directors to
adopt such other incentive arrangements as it may deem desirable, including,
without limitation, the granting of stock options otherwise than under the
Option Plan, and such arrangements may be either applicable generally or only in
specific cases.
13. GOVERNMENT AND OTHER REGULATIONS
(a) The obligation of the Corporation to sell and deliver shares of Common
Stock under options granted under the Option Plan shall be subject to all
applicable laws, rules and regulations and the obtaining of all such approvals
by governmental agencies as may be deemed necessary or appropriate by the Board
of Directors of the Corporation.
(b) The Option Plan shall be governed by the laws of the State of
Wisconsin.
(c) The Option Plan is intended to comply with Rule 16b-3 under the
Securities Exchange Act of 1934. Any provision inconsistent with such Rule shall
be inoperative and
-7-
<PAGE>
shall not affect the validity of the Option Plan.
14. EFFECTIVE DATE OF OPTION PLAN
The Option Plan was adopted by the Board of Directors of the Corporation
on February 20, 1991 and will be submitted to the Corporation's stockholders at
the annual meeting on April 24, 1991. The Option Plan will be effective upon
approval by the Corporation's stockholders.
-8-
<PAGE>
EXHIBIT 10(u)
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF ROCKFORD
EMPLOYEE STOCK OWNERSHIP PLAN
AS ADOPTED AND AMENDED
BY FIRST FINANCIAL BANK
<PAGE>
CONSENT IN LIEU OF SPECIAL MEETING
OF THE BOARD OF DIRECTORS OF
FIRST FINANCIAL BANK
The undersigned, being all of the directors of First Financial Bank
("Bank"), hereby take the following action by unanimous consent pursuant to the
Bank's bylaws, which action shall have the full force and effect of a Resolution
duly enacted at a special meeting of the board of directors of the Bank called
for such purpose:
WHEREAS, the Bank acquired First Federal Savings Bank of Rockford, FSB
("First Federal") on February 28, 1995; and
WHEREAS, the Bank wishes to adopt First Federal's Employee Stock
Ownership Plan ("ESOP") as its own and make certain amendments to the ESOP as
permitted by applicable ERISA laws and the terms of such Plan.
NOW, THEREFORE, IT IS RESOLVED, that the Bank is hereby substituted for
First Federal as the ESOP Plan sponsor and hereby adopts the ESOP as a party to
the Trust Agreement, all pursuant to Section 13.2 of the ESOP.
FURTHER RESOLVED, that the ESOP is hereby amended as follows:
o Section 1.1 is amended to provide that the name of the Plan is
the "First Financial Bank Employee Stock Ownership Plan."
o Section 1.4 is amended to provide the Plan shall be operated
on the basis of a January 1--December 31 fiscal year.
o The reference to "July 1" in the definition of "Break in
Service" in Section 2 shall be changed to "January 1."
o The definition of "Company" in Section 2 shall be amended to
mean First Financial Bank and any successor to the business of
First Financial Bank which adopts this Plan.
o The definition of "Matching Employer Contributions" in Section
2 is deleted.
o The definition of "Matching Employer Contribution Account" in
Section 2 is deleted.
o The definition of "Plan Year" in Section 2 is amended to mean
the Plan Year commencing July 1, 1995 and ending December 31,
1995 and each period of 12 consecutive months beginning
January 1 of each succeeding year.
o The definition of "Salary Reduction Contributions" of Section
2 is deleted.
<PAGE>
o Section 4.1 is amended by changing the final period to a
comma, and adding the following language thereafter: "except
for the contribution made on February 28, 1995, which shall be
credited to eligible First Federal employees as of such date
in proportion to their cash compensation earned during the
period from July 1, 1994 through February 28, 1995."
o Section 4.2(i) and 4.2(ii) are deleted and replaced with the
following: "the number of shares of stock with a fair market
value equal to the amount that bears the same ratio as the
Active Participant's Cash Compensation bears to the aggregate
Cash Compensation for all Active Participants for the 12 month
period ending on the last day of the Plan Year shall be
credited to such Participant's Account."
o The definition of "Active Participant" contained in Section
4.3 is amended as follows: The period at the end of such
definition shall be changed to a comma, and the following
shall be inserted thereafter: "or (iii) for purposes of the
Plan Year from July 1, 1995 to December 31, 1995, he is
credited with at least 1000 hours of service during calendar
year 1995."
o Section 4.5 is deleted.
o Sections 5.2(i) and (ii) are deleted and replaced with the
following: (i) the benefits of the Participant provided under
this Plan shall be reduced and then, to the extent necessary,
(ii) the annual additions to the other defined contribution
plan shall be reduced before reducing the annual additions to
the defined benefit plan.
o The Table contained in Section 9.1 is amended to provide as
follows:
Percentage of
Vesting Years Interest Vested
------------- ---------------
3 20%
4 40%
5 or more 100%
o Section 12.2 shall be amended to add the following language:
"The members of the ESOP Committee shall be those individuals
serving from time to time as members of the Profit Sharing
Plan Committee."
Dated as of February 28, 1995.
<PAGE>
SIGNATURES
By: /s/ Robert S. Gaiswinkler By: /s/ Gordon M. Haferbecker
------------------------- -------------------------
Robert S. Gaiswinkler Gordon M. Haferbecker
By: /s/ James O. Heinecke By: /s/ Robert T. Kehr
------------------------- -------------------------
James O. Heinecke Robert T. Kehr
By: /s/ Paul C. Kehrer By: /s/ Robert P. Konopacky
------------------------- -------------------------
Paul C. Kehrer Robert P. Konopacky
By: /s/ Dr. George R. Leach By: /s/ Ignatius H. Robers
------------------------- -------------------------
Dr. George R. Leach Ignatius H. Robers
By: /s/ John C. Seramur By: /s/ John H. Sproule
------------------------- -------------------------
John C. Seramur John H. Sproule
By: /s/ Ralph R. Staven By: /s/ Norman L. Wanta
------------------------- -------------------------
Ralph R. Staven Norman L. Wanta
By: /s/ Arlyn G. West
-------------------------
Arlyn G. West
Consent in Lieu of Special Meeting of
the Board of Directors of
First Financial Bank
dated as of February 28, 1995
<PAGE>
<TABLE>
<CAPTION>
C O N T E N T S
Page No.
<S> <C>
Section 1. Plan Identity........................................................................................1
-------------
1.1 Name.....................................................................................................1
1.2 Purpose..................................................................................................1
1.3 Effective Date...........................................................................................1
1.4 Fiscal Period............................................................................................1
1.5 Single Plan for All Employers............................................................................1
1.6 Interpretation of Provisions.............................................................................1
Section 2. Definitions..........................................................................................2
-----------
Section 3. Eligibility for Participation.......................................................................12
-----------------------------
3.1 Initial Eligibility.....................................................................................12
3.2 Definition of Eligibility Year..........................................................................12
3.3 Terminated Employees....................................................................................12
3.4 Certain Employees Ineligible............................................................................13
3.5 Participation and Reparticipation.......................................................................13
Section 4. Employer Contributions and Credits..................................................................13
----------------------------------
4.1 Discretionary Contributions.............................................................................13
4.2 Contributions for Stock Obligations.....................................................................13
4.3 Definitions Related to Contributions....................................................................15
4.4 Conditions as to Contributions..........................................................................16
4.5 Matching Employer Contributions.........................................................................16
Section 5. Limitations on Contributions and Allocations........................................................17
--------------------------------------------
5.1 Limitation on Annual Additions..........................................................................17
5.2 Coordinated Limitation With Other Plans.................................................................18
5.3 Effect of Limitations...................................................................................19
5.4 Limitations as to Certain Participants..................................................................20
5.5 Nondiscrimination Test for Matching Employer Contributions..............................................21
5.6 Distribution of Excess Contributions....................................................................22
5.7 Correction of Error.....................................................................................24
5.8 Trust as Single Fund....................................................................................24
Section 6. Trust Fund and Its Investment.......................................................................24
-----------------------------
6.1 Creation of Trust Fund..................................................................................25
6.2 Stock Fund and Investment Fund..........................................................................25
6.3 Acquisition of Stock....................................................................................25
6.4 Participants' Option to Diversify.......................................................................26
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<PAGE>
Section 7. Voting Rights and Dividend on Stock.................................................................27
-----------------------------------
7.1 Voting of Stock.........................................................................................27
7.2 Dividends on Stock......................................................................................28
Section 8. Adjustments to Accounts.............................................................................29
-----------------------
8.1 Adjustments for Transactions............................................................................29
8.2 Valuation of Investment Fund............................................................................29
8.3 Adjustments for Investment Experience...................................................................30
Section 9. Vesting of Participants' Interests..................................................................30
----------------------------------
9.1 Deferred Vesting in Accounts............................................................................30
9.2 Computation of Vesting Years............................................................................30
9.3 Full Vesting Upon Certain Events........................................................................31
9.4 Full Vesting Upon Plan Termination......................................................................31
9.5 Forfeitures, Repayment, and Restoral....................................................................31
9.6 Accounting for Forfeitures..............................................................................32
9.7 Vesting and Nonforfeitability...........................................................................32
Section 10. Payment of Benefits.................................................................................32
-------------------
10.1 Benefits for Participants...............................................................................32
10.2 Benefits on a Participant's Death.......................................................................33
10.3 Payments Upon Divorce...................................................................................34
10.4 Direct Transfers........................................................................................35
10.5 Marital Status..........................................................................................36
10.6 Delay in Benefit Determination..........................................................................36
10.7 Accounting for Benefit Payments.........................................................................37
10.8 Options to Receive and Sell Stock.......................................................................37
10.9 Restrictions on Disposition of Stock....................................................................38
Section 11. Rules Governing Benefit Claims and Review of Appeals................................................39
----------------------------------------------------
11.1 Claim for Benefits......................................................................................39
11.2 Notification by Committee...............................................................................39
11.3 Claims Review Procedure.................................................................................40
Section 12. The Committee and Its Functions..................................................................41
12.1 Authority of Committee..................................................................................41
12.2 Identity of Committee...................................................................................41
12.3 Duties of Committee.....................................................................................42
12.4 Valuation of Stock......................................................................................43
12.5 Compliance with ERISA...................................................................................43
12.6 Action by Committee.....................................................................................43
12.7 Execution of Documents..................................................................................43
12.8 Adoption of Rules.......................................................................................43
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<PAGE>
12.9 Responsibilities to Participants.......................................................................44
12.10 Alternative Payees in Event of Incapacity..............................................................44
12.11 Indemnification by Employers...........................................................................45
12.12 Nonparticipation by Interested Member..................................................................45
Section 13. Adoption, Amendment or Termination of the Plan......................................................45
----------------------------------------------
13.1 Adoption of Plan by Other Employers....................................................................45
13.2 Adoption of Plan by Successor..........................................................................45
13.3 Plan Adoption Subject to Qualification.................................................................45
13.4 Right to Amend or Terminate............................................................................47
Section 14. Miscellaneous Provisions............................................................................48
------------------------
14.1 Plan Creates No Employment Rights......................................................................48
14.2 Nonassignability of Benefits...........................................................................48
14.3 Limit of Employer Liability............................................................................48
14.4 Treatment of Expenses..................................................................................49
14.5 Number and Gender......................................................................................49
14.6 Nondiversion of Assets.................................................................................49
14.7 Separability of Provisions.............................................................................49
14.8 Service of Process.....................................................................................49
14.9 Governing State Law....................................................................................49
Section 15. Top-Heavy Provisions................................................................................49
--------------------
15.1 Determination of Top-Heavy Status......................................................................49
15.2 Minimum Contributions..................................................................................52
15.3 Minimum Vesting........................................................................................53
15.4 Maximum Compensation...................................................................................53
</TABLE>
-iii-
<PAGE>
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF ROCKFORD
EMPLOYEE STOCK OWNERSHIP PLAN
Section 1. Plan Identity
1.1 Name. The name of this Plan is "First Federal Savings and Loan
Association of Rockford Employee Stock Ownership Plan."
1.2 Purpose. The purpose of this Plan is to describe the terms and
conditions under which contributions made pursuant to the Plan will be credited
and paid to the Participants and their Beneficiaries.
1.3 Effective Date. The Effective Date of this Plan is October 2, 1992.
1.4 Fiscal Period. This Plan shall be operated on the basis of a July 1 -
June 30 fiscal year for the purpose of keeping the Plan's books and records and
distributing or filing any reports or returns required by law.
1.5 Single Plan for All Employers. This Plan shall be treated as a single
plan with respect to all participating Employers for the purpose of crediting
contributions and forfeitures and distributing benefits, determining whether
there has been any termination of Service, and applying the limitations set
forth in Section 5.
1.6 Interpretation of Provisions. The Employers intend this Plan and the
Trust to be a qualified stock bonus plan under Section 401(a) of the Code and an
employee stock ownership plan within the meaning of Section 407(d)(6) of ERISA
and Section 4975(e)(7) of the Code. The Plan is intended to have its assets
invested primarily in qualifying employer securities of one or more Employers
within the meaning of Section 407(d)(3) of ERISA, and
-1-
<PAGE>
to satisfy any requirement under ERISA or the Code applicable to such a plan.
Accordingly, the Plan and Trust Agreement shall be interpreted and applied in a
manner consistent with this intent and shall be administered at all times and in
all respects in a nondiscriminatory manner.
Section 2. Definitions. The following capitalized words and phrases shall
have the meanings specified when used in this Plan and in the Trust Agreement,
unless the context clearly indicates otherwise:
"Account" means a Participant's interest in the assets accumulated under
this Plan as expressed in terms of a separate account balance which is
periodically adjusted to reflect Employer contributions, the Plan's investment
experience, and distributions and forfeitures.
"Active Participant" means any Employee who has satisfied the eligibility
requirements of Section 3 and who qualifies as an Active Participant for a
particular Plan Year under Section 4.3.
"Beneficiary" means the person or persons who are designated by a
Participant to receive benefits payable under the Plan on the Participant's
death. In the absence of any designation or if all the designated beneficiaries
shall die before the Participant dies or shall die before all benefits have been
paid, the Participant's Beneficiary shall be his surviving spouse. The Committee
may rely upon the advice of the Participant's executor or administrator as to
the identity of the Participant's spouse.
"Break in Service" means any five or more consecutive 12-month periods
beginning July 1 in which an employee has 500 or fewer Hours of Service per
period. Solely for this purpose, an Employee shall be considered employed for
his normal hours of paid
-2-
<PAGE>
employment
during a Recognized Absence, unless he does not resume his Service at the end of
the Recognized Absence. Further, if an Employee is absent for any period (i) by
reason of the Employee's pregnancy, (ii) by reason of the birth of the
Employee's child, (iii) by reason of the placement of a child with the Employee
in connection with the Employee's adoption of the child, or (iv) for the
purposes of caring for such child for a period beginning immediately after such
birth or placement, the Employee shall be credited with the Hours of Service
which would normally have been credited but for such absence, up to a maximum of
501 Hours of Service, in the first 12-month period which would otherwise be
counted toward a Break in Service.
"Code" means the Internal Revenue Code of 1986, as amended.
"Committee" means the committee responsible for the administration of this
Plan in accordance with Section 12.
"Company" means the First Federal Savings and Loan Association of Rockford,
and any entity which succeeds to the business of First Federal Savings and Loan
Association of Rockford and adopts this Plan as its own pursuant to Section
14.2.
"Compensation" means a Participant's wages, salary, overtime, bonuses
(except any one-time incentive bonus payable to an Employee under an employment
contract dated January 1, 1985 between the Employee and the Employer),
commissions, and any other amounts received for personal services rendered while
in Service from any Employer or an affiliate (within the meaning of Section
414(b), (c), and (m) of the Code). Notwithstanding
-3-
<PAGE>
the foregoing, Compensation shall not include contributions, credits or benefits
paid or accrued under this Plan or any other qualified or non-qualified
retirement plan, deferred compensation plan, stock-related plan, welfare benefit
plan or fringe benefit plan of the employer, compensation resulting from grant,
exercise or cancellation of stock options or stock awards or disposition of the
underlying stock, direct reimbursement for expenses, or Compensation earned
during any portion of the Plan Year in which such employee is not a Participant.
In all cases, however, notwithstanding any exclusion specified above,
Compensation shall include any amount which would otherwise be deemed
Compensation under this section but for the fact that it is deferred pursuant to
a salary reduction agreement under any plan described in Section 401(k), 402(h),
or 125 of the Code.
For the purposes of applying the limits of Section 415 of the Code, and for
purposes of applying the minimum contribution provisions set forth in Section
15, Compensation shall mean, generally, an Employee's taxable wages, salaries,
fees for professional services, bonuses, commissions and other amounts received
from the Employer during the limitation year to the maximum extent permitted by
Section 415(c)(3) of the Code, modified, however, as necessary to conform with
the definition of Compensation contained in Section 415(c)(3) of the Code and
the regulations thereunder.
For the purposes of determining whether an individual is a Highly
Compensated Employee, and for the purposes of determining whether an individual
is a "Key Employee," within the meaning of Section 15 herein, Compensation shall
mean, generally, an Employee's taxable wages, salaries, fees for professional
services, bonuses, commissions and other amounts received from the Employer
during the Plan Year to the maximum extent
-4-
<PAGE>
permitted by Section 415(c)(3) of the Code, modified, however, as necessary to
conform with the definition of compensation contained in Section 415(c)(3) of
the Code and the regulations thereunder. Notwithstanding the foregoing,
Compensation under this section shall include any amount which would otherwise
be deemed Compensation under this section but for the fact that it is deferred
pursuant to a salary reduction agreement under any plan described in Section
401(k), 402(h) or 125 of the Code.
For the purposes of this Section, Compensation with respect to any Plan Year
shall in no event exceed $200,000 (as adjusted from time to time by the
Secretary of Treasury); provided however, that in the application of this
$200,000 compensation limit to any Employee, the rules of Section 414(q)(6) of
the Code shall apply (dealing with family groups of certain Highly Compensated
Employees), except that, for purposes of such rules, the term "family" shall
include only the spouse of such Employee and any lineal descendant of such
Employee who has not attained age 19 before the end of the Plan Year or
"limitation year" (as defined in Section 5.1), as the case may be.
"Disability" means the inability to engage in any substantial gainful
activity by reason of any medically determinable physical or mental impairment
that can be expected to result in death or which has lasted or can be expected
to last for a continuous period of not less than twelve months. The Committee
shall determine whether a Participant has incurred a Disability on the basis of
a medical report of a physician acceptable to the Committee.
"Early Retirement" means the date a Participant attains age sixty-two.
"Effective Date" means October 2, 1992.
"Employee" means any person employed by the Employer on a full-time basis,
including
-5-
<PAGE>
self-employed individuals and including officers, but excluding directors in
their capacity as such; provided, however, that the term Employee shall not
include any Leased Employees within the meaning of Section 414(n)(6) of the
Code, or any Employees included in the unit of employees covered by a collective
bargaining agreement with the Employer that does not expressly provide for
participation of such Employees Plan, where there has been good-faith bargaining
between the Employer and Employees' representatives on the subject of retirement
benefits. An individual shall be deemed to be employed on a full-time basis as
of his date of employment with the Employer if he is expected by the Employer to
complete at least 1,000 Hours of Service during the 12 consecutive month period
commencing on the date he is employed by the Employer. If an individual is not
hired on a full-time basis, but actually completed at least 1,000 Hours of
Service during the aforementioned 12 consecutive month period or during any Plan
Year commencing after he is employed by the Employer, he shall be deemed to be a
full-time employee on a retroactive basis as of the first day of such 12
consecutive month period or such Plan Year, as the case may be.
"Employer" means the Company or any affiliate within the meaning of Section
414(b), (c) or (m) and 415(h) of the Code, any other Corporation, Partnership,
or proprietorship which adopts this Plan with the Company's consent pursuant to
Section 13.1, and any entity which succeeds to the business of any Employer and
adopts the Plan pursuant to Section 13.2.
"Entry Date" means the Effective Date of the Plan and the first day of each
month thereafter.
"ERISA" means the Employee Retirement Income Security Act of 1974 (P.L.
93-406, as amended).
-6-
<PAGE>
"Highly Compensated Employee" for any Plan Year means an Employee who,
during either of that or the immediately preceding Plan Year, (i) owned more
than five percent of the outstanding equity interest of the outstanding voting
interest in any Employer, (ii) had Compensation exceeding $75,000 (as adjusted
pursuant to section 415(d) of the Code), (iii) had Compensation exceeding
$50,000 (as adjusted pursuant to section 415(d) of the Code) and was among the
most highly compensated one-fifth of all Employees, or (iv) was at any time an
officer of an Employer and had Compensation exceeding $45,000 (or 50 percent of
the currently applicable dollar limit under Section 415(b)(1)(A) of the Code).
For this purpose:
(a) "Compensation" shall not include any amount which is excludable from the
Employee's gross income for tax purposes pursuant to Sections 125, 402(a)(8),
402(h)(1)(B), or 403(b) of the Code.
(b) The number of Employees in "the most highly compensated one-fifth of all
Employees" shall be determined by taking into account all individuals working
for all related employer entities described in the definition of "Service", but
excluding any individual who has not completed six months of Service, who
normally works fewer than six months per year, who has not reached age 21, whose
employment is covered by a collective bargaining agreement, or who is a
nonresident alien who received no earned income from United States sources.
(c) The number of individuals counted as "officers" shall not be more than
the lesser of (i) 50 individuals and (ii) the greater of 3 individuals or 10
percent of the total number of Employees. If no officer earns more than $45,000
(or the adjusted limit), then the highest paid officer shall be a Highly
Compensated Employee.
(d) A former employee shall be treated as a highly compensated employee if
such
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employee was a highly compensated employee when such employee separated from
service, or if such employee was a highly compensated employee at any time after
attaining age 55.
"Hours of Service" means hours to be credited to an Employee under the
following rules:
(a) Each hour for which an Employee is paid or is entitled to be paid for
services to an Employer is an Hour of Service.
(b) Each hour for which an Employee is directly or indirectly paid or is
entitled to be paid for a period of vacation, holidays, illness, disability,
lay-off, jury duty, temporary military duty, or leave of absence is an Hour of
Service. However, except as otherwise specifically provided, no more than 501
Hours of Service shall be credited for any single continuous period which an
Employee performs no duties. Further, no Hours of Service shall be credited on
account of payments made solely under a plan maintained to comply with worker's
compensation, unemployment compensation, or disability insurance laws, or to
reimburse an Employee for medical expenses.
(c) Each hour for which back pay (ignoring any mitigation of damages) is
either awarded or agreed to by an Employer is an Hour of Service. However, no
more than 501 Hours of Service shall be credited for any single continuous
period during which an Employee would not have performed any duties.
(d) Hours of Service shall be credited in any one period only under one of
the foregoing paragraphs (a), (b) and (c); an Employee may not get double credit
for the same period.
(e) If an Employer finds it impractical to count the actual Hours of Service
for any class or group of non-hourly Employees, each Employee in that class or
group shall be credited
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with 45 Hours of Service for each weekly pay period in which he has at least one
Hour of Service. However, an Employee shall be credited only for his normal
working hours during a paid absence.
(f) Hours of Service to be credited on account of a payment to an Employee
(including back pay) shall be recorded in the period of Service for which the
payment was made. If the period overlaps two or more Plan Years, the Hours of
Service credit shall be allocated in proportion to the respective portions of
the period included in the several Plan Years. However, in the case of periods
of 31 days or less, the Administrator may apply a uniform policy of crediting
Hours of Service to either the first Plan Year or the second.
(g) In all respects an Employee's Hours of Service shall be counted as
required by Section 2530.200b-2(b) and (c) of the Department of Labor's
regulations under Title I of ERISA.
"Investment Fund" means that portion of the Trust Fund consisting of assets
other than Stock.
"Matching Employer Contributions" means contributions made by the Employer
pursuant to Section 4.5 to a Participant's Matching Employer Contributions
Account.
"Matching Employer Contributions Account" means those Matching Employer
Contributions made to a Participant's Matching Employer Contributions Account.
"Normal Retirement Age" means a Participant's 65th birthday.
"Normal Retirement Date" means the first day of the month coincident with or
next following attainment of Normal Retirement Age.
"Participant" means any Employee who is participating in the Plan, or who
has previously
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participated in the Plan and still has a balance credited to his Account.
"Plan Year" means the plan year commencing July 1, 1992 and ending June 30,
1992 and eachperiod of 12 consecutive months beginning on July 1 of each
succeeding year. "Recognized Absence" means a period for which --
(a) an Employer grants an Employee of leave of absence for a limited period,
but only if an Employer grants such leaves on a nondiscriminatory basis; or
(b) an Employee is temporarily laid off by an Employer because of a change
in business
conditions; or
(c) an Employee is on active military duty, but only to the extent that his
employment rights are protected by the Military Selective Service Act of 1967
(38 U.S.C. sec. 2021).
"Salary Reduction Contributions" means contributions made at the election of
a Participant to the First Federal Savings and Loan Association of Rockford
401(k) Savings Plan.
"Service" means an Employee's period(s) of employment with an Employer,
excluding for initial eligibility purposes any period in which the individual
was a nonresident alien and did not receive from an Employer any earned income
which constituted income from sources within the United States. An Employee's
Service shall include any service which constitutes service with a predecessor
employer within the meaning of Section 414(a) of the Code. An Employee's Service
shall also include any service with an entity which is not an employer, but only
either (i) in which the other entity is a member of a controlled group of
corporations or is under common control with other trades and businesses within
the meaning of Section
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414(b) or 414(c) of the Code, and a member of the controlled group or one of the
trades and businesses is an Employer, or (ii) in which the other entity is a
member of an affiliated service group within the meaning of Section 414(m) of
the Code, and a member of the Affiliated service group is an Employer.
"Spouse" means the individual, if any, to whom a Participant is lawfully
married on the date benefit payments to the Participant are to begin, or on the
date of the Participant's death, if earlier.
"Stock" means shares of voting common stock or preferred stock meeting the
requirements of Section 409(e)(3) of the Code issued by an Employer or an
affiliated corporation.
"Stock Fund" means that portion of the Trust Fund consisting of Stock.
"Stock Obligation" means an indebtedness arising from any extension of
credit to the Plan or the Trust which was obtained for the purpose of buying
Stock and which satisfies the requirements set forth in Section 6.3.
"Trust" or "Trust Fund" means the trust fund created under this Plan.
"Trust Agreement" means the agreement between the Company and the Trustee
concerning the Trust Fund. If any assets of the Trust Fund are held in a
co-mingled trust fund with assets of other qualified retirement plans, "Trust
Agreement" shall be deemed to include the trust agreement governing that
co-mingled trust fund. With respect to the allocation of investment
responsibility for the assets of the Trust Fund, the provisions of Section 2.2
of the Trust Agreement are incorporated herein by reference.
"Trustee" means one or more corporate persons and individuals selected from
time to
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time by the Company to serve as trustee or co-trustees of the Trust Fund.
"Unallocated Stock Fund" means that portion of the Stock Fund consisting of
the Plan's holding of stock which have been acquired in exchange for one or more
Stock obligations and which have not yet been allocated to the Participant's
Accounts in accordance with Section 4.2.
"Valuation Date" means the last day of the Plan Year and each other date as
of which the committee shall determine the investment experience of the
Investment Fund and adjust the Participants' accounts accordingly.
"Valuation Period" means the period following a Valuation Date and ending
with the next Valuation Date.
"Vesting Year" means a unit of Service credited to a Participant pursuant to
Section 9.2 for the purposes of determining his vested interest in his Account.
Section 3. Eligibility for Participation.
3.1 Initial Eligibility.
(a) An Employee who on the Effective Date has both attained age 21 and has
1,000 Hours of Service (based on the date his employment with the Employer
commenced) shall become a participant on the Effective Date. The eligibility of
all other Employees to participate in the Plan shall be determined in accordance
with Section 3.1(b).
(b) An Employee shall enter the Plan as of the Entry Date coinciding with or
next following the later of the following dates:
(i) the last day of the Employee's first Eligibility Year, and
(ii) the Employee's 21st birthday.
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However, if an employee is not in active Service with an Employer on the
date he would otherwise first enter the Plan, his entry shall be deferred until
the next day he is in Service.
3.2 Definition of Eligibility Year. An "Eligibility Year" means an
applicable eligibility period (as defined below) in which the Employee has at
least 1,000 Hours of Service. For this purpose,
(a) an Employee's first "eligibility period" is the 12-consecutive month
period beginning on the first day on which he has an Hour of Service, and
(b) his subsequent eligibility periods will be 12-consecutive month
periods beginning on each January 1 after that first day of Service.
3.3 Terminated or Part-Time Employees. No Employee shall have any interest
or rights under this Plan if (i) he is never in active Service with an Employer
on or after the Effective Date, or (ii) he has 500 or fewer hours of Service in
any eligibility period beginning before the Effective Date and he never has an
Eligibility Year after such period.
3.4 Certain Employees Ineligible. No Employee shall participate in the Plan
while his service is covered by a collective bargaining agreement between an
Employer and the Employee's collective bargaining representative if (i)
retirement benefits have been the subject of good faith bargaining between the
Employer and the representative and (ii) the collective bargaining agreement
does not provide for the Employee's participation in the Plan while he is
actually employed by a leasing organization rather than an Employer.
3.5 Participation and Reparticipation Subject to the satisfaction of the
foregoing requirements, an Employee shall participate in the Plan during each
period of his Service from the date on which he first becomes eligible until his
termination. For this purpose, an
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Employee returning within five years of his eligibility requirements shall
re-enter the Plan as of the date of his return to Service with an Employer.
Section 4. Employer Contributions and Credits.
4.1 Discretionary Contributions. Each employer may contribute in its sole
discretion, with respect to a Plan Year, such amounts as it may determine from
time to time. The
Employers' contributions and available forfeitures for a Plan Year shall be
credited as of the last day of the year to the Accounts of the Active
Participants in proportion to their amounts of Cash Compensation.
4.2 Contributions for Stock Obligations. If the Trustee, upon instructions
from the Committee, incurs any Stock Obligation upon the purchase of Stock, the
Employers shall, subject to the provisions of the Company's Plan of Conversion
and any regulatory prohibitions, contribute for each Plan Year an amount
sufficient to cover all payments of principal and interest as they come due
under the terms of the Stock Obligation. If there is more than one Stock
Obligation, the Employers shall designate the one to which any contribution is
to be applied. The Employers' obligation to make contributions under this
Section 4.2 shall be reduced to the extent of any investment earnings realized
on such contributions, any dividends paid by the Employers on Stock held in the
Unallocated Stock Account, (which earnings and dividends shall be applied to the
Stock Obligation related to that Stock) and by the Employers' Matching
Contributions.
In each Plan Year in which Employer contributions, earnings on
contributions, or
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dividends on unallocated Stock are used as payments under a Stock Obligation, a
certain number of shares of the Stock acquired with that Stock Obligation which
is then held in the Unallocated Stock Fund shall be released for allocation
among the Participants. The number of shares released shall bear the same ratio
to the total number of those shares then held in the Unallocated Stock Fund
(prior to the release) as (i) the principal and interest payments made on the
Stock Obligation in the current Plan Year bears to (ii) the sum of (i) above,
and the remaining principal and interest payments required (or projected to be
required on the basis of the interest rate in effect at the end of the Plan
Year) to satisfy the Stock Obligation.
At the direction of the Committee, the current and projected payments of
interest under a Stock Obligation may be ignored in calculating the number of
shares to be released in each year if (i) the Stock Obligation provides for
annual payments of such amounts for 10 years, (ii) the interest included in any
payment is ignored only to the extent that it would be determined to be interest
under standard loan amortization tables, and (iii) the term of the Stock
Obligation, by reason of renewal, extension, or refinancing, has not exceeded 10
years from the original acquisition of the Stock.
For these purposes, each Stock Obligation, the Stock purchased with it, and
any dividends on such Stock, shall be considered separately. The Stock released
from the Unallocated Stock Fund in any Plan Year shall be credited as of the
last day of such year as follows:
(i) first, subject to Section 5.5 herein, the number of shares of Stock
with a fair market value equal to the Matching Employer Contribution
made on behalf of an Active Participant shall be credited to the
Participant's matching Employer Contributions Account; and then
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(ii) the number of shares of Stock with a fair market value equal to the
amount that bears the same ratio as the Active Participant's Cash
Compensation bears to the aggregate Cash Compensation of all Active
Participants for the Plan Year shall be credited to such Participant's
Account.
4.3 Definitions Related to Contributions. For the purposes of this
Plan, the following terms have the meanings specified:
"Active Participant" means a Participant who has satisfied the eligibility
requirements under Section 3. However, a Participant shall not qualify as an
Active Participant unless (i) he is credited with at least 1,000 Hours of
Service during the Plan Year and he is in active Service with an Employer on the
last day of the Plan Year, or (ii) he is on a Recognized Absence as of that
date, or (iii) his Service terminated during the Plan Year by reason of Normal
Retirement, Early Retirement, Disability or death.
