EXHIBIT 13-B
FIRST FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION
TEN-YEAR SUMMARY (Dollars in thousands, except per share amounts)
1993 (a) 1992 (b) 1991 1990 (c) 1989 (d)
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Income (loss) before extraordinary
items and the cumulative effect of
an accounting change $ 45,215 $ 28,432 $ 18,526 $ 16,022 $ 14,376
Net income (loss) $ 45,215 $ 34,032 $ 18,526 $ 16,022 $ 14,376
Earnings per share (f):
Primary:
Income (loss) before extraordinary
items and the cumulative effect
of an accounting change $ 1.88 $ 1.21 $ .80 $ .70 $ .63
Net income (loss) 1.88 1.45 .80 .70 .63
Fully Diluted:
Income (loss) before extraordinary
items and the cumulative effect
of an accounting change $ 1.86 $ 1.19 $ .79 $ .70 $ .63
Net income (loss) 1.86 1.43 .79 .70 .63
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
Provisions for losses on loans 10,219 13,851 18,333 16,064 18,306
Non-interest income 37,721 32,209 34,331 31,383 32,389
Non-interest expense 105,804 88,711 81,395 76,840 64,868
Total assets 4,774,633 3,908,286 3,220,002 3,142,293 2,456,695
Loans receivable and held for sale
(includes mortgage-related securities) 4,248,757 3,512,306 2,885,236 2,738,265 2,142,264
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
Stockholders' equity 234,685 194,095 164,535 149,576 137,081
Shares outstanding (f) 23,586,827 23,266,414 23,038,404 22,978,604 22,915,604
Stockholders' equity per share (f) 9.95 8.34 7.14 6.51 5.98
Dividends declared per share (f) .35 .22 .16 .16 .15
Return (loss) on average assets (h) .98% .79% .58% .54% .60%
Return (loss) on average equity (h) 21.23% 15.78% 11.85% 11.21% 10.82%
Average equity to average assets 4.62% 4.99% 4.86% 4.78% 5.59%
TEN-YEAR SUMMARY (Dollars in thousands, except per share amounts)
1988 1987 (e) 1986 (e) 1985 (e) 1984 (e)
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Income (loss) before extraordinary
items and the cumulative effect of
an accounting change $ 10,769 $ 6,252 $ 9,324 $ (11,909) $ (2,826)
Net income (loss) $ 14,553 $ 11,279 $ 13,186 $ (9,527) $ (1,239)
Earnings per share (f):
Primary:
Income (loss) before extraordinary
items and the cumulative effect
of an accounting change $ .49 $ .33 $ .37 $ (.69) $ (.15)
Net income (loss) .66 .59 .57 (.56) (.06)
Fully Diluted:
Income (loss) before extraordinary
items and the cumulative effect
of an accounting change $ .49 $ .33 $ .37 $ (.69) $ (.15)
Net income (loss) .66 .59 .57 (.56) (.06)
Interest income $ 212,809 $ 206,546 $ 220,054 $ 240,718 $ 249,449
Interest expense 143,069 139,223 160,204 194,464 209,583
Net interest income 69,740 67,323 59,850 46,254 39,864
Provisions for losses on loans 16,185 8,777 9,302 11,405 3,829
Non-interest income 30,060 41,471 43,853 35,274 33,746
Non-interest expense 65,550 86,109 80,365 80,867 68,949
Total assets 2,300,129 2,169,911 2,124,190 2,173,063 2,381,170
Loans receivable and held for sale
(includes mortgage-related securities) 2,026,445 1,824,726 1,743,169 1,747,593 1,891,381
Intangible assets 6,197 9,196 11,666 12,662 13,680
Deposits 1,969,217 1,889,018 1,800,316 1,913,174 1,996,741
Borrowings 155,568 119,912 182,682 128,605 246,912
Stockholders' equity 126,248 105,559 96,048 83,656 94,511
Shares outstanding (f) 22,841,464 19,241,340 19,091,924 18,394,480 18,330,680
Stockholders' equity per share (f) 5.53 (g) (g) (g) (g)
Dividends declared per share (f) .14 .11 .09 .09 .08
Return (loss) on average assets (h) .48% .29% .43% (.53)% (.11)%
Return (loss) on average equity (h) 9.06% 6.16% 10.51% (13.50)% (3.10)%
Average equity to average assets 5.35% 4.70% 4.10% 3.85% 3.93%
<FN>
(a) In January, 1993, the Corporation's major subsidiary First Financial
Bank, FSB (First Financial) acquired Westinghouse Federal Bank, FSB,
d/b/a United Federal Bank ("United"), of Galesburg, Illinois for cash.
In addition, in August, 1993, the Corporation completed the assumption
of deposits and the purchase of the branch facilities of four Quincy,
Illinois-area branches of American Savings. Each acquisition has been
accounted for as a purchase.
(b) In separate transactions during 1992, the Corporation completed the
assumption of deposits and the purchase of branch facilities of ten
Peoria, Illinois-area branches from the LaSalle Talman Bank, FSB and
the Resolution Trust Corporation (RTC). Each acquisition has been
accounted for as a purchase.
(c) The Corporation completed the acquisition of Illini Federal Savings and
Loan Association (Illini) in January, 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 consolidated financial statements
since the respective dates of acquisition.
(d) The Corporation completed the acquisition of First Financial-Port Savings
Bank, S.A. (Port) in May, 1989. This cash acquisition was accounted for
as a purchase and the results of Port's operations have been included in
the financial statements since that date.
(e) Restated, except per share data, to reflect the March, 1988 merger-
conversion of National Savings & Loan (National) which was accounted
for as a pooling-of-interests.
(f) As adjusted for a 2-for-1 stock split of March 5, 1993, a 2-for-1 stock
split of April 16, 1992, a 10% stock dividend of March 31, 1989, and for
a 2-for-1 stock split of September 30, 1985.
(g) Stockholders' equity per share is not meaningful due to the National
merger-conversion in 1988.
(h) Ratio is based upon income (loss) prior to extraordinary items and
the cumulative effect of an accounting change.
QUARTERLY DATA
The following table sets forth the Corporation's unaudited quarterly income
and expense data for 1992 and 1993.
Dec. 31, Sept. 30, June 30, March 31, Dec. 31, Sept. 30, June 30, March 31,
1993 1993 (a) 1993 1993 (b) 1992 1992 1992 1992 (c)
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(Dollars in thousands, except per share amounts)
Interest income:
Loans and mortgage-related
securities $81,507 $82,027 $82,702 $81,460 $74,919 $72,329 $71,347 $68,799
Investments 4,022 3,174 2,307 2,924 2,171 2,223 3,022 2,061
Interest income 85,529 85,201 85,009 84,384 77,090 74,552 74,369 70,860
Interest expense:
Deposits 41,412 42,365 41,388 44,576 40,510 43,082 46,195 44,255
Borrowings 4,456 5,157 5,618 4,762 3,983 1,710 861 1,300
Interest expense 45,868 47,522 47,006 49,338 44,493 44,792 47,056 45,555
Net interest income 39,661 37,679 38,003 35,046 32,597 29,760 27,313 25,305
Provisions for losses on loans (2,395) (2,180) (2,800) (2,844) (3,546) (2,666) (3,501) (4,138)
Gain on sales of assets (d) 2,445 2,657 1,329 1,341 1,423 1,735 481 1,384
Non-interest income 7,631 7,336 7,655 7,327 6,618 6,510 7,132 6,926
47,342 45,492 44,187 40,870 37,092 35,339 31,425 29,477
Non-interest expense 26,003 27,462 26,657 25,682 22,604 23,474 21,937 20,696
Income before income taxes and
cumulative effect of a change
in accounting principle 21,339 18,030 17,530 15,188 14,488 11,865 9,488 8,781
Income taxes 8,167 6,704 6,362 5,639 5,353 4,335 3,368 3,134
Income before cumulative effect
of a change in accounting
principle 13,172 11,326 11,168 9,549 9,135 7,530 6,120 5,647
Cumulative effect of a change
in accounting principle (e) -- -- -- -- -- -- -- 5,600
Net income $13,172 $11,326 $11,168 $ 9,549 $ 9,135 $ 7,530 $ 6,120 $11,247
Earnings per share (f):
Primary:
Income before cumulative
effect of an accounting
change (e) $ .54 $ .48 $ .47 $ .40 $ .38 $ .33 $ .26 $ .24
Net income .54 .48 .47 .40 .38 .33 .26 .48
Fully Diluted:
Income before cumulative
effect of an accounting
change (e) $ .54 $ .46 $ .46 $ .40 $ .38 $ .32 $ .25 $ .24
Net income .54 .46 .46 .40 .38 .32 .25 .48
Cash dividends per share (f) $ .10 $ .10 $ .075 $ .075 $ .06 $ .06 $ .05 $ .05
<FN>
(a) The American Savings acquisition was completed in August, 1993 and
results of operations have been included from the date of acquisition.
