UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1993
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition report from _______________ to ________________
Commission File Number 0-11889
FIRST FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Wisconsin 39-1471963
_________________________________ ______________________________
(State of other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1305 Main Street
Stevens Point, Wisconsin 54481
(Address of principal executive office)
Registrant's telephone number, including area code (715) 341-0400
Securities registered pursuant to Section 12(b) of the Act Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
_______________________________________
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes
X _____ No ______
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 or Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ X ]
Based upon the closing price of the registrant's common stock as of
March 7, 1994, the aggregate market value of the voting stock held by
non-affiliates of the registrant is: $324,311,850.
As of March 7, 1994, 24,564,999 shares of the registrant's common
stock were outstanding.
Documents Incorporated by Reference.
Part II:
Portions of First Financial Corporation's 1993 Annual Report to
Shareholders.
Part III:
Portions of definitive proxy statement for the 1994 Annual Meeting
of Shareholders.
PART I
ITEM 1. BUSINESS
FIRST FINANCIAL CORPORATION
First Financial Corporation (the "Corporation"), which was
formed in 1984, conducts business as a multiple savings and loan
holding company. As a Wisconsin corporation, the Corporation is
authorized to engage in any activity permitted by the Wisconsin
Business Corporation Law.
The principal assets of the Corporation are all of the
outstanding stock of First Financial Bank, F.S.B., ("First
Financial") and First Financial-Port Savings Bank, F.S.B.
("Port") - collectively the "Banks". The business of the
Corporation is the business of the Banks. Other activities of
the Corporation could be funded by dividends paid by the Banks,
borrowings or the issuance of additional shares of capital stock.
The Corporation is headquartered at 1305 Main Street, Stevens
Point, Wisconsin, 54481, telephone number
(715) 341-0400.
FIRST FINANCIAL BANK, F.S.B.
First Financial is a federally-chartered, stock savings
institution whose deposits are insured by the Savings Association
Insurance Fund ("SAIF"), as administered by the Federal Deposit
Insurance Corporation ("FDIC"). Business is conducted through
114 full-service branch offices, one limited loan origination
office, an insurance agency and an appraisal company in both
Wisconsin and Illinois. Based on total assets of $4.6 billion at
December 31, 1993, First Financial is the largest thrift
institution headquartered in Wisconsin. The principal mortgage
lending area of First Financial is Wisconsin and Illinois. In
addition to real estate loans, First Financial originates a
significant volume of consumer loans, manufactured housing loans,
credit card loans and student loans. Consumer, home equity and
student lending activities are principally conducted in Wisconsin
and Illinois, while the credit card base and resulting loans are
principally centered in the Midwest. Manufactured housing
lending activity is conducted in Wisconsin, Illinois and other
Midwestern states. Nearly all long-term fixed-rate real estate
mortgage loans generated are sold in the secondary market and to
other financial institutions with First Financial retaining the
servicing of those loans. First Financial offers brokerage
services and also operates a full-line independent insurance
agency and a real estate appraisal company.
First Financial has grown significantly through mergers and
acquisitions since its stock conversion in 1980, when First
Financial had total assets of $244 million and 14 branch offices
in central Wisconsin. In 1984, First Financial and First State
Savings of Wisconsin ("First State"), concurrently with First
State's stock conversion, combined to form the Corporation, which
operated as a multiple savings and loan holding company from 1984
until late 1985 when the Corporation acquired First Savings
Association of Wisconsin ("First Savings"). At that time, all
three institutions were merged together. In 1988, First
Financial acquired National Savings and Loan Association of
Milwaukee, Wisconsin through a merger conversion. By the end of
1988, First Financial's total assets had grown to $2.3 billion
and First Financial operated 63 full-service banking offices
throughout Wisconsin.
Beginning in 1990, First Financial expanded into the
southern Illinois (suburban St. Louis) and Peoria, Illinois
markets by acquiring Illini Federal Savings and Loan Association
of Fairview Heights ("Illini") in a voluntary supervisory merger
conversion and by purchasing the deposits and nine branch banking
offices of two former Peoria thrifts from the Resolution Trust
Corporation ("RTC"). Also during 1990, First Financial acquired
two western-Wisconsin area branch banking offices from the RTC.
During 1992, First Financial acquired ten additional branch
banking offices in the Peoria market, including eight from
LaSalle Talman Bank, FSB ("Talman"), and two from the RTC. In
1993, First Financial acquired Westinghouse Federal Bank, FSB
d/b/a United Federal Bank (United) of Galesburg, Illinois and
also purchased the deposits and the four Quincy, Illinois-area
branch banking offices of Citizens Federal Bank, a FSB
(Citizens).
While pursuing its strategy of expansion by acquisition in
Wisconsin and Illinois, management of First Financial has also
curtailed certain lending activities outside of the Midwest in
recent years. In 1988, First Financial liquidated the West Coast
mortgage banking operation which First Financial had acquired as
part of the acquisition of First Savings. This operation had
incurred continuing operating losses. Also in 1988, First
Financial sold a portion of its credit card loan portfolio,
totaling $44.8 million, consisting of loans concentrated in
California, Texas, and the Northeastern states. First
Financial's credit card lending activities are now focused
primarily on Wisconsin, Illinois and other Midwestern states.
During 1989, First Financial also curtailed manufactured housing
lending outside of the Midwest.
First Financial is a member of the Federal Home Loan ("FHL")
Bank System. First Financial is subject to comprehensive
examination, supervision and regulation by the Office of Thrift
Supervision (the "OTS") and the FDIC, and is also regulated by
the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board") as to reserves required to be maintained
against deposits and certain other matters. See "Regulation".
FIRST FINANCIAL - PORT SAVINGS BANK, F.S.B.
Port is a federally-chartered stock savings institution,
acquired by the Corporation in 1989, whose deposits are insured
by SAIF. Effective March 1, 1992, Port was converted to a
federal savings bank charter, having operated as a state-
chartered stock savings institution prior to that date. Business
is conducted through three offices located in Ozaukee County,
Wisconsin. Assets totaled $99.5 million at December 31, 1993.
In addition to real estate loans, Port originates consumer loans,
credit card loans and student loans. Port's lending activities
are principally conducted in Ozaukee County and surrounding
communities.
Port is a member of the FHL Bank System. Port is also
subject to comprehensive examination, supervision and regulation
by the OTS and the FDIC, and is also regulated by the Federal
Reserve Board as to reserves required to be maintained against
deposits and certain other matters. See "Regulation".
RECENT DEVELOPMENT
On February 26, 1994, the Corporation acquired NorthLand
Bank of Wisconsin, SSB (NorthLand), of Ashland, Wisconsin,
through an exchange of stock valued at 130 percent of NorthLand's
defined tangible stockholders' equity at closing. Upon closing,
NorthLand was merged into First Financial. The transaction has
been accounted for as a pooling-of-interests. As of December 31,
1993, NorthLand had total assets and shareholders' equity of
$127.4 million and $11.4 million, respectively.
FINANCIAL RATIOS
Year Ended December 31,
1993 1992 1991
Return on average assets* .98% .79% .58%
Return on average equity* 21.23 15.78 11.85
Average equity to average assets 4.62 4.99 4.86
Dividend payout ratio* 18.62 17.93 19.87
Net interest spread:
During the period 3.33 3.27 3.12
At end of period 3.29 3.27 3.27
* Ratio for 1992 is based upon net income prior to the
$5.6 million increase in net income arising from the
cumulative effect of a change in accounting principle.
MARKET AREA AND COMPETITION
At December 31, 1993, the Banks conducted business from 117
full-service branch banking offices located in 53 Wisconsin and
35 Illinois communities. The offices are located throughout most
of Wisconsin and much of downstate Illinois, including the Peoria
and suburban St. Louis areas. These offices include 27 locations
in the Milwaukee Metropolitan Statistical Area ("MSA"), the
largest in Wisconsin, and 29 locations in the Peoria and
St. Louis MSA's, Illinois' largest outside of Chicago.
In 1990, the counties in which the Banks had offices in
Wisconsin and Illinois had a total population of 5.0 million.
Between 1980 and 1990, the population of this area increased
1.4%, compared to 1.2% for the two-state area. The median
household income in these counties was $30,598 according to the
1990 Census, compared to $31,402 for the two-state area. It
increased 63.1% between 1980 and 1990. This area, in both
states, contains a diversity of major urban and suburban areas,
smaller less-urbanized communities and predominantly rural areas.
Some of the larger companies headquartered in First Financial's
market include Briggs & Stratton Company, A.O. Smith, General
Electric Medical Systems, Allen Bradley, Miller Brewing Company,
Johnson Controls and Caterpillar.
First Financial also does business outside of Wisconsin and
Illinois. At December 31, 1993, the credit card loan portfolio
of First Financial was distributed approximately 42% to Wisconsin
residents, 11% to Illinois, 5% to California, 4% to Michigan, 3%
to New York, 3% to Texas, 3% to Ohio and 29% to other states.
First Financial originates manufactured housing loans in
Wisconsin, Indiana, Ohio, Illinois, Iowa, Michigan, Minnesota and
Missouri. Consumer and student loans are made principally to
Wisconsin, Illinois and other Midwestern residents.
The Banks are subject to competition from other savings
institutions as well as commercial banks and credit unions in
both attracting and retaining deposits and in real estate and
other lending activities. Competition for deposits also comes
from money market funds, bond funds, corporate debt and
government securities. Competition for the origination of real
estate loans comes principally from other savings institutions,
commercial banks and mortgage banking companies. Competition for
manufactured housing loans is primarily from other financial
institutions or entities. Consumer loan competition principally
emanates from other savings institutions, commercial banks,
automobile manufacturers and their financing subsidiaries,
consumer finance companies and credit unions.
The principal methods used by competing financial
institutions to attract deposit accounts include rates of return,
types of accounts, convenience of office locations, and other
services. The primary factors in competing for loans are
interest rates, loan fee charges, and timing and quality of
service to the borrower.
As a Wisconsin-based savings and loan holding company, the
Corporation may acquire savings institutions or savings and loan
holding companies located in the states of Illinois, Indiana,
Iowa, Kentucky, Michigan, Minnesota, Missouri, Ohio and Wisconsin
("Regional Compact States"). Further, the OTS's statement of
policy on branching by federally chartered savings institutions
permits nationwide branching. However, nationwide branching is
not permitted to the extent that it would result in formation of
a multiple savings and loan holding company (such as the
Corporation) controlling savings institutions in more than one
state. Generally, the formation of multi-state multiple savings
and loan holding companies are prohibited unless one of three
exemptions exists. The first exemption authorizes a savings and
loan holding company or any of its savings institution
subsidiaries to acquire an institution or operate branches in
another state following a supervisory acquisition. The second
exemption relates to grandfathered branching rights and the third
exemption relates to specific approvals under the laws of the
state in which the acquired institution or branches are located.
Additionally, OTS regulations allow federal savings
institutions to establish, in any state in which the institution
has its home or a branch office, agency offices which only
service and originate (but do not approve) loans and contracts,
manage or sell real estate owned by the institution or engage in
such other activities (other than accepting payments on savings
accounts or approving loans) as may be approved by the District
Director of the OTS for the region in which the institution is
located.
Management of the Corporation is not able to predict, at
this time, what new laws will be enacted, if any, or what effect
such new laws would have on the financial condition and prospects
of the Corporation and the Banks.
SELECTED HISTORICAL FINANCIAL INFORMATION
The following tables present selected historical consolidated financial
information of the Corporation.
December 31,
1993 (e) 1992 (f) 1991 1990 (g) 1989 (h)
(Dollars in thousands)
Financial Condition and Other Data
Total assets . . . . . . . . . . . . . . $4,774,633 $3,908,286 $3,220,002 $3,142,293 $2,456,695
Investments (a). . . . . . . . . . . . . 275,696 163,800 104,022 186,139 137,839
Loans receivable and mortgage-related
securities . . . . . . . . . . . . . . 4,174,838 3,457,466 2,847,175 2,685,162 2,125,376
Loans held for sale-net. . . . . . . . . 73,919 54,840 38,061 53,103 16,888
Intangible assets. . . . . . . . . . . . 31,392 23,278 20,388 23,178 5,505
Deposits . . . . . . . . . . . . . . . . 4,050,520 3,206,112 2,935,645 2,883,214 2,098,234
Borrowings . . . . . . . . . . . . . . . 438,598 461,948 77,243 60,351 177,253
Shareholders' equity (substantially
restricted)(b) . . . . . . . . . . . . 234,685 194,095 164,535 149,576 137,081
Number of full-service offices . . . . . 117 94 86 86 67
Year Ended December 31,
1993 (e) 1992 (f) 1991 1990 (g) 1989 (h)
(In thousands except per share amounts)
Operating Data
Interest income. . . . . . . . . . . . . $ 340,123 $ 296,871 $ 300,081 $ 292,141 $ 235,890
Interest expense . . . . . . . . . . . . 189,734 181,896 203,749 204,748 162,059
Net interest income. . . . . . . . . . . 150,389 114,975 96,332 87,393 73,831
Provision for losses on loans. . . . . . (10,219) (13,851) (18,333) (16,044) (18,306)
Loan fees and servicing income . . . . . 14,112 12,961 15,143 15,884 14,510
Other non-interest income. . . . . . . . 16,034 14,348 13,628 13,996 12,344
Gain on sale of loans and securities . . 7,575 4,900 5,560 1,503 5,535
Non-interest expense . . . . . . . . . . (105,804) (88,711) (81,395) (76,840) (64,868)
Income before income taxes and the
cumulative effect of a change in
accounting principle . . . . . . . . . 72,087 44,622 30,935 25,892 23,046
Income taxes . . . . . . . . . . . . . . 26,872 16,190 12,409 9,870 8,670
Income before the cumulative effect of a
change in accounting principle. . . . . 45,215 28,432 18,526 16,022 14,376
Cumulative effect of a change in
accounting principle (c). . . . . . . . -- 5,600 -- -- --
Net income . . . . . . . . . . . . . . . $ 45,215 $ 34,032 $ 18,526 $ 16,022 $ 14,376
Earnings per share (d):
Primary:
Income before the cumulative effect
of a change in accounting principle
(c) . . . . . . . . . . . . . . . $ 1.88 $ 1.21 $ .80 $ .70 $ .63
Net income. . . . . . . . . . . . . 1.88 1.45 .80 .70 .63
Fully Diluted:
Income before extraordinary items
and the cumulative effect of a change
in accounting principle (c) . . . . $ 1.86 $ 1.19 $ .79 $ .70 $ .63
Net income. . . . . . . . . . . . . 1.86 1.43 .79 .70 .63
Cash dividends declared and paid per
share (f) . . . . . . . . . . . . . . $ .35 $ .22 $ .16 $ .16 $ .15
(a) Consists of federal funds sold, interest-earning deposits,
and investment securities.
(b) See Note L to the Corporation's consolidated financial
statements.
(c) A $5.6 million credit was realized in 1992 from the
cumulative effect of the adoption of Statement of Financial
Accounting Standards No. 109, "Accounting for Income
Taxes". See Note A to the Corporation's consolidated
financial statements.
(d) Per share data have been adjusted to reflect A) a two-for-
one stock split distributed in March, 1993, B) a two-for-
one stock split distributed in April, 1992 and C) a ten
percent stock dividend distributed in March, 1989. See
Note A to the Corporation's consolidated financial
statements.
(e) In 1993, First Financial acquired United and also purchased
the deposits and the four Quincy, Illinois-area branch
banking offices of Citizens. Each transaction has been
accounted for as a purchase and the related results of
operations have been included in the Corporation's
consolidated financial statements since the respective
dates of acquisition. See Note B to the Corporation's
consolidated financial statements.
(f) During the first quarter of 1992, First Financial completed
the assumption of deposits and the purchase of branch
facilities of ten Peoria, Illinois-area branches including
eight from the Talman and two from the RTC. Each of these
transactions was accounted for as a purchase. See Note B
to the Corporation's consolidated financial statements.
(g) The Corporation completed the acquisition of Illini on
January 19, 1990 and, at various dates during 1990, the
assumption of the deposits and purchase of certain assets
of three former thrift institutions from the RTC. Each of
these transactions has been accounted for as a purchase and
the related results of operations have been included in the
Corporation's consolidated financial statements since the
respective dates of acquisition.
(h) The acquisition of Port was completed on May 31, 1989 and
was accounted for as a purchase. Accordingly, the results
of Port's operations have been included in the
Corporation's consolidated financial statements since that
date.
Lending Activities (Including Mortgage-Related Securities)
General. The Banks have traditionally concentrated on
origination of conventional mortgage loans secured by first liens
on one- to four-family residences. The Banks also make loans
which are insured by the FHA or partially guaranteed by the VA as
well as home loans on behalf of or for immediate sale to the
Wisconsin Department of Veterans Affairs ("WDVA"), the Wisconsin
Housing and Economic Development Authority ("WHEDA") and the
Illinois Housing and Development Authority (IHDA). At December
31, 1993, the Corporation's total loan portfolio, including
mortgage-related securities, amounted to $4.3 billion, including
mortgage loans totaling $2.1 billion of which $1.8 billion, or
41.1% of the total loan portfolio, before net items, were loans
secured by one- to four-family residences. In addition, the
Banks make long-term, first mortgage real estate loans on
multiple dwelling units and commercial properties, second
mortgages and short-term construction loans. As a means of
better matching maturities of its asset and liability products,
the Banks have also originated other types of high-yielding loan
products which have either a short term to maturity or contain
adjustable-rate features. These products include education
loans, credit card loans, home equity loans, consumer loans
principally consisting of automobile collateral and manufactured
housing loans consisting of conventional loans, VA-guaranteed
loans and FHA-insured loans. At December 31, 1993, these loans
amounted to $888.8 million, or 20.7%, before net items, of the
total loan portfolio. Loans with terms up to 15 years and loans
with adjustable interest rates are originated for the Banks' own
portfolios, while longer-term fixed-rate mortgage loans are
originated for sale in the secondary market. The Federal Reserve
Board is authorized to promulgate regulations limiting the
maximum interest rate that may apply during the term of
adjustable-rate mortgage loans originated by savings institutions
such as the Banks. Under the regulation adopted by the Federal
Reserve Board, no specific interest rate limit is set, but
lenders are required to impose interest rate caps on all
adjustable-rate mortgage loans and all dwelling-secured consumer
loans, including home equity loans, which provide for interest
rate adjustments. The regulation is applicable to loans made
after December 8, 1987.
