SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
----------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to _____________
Commission File Number 0-11889
FIRST FINANCIAL CORPORATION
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Wisconsin 39-1471963
----------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1305 Main Street, Stevens Point, Wisconsin 54481
------------------------------------------------
(Address of principal executive office)
(715) 341-0400
--------------------------------------------------
(Registrant's telephone number, including area code)
---------------------------------------------------
(Former name, address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Common Stock, par value $1.00 per share 29,932,524 Shares
- --------------------------------------- -----------------------
Class Outstanding at October 31, 1996
<PAGE>
FIRST FINANCIAL CORPORATION
Form 10-Q Index
Part I - Financial Information
Consolidated Balance Sheets as of September 30, 1996
(Unaudited) and December 31, 1995
Unaudited Consolidated Statements of Income for
the Three Months and Nine Months Ended September 30,
1996 and 1995
Unaudited Consolidated Statement of Changes In
Stockholders' Equity for the Nine Months Ended
September 30, 1996
Unaudited Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 1996 and
1995
Notes to Unaudited Consolidated Financial Statements
Management's Discussion and Analysis:
Comparison of the Consolidated Balance Sheets
at September 30, 1996 (Unaudited) and December 31,
1995
Comparison of the Unaudited Consolidated Statements
of Income for the Three Months and Nine Months Ended
September 30, 1996 and 1995
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
Exhibits
-1-
<PAGE>
FIRST FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
---- ----
(Unaudited)
ASSETS (In thousands)
<S> <C> <C>
Cash $ 99,739 $ 123,379
Federal funds sold 55,031 34,929
Interest-earning deposits 70,692 13,801
---------- ----------
Cash and cash equivalents 225,462 172,109
Securities available for sale (at fair value):
Investment securities 152,821 80,999
Mortgage-related securities 839,745 571,293
Securities held to maturity (at amortized cost):
Investment securities (fair
value of $66,240,000--1996
and $119,063,000--1995) 67,081 119,426
Mortgage-related securities
(fair value of $613,350,000
--1996 and $691,060,000--1995) 622,628 699,468
Loans receivable:
Held for sale 12,631 26,651
Held for investment 3,468,859 3,590,149
Foreclosed properties and repossessed assets 3,603 3,379
Real estate held for investment or sale 8,690 8,289
Office properties and equipment, at cost 50,483 51,124
Intangible assets, less accumulated amortization 13,641 21,481
Other assets 129,968 126,740
---------- ----------
$5,595,612 $5,471,108
========== ==========
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
<S> <C> <C>
Deposits:
Checking $ 432,554 $ 473,203
Money market accounts 389,115 310,545
Passbook 667,428 687,960
Certificates of deposit 2,875,434 2,952,817
---------- ----------
Total deposits 4,364,531 4,424,525
Borrowings 708,820 570,508
Advance payments by borrowers
for taxes and insurance 54,347 13,206
Other liabilities 66,812 77,952
---------- ----------
Total liabilities 5,194,510 5,086,191
---------- ----------
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:
29,915,306-September 30, 1996;
29,676,365-December 31, 1995 29,915 29,676
Additional paid-in capital 50,958 49,756
Net unrealized loss on
securities available for sale (8,354) (6,021)
Common stock purchased by
employee benefit plan (271) (271)
Retained earnings (substantially restricted) 328,854 311,777
---------- ----------
Total stockholders' equity 401,102 384,917
---------- ----------
$5,595,612 $5,471,108
========== ==========
</TABLE>
See notes to unaudited consolidated financial statements.
-2-
<PAGE>
FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
--------- -------- ---------- ------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Interest income:
Mortgage loans $ 42,979 $ 45,711 $132,264 $137,161
Other loans 32,238 30,912 95,271 88,719
Mortgage-related securities 27,180 24,635 69,667 75,751
Investments 4,660 3,895 15,416 11,058
-------- -------- -------- --------
Total interest income 107,057 105,153 312,618 312,689
Interest expense:
Deposits 49,302 50,939 149,347 146,055
Borrowings 9,443 8,525 23,263 29,240
-------- -------- -------- --------
Total interest expense 58,745 59,464 172,610 175,295
-------- -------- -------- --------
Net interest income 48,312 45,689 140,008 137,394
Provision for losses on loans 2,850 2,873 6,930 7,065
-------- -------- -------- --------
45,462 42,816 133,078 130,329
Non-interest income:
Deposit account service fees 3,622 3,195 10,098 8,789
Loan fees and service charges 3,146 2,943 8,895 8,201
Insurance and brokerage commissions 1,844 1,536 5,455 5,322
Service fees on loans sold 1,583 1,873 4,680 5,629
Gain on disposition of loans and
mortgage-related securities, net 1,347 1,365 2,055 1,647
Net gain on sales of securities 52 1,173 456 1,184
Other 776 677 2,366 2,612
-------- -------- -------- --------
Total non-interest income 12,370 12,762 34,005 33,384
-------- -------- -------- --------
Operating income 57,832 55,578 167,083 163,713
Non-interest expense:
Compensation, payroll taxes
and benefits 12,456 11,172 35,722 35,309
Federal deposit insurance premiums 2,572 2,517 7,675 7,575
SAIF recapitalization charge 28,767 -- 28,767 --
Occupancy 2,378 2,285 7,210 6,815
Data processing 1,924 1,776 5,674 5,389
Loan expenses 1,770 1,543 5,374 4,545
Telephone and postage 1,650 1,555 4,935 4,855
Marketing 1,653 1,245 4,923 5,422
Furniture and equipment 1,228 1,356 3,842 4,253
Amortization of intangible assets 1,286 1,312 3,815 3,934
Goodwill writedown 4,238 -- 4,238 --
Net cost of foreclosed properties 191 22 68 15
Acquisition-related costs -- -- -- 6,458
Other 2,958 2,987 8,516 8,701
-------- -------- -------- --------
Total non-interest expense 63,071 27,770 120,759 93,271
-------- -------- -------- --------
Income (loss) before income taxes and
extraordinary item (5,239) 27,808 46,324 70,442
Income taxes (credit) (1,542) 10,015 15,106 25,517
-------- -------- -------- --------
Income (loss) before extraordinary item (3,697) 17,793 31,218 44,925
Extraordinary item -- -- (686) --
-------- -------- -------- --------
Net income (loss) $ (3,697) $ 17,793 $ 30,532 $ 44,925
======== ======== ======== ========
Earnings per share:
Primary:
Income (loss) before extra-
ordinary item $ (0.12) $ 0.59 $ 1.02 $ 1.49
Extraordinary item -- -- (0.02) --
-------- -------- -------- --------
Net income (loss) $ (0.12) $ 0.59 $ 1.00 $ 1.49
======== ======== ======== ========
Fully diluted:
Income (loss) before extra-
ordinary item $ (0.12) $ 0.59 $ 1.02 $ 1.48
Extraordinary item -- -- (0.02) --
-------- -------- -------- --------
Net income (loss) $ (0.12) $ 0.59 $ 1.00 $ 1.48
======== ======== ======== ========
Cash dividends per share $ 0.15 $ 0.12 $ 0.45 $ 0.36
======== ======== ======== ========
</TABLE>
See notes to unaudited consolidated financial statements.
-3-
<PAGE>
FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Net
Unrealized
Common Holding Common
Stock and Loss on Stock
Additional Securities Purchased
Paid-In Available By ESOP Retained Stockholders'
Capital For Sale Plan Earnings Equity
------- -------- ---- -------- ------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Balances at
December 31, 1995 $ 79,432 $ (6,021) $ (271) $ 311,777 $ 384,917
Net income for the
nine months ended
September 30, 1996 30,532 30,532
Cash dividends paid
($0.45 per share) (13,455) (13,455)
Exercise of stock
options 1,441 1,441
Change in net unrealized
holding loss on
securities available
for sale, net of tax (2,333) (2,333)
---------- ---------- --------- --------- -----------
Balances at
September 30, 1996 $ 80,873 $ (8,354) $ (271) $ 328,854 $ 401,102
========== ========== ========= ========= ===========
</TABLE>
See notes to unaudited consolidated financial statements.
-4-
<PAGE>
FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1996 1995
---------- -------
<S> <C> <C>
OPERATING ACTIVITIES (In thousands)
Net income $ 30,532 $ 44,925
Adjustments to reconcile net income to net cash provided
by operating activities:
Decrease (increase) in accrued interest on loans 961 (3,446)
Increase in accrued interest on deposits 1,508 10,369
Loans originated for sale (174,743) (142,577)
Proceeds from sales of loans held for sale 271,306 142,861
Provision for depreciation 4,465 4,321
Provision for losses on loans 6,930 7,065
Provision for losses on real estate and other assets (342) 659
Amortization of cost in excess of net assets of
acquired businesses 2,959 624
Amortization of core deposit intangibles 5,094 3,310
Amortization of mortgage servicing rights 1,369 710
Net gain on sales of loans, securities and assets (2,494) (2,867)
Other-net 17,145 5,836
--------- ---------
Net cash provided by operating activities 164,690 71,790
INVESTING ACTIVITIES
Proceeds from sales of investment securities available for sale 2,564 18,759
Proceeds from sales of mortgage-related securities available
for sale 359,180 --
Proceeds from maturities of investment securities held
to maturity 81,787 41,695
Proceeds from maturities of investment securities available for
sale 6,860 9,351
Purchases of investment securities held to maturity (29,849) (34,655)
Purchases of investment securities available for sale (82,884) (15,770)
Purchases of mortgage-related securities available for sale (551,363) --
Principal payments received on mortgage-related securities 152,708 192,719
Principal received on loans receivable 512,326 401,879
Loans originated for portfolio (635,527) (536,651)
Additions to office properties and equipment (3,233) (2,722)
Proceeds from sales of foreclosed properties and
repossessed assets 5,768 5,341
Proceeds from sales of real estate held for investment 81 --
--------- ---------
Net cash provided by (used in) investing activities (181,582) 79,946
FINANCING ACTIVITIES
Net increase (decrease) in deposits (61,502) 48,769
Net increase in advance payments by borrowers for
taxes and insurance 41,141 46,292
Funding of official checks for borrower tax escrows (35,692) (34,953)
Net increase in short-term borrowings 145,763 33,582
Proceeds from borrowings 1,227,300 814,223
Repayments of borrowings (1,234,751) (1,028,730)
Proceeds from exercise of stock options 1,441 2,693
Proceeds from vesting of employee benefit plans -- 1,139
Payments of cash dividends to stockholders (13,455) (10,595)
--------- ---------
Net cash provided by (used in) financing activities 70,245 (127,580)
--------- ---------
Increase in cash and cash equivalents 53,353 24,156
Cash and cash equivalents at beginning of period 172,109 118,978
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 225,462 $ 143,134
========= =========
</TABLE>
See notes to unaudited consolidated financial statements.