(b) The United acquisition was completed in January, 1993 and the related
results of operations have been included from January 1, 1993.
(c) The 1992 acquisitions were completed in the first quarter and the
results of the related operations have been included since the dates
of acquisition.
(d) Includes net gains (losses) on sales of loans, mortgage-related
securities, investment securities and other assets.
(e) The change in accounting principle relates to the adoption of Statement
of Financial Accounting Standards No. 109 in the first quarter of 1992.
(f) Per share data have been adjusted to reflect the 2-for-1 stock splits
distributed in March, 1993 and April, 1992.
Results of Operations
Comparison of Years Ended December 31, 1993 and 1992
General. Net income increased 59.1% to $45.2 million in 1993
from the $28.4 million earned in 1992 prior to the 1992
$5.6 million cumulative effect of a change in accounting for
income taxes upon the adoption of Statement of Financial
Accounting Standards (SFAS) No. 109. Continued low interest
rates and the 1993 acquisitions, principally the acquisition of
Westinghouse Federal Bank, FSB, d/b/a United Federal Bank
(United) of Galesburg, Illinois, played important roles in the
significantly improved results for 1993. The returns on average
assets and average stockholders' equity for 1993 were 0.98% and
21.23%, respectively, as compared to 0.79% and 15.78%,
respectively, for 1992 before giving effect to the change in
accounting principle. Primary earnings per share, prior to the
change in accounting principle, increased 55.4% to $1.88 for 1993
from $1.21 for 1992.
Net Interest Income. Net interest income increased $35.4 million
to $150.4 million during 1993 from $115.0 million for 1992. The
net interest margin increased from 3.35% for 1992 to 3.41% for
1993 due to the effect of the lower cost of funds in 1993
reflecting the current low interest-rate environment and a
continued improvement in the ratio of interest-earning assets to
interest-costing liabilities in 1993 as compared to the 1992.
Interest income increased $43.2 million and interest expense
increased $7.8 million, respectively for 1993 as compared to
1992. The average balances of interest-earning assets and
interest-costing liabilities increased from $3.43 billion and
$3.38 billion, respectively, in 1992 to $4.41 billion and
$4.34 billion, respectively, in 1993. The ratio of average
interest-earning assets to average interest-costing liabilities
increased from 101.43% in 1992 to 101.68% in 1993. The 1993
increases in average balances are primarily due to the 1993
acquisitions. The improvement in the ratio of interest-earning
assets to interest-costing liabilities was complemented by a
slightly greater decrease in the average cost of interest-costing
liabilities (5.38% in 1992 versus 4.37% in 1993) than in the
average yield on interest-earning assets (8.65% in 1992 versus
7.70% in 1993.) These various factors are reflected in the
rate/volume analysis, of changes in net interest income, which
indicates a net increase of $30.7 million from volume-related
factors and a net increase of $4.7 million from rate-related
factors.
At the end of 1993, the Corporation's net interest margin was
3.36% as compared to 3.32% at the end of 1992. Historically the
Corporation's net interest margin has been at its lowest point at
year-end due to seasonal factors. Although the 1993 acquisitions
contributed to lower margins than historically experienced by the
Corporation, the combination of the low interest-rate environment
during 1993 and asset/liability management decisions made during
1993 have enabled the Corporation to continue to build the net
interest margin to a higher level at the end of 1993.
Provisions for Losses On Loans. Provisions for losses on loans
decreased $3.7 million from $13.9 million for 1992 compared to
$10.2 million for 1993, reflecting a continuing lower level of
charge-offs experienced in 1993. For a further discussion of
allowances for loan losses on loans and related loan portfolio
information, see "Allowances for Loan and Foreclosure Losses" and
"Loans and Mortgage-Related Securities."
Non-Interest Income. Non-interest income increased $5.5 million
to $37.7 million for 1993 compared to $32.2 million for 1992 as
the net result of several significant factors. Gains realized on
an increased volume of sales of mortgage loans, including loans
originated for sale and refinanced mortgage loans transferred to
held for sale status, increased $3.1 million in 1993 as compared
to 1992. The increased volume of such sales is directly related
to the low interest-rate environment experienced throughout 1993.
The Corporation's subsidiary banks, First Financial Bank, FSB and
First Financial-Port Savings Bank, FSB (the Banks), sell long-
term fixed-rate mortgage loans in the normal course of interest-
rate risk management. Gains or losses realized from the sale of
mortgage loans held for sale can fluctuate significantly from
year to year depending upon the volatility of interest rates and
the volume of loan originations. Thus, results of sales in any
one year may not be indicative of future results. In this
regard, many observers believe that refinancing activities in
1994 will be down from 1993. As such, management does not
believe that 1994 gains on sales of mortgage loans will be at
1993 levels. Deposit account service fees increased $1.7 million
for 1993 as compared to 1992. The 1993 acquisitions and pricing
changes were the major reasons for the increase in these fees.
Net fees earned relative to loans serviced for others increased
$800,000 to $5.2 million in 1993 from $4.4 million in 1992 as a
net result of i) a decrease in the average servicing spread on
mortgage loans serviced for others, ii) a slight decrease in the
size of the mortgage loan servicing portfolio, iii) a decrease in
the size of the manufactured housing loan servicing portfolio due
to the refinancing of loans previously serviced for others and
iv) decreased 1993 charges to adjust the amortization of the
carrying value of purchased and capitalized excess mortgage
servicing rights. The 1993 charges of $1.4 million were
$2.1 million less than similar charges of $3.5 million in 1992
and reflect changes in loan prepayment assumptions, revised for
recent experience, used in management's periodic review of the
value of these servicing rights. At the end of 1993, the
carrying value of servicing rights have been reduced to $473,000.
Thus, amortization of such rights in the future will be
significantly less than in recent years, which will favorably
affect servicing income in the future.
Net losses on sales of available-for-sale securities in 1993
amounted to $422,000 as compared to a gain of $41,000 in 1992.
A loss of $415,000 was realized upon the disposition of a
$45.0 million available-for-sale investment, in an adjustable-
rate mortgage mutual fund during late 1993, for liquidity
purposes. This investment was acquired during 1993 for such
purposes. The remaining $7,000 loss was realized upon the sale
of $81.3 million of mortgage-related securities (MBS) acquired in
conjunction with the United acquisition. These MBSs were
classified as available-for-sale to facilitate the restructuring
of the mortgage-related securities portfolio acquired from
United.
Non-Interest Expense. Non-interest expense increased
$17.1 million for the year ended December 31, 1993 to
$105.8 million as compared to $88.7 million for 1992. The higher
level of non-interest expense reflects inherent increases in the
expanded scope of operations as a result of the 1993
acquisitions. The major categories of non-interest expense
affected by acquisitions are compensation, occupancy, furniture
and equipment, federal deposit insurance, marketing and
amortization of core deposit intangibles.