"Cash Compensation" means a Participant's cash compensation from his
Employer during the Plan Year ending with or within that Plan Year which is
required to be reported as wages on the Participant's Form W-2. A Participant's
Cash Compensation also includes compensation that is not currently includable in
the Participant's taxable income by reason of Sections 125, 402(a)(8) or
402(h)(1)(B) of the Code. A Participant's Cash Compensation shall exclude any
compensation in excess of $200,000 (or the limit currently in effect under
Section 401(a)(17) of the Code).
4.4 Conditions as to Contributions. Employers' contributions shall in any
event be subject to the limitation set forth in Section 5. Contributions may be
made in the form of cash, or securities and other property to the extent
permissible under ERISA, including
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Stock, and shall be held by the Trustee in accordance with the Trust Agreement.
In addition to the provisions of Section 13.3 for the return of an Employer's
contributions in connection with a failure of the plan to qualify initially
under the Code, any amount contributed by an Employer due to a good faith
mistake of fact, or based upon a good faith but erroneous determination of its
deductibility under Section 404 of the Code, shall be returned to the Employer
within one year after the date on which the contribution was originally made, or
within one year after its nondeductibility has been finally determined.
Notwithstanding the foregoing, earnings attributable to the excess contribution
may not be returned to the Employer. However, the amount to be returned shall be
reduced to take account of any adverse investment experience within the Trust
Fund in order that the balance credited to each Participant's Account is not
less than it would have been if the contribution had never been made.
4.5 Matching Employer Contributions. For each Plan Year, the Employer, in
its sole discretion, may make a contribution equal to a percentage of the Salary
Reduction Contributions made for the Plan Year on behalf of each Participant.
Section 5. Limitations on Contributions and Allocations.
5.1 Limitation on Annual Additions.
Notwithstanding the provisions of Section 4, the annual addition to a
Participant's accounts under this and any other defined contribution plans
maintained by the Employers or an affiliate (within the purview of Section
414(b), (c), and (m) and Section 415(h) of the Code, which affiliate shall be
deemed an Employer for this purpose) shall not exceed for any limitation year an
amount equal to the lesser of --
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5.1-1 $30,000, or the dollar limitation currently in effect; or
5.1-2 25 percent of the Participant's Compensation for such limitation year.
For purposes of this Section 5.1 and the following Section 5.2, the "annual
addition" to a Participant's accounts means the sum of (i) the Employer
contributions (including any Matching Employer Contributions) and Employee
forfeitures credited to a Participant's accounts with respect to a limitation
year, plus (ii) the Participant's total voluntary contributions for that year.
Notwithstanding the foregoing, the 25 percent of compensation limitation set
forth above shall not apply to any contribution for medical benefits (within the
meaning of Section 419(f)(2) of the Code) after a Participant's separation from
service, which contribution is otherwise treated as an annual addition. The
$30,000 and $90,000 limitations referred to for each limitation year shall be
automatically adjusted to the new dollar limitations determined by the
Commissioner of Internal Revenue for the calendar year beginning in that
limitation year. Notwithstanding the foregoing, if the special limitations on
annual additions described in section 415(c)(6) of the Code applies, the
limitations described in this section shall be adjusted accordingly. A
"limitation year" means each 12 consecutive month period beginning July 1.
5.2 Coordinated Limitation with Other Plans. Aside from the limitation
prescribed in Section 5.1 with respect to the annual addition to a Participant's
accounts for any single limitation year, if a Participant participates in one or
more defined benefit plans maintained by an Employer or an affiliate, or in one
or more defined contribution plans maintained by an Employer or an affiliate,
then (i) the benefits of the Participant provided under the defined benefits
plan shall be reduced and then, to the extent necessary, (ii) the annual
additions to
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the other defined contribution plan shall be reduced before reducing the annual
additions to this Plan. Such benefits or annual additions shall be reduced so
that the sum of his defined contribution plan fraction and his defined benefit
plan fraction does not exceed one. For this purpose:
5.2-1 A Participant's defined contribution plan fraction with respect to a
Plan Year shall be a fraction, (i) the numerator of which is the sum of the
annual additions to his accounts through the current year, and (ii) the
denominator of which is the sum of the lesser of the following amounts -A- and
- -B- determined for the current limitation year and each prior limitation year of
Service with an Employer: -A- is 1.25 times $30,000, or 1.0 times such dollar
limitation if the Plan is top-heavy, and -B- is 35 percent of the Participant's
Compensation for such year. Further, if the Participant participated in any
related defined contribution plan in any years beginning before 1976, any excess
of the sum of the actual annual additions to the Participant's accounts for
those years over the maximum annual additions which could have been made in
accordance with Section 5.1 shall be ignored, and voluntary contributions by the
Participant during those years shall be taken into account as to each year only
to the extent that his average annual voluntary contribution in those years
exceeded 10 percent of his average annual Compensation in those years.
5.2-2 A Participant's defined benefit plan fraction with respect to a
limitation year shall be a fraction, (i) the numerator of which is his projected
annual benefit payable at normal retirement under the Employer's defined benefit
plans, and (ii) the denominator of which is the lesser of (a) 1.25 times
$90,000, or 1.0 times such dollar limitation if the Plan is top-heavy, and (b)
1.4 times the Participant's average Compensation during his highest-
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paid three consecutive limitation years.
5.3 Effect of Limitations. The Committee shall take whatever action may be
necessary from time to time to assure compliance with the limitation set forth
in Section 5.1 and 5.2. Specifically, the Committee shall see that each Employer
restrict its contributions for any Plan Year to an amount which, taking into
account the amount of available forfeitures, may be completely allocated to the
Participants consistent with those limitations. Where the limitations would
otherwise be exceeded by any Participant, further allocations to the Participant
shall be curtailed to the extent necessary to satisfy the limitations. Where an
excessive amount is contributed on account of a mistake as to a participant's
compensation, or there are forfeitures which may not be credited in the current
Plan Year, the amount shall be held in a suspense account and shall be allocated
to the Participant in lieu of any Employer contributions with respect to such
Participant in future years until it is eliminated. Any amount that cannot be
allocated to the Participant before the Participant ceases participation in the
Plan shall be held in a suspense account and shall be used to reduce Employer
Contributions for all remaining Participants in the Plan. If any amount cannot
be credited consistent with these limitations before the termination of the
Plan, such amount shall be returned to the Employer.
5.4 Limitations as to Certain Participants. Aside from the limitations set
forth in Section 5.1 and 5.2, if the Plan acquires any Stock in a transaction as
to which a selling shareholder or the estate of a deceased shareholder is
claiming the benefit of Section 1042 of the Code, the Committee shall see that
none of such Stock, and no other assets in lieu of such Stock, are allocated to
the Accounts of certain Participants in order to comply with
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Section 409(n) of the Code. This restriction shall apply at all times to a
Participant who owns (taking into account the attribution rules under Section
318(a) of the Code, without regard to the exception for employee plan trusts in
Section 318(a)(2)(B)(i) more than 25 percent of any class of stock of a
corporation which issued the Stock acquired by the Plan, or another corporation
within the same controlled group, as defined in Section 409(1)(4) of the Code
(any such class of stock hereafter called a "Related Class"). For this purpose,
a Participant who owns more than 25 percent of any Related Class at any time
within the one year preceding the Plan's purchase of the Stock shall be subject
to the restriction as to all allocations of the Stock, but any other Participant
shall be subject to the restriction only as to allocations which occur at a time
when he owns more than 25 percent of any Related Class.
Further, this restriction shall apply to the selling shareholder claiming
the benefit of Section 1042 and any other Participant who is related to such a
shareholder within the meaning of Section 267(b) of the Code, during the period
beginning on the date on which the Plan purchases the Stock and ending 10 years
after the later of (i) the date of such purchase, and (ii) the date of the
allocation under Section 4.2 attributable to the final payment on whatever Stock
Obligations were incurred with the Purchase.
This restriction shall not apply to any Participant who is a lineal
descendant of a selling shareholder if the aggregate amounts allocated under the
Plan for the benefit of all such descendants do not exceed five percent of the
Stock acquired from the shareholder.
5.5 Nondiscrimination Test for Matching Employer Contributions.
Notwithstanding anything herein to the contrary, the Plan shall meet the
nondiscrimination test of Section 401(m) of the Code (described in Section 5.5-1
and applicable regulations) for each Plan
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Year. In order to meet the nondiscrimination test, any or all of the following
steps may be taken:
(a) At any time during the Plan Year, the Committee may limit the amount of
Matching Employer Contributions that may be made on behalf of Highly Compensated
Employees;
(b) The Committee may reduce the Matching Employer Contributions made for
the Plan Year to the extent necessary to meet the requirements of Section 401(m)
of the Code, in the manner described in Section 5.7;
(c) The Committee may recommend to the Board that the Employer make an
additional Matching Employer Contribution to the Plan for the benefit of
Participants who are not Highly Compensated Employees. This additional
allocation may be made based on Participants' Compensation; and
(d) The Committee may take any other steps that the Committee deems
appropriate.
5.5-1 The nondiscrimination requirements of Section 401(m) of the Code
require that, in each Plan Year, the Contribution Percentage (defined below) of
the eligible Highly Compensated Employees does not exceed the greater of:
(a) The Contribution Percentage of all other eligible Employees multiplied
by 1.25; or
(b) The lesser of the Contribution Percentage of all other eligible
Employees multiplied by 2, or the Contribution Percentage of all other eligible
Employees plus 2 percentage points.
5.5-2 The Contribution Percentage for a group of Employees is the average of
the ratios, calculated separately for each Employee in that group, of the amount
of Matching Employer Contributions that are credited under the Plan of behalf of
each Employee for the Plan Year, to the Employee's Compensation for the Plan
Year. Use of the alternative limitation shall be
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subject to the provisions of Treasury Regulation ss. 1.401(m)-2 regarding the
multiple use of the alternative deferral tests set forth in Sections 401(k) and
401(m) of the Code.
5.5-3 Notwithstanding the foregoing, if the test described in Section 5.5-1
is not satisfied for a Plan Year, the Committee may use any other test permitted
under Section 401(m) of the Code to determine whether the Plan meets the
nondiscrimination requirements of Section 401(m) of the Code.
5.6 Distribution of Excess Contributions.
5.6-1 If Matching Employer Contributions with respect to Highly Compensated
Employees are required to be reduced as a result of the nondiscrimination tests
described in Section 5.5, the excess Matching Employer Contributions and income
attributable thereto shall be distributed to the Highly Compensated Employees
after the close of the Plan Year (but within 2-1/2 months after the close of the
Plan Year) to which the Matching Employer Contributions relate. In determining
the amount of the distributions under this Section, the Committee shall use the
leveling method described in Section 5.6-4
5.6-2 The amount of income attributable to excess contributions is that
portion of the income on the Participant's Account to which the contributions
were allocated for the Plan Year that bears the same ratio as the amount of
excess contributions bears to the total balance of that Account.
5.6-3 The distributions required under this Section may be made without the
consent of the Participant or his spouse and may be made without regard to any
Qualified Domestic Relations Order described in Section 14.2.
5.6-4 Leveling Method.
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(a) If the Contribution Percentage of a Highly Compensated Employee is
determined by combining the contributions and compensation of only those family
members of the Employees who are Highly Compensated Employees (without regard to
family aggregation), then the Contribution Percentage is reduced in accordance
with the "leveling method" described below and the excess contributions for the
family unit are allocated among the family members in proportion to the
contributions of each family member that have been combined. If the Contribution
Percentage of the Highly Compensated Employee is determined by combining the
compensation of all family members of the Employee, then the Contribution
Percentage is reduced in accordance with the leveling method, but not below the
Contribution Percentage of eligible non-highly compensated family members.
(b) Excess contributions are determined by taking into account contributions
of eligible family members who are Highly Compensated Employees (without regard
to family aggregation) and are allocated among such family members in proportion
to their contributions If further reduction of the Contribution Percentage is
required, excess contributions resulting from this reduction are determined by
taking into account the contributions of all family members and are allocated
among such family members in proportion to their contributions.
(c) The leveling method of reducing an Employee's excess contributions, as
described above, means the method of reducing the excess contributions of Highly
Compensated Employees as follows:
Step One. Reduce the Contribution Percentage of the Highly Compensated
Employee with the highest Contribution Percentage until either (i) the
nondiscrimination test is
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satisfied, or (ii) such Highly Compensated Employee's Contribution
Percentage is equal to the next highest Contribution Percentage of a
Highly Compensated Employee, whichever occurs first.
Step Two. If necessary, reduce the Contribution Percentages of both
Highly Compensated Employees with the highest Contribution Percentages
(after application of Step One) until either (i) the nondiscrimination
test is satisfied, or (ii) such Highly Compensated Employees'
Contribution Percentages are equal to the next highest Contribution
Percentage of a Highly Compensated Employee, whichever occurs first.
Step Three. Continue the procedure until the nondiscrimination test is
satisfied.
5.7 Correction of Error. If an error is made in the adjustment of a
Participant's Accounts, the error shall be corrected by the Committee, and any
gain or loss resulting from the correction shall be credited to the income or
charged as an expense of the Trust Fund for the Plan Year in which the
correction is made. In no event shall the Accounts of other Participants be
adjusted on account of the error.
5.8 Trust as Single Fund: The creation of separate Accounts for accounting
and bookkeeping purposes shall not restrict the Trustee in operating the Trust
as a single Fund. Section 6. Trust Fund and Its Investment.
6.1 Creation of Trust Fund. All amounts received under the Plan from
Employers and investments shall be held as the Trust Fund pursuant to the terms
of this Plan and of the Trust Agreement between the Company and the Trustee. The
benefits described in this Plan shall be payable only from the assets of the
Trust Fund, and none of the Company, any other Employer, its board of directors
or trustees, its stockholders, its officers, its employees, the
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Committee, and the Trustee shall be liable for payment of any benefit under this
Plan except from the Trust Fund.
6.2 Stock and Investment Fund. The Trust Fund held by the Trust shall be
divided into the Stock Fund, consisting entirely of Stock, and the Investment
Fund, consisting of all assets of the Trust other than Stock. The Trustee shall
have no investment responsibility for the Stock Fund, but shall acquire, sell,
exchange, distribute, and otherwise deal with and dispose of Stock in accordance
with the instructions of the Committee. The Trustee shall invest the Investment
Fund in accordance with the direction received by the Committee, or, where such
investment responsibility is delegated to one or more investment managers
pursuant to the Trust Agreement, as directed by the investment manager.
6.3 Acquisition of Stock. From time to time the Committee may, in its sole
discretion, direct the Trustee to acquire Stock from the issuing Employer or
from shareholders, including shareholders who are or have been Employees,
Participants, or fiduciaries with respect to the Plan. The Trustee shall pay for
such Stock no more than its fair market value, which shall be determined
conclusively by the Committee pursuant to Section 12.4. The Committee may direct
the Trustee to finance the acquisition of Stock by incurring or assuming
indebtedness to the seller or another party which indebtedness shall be called a
"Stock Obligation". Any Stock Obligation shall be subject to the following
conditions and limitations:
6.3-1 A Stock Obligation shall be for a specific term, shall not be payable
on demand except in the event of default, and shall bear a reasonable rate of
interest.
6.3-2 A Stock Obligation may, but need not, be secured by a collateral
pledge of either
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the Stock acquired in exchange for the Stock Obligation, or the Stock previously
pledged in connection with a prior Stock Obligation which is being repaid with
the proceeds of the current Stock Obligation. No other assets of the Plan and
Trust may be used as collateral for a Stock Obligation, and no creditor under a
Stock Obligation shall have any right or recourse to any Plan and Trust assets
other than Stock remaining subject to a collateral pledge.
6.3-3 Any pledge of Stock to secure a Stock Obligation must provide for the
release of pledged Stock in connection with payments on the Stock Obligations in
the ratio prescribed in Section 4.2.
6.3-4 Repayments of principal and interest on any Stock Obligation shall be
made by the Trustee only from Employer cash contributions designated for such
payments, from earnings on such contributions, and from cash dividends received
on Stock held in the Unallocated Stock Fund.
6.4 Participants' Option to Diversify. The committee shall provide for a
procedure under which each Participant may, during the first five years of a
certain six-year period, elect to have up to 25 percent of the value of his
Account committed to alternative investment options within the Investment Fund.
For the sixth year in this period, the Participant may elect to have up to 50
percent of the value of his Account committed to other investments. The six-year
period shall begin with the Plan Year following the first Plan Year in which the
Participant has both reached age 55 and completed 10 years of participation in
the Plan; a Participant's election to diversify his Account must be made within
the 90-day period immediately following the last day of each of the six Plan
Years. The Committee shall see that the Investment fund includes a sufficient
number of investment
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options to comply with Section 401(a)(28)(B) of the Code. The Trustee shall
comply with any investment directions received from Participants in accordance
with the procedures adopted from time to time by the Committee under this
Section 6.4.
Section 7. Voting Rights and Dividends on Stock.
7.1 Voting and Tendering of Stock. The Trustee generally shall vote all
shares of Stock held under the Plan in accordance with the written instructions
of the Committee. However, if any Employer has registration-type class of
securities within the meaning of Section 409(e)(4) of the Code, or if a matter
submitted to the holders of the Stock involves a merger, consolidation,
recapitalization, reclassification, liquidation, dissolution, or sale of
substantially all assets of an entity, then (i) the shares of Stock which have
been allocated to Participants' Accounts shall be voted by the Trustee in
accordance with the Participants' written instructions, and (ii) the Trustee
shall vote any unallocated Stock in a manner calculated to most accurately
reflect the instructions it has received from Participant regarding the
allocated Stock. In the event no shares of Stock have been allocated to
Participants' Accounts at the time Stock is to be voted, each Participant shall
be deemed to have one share of Stock allocated to his or her account for the
sole purpose of providing the Trustee with voting instructions. Notwithstanding
any provision hereunder to the contrary, all unallocated shares of stock must be
voted by the Trustee in a manner determined by the Trustee to be for the
exclusive benefit of the Participants and Beneficiaries. Whenever such voting
rights are to be exercised, the Employers, the Committee, and the Trustee shall
see that all Participants are provided with the same notices and other materials
as are provided to other holders of the Stock, and are provided with adequate
opportunity to deliver their
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instructions to the Trustee regarding the voting of Stock allocated to their
Accounts. The instructions of the Participants' with respect to the voting of
allocated shares hereunder shall be confidential.
7.1-1 In the event of a tender offer, Stock shall be tendered by the Trustee
in the same manner as set forth above with respect to the voting of Stock.
Notwithstanding any provision hereunder to the contrary, Stock must be tendered
by the Trustee in a manner determined by the Trustee to be for the exclusive
benefit of the Participants and Beneficiaries.
7.2 Dividends on Stock. Dividends on Stock which are received by the Trustee
in the form of additional Stock shall be retained in the Stock Fund, and shall
be allocated among the Participant's Accounts and the Unallocated Stock Fund in
accordance with their holdings of the Stock on which the dividends have been
paid. Dividends on Stock credited to Participants' Accounts which are received
by the Trustee in the form of cash shall, at the direction of the Company paying
the dividends, either (i) be credited to the Accounts in accordance with Section
8.03 and invested as part of the Investment Fund, (ii) be distributed
immediately to the Participants in proportion with the Participants' Account
balance or (iii) be distributed to the Participants within 90 days of the close
of the Plan Year in which paid in proportion with the Participants' Account
balance. Dividends on Stock held in the Unallocated Stock Fund which are
received by the Trustee in the form of cash shall be applied as soon as
practicable to payments of principal and interest under the Stock Obligation
incurred with the purchase of the Stock.
Section 8. Adjustments to Accounts.
8.1 Adjustments for Transactions. An Employer contribution pursuant to
Section
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4.1 shall be credited to the Participants' Accounts as of the last day of the
Plan Year for which it is contributed. Stock released from the Unallocated Stock
Fund upon the Trust's repayment of a Stock Obligation pursuant to Section 4.2
shall be credited to the Participants' Accounts as of the last day of the Plan
Year in which the repayment occurred. Any excess amounts remaining from the use
of proceeds of a sale of Stock from the Unallocated Stock Fund to repay a Stock
Obligation shall be allocated as of the last day of the Plan Year in which the
repayment occurred among the Participants' Accounts in proportion to the opening
balance in each Account. Any benefit which is paid to a Participant or
Beneficiary pursuant to Section 10 shall be charged to the Participant's Account
as of the first day of the Valuation Period in which it is paid. Any forfeiture
or restoral shall be charged or credited to the Participant's Account as of the
first day of the Valuation Period in which the forfeiture or restoral occurs
pursuant to Section 9.6.
8.2 Valuation of Investment Fund. As of each Valuation Date, the Trustee
shall prepare a balance sheet of the Investment Fund, recording each asset
(including any contribution receivable from an Employer) and liability at its
fair market value. Any liability with respect to short positions or options and
any item of accrued income or expense and unrealized appreciation or
depreciation shall be included; provided, however, that such an item may be
estimated or excluded if it is not readily ascertainable unless estimating or
excluding it would result in a material distortion. The Committee shall then
determine the net gain or loss of the Investment Fund since the preceding
Valuation Date, which shall mean the entire income of the investment Fund,
including realized and unrealized capital gains and losses, net of any expenses
to be charged to the general Investment Fund and excluding any
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contributions by the Employer. The determination of gain or loss shall be
consistent with the balance sheets of the Investment Fund for the current and
preceding Valuation Dates.
8.3 Adjustments for Investment Experience. Any net gain or loss of the
Investment Fund during a Valuation Period, as determined pursuant to Section
8.2, shall be allocated as of the last day of the Valuation Period among the
Participants' Accounts in proportion to the opening balance in each Account, as
adjusted for benefit payments and forfeitures during the Valuation Period,
without regard to whatever Stock may be credited to an Account.
Section 9. Vesting of Participants' Interests.
9.1 Deferred Vesting in Accounts. A Participant's vested interest in his
Account shall be based on his Vesting Years in accordance with the following
Table, subject to the balance of this Section 9:
Vesting Percentage of
Years Interest Vested
----- ---------------
0-4 0%
5 or more 100%
9.2 Computation of Vesting Years. For purposes of this Plan, a "Vesting
Year" means each 12-month period in which an Employee has at least 1,000 Hours
of Service, beginning with his Service with any Employer on and after the
Effective Date, and including certain Service with other employers as provided
in the definition of "Service". However, a Participant's Vesting Years shall be
computed subject to the following conditions and qualifications:
(a) A Participant's vested interest in his Account accumulated before a
Break in Service shall be determined without regard to any Service after the
Break. Further, if a Participant has a Break in Service before his interest in
his Account has become vested to some extent,
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he shall lose credit for any Vesting Year before the Break.
(b) Unless otherwise specifically excluded, a Participant's Vesting Years
shall include any period of active military duty to the extent required by the
Military Selective Service Act of 1967 (38 U.S.C. Section 2021).
9.3 Full Vesting Upon Certain Events.
Notwithstanding Section 9.1, a Participant's interest in his Account shall fully
vest on the Participant's Normal Retirement Date, provided the Participant is in
Service on or after that date. The Participant's interest shall also fully vest
in the event that his Service is terminated by Early Retirement, Disability or
by death.
9.4 Full Vesting Upon Plan Termination.
Notwithstanding Section 9.1, a Participant's interest in his Account shall fully
vest if he is in active Service upon termination of this Plan or upon the
permanent and complete discontinuance of contributions by his Employer. In the
event of a partial termination, the interest of each Participant who is in
Service shall fully vest with respect to that part of the Plan which is
terminated.
9.5 Forfeiture, Repayment, and Restoral. If a Participant's Service
terminates before his interest in his Account is fully vested, that portion
which has not vested shall be forfeited if he either (i) receives a distribution
of his entire vested interest pursuant to Section 10.1, or (ii) attains Normal
Retirement Age. If a Participant's Service terminates prior to having any
portion of his Account become vested, such Participant shall be deemed to have
received a distribution of his vested interest as of the Valuation Date next
following his termination of Service.
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If a Participant who has received his entire vested interest returns to
Service before he has a Break in Service, he may repay to the Trustee an amount
equal to the distribution. The Participant may repay such amount at any time
within five years after he has returned to Service. The amount shall be credited
to his account as of the last day of the Plan Year in which it is repaid; an
additional amount equal to that portion of his Account which was previously
forfeited shall be restored to his Account at the same time from other
Employees' forfeitures and, if such forfeitures are insufficient, from a special
contribution by his Employer for that year.
In the case of a terminated Participant who does not receive a distribution
of his entire vested interest and whose Service resumes before a Break in
Service occurs, any undistributed vested balance from his prior participation
shall be maintained as a fully vested subaccount with his Account.
9.6 Accounting for Forfeitures. A forfeiture shall be charged to the
Participant's Account as of the first day of the first Valuation Period in which
the forfeiture becomes certain pursuant to Section 9.5. Except as otherwise
provided in that Section, a forfeiture shall be added to the contributions of
the terminated Participant's Employer which are to be credited to other
Participants pursuant to Section 4.1 as of the last day of the Plan Year in
which the forfeiture becomes certain.
9.7 Vesting and Nonforfeitability. A Participant's interest in his Account
which has become vested is nonforfeitable.
Section 10. Payment of Benefits.
10.1 Benefits for Participants. A Participant whose Service ends for any
reason
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(including his Early Retirement) shall receive the vested portion of his Account
and his Matching Employer Contribution Account, if any, in a single payment as
soon as practicable following such termination of Service; provided, however,
that such payment shall be made no later than 60 days following the end of the
Plan Year in which his Service ends. Notwithstanding the foregoing, if the
balance credited to his Account and to his Matching Employer Contribution
Account exceeds $3,500, his benefits shall not be paid before the latest of his
65th birthday or the tenth anniversary of the year in which he commenced
participation in the Plan unless he elects an early payment date in a written
election filed with the Committee. A Participant may modify such an election at
any time, provided any new benefit payment date is at least 30 days after a
modified election is delivered to the Committee. In all events, a Participant's
benefits shall be paid by April 1st of the calendar year in which he reaches age
71-1/2. A Participant's benefits from that portion of his Account or his
Matching Employer Contribution Account committed to the Investment Fund shall be
calculated on the basis of the most recent Valuation Date before the day of
payment.
10.2 Benefits on a Participant's Death. If a Participant dies before his
benefits are paid pursuant to Section 10.1, the balance credited to his Account
and his Matching Employer Contribution Account shall be paid to his Beneficiary
in a single distribution on or before the 60th day after the end of the Plan
Year in which he died. The benefits from that portion of the Participant's
Account and the participant's Matching Employer Contribution Account committed
to the Investment Fund shall be calculated on the basis of the most recent
Valuation Date before the date of payment.
If a married participant dies before his benefit payments begin, then unless
he has
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specifically elected otherwise the Committee shall cause the balance in his
Account and in his Matching Employer contribution Account to be paid to his
Spouse. No election by a married Participant of a different Beneficiary shall be
valid unless the election is accompanied by the Spouse's written consent, which
(i) must acknowledge the effect of the election, (ii) must explicitly provide
either that the designated Beneficiary may not subsequently be changed by the
Participant without the Spouse's further consent, or that it may be changed
without such consent, and (iii) must be witnessed by the Committee, its
representative, or a notary public. This requirement shall not apply if the
Participant establishes to the Committee's satisfaction that the Spouse may not
be located.
10.3 Payments Upon Divorce.
(a) If the Trustee or the Committee receives a domestic
relations order that purports to require the payment of a participant's
benefits to a person other than the Participant, the Committee shall
take the following steps:
(i) If benefits are in pay status, the Committee shall direct
the Trustee to account separately for the amounts that will be
payable to the Alternate Payees (defined below) if the order is
a Qualified Domestic Relations Order (defined below).
(ii) The Committee shall promptly notify the named Participant
and any Alternate Payees of the receipt of the domestic
relations order and of the Committee's procedures for
determining if the order is a Qualified Domestic Relations
Order.
(iii) The Committee shall determine whether the order is a
Qualified Domestic Relations Order under the provisions of
Section 414(p) of the Code.
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(iv) The Committee shall notify the named Participant and any
Alternate Payees of its determination as to whether the order
meets the requirements of a Qualified Domestic Relations Order.
(b) If, within 18 months beginning on the date the first payment
would be made under the domestic relations order (the "18-Month
Period"), the order is determined to be a Qualified Domestic
Relations Order, the Committee shall direct the Trustee to pay
the specified amounts to the persons entitled to receive the
amounts pursuant to the order.
(c) If, within the 18-Month Period (i) the order is determined
not to be a Qualified Domestic Relations Order or (ii) the issue
as to whether the order is a Qualified Domestic Relations Order
has not been resolved, the Committee shall direct the Trustee to
pay the amounts (and any interest thereon) to the Participant or
other person who would have been entitled to such amounts if
there had been no order.
(d) If an order is determined to be a Qualified Domestic
Relations Order after the end of the 18-Month Period, the
determination shall be applied prospectively only.
(e) For purposes of this Section, the following terms shall have
the following definitions:
(i) Alternate Payee - Any spouse, former spouse, child or other
dependent of a Participant who is recognized by a domestic
relations order as having a right to all or a portion of the
benefits payable under the Plan to the Participant.
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(ii) Qualified Domestic Relations Order - Any domestic relations
order or judgment that meets the requirements set forth in
Section 414(p) of the Code.
10.4 Direct Transfers. Effective with respect to an eligible rollover
distribution to a Participant on or after January 1, 1993, the Committee, at the
election of the Participant, shall transfer all or any portion of an eligible
rollover distribution directly to another plan qualified under Section 401(a) of
the Code, to an Individual Retirement Account within the meaning of Section
408(a) of the Code, or to any other plan permitted under applicable federal law.
For purposes of this Section 10.4, an "eligible rollover distribution" includes
any distribution to a participant of all or any portion of the balance of a
Participant's Account except:
(a) any distribution that is one of a series of substantially equal
periodic payments (not less frequently than annually) made (i) for the life
(or life expectancy) of the Participant or the joint lives (or joint life
expectancies) of the Participant and the Participant's designated
Beneficiary; or (ii) for a specified period of 10 years or more;
(b) any distribution to the extent that such distribution is required
under Section 401(a)(9) of the Code; and
(c) any other distributions excepted under applicable federal law.
10.5 Marital Status. The Committee shall from time to time take whatever
steps it deems appropriate to keep informed of each Participant's marital
status. Each Employer shall provide the Committee with the most reliable
information in the Employer's possession regarding its Participants' marital
status, and the Committee may, in its discretion, require a notarized affidavit
from any Participant as to his marital status. The
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Committee, the Plan, the Trustee, and the Employers shall be fully protected and
discharged from any liability to the extent of any benefit payments made as a
result of the Committee's good faith and reasonable reliance upon information
obtained from a Participant and his Employer as to his marital status.
10.6 Delay in Benefit Determination. If the Committee is unable to determine
the benefits payable to a Participant or Beneficiary on or before the latest
date prescribed for payment pursuant to Section 10.1 or 10.2, the benefits shall
in any event be paid as soon as practicable after they can first be determined,
with whatever makeup payments may be appropriate in view of the delay.
10.7 Accounting for Benefit Payments. Any benefit payment shall be charged
to the Participant's Account and to the Participant's Matching Employer
Contribution Account as of the first day of the Valuation Period in which the
payment is made.
10.8 Options to Receive and Sell Stock. Unless ownership of virtually all
Stock is restricted to active Employees and qualified retirement plans for the
benefit of Employees pursuant to the certificates of incorporation or by-laws of
the Employers issuing Stock, a terminated Participant or the Beneficiary of a
deceased Participant may instruct the Committee to distribute the participant's
entire vested interest in his Account in the form of Stock. In that event, the
Committee shall apply the Participant's vested interest in the Investment Fund
to purchase sufficient Stock from the Stock Fund or from any owner of stock to
make the required distribution. In all other cases, the Participant's vested
interest in the Stock Fund shall be distributed in shares of Stock, and his
vested interest in the
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Investment Fund shall be distributed in cash.
Any Participant who receives Stock pursuant to Section 10.1, and any person
who has received Stock from the Plan or from such a Participant by reason of the
Participant's death or incompetency, by reason of divorce or separation from the
Participant, or by reason of a rollover contribution described in Section
402(a)(5) of the Code, shall have the right to require the Employer which issued
the Stock to purchase the Stock for its current fair market value (hereinafter
referred to as the "put right"). The put right shall be exercisable by written
notice to the Committee during the first 60 days after the Stock is distributed
by the Plan, and, if not exercised in that period, during the first 60 days in
the following Plan Year after the Committee has communicated to the Participant
its determination as to the Stock's current fair market value. However, the put
right shall not apply to the extent that the Stock, at the time the put right
would otherwise be exercisable, may be sold on an established market in
accordance with federal and state securities laws and regulations. If the put
right is exercised, the Trustee may, if so directed by the Committee in its sole
discretion, assume the Employer's rights and obligations with respect to
purchasing the Stock.