-5-
<PAGE>
FIRST FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - PRINCIPLES OF CONSOLIDATION
The unaudited consolidated financial statements include the accounts and
results of operations of First Financial Corporation ("FFC") and its
wholly-owned subsidiary, First Financial Bank ("FF Bank"). Significant
intercompany accounts and transactions have been eliminated in consolidation.
FFC uses the calendar year as its fiscal year.
The financial statements reflect adjustments, all of which are of a
normal recurring nature, and in the opinion of management, necessary for a fair
statement of the results for the interim periods, and are presented on an
unaudited basis. 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. The operating results for the first nine months of
1996 are not necessarily indicative of the results which may be expected for the
entire 1996 fiscal year. The December 31, 1995 balance sheet included herein is
derived from the consolidated financial statements included in FFC's 1995 Annual
Report to Shareholders. The accompanying unaudited consolidated financial
statements and related notes should be read in conjunction with the consolidated
financial statements and related notes included in FFC's 1995 Annual Report to
Shareholders. See Note B for information relative to business combinations.
NOTE B - FIRST FINANCIAL CORPORATION
At September 30, 1996, FFC conducted business as a nondiversified
unitary thrift holding company and its principal asset was all of the capital
stock of FF Bank. The primary business of FFC is the business of FF Bank. FFC's
activities are currently comprised of providing limited administrative services
to FF Bank.
On February 28, 1995, FFC acquired FirstRock Bancorp, Inc. ("FirstRock")
of Rockford, Illinois. 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. The transaction
was accounted for as a pooling-of-interests and, accordingly, financial
statements for all periods presented have been restated to include the results
of FirstRock.
-6-
<PAGE>
On February 28, 1995 FirstRock had assets (unaudited) of $376,473,000
and shareholders' equity (unaudited) of $48,430,000. The total income and net
income (loss) for the two-month period ended February 28, 1995 (unaudited),
which reflects the pre-merger results of FFC and FirstRock that are included in
the first nine months of 1995 results of operations, are as follows:
Net
Total Income
Income (Loss)
------ ------
FFC $69,579 $ 9,348
FirstRock 5,383 (3,091)
------- -------
$74,962 $ 6,257
======= =======
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.
NOTE C - EARNINGS PER SHARE
Primary and fully diluted earnings per share for the periods ended
September 30, 1996 and 1995 have been determined based on the weighted average
number of common shares outstanding during each period and common equivalent
shares, using the treasury share method, outstanding at the end of each period.
FFC's common stock equivalents consist entirely of stock options. Weighted
average common shares have been adjusted for all periods presented to reflect
the restatement for FirstRock shares. See Exhibit 11 to this Report for a
detailed computation of earnings per share.
NOTE D - CONTINGENT LIABILITIES
FF Bank has previously entered into agreements whereby, for an annual
fee, letters of credit are issued by FF Bank in connection with the issuance of
industrial development revenue bonds. At September 30, 1996, bond issues
totaling $7.1 million are supported by such letters of credit. At September 30,
1996, each of the outstanding bonds for which FF Bank has issued letters of
credit is current with regard to debt service payments.
NOTE E - DIVIDENDS PAID OR DECLARED TO STOCKHOLDERS
The Board of Directors of FFC on August 21, 1996, declared a $0.15 per
share quarterly cash dividend payable on September 30, 1996 to shareholders of
record of FFC common stock on September 13, 1996.
-7-
<PAGE>
NOTE F - REGULATORY CAPITAL REQUIREMENTS
Current Office of Thrift Supervision ("OTS") regulatory capital
requirements for federally-insured thrift institutions include a tangible
capital to tangible assets ratio, a core leverage capital to adjusted tangible
assets ratio and a risk-based capital measurement based upon assets weighted for
their inherent risk.
As of September 30, 1996, FF Bank exceeded all OTS capital requirements
as displayed below:
Required Actual
OTS FF Bank
Ratio Ratio
----- -----
Tangible capital 1.50% 6.81%
Core leverage capital 3.00 7.02
Risk-based capital 8.00 15.09
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 September 30, 1996,
FFC had core deposit intangibles of $12.2 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 September 30, 1996. 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 will significantly impact the
capital requirements of FF Bank or cause FF Bank to fail to meet its regulatory
capital requirements.
NOTE G - EXTRAORDINARY ITEM
In January 1996, FFC redeemed all of its outstanding 8% Subordinated
Notes due November 1999 (which aggregated $54,925,000 at the date of
redemption). The net after-tax cost associated with this redemption, $686,000 or
$0.02 per share, has been reported as an extraordinary charge in the first
quarter of 1996. This transaction was funded principally through a dividend from
FF Bank.
-8-
<PAGE>
NOTE H - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
For The
Nine Months Ended
September 30,
--------------------
1996 1995
-------- ------
(In thousands)
Supplemental disclosure of cash flow information:
Cash paid or credited to accounts during
period for:
Interest on deposits and borrowings $170,906 $165,325
Income taxes 25,967 24,647
Non-cash investing activities:
Mortgage loans transferred to held for sale
portfolio 70,502 7,498
Loans receivable transferred to foreclosed
properties 5,972 4,757
Increase in net unrealized holding loss
on securities available for sale (2,333) (440)
Mortgage loans securitized and transferred to
mortgage-related securities available for sale 161,087 --
NOTE I - SUBSEQUENT EVENT
On October 16, 1996 FFC's Board of Directors approved the repurchase of
up to 1,500,000 shares, or approximately 5%, of its outstanding common stock
from time to time over the next six months in open market and privately
negotiated transactions. Shares of common stock acquired pursuant to the
repurchase program shall be retained as treasury shares for general corporate
purposes.
-9-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
COMPARISON OF THE CONSOLIDATED BALANCE SHEETS
AT SEPTEMBER 30, 1996 (UNAUDITED) WITH DECEMBER 31, 1995
General:
Total assets increased to $5.596 billion at September 30, 1996 from
$5.471 billion at December 31, 1995. Deposits decreased to $4.365 billion at
September 30, 1996 from $4.425 billion at year-end 1995 while borrowings
increased to $708.8 million from $570.5 million during the same time frame.
Advance payments by borrowers for taxes and insurance increased by $41.1 million
between December 31, 1995 and September 30, 1996 and other liabilities decreased
$11.1 million from December 31, 1995 to September 30, 1996. Stockholders' equity
at September 30, 1996 was $401.1 million, up from $384.9 million at year-end
1995.
Liquidity and Capital Resources:
At September 30, 1996, total consolidated liquidity, consisting of
cash, cash equivalents, and investment securities represented 7.96% of FFC's
total assets compared with 6.81% at December 31, 1995. FF Bank is in compliance
with requirements relating to minimum levels of liquid assets as defined by OTS
regulations. The ongoing management of liquid assets is an integral part of
FFC's overall asset/liability management program as described below under
"Asset/Liability Management." The cash and securities portfolios are among the
most flexible assets available for shorter term liability matching. Total
consolidated liquidity at September 30, 1996 increased by $72.8 million as
compared to December 31, 1995 liquidity as a result of the net effect of
significant changes in various categories of assets and liabilities during the
nine-month interim period. Some of the more significant changes in these
categories, including liquid assets, are summarized as follows:
<TABLE>
<CAPTION>
Consolidated Balance Balance
Balance Sheet December 31, Increases September 30,
Classification 1995 (Decreases) 1996
- ------------------- ------------ ----------- --------
(In thousands)
<S> <C> <C> <C>
Cash and cash equivalents $ 172,109 $ 53,353 $ 225,462
Securities available for
sale:
Investment securities 80,999 71,822 152,821
Mortgage-related
securities 571,293 268,452 839,745
Securities held to
maturity:
Investment securities 119,426 (52,345) 67,081
Mortgage-related
securities 699,468 (76,840) 622,628
Loans receivable, in-
cluding loans held
for sale 3,616,800 (135,310) 3,481,490
Office properties 51,124 (641) 50,483
Intangible assets 21,481 (7,840) 13,641
-10-
<PAGE>
Deposits 4,424,525 (59,994) 4,364,531
Borrowings 570,508 138,312 708,820
Advance payments by
borrowers for taxes
and insurance 13,206 41,141 54,347
Other liabilities 77,952 (11,140) 66,812
Stockholders' equity 384,917 16,185 401,102
</TABLE>
Changes noted in the "Increases (Decreases)" column of the preceding
table are discussed below in the related sections of "Management's Discussion
and Analysis."
