SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1994
_____________________________________________
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to ________________
Commission File Number 0-11889
FIRST FINANCIAL CORPORATION
______________________________________________________
(Exact name of registrant as specified in its charter)
Wisconsin 39-1471963
_______________________________ ___________________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1305 Main Street, Stevens Point, Wisconsin 54481
________________________________________________
(Address of principal executive office)
(715) 341-0400
____________________________________________________
(Registrant's telephone number, including area code)
___________________________________________________________________________
(Former name, address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
_____ ______
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, par value $1.00 per share 24,764,852 Shares
_________________________________________ _______________________________
Class Outstanding at October 31, 1994
FIRST FINANCIAL CORPORATION
Form 10-Q Index
Part I -Financial Information
Consolidated Balance Sheets as of September 30,
1994 (Unaudited) and December 31, 1993
Unaudited Consolidated Statements of Income for
the Three Months and Nine Months Ended September 30,
1994 and 1993
Unaudited Consolidated Statement of Stockholders'
Equity for the Nine Months Ended September 30, 1994
Unaudited Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 1994 and
1993
Notes to Unaudited Consolidated Financial Statements
Management's Discussion and Analysis:
Comparison of the Consolidated Balance Sheets
at September 30, 1994 (Unaudited) and December 31,
1993
Comparison of the Unaudited Consolidated Statements
of Income for the Three Months and Nine Months Ended
September 30, 1994 and 1993
Part II -Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
Exhibits
FIRST FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
September 30,
1994 December 31,
(Unaudited) 1993
------------- ------------
(In thousands)
Cash $ 68,147 $ 63,241
Federal funds sold 23,852 21,873
Interest-earning deposits 2,352 25,768
Cash and cash equivalents 94,351 110,882
Securities available for sale (at
fair value):
Investment securities 6,625 84,487
Mortgage-related securities 174,648 178,362
Securities held to maturity:
Investment securities (fair value of
$126,862,000--1994 and $143,448,000
--1993) 130,577 143,568
Mortgage-related securities (fair
value of $1,294,151,000--1994
and $1,160,230,000--1993) 1,325,834 1,147,891
Loans receivable:
Held for sale 6,839 73,919
Held for investment 3,126,789 2,848,585
Foreclosed properties and
repossessed assets 4,727 6,817
Real estate held for investment or
sale 6,628 16,810
Office properties and equipment 48,989 50,120
Intangible assets, less accumulated
amortization 28,059 31,392
Other assets 97,133 81,800
---------- ----------
$5,051,199 $4,774,633
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $4,101,449 $4,050,520
Borrowings 591,145 438,598
Advance payments by borrowers for
taxes and insurance 59,149 13,805
Other liabilities 33,526 37,025
---------- ----------
Total liabilities 4,785,269 4,539,948
Stockholders' equity:
Serial preferred stock, $1 par value,
3,000,000 shares authorized; none
outstanding
Common stock, $1 par value, 75,000,000
shares authorized; shares issued and
outstanding: 24,698,852--1994;
23,586,827--1993 24,699 23,587
Additional paid-in capital 31,902 27,340
Net unrealized holding gain (loss) on
securities available for sale (4,426) 2,701
Retained earnings (substantially
restricted) 213,755 181,057
Total stockholders' equity 265,930 234,685
---------- ----------
$5,051,199 $4,774,633
See notes to unaudited consolidated financial statements.
FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1994 1993 1994 1993
------ ------ ------ -----
(In thousands, except
per share amounts)
Interest income:
Mortgage loans $ 40,578 $ 41,138 $121,050 $119,927
Other loans 24,658 20,524 71,118 59,568
Mortgage-related securities 22,657 20,365 62,372 66,694
Investments 2,365 3,174 8,269 8,405
Total interest income 90,258 85,201 262,809 254,594
Interest expense:
Deposits 41,162 42,365 123,241 128,329
Borrowings 7,264 5,157 18,326 15,537
Total interest expense 48,426 47,522 141,567 143,866
Net interest income 41,832 37,679 121,242 110,728
Provision for losses on loans 1,662 2,180 4,878 7,824
------ ------ ------- -------
40,170 35,449 116,364 102,904
Non-interest income:
Loan fees and service charges 2,198 2,440 6,362 6,455
Insurance and brokerage sales
commissions 1,571 1,478 5,128 4,822
Deposit account service fees 1,966 2,081 5,803 5,595
Service fees on loans sold 1,307 988 3,906 4,229
Net gain on sale of loans 250 2,641 1,666 5,120
Net gain (loss) on sale of securities
available for sale (97) -- 1,375 --
Unrealized loss on impairment of
mortgage-related securities -- -- (9,000) --
Other 499 365 2,179 1,424
Total non-interest income 7,694 9,993 17,419 27,645
------ ------ ------- -------
Operating income 47,864 45,492 133,783 130,549
Non-interest expense:
Compensation, payroll taxes and
benefits 11,151 10,977 34,139 33,359
Federal deposit insurance premiums 2,372 2,233 7,177 5,080
Occupancy expense 2,114 1,922 6,179 5,680
Data processing 1,781 1,602 5,323 5,616
Loan expenses 1,535 1,839 4,554 4,447
Telephone and postage 1,375 1,340 4,149 3,854
Amortization of intangible assets 1,344 1,876 4,032 4,815
Furniture and equipment 1,231 1,263 3,899 3,896
Marketing 1,179 980 3,261 2,965
Net cost of operations of foreclosed
properties 94 1,097 603 3,056
Other 2,458 2,333 7,321 7,033
Total non-interest expense 26,634 27,462 80,637 79,801
Income before income taxes 21,230 18,030 53,146 50,748
Income taxes 7,484 6,704 19,591 18,705
------ ------ ------- -------
Net income $ 13,746 $ 11,326 $ 33,555 $ 32,043
Earnings per share:
Primary $ 0.54 $ 0.48 $ 1.33 $ 1.35
Fully diluted $ 0.54 $ 0.46 $ 1.32 $ 1.32
Cash dividend per share $ 0.10 $ 0.10 $ 0.30 $ 0.25
See notes to unaudited consolidated financial statements.
FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For The Nine Month Period Ended September 30, 1994
(Unaudited)
Net
Unrealized
Holding
Gain (Loss)
On
Additional Securities Total
Common Paid-In Available Retained Stockholders'
Stock Capital For Sale Earnings Equity
(In thousands)
BALANCES AT DECEMBER 31, 1993 $23,587 $27,340 $ 2,701 $181,057 $234,685
Net income 33,555 33,555
Cash dividend ($.30 per share) (7,470) (7,470)
Exercise of stock options 174 712 886
Issuance of common stock in
conjunction with acquisition 938 3,850 6,613 11,401
Change in net unrealized holding
gain (loss) on securities
available for sale, net of
tax (7,127) (7,127)
------- ------- --------- -------- --------
BALANCES AT SEPTEMBER 30,
1994 $24,699 $31,902 $ (4,426) $213,755 $265,930
======= ======= ========= ======== ========
See notes to unaudited consolidated financial statements.
FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
1994 1993
OPERATING ACTIVITIES (In thousands)
Net income $ 33,555 $ 32,043
Adjustments to reconcile net income to net cash provided
by operating activities:
(Increase) decrease in accrued interest on loans (1,874) 2,401
Increase in accrued interest on deposits 253 117
Mortgage loans originated for sale (167,053) (362,439)
Proceeds from sales of loans held for sale 274,824 365,259
Provision for depreciation 4,308 4,048
Provision for losses on loans 4,878 7,824
Provision for losses on real estate and other assets 525 3,169
Unrealized loss on impairment of mortgage-related securities 9,000 --
Amortization of cost in excess of net assets of
acquired businesses (1,360) 416
Amortization of core deposit intangibles 5,392 4,399
Amortization of purchased mortgage servicing rights 465 937
Net gain on sales of loans and assets (3,656) (5,327)
Other-net (10,614) (4,731)
-------- -------
Net cash provided by operating activities 148,643 48,116
INVESTING ACTIVITIES
Proceeds from sales of investment securities available for sale 65,088 --
Proceeds from maturities of investment securities held
to maturity 30,945 59,747
Purchases of investment securities held to maturity (1,523) (191,902)
Proceeds from sales of mortgage-related securities available
for sale 181,890 81,287
Principal payments received on mortgage-related securities 230,313 270,891
Purchases of mortgage-related securities held to maturity (588,352) (140,640)
Proceeds from sale of finance company receivables 6,665 --
Principal received on loans receivable 391,055 419,659
Loans originated for portfolio (627,939) (740,191)
Additions to office properties and equipment (1,828) (4,128)
Proceeds from sales of foreclosed properties and
repossessed assets 7,315 10,727
Proceeds from sales of real estate held for investment 10,130 292
Business acquisitions (net of cash and cash equivalents
acquired of $4,593,000--1994; $443,795,000--1993):
Investment securities held to maturity (4,785) (22,775)
Mortgage-related securities available for sale -- --
Mortgage-related securities held to maturity (16,742) (226,385)
Loans receivable (96,748) (316,305)
Office properties (2,387) (8,445)
Intangible assets (699) (14,541)
Deposits and related accrued interest 114,297 970,162
Borrowings 750 71,897
Stockholders' equity 11,401 --
Other-net (494) (9,813)
-------- --------
Net cash provided by (used in) investing activities (291,648) 209,537
FINANCING ACTIVITIES
Net decrease in deposits (63,621) (86,461)
Net increase in advance payments by borrowers for
taxes and insurance 44,882 43,888
Proceeds from borrowings 678,580 686,000
Repayments of borrowings (526,783) (895,809)
Proceeds from exercise of stock options 886 820
Payments of cash dividends to stockholders (7,470) (5,880)
-------- --------
Net cash provided by (used in) financing activities 126,474 (257,442)
-------- --------
Increase (decrease) in cash and cash equivalents (16,531) 211
Cash and cash equivalents at beginning of period 110,882 122,281
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 94,351 $ 122,492
======== ========
See notes to unaudited consolidated financial statements.
FIRST FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - PRINCIPLES OF CONSOLIDATION
The unaudited consolidated financial statements include the accounts and
results of operations of First Financial Corporation (the Corporation) and its
wholly-owned subsidiaries, First Financial Bank, FSB (First Financial) and First
Financial - Port Savings Bank, FSB (Port), (collectively, the Banks).
Significant intercompany accounts and transactions have been eliminated in
consolidation. The Corporation uses the calendar year as its fiscal year.
The financial statements reflect adjustments, all of which are of a normal
recurring nature, and in the opinion of management, necessary for a fair
statement of the results for the interim periods, and are presented on an
unaudited basis. The operating results for the first nine months of 1994 are not
necessarily indicative of the results which may be expected for the entire 1994
fiscal year. The December 31, 1993 balance sheet included herein is derived from
the consolidated financial statements included in the Corporation's 1993 Annual
Report to Shareholders. The accompanying unaudited consolidated financial
statements and related notes should be read in conjunction with the consolidated
financial statements and related notes included in the Corporation's 1993 Annual
Report to Shareholders.
NOTE B - THE CORPORATION
At September 30, 1994, the Corporation conducted business as a
non-diversified multiple thrift holding company and its principal assets were
all of the capital stock of First Financial and Port. Upon the merger of Port
subsequent to quarter-end, see Note I, the Corporation's regulatory status has
changed to that of a nondiversified unitary thrift holding company. The primary
business of the Corporation is now the business of First Financial. The
Corporation's activities are currently comprised of providing limited
administrative services to First Financial.
On February 26, 1994, the Corporation completed the acquisition of NorthLand
Bank of Wisconsin, SSB (NorthLand) of Ashland, Wisconsin. The Corporation issued
approximately 938,000 shares of common stock, valued in the aggregate at $14.2
million, at the time of the acquisition. The acquisition of NorthLand has been
accounted for as a pooling-of-interests. NorthLand is not material to the
balance sheet or operating results of the Corporation; therefore, balances for
prior years have not been restated. However, 1994 amounts have been adjusted to
reflect the transaction as if it had occurred on January 1, 1994. Upon closing,
NorthLand, which was merged into First Financial, had total assets and
stockholders' equity of $125.6 million and $11.6 million, respectively.
Condensed 1993 operating results for NorthLand are on the following page:
Three Months Nine Months
Ended Ended
September 30, September 30,
1993 1993
-------------- -------------
(In thousands)
Net interest income $ 1,433 $ 4,454
Provision for losses on loans (164) (374)
Non-interest income 443 1,116
Non-interest expense (1,234) (3,761)
Income taxes (268) (654)
-------- --------
Net income $ 210 $ 781
On August 20, 1993, First Financial completed the assumption of deposits
(approximately $268.0 million) and the purchase of the branch facilities of the
four Quincy, Illinois-area branches of Citizens Federal, a Federal Savings Bank
(Citizens) of Miami, Florida. The acquisition of Citizens' four Quincy,
Illinois-area offices, now operating as branches of First Financial, was
accounted for as a purchase.