The Employer or the Trustee, as the case may be, may elect to pay for the
Stock in equal periodic installments, not less frequently than annually, over a
period not longer than five years from the 30th day after the put right is
exercised, with adequate security and interest at a reasonable rate on the
unpaid balance, all such terms to be set forth in a promissory note delivered to
the seller with normal terms as to acceleration upon any uncured default.
Nothing contained herein shall be deemed to obligate any Employer to
register any Stock under any federal or state securities law or to create or
maintain a public market to facilitate
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the transfer or disposition of any Stock. The put right described herein may
only be exercised by a person described in the second preceding paragraph, and
may not be transferred with any Stock to any other person. As to all Stock
purchased by the Plan in exchange for any Stock Obligation, the put right shall
be nonterminable. The put right for Stock acquired through a Stock Obligation
shall continue with respect to such Stock after the Stock Obligation is repaid
or the Plan ceases to be an employee stock ownership plan.
10.9 Restrictions on Disposition of Stock. Except in the case of Stock which
is traded on an established market, a Participant who receives Stock pursuant to
Section 10.1, and any person who has received Stock from the Plan or from such a
Participant by reason of the Participant's death or incompetency, by reason of
divorce or separation from the Participant, or by reason of a rollover
contribution described in Section 402(a)(5) of the Code, shall, prior to any
sale or other transfer of the Stock to any other person, first offer the Stock
to the issuing Employer and to the Plan at its current fair market value. This
restriction shall apply to any transfer, whether voluntary, involuntary, or by
operation of law, and whether for consideration or gratuitous. Either the
Employer or the Trustee may accept the offer within 14 days after it is
delivered. Any Stock distributed by the Plan shall bear a conspicuous legend
describing the right of first refusal under this Section 10.9 as well as any
other restrictions upon the transfer of the Stock imposed by federal and state
securities laws and regulations.
Section 11. Rules Governing Benefit Claims and Review of Appeals.
11.1 Claim for Benefits. Any Participant or Beneficiary who qualifies for
the payment of benefits shall file a claim for his benefits with the Committee
on a form provided
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by the Committee. The claim, including any election of an alternative benefit
form, shall be filed at least 30 days before the date on which the benefits are
to begin. If a Participant or Beneficiary fails to file a claim by the 30th day
before the date on which benefits become payable, he shall be presumed to have
filed a claim for payment for the Participant's benefits in the standard form
prescribed by Sections 10.1 or 10.2.
11.2 Notification by Committee. Within 90 days after receiving a claim
for benefits (or within 180 days, if special circumstances require an extension
of time and written notice of the extension is given to the Participant or
Beneficiary within 90 days after receiving the claim for benefits), the
Committee shall notify the Participant or Beneficiary whether the claim has been
approved or denied. If the Committee denies a claim in any respect, the
Committee shall set forth in a written notice to the Participant or Beneficiary:
(a) each specific reason for the denial;
(b) specific references to the pertinent Plan provisions on
which the denial is based;
(c) a description of any additional material or information
which could be submitted by the Participant or Beneficiary to
support his claim, with an explanation of the relevance of such
information; and
(d) an explanation of the claims review procedures set forth in
Section 11.3.
11.3 Claims Review Procedure. Within 60 days after a participant or
Beneficiary receives notice from the Committee that his claim for benefits has
been denied in any respect, he may file with the Committee a written notice of
appeal setting forth his reasons for disputing the Committee's determination. In
connection with his appeal the participant or
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Beneficiary or his representative may inspect or purchase copies of pertinent
documents and records to the extent not inconsistent with other Participant's
and Beneficiaries' rights of privacy. Within 60 days after receiving a notice of
appeal from a prior determination (or within 120 days, if special circumstances
require an extension of time and written notice of the extension is given to the
Participant or Beneficiary and his representative within 60 days after receiving
the notice of appeal), the Committee shall furnish to the Participant or
Beneficiary and his representative, if any, a written statement of the
Committee's final decision with respect to his claim, including the reasons for
such decision and the particular Plan provisions upon which it is based.
Section 12. The Committee and Its Functions.
12.1 Authority of Committee. The Committee shall be the "plan
administrator" and the named fiduciary within the meaning of ERISA and shall
have exclusive responsibility and authority to control and manage the operation
and administration of the Plan, including the interpretation and application of
its provisions, except to the extent such responsibility and authority are
otherwise specifically (i) allocated to the Company, the Employers, or the
Trustee under the Plan and Trust Agreement, (ii) delegated in writing to other
persons by the Company, the Employers, the Committee, or the Trustee, or (iii)
allocated to other parties by operation of law. The Committee shall have
exclusive responsibility regarding decisions concerning the payment of benefits
under the Plan. The Committee, or the investment manager appointed by the
Committee, shall direct the Trustee regarding the manner in which funds held in
the Investment Fund are invested. In the discharge of its duties, the Committee
may employ accountants, actuaries, legal counsel, and other agents (who also may
be
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employed by an Employer or the Trustee in the same or some other capacity) and
may pay their reasonable expenses and compensation.
12.2 Identity of Committee. The Committee shall consist of three or
more individuals selected by the Company. Any individual, including a director,
trustee, shareholder, officer, or employee of an Employer, shall be eligible to
serve as a member of the Committee. The Company shall have the power to remove
any individual serving on the Committee at any time without cause upon 10 days'
written notice, and any individual may resign from the Committee at any time
upon 10 days' written notice to the Company. The Company shall notify the
Trustee of any change in membership of the Committee.
12.3 Duties of Committee. The Committee shall keep whatever records may
be necessary to implement the Plan and shall furnish whatever reports may be
required from time to time by the Company. The Committee shall furnish to the
Trustee whatever information may be necessary to properly administer the Trust.
The Committee shall see to the filing with the appropriate government agencies
of all reports and returns required of the plan Committee under ERISA and other
laws.
Further, the Committee shall have exclusive responsibility and authority
with respect to the Plan's holdings of Stock and shall direct the trustee in all
respects regarding the purchase, retention, sale, exchange, and pledge of Stock
and the creation and satisfaction of Stock Obligations. The Committee shall at
all times act consistently with the Company's long-term intention that the Plan,
as an employee stock ownership plan, be invested primarily in Stock. Subject to
the direction of the Board as to the application of Employer contributions to
Stock Obligations, and subject to the provisions of Sections 6.4 and 10.6 as
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to Participant's rights under certain circumstances to have their Accounts
invested in Stock or in assets other than Stock, the Committee shall determine
in its sole discretion the extent to which assets of the Trust shall be used to
repay Stock Obligations, to purchase Stock, or to invest in other assets to be
selected by the Trustee or an investment manager. No provision of the Plan
relating to the allocation or vesting of any interests in the Stock Fund or the
Investment Fund shall restrict the Committee from changing any holdings of the
Trust, whether the changes involve an increase or a decrease in the Stock or
other assets credited to Participant's Accounts. In determining the proper
extent of the trust's investment in Stock, the Committee shall be authorized to
employ investment counsel, legal counsel, appraisers, and other agents to pay
their reasonable expenses and compensation.
12.4 Valuation of Stock. If the valuation of any Stock is not
established by reported trading on a generally recognized public market, the
Committee shall have the exclusive authority and responsibility to determine its
value for all purposes under the Plan. Such value shall be determined as of each
Valuation Date, and on any other date as of which the Plan purchases or sells
such Stock. The Committee shall use generally accepted methods of valuing stock
of similar corporations for purposes of arm's length business and investment
transactions, and in this connection the Committee shall obtain, and shall be
protected in relying upon, the valuation of such Stock as determined by an
independent appraiser experienced in preparing valuations of similar businesses.
12.5 Compliance with ERISA. The Committee shall perform all acts
necessary to comply with ERISA. Each individual member or employee of the
Committee shall discharge his duties in good faith and in accordance with the
applicable requirements of ERISA.
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12.6 Action by Committee. All actions of the Committee shall be
governed by the affirmative vote of a number of members which is a majority of
the total number of members currently appointed, including vacancies. The
members of the Committee may meet informally and may take any action without
meeting as a group.
12.7 Execution of Documents. Any instrument executed by the Committee
shall be signed by any member or employee of the Committee.
12.8 Adoption of Rules. The Committee shall adopt such rules and
regulations of uniform applicability as it deems necessary or appropriate for
the proper administration and interpretation of the Plan.
12.9 Responsibilities to Participants. The Committee shall determine
which Employees qualify to enter the Plan. The Committee shall furnish to each
eligible Employee whatever summary plan descriptions, summary annual reports,
and other notices and information may be required under ERISA. The Committee
also shall determine when a Participant or his Beneficiary qualifies for the
payment of benefits under the Plan. The Committee shall furnish to each such
Participant or Beneficiary whatever information is required under ERISA (or is
otherwise appropriate) to enable the participant or Beneficiary to make whatever
elections may be available pursuant to Sections 6 and 10, and the Committee
shall provide for the payment of benefits in the proper form and amount from the
assets of the Trust Fund. The Committee may decide in its sole discretion to
permit modifications of elections and to defer or accelerate benefits to the
extent consistent with applicable law and the best interests of the individuals
concerned.
12.10 Alternative Payees in Event of Incapacity. If the Committee finds
at any time
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that an individual qualifying for benefits under this Plan is a minor or is
incompetent, the Committee may direct the benefits to be paid, in the case of a
minor, to his parents, his legal guardian, a custodian for him under the Uniform
Transfers to Minors Act, or the person having actual custody of him, or, in the
case of an incompetent, to his spouse, his legal guardian, or the person having
actual custody of him, the payments to be used for the individuals's benefit.
The Committee and the Trustee shall not be obligated to inquire as to the actual
use of the funds by the person receiving them under this Section 12.10, and any
such payment shall completely discharge the obligations of the Plan, the
Trustee, the Committee, and the Employers to the extent of the payment.
12.11 Indemnification by Employers. Except as separately agreed in
writing, the Committee, and any member or employee of the Committee, shall be
indemnified and held harmless by the Employers, jointly and severally, to the
fullest extent permitted by law against any and all costs, damages, expenses,
and liabilities reasonably incurred by or imposed upon it or him in connection
with any claim made against it or him or in which it or he may be involved by
reason of its or his being, or having been, the Committee, or a member or
employee of the Committee, to the extent such amounts are not paid by insurance.
12.12 Nonparticipation by Interested Member. Any member of the
Committee who also is a Participant in the Plan shall take no part in any
determination specifically relating to his own participation or benefits, unless
his abstention would leave the Committee incapable of acting on the matter.
Section 13. Adoption, Amendment, or Termination of the Plan.
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13.1 Adoption of Plan by Other Employers. With the consent of the
Company, any entity may become a participating Employer under the Plan by (i)
taking such action as shall be necessary to adopt the Plan, (ii) becoming a
party to the Trust Agreement establishing the Trust Fund, and (iii) executing
and delivering such instruments and taking such other action as may be necessary
or desirable to put the Plan into effect with the respect to the entity's
Employees.
13.2 Adoption of Plan by Successor. In the event that any Employer
shall be reorganized by way of merger, consolidation, transfer of assets or
otherwise, so that an entity other than an Employer shall succeed to all or
substantially all of the Employer's business, the successor entity may be
substituted for the Employer under the Plan by adopting the Plan and becoming a
party to the Trust Agreement. Contributions by the Employer shall be
automatically suspended from the effective date of any such reorganization until
the date upon which the substitution of the successor entity for the Employer
under the Plan becomes effective. If, within 90 days following the effective
date of any such reorganization, the successor entity shall not have elected to
become a party to the Plan, or if the Employer shall adopt a plan of complete
liquidation other than in connection with a reorganization, the Plan shall be
automatically terminated with respect to Employees of the Employer as of the
close of business on the 90th day following the effective date of the
reorganization, or as of the close of business on the date of adoption of a plan
of complete liquidation, as the case may be.
13.3 Plan Adoption Subject to Qualification. Notwithstanding any other
provision of the Plan, the adoption of the Plan and the execution of the Trust
Agreement are conditioned
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<PAGE>
upon their being determined initially by the Internal Revenue Service to meet
the qualification requirements of Section 401(a) of the Code, so that the
Employers may deduct currently for federal income tax purposes their
contributions to the Trust and so that the Participants may exclude the
contributions from their gross income and recognize income only when they
receive benefits. In the event that this Plan is held by the Internal Revenue
Service not to qualify initially under Section 401(a), the Plan may be amended
retroactively to the earliest date permitted by U.S. Treasury Regulations in
order to secure qualification under Section 401(a). If this Plan is held by the
Internal Revenue Service not to qualify initially under Section 401(a) either as
originally adopted or as amended, each Employer's contributions to the Trust
under this Plan (including any earnings thereon) shall be returned to it and
this Plan shall be terminated. In the event that this Plan is amended after its
initial qualification and the Plan as amended is held by the Internal Revenue
Service not to qualify under Section 401(a), the amendment may be modified
retroactively to the earliest date permitted by U.S. Treasury Regulations in
order to secure approval of the amendment under Section 401(a).
13.4 Right to Amend or Terminate. The Company intends to continue this
Plan as a permanent program. However, each participating Employer separately
reserves the right to suspend, supersede, or terminate the Plan at any time and
for any reason, as it applies to the Employer's Employees, and the Company
reserves the right to amend, suspend, supersede, merge, consolidate, or
terminate the Plan at any time and for any reason, as it applies to the
Employees of all Employers. No amendment, suspension, supersession, merger,
consolidation, or termination of the Plan shall reduce any Participant's or
Beneficiary's
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<PAGE>
proportionate interest in the Trust Fund, or shall divert any portion of the
Trust Fund to purposes other than the exclusive benefit of the Participants and
their Beneficiaries prior to the satisfaction of all liabilities under the Plan.
Except as is required for purposes of compliance with the Code or ERISA, each as
amended from time to time, neither the provisions of Section 4.1 and 4.2
relating to the crediting of contributions, forfeitures and shares of stock
released from the Unallocated Stock Fund, nor any other provision of the Plan
relating to the allocation of benefits to Participants, may be amended more
frequently than once every six months. Moreover, there shall not be any transfer
of assets to a successor plan or merger or consolidation with another plan
unless, in the event of the termination of the successor plan or the surviving
plan immediately following such transfer, merger, or consolidation, each
participant or beneficiary would be entitled to a benefit equal to or greater
than the benefit he would have been entitled to if the plan in which he was
previously a participant or beneficiary had terminated immediately prior to such
transfer, merger, or consolidation. Following a termination of this Plan by the
Company, the Trustee shall continue to administer the Trust and pay benefits in
accordance with the Plan as amended from time to time and the Committee's
instructions.
Section 14. Miscellaneous Provisions.
14.1 Plan Creates No Employment Rights. Nothing in this Plan shall be
interpreted as giving any Employee the right to be retained as an Employee by an
Employer, or as limiting or affecting the rights of an Employer to control its
Employees or to terminate the Service of any Employee at any time and for any
reason, subject to any applicable employment or collective bargaining
agreements.
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<PAGE>
14.2 Nonassignability of Benefits. No assignment, pledge, or other
anticipation of benefits from the Plan will be permitted or recognized by the
Employers, the Committee, or the Trustee. Moreover, benefits from the Plan shall
not be subject to attachment, garnishment, or other legal process for debts or
liabilities of any Participant or Beneficiary, to the extent permitted by law.
This prohibition on assignment or alienation shall apply to any judgment,
decree, or order (including approval of a property settlement agreement) which
relates to the provision of child support, alimony, or property rights to a
present or former spouse, child or other dependent of a Participant pursuant to
a State domestic relations or community property law, unless the judgment,
decree, or order is determined by the Committee to be a qualified domestic
relations order within the meaning of Section 414(p) of the Code.
14.3 Limit of Employer Liability. The liability of the Employers with
respect to participants under this Plan shall be limited to making contributions
to the Trust from time to time, in accordance with Section 4.
14.4 Treatment of Expenses. All expenses incurred by the Committee and
the Trustee in connection with administering this Plan and Trust Fund shall be
paid by the Trustee from the Trust Fund to the extent the expenses have not been
paid or assumed by the Employers or by the Trustee.
14.5 Number and Gender. Any use of the singular shall be interpreted to
include the plural, and the plural the singular. Any use of the masculine,
feminine, or neuter shall be interpreted to include the masculine, feminine, or
neuter, as the context shall require.
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<PAGE>
14.6 Nondiversion of Assets. Except as provided in Sections 5.3 and
13.3, under no circumstances shall any portion of the Trust Fund be diverted to
or used for any purpose other than the exclusive benefit of the Participants and
their Beneficiaries prior to the satisfaction of all liabilities under the Plan.
14.7 Separability of Provisions. If any provision of this Plan is held
to be invalid or unenforceable, the other provisions of the Plan shall not be
affected but shall be applied as if the invalid or unenforceable provision had
not been included in the Plan.
14.8 Service of Process. The agent for the service of process upon the
Plan shall be the president of the Company, or such other person as may be
designated from time to time by the Company.
14.9 Governing State Law. This Plan shall be interpreted in accordance
with the laws of the State of Illinois to the extent those laws are applicable
under the provisions of ERISA.
Section 15. Top-Heavy Provisions.
15.1 Determination of Top-Heavy Status. The Committee shall determine
on a regular basis whether each Plan Year is or is not a "Top-Heavy Year" for
purposes of implementing the provisions of Sections 15.2, 15.3, 15.4, and 5.2
which apply only to the extent the Plan is top-heavy or super top-heavy within
the meaning of Section 416 and the Treasury Regulations promulgated thereunder.
In making this determination, the Committee shall use the following definitions
and principles:
15.1-1 The "Employer" includes all business entities which are
considered commonly controlled or affiliated within the meaning of Sections
414(b), 414(c), and 414(m) of the
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<PAGE>
Code.
15.1-2 The "plan aggregation group" includes each qualified retirement
plan maintained by the Employer (i) in which a Key Employee (defined below), is
a participant during the Plan Year, or (ii) which enables any plan described in
clause (i) to satisfy the requirements of Section 401(a)(4) or 410 of the Code,
or (iii) which provides contributions or benefits comparable to those of the
plans described in clauses (i) and (ii) and which is designated by the Committee
as part of the plan aggregation group.
15.1-3 The "determination date", with respect to the first Plan Year of
any plan, means the last day of that Plan Year, and with respect to each
subsequent Plan Year, means the last day of the preceding Plan Year. If any
other plan has a determination date which differs from this Plan's determination
date, the top-heaviness of this Plan shall be determined on the basis of the
other plan's determination date falling within the same calendar years as this
Plan's determination date.
15.1-4 A "Key Employee", with respect to a Plan Year, means an Employee
who at any time during the five years ending on the top-heavy determination date
for the Plan Year has received compensation from an Employer and has been (i) an
officer of the Employer having Compensation greater than 50 percent of the limit
then in effect under Section 415(b)(1)(A) of the Code, (ii) one of the 10
Employees owning the largest interests in the Employer having Compensation
greater than the limit then in effect under Section 415(c)(1)(A), (iii) an owner
of more than five percent of the outstanding equity interest or the outstanding
voting interest in any Employer, or (iv) an owner of more than one percent of
the outstanding equity interest or the outstanding voting interest in an
Employer whose
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Compensation exceeds $150,000. In determining which individuals are Key
Employees, the rules of Section 415(i) of the Code and Treasury Regulations
promulgated thereunder shall apply. The Beneficiary of a Key Employee shall also
be considered a Key Employee.
15.1-5 A "Non-Key Employee" means an Employee who at any time during
the five years ending on the top-heavy determination date for the Plan Year has
received compensation from an Employer and who has never been a Key Employee,
and the Beneficiary of any such Employee.
15.1-6 The "aggregated benefits" for any Plan Year means (i) the
adjusted account balances in defined contribution plans on the determination
date, plus (ii) the adjusted value of accrued benefits in defined benefit plans,
calculated as of the annual valuation date coinciding with or next preceding the
determination date, with respect to Key Employees and Non-key Employees under
all plans within the plan aggregation group which includes this Plan. For this
purpose, the "adjusted account balance" for and the "adjusted value of accrued
benefit" for any Employee shall be increased by all plan distributions made with
respect to the Employee during the five years ending the determination date.
Further, the adjusted account balance under a plan shall not include any amount
attributable to a rollover contribution or similar transfer to the plan
initiated by an Employee and made after 1983, unless both plans involved are
maintained by the Employer, in which event the transferred amount shall be
counted in the transferee plan and ignored for all purposes in the transferor
plan. Finally, the adjusted value of accrued benefits under any defined benefit
plan shall be determined by assuming whichever actuarial assumptions were
applied by the Pension Benefit Guaranty Corporation to determine the sufficiency
of the plan assets for plans terminating on
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<PAGE>
the valuation date.
15.1-7 This Plan shall be "top-heavy" for any Plan Year in which the
aggregated benefits of the Key Employees exceed 60 percent of the total
aggregated benefits for both Key Employees and Non-key Employees.
15.1-8 This Plan shall be "super top-heavy" for any Plan Year in which
the aggregated benefits of the Key Employees exceed 90 percent of the total
aggregated benefits for both Key Employees and Non-key Employees.
15.1-9 A "Top-Heavy Year" means a Plan Year in which the Plan is
top-heavy .
15.2 Minimum Contributions. For any Top-Heavy Year, each Employer shall
make a special contribution on behalf of each Participant to the extent that the
total allocations to his Account pursuant to Section 4 is less than the lesser
of (i) four percent of his Compensation for that year, or (ii) the highest ratio
of such allocation to Compensation received by any Key Employee for that year.
For purposes of the special contribution of this Section 15.2, a Key Employee's
Compensation shall include amounts the Key Employee elected to defer under a
qualified 401(k) arrangement. Such a special contribution shall be made on
behalf of each Participant who is employed by an Employer on the last day of the
Plan Year, regardless of the number of his Hours of Service, and shall be
allocated to his Account.
For any Plan Year when (1) the Plan is top-heavy and (2) a Non-key
Employee is a Participant in both this Plan and a defined benefit plan included
in the plan aggregation group which is top heavy, the sum of the Employer
contributions and forfeitures allocated to the Account of each such Non-key
Employee shall be equal to at least five percent (5%) of such
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Non-key Employee's Compensation for that year.
15.3 Minimum Vesting. If a Participant's vested interest in his Account
is to be determined in a Top-Heavy Year, it shall be based on the following
"top-heavy table":
Vesting Percentage of
Years Interest Vested
----- ---------------
0-2 0%
3 or more 100%
15.4 Maximum Compensation. For any Top-Heavy Year, a Participant's
"Cash Compensation" as defined in Section 4.3, and his "Compensation" for
purposes of Section 15.2, shall not exceed $200,000 (or the limit currently in
effect under Section 415(d) of the Code).
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<PAGE>
FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF ROCKFORD
EMPLOYEE STOCK OWNERSHIP PLAN
TRUST AGREEMENT
AS ADOPTED AND AMENDED
BY FIRST FINANCIAL BANK
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<PAGE>
<TABLE>
<CAPTION>
TRUST AGREEMENT
Table of Contents
-----------------
<S> <C> <C>
SECTION 1 Definitions.....................................................................................2
SECTION 2 General Duties of the Parties...................................................................3
SECTION 3 Powers and Duties of the Trustee................................................................4
SECTION 4 Settlement of Accounts.........................................................................11
SECTION 5 Duration and Termination of Trust Agreement....................................................13
SECTION 6 Resignation or Removal of Trustee..............................................................14
SECTION 7 Taxes, Expenses and Compensation of Trustee....................................................15
SECTION 8 Fiduciary Responsibilities.....................................................................16
SECTION 9 Miscellaneous..................................................................................17
</TABLE>
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<PAGE>
TRUST AGREEMENT
THIS TRUST AGREEMENT, hereby made and entered into by and between First Federal
Savings and Loan Association of Rockford (herein referred to as the "Employer")
and WM Trust Company (herein referred to as the "Trustee"),
WITNESSETH
WHEREAS, the Employer heretofore established the First Federal Savings and Loan
Association of Rockford Employee Stock Ownership Plan (hereinafter referred to
as the "Plan") effective October 2, 1992; and
WHEREAS, effective October 2, 1992, all Plan assets will be held in Trust by WM
Trust Company as nondiscretionary Trustee to the Plan; and
WHEREAS, it is the intent of the Parties hereto to establish the Trust Agreement
to constitute a part of, and to be administered in conjunction with, the
provisions of the Plan as a tax exempt trust under IRC Section 501(a) and it is
further intended that the Plan will continue to qualify under IRC Section
401(a);
NOW, THEREFORE, effective September 22, 1992, the Employer and the Trustee
hereby establish the Trust as follows:
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<PAGE>
SECTION 1
DEFINITIONS
-----------
Whenever any term is used in the Trust with the first letter capitalized, it
shall have the meaning specified below unless the context clearly indicates the
contrary. If such a term is not specified below, then it shall have the meaning
specified in the Plan unless the context clearly indicates the contrary. The
masculine gender shall include the feminine, and the singular shall include the
plural, as the context requires.
1.1 "Anniversary Date" means the last day of the Plan Year. The Plan and
Trust year is the twelve (12) month period ending on the last day of
the Plan Year.
1.2 "Committee" means the Plan Administrator as defined in the Plan.
1.3 "Employer" means First Federal Savings and Loan Association of
Rockford.
1.4 "ERISA" means the Employee Retirement Income Security Act of 1974, as
it may be amended from time to time.
1.5 "Fiduciary" means a named fiduciary, as defined in ERISA, and such
other fiduciaries as are defined in ERISA and are associated in any
manner with the control, management, and administration of the Plan and
Trust.
1.6 "IRC" means the Internal Revenue Code of 1986, as amended.
1.7 "Plan" means the First Federal Savings and Loan Association of Rockford
Employee Stock Ownership Plan and any amendments thereto.
1.8 "Trust" means the Trust Fund established under this Trust Agreement.
1.9 "Trustee" means WM Trust Company or any successor Trustee appointed by
the Employer.
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<PAGE>
SECTION 2
GENERAL DUTIES OF THE PARTIES
-----------------------------
2.1 The Employer may appoint a Committee to administer the Plan and shall
certify to the Trustee the names and specimen signatures of the members
of the Committee acting from time to time. The Employer shall make
contributions to the Trust Fund by due action in cash. The Employer
shall keep accurate books and records with respect to its employees,
their service with the Employer and their compensation. The Employer
promises and agrees that so long as the related Plan is in effect, it
will file with the Internal Revenue Service and the Department of
Labor, at the time and place required, the information provided for in
the applicable regulations.
2.2 (a) The Trustee shall hold all acceptable property received by it and
consisting of contributions paid pursuant to the provisions of the
Plan. The Trust Fund, which shall consist of said contributions,
together with the income therefrom, shall be administered by the
Trustee pursuant to the terms of this Agreement without distinction
between principal and income and without liability for the payment of
interest thereon. The Trustee shall have no duty or authority to
compute any amount to be paid to it by the Employer, nor shall it be
responsible for the collection of any contributions to the Trust Fund.
(b) Except as otherwise directed by the Committee, the Trustee shall apply
cash contributions received from the Employer and all cash dividends
received with respect to stock of the Employer held in the Trust Fund, to
make payments on all Stock Obligations as defined in the Plan. After all
Stock Obligations have been paid in full, such contributions and dividends
may be used to purchase stock of the Employer, and may be used to pay
brokerage commissions and other reasonable expenses incurred in the
connection with such purchase.
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<PAGE>
SECTION 3
POWERS AND DUTIES OF THE TRUSTEE
--------------------------------
3.1 Exclusive Authority And Discretion. The Trustee shall have the
exclusive authority and discretion to manage and control the assets of
the Trust Fund except where:
(a) Nondiscretionary Trustee. WM Trust Company shall be a nondiscretionary
Trustee. The named fiduciary under the Employer's Plan has the sole
responsibility for the management and control of the Employer's Trust Fund,
except with respect to a Plan asset under the control of a properly
appointed Investment Manager or with respect to a Plan asset properly
subject to Participant or Administrative Committee discretion of investment.
If the Employer appoints a Custodian or nondiscretionary co-Trustee, the
named fiduciary is the discretionary Trustee. If the Employer does not
designate in writing another person or persons to serve as named fiduciary,
the named fiduciary under the Plan is the president of a corporate Employer,
the managing partner of a partnership Employer, or the sole proprietor, as
appropriate. The named fiduciary will exercise its management and control of
the Trust Fund through its written direction to the nondiscretionary Trustee
or to the Custodian, whichever applies to the Employer's Plan. If WM Trust
Company is named as a nondiscretionary Trustee only with respect to assets
actually delivered to it in such capacity.
(b) Duties of Nondiscretionary Trustee. WM Trust Company, as
nondiscretionary Trustee, has no duty to review or to make recommendations
regarding investments made at the written direction of the named fiduciary.
WM Trust Company must retain any investment obtained at the written
direction of the named fiduciary until further directed in writing by the
named fiduciary to dispose of such investment. WM Trust is not liable in any
manner or for any reason for making, retaining, or disposing of any
investment pursuant to any written direction described in this paragraph.
Furthermore, the Employer agrees to indemnify and to hold WM Trust Company
harmless from any damages, costs, or expenses, including reasonable counsel
fees, which WM Trust Company may incur as a result of any claim asserted
against WM Trust Company or the Trust arising out of WM Trust Company's
compliance with any written direction described in this paragraph.
(c) In no event shall any part of the corpus or income of the Trust Fund be
used for, or diverted to, purposes other than for the exclusive benefit of
the Participants and their Beneficiaries prior to the satisfaction of all
liabilities under the Plan, except to the extent that assets may be returned
to the Employer in accordance with the Plan.
-4-
<PAGE>
3.2 Investment Guidelines. The Administrator shall keep the Trustee
informed of any requirements and objectives (including, without
limitation, any interest rate assumption) of the Plan which may be
pertinent to the Trustee's investment of the Trust Fund by the
communication of such requirements and objectives in writing to the
Trustee. The Administrator shall also establish investment guidelines
and communicate such guidelines in writing to the Trustee. To the
maximum extent permitted by ERISA, the Trustee shall be protected in
acting upon or complying with such requirements, objectives and
guidelines.
3.3 Powers and Duties of the Trustee. Subject to Section 3.1 herein, and
Section 406 of ERISA, the Trustee shall have full power and authority
with respect to any and all property at any time received or held in
Trust, to do all such acts, take all such proceedings, and exercise all
such rights and privileges, whether herein specifically referred to or
not, as could be done, taken, or exercised by the absolute owner of
such property including, without in any way limiting or impairing the
generality of the foregoing, the following powers and authority:
(a) Sell or Exchange Assets. To sell for cash or credit, to grant options,
to convert, to exchange for any security or other property or otherwise
dispose of any security or other property at any time held by Trustee for
the Trust Fund.
To exercise or sell any conversion privileges and/or subscription right
and/or call provision or other rights including, but not limited to the
exercise of all proxies, rights and warrants appurtenant to any security or
other property held at any time by the Trustee in the Trust Fund; to oppose
or consent to the reorganization, consolidation, merger, or re-adjustment of
the finances of any corporation, company, or association in which the Trust
Fund has an interest; to sell, manage, operate, repay, mortgage, pledge, or
lease the property of any corporation, company, or association to or from
the Trust Fund; to vote or not vote any securities held as part of the Trust
Fund and to do any act and to retain any security or other property deemed
necessary or advisable in connection with any security or other property at
any time held in the Trust Fund.
(c) General Authority to Borrow. To borrow money for any Trust purpose from
any person, unless such borrowing would be a non-exempt "prohibited
transaction" as such term is defined in Section 406 of ERISA and Section
4975 of the Internal Revenue Code, upon such terms and conditions as the
Trustee deems proper, with or without giving security, and to obligate the
Trust for repayment by encumbering all or a portion of the Trust assets.
(d) Exempt Loans. Subject to Section 3.6, at the direction of the Committee
in accordance with the Plan, the Trustee may (i) borrow money for the
purpose of acquiring qualifying employer securities as defined under ERISA;
(ii) execute any promissory note as the Committee shall direct obligating
the Trust Fund in connection therewith; and (iii) pledge or encumber
qualifying employer securities acquired with the proceeds of such
-5-
<PAGE>
loan or used as collateral for a prior loan that is paid by the current loan.
(e) Account Uninvested. To hold part or all of the Trust Fund uninvested.
(f) Registration of Assets. To register any security or other property held
by the Trustee hereunder in its own name (with or without the addition of
words indicating that such asset is held in a fiduciary capacity) or in the
name of the nominee, or in bearer form, or such other form that will pass
delivery. Trustee may in its sole discretion elect to leave any security or
other property in the possession of any other organization.
(g) Exercising Rights to Assets. Except as otherwise provided in the Plan,
to exercise any right (including the right to vote) appurtenant to any
security or other property at any time held by the Trustee. The Trustee may
exercise such right personally or by general power of attorney or by limited
power of attorney.