Management believes liquidity levels are proper and that adequate
capital and borrowings are available through the capital markets, the Federal
Home Loan Bank ("FHLB") and other sources. For a discussion of regulatory
capital requirements, see Note F to the unaudited consolidated financial
statements.
On an unconsolidated basis, FFC had cash of $5.5 million. During the
first quarter of 1996, FFC redeemed its subordinated debt of $54.9 million (See
Note G to the unaudited consolidated financial statements). The principal
ongoing source of funds for FFC is primarily dividends from FF Bank. Applicable
rules and regulations of the OTS impose limitations on capital distributions by
savings institutions such as FF Bank. Savings institutions such as FF Bank which
have capital in excess of all capital requirements before and after a proposed
capital distribution are permitted, after giving prior notice to the OTS, to
make capital distributions during a calendar year up to the greater of (i) 100%
of net income to date during the calendar year, plus the amount that would
reduce by 1/2 its "surplus capital ratio" (the excess capital over its capital
requirements) at the beginning of the calendar year, or (ii) 75% of its net
income over the most recent four-quarter period.
Total Loans Receivable and Held for Sale:
Total loans, including loans held for sale, decreased $135.3 million
from $3.617 billion at December 31, 1995 to $3.481 billion at September 30,
1996. Total loans are summarized below as of the dates indicated.
<TABLE>
<CAPTION>
September 30, December 31, Increase
1996 1995 (Decrease)
------------- ------------ ----------
(In thousands)
<S> <C> <C> <C>
Real estate loans:
One-to-four family $ 1,885,612 $2,038,103 $(152,491)
Multi-family 230,200 220,772 9,428
Commercial and non-residential 173,105 153,173 19,932
---------- --------- ---------
Total real estate loans 2,288,917 2,412,048 (123,131)
Other loans:
Consumer 409,329 362,659 46,670
Home equity 296,324 284,700 11,624
Education 263,543 240,650 22,893
Credit cards 168,423 214,107 (45,684)
Manufactured housing 112,286 139,385 (27,099)
Business 12,220 17,198 (4,978)
Less net items to loans receivable (69,552) (53,947) (15,605)
---------- ---------- ---------
Total loans (including loans held
for sale) $3,481,490 $3,616,800 $(135,310)
========== ========== =========
</TABLE>
-11-
<PAGE>
The decrease in total loans during the first nine months of 1996
included a $123.1 million decrease in real estate loans. This decrease was
primarily the result of the net effect of i) originations of $561.0 million
offset by ii) repayments of $326.6 million, iii) loan sales of $211.3 million,
and iv) the securitization of $161.1 million of seasoned fixed-term fixed-rate
mortgage loans transferred to the mortgage-related securities portfolio. For a
further discussion of loan origination activity, see "Loan Originations".
Consumer loan balances increased $46.7 million and education loans
increased $22.9 million in 1996 as originations outpaced repayments for these
product lines. Consumer loan balances were positively impacted by the purchase
of a $7.3 million automobile loan portfolio as well as by the continued success
of a second mortgage loan product. Manufactured housing loan balances decreased
$27.1 million as FFC had previously ceased originating manufactured housing
loans and the portfolio continues to make scheduled repayments.
Credit card loan balances decreased $45.7 million in 1996 as the
result of the sale of a $47.9 million affinity group portfolio. Offsetting the
sale is a $2.2 million increase in credit card balances at September 30, 1996
over traditionally high calendar year-end balances.
Home equity loan balances increased $11.6 million to $296.3 million at
September 30, 1996 due to a successful loan promotion and the stabilization of
record repayment levels experienced in early 1996.
Mortgage loans held for sale were $12.6 million at September 30, 1996
as compared to $26.7 million at the end of 1995. Off-balance sheet commitments
to extend credit and to sell mortgage loans totaled $40.0 million and $16.8
million, respectively, at September 30, 1996 as compared to $40.2 million and
$43.3 million, respectively, at December 31, 1995. During the nine months ended
September 30, 1996, market interest rates moved slightly lower than year-end
1995 rates early in 1996 but then trended upward from year-end levels and
stabilized during the third quarter of 1996. The fair value of on-balance sheet
mortgage loans held for sale and off-balance sheet commitments to originate and
sell mortgage loans can vary substantially depending upon the movement of
interest rates. Management utilizes various methods to insulate FFC from the
effects of such interest-rate movements, principally by securing forward
commitments to sell loans in the secondary mortgage market. However, there can
be no assurance that these means will be totally effective. Future operations
may be affected by the above-discussed risk factors.
Mortgage-Related Securities:
The mortgage-related securities ("MBS") portfolio increased $191.6
million during the nine months ended September 30, 1996 primarily as a result of
the net effect of i) the purchase of $551.4 million of adjustable rate U.S.
Government agency-backed MBSs and ii) the aforementioned securitization of
$161.1 million of mortgage loans transferred to the mortgage-related securities
portfolio offset by iii) sales of MBSs having an aggregate par value of $358.6
million and iv) principal repayments of $152.7 million. At the end of the third
quarter, FF Bank had commitments to purchase adjustable rate U.S. Government
agency-backed MBSs having an aggregate par value of $145.0 million. These
commitments were undertaken to cover expected cash flows as well as to reinvest
the proceeds from the credit card sale noted above.
-12-
<PAGE>
The following tables set forth, at the dates indicated, the
composition of the MBS portfolio including issuer, security type and financial
statement carrying value as well as classification according to
available-for-sale or held-to-maturity status:
<TABLE>
<CAPTION>
Carrying Value At
September 30, December 31,
1996 1995
----------- -------
(In thousands)
<S> <C> <C>
Issuer/Security Type
U.S. Government agencies:
Mortgage-backed certificates $ 857,020 $ 349,216
Collateralized mortgage
obligations ("CMOs") 284,349 342,190
---------- ----------
Total agencies 1,141,369 691,406
---------- ----------
Private issuers:
Mortgage-backed certificates
Senior position 304,573 480,839
Mezzanine position 15,968 97,904
CMOs 463 612
---------- ----------
Total private issuers 321,004 579,355
---------- ----------
Totals $1,462,373 $1,270,761
========== ==========
Financial Statement Classification
Available-for-sale portfolio $ 839,745 $ 571,293
Held-to-maturity portfolio 622,628 699,468
---------- ----------
Total carrying value $1,462,373 $1,270,761
========== ==========
</TABLE>
FFC's investment in private-issuer, i.e., non-agency, MBSs has declined
significantly in 1994, 1995 and 1996 due to prepayments and sales. The following
table sets forth the carrying value of FFC's private-issuer MBSs as of the
indicated dates:
<TABLE>
<CAPTION>
At
September 30, At December 31,
1996 1995 1994 1993
------------- -------- -------- ------
(In thousands)
<S> <C> <C> <C> <C>
Private issuers:
Senior position $ 304,573 $ 480,839 $ 649,294 $ 912,461
Mezzanine position 15,968 97,904 107,721 220,576
CMOs 463 612 2,115 3,205
---------- ---------- ---------- ----------
Total $ 321,004 $ 579,355 $ 759,130 $1,136,242
========== ========== ========== ==========
Private issue
portfolio as
% of total MBSs 22.0% 45.6% 52.2% 85.8%
========== ========== ========== ==========
</TABLE>
During the first nine months of 1996, FFC reduced its holdings of private
issue MBSs by $258.4 million from $579.4 million at the end of 1995 to $321.0
million at September 30, 1996. This decrease included an $81.9 million reduction
in mezzanine position MBSs, primarily due to the disposition of such securities
having an aggregate carrying value of $81.2 million at a net loss of $15.9
million. (See "Non-Performing MBSs").
FFC's portfolio of MBSs totaled approximately $1.46 billion at September
30, 1996 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.
-13-
<PAGE>
Loan Delinquencies:
FFC monitors the delinquency status of its loan portfolio on a constant
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 loans are placed on a non-accrual basis until such
time as the delinquency is reduced again to 90 days or less. Non- accrual loans
are presented separately in the following section. Loan delinquencies of 90 days
or less, for the dates indicated, are summarized in the following chart:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- --------
(In thousands)
<S> <C> <C>
Loans Delinquent 30-59 Days
Residential real estate $ 6,114 $ 7,945
Manufactured housing 1,812 2,888
Credit card 1,805 2,555
Commercial real estate 277 303
Consumer, student and other 9,705 9,519
------- -------
$19,713 $23,210
======= =======
Loans Delinquent 60-90 Days
Residential real estate $ 1,715 $ 1,193
Manufactured housing 709 766
Credit card 1,033 1,315
Commercial real estate -- 606
Consumer, student and other 12,950 9,734
------- -------
$16,407 $13,614
======= =======
Total Loans Delinquent 30-90 Days
Residential real estate $ 7,829 $ 9,138
Manufactured housing 2,521 3,654
Credit card 2,838 3,870
Commercial real estate 277 909
Consumer, student and other 22,655 19,253
------- -------
$36,120 $36,824
======= =======
</TABLE>
At September 30, 1996, the 30-90 day delinquencies decreased $700,000 to
$36.1 million from $36.8 million at year-end 1995. As a percent of total loans
receivable, these loan delinquencies increased from 1.02% at the end of 1995 to
1.04% at September 30, 1996. The slight increase in the percentage of 30-90 day
delinquencies to total loans is the result of the $135.3 million reduction in
the loan base from year-end 1995 to September 30, 1996. The decrease in 30-90
day delinquencies relates to the net effect of changes of such delinquencies for
various loan categories, including the following, i) a decrease of $1.3 million
for residential mortgage loans, ii) a decrease of $1.2 million for manufactured
housing loans, iii) a decrease of $1.1 million for credit card loans, and iv) an
increase of $2.5 million for student loans which are fully-guaranteed. Similar
delinquencies for other categories of loans changed by lesser amounts and tended
to offset.