NOTE C - EARNINGS PER SHARE
Primary and fully diluted earnings per share for the periods ended September
30, 1994 and 1993 have been determined based on the weighted average number of
common shares outstanding during each period and common equivalent shares, using
the treasury share method, outstanding at the end of each period. The
Corporation's common stock equivalents consist entirely of stock options. See
Exhibit 11 to this Report for a detailed computation of earnings per share.
NOTE D - CONTINGENT LIABILITIES
The Banks have previously entered into agreements whereby, for an annual
fee, certain securities are pledged as secondary collateral in connection with
the issuance of industrial development revenue bonds. At September 30, 1994,
mortgage-related securities and investment securities with a carrying value of
approximately $6.4 million were pledged as collateral for bonds in the aggregate
principal amount of $4.0 million. Additional bond issues totaling $7.6 million
are supported by letters of credit issued by First Financial, in lieu of
specific collateral. At September 30, 1994, each of the outstanding collateral
agreements was current with regard to bond debt-service payments.
NOTE E - DIVIDENDS PAID OR DECLARED TO STOCKHOLDERS
The Board of Directors of the Corporation declared a $0.10 per share
quarterly cash dividend for the three month period ended September 30, 1994 to
shareholders of record of the common stock on September 15, 1994.
NOTE F - REGULATORY CAPITAL REQUIREMENTS
Current Office of Thrift Supervision (OTS) regulatory capital requirements
for federally-insured thrift institutions include a tangible capital to tangible
assets ratio, a core leverage capital to adjusted tangible assets ratio and a
risk-based capital measurement based upon assets weighted for their inherent
risk. As of September 30, 1994, both First Financial and Port exceeded all OTS
capital requirements as displayed below.
Required Actual Actual
OTS First Financial Port
Ratio Ratio Ratio
--------- ---------------- -------
Tangible capital 1.50% 5.54% 7.76%
Core leverage capital 3.00 5.98 7.76
Risk-based capital 8.00 13.18 14.87
The OTS has added an interest-rate risk calculation such that an institution
with a measured interest rate risk exposure greater than specified levels must
deduct an interest rate risk component when calculating the OTS risk-based
capital requirement. At September 30, 1994, the Banks were not required to
deduct any interest rate risk component under the OTS regulations. The OTS has
adopted another final rule, which was effective on 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 minimum required core capital ratio from the
current 3.00% to a range of 4.00% to 5.00% for all but the most healthy
financial institutions. Management of the Corporation and First Financial do not
believe these rules will significantly impact the capital requirements of the
Bank or cause First Financial to fail to meet its regulatory capital
requirements.
Under the terms of the Federal Deposit Insurance Corporation Improvement Act
of 1991 (FDICIA), the Banks are also further regulated pursuant to the prompt
corrective action (PCA) provisions of FDICIA. Under FDICIA, thrift institutions
are assigned, based upon regulatory capital ratios and other subjective
supervisory criteria, to one of five PCA categories, ranging from "well
capitalized" to "critically undercapitalized". Institutions assigned to the
three lowest categories are subject to PCA sanctions by the OTS. PCA sanctions
include, among other items, restrictions on dividends and capital distributions.
First Financial is not subject to any PCA sanctions.
NOTE G - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
For The
Nine Months Ended
September 30,
------------------
1994 1993
---- ----
(In thousands)
Supplemental disclosure of cash flow information:
Cash paid or credited to accounts during
period for:
Interest on deposits and borrowings $140,557 $143,241
Income taxes 23,184 17,901
Non-cash investing activities:
Loans transferred to held for sale
portfolio 39,025 43,367
Loans receivable transferred to foreclosed
properties 5,321 5,355
Mortgage-backed securities transferred to
available-for-sale portfolio 17,564 --
Change in net unrealized holding gain (loss)
on securities available for sale (7,127) --
NOTE H--PENDING ACCOUNTING CHANGES
The Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 114, ("Accounting by Creditors for Impairment of
a Loan") in May, 1993 and subsequently issued SFAS No. 118 ("Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures") in
October, 1994. SFAS Nos. 114 and 118 are effective for fiscal years beginning
after December 15, 1994. Early adoption of the statement is allowed. SFAS No.
114 requires that impaired loans be measured at the present value of expected
future cash flows discounted at the loan's effective interest rate, or, as a
practical expedient, at the loan's observable market price or the fair value of
the collateral if the loan is collateral dependent. SFAS No. 118 amends certain
accounting and disclosure requirements set forth in SFAS No. 114. Management
does not believe that the adoption of SFAS Nos. 114 and 118 will have a material
impact on the Corporation's financial condition or results of operations.
The FASB also issued SFAS No. 119 ("Disclosure about Derivative Financial
Instruments and Fair Value of Financial Instruments") in October, 1994 relating
to disclosures about derivative financial instruments. Management believes that
SFAS No. 119 will have limited applicability to the Corporation.
NOTE I--SUBSEQUENT EVENTS
On October 26, 1994, the Corporation entered into a definitive agreement to
acquire FirstRock Bancorp, Inc. (FROK) of Rockford, Illinois through a tax-free
exchange of stock. The agreement calls for shareholders of FROK to receive
Corporation common stock worth $27.10 for each FROK share. The Corporation stock
will be valued at the average price over the 15-day trading period which
predates the closing of the transaction by three trading days. Upon the closing,
a newly-formed subsidiary of the Corporation will be merged with FROK and it is
probable that the surviving corporation of that merger will thereafter be
liquidated into the Corporation. FROK's sole subsidiary, First Federal Savings
Bank, FSB of Rockford, Illinois, will be merged into First Financial upon the
closing.
The acquisition is subject to regulatory approval and approval by
shareholders of FROK. This transaction is expected to close during the first
quarter of 1995 and will be accounted for as a pooling-of-interests. The
agreement also allows for possible termination of the transaction or
modification of the exchange ratio if the average price of the Corporation's
stock falls below $13.25 or goes above $20.00 during the valuation period prior
to closing. The Corporation also announced that it may repurchase up to 450,000
of its outstanding shares in the open market if conditions justify such
repurchases. These shares, along with newly issued shares, would be used to
purchase FROK. In conjunction with the definitive agreement, FROK has issued a
warrant entitling First Financial to purchase an aggregate 475,246 shares of
FROK common stock at $22.50, the closing price of FROK's stock on October 25,
1994, under certain circumstances related primarily to third party offers for
FROK if the transaction is not completed. Exercise of the warrant would be
subject to necessary regulatory approvals.
On October 1, 1994, the Corporation merged Port into First Financial.
Management anticipates that non-interest expense reductions arising from the
consolidation of various support functions will contribute approximately $0.02
per share to the Corporation's future earnings.