Federal deposit insurance expense increased $300,000 in 1993 due
to an increase in insured deposits as a result of acquisitions.
The full effect of the increase was offset by a reduction in
premiums charged by the Federal Deposit Insurance Corporation
(FDIC) as the FDIC allowed a one-time premium reduction
(approximately $1.5 million) representing the Banks' previously
unutilized credits, from the dissolved Secondary Reserve of the
Federal Savings and Loan Insurance Corporation. The Banks'
credits in the Secondary Reserve had been written-off in 1987 due
to the uncertainty of recoverability. In addition, each of the
Banks qualifies for the lowest FDIC assessment rate and
management of the Corporation believes that the Banks will
continue to qualify for the lowest FDIC assessment rate, thus
enabling the Banks to keep deposit insurance expense under
control. The Banks, however, do not have control over potential
future rate increases by the FDIC.
The increase of $1.8 million in loan expenses for 1993 represents
the impact of higher 1993 mortgage loan production as well as the
cost of a program to attract new credit card accounts through
affinity groups.
The net cost of operations of foreclosed properties decreased
$1.3 million in 1993 as compared to 1992, when an increased level
of writedowns was experienced relative to foreclosed commercial
real estate properties.
Non-interest expense decreased as a percentage of average assets
to 2.29% in 1993 as compared to 2.46% in 1992. The improvement
in this ratio is reflective of the effectiveness of the
consolidation of operations after the acquisitions in 1993 and
1992. In addition, the Corporation's efficiency ratio (which
represents the ratio of controllable expenses to net interest
income plus recurring non-interest income) improved to 53% for
1993 as compared to 56% for 1992.
Income Taxes. Income tax expense increased $10.7 million for
1993 as compared to 1992 due to the increase in pre-tax income in
1993 and other factors. As a percent of pre-tax income, the
effective income tax rate increased slightly from 36.3% for 1992
to 37.3% in 1993. The increase in the effective income tax rate
primarily relates to i) increased provisions for Illinois taxes
as the Corporation's scope of operations has increased in that
state subsequent to the recent acquisitions and ii) the 1993
increase in the federal tax rate from 34% to 35% for taxable
income in excess of $10.0 million.
Accounting Change. The Financial Accounting Standards Board
(FASB) issued SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities" in May, 1993. As permitted under
the Statement, the Corporation adopted the provisions of the new
standard as of the end of 1993. As a result of adopting SFAS
No. 115, stockholders' equity was increased by $2.7 million (net
of deferred income taxes) at December 31, 1993 to reflect the net
unrealized holding gain on securities, having an estimated fair
value of approximately $262.8 million, classified as available-
for-sale at the end of 1993 and which had been previously
recorded at amortized cost.
Pending Accounting Change. In May, 1993, the FASB also issued
SFAS No. 114, "Accounting by Creditors for Impairment of a Loan".
SFAS No. 114 requires that impaired loans be measured at the
present value of expected future cash flows discounted at the
loan's original effective interest rate or, as a practical
expedient, at the loan's observable market price or the fair
value of the collateral if the loan is collateral dependent.
SFAS No. 114 is effective for fiscal years beginning after
December 15, 1994. Management does not believe that the adoption
of SFAS No. 114 will have a material impact on the Corporation's
financial condition or results of operations.
Results of Operations
Comparison of Years Ended December 31, 1992 and 1991
General. Net income increased to $34.0 million in 1992 from
$18.5 million in 1991. Net income for 1992, prior to a
$5.6 million credit representing the cumulative effect of a
change in accounting for income taxes, increased 53.5% to
$28.4 million from the $18.5 million earned in 1991. The returns
on average assets and average stockholders' equity for 1992,
before giving effect to the change in accounting principle, were
0.79% and 15.78%, respectively, as compared to 0.58% and 11.85%,
respectively, for 1991. Earnings per share, prior to the change
in accounting, increased 51.3% to $1.21 for 1992 from $0.80 for
1991.
Net Interest Income. Net interest income increased $18.6 million
to $115.0 million during 1992 from $96.3 million for 1991. The
net interest margin increased from 3.17% for 1991 to 3.35% for
1992 due to a lower cost of funds in 1992 reflecting a declining
interest-rate environment, managed asset growth by the Banks in
1992 and an improvement in the ratio of interest-earning assets
to interest-costing liabilities in 1992 as compared to the 1991.
Interest income decreased $3.2 million and interest expense
decreased $21.8 million, respectively for 1992 as compared to
1991. The average balances of interest-earning assets and
interest-costing liabilities increased from $3.042 billion and
$3.019 billion, respectively, in 1991 to $3.431 billion and
$3.383 billion, respectively, in 1992. The ratio of average
interest-earning assets to average interest-costing liabilities
increased from 100.76% in 1991 to 101.43% in 1992. The 1992
increases in average balances are due to internal growth as well
as the 1992 acquisitions. The improvement in the ratio of
interest-earning assets to interest-costing liabilities was
complemented by a greater decrease in the average cost of
interest-costing liabilities (6.75% in 1991 versus 5.38% in 1992)
than in the average yield on interest-earning assets (9.87% in
1991 versus 8.65% in 1992.) These factors are reflected in the
analysis of changes in net interest income arising from factors
relating to the volume of interest-bearing dollars and the rates
paid on those dollars. This analysis indicates an increase of
$17.5 million from volume-related factors and $1.1 million from
rate-related factors.
Provisions for Losses On Loans. Provisions for losses on loans
decreased $4.4 million from $18.3 million for 1991 compared to
$13.9 million for 1992, reflecting a lower level of charge-offs
experienced in 1992 as well as management's actions to build a
higher level of loan loss allowances during 1991 for the
manufactured housing and commercial real estate portfolios. The
Corporation's allowances for losses on loans increased to
$17.1 million, or 0.77% of loans receivable, at December 31, 1992
from $16.7 million and 0.82%, respectively, at December 31, 1991.
The decrease in allowances as a percentage of loans receivable
was attributable to the growth of the loan portfolio in 1992.
This growth was concentrated in single-family mortgage loans,
which portfolio historically has a much lower loss experience
than the non-mortgage loan portfolios. In addition, the
manufactured housing and commercial real estate loan portfolios
decreased in 1992, further contributing to the lower allowance
ratio at year-end 1992 since these portfolios historically had
higher loss experience.
Non-Interest Income. Non-interest income decreased $2.1 million
to $32.2 million for 1992 compared to $34.3 million for 1991 as
the net result of several significant factors. Gains realized on
an increased volume of sales of mortgage loans, including loans
originated for sale and refinanced mortgage loans transferred to
available for sale status, increased $1.7 million in 1992 as
compared to 1991. The increased volume of such sales is directly
related to the declining interest-rate environment experienced
throughout 1992. Deposit account service fees increased $800,000
for 1992 as compared to 1991. Pricing changes initiated in the
last half of 1991 and early 1992 were the major reason for the
increase in these fees. Net fees earned relative to loans
serviced for others decreased $2.5 million to $4.4 million in
1992 from $6.9 million in 1991 as a result of i) a decrease in
the average servicing spread on mortgage loans serviced for
others, ii) a decrease in the size of the mortgage loan servicing
portfolio, iii) a decrease in the size of the manufactured
housing loan servicing portfolio due to management's decision to
restrict manufactured housing lending to the Midwest and
iv) increased 1992 charges to adjust the amortization of the
carrying value of purchased and capitalized excess mortgage
servicing rights. The 1992 charges of $3.5 million were $700,000
over similar charges of $2.8 million in 1991 and reflect changes
in loan prepayment assumptions, revised for recent experience,
used in management's periodic review of the value of these
servicing rights.