(h) Distributions From a Participant's Account. To settle or compromise any
claims, debts, or damages due or owing from the Trust Fund or a
Participant's Account, provided the Trustee need not take any action if it
is not first reimbursed for any fees, expenses, etc. that it anticipates may
be incurred if it commences or defends such proceedings. To commence or
defend suits or legal proceedings for the Trust Fund or a Participant's
Account. Trustee shall be reimbursed for any expenses it incurs in excess of
any pre- funded amount pursuant to the terms of Section 7.
(i) Delegation of Authority. To delegate any right, power or duty hereunder
to a suitable agent or counsel and to provide for their reasonable expenses
and compensation. Furthermore, Employer and/or Administrator (if different
from the Employer) hereby agrees that any and all court costs and attorney's
fees awarded by a court shall become the responsibility of the Employer or a
Participant's Account with respect to those actions necessary to administer
the Trust.
(j) Lend to Participants. Pursuant to Committee directions, to make loans to
a Participant from his Account or Benefits Account (to the extent rollover
funds were not the result of contributions made on his behalf during a time
when the Participant was an Owner- Employee in a Keogh Plan) if applicable
under the terms of the Plan. Notwithstanding the above, no loans may be made
to a Participant from the cash values of any insurance contracts held in the
Participants' Accounts.
(k) Blanket Authority. To make, execute, and deliver any and all
conveyances, contracts, waivers, releases or other instruments in writing
and to do all other acts which it deems necessary or proper for the exercise
or accomplishment of any of its foregoing rights, powers and duties.
(l) Other Accounts. Notwithstanding any other provision of the Plan and/or
Trust Agreement without limiting the generality of the authorized
investments of the assets held
-6-
<PAGE>
by the Trustee elsewhere protected in the Plan or in this Trust, or under
applicable law, all or any part of the assets held by the Trustee may be
held or invested in deposits in any trust company, bank or savings and loan
(including that of the Trustee if applicable) which bear a reasonable rate
of interest, including without limitation, investments in trust savings
accounts, certificates of deposit, time certificates or similar investments
or deposits.
(m) Employer Securities. To acquire or hold any security issued by the
Employer or an affiliate of the Employer which is a "qualifying employer
security" as defined under ERISA, provided that the Trustee may not acquire
additional qualifying employer securities if immediately after such
acquisition the aggregate fair market value of employer securities exceeds
the amount permitted under ERISA or Department of Labor Regulations, as
amended from time to time. The Trustee's acquisition or sale of qualifying
employer securities from or to any party who is a "party in interest" within
the meaning of Section 3(14) of ERISA or a "disqualified person" within the
meaning of IRC Section 4975(e)(2) shall be in accordance with Section 408(e)
of ERISA. Any qualifying employer securities held in the Trust Fund shall be
valued at fair market value for all purposes of the Plan.
3.4 Combination of Assets of Other Trusts of Plans
The Trustee may accept and hold, in part or in whole, assets contributed or
held under the provisions of any employee benefit plan which has satisfied
the applicable requirements of Section 401 of the Code, provided as follows:
(a) the qualified status of this Plan and this Trust under applicable
Sections of the Code will not thereby be affected, and
(b) accounting records shall be maintained so that the contributions and
assets of each separate plan can be identified, and
(c) the Trustee shall be directed by each separate plan with respect to its
separate assets.
3.5 Transfer of Trust Assets to Exempt Investment Fund of Trustee
(a) Notwithstanding any provisions of this Agreement, if the Trustee shall
be a bank, trust company or savings and loan licensed to do business in any
state of the United States, it shall have full power and authority to
transfer money and other assets of the Trust to itself as trustee of any
investment fund or funds consisting exclusively of assets of exempt pension
or profit sharing trusts. In such event, said instrument or instruments
shall become a part hereof as if fully set forth in length herein. Money and
other assets of the trust invested in said fund shall be held and
administered by the Trustee strictly in accordance with the terms and under
the powers granted in said instrument or instruments. The commingling of
money and other assets of qualified trusts in such fund
-7-
<PAGE>
or funds is specifically authorized.
(b) Pooled and Collective Funds. WM Trust Company acting in a fiduciary
capacity may invest and reinvest any assets at any time held in trust
hereunder in any of the collective or pooled Funds maintained by WM Trust
Company under its Plan of Operation and Declaration of Trust for WM Trust
Company Collective Investment Trust and Appendices, or any of its model
portfolios (made up of one or more publicly traded mutual funds or other
securities) maintained by WM Trust Company, all of which are hereby
incorporated by reference. WM Trust Company is hereby authorized to
commingle the assets of this Plan with the assets of the funds named above.
3.6 Requirements Regarding Stock Obligations
Notwithstanding anything herein to the contrary, with respect to any
extension of credit to the Trust Fund involving, as a lender or guarantor,
an Employer of another "disqualified person" within the meaning of IRC
Section 4975(e)(2) or a "party in interest" within the meaning of Section
3(14) of ERISA, the following must be satisfied:
(a) Each loan or installment contract must be primarily for the benefit of
Participants and Beneficiaries of the Plan;
(b) Any interest on a loan or installment contract may not exceed a
reasonable rate;
(c) Proceeds of any loan shall be used only to acquire qualifying employer
securities, to repay the loan, or to repay a previous loan meeting these
conditions, and the subject of any installment contract shall be only the
Trust's purchase of qualifying employer securities;
(d) Any collateral pledged to a creditor by the Trustee shall consist only
of the assets purchased with borrowed funds or received in accordance with
an installment contract and the creditor shall have no recourse against the
Trust Fund except with respect to the collateral (although the creditor may
have recourse against an Employer as guarantor);
(e) Payments with respect to a loan or installment contract may be made only
from those amounts contributed by the Employers to the Trust Fund, from
amounts earned on such contributions, and from cash dividends received on
unallocated stock held by the Trust as collateral for such an obligation;
and
(f) Upon the payment of any portion of the balance due on a loan or upon any
installment payment, a proportionate part of any assets originally pledged
as collateral for such indebtedness shall be released from encumbrance in
accordance with section 4.2 of the Plan.
-8-
<PAGE>
3.7 Voting Rights
Notwithstanding any provisions of this Agreement, all stock of the Employer
held in the Trust Fund shall be voted by the Trustee in accordance with the
Plan.
3.8 Individual Investment Control
In the event the Board, by resolution, permits a Participant to direct
investment of his Accounts, the Trustee shall deposit all contributions to
such Participants in an interest-bearing account. Trustee shall execute each
Participant's investment directions in the following manner:
(a) All investment transactions shall be governed by the current investment
procedures as followed by the Trustee.
(b) In completing the investment directions of a Participant to purchase for
his Account, or for the Trust Fund, as applicable, or sell, convey,
exchange, transfer, pledge, mortgage, or otherwise dispose of any security
or other property held in the Participant's Account or in the Trust Fund, as
applicable, it being understood that the responsibility for instituting any
of the above transactions rests with the Participant. Trustee shall be
responsible only for the disbursing of funds, the receiving of any security
or other property and/or the execution of any applicable documents.
Trustee's completion of the investment direction shall be accomplished as
soon as administratively possible within the constraints of Trustee's
operating and administrative procedures.
3.9 No Investment Direction
In the event individual investment control is permitted by resolution of the
Board and the Trustee does not receive any direction from the Participant,
the Trustee shall hold and administer the Accounts of such Participant in
such other investment fund medium as mutually agreed upon by the
Administrator and Trustee.
3.10 Distributions
The Trustee shall from time to time, on the written direction of the
Administrator, make distributions from the Trust to such person or persons
that may be specified on such directive. The Trustee shall be under no
liability for any distribution made by it pursuant to the directions of the
Administrator and shall be under no duty to make inquiry as to whether any
distributions directed by the Administrator are made pursuant to the
provisions of the Plan and this Section except to the extent required of a
prudent co- Fiduciary under ERISA. The Trustee shall not be liable for the
proper application of any part of the Trust if distributions are made in
accordance with the written direction of the Administrator as herein
provided nor shall the Trustee be responsible for the adequacy of the Trust
Fund to meet and discharge any and all payments and liabilities under the
Plan.
-9-
<PAGE>
3.11 Limited Indemnification and Authority
(a) The Employer hereby indemnifies the Trustee against, and agrees to hold
the Trustee harmless from, all liabilities and claims (including reasonable
attorney's fees and expenses in defending against such liabilities and
claims) against the Trustee as a result of any breach of any Fiduciary other
than the Trustee, unless the Trustee participates knowingly in such breach
through its negligence in performing its own specific fiduciary
responsibilities, or has enabled such other Fiduciary to commit a breach of
the latter's Fiduciary responsibilities or by its negligence, or willful and
intentional nonfeasance, malfeasance or misfeasance enables such other
Fiduciary to commit a breach of the latter's Fiduciary responsibilities.
(b) All persons dealing with the Trustee are released from inquiring into
the decisions or authority of the Trustee and from seeing to the application
of any funds paid to the Trustee.
-10-
<PAGE>
SECTION 4
SETTLEMENT OF ACCOUNTS
----------------------
4.1 The Trustee shall maintain accurate records and detailed accounts of
all investments, receipts, disbursements, and other transactions
hereunder, and such records shall be available at all reasonable times
to inspection by the Committee, the Employer or any other authorized
representative of either.
4.2 The Trustee, at the direction of the Committee, shall submit to the
Committee such valuations, reports or other information as the
Committee may reasonably require. In any case, the Trust Fund shall be
valued by the Trustee in accordance with the terms of the Plan. The
fair market value of assets in the Trust shall be determined by the
Trustee based upon such sources of information as it may deem reliable
including, but not limited to, information reported in (1) newspapers
of general circulation, (2) standard financial periodicals or
publications, (3) statistical and valuation services, (4) the records
of securities exchanges or brokerage firms deemed by the Trustee to be
reliable, or any combination thereof. In the event the Trustee
considers the method set forth in this Section 4.2 to be impracticable,
then the Trustee may employ at the expense of the Trust Fund, two
reputable brokers, members of the New York Stock Exchange or any other
recognized stock exchange, to appraise such securities for the purpose
of obtaining the value of the Trust Fund and for any other purpose
necessary to the administration of the Trust Fund. Notwithstanding any
other provision to the contrary, in valuing securities issued by the
Employer or any of its affiliated companies for any purpose, the
Trustee shall determine the fair market value of such stock in good
faith and in accordance with regulations promulgated by the Secretary
of Labor pursuant to Section 3(18) of ERISA. In making such
determination, the Trustee may, in its discretion, obtain the opinions
of one or more qualified appraisers who may be employed by the Trustee
from time to time at the expense of the Trust Fund. In the absence of
fraud or bad faith, the valuation of the Trust by the Trustee shall be
conclusive.
4.3 Within sixty (60) days following the close of each Plan year (or
following the close of any period as may be agreed upon by the Trustee
and Committee), the Trustee shall file with the Committee a written
account setting forth a description of all securities and other
property purchased and sold, all receipts, disbursements, and other
transactions effected by it during such period, and listing the
securities and other property held by it at the end of such period,
together with the then fair market value
-11-
<PAGE>
thereof.
The Committee may approve such account by written notice of approval
delivered to the Trustee or by failure to express objections to such account
delivered to the Trustee in writing within ninety (90) days from the date
upon which the account was delivered to the Committee.
Upon receipt of a written approval of the account, or upon the passage of
said period of time within which objections may be filed, without written
objections having been delivered to the Trustee, such account shall be
deemed to be approved, and the Trustee shall be released and discharged as
to all items, matters and things set forth in such account as if such
account had been settled and allowed by a decree of a court of competent
jurisdiction.
4.4 The Employer or the Committee, or both, at any time may employ the
individual or corporation which then is serving as Trustee hereunder as
its or their agent to perform any act, keep any records of accounts, or
make any computations which are required of the Employer or the
Committee by this Agreement or the Plan, and may compensate said
individual or corporation therefore, and such employment shall not be
deemed to be contrary to or inconsistent with the provisions of this
Agreement. Nothing done by said individual or corporation as agent for
the Employer or the Committee shall change or increase in any manner
its responsibility or liability as Trustee hereunder.
-12-
<PAGE>
SECTION 5
DURATION AND TERMINATION OF TRUST AGREEMENT
-------------------------------------------
5.1 It is the intention of the Employer that this Trust and the Plan of
which it is a part shall be permanently administered for the benefit of
employees and this Trust is, accordingly, irrevocable; but, if changing
conditions require, this Agreement and the Trust created hereby may be
terminated at any time by the Employer, and upon such termination the
Trust shall be distributed by the Trustee as and when directed by the
Committee in accordance with the provisions of Section 3. From and
after the date of termination of this Agreement and the Trust and until
the final distribution of the Trust, the Trustee shall continue to have
all powers provided under this Agreement as are necessary and expedient
for the orderly liquidation and distribution of the Trust.
5.2 This Agreement may be amended at any time by written agreement of the
Employer and the Trustee, provided, however, that such amendment shall
not operate to (a) revest the Trust or any part thereof in the
Employer, (b) reduce the then accrued benefit or the amount then held
for the benefit of any participant in the Plan, (c) cause or effect any
discrimination in favor of highly compensated employees, (d) cause any
part of the Trust Fund (other than such part as is required to pay
taxes and administration expenses) to be used for, or diverted to,
purposes other than for the exclusive benefit of participants and their
beneficiaries at any time prior to the satisfaction of all liabilities
with respect to participants and their beneficiaries. No reversion
shall occur to the Employer except as provided in the Plan document.
-13-
<PAGE>
SECTION 6
RESIGNATION OR REMOVAL OF TRUSTEE
---------------------------------
6.1 The Trustee may resign as Trustee hereunder or may be removed by the
Employer. Such resignation or removal may be accomplished at any time
upon the giving of sixty (60) days written notice. Upon such
resignation or removal, the Employer shall appoint a successor Trustee
to whom the Trustee shall transfer all property of the Trust then held
by it. Such successor Trustee shall thereupon succeed to all of the
powers and duties given to the Trustees by this Agreement.
6.2 Within sixty (60) days of such transfer the resigning or removed
Trustee shall render to the Employer an account in the form and manner
prescribed for the annual account by Section 4 hereof. Unless the
Employer shall within sixty (60) days after the rendering of such
account file with the Trustee written objections thereto, the account
shall be deemed to have been approved and the trustee shall be released
and discharged as to all items, matters and things set forth in such
account as if such account had been settled and allowed by a decree of
a court of competent jurisdiction.
6.3 In the case where the Trustee dies, or for any reason, is incapable of
performing its duties hereunder, the Employer shall appoint a successor
Trustee within thirty (30) days of such event. Within sixty (60) days
of such appointment the Committee shall render an account as provided
at Section 6.2.
-14-
<PAGE>
SECTION 7
TAXES, EXPENSES AND COMPENSATION OF TRUSTEE
-------------------------------------------
7.1 The Trustee shall deduct from and charge against the Trust Fund any
taxes paid by it which may be imposed upon the Trust Fund or the income
thereof or which the Trustee is required to pay with respect to the
interest of any person therein.
7.2 The Trustee shall deduct from and charge against the Trust Fund such
fees and compensation for performing duties hereunder as agreed to,
from time to time, by the Employer and the Trustee, unless paid by the
Employer.
-15-
<PAGE>
SECTION 8
FIDUCIARY RESPONSIBILITIES
--------------------------
8.1 It is intended that each of the Fiduciaries under the Plan and Trust
shall be solely responsible for its acts or omissions. Except to the
extent imposed upon other Fiduciary by ERISA, or by any Regulations or
Rulings rendered thereunder, no Fiduciary shall have any liability for
a breach of fiduciary responsibility of another Fiduciary with respect
to the Plan and Trust Agreement unless he participates knowingly in
such breach, knowingly undertakes to conceal such breach, has actual
knowledge of such breach and fails to take reasonable remedial action
to remedy said breach or, through his negligence in performing his own
specific fiduciary responsibilities which give rise to his status as a
Fiduciary, he has enabled such other Fiduciary to commit a breach of
the latter's fiduciary responsibilities.
-16-
<PAGE>
SECTION 9
MISCELLANEOUS
-------------
9.1 The Trust will be administered according to the laws of the United
States and the State of Washington, and its validity, construction and
all rights hereunder shall be governed by the laws of that State to the
extent that the latter are not preempted by the former. If any
provisions of this Agreement shall be invalid or unenforceable, the
remaining provisions thereof shall continue to be fully effective.
9.2 The headings in this instrument have been inserted for convenience of
reference only, and are to be ignored in any construction of the
provisions thereof.
9.3 No person entitled to any benefit under this Agreement shall have any
right to assign, transfer, hypothecate, encumber, commute or anticipate
his interest in any benefits under this Trust and such benefits shall
not in any way be subject to any legal process or levy of execution
upon, or attachment or garnishment proceedings against the same for the
payment of any claim against such person, except as required pursuant
to a Qualified Domestic Relations Order.
9.4 It is intended that this Trust and the Plan referred to herein qualify
as a tax exempt Trust Fund under IRC Sections 401(a) and 501(a).
9.5 This Trust Agreement is effective as of the date executed by the
Employer and the Trustee.
9.6 In the event any provision of this Trust Agreement shall be held
illegal or invalid for any reason, said illegality or invalidity shall
not affect the remaining provisions hereof, and this Trust Agreement
shall thereafter be construed and enforced as if said illegal or
invalid provisions had never been included herein.
9.7 This Trust Agreement may be executed in any number of counterparts,
each of which shall be deemed to be an original.
-17-
<PAGE>
IN WITNESS WHEREOF, the undersigned have caused this Trust Agreement to be
executed as of the 22nd day of September, 1992.
EMPLOYER:
First Federal Savings and Loan Association of Rockford
By: /s/ David A. Ingrassia
------------------------
Title: President/CEO
---------------------
Dated: 9/22/92
---------------------
TRUSTEE:
WM Trust Company
By: /s/ Gerry D. Kelley
-------------------------
Title: Trust Officer
----------------------
Dated: 9/23/92
----------------------
-18-
<PAGE>
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 11
FIRST FINANCIAL CORPORATION
COMPUTATION OF EARNINGS PER SHARE
For The For The
Three Months Ended Year Ended
December 31, December 31,
---------------------- ----------------------
1995 1994 1995 1994
------ ------ ------ -----
(In thousands, except
per share data)
<S> <C> <C> <C> <C>
PRIMARY EARNINGS PER SHARE
Net income $19,059 $15,816 $63,984 $53,029
======= ======= ======= =======
Shares:
Weighted average common shares
outstanding 29,638 29,036 29,431 28,926
Shares from assumed exercise of options
(as determined by the treasury stock
method) 755 855 754 929
------- ------- ------- -------
Common and common equivalent shares 30,393 29,891 30,185 29,855
======= ======= ======= =======
Primary Earnings Per Common Share $ .63 $ .53 $ 2.12 $ 1.78
======= ======= ======= =======
FULLY DILUTED EARNINGS PER SHARE
Net income $19,059 $15,816 $63,984 $53,029
======= ======= ======= =======
Shares:
Weighted average common shares
outstanding 29,638 29,036 29,431 28,926
Shares from assumed exercise of options
(as determined by the treasury stock
method) 778 859 903 961
------- ------- ------- -------
Common and common equivalent shares 30,416 29,895 30,334 29,887
======= ======= ======= =======
Fully Diluted Earnings Per Common Share $ .63 $ .53 $ 2.11 $ 1.77
======= ======= ======= =======
</TABLE>
-1-
<PAGE>
EXHIBIT 13(a)
CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders
First Financial Corporation
We have audited the accompanying consolidated balance sheets of First Financial
Corporation as of December 31, 1995 and 1994, and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of First Financial
Corporation at December 31, 1995 and 1994, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995 in conformity with generally accepted accounting principles.
January 15, 1996
Milwaukee, Wisconsin
-1-
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
FIRST FINANCIAL CORPORATION
December 31,
1995 1994
----------- ----------
(Dollars in thousands)
<S> <C> <C>
ASSETS
Cash $ 123,379 $ 94,064
Federal funds sold 34,929 23,890
Interest-earning deposits 13,801 1,024
---------- ----------
CASH AND CASH EQUIVALENTS 172,109 118,978
Securities available for sale (at fair value):
Investment securities 80,999 68,959
Mortgage-related securities 571,293 201,373
Securities held to maturity:
Investment securities (fair value of
$119,063,000--1995 and $124,434,000
--1994) 119,426 129,301
Mortgage-related securities (fair value of
$691,060,000--1995 and $1,263,489,000
--1994) 699,468 1,301,118
Loans receivable:
Held for sale 26,651 11,736
Held for investment 3,590,149 3,458,711
Foreclosed properties and repossessed
assets 3,379 5,216
Real estate held for investment or sale 8,289 7,706
Office properties and equipment, at cost 51,124 53,927
Intangible assets, less accumulated
amortization 21,481 26,726
Other assets 126,740 118,073
---------- ----------
$5,471,108 $5,501,824
========== ==========
</TABLE>
-2-
<PAGE>
<TABLE>
<CAPTION>
December 31,
1995 1994
---------- ----------
(Dollars in thousands)
<S> <C> <C>
LIABILITIES
Deposits $4,424,525 $4,381,455
Short-term borrowings 25,972 13,127
Federal Home Loan Bank and
other borrowings 544,536 695,319
Advance payments by borrowers for
taxes and insurance 13,206 15,986
Other liabilities 77,952 68,629
---------- ----------
TOTAL LIABILITIES 5,086,191 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: 29,676,365--1995;
29,125,858--1994 29,676 29,126
Additional paid-in capital 49,756 50,129
Net unrealized loss on securities
available for sale (6,021) (8,619)
Treasury stock (3,669)
Common stock purchased by employee
benefit plans (271) (1,608)
Retained earnings (substantially
restricted) 311,777 261,949
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 384,917 327,308
$5,471,108 $5,501,824
========== ==========
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
FIRST FINANCIAL CORPORATION Year Ended December 31,
1995 1994 1993
------ -------- ------
(Dollars in thousands,
except per share amounts)
<S> <C> <C> <C>
Interest income:
Mortgage loans $183,434 $176,914 $175,998
Other loans 120,256 100,755 84,595
Mortgage-related securities 98,821 89,379 89,965
Investments 14,797 14,816 16,153
-------- -------- --------
TOTAL INTEREST INCOME 417,308 381,864 366,711
Interest expense:
Deposits 196,823 174,819 179,766
Short-term borrowings 3,895 666
Federal Home Loan Bank and
other borrowings 33,453 28,737 22,727
-------- -------- --------
TOTAL INTEREST EXPENSE 234,171 204,222 202,493
-------- -------- --------
NET INTEREST INCOME 183,137 177,642 164,218
Provision for losses on loans 9,738 6,824 10,570
-------- -------- --------
NET INTEREST INCOME AFTER PROVISIONS
FOR LOSSES ON LOANS 173,399 170,818 153,648
Non-interest income:
Deposit account service fees 12,101 10,582 10,022
Loan fees and service charges 11,109 9,814 10,579
Service fees on loans sold 7,125 7,737 6,587
Insurance and brokerage sales commis-
sions 6,849 7,269 6,848
Net gain on sales of loans held for sale 2,703 2,732 8,324
Net gain (loss) on sales of securities
available for sale 1,182 1,104 (385)
Unrealized loss on impairment of
mortgage-related securities (9,000)
Other 3,222 3,056 2,783
-------- -------- --------
TOTAL NON-INTEREST INCOME 44,291 33,294 44,758
-------- -------- --------
217,690 204,112 198,406
Non-interest expense:
Compensation, payroll taxes and other
employee benefits 45,263 51,496 50,122
Federal deposit insurance premiums 10,169 10,291 7,953
Occupancy 9,006 9,157 8,497
Data processing 7,159 7,360 7,462
Acquisition-related costs 6,458
Telephone and postage 6,434 6,083 5,689
Loan expense 6,257 6,669 6,353
Marketing 5,941 5,004 4,210
Furniture and equipment 5,303 6,071 6,355
Amortization of intangible assets 5,245 5,365 6,427
Net cost of (income from) operations
of foreclosed properties (164) 1,123 3,293
Other 11,531 11,748 12,603
-------- -------- --------
TOTAL NON-INTEREST EXPENSE 118,602 120,367 118,964
-------- -------- --------
INCOME BEFORE INCOME TAXES 99,088 83,745 79,442
Income taxes 35,104 30,716 29,691
-------- -------- --------
NET INCOME $ 63,984 $ 53,029 $49,751
======== ======== ========
Earnings per share:
Primary $ 2.12 $ 1.78 $ 1.72
Fully diluted 2.11 1.77 1.71
Cash dividends paid per share $ .48 $ .40 $ .35
</TABLE>
See notes to consolidated financial statements.
-4-
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FIRST FINANCIAL CORPORATION Net
Unrealized Common
Gain Stock
(Loss) On Purchased
Additional Securities by Employee Total
Common Paid-In Available Treasury Benefit Retained Stockholders'
Stock Capital For Sale Stock Plans Earnings Equity
------ --------- ---------- -------- --------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1993 $27,999 $43,811 $ (87) $ 0 $(2,488) $170,744 $239,979
Net Income (including pooled
company) 49,751 49,751
Cash dividends ($.35 per share) (8,238) (8,238)
Exercise of stock options 321 591 912
Change in net unrealized gain
(loss) on securities available
for sale, net of tax (including
pooled company) 1,834 1,834
Other pre-merger transactions
of pooled company (462) 530 (4,126) 463 (3,595)
------ ------ ----- ------ ------ --------- ------
BALANCES AT DECEMBER 31, 1993 27,858 44,932 1,747 (4,126) (2,025) 212,257 280,643
Net income (including pooled
company) 53,029 53,029
Cash dividends ($.40 per share) (9,950) (9,950)
Exercise of stock options 279 1,316 1,595
Issuance of common stock in
conjunction with acquisition 938 3,850 6,613 11,401
Change in net unrealized gain
(loss) on securities available
for sale, net of tax (including
pooled company) (10,366) (10,366)
Other pre-merger transactions
of pooled company 51 31 457 417 956
------ ------ ------- ------ ------ --------- -------
BALANCES AT DECEMBER 31, 1994 29,126 50,129 (8,619) (3,669) (1,608) 261,949 327,308
Net income 63,984 63,984
Cash dividends ($.48 per share) (14,156) (14,156)
Exercise of stock options 504 2,520 3,024
Payment on ESOP loan 790 790
Change in net unrealized gain
(loss) on securities available
for sale, net of tax (including
pooled company) 2,598 2,598
Other pre-merger transactions
of pooled company 46 (2,893) 3,669 547 1,369
------- -------- ------- ------- ------- -------- --------
BALANCES AT DECEMBER 31, 1995 $29,676 $49,756 $(6,021) $ 0 $ (271) $311,777 $384,917
======= ======== ======= ======= ======= ======== ========
</TABLE>
See notes to consolidated financial statements.
-5-
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FIRST FINANCIAL CORPORATION
Year Ended December 31,
1995 1994 1993
-------- -------- ------
(Dollars in thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 63,984 $ 53,029 $ 49,751
Adjustments to reconcile net income
to net cash provided by operating
activities:
Decrease (increase) in accrued
interest on loans (4,657) (2,563) 3,711
(Decrease) increase in accrued
interest on deposits 4,123 148 (1,928)
Loans originated for sale (210,150) (298,813) (1,005,655)
Proceeds from sales of loans held
for sale 211,658 443,931 1,051,358
Provision for depreciation 5,746 6,513 6,307
Provision for losses on loans 9,738 6,824 10,570
Provision for losses on real
estate and other assets 502 1,125 3,564
Unrealized loss on impairment of
mortgage-related securities 9,000
Amortization of cost in excess of
acquired businesses 832 873 554
Amortization of core deposit
intangibles 4,413 4,492 5,873
Amortization of mortgage
servicing rights 1,197 890 2,379
Net gain on sales of loans and other
assets (3,911) (4,076) (8,310)
Other 38,592 (1,971) 12,320
---------- ----------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 122,067 219,402 130,494
INVESTING ACTIVITIES
Proceeds from sales of investment
securities available for sale 18,759 65,088 45,000
Proceeds from sales of investment
securities held to maturity 6,235
Proceeds from maturities of investment
securities held to maturity 51,126 24,393 68,486
Proceeds from maturities of available
for sale investment securities 9,615 16,649
Purchases of available for sale
investment securities (15,770) (2,627) (80,000)
Purchases of investment securities held
to maturity (62,710) (7,610) (159,188)
Proceeds from sales of mortgage-related
securities available for sale 182,563 81,287
Principal payments received on
mortgage-related securities 233,949 292,219 392,557
Purchases of mortgage-related securities (594,952) (271,719)
Principal collected on loans
receivable 564,076 586,875 655,712
Loans originated for portfolio (726,877) (972,726) (1,114,424)
Additions to office properties and
equipment (3,473) (3,397) (6,864)
Proceeds from sales of foreclosed
properties and repossessed assets 8,048 8,745 18,605
Proceeds from sales of real estate
held for investment 18 14,042 293
</TABLE>
-6-
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS--Continued
FIRST FINANCIAL CORPORATION Year Ended December 31,
1995 1994 1993
-------- -------- ------
(Dollars in thousands)
<S> <C> <C> <C>
INVESTING ACTIVITIES--Continued
Business acquisitions, net of cash and
cash equivalents acquired of $4,593,000
--1994 and $443,795,000--1993
Loans receivable (96,748) (316,305)
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)
Office properties and equipment (2,387) (8,445)
Intangible assets (699) (14,541)
Deposits and related accrued
interest 114,297 970,162
Borrowings 750 71,897
Stockholders' equity 11,401
Other--net (494) (9,813)
---------- ---------- ----------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 76,761 (386,145) 79,775
FINANCING ACTIVITIES
Net increase (decrease) in deposits 38,947 ( 96,257) (119,863)
Increase (decrease) in advance payments by
borrowers for taxes and insurance (2,780) 337 897
Funding of official checks for borrower
tax escrows (34,953)
Net increase in short-term borrowings 12,845 13,127
Proceeds of borrowings 1,094,623 1,119,527 836,807
Repayments of borrowings (1,245,406) (881,342) (940,783)
Proceeds from exercise of stock options 3,254 1,845 912
Proceeds from vesting of employee
benefit plans 1,929 416 463
Purchase of treasury stock (4,126)
Payments of cash dividends to
stockholders (14,156) (9,950) (8,238)
---------- ---------- ----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (145,697) 147,703 (233,931)
---------- ---------- ----------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 53,131 (19,040) (23,662)
Cash and cash equivalents at beginning of
year 118,978 138,018 161,680
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 172,109 $ 118,978 $ 138,018
========== ========== ==========
Supplemental disclosure of cash flow information: Cash paid or credited to
accounts for:
Interest on deposits and borrowings $ 230,501 $ 202,520 $ 203,506
Income taxes 35,138 34,111 31,511
Non-cash investing activities:
Investment securities transferred to
available-for-sale portfolio at
amortized cost 20,734 67,337 48,338
Mortgage-related securities transferred
to available-for-sale portfolio at
amortized cost 391,537 64,153 345,468
Mortgage loans transferred to loans
held for sale portfolio 15,467 26,028 60,238
Loans receivable transferred to
foreclosed properties 6,158 7,169 7,439
</TABLE>
See notes to consolidated financial statements.
-7-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST FINANCIAL CORPORATION
December 31, 1995
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business: First Financial Corporation ("FFC") provides a full range of financial
services to individual customers in Wisconsin and Illinois through its
wholly-owned insured banking subsidiary, First Financial Bank ("FF Bank") and
its subsidiaries, all of which are wholly-owned. FFC and its subsidiary are
subject to competition from other financial institutions. FFC and its subsidiary
also are subject to the regulations of certain federal agencies and undergo
periodic examinations by those regulatory authorities.
Basis Of Financial Statement Presentation: The consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
and include the accounts of FFC and FF Bank. Significant intercompany accounts
and transactions have been eliminated. Investments in joint ventures, which are
not material, are accounted for on the equity method.
The accompanying consolidated financial statements have been restated for an
acquisition, discussed in Note B, which has been accounted for as a
pooling-of-interests.
In preparing the consolidated financial statements in conformity with generally
accepted accounting principles, management is required to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates. Material estimates that are particularly susceptible to change in the
near-term relate to the determination of the allowance for loan losses, the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans as well as the valuation of intangible assets,
investments, mortgage-related securities, and mortgage servicing rights. In
connection with the determination of the allowance for loan losses and real
estate owned, management obtains independent appraisals for significant
properties.
Cash and Cash Equivalents: FFC considers its interest-earning deposits and
federal funds sold which have original maturities of three months or less to be
cash equivalents.
Investment And Mortgage Related-Securities Held-To-Maturity And
Available-For-Sale: Debt securities are classified as held-to- maturity when FFC
has the intent and ability to hold the securities to maturity. Held-to-maturity
securities are stated at amortized cost.
