SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
--------------------------------
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 36,188,002 Shares
--------------------------------------- -----------------------------
Class Outstanding at April 30, 1997
<PAGE>
FIRST FINANCIAL CORPORATION
Form 10-Q Index
Part I - Financial Information
----------------------
Consolidated Balance Sheets as of March 31, 1997
(Unaudited) and December 31, 1996
Unaudited Consolidated Statements of Income for
the Three Months Ended March 31, 1997 and 1996
Unaudited Consolidated Statement of Changes In
Stockholders' Equity for the Three Months Ended
March 31, 1997
Unaudited Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 1997 and
1996
Notes to Unaudited Consolidated Financial Statements
Management's Discussion and Analysis:
Comparison of the Consolidated Balance Sheets
at March 31, 1997 (Unaudited) and December 31,
1996
Comparison of the Unaudited Consolidated Statements
of Income for the Three Months Ended March 31, 1997 and
1996
Part II - Other Information
-----------------
Item 6. Exhibits and Reports on Form 8-K
Signatures
- ----------
Exhibits
- --------
-1-
<PAGE>
<TABLE>
<CAPTION>
FIRST FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31,
1997 December 31,
(Unaudited) 1996
----------- ------------
(In thousands)
<S> <C> <C>
Cash $ 82,347 $ 133,529
Federal funds sold 48,485 2,513
Interest-earning deposits 8,999 18,043
---------- ----------
Cash and cash equivalents 139,831 154,085
Securities available for sale (at fair value):
Investment securities 122,811 136,477
Mortgage-related securities 1,217,366 1,048,085
Securities held to maturity (at amortized cost):
Investment securities (fair value of
$55,762,000--1997 and $57,996,000--1996) 56,394 58,434
Mortgage-related securities (fair value of
$574,862,000--1997 and $597,106,000--1996) 582,882 602,352
Loans receivable:
Held for sale 16,906 19,119
Held for investment 3,485,783 3,493,700
Foreclosed properties and repossessed assets 4,356 3,997
Real estate held for investment or sale 7,365 7,431
Office properties and equipment 50,462 50,428
Intangible assets, less accumulated amortization 11,867 12,739
Other assets 112,483 113,584
---------- ----------
$5,808,506 $5,700,431
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $4,493,105 $4,444,932
Borrowings 832,624 769,526
Advance payments by borrowers
for taxes and insurance 29,885 13,382
Other liabilities 47,196 62,080
---------- ----------
Total liabilities 5,402,810 5,289,920
Stockholders' equity:
Serial preferred stock, $1 par value:
Authorized, 3,000,000 shares
None issued
Common stock, $1 par value:
Authorized, 75,000,000 shares
Issued, 37,601,063 (1997),
37,450,879 (1996)
Outstanding, 36,411,443 (1997)
36,802,484 (1996) 37,601 37,451
Additional paid-in capital 44,685 43,668
Net unrealized gain (loss) on
securities available for sale (3,833) 1,300
Treasury stock, 1,189,620 (1997) and
648,395 (1996) shares, at cost (28,909) (14,447)
Retained earnings 356,152 342,539
---------- ----------
Total stockholders' equity 405,696 410,511
---------- ----------
$5,808,506 $5,700,431
========== ==========
</TABLE>
See notes to unaudited consolidated financial statements.
-2-
<PAGE>
<TABLE>
<CAPTION>
FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
March 31,
-------------------------
1997 1996
---- ----
(In thousands, except per share amounts)
<S> <C> <C>
Interest income:
Mortgage loans $ 43,088 $ 45,879
Other loans 30,628 31,659
Mortgage-related securities 30,357 21,829
Investments 4,086 4,255
-------- --------
Total interest income 108,159 103,622
Interest expense:
Deposits 49,771 50,367
Borrowings 10,753 7,286
-------- --------
Total interest expense 60,524 57,653
-------- --------
Net interest income 47,635 45,969
Provisions for losses on loans 2,250 1,900
-------- --------
45,385 44,069
Non-interest income:
Deposit account service fees 3,369 3,142
Loan fees and service charges 3,220 2,729
Insurance and brokerage commissions 1,940 1,832
Service fees on loans sold 1,401 1,533
Net gain on sales of loans and
mortgage-related securities 1,128 261
Net gain on sales of
securities available for sale 102 13
Other 837 747
-------- --------
Total non-interest income 11,997 10,257
-------- --------
Operating income 57,382 54,326
Non-interest expense:
Compensation, payroll taxes and benefits 12,810 12,083
Occupancy 2,560 2,458
Marketing 1,896 1,657
Data processing 1,837 1,865
Telephone and postage 1,777 1,698
Loan expenses 1,453 1,721
Furniture and equipment 1,137 1,360
Amortization of intangible assets 872 1,264
Federal deposit insurance premium 707 2,561
Net cost of (income from) foreclosed properties (25) 60
Other 2,656 2,668
-------- --------
Total non-interest expense 27,680 29,395
-------- --------
Income before income taxes and
extraordinary item 29,702 24,931
Income taxes 10,592 7,597
-------- --------
Income before extraordinary item 19,110 17,334
Extraordinary item -- (686)
-------- --------
Net income $ 19,110 $ 16,648
======== ========
Earnings per share:
Primary and fully diluted:
Income before extraordinary item $ 0.51 $ 0.46
Extraordinary item -- (0.02)
-------- --------
Net income $ 0.51 $ 0.44
======== ========
Cash dividends per share $ 0.15 $ 0.12
======== ========
See notes to unaudited consolidated financial statements.