Gains on sales of MBSs declined from $2.3 million in 1991 to
$41,000 in 1992. During 1991, an asset/liability management
decision was made to conform the composition of the MBS
portfolio, of previously acquired institutions, to existing
investment policies. As such, all long-term fixed-rate MBSs,
totaling $45.5 million, were sold in late 1991. Also, in 1990,
an asset/liability management decision was made to limit
purchases of MBSs to no more than a two percent premium to par
value. During 1991, this policy was extended to include all
similar securities already held in First Financial's MBS
portfolio. At that time, approximately $111.3 million of MBSs
having unamortized premiums exceeding two percent of par value
were sold. During 1992, the Corporation had one minor MBS sale,
for $853,000, when Port sold its longer-term fixed-rate MBS
portfolio.
Non-Interest Expense. Non-interest expense increased
approximately $7.3 million for 1992 as compared to 1991 for the
reasons noted below. Such expenses decreased as a percentage of
average assets to 2.46% for 1992 as compared to 2.53% for 1991.
The higher dollar level of non-interest expense reflects inherent
increases in the expanded scope of operations as a result of the
1992 acquisitions (each of which was accounted for as a purchase)
in addition to increased writedowns of foreclosed real estate
properties during 1992. Provisions for losses on foreclosed real
estate properties (primarily commercial real estate) increased
$1.8 million in 1992 as compared to 1991 (see "Foreclosed
Properties"). Increases in other categories of non-interest
expense were primarily the result of the 1992 acquisitions (i.e.,
compensation, FDIC insurance of accounts premiums, and
amortization of core deposit intangibles).
Income Taxes. Income tax expense increased $3.8 million for 1992
as compared to 1991. As a percent of pre-tax income, however,
the effective tax rate declined from 40.11% for 1991 to 36.28%
for 1992. The decrease in the effective tax rate was the result
of low Nevada state income taxes on an operating subsidiary of
First Financial, which was formed in late 1991. This subsidiary
manages an investment portfolio having long-term maturities.
Previously, this portfolio was managed by First Financial in
Wisconsin and subject to applicable taxes at higher state tax
rates.
Accounting Change. In February, 1992, the FASB issued SFAS No.
109, "Accounting for Income Taxes." As permitted by the
Statement, the Corporation adopted SFAS No. 109 in 1992. The
cumulative effect of the adoption of SFAS No. 109 on prior years,
through December 31, 1991, resulted in an increase in net income
of $5.6 million, or $0.24 per share, in 1992. The primary
component of this change resulted from the recognition of a
deferred tax asset in relation to the cumulative excess of book
loan loss provisions over certain limited amounts previously
claimed as income tax deductions, as defined in SFAS No. 109.
MARKET PRICE AND DIVIDEND INFORMATION
The Corporation's common stock trades on the NASDAQ National
Market System (NASDAQ) under the NASDAQ listing symbol of FFHC.
At December 31, 1993, the Corporation had 23,586,827 outstanding
shares and 3,512 shareholders of record.
The following table presents market price information and cash
dividends paid on First Financial Corporation's common stock.
The prices displayed represent high and low sales prices, for
each quarter over the past two years, as reported by NASDAQ. The
data in the table have been adjusted for the two-for-one stock
splits distributed in March, 1993 and April, 1992.
Market Price Cash
High Low Dividend
----------------------------------------------------
Quarter Ended:
December 31, 1993 $19.750 $14.250 $ .10
September 30, 1993 18.000 13.500 .10
June 30, 1993 15.750 12.250 .075
March 31, 1993 16.000 11.250 .075
December 31, 1992 $11.750 $ 7.500 $ .06
September 30, 1992 9.313 7.250 .06
June 30, 1992 8.500 6.375 .05
March 31, 1992 7.500 5.625 .05
AVERAGE INTEREST-EARNING ASSETS, AVERAGE INTEREST-COSTING LIABILITIES,
INTEREST RATE SPREAD AND NET INTEREST MARGIN
The following table sets forth the weighted average yields earned on the
Corporation's consolidated loan and investment portfolios, the weighted
average interest rates paid on deposits and borrowings, the interest rate
spread between yields earned and rates paid and the net interest
margin during the years 1993, 1992 and 1991. Balances of interest-sensitive
assets and liabilities arising from the 1992 and 1993 acquisitions are
included from the respective dates of the related transactions.
Year Ended December 31,
1993 1992 1991
--------------------------------------------------------------------------------------------
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
--------------------------------------------------------------------------------------------
(Dollars in thousands)
Interest-earning assets:
Mortgage loans (1)(2) $1,957,288 $160,372 8.19% $1,416,264 $131,206 9.26% $1,427,702 $143,574 10.06%
Mortgage-related securities 1,410,941 86,052 6.10 1,137,275 83,040 7.30 764,895 67,650 8.84
Other loans (1) 789,073 81,272 10.30 681,537 73,148 10.73 645,424 75,204 11.65
U.S. Government and agency 106,138 5,709 5.38 31,659 2,036 6.43 18,326 1,521 8.30
Other securities 56,194 3,050 5.43 62,584 3,245 5.19 93,678 7,060 7.54
Cash equivalents 66,716 1,952 2.93 80,906 2,929 3.62 72,539 3,755 5.18
FHL Bank stock 28,540 1,716 6.01 21,004 1,267 6.03 19,363 1,317 6.80
4,414,890 340,123 7.70 3,431,229 296,871 8.65 3,041,927 300,081 9.87
Interest-costing liabilities:
Passbook 798,058 25,953 3.25 635,382 27,154 4.27 285,496 14,275 5.00
Checking 636,008 14,924 2.35 548,643 15,579 2.84 531,754 23,992 4.51
Certificates 2,529,824 128,864 5.09 2,041,100 131,309 6.43 2,154,524 161,501 7.50
FHL Bank advances 310,911 14,205 4.57 127,618 5,445 4.27 31,487 2,500 7.95
Other borrowings 67,264 5,788 8.60 30,163 2,409 7.99 15,852 1,481 9.34
4,342,065 189,734 4.37 3,382,906 181,896 5.38 3,019,113 203,749 6.75
Net earning assets and
interest rate spread $ 72,825 3.33% $ 48,323 3.27% $ 22,814 3.12%
Earning asset ratio 101.68% 101.43% 100.76%
Average interest-earning
assets, net interest income,
and net interest margin on
average interest-earning
assets $4,414,890 $150,389 3.41% $3,431,229 $114,975 3.35% $3,041,927 $ 96,332 3.17%
(1) Includes non-accruing loans.
(2) Includes loans held for sale.
RATE VOLUME ANALYSIS
The most significant impact on the Corporation's net income between periods
is derived from the interaction of changes in the volume of and rates
earned or paid on interest-earning assets and interest-costing liabilities.
The volume of earning dollars in loans and investments, compared to the
volume of interest-costing liabilities represented by deposits and
borrowings, combined with the spread, produces the changes in net interest
income between periods.
The following table shows the relative contribution of changes in average
volume and average interest rates on changes in net interest income
for the periods indicated. The change in interest income and interest
expense attributable to changes in both volume and rate, which cannot
be segregated, has been allocated proportionately to the change due to
volume and the change due to rate.