Debt securities not classified as held-to-maturity are classified as
available-for-sale. Available-for-sale securities are stated at fair value, with
the unrealized gains and losses, net of tax, reported as a separate component of
stockholders' equity. At
-8-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
December 31, 1995 and 1994 the balances of stockholders' equity were decreased
by $6,021,000 and $8,619,000, net of $3,104,000 and $4,861,000 in deferred
income taxes. See Notes C and D. No securities are held by FFC in a trading
account.
In October 1995, the Financial Accounting Standards Board ("FASB") approved a
modification of Statement of Financial Accounting Standards ("SFAS") No. 115,
wherein from November 15, 1995 through December 31, 1995 FF Bank had the
opportunity to reconsider its classification of investment and mortgage-related
securities as held-to-maturity, trading, or available-for-sale. Accordingly, on
December 21, 1995, FFC chose to reclassify certain investments and
mortgage-related securities from held-to- maturity to available-for-sale. At the
date of transfer, the amortized cost of the investment and mortgage-related
securities was $20,734,000 and $391,537,000, respectively. The net unrealized
gain on those securities was $895,000 and $410,000, which is included in
stockholders' equity net of income tax effect of $322,000 and $148,000,
respectively.
The amortized cost of debt securities classified as held-to- maturity or
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity, or in the case of mortgage-related securities, over the
estimated life of the security. Such amortization is included in interest income
from the related security.
Interest and dividends are included in interest income from the related
securities. Realized gains and losses and declines in value judged to be other
than temporary are included in net securities gains (losses). The cost of
securities sold is based on the specific identification method.
In connection with the amortization of premiums and discounts and in determining
if declines in value are other than temporary, management estimates future cash
flows to be generated by pools of loans underlying the mortgage-related
securities. Included in this evaluation are such factors as i) estimated loan
prepayment rates, ii) a review of delinquencies, foreclosures, repossessions and
recovery rates relative to the underlying mortgage loans collateralizing each
security, iii) the level of available subordination or other credit
enhancements, iv) an assessment of the servicer of the underlying mortgage
portfolio and v) the rating assigned to each security by independent national
rating agencies.
Interest, Fees, And Discounts On Loans: Interest on loans is recorded using the
accrual method. Allowances ($914,000--1995; $719,000--1994) are established for
uncollected interest on non-accrual loans. Generally, a loan is classified as
non-accrual and the accrual of interest on such loan is discontinued when the
contractual payment of principal or interest has become more than 90 days past
due or management has serious doubts about further
-9-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
collectibility of principal or interest, even though the loan currently is
performing. When a loan is placed on non-accrual status, accrued but unpaid
interest is reversed. Generally, loans are restored to accrual status when the
obligation is brought current, has performed in accordance with the contractual
terms for a reasonable period of time and the ultimate collectibility of the
total contractual principal and interest is no longer in doubt.
Loan origination and commitment fees and certain direct loan origination costs
are being deferred and the net amounts amortized as an adjustment to the related
loan's yield. FFC is amortizing these amounts, using the level yield method,
over the contractual life of the related loans. Such deferred fees are recorded
as income upon prepayment of the related loans.
Unearned discounts on consumer, home improvement and manufactured housing loans
are amortized over the term of the loans using a method which approximates the
level yield method.
The discounts on loans of acquired businesses are being amortized using the
level yield method, adjusted for prepayments.
Loans Held For Sale: Loans held for sale are recorded at the lower of aggregate
cost or market value and generally consist of current production of certain
fixed-rate first mortgage loans. Fees received from the borrower are deferred
and recorded as an adjustment of the sales price.
Fees For Loans Serviced For Others: Effective January 1, 1995, FFC adopted SFAS
or the ("Statement") No. 122, ("Accounting for Mortgage Servicing Rights"). SFAS
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. As a result of the adoption of SFAS No. 122 in
1995, FFC realized a pre-tax gain of $1.7 million ($1.1 million after tax, or
$0.04 per share) upon the capitalization of originated mortgage servicing
rights.
Originated servicing rights resulting from the above adoption of SFAS No. 122,
purchased servicing rights resulting from the valuation of loan servicing
acquired in business acquisitions or in the purchase of loan servicing rights
from other financial institutions and excess servicing rights generated prior to
the 1995 adoption of SFAS No. 122, for servicing income above the normal
servicing spread, are amortized over the estimated lives of the loans using the
level yield method, adjusted for
-10-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
prepayments, and are shown as a reduction of "Service Fees on Loans Sold" in the
consolidated statements of income.
Foreclosed Properties And Repossessed Assets: Real estate and manufactured homes
which were acquired by foreclosure or by deed in lieu of foreclosure and other
repossessed assets are carried at the lower of cost or fair value. Costs
relating to the development and improvement of property are capitalized; holding
costs are charged to expense.
Allowances For Losses: Allowances for losses on loans, foreclosed properties and
repossessed assets are established when a loss is probable and can be reasonably
estimated. These allowances are provided based on past experience and on
prevailing market conditions. Management's evaluation of loss considers various
factors including, but not limited to, general economic conditions, loan
portfolio composition, prior loss experience and estimated collateral value.
A substantial portion of FF Bank's loans are collateralized by real estate in
Wisconsin and Illinois. Accordingly, the ultimate collectibility of a
substantial portion of FF Bank's loan portfolio and the recovery of a
substantial portion of the carrying amount of real estate owned are susceptible
to changes in market conditions in Wisconsin and Illinois.
Management believes that the allowances for losses on loans, foreclosed
properties and repossessed assets are adequate. While management uses available
information to recognize losses, future additions to the allowances may be
necessary based on changes in economic conditions.
Effective January 1, 1995, FFC adopted SFAS No. 114, ("Accounting by Creditors
for Impairment of a Loan"). Statement No. 114, which was amended by Statement
No. 118, 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. The adoption of
Statements No. 114 and 118 had no effect on FFC's financial condition or results
of operations.
Real Estate Held For Investment Or Sale: Real estate held for investment or sale
includes land, buildings and equipment. These investments are carried at the
lower of initial cost plus capitalized development period interest and real
estate taxes, less accumulated depreciation, or estimated fair value.
Depreciation And Amortization: The cost of office properties and equipment and
real estate held for investment or sale is being depreciated principally by the
straight-line method over the estimated useful lives of the assets. The cost of
leasehold
-11-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
improvements is being amortized on the straight-line method over the lesser of
the term of the respective lease or estimated economic life.
Intangible Assets: The cost in excess of net assets of acquired businesses is
being amortized over ten to twenty years using the straight-line and accelerated
methods. The cost in excess of net assets of acquired businesses, aggregating
$4,164,000 and $4,996,000 at December 31, 1995 and 1994, respectively, is net of
accumulated amortization.
The premiums resulting from the valuation of core deposits acquired in business
combinations or in the purchase of branch offices are amortized over the
estimated useful life of seven to ten years using the level yield method. Core
deposit intangibles, aggregating $17,317,000 and $21,730,000 at December 31,
1995 and 1994, respectively, are net of accumulated amortization.
Income Taxes: FFC and its subsidiary file a consolidated federal income tax
return and separate state income tax returns. Financial statement provisions are
made in the income tax expense accounts for deferred taxes applicable to income
and expense items reported in different periods than for income tax purposes.
FFC accounts for income taxes using the liability method. Deferred income tax
assets and liabilities are adjusted regularly to amounts estimated to be
receivable or payable based on current tax law and FFC's tax status.
Consequently, tax expense in future years may be impacted by changes in tax
rates and tax return limitations.
Per Share Amounts: Primary and fully diluted earnings per share are 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 equivalent shares consist entirely of stock
options. The resulting number of shares used in computing primary earnings per
share in 1995, 1994 and 1993 is 30,185,000, 29,855,000 and 28,851,000,
respectively. The resulting number of shares used in computing fully diluted
earnings per share in 1995, 1994 and 1993 is 30,334,000, 29,887,000 and
29,118,000, respectively.
Pending Accounting Changes: The FASB issued SFAS No. 123 ("Accounting for
Stock-Based Compensation") in October 1995 relative to financial accounting and
reporting standards for stock-based employee compensation plans. SFAS No. 123 is
effective for fiscal years beginning after December 15, 1995. The Statement
defines a fair value based method of accounting for employee stock options or
similar equity instruments and encourages all entities to adopt that method of
accounting for all employee stock compensation plans. However, the Statement
-12-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
also allows an entity to continue to measure compensation cost for these plans
using an intrinsic value based method of accounting prescribed by Accounting
Principles Board Opinion No. 25 ("APB No. 25"). Entities electing to retain the
accounting treatment under APB No. 25 must make pro forma footnote disclosures
of net income and earnings per share as if the fair value based method of
accounting defined in this statement has been applied. Management has not
decided which method it will elect.
Reclassifications: Certain 1994 and 1993 accounts have been reclassified to
conform to the 1995 presentations.
NOTE B--BUSINESS COMBINATIONS
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, the number of shares, and earnings per share for all
periods presented have been restated to include the results of FirstRock.
On February 28, 1995 FirstRock had assets (unaudited) of $376,473,000 and
shareholder's 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
1995 results of operations, are as follows:
Net
Total Income
Income (Loss)
------ ------
(Dollars in thousands)
FFC $69,579 $ 9,348
FirstRock 5,383 (3,091)
------- -------
$74,962 $ 6,257
======= =======
-13-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE B--BUSINESS COMBINATIONS--Continued
A reconciliation of total income, net income and earnings per share (unaudited),
as previously reported, with restated amounts for the years ended December 31,
1994 and 1993 follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1994 December 31, 1993
----------------- -----------------
Total Net Total Net
Income Income Income Income
------ ------ ------ ------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Operations:
Previously reported $381,944 $ 48,325 $377,844 $ 45,215
FirstRock 33,214 4,704 33,625 4,536
-------- -------- -------- --------
As restated $415,158 $ 53,029 $411,469 $ 49,751
======== ======== ======== ========
Earnings per share:
Primary:
Previously reported $ 1.91 $ 1.88
As restated 1.78 1.72
Fully diluted:
Previously reported $ 1.91 $ 1.86
As restated 1.77 1.71
</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, FFC completed the acquisition of NorthLand Bank of
Wisconsin, SSB ("NorthLand") of Ashland, Wisconsin. FFC 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 was not material to the operations of FFC;
therefore, balances for prior years have not been restated. However, 1994
amounts have been adjusted to reflect the transaction as if it had occurred on
January 1, 1994. NorthLand, which was merged into FF Bank, had total assets and
stockholders' equity of $125.6 million (unaudited) and $11.4 million
(unaudited), respectively, at December 31, 1993.
-14-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE B--BUSINESS COMBINATIONS--Continued
Condensed 1993 operating results for NorthLand were as follows:
(Dollars in thousands)
1993
------
Net interest income $5,917
Provision for losses on loans (482)
Non-interest income 1,460
Non-interest expense (4,962)
Income taxes (858)
------
Net income $1,075
======
-15-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE C--INVESTMENT SECURITIES
The following is a summary of available-for-sale investment securities and
held-to-maturity investment securities.
<TABLE>
<CAPTION>
Gross Unrealized
Amortized -----------------------
Cost Gains Losses Fair Value
--------- ------- ------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
December 31, 1995:
Available-for-sale:
U.S. Government and
federal agency
obligations $ 31,812 $ 916 $ 51 $ 32,677
Adjustable-rate mortgage
mutual fund 47,905 17 659 47,263
Corporate and bank notes
receivable (investment
grade) 997 62 1,059
-------- ------ ------ --------
$ 80,714 $ 995 $ 710 $ 80,999
======== ====== ====== ========
Held-to-maturity:
U.S. Government and
federal agency
obligations $113,519 $ 417 $ 777 $113,159
Corporate and bank notes
receivable (investment
grade) 4,859 2 11 4,850
State and municipal
obligations 1,048 8 2 1,054
-------- ------ ------ --------
$119,426 $ 427 $ 790 $119,063
======== ====== ====== ========
December 31, 1994:
Available-for-sale:
U.S. Government and
federal agency
obligations $ 21,088 $ 8 $ 505 $ 20,591
Adjustable-rate mortgage
mutual fund 47,227 2,147 45,080
Real estate investment
trust 2,371 172 2,543
Corporate and bank notes
receivable (investment
grade) 750 5 745
-------- ------ ------ --------
$ 71,436 $ 180 $2,657 $ 68,959
======== ====== ====== ========
Held-to-maturity:
U.S. Government and
federal agency
obligations $ 86,162 $ 1 $4,339 $ 81,824
Corporate and bank notes
receivable (investment
grade) 38,202 1 501 37,702
State and municipal
obligations 4,433 1 26 4,408
Certificates of deposit 504 4 500
-------- ------ ------ --------
$129,301 $ 3 $4,870 $124,434
======== ====== ====== ========
</TABLE>
-16-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE C--INVESTMENT SECURITIES--Continued
The amortized cost and fair value of investment securities at December 31, 1995,
by contractual maturity or repricing date, are shown below.
<TABLE>
<CAPTION>
Available-For-Sale Held-To-Maturity
--------------------- ----------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ------- ---------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Due in one year or less $ 56,973 $ 56,335 $ 73,352 $ 72,660
Due after one year through
five years 23,741 24,664 45,502 45,816
Due after five years through
ten years 572 587
-------- -------- -------- --------
$ 80,714 $ 80,999 $119,426 $119,063
======== ======== ======== ========
</TABLE>
During the years ended December 31, 1995, 1994 and 1993, investment securities
available for sale with a fair value at the date of sale of $18,759,000,
$65,088,000, and $45,000,000, respectively, were sold. The gross realized gains
on such sales totaled $1,182,000, $1,319,000, and $162,000 in 1995, 1994, and
1993, respectively. Gross realized losses on such sales totaled $544,000 and
$540,000 in 1994 and 1993, respectively.
Accrued interest on investment securities, including those securities classified
as federal funds sold, interest-earning deposits and short-term securities, was
$3,470,000 and $3,351,000 at December 31, 1995 and 1994, respectively.
-17-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE D--MORTGAGE-RELATED SECURITIES
The following is a summary of available-for-sale and held-to- maturity
mortgage-related securities.
<TABLE>
<CAPTION>
Gross Unrealized
Amortized ------------------------
Cost Gains Losses Fair Value
--------- -------- ------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
December 31, 1995:
Available-for-sale:
Mortgage-backed securities:
Adjustable-rate $ 475,609 $ 4,462 $14,041 $ 466,030
Fixed-rate 38,580 88 587 38,081
Collateralized mortgage
obligations:
Adjustable-rate 55,331 843 65 56,109
Fixed-rate 11,182 23 132 11,073
---------- ------- ------- ----------
$ 580,702 $ 5,416 $14,825 $ 571,293
========== ======= ======= ==========
Held-to-maturity:
Mortgage-backed securities:
Adjustable-rate $ 333,410 $2,255 $ 2,784 $ 332,881
Fixed-rate 90,439 2,553 32 92,960
Collateralized mortgage
obligations:
Adjustable-rate 275,008 666 11,092 264,582
Fixed-rate 611 26 637
---------- ------- ------- ----------
$ 699,468 $ 5,500 $13,908 $ 691,060
========== ======= ======= ==========
December 31, 1994:
Available-for-sale:
Mortgage-backed securities:
Adjustable-rate $ 173,821 $ 29 $ 8,661 $ 165,189
Fixed-rate 16,043 1 922 15,122
Collateralized mortgage
obligations:
Adjustable-rate 9,982 494 9,488
Fixed-rate 12,529 955 11,574
---------- ------- ------- ----------
$ 212,375 $ 30 $11,032 $ 201,373
========== ======= ======= ==========
Held-to-maturity:
Mortgage-backed securities:
Adjustable-rate $ 830,916 $22,138 $ 808,778
Fixed-rate 141,331 $ 688 4,634 137,385
Collateralized mortgage
obligations:
Adjustable-rate 326,756 35 11,525 315,266
Fixed-rate 2,115 1 56 2,060
---------- ------- ------- ----------
$1,301,118 $ 724 $38,353 $1,263,489
========== ======= ======= ==========
</TABLE>
-18-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE D--MORTGAGE-RELATED SECURITIES--Continued
The following tables summarize aggregate mortgage-related securities by security
type and issuer.
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
---------------------------------- ------------------------------------
Amortized Fair Carrying Amortized Fair Carrying
Issuer/Security Type Cost Value Value Cost Value Value
- -------------------- ---------- --------- -------- ---------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Government agencies:
Mortgage-backed certi-
ficates $ 347,177 $ 353,712 $ 349,216 $ 397,325 $ 383,830 $ 395,544
Collateralized mortgage
obligations 341,521 331,764 342,190 349,267 336,328 347,817
---------- ---------- ---------- ---------- ---------- ----------
Total agencies 688,698 685,476 691,406 746,592 720,158 743,361
---------- ---------- ---------- ---------- ---------- ----------
Private issuers:
Mortgage-backed certi-
ficates
Senior position 492,401 485,411 487,914 660,922 644,136 658,508
Mezzanine position 98,459 90,829 90,829 103,864 98,507 98,507
Collateralized mort-
gage obligations 612 637 612 2,115 2,061 2,115
---------- ---------- ---------- ---------- ---------- ----------
Total private issuers 591,472 576,877 579,355 766,901 744,704 759,130
---------- ---------- ---------- ---------- ---------- ----------
Totals $1,280,170 $1,262,353 $1,270,761 $1,513,493 $1,464,862 $1,502,491
========== ========== ========== ========== ========== ==========
Total carrying value per consolidated
financial statements, by classification:
Available-for-sale portfolio $ 571,293 $ 201,373
Held-to-maturity portfolio 699,468 1,301,118
---------- ----------
Total carrying value $1,270,761 $1,502,491
========== ==========
</TABLE>
-19-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE D--MORTGAGE-RELATED SECURITIES--Continued
The mortgage-related securities portfolio at the end of 1995, excluding six
private-issuer securities downgraded to below investment grade (having an
aggregate carrying value of approximately $28,900,000), consisted of either i)
U.S. Government agency-backed securities or ii) securities rated at a minimum of
investment grade quality by at least one nationally recognized independent
rating agency as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
Amortized Fair Carrying
Issuer Cost Value Value
- ------------------------- ----------- ---------- ----------
<S> <C> <C> <C>
U.S. Government Agencies $ 688,698 $ 685,476 $ 691,406
Private issuers:
Securities rated AA or
above 503,325 498,101 500,403
Other securities of
investment grade 54,642 49,897 50,073
Securities rated below
investment grade 33,505 28,879 28,879
---------- ---------- ----------
$1,280,170 $1,262,353 $1,270,761
========== ========== ==========
</TABLE>
In 1994, FFC recorded a $9.0 million permanent impairment loss on two of the
securities rated below investment grade. The other securities rated below
investment grade continue to be performing.
With the exception of collateralized mortgage obligations, noted in the tables
above, FFC does not invest in, nor is a party to, derivative investment
instruments.
No mortgage-related securities classified as available for sale were sold during
the year ended December 31, 1995. During the years ended December 31, 1994 and
1993, mortgage-related securities available for sale with a fair value at the
date of sale of $182,563,000 and $81,287,000, respectively, were sold. The gross
realized gains on such sales totaled $461,000 and $14,000 in 1994 and 1993,
respectively. The gross realized losses on such sales totaled $132,000 and
$21,000 in 1994 and 1993, respectively. The 1994 sales were related to sales of
mortgage-related securities previously classified as available for sale. The
1993 sales related to the mortgage-related securities portfolio acquired in a
prior acquisition which did not meet FFC's investment guidelines.
Accrued interest receivable on mortgage-related securities was $8,475,000 and
$8,394,000 at December 31, 1995 and 1994, respectively.
-20-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE E--LOANS RECEIVABLE
Loans receivable held for investment consist of the following:
<TABLE>
<CAPTION>
December 31,
1995 1994
---------- ----------
(Dollars in thousands)
<S> <C> <C>
Real estate mortgage loans:
Residential (including multi-family) $2,176,659 $2,204,032
Commercial and other 136,714 134,715
Construction - residential (including
multi-family) 56,314 64,944
Construction - commercial 15,710 8,270
---------- ----------
Total real estate mortgage loans 2,385,397 2,411,961
Consumer and other loans:
Consumer 362,659 304,771
Home equity 284,700 240,915
Education 240,650 192,542
Credit card 214,107 200,747
Manufactured housing 139,385 152,674
Business 17,198 19,023
---------- ----------
Total consumer and other loans 1,258,699 1,110,672
---------- ----------
Total loans before net items 3,644,096 3,522,633
Less:
Allowances for losses 25,235 25,180
Undisbursed loan proceeds 28,992 36,809
Deferred net loan fees (costs) (977) 555
Discount on loans of acquired businesses 769 894
Unearned discounts (premiums) (72) 484
---------- ----------
53,947 63,922
---------- ----------
$3,590,149 $3,458,711
========== ==========
</TABLE>
Accrued interest on loans receivable was $25,777,000 and $21,202,000 at December
31, 1995 and 1994, respectively.
The following table sets forth the composition of the non-residential real
estate loan portfolio, including both permanent and construction loans, by
geographic location of the related collateral properties.
<TABLE>
<CAPTION>
December 31,
1995 1994
----------------------- -------------------------
Percent Percent
Of Of
Property Location Amount Total Amount Total
----------------- -------- ------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Wisconsin $ 96,196 63.1% $ 93,530 65.4%
Illinois 30,734 20.2 23,401 16.4
Minnesota 7,343 4.8 7,525 5.3
Georgia 4,021 2.6 4,106 2.9
Iowa 2,547 1.7 2,588 1.8
Arizona 2,492 1.6 2,503 1.7
Tennessee 2,399 1.6 2,829 2.0
Other 6,692 4.4 6,503 4.5
-------- ----- -------- -----
$152,424 100.0% $142,985 100.0%
======== ===== ======== =====
</TABLE>
-21-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE F--FORECLOSED PROPERTIES AND REPOSSESSED ASSETS
Foreclosed properties and repossessed assets are summarized as follows:
<TABLE>
<CAPTION>
December 31,
1995 1994
------ ------
(Dollars in thousands)
<S> <C> <C>
Real estate owned $ 2,531 $ 3,592
Real estate judgments subject to redemption 1,436 2,503
Manufactured housing owned 303 171
Repossessed collateral assets 102 96
------- -------
4,372 6,362
Less allowance for losses 993 1,146
------- -------
$ 3,379 $ 5,216
======= =======
</TABLE>
NOTE G--ALLOWANCES FOR LOSSES
A summary of the activity in the allowance for loan losses follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993
------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of year $25,180 $25,905 $19,540
Acquired banks' allowance 816 4,885
Provisions 9,738 6,824 10,570
Charge-offs (11,087) (9,872) (10,486)
Recoveries 1,404 1,507 1,396
------- ------- -------
BALANCE AT END OF YEAR $25,235 $25,180 $25,905
======= ======= =======
</TABLE>
A summary of the activity in the allowance for losses on foreclosed properties
and repossessed assets follows. The provisions for losses are included in the
Consolidated Statements of Income in "Net Cost of (Income From) Operations of
Foreclosed Properties."
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993
------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of year $1,146 $3,561 $3,377
Provisions 60 1,000 3,519
Charge-offs (213) (3,415) (3,335)
------ ------ ------
BALANCE AT END OF YEAR $ 993 $1,146 $3,561
====== ====== ======
</TABLE>
-22-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE H--OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31,
1995 1994
-------- ------
(Dollars in thousands)
<S> <C> <C>
Land and parking lot improvements $12,160 $12,143
Office buildings and improvements 52,083 51,708
Furniture and equipment 36,814 38,437
Leasehold improvements 2,850 2,602
------- -------
103,907 104,890
Less allowances for depreciation and
amortization 52,783 50,963
------- -------
$51,124 $53,927
======= =======
</TABLE>
NOTE I--DEPOSITS
Deposits are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
Weighted Weighted
Average Average
Amount Rate Amount Rate
--------- -------- ---------- --------
(Dollars in thousands)
Checking accounts:
<S> <C> <C> <C> <C>
Interest-bearing $ 321,929 1.17% $ 333,144 1.46%
Non-interest-bearing 151,274 143,210
---------- ----------
Total checking
accounts 473,203 0.78 476,354 1.01
Passbook accounts 687,960 2.67 780,883 2.92
Variable-rate insured
money market accounts 310,545 3.45 321,421 3.51
Certificate accounts (by original maturity):
Less than one year 698,031 5.62 349,650 4.42
One to two years 1,022,663 5.91 842,256 4.54
Two to three years 500,308 5.31 780,653 4.97
Three to four years 260,684 5.27 284,651 5.23
Four years or more 462,914 6.16 541,493 6.48
---------- ----------
Total certificates 2,944,600 5.72 2,798,703 5.09
---------- ----------
4,416,308 4.56% 4,377,361 4.15%
==== ====
Accrued interest 8,217 4,094
---------- ----------
$4,424,525 $4,381,455
========== ==========
</TABLE>
-23-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE I--DEPOSITS--Continued
Aggregate annual maturities of certificate accounts at December 31, 1995 are as
follows:
(Dollars in thousands)
Matures During
Year Ended
December 31,
--------------
1996 $1,916,572
1997 646,650
1998 201,264
1999 92,456
2000 83,975
Thereafter 3,683
----------
$2,944,600
==========
Interest expense on deposits consists of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993
-------- -------- ------
(Dollars in thousands)
<S> <C> <C> <C>
Passbook $ 21,017 $ 25,159 $ 26,932
Checking 4,202 6,426 7,302
Variable-rate insured
money market 10,450 8,943 9,266
Certificates 161,154 134,291 136,266
-------- -------- --------
$196,823 $174,819 $179,766
======== ======== ========
</TABLE>
NOTE J--BORROWINGS
Short term borrowings of $25,972,000 and $13,127,000 at December 31, 1995 and
1994, respectively, consisted of sales of securities under agreements to
repurchase the identical securities (reverse repurchase agreements). The reverse
repurchase agreements had a weighted average rate of 5.89% and 5.76% at December
31, 1995 and 1994, respectively. All agreements outstanding at the end of 1995
had maturity dates within ninety days. These agreements are treated as
financings with the obligations to repurchase securities reflected as a
liability and the dollar amount of the securities underlying the agreements
remaining in the asset accounts. The securities underlying the agreements are
held by the counter-party brokers in FF Bank's account. The agreements were
collateralized by mortgage-related securities having a fair value of $27,786,000
and $13,395,000 at December 31, 1995 and 1994, respectively. Based upon
month-end balances, securities sold under agreements to repurchase averaged
$59,092,000 and $14,006,000 during 1995 and 1994, respectively. The maximum
amount outstanding at any month-end was $100,454,000 and $45,742,000 during 1995
and 1994, respectively.
-24-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE J--BORROWINGS-Continued
At December 31, 1995, FFC has an unused line-of-credit in the amount of
$18,000,000. The line-of-credit is available to FFC for working-capital purposes
or for potential future acquisitions. Under the terms of the line-of-credit,
which is available through April, 1996, interest on outstanding notes would be
payable at the lender's then prevailing prime rate. The line-of-credit agreement
contains various covenants relative to the operations of FFC and FF Bank.
Included among the covenants are restrictions on levels of total borrowings and
the interest-bearing asset/liability ratio for FFC, on a consolidated basis, and
a requirement that FF Bank maintain a minimum risk-based regulatory capital of
8.0%. All of such covenants are met at December 31, 1995. In addition, FFC would
pledge its stock in FF Bank as collateral should the line-of-credit be drawn
upon.
Federal Home Loan Bank ("FHL Bank") advances and other borrowings are comprised
of the following:
<TABLE>
<CAPTION>
December 31,
1995 1994
----------------------- -----------------------
Weighted Weighted
Average Average
Maturity Amount Rate Amount Rate
-------- ------- -------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Federal Home Loan Bank: On Demand $154,401 5.95% $450,050 6.01%
1995 150,250 4.61
1996 320,367 5.81 21,309 6.20
1997 31 7.00 31 7.00
2000 162 7.00 162 7.00
2001 100 5.50 100 5.50
2003 307 2.50 307 2.50
Subordinated notes 1996 54,925 8.51 54,977 8.51
Collateralized mortgage
obligations Various 8,024 18.65 11,818 15.35
Industrial development
revenue bonds Various 6,219 7.10 6,315 7.07
-------- --------
$544,536 6.33% $695,319 6.08%
======== ===== ======== =====
</TABLE>
-25-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE J--BORROWINGS--Continued
Aggregate maturities on borrowings, including short-term borrowings, at December
31, 1995 are as follows. Payments on collateralized mortgage obligations are
included based upon estimated prepayments on the underlying mortgage portfolios.
(Dollars in thousands)
Matures During
Year Ended
December 31,
--------------
1996 $555,665
1997 3,277
1998 2,707
1999 1,914
2000 883
Thereafter through 2021 6,062
--------
$570,508
========
FF Bank is required to maintain unencumbered first mortgage loans in its
portfolio aggregating at least 167% of the amount of outstanding advances from
the FHL Bank as collateral. In addition, these borrowings are collateralized by
FHL Bank stock of $35,456,000 at December 31, 1995, which is included in "Other
Assets" in the consolidated balance sheets.
Subordinated notes ("the Notes") are payable at maturity on November 1, 1999.
Interest at the rate of 8% per annum is payable monthly. Under the terms of the
indenture relating to the Notes, the ability of FFC to incur additional
indebtedness, pay cash dividends or make other capital distributions is limited
under certain circumstances. The indenture does not limit the ability of FFC's
subsidiary to incur indebtedness (except for indebtedness that is guaranteed by,
or secured by, property of FFC). Unamortized issuance costs relating to the
Notes totaled $1,068,000 and $1,346,000 at December 31, 1995, and 1994,
respectively, and are being amortized using the interest method. The Notes were
redeemed by FFC at par plus accrued interest on January 15, 1996.
UFS Capital Corporation and FFS Funding Corporation, FF Bank's wholly-owned
finance subsidiaries, have issued the collateralized mortgage obligations.
Principal repayments are scheduled in varying amounts through January, 2003. The
obligations are collateralized by mortgage-backed securities with a carrying
value of $11,443,000 and a fair value of $11,809,000 at December 31, 1995.
Industrial Development Revenue Bonds are payable in ten annual installments
ranging from $100,000 to $150,000 with additional payments of $1,910,000 and
$3,320,000 due October 1, 2012 and 2021, respectively. Interest is payable
semi-annually. The
-26-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE J--BORROWINGS--Continued
bonds were issued to refinance an apartment project which was previously sold.
The bonds are collateralized by mortgage-backed securities with a carrying value
of $8,360,000 at December 31, 1995. FF Bank has a loan receivable from the buyer
of $5,818,000 at December 31, 1995, which is secured by a first mortgage on the
apartment project.
NOTE K--INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993
----------- ---------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Current:
Federal $31,425 $30,743 $28,596
State 2,435 1,903 3,475
------- ------- -------
33,860 32,646 32,071
Deferred (credit):
Federal 1,091 (2,080) (2,075)
State 153 150 (305)
------- ------- -------
1,244 (1,930) (2,380)
------- ------- -------
$35,104 $30,716 $29,691
======= ======= =======
</TABLE>
The provision for income taxes differs from that computed at the federal
statutory corporate tax rate as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993
----------- ---------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Income before income taxes $99,088 $83,745 $79,442
======= ======= =======
Tax at federal statutory rate (35%) $34,681 $29,311 $27,805
Add (deduct) effect of:
State income taxes (net of
federal income taxes) 1,682 2,019 2,363
Other (1,259) (614) (477)
------- ------- -------
INCOME TAX PROVISION $35,104 $30,716 $29,691
======= ======= =======
</TABLE>
-27-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE K--INCOME TAXES--Continued
The significant components of the net deferred tax asset (liability) are as
follows:
<TABLE>
<CAPTION>
Deferred Tax
Asset (Liability)
---------------------
At December 31,
1995 1994
------- ------
(Dollars in thousands)
<S> <C> <C>
Deferred loan fees and other
loan yield adjustments $ 1,088 $ 1,930
Excess tax depreciation (2,262) (2,379)
Loan loss allowances 11,648 12,367
Deferred compensation 2,185 1,849
Excess book deposit base
intangible amortization 2,636 2,471
FHL Bank stock dividend (1,084) (868)
Market valuation adjustments 3,029 4,648
Tax net operating loss
carryforwards 1,804 1,641
Other (847) (549)
-------- -------
18,197 21,110
Valuation allowance for
deferred tax assets (2,499) (3,797)
-------- -------
$ 15,698 $17,313
======== =======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
For financial reporting purposes, a valuation allowance has been recognized to
offset deferred tax assets related to state net operating loss carryforwards of
subsidiary, deposit base intangibles and other timing differences. When
realized, the tax benefit for these items will be used to reduce current tax
expense for that period.