MANAGEMENT'S DISCUSSION AND ANALYSIS
COMPARISON OF THE CONSOLIDATED BALANCE SHEETS
AT SEPTEMBER 30, 1994 (UNAUDITED) WITH DECEMBER 31, 1993
General:
Total assets increased to $5.05 billion at September 30, 1994 from $4.77
billion at December 31, 1993, primarily due to i) asset growth funded by FHL
Bank advances and ii) the NorthLand acquisition. See Note B to the unaudited
consolidated financial statements for a discussion of this acquisition. Total
loans (including mortgage-related securities) and deposits increased to $4.63
billion and $4.10 billion, respectively, at September 30, 1994 from $4.25
billion and $4.05 billion, respectively, at the end of 1993. Stockholders'
equity at September 30, 1994 was $265.9 million, up from $234.7 million at
year-end 1993.
Liquidity and Capital Resources:
At September 30, 1994, total consolidated liquidity, consisting of cash,
cash equivalents, and investment securities represented 4.6% of the
Corporation's total assets compared with 7.10% at December 31, 1993. Each of the
Banks are in compliance with requirements relating to minimum levels of liquid
assets as defined by OTS regulations. The ongoing management of liquid assets is
an integral part of the Corporation's overall asset/liability management program
as described below under "Asset/Liability Management." The cash and securities
portfolios are among the most flexible assets available for shorter term
liability matching. Total consolidated liquidity at September 30, 1994 decreased
by $107.4 million as compared to December 31, 1993 liquidity as a result of the
net effect of significant changes in various categories of assets and
liabilities during the nine-month interim period. Some of the more significant
changes in these categories, including liquid assets, can be summarized as
follows:
Consolidated
Statement Of Balance From Other Balance
Financial Condition December 31, NorthLand Increases September 30,
Classification 1993 Acquisition (Decreases) 1994
-------------------- ------------ ----------- ----------- -------------
(In thousands)
Cash and cash equivalents $ 110,882 $ 4,593 $(21,12) $ 94,351
Securities available for
sale:
Investment securities 84,487 -- (77,862) 6,625
Mortgage-related
securities 178,362 -- (3,714) 174,648
Securities held to
maturity:
Investment securities 143,568 4,785 (17,776) 130,577
Mortgage-related
securities 1,147,891 16,742 161,201 1,325,834
Loans receivable, in-
cluding loans held
for sale 2,922,504 96,748 114,376 3,133,628
Office properties 50,120 2,387 (3,518) 48,999
Intangible assets 31,392 699 (4,032) 28,059
Deposits 4,050,520 114,297 (63,368) 4,101,449
Borrowings 438,598 750 151,797 591,145
Advance payments by
borrowers for taxes
and insurance 13,805 462 44,882 59,149
Stockholders' equity 234,685 11,401 19,844 265,930
Changes noted in the "Other Increases (Decreases)" column of the preceding
table are discussed below in the related sections of "Management's Discussion
and Analysis."
Management believes liquidity levels are proper and that adequate capital
and borrowings are available through the capital markets, the Federal Home Loan
Bank (FHLB) and other sources. For a discussion of regulatory capital
requirements, see Note F to the unaudited consolidated financial statements.
On an unconsolidated basis, the Corporation had cash of $7.8 million and
subordinated debt of $55.0 million at September 30, 1994. The principal ongoing
sources of funds for the Corporation are dividends from the Banks. Applicable
rules and regulations of the OTS impose limitations on capital distributions by
savings institutions such as the Banks. Savings institutions such as the Banks
which have capital in excess of all fully phased-in capital requirements before
and after a proposed capital distribution are permitted, after giving prior
notice to the OTS, to make capital distributions during a calendar year up to
the greater of (i) 100% of net income to date during the calendar year, plus the
amount that would reduce by 1/2 its "surplus capital ratio" (the excess capital
over its fully phased-in capital requirements) at the beginning of the calendar
year, or (ii) 75% of its net income over the most recent four-quarter period.
Loans and Mortgage-Related Securities:
Total loans, including loans held for sale and mortgage-related securities
(MBSs), increased $385.4 million from $4.25 billion at December 31, 1993 to
$4.63 billion at September 30, 1994. Total loans are summarized below as of the
dates indicated.
September 30, December 31, Increase
1994 1993 (Decrease)
------------- ------------ ----------
(In thousands)
Real estate loans:
One- to four-family $ 1,865,476 $1,797,990$ 67,486
Multi-family 191,471 188,558 2,913
Commercial and non-residential 110,068 94,789 15,279
---------- ---------- --------
Total real estate loans 2,167,015 2,081,337 85,678
Other loans:
Consumer 242,079 153,574 88,505
Home equity 224,571 193,291 31,280
Credit cards 190,978 209,414 (18,436)
Education 185,831 167,385 18,446
Manufactured housing 156,795 165,017 (8,222)
Business 20,148 111 20,037
Less net items to loans receivable (53,789) (47,625) (6,164)
---------- ---------- --------
Total loans (including loans held
for sale) 3,133,628 2,922,504 211,124
MBSs 1,500,482 1,326,253 174,229
---------- ---------- --------
Total loans and MBSs $ 4,634,110 $4,248,757 $ 385,353
========== ========== ========
The major components of the increase in total loans during the nine months
of 1994 were a $174.2 million increase in MBSs, a $85.7 million increase in real
estate loans, an $88.5 million increase in consumer loans and a $20.0 million
increase in commercial business loans.
The increase in residential mortgage loans receivable at September 30, 1994
was attributable to i) the NorthLand acquisition and ii) the retention of an
increased level of adjustable-rate mortgage loans as higher interest rates in
1994 have induced borrowers to take such loans as opposed to fixed rate loans.
Consumer loans increased $88.5 million in 1994 due to the NorthLand
acquisition as well as continuing success in marketing a second mortgage
product. Home equity loans have increased $31.3 million in 1994 as customer
usage of this product has continued to grow. Credit card loans decreased $18.4
million in 1994 reflecting a seasonal decline in this portfolio as well as the
sale of $13.0 million of credit card loans relating to a discontinued
California-based affinity group relationship. Manufactured housing loan balances
decreased $8.2 million as the Corporation continued to restrict new originations
of such loans to the Midwest. Subsequent to the end of the third quarter, the
Corporation has exited the manufactured housing lending business due to
unfavorable pricing practices by competitors. The $20.0 million increase in
business loans reflects the acquisition of NorthLand's business loan portfolio,
which First Financial continues to service.