-3-
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
Net
Unrealized
Holding
Common Gain
Stock and (Loss) on
Additional Securities
Paid-In Available Treasury Retained Stockholders'
Capital For Sale Stock Earnings Equity
------- -------- ----- -------- ------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balances at
December 31, 1996 $ 81,119 $ 1,300 $(14,447) $342,539 $410,511
Net income for the three
months ended
March 31, 1997 19,110 19,110
Cash dividends paid -
$0.15 per share (5,497) (5,497)
Exercise of stock options 1,167 1,167
Change in net unrealized
holding gain (loss) on
securities available
for sale (net of taxes) (5,133) (5,133)
Treasury stock purchased (14,462) (14,462)
-------- --------- --------- -------- --------
Balances at
March 31, 1997 $ 82,286 $ (3,833) $ (28,909) $356,152 $405,696
======== ========= ========= ========= ========
See notes to unaudited consolidated financial statements.
</TABLE>
-4-
<PAGE>
<TABLE>
<CAPTION>
FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
------------------------------------
1997 1996
---------- -------
OPERATING ACTIVITIES (In thousands)
<S> <C> <C>
Net income $ 19,110 $ 16,648
Adjustments to reconcile net income to net cash provided
by operating activities:
Decrease (increase) in accrued interest on loans (63) 1,178
Increase in accrued interest on deposits 3,402 3,180
Loans originated for sale (23,713) (88,605)
Proceeds from sales of loans held for sale 31,866 85,811
Provision for depreciation 1,290 1,394
Provision for losses on loans and other assets 2,250 1,900
Amortization of intangible assets and servicing rights 1,400 1,743
Net gain on sales of loans and other assets (1,221) (274)
Other 15,901 (4,963)
----------- --------
Net cash provided by operating activities 50,222 18,012
INVESTING ACTIVITIES
Proceeds from sales of investment securities available
for sale 10,295 2,121
Proceeds from sales of mortgage-related securities
available for sale 20,610 91,527
Proceeds from maturities of investment securities held
to maturity 1,911 6,000
Proceeds from maturities of investment securities
available for sale 1,013 3,316
Purchases of investment securities available for sale -- (59,548)
Purchases of mortgage-related securities (214,253) --
Principal payments received on mortgage-related securities 41,604 49,021
Principal collected on loans receivable 165,502 179,678
Loans originated for portfolio (167,433) (184,946)
Additions to office properties and equipment (1,234) (1,744)
Proceeds from sales of foreclosed properties and
repossessed assets 1,587 1,449
---------- ----------
Net cash provided by (used in) investing activities (140,398) 86,874
FINANCING ACTIVITIES
Net increase in deposits 44,771 67,330
Net increase in advance payments by borrowers for
taxes and insurance 16,503 16,826
Funding of official checks for borrower tax escrows (29,658) (35,692)
Net increase in reverse repurchase agreements 116,723 46,059
Proceeds from borrowings 419,600 169,500
Repayments of borrowings (473,225) (331,819)
Proceeds from exercise of stock options 1,167 1,200
Purchase of treasury stock (14,462) --
Payments of cash dividends to stockholders (5,497) (4,482)
---------- ----------
Net cash provided by (used in) financing activities 75,922 (71,078)
---------- ----------
Increase (decrease) in cash and cash equivalents (14,254) 33,808
Cash and cash equivalents at beginning of period 154,085 172,109
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 139,831 $ 205,917
========== ==========
See notes to unaudited consolidated financial statements.
-5-
</TABLE>
<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 three months of
1997 are not necessarily indicative of the results which may be expected for the
entire 1997 fiscal year. The December 31, 1996 balance sheet included herein is
derived from the consolidated financial statements included in FFC's 1996 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 1996 Annual Report to
Shareholders.
NOTE B - FIRST FINANCIAL CORPORATION
At March 31, 1997, 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.
NOTE C - EARNINGS PER SHARE
Primary and fully diluted earnings per share for the periods ended March
31, 1997 and 1996 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. See Exhibit 11 to this
Report for a detailed computation of earnings per share.
-6-
<PAGE>
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share", effective for periods ending after December 15, 1997. Early application
of SFAS No. 128 is not permitted. Pro forma earnings per share ("EPS") data
using the criteria set forth by SFAS No. 128, would be as follows for the
periods presented:
Three Months Ended
March 31,
--------------------
1997 1996
-------- ------
Basic EPS $ 0.52 $ 0.45
Diluted EPS $ 0.51 $ 0.44
NOTE D - DIVIDENDS PAID OR DECLARED TO STOCKHOLDERS
The Board of Directors of FFC on February 19, 1997, declared a $0.15 per
share quarterly cash dividend payable on March 31, 1997 to shareholders of
record of FFC common stock on March 14, 1997.
NOTE E - 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 March 31, 1997, bond issues totaling
$7.0 million are supported by such letters of credit. At March 31, 1997, each of
the outstanding bonds for which FF Bank has issued letters of credit is current
with regard to debt service payments.
NOTE F - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
For The
Three Months Ended
March 31,
--------------------
1997 1996
-------- ------
(In thousands)
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid or credited to accounts during
period for:
Interest on deposits and borrowings $ 57,957 $ 54,697
Income taxes 696 710
Non-cash investing activities:
Mortgage loans transferred to held for sale
portfolio 5,754 15,453
Loans receivable transferred to foreclosed
properties 1,844 1,525
Mortgage loans securitized and transferred to
mortgage-related securities available for sale -- 41,448
</TABLE>
-7-
<PAGE>
NOTE G - STOCK REPURCHASE PROGRAMS
As part of a six-month 5%, or 1,875,000 share, stock repurchase program
announced in October, 1996, FFC had repurchased 541,225 shares of stock at an
average cost of $26.72 per share during the first quarter of 1997. After quarter
end, the company acquired another 240,000 shares prior to the expiration of the
program on April 16, 1997. In connection with this expired program, a total of
1,429,620 shares were purchased at an average cost of $24.46 per share. On April
22, 1997, FFC announced its second stock repurchase program whereby the company
would purchase up to an additional 1,850,000 shares over the period ending March
31, 1998.