The Banks also periodically purchase mortgage-related securities
as a lending alternative when excess liquidity is available. At
December 31, 1993, these securities amounted to $1.3 billion, or
30.9% of the total loan portfolio, before net items. Included in
mortgage-related securities are adjustable-rate securities
totaling $1.1 billion. The Banks also review the geographic
distribution of collateral when purchasing non-agency mortgage-
related securities. In an effort to decrease the concentration
of collateral located in the states of California, New York and
New Jersey, the Banks have implemented a policy of limiting the
concentration of underlying collateral in those three states to
15% of the total collateral underlying any new non-agency issue
that is purchased for the Banks' portfolio. For a related
discussion of the accounting for debt securities, including
mortgage-related securities, see "Investment Securities." For
further discussion of the mortgage-related securities portfolio,
see Notes A and D to the Corporation's consolidated financial
statements, filed as an exhibit hereto.
Loan Portfolio Composition. The following table sets forth
information concerning the composition of the Corporation's total loan
portfolio including loans held for sale and mortgage-related
securities, on a consolidated basis, before net items, by type of loan.
Total loans receivable, including net items but excluding loans held
for sale and mortgage-related securities are set forth in Note E to
the Corporation's consolidated financial statements. The data
presented include the accounts of the Corporation (on a parent-company
only basis) and First Financial for all periods, Port since its
acquisition in 1989, and the balances of interest-sensitive assets and
liabilities arising from the 1990, 1992 and 1993 acquisitions are
included from the respective dates of the related transactions.
December 31,
1993 1992 1991 1990 1989
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
(Dollars in thousands)
Type of Loans
Real estate mortgage loans:
Conventional loans:
One- to four-family . . $1,766,519 41.1% $1,230,914 34.5% $1,084,541 37.0% $1,245,965 44.7% $1,104,530 50.3%
Multi-family. . . . . . 183,619 4.3 155,798 4.4 133,965 4.6 133,485 4.8 95,161 4.3
FHA and VA . . . . . . . 36,410 .8 43,708 1.2 53,299 1.8 59,286 2.1 59,769 2.7
Commercial and other real
estate.. . . . . . . . 94,789 2.2 101,865 2.9 100,915 3.4 111,569 4.0 129,079 5.9
Total real estate mortgage
loans . . . . . . . . 2,081,337 48.4 1,532,285 43.0 1,372,720 46.8 1,550,305 55.6 1,388,539 63.2
Other loans:
Credit card loans. . . . 209,414 4.9 178,436 5.0 160,712 5.5 152,320 5.5 142,946 6.5
Home equity loans. . . . 193,291 4.5 162,283 4.6 141,285 4.8 113,426 4.0 98,877 4.5
Education loans. . . . . 167,385 3.9 163,261 4.6 158,664 5.4 144,054 5.2 125,445 5.8
Manufactured housing loans . 165,017 3.8 133,195 3.7 140,384 4.8 155,466 5.6 174,123 7.9
Consumer loans . . . . . 153,574 3.6 89,028 2.5 64,578 2.2 99,514 3.6 98,034 4.5
Other loans. . . . . . . 111 -- 3,298 .1 4,831 .1 5,166 .1 5,409 .2
Total other loans. . . . 888,792 20.7 729,501 20.5 670,454 22.8 669,946 24.0 644,834 29.4
Total loans receivable before
net items . . . . . 2,970,128 69.1 2,261,786 63.5 2,043,174 69.6 2,220,251 79.6 2,033,373 92.6
Mortgage-related
securities. . . . . . 1,326,253 30.9 1,301,589 36.5 893,733 30.4 569,085 20.4 162,056 7.4
Total Loans Receivable Before
Net Items And Mortgage-
Related Securities . . .$4,296,382 100.0% $3,563,375 100.0% $2,936,907 100.0% $2,789,336 100.0% $2,195,429 100.0%
A summary of the Corporation's loan portfolio, before net items,
including loans held for sale and mortgage-related securities is set forth
below by adjustable-rate loans, short-term loans and fixed-rate loans.
December 31, 1993 December 31, 1992 December 31, 1991
Percent Percent Percent
Balance Of Total Balance Of Total Balance Of Total
(Dollars in thousands)
Adjustable-rate loans:
Mortgage-related securities. . . . . . . . . $ 1,151,360 $1,140,581 $ 679,983
Mortgage loans . . . . . . . . . . . . . . . 515,755 498,118 632,965
Education loans. . . . . . . . . . . . . . . 167,385 163,261 158,664
Home equity loans. . . . . . . . . . . . . . 193,291 162,283 141,285
Manufactured housing loans . . . . . . . . . 5,857 7,111 10,626
Consumer loans . . . . . . . . . . . . . . . 5,816 1,741 2,709
Total . . . . . . . . . . . . . . . . . 2,039,464 47.5% 1,973,095 55.4% 1,626,232 55.4%
Short-term loans*:
Credit card loans. . . . . . . . . . . . . . 209,414 178,436 160,712
Mortgage loans . . . . . . . . . . . . . . . 230,054 158,351 120,028
Consumer loans . . . . . . . . . . . . . . . 55,414 32,608 26,925
Deposit account loans. . . . . . . . . . . . 4,158 3,889 5,641
Manufactured housing loans . . . . . . . . . 1,443 5,761 5,461
Total . . . . . . . . . . . . . . . . . 500,483 11.6 379,045 10.6 318,767 10.8
Total adjustable-rate and
short-term loans. . . . . . . . . . . . . 2,539,947 59.1 2,352,140 66.0 1,944,999 66.2
Loans having maturities greater than
three years:
Conventional mortgage loans. . . . . . . . . 1,299,057 831,993 568,124
FHA/VA mortgage loans. . . . . . . . . . . . 36,470 43,823 51,603
Mortgage-related securities. . . . . . . . . 174,893 161,008 213,750
Conventional manufactured
housing loans. . . . . . . . . . . . . . . 72,165 81,153 94,057
FHA/VA manufactured housing
loans. . . . . . . . . . . . . . . . . . . 85,552 39,170 30,240
Consumer loans . . . . . . . . . . . . . . . 88,187 50,790 29,303
Other loans. . . . . . . . . . . . . . . . . 111 3,298 4,831
Total fixed-rate loans. . . . . . . . . 1,756,435 40.9 1,211,235 34.0 991,908 33.8
Total . . . . . . . . . . . . . . . . . $4,296,382 100.0% $3,563,375 100.0% $2,936,907 100.0%
* Credit card and fixed-rate loans with remaining contractual life of three
years or less.
As of December 31, 1993, the total amount of loans held by
the Banks repricing or maturing after December 31, 1994 was
$2.18 billion. Of these loans, $1.84 billion have fixed rates of
interest and $340.5 million have short-terms or adjustable
interest rates.
The following table sets forth, at December 31, 1993, the
dollar amount of loans maturing in the Banks' loan portfolios
before net items, plus loans held for sale and mortgage-related
securities, based on either their contractual terms to maturity
or for the remaining time before the loans can be repriced during
the periods indicated.
1995 - 1997 - 1999 - 2004 - After
1994 1996 1998 2003 2013 2013 Total
(In thousands)
Real estate mortgage loans . . . . . $ 382,149 $147,791 $110,622 $395,785 $ 896,899 $ 89,499 $2,022,745
Construction mortgage loans. . . . . 12,586 21,125 5,095 6,600 12,939 247 58,592
Mortgage-related securities. . . . . 1,151,360 28,183 6 33,807 61,142 51,755 1,326,253
Credit card and home equity
loans. . . . . . . . . . . . . . . 379,185 23,520 -- -- -- -- 402,705
Other loans* . . . . . . . . . . . . 189,974 51,927 62,439 107,956 63,988 9,803 486,087
Total . . . . . . . . . . . . $2,115,254 $272,546 $178,162 $544,148 $1,034,968 $151,304 $4,296,382
* Includes consumer, manufactured housing and student loans.
One- to Four-Family First Mortgage Loans. The primary
mortgage loan product of the Banks is the single family home loan
with some additional volume being secured by two- to four-family
residential units. In addition to a conventional mortgage loan
program, the Banks have available various other programs
including FHA-insured, VA-guaranteed, FmHA-guaranteed, Wisconsin
and Illinois state agency and veterans programs and jumbo
mortgage loans in excess of a specified balance. These mortgage
loan products are originated using either a fixed-rate, or an
adjustable-rate of interest indexed primarily to one-year U.S.
Treasury securities yields, three-year Treasury securities yields
or the national cost of funds index as published by the FHL
Banks. Original terms to maturity vary from 15 years to 30
years. First Financial currently holds in its portfolio loans
for terms up to 15 years and generally sells fixed-rate mortgage
loans having maturities greater than 15 years in the secondary
mortgage market.
Income-Producing Real Estate Property Loans. First
Financial, through its commercial mortgage real estate division,
has sought to diversify its loan portfolio through the
origination of loans on selected income-producing real estate
properties, which meet strict internal underwriting guidelines.
First Financial also periodically seeks to limit its overall
exposure relative to such loans through the sale of participation
interests and whole loans to other financial institutions. First
Financial provides servicing of these loans for participants (see
"Loan Servicing").
Among the projects financed by First Financial and Port are
apartments, office buildings, retail centers, medical clinics,
industrial buildings, elderly housing and other commercial real
estate located primarily in Wisconsin, Illinois and other
Midwestern states. The level of originations of commercial real
estate loans, excluding multi-family mortgage loans, has declined
significantly in recent years because management has chosen to
de-emphasize this product due to market conditions and regulatory
capital requirements. First Financial has, beginning in 1993,
emphasized multi-family mortgage loans, targeting five- to
twelve-family units. Multi-family and commercial real estate
lending involves greater risks than does one- to four-family
residential lending. The repayment of loans collateralized by
income-producing real estate is dependent upon the successful
operation of the related real estate property and also on the
credit and net worth of the borrower and thus is subject to
conditions in the real estate market, interest-rate levels and
overall economic conditions. The underwriting process for such
loans is structured to ascertain that each property has
sufficient value and market appeal to provide adequate security
for the loan and that the property will produce sufficient income
to meet minimum debt service coverage ratios established by the
Banks, which vary depending upon the property type. All
properties are also inspected, independently appraised in
accordance with applicable regulatory standards, and reviewed by
a qualified engineer. Loans on such properties are generally not
permitted to exceed a loan-to-value ratio of 75%. Also, each
borrower is reviewed as to management talent, integrity,
experience and available financial resources. The Banks
generally require the personal guarantee of the debt by all
parties holding a major equity interest in the secured property
when the owner/borrower is a business entity.
Additionally, the portfolio of income-producing properties is
reviewed on a continuing basis to identify any potential risk
that exists for the Banks through undue concentration of the
portfolio in any one borrower, property type or geographic
location. These and other underwriting standards are documented
in written policy statements, which are periodically updated, and
approved by the Banks' respective Boards of Directors.
Lending terms for the Banks' income-producing real estate
property loans generally call for a maturity of three to fifteen
years based upon an amortization schedule of fifteen to thirty
years and an interest rate periodically adjustable based upon a
cost of funds index.
Borrowers may experience cash flow from the property which is
inadequate to service the debt. This cash flow shortage may
result in the failure to make loan payments. Additionally, the
repayment of loans secured by income-producing properties is
dependent on the successful operation of the related real estate
project and the financial strength of the borrower and thus, is
subject to adverse conditions in the real estate market or the
economy in general.
Construction Loans. Loans made by the Banks to provide
interim financing for residential and commercial properties
during the construction period are typically originated for
periods of six to eighteen months. These loans are generally
limited to 75% of value of the property upon completion.
Construction loan funds are periodically disbursed as
construction progresses. At any stage of construction, remaining
undisbursed funds are in amounts estimated to be adequate for
completion or sale of the property.
Construction lending is generally considered to involve a
higher level of risk than lending secured by existing properties
because properties securing these loans are generally more
speculative and more difficult to evaluate and monitor. The
Banks' risk of loss on construction or development loans is
dependent upon the accuracy of the initial estimate of the
property's value at completion of the project and the estimated
cost of the project. If the estimate of construction or
development costs proves to be inaccurate, the Banks may be
required to advance funds beyond the amount originally committed
to permit completion of the project. If the estimate of the
value proves to be inaccurate, the lender may be confronted with
a property having a value which is insufficient to assure full
repayment of the construction loan upon securing a permanent
mortgage loan. The Banks had construction loans outstanding of
$58.6 million, at December 31, 1993, of which $53.1 million was
collateralized by residential real estate.
Manufactured Housing Loans. Through a series of dealer
relationships in Wisconsin and other Midwestern states, First
Financial indirectly originates manufactured housing loans. The
dealers close the loans at their locations after forwarding all
necessary documentation to First Financial for underwriting,
processing, and credit checks in order to receive approval to
originate the loans for ultimate purchase by First Financial.
Funds for the purchase of the loan are disbursed directly to the
dealers either by check or direct deposit. The loans are either
conventional or originated under the FHA-insured or VA-guaranteed
programs throughout the various states. The term of such loans
is usually up to 15 years at fixed interest rates.
Consumer and Other Loans. The Banks offer a variety of
lending products to meet the specific needs of consumers. These
products include secured and unsecured installment loans with
fixed repayments, student loans, credit card programs and home
equity loans. Consumer loans are made directly with the customer
and are secured by automobiles, recreational vehicles,
manufactured homes, junior mortgages on real estate or deposit
accounts. The Banks provide financing on both new and used
automobiles, recreational vehicles and manufactured homes using
different rates and terms to maturity to compensate for the
difference in the collateral value of the property and the
related credit risk. In addition to the secured consumer loans,
the Banks extend unsecured loans to qualified borrowers based
upon their financial statements and creditworthiness. The vast
majority of the consumer loan originations are made within
Wisconsin and Illinois through the extensive branch network of
the Banks.
Several student loan programs are offered by the Banks
through three guarantor programs, with the majority being
originated within Wisconsin. The various student lending
programs meet a variety of borrower financial qualifications with
varying rate structures. Additionally, First Financial offers a
consolidation loan plan whereby various student loans can be
combined for the convenience and benefit of the borrower.
First Financial offers credit card programs to the general
public and have also placed additional emphasis on issuing cards
through organizations whose membership substantially meets the
qualifying criteria ("affinity programs"). Certain additional
benefits can be linked to card usage under the affinity programs.
These affinity programs are related to the Visa/Mastercard credit
card programs operating on a nationwide basis. In addition to
the regular credit card products, First Financial also operates
the BasiCard program which offers the consumer a lower cost, no-
frills charge card bearing an interest rate of 14.9% applied to
balances and advances.
During the last decade the Banks placed additional emphasis
on their home equity loan program. The new emphasis was tied to
federal income tax law changes which were brought about during
1986, causing consumers to look for a new vehicle through which
to finance future needs on a tax-deductible basis. As a result
of federal tax legislation adopted in 1987, however, interest on
a home equity line of credit is deductible only up to $100,000 of
principal. The home equity loan calls for a floating interest
rate which is linked to the prime interest rate and is secured by
a mortgage, either a primary or a junior lien, on the borrower's
residence. As an additional convenience to consumers, the home
equity lines are generally tied to a Gold or a standard
Mastercard credit card account whereby consumers can conveniently
draw against their approved line through the use of their credit
card. Fixed-rate non-revolving second mortgage loans are also
offered.
Loan Originations, Purchases and Sales. The Banks' loan
originations come from a number of sources. Residential mortgage
loan originations are attributable primarily to depositors, walk-
in customers, referrals from real estate brokers and builders,
out-of-state originators and direct solicitations. In addition,
the Banks also acquire refinanced residential mortgage loans
which were previously originated by the Banks, but sold to and
serviced for other financial institutions. Prior to acquisition,
these loans are refinanced to a lower rate, as per the borrower's
request. Commercial mortgage loan originations are obtained by
direct solicitation and referrals. VA-guaranteed, FHA-insured
and conventional manufactured housing loans are obtained from
approved dealers. Consumer loans are originated from walk-in
customers, existing depositors and mortgagors and direct
solicitations. Student loans are originated from solicitation of
eligible students and from walk-in customers. First Financial
also periodically purchases student loan portfolios from other
lenders.
Real estate loans are originated by loan officers in the
Banks' offices. Relative to First Financial's real estate loans,
loans up to the FHLMC/FNMA upper limit authority (currently
$203,150 for single-family mortgage loans) for one- to four-
family residences are approved by an underwriter who is employed
by First Financial. Loans in excess of this amount up to
$250,000 are approved by designated officers. Loans in excess of
$250,000 up to $1,500,000 are approved by an officer loan
committee. Loans in excess of $1,500,000 require approval of the
Executive Committee of the Board of Directors of First Financial,
and loans in excess of $5,000,000 require approval of First
Financial's full Board of Directors. The majority of
conventional home mortgage loans are written to comply with
underwriting standards of FHLMC and/or FNMA to ensure that
national standards are being met and that First Financial's loans
meet or exceed national secondary market requirements. All loans
are centrally reviewed by an underwriting staff prior to final
approval to ensure compliance with loan underwriting policies.
With respect to the appraisal of properties, borrowers may use
the appraisal subsidiary of First Financial or outside appraisers
preapproved by First Financial's Board of Directors. Relative to
real estate loan originations by Port, loans of up to $200,000
for one- to four-family residences and all other loans under
$100,000 can be approved by a designated officer of Port. Loans
above these parameters are approved by a committee consisting of
three officers and three outside directors. All loan approvals
are subsequently reviewed by the Board of Directors of Port.