Mortgage loans held for sale were $6.8 million at September 30, 1994 as
compared to $73.9 million at the end of 1993. Off-balance sheet commitments to
extend credit and to sell mortgage loans totaled $30.2 million and $8.7 million,
respectively, at September 30, 1994 as compared to $62.3 million and $111.5
million, respectively, at December 31, 1993. During the nine months ended
September 30, 1994, market interest rates generally increased as compared to
interest rate levels at the end of 1993, and continue to fluctuate. The fair
value of on-balance sheet mortgage loans held for sale and off-balance sheet
commitments to originate and sell mortgage loans can vary substantially
depending upon the movement of interest rates. Management utilizes various
methods to insulate the Banks from the effects of such interest-rate movements,
principally by securing forward commitments to sell loans in the secondary
mortgage market. However, there can be no assurance that these means will be
totally effective. Future operations may be affected by the above-discussed risk
factors. Loan originations resulting from refinancing transactions, and
consequently gains on sales of loans, have decreased during this period of
rising interest rates.
After giving effect to the $16.7 million of MBSs acquired in the NorthLand
acquisition, the aggregate MBS portfolio increased $157.5 million during the
nine months ended September 30, 1994 primarily as a result of (i) purchases of
$588.4 million of U.S. Government agency adjustable-rate MBSs, ii) sales of
available-for-sale MBSs of $181.9 million, and (iii) repayments of $230.3
million. At the end of the third quarter, the Banks had no commitments to
purchase MBSs.
During the second quarter of 1994, all private-issue adjustable rate MBSs
with a junior ownership position, and not previously classified as available for
sale (having a carrying value of approximately $184.2 million), were transferred
to the available-for-sale portfolio since the inherent risk of ownership of
junior position (i.e., subordinated) securities could affect management's intent
and/or ability to hold such securities to maturity. At September 30, 1994, such
junior position private-issue MBSs held in the available-for-sale portfolio had
an aggregate cost of $114.8 million with a fair value of $101.9 million. The
decrease in fair value of these securities is attributable to the difficult
overall market conditions for MBSs as interest rates have increased during 1994.
This decrease in fair value is not considered to be permanent. See "Non-Accrual
MBSs" for further discussion of the junior position private-issue MBS portfolio.
Loan Delinquencies:
First Financial and Port monitor the delinquency status of their respective
loan portfolios on a constant basis and initiate a borrower contact and
additional collection procedures as necessary at an early date. Delinquencies
and past due loans are, however, a normal part of the lending function. When the
delinquency reaches the status of greater than 90 days, the loans are placed on
a non-accrual basis until such time as the delinquency is reduced again to 90
days or less. Non-accrual loans are presented separately in the following
section. Loan delinquencies of 90 days or less, for the dates indicated, are
summarized in the following chart:
September 30, December 31,
1994 1993
------------- ------------
(In thousands)
Loans Delinquent 30-59 Days
Student loans $ 4,085 $ 4,014
Residential real estate loans 7,325 5,844
Manufactured housing loans 2,375 2,999
Credit card loans 1,877 1,988
Commercial real estate loans 445 3,798
Commercial business -- --
Consumer and home equity 561 479
------- -------
$16,668 $19,122
Loans Delinquent 60-90 Days
Student loans $ 6,261 $ 4,159
Residential real estate loans 1,672 1,111
Manufactured housing loans 1,077 1,035
Credit card loans 947 904
Commercial real estate loans 788 707
Commercial business -- --
Consumer and home equity 174 128
------- -------
$10,919 $ 8,044
Total Loans Delinquent 30-90 Days
Student loans $10,346 $ 8,173
Residential real estate loans 8,997 6,955
Manufactured housing loans 3,452 4,034
Credit card loans 2,824 2,892
Commercial real estate loans 1,233 4,505
Commercial business -- --
Consumer and home equity 735 607
------- -------
$27,587 $27,166
At September 30, 1994, the 30-90 day delinquencies increased $400,000 to
$27.6 million from $27.2 million at year-end 1993. However, as a percent of
total loans receivable, loan delinquencies decreased from 0.93% at the end of
1993 to 0.88% at September 30, 1994. The $400,000 increase, at September 30,
1994, relates to the net effect of i) the return to satisfactory contractual
performance of a $3.4 million commercial real estate loan, ii) an increase of
$2.1 million in delinquent student loans (which are government guaranteed)
delinquent 30-90 days, iii) an increase of $2.0 million of delinquent
residential real estate loans and iv) a decrease of $500,000 in manufactured
housing loans delinquent 30- 90 days. All delinquent loans have been considered
by management in its evaluation of the adequacy of the allowances for loan
losses.
Non-Accrual Loans:
The Corporation places loans into a non-accrual status when loans are
contractually delinquent more than 90 days. If appropriate, loans may be placed
into non-accrual status prior to becoming 90 days delinquent based upon
management's analysis. Non-accrual loans are summarized, for the dates
indicated, in the following table:
September 30, December 31,
1994 1993
------------- ------------
(In thousands)
One- to four-family residential $ 4,558 $ 5,005
Multi-family residential 85 139
Commercial and other real estate 453 --
Manufactured housing 939 1,063
Credit cards 1,861 1,836
Commercial business 682 --
Consumer and other 267 197
------- -------
$ 8,845 $ 8,240
======= =======
Non-accrual loans increased $600,000 to $8.8 million at September 30, 1994
from $8.2 million at December 31, 1993. As a percentage of net loans receivable,
non-accrual loans remained steady at 0.28% at September 30, 1994 and December
31, 1993. The 1994 increase in non-accrual loans is related to increases of
$500,000 and $700,000 in the commercial real estate mortgage and commercial
business loan portfolios, respectively. These increases were offset partially by
a $400,000 decrease in non-accrual residential mortgages and a smaller decrease
in non-accrual manufactured housing loans. The commercial real estate mortgage
increase relates to a purchased loan on a recreational facility which became
more seriously delinquent. The commercial business loan increase relates
primarily to such loans acquired in the NorthLand acquisition. Non-accrual loans
for the other loan portfolios remained at the same relative level at September
30, 1994 as compared to the end of 1993. The Banks had no troubled debt
restructurings during 1994.
All loans included in non-accrual status have been considered by management
in its review of the adequacy of allowances for loan losses.
Non-Accrual MBSs:
During the first quarter of 1994, First Financial placed on non-accrual
status two privately issued junior position adjustable rate mortgage-backed
securities, aggregating approximately $21.2 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 mortgage portfolio and substantially all of the cash flows are
currently directed to owners of the senior position. Further delayed receipt of
full monthly principal and interest payments is probable. The underlying loans
comprising these securities have been serviced by a California institution under
the control of the Resolution Trust Corporation (RTC). Subsequent to September
30, 1994, the servicing of these loans was transferred to the trustee for these
securities. The trustee has secured a sub-servicing arrangement for these loans.