-8-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
COMPARISON OF THE CONSOLIDATED BALANCE SHEETS
AT MARCH 31, 1997 (UNAUDITED) WITH DECEMBER 31, 1996
GENERAL:
Total assets increased to $5.809 billion at March 31, 1997 from $5.700
billion at December 31, 1996. Deposits increased to $4.493 billion at March 31,
1997 from $4.445 billion at year-end 1996 and borrowings increased to $832.6
million from $769.5 million during the same time frame. Advance payments by
borrowers for taxes and insurance increased by $16.5 million between December
31, 1996 and March 31, 1997 and other liabilities decreased $14.9 million from
December 31, 1996 to March 31, 1997. Stockholders' equity at March 31, 1997 was
$405.7 million, down from $410.5 million at year-end 1996.
LIQUIDITY AND CAPITAL RESOURCES:
At March 31, 1997, total consolidated liquidity, consisting of cash,
cash equivalents, and investment securities represented 5.49% of FFC's total
assets compared with 6.12% at December 31, 1996. 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 under
"Asset/Liability Management." The cash and securities portfolios are among the
most flexible assets available for shorter term liability matching. Total
consolidated liquidity at March 31, 1997 decreased by $30.0 million as compared
to December 31, 1996 liquidity as a result of the net effect of significant
changes in various categories of assets and liabilities during the three-month
interim period. Some of the more significant changes in these categories,
including liquid assets, are summarized as follows:
<TABLE>
<CAPTION>
Consolidated Balance Balance
Balance Sheet December 31, Increases March 31,
Classification 1996 (Decreases) 1997
- ------------------- ------------ ----------- --------
(In thousands)
<S> <C> <C> <C>
Cash and cash equivalents $ 154,085 $ (14,254) $ 139,831
Securities available for sale:
Investment securities 136,477 (13,666) 122,811
Mortgage-related securities 1,048,085 169,281 1,217,366
Securities held to maturity:
Investment securities 58,434 (2,040) 56,394
Mortgage-related securities 602,352 (19,470) 582,882
Loans receivable, including loans
held for sale 3,512,819 (10,130) 3,502,689
Office properties 50,428 34 50,462
Intangible assets 12,739 (872) 11,867
Deposits 4,444,932 48,173 4,493,105
Borrowings 769,526 63,098 832,624
Advance payments by
borrowers for taxes
and insurance 13,382 16,503 29,885
Other liabilities 62,080 (14,884) 47,196
Stockholders' equity 410,511 (4,815) 405,696
</TABLE>
-9-
<PAGE>
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 "Regulatory Capital."
On an unconsolidated basis, FFC had cash of $26.1 million. The principal
sources of funds for FFC are dividends from FF Bank and earnings on cash
reserves. 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 $10.1 million to
$3.503 billion at March 31, 1997. Total loans are summarized below as of the
dates indicated.
<TABLE>
<CAPTION>
March 31, December 31, Increase
1997 1996 (Decrease)
------------- ------------ ----------
(In thousands)
<S> <C> <C> <C>
Real estate loans:
One- to four-family $ 1,880,779 $1,884,018 $ (3,239)
Multi-family 233,418 238,766 (5,348)
Commercial and non-residential 174,808 176,911 (2,103)
---------- --------- ---------
Total real estate loans 2,289,005 2,299,695 (10,690)
Other loans:
Consumer 420,797 415,155 5,642
Home equity 295,107 296,749 (1,642)
Education 273,682 269,633 4,049
Credit cards 170,667 179,352 (8,685)
Manufactured housing 97,607 104,783 (7,176)
Business 10,759 11,728 (969)
Less net items to loans receivable (54,935) (64,276) 9,341
---------- ---------- ---------
Total loans (including loans held
for sale) $3,502,689 $3,512,819 $ (10,130)
========== ========== =========
</TABLE>
-10-
<PAGE>
Consumer loan balances increased $5.6 million and education loans
increased $4.0 million in the first quarter of 1997 as originations outpaced
repayments for these product lines. Credit card loan balances decreased $8.7
million in the first quarter of 1997 reflecting a seasonal decline in this
portfolio. Manufactured housing loan balances decreased $7.2 million as FFC had
previously ceased originating manufactured housing loans and borrowers make
repayments.
Mortgage loans held for sale were $16.9 million at March 31, 1997, as
compared to $19.1 million at the end of 1996. Off-balance sheet commitments to
extend credit and to sell mortgage loans totaled $46.3 million and $28.2
million, respectively, at March 31, 1997, as compared to $30.2 million and $20.7
million, respectively, at December 31, 1996. During the three months ended March
31, 1997, market interest rates initially moved slightly lower than year-end
1996 rates but then trended upward from year-end levels. 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 $149.8
million during the three months ended March 31, 1997 primarily as a result of
the net effect of i) the purchase of $214.3 million of U.S. Government
agency-backed MBSs offset by ii) sales of MBSs having an aggregate par value of
$20.6 million and iii) principal repayments of $41.6 million. At the end of the
first quarter, FF Bank had commitments to purchase U.S. Government agency-backed
MBSs having an aggregate par value of $41.0 million.
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
----------------------------------
March 31, December 31,
1997 1996
----------- -------------
(In thousands)
<S> <C> <C>
ISSUER/SECURITY TYPE
- --------------------
U.S. Government agencies:
Mortgage-backed certificates $1,262,281 $1,093,513
Collateralized mortgage
obligations ("CMOs") 281,793 282,894
---------- ----------
Total agencies 1,544,074 1,376,407
---------- ----------
Private issuers:
Mortgage-backed certificates 255,895 273,595
CMOs 279 435
---------- ----------
Total private issuers 256,174 274,030
---------- ----------
Totals $1,800,248 $1,650,437
========== ==========
FINANCIAL STATEMENT CLASSIFICATION
- ----------------------------------
Available-for-sale portfolio $1,217,366 $1,048,085
Held-to-maturity portfolio 582,882 602,352
---------- ----------
Total carrying value $1,800,248 $1,650,437
========== ==========
-11-
</TABLE>
<PAGE>
During the first three months of 1997, FFC reduced its holdings of private
issue MBSs by $17.8 million from $274.0 million at the end of 1996 to $256.2
million at March 31, 1997.