In general, the Banks may lend up to 100% of the appraised
value of real property for residential purposes provided loans in
excess of 80% have private mortgage insurance, a government
guarantee, additional collateral or a combination of both. In
practice, most of the Banks' mortgage loans are written in the
range of 75% to 95% loan-to-value ratio.
Real estate loans are secured by a first mortgage, subject to
title insurance and are covered by fire and casualty insurance.
When appropriate, flood insurance is also required. Related
costs, together with private mortgage insurance as required, are
paid by the borrower.
The Banks encounter certain environmental risks in their
lending activities. Under federal and state environmental laws,
lenders may become liable for costs of cleaning up hazardous
materials found on secured properties. Certain states may also
impose liens with higher priorities than first mortgages on
properties to recover funds used in such efforts. Although the
foregoing environmental risks are more usually associated with
industrial and commercial loans, environmental risks may be
substantial for residential lenders, like the Banks, since
environmental contamination may render the secured property
unsuitable for residential use. In addition, the value of
residential properties may become substantially diminished by
contamination of nearby properties. In accordance with the
guidelines of FNMA and FHLMC, appraisals for single-family homes
on which the Banks lend include comments on environmental
influences and conditions. The Banks attempt to control their
exposure to environmental risks with respect to loans secured by
larger properties by monitoring available information on
hazardous waste disposal sites and requiring environmental
inspections of such properties prior to closing the loan. No
assurance can be given, however, that the value of properties
securing loans in the Banks' portfolios will not be adversely
affected by the presence of hazardous materials or that future
changes in federal or state laws will not increase the Banks'
exposure to liability for environmental cleanup.
The following table shows loan and mortgage-related
securities originations, purchases, sales and repayment
activities of the Banks on a consolidated basis for 1993, 1992
and 1991.
Year Ended December 31,
1993 1992 1991
(In thousands)
Loans originated:
Mortgage loans:
One- to four-family . . . . . . . . . . . . . . . . $1,045,795 $ 598,477 $ 295,206
Multi-family. . . . . . . . . . . . . . . . . . . . 85,719 54,643 28,900
Commercial real estate. . . . . . . . . . . . . . . 10,712 6,821 5,956
Refinanced residential mortgage loans
previously sold and serviced for others. . . . . . 187,066 294,477 44,334
1,329,292 954,418 374,396
Consumer loans. . . . . . . . . . . . . . . . . . . . . 136,766 93,967 59,854
Education loans . . . . . . . . . . . . . . . . . . . . 31,885 30,115 36,875
Home equity loans - net increase. . . . . . . . . . . . 31,008 19,385 27,860
Credit card loans - net increase. . . . . . . . . . . . 30,978 17,724 8,393
Manufactured housing loans. . . . . . . . . . . . . . . 23,405 17,292 11,361
Refinanced manufactured housing loans pre-
viously sold and serviced for others. . . . . . . . . 36,953 -- --
Decrease (increase) in undisbursed
loan proceeds. . . . . . . . . . . . . . . . . . . . . 8,142 322 (1,910)
Total loans originated. . . . . . . . . . . . 1,628,429 1,133,223 516,829
Mortgage-related securities purchased. . . . . . . . . . 240,640 696,206 616,306
Total originations and purchases. . . . . . . 1,869,069 1,829,429 1,133,135
Loans and mortgage-related securities from
acquisitions (before net items) . . . . . . . . . . . . 540,474 146 --
Market valuation adjustment: available-
for-sale mortgage-related securities . . . . . . . . . 2,979 -- --
Loan repayments and sales:
Repayments of loans and mortgage-related
securities. . . . . . . . . . . . . . . . . . . . . 949,794 711,259 504,342
Sales of one- to four-family real estate
loans . . . . . . . . . . . . . . . . . . . . . . . 614,664 481,586 285,355
Sales of multi-family and commercial
real estate loans . . . . . . . . . . . . . . . . . 25,621 9,128 10,179
Sales of mortgage-related securities. . . . . . . . . . 81,294 812 154,506
Sales of manufactured housing loans . . . . . . . . . . -- -- 503
Sales of indirect automobile loans. . . . . . . . . . . -- -- 30,679
Total repayments and sales. . . . . . . . . . 1,671,373 1,202,785 985,564
Increase in total loans before net items
(excluding change in undisbursed loan
proceeds), including loans held for sale
and mortgage-related securities . . . . . . . . . . . . $ 741,149 $ 626,790 $ 147,571
First Financial has been actively engaged in secondary
mortgage market activities on a national basis through the sale
of whole loans and participations to pension funds, insurance
companies, banks, other savings institutions and governmental
units such as FHLMC, FNMA, GNMA and special Wisconsin programs.
On a limited basis, the Banks and their predecessors have
purchased selected groups of loans or a portfolio of loans.
First Financial also periodically has used its loans to
securitize mortgage-related securities sold by registered broker-
dealers. Sales of loans are used to provide additional funds for
lending, to generate servicing fee income and to reduce the risk
resulting from fluctuating interest rates and loan concentrations.
Under loan sales and participation agreements, First Financial
sells mortgage loans on a non-recourse basis and pays participants
an agreed upon yield on the participant's portion of the loan out of
monthly payments received from the borrowers. First Financial, in
general, has forward commitments to sell all of its fixed-rate
mortgage loans, having maturities of greater than 15 years, which
are closed or approved and one-half of the amount of such loans
pursuant to accepted applications for loans. The sale of $30.7
million of indirect automobile loans in 1991 was the result of
management's decision to discontinue this line of customer business.
Loan Servicing. The Banks have originated the majority of
the loans they service for others. They receive fees for those
servicing activities, which include collecting and remitting loan
payments, inspecting the properties and making certain insurance
and tax payments on behalf of the borrowers. At December 31,
1993, the Banks were servicing $1.30 billion of mortgage and
manufactured housing loans owned by others. Mortgage loans
totaling $1.25 billion were being serviced for annual fees
ranging from 1/4 to 1/2 of 1% of the unpaid principal, and
$50.0 million of manufactured housing loans were being serviced
for investors. Servicing fees retained on manufactured housing
loans average approximately 2.3% of the unpaid principal,
reflecting the higher costs of servicing these loans. The
following table sets forth information as to the Banks' loan
servicing portfolio, net of loans in process, at the dates shown.
December 31,
1993 1992
Amount % Amount %
(Dollars in thousands)
Loans owned by the Banks . . . . . . . . . . . . . . . $2,951,000 69.0% $2,235,000 63.0%
Loans serviced for others. . . . . . . . . . . . . . . 1,301,000 31.0 1,311,000 37.0
Total loans serviced . . . . . . . . . . . . . . $4,252,000 100.0% $3,546,000 100.0%
Information concerning the Banks' servicing income from loans
serviced for others is summarized in the following table for the
periods indicated.
Year Ended December 31,
1993 1992 1991
(Dollars in thousands)
Loan servicing income. . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,233 $4,395 $6,920
Servicing spread for the year* . . . . . . . . . . . . . . . . . . . . . .401% .307% .443%
*
The servicing spread represents the average fee earned as a
percentage of average balances of loans serviced for others,
net of undisbursed proceeds, as reduced by the periodic
amortization of purchased and capitalized excess mortgage
servicing rights.
Net loan servicing income has decreased in 1993 and 1992 from
the levels experienced in 1991 and prior to 1991, as a result of
A) a decrease in the average servicing spread on serviced
mortgage loans, B) a decline in the size of the manufactured
housing servicing portfolio due to management's decision to
restrict manufactured housing lending to the Midwest, and C)
increased amortization of purchased mortgage servicing rights and
capitalized excess servicing rights totaling $1.4 million,
$3.5 million and $2.8 million for 1993, 1992 and 1991,
respectively. The remaining purchased mortgage servicing rights,
which are amortized over the expected lives of the related loans
using the level yield method and are adjusted for prepayments,
had a carrying value of $453,000 at the end of 1993.
Fee Income From Lending Activities. Loan origination and
commitment fees and certain direct loan origination costs are
being deferred and the net amounts amortized as an adjustment of
the related loan's yield. The Banks are amortizing these
amounts, using the level yield method, over the contractual lives
of the related loans.
The Banks also receive other fees and charges relating to
existing mortgage loans which include prepayment penalties, late
charges and fees collected in connection with a change in
borrower or other loan modifications. Other types of loans also
generate fee income for the Banks. These include annual fees
assessed on credit card accounts, transactional fees relating to
credit card usage and late charges on consumer loans and
manufactured housing loans.
Collateralized Industrial Development Revenue Bonds.
Additional income has been earned by First Financial and Port by
offering loans and securities in their portfolios to third
parties for their use as collateral. The Banks have previously
entered into agreements under which mortgage loans and investment
securities held in portfolio are pledged as secondary collateral
in connection with the issuance of Industrial Development Revenue
Bonds. The bonds were issued by municipalities to finance multi-
family or commercial real estate owned by third parties unrelated
to the Banks. Under the terms of these agreements, the Banks
i) issue uncollateralized letters of credit or ii) maintain, with
a trustee, mortgage loans or securities with a fair market value,
as defined, aggregating up to 180% of the outstanding principal
balance of the bonds to provide security for the payment of
principal, interest and any mandatory redemption premium owing on
the bonds. The Banks continue to receive principal and interest
payments on the mortgage loans or securities used as collateral.
If any of such bonds were in default, the Banks would have the
primary obligation to either pay any amount in default or to
acquire the bonds on which the default had occurred. If the
Banks were required to perform under these agreements, they would
foreclose on the existing mortgage, and security interest in, the
real and personal property financed with the proceeds of the
bonds. The Banks have discontinued this line of business and do
not currently anticipate entering into any new agreements, except
for the purpose of facilitating the refinancing of existing bond
issues.
At December 31, 1993, certain mortgage-related securities and
investment securities with a carrying value of approximately
$5,394,000 were pledged as collateral for bonds in the aggregate
of $3,341,000. Additional bond issues totaling $7,610,000 are
supported by letters of credit issued by First Financial in lieu
of specific collateral. The bond agreements have expiration
dates through 2008.
At December 31, 1993, each of the outstanding agreements was
current with regard to bond debt-service payments. Management
has considered these agreements in its review of the adequacy of
allowances for losses relating to contingent liabilities.
Usury Limitations. Federal law has preempted state usury law
interest-rate limitations on first-lien residential mortgage
loans unless the state legislature acted before a certain date to
override the exemption. The Wisconsin legislature acted to
override the preemption and, therefore, loans made by the Banks
in Wisconsin are subject to Wisconsin usury limitations,
described below.
The Illinois legislature did not override the federal
preemption, and at present Illinois law imposes no ceiling on
interest rates for residential real estate loans, including
junior mortgage loans. Additionally, in Illinois, federally-insured
savings institutions can charge the highest rate permitted any
other lender in Illinois. The Illinois State Legislature has
allowed state banks to charge any interest rate on any type of
loan, and, thus, there are effectively no ceilings on the
interest rate which a federal savings bank may charge on a loan
in Illinois.
On November 1, 1981, Wisconsin enacted a comprehensive
revision of its usury statutes overriding federal preemption and
deregulating interest rates. After that date, maximum interest
rates were eliminated for loans secured by first lien mortgages
on residential real estate. Maximum interest rates have also
been eliminated for most forms of fixed and variable rate
consumer loans made by savings institutions after October 31,
1984. Variable rate revolving consumer loans which are not
secured by real estate remain subject to a maximum interest rate
of 18%, except that the limit does not apply following notice to
the borrower if the auction yield on two-year U.S. Treasury notes
exceeds 15% per year for five consecutive weeks.
With respect to first-lien residential real estate loans, the
1981 Wisconsin usury legislation clarified the Wisconsin law
requirement that unearned interest be refunded. However, certain
items are now deemed not to be interest for purposes of
calculating the rebate. These items include charges paid to
third parties, fees and other amounts required to be passed on to
secondary market purchasers of any loans, up to two points to the
lender for "loan administration", commitment fees, loan fees paid
by third parties ("seller's points") and a prepayment penalty of
not more than 60 days interest on that amount of the prepayment
which exceeds 20% of the original amount of the loan, provided
the prepayment is made within five years of the date of the loan
and the parties have agreed to such a prepayment penalty.
Since November 1, 1981, Wisconsin-chartered savings
institutions have been permitted to use two forms of interest-
rate adjustment clauses in mortgage loans secured by one- to
four-family homes. Interest rates may either be adjusted based
on changes in an "approved index" ("indexed adjustable rate") or
by providing for no more than a 1% increase in the interest rate
not more than once during each six-month period and by permitting
decreases in the interest rate to be made at any time ("non-
indexed adjustable rate"). An "approved index" is defined as (i)
the national average mortgage contract rate for major lenders on
the purchase of previously occupied houses, as computed by the
FHL Banks; (ii) the monthly average of weekly auction rates on
U.S. Treasury bills with a maturity of three months or six months
made available by the Federal Reserve Board; (iii) the monthly
average yield on U.S. Treasury securities adjusted to a constant
maturity of one, two, three or five years, made available by the
Federal Reserve Board; or (iv) an index approved by the Wisconsin
Commissioner of Savings and Loans. Loans made after November 1,
1981, containing either form of adjustment mechanism, are not
subject to any maximum usury interest rate; however, increases in
the rate based on increases in the index are optional with the
lender. Adjustments under the non-indexed version are solely at
the option of the lender and if no increase is made during any
six-month period, the lender may accumulate such increases and
impose them at any time. A notice to the borrower is required at
least 30 days prior to an interest rate adjustment during which
period the loan may be prepaid without penalty. Loans originated
by First Financial and Port prior to their respective conversions
to a federal savings bank charter are subject to the above
provisions.
Other states in which First Financial makes loans have
varying laws concerning usury. Management believes that all
loans made by First Financial in other states are in compliance
with the applicable usury provisions.
Collection Procedures - Residential and Commercial Mortgage
Loans. Under Wisconsin and Illinois law, a mortgage loan
borrower is afforded a period of time, subsequent to the entry of
judgment and prior to sale of the mortgaged property, within
which to redeem the foreclosure judgment ("equity of
redemption"). During this period, the loan is generally a non-
earning asset. The length of the equity of redemption available
in any case is dependent upon the form of legal proceeding
selected by the lender at the time the suit is initiated and can
vary between two months and one year. Further delays can be
incurred if bankruptcy proceedings intervene. A judgment of
foreclosure for residential mortgage loans will normally provide
for the recovery of all sums advanced by the mortgagor including,
but not limited to, insurance, repairs, taxes, appraisals, post-
judgment interest, attorneys' fees, costs and disbursements. The
majority of foreclosure actions by the Banks follow a form which
provides for a six-month equity of redemption. Unless the right
of redemption is exercised, the Banks generally acquire title to
the property pursuant to public bidding at a sheriff's sale.
Thereafter, the Banks attempt to sell the property.
Collection Procedures - Non-Mortgage Loans. Collection
procedures for manufactured housing loans, credit card loans,
consumer loans and student loans are done in accordance with
state and federal Fair Debt Collection Practices Acts and, where
applicable, governmental agencies procedures. The intent of the
collection procedures is either to assist the borrower in
performing in accordance with contract terms or to work out the
problem loan in a timely manner so as to minimize the Banks'
loss. Generally, collection efforts are started 10 to 15 days
after the payment on account was due.
Procedures for Nonaccrual Loans, Delinquencies and
Foreclosures. Delinquent and problem loans are a normal part of
any lending business. When a borrower fails to make a required
payment by the 15th day following the date on which the payment
is due, the loan is considered delinquent and internal collection
procedures generally are instituted. The borrower is contacted
by a Bank representative who seeks to determine the reason for
the delinquency, and attempts are made to effect a cure. In most
cases deficiencies are cured promptly. The loan status is
reviewed and, where appropriate, the condition of the property
and the financial circumstances of the borrower are evaluated.
Based upon the results of any such investigation, (i) a repayment
program of the arrearage from the borrower may be accepted; (ii)
evidence may be sought (in the form of a listing contract) of
efforts by the borrower to sell the property if the borrower has
stated that he is seeking to sell; (iii) a deed in lieu of
foreclosure or voluntary surrender of the property may be
requested in compliance with applicable laws; or (iv)
foreclosure, replevin or collection proceedings may be initiated.
A decision as to whether and when to initiate legal
proceedings is based upon such factors as the amount of the
outstanding loan in relation to the original indebtedness, the
extent of delinquency and the borrower's ability and willingness
to cooperate in curing deficiencies. At a foreclosure sale,
representatives of the Banks will generally bid an amount
reasonably equivalent to the lower of the fair value of the
foreclosed property or the amount of judgment due to the Banks.
If the sum of the outstanding loan principal balance and
costs of foreclosure that have been capitalized exceed the fair
market value of the property, in the judgment of management, an
allowance for loss in an amount equal to such excess is
established. In such circumstances, a deficiency judgment may be
sought against the borrower.
When one of the Banks acquires real estate through
foreclosure or deed in lieu of foreclosure, such real estate is
placed on its books at the lower of the carrying value of the
loan or the fair market value of the real estate based upon a
current appraisal. Any reduction from the value previously
recorded on the books is charged against the appropriate
allowance for loan losses.
Loan Delinquencies. The Banks monitor the delinquency status
of their respective loan portfolios on a regular basis and
initiate 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 at December 31, 1993 have been presented separately as a
part of the discussion of Non-Performing Assets in Management's
Discussion and Analysis, filed as an exhibit hereto.