All delinquent loans have been considered by management in its
evaluation of the adequacy of the allowances for loan losses.
-14-
<PAGE>
Non-Accrual Loans:
FFC places loans into a non-accrual status when loans are contractually
delinquent more than 90 days. If appropriate, loans may be placed into
non-accrual status prior to becoming 90 days delinquent based upon management's
analysis. Non-accrual loans are summarized, for the dates indicated, in the
following table:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- --------
(In thousands)
<S> <C> <C>
One- to four-family residential $ 5,260 $ 6,449
Multi-family residential 1,700 873
Commercial and other real estate 134 162
Manufactured housing 945 926
Consumer and other 3,114 3,836
------- -------
$11,153 $12,246
======= =======
</TABLE>
Non-accrual loans decreased by $1.0 million to $11.2 million at
September 30, 1996 versus $12.2 million at December 31, 1995. As a percentage of
net loans receivable, non-accrual loans decreased slightly to 0.32% at September
30, 1996 from 0.34% at December 31, 1995. The 1996 net decrease in non-accrual
loans reflects primarily the combination of a decrease of $1.1 million in
one-to-four family residential mortgage non-accrual accounts, a decrease of
$500,000 in credit card non-accrual accounts and a decrease of $300,000 in
commercial business loan non-accrual accounts offset by an increase of $800,000
in multi-family residential non-accrual mortgage loans.
The decrease in credit card non-accrual loans relates primarily to the
third-quarter 1996 sale of an affinity group of the credit card portfolio which
was experiencing higher than average delinquencies and charge-offs. This is also
demonstrated by a decrease of $1.1 million in the 30-90 day delinquent credit
card accounts between year-end 1995 and September 30, 1996, as scheduled in the
previous section. Aside from the effect of the sale of credit card accounts, FFC
is still showing delinquencies somewhat higher than its historical delinquency
levels, following national delinquency trends and statistics for this product.
However, FFC continues to experience significantly smaller overall credit card
delinquencies compared to such national statistics.
The residential mortgage loan non-accrual decrease represents normal
changes as loans either return to more current performance (lesser delinquency)
or migrate to foreclosed status if the delinquency is not cured. The commercial
business loan non-accrual decrease relates to the resolution or charge-off of
certain delinquent situations within this declining portfolio. The multi-family
residential mortgage non-accrual loan increase relates to a group of loans to
one borrower, totaling $1.3 million, which recently became sufficiently
delinquent to warrant non-accrual status. Management is currently analyzing this
delinquent group and reviewing the collateral properties to determine the
appropriate course to resolve this situation. Consumer loan, manufactured
housing loan and commercial mortgage loan non-accrual totals changed by lesser
amounts. FFC has had no significant troubled debt restructurings during 1996.
-15-
<PAGE>
All loans included in non-accrual status have been considered by
management in its review of the adequacy of allowances for loan losses.
Non-Performing MBSs:
During the third quarter of 1996, FFC sold two private issue MBSs, which
had been non-performing at the end of 1995. Each of these MBSs was structured as
a mezzanine security, which is subordinate to the senior position of that issue
but is structured to be superior to other subordinate positions designed to
absorb first losses. FFC had not received full monthly payments on these
securities since 1993. The payments had been interrupted due to delinquencies
and foreclosures in the underlying mortgage portfolio and all of the cash flows
were directed to owners of the senior position(s). The underlying loans
comprising these securities had been serviced by a California institution
formerly 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 mezzanine
securities to below investment grade. Subsequently, writedowns of $13.1 million,
including $5.0 million in 1996, were recorded reflecting permanent impairment of
these securities. The writedowns were based upon information from the rating
agencies as well as discounted cash flow analyses performed by management, using
current assumptions for delinquency levels, foreclosure rates, recovery ratios
in the underlying portfolios, market prices, and other factors. Relative to both
mezzanine issues, the positions subordinate to FFC had been eliminated and
principal losses of $6.8 million were realized, including $6.0 million during
1996. These realized principal losses were anticipated in the aforementioned
writedowns previously taken. Upon disposition, an additional loss of $7.9
million was realized.
Independent national rating agencies have also downgraded, to below
investment grade, additional MBSs of four unrelated issuers in which FFC has
senior ownership positions having an aggregate par value, amortized cost and
carrying value of $18.5 million, $18.5 million and $16.0 million, respectively,
at September 30, 1996. Three of these senior position securities continue to be
performing assets and are superior to subordinate positions amounting to 6.44%
of the current aggregate par value of the related mortgage pool securities at
September 30, 1996.
Relative to the fourth senior position MBS, collateralized by
multi-family properties located in California, the positions subordinate to FFC
have been eliminated during 1996. Based upon this event and other factors,
management has determined that permanent impairment of this security has
occurred and the security, thus, has been written down in the second quarter of
1996 by $900,000 to its approximate fair value of $2.6 million. Principal losses
of $242,000 have been realized since the writedown. This senior position
security has otherwise continued to be a performing asset.
As part of its current investment policy, FFC does not purchase any
mezzanine or subordinated position MBSs and has further strengthened the
criteria for private issuer MBS purchases. No private issuer MBSs have been
purchased since 1992.
Management has taken writedowns relating to the above referenced
securities 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
-16-
<PAGE>
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. As such, further
writedowns could be experienced in the future.
Allowances for Loan Losses:
FFC's loan portfolios and off-balance sheet financial guarantees are
evaluated on a continuing basis to determine the additions to the allowances for
losses and the related balance in the allowances. These evaluations consider
several factors including, but not limited to, general economic conditions, loan
portfolio compositions, loan collateral value, loan delinquencies, prior loss
experience, and management's estimation of future potential losses. The
evaluation of allowances for loan losses includes a review of both known loan
problems as well as a review of potential problems based upon historical trends
and ratios.
A summary of activity in the allowances for loan losses, for the three
months and nine months ended September 30, 1996 and 1995, follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Allowances at beginning of period $23,755 $24,643 $25,235 $25,180
Provisions 2,850 2,873 6,930 7,065
Charge-offs (3,357) (2,694) (9,427) (8,193)
Recoveries 348 309 858 1,079
------- ------- ------- -------
Allowances at end of period $23,596 $25,131 $23,596 $25,131
======= ======= ======= =======
</TABLE>
A discussion of loan loss provisions and charge-offs is presented in
"Management's Discussion and Analysis--Comparison of the Unaudited Consolidated
Statements of Income for the Three Months and Nine Months Ended September 30,
1996 and 1995." An analysis of allowances by loan category and the percentage of
such allowances by category and in the aggregate to loans receivable at the
dates indicated, follows:
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1996
-------------------------- ---------------------
As Percentage As Percentage
Allowance Of Total Loans Allowance Of Total Loans
Amount In Category Amount In Category
------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Credit cards $ 6,997 4.15% $ 6,425 3.00%
Residential real estate 6,695 0.33 7,726 .34
Manufactured housing 1,905 1.70 3,034 2.18
Commercial and non-resi-
dential real estate 3,634 2.10 3,823 2.50
Consumer 3,339 0.82 3,029 .84
Home equity 568 0.19 562 .20
Commercial business 416 3.40 585 3.40
Education 42 0.02 51 .02
------- -------
$23,596 0.68% $25,235 .70%
======= ===== ======= =====
</TABLE>
The allowances for loan losses were $23.6 million, or 0.68% of loans
receivable, at September 30, 1996 compared to $25.2 million, or 0.70%, at
December 31, 1995. The allowances for losses represented 211.57% of non-accrual
loans at September 30, 1996 as
-17-
<PAGE>
compared to 206.07% at the end of 1995. The decrease in the aggregate allowances
for losses from year-end 1995 to September 30, 1996 relates primarily to
residential real estate loans and manufactured housing loans based upon the
resolution of certain problem loan groups during 1996, for which allowances had
been previously established. Management believes that the allowances for losses
are sufficient based upon its current evaluations.
Foreclosed Properties and Repossessed Assets:
Foreclosed properties and other repossessed assets are summarized, for
the dates indicated, as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- --------
(In thousands)
<S> <C> <C>
Foreclosed real estate properties $ 3,637 $ 3,967
Manufactured housing owned 185 303
Consumer and other repossessed assets 126 102
------- -------
3,948 4,372
Less allowances for losses (345) (993)
------- -------
$ 3,603 $ 3,379
======= =======
</TABLE>
Foreclosed properties, net of allowances for losses, increased $200,000
to $3.6 million at September 30, 1996 from $3.4 million at December 31, 1995.