FF Bank qualifies under provisions of the Internal Revenue Code ("IRC") which
permit as a deduction from taxable income allowable bad debt deductions which,
particularly in prior years, significantly exceeded actual losses and the
financial statement loan loss provisions. A deferred tax liability is not
required for these excess tax deductions accumulated prior to the base year (as
defined by the IRC) because they meet the indefinite reversal criteria of
Accounting Principal Board Opinion No. 23, "Accounting for Income Taxes -
Special Areas". If these excess base year accumulations totaling $79,243,000 are
used for any purpose other than to absorb bad debt losses, income taxes of
approximately $31,804,000 would be imposed at the then-applicable rates,
resulting in a charge to operations since no provision for income taxes has been
made.
-28-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE L--STOCKHOLDERS' EQUITY
The Board of Directors of FFC is authorized to issue preferred stock in series
and to establish the voting powers, other special rights of the shares of each
such series and the qualifications and restrictions thereof. Preferred stock may
rank prior to the common stock as to dividend rights, liquidation preferences or
both, and may have full or limited voting rights.
Under Wisconsin state law, preferred stockholders would be entitled to vote as a
separate class or series in certain circumstances, including any amendment which
would adversely change the specific terms of such series of stock or which would
create or enlarge any class or series ranking prior thereto in rights and
preferences. No preferred stock has been issued.
Deposits in FF Bank are insured to the maximum allowable amounts by the Savings
Association Insurance Fund ("SAIF") as administered by the Federal Deposit
Insurance Corporation ("FDIC"). As a SAIF-insured institution, FF Bank is
required to meet tangible, core and risk-based regulatory capital requirements
as determined by the Office of Thrift Supervision ("OTS").
FF Bank's various OTS regulatory capital measurements at December 31, 1995 are
set forth below:
<TABLE>
<CAPTION>
(Dollars in thousands)
<S> <C>
Stockholder's equity $417,830
Add: Net unrealized loss on securities
available for sale 5,944
Less:
Core deposit intangibles (17,317)
Goodwill (4,380)
Non-qualifying investment in subsidiary (1,163)
Other (715)
--------
TANGIBLE CAPITAL 400,199
Add: Qualifying intangibles 17,317
--------
CORE CAPITAL 417,516
Add: Qualifying general allowances for
loan losses 25,235
Less: Other (207)
RISK-BASED CAPITAL $442,544
========
</TABLE>
-29-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE L--STOCKHOLDERS' EQUITY--Continued
The following table compares FF Bank's regulatory capital with OTS capital
requirements at December 31, 1995:
<TABLE>
<CAPTION>
Actual Required Actual Required
Amount Amount Excess Ratio Ratio Excess
------- -------- ------ ------ --------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tangible capital $400,199 $ 82,251 $317,948 7.30% 1.50% 5.80%
Core capital 417,516 165,021 252,495 7.59 3.00 4.59
Risk-based
capital 442,544 223,850 218,694 15.82 8.00 7.82
</TABLE>
The OTS has adopted a final rule, which was effective in 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. The OTS has also added an interest-rate risk calculation
such that an institution with a measured interest-rate risk exposure, as
defined, greater than specified levels must deduct an interest rate risk
component when calculating the OTS risk-based capital requirement. Final
implementation of this rule was pending at the end of 1995. Management of FFC
and FF Bank do not believe these rules will significantly impact the capital
requirements of FF Bank or cause it to fail to meet its regulatory capital
requirements.
Under the terms of the Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA"), FF Bank is further subject 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,
additional restrictions on dividends and capital distributions. As of December
31, 1995, management believes that FF Bank had capital in excess of the
requirements to be a "well capitalized" institution under the PCA provisions of
FDICIA.
Applicable rules and regulations of the OTS impose limitations on dividends by
FF Bank. Within those limitations, certain "safe harbor" dividends are
permitted, subject to providing the OTS at least 30 days advance notice. The
safe harbor amount is based upon an institution's regulatory capital level.
Thrift institutions which have capital in excess of all capital requirements
before and after the proposed dividend are permitted to make capital
distributions during any calendar year up to the greater of (i) 100% of net
income to date during the calendar year, plus one-half of the surplus over such
-30-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE L--STOCKHOLDERS' EQUITY--Continued
institution's capital requirements at the beginning of the calendar year, or
(ii) 75% of net income over the most recent four-quarter period. Additional
restrictions would apply to an institution which does not meet its capital
requirement before or after a proposed dividend. In addition, as a result of the
PCA provisions of FDICIA, the OTS has indicated that it intends to review
existing regulations on dividends to determine whether amendments are necessary
based on such provisions. In the interim, the OTS has indicated that it intends
to determine the permissibility of dividends consistent with the PCA provisions
of FDICIA.
NOTE M--EMPLOYEE BENEFIT PLANS
FFC has a stock option plan under which shares of common stock are reserved for
the grant of both incentive and non-incentive stock options to directors,
officers and employees. FFC follows the intrinsic value method of accounting.
Therefore, because the plan provides that option prices will not be less than
the fair market value of the stock at the grant date, no compensation expense is
recorded as a result of these options. The date on which the options are first
exercisable, generally two or more years from the grant date, is determined by
the Stock Option Committee of the Board of Directors. The options expire no
later than ten years from the grant date.
A summary of stock option activity follows:
<TABLE>
<CAPTION>
Number Of Option Price
Shares Per Share
--------- -------------
<S> <C> <C>
Balance January 1, 1993 2,468,941 $ 1.68 - $ 9.44
Granted 40,500 13.63 - 15.00
Exercised (348,741) 1.70 - 9.44
Cancelled (8,000) 4.90 - 9.44
--------- ---------------
Balance December 31, 1993 2,152,700 1.68 - 15.00
Granted 175,250 14.75 - 16.75
Exercised (333,254) 1.68 - 9.44
Cancelled (27,784) 4.90 - 16.75
--------- ---------------
Balance December 31, 1994 1,966,912 3.09 - 16.75
Granted 28,000 15.75 - 21.38
Exercised (566,218) 3.09 - 15.00
Cancelled ( 5,750) 14.75 - 16.75
--------- ---------------
BALANCE DECEMBER 31, 1995 1,422,944 $ 3.09 - $21.38
========= ===============
</TABLE>
Options for 1,035,994 shares and 1,271,238 shares were exercisable at December
31, 1995 and 1994, respectively. At December 31, 1995, options for 611,000
shares were available for future grant.
FFC sponsors a defined-contribution profit sharing plan which covers all full
time employees who have completed one year of service and are at least
twenty-one years old. Corporate contributions are discretionary. Expense for
this plan
-31-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE M--EMPLOYEE BENEFIT PLANS--Continued
for 1994 and 1993 was $3,353,000 and $3,666,000, respectively. There was no
expense related to this plan for 1995.
FFC sponsors a supplemental executive retirement plan for certain executive
officers, which is funded through life insurance and provides additional
benefits at retirement. At December 31, 1995, the projected future obligation
under this plan amounted to $1,792,000, which is being accrued through a
combination of annual amortization of prior service costs plus current annual
provisions for additional service costs and interest. Expense for this plan was
$215,000, $227,000, and $434,000 for 1995, 1994 and 1993, respectively.
FFC sponsors an unfunded defined-benefit retirement plan for all outside
directors. At December 31, 1995, the projected future obligation under this plan
totaled $1,325,000, which is being accrued through a combination of annual
amortization of prior service costs plus current annual provisions for
additional service costs and interest. Expense for this plan was $126,000,
$183,000 and $122,000 in 1995, 1994 and 1993, respectively.
During 1995, as part of the acquisition of FirstRock, FF Bank acquired the
existing Employee Stock Ownership Plan ("ESOP"), originally established in 1992.
The plan covers substantially all employees with more than one year of service
who have attained the age of twenty-one. The ESOP owes $271,000 to FFC at
December 31, 1995 relating to the cost of the remaining 55,450 FFC shares held
by the ESOP at that date. During 1995, the ESOP was utilized in lieu of FFC's
profit sharing plan, resulting in the distribution of approximately 161,000 FFC
shares to employees. The ESOP shares, which were purchased in 1992, are
grandfathered from Statement of Position ("SOP") No. 93-6 issued by the American
Institute of Certified Public Accountants. As such, expense for ESOP shares
allocated to FFC employees was recorded at cost as opposed to market value as
required by SOP No. 93-6 for shares acquired after 1992. The expense related to
ESOP distributions for 1995, 1994 and 1993 was $828,000, $231,000 and $231,000,
respectively.
FFC also sponsors a defined-benefit pension plan covering substantially all of
its Illinois-based employees (the "Retirement Plan"). Benefits are based upon a
formula using years of service and the participant's compensation during the
term of employment.
-32-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE M--EMPLOYEE BENEFIT PLANS--Continued
The following tables set forth the Retirement Plan's funded status and amounts
recognized in the consolidated financial statements:
<TABLE>
<CAPTION>
December 31,
1995 1994
-------- ------
(Dollars in thousands)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including
vested benefits of $2,971,000--1995 and
$2,621,000--1994 $ 3,126 $ 2,677
======== =======
Plan assets at fair value, primarily fixed
income securities $ 4,143 $ 3,704
Projected benefit obligation 3,238 2,770
-------- -------
Plan assets in excess of projected
benefit obligation 905 934
Unrecognized prior service cost 201 194
Unrecognized net loss from past experience
different from that assumed and effects
of changes in assumptions 500 729
Unrecognized net transition asset (1,175) (1,303)
-------- -------
Prepaid pension cost included in other assets $ 431 $ 554
======== =======
</TABLE>
Net periodic expense for the Retirement Plan, as determined by actuarial
consultants, was $238,000, $504,000 and $432,000 in 1995, 1994 and 1993,
respectively.
The principal actuarial assumptions used to develop the net pension benefit for
the Retirement Plan were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993
-------- -------- ------
<S> <C> <C> <C>
Weighted average discount rate 7.25% 8.25% 7.25%
Rate of increase in future compensation 5.00 5.00 5.00
Expected long-term rate of return on plan
assets 8.50 8.50 7.75
</TABLE>
FFC does not, as a policy, offer post-retirement benefits other than profit
sharing, ESOP, pensions and certain supplemental retirement benefits noted
above.
NOTE N--FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
FFC is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and financial
guarantees and involve, to varying degrees, elements of credit and interest-rate
risk in excess of the amount recognized in the consolidated
-33-
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE N--FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK--
Continued
balance sheets. The contract amounts of those instruments reflect the extent of
involvement FFC has in particular classes of financial instruments.
FFC's exposure to credit loss in the event of nonperformance by the other party
to the financial instrument for commitments to extend credit and financial
guarantees written is represented by the contractual amount of those
instruments. FFC uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.
Financial instruments whose contract amounts represent credit risk are as
follows:
<TABLE>
<CAPTION>
December 31,
1995 1994
-------- --------
(Dollars in thousands)
<S> <C> <C>
Commitments to extend credit:
Fixed rate (6.55% to 9.75% at
December 31, 1995) $ 19,398 $ 8,279
Adjustable rate 20,778 23,394
Unused lines of credit:
Credit cards 837,341 764,953
Home equity 360,189 308,347
Business lines 1,158 858
Other 8,800 8,800
Loans sold with recourse 37,000 44,000
Financial guarantees written 10,995 11,215
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. As some such commitments expire without being drawn
upon, the total commitment amounts do not necessarily represent future cash
requirements. FFC evaluates each customer's creditworthiness on a case-by-case
basis. With the exception of credit card lines-of-credit, FFC generally extends
credit only on a secured basis. Collateral obtained varies but consists
primarily of one-to four-family residences and income-producing commercial
properties.
Commitments to extend credit on a fixed-rate basis expose FFC to a certain
amount of interest-rate risk if market rates of interest increase substantially
during the commitment period. Similar risks exist relative to loans classified
as held for sale, which totaled $26,651,000 at December 31, 1995. This exposure,
however, is mitigated by the hedge of firm commitments to sell certain of these
loans. Commitments outstanding to sell mortgage loans at December 31, 1995
amount to $43,300,000.
-34-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE N--FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK--
Continued
All loans currently sold to others are sold on a non-recourse basis with the
servicing of these loans being retained by FF Bank. At December 31, 1995, 1994
and 1993, $37,000,000, $44,000,000 and $59,000,000, respectively, of the
serviced loans were previously sold with recourse. Of these recourse loans,
approximately $27,000,000, $36,000,000 and $47,000,000 were federally-insured or
federally-guaranteed at December 31, 1995, 1994 and 1993, respectively. In
addition, management has considered the remaining uninsured or non-guaranteed
balance in the determination of the adequacy of the allowance for losses.
Financial guarantees represent agreements whereby, for an annual fee, certain of
FF Bank's mortgage loans, investments and mortgage-backed securities are pledged
as collateral for industrial development revenue bonds which were issued by
municipalities to finance commercial or multi-family real estate owned by third
parties. In the event the third party borrowers default on principal or interest
payments on the bonds, FF Bank is required to either pay the amount in default
or acquire the then outstanding bonds. FF Bank may foreclose on the underlying
real estate to recover amounts in default. Management has considered these
agreements in its review of the adequacy of the allowance for losses. At
December 31, 1995, certain mortgage-related securities and investment securities
with a carrying value of approximately $6,280,000 were pledged as collateral for
bonds in the aggregate principal amount of $3,890,000. Additional bond issues
totaling $7,105,000 are supported by letters of credit issued by FF Bank, in
lieu of specific collateral. The bond agreements have expiration dates through
2008.
Except for the above-noted commitments to originate and/or sell mortgage loans
in the normal course of business, FFC and FF Bank have not undertaken the use of
off-balance sheet derivative financial instruments for any purpose.
-35-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE O--FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement No. 107, ("Disclosures about Fair Value of Financial Instruments"),
requires disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate that value. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. In that regard, the
derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. Statement No. 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not necessarily
represent the underlying value of FFC. FFC does not routinely measure the market
value of financial instruments because such measurements represent point-in-time
estimates of value. It is generally not the intent of FFC to liquidate and
therefore realize the difference between market value and carrying value and
even if it were, there is no assurance that the estimated market values could be
realized. Thus, the information presented is not particularly relevant to
predicting FFC's future earnings or cash flows.
The following methods and assumptions were used by FFC in estimating its fair
value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance
sheet for cash and short-term instruments approximate those assets' fair
values.
Accrued interest income and expense: The fair value of accrued interest
income and expense approximates the respective book value.
Investment and mortgage-related securities: Fair values for investment and
mortgage-related securities are based on quoted market prices, where
available. If quoted market prices are not available, fair values are based
on quoted market prices of comparable instruments.
Loans receivable: For variable-rate mortgage loans that reprice frequently
and with no significant change in credit risk, fair values are based on
carrying values. The fair values for fixed-rate residential mortgage loans
are based on quoted market prices of similar loans sold in conjunction with
securitization transactions, adjusted for differences in loan
characteristics. The fair values for commercial real estate loans, rental
property mortgage loans and consumer and other
-36-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE O--FAIR VALUES OF FINANCIAL INSTRUMENTS--Continued
loans are estimated using discounted cash flow analyses and interest rates
currently being offered for loans with similar terms to borrowers of
similar credit quality.
Mortgage servicing rights: Mortgage loan servicing rights, which consist of
FFC's contractual right to service loans for others, represent a distinct
income producing intangible asset that could be realized by selling those
rights to another institution. Due to lack of practicability, the value of
those rights, except to the extent that purchased or originated (after
January 1, 1995) mortgage servicing rights exist, is not reflected in FFC's
consolidated balance sheets.
Federal Home Loan Bank stock: FHL Bank stock is carried at cost which is
its redeemable value since the market for this stock is restricted.
Deposits: The fair values disclosed for interest-bearing and
non-interest-bearing checking accounts, passbook accounts and money market
accounts are, by definition, equal to the amount payable on demand at the
reporting date (i.e., their carrying amounts). The fair values of
fixed-rate certificates of deposit are estimated using a discounted cash
flow calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly maturities of the
outstanding certificates of deposit.
Borrowings: The fair values of FFC's long-term borrowings are estimated
using discounted cash flow analyses, based on FFC's current incremental
borrowing rates for similar types of borrowing arrangements.
Off-balance-sheet instruments: Fair values for FFC's off- balance-sheet
instruments (lending commitments and unused lines of credit) are based on
fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements, the counterparties' credit
standing and discounted cash flow analyses. The fair value of these
off-balance-sheet items approximates the recorded amounts of the related
fees and is not material at December 31, 1995 and 1994.
-37-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE O--FAIR VALUES OF FINANCIAL INSTRUMENTS--Continued
The carrying amounts and fair values of FFC's financial instruments consist of
the following:
<TABLE>
<CAPTION>
December 31,
1995 1994
-------------------------- --------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- --------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Cash equivalents $ 48,730 $ 48,730 $ 24,914 $ 24,914
Investment securities avail-
able for sale $ 80,999 $ 80,999 $ 68,959 $ 68,959
Investment securities held
to maturity $ 119,426 $ 119,063 $ 129,301 $ 124,434
Federal Home Loan Bank stock $ 35,456 $ 35,456 $ 34,918 $ 34,918
Mortgage-related securities
available for sale $ 571,293 $ 571,293 $ 201,373 $ 201,373
Mortgage-related securities
held to maturity $ 699,468 $ 691,060 $1,301,118 $1,263,489
Loans held for sale $ 26,651 $ 27,001 $ 11,736 $ 11,797
Loans receivable:
Real estate $2,341,370 $2,365,415 $2,360,878 $2,297,848
Credit cards 208,213 208,213 194,538 194,538
Home equity 286,500 286,500 242,298 242,298
Education 241,022 241,022 192,697 192,697
Manufactured housing 136,759 140,536 148,499 151,823
Consumer and other 376,285 378,506 319,801 311,075
---------- ---------- ---------- ----------
$3,590,149 $3,620,192 $3,458,711 $3,390,279
========== ========== ========== ==========
Accrued interest receivable $ 37,722 $ 37,722 $ 32,947 $ 32,947
Deposits:
Checking $ 473,203 $ 473,203 $ 476,354 $ 476,354
Passbooks 687,960 687,960 780,883 780,883
Money market 310,545 310,545 321,421 321,421
Certificates 2,944,600 2,951,564 2,798,703 2,738,147
---------- ---------- ---------- ----------
$4,416,308 $4,423,272 $4,377,361 $4,316,805
========== ========== ========== ==========
Short-term borrowings $ 25,972 $ 27,786 $ 13,127 $ 13,395
Federal Home Loan Bank
and other borrowings:
Federal Home Loan Bank
advances $ 475,367 $ 475,457 $ 622,209 $ 621,590
Collateralized mortgage
obligations 8,024 9,309 11,818 13,049
Subordinated notes 54,925 54,925 54,977 53,103
Industrial development
revenue bonds 6,220 6,605 6,315 5,058
---------- ---------- ---------- ----------
$ 544,536 $ 546,296 $ 695,319 $ 692,800
========== ========== ========== ==========
Accrued interest payable $ 10,585 $ 10,585 $ 7,160 $ 7,160
</TABLE>
-38-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE P--MORTGAGE BANKING ACTIVITIES
Loans serviced for investors amounted to $2,326,000,000, $2,424,000,000 and
$2,068,000,000 at December 31, 1995, 1994 and 1993, respectively. These loans
are not reflected in the consolidated financial statements. FF Bank originates
mortgage loans which, depending whether the loans meet FF Bank's investment
objectives, may be sold in the secondary mortgage market or to other private
investors.
Direct origination and servicing costs for mortgage banking activities cannot be
presented as these operations are integrated with and not separable from the
origination and servicing of portfolio loans, and, as a result, cannot be
accurately estimated.
Mortgage banking activities are summarized as follows:
<TABLE>
<CAPTION>
At Or For The Year Ended
December 31,
1995 1994 1993
-------- -------- ------
(Dollars in thousands)
<S> <C> <C> <C>
Consolidated balance sheet information:
Mortgage loans held for sale $ 26,651 $ 11,736 $ 104,653
Unamortized mortgage servicing
rights and capitalized
excess servicing (included in
"Other Assets") 8,395 7,880 4,441
Consolidated statement of income information:
Service fees on loans
sold (gross) $ 8,383 $ 8,806 $ 9,822
Amortization of mortgage
servicing rights and
capitalized excess
servicing (1,258) (1,069) (3,235)
-------- -------- ----------
Service fees on loans
sold (net) $ 7,125 $ 7,737 $ 6,587
======== ======== ==========
Gain on sales of mortgage loans held for sale (included $1.7 million in
1995 as a result of change in accounting method)
(See Note A) $ 2,703 $ 1,455 $ 8,324
Consolidated statement of cash flow information:
Mortgage loans originated for
sale $210,150 $298,813 $1,005,655
Mortgage loans transferred to
held for sale portfolio 15,467 26,028 60,238
Sales of mortgage loans held for
sale 211,658 418,895 1,051,358
</TABLE>
NOTE Q--LITIGATION
FF Bank is involved in certain lawsuits in the course of its general lending
business and other operations. FFC believes there are sound defenses against the
claims asserted therein and is vigorously defending these actions. Management,
after review with its legal counsel, is of the opinion that the ultimate
-39-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE Q--LITIGATION--Continued
disposition of its litigation will not have a material effect on FFC's financial
condition.
NOTE R--REGULATORY ISSUES
FF Bank's deposits are insured by the SAIF of the 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). Deposit insurance premiums for the SAIF and the BIF, which insures
deposits in national and state-chartered banks, are set to facilitate each fund
achieving its designated reserve ratio. In August 1995, the FDIC determined that
the BIF had achieved its designated reserve ratio and lowered BIF deposit
insurance premium rates for all but the riskiest institutions. Effective January
1, 1996, BIF deposit insurance premiums for well-capitalized banks were further
reduced to the statutory minimum of $2,000 per institution per year. Because the
SAIF remains significantly below its designated reserve ratio, SAIF deposit
insurance premiums were not reduced and remain at 0.23% to 0.31% of deposits,
based upon an institution's supervisory evaluations and capital levels. The
current discrepancy in deposit insurance premiums between the BIF and the SAIF
could place FF Bank at a competitive disadvantage to BIF insured institutions.
The current financial condition of the SAIF has resulted in proposed legislation
to recapitalize the SAIF through a one-time special assessment (of approximately
80 cents to 85 cents per $100 of assessable SAIF deposits as of March 31, 1995)
and in legislation to then merge the SAIF into the BIF. If the special
assessment is enacted, a special one-time assessment of approximately $24.0
million, net of tax effect, would be imposed on FF Bank. After the special
assessment, it is expected that the SAIF would achieve its designated reserve
ratio and that SAIF premium rates would then become comparable to BIF rates. The
proposed legislation also contemplates a merger of the SAIF into the BIF, which
would require separate legislation. FFC 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.
Legislation also has been proposed that could eliminate the federal savings
association charter. 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. Pending legislation may provide
relief as to recapture of the bad debt deduction for federal tax purposes that
otherwise would be applicable if FF Bank converted its charter, provided that FF
Bank meets a proposed residential loan origination requirement. Pending
legislation also may
-40-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL COPORATION
NOTE R--REGULATORY ISSUES--Continued
result in FFC becoming regulated at the holding company level by the Federal
Reserve Board rather than by the OTS. Regulation by the Federal Reserve Board
could subject FFC to capital requirements that are not currently applicable to
FFC as a holding company under OTS regulation and may result in 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.
FFC is unable to predict whether such legislation will be enacted or, if
enacted, whether it will contain relief as to the recapture of bad debt
deductions previously taken.
-41-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE S--FIRST FINANCIAL CORPORATION PARENT COMPANY ONLY
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
BALANCE SHEETS
December 31,
1995 1994
-------- -------
(Dollars in thousands)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 13,613 $ 10,195
Investment securities available for sale 4,668 4,492
Investment in subsidiary 417,830 364,116
Prepaid expenses and other assets 5,068 5,965
-------- --------
$441,179 $384,768
======== ========
LIABILITIES
Subordinated notes $ 54,925 $ 54,977
Other liabilities 1,066 875
-------- --------
TOTAL LIABILITIES 55,991 55,852
STOCKHOLDERS' EQUITY
Common stock 29,676 29,126
Additional paid-in capital 49,756 50,129
Retained earnings 311,777 261,949
Net unrealized loss on
securities available for sale (6,021) (8,619)
Treasury stock (3,669)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 385,188 328,916
-------- --------
$441,179 $384,768
======== ========
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF INCOME
Year Ended December 31,
1995 1994 1993
-------- -------- ------
(Dollars in thousands)
<S> <C> <C> <C>
Interest income $ 920 $ 644 $ 732
Interest expense on borrowings 4,675 4,686 4,736
------- ------- -------
NET INTEREST EXPENSE (3,755) (4,042) (4,004)
Equity in net income from subsidiary 68,028 56,903 53,359
------- ------- -------
64,273 52,861 49,355
Management fees paid to subsidiary 660 628 735
Other expenses 1,807 1,080 628
------- ------- -------
INCOME BEFORE INCOME TAX CREDITS 61,806 51,153 47,992
Income tax credits (2,178) (1,876) (1,759)
------- ------- -------
NET INCOME $63,984 $53,029 $49,751
======= ======= =======
</TABLE>
-42-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE S--FIRST FINANCIAL CORPORATION PARENT COMPANY ONLY
FINANCIAL INFORMATION--Continued
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
Year Ended December 31,
1995 1994 1993
-------- -------- ------
(Dollars in thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $63,984 $53,029 $49,751
Adjustments to reconcile net income
to net cash used in operating
activities:
Equity in net income of subsidiary (68,028) (56,903) (53,359)
Other 1,649 218 (723)
------- ------- -------
NET CASH USED IN OPERATING
ACTIVITIES (2,395) (3,656) (4,331)
INVESTING ACTIVITIES
Cash dividends from subsidiary 16,945 16,200 5,500
Investment in subsidiary (24,000)
Purchase of investments (1,500)
Proceeds from maturity and sale
of investments 5,237
------ ------- -------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 16,945 16,200 (14,763)
FINANCING ACTIVITIES
Purchase of treasury stock (4,126)
Exercise of stock options 3,024 1,595 912
Cash dividends paid (14,156) (9,950) (8,238)
------- ------- -------
NET CASH USED IN
FINANCING ACTIVITIES (11,132) (8,355) (11,452)
------- ------- -------
Increase (decrease) in cash and cash
equivalents 3,418 4,189 (30,546)
Cash and cash equivalents at beginning
of year 10,195 6,006 36,552
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $13,613 $10,195 $ 6,006
======= ======= =======
</TABLE>
-43-
<PAGE>
EXHIBIT 13(b)
MANAGEMENT DISCUSSION & ANALYSIS
<PAGE>
<TABLE>
<CAPTION>
FIVE-YEAR SUMMARY (Dollars in thousands, except per share amounts)
1995(a) 1994(a)(b) 1993(a)(e) 1992(a)(f) 1991(a)
----------- ----------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Income before the cumulative
effect of an accounting change (c) $ 63,984 $ 53,029 $ 49,751 $ 30,376 $ 21,828
Net income (c) 63,984 53,029 49,751 36,976 21,828
Earnings per share (c)(d):
Primary:
Income before the cumulative
effect of an accounting change $ 2.12 $ 1.78 $ 1.72 $ 1.15 $ .80
Net income 2.12 1.78 1.72 1.42 .80
Fully Diluted:
Income before the cumulative
effect of an accounting change $ 2.11 $ 1.77 $ 1.71 $ 1.14 $ .79
Net Income 2.11 1.77 1.71 1.40 .79
Interest income $ 417,308 $ 381,864 $ 366,711 $ 325,057 $ 333,157
Interest expense 234,171 204,222 202,493 198,058 225,992
Net interest income 183,137 177,642 164,218 126,999 107,165
Provision for losses on loans 9,738 6,824 10,570 15,779 19,037
Loss on impairment of mortgage-related
securities (c) -- (9,000) -- -- --
Non-interest income 44,291 42,294 44,758 38,023 41,467
Non-interest expense 118,602 120,367 118,964 101,540 93,095
Total assets 5,471,108 5,501,824 5,181,772 4,309,067 3,609,917
Loans receivable and mortgage-related
securities 4,887,561 4,972,938 4,532,456 3,795,083 3,171,800
Intangible assets 21,481 26,726 31,392 23,278 22,576
Deposits 4,424,525 4,381,455 4,388,122 3,531,062 3,234,078
Borrowings 570,508 708,446 455,797 487,237 110,353
Stockholders' equity 384,917 327,308 280,643 239,979 190,405
Shares outstanding (d) 29,676,365 29,125,858 27,858,088 27,999,113 23,038,404
Stockholders' equity per share (d) $ 12.97 $ 11.24 $ 10.07 $ 8.57 $ 8.26
Dividends declared per share (d) .48 .40 .35 .22 .16
Return on average assets (g) 1.17% .99% .99% .92% .61%
Return on average equity (g) 18.03% 17.21% 19.15% 17.57% 12.08%
Average equity to average assets 6.50% 5.72% 5.17% 5.25% 5.01%
<FN>
(a) In February 1995, the company acquired FirstRock Bancorp, Inc. of
Rockford, Illinois through an exchange of stock. This transaction was
accounted for as a pooling-of-interests and, accordingly, results for all
periods presented have been restated to include the results of FirstRock,
except the earnings per share information for 1991 and 1992 are based only
on the historical net income and weighted average shares of common stock
and common stock equivalents of the company prior to the October 2, 1992
conversion of FirstRock.
(b) In February 1994, the company acquired NorthLand Savings Bank of
Wisconsin, SSB of Ashland, Wisconsin through an exchange of stock. This
transaction was accounted for as a pooling-of-interests. Since the
NorthLand acquisition was immaterial in relation to the company, prior
years' results have not been restated.
(c) Net income for 1994 was negatively affected by a pre-tax $9.0 million
impairment loss relative to two private-issue subordinated
mortgage-related securities, which were downgraded to below investment
grade and became non-performing during 1994.
(d) As adjusted for a 2-for-1 stock split on March 5, 1993 and a 2-for-1 stock
split on April 16, 1992.
(e) In January 1993, the company's major subsidiary, First Financial Bank,
acquired Westinghouse Federal Bank, FSB d/b/a United Federal Bank of
Galesburg, Illinois for cash. In addition, in August 1993, the company
completed the assumption of deposits and the purchase of the branch
facilities of four Quincy, Illinois-area branches of American Savings.
Each acquisition has been accounted for as a purchase.
(f) In separate transactions during 1992, the company completed the assumption
of deposits and the purchase of branch facilities of ten Peoria,
Illinois-area branches from the LaSalle Talman Bank, FSB and the
Resolution Trust Corporation. Each acquisition has been accounted for as a
purchase.
(g) Ratio is based upon income prior to the cumulative effect of an accounting
change.
</FN>
</TABLE>
-1-
<PAGE>
QUARTERLY DATA
The following table sets forth the company's unaudited quarterly income and
expense data for 1995 and 1994(a).
<TABLE>
<CAPTION>
Dec. 31, Sept. 30, June 30, March 31, Dec. 31, Sept. 30, June 30, March 31,
1995 1995 1995 1995 1994 1994 1994 1994(b)
-------- --------- -------- --------- -------- --------- -------- ---------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Loans and mortgage-related
securities $100,880 $101,258 $101,011 $ 99,362 $96,354 $93,503 $90,306 $86,885
Investments 3,739 3,895 3,723 3,440 3,626 3,271 3,625 4,294
-------- -------- -------- -------- ------- ------- ------- -------
Interest income 104,619 105,153 104,734 102,802 99,980 96,774 93,931 91,179
Interest expense:
Deposits 50,768 50,939 49,949 45,167 44,691 43,518 43,166 43,444
Borrowings 8,108 8,525 9,278 11,437 9,415 7,859 6,738 5,391
-------- -------- -------- -------- ------- ------- ------- -------
Interest expense 58,876 59,464 59,227 56,604 54,106 51,377 49,904 48,835
-------- -------- -------- -------- ------- ------- ------- -------
Net interest income 45,743 45,689 45,507 46,198 45,874 45,397 44,027 42,344
Provision for losses on loans (2,673) (2,873) (2,073) (2,119) (1,731) (1,731) (1,894) (1,468)
Unrealized loss on impairment of
mortgage-related securities (9,000)
Gain on sales of assets (c) 1,045 2,542 286 38 174 34 1,355 2,273
Non-interest income 9,862 10,220 10,083 10,215 10,215 9,365 9,532 9,346
-------- -------- -------- -------- ------- ------- ------- -------
53,977 55,578 53,803 54,332 54,532 53,065 44,020 52,495
Non-interest expense 25,331 27,770 28,503 36,998 29,849 29,830 29,935 30,753
-------- -------- -------- -------- ------- ------- ------- -------
Income before income taxes 28,646 27,808 25,300 17,334 24,683 23,235 14,085 21,742
Income taxes 9,587 10,015 8,995 6,507 8,867 8,252 5,336 8,261
-------- -------- -------- -------- ------- ------- ------- -------
Net income $ 19,059 $ 17,793 $ 16,305 $ 10,827 $15,816 $14,983 $ 8,749 $13,481
======== ======== ======== ======== ======= ======= ======= =======
Earnings per share:
Primary $ .63 $ .59 $ .54 $ .36 $ .53 $ .50 $ .29 $ .45
Fully diluted $ .63 $ .59 $ .54 $ .36 $ .53 $ .50 $ .29 $ .45
Cash dividends per share $ .12 $ .12 $ .12 $ .12 $ .10 $ .10 $ .10 $ .10
<FN>
(a) In February 1995, the company acquired FirstRock Bancorp, Inc. of
Rockford, Illinois through an exchange of stock. This transaction was
accounted for as a pooling-of-interests and accordingly, results for all
periods presented have been restated to include the results of FirstRock.