Delinquencies of 30 to 90 days are summarized as follows:
Balance At December 31,
1993 1992
(In thousands)
30 - 59 Days Delinquent
Residential real estate loans $ 5,844 $ 5,626
Commercial real estate loans 3,798 1,553
Manufactured housing loans 2,999 4,215
Credit card loans 1,988 1,594
Consumer, student and other loans 4,493 3,762
$19,122 $ 16,750
60 - 90 Days Delinquent
Residential real estate loans $ 1,111 $ 492
Commercial real estate loans 707 980
Manufactured housing loans 1,035 1,849
Credit card loans 904 782
Consumer, student and other loans 4,287 4,029
$ 8,044 $ 8,132
Total 30 - 90 Day Delinquent Loans
Residential real estate loans $ 6,955 $ 6,118
Commercial real estate loans 4,505 2,533
Manufactured housing loans 4,034 6,064
Credit card loans 2,892 2,376
Consumer, student and other loans 8,780 7,791
$27,166 $ 24,882
At December 31, 1993, the 30-90 day delinquencies increased
$2.3 million to $27.2 million from $24.9 million at year-end
1992. As a percent of total loans receivable, loan delinquencies
decreased from 1.13% at the end of 1992 to 0.93% at December 31,
1993 due to the greater size of the loan portfolio at the later
date resulting from the United acquisition. The $2.3 million
increase, at December 31, 1993, relates to i) the inclusion in
the 30-59 day delinquency category of a $3.4 million commercial
real estate loan during 1993 (offset by the return to
satisfactory contractual performance of several other commercial
real estate loans), ii) an increase of $700,000 in delinquent
student loans (which are government guaranteed) delinquent 30-90
days, iii) a decrease of $2.0 million in manufactured housing
loans delinquent 30-90 days and iv) an increase of $800,000 of
delinquent residential mortgage loans. The 1993 increase in
residential delinquencies relates to the addition of such loans
following the United acquisition.
All of these delinquent loans have been considered by
management in its evaluation of the adequacy of the allowances
for loan losses.
Foreclosed Properties. Non-performing assets of
$15.1 million and $29.9 million at December 31, 1993 and 1992,
respectively, are discussed as a part of Management's Discussion
and Analysis, filed as an exhibit hereto. In that discussion, it
is noted that a portion of the balances of foreclosed properties
and other repossessed assets included in the non-performing
assets at December 31, 1993 and 1992 are comprised of large
(having a carrying value in excess of $500,000) commercial real
estate properties. A list of the properties referred to in that
discussion is presented below.
Carrying Value At December 31,
Property Type Location 1993 1992
(In thousands)
Office Madison, Wisconsin $ 1,500 $1,573
Retail Milwaukee, Wisconsin 1,089 --
Office Phoenix, Arizona 700 1,020
Office/Retail Carpentersville, Illinois -- 3,425
Office Independence, Missouri -- 1,550
During 1993, the Illinois and Missouri properties were
written down $1.4 million and, subsequently, sold and financed by
First Financial at market terms.
A discussion of the commercial real estate foreclosures
listed above, at December 31, 1993, follows:
* The office building in Madison, Wisconsin was acquired as a
result of the exercise of a previous industrial revenue bond
guarantee by First Financial whereby the bondholders were
paid after default by the borrower. The 100% occupancy level
at December 31, 1993 is the same as last year and efforts to
sell the building will be management's primary focus in 1994
for this property. At December 31, 1993, the estimated fair
value of this property was $1.5 million.
* The retail property in Milwaukee, Wisconsin had previously
been developed and owned by a wholly-owned subsidiary of
First Financial. The subsidiary carried the property as real
estate held for investment prior to foreclosure in 1993 by
First Financial. The 79% occupancy level at December 31,
1993 is a slight improvement over the previous year and
efforts to lease additional space will be management's
primary focus in 1994 for this property. At December 31,
1993, the estimated fair value of this property was
$1.1 million.
* The office building in Phoenix, Arizona had previously been
owned by a joint venture in which a wholly-owned subsidiary
of First Financial was a joint venturer. That subsidiary
subsequently acquired its co-venturer's interest and had
carried this property as real estate held for investment
prior to foreclosure by First Financial. The decrease in
carrying value of this office building from $1.0 million at
December 31, 1992 to $700,000 at December 31, 1993 reflects a
writedown of this property to its current estimated fair
value. The overbuilt Phoenix market is a primary concern for
the project. The 45% occupancy level at December 31, 1993 is
less than the previous year. The property is currently under
contract to sell with a projected closing in the first
quarter of 1994.
During 1992, the Corporation adopted an American Institute of
Certified Public Accountants' Statement of Position ("SOP"),
"Accounting for the Results of Operations of Foreclosed Assets
Held For Sale". The SOP requires that foreclosed properties be
valued at fair value in lieu of the net realizable value method
previously used. Fair value calculations use a market rate of
interest to discount estimated cash flows compared to net
realizable value calculations in which an internal cost of funds
rate was used.
The above listed foreclosed properties, as well as all other
non-performing assets, have been considered in the evaluation of
the adequacy of allowances for losses. See the Management
Discussion and Analysis referred to above for management's review
of adequacy of allowances for losses relative to these
properties.
Classified Assets:
For regulatory purposes, the Banks utilize a comprehensive
classification system for thrift institution problem assets.
This classification system requires that problem assets be
classified as "substandard", "doubtful" or "loss", depending upon
certain characteristics of the particular asset or group of
assets as defined by supervisory regulators.
An asset is classified "substandard" if it contains defined
characteristics relating to borrower net worth, paying capacity
or value of collateral which indicate that some loss is
distinctly possible if noted deficiencies are not corrected.
"Doubtful" assets have the same characteristics present in
substandard assets but to a more serious degree so that it is
improbable that the asset could be collected or liquidated in
full. "Loss" assets are deemed to be uncollectible or of such
minimal value that their continuance as assets without being
specifically reserved is not warranted. Substandard and doubtful
classifications require the establishment of prudent general
allowances for loss amounts while loss assets require a 100%
specific allowance or that the asset be charged off.
In general, classified assets include non-performing assets
plus other loans and assets, including contingent liabilities,
meeting the criteria for classification. Non-performing assets
include loans or assets which were previously loans i) which are
not performing to a serious degree under the contractual terms of
the original notes or ii) for which known information about
possible credit problems of borrowers causes management to have
serious doubts as to the ability of such borrowers to comply with
current contractual terms. This non-performance characteristic
impacts directly upon the interest income normally expected from
such assets. Specifically included are the loans held on a non-
accrual basis, real estate judgments subject to redemption, and
foreclosed properties for which the Bank has obtained title.
Classified assets, including non-performing assets, for the
Banks, are set forth in the following table, as of December 31,
1993 and 1992, respectively.
December 31,
1993 1992
(In thousands)
Classified assets:
Non-performing assets:
Non-accrual loans $ 8,240 $ 15,659
Foreclosed properties and other
repossessed assets 6,817 14,198
Total Non-Performing Assets 15,057 29,857
Add back valuation allowances netted against
foreclosed properties above 1,386 --
Adjustment for non-performing residential loans
not classified due to low loan-to-
appraisal value (707) (771)
Additional classified performing loans:
Residential real estate 1,919 --
Commercial real estate 9,747 7,240
Consumer (including manufactured housing
and credit cards) 241 378
Collateralized industrial development revenue
bond agreements -- 4,555
Other assets 757 1,945
Total Classified Assets $ 28,400 $ 43,204
During the year ended December 31, 1993, classified assets
decreased $14.8 million to $28.4 million from the December 31,
1992 total of $43.2 million as a result of the net effect of
various 1993 events. As a percentage of total assets, classified
assets decreased from 1.11% at December 31, 1992 to 0.59% at
December 31, 1993.
The non-performing asset segment of classified assets
similarly decreased $14.8 million during 1993. For further
discussions of such non-performing assets, see Management's
Discussion and Analysis, filed as an exhibit hereto, as well as
the "Foreclosed Properties" review immediately preceding this
discussion of classified assets. Offsetting changes in the
remaining classified asset categories are discussed below.
Performing commercial real estate loans which earlier had
been adversely classified due to the possible adverse effects of
identifiable future events increased $2.5 million in 1993. This
increase is due to the net effect of i) the improvement in
delinquency status of loans, totaling $5.4 million, that were in
non-accrual status at year-end 1992 and are now included in the
adversely classified performing loan category, ii) the inclusion
in this category of a $1.1 million loan, to facilitate the 1993
sale of an office foreclosure property, pending future
contractual performance by the borrower and offset by iii) the
removal from classified asset status of a contractually
performing $4.2 million loan on a motel in Georgia, which had
been previously classified due to cash flow problems which have
been resolved.
The increase in adversely classified performing residential
mortgage loans of $1.9 million relates to groups of performing
residential mortgage loans to several borrowers which have been
adversely classified in 1993 due to the possible impact of
identifiable potential future events.
The collateralized industrial revenue bond agreement
included above in classified assets at December 31, 1992 was
refinanced and removed from classified assets in 1993.
At December 31, 1993, exclusive of non-performing assets,
the major concentration of classified assets consists of the
approximately $9.7 million of currently performing commercial
real estate loans that have been classified due to prior
delinquency and/or the potential adverse effects of possible
identifiable future events or other factors. Loans in excess of
$1.0 million included in this category are noted below (in
thousands):
Loan Amount Classified
Property Type Of Property December 31, December 31,
Loan Collateral Location 1993 1992
Office/Land Sheboygan, Wisconsin $ 3,670 (a) $ 874
Motels Various-Tennessee 2,600 (a)(b) --
Office Independence, Missouri 1,091 (c) --
Motel Norcross, Georgia -- 4,229
(a) Loan(s) were in non-accrual status at year-end 1992.
(b) Represents a 20% participating interest in loans totaling
$14.6 million, for which First Financial is the lead lender.
(c) Represents loan to finance the 1993 sale of a former
foreclosed real estate property. The loan has been
classified pending future performance by the borrower.
All adversely classified assets at December 31, 1993 have
been considered by management in its evaluation of the adequacy
of allowances for losses.
Also, First Financial is closely monitoring the performance
of two privately issued second tranche adjustable rate mortage-backed
securities, aggregating approximately $21 million. First Financial has
not received full monthly payments due on these securities since late
1993. The payments have been interrupted due to delinquencies and
foreclosures in the underlying mortage portfolio and substantially all
of the cash flows are currently directed to owners of the senior tranche.
Both securities are serviced by a California institution under the control
of the RTC. First Financial's second tranche position is senior to several
subordinate tranches (currently amounting to approximately 11% of the value
of the total portfolios in question) which are designed to absorb losses in
the underlying mortgage portfolio, and as a result, management does not
believe at this time that material losses will be realized in connection with
either of these securities. First Financial's portfolio of mortage-
related securities totaled approximately $1.3 billion at December 31, 1993,
and except for one of the referenced securities which was recently downgraded,
all of First Financial's mortgage-related securities are rated investment
grade by at least one nationally recognized independent rating
agency.
Investment Activities
In addition to lending activities, the Banks conduct other
investment activities on an ongoing basis in order to diversify
assets, obtain maximum yield and meet levels of liquid assets
required by regulatory authorities. Investment decisions are
made by authorized officers in accordance with policies
established by the boards of directors. In addition to
satisfying regulatory liquidity requirements, investments are
used as part of the Banks' asset and liability program to
minimize the Banks' vulnerability to changing interest rates. At
December 31, 1993, 62.1% of the Banks' investments mature or
reprice within one year or less.
Certain of First Financial's investment policies relate to
the term of the investment. For example, First Financial invests
in U.S. government, agency and instrumentality obligations
maturing in three years or less; obligations of state and other
political subdivisions maturing in two years or less;
certificates of deposits of insured institutions which will
mature in nine months or less; negotiable federal funds which
will mature in nine months or less; nonnegotiable federal funds
which will mature in 30 days or less; corporate debt obligations
maturing in three years or less; and commercial paper maturing in
270 days or less. Additionally, corporate debt obligations must
be rated in one of the four highest categories by a nationally
recognized investment rating service, and commercial paper must
be rated in one of the two highest categories by two nationally
recognized rating services.
Other investment policies relate to the aggregate amount of
certain investments. For example, state and municipal general
obligations and revenue bonds are limited to 1% of assets;
industrial revenue bonds to 2% of assets in the aggregate and 1%
of assets for any single issue; repurchase agreements to 10% of
stockholders' equity plus an additional 10% if secured by readily
marketable collateral; banker's acceptances to no more than 1/4
of 1% of such institution's total deposits; and all other
obligations, except those of the U.S. or guaranteed thereby, to
the lesser of 10% of stockholders' equity or 1% of total assets.
Subject to limitations of its investment policy, Port
increases or decreases its investments depending upon regulatory
requirements, the availability of funds and comparative yields in
relation to its return on loans. The primary responsibility for
the investment function rests with executive management of Port.
Management determines the appropriate classification of debt
securities (including mortgage-related securities) at the time of
purchase and reevaluates such designation as of each balance
sheet date. Debt securities are classified as held-to-maturity
when the Corporation has the positive intent and ability to hold
the securities to maturity. Held-to-maturity securities are
stated at amortized cost.
Debt securities not classified as held-to-maturity are
classified as available-for-sale. Available-for-sale securities
are stated at fair value with the unrealized gains and losses
(net of income tax effect) reported as a separate component of
stockholders' equity.
The cost of debt securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and
accretion of discounts to maturity, or in the case of mortgage-
related securities, over the estimated life of the security.
Such amortization is included in interest income from the related
security. Interest and dividends are included in interest income
from the related securities. Realized gains and losses, and
declines in value judged to be other-than-temporary are included
in net securities gains (losses). The costs of securities sold
is based on the specific identification method.
For a breakdown of investment securities held by the Banks at
certain dates, see Note C to the Corporation's consolidated
financial statements, incorporated herein by reference.
The following table sets forth the maturity/repricing
characteristics of the Banks' investment securities at December
31, 1993 and the weighted average yields of such securities.
After One, But After Five, But
Within One Year Within Five Years Within 10 Years After 10 Years
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Yield Amount Yield Amount Yield Amount Yield
(Dollars in thousands)
U.S. Government and agency
obligations . . . . . . . . $ 77,456 5.15% $57,520 4.72% $ -- --% $4,988 7.65%
Adjustable-rate mortgage
mutual funds. . . . . . . . 34,585 4.42 -- -- -- -- -- --
Interest-earning deposits
in banks. . . . . . . . . . 25,768 3.35 -- -- -- -- -- --
Federal funds sold . . . . . . 21,873 2.79 -- -- -- -- -- --
Corporate and bank notes
receivable. . . . . . . . . 11,437 4.72 37,616 5.23 -- -- -- --
State and municipal
obligations . . . . . . . . 20 6.05 3,983 3.72 350 8.00 100 8.00
Total . . . . . . . . . . . $171,139 4.40% $99,119 4.87% $ 350 8.00% $5,088 7.66%
At December 31, 1993, the Banks had no investments in any
issuer in excess of 10% of net worth.
The following table sets forth the aggregate amortized cost
and estimated fair value of investment securities at the dates
indicated.
December 31,
1993 1992 1991
(In thousands)
U.S. Government and agency obligations . . . . . . . . . . . . . . . . . $138,400 $ 40,828 $ 14,661
Corporate and bank notes
(investment grade). . . . . . . . . . . . . . . . . . . . . . . . . . 49,053 52,020 26,638
Adjustable-rate mortgage mutual fund . . . . . . . . . . . . . . . . . . 34,585 -- --
Interest-earning deposits. . . . . . . . . . . . . . . . . . . . . . . . 25,768 31,067 3,898
Federal funds sold . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,873 29,100 42,870
State and municipal obligations. . . . . . . . . . . . . . . . . . . . . 4,453 598 598
Certificates of deposit. . . . . . . . . . . . . . . . . . . . . . . . . -- 198 392
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 9,989 14,965
Total amortized cost. . . . . . . . . . . . . . . . . . . . . . . . . $274,132 $163,800 $104,022
Total estimated fair value. . . . . . . . . . . . . . . . . . . . . . $275,576 $165,116 $104,817
Sources of Funds
General. Deposit accounts, sales of loans in the secondary
market and loan repayments are the primary sources of funds for
use in lending and for other general business purposes. In
addition, the Banks derive funds from maturity of investments,
advances from the FHL Bank and other borrowings. Repayments of
loans and mortgage-related securities are a relatively stable
source of funds, while deposit inflows and outflows are
significantly influenced by general interest rates and money
market and economic conditions. Borrowings may be used on a
short-term basis to compensate for reduction in normal sources of
funds such, as deposit inflows, at less than projected levels.
They may also be used on a longer-term basis to support expanded
lending and investment activities. The Banks have not generally
solicited deposits outside the market area served by their
offices or used brokers to obtain deposits and have no brokered
deposits at December 31, 1993.
Deposit Activities. The Banks offer a variety of deposits
having a wide range of interest rates and terms.
The following table presents, by various interest-rate
intervals, the Banks' long-term (one year and over) certificates
as of the date indicated.
December 31,
Interest Rate 1993 1992 1991
(In thousands)
3.50 - 4.00%. . . . . . . . . . . . . . . . . . . . . . . . . $ 209,813
4.01 - 6.00%. . . . . . . . . . . . . . . . . . . . . . . . . 1,434,598 $ 788,460 $ 149,698
6.01 - 8.00%. . . . . . . . . . . . . . . . . . . . . . . . . 273,664 425,662 717,162
8.01 - 10.00%. . . . . . . . . . . . . . . . . . . . . . . . . 242,502 394,585 768,772
$2,160,577 $1,608,707 $1,635,589
The following table presents, by various similar interest-rate
intervals, the amounts of long-term (one year and over) time
deposits at December 31, 1993 maturing during the period
indicated.
Interest Rates
3.50-4.00% 4.01-6.00% 6.01-8.00% 8.01-10.00% Total
(In thousands)
Certificate accounts
maturing in the 12
months ending:
December 31, 1994. . . . . . . . . . . $206,826 $ 670,222 $ 93,334 $132,118 $1,102,500
December 31, 1995. . . . . . . . . . . 2,987 488,612 17,554 104,956 614,109
December 31, 1996. . . . . . . . . . . -- 185,796 57,741 1,566 245,103
After December 31, 1996 -- 89,968 105,035 3,862 198,865
$209,813 $1,434,598 $273,664 $242,502 $2,160,577
The following table presents the maturities of the Banks'
certificates in amounts of $100,000 or more at December 31, 1993
by time remaining to maturity.