A summary of the activity in allowances for losses on foreclosed
properties, for the three months and nine months ended September 30, 1996 and
1995, is presented below.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1996 1995 1996 1995
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Allowances at beginning
of period $ 424 $1,086 $ 993 $1,146
Provisions (10) 15 (342) 45
Charge-offs (69) (53) (306) (143)
------ ------ ------ ------
Allowances at end of
period $ 345 $1,048 $ 345 $1,048
====== ====== ====== ======
</TABLE>
The allowances for losses on foreclosed properties have been maintained
at levels adequate to provide for reasonable potential losses within the
existing foreclosed property portfolio. The most recent additions of foreclosed
properties have been residential properties with lower risks which allows for
the reduction of the allowance balance while realizing losses within the current
portfolio of properties. Provisions for losses on foreclosed properties were
credited during 1996 to reverse the allowance related to non-residential
properties, none of which are in inventory at September 30, 1996.
A large commercial real estate property (having a carrying amount of
$1.0 million or greater) in Fort Worth, Texas included in foreclosed properties
at December 31, 1995 was sold earlier in 1996. Also included in the table below
is a previously foreclosed property (Milwaukee) which was dividended to FFC from
FF Bank and is currently classified as a real estate investment held for sale.
These properties are carried at the lower of cost or fair value.
-18-
<PAGE>
<TABLE>
<CAPTION>
Carrying Value At
Property September 30, December 31,
Type Property Location 1996 1995
- -------- ----------------- ------------- --------
(In thousands)
<S> <C> <C> <C>
Retail Milwaukee, Wisconsin $ 1,043 $ 1,089
Retail Fort Worth, Texas -- 1,000
</TABLE>
All of the above foreclosed real estate properties, repossessed assets
and real estate investments held for sale have been considered by management in
its evaluation of the adequacy of allowances for losses.
Classified Assets, Including Non-Performing Assets:
For regulatory purposes, FF Bank utilizes a comprehensive classification
system for thrift institution problem assets. This classification system
requires that problem assets be classified as "substandard", "doubtful" or
"loss," depending upon certain characteristics of the particular asset or group
of assets as defined by supervisory regulations.
An asset is classified "substandard" if management believes it contains
defined characteristics relating to borrower net worth, paying capacity or value
of collateral which indicate that some loss is distinctly possible if noted
deficiencies are not corrected. "Doubtful" assets have the same characteristics
present in substandard assets but to a more serious degree, to the belief of
management, such that it is improbable that the asset could be collected or
liquidated in full. "Loss" assets are deemed to be uncollectible or of such
minimal value that their continuance as assets without being specifically
reserved is not warranted. Substandard and doubtful classifications require the
establishment of prudent general allowance for loss amounts while loss assets,
to the extent that such assets are classified as a "loss," require a 100%
specific allowance or that the asset be charged off.
In general, classified assets include non-performing assets plus other
loans and assets, including contingent liabilities (see Note D), meeting the
criteria for classification. Non- performing assets include non-accrual loans,
non-performing MBSs or assets i) which were previously loans which are not
substantially performing under the contractual terms of the original notes, or
ii) for which known information about possible credit problems of borrowers
causes management to have serious doubts as to the ability of such borrowers to
comply with current contractual terms. This non-performing characteristic
impacts directly upon the interest income normally expected from such assets.
Specifically included are the loans held on a non-accrual basis, non-performing
MBSs, and real estate judgments subject to redemption and foreclosed properties
for which FF Bank has obtained title.
-19-
<PAGE>
Classified assets, including non-performing assets, for FF Bank,
categorized by type of asset are set forth in the following table:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- --------
(In thousands)
<S> <C> <C>
Classified assets:
Non-performing assets:
Non-accrual loans $11,153 $12,246
Non-performing MBSs -- 12,858
Real estate held for sale by FFC 1,263 1,309
Foreclosed properties and other
repossessed assets 3,603 3,379
------- -------
Total Non-Performing Assets 16,019 29,792
Add back general valuation allowances net-
ted against foreclosed properties above 432 993
Adjustment for non-performing residential
loans not classified due to low
loan-to-appraisal value (912) (584)
Adjustment for real estate held for sale
not included in FF Bank classified
assets (1,263) (1,309)
Additional classified performing loans:
Residential real estate 578 1,013
Commercial real estate 6,469 5,890
Consumer and other 766 698
Additional classified performing MBS 2,550 --
------- -------
Total Classified Assets $24,639 $36,493
======= =======
</TABLE>
During the nine months ended September 30, 1996, classified assets
decreased $11.9 million to $24.6 million from $36.5 million at December 31, 1995
as the net result of the disposal of the two non-accrual mortgage-backed
securities totaling $12.9 million at year-end 1995 referred to previously (see
"Non-Performing MBSs"), the $2.6 million addition of the performing senior
position MBS collateralized by multi-family properties, as also discussed above,
and the $1.0 million reduction in non-accrual loans, as discussed in an earlier
section. The changes in additional classifications for various other performing
loan categories substantially offset as such commercial real estate mortgages
and consumer-related loans increased and residential mortgage loans decreased.
These additional classifications are based on certain characteristics identified
as potential weaknesses. As a percentage of total assets, classified assets
decreased from 0.67% at year-end 1995 to 0.44% at September 30, 1996.
The following table sets forth, at the dates indicated, the
one performing commercial real estate mortgage loan in excess of $1.0 million,
included in classified assets due to the possible adverse effects of
identifiable future events.
<TABLE>
<CAPTION>
Loan Amount Classified
Property Type Of Property September 30, December 31,
Loan Collateral Location 1996 1995
- ---------------- ---------- ------------- --------
(In thousands)
<S> <C> <C> <C>
Office/Land Sheboygan, Wisconsin $ 3,567 $3,596
</TABLE>
All adversely classified assets at September 30, 1996, have been
considered by management in its evaluation of the adequacy of allowances for
losses.
-20-
<PAGE>
Deposits and Other Liabilities:
Deposits decreased $60.0 million during the nine months ended
September 30, 1996 including interest credits of $122.3 million offset by net
cash outflows of $182.3 million. The weighted average cost of deposits of 4.53%
at September 30, 1996 was slightly lower than the 4.55% reported at December 31,
1995.
Advance payments by borrowers for taxes and insurance increased by
$41.1 million during the first nine months of 1996 as a result of the normal
cumulative monthly escrow deposits made by borrowers less interim payments of
taxes and insurance premiums.
Other liabilities decreased $11.1 million from $77.9 million at
December 31, 1995 to $66.8 million at September 30, 1996. The higher other
liabilities balance at year-end 1995 represented outstanding real estate
property tax checks of $35.7 million issued to municipalities on behalf of the
borrowers and as those checks were paid during early 1996, other liabilities
decreased significantly. This decrease was offset by a $28.8 million payable
recorded in the third quarter of 1996 for the recapitalization of the Savings
Association Insurance Fund ("SAIF"). (See "Non-Interest Expense").
Borrowings:
At September 30, 1996, FFC's consolidated borrowings increased $138.3
million to $708.8 million from $570.5 million at December 31, 1995. In January
1996, FFC redeemed all of its outstanding 8% Subordinated Notes due November,
1999, which aggregated $54.9 million at the date of redemption. This redemption
was offset by a $145.8 million net increase in short-term reverse repurchase
agreements and a $49.7 million net increase in shorter-term FHLB advances used
to fund the purchase of U.S. Government Agency MBSs.
Stockholders' Equity:
Stockholders' equity at September 30, 1996 was $401.1 million, or
7.17% of total assets, as compared to $384.9 million, or 7.04% of total assets,
at December 31, 1995. The major changes in stockholders' equity included i) net
income of $30.5 million earned during the first nine months of 1996 offset by
ii) cash dividend payments to stockholders of $13.5 million. Stockholders'
equity per share increased from $12.97 per share at year-end 1995 to $13.41 per
share at September 30, 1996.
Regulatory Capital:
As set forth in Note F to the unaudited consolidated financial
statements, FF Bank exceeds all regulatory capital requirements mandated by the
OTS and FDIC.
-21-
<PAGE>
Loan Originations:
A comparison of loan originations and purchases, including loans
originated for sale but excluding purchases of MBSs, for the first nine months
of 1996 and 1995 is set forth below:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1996 Percent 1995 Percent
---- ------- ---- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Loan Type
Mortgage:
One- to four-family $ 479,246 57.8% $ 343,731 51.1%
Multi-family 27,353 3.3 18,540 2.8
Commercial/non-residential 54,355 6.6 21,546 3.2
---------- ----- --------- -----
Total mortgage origina-
tions 560,954 67.7 383,817 57.1
Consumer 202,888 24.5 170,316 25.4
Student 49,818 6.0 56,037 8.3
Home equity-net 11,624 1.4 39,097 5.8
Manufactured housing -- -- 18,288 2.7
Credit cards - net 2,260 .3 1,975 .3
Commercial business 967 .1 2,536 .4
---------- ----- --------- -----
Total loans originated 828,511 100.0% 672,066 100.0%
===== =====
Decrease(increase) in undisbursed
loan proceeds (18,241) 7,162
---------- ----------
Total loans disbursed $ 810,270 $ 679,228
========== ==========
</TABLE>
Total loan originations increased to $828.5 million for the first nine
months of 1996 from $672.1 million for the same period in 1995. This net 1996
increase of $156.4 million was primarily attributable to a $177.2 million
increase in mortgage loan originations.
One- to four-family mortgage loan originations increased $135.5 million
to $479.2 million for the first nine months of 1996 as compared to $343.7
million for the same period in 1995. The increase in originations in 1996 over
1995 reflects increased borrower demand as interest rates during the first nine
months of 1996 were generally lower than the market interest rates during the
same period in 1995. Interest rates rose in the first half of 1996, and then
leveled off in the third quarter, causing borrower preference to turn toward
adjustable-rate mortgage loans. Approximately 46% of originations for the first
nine months of 1996 were adjustable-rate mortgage loans which are held for
investment purposes. Longer-term fixed-rate mortgages are normally sold into the
secondary market. At September 30, 1996, one- to four-family mortgage loan
applications in process and commitments totaled $50.4 million and $32.7 million,
respectively, as compared to $51.2 million and $24.7 million at December 31,
1995.