Year Ended December 31, 1993 Year Ended December 31, 1992
Compared to Year Ended Compared to Year Ended
December 31, 1992 December 31, 1991
Rate Volume Total Rate Volume Total
-------------------------------------------------------------------------------
(In thousands)
Interest-earning assets:
Mortgage loans, including loans
held for sale $(16,509) $ 45,675 $ 29,166 $(11,226) $ (1,142) $(12,368)
Mortgage-related securities (15,016) 18,028 3,012 (13,315) 28,705 15,390
Other loans (3,047) 11,171 8,124 (6,126) 4,070 (2,056)
U.S. Government and agency (384) 4,057 3,673 (401) 916 515
Other securities 147 (342) (195) (1,848) (1,967) (3,815)
Cash equivalents (510) (467) (977) (1,223) 397 (826)
FHL Bank stock (4) 453 449 (156) 106 (50)
Total $(35,323) 78,575 43,252 $(34,295) $ 31,085 (3,210)
Interest-costing liabilities:
Passbook $ (7,294) $ 6,093 (1,201) $ (2,343) $ 15,222 12,879
Checking (2,930) 2,275 (655) (9,153) 740 (8,413)
Certificates (30,384) 27,939 (2,445) (22,016) (8,176) (30,192)
FHL Bank advances 412 8,348 8,760 (1,621) 4,566 2,945
Other borrowings 200 3,179 3,379 (242) 1,170 928
Total $(39,996) $ 47,834 7,838 $(35,375) $ 13,522 (21,853)
Increase in net interest income $ 35,414 $ 18,643
NET INTEREST MARGIN AT YEAR-END
The following table sets forth the weighted average yields on the
Corporation's loan and investment portfolios, the weighted
average cost of deposits and borrowings, the interest rate spread
between the anticipated yields and costs and the resulting net
interest margin at the indicated dates.
At December 31,
1993 1992 1991
-----------------------------------------
Weighted average yield:
Mortgage loans 7.73% 8.74% 9.75%
Mortgage-related securities 5.82 6.72 8.48
Other loans 0.00 10.45 11.25
Investments 4.84 4.80 5.73
Combined weighted average yield on
loans and investments 7.42 8.17 9.54
Weighted average cost:
Deposits and advance payments from
borrowers for taxes and insurance 4.05 4.91 6.27
Borrowings 4.91 4.81 6.57
Combined weighted average cost
of deposits and borrowings 4.13 4.90 6.27
Interest rate spread 3.29% 3.27% 3.27%
Net interest margin 3.36% 3.32% 3.28%
/TABLE
FINANCIAL CONDITION
GENERAL
Total assets of the Corporation increased to $4.77 billion at the
end of 1993 from $3.91 billion at year-end 1992 as a result of
the 1993 acquisitions. Stockholders' equity was $234.7 million,
or 4.92% of total assets, at December 31, 1993 compared to
$194.1 million and 4.97%, respectively, at the end of 1992.
LIQUIDITY AND CAPITAL RESOURCES
On an unconsolidated basis, the Corporation had cash of
$4.9 million and subordinated debt of $55.0 million at
December 31, 1993. Management anticipates that the subordinated
debt will be repaid in the future from proceeds of cash dividends
from its subsidiary Banks or issuance of stock.
The Banks are subject to certain regulatory limitations relative
to their ability to pay dividends to the Corporation. Management
believes that the Corporation will not be adversely affected by
these dividend limitations and that projected future dividends
from the Banks will be sufficient to meet the parent company's
liquidity needs. See Note L to the consolidated financial
statements for further discussion of these limitations. In
addition to dividends from the Banks, the Corporation could also
sell capital stock or debt issues through the capital markets as
alternative sources of funds.
The Corporation also has available an unused line-of-credit in
the amount of $18,000,000 which is available through April, 1994.
The line-of-credit agreement contains various covenants relative
to the operations of the Corporation and First Financial. All of
such covenants were met. See Note J to the consolidated
financial statements for further discussion. In addition, the
Corporation has pledged its stock in First Financial as
collateral for the line-of-credit.
The Banks are required to maintain minimum levels of liquid
assets as defined by the Office of Thrift Supervision ("OTS")
regulations. This requirement, which may be varied by the OTS,
is based upon a percentage of deposits and short-term borrowings.
The required ratio is currently 5%. Both Banks are in compliance
with this requirement. The Banks' principal sources of funds are
amortization and prepayment of loan principal, deposits, sales of
mortgage loans originated for sale, Federal Home Loan (FHL) Bank
advances, other borrowings and funds provided from operations.
These funds are used to meet loan commitments, make other
investments, fund deposit withdrawals and repay borrowings.
Total consolidated liquidity, consisting of cash, cash
equivalents, short-term securities and investment securities,
increased $113.0 million during 1993. Total consolidated
liquidity, as a percent of total assets, increased from 5.78% at
the end of 1992 to 7.10% of total assets at the end of 1993, as a
result of the net effect of the Corporation's various operating,
investing and financing activities.
Operating activities resulted in a net cash inflow of
$108.1 million. Operating cash flows included earnings of
$45.2 million for 1993 and $648.3 million realized from the sales
of mortgage loans available for sale, less $599.1 million
disbursed for loans originated for sale.
Investing activities resulted in a net cash inflow of
$106.3 million. The most significant cash inflows in 1993 from
investing activities were principal payments of $575.1 million
and $364.0 million received on loans receivable and MBSs,
respectively, as well as $60.9 million from the proceeds of
maturities of investment securities. In addition, $126.4 million
was realized upon the sale of securities available for sale.
Major investing activities resulting in cash outflows were
$240.6 million for the purchase of MBSs, $1.03 billion for the
origination of loans for portfolio and $206.4 million for the
purchase of securities. In addition, cash of $443.8 million was
received in conjunction with the 1993 acquisitions representing
primarily $970.2 million of assumed deposits less $565.5 million
of loans and securities acquired. As a result of adopting SFAS
No. 115, securities having an estimated fair value of
$262.8 million, and previously carried at the lower of amortized
cost or estimated fair value, were classified as available-for-
sale.
Financing activities for 1993 resulted in a net cash outflow of
$225.8 million represented by a $124.1 million net deposit
outflows, a net decrease in borrowings of $95.2 million and
$8.2 million in cash dividends paid to our stockholders.
At December 31, 1993, the Banks had outstanding commitments to
originate mortgage loans totaling $62.3 million and had no
commitments outstanding to purchase loans. At that date, the
Banks also had commitments outstanding to sell $111.5 million of
mortgage loans that were held for sale or for which the Banks
were committed to originate. Loans held for sale totaled
$73.9 million at the end of 1993. In addition, First Financial
had commitments to purchase $87.8 million of adjustable-rate MBSs
at year-end 1993. Management believes liquidity levels are
proper and that adequate capital and borrowings are available
through the capital markets, the FHL Bank of Chicago and other
sources.
LOANS AND MORTGAGE-RELATED SECURITIES
Total loans, including loans held for sale and MBSs, increased to
$4.25 billion at the end of 1993 from $3.51 billion at the end of
1992. The components of this increase are summarized, by type of
loan collateral, as follows:
December 31, Increase
1993 1992 (Decrease)
-------------------------------------------------------
(In thousands)
Real estate mortgage loans:
One- to four-family $1,797,990 $1,267,108 $ 530,882
Multi-family 188,558 163,312 25,246
Commercial and other 94,789 101,865 (7,076)
Total real estate mortgage loans 2,081,337 1,532,285 549,052
Other loans:
Credit cards 209,414 178,436 30,978
Home equity 193,291 162,283 31,008
Education 167,385 163,261 4,124
Manufactured housing 165,017 133,195 31,822
Consumer and other 153,685 92,326 61,359
Less: net items to loans receivable (47,625) (51,069) 3,444
Total loans (including loans
held for sale) 2,922,504 2,210,717 711,787
Mortgage-related securities 1,326,253 1,301,589 24,664
Total loans and mortgage-related
securities $4,248,757 $3,512,306 $ 736,451
One- to four-family residential mortgage loans increased
$530.9 million during 1993. The increase in residential mortgage
loans during 1993 is attributable to the United acquisition and
high levels of originations and refinancings as a result of the
continuing low interest-rate environment during 1993. In
addition, First Financial refinanced approximately $187.1 million
of mortgage loans that were previously serviced for others. Such
refinanced loans typically are fixed-rate residential mortgage
loans. The Corporation has retained in its loan portfolio
certain fixed-rate mortgage loans with shorter maturities as well
as all adjustable-rate mortgage loans. The Corporation typically
sells longer-term fixed-rate mortgage loans as a part of its
ongoing interest-rate risk management program. Income-producing
real estate loans increased $18.1 million in 1993 with a
continuing change in emphasis as multi-family residential loans
increased $25.2 million and commercial real estate mortgage loans
decreased $7.1 million.