(b) The NorthLand acquisition was completed in February, 1994 and results of
operations were included from January 1, 1994.
(c) Includes net gains (losses) on the disposition of loans held for sale,
available for sale securities and other assets.
</FN>
</TABLE>
-2-
<PAGE>
Results of Operations
Comparison of Years Ended December 31, 1995 and 1994
General. First Financial Corporation ("FFC") reported net income of $64.0
million for the year ended December 31, 1995, which represents an increase of
$11.0 million from the $53.0 million reported for 1994. Net income for 1995
includes a charge for acquisition related costs incurred relative to the
acquisition of FirstRock Bancorp, Inc. ("FirstRock") of Rockford, Illinois
during the first quarter of 1995. The acquisition charge aggregated $6.5 million
on a pre-tax basis, and $4.0 million or $0.14 per share on an after-tax basis.
Earnings for 1994 were affected by an after-tax charge of $5.9 million, or $0.20
per share, relating to allowances established to cover possible losses on a
portion of FFC's mortgage-related securities ("MBS") portfolio. The FirstRock
acquisition was accounted for as a pooling-of-interests, and accordingly,
financial statements for all periods presented have been restated to include
FirstRock's operations. The annualized returns on average assets and average
equity for 1995, excluding the acquisition charge, were 1.25% and 19.16%,
respectively, as compared to 0.99% and 17.21%, respectively, for 1994. Fully
diluted earnings per share increased to $2.11 per share for 1995 as compared to
$1.77 per share reported for 1994. Excluding the acquisition charge, fully
diluted earnings would have been $2.24 per share for 1995.
Net Interest Income. Net interest income increased $5.5 million to $183.1
million during 1995 from $177.6 million for 1994. The net interest margin, which
is net interest income as a percentage of average interest-earning assets,
increased to 3.51% for 1995 from 3.46% reported for 1994. Interest income and
interest expense increased $35.4 million and $30.0 million, respectively, for
1995 as compared to 1994. The average balances of interest-earning assets
increased from $5.14 billion in 1994 to $5.21 billion in 1995, while average
balances of interest-bearing liabilities increased to $5.02 billion in 1995 from
$4.98 billion in 1994. The increase in average interest-earning assets was
complemented by i) a slightly lower increase in the average cost on
interest-bearing liabilities (4.10% in 1994 versus 4.66% in 1995) than in the
average yield of interest-earning assets (7.43% in 1994 versus 8.00% in 1995)
and ii) an improvement in the ratio of earning assets to interest-bearing
liabilities to 103.78% in 1995 from 103.21% in 1994. At the end of 1995, FFC's
net interest margin was 3.46% as compared to 3.37% at the end of 1994.
Historically, FFC's net interest margin has been at its lowest point at year-end
due to seasonal factors, including the disbursement of mortgage loan escrow
accounts for real estate taxes.
Provisions for Losses On Loans. Provisions for losses on loans increased to $9.7
million for 1995 compared to $6.8 million for 1994. The increased provision for
losses on loans reflects i) growth in the overall loan portfolio during 1995 and
ii) increased net credit card charge-offs in 1995 as that portfolio continues to
increase in size. The increase in credit card charge-offs reflects a
traditionally higher experience for that portfolio, although FFC's experience is
well below industry and national credit card averages. For a further discussion
of allowances for losses on loans and related loan portfolio information, see
"Allowances for Loan and Foreclosure Losses" and "Loans Receivable."
Non-Interest Income. Non-interest income increased $11.0 million during 1995 as
compared to 1994 due to the net effect of several factors, the most significant
of which relates to a 1994 $9.0 million MBS impairment loss (see "Non-Performing
MBSs"). Deposit account service fees increased $1.5 million in 1995 as a result
of i) increased fees relating to
-3-
<PAGE>
the growth of the "Absolutely Free Checking" product during 1995 and ii)
introduction of automated teller machine charges in certain markets during 1995.
Loan fees and service charges increased $1.3 million in 1995 as a result of i)
increased credit card fees as that portfolio continued to grow and ii) increased
interchange fees resulting from a successful debit card program. Service fees on
loans sold decreased in 1995 as i) the loan servicing portfolio decreased from
$2.42 billion at the end of 1994 to $2.33 billion at year end 1995 and ii) the
average servicing margin decreased in 1995 due to the continuing impact of very
competitive conditions in the secondary mortgage market into which mortgage
loans are sold and thereby added to the servicing portfolio. Excluding the
effect of i) a 1994 gain of $1.3 million on the sale of credit card loans and
ii) a $400,000 gain realized in 1994 upon the sale of the finance company
receivables of NorthLand Savings Bank of Wisconsin, SSB bank ("NorthLand") which
FFC acquired in 1994, gains on sales of loans increased $1.7 million in 1995.
This increase is due to a $1.7 million gain realized in 1995 as a result of the
capitalization of originated mortgage servicing rights upon FFC's adoption of
Statement of Financial Accounting Standard ("SFAS") or the ("Statement") No. 122
(See Note A to the Consolidated Financial Statements for further information).
FFC's subsidiary, First Financial Bank ("FF Bank"), 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. Gains on sales of available-for-sale securities
increased $100,000 in 1995 over 1994, as a $1.2 million gain was realized in
1995 upon the purchase and sale of a zero coupon treasury bond as interest rates
declined during 1995.
Non-Interest Expense. Non-interest expenses decreased approximately $1.8 million
in 1995 as compared to 1994, primarily 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 included 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 $6.2 million in 1995. Employee
benefits expense was reduced $3.0 million in 1995 as a result of the utilization
of an Employee Stock Ownership Plan ("ESOP"), acquired in the FirstRock
transaction, in place of FFC's normal profit sharing contributions for 1995. The
ESOP shares, which were purchased in 1992, are grandfathered from Statement of
Position ("SOP") No. 93-6 issued by the American Institute of Certified Public
Accountants. As such, expense for ESOP shares allocated to FFC employees was
recorded at cost as opposed to market value as required by SOP No. 93-6 for
shares acquired after 1992.
Non-interest expenses decreased as a percentage of average assets to 2.05% for
1995 as compared to 2.24% in 1994. The improvement in this ratio is reflective
of i) the effectiveness of the consolidation of operations after the FirstRock
and NorthLand
-4-
<PAGE>
acquisitions, ii) cost savings of $1.0 million realized after the 1994
consolidation of FFC's then existing banking subsidiaries, iii) decreases in
writedowns on foreclosed commercial real estate and iv) ongoing expense control
measures.
The ratio of controllable non-interest expenses to average total assets, which
excludes the FirstRock acquisition charge, the amortization of intangible assets
and the net cost of operations of foreclosed properties, decreased to 1.96% for
1995 as compared to 2.12% for 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 47.89% for 1995, as compared to
52.58% for 1994.
Income Taxes. Income tax expense increased $4.4 million for 1995 as compared to
1994. The effective income tax rate, as a percent of pre-tax income, decreased
to 35.4% in 1995 from 36.7% in 1994. The decrease in the effective tax rate for
1995 relates to i) implementation of tax planning strategies and ii) the change
in the valuation allowance of certain deferred tax assets established in prior
years.
Accounting Changes. Effective January 1, 1995, FFC adopted SFAS No. 122
("Accounting for Mortgage Servicing Rights"). SFAS 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. As
a result of the adoption of SFAS No. 122 in 1995, FFC realized a pre-tax gain of
$1.7 million ($1.1 million after tax, or $0.04 per share) upon the
capitalization of originated mortgage servicing rights.
Effective January 1, 1995, FFC adopted SFAS No. 114 ("Accounting by Creditors
for Impairment of a Loan"). Statement No. 114, which was amended by Statement
No. 118, requires that impaired loans be measured at the present value of
expected future cash flows discounted at the loans' 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. The adoption of
Statements No. 114 and 118 had no effect on FFC's financial condition or results
of operations.
Pending Accounting Change. The Financial Accounting Standards Board ("FASB")
issued SFAS No. 123 ("Accounting for Stock-Based Compensation") in October 1995
relative to financial accounting and reporting standards for stock-based
employee compensation plans. SFAS No. 123 is effective for fiscal years
beginning after December 15, 1995. The Statement defines a fair value based
method of accounting for employee stock options or similar equity instruments
and encourages all entities to adopt that method of accounting for all employee
stock compensation plans. However, the Statement also allows an entity to
continue to measure compensation cost for these plans using an intrinsic value
based method of accounting prescribed by Accounting Principles Board Opinion No.
25 ("APB No. 25"). Entities electing to retain the accounting treatment under
APB No. 25 must make pro forma footnote disclosures of net income and earnings
per share as if the fair value based method of accounting defined in this
statement has been applied. Management has not decided which method it will
elect.
-5-
<PAGE>
Results of Operations
Comparison of Years Ended December 31, 1994 and 1993
General. For the year ended December 31, 1994, FFC reported net income of $53.0
million, up from the $49.8 million reported for 1993. Earnings for fiscal 1994
were negatively affected by a pre-tax $9.0 million impairment loss recorded
relative to two private issue subordinated MBSs which were i) transferred to
non-performing status during 1994 and ii) also downgraded to below investment
grade by a national independent rating agency. As a result of the impairment
loss, the returns on average assets and average stockholders' equity decreased
to 0.99% and 17.21%, respectively, for fiscal 1994 from 0.99% and 19.15%,
respectively, for fiscal 1993. Fully diluted earnings per share improved to
$1.77 for the year ended December 31, 1994 from $1.71 for 1993.
Net Interest Income. Net interest income increased $13.4 million to $177.6
million for 1994 from $164.2 million for 1993. The net interest margin of 3.46%
for 1994 was up from the 3.43% reported for 1993. Interest income and interest
expense increased $15.2 million and $1.7 million, respectively, for 1994 as
compared to 1993. The average balances of interest-earning assets and
interest-bearing liabilities increased from $4.79 billion and $4.66 billion,
respectively, in 1993 to $5.14 billion and $4.98 billion, respectively, in 1994.
The ratio of average interest-earning assets to average interest-bearing
liabilities increased to 103.21% for 1994 as compared to 102.79% for 1993. The
1994 increases in average balances were due to i) asset growth funded via
Federal Home Loan Bank ("FHL Bank") advances and ii) the effect of acquisitions.
The increase in average interest-earning assets, as well as the improved
earning-asset ratio noted above, was primarily responsible for the stability in
the net interest margin. The net interest spread increased to 3.33% in 1994 from
3.31% in 1993 as the average yield on interest-earning assets (7.66% in 1993
versus 7.43% in 1994) decreased slightly less than the decrease in the average
cost of interest-bearing liabilities (4.35% in 1993 versus 4.10% in 1994).
Provisions for Losses On Loans. Provisions for losses on loans decreased $3.8
million from $10.6 million for 1993 to $6.8 million for 1994, reflecting i) a
low charge-off experience, ii) a lower level of loan delinquencies and iii) a
change in the mix of the loan portfolio due to the growth in the residential
mortgage loan portfolio, which traditionally displays a much lower charge-off
experience.
Non-Interest Income. Non-interest income decreased $11.5 million during 1994 as
compared to 1993 with the primary decrease relating to the $9.0 million MBS
impairment loss (see "Non-Performing MBSs"). Increases of $600,000 in deposit
account service fees, $500,000 in insurance and brokerage sales commissions and
$1.5 million in gains on sales of available-for-sale securities were offset by a
$5.6 million decrease in gains on sales of loans held for sale. The net gains on
sales of loans for 1994 decreased $5.6 million as noted above to $2.7 million,
despite a $1.3 million gain on the sale of credit card loans upon the
termination of a credit card affinity group relationship and the $400,000 gain
realized on the sale of finance company receivables of NorthLand. Exclusive of
this latter sale, gains realized from the sale of mortgage loans held for sale
decreased $7.3 million to $1.0 million in 1994. The $1.5 million of net gains
realized on sales of available-for-sale securities relates primarily to actions
taken by management to i) protect the value of that portfolio as interest rates
rose sharply in the first half of 1994 and ii) to reduce the level of
subordinated mezzanine position MBSs held by FFC.
-6-
<PAGE>
Non-Interest Expense. Non-interest expenses increased $1.4 million for 1994 as
compared to 1993. The level of non-interest expenses reflects i) inherent
increases in the expanded scope of operations as a result of the 1993 and 1994
acquisitions, ii) effective cost controls, iii) reductions in writedowns of
foreclosed commercial real estate properties in 1994 and iv) a higher level of
federal deposit insurance costs. The major categories of non-interest expense
affected by acquisitions are compensation, occupancy and federal deposit
insurance.
Federal deposit insurance expense increased $2.3 million in 1994 as compared to
1993, due in part to the increase in insured deposits as a result of the recent
acquisitions. However, also affecting the comparison was a reduction in the
level of premiums assessed to FF Bank in 1993 as the Federal Deposit Insurance
Corporation ("FDIC") allowed a one-time premium reduction (approximately $1.7
million) representing FF Bank's previously unutilized credits from the dissolved
Secondary Reserve of the Federal Savings and Loan Insurance Corporation. The
credits in the Secondary Reserve had been written-off in 1987 due to the
uncertainty of recoverability.
The net cost of operations of foreclosed properties decreased $2.2 million in
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 2.24% for
1994 as compared to 2.37% for 1993. Controllable non-interest expenses, which
exclude the amortization of intangible assets and the net cost of operations of
foreclosed properties, decreased to 2.12% of average assets for 1994 as compared
to 2.18% for 1993. In addition, FFC's efficiency ratio (which represents the
ratio of controllable expenses to net interest income plus recurring
non-interest income) improved to 52.58% in 1994 as compared to 54.34% for 1993.
Income Taxes. Income tax expense increased $1.0 million for 1994 as compared to
1993. The effective income tax rate, as a percent of pre-tax income, decreased
to 36.7% in 1994 from 37.4% in 1993. The decrease in the effective tax rate for
1994 relates to a one-time adjustment arising from a change in filing status for
state tax purposes.
-7-
<PAGE>
MARKET PRICE AND DIVIDEND INFORMATION
FFC's common stock trades on the Nasdaq National Market tier of The Nasdaq Stock
MarketSM ("NASDAQ") under the symbol of FFHC. At December 31, 1995, FFC has
29,676,365 outstanding shares and 4,393 shareholders of record.
The following table presents market price information and cash dividends paid on
FFC's common stock. The prices displayed represent high and low sales prices,
for each quarter over the past two years, as reported by NASDAQ.
<TABLE>
<CAPTION>
Market Price
----------------------- Cash
High Low Dividend
----- ----- --------
Quarter Ended:
<S> <C> <C> <C> <C> <C>
December 31, 1995 $23.750 $20.250 $ .12
September 30, 1995 21.625 17.000 .12
June 30, 1995 18.000 15.250 .12
March 31, 1995 16.250 13.500 .12
December 31, 1994 $17.250 $13.250 $ .10
September 30, 1994 17.250 14.500 .10
June 30, 1994 17.250 14.500 .10
March 31, 1994 17.000 14.250 .10
</TABLE>
-8-
<PAGE>
AVERAGE INTEREST-EARNING ASSETS, AVERAGE INTEREST-BEARING LIABILITIES, INTEREST
RATE SPREAD AND NET INTEREST MARGIN
The following table sets forth the weighted average yields earned on FFC's
consolidated loan and investment portfolios, the weighted average interest rates
paid on deposits and borrowings, the interest rate spread between yields earned
and rates paid and the net interest margin during the years 1995, 1994 and 1993.
Balances of interest-sensitive assets and liabilities arising from the 1993 and
1994 acquisitions are included from the respective dates of the related
transactions.
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993
----------------------------- ---------------------------- -----------------------------------
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
---------- -------- ------- --------- -------- ------- ---------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans (1)(2) $2,384,057 $183,434 7.69% $2,304,429 $176,914 7.68% $2,154,037 $175,998 8.17%
Mortgage-related secur-
ities (1) 1,388,338 98,821 7.12 1,507,334 89,379 5.93 1,467,250 89,965 6.13
Other loans (1) 1,182,380 120,256 10.17 1,027,942 100,755 9.80 822,284 84,595 10.29
U.S. Government and agency 127,598 6,709 5.26 121,521 6,331 5.21 132,196 6,840 5.17
Other securities 68,254 4,091 5.99 106,378 4,912 4.62 87,939 4,648 5.29
Cash equivalents 28,371 1,651 5.82 38,371 1,522 3.97 94,439 2,806 2.97
FHL Bank stock 35,323 2,346 6.64 34,416 2,051 5.96 31,000 1,859 6.00
---------- -------- ------ ---------- -------- ------ ---------- -------- ------
5,214,321 417,308 8.00 5,140,391 381,864 7.43 4,789,145 366,711 7.66
Interest-bearing liabilities:
Passbook 730,363 21,017 2.88 833,291 25,159 3.02 844,460 26,932 3.19
Checking 433,904 4,202 .97 473,850 6,426 1.36 431,731 7,302 1.69
Money Market Accounts 311,479 10,450 3.36 297,604 8,943 3.00 303,496 9,266 3.05
Certificates 2,969,537 161,154 5.43 2,848,596 134,291 4.71 2,681,083 136,266 5.08
FHL Bank advances 444,110 26,742 6.02 436,019 21,335 4.89 311,181 14,216 4.57
Other borrowings 134,801 10,606 7.87 91,151 8,068 8.85 87,225 8,511 9.76
---------- -------- ------ ---------- -------- ------ ---------- -------- ------
5,024,194 234,171 4.66 4,980,511 204,222 4.10 4,659,176 202,493 4.35
---------- -------- ------ ---------- -------- ------ ---------- -------- ------
Net earning assets and
interest rate spread $ 190,127 3.34% $ 159,880 3.33% $ 129,969 3.31%
========== ====== ========== ====== ========== ======
Earning asset ratio 103.78% 103.21% 102.79%
========== ========== ==========
Average interest-earning
assets, net interest income,
and net interest margin on
average interest-earning
assets $5,214,321 $183,137 3.51% $5,140,391 $177,642 3.46% $4,789,145 $164,218 3.43%
========== ======== ===== ========== ======== ===== ========== ======== =====
<FN>
(1) Includes non-accruing loans and/or MBSs.
(2) Includes loans held for sale.
</FN>
</TABLE>
-9-
<PAGE>
RATE VOLUME ANALYSIS
The most significant impact on FFC's net income between periods is derived from
the interaction of changes in the volume of and rates earned or paid on
interest-earning assets and interest-bearing liabilities. The volume of earning
dollars in loans and investments, compared to the volume of interest-bearing
liabilities represented by deposits and borrowings, combined with the spread,
produces the changes in net interest income between periods.
The following table shows the relative contribution of changes in average volume
and average interest rates to changes in net interest income for the periods
indicated. The change in interest income and interest expense attributable to
changes in both volume and rate, which cannot be segregated, has been allocated
proportionately to the change due to volume and the change due to rate.
<TABLE>
<CAPTION>
Year Ended December 31, 1995 Year Ended December 31, 1994
Compared to Year Ended Compared to Year Ended
December 31, 1994 December 31, 1993
--------------------------------------- ---------------------------------------
Rate Volume Total Rate Volume Total
-------- -------- --------- -------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans(1)(2) $ 394 $ 6,126 $ 6,520 $(10,974) $ 11,890 $ 916
Mortgage-related securities(1) 16,898 (7,456) 9,442 (3,007) 2,421 (586)
Other loans(1) 3,908 15,593 19,501 (4,157) 20,317 16,160
U.S. Government and agency 59 319 378 47 (556) (509)
Other securities 1,226 (2,047) (821) (634) 898 264
Cash equivalents 592 (463) 129 739 (2,023) (1,284)
FHL Bank stock 240 55 295 (12) 204 192
-------- -------- -------- -------- -------- --------
Total $ 23,317 $ 12,127 35,444 $(17,998) $ 33,151 15,153
======== ======== ======== ======== ======== ========
Interest-bearing liabilities:
Passbook $ (1,140) $ (3,002) (4,142) $ (1,421) $ (352) (1,773)
Checking (1,718) (506) (2,224) (1,542) 666 (876)
Money Market Accounts 1,077 430 1,507 (145) (178) (323)
Certificates 20,973 5,890 26,863 (10,203) 8,228 (1,975)
FHL Bank advances 5,004 403 5,407 1,072 6,047 7,119
Other borrowings (977) 3,515 2,538 (814) 371 (443)
-------- -------- -------- -------- -------- --------
Total $ 23,219 $ 6,730 29,949 $(13,053) $ 14,782 1,729
======== ======== -------- ======== ======== --------
Increase in net interest income $ 5,495 $ 13,424
======== ========
<FN>
(1) Includes non-accruing loans and/or MBSs.
(2) Includes loans held for sale.
</FN>
</TABLE>
-10-
<PAGE>
NET INTEREST MARGIN AT YEAR-END
The following table sets forth the weighted average yields on FFC's loan, MBS,
and investment security portfolios, the weighted average cost of deposits and
borrowings, the interest rate spread between the anticipated yields and costs
and the resulting net interest margin at the indicated dates.
<TABLE>
<CAPTION>
December 31,
----------------------------------
1995 1994 1993
---- ---- -----
<S> <C> <C> <C>
Weighted average yield:
Mortgage loans 7.74% 7.65% 7.73%
Mortgage-related securities 7.15 6.42 5.86
Other loans 9.99 9.81 9.99
Investments 5.64 5.40 4.72
----- ----- -----
Combined weighted average yield on
loans and investments 8.03 7.64 7.38
Weighted average cost:
Deposits and advance payments from
borrowers for taxes and insurance 4.55 4.14 3.99
Borrowings 6.31 6.07 5.27
----- ----- -----
Combined weighted average cost
of deposits and borrowings 4.75 4.41 4.11
----- ----- -----
Interest rate spread 3.28% 3.23% 3.27%
===== ===== =====
Net interest margin 3.46% 3.37% 3.38%
===== ===== =====
-11-
<PAGE>
FINANCIAL CONDITION
GENERAL
Total assets of FFC were $5.47 billion at the end of 1995 compared to $5.50
billion at year-end 1994. Stockholders' equity increased to 384.9 million, or
7.04% of total assets, at December 31, 1995 from $327.3 million and 5.95%,
respectively, at the end of 1994.
LIQUIDITY AND CAPITAL RESOURCES
On an unconsolidated basis, FFC had cash of $13.6 million and subordinated debt
of $54.9 million at December 31, 1995. On January 15, 1996, FFC redeemed the
subordinated debt at par plus accrued interest with the proceeds of a $50.0
million cash dividend received from FF Bank.
FF Bank is subject to certain regulatory limitations relative to its ability to
pay dividends to FFC. Management believes that FFC will not be adversely
affected by these dividend limitations and that projected future dividends from
FF Bank will be sufficient to meet the parent company's liquidity needs. See
Note L to the consolidated financial statements for further discussion of these
limitations. In addition to dividends from FF Bank, FFC also could sell capital
stock or debt issues through the capital markets as alternative sources of
funds.
FFC also has available an unused line-of-credit in the amount of $18,000,000
which is available through April 1996. The line-of-credit agreement contains
various covenants relative to the operations of FFC and FF Bank. All of such
covenants were met during 1995. See Note J to the consolidated financial
statements for further discussion. In addition, FFC would pledge its stock in FF
Bank as collateral should the line-of-credit be drawn upon.
FF Bank is required to maintain minimum levels of liquid assets as defined by
Office of Thrift Supervision ("OTS") regulations. This requirement, which may be
varied by the OTS, is based upon a percentage of average deposits and short-term
borrowings. The required ratio is currently 5%. FF Bank is currently in
compliance with this requirement. FF Bank's principal sources of funds are
amortization and prepayment of loan principal, deposits, sales of mortgage loans
originated for sale, FHL Bank advances, other borrowings and funds provided from
operations. These funds are used to meet loan commitments, make other
investments, fund deposit withdrawals and repay borrowings.
Total consolidated liquidity, consisting of cash, cash equivalents, short-term
securities and investment securities, increased $55.3 million during 1995. Total
consolidated liquidity, as a percent of total assets, increased from 5.77% at
the end of 1994 to 6.81% at the end of 1995, as a result of the net effect of
FFC's various operating, investing and financing activities.
In October 1995, the FASB approved a modification of SFAS No. 115 providing that
from November 15, 1995 through December 31, 1995 the Bank had the one-time
opportunity to reconsider its classification of investment and mortgage-related
securities as held-to-maturity, trading, or available-for-sale. Accordingly, on
December 21, 1995, FFC chose to reclassify certain investments and
mortgage-related securities from held-to-maturity to available-for-
-12-
<PAGE>
sale. At the date of transfer, the aggregate amortized cost of the investment
and mortgage-related securities was $20,734,000 and $391,537,000, respectively,
and the aggregate net unrealized gain on those securities was $895,000 and
$410,000, respectively, which is included in stockholders' equity.
Operating activities resulted in a net cash inflow of $122.1 million. Operating
cash flows for 1995 included earnings of $64.0 million and $211.7 million
realized from the sale of mortgage loans held for sale, less $210.2 million
disbursed for loans originated for sale.
Investing activities in 1995 resulted in a net cash inflow of $76.8 million.
Major investing activities resulting in cash outflows were $78.5 million for the
purchase of investment securities and $726.9 million for the origination of
loans for portfolio. The most significant cash inflows from investing activities
were principal payments of $564.1 million and $233.9 million received on loans
receivable and MBSs, respectively, as well as $60.7 million from the proceeds of
maturities of investment securities. In addition, $18.8 million was received
upon the sale of securities available for sale.
Financing activities for 1995 resulted in a net cash outflow of $145.7 million
represented by a net increase in deposits of $38.9 million, a net decrease in
borrowings of $137.9 million, a cash outflow of $35.0 million for borrower tax
escrow checks, and $14.2 million in cash dividends paid to FFC stockholders.
At December 31, 1995, FF Bank had outstanding commitments to originate mortgage
loans totaling $40.2 million and no commitments outstanding to purchase loans.
At that date, FF Bank also had commitments outstanding to sell $43.3 million of
mortgage loans that were held for sale or for which FF Bank was committed to
originate. Loans held for sale totaled $26.7 million at the end of 1995. FF Bank
had no commitments to purchase MBSs at year-end 1995. Management believes
liquidity levels are proper and that adequate capital and borrowings are
available through the capital markets, the FHL Bank of Chicago and other
sources.
-13-
<PAGE>
LOANS RECEIVABLE
Total loans receivable, including loans held for sale, increased to $3.62
billion at the end of 1995 from $3.47 billion at the end of 1994. The components
of this increase are summarized, by type of loan collateral, as follows:
</TABLE>
<TABLE>
<CAPTION>
December 31, Increase
1995 1994 (Decrease)
----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C>
Real estate mortgage loans:
One- to four-family $2,038,103 $2,064,232 $ (26,129)
Multi-family 220,772 215,703 5,069
Commercial and other 153,173 143,762 9,411
---------- ---------- ----------
Total real estate mortgage loans 2,412,048 2,423,697 (11,649)
Other loans:
Consumer 362,659 304,771 57,888
Home equity 284,700 240,915 43,785
Education 240,650 192,542 48,108
Credit cards 214,107 200,747 13,360
Manufactured housing 139,385 152,674 (13,289)
Business 17,198 19,023 (1,825)
Less: net items to loans receivable (53,947) (63,922) 9,975
---------- ---------- ----------
Total loans receivable (including
loans held for sale) $3,616,800 $3,470,447 $ 146,353
========== ========== ==========
</TABLE>
The major components of the increase in total loans receivable during 1995 were
a $57.9 million increase in consumer loans, a $43.8 million increase in home
equity loans, and a $48.1 million increase in education loans.
Consumer loans increased $57.9 million in 1995 due to continuing success in
marketing a second mortgage product and increased automobile financing. Home
equity loans have increased $43.8 million in 1995 as customer usage of this
product continues to grow. Education loans increased $48.1 million in 1995 as a
result of increased government guaranteed portfolio acquisitions and origination
referrals from other lenders. Manufactured housing loan balances decreased $13.3
million as FFC continued to restrict new originations of such loans to the
Midwest. FFC exited the retail manufactured housing lending business in late
1994 due to pricing practices by competitors. During 1995, FFC purchased on a
wholesale basis $18.8 million of seasoned manufactured housing loans from a
government agency.
Aggregate real estate mortgage loans decreased $11.6 million during 1995. As
interest rates fell in 1995, borrowers turned to fixed rate financing and such
long-term fixed rate loans are generally sold into the secondary market.
MORTGAGE-RELATED SECURITIES
The total carrying value of the MBS portfolio decreased $231.7 million to $1.27
billion at December 31, 1995 from $1.50 billion at the end of 1994. This
decrease was the net result of i) repayments of $233.9 million, and ii) a $1.6
million decline in the net unrealized holding loss on the available-for-sale MBS
portfolio. At the end of 1995, FFC had no commitments to purchase MBSs.
-14-
<PAGE>
The following tables set forth, at the dates indicated, the composition of the
MBS portfolio including issuer, security type, amortized cost, fair value and
financial statement carrying value as well as classification according to
available-for-sale or held-to-maturity status. See Note D to the consolidated
financial statements for i) a further breakdown of the available- for-sale and
held-to-maturity classifications of the MBS portfolio and ii) a summary of gains
and losses realized upon the disposition of available-for-sale MBSs during the
past three years.
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
---------------------------------- ------------------------------------
Amortized Fair Carrying Amortized Fair Carrying
Issuer/Security Type Cost Value Value Cost Value Value
- -------------------- ---------- --------- -------- ---------- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Government agencies:
Mortgage-backed certi-
ficates $ 347,177 $ 353,712 $ 349,216 $ 397,325 $ 383,830 $ 395,544
Collateralized mortgage
obligations 341,521 331,764 342,190 349,267 336,328 347,817
---------- ---------- ---------- ---------- ---------- ----------
Total agencies 688,698 685,476 691,406 746,592 720,158 743,361
---------- ---------- ---------- ---------- ---------- ----------
Private issuers:
Mortgage-backed certi-
ficates
Senior position 492,401 485,411 487,914 660,922 644,136 658,508
Mezzanine position 98,459 90,829 90,829 103,864 98,507 98,507
Collateralized mort-
gage obligations 612 637 612 2,115 2,061 2,115
---------- ---------- ---------- ---------- ---------- ----------
Total private issuers 591,472 576,877 579,355 766,901 744,704 759,130
---------- ---------- ---------- ---------- ---------- ----------
Totals $1,280,170 $1,262,353 $1,270,761 $1,513,493 $1,464,862 $1,502,491
========== ========== ========== ========== ========== ==========
Total carrying value per consolidated
financial statements, by classification:
Available-for-sale portfolio $ 571,293 $ 201,373
Held-to-maturity portfolio 699,468 1,301,118
---------- ----------
Total carrying value $1,270,761 $1,502,491
========== ==========
</TABLE>
Since MBSs are asset-backed securities, they are subject to inherent risks based
upon the future performance of the underlying collateral (i.e., mortgage loans)
for these securities. Among these risks are prepayment risk and interest-rate
risk. Should general interest-rate levels decline, the MBS portfolio would be
subject to i) prepayments as borrowers typically would seek to obtain financing
at lower rates, ii) a decline in interest income received on adjustable-rate
MBSs, and iii) an increase in fair value of fixed-rate MBSs. Conversely, should
general interest-rate levels increase, the MBS portfolio would be subject to i)
a longer term to maturity as borrowers would be less likely to prepay their
loans, ii) an increase in interest income received on adjustable-rate MBSs, iii)
a decline in fair value of fixed-rate MBSs and iv) a decline in fair value of
adjustable-rate MBSs to an extent dependent upon the level of interest-rate
increases, the time period to the next interest-rate repricing date for the
individual security and the applicable periodic (annual and/or lifetime) cap
which could limit the degree to which the individual security could reprice
within a given time period.