Consumer loan originations increased $32.6 million to $202.9 million in
the first nine months of 1996 as compared to $170.3 million during the same
period in 1995 due to the purchase of a $7.3 million automobile loan portfolio
in 1996 as well as to the continued success of a second mortgage loan product.
Student loan originations decreased to $49.8 million during the first
nine months of 1996 from $56.0 million for the same period in 1995. This
decrease of $6.2 million is the result of a decrease in government guaranteed
portfolio purchases from other lenders of $13.4 million offset by an increase in
student loan originations of $7.2 million.
-22-
<PAGE>
Home equity loan balances increased $11.6 million during the first nine
months of 1996 as compared to a $39.1 million increase during the same period in
1995. Balances increased at a slower rate in 1996 because new originations were
offset by refinancing and payoffs resulting in record repayment levels for the
product line in early 1996. Payment levels have stabilized in the third quarter
of 1996.
FFC discontinued dealer-originated mobile home financing in late 1994
due to pricing practices by competitors. However, in the third quarter of 1995,
an $18.3 million portfolio of seasoned FHA insured and VA guaranteed mobile home
loans was purchased from GNMA.
Asset/Liability Management:
The objective of FFC's asset/liability policy is to manage interest rate
risk so as to maximize net interest income over time in changing interest-rate
environments. To this end, management believes that strategies for managing
interest-rate risk must be responsive to changes in the interest-rate
environment and must recognize and accommodate the market demands for particular
types of deposit and loan products.
Interest-bearing assets and liabilities can be analyzed by measuring the
magnitude by which such assets and liabilities are interest-rate sensitive and
by monitoring an institution's interest-rate sensitivity "gap." An asset or
liability is determined to be interest-rate sensitive within a specific time
frame if it matures or reprices within that time period. An interest-rate
sensitivity "gap" is defined as the difference between the amount of
interest-earning assets anticipated to mature or reprice within a specific time
period and the amount of interest-costing liabilities anticipated to mature or
reprice within the same time period. A gap is considered positive when the
amount of interest-rate sensitive assets exceeds the amount of interest-rate
sensitive liabilities that mature or reprice within a given time frame. A gap is
considered negative when the amount of interest-rate sensitive liabilities
exceeds the amount of interest-rate sensitive assets that mature or reprice
within a specified time period.
The table on page 25 sets forth the combined estimated
maturity/repricing structure of FFC's consolidated interest-earning assets
(including net items) and interest-costing liabilities at September 30, 1996.
Assumptions regarding prepayment and withdrawal rates are based upon FFC's
historical experience, and management believes such assumptions are reasonable.
The table does not necessarily indicate the impact of general interest rate
movements on FFC's net interest income because repricing of certain categories
of assets and liabilities through, for example, prepayments of loans and
withdrawals of deposits, is beyond FFC's control. As a result, certain assets
and liabilities indicated as repricing within a stated period may in fact
reprice at different times and at different rate levels. Further, in the event
of a change in interest rates, prepayment and early withdrawal levels may
deviate significantly from those assumed in calculating the data in the table.
FFC's consolidated negative one-year interest-rate sensitivity gap at
September 30, 1996 was $112.2 million or 2.00% of total assets. The one-year
negative gap decreased $87.6 million from the December 31, 1995 negative gap of
$199.8 million or 3.65% of total assets at that date.
FFC's consolidated one-year negative gap position of 2.00% at September
30, 1996 falls within management's operating range of a 10% positive gap
position to a 10% negative
-23-
<PAGE>
gap position. In view of the current interest-rate environment and the related
impact on customer behavior, management believes that it is extremely important
to weigh and balance the effect of asset/liability management decisions in the
short-term in its efforts to maintain net interest margins and acceptable future
profitability. As such, management believes that it has been able to achieve a
consistent net interest margin while still meeting its asset/liability
management objectives.
In compliance with OTS regulations, FF Bank also measures and evaluates
interest-rate risk via a separate methodology. The net market value of
interest-sensitive assets and liabilities is determined by measuring the net
present value of future cash flows under varying interest rate scenarios in
which interest rates would theoretically increase or decrease up to 400 basis
points on a sudden and prolonged basis. This theoretical analysis at the end of
the third quarter of 1996 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 capital 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 September 30, 1996 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 September
30, 1996, FF Bank would not have been required to deduct an interest-rate risk
component under the OTS regulations.
-24-
<PAGE>
FIRST FINANCIAL CORPORATION CONSOLIDATED GAP ANALYSIS AT SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Three Greater Greater Greater
Months Four Months Than One Than Three Than Five
and Through Through Through Through
Under One Year Three Years Five Years Ten Years
--------- ---------- ----------- ----------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Rate-sensitive assets:
Investments and interest-
earning deposits, including
federal funds (a)(b) $ 183,178 $ 10,300 $ 61,720 $ 43,447 $ 471
Mortgage-related securities (b) 565,956 733,942 64,956 38,657 44,575
Mortgage loans:
Fixed-rate (c)(d) 52,896 136,288 306,678 207,115 241,818
Adjustable-rate (c) 213,944 558,860 348,549 -- --
Other loans 691,223 198,754 212,199 79,949 56,997
---------- ---------- ---------- ---------- --------
1,707,197 1,638,144 994,102 369,168 343,861
Rate-sensitive liabilities:
Deposits (e)(f):
Checking 116,635 24,572 61,364 47,949 75,085
Money market accounts 104,225 57,208 117,006 50,471 42,648
Passbook 270,317 196,880 56,065 40,366 58,128
Certificates of deposit 698,413 1,292,025 806,644 126,692 3,305
Borrowings 695,836 1,419 2,707 2,897 731
---------- ---------- ---------- ---------- --------
1,885,426 1,572,104 1,043,786 268,375 179,897
---------- ---------- ---------- ---------- --------
GAP (repricing difference) $ (178,229) $ 66,040 $ (49,684) $ 100,793 $163,964
========== ========== ========== ========== ========
Cumulative GAP $ (178,229) $ (112,189) $ (161,873) $ ( 61,080) $102,884
========== ========== ========== ========== ========
Cumulative GAP/Total assets (3.19)% (2.00)% (2.89)% (1.09)% 1.84%
========== ========== ========== ========== ========
</TABLE>
<PAGE>
Greater
Than Ten Greater
Through Than
20 Years 20 Years Total
---------- -------- -------
Rate-sensitive assets:
Investments and interest-
earning deposits, including
federal funds (a)(b) $ 33,217 $ 41,850 $ 374,183
Mortgage-related securities (b) 14,166 121 1,462,373
Mortgage loans:
Fixed-rate (c)(d) 157,863 3,169 1,105,827
Adjustable-rate (c) -- -- 1,121,353
Other loans 15,188 -- 1,254,310
-------- ---------- ----------
220,434 45,140 5,318,046
Rate-sensitive liabilities:
Deposits (e)(f):
Checking 68,054 37,400 431,059
Money market accounts 10,826 1,203 383,587
Passbook 36,994 8,678 667,428
Certificates of deposit -- -- 2,927,079
Borrowings 1,910 3,320 708,820
-------- ---------- ----------
117,784 50,601 5,117,973
-------- ---------- ----------
GAP (repricing difference) $102,650 $ ( 5,461) $ 200,073
======== ========== ==========
Cumulative GAP $205,534 $ 200,073
======== ==========
Cumulative GAP/Total assets 3.67% 3.58%
======== ==========
(a) Investments are adjusted to include FHLB stock totaling $33.2 million as
investments in the "Greater Than Ten Through 20 Years" category.
(b) Investment and mortgage-related securities are presented at carrying value,
including net unrealized gain or loss on available-for-sale securities.
(c) Based upon 1) contractual maturity, 2) repricing date, if applicable, 3)
scheduled repayments of principal and 4) projected prepayments of principal
based upon FFC's historical experience as modified for current market
conditions.
(d) Includes loans held for sale.
(e) Deposits include $54.3 million of advance payments by borrowers for tax and
insurance and exclude accrued interest on deposits of $ 9.7 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.
-25-
<PAGE>
COMPARISON OF THE
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS AND NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1995
Selected Income Statement Information:
For the third quarter of 1996, FFC reported a net loss of $3.7 million,
down from the $17.8 million reported for the third quarter of 1995 due to i) a
$28.8 million one-time assessment to recapitalize the SAIF and ii) a $4.2
million charge reflecting a change in accounting for intangible assets. Fully
diluted earnings per share for the 1996 quarter amounted to ($0.12) per share as
compared to $0.59 per share for the 1995 quarter. Excluding the above items,
fully diluted earnings per share for the 1996 period would have been $0.60 per
share. Excluding the effect of the SAIF assessment and the accounting change,
the annualized return on assets for the third quarter of 1996 increased to 1.31%
from 1.30% for 1995 while the annualized return on average equity for the third
quarter of 1996 was 17.78%, compared to 19.69% for the third quarter of 1995.