Consumer loans increased $61.4 million in 1993 due to the United
acquisition as well as increased marketing efforts and a new
second mortgage product. Both the credit card loan and home
equity loan portfolios increased $31.0 million during 1993 as the
Corporation continues to promote growth in these product areas in
order to diversify the loan portfolio and to provide higher
yielding assets. Manufactured housing loans increased
$31.8 million primarily due to the refinancing of $37.0 million
of such loans which had previously been serviced for others.
After giving effect to the $226.4 million of MBSs received in the
United acquisition, the MBS portfolio declined $201.7 million
during 1993 primarily as the net result of i) purchases of
$240.6 million of adjustable-rate MBSs, ii) repayments of
$364.0 million and iii) sales of $81.3 million of MBSs acquired
in the United transaction (as management restructured the United
MBS portfolio to meet the Corporation's investment portfolio
guidelines). There were no sales of MBSs during 1993 other than
the above-mentioned post-merger restructuring sales. In
conjunction with the adoption of SFAS No. 115, the Banks
transferred MBSs with a cost of $175.4 million and a fair value
of $178.4 million to the available-for-sale portfolio at the end
of 1993.
NON-PERFORMING ASSETS
Non-performing assets (consisting of non-accrual loans,
foreclosed properties and other repossessed collateral assets)
decreased to $15.1 million at December 31, 1993 from
$29.9 million at December 31, 1992. As a percentage of total
assets, non-performing assets decreased from 0.76% at
December 31, 1992 to 0.32% at December 31, 1993. During the five
years ended December 31, 1993, the Corporation has not had any
troubled debt restructurings. Non-performing assets are
summarized as follows for the dates indicated:
December 31,
1993 1992 1991 1990 1989
-------------------------------------------------------------------
(Dollars in thousands)
Non-accrual loans:
One- to four-family
residential $ 5,005 $ 5,660 $ 8,717 $ 9,904 $ 5,022
Multi-family residential 139 314 332 891 1,464
Commercial real estate -- 6,478 2,624 497 684
Manufactured housing 1,063 1,295 1,851 2,021 6,376
Consumer and other 2,033 1,912 2,965 3,229 3,497
Total non-accrual loans 8,240 15,659 16,489 16,542 17,043
Real estate judgments 2,236 2,761 3,572 7,746 5,762
Real estate foreclosed
properties 4,418 10,975 21,065 21,518 21,380
Repossessed collateral assets 163 462 889 2,143 3,688
Total non-performing
assets $15,057 $29,857 $42,015 $47,949 $47,873
Non-accrual loans as a
percentage of net loans .28% .71% .83% .76% .86%
Non-performing assets as a
percentage of total assets .32% .76% 1.30% 1.52% 1.95%
The Corporation places loans into a non-accrual status when loans
are contractually delinquent more than ninety days. Such loans
have decreased as a percentage of net loans to 0.28% at
December 31, 1993 from .71% at December 31, 1992 showing an
improvement in most categories with a significant $6.5 million
decrease in the commercial mortgage real estate loan category.
This decrease represents the improvement in the contractual
delinquency and subsequent removal from non-accrual status of
several large commercial real estate mortgage loans. The non-
accrual loans, in the aggregate, at December 31, 1993, 1992 and
1991 represented $700,000, $1.2 million and $1.3 million of
interest which would have been reflected in 1993, 1992 and 1991
income, respectively, if the loans had been contractually
current.
Another significant factor in the 1993 decrease in non-performing
assets was the $7.0 million decline in real estate judgments and
foreclosed properties from $13.7 million at the end of 1992 to
$6.7 million at year-end 1993. This decline is directly related
to the sale and/or writedown of several large commercial real
estate properties during 1993. As a result of these
dispositions, the Corporation has been able to reduce its
inventory of large (having a carrying value in excess of
$500,000) commercial real estate properties owned from four
properties totaling $7.6 million at December 31, 1992 to three
properties totaling $3.3 million at December 31, 1993. The
remainder of the real estate foreclosed properties consist
primarily of one- to four-family and smaller multi-family
residential real estate located in the Midwest.
Non-performing assets have declined significantly during the five
year period ending December 31, 1993 due to i) the disposition of
such properties acquired in the acquisition of a troubled thrift
institution in 1985, ii) improved collection efforts, and iii) a
management decision to restrict lending primarily to Wisconsin,
Illinois and other selected Midwestern states.
All of the above non-accrual loans and foreclosed properties have
been considered by management in the review of the adequacy of
allowances for losses.
ALLOWANCES FOR LOSSES ON LOANS AND FORECLOSED PROPERTIES
The Corporation's loan portfolios, foreclosed properties and off-
balance sheet financial guarantees are evaluated on a continuing
basis to determine the additions to the allowances for losses and
the related balance in the allowances. These evaluations
consider several factors including, but not limited to, general
economic conditions, loan portfolio composition, prior loss
experience and management's estimation of future potential
losses. The evaluation of allowances for loan losses includes a
review of both known loan problems as well as a review of
potential problems based upon historical trends and ratios. The
allowances for losses on foreclosed properties are determined by
reducing the carrying value of such foreclosed properties to the
estimated fair value.
A summary of activity in the allowances for losses on loans
follows:
Year Ended December 31,
1993 1992 1991 1990 1989
-------------------------------------------------------------------------
(Dollars in thousands)
Balance at beginning of year $17,067 $16,706 $15,644 $13,673 $11,922
Charge-offs:
Residential real estate (691) (1,579) (1,916) (1,260) (1,884)
Commercial real estate (501) (968) (2,107) (5,422) (2,407)
Manufactured housing (2,731) (4,212) (7,365) (7,650) (7,362)
Credit card (5,890) (6,142) (5,550) (5,248) (5,255)
Consumer-related (481) (459) (654) (742) (933)
Commercial -- (1,367) (1,051) -- --
Total charge-offs (10,294) (14,727) (18,643) (20,322) (17,841)
Recoveries:
Residential real estate 131 231 218 546 116
Commercial real estate -- 3 1 -- --
Manufactured housing 179 288 272 450 94
Credit card 653 584 653 656 509
Consumer-related 426 131 228 664 524
Total recoveries 1,389 1,237 1,372 2,316 1,243
Net charge-offs (8,905) (13,490) (17,271) (18,006) (16,598)
Provisions for losses 10,219 13,851 18,333 16,044 18,306
Acquired banks' allowances 4,885 -- -- 3,933 43
Balance at end of year $23,266 $17,067 $16,706 $15,644 $13,673
Ratio of net charge-offs to
average loans outstanding .32% .64% .83% .82% .83%
A summary of the activity in the allowance for losses on
foreclosed properties follows.
Year Ended December 31,
1993 1992 1991 1990 1989
---------------------------------------------------------------------
(In thousands)
Balance at beginning of year $ 552 $ 738 $1,023 $ 750 $ 760
Charge-offs (2,685) (4,980) (3,232) (577) (1,013)
Provision 3,519 4,794 2,947 754 957
Acquired banks' allowances -- -- -- 96 46
Balance at end of year $1,386 $ 552 $ 738 $1,023 $ 750
The provisions for losses on foreclosed properties are included
in the consolidated statements of income in "net cost of
operations of foreclosed properties."
The Corporation's allowance for losses on loans increased to
$23.3 million, or 0.80% of loans receivable, at December 31, 1993
from $17.1 million and 0.77%, respectively, at the end of 1992.