First Financial's junior position is senior to several subordinate tranches,
currently amounting to approximately 7.6% of the face value of the total
portfolios in question, which are designed to absorb first losses in the
underlying mortgage portfolio.
During the second quarter an independent national rating agency downgraded
these two securities as well as an unrelated senior position security of the
same issuer. The senior position security continues to be a performing asset.
Subsequent to this downgrading, a $5.8 million writedown was recorded by First
Financial relative to these securities reflecting a permanent impairment of the
securities. In addition, a $3.2 million general valuation allowance was recorded
to cover possible loss on all other junior position private issue MBSs. The
writedown amount was based upon information from the rating agency as well as
discounted cash flow analyses performed by management (based upon assumptions
for delinquency levels, foreclosure rates and recovery ratios in the underlying
portfolios). Management believes that this writedown and allowance are adequate
based upon its evaluations. As discussed in "Loans and Mortgage-Related
Securities", all junior position private-issue MBSs, including the two
securities discussed above, not previously classified as available for sale,
were transferred to the available-for-sale portfolio during the second quarter
of 1994.
The junior position MBSs transferred to available-for-sale status, excluding
the two written-down MBSs discussed above, totaled $184.2 million and had an
approximate market value of $184.0 million at the time of transfer. While
management does not believe that these latter junior position securities
demonstrate any permanent impairment in value, these securities were transferred
to the available-for-sale portfolio reflecting management's intention to divest
the Bank of such junior position securities and the inherent risk in ownership
of such subordinated securities as discussed in "Loans and Mortgage-Related
Securities".
First Financial's portfolio of mortgage-related securities totaled
approximately $1.5 billion at September 30, 1994, and except for the three
securities which were recently downgraded as noted above, all of First
Financial's mortgage-related securities are performing and are i) rated at a
minimum of investment grade by at least one nationally recognized independent
rating agency, or ii) are government agency backed issues.
Allowances for Loan Losses:
The Corporation's loan portfolios and off-balance sheet financial guarantees
are evaluated on a continuing basis to determine the additions to the allowances
for losses and the related balance in the allowances. These evaluations consider
several factors including, but not limited to, general economic conditions, loan
portfolio compositions, loan delinquencies, prior loss experience, and
management's estimation of future potential losses. The evaluation of allowances
for loan losses includes a review of both known loan problems as well as a
review of potential problems based upon historical trends and ratios.
A summary of activity in the allowances for loan losses, for the three
months and nine months ended September 30, 1994 and 1993, follows:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
1994 1993 1994 1993
------ ----- ----- -----
(In thousands)
Allowances at beginning of period $23,776 $22,994 $ 23,266 $ 17,067
From acquired banks -- -- 816 4,885
Provisions 1,662 2,180 4,878 7,824
Charge-offs (2,613) (7,031) (7,683)
Recoveries 272 321 1,168 1,184
-------- -------- --------- --------
Allowances at end of period $23,097 $23,277 $ 23,097 $ 23,277
A discussion of loan loss provisions and charge-offs is presented in
"Management's Discussion and Analysis-Comparison of the Unaudited Consolidated
Statements of Income for the Three Months and the Nine Months Ended September
30, 1994 and 1993." An analysis of allowances by loan category, the percentage
of such allowances by category and in the aggregate to loans receivable at the
dates indicated, follows:
September 30, 1994 December 31, 1993
-------------------------- --------------------------
As Percentage As Percentage
Allowance Of Total Loans Allowance Of Total Loans
Amount In Category Amount In Category
---------- -------------- --------- --------------
(Dollars in thousands)
Credit cards $ 6,563 3.44% $ 6,502 3.10%
Residential real estate 5,887 .29 5,877 .30
Manufactured housing 4,543 2.90 4,668 2.83
Commercial and non-resi-
dential real estate 2,874 2.61 4,010 4.23
Consumer 2,087 .86 1,728 1.12
Home equity 469 .21 429 .22
Commercial business 624 3.10 -- --
Education 50 .03 52 .03
------- -------
$23,097 .74% $23,266 .80%
The allowances for loan losses were $23.1 million, or 0.74% of loans
receivable, at September 30, 1994 compared to $23.3 million, or 0.80%, at
December 31, 1993. The allowances for losses represented 261% of non-accrual
loans at September 30, 1994 as compared to 282% at the end of 1993. Management
of the Corporation and the Banks believe that the allowances for losses are
sufficient based upon their current evaluations.
Foreclosed Properties and Repossessed Assets:
Foreclosed properties and other repossessed assets are summarized, for the
dates indicated, as follows:
September 30, December 31,
1994 1993
------------- ------------
(In thousands)
Foreclosed real estate properties $ 5,879 $ 8,040
Manufactured housing owned 154 115
Consumer and other repossessed assets 36 48
6,068 8,203
Less allowances for losses (1,341) (1,386)
-------- --------
$ 4,727 $ 6,817
Foreclosed properties, net of allowances for losses, decreased $2.1 million
to $4.7 million at September 30, 1994 from $6.8 million at December 31, 1993 due
to the sales of two large foreclosed commercial real estate properties in 1994
(see below).
A summary of the activity in allowances for losses on foreclosed properties,
for the three months and nine months ended September 30, 1994 and 1993, is
presented below.
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ----------------------
1994 1993 1994 1993
(In thousands)
Allowances at beginning
of period $ 1,331 $1,111 $1,386 $ 552
Provisions 75 1,153 400 3,124
Charge-offs (65) (845) (444) (2,257)
-------- ------- ------- --------
Allowances at end of
period $ 1,341 $1,419 $1,342 $ 1,419
======== ======= ======= ========
A list of the larger commercial real estate properties (having a carrying
amount of $1.0 million or greater) included in foreclosed properties, for the
dates indicated, is presented below. These properties are carried at the lower
of cost or fair value.
Carrying Value At
---------------------------
Property September 30, December 31,
Type Property Location 1994 1993
- --------- -------------------- ------------- -----------
(In thousands)
Office Madison, Wisconsin $ -- $ 1,500
Retail Milwaukee, Wisconsin 1,089 1,089
The Madison, Wisconsin property and another $700,000 property were sold in
1994 and financed by First Financial at market terms.
All of the above foreclosed real estate properties and repossessed assets
have been considered by management in its evaluation of the adequacy of
allowances for losses.
Classified Assets, Including Non-Performing 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 regulations.