For the first nine months of 1996, FFC reported income, before an
extraordinary charge, of $31.2 million and net income of $30.5 million. In
comparison, net income of $44.9 million was reported for the first nine months
of 1995. The 1996 extraordinary charge of $686,000, or $0.02 per share, resulted
from costs associated with the early redemption of FFC's outstanding
subordinated notes originally scheduled to mature in November 1999. The 1995
results included a $4.0 million acquisition charge, or $0.14 per share, related
to the FirstRock acquisition. Fully diluted earnings per share for the first
nine months of 1996 amounted to $1.02 per share prior to the extraordinary
charge, while net income per share was $1.00 per share as compared to $1.48 per
share for the first nine months of 1995. Excluding the SAIF assessment,
accounting change, extraordinary item and the 1995 acquisition charge, the
annualized return on assets for the first nine months of 1996 increased to 1.29%
from 1.19% for 1995, while the annualized return on average equity for the first
nine months of 1996 was 17.63%, compared to 18.76% for the same period of 1995.
Net Interest Income:
Net interest income increased $2.6 million to $48.3 million during the
third quarter of 1996 from $45.7 million for the third quarter of 1995 due to
the net effect of i) an increase in average balances of interest-earning assets
and interest-bearing liabilities from $5.208 billion and $5.013 billion,
respectively, in 1995 to $5.349 billion and $5.094 billion, respectively, in
1996, and ii) an increase in the net interest margin to 3.64% for the third
quarter of 1996 from the 3.55% reported for the third quarter of 1995. The
increase in average interest-earning assets in 1996 was augmented by an
improvement in the earning- asset ratio from 103.89% in 1995 to 104.98% in 1996.
The average yield of interest-earning assets (8.08% in 1995 versus 8.00% in
1996) decreased by 8 basis points, in comparison to a 13 basis point decrease in
the average cost of interest-bearing liabilities (4.71% in 1995 versus 4.58% in
1996).
Net interest income increased $ 2.6 million during the first nine
months of 1996 primarily due to an increase in average balances of
interest-earning assets and a decrease in interest-bearing liabilities from
$5.225 billion and $5.050 billion, respectively, in 1995 to $5.237 billion and
$4.992 billion, respectively, in 1996. The net interest margin of 3.57%
-26-
<PAGE>
for the first nine months of 1996 was up from the 3.49% reported for the first
nine months of 1995. The increase in average interest-earning assets in 1996 was
again augmented by an improvement in the earning-asset ratio from 103.47% in
1995 to 104.90% in 1996. The average yield of interest-earning assets (7.98% in
1995 versus 7.96% in 1996) decreased by 2 basis points, which was similar to the
3 basis points decrease in the average cost of interest-bearing liabilities
(4.64% in 1995 versus 4.61% in 1996).
Interest Spread:
The following table sets forth the weighted average yield earned on
FFC's interest-earning assets, the weighted average interest rate paid on
deposits and borrowings, the net spread between yield earned and rates paid and
the net interest margin during the three months and nine months ended September
30, 1996 and 1995. A comparison of similar data at September 30, 1996 and 1995
is also shown.
<TABLE>
<CAPTION>
For the For the
Three Months Ended Nine Months Ended At
September 30, September 30, September 30,
------------- ------------- -------------
1996 1995 1996 1995 1996 1995
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Weighted average yield
on interest-earning
assets 8.00% 8.08% 7.96% 7.98% 7.93% 8.06%
Weighted average rate
paid on deposits and
borrowings 4.58 4.71 4.61 4.64 4.63 4.74
----- ----- ----- ----- ----- -----
Interest Spread 3.42% 3.37% 3.35% 3.34% 3.30% 3.32%
===== ===== ===== ===== ===== =====
Net interest margin
(net interest income
as a percentage of
earning assets) 3.64% 3.55% 3.57% 3.49% 3.49% 3.46%
===== ===== ===== ===== ===== =====
</TABLE>
The interest spread was 3.42% and 3.35% for the three month and nine
month periods ended September 30, 1996, as compared to 3.37% and 3.34% for the
same periods in 1995 due to the factors noted above. The interest margin
increased to 3.64% and 3.57%, respectively, for the three month and nine month
periods ended September 30, 1996 from 3.55% and 3.49%, respectively, for the
1995 periods. The interest spread and the net interest margin were 3.30% and
3.49%, respectively, at September 30, 1996 as compared to 3.32% and 3.46%,
respectively, at September 30, 1995.
Provisions For Losses on Loans:
Provisions for loan losses remained steady at $2.9 million for the third
quarter of 1996 and the 1995 quarter while the provisions decreased $100,000 to
$6.9 million for the nine months ended September 30, 1996 compared to the same
period in 1995. Charge-offs for both 1996 periods displayed exceeded related
period provisions due to i) previously provided for charge-offs related to the
manufactured housing portfolio and ii) lower provisions added to the loss
allowances for residential mortgage loans based on current evaluations of the
portfolio.
The following table summarizes FFC's net charge-off experience by
category for the three months and nine months ended September 30, 1996 and 1995.
-27-
<PAGE>
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-----------------------------------------------------------------------
1996 1995 1996 1995
--------- ----------- ---------- -------
Net Net Net Net
Charge-offs Charge-offs Charge-offs Charge-offs
----------- ----------- ----------- -----------
Loan Type (Dollars in thousands)
<S> <C> <C> <C> <C>
Credit cards $2,172 $1,832 $6,485 $5,006
Manufactured housing 393 233 871 924
Residential real estate 224 172 624 736
Consumer and other 191 139 390 232
Commercial business 29 9 199 216
------ ------ ------ ------
$3,009 $2,385 $8,569 $7,114
====== ====== ====== ======
Net charge-offs as a
percent of average loans
outstanding (annualized) 0.34% 0.27% 0.32% 0.27%
====== ====== ====== ======
</TABLE>
The $600,000 increase in net charge-offs for the quarter ended September
30, 1996 versus the same period in 1995 relates primarily to the increase in
credit card loan net charge-offs. Similarly, the $1.5 million increase in net
charge-offs for the first nine months of 1996 compared to the first nine months
of 1995 relates primarily to the credit card loss experience. While the current
increased level of credit card loan net charge-offs is following the national
trend, FFC's experience is at a somewhat lower percentage than the national
averages. During the third quarter of 1996, FFC sold an affinity group of the
credit card loan portfolio that was experiencing higher than average
delinquencies and charge-offs. That sale should help to reduce future credit
card losses. Previously management had increased the provisions for losses
allocated to credit card loss allowances to keep pace with net charge-off
experience and that allowance at September 30, 1996 is 4.15% of credit card loan
balances compared to 3.00% as of December 31, 1995.
The OTS and the FDIC, as an integral part of their supervisory
examination process, periodically review FF Bank's allowances for losses. These
agencies may require FF Bank to recognize additions to the allowances based upon
their judgment of information available to them at the time of their
examination. A regularly scheduled supervisory examination by the OTS was
completed in early 1996 and no material corrective actions were required.
Management of FFC and FF Bank believe that the current level of
provisions for losses are sufficient based upon its allowance criteria. See
"Allowances for Loan Losses" for further discussion.
Non-Interest Income:
Non-interest income decreased $400,000 to $12.4 million for the quarter
ended September 30, 1996 from $12.8 million in 1995. Deposit fee income and
insurance/ brokerage commissions increased $400,000 and $300,000 respectively,
in 1996. Service fees on loans sold decreased $300,000 in 1996 as the average
servicing rate on such serviced loans continued to decline as a result of
competition in the secondary mortgage market. The gain on disposition of loans,
MBSs, and investment securities decreased $1.1 million in 1996 due to the net
effect of i) a realized loss of $10.5 million on the sale of available-for-sale
MBSs during the third quarter of 1996 (see "Mortgage-Related Securities" and
"Non- Performing MBSs"), ii) a $100,000 gain on sale of investment securities in
1996 as opposed to a $1.2 million gain in 1995, iii) an $11.2 million net gain
realized on the previously discussed sale of a credit card affinity group
relationship having outstanding balances of
-28-
<PAGE>
$47.9 million and iv) a decrease of $800,000 on gains achieved upon the sale of
loans in the secondary mortgage market and the realization of related originated
mortgage servicing rights ("OMSRs"). Gains realized from the sale of loans, and
the recognition of related OMSRs, decreased in 1996 due to the lower
interest-rate environment prevailing during the early part of the third quarter
of 1995, compared to 1996, as borrowers shifted to longer term fixed-rate
financing and as a result of the 1995 change in accounting methodology. FFC
sells long-term, fixed-rate mortgage loans in the normal course of interest-rate
risk management. Gains or losses realized from the sale of loans held for sale
and the recognition of related OMSRs 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.
Non-interest income increased to $34.0 million for the nine months ended
September 30, 1996 from $33.4 million for the same period in 1995. Deposit fee
income increased $1.3 million in 1996. Insurance and brokerage sales commissions
increased $200,000 as FFC's insurance agency subsidiary realized continued
stable results. Loan fee income also increased $700,000 in 1996. Loan servicing
income decreased $900,000 for the first nine months of 1996. The gain on
disposition of loans, MBSs, and investment securities decreased $300,000 in 1996
due to the net effect of i) a realized loss of $12.2 million on the disposition
of available-for-sale MBSs, ii) a $700,000 decrease in the sale of investment
securities in 1996, iii) the above mentioned $11.2 million gain on sale of
credit cards and iv) an increase of $1.4 million on gains achieved upon the sale
of loans in the secondary mortgage market and the realization of related OMSRs.