FFC's portfolio of MBSs totaled approximately $1.80 billion at March 31,
1997 and were either i) U.S. Government agency-backed or ii) rated
investment-grade quality by at least one nationally recognized independent
rating agency except as noted below:
<TABLE>
<CAPTION>
Amortized Fair Carrying
Cost Value Value
---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
U.S. Government agencies $ 1,545,077 $ 1,535,670 $ 1,544,074
Non-agency:
Securities rated AA or above 231,528 232,002 231,638
Securities rated below AA, but
of investment grade 10,651 10,086 10,066
Securities rated below
investment grade 16,601 14,470 14,470
----------- ----------- -----------
$ 1,803,857 $ 1,792,228 $ 1,800,248
=========== =========== ===========
</TABLE>
The non-agency securities rated below investment grade include four securities,
each security having been issued by an unrelated company, with an aggregate
carrying value of $14.5 million. Based upon i) the results of management's most
current review of the performance characteristics of the underlying mortgage
loans collateralizing these below-investment-grade securities and ii) the fact
that these securities continue to perform, management believes that these MBSs
have a net realizable value in excess of their indicated fair value and/or
amortized cost and that any 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.
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:
March 31, December 31,
1997 1996
------------- ------------
(In thousands)
Residential real estate loans $ 5,514 $ 7,241
Manufactured housing loans 1,374 2,314
Credit card loans 2,827 2,863
Commercial real estate loans 440 125
Consumer and other loans 1,027 1,658
Student loans 23,253 23,034
------- -------
$34,435 $37,235
======= =======
-12-
<PAGE>
At March 31, 1997, the 90 days or less delinquencies decreased $2.8
million to $34.4 million from $37.2 million at year-end 1996. As a percent of
total loans receivable, these loan delinquencies decreased from 1.06% at the end
of 1996 to 0.98% at March 31, 1997. The decrease in 90 days or less
delinquencies relates to the net effect of changes of such delinquencies for
various loan categories, including the more significant as follows, i) a
decrease of $1.7 million for residential mortgage loans, ii) a decrease of
$900,000 for manufactured housing loans and iii) a decrease of $700,000 for
consumer and other loans. These decreases were partially offset with smaller
increases in delinquencies for commercial real estate loans and student loans.
The net decreases included $400,000 of transfers of various loans to non-accrual
status, as noted below.
All delinquent loans have been considered by management in its
evaluation of the adequacy of the allowances for loan losses.
NON-ACCRUAL AND IMPAIRED 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:
March 31, December 31,
1997 1996
------------ ------------
(In thousands)
One- to four-family residential $ 6,244 $ 6,325
Multi-family residential 1,654 1,607
Commercial and other real estate 402 98
Credit cards 2,141 2,106
Manufactured housing 970 1,164
Consumer and other 939 688
------- -------
$12,350 $11,988
======= =======
Non-accrual loans increased by $400,000 to $12.4 million at March 31,
1997 versus $12.0 million at December 31, 1996. As a percentage of net loans
receivable, non-accrual loans increased slightly to 0.35% at March 31, 1997 from
0.34% at December 31, 1996. The net increase in non-accrual loans is relatively
small in the aggregate as well as for any particular loan category. The
increases or decreases are reasonable fluctuations distributed across all loan
types.
The credit card non-accrual loans remained stable during the first
quarter of 1997. FFC is still showing credit card 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.
Impaired loans as defined in SFAS No. 114, "Impairment of Loans," are
not significant at March 31, 1997. FFC has had no significant troubled debt
restructurings during the first quarter of 1997. All loans included in
non-accrual status have been considered by management in its review of the
adequacy of allowances for loan losses.
-13-
<PAGE>
ALLOWANCES FOR LOAN LOSSES:
FFC's loan portfolios 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 ended March 31, 1997 and 1996, follows:
Three Months Ended
March 31,
1997 1996
------- ------
(In thousands)
Allowances at beginning of period $23,228 $25,235
Provisions 2,250 1,900
Charge-offs (2,930) (3,133)
Recoveries 378 234
------- -------
Allowances at end of period $22,926 $24,236
======= =======
A discussion of loan loss provisions and charge-offs is presented in
"Management's Discussion and Analysis--Comparison of the Unaudited Consolidated
Statements of Income for the Three Months Ended March 31, 1997 and 1996." 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>
March 31, 1997 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 $ 6,615 3.88% $ 6,783 3.78%
Residential real estate 6,612 .32 6,610 .31
Manufactured housing 1,590 1.63 1,814 1.73
Commercial and non-resi-
dential real estate 3,659 2.09 3,621 2.00
Consumer 3,568 .85 3,462 .83
Home equity 572 .19 572 .19
Commercial business 292 2.71 343 2.92
Education 18 .01 23 .01
------- -------
$22,926 .65% $23,228 .66%
======= ===== ======= =====
</TABLE>
The allowances for loan losses were $22.9 million, or 0.65% of loans
receivable, at March 31, 1997 compared to $23.2 million, or 0.66%, at December
31, 1996. The allowances for losses represented 186% of non-accrual loans at
March 31, 1997 as compared to 194% at the end of 1996. The decrease in the
aggregate allowances for losses from year-end 1996 to March 31, 1997 relates
primarily to manufactured housing loans based upon the decreasing size of the
portfolio for this product which is no longer originated. Management believes
that the allowances for losses are sufficient based upon its current
evaluations.