An asset is classified "substandard" if management believes it contains
defined characteristics relating to borrower net worth, paying capacity or value
of collateral which indicate that some loss is distinctly possible if noted
deficiencies are not corrected. "Doubtful" assets have the same characteristics
present in substandard assets but to a more serious degree, to the belief of
management, such that it is improbable that the asset could be collected or
liquidated in full. "Loss" assets are deemed to be uncollectible or of such
minimal value that their continuance as assets without being specifically
reserved is not warranted. Substandard and doubtful classifications require the
establishment of prudent general allowance for loss amounts while loss assets,
to the extent that such assets are classified as a "loss", require a 100%
specific allowance or that the asset be charged off.
In general, classified assets include non-performing assets plus other loans
and assets, including contingent liabilities (see Note D), meeting the criteria
for classification. Non- performing assets include loans or assets i) which were
previously loans which are not substantially performing under the contractual
terms of the original notes, or ii) for which known information about possible
credit problems of borrowers causes management to have serious doubts as to the
ability of such borrowers to comply with current contractual terms. This
non-performing characteristic impacts directly upon the interest income normally
expected from such assets. Specifically included are the loans held on a
non-accrual basis, real estate judgments subject to redemption and foreclosed
properties for which one of the Banks has obtained title.
Classified assets, including non-performing assets, for the Banks,
categorized by type of asset are set forth in the following table:
September 30, December 31,
1994 1993
------------- ------------
(In thousands)
Classified assets:
Non-performing assets:
Non-accrual loans $ 8,845 $ 8,240
Non-accrual MBSs 15,455 --
Foreclosed properties and other
repossessed assets 4,727 6,817
------ ------
Total Non-Performing Assets 29,027 15,057
Add back general valuation allowances net-
ted against foreclosed properties above 1,341 1,386
Adjustment for non-performing residential
loans not classified due to low
loan-to-appraisal value (796) (707)
Additional classified performing loans:
Residential real estate 3,246 1,919
Commercial real estate 8,323 9,747
Consumer and other 604 241
Other adversely classified assets 386 757
Total Classified Assets $ 42,131 $ 28,400
====== ======
During the nine months ended September 30, 1994, classified assets
increased $13.7 million to $42.1 million from $28.4 million at December 31, 1993
as a result of the $15.5 million increase in non-accrual mortgage-backed
securities referred to previously (see "Non-Accrual MBSs"). As a percentage of
total assets, classified assets increased from 0.60% at year-end 1993 to 0.83%
at September 30, 1994.
The increase in non-accrual loans and the $2.1 million decrease in
foreclosed properties during the first nine months of 1994 have been discussed
above (see "Non-Accrual Loans" and "Foreclosed Properties").
The following table sets forth, at the dates indicated, performing
commercial real estate mortgage loans (in excess of $1.0 million) included in
classified assets, due to the possible adverse effects of identifiable future
events.
Loan Amount Classified
---------------------------
Property Type Of Property September 30, December 31,
Loan Collateral Location 1994 1993
- ---------------- ---------- ------------- -----------
(In thousands)
Office/Land Sheboygan, Wisconsin $ 3,645 $3,670
Motels Various-Tennessee 2,567 (a) 2,600 (a)
Office Independence, Missouri -- 1,091 (b)
(a) Represents First Financial's 20% interest in loans, aggregating $12.3
million, for which First Financial is also the lead lender.
(b) Represents loan to finance the 1993 sale of a former foreclosed real estate
property. The loan had been classified pending future performance by the
borrower. Since December, 1993, the loan has been performing in accordance
with the terms of the loan agreement, and, thus, it was removed from the
classified asset list.
Other assets adversely classified remained relatively unchanged during the
first nine months of 1994.
All adversely classified assets at September 30, 1994, have been considered
by management in its evaluation of the adequacy of allowances for losses.
Deposits and Other Liabilities:
Deposits, excluding the $114.3 million resulting from the NorthLand
acquisition, decreased $63.4 million during the nine months ended September 30,
1994. Although interest rates have risen significantly during 1994, the weighted
average cost of deposits of 4.07% at September 30, 1994 was only slightly higher
than the 4.06% reported at December 31, 1993.
Advance payments by borrowers for taxes and insurance, excluding $462,000
of such liabilities assumed in the NorthLand acquisition, increased by $44.9
million during the first nine months of 1994 as a result of the normal
cumulative monthly deposits made by borrowers less interim payments of taxes and
insurance premiums.
Borrowings:
At September 30, 1994, the Corporation's consolidated borrowings increased
to $591.1 million from $438.6 million at December 31, 1993. The increase in
borrowings is primarily attributable to i) increases in FHLB advances used to
fund loan originations and MBS purchases and ii) $750,000 of borrowings assumed
by the Corporation when it acquired NorthLand.
Stockholders' Equity:
Stockholders' equity at September 30, 1994 was $265.9 million, or 5.26% of
total assets, as compared to $234.7 million, or 4.92% of total assets, at
December 31, 1993. The major changes in stockholders' equity included i) net
income of $33.6 million earned during the first nine months of 1994, ii) cash
dividend payments to stockholders of $7.5 million, iii) $11.4 million additional
equity realized in the NorthLand acquisition, which was accounted for as a
pooling-of-interests, and iv) a negative $7.1 million change in the carrying
value of securities available for sale due to market conditions. See Note B to
the unaudited consolidated financial statements for a discussion of the
accounting treatment of the NorthLand acquisition. Stockholders' equity per
share increased from $9.95 per share at year-end 1993 to $10.77 per share at
September 30, 1994.
Regulatory Capital:
As set forth in Note F to the unaudited consolidated financial statements,
both First Financial and Port exceed all fully phased-in regulatory capital
requirements mandated by the OTS. The Banks have been classified as "well
capitalized" institutions by the Federal Deposit Insurance Corporation (FDIC)
under applicable insurance of accounts regulations.