December 31,
Maturities 1993
(In thousands)
January 1, 1994 through March 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 48,170
April 1, 1994 through June 30, 1994. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,654
July 1, 1994 through December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,872
January 1, 1995 and after. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,193
$164,889
The Banks' deposit base at December 31, 1993 included
$2.56 billion of certificates of deposit with a weighted average
rate of 5.01%. Of these certificates of deposit, $1.50 billion
with a weighted average rate of 4.71% will mature during the 12
months ending December 31, 1994. The Banks will seek to retain
these deposits to the extent consistent with its long-term
objective of maintaining positive interest rate spreads.
Depending upon interest rates existing at the time such
certificates mature, the Banks' cost of funds may be
significantly affected by the rollover of these funds.
Other Sources of Funds. The following table sets forth
certain information as to the Corporation's advances and other
borrowings at the dates and for the periods indicated. See Note
J to the Corporation's consolidated financial statements,
incorporated herein by reference.
December 31,
1993 1992 1991
(In thousands)
FHL Bank advances. . . . . . . . . . . . . . . . . . . . . . . . . . . $371,974 $397,193 $ 58,693
Subordinated notes . . . . . . . . . . . . . . . . . . . . . . . . . . 54,997 55,000
--
Industrial development revenue bonds . . . . . . . . . . . . . . . . . 6,410 9,755 6,550
Collateralized mortgage obligations. . . . . . . . . . . . . . . . . . 5,217 --
--
Notes payable to bank. . . . . . . . . . . . . . . . . . . . . . . . . -- -- 12,000
Total borrowings. . . . . . . . . . . . . . . . . . . . . . . . $438,598 $461,948 $ 77,243
Weighted average interest cost of total
borrowings during the year. . . . . . . . . . . . . . . . . . . . . 5.29% 4.98% 8.41%
Average month-end balance of short-term
borrowings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- $ 10,792 $ 15,700
Weighted average interest rate of short-term
borrowings during year. . . . . . . . . . . . . . . . . . . . . . . -- 7.71% 8.59%
Weighted average interest rate of short-term
borrowings at end of year . . . . . . . . . . . . . . . . . . . . . -- -- 6.50%
Service Corporations and Operating/Finance Subsidiaries
First Financial has i) five active, wholly-owned service
corporations, ii) an operating subsidiary, and iii) a limited-
purpose finance subsidiary. Port has no active service
corporations. The net book value of First Financial's aggregate
investment in active service corporations at December 31, 1993
was as follows (in thousands):
Wisconsin Insurance Management, Inc. . . . . . . $ 998
Appraisal Services, Inc. . . . . . . . . . . . . 142
First Service Corporation of Wisconsin . . . . . 12
Illini Service Corporation . . . . . . . . . . . --
Mortgage Finance Corporation . . . . . . . . . . --
Total . . . . . . . . . . . . . . . . . . . . $1,152
Wisconsin Insurance Management, Inc. ("WIM") is a full-
service, independent insurance agency. This subsidiary offers a
broad range of insurance products, including hazard, mortgage,
life and disability policies, to First Financial's customers, as
well as a full line of commercial and personal coverages to the
general public. Brokerage services are also provided through
this subsidiary. WIM had net income of $1.3 million,
$1.3 million and $1.4 million for 1993, 1992 and 1991,
respectively.
Appraisal Services, Inc. performs real estate appraisals for
First Financial's loan customers, governmental agencies and the
general public. Insurance valuations and ad valorem tax services
for outside sources are also performed. Appraisal Services,
Inc., had net income of $111,000, $124,000 and $90,000 for 1993,
1992 and 1991, respectively.
First Service Corporation of Wisconsin ("FSC") previously
engaged in the management and sale of commercial real estate and
apartments for First Financial and others, as well as acting as
general partner for several real estate partnerships. This
subsidiary had a net loss of $207,000, $435,000 and $600,000 for
1993, 1992 and 1991, respectively. At December 31, 1993, FSC's
activities were sharply cut back and its principal assets were
transferred to First Financial. FSC's remaining function is to
serve as general partner for the remaining two real estate
partnerships in each of which FSC has a minor investment.
Illini Service Corporation ("ISC") was acquired in
conjunction with the Illini transaction and acts as nominal
trustee on deeds of trust in Missouri. ISC's sole corporate
function is to provide the trustee's signature capability.
Mortgage Finance Corporation ("MFC") was a subsidiary of a
former mortgage banking affiliate of First Financial and acts as
a nominal trustee on deeds of trust in California and other
states. MFC's sole corporate function is to provide the
trustee's signature capability on such deeds of trust acquired by
First Financial from the former affiliate.
First Financial Investments, Inc. ("FFII") is an operating
subsidiary of First Financial and was incorporated in 1991.
FFII, which is located in the State of Nevada, was formed for the
purpose of managing a portion of First Financial's investment
portfolio (primarily mortgage-related securities purchased
subsequent to the recent Illinois-area acquisitions) having long-
term maturities. As an operating subsidiary, FFII's results of
operations are combined with First Financial's for financial and
regulatory reporting purposes.
UFS Capital Corporation ("UFSCC"), which was acquired in
conjunction with the United acquisition, is a limited-purpose
finance subsidiary of First Financial and functions as an issuer
of certain collateralized mortgage obligation bonds. As a
finance subsidiary, UFSCC's results of operations are combined
with First Financial's for financial and regulatory reporting
purposes.
Employees of the Corporation
At December 31, 1993, the Corporation and its subsidiaries
employed 1,320 full-time employees and 337 part-time employees.
The Corporation promotes equal employment opportunity and
considers its employee relations to be good. The Corporation's
employees are not represented by any collective bargaining group.
The Corporation sponsors retirement plans covering all
employees with one or more years of service who are at least 21
years old. Additionally, the Corporation maintains an employee
benefit program providing, among other items, hospitalization and
major medical insurance, limited dental and life insurance, and
educational assistance. Such employee benefits are considered by
management to be competitive with employee benefits provided by
other financial institutions and major employers in the counties
in which First Financial and Port have offices.
Executive Officers
The following table sets forth information regarding each of
the executive officers of the Corporation and First Financial:
Age At
Executive December 31, Business Experience
Officer 1993 During Past Five Years
- --------------------------------------------------------------
John C. Seramur 51 Mr. Seramur joined First Financial
in 1966 and serves as Director,
President, Chief Executive Officer
and Chief Operating Officer of the
Corporation and First Financial.
He has also served as Chairman of
the Board of Port since May, 1989.
Robert M. Salinger 43 Mr. Salinger joined the
Corporation as Corporate Secretary
and General Counsel in 1985. He
also serves as an Executive Vice
President of First Financial. In
1984, he had served as General
Counsel and Corporate Secretary
for an institution acquired by the
Corporation. Prior to 1984, he
was a partner in the law firm of
Petrie & Stocking, S.C., and
associated with the law firm of
Whyte & Hirschboeck, S.C.
Donald E. Peters 44 Mr. Peters joined First Financial
in 1982 and serves as Executive
Vice President - Retail Banking of
First Financial. Prior to 1982,
he was an officer of another
thrift institution.
Harry K. Hammerling 43 Mr. Hammerling joined First
Financial in 1984 and serves as
Executive Vice President -
Administration and Servicing for
First Financial. From 1972 to
1984, he served as an officer of
First State.
Kenneth F. Csinicsek 54 Mr. Csinicsek joined First
Financial in 1987 and serves as
Senior Vice President of Marketing
and Investor Relations. Prior to
joining First Financial, he served
as president of another thrift
institution for two years and
operated two financial institution
consulting firms over a thirteen
year period.
REGULATION
General
The Corporation, as a savings institution holding company (a
"thrift holding company"), and First Financial and Port, as
federally chartered savings banks, are subject to extensive
regulation, supervision and examination by the OTS as their
primary federal regulator. First Financial and Port are also
subject to regulation, supervision and examination by the FDIC
and as to certain matters by the Federal Reserve Board.
In recent years there have been a significant number of
changes in the manner in which insured depository institutions
and their holding companies are regulated. Such changes have
imposed additional regulatory restrictions on the operations of
insured depository institutions and their holding companies. In
particular, regulatory capital requirements for insured
depository institutions have increased significantly. The
Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") requires the bank regulatory agencies to impose
certain sanctions on insured depository institutions which fail
to meet minimum capital requirements. In addition, the deposit
premiums paid by insured depository institutions have increased
significantly in recent years and may increase in the future.
Thrift Holding Company Regulation
General. Under the Home Owners Loan Act (the "HOLA"), the
Corporation, as a thrift holding company, is subject to
regulation, supervision and examination by, and the reporting
requirements of, the OTS.
The HOLA permits, subject to a number of conditions, the
acquisition by a thrift holding company, such as the Corporation,
of control of another thrift institution or thrift holding
company with prior written approval of the OTS, including in
certain situations an acquisition that would result in the
creation of a multiple thrift holding company controlling thrift
institutions located in more than one state. No director,
officer, or controlling shareholder of the Corporation may,
except with the prior approval of the OTS, acquire control of any
thrift institution which is not a subsidiary of the Corporation.
Restrictions relating to service as an officer or director of an
unaffiliated holding company or thrift institution are applicable
to the directors and officers of the Corporation and its thrift
institution subsidiaries and their affiliates under the
Depository Institutions Management Interlocks Act.
Under the HOLA, transactions engaged in by a thrift
institution or one of its subsidiaries with affiliates of the
thrift institution generally are subject to the affiliate
transaction restrictions contained in Sections 23A and 23B of the
Federal Reserve Act. Section 23A of the Federal Reserve Act
imposes both quantitative and qualitative restrictions on
transactions with an affiliate, while Section 23B of the Federal
Reserve Act requires, among other things, that all transactions
with affiliates be on terms substantially the same, and at least
as favorable, as the terms that would apply to, or would be
offered in, a comparable transaction with an unaffiliated party.
Exemptions from, and waivers of, the provisions of Sections 23A
and 23B of the Federal Reserve Act may be granted only by the
Federal Reserve Board. The HOLA contains certain other
restrictions on loans and extensions of credit to affiliates, and
authorizes the OTS to impose additional restrictions on
transactions with affiliates if the OTS determines such
restrictions are necessary to ensure the safety and soundness of
any thrift institution. Current OTS regulations are similar to
Sections 23A and 23B of the Federal Reserve Act.
Restrictions on Activities of Multiple Savings and Loan
Holding Companies. As a multiple savings and loan holding
company, the Corporation is prohibited from engaging in any
activities other than (i) furnishing or providing management
services for First Financial or Port; (ii) conducting an
insurance agency or escrow business; (iii) holding, managing or
liquidating assets owned or acquired from First Financial or
Port; (iv) holding or managing properties used or occupied by
First Financial or Port; (v) acting as trustee under deeds of
trust; (vi) engaging in any other activity in which multiple
savings and loan holding companies were authorized by regulation
to engage as of March 5, 1987; and (vii) engaging in any activity
which the Federal Reserve Board by regulation has determined to
be permissible for bank holding companies under Section 4(c) of
the Bank Holding Company Act (the "BHCA") (unless the Director of
the OTS, by regulation, prohibits or limits any such activity for
savings and loan holding companies). The activities in which
multiple savings and loan holding companies were authorized by
regulation to engage in as of March 5, 1987, consist of
activities similar to those permitted for service corporations of
federally chartered savings institutions and include, among other
things, various types of lending activities, furnishing or
performing clerical, accounting and internal audit services
primarily for affiliates, certain real estate development and
leasing activities and underwriting credit life or credit health
and accident insurance in connection with extension of credit by
savings institutions or their affiliates. The activities which
the Federal Reserve Board by regulation has permitted for bank
holding companies under Section 4(c) of BHCA generally consist of
those activities that the Federal Reserve Board has found to be
so closely related to banking or managing or controlling banks as
to be a proper incident thereto, and include, among other things,
various lending activities, certain real and personal property
leasing activities, certain securities brokerage activities,
acting as an investment or financial advisor subject to certain
conditions, and providing management consulting to depository
institutions subject to certain conditions. OTS regulations do
not limit the extent to which savings and loan holding companies
and their non-savings institutions subsidiaries may engage in
activities permitted for bank holding companies pursuant to
Section 4(c)(8) of the BHCA, although prior OTS approval is
required to commence any such activity. The Corporation could be
prohibited from engaging in any activity (including those
otherwise permitted under the HOLA) not allowed for bank holding
companies if First Financial or Port fail to constitute a
qualified thrift lender. See "-- Savings Institution Regulation
- -- Qualified Thrift Lender Requirement."
Savings Institution Regulation
General. First Financial and Port are subject to supervision
and regulation by the OTS. Under OTS regulations, First
Financial and Port are required to obtain annual audits by
independent accountants and to be examined periodically by the
OTS. Examinations are required to be conducted no less
frequently than every 12 months. First Financial and Port are
subject to assessments by the OTS to cover the costs of such
examinations. The OTS may revalue assets of First Financial and
Port, based upon appraisals, and require the establishment of
specific reserves in amounts equal to the difference between such
revaluation and the book value of the assets. The OTS is
authorized to promulgate regulations to ensure the safe and sound
operations of savings institutions and may impose various
requirements and restrictions on the activities of savings
institutions. Additionally, under the FDICIA, the OTS has
recently proposed safety and soundness regulations relating to
(i) internal controls, information systems, and internal audit
systems; (ii) loan documentation; (iii) credit underwriting;
(iv) interest rate exposure; (v) asset growth; and
(vi) compensation and benefit standards for officers, directors,
employees and principal shareholders. The HOLA requires that all
regulations and policies of the OTS for the safe and sound
operations of savings institutions are to be no less stringent
than those established by the Office of the Comptroller of the
Currency (the "OCC") for national banks. First Financial and
Port, as members of the SAIF, are also subject to regulation and
supervision by the FDIC, in its capacity as administrator of the
SAIF to ensure the safety and soundness of the SAIF. See
"Regulation--Savings Institution-- Insurance of Deposits."
Capital Requirements. Under OTS regulations, savings
institutions must maintain (i) "core capital" in an amount of not
less than 3% of total assets, (ii) "tangible capital" in an
amount not less than 1.5% of total assets and (iii) a level of
risk-based capital equal to 8.0% of risk-weighted assets.
Capital standards established by the OTS for savings
institutions must generally be no less stringent than those
applicable to national banks. Under OTS regulations, the term
"core capital" generally includes common stockholders' equity,
noncumulative perpetual preferred stock and related surplus, and
minority interests in the equity accounts of consolidated
subsidiaries less intangible assets and certain investments in
subsidiaries plus 90% of the fair market value of readily
marketable purchased mortgage servicing rights ("PMSRs") (subject
to certain conditions).
"Tangible capital" is core capital minus intangible assets
and certain investments in subsidiaries, provided, however, that
savings institutions may include 90% of the fair market value of
readily marketable PMSRs as tangible capital (subject to certain
conditions, including any limitations imposed by the FDIC on the
maximum percentage of the tangible capital requirement that may
be satisfied with such servicing rights).
In establishing risk-based capital requirements for savings
institutions, the OTS may deviate from the risk-based capital
standards applicable to national banks to reflect interest-rate
risk or other risks so long as such deviations, in the aggregate,
do not result in a materially lower risk-based capital
requirement for savings institutions than would be required under
the national bank standards.
In determining total risk-weighted assets for purposes of the
risk-based requirement, (i) each off-balance sheet asset must be
converted to its on-balance sheet credit equivalent amount by
multiplying the face amount of each such item by a credit
conversion factor ranging from 0% to 100% (depending upon the
nature of the asset), (ii) the credit equivalent amount of each
off-balance sheet asset and each on-balance sheet asset must be
multiplied by a risk factor ranging from 0% to 100% (again
depending upon the nature of the asset) and (iii) the resulting
amounts are added together and constitute total risk-weighted
assets. Total capital, for purposes of the risk-based capital
requirement, equals the sum of core capital plus supplementary
capital (which, as defined, includes the sum of, among other
items, perpetual preferred stock not counted as core capital,
limited life preferred stock, subordinated debt, and general loan
and lease loss allowances up to 1.25% of risk-weighted assets)
less certain deductions. The amount of supplementary capital
that may be counted towards satisfaction of the total capital
requirement may not exceed 100% of core capital, and OTS
regulations require the maintenance of a minimum ratio of core
capital to total risk-weighted assets of 4.0%. At December 31,
1993, First Financial and Port exceeded all capital requirements
on a fully phased-in basis. (See table under Regulatory Capital
in Management's Discussion and Analysis, included in the
Corporation's 1993 Annual Report to Shareholders, which is
incorporated herein by reference.)
Under an OCC rule, all national banks must maintain "core" or
"Tier 1" capital of at least 3% of total assets. The rule
further provides that a national bank operating at or near the 3%
capital level is expected to have well-diversified risks,
including no undue interest rate risk exposure; excellent control
systems; good earnings; high asset quality; high liquidity; well-
managed on and off-balance sheet activities; and in general be
considered a strong banking organization with a composite 1
rating under the CAMEL rating system for banks. For all but the
most highly rated banks meeting the above conditions, the minimum
leverage requirement will be 4% to 5% of total assets. The OTS
is required to issue capital standards that are no less stringent
than those applicable to national banks. The OTS has issued
notice of a proposed regulation that would require all but the
most highly rated savings institutions to maintain a minimum
leverage ratio (defined as the ratio of core capital to total
assets) of between 4% and 5%. At December 31, 1993, First
Financial and Port had ratios of core capital to total assets of
5.78% and 7.38%, respectively.