-14-
<PAGE>
CLASSIFIED ASSETS:
For regulatory purposes, FF Bank utilizes a comprehensive classification
system for thrift institution problem assets. 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.
Classified assets, including non-performing assets, for FF Bank,
categorized by type of asset are set forth in the following table:
March 31, December 31,
1997 1996
------------ -----------
(In thousands)
CLASSIFIED ASSETS:
Non-performing assets:
Non-accrual loans $12,350 $11,988
Foreclosed properties and other
repossessed assets 4,356 3,997
------- -------
TOTAL NON-PERFORMING ASSETS 16,706 15,985
Additional classified performing loans:
Residential real estate 564 545
Commercial real estate 4,926 6,105
Consumer and other 210 580
Other assets 2,277 2,491
Other adjustments - net (2,003) (1,638)
------- -------
TOTAL CLASSIFIED ASSETS $22,680 $24,068
======= =======
During the three months ended March 31, 1997, classified assets
decreased $1.40 million to $22.7 million from $24.1 million at December 31, 1996
primarily as the net result of the $400,000 increase in non-accrual loans, as
discussed in an earlier section, a $400,000 increase in foreclosed properties
and a $1.2 million decrease in additional classified commercial real estate
loans, including $300,000 which was added to non-accrual commercial real estate
loans during the first quarter of 1997. Other additional classification
categories changed by smaller amounts. These additional classifications are
based on certain characteristics identified as potential weaknesses. As a
percentage of total assets, classified assets decreased from 0.42% at year-end
1996 to 0.39% at March 31, 1997.
All adversely classified assets and off-balance sheet financial
guarantees at March 31, 1997, have been considered by management in its
evaluation of the adequacy of allowances for losses.
-15-
<PAGE>
DEPOSITS AND OTHER LIABILITIES:
Deposits increased $48.2 million during the three months ended March
31, 1997 including interest credits of $38.5 million and net cash inflows of
$9.7 million. The weighted average cost of deposits of 4.50% at March 31, 1997
was slightly lower than the 4.59% reported at December 31, 1996.
Advance payments by borrowers for taxes and insurance increased by
$16.5 million during the first three months of 1997 as a result of the normal
cumulative monthly escrow deposits made by borrowers less interim payments of
taxes and insurance premiums.
Other liabilities decreased $14.9 million from $62.1 million at
December 31, 1996 to $47.2 million at March 31, 1997. The higher other
liabilities balance at year-end 1996 included outstanding real estate property
tax checks of $29.7 million issued to municipalities on behalf of the borrowers
and as those checks were paid during early 1997 other liabilities decreased.
BORROWINGS:
At March 31, 1997, FFC's consolidated borrowings increased $63.1
million to $832.6 million from $769.5 million at December 31, 1996. This
increase was primarily due to a $116.7 million net increase in short-term
reverse repurchase agreements offset by a $53.1 million net decrease in
shorter-term FHLB advances.
STOCKHOLDERS' EQUITY:
Stockholders' equity at March 31, 1997, was $405.7 million, or 6.98%
of total assets, as compared to $410.5 million, or 7.20% of total assets, at
December 31, 1996. The major changes in stockholders' equity included i) net
income of $19.1 million earned during the first three months of 1997 offset by
ii) cash dividend payments to stockholders of $5.5 million, iii) the purchase of
treasury stock at a cost of $14.5 million and iv) a decline of $5.1 million in
the net unrealized holding valuation on available-for-sale securities.
Stockholders' equity per share decreased from $11.15 per share at year-end 1996
to $11.14 per share at March 31, 1997.
REGULATORY CAPITAL:
FF Bank is subject to various OTS minimum capital measurements, as
formulated under the Federal Deposit Insurance Corporation Improvement Act, and
also is subject to additional FDIC "well capitalized" institution requirements
relative to deposit account insurance premiums.
-16-
<PAGE>
As of March 31, 1997, FF Bank had regulatory capital well in excess of
all such requirements. At that date, the following table summarizes FF Bank's
capital amounts and capital ratios, and the capital amounts and ratios required
by its regulators:
<TABLE>
<CAPTION>
Minimum
Required For Minimum Required
Capital To Be Well
Adequacy Capitalized Under
Actual Purposes OTS Requirement
-------------------- ------------ ---------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tangible capital (to
tangible assets) $366,825 6.32% $ 87,113 1.50%
Core leverage capital
(to adjusted 377,397 6.49% 171,544 3.00% $290,907 5.00%
tangible assets)
Risk-based capital
(to risk-based 400,182 13.95% 229,424 8.00% 286,780 10.00%
assets)
Core leverage capital
(to risk-based 377,397 13.16% 172,068 6.00%
assets)
</TABLE>
The OTS has proposed 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. Implementation of these rules remained
indefinitely delayed at March 31, 1997. Management of FFC and FF Bank do not
believe these rules would significantly impact the capital requirements of FF
Bank or cause FF Bank to fail to meet its regulatory capital requirements.
LOAN ORIGINATIONS:
A comparison of loan originations and purchases, including loans
originated for sale but excluding purchases of MBSs, for the first three months
of 1997 and 1996 is set forth below:
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------------------------------
1997 Percent 1996 Percent
-------- ------- -------- -------
(Dollars in thousands)
LOAN TYPE
- ---------
<S> <C> <C> <C> <C>
Mortgage:
One- to four-family $ 103,122 56.6% $ 161,156 60.1%
Multi-family 4,596 2.5 9,554 3.6
Commercial/non-residential 5,615 3.1 17,885 6.7
---------- ----- --------- -----
Total mortgage origina-
tions 113,333 62.2 188,595 70.4
Consumer 54,997 30.2 57,981 21.6
Student 13,732 7.5 20,973 7.8
Commercial business 86 .1 509 .2
---------- ----- --------- -----
Total loans originated 182,148 100.0% 268,058 100.0%
===== =====
Decrease in undisbursed
loan proceeds 8,998 5,493
---------- ---------
Total loans disbursed $ 191,146 $ 273,551
========== =========
</TABLE>
Total loan originations decreased to $182.1 million for the first three
months of 1997 from $268.1 million for the same period in 1996. This net 1997
decrease of $86.0 million was primarily attributable to a $75.3 million decrease
in mortgage loan originations.