The increase in the allowance relates to a rise in loans
receivable in 1993 as well as allowances acquired in conjunction
with the United acquisition. The 1993 provisions for losses on
loans and foreclosed properties totaled $10.2 million and
$3.5 million, respectively, compared to $13.9 million and
$4.8 million, respectively, for 1992. The provision for losses
has been significantly lower in 1993 and 1992 compared to the
1989-1991 period as the Banks' charge-off experience has improved
due to the decrease in non-performing assets during this period.
See "Non-Performing Assets" for further discussion.
The most significant change in allowances for individual loan
portfolios took place in the allowance for credit card losses.
The allowance for credit card loan losses increased to 3.10% of
outstanding balances at the end of 1993 from 2.26% at year-end
1992. The increase in the credit card allowance relates to the
1993 growth of that portfolio and to management's decision to
build the allowance for this portfolio to a higher level. Credit
card loan charge-offs leveled off at $5.9 million compared to
$6.1 million and $5.6 million for 1992 and 1991, respectively.
First Financial's credit card loan charge-offs, 2.87% for 1993
and 3.44% for 1992, have been historically well below national
averages.
The allowance for losses on residential mortgage loans increased
to $5.9 million, or 0.30% of such loans, at the end of 1993 as
compared to $3.3 million, or 0.23%, at the end of 1992. The
growth in the allowance relates to the increase in the
residential mortgage portfolio during 1993 and the allowance
acquired in the United acquisition. Charge-offs of residential
mortgage loans as a percentage of average outstandings decreased
to 0.03% in 1993 from 0.10% in 1992.
The level of charge-offs for the commercial real estate loan
portfolio for 1993 and 1992 were significantly lower than in 1991
and 1990 when $2.1 million and $5.4 million, respectively, of
such loans were transferred to loss status by management in the
course of reviews of such loans. The allowance for commercial
real estate loan losses increased, as a percentage of
outstandings, to 4.23% at the end of 1993 from 3.91% at the end
of 1993.
Commercial loan charge-offs in 1991 and 1992 of $1.1 million and
$1.4 million, respectively, were directly related to the
writedown of a working capital loan, to a limited partnership,
for an apartment project located in Milwaukee, Wisconsin. This
loan was acquired in the acquisition of a troubled thrift
institution in 1985. The Corporation has no commercial loans in
its loan portfolio at the end of 1993.
The Banks have also, in the past, undertaken off-balance sheet
financial guarantees, totaling $11.0 million at December 31,
1993, whereby certain of the Banks' assets, primarily MBSs, are
pledged as collateral for Industrial Development Revenue Bonds
which were issued by municipalities to finance real estate owned
by third parties. Management has considered these guarantees,
all of which are performing, in its review of the adequacy of
allowance for possible losses relating to contingent liabilities.
See Note N to the consolidated financial statements for further
discussion of off-balance sheet financial guarantees.
Management believes that the December 31, 1993, allowances for
loan and foreclosed property losses are adequate based upon the
current evaluation of loan delinquencies, non-performing assets,
charge-off trends, economic conditions and other factors.
Management also continues to pursue all practical and legal
methods of collection, repossession and disposal, as well as
adhering to high underwriting standards in the origination
process, in order to continue to reduce provisions for losses of
all types in future years.
A detailed analysis of the Corporation's allowances for losses on loans
and related charge-off information is as follows for the dates and
periods indicated:
At December 31, 1993 At December 31, 1992 At December 31, 1991
---------------------------------- ---------------------------------- ---------------------------------
1993 1992 1991
Charge-offs Charge-offs Charge-offs
Allowance As A Percent Allowance As A Percent Allowance As A Percent
As A % Of Of Average As A % Of Of Average As A % Of Of Average
Outstanding Related Loans Outstanding Related Loans Outstanding Related Loans
Allowance Loans In For The Year Allowance Loans In For The Year Allowance Loans In For The Year
Type of Loan Amount Category Ended Amount Category Ended Amount Category Ended
12/31/93 12/31/92 12/31/91
- --------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Residential real estate $ 5,877 .30% .03% $ 3,301 .23% .10% $ 2,679 .21% .13%
Commercial real estate 4,010 4.23 .51 3,986 3.91 .94 4,628 4.59 1.98
Manufactured housing 4,668 2.83 1.85 4,325 3.25 2.90 4,492 3.20 4.88
Credit cards 6,502 3.10 2.87 4,034 2.26 3.44 2,734 1.70 3.32
Consumer 1,728 1.12 -- 860 .97 .08 510 .79 .26
Education 52 .03 .01 269 .16 .09 288 .18 .12
Home equity 429 .22 .02 292 .18 .08 285 .20 .04
Commercial -- -- -- -- -- 34.23 1,090 22.60 20.90
$23,266 .80% .32% $17,067 .77% .64% $16,706 .82% .83%
The Corporation's allowances for losses on loans were allocated to various
loan categories as follows for the dates indicated:
December 31,
1993 1992 1991 1990 1989
------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Percent Of Percent Of Percent Of Percent Of Percent Of
Loans in Each Loans In Each Loans In Each Loans In Each Loans In Each
Category to Category to Category to Category to Category to
Type of Loan Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
Residential real
estate $ 5,877 66.9% $ 3,301 63.2% $ 2,679 62.3% $ 3,312 64.8% $ 457 62.0%
Commercial real
estate 4,010 3.2 3,986 4.5 4,628 4.9 4,349 5.1 6,073 6.4
Manufactured housing 4,668 5.6 4,325 5.9 4,492 6.9 2,259 7.0 2,229 8.5
Credit cards 6,502 7.0 4,034 7.9 2,734 7.9 3,195 6.8 3,342 7.0
Consumer and other 2,209 17.3 1,421 18.4 1,083 17.8 969 16.1 1,004 15.8
Commercial -- -- -- .1 1,090 .2 1,560 .2 568 .3
$23,266 100.0% $17,067 100.0% $16,706 100.0% $15,644 100.0% $13,673 100.0%
/TABLE
DEPOSITS
Deposits increased $844.0 million to $4.05 billion at
December 31, 1993. This growth was achieved primarily as a
result of acquisitions. The weighted-average cost of deposits
decreased to 4.06% at year-end 1993 compared to 4.94% at year-end
1992, as a result of continued lower market rates during 1993.
BORROWINGS
The Corporation's total borrowings decreased from $461.9 million
at year-end 1992 to $438.6 million at the end of 1993. The
weighted average cost of borrowings increased slightly to 4.91%
at the end of 1993 as compared to 4.81% at year-end 1992,
representing a moderate lengthening of the average maturity of
the Banks' borrowings.
STOCKHOLDERS' EQUITY
Stockholders' equity at December 31, 1993 was $234.7 million, or
4.92% of total assets, compared to $194.1 million and 4.97%,
respectively, at December 31, 1992. The dollar increase in
stockholders' equity resulted from net income of $45.2 million
and a $2.7 million increase in stockholders' equity recorded upon
the adoption of SFAS No. 115 as offset by cash dividend payments
to stockholders of $8.2 million. Stockholders' equity per share
increased from $8.34 per share at year-end 1992 to $9.95 per
share at year-end 1993.
REGULATORY CAPITAL
The Corporation's subsidiary Banks are each subject to various
individual OTS capital measurements. Both First Financial and
Port have regulatory capital well in excess of OTS requirements
at December 31, 1993, as summarized below:
OTS Capital Ratios
Actual Required
Ratio Ratio Excess
Tangible capital:
First Financial 5.21% 1.50% 3.71%
Port 7.38 1.50 5.88
Core leverage capital:
First Financial 5.78% 3.00% 2.78%
Port 7.38 3.00 4.38
Risk-based capital:
First Financial 12.56% 8.00% 4.56%
Port 14.55 8.00 6.55
In addition, First Financial and Port each meet the definition of
a "well capitalized" thrift institution at year-end 1993 per FDIC
rules employing OTS measurements.