During the third quarter, FF Bank received regulatory approvals from the
Office of the Comptroller of the Currency ("OCC") and the OTS to charter a
limited-purpose national credit card bank ("CEBA-Bank"). The CEBA-Bank, an
operating subsidiary of FF Bank, became operational during the third quarter of
1996 and has the authority to export Wisconsin rates and fees nationwide to all
FFC credit card customers under the National Bank Act. It is expected that such
uniform application of law will i) reduce compliance costs, ii) reduce the risk
of violation of local law and iii) allow FFC and its subsidiary banks to enhance
their credit card rate and fee structure, thereby potentially increasing FFC's
profitability depending upon customer behavior and other factors. It is not
management's intention to expand the scope of FFC's credit card operations
beyond its Midwest regional markets as a result of the formation of the
CEBA-Bank.
Non-Interest Expense:
Non-interest expenses increased $35.3 million for the quarter ended
September 30, 1996 as compared to the same period in 1995, due to the $28.8
million one-time SAIF assessment charge and the $4.2 million goodwill accounting
change. The SAIF assessment represents FFC's share of a one-time charge by the
FDIC to fund its SAIF at 1.25% of overall thrift deposits and achieve parity
with the FDIC's Bank Insurance Fund. On an ongoing basis, FFC's annual deposit
insurance assessment will decrease to 6.4 cents per $100 of assessable deposits
from the current 23 cent rate. As such, based upon current levels of assessable
deposits, FFC's annual federal insurance premium will decline by approximately
$7.2 million, or $0.15 per share on an after-tax basis (excluding the funding
cost related to the one-time assessment). The $4.2 million reduction in goodwill
and core deposit intangibles relates primarily to FFC's re-evaluation of these
intangibles in accordance with
-29-
<PAGE>
SFAS No. 72 ("Accounting for Certain Acquisitions of Banking or Thrift
Institutions") in relation to acquisitions undertaken in the early 1980's.
Non-interest expenses, excluding the above one-time items, increased as a
percentage of average assets to 2.15% for the third quarter of 1996 as compared
to 2.04% for the same period in 1995. Controllable non-interest expenses, which
exclude the amortization of intangible assets and the net cost of operations of
foreclosed properties increased slightly to 2.04% of average assets for the
quarter ended September 30, 1996 as compared to 1.94% for the same period in
1995. FFC's efficiency ratio (which represents the ratio of controllable
expenses to recurring income) remained stable at 48.22% for the quarter ended
September 30, 1996, as compared to 47.28% for the corresponding 1995 period,
reflecting the continuing efforts to control expenses in relation to FFC's
overall operations.
Non-interest expenses increased approximately $27.5 million for the nine
months ended September 30, 1996 as compared to the same period in 1995,
primarily due to i) the one-time expenses of $33.0 million noted above, ii)
acquisition costs, totaling $6.5 million, incurred relative to the 1995
FirstRock acquisition and iii) the consolidation of operations following that
acquisition. Non-interest expenses, excluding the SAIF assessment, goodwill
adjustment, and FirstRock acquisition charge, increased as a percentage of
average assets to 2.13% for the first nine months of 1996 as compared to 2.12%
for the same period in 1995. Controllable non-interest expenses, which exclude
the amortization of intangible assets and the net cost of operations of
foreclosed properties, increased to 2.04% of average assets for the nine months
ended September 30, 1996 as compared to 2.02% for the same period in 1995.
However, the efficiency ratio improved to 48.90% for the nine months ended
September 30, 1996, as compared to 49.34% for the corresponding 1995 period.
Income Taxes:
Income tax expense decreased $11.5 million and $10.4 million for the
third quarter and first nine months, respectively, of 1996 as compared to
similar periods of 1995. The quarter-to-quarter decrease is directly related to
the decrease in pre-tax income in 1996 as a result of the above noted one-time
items. The $15.1 million income tax expense for the first nine months of 1996
represents an effective tax rate of 32.6% as opposed to 36.2% for 1995. This is
primarily the result of the realization during early 1996 of a $1.4 million
credit upon the completion of a federal tax audit for the taxable years 1989
through 1991 and as well as the resolution of other tax matters. Upon completion
of the audit, the settlement of certain issues resulted either in refunds of
taxes previously paid or on which deferred tax asset allowances had been
previously provided.
-30-
<PAGE>
FORWARD-LOOKING STATEMENTS
When used in this Form 10-Q or future filings by FFC with the Securities
and Exchange Commission, in FFC's press releases or other public or shareholder
communications, or in oral statements made with the approval of an authorized
executive officer, the words or phrases "will likely result," "are expected to,"
"will continue," "is anticipated," "estimate," "project" or similar expressions
are intended to identify "forward- looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. FFC wishes to caution readers
not to place undue reliance on any such forward- looking statements, which speak
only as of the date made, and to advise readers that various factors could
affect FFC's financial performance and could cause FFC's actual results for
future periods to differ materially from those anticipated or projected. Such
factors include, but are not limited to: i) general market rates, ii) general
economic conditions, iii) legislative/regulatory changes, iv) monetary and
fiscal policies of the U.S. Treasury and the Federal Reserve, v) changes in the
quality or composition of FFC's loan and investment portfolios, vi) demand for
loan products, vii) deposit flows, viii) competition, ix) demand for financial
services in FFC's markets, and x) changes in accounting principles, policies or
guidelines.
FFC does not undertake and specifically disclaims any obligation to
update any forward-looking statements to reflect occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
-31-
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits:
Exhibit 11 - Computation of Earnings Per Share
Exhibit 27 - Financial Data Schedule
b. Reports on Form 8-K:
None
-32-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST FINANCIAL CORPORATION
Date: November 8, 1996 /s/ John C. Seramur
--------------------
John C. Seramur, President
(Chief Executive Officer) and Director
Date: November 8, 1996 /s/ Thomas H. Neuschaefer
--------------------------
Thomas H. Neuschaefer
Vice President, Treasurer and Chief
Financial Officer
-33-
<PAGE>
EXHIBIT INDEX
11 - Computation of Earnings Per Share
27 - Financial Data Schedule
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
<PAGE>
EXHIBIT 11
FIRST FINANCIAL CORPORATION
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
For The For The
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ----------------
1996 1995 1996 1995
------ ------- ------ ------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
PRIMARY EARNINGS PER SHARE
Income (loss) before extraordinary item $(3,697) $17,793 $31,218 $44,925
Extraordinary item -- -- (686) --
------- ------- ------- -------
Net income (loss) $(3,697) $17,793 $30,532 $44,925
======= ======= ======= =======
Shares:
Weighted average common shares
outstanding 29,911 29,542 29,872 29,362
Shares from assumed exercise of options
(as determined by the treasury stock
method) 617 711 622 742
------- ------- ------- -------
Common and common equivalent shares 30,528 30,253 30,494 30,104
======= ======= ======= =======
Primary Earnings Per Common Share:
Income (loss) before extraordinary item $ (0.12) $ .59 $ 1.02 $ 1.49
Extraordinary item -- -- (0.02) --
------- ------- ------- -------
Net income (loss) $ (0.12) $ .59 $ 1.00 $ 1.49
======= ======= ======= =======
FULLY DILUTED EARNINGS PER SHARE
Income (loss) before extraordinary item $(3,697) $17,793 $31,218 $44,925
Extraordinary item -- -- (686) --
------- ------- ------- -------
Net income (loss) $(3,697) $17,793 $30,532 $44,925
======= ======= ======= =======
Shares:
Weighted average common shares
outstanding 29,911 29,542 29,872 29,362
Shares from assumed exercise of options
(as determined by the treasury stock
method) 636 794 657 902
------- ------- ------- -------
Common and common equivalent shares 30,547 30,336 30,529 30,264
======= ======= ======= =======
Fully Diluted Earnings Per Common Share:
Income (loss) before extraordinary item $ (0.12) $ .59 $ 1.02 $ 1.48
Extraordinary item -- -- (0.02) --
------- ------- ------- -------
Net income (loss) $ (0.12) $ .59 $ 1.00 $ 1.48
======= ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 99,739
<INT-BEARING-DEPOSITS> 70,692
<FED-FUNDS-SOLD> 55,031
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 992,566
<INVESTMENTS-CARRYING> 689,709
<INVESTMENTS-MARKET> 679,590
<LOANS> 3,468,859
<ALLOWANCE> 23,596
<TOTAL-ASSETS> 5,595,612
<DEPOSITS> 4,364,531
<SHORT-TERM> 171,735
<LIABILITIES-OTHER> 121,159
<LONG-TERM> 537,085
29,915
0
<COMMON> 0
<OTHER-SE> 371,187
<TOTAL-LIABILITIES-AND-EQUITY> 5,595,612
<INTEREST-LOAN> 227,535
<INTEREST-INVEST> 85,083
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 312,618
<INTEREST-DEPOSIT> 149,347
<INTEREST-EXPENSE> 172,610
<INTEREST-INCOME-NET> 140,008
<LOAN-LOSSES> 6,930
<SECURITIES-GAINS> 2,511
<EXPENSE-OTHER> 120,759
<INCOME-PRETAX> 46,324
<INCOME-PRE-EXTRAORDINARY> 31,218
<EXTRAORDINARY> (686)
<CHANGES> 0
<NET-INCOME> 30,532
<EPS-PRIMARY> 1.00
<EPS-DILUTED> 1.00
<YIELD-ACTUAL> 3.35
<LOANS-NON> 11,153
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 7,813
<ALLOWANCE-OPEN> 25,235
<CHARGE-OFFS> 9,427
<RECOVERIES> 858
<ALLOWANCE-CLOSE> 23,596
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 23,596
</TABLE>