-17-
<PAGE>
One- to four-family mortgage loan originations decreased $58.1 million
to $103.1 million for the first three months of 1997 as compared to $161.2
million for the same period in 1996. The decrease in originations in 1997 from
1996 reflects decreased borrower demand as interest rates during the first three
months of 1997 were generally higher than the market interest rates during the
same period in 1996. Approximately 50% of originations for the first three
months of 1997 were adjustable-rate mortgage loans which are held for investment
purposes. Longer-term fixed-rate mortgages are normally sold into the secondary
market. At March 31, 1997, one- to four-family mortgage loan applications in
process and commitments totaled $60.6 million and $36.8 million, respectively,
as compared to $33.4 million and $20.8 million at December 31, 1996.
Consumer loan originations decreased $3.0 million to $55.0 million in
the first three months of 1997 as compared to $58.0 million during the same
period in 1996. Student loan originations decreased to $13.7 million during the
first three months of 1997 from $21.0 million for the same period in 1996. This
decrease of $7.3 million in student loan originations is due to the conversion
to direct lending of a major university in our marketing area.
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 20 sets forth the combined estimated
maturity/repricing structure of FFC's consolidated interest-earning assets
(including net items) and interest-costing liabilities at March 31, 1997.
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
-18-
<PAGE>
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 one-year interest-rate sensitivity gap at March 31,
1997 was a positive $39.2 million or 0.68% of total assets. This one-year
positive gap position compares to the December 31, 1996 negative gap of $102.6
million or 1.80% of total assets at that date.
FFC's consolidated one-year positive gap position of 0.68% at March 31,
1997 falls within management's operating range of a 10% positive gap position to
a 10% negative gap position. In view of the current interest-rate environment
and the related impact on customer behavior, management believes that it is
extremely important to weigh and balance the effect of asset/liability
management decisions in the short-term in its efforts to maintain net interest
margins and acceptable future profitability. As such, management believes that
it has been able to achieve a consistent net interest margin while still meeting
its asset/liability management objectives.
In this regard, FF Bank also measures and evaluates interest-rate risk
via a separate methodology pursuant to OTS regulations. The net market value of
interest-sensitive assets and liabilities is determined by measuring the net
present value of future cash flows under varying interest rate scenarios in
which interest rates would theoretically increase or decrease up to 400 basis
points on a sudden and prolonged basis. This theoretical analysis at March 31,
1997 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 proposed 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 its OTS risk-based capital
requirement. The implementation of this rule remained indefinitely delayed at
the end of the first quarter. At March 31, 1997, FF Bank would not have been
required to deduct an interest-rate risk component under this proposed
regulation.
-19-
<PAGE>
<TABLE>
<CAPTION>
FIRST FINANCIAL CORPORATION CONSOLIDATED GAP ANALYSIS AT MARCH 31, 1997
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) $ 109,760 $ 19,760 $ 37,558 $ 40,200 $ 401
Mortgage-related securities (b) 595,923 907,599 88,745 67,438 80,769
Mortgage loans:
Fixed-rate (c)(d) 56,637 134,540 287,644 207,928 221,401
Adjustable-rate (c) 230,971 681,743 250,660 -- --
Other loans 704,631 194,255 208,799 84,384 54,951
---------- ---------- ---------- ---------- --------
1,697,922 1,937,897 873,406 399,950 357,522
Rate-sensitive liabilities:
Deposits (e)(f):
Checking 121,379 25,602 63,948 49,991 78,323
Money market accounts 97,525 65,641 125,482 47,018 39,731
Passbook 266,061 195,427 52,502 37,802 54,434
Certificates of deposit 698,272 1,305,613 928,078 91,963 3,294
Borrowings 570,813 250,244 4,621 1,119 597
---------- ---------- ---------- ---------- --------
1,754,050 1,842,527 1,174,631 227,893 176,379
---------- ---------- ---------- ---------- --------
GAP (repricing difference) $ (56,128) $ 95,370 $ (301,225) $ 172,057 $181,143
========== ========== ========== ========== ========
Cumulative GAP $ (56,128) $ 39,242 $ (261,983) $ ( 89,926) $ 91,217
========== ========== ========== ========== ========
Cumulative GAP/Total assets (0.97)% 0.68% (4.51)% (1.55)% 1.57%
========== ========== ========== =========== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Greater
Than Ten Greater
Through Than
20 Years 20 Years Total
---------- -------- -------
<S> <C> <C> <C>
Rate-sensitive assets:
Investments and interest-
earning deposits, including
federal funds (a)(b) $ 36,229 $ 29,010 $ 272,918
Mortgage-related securities (b) 59,326 448 1,800,248
Mortgage loans:
Fixed-rate (c)(d) 168,203 1,673 1,078,026
Adjustable-rate (c) -- -- 1,163,374
Other loans 14,269 -- 1,261,289
-------- ---------- ----------
278,027 31,131 5,575,855
Rate-sensitive liabilities:
Deposits (e)(f):
Checking 71,238 39,161 449,642
Money market accounts 10,085 1,121 386,603
Passbook 34,644 8,126 648,996
Certificates of deposit -- -- 3,027,220
Borrowings 1,910 3,320 832,624
-------- ---------- ----------
117,877 51,728 5,345,085
-------- ---------- ----------
GAP (repricing difference) $160,150 $ (20,597) $ 230,770
======== ========== ==========
Cumulative GAP $251,367 $ 230,770
======== ==========
Cumulative GAP/Total assets 4.33% 3.97%
======== ==========
</TABLE>
(a) Investments are adjusted to include FHLB stock totaling $36.2 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 $29.9 million of advance payments by borrowers for tax
and insurance and exclude accrued interest on deposits of $10.5
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.