The OTS has issued a final regulation relating to capital
requirements based upon interest-rate risk effective July 1,
1994. In addition, under the terms of FDICIA the OTS is required
to revise its risk-based capital standards to reflect various
risk factors. Management believes that the Banks will not need
additional capital to meet this regulation. The OTS has adopted
another final rule, effective March 4, 1994, disallowing any new
core deposit intangibles, acquired after the rule's effective
date, from counting as regulatory capital. Core deposit
intangibles acquired prior to the effective date have been
grandfathered for purposes of this rule. The OTS also has
proposed to increase the core capital requirement from the
current 3.00% level to between 4.00% and 5.00%, for all but the
most healthy thrift institutions. The additional requirements
could potentially increase the current requirement levels.
Management of the Corporation believes that the Banks will
continue to exceed these regulatory capital requirements in the
future through core earnings.
For a more detailed discussion of regulatory capital
requirements, see Note L to the consolidated financial
statements.
ASSET/LIABILITY MANAGEMENT
The objective of the Corporation's asset/liability policy is to
manage interest-rate risk so as to maximize net interest income
over time in changing interest-rate environments. To this end,
management believes that strategies for managing interest-rate
risk must be responsive to changes in the interest-rate
environment and must recognize and accommodate the market demands
for particular types of deposit and loan products.
Interest-bearing assets and liabilities can be analyzed by
measuring the magnitude by which such assets and liabilities are
interest-rate sensitive and by monitoring an institution's
interest-rate sensitivity "gap." An asset or liability is
determined to be interest-rate sensitive within a specific time
frame if it matures or reprices within that time period. An
interest-rate sensitivity "gap" is defined as the difference
between the amount of interest-earning assets anticipated to
mature or reprice within a specific time period and the amount of
interest-costing liabilities anticipated to mature or reprice
within the same time period. A gap is considered positive when
the amount of interest-rate sensitive assets exceeds the amount
of interest-rate sensitive liabilities that mature or reprice
within a given time frame. A gap is considered negative when the
amount of interest-rate sensitive liabilities exceeds the amount
of interest-rate sensitive assets that mature or reprice within a
specified time period.
Summary gap information for the Corporation is presented below as
of December 31, 1993, 1992 and 1991.
Ratio of Cumulative
Positive (Negative) Gap To Total Assets
One Year Three Years Five Years
December 31, 1993 6.09% (2.63)% (2.57)%
December 31, 1992 4.85 (2.48) (1.88)
December 31, 1991 6.72 (3.04) (4.75)
The Corporation's positive one-year gap increased to
$290.8 million, or 6.09% of total assets, at the end of 1993 from
$189.5 million, or 4.85% of total assets, at the end of 1992.
The Corporation's consolidated one-year positive gap position of
6.09% at December 31, 1993 falls within management's currently
acceptable range of 10% positive to 10% negative. In view of the
current low interest-rate environment and the related impact on
customer behavior, management believes that it is important to
weigh and balance the effect of asset/liability management
decisions in the short-term in its efforts to maintain net
interest margins and acceptable future profitability. As such,
management believes that it has been able to achieve a consistent
net interest margin while still meeting asset/liability
management objectives.
In this regard, the Banks also measure and evaluate interest-rate
risk via a separate methodology. The net "market value" of
interest-sensitive assets and liabilities is determined by
measuring the net present value of future cash flows under
varying interest-rate scenarios in which interest rates would
theoretically increase or decrease up to 400 basis points on a
sudden and prolonged basis. This complex theoretical analysis at
December 31, 1993 indicates that the Banks' current financial
position should adequately protect the Banks, and thus the
Corporation, from the effects of rapid rate changes. The OTS has
issued final regulations, as noted above, that call for further
regulatory capital requirements based upon this market value
methodology effective July 1, 1994. Management of the
Corporation anticipates that current asset/liability management
practices should place the Banks in compliance with this
regulation and that further capital will not be required as a
result thereof.
Asset/Liability Repricing Schedule. The table on the following
page sets forth the combined estimated maturity/repricing
structure of the Banks' interest-earning assets (including net
items) and interest-costing liabilities at December 31, 1993.
Assumptions regarding prepayment and withdrawal rates are based
upon the Banks' historical experience, and management believes
such assumptions are reasonable. The table does not necessarily
indicate the impact of general interest-rate movements on the
Banks' net interest income because repricing of certain
categories of assets and liabilities through, for example,
prepayments of loans and withdrawals of deposits, is beyond the
Banks' control. As a result, certain assets and liabilities
indicated as repricing within a stated period may in fact reprice
at different times and at different rate levels. Certain
shortcomings are inherent in the method of analysis presented in
the gap table. For example, although certain assets and
liabilities may have similar maturities or periods to repricing,
they may react in different degrees to changes in market interest
rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag
behind changes in market rates. Additionally, certain assets,
such as adjustable-rate loans, have features which restrict
changes in interest rates on a short-term basis and over the life
of the asset. Further, in the event of a change in interest
rates, prepayment and early withdrawal levels could deviate
significantly from those assumed in calculating the data in the
table.
FIRST FINANCIAL CORPORATION CONSOLIDATED GAP ANALYSIS AT DECEMBER 31, 1993
Greater Greater Greater Greater
Than One Than Three Than Five Than Ten Greater
Under Through Through Through Through Than
One Year Three Years Five Years Ten Years 20 Years 20 Years Total
(Dollars in thousands)
Rate-sensitive assets:
Investments and interest-
earning deposits (a)(b) $ 171,139 $ 91,963 $ 7,156 $ 350 $ 34,920 $ -- $ 305,528
Mortgage-related securities(b) 1,233,107 78,928 14,181 7 30 -- 1,326,253
Mortgage loans:
Fixed-rate (c)(d) 249,674 403,126 296,706 511,556 19,365 170 1,480,597
Adjustable-rate (c)(d) 412,109 148,930 2,348 99 -- -- 563,486
Other loans 645,602 144,477 30,963 55,200 2,179 -- 878,421
2,711,631 867,424 351,354 567,212 56,494 170 4,554,285
Rate-sensitive liabilities:
Deposits (e)(f) 2,219,743 1,112,718 348,282 208,028 126,978 45,372 4,061,121
Borrowings (g) 201,044 171,027 251 61,046 1,910 3,320 438,598
2,420,787 1,283,745 348,533 269,074 128,888 48,692 4,499,719
GAP (repricing difference) $ 290,844 $ (416,321) $ 2,821 $298,138 $ (72,394) $(48,522) $ 54,566
Cumulative GAP $ 290,844 $ (125,477) $ (122,656) $175,482 $ 103,88 $ 54,566
Cumulative GAP/Total Assets 6.09% (2.63)% (2.57)% 3.68% 2.16% 1.14%
[FN]
(a) Investments are adjusted to include FHL Bank stock and other items
totaling $29.8 million as investments in the "Greater than Ten Through
20 Years" category.
(b) Investment and mortgage-related securities are presented at carrying
value, including net unrealized holding gain on available-for-sale
securities.
(c) Based upon 1) contractual maturity, 2) repricing date, if applicable,
3) scheduled repayments of principal and 4) projected prepayments of
principal based upon the Corporation's historical experience as modified
for current market conditions.
(d) Includes loans held for sale.
(e) Deposits include $13.8 million of advance payments by borrowers for
tax and insurance and exclude accrued interest of $3.2 million.
(f) The Corporation has assumed that its passbook savings, NOW accounts
and money market accounts would have projected annual withdrawal
rates, based upon the Corporation's historical experience, of 26%,
34% and 42%, respectively.
(g) Collateralized mortgage obligations totaling $5.2 million are included
in the "Greater Than Five Through Ten Years" category.