In August, 1993, the OTS issued new regulations, effective
January 1, 1994, which add an interest-rate risk component to the
risk-based capital measurement. Under the new regulations, an
institution's interest rate risk exposure is measured based upon
a 200 basis point change in market interest rates. A savings
institutions whose measured interest rate risk exposure is
greater then specified levels must deduct an interest-rate risk
component when calculating total capital for purposes of
determining regulatory risk-based capital levels. As of December
31, 1993, the Banks would not have been required to deduct any
interest-rate risk component under the OTS interest-rate risk
capital regulations. The new interest-rate risk requirements are
not expected to have any material effect on the Banks' ability to
meet the risk-based capital measurement. The OTS also is
required to revise its risk-based capital standards to ensure
that its standards provide adequately for concentration of credit
risk, risk from nontraditional activities and actual performance
and expected risk of loss on multi-family mortgages. Further
increases in capital requirements are possible in future periods.
Capital requirements higher than the generally applicable
minimum requirement may be established for a particular savings
institution if the OTS determines that the institution's capital
was or may become inadequate in view of its particular
circumstances. Individual minimum capital requirements may be
appropriate where the savings institution is receiving special
supervisory attention, has a high degree of exposure to interest
rate risk, or poses other safety or soundness concerns. No such
requirements have been established for First Financial or Port.
The following is a reconciliation of the Banks' equity
capital under generally accepted accounting principles ("GAAP")
to regulatory capital at December 31, 1993.
First
Financial Port
GAAP capital . . . . . . . . . . . . . . . . . . . . . . . . . . . $276,138 $7,400
Less: intangible assets. . . . . . . . . . . . . . . . . . . . . . (3,070) --
Investment in subsidiaries and activities
not permitted for national banks . . . . . . . . . . . . . . . . (1,792) (59)
Other adjustments. . . . . . . . . . . . . . . . . . . . . . . . . (321) --
Regulatory core capital (Tier 1) . . . . . . . . . . . . . . . . . $270,955 $7,341
The following table sets forth the actual and required
minimum levels of regulatory capital for the Banks under
applicable OTS regulations as of December 31, 1993.
Actual Required Actual Required
Amount Amount Excess Ratio Ratio Excess
(Dollars in Thousands)
First Financial:
Tangible capital $242,633 $ 69,881 $172,752 5.21% 1.50% 3.71%
Core capital 270,955 140,611 130,344 5.78 3.00 2.78
Risk-based capital 290,629 185,133 105,496 12.56 8.00 4.56
Port:
Tangible capital $ 7,341 $ 1,494 $ 5,847 7.38% 1.50% 5.88%
Core capital 7,341 2,987 4,354 7.38 3.00 4.38
Risk-based capital 7,865 4,325 3,540 14.55 8.00 6.55
Prompt Corrective Action. Pursuant to FDICIA, the federal
banking agencies are required to establish, by regulation, for
each capital measure, the levels at which an insured institution
is well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized,
and to take prompt corrective action with respect to insured
institutions which fall below minimum capital standards. The
degree of regulatory intervention mandated by FDICIA is tied to
an insured institution's capital category, with increasing
scrutiny and more stringent restrictions being imposed as an
institution's capital declines. Any insured depository
institution which falls below the minimum capital standards must
submit a capital restoration plan. Effective December 19, 1992,
the FDICIA requires any company that controls an undercapitalized
savings institution, in connection with the submission of a
capital restoration plan by the savings institution, to guarantee
that the institution will comply with the plan and to provide
appropriate assurances of performance. The aggregate liability
of any such controlling company under such guaranty is limited to
the lesser of (i) 5% of the savings institution's assets at the
time it became undercapitalized; or (ii) the amount necessary to
bring the savings institution into capital compliance at the time
the institution fails to comply with the terms of its capital
plan. If either First Financial or Port becomes
undercapitalized, the Corporation would be required to provide
such a guarantee. Both First Financial and Port were classified
as well capitalized, the highest capital category, at December
31, 1993.
Pursuant to FDICIA, undercapitalized institutions are
precluded from increasing their assets, acquiring other
institutions, establishing additional branches, or engaging in
new lines of business without an approved capital plan and an
agency determination that such actions are consistent with the
plan. Savings institutions that are significantly
undercapitalized may be required to take one or more of the
following actions: (i) raise additional capital so that the
institution will be adequately capitalized; (ii) be acquired by,
or combined with, another institution if grounds exist for
appointing a receiver; (iii) refrain from affiliate transactions;
(iv) limit the amount of interest paid on deposits to the
prevailing rates of interest in the region where the institution
is located; (v) further restrict asset growth; (vi) hold a new
election for directors, dismiss any director or senior executive
officer who held office for more than 180 days immediately before
the institution became undercapitalized, or employ qualified
senior executive officers; (vii) stop accepting deposits from
correspondent depository institutions; (viii) divest or liquidate
any subsidiary which the OTS determines poses a significant risk
to the institution; (ix) restrict payments of bonuses to or
increases in compensation of executive officers; and (x) obtain
prior OTS approval of newly appointed executive officers and
directors. Any company which controls a significantly
undercapitalized savings institution may be required to: (i)
divest or liquidate any affiliate other than an insured
depository institution; (ii) divest the institution if the OTS
determines that divestiture would improve the institution's
financial condition and future prospects; and (iii) if such
company is a bank holding company, refrain from making any
capital distribution without the prior approval of the Federal
Reserve Board.
Critically undercapitalized institutions are subject to
additional restrictions. No later than 90 days after a savings
institution becomes critically undercapitalized, the OTS is
required to appoint a conservator or receiver for the
institution, unless the OTS determines, with the concurrence of
the FDIC, that other action would better achieve the purpose of
FDICIA. The OTS must make periodic redeterminations that the
alternative action continues to be justified no less frequently
than every 90 days. The OTS is required to appoint a receiver if
the institution remains critically undercapitalized nine months
later, unless the institution is in compliance with an approved
capital plan and the OTS and FDIC certify that the institution is
viable.
Under prompt corrective action regulations adopted by the
OTS, an institution will be considered (i) "well capitalized" if
the institution has a total risk-based capital ratio of 10% or
greater, a Tier 1 or core capital to risk-weighted assets ratio
of 6% or greater, and a leverage ratio of 5% or greater (provided
that the institution is not subject to an order, written
agreement, capital directive or prompt corrective action
directive to meet and maintain a specific capital level for any
capital measure); (ii) "adequately capitalized" if the
institution has a total risk-based capital ratio of 8% or
greater, a Tier 1 or core capital to risk-weighted assets ratio
of 4% or greater, and a leverage ratio of 4% or greater (3% or
greater if the institution is rated composite 1 in its most
recent report of examination); (iii) "undercapitalized" if the
institution has a total risk-based capital ratio that is less
than 8%, a Tier 1 or core capital to risk-weighted assets ratio
of less than 4%, or a leverage ratio that is less than 4% (3% if
the institution is rated composite 1 in its most recent report of
examination); (iv) "significantly undercapitalized" if the
institution has a total risk-based capital ratio that is less
than 6%, a Tier 1 or core capital to risk-weighted assets ratio
that is less than 3%, or a leverage ratio that is less than 3%;
and (v) "critically undercapitalized" if the institution has a
ratio of tangible equity to total assets that is less than or
equal to 2%. The regulation also permits the OTS to determine
that a savings institution should be classified in a lower
category based on other information, such as the institution's
examination report, after written notice. Under the OTS's prompt
corrective action regulations, at December 31, 1993, each of
First Financial and Port were classified as well capitalized
based on its capital ratios as of such date.
FDICIA prohibits any depository institution that is not well
capitalized from accepting deposits through a deposit broker.
Previously, only troubled institutions were prohibited from
accepting brokered deposits. The FDIC may allow adequately
capitalized institutions that apply for a waiver to accept
brokered deposits. Institutions that receive a waiver are
subject to limits on the rates of interest they may pay on
brokered deposits. FDICIA also prohibits undercapitalized
institutions from offering rates of interest on insured deposits
that significantly exceed the prevailing rate in their normal
market area or the area in which the deposits would otherwise be
accepted.
Safety and Soundness Regulations. Under FDICIA, the OTS is
required to prescribe safety and soundness regulations relating
to (i) internal controls, information systems and internal audit
systems; (ii) loan documentation; (iii) credit underwriting; (iv)
interest rate exposure; (v) asset growth; and (vi) compensation
and benefit standards for officers, directors, employees and
principal shareholders. In November, 1993, the OTS, along with
the other federal banking agencies, published revised proposed
regulations for the purpose of implementing this provision of
FDICIA. As proposed, savings institutions, such as the Banks,
would be required, among other things, to maintain a ratio of
classified assets to total risk-based capital and allowances for
loan losses not eligible for inclusion in risk-based capital that
is no greater than 1.0. At December 31, 1993, First Financial
and Port had a ratio of classified assets to total risk-based
capital and ineligible allowances of 0.10 and 0.05, respectively.
The proposed regulations also would impose safety and soundness
standards on holding companies such as the Corporation. Under
the proposed regulations, an institution or holding company not
meeting one or more of the safety and soundness standards would
be required to file a compliance plan with the appropriate
federal banking agency. In the event that an institution or
holding company fails to submit an acceptable compliance plan or
fails in any material respect to implement an accepted compliance
plan within the time allowed by the agency, the institution or
holding company would be required to correct the deficiency and
the appropriate federal agency would also be authorized to:
(i) restrict asset growth; (ii) require the institution or
holding company to increase its ratio of tangible equity to
assets; (iii) restrict the rates of interest that the institution
may pay; or (iv) take any other action that would better carry
out the purpose of the corrective action. Until adopted in final
form, the Corporation is unable to predict the precise effect of
these regulations on the Corporation or the Banks.
Qualified Thrift Lender Requirement. In order for First
Financial and Port to exercise the powers granted to federally
chartered savings institutions and maintain full access to FHLB
advances, they must meet the definition of a "qualified thrift
lender" ("QTL"). Pursuant to recent amendments effected by
FDICIA, a savings institution will be a QTL if the savings
institution's qualified thrift investments continue to equal or
exceed 65% of the institution's portfolio assets on a monthly
average basis in nine out of every 12 months. Subject to certain
exceptions, qualified thrift investments generally consist of
housing related loans and investments, certain obligations of
federal instrumentalities and certain groups of assets, such as
consumer loans, to a limited extent. The term "portfolio assets"
means the savings institution's total assets minus goodwill and
other intangible assets, the value of property used by the
savings institution to conduct its business, and liquid assets
held by the savings institution in an amount up to 20% of its
total assets.
OTS regulations provide that any savings institution that
fails to meet the definition of a QTL must either convert to a
bank charter, other than a savings bank charter, or limit its
future investments and activities (including branching and
payments of dividends) to those permitted for both savings
institutions and national banks. Additionally, any such savings
institution that does not convert to a bank charter will be
ineligible to receive further FHLB advances and, beginning three
years after the loss of QTL status, will be required to repay all
outstanding FHLB advances and dispose of or discontinue any
preexisting investment or activities not permitted for both
savings institutions and national banks. Further, within one
year of the loss of QTL status, the holding company of a savings
institution that does not convert to a bank charter must register
as a bank holding company and will be subject to all statutes
applicable to bank holding companies.
Both First Financial and Port are QTLs under the current test
with investments in qualified thrift investments substantially in
excess of required limits.
Liquidity. Under applicable federal regulations, savings
institutions are required to maintain an average daily balance of
liquid assets (including cash, certain time deposits, certain
bankers' acceptances, certain corporate debt securities and
highly rated commercial paper, securities of certain mutual funds
and specified United States government, state or federal agency
obligations) equal to a monthly average of not less than a
specified percentage of the average daily balance of the savings
institution's net withdrawable deposits plus short-term
borrowings. Under the HOLA, this liquidity requirement may be
changed from time to time by the Director of the OTS to any
amount within the range of 4% to 10% depending upon economic
conditions and the deposit flows of member institutions, and
currently is 5%. Savings institutions are also required to
maintain an average daily balance of short-term liquid assets at
a specified percentage (currently 1%) of the total of the average
daily balance of its net withdrawable deposits and short-term
borrowings. First Financial and Port are in compliance with
these liquidity requirements.
Loans to One Borrower Limitations. The HOLA generally
requires savings institutions to comply with the loans to one
borrower limitations applicable to national banks. National
banks generally may make loans to a single borrower in amounts up
to 15% of their unimpaired capital and surplus, plus an
additional 10% of capital and surplus for loans secured by
readily marketable collateral. FIRREA provides exceptions under
which a savings institution may make loans to one borrower in
excess of the generally applicable national bank limits. A
savings institution may make loans to one borrower in excess of
such limits under one of the following circumstances: (i) for
any purpose, in any amount not to exceed $500,000; (ii) to
develop domestic residential housing units, in an amount not to
exceed the lesser of $30 million or 30% of the savings
institution's unimpaired capital and unimpaired surplus, provided
other conditions are satisfied; or (iii) to finance the sale of
real property acquired in satisfaction of debts previously
contracted in good faith in amounts up to 50% of the savings
institution's unimpaired capital and unimpaired surplus.
However, the OTS has modified the third standard by limiting
loans to one borrower to finance the sale of real property
acquired in satisfaction of debts to 15% of unimpaired capital
and surplus. That rule provides, however, that purchase money
mortgages received by a savings institution to finance the sale
of such real property do not constitute "loans" (provided the
savings institution is not placed in a more detrimental position
holding the note than holding the real estate) and, therefore,
are not subject to the loans to one borrower limitations.
Neither First Financial nor Port has loans to any one borrower in
violation of these regulations.
Commercial Real Property Loans. HOLA limits the aggregate
amount of commercial real estate loans that a federal savings
institution may make to an amount not in excess of 400% of the
savings institution's capital. First Financial and Port are in
compliance with this limitation.
Limitation on Capital Distributions. An OTS rule imposes
limitations on all capital distributions by savings institutions
(including dividends, stock repurchases and cash-out mergers).
Under the rule, a savings institution is classified as a tier 1
institution, a tier 2 institution or a tier 3 institution,
depending on its level of regulatory capital both before and
after giving effect to a proposed capital distribution. A tier 1
institution (i.e., one that both before and after a proposed
capital distribution has net capital equal to or in excess of its
fully phased-in regulatory capital requirement) and a tier 2
institution (i.e., one that both before and after a proposed
capital distribution has net capital equal to its then-applicable
minimum capital requirement but would fail to meet its fully
phased-in capital requirement either before or after the
distribution) would be allowed to make certain capital
distributions in specified amounts in any calendar year without
prior regulatory approval. A tier 3 institution (i.e., one that
either before or after a proposed capital distribution fails to
meet its then-applicable minimum capital requirement) may not
make any capital distributions without
the prior written approval of the OTS or the OTS may prohibit a
capital distribution. For purposes of this regulation, First
Financial and Port are tier 1 institutions and all capital
distributions made by the Banks in 1993 were in compliance with
these regulations.
Effective December 19, 1992, FDICIA prohibits an insured
depository institution from declaring any dividend, making any
other capital distribution, or paying a management fee to a
controlling person if, following the distribution or payment, the
institution would be classified as undercapitalized,
significantly undercapitalized or critically undercapitalized.
The OTS has indicated that it intends to review its existing
capital distribution regulations to determine whether amendments
are necessary based on FDICIA. In the interim, the OTS has
indicated that it intends for the permissibility of capital
distributions to be determined by the prompt corrective action
regulations recently adopted under FDICIA. A savings institution
permitted to make a capital contribution under the prompt
corrective action regulation may do so only if the amount and
type would also be permitted under the OTS's existing capital
distribution regulation.
Limitation on Equity Risk Investments. First Financial and
Port are generally prohibited from investing directly in equity
securities and real estate (other than that used for offices and
related facilities or acquired through, or in lieu of,
foreclosure or on which a contract purchaser has defaulted). In
addition, existing regulations limit the aggregate investment by
savings institutions in certain equity risk investments,
including equity securities, real estate, service corporations
and operating subsidiaries and loans for the purchase of land and
construction loans made after February 27, 1987 on non-
residential properties with loan-to-value ratios exceeding 80%.
First Financial and Port are in compliance with the requirements
of the equity risk investment limitations.
Activities of Subsidiaries. FIRREA requires a savings
institution seeking to establish a new subsidiary, acquire
control of an existing company (after which it would be a
subsidiary), or conduct a new activity through a subsidiary, to
provide 30 days prior notice to the FDIC and the OTS and conduct
any activities of the subsidiary in accordance with regulations
and orders of the OTS. The OTS has the power to require a
savings institution to divest any subsidiary or terminate any
activity conducted by a subsidiary that the OTS determines is a
serious threat to the financial safety, soundness or stability of
such savings institution or is otherwise inconsistent with sound
banking practices.
Insurance of Deposits. Federal deposit insurance is required
for all federally chartered savings institutions. Savings
institutions' deposits are insured to a maximum of $100,000 for
each insured account by the SAIF. As SAIF-insured institutions,
First Financial and Port are subject to regulation and
supervision by the FDIC, to the extent deemed necessary by the
FDIC to ensure the safety and soundness of the SAIF. The FDIC is
entitled to have access to reports of examination of First
Financial and Port made by the OTS and all reports of condition
filed by First Financial and Port with the OTS, and may require
First Financial and Port to file such additional reports as the
FDIC determines to be advisable for insurance purposes. The FDIC
may determine by regulation or order that any specific activity
poses a serious threat to the SAIF and that no SAIF member may
engage in the activity directly. The FDIC is also authorized to
issue and enforce such regulations or orders as it deems
necessary to prevent actions of savings institutions that pose a
serious threat to SAIF.
Insurance premiums are paid in semiannual assessments. Under
the risk-based assessment system adopted pursuant to FDICIA, the
FDIC is required to calculate a savings institution's semiannual
assessment based on (i)The probability that the insurance fund
will incur a loss with respect to the institution (taking into
account the institution's asset and liability concentration),
(ii) the potential magnitude of any such loss, and (iii) the
revenue and reserve needs of the insurance fund. Until
December 31, 1997, the minimum semi-annual assessments under the
risk-based assessment system must equal or exceed the assessments
that would have applied prior to enactment of FDICIA. The
semiannual assessment imposed on the Banks may be higher
depending on SAIF revenue and expense levels, and the risk
classification applied to the Banks. Effective January 1, 1998,
the FDIC is required to set SAIF semiannual assessments rates in
an amount sufficient to increase the reserve ratio of the SAIF to
1.25% of insured deposits over no more than a 15 year period.