-20-
<PAGE>
COMPARISON OF THE
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1996
SELECTED INCOME STATEMENT INFORMATION:
For the first quarter of 1997, FFC reported net income of $19.1 million
in comparison with net income, before an extraordinary charge, of $17.3 million
for the first quarter of 1996. The 1996 extraordinary charge, $686,000 or $0.02
per share, related to costs associated with the early redemption of FFC's
outstanding subordinated notes originally scheduled to mature in 1999.
Fully diluted earnings per share for the 1997 quarter amounted to $0.51
per share as compared to $0.46 per share prior to the extraordinary charge for
the 1996 quarter. Excluding the 1996 extraordinary item, the annualized return
on assets for the first quarter of 1997 increased to 1.33% from 1.28% for 1996,
while the annualized return on average equity for the first quarter of 1997
increased to 18.50%, compared to 17.71% for the first quarter of 1996.
NET INTEREST INCOME:
Net interest income increased $1.6 million to $47.6 million during the
first quarter of 1997 from $46.0 million for the first quarter of 1996,
primarily due to an increase in average balances of interest-earning assets and
interest-bearing liabilities from $5.175 billion and $4.942 billion,
respectively, in 1996 to $5.496 billion and $5.232 billion, respectively, in
1997. The net interest margin of 3.42% for the first quarter of 1997, however,
was down from the 3.54% reported for the first quarter of 1996. The decrease in
the margin in 1997 was offset by an improvement in the earning-asset ratio from
104.71% in 1996 to 105.05% in 1997. The average yield on interest-earning assets
(8.01% in 1996 versus 7.89% in 1997) decreased by 12 basis points, while the
average cost of interest-bearing liabilities (4.68% in 1996 versus 4.69% in
1997), increased one basis point. The decrease in the margin and the average
yield on earning assets relates to the sale of credit card loans and
mortgage-backed securities during the latter half of 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
-21-
<PAGE>
months ended March 31, 1997 and 1996. A comparison of similar data at March 31,
1997 and 1996 is also shown.
<TABLE>
<CAPTION>
For the
Three Months Ended At
March 31, March 31,
----------------------- -----------------------
1997 1996 1997 1996
------- ------- -------- ------
<S> <C> <C> <C> <C>
Weighted average yield on
interest-earning assets 7.89% 8.01% 7.87% 7.97%
Weighted average rate paid
on deposits and borrowings 4.69 4.68 4.67 4.63
----- ----- ----- -----
Interest spread 3.20% 3.33% 3.20% 3.34%
===== ===== ===== =====
Net interest margin (net
interest income divided
by earning assets) 3.42% 3.54% 3.41% 3.51%
===== ===== ===== =====
</TABLE>
The interest spread was 3.20% for the three month period ended March
31, 1997, as compared to 3.33% for the same period in 1996. The interest margin
decreased to 3.42% for the three month period ended March 31, 1997 from 3.54%
for the 1996 period, due to the factors noted above. The interest spread and the
net interest margin were 3.20% and 3.41%, respectively, at March 31, 1997 as
compared to 3.34% and 3.51%, respectively, at March 31, 1996.
PROVISIONS FOR LOSSES ON LOANS:
Provisions for loan losses increased $400,000 to $2.3 million for the
first quarter of 1997 compared to $1.9 million for the 1996 quarter. Charge-offs
for the first quarter of 1997 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 ended March 31, 1997 and 1996.
For the Three Months
Ended March 31,
---------------------------------
1997 1996
----------- --------
Net Net
Charge-offs Charge-offs
----------- -----------
LOAN TYPE (Dollars in thousands)
- ---------
Credit cards $1,761 $2,116
Manufactured housing 433 192
Residential real estate 84 353
Consumer and other 165 69
Commercial business 109 169
------ ------
$2,552 $2,899
====== ======
Net charge-offs as a
percent of average loans
outstanding (annualized) 0.29% 0.32%
====== ======
-22-
<PAGE>
The $300,000 decrease in net charge-offs for the quarter ended March 31,
1997 versus the same period in 1996 reflects a similar decrease of $300,000 in
credit card loan net charge-offs. Other increases and decreases for various loan
category net charge-offs were smaller and substantially offset. The $1.8 million
of net credit card loan charge-offs for 1997, while decreased from the 1996
level, remains higher than historical levels. The current increased level of
credit card loan net charge-offs is following the national trend, however, 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 and that sale has helped reduce 1997 credit card losses. Management
continues to closely monitor the provisions for losses allocated to credit card
loss allowances to keep pace with net charge-off experience and that allowance
at March 31, 1997 is 3.88% of credit card loan balances compared to 3.78% as of
December 31, 1996.
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 1997 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:
Changes in non-interest income for the first quarter of 1997 as compared to 1996
are summarized below:
Three Months Ended
March 31
----------------------- Increase
1997 1996 (Decrease)
-------- -------- ----------
Deposit account service fees $ 3,369 $ 3,142 $ 227
Loan fees and service charges 3,220 2,729 491
Insurance and brokerage
commissions 1,940 1,832 108
Service fees on loans sold 1,401 1,533 (132)
Gain on sales of loans and MBSs 1,128 261 867
Gain on sales of investments 102 13 89
Other 837 747 90
------- ------- -------
$11,997 $10,257 $ 1,740
======= ======= =======
Non-interest income increased $1.7 million for the first quarter of
1997 as compared to the 1996 quarter. FFC's fee-based income continued to
increase as i) deposit-related fees were up $200,000, ii) loan fees were up
$491,000 and iii) insurance/brokerage sales commissions increased $100,000. Net
gains on the disposition of loans and MBSs increased $867,000 as a net result of
i) a decrease of $720,000 in gains achieved upon the sale of loans in the
secondary mortgage market and the realization of related originated mortgage
servicing rights ("OMSRs") and ii) an increase of $1.6 million in the gain or
loss realized upon the sale or valuation of MBSs. The 1997 decrease in gains on
sales of loans, and the recognition of related OMSRs, was related to the lower
level of production of fixed-rate mortgage loans
-23-
<PAGE>
as general interest rates tended to rise during the course of the first quarter.