As noted in the above table, included in FFC's MBS portfolio are private issuer,
primarily adjustable-rate, MBSs having a carrying value of $578.7 million at
December 31, 1995. Unlike U.S. Government agency MBSs which include a guarantee
of principal and interest payments on the underlying collateral, these private
issuer securities are generally structured with a senior ownership position and
subordinate ownership position(s) providing credit support for the senior
position. In a limited number of cases, this support is instead provided through
letters of credit or cash reserves. Included in FFC's private issuer portfolio
are several mezzanine MBSs which are subordinate to the most senior position of
a given security but are also superior to other more subordinate positions. The
structure of the
-15-
<PAGE>
private issuer MBSs may expose FFC to credit risk in addition to interest-rate
risk and prepayment risk as discussed above. In this regard, management has
instituted a monitoring system for tracking the major factors affecting the
performance of a private issuer MBS including i) delinquencies, foreclosures,
repossessions and recoveries relative to the underlying mortgage loans
collateralizing each security, ii) the level of available subordination or other
credit enhancements, iii) the competence of the servicer of the underlying
mortgage portfolio and iv) the rating assigned to each security by independent
national rating agencies. This ongoing monitoring process has confirmed that all
private issuer MBSs, with the exclusion of two non-performing mezzanine MBSs
(see "Non- Performing MBSs"), continue to be performing and do not display the
underlying problems experienced in the case of the two non-performing mezzanine
securities. Although management believes that the performing private issuer
securities will continue to contractually perform based on its review, there can
be no assurance that such performance will continue in the future should
economic conditions, market conditions, or other factors change significantly.
The aggregate $485.4 million fair value of FFC's senior position private issuer
MBSs at the end of 1995 improved to 98.6% of the aggregate $492.4 million
amortized cost of those securities, compared to a similar relationship of 97.5%
at the end of 1994. This improvement relates primarily to lower interest-rate
levels in 1995. Despite the improvement in interest-rate levels, the aggregate
fair value of mezzanine securities of $90.8 million declined to 92.3% of the
aggregate amortized cost of $98.5 million at the end of 1995 compared to a
similar relationship of 94.8% at the end of 1994. The decrease in fair value of
the mezzanine securities was attributable to a continuing thin market for
mezzanine securities, thus leading to limited liquidity in these securities.
Based upon i) the results of management's most current review of the performance
characteristics of the underlying mortgage loans collateralizing these private
issue securities (see discussion of FFC's monitoring system above) and ii) the
fact that those securities not classified as non-accrual continue to perform,
management believes that the private issuer MBSs have a net realizable value in
excess of their indicated fair value and/or amortized cost and that the
indicated impairment in fair value is not permanent. Management also has the
intent and the ability to retain its investment in these securities for a period
of time sufficient to allow for any anticipated recovery of market value.
FFC's portfolio of MBSs totaled approximately $1.27 billion at the end of 1995
and, except for those securities discussed in "Non-Performing MBSs," were either
i) U.S. Government agency-backed or ii) rated at a minimum of investment grade
quality by at least one nationally recognized independent rating agency, as
displayed below:
<TABLE>
<CAPTION>
Amortized Fair Carrying
Issuer Cost Value Value
- ------------------------- ---------- ---------- -----------
(Dollars in thousands)
<S> <C> <C> <C>
U.S. Government agencies $ 688,698 $ 685,476 $ 691,406
Private issuers:
Securities rated AA or
above 503,325 498,101 500,403
Securities rated below
AA, but of investment
grade 54,642 49,897 50,073
Securities rated below
investment grade 33,505 28,879 28,879
---------- ---------- ----------
$1,280,170 $1,262,353 $1,270,761
========== ========== ==========
</TABLE>
-16-
<PAGE>
NON-PERFORMING ASSETS
Non-performing assets (consisting of impaired and non-accrual loans,
non-performing MBSs, foreclosed properties, and other repossessed collateral
assets) decreased to $29.8 million at December 31, 1995 from $32.3 million at
December 31, 1994. The 1995 decrease in non-performing assets relates to the
reduction in carrying value of $2.6 million of two private- issue mezzanine MBSs
placed in non-accrual status during 1994 (see "Non-Performing MBSs" below). The
carrying value for these two MBS's decreased due to i) amounts written down
through charges against the $9.0 million allowance for losses established during
1994 and, ii) certain limited payments received in 1995. Other loan and asset
category fluctuations generally offset. As a percentage of total assets,
non-performing assets decreased from 0.59% at December 31, 1994 to 0.54% at
December 31, 1995. During the five years ended December 31, 1995, FFC has not
had any troubled debt restructurings. Non-performing assets are summarized as
follows for the dates indicated:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
One- to four-family
residential $ 6,449 $ 5,706 $ 6,361 $ 7,320 $11,641
Multi-family residential 873 585 374 314 475
Commercial real estate 162 271 340 6,496 2,651
Manufactured housing 926 1,034 1,063 1,295 1,851
Consumer and other 3,836 2,968 2,117 1,961 3,019
------- ------- ------- ------- -------
Total non-accrual loans 12,246 10,564 10,255 17,386 19,637
Non-performing MBSs 12,858 15,455 -- -- --
Real estate judgments 1,436 2,503 2,236 2,761 3,572
Real estate foreclosed
properties 1,538 2,446 6,126 17,262 28,017
Real estate held for sale 1,309 1,089 -- -- --
Repossessed collateral assets 405 267 163 462 889
------- ------- ------- ------- -------
Total non-performing
assets $29,792 $32,324 $18,780 $37,871 $52,115
======= ======= ======= ======= =======
Non-accrual loans as a
percentage of net loans .34% .30% .33% .71% .88%
Non-performing assets as a
percentage of total assets .54% .59% .36% .88% 1.44%
</TABLE>
Non-Accrual and Impaired Loans. FFC places loans into a non-accrual status when
loans are contractually delinquent more than ninety days. When a loan is placed
on non-accrual status, previously accrued but unpaid interest is reversed.
Non-accrual loans have increased as a percentage of net loans to .34% from .30%
at December 31, 1995 and 1994, respectively. The total of residential
non-accrual loans increased by $1.0 million to $7.3 million at December 31, 1995
from year-end 1994 and the non-accrual consumer and other loans increased by
$800,000 for the same period. These increased non-accrual loan categories total
$1.8 million and account for the net increase of $1.6 million in total
non-accrual loans from 1994 year-end to December 31, 1995. The non-accrual
loans, in the aggregate, at December 31, 1995, 1994 and 1993 represented
$900,000, $700,000 and
-17-
<PAGE>
$800,000 of interest which would have been reflected in 1995, 1994 and 1993
income, respectively, if the loans had been contractually current.
The increase in residential mortgage non-accrual loans is more than offset by a
reduction of $1.6 million in residential mortgage delinquencies of 30-90 days
from year-end 1994 to December 31, 1995. While a portion of such 30-90
delinquent residential mortgage loans continued to become increasingly
delinquent and converted to non-accrual status, the remainder improved or were
paid off. The credit card non-accrual loans increased throughout the year
similar to the national trend for credit card accounts but at lower delinquency
percentages compared to the national comparative statistics. FFC's overall
delinquency ratios for credit card accounts remain at approximately 25% below
national averages in spite of trending upward during 1994 and 1995.
Non-Performing MBSs. At December 31, 1995, FFC had two non-accrual MBSs, held in
the available for sale portfolio, with an amortized cost of $12.9 million, net
of applicable allowances for loss, and a carrying value of $9.5 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 has not received full monthly payments on these
securities since 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 position(s).
Further delayed receipt of payments is probable. The underlying loans comprising
these securities had been serviced by a California institution under the control
of the Resolution Trust Corporation ("RTC"). During 1994 and 1995, servicing was
transferred from the RTC to the trustee and subsequently to a third-party
servicer. In 1994, independent national rating agencies downgraded these
securities to below investment grade. Subsequent to the downgrading, an
allowance for loss was recorded reflecting a permanent impairment of these
securities. The allowance amount was based upon information from the rating
agencies as well as discounted cash flow analyses performed by management, based
upon assumptions for delinquency levels, foreclosure rates and recovery ratios
in the underlying portfolios. Relative to one mezzanine issue, having a carrying
value of $4.2 million, FFC's subordinated protection has been eliminated and
principal losses, which were anticipated in the aforementioned provision for
loss, of approximately $750,000 have been realized during 1995. FFC's mezzanine
position for the second issue, having a carrying value of $5.3 million, remains
superior to subordinate positions amounting to 4.42% of the aggregate par value
of that issue at the end of 1995.
Also in 1994, independent national rating agencies downgraded, to below
investment grade, an unrelated senior position security of the above noted
issuer. This senior position security had a carrying value of $6.3 million at
the end of 1995. During 1995, independent national rating agencies have
downgraded, to below investment grade, additional MBSs of three unrelated
issuers in which FFC had senior ownership positions having a carrying value of
$13.1 million at December 31, 1995. The aggregate par value, amortized cost and
carrying value of all of the above discussed senior-position MBSs rated below
investment grade, each of which is held in the available for sale portfolio,
were $21.8 million, $21.9 million and $19.4 million, respectively, at December
31, 1995. These senior position securities continue to be performing assets and
are superior to subordinate positions amounting to 5.8% of the current aggregate
par value of the securities in question at year-end 1995.
-18-
<PAGE>
Management believes that the allowance for losses on the above referenced
securities is 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 certain assumptions for future delinquency
levels, foreclosure rates and recovery ratios in the underlying portfolios.
There can be no assurance that these evaluations will remain the same in the
future should economic conditions, market conditions, or other factors differ
significantly from the assumptions used. Management 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.
Other Non-Performing Assets. The increase in non-accrual loans discussed above
was offset by a decrease in FFC's other non-performing assets. Real estate
judgments, foreclosed properties and real estate held for sale decreased $1.7
million from year-end 1994 to December 31, 1995 consisting of $1.5 million in
dispositions and $200,000 of charge-offs during 1995. FFC has been able to limit
its inventory of large commercial real estate properties owned (having a
carrying value of $1.0 million or greater) to two properties totaling $2.1
million at December 31, 1995. One retail property for $1.0 million at December
31, 1995 was acquired in the FirstRock acquisition. The remaining $1.1 million
property was held by FFC at December 31, 1994 and is real estate held for sale.
The remainder of the real estate judgments and foreclosed properties consist
primarily of one- to four-family or small multi-family properties located in the
Midwest.
Summary. Non-performing and impaired (as defined) assets have declined
significantly during the five-year period ended December 31, 1995 due to i) the
disposition of such properties acquired in the acquisition of a troubled thrift
institution in 1985, ii) improved collection efforts and iii) a management
decision to restrict lending primarily to Wisconsin, Illinois and other selected
Midwestern states.
All non-performing and impaired assets have been considered by management in the
review of the adequacy of allowances for losses.
ALLOWANCES FOR LOSSES ON LOANS AND FORECLOSED PROPERTIES
FFC's loan portfolios, foreclosed properties and off-balance sheet financial
guarantees are evaluated on a continuing basis to determine the necessity for
additions to the allowances for losses and the related aggregate balance of the
allowances. These evaluations consider several factors including, but not
limited to, general economic conditions, collateral value, loan portfolio
composition, prior loss experience and management's estimate of future potential
losses. The evaluation of allowances for loan losses includes a review of both
known loan problems as well as potential problems based upon historical trends
and ratios. The allowances for losses on foreclosed properties are maintained at
levels adequate to absorb potential future declines in the estimated fair value
of the properties.
-19-
<PAGE>
A summary of activity in the allowances for losses on loans follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $25,180 $25,905 $19,540 $17,493 $16,165
Charge-offs:
Residential real estate (1,111) (864) (839) (1,691) (2,155)
Commercial real estate (3) (288) (501) (1,044) (2,165)
Manufactured housing (1,397) (1,477) (2,731) (4,212) (7,365)
Credit card (7,912) (6,658) (5,890) (6,142) (5,640)
Consumer-related (383) (371) (525) (524) (711)
Commercial (281) (214) -- (1,367) (1,051)
------- ------- ------- ------- -------
Total charge-offs (11,087) (9,872) (10,486) (14,980) (19,087)
------- ------- ------- ------- -------
Recoveries:
Residential real estate 147 604 138 242 219
Commercial real estate 80 -- -- 3 1
Manufactured housing 204 181 179 288 272
Credit card 878 593 653 584 653
Consumer-related 86 127 426 131 233
Commercial 9 2 -- -- --
------- ------- ------- ------- -------
Total recoveries 1,404 1,507 1,396 1,248 1,378
------- ------- ------- ------- -------
Net charge-offs (9,683) (8,365) (9,090) (13,732) (17,709)
Provisions for losses 9,738 6,824 10,570 15,779 19,037
Acquired banks' allowances -- 816 4,885 -- --
------- ------- ------- ------- -------
Balance at end of year $25,235 $25,180 $25,905 $19,540 $17,493
======= ======= ======= ======= =======
Ratio of net charge-offs to
average loans outstanding .27% .25% .31% .59% .76%
Ratio of allowance for losses
on loans to average loans
outstanding .71% .76% .87% .84% .75%
A summary of the activity in the allowance for losses on foreclosed properties
follows:
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $1,146 $3,561 $3,377 $2,569 $2,378
Charge-offs (213) (3,415) (3,335) (5,016) (3,377)
Provision 60 1,000 3,519 5,824 3,568
------ ------ ------ ------ ------
Balance at end of year $ 993 $1,146 $3,561 $3,377 $2,569
====== ====== ====== ====== ======
</TABLE>
The provisions for losses on foreclosed properties are included in the
consolidated statements of income in "net cost of operations of foreclosed
properties."
FFC's allowance for losses on loans remained steady at $25.2 million at December
31, 1995 compared to December 31, 1994. The ratio of allowances for losses on
loans to average loans, however, decreased from year-end 1994 to year-end 1995,
from .76% to .71%, respectively. This decline in the ratio of allowances to
loans is the result of both increased loan portfolio size during 1995 and also
the detailed analysis of the reserve levels appropriate for the various loan
categories based on historical data and current trends.
-20-
<PAGE>
The aggregate allowances for losses on loans was virtually the same at $25.2
million at both year-ends 1995 and 1994, but there were certain changes in the
allocation of balances by loan type. The most significant increases were
$700,000 in the residential real estate loan allowance and $600,000 in the
consumer loan allowance. Management strengthened the real estate loan allowance
to a slightly higher ratio to related loan balances for this largest segment of
the total portfolio. Consumer loan growth during 1995 is also substantially
collateralized by residential real estate and allowances were increased in
relation to such growth.
The major decreases in allowances for losses occurred in the allowance for
losses for the manufactured housing loan portfolio which continues to decline
since FFC left that market. The allowance for losses on credit card loans
decreased $300,000 from year-end 1994 to year-end 1995. This decrease in the
credit card allowance is the result of net charge-offs exceeding provisions
added to the allowance during 1995. National delinquency and charge-off data for
credit card portfolios are trending upward and FFC is experiencing the same but
at lower levels than most lenders. Recent data show FFC is experiencing about
25% lower delinquency and charge-off balances than national averages. However,
as a result of FFC's charge-off's for credit card loans to average loans
increasing to 3.51% for 1995 from 3.09% for 1994, management is carefully
monitoring the credit card portfolio, the related allowance for losses and
related provision for losses.
The 1995 provisions for losses on loans and losses on foreclosed properties
totaled $9.7 million and $60,000, respectively, compared to the $6.8 million and
$1.0 million, respectively, for 1994. The overall increase in provisions for
1995 versus 1994 reflects the additional residential mortgage provision
emphasized by management for the largest segment of the loan portfolio as a
whole. Provisions for credit cards and consumer loans also increased for 1995
compared to 1994 and those increases were offset by decreases in the provisions
for losses on manufactured housing loans for the same period. The provisions for
losses for years 1995, 1994 and 1993 remain at significantly lower levels
compared to earlier years 1992 and 1991 when FF Bank's charge-off experience
from certain portfolio segments and foreclosed properties from an earlier
acquisition required larger allowances for losses. Also, see "Non-Performing
Assets" for further discussion of this trend.
FF Bank has also, in the past, undertaken off-balance sheet financial
guarantees, totaling $11.0 million at December 31, 1995, whereby certain of FF
Bank's assets, primarily MBSs and securities, are pledged as collateral or
letters of credit have been issued for industrial development revenue bonds
which were issued by municipalities to finance real estate owned by third
parties. Management has considered these guarantees, all of which are
performing, in its review of the adequacy of the allowance for loan losses. See
Note N to the consolidated financial statements for further discussion of
off-balance sheet financial guarantees.
Management believes that the December 31, 1995, allowances for loan and
foreclosed property losses are adequate based upon the current evaluation of
loan delinquencies, non-performing and impaired assets, charge-off trends,
economic conditions and other factors. Management also continues to pursue all
practical and legal methods of collection, repossession and disposal, as well as
adhering to high underwriting standards in the origination process, in order to
continue to maintain such provisions at or below current levels.
-21-
<PAGE>
A detailed analysis of FFC's allowances for losses on loans and related
charge-off information is as follows for the dates and years indicated:
<TABLE>
<CAPTION>
At December 31, 1995 At December 31, 1994 At December 31, 1993
-------------------- -------------------- --------------------
Net Charge Net Charge Net Charge
-offs -offs -offs
As A As A As A
Percent Percent Percent
Allowance Of Average Allowance Of Average Allowance Of Average
As A Percent Related As A Percent Related As A Percent Related
Of Loans Of Loans Of Loans
Outstanding For The Outstanding For The Outstanding For The
Allowance Loans In Year Allowance Loans In Year Allowance Loans In Year
Type of Loan Amount Category Ended 12/31/95 Amount Category Ended 12/31/94 Amount Category Ended 12/31/93
- ------------ --------- -------- -------------- --------- ---------- -------------- -------- ---------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential real
estate $ 7,726 .34% .04% $ 6,990 .31% .01% $ 6,792 .31% .03%
Commercial real
estate 3,823 2.50 (.05) 3,632 2.53 .22 5,353 4.68 .42
Manufactured
housing 3,034 2.18 .83 4,267 2.79 .81 4,668 2.83 1.85
Credit cards 6,425 3.00 3.51 6,737 3.36 3.09 6,502 3.10 2.87
Consumer 3,029 .84 .05 2,444 .80 .08 1,820 1.01 .03
Education 51 .02 -- 46 .02 -- 52 .03 .01
Home equity 562 .20 .04 487 .20 .02 718 .36 .02
Commercial 585 3.40 1.59 577 3.03 1.02 -- -- --
------- ------- -------
$25,235 .70% .27% $25,180 .73% .25% $25,905 .82% .31%
======= ===== ===== ======= ===== ===== ======= ===== =====
</TABLE>
FFC's allowances for losses on loans were allocated to various loan categories
as follows for the dates indicated:
<TABLE>
<CAPTION>
December 31,
1995 1994 1993 1992 1991
-------------------- ------------------- -------------------- -------------------- --------------------
(Dollars in thousands)
Percent Of Percent Of Percent Of Percent Of Percent Of
Loans in Each Loans In Each Loans In Each Loans In Each Loans In Each
Category to Category to Category to Category to Category to
Type of Loan Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
- ------------ ------ ------------ ------ ---------- ------ ------------ ------ ------------ ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential real
estate $ 7,726 61.5% $ 6,990 64.5% $ 6,792 67.6% $ 4,140 64.5% $ 3,251 63.8%
Commercial real
estate 3,823 4.2 3,632 4.1 5,353 3.6 5,281 4.9 4,788 5.5
Manufactured
housing 3,034 3.8 4,267 4.3 4,668 5.1 4,325 5.3 4,492 6.1
Credit cards 6,425 5.8 6,737 5.7 6,502 6.5 4,034 7.2 2,734 7.0
Consumer and other 3,642 24.2 2,977 20.9 2,590 17.2 1,760 18.1 1,138 17.4
Commercial 585 .5 577 .5 -- -- -- -- 1,090 .2
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
$25,235 100.0% $25,180 100.0% $25,905 100.0% $19,540 100.0% $17,493 100.0%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
-22-
<PAGE>
DEPOSITS
Deposits increased $43.1 million during 1995 as a result of shifting of funds by
depositors as interest rates rose substantially during 1995. The weighted
average cost of deposits increased to 4.56% at the end of 1995, from the 4.15%
reported at the end of 1994, due to increases in general interest rate levels.
BORROWINGS
At December 31, 1995, FFC's consolidated borrowings decreased to $570.5 million
from $708.4 million at the end of 1994. The decrease in borrowings is primarily
attributable to a decrease in FHL Bank advances of $146.8 million. The weighted
average cost of borrowings increased to 6.31% at the end of 1995 as compared to
6.07% at year-end 1994 as a result of generally higher interest rate levels
during 1995.
STOCKHOLDERS' EQUITY
Stockholders' equity at December 31, 1995 was $384.9 million or 7.04% of total
assets, compared to $327.3 million or 5.95% of total assets at December 31,
1994. The dollar increase in stockholders' equity, after restatement of 1994
amounts to reflect the stock issued in connection with the FirstRock merger,
resulted from the net effect of i) net income of $64.0 million, ii) cash
dividend payments to stockholders of $14.2 million and iii) an improvement of
$2.6 million in the net unrealized holding loss on available-for-sale
securities. Stockholders' equity per share increased from $11.24 per share at
year-end 1994 to $12.97 per share at year-end 1995.
REGULATORY CAPITAL
FF Bank is subject to various OTS capital measurements and had regulatory
capital well in excess of all OTS requirements at December 31, 1995, as
summarized below:
<TABLE>
<CAPTION>
OTS Capital Ratios
------------------------------------------------
Actual Required
Ratio Ratio Excess
------ -------- ------
<S> <C> <C> <C>
Tangible capital 7.30% 1.50% 5.80%
Core leverage capital 7.59% 3.00% 4.59%
Risk-based capital 15.82% 8.00% 7.82%
</TABLE>
The OTS has adopted a final rule, effective 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. At December
31, 1995, FFC had core deposit intangibles of $17.3 million, all of which have
been grandfathered from this OTS rule. The OTS has added an interest-rate risk
calculation 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. Final implementation of this
rule was pending at the end of 1995. 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 FFC
and FF Bank do not believe these rules
-23-
<PAGE>
will significantly impact the capital requirements of FF Bank or cause FF Bank
to fail to meet its regulatory capital requirements.
For a more detailed discussion of regulatory capital requirements, see Note L to
the consolidated financial statements.
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.
Summary gap information for FFC is presented below as of year end 1995 and 1994.
<TABLE>
<CAPTION>
Ratio of Cumulative
Negative Gap To Total Assets
-----------------------------------------------------------
One Year Three Years Five Years
-------- ----------- ----------
<S> <C> <C> <C> <C> <C>
December 31, 1995 (3.65)% (4.01)% (3.15)%
December 31, 1994 (1.93) (4.29) (6.06)
</TABLE>
FFC's negative one-year gap increased to $199.8 million, or 3.65% of total
assets, at the end of 1995 from $106.1 million, or 1.93% of total assets, at the
end of 1994. FFC's consolidated one-year negative gap position of 3.65% at
December 31, 1995 falls within management's currently acceptable range of 10%
positive to 10% negative. Traditionally, management of FFC and FF Bank have not
utilized off-balance sheet derivative financial instruments as part of its
efforts to control interest-rate risk. In view of the current interest-rate
environment and the related impact on customer behavior, management believes
that it is 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
asset/liability management objectives.
In this regard, 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
-24-
<PAGE>
sudden and prolonged basis. This theoretical analysis at the end of 1995
indicates that FF Bank's current financial position should adequately protect FF
Bank, and thus FFC, from the effects of rapid rate changes. The OTS has added an
interest-rate risk calculation 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. The final implementation of this rule was pending at the end of
1995 as the OTS has delayed the effective date of the regulation pending its
adoption of a process by which an institution may appeal an OTS interest-rate
risk capital deduction determination. At December 31, 1995, FF Bank would not
have been required to deduct an interest-rate risk component under this
regulation.
Asset/Liability Repricing Schedule. The table on the following page sets forth
the combined estimated maturity/repricing structure of FFC's interest-earning
assets (including net items) and interest-costing liabilities at December 31,
1995. Assumptions regarding prepayment and withdrawal rates are based upon FF
Bank's historical experience, and management believes such assumptions are
reasonable. The table does not necessarily indicate the impact of general
interest-rate movements on FF Bank'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 FF Bank'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. Certain
shortcomings are inherent in the method of analysis presented in the gap table.
For example, although certain assets and liabilities may have similar maturities
or periods to repricing, they may react in different degrees to changes in
market interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as adjustable-rate loans, have features which
restrict changes in interest rates on a short-term basis and over the life of
the asset. Further, in the event of a change in interest rates, prepayment and
early withdrawal levels could deviate significantly from those assumed in
calculating the data in the table.
-25-
<PAGE>
<TABLE>
<CAPTION>
FIRST FINANCIAL CORPORATION CONSOLIDATED GAP ANALYSIS AT DECEMBER 31, 1995
Three Four Greater Greater Greater Greater
Months Months Than One Than Three Than Five Than Ten Greater
And Through Through Through Through Through Than
Under One Year Three Years Five Years Ten Years 20 Years 20 Years Total
--------- -------- ----------- ---------- --------- ---------- ---------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Rate-sensitive assets:
Investments and interest-
earning deposits, including
federal funds (a)(b) $ 122,154 $ 56,263 $ 42,020 $ 28,146 $ 572 $ 35,456 $ -- $ 284,611
Mortgage-related securities (b) 552,083 630,077 34,332 20,172 23,168 10,605 324 1,270,761
Mortgage loans:
Fixed-rate (c)(d) 61,857 155,776 361,280 241,778 387,156 140,937 8,624 1,357,408
Adjustable-rate (c) 170,205 425,547 414,863 -- -- -- -- 1,010,615
Other loans 679,569 183,327 199,763 79,180 81,580 24,175 1,183 1,248,777
--------- --------- --------- -------- -------- -------- -------- ----------
1,585,868 1,450,990 1,052,258 369,276 492,476 211,173 10,131 5,172,172
Rate-sensitive liabilities:
Deposits (e)(f):
Checking 129,157 27,032 67,487 52,665 82,363 73,909 40,590 473,203
Money market accounts 83,660 39,206 90,086 46,845 39,583 10,049 1,116 310,545
Passbook 273,473 198,662 60,431 43,510 62,655 39,875 9,354 687,960
Certificates of deposit 666,949 1,262,832 847,927 176,382 3,716 -- -- 2,957,806
Borrowings 535,297 20,368 5,984 2,797 832 1,910 3,320 570,508
--------- --------- --------- -------- -------- -------- -------- ----------
1,688,536 1,548,100 1,071,915 322,199 189,149 125,743 54,380 5,000,022
--------- --------- --------- -------- -------- -------- -------- ----------
GAP (repricing difference) $ (102,668) $ (97,110) $ ( 19,657) $ 47,077 $303,327 $ 85,430 $(44,249) $ 172,150
========= ========= ========= ======== ======== ======== ======== ==========
Cumulative GAP $ (102,668) $ (199,778) $ (219,435) $ (172,358) $130,969 $216,399 $172,150
========= ========= ========= ======== ======== ======== ========
Cumulative GAP/Total Assets (1.88)% (3.65)% (4.01)% (3.15)% 2.39% 3.96% 3.15%
========= ========= ========= ========= ======== ======== ========
<FN>
(a) Investments are adjusted to include FHL Bank stock 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 holding 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 FFC's historical experience as modified for current
market conditions.
(d) Includes loans held for sale.
(e) Deposits include $13.2 million of advance payments by borrowers for tax
and insurance and exclude accrued interest of $8.2 million.
(f) FFC has assumed that its passbook savings, checking accounts and money
market accounts would have projected annual withdrawal rates, based upon
FFC's historical experience, of 26%, 34% and 42%, respectively.
</FN>
</TABLE>
-26-
<PAGE>
REGULATORY ISSUES
FF Bank's deposits are insured by the Savings Association Insurance Fund
("SAIF") of the 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). Deposit insurance
premiums for the SAIF and the BIF, which insures deposits in national and
state-chartered banks, are set to facilitate each fund achieving its designated
reserve ratio. In August 1995, the FDIC determined that the BIF had achieved its
designated reserve ratio and lowered BIF deposit insurance premium rates for all
but the riskiest institutions. Effective January 1, 1996, BIF deposit insurance
premiums for well-capitalized banks were further reduced to the statutory
minimum of $2,000 per institution per year. Because the SAIF remains
significantly below its designated reserve ratio, SAIF deposit insurance
premiums were not reduced and remain at 0.23% to 0.31% of deposits, based upon
an institution's supervisory evaluations and capital levels. The current
discrepancy in deposit insurance premiums between the BIF and the SAIF could
place FF Bank at a competitive disadvantage to BIF insured institutions.
The current financial condition of the SAIF has resulted in proposed legislation
to recapitalize the SAIF through a one-time special assessment (of approximately
80 cents to 85 cents per $100 of assessable SAIF deposits as of March 31, 1995)
and in legislation to then merge the SAIF into the BIF. If the special
assessment is enacted, a special one-time assessment of approximately $24.0
million, net of tax effect, would be imposed on FF Bank. After the special
assessment, it is expected that the SAIF would achieve its designated reserve
ratio and that SAIF premium rates would then become comparable to BIF rates. The
proposed legislation also contemplates a merger of the SAIF into the BIF, which
would require separate legislation. FFC 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.
Legislation also has been proposed that could eliminate the federal savings
association charter. 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. Pending legislation may provide
relief as to recapture of the bad debt deduction for federal tax purposes that
otherwise would be applicable if FF Bank converted its charter, provided that FF
Bank meets a proposed residential loan origination requirement. Pending
legislation also may result in FFC becoming regulated at the holding company
level by the Federal Reserve Board rather than by the OTS. Regulation by the
Federal Reserve Board could subject FFC to capital requirements that are not
currently applicable to FFC as a holding company under OTS regulation and may
result in 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. FFC is unable to predict whether such legislation will be
enacted or, if enacted, whether it will contain relief as to the recapture of
bad debt deductions previously taken.
-27-
<PAGE>
EXHIBIT 22
LIST OF SUBSIDIARIES
<PAGE>
LIST OF SUBSIDIARIES
At December 31, 1995
First Financial Bank
<PAGE>
EXHIBIT 24
CONSENT OF ERNST & YOUNG LLP
INDEPENDENT AUDITORS
<PAGE>
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of First Financial Corporation of our report dated January 15, 1996, included in
the 1995 Annual Report to Shareholders of First Financial Corporation.
Our audits also included the financial statement schedule of First Financial
Corporation listed in Item 14(a). This schedule is the responsibility of the
Corporation's management. Our responsibility is to express an opinion based on
our audits. In our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration Statements
No. 2-90005 on Form S-8 dated March 16, 1984, No. 33-17304 on Form S-8 dated
September 17, 1987, and No. 33-36295 on Form S-8 dated August 9, 1990, in the
Post-Effective amendment No. 5 to Form S-1 on Form S-8 (Registration No
33-16948) dated May 12, 1988, No. 33-69856 on Form S-8 dated October 1, 1993,
Registration Statement No. 33-51487 filed with the Securities and Exchange
Commission on January 13, 1994 and Registration Statement No. 33-55823 filed
with the Securities and Exchange Commission on January 27, 1995, with respect to
the consolidated financial statements and schedule of First Financial
Corporation incorporated by reference in the Annual Report (Form 10-K) for the
year ended December 31, 1994.
/s/Ernst & Young LLP
Milwaukee, Wisconsin
March 20, 1996
<PAGE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 123,379
<INT-BEARING-DEPOSITS> 13,801
<FED-FUNDS-SOLD> 34,929
<TRADING ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 652,292
<INVESTMENTS-CARRYING> 818,894
<INVESTMENTS-MARKET> 810,123
<LOANS> 3,590,149
<ALLOWANCE> 25,235
<TOTAL-ASSETS> 5,471,108
<DEPOSITS> 4,424,525
<SHORT-TERM> 25,972
<LIABILITIES-OTHER> 91,158
<LONG-TERM> 544,536
<COMMON> 29,676
0
0
<OTHER-SE> 355,141
<TOTAL-LIABILITIES-AND-EQUITY> 5,471,108
<INTEREST-LOAN> 303,690
<INTEREST-INVEST> 113,618
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 417,308
<INTEREST-DEPOSIT> 196,823
<INTEREST-EXPENSE> 37,348
<INTEREST-INCOME-NET> 183,137
<LOAN-LOSSES> 9,738
<SECURITIES-GAINS> 1,182
<EXPENSE-OTHER> 118,602
<INCOME-PRETAX> 99,088
<INCOME-PRE-EXTRAORDINARY> 63,984
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 63,984
<EPS-PRIMARY> 2.12
<EPS-DILUTED> 2.11
<YIELD-ACTUAL> 3.34
<LOANS-NON> 12,246
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 7,601
<ALLOWANCE-OPEN> 25,180
<CHARGE-OFFS> 11,087
<RECOVERIES> 1,404
<ALLOWANCE-CLOSE> 25,235
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 25,235
</TABLE>