FDICIA also gives the FDIC the authority to establish a higher
reserve ratio.
As part of the risk-based deposit insurance system, the
deposit insurance assessment rate was increased from .23% of an
institution's assessment base (generally all insured accounts
subject to certain adjustments) to an assessment rate within the
range of .25% to .31% for all BIF and SAIF members, depending on
the assessment risk classifications assigned to each institution,
effective January 1, 1993. Each BIF and SAIF member is assigned
to one of three capital groups: "well capitalized," "adequately
capitalized," or "less than adequately capitalized." Such terms
are defined in the same manner as under the OTS's prompt
corrective action regulation (discussed above), except that "less
than adequately capitalized" includes any institution that is not
well capitalized or adequately capitalized. Within each capital
group, institutions are assigned to one of three supervisory
subgroups -- "healthy (institutions that are financially sound
with only a few minor weaknesses), "supervisory concern"
(institutions with weaknesses which, if not corrected could
result in significant deterioration of the institution and
increased risk to BIF or SAIF) or "substantial supervisory
concern" (institutions that pose a substantial probability of
loss to the BIF or SAIF unless corrective action is taken). The
FDIC will place each institution into one of nine assessment risk
classifications based on the institution's capital group and
supervisory subgroup classification. The deposit insurance rate
for each Bank under these regulations is currently .23% and each
of the Banks is "well capitalized" under the transitional
regulations. There can be no assurance that premiums will not
further increase in the future.
During the five-year period following enactment of FIRREA,
savings institutions are precluded from engaging in any
transaction which would result in a conversion from SAIF to BIF
insurance (subject to certain exceptions for limited branch sales
and supervisory transactions). FDICIA expanded the list of
permitted conversion transactions that may be effected during the
five-year moratorium. Under FDICIA, BIF and SAIF insured
institutions may merge, consolidate or engage in asset transfer
and liability assumption transactions. The resulting institution
will continue to be subject to BIF and SAIF assessments in
relation to that portion of its combined deposit base which is
attributable to the deposit base of its respective predecessor
BIF and SAIF institutions. After August 9, 1994, the resulting
institution may apply to the FDIC to convert all of its deposits
to either insurance fund upon payment of the then applicable
entrance and exit fees for each fund.
Insurance of deposits may be terminated by the FDIC after
notice and hearing, upon a finding by the FDIC that the savings
institution has engaged in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has
violated any applicable law, rule, regulation, order or condition
imposed by, or written agreement with, the FDIC. Additionally,
if insurance termination proceedings are initiated against a
savings institution, the FDIC may temporarily suspend insurance
on new deposits received by an institution under certain
circumstances. The Corporation is not aware of any activity or
condition which could result in a termination of the deposit
insurance of First Financial or Port.
Under the Federal Deposit Insurance Act, as amended by
FIRREA, a savings institution may be held liable to the FDIC for
any loss incurred by the FDIC in connection with the default of a
commonly controlled savings institution or in connection with the
provision of assistance by the FDIC to a commonly controlled
savings institution in danger of default. First Financial and
Port are commonly controlled for purposes of this provision of
FIRREA. Accordingly, if a receiver, conservator or other legal
custodian is appointed for one of the institutions, or if the
FDIC is required to provide financial assistance to one of the
institutions, the other institution could be held liable to the
FDIC for any loss incurred in connection with such appointment or
assistance.
FDICIA requires any company that has control of an
undercapitalized savings institution, in connection with the
submission of a capital restoration plan by the savings
institution, to guarantee that the institution will comply with
the plan and provide appropriate assurances of performance. The
aggregate liability of any such controlling company under such
guaranty is limited to the lesser of (i) 5% of the savings
institution's assets at the time it became undercapitalized; or
(ii) the amount necessary to bring the savings institution into
capital compliance at the time the institution fails to comply
with the terms of its capital plan. If either Bank becomes
undercapitalized the Corporation will be required to guarantee
performance of the capital plan submitted under the FDICIA as a
condition to OTS approval.
Federal Home Loan Bank System
The Federal Home Loan Bank System consists of 12 regional
FHLBs, each subject to supervision and regulation by the Federal
Housing Finance Board (the "FHFB"). The FHLBs provide a central
credit facility for member savings institutions. First Financial
and Port, as members of the FHLB of Chicago, are required to own
shares of capital stock in the FHLB of Chicago in an amount at
least equal to 1% of the aggregate principal amount of unpaid
residential mortgage loans, home purchase contracts and similar
obligations at the beginning of each year, or 1/20 of the their
advances (borrowings) from the FHLB, whichever is greater. First
Financial and Port are in compliance with this requirement. The
maximum amount which the FHLB of Chicago will advance fluctuates
from time to time in accordance with changes in policies of the
FHFB and the FHLB of Chicago, and the maximum amount generally is
reduced by borrowings from any other source. In addition, the
amount of FHLB advances that a savings institution may obtain
will be restricted in the event the institution fails to
constitute a QTL. See "-- Qualified Thrift Lender Requirement."
Federal Reserve System
The Federal Reserve Board has adopted regulations that
require savings institutions to maintain nonearning reserves of
3% on the first $51.9 million and 10% on the remaining balance of
net transaction accounts (primarily NOW and regular checking
accounts). First Financial and Port are in compliance with these
requirements. These reserves may be used to satisfy liquidity
requirements imposed by the OTS. Because required reserves must
be maintained in the form of cash or a noninterest-bearing
account at a Federal Reserve Bank, the effect of this reserve
requirement is to reduce the amount of the institution's
interest-earning assets.
Savings institutions also have the authority to borrow from
the Federal Reserve "discount window." Federal Reserve Board
regulations, however, require savings institutions to exhaust all
FHLB sources before borrowing from a Federal Reserve Bank.
TAXATION
Federal
The Corporation files on behalf of itself, First Financial,
Port, and their subsidiaries a calendar tax year consolidated
federal income tax return. Income and expense are reported on
the accrual method of accounting.
Savings institutions, such as the Banks, are generally taxed
in the same manner as other corporations. Unlike other
corporations, however, qualifying savings institutions that meet
certain definitional tests relating to the nature of their
supervision, income, assets and business operations are allowed
to establish a reserve for bad debts and each tax year are
permitted to deduct additions to that reserve on qualifying real
property loans using the more favorable of the following two
alternative methods: (i) a method based on the institution's
actual loss experience (the "experience" method) or (ii) a method
based upon a specified percentage of the institution's taxable
income (the "percentage of taxable income method"). Qualifying
real property loans are, in general, loans secured by interests
in improved real property. The addition to the reserve for
nonqualifying loans must be computed under the experience method.
In recent years, First Financial generally has computed additions
to its reserves for losses on qualifying loans using the
experience method and Port has used the percentage of taxable
income method (PTI). It is anticipated that each Bank will
continue to use its respective methods in future years.
Under the PTI, a qualifying institution may deduct 8% of its
taxable income, subject to the limitations discussed below. The
net effect of the PTI deduction is that the effective federal
income tax rate on income computed without regard to actual bad
debts would be 32.20%. Under the experience method, a qualifying
institution is permitted to deduct the amount needed to increase
the tax loss reserve to a prescribed level after charge-offs.
The prescribed level is calculated as the greater of an amount
based on average loan losses over the current and previous five
years or the balance in the tax loss reserve at December 31, 1987
(the base year). The experience method deduction is limited to
the extent the tax loan loss reserve exceeds the prescribed
level.
The amount of bad debt deduction that a savings institution
may claim with respect to additions to its reserve for bad debts
is subject to certain limitations. First, the deduction may be
eliminated entirely (regardless of the method of computation) if
at least 60% of the savings institution's assets do not fall
within certain designated categories. Second, the PTI deduction
is limited to the amount by which the sum of surplus and
undivided profits at the beginning of the tax year is less than
12% of total deposits and withdrawable accounts at the close of
such year. Third, the amount of the bad debt deduction
attributable to qualifying real property loans computed using PTI
is permitted only to the extent that the institution's reserve
for losses on qualifying real property loans at the close of the
taxable year, taking into account the addition to the reserve for
that taxable year, does not exceed 6% of such loans outstanding
at that time. Finally, the amount of the PTI deduction is
reduced, but not below zero, by the amount of the addition to
reserves for losses on nonqualifying loans for the taxable year.
The Banks do not expect that these restrictions will operate to
limit the amount of their otherwise available bad debt deductions
in the reasonably foreseeable future.
To the extent that the Banks make distributions to their
stockholder that are considered withdrawals from that excess bad
debt reserve, the amounts withdrawn will be included in the
Banks' taxable income. The amount considered to be withdrawn by
such a distribution will be the amount of the distribution, plus
the amount necessary to pay the tax with respect to the
withdrawal. Dividends paid out of the Banks' current or
accumulated earnings and profits as calculated for federal income
tax purposes, however, will not be considered to result in
withdrawals from their bad debt reserves. Distributions in
excess of the Banks' current and accumulated earnings and
profits, distributions in redemptions of stock, and distributions
in partial or complete liquidation of one of the Banks will be
considered to result in withdrawals from that Banks' bad debt
reserves. At December 31, 1993, First Financial and Port had
$69.9 million and $3.5 million, respectively, in accumulated
federal income tax bad debt reserves that would not be available
for distribution to their stockholder without the imposition of
additional tax.
Depending on the composition of its items of income and
expense, a savings institution may be subject to the alternative
minimum tax (AMT) to the extent the AMT exceeds the regular tax
liability. AMT is calculated by multiplying alternative minimum
taxable income (AMTI) by 20%. AMTI equals regular taxable income
increased by certain tax preferences, including depreciation
deductions in excess of that allowable for alternative minimum
tax purposes, the amount of the bad debt reserve deduction
claimed in excess of the deduction based on the experience
method, and 75% of the excess of adjusted current earnings (ACE)
over AMTI. ACE is defined as AMTI adjusted for certain items
such as accelerated tax depreciation, tax exempt interest, the
dividends received deduction, and other tax preferences. Only
90% of AMTI may be reduced by net operating loss carryovers and
most alternative minimum tax paid may be used as a credit against
regular tax paid in future years.
State
The Corporation and the Banks are headquartered in Wisconsin
and have significant operations in Illinois. The State of
Wisconsin imposes a corporate franchise tax measured by the
separate Wisconsin taxable income of each of the members. The
State of Illinois imposes a corporate income tax based on the
apportionment of Illinois taxable income by the entire group to
their Illinois activities. The current corporate tax rates
imposed by Wisconsin and Illinois are 7.9% and 7.3% respectively.
First Financial also has an operating subsidiary (FFII) located
in Nevada which manages a portion of the Bank's investment
portfolio. The income of FFII is only subject to taxation in
Nevada which currently does not impose a corporate income or
franchise tax other than a nominal registration fee.
Examinations
The Internal Revenue Service (IRS) has examined the consolidated
federal income tax returns of the Corporation and the Banks
through 1988. The IRS is currently examining the consolidated
returns of the Corporation and the Banks for 1989, 1990 and 1991.
The separate Wisconsin state income tax returns of the members of
the group through 1986 are closed to examination by the Wisconsin
Department of Revenue (WDR) due to the expiration of the statute
of limitations. However, the WDR is currently examining earlier
returns of a previously acquired institution due to the
utilization by First Financial of Wisconsin net operating losses
carried forward from that institution.
ITEM 2. PROPERTIES
At December 31, 1993, First Financial and Port operated
through 117 full-service savings bank branch offices, one loan
origination limited office and one insurance agency office,
located in Wisconsin and Illinois. The aggregate net book value
at December 31, 1993 of the properties owned or leased, including
headquarters, properties and leasehold improvements at the leased
offices, was $40.2 million. The leases expire between 1994 and
2021. See Note H to the Corporation's consolidated financial
statements, filed as an exhibit hereto, for information regarding
First Financial's and Port's premises and equipment. Management
believes that all of these properties are in good condition. The
following tables set forth the location of the Corporation's
banking and other offices.
Metropolitan Milwaukee, Wisconsin Region (First Financial)
1 North Moorland Road 5900 West North Avenue 1733 Douglas Avenue
Brookfield, Wisconsin (a) Milwaukee, Wisconsin Racine, Wisconsin
1930 Wisconsin Avenue 7900 West Brown Deer Road 2815 South Chicago Avenue
Grafton, Wisconsin (a) Milwaukee, Wisconsin South Milwaukee, Wisconsin
5651 Broad Street 3432 South 27th Street 2645 North Mayfair Road
Greendale, Wisconsin Milwaukee, Wisconsin (a) Wauwatosa, Wisconsin
4981 South 76th Street 200 East Wisconsin Avenue 7101 West Greenfield Avenue
Greenfield, Wisconsin Milwaukee, Wisconsin West Allis, Wisconsin (a)
829 West Mitchell Street 5350 West Fond du Lac Ave. 2825 South 108th Street
Milwaukee, Wisconsin Milwaukee, Wisconsin West Allis, Wisconsin (a)
3027 West Lincoln Avenue 15665 West National Avenue 430 East Silver Spring Drive
Milwaukee, Wisconsin New Berlin, Wisconsin Whitefish Bay, Wisconsin
Southeast Wisconsin Region (First Financial)
201 Park Avenue 300 East Lake Street 704 North Grand Avenue
Beaver Dam, Wisconsin Lake Mills, Wisconsin Waukesha, Wisconsin
197 West Chestnut Street 306 North Rochester Street 2831 North Grandview Blvd.
Burlington, Wisconsin Mukwonago, Wisconsin Waukesha, Wisconsin (a)
709 East Geneva Street 1093 Summit Avenue 100 East Sunset Drive
Delavan, Wisconsin Oconomowoc, Wisconsin (a) Waukesha, Wisconsin (a)
3292 Main Street 213 North Lake Avenue 2306 West St. Paul Avenue
East Troy, Wisconsin (a) Twin Lakes, Wisconsin Waukesha, Wisconsin (a)
23 South Washington 600 Main Street 1200 Delafield Street
Elkhorn, Wisconsin Watertown, Wisconsin Waukesha, Wisconsin (a)
One North Madison Street 633 South Church Street 219 Center Street
Evansville, Wisconsin Watertown, Wisconsin (a) Whitewater, Wisconsin
2525 Milton Avenue
Janesville, Wisconsin (a)
North Central Wisconsin Region (First Financial)
926 West College Avenue Highways 51 & 70 West 1230 North Taylor Drive
Appleton, Wisconsin Minocqua, Wisconsin (a) Sheboygan, Wisconsin
2235 Main Street 429 North Sawyer Street 1305 Main Street
Green Bay, Wisconsin Oshkosh, Wisconsin Stevens Point, Wisconsin
1482 West Mason Street Post Road & South Drive 330 Third Street
Green Bay, Wisconsin Plover, Wisconsin Wausau, Wisconsin (a)
205 North Eighth Street 140 South Brown 2711 West Stewart Avenue
Manitowoc, Wisconsin Rhinelander, Wisconsin Wausau, Wisconsin
705 North Center Avenue
Merrill, Wisconsin
Western Wisconsin Region (First Financial)
609 East Spruce Street 806 South Hastings Way 600 Hewett Street
Abbotsford, Wisconsin Eau Claire, Wisconsin Neillsville, Wisconsin
103 West Cleveland Holmen Square 1101 Main Street
Arcadia, Wisconsin Holmen, Wisconsin Onalaska, Wisconsin
203 Main Street 620 Main Street 108 West Prospect
Black River Falls, Wisconsin LaCrosse, Wisconsin Thorp, Wisconsin (a)
308 Third Avenue West 630 South Central Avenue 1714 Scranton Street
Durand, Wisconsin Marshfield, Wisconsin (a) Whitehall, Wisconsin
130 South Barstow Commons 600 East Main Street 711 West Grand Avenue
Eau Claire, Wisconsin Mondovi, Wisconsin Wisconsin Rapids, Wisconsin(a)
- --------------------------
(a) Leased
Southern Illinois Region (First Financial)
104 Homer Adams Pkwy. 326 Missouri Avenue 318 West College
Alton, Illinois East St. Louis, Illinois Greenville, Illinois
100 East Washington 6550 North Illinois 217 West Washington
Belleville, Illinois Fairview Heights, Illinois Millstadt, Illinois
6902 West Main 10280 Lincoln Trail 1645 State Highway 121
Belleville, Illinois (a) Fairview Heights, Illinois Mount Zion, Illinois
238 North Main #1 Junction Drive West 200 South Market
Columbia, Illinois Glen Carbon, Illinois Waterloo, Illinois
Central Illinois Region (First Financial)
1007 North Fourth Street 300 South 4th Street 103 West Forrest Hill
Chillicothe, Illinois Pekin, Illinois Peoria, Illinois
12200 North Route 88 4125 North Sheridan Road 4600 Brandywine Drive
Dunlap, Illinois (a) Peoria, Illinois (a) Peoria, Illinois
300 East Washington Street 111 North Jefferson Avenue 700 Main Street
East Peoria, Illinois Peoria, Illinois Peoria, Illinois
313 Fifth Street 201B Northwoods Mall 2515 West Lake Avenue
Lacon, Illinois Peoria, Illinois (a) Peoria, Illinois
119 West 5th Street 3222 West Harmon Highway 416 West Front Street
Minonk, Illinois Peoria, Illinois (a) Roanoke, Illinois
3500 Court Street 7620 North University 1881 Washington Road
Pekin, Illinois (a) Peoria, Illinois (a) Washington, Illinois
Western & Northern Illinois Region (First Financial)
104 Southeast 3rd Avenue 1865 North Henderson 21 Boulder Hill Pass
Aledo, Illinois Galesburg, Illinois Montgomery, Illinois (a)
101 East Broadway 50 East Main Street 525 West Washington Street
Astoria, Illinois Galesburg, Illinois Pittsfield, Illinois
301 West Galena Boulevard 1035 Broadway 116 East Main Street
Aurora, Illinois Hamilton, Illinois Princeville, Illinois
1325 Sycamore Road 333 West Main 706 Maine Street
DeKalb, Illinois (a) Havana, Illinois Quincy, Illinois (a)
305 East Locust 143 South Main Street 24th and Broadway
DeKalb, Illinois (a) Lewistown, Illinois Quincy, Illinois
101 East Evergreen 122 West Boston Avenue 116 South Congress
Elmwood, Illinois Monmouth, Illinois Rushville, Illinois
16 East Fort Street
Farmington, Illinois (a)
Insurance Agency Office (First Financial)
300 Wisconsin Avenue
Waukesha, Wisconsin
Loan Origination Office (First Financial)
2659 Farragut Drive
Springfield, Illinois (a)
First Financial - Port Savings Bank, S.A.