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 related recognition of 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. FFC realized gains of $600,000 on the sale of
previously securitized MBSs in 1997 whereas a net loss of $1.0 million was
recognized in 1996 due to sales of MBSs and an impairment writedown of
non-agency MBSs.
Non-Interest Expense:
A summary of changes in non-interest expense, for the periods indicated and by
major categories, follows:
Three Months Ended
March 31
---------------------- Increase
Expense Category 1997 1996 (Decrease)
- ---------------- -------- -------- ----------
Compensation and benefits $12,810 $12,083 $ 727
Occupancy 2,560 2,458 102
Marketing 1,896 1,657 239
Amortization of intangible assets 872 1,264 (392)
Federal deposit insurance premiums 707 2,561 (1,854)
All other 8,835 9,372 (537)
------- ------- -------
$27,680 $29,395 $(1,715)
======= ======= =======
Non-interest expense decreased approximately $1.7 million for the first
quarter of 1997 as compared to the first quarter of 1996. This decrease is
directly related to the decrease in federal deposit insurance premiums in 1997
following legislation in 1996 to create parity between the bank and thrift
insurance funds of the Federal Deposit Insurance Corporation. The decrease in
the amortization of intangible assets relates to the change in accounting for
such assets in the latter part of 1996.
Non-interest expense decreased as a percentage of average assets to
1.93% for the first quarter of 1997 compared to 2.17% for 1996. Controllable
non-interest expenses, which exclude the amortization of intangible assets and
one-time expenditures (if any), decreased to 1.87% of average assets for the
first quarter of 1997 as compared to 2.07% for 1996. In addition, FFC's
efficiency ratio (which represents the ratio of controllable expenses to
recurring income) improved to 45.95% for the 1997 quarter from 50.17% for the
1996 quarter.
Income Taxes:
Income tax expense increased $3.0 million for the first quarter of 1997
as compared to the first quarter of 1996 as a result of i) a 16.1% increase in
pretax income in 1997 and ii) the realization of a $1.4 million credit in 1996
upon the completion of a federal tax audit. Upon completion of the audit, the
settlement of certain issues resulted either in refunds of taxes previously paid
or on which deferred tax valuation allowances had been previously provided.
Excluding the impact of the refund, the effective income tax rate, as a percent
of pre-tax income, increased to 36.1% for the first quarter of 1997 from 35.7%
in 1996.
-24-
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain "forward-looking statements." FFC desires
to take advantage of the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995 and is including this statement for the express
purpose of availing itself of the protections of the safe harbor with respect to
all of such forward-looking statements. These forward-looking statements
describe future plans or strategies and include FFC's expectations of future
financial results. The words "believe," "expect," "anticipate," "estimate,"
"project," and similar expressions identify forward-looking statements. FFC's
ability to predict results or the effect of future plans or strategies is
inherently uncertain. Factors which could affect actual results 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. These factors
should be considered in evaluating the forward-looking statements, and undue
reliance should not be placed on such statements.
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.
-25-
<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:
On January 14, 1997, the Registrant filed a Current
Report on Form 8-K with the Securities and Exchange Commission
to report that FFC had announced earnings for the year ended
December 31, 1996.
-26-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST FINANCIAL CORPORATION
Date: May 9, 1997 /s/ John C. Seramur
--------------------
John C. Seramur, President
(Chief Executive Officer) and Director
Date: May 9, 1997 /s/ Thomas H. Neuschaefer
--------------------------
Thomas H. Neuschaefer
Vice President, Treasurer and Chief
Financial Officer
-27-
<PAGE>
EXHIBIT INDEX
11 - Computation of Earnings Per Share
27 - Financial Data Schedule
EXHIBIT 11
FIRST FINANCIAL CORPORATION
COMPUTATION OF EARNINGS PER SHARE
For The
Three Months Ended
March 31
------------------------
1997 1996
------ ------
(In thousands, except
per share data)
PRIMARY EARNINGS PER SHARE
Income before extraordinary item $19,110 $17,334
Extraordinary item -- (686)
------- -------
Net income $19,110 $16,648
======= =======
Shares:
Weighted average common shares
outstanding 36,743 37,260
Shares from assumed exercise of options
(as determined by the treasury stock
method) 829 789
------- -------
Common and common equivalent shares 37,572 38,049
======= =======
Primary Earnings Per Common Share:
Income before extraordinary item $ 0.51 $ 0.46
Extraordinary item -- (0.02)
------- -------
Net income $ 0.51 $ 0.44
======= =======
FULLY DILUTED EARNINGS PER SHARE
Income before extraordinary item $19,110 $17,334
Extraordinary item -- (686)
------- -------
Net income $19,110 $16,648
======= =======
Shares:
Weighted average common shares
outstanding 36,743 37,260
Shares from assumed exercise of options
(as determined by the treasury stock
method) 834 794
------- -------
Common and common equivalent shares 37,577 38,054
======= =======
Fully Diluted Earnings Per Common Share:
Income before extraordinary item $ 0.51 $ 0.46
Extraordinary item -- (0.02)
------- -------
Net income $ 0.51 $ 0.44
======= =======
<TABLE> <S> <C>
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<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
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