222 North Wisconsin Street 135 South Mill Street
Port Washington, Wisconsin Saukville, Wisconsin
211 North Highland Drive
Fredonia, Wisconsin
- ------------------------
(a) Leased
ITEM 3. LEGAL PROCEEDINGS
The Corporation and the Banks are involved as plaintiff or
defendant in various legal actions incidental to their business,
all of which in the aggregate are believed by management of the
Corporation not to represent an adverse risk of loss which would
be material to the financial condition or operations of the
Corporation. See Note Q to the Corporation's consolidated
financial statements, filed at Exhibit 13(a) hereto, for further
discussion.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The information required by this item is incorporated herein
by reference from Management's Discussion and Analysis filed at
Exhibit 13(b) hereto. The Corporation's Board of Directors has
discretion to declare and pay dividends on the Corporation's
common stock from time to time under Wisconsin law, unless such
payment would render the Corporation insolvent.
Also, relative to OTS restrictions on the payment of
dividends by the Banks to the Corporation, see Note L to the
Corporation's consolidated financial statements filed at Exhibit
13(a) hereto. Also, see Item 1, "Business - Regulation - Savings
Institution Regulation - Limitation on Capital Distribution from
the Banks to the Corporation."
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data required by this item is
incorporated herein by reference from "Management's Discussion
and Analysis" filed at Exhibit 13(b) hereto.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
"Management's Discussion and Analysis of Financial Condition
and Results of Operations" is filed at Exhibit 13(b) hereto.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Corporation's consolidated financial statements are filed
at Exhibit 13(a) hereto. Quarterly financial information is
included as a part of "Management's Discussion and Analysis of
Financial Condition and Results of Operations" filed at Exhibit
13(b) hereto. Schedule 28(a) includes the required schedule for
"Guarantees of Securities of Other Issuers".
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item regarding directors is
incorporated by reference from pages 4 to 8 and 16 of the proxy
statement for the Corporation's 1994 annual meeting of
shareholders, filed with the Securities and Exchange Commission
on March 21, 1994. Information acquired by this item regarding
executive officers is included herein at page 29 and at page 16
of the proxy statement.
ITEM 11. EXECUTIVE COMPENSATION
The information regarding executive compensation required by
this item is incorporated herein by reference from pages 8 - 14
of the proxy statement for the Corporation's 1994 annual meeting
of shareholders, filed with the Securities and Exchange
Commission on March 21, 1994.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this item is incorporated herein
by reference from pages 2 - 3 of the proxy statement for the
Corporation's 1994 annual meeting of shareholders, filed with the
Securities and Exchange Commission on March 21, 1994.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein
by reference from page 14 of the proxy statement for the
Corporation's 1994 annual meeting of shareholders, filed with the
Securities and Exchange Commission on March 21, 1994.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a)(1) The following consolidated financial statements of
the Registrant and its subsidiaries for the year ended December
31, 1993, including the related notes and the report of the
independent auditors are incorporated herein by reference from
Exhibits 21 and 28(b), respectively, of this Report.
Report of Independent Auditors
Consolidated Statements of Financial Condition - December 31,
1993 and 1992.
Consolidated Statements of Income - Years ended December 31,
1993, 1992 and 1991.
Consolidated Statements of Stockholders' Equity - Years Ended
December 31, 1993, 1992 and 1991.
Consolidated Statements of Cash Flows - Years Ended December
31, 1993, 1992 and 1991.
Notes to Consolidated Financial Statements.
(a)(2) The following consolidated financial statement
schedule of the Registrant is filed at Exhibit 13(a) to this
Report in response to the requirement of Items 8 and 14(d) of
this Report and should be read in conjunction with the
consolidated financial statements incorporated herein by
reference to Item 8 of this Report:
Schedule II - Guarantees of Securities of Other Issuers
All other schedules for which provision is made in the
applicable accounting regulations of the Securities and Exchange
Commission are not required under the related instructions or are
inapplicable, and therefore, have been omitted.
(a)(3) The following exhibits are either filed as part of
this Report on Form 10-K or are incorporated herein by reference.
3(a) Articles of Incorporation of Registrant dated February
21, 1984 and amended on April 24, 1987.
3(b) Bylaws of the Registrant, as amended (incorporated
herein by reference to the Registrant's Annual Report
on Form 10-K filed on March 25, 1985).
4(b) Form of Certificate of Common Stock (incorporated
herein by reference to Exhibit 4.3 of the Registrant's
Registration Statement on Form S-1 (Registration No.
2-88289) filed on December 7, 1983).
10(a) Employment Contract of Registrant with John C. Seramur
dated January 1, 1989, (incorporated by reference from
Annual Report on Form 10-K for 1989 filed on March 29,
1990).
10(b) Severance Agreement between Registrant and Robert M.
Salinger dated August 16, 1989, (incorporated by
reference from Annual Report on Form 10-K for 1989
filed on March 29, 1990).
10(c) Deferred Compensation Agreement between First State
Savings of Wisconsin and Paul C. Kehrer (incorporated
herein by reference to Exhibit 10.8 to Amendment No. 2
to Registrant's Registration Statement on Form S-1
(Registration No. 2-88289) filed on February 14, 1984).
10(d) Stock Option Plan of Registrant (incorporated herein by
reference to Exhibit 10.4 to Amendment No. 2 to
Registrant's Registration Statement on Form S-1
(Registration No. 2-88289) filed on February 14, 1984).
10(e) Supplemental Executive Profit Sharing Plan dated
December 21, 1987 (incorporated herein by reference to
Exhibit 10(q) to Post-Effective Amendment No. 2 to
Registrant's Registration Statement on Form S-1
(Registration No. 33-16948) filed on February 29,
1988).
10(f) Form of Executive Supplemental Life Insurance Plan
dated April 10, 1989 (incorporated herein by reference
from Annual Report on Form 10-K for 1989 filed on March
26, 1990).
10(g) Collateral Pledge Agreement, dated March 22, 1991, with
the Federal Home Loan Bank of Chicago (incorporated
herein by reference from Annual Report on Form 10-K for
1991 filed on March 27, 1992).
10(h) First Financial Corporation Stock Option Plan III dated
April 24, 1991 (incorporated herein by reference from
Annual Report on Form 10-K for 1991 filed on March 27,
1992).
10(i) Form of Supplemental Executive Retirement Plan dated
August 1, 1989, and amended on November 1, 1991
(incorporated herein by reference from Annual Report on
Form 10-K for 1991 filed on March 27, 1992).
10(j) Severance Agreement between Registrant and Donald E.
Peters dated August 16, 1989 and amended August 19,
1992. (Incorporated herein by reference from Annual
Report on Form 10-K for 1992 filed on March 26, 1993.)
10(k) Severance Agreement between Registrant and Harry K.
Hammerling dated August 16, 1989 and amended August 19,
1992. (Incorporated herein by reference from Annual
Report on Form 10-K for 1992 filed on March 26, 1993.)
10(l) Acquisition Agreement among Westinghouse Financial
Services, Inc., Westinghouse Savings Corporation and
First Financial Bank, FSB dated September 14, 1992
(incorporated herein by reference to the Current Report
filed by the Registrant on Form 8-K on September 29,
1992).
10(m) Form of Indenture between the Registrant and Norwest
Bank Wisconsin, N.A. as trustee relative to issuance of
8.0% Subordinated Notes due November 1, 1999
(incorporated herein by reference to Exhibit 4.2 to
Amendment No. 1 to Registrant's Registration Statement
on Form S-3 [Registration No. 33-52638] on October 9,
1992).
10(n) Directors' Retirement Plan dated November 18, 1992.
(Incorporated herein by reference from Annual Report on
Form 10-K for 1992 filed on March 26, 1993.)
10(o) Consulting Agreement between Registrant and Robert S.
Gaiswinkler dated January 1, 1993. (Incorporated
herein by reference from Annual Report on Form 10-K for
1992 filed on March 26, 1993.)
10(p) Promissory Note relating to Registrant's commercial
bank line-of-credit agreement dated April 30, 1993.
10(q) Agreement and Plan of Merger by and among NorthLand
Bank of Wisconsin, SSB, First Financial Corporation and
First Financial Bank, FSB dated October 13, 1993
(incorporated herein by reference to Exhibit 2 to the
Registrant's Registration Statement on Form S-4
[Registration No. 33-51487] filed on December 16,
1993.)
10(r) Deferred Compensation Plan and Trust, dated January 1,
1988 and amended January 1, 1993.
13(a) Consolidated Financial Statements
13(b) Management Discussion and Analysis of Financial
Condition and Results of Operations
22 Subsidiaries of the Registrant
24 Consent of Ernst & Young for Registration Statement No.
2-90005 as filed with the Securities and Exchange
Commission on March 16, 1984, for Registration
Statement No. 33-17304 as filed with the Securities and
Exchange Commission on September 17, 1987, Post-
Effective Amendment No. 5 to Form S-1 on Form S-8
(Registration No. 33-16948), as filed with the
Securities and Exchange Commission on May 12, 1988 for
Registration Statement No. 33-36295 as filed with the
Securities and Exchange Commission on August 9, 1990
and Registration Statement No. 33-69856 as filed with
the Securities and Exchange Commission on October 1,
1993.
(b) Reports on Form 8-K.
On October 13, 1993, the Registrant filed a Current
Report on Form 8-K with the Securities and Exchange
Commission (SEC) reporting that the Corporation had
released its earnings information as well as other
related financial and operating data for the quarter
ended September 30, 1993.
On October 19, 1993, the Registrant filed a Current
Report on Form 8-K with the Securities and Exchange
Commission announcing that the Corporation entered into
a definitive agreement to acquire NorthLand Bank of
Wisconsin, SSB of Ashland, Wisconsin.
(c) Exhibits to this Report on Form 10-K required by Item
601 of Regulation S-K are attached or incorporated
herein by reference as stated in the Index to Exhibits.
(d) The report of independent accountants and the financial
statement schedules listed in subsections (a)(1) and
(2) above are filed at Exhibits 13(a) to this Report on
Form 10-K in response to the requirements of Items 8
and 14(d) of this Report on Form 10-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
FIRST FINANCIAL CORPORATION
By: /s/ John C. Seramur
-------------------------
John C. Seramur
President
Chief Executive Officer
Date: March 28, 1994
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated.
By: /s/ John C. Seramur
------------------------
John C. Seramur
President
Chief Executive Officer
Director
Date: March 28, 1994
By: /s/ Thomas H. Neuschaefer
--------------------------
Thomas H. Neuschaefer
Principal Accounting Officer
Date: March 28, 1994
By: /s/ John C. Seramur By: /s/ Robert S. Gaiswinkler
----------------------- --------------------------
John C. Seramur Robert S. Gaiswinkler
President Chairman of the Board
Chief Executive Officer Director
Director Date: March 28, 1994
Date: March 28, 1994
By: /s/ Gordon M. Haferbecker By: /s/ James O. Heinecke
-------------------------- --------------------------
Gordon M. Haferbecker James O. Heinecke
Director Director
Date: March 28, 1994 Date: March 28, 1994
By: /s/ Robert T. Kehr By: /s/ Paul C. Kehrer
-------------------------- --------------------------
Robert T. Kehr Paul C. Kehrer
Director Director
Date: March 28, 1994 Date: March 28, 1994
By: /s/ Robert P. Konopacky By: /s/ Dr. George R. Leach
-------------------------- --------------------------
Robert P. Konopacky Dr. George R. Leach
Director Director
Date: March 28, 1994 Date: March 28, 1994
By: /s/ Ignatius H. Robers By: /s/ John H. Sproule
-------------------------- --------------------------
Ignatius H. Robers John H. Sproule
Director Director
Date: March 28, 1994 Date: March 28, 1994
By: /s/ Ralph R. Staven By: /s/ Norman L. Wanta
-------------------------- --------------------------
Ralph R. Staven Norman L. Wanta
Director Director
Date: March 28, 1994 Date: March 28, 1994
By: /s/ Arlyn G. West
--------------------------
Arlyn G. West
Director
Date: March 28, 1994
EXHIBIT INDEX
3(a) Articles of Incorporation of Registrant dated February
21, 1984 and amended on April 24, 1987.
3(b) Bylaws of the Registrant, as amended (incorporated
herein by reference to the Registrant's Annual Report on
Form 10-K filed on March 25, 1985).
4(b) Form of Certificate of Common Stock (incorporated herein
by reference to Exhibit 4.3 of the Registrant's
Registration Statement on Form S-1 (Registration No. 2-
88289) filed on December 7, 1983).
10(a) Employment Contract of Registrant with John C. Seramur
dated January 1, 1989, (incorporated by reference from
Annual Report on Form 10-K for 1989 filed on March 29,
1990).
10(b) Severance Agreement between Registrant and Robert M.
Salinger dated August 16, 1989, (incorporated by
reference from Annual Report on Form 10-K for 1989 filed
on March 29, 1990).
10(c) Deferred Compensation Agreement between First State
Savings of Wisconsin and Paul C. Kehrer (incorporated
herein by reference to Exhibit 10.8 to Amendment No. 2
to Registrant's Registration Statement on Form S-1
(Registration No. 2-88289) filed on February 14, 1984).
10(d) Stock Option Plan of Registrant (incorporated herein by
reference to Exhibit 10.4 to Amendment No. 2 to
Registrant's Registration Statement on Form S-1
(Registration No. 2-88289) filed on February 14, 1984).
10(e) Supplemental Executive Profit Sharing Plan dated
December 21, 1987 (incorporated herein by reference to
Exhibit 10(q) to Post-Effective Amendment No. 2 to
Registrant's Registration Statement on Form S-1
(Registration No. 33-16948) filed on February 29, 1988).
10(f) Form of Executive Supplemental Life Insurance Plan dated
April 10, 1989 (incorporated herein by reference from
Annual Report on Form 10-K for 1989 filed on March 26,
1990).
10(g) Collateral Pledge Agreement, dated March 22, 1991, with
the Federal Home Loan Bank of Chicago (incorporated
herein by reference from Annual Report on Form 10-K for
1991 filed on March 27, 1992).
10(h) First Financial Corporation Stock Option Plan III dated
April 24, 1991 (incorporated herein by reference from
Annual Report on Form 10-K for 1991 filed on March 27,
1992).
10(i) Form of Supplemental Executive Retirement Plan dated
August 1, 1989, and amended on November 1, 1991
(incorporated herein by reference from Annual Report on
Form 10-K for 1991 filed on March 27, 1992).
10(j) Severance Agreement between Registrant and Donald E.
Peters dated August 16, 1989 and amended August 19,
1992. (Incorporated herein by reference from Annual
Report on Form 10-K for 1992 filed on March 26, 1993.)
10(k) Severance Agreement between Registrant and Harry K.
Hammerling dated August 16, 1989 and amended August 19,
1992. (Incorporated herein by reference from Annual
Report on Form 10-K for 1992 filed on March 26, 1993.)
10(l) Acquisition Agreement among Westinghouse Financial
Services, Inc., Westinghouse Savings Corporation and
First Financial Bank, FSB dated September 14, 1992
(incorporated herein by reference to the Current Report
filed by the Registrant on Form 8-K on September 29,
1992).
10(m) Form of Indenture between the Registrant and Norwest
Bank Wisconsin, N.A. as trustee relative to issuance of
8.0% Subordinated Notes due November 1, 1999
(incorporated herein by reference to Exhibit 4.2 to
Amendment No. 1 to Registrant's Registration Statement
on Form S-3 [Registration No. 33-52638] on October 9,
1992).
10(n) Directors' Retirement Plan dated November 18, 1992.
(Incorporated herein by reference from Annual Report on
Form 10-K for 1992 filed on March 26, 1993.)
10(o) Consulting Agreement between Registrant and Robert S.
Gaiswinkler dated January 1, 1993. (Incorporated herein
by reference from Annual Report on Form 10-K for 1992
filed on March 26, 1993.)
10(p) Promissory Note and collateral pledge agreement relating
to Registrant's commercial bank line-of-credit agreement
dated April 30, 1993.
10(q) Agreement and Plan of Merger by and among NorthLand Bank
of Wisconsin, SSB, First Financial Corporation and First
Financial Bank, FSB dated October 13, 1993 (incorporated
herein by reference to Exhibit 2 to the Registrant's
Registration Statement on Form S-4 [Registration No. 33-
51487] filed on December 16, 1993.)
10(r) Deferred Compensation Plan and Trust, dated January 1,
1988 and amended January 1, 1993.
13(a) Consolidated Financial Statements
13(b) Management Discussion and Analysis of Financial
Condition and Results of Operations
22 Subsidiaries of the Registrant
24 Consent of Ernst & Young for Registration Statement No.
2-90005 as filed with the Securities and Exchange
Commission on March 16, 1984, for Registration Statement
No. 33-17304 as filed with the Securities and Exchange
Commission on September 17, 1987, Post-Effective
Amendment No. 5 to Form S-1 on Form S-8 (Registration
No. 33-16948), as filed with the Securities and Exchange
Commission on May 12, 1988 for Registration Statement
No. 33-36295 as filed with the Securities and Exchange
Commission on August 9, 1990 and Registration Statement
No. 33-69856 as filed with the Securities and Exchange
Commission on October 1, 1993.