Loan Originations:
A comparison of loan originations for the first nine months of 1994 and
1993, including loans originated for sale (but excluding MBSs), is set forth
below:
Nine Months Ended September 30,
----------------------------------------
1994 Percent 1993 Percent
---- ------- ---- -------
(Dollars in thousands)
Loan Type
Mortgage:
One- to four-family $ 478,401 59.5% $ 656,248 59.6
Multi-family 38,344 4.8 60,209 5.5
Commercial/non-residential 27,321 3.4 8,367 0.7
Refinanced one- to four-
family loans previously
sold and serviced for others 52 -- 185,604 16.9
544,118 67.7 910,428 82.7
---------- ----- ---------- ------
Consumer 170,562 21.2 99,262 9.0
Student 39,346 4.9 25,067 2.3
Home equity-net 31,280 3.9 24,293 2.2
Manufactured housing 14,817 1.8 16,976 1.5
Commercial business 3,377 .4
Refinanced manufactured
housing loans previously
sold and serviced for others 475 .1 10,809 1.0
Credit cards-net -- -- 13,773 1.3
---------- ----- ---------- ------
Total loans originated 803,975 100.0 1,100,608 100.0%
Decrease (increase) in undis-
bursed loan proceeds (8,983) 2,022
---------- ----------
Total loans disbursed $ 794,992 $1,102,630
========== ==========
Total loan originations decreased to $804.0 million for the first nine
months of 1994 from $1,100.6 million for the same period in 1993. This net 1994
decrease of $296.6 million was primarily attributable to i) a $366.3 million
decrease in mortgage loan originations and ii) a $71.3 million increase in
consumer lending.
One- to four-family mortgage loan originations and refinancings decreased
$363.4 million to $478.5 million for the first nine months of 1994 as compared
to $841.9 million for the same period in 1993. At September 30, 1994, one- to
four-family mortgage loan applications in process and commitments totaled $44.6
million and $21.9 million as compared to $84.2 million and $50.0 million at
December 31, 1993. The decrease in originations, refinancings, applications and
commitments reflects a lower level of refinancings and reduced borrower demand
as interest rates have risen in 1994.
Originations of multi-family residential mortgage loans were $21.9 million
under the 1993 level, while originations of commercial/non-residential mortgage
loans increased by $19.0 million over the 1993 level. This shift from
multi-family residential lending to non-residential mortgage lending reflects
competitive market forces.
Consumer loan originations increased $71.3 million to $170.6 million in the
first nine months of 1994 primarily due to increased volumes in a short-term
consumer first mortgage product, increased automobile financing, the
availability of additional Wisconsin markets after the NorthLand acquisition and
the implementation of a fully-automated consumer loan origination system in the
branches.
Student loan originations increased $14.3 million to $39.3 million during
the first nine months of 1994 as a result of increased government guaranteed
portfolio acquisitions from other lenders and the elimination of borrowing
limits on some student loan products.
Home equity loan balances increased $31.3 million for the first nine months
of 1994 to $224.5 million as customer usage of this product continues to grow.
Credit card loans decreased $18.4 million in the first nine months of 1994
due to i) the above noted sale of $13.0 million of affinity group-related credit
card loans and ii) other net decreases in credit card loan balances which are
included in loan repayments in the Corporation's consolidated statement of cash
flows. Credit card balances traditionally decrease in the first part of the year
due to normal seasonal reductions of consumer demand following the calendar year
end. Credit card loan balances totaled $191.0 million at September 30, 1994
compared to $209.4 million at the end of 1993 and $192.2 million at September
30, 1993, reflecting continued growth in this portfolio excluding seasonal
factors despite the $13.0 million sale of the affinity group loans noted above.
Asset/Liability Management:
The objective of the Banks' asset/liability policy is to manage interest
rate risk so as to maximize net interest income over time in changing
interest-rate environments. To this end, management believes that strategies for
managing interest-rate risk must be responsive to changes in the interest-rate
environment and must recognize and accommodate the market demands for particular
types of deposit and loan products.
Interest-bearing assets and liabilities can be analyzed by measuring the
magnitude by which such assets and liabilities are interest-rate sensitive and
by monitoring an institution's interest-rate sensitivity "gap". An asset or
liability is determined to be interest-rate sensitive within a specific time
frame if it matures or reprices within that time period. An interest-rate
sensitivity "gap" is defined as the difference between the amount of
interest-earning assets anticipated to mature or reprice within a specific time
period and the amount of interest- costing liabilities anticipated to mature or
reprice within the same time period. A gap is considered positive when the
amount of interest-rate sensitive assets exceeds the amount of interest-rate
sensitive liabilities that mature or reprice within a given time frame. A gap is
considered negative when the amount of interest-rate sensitive liabilities
exceeds the amount of interest-rate sensitive assets that mature or reprice
within a specified time period.
The table on page 24 sets forth the combined estimated maturity/repricing
structure of the Corporation's consolidated interest-earning assets (including
net items) and interest-costing liabilities at September 30, 1994. 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. Further, in the event of a change
in interest rates, prepayment and early withdrawal levels may deviate
significantly from those assumed in calculating the data in the table.
The Corporation's consolidated positive one-year interest-rate sensitivity
gap at September 30, 1994 was $185,000 or 0.01% of total assets. The one-year
positive gap decreased $290.6 million from the December 31, 1993 positive gap of
$290.8 million or 6.09% of total assets at that date.
The Corporation's consolidated one-year positive gap position of 0.01% at
September 30, 1994 falls within management's current operating range of a 10%
positive gap position to a 10% negative gap position. In view of the current
interest-rate environment and the related impact on customer behavior,
management believes that it is extremely important to weigh and balance the
effect of asset/liability management decisions in the short-term in its efforts
to maintain net interest margins and acceptable future profitability. As such,
management believes that it has been able to achieve a consistent net interest
margin while still meeting its asset/liability management objectives.
In this regard, 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 theoretical analysis at September 30, 1994 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 issued a
final regulation which calls for further regulatory capital requirements based
upon this market value methodology. See Note F to the unaudited consolidated
financial statements. 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.
FIRST FINANCIAL CORPORATION CONSOLIDATED GAP ANALYSIS AT SEPTEMBER 30, 1994
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) $ 95,749 $ 66,819 $ 148 $ 591 $ 32,791 $ -- $ 196,098
Mortgage-related securities (b) 1,397,557 49,455 21,028 24,805 7,637 -- 1,500,482
Mortgage loans (c)(d):
Fixed-rate 203,962 333,109 252,183 433,963 189,353 2,424 1,414,994
Adjustable-rate 389,571 315,919 3,109 -- -- -- 708,599
Other loans 705,372 162,813 70,745 59,237 11,869 -- 1,010,036
2,792,211 928,115 347,213 518,596 241,650 2,424 4,830,209
Rate-sensitive liabilities:
Deposits (e)(f) 2,312,181 1,093,968 361,248 217,744 125,328 46,481 4,156,950
Borrowings (g) 479,845 48,725 1,476 58,379 -- 2,720 591,145
2,792,026 1,142,693 362,724 276,123 125,328 49,201 4,748,095
GAP (repricing difference) $ 185 $ (214,578) $ (15,511) $ 242,473 $ 116,322 $(46,777) $ 82,114
Cumulative GAP $ 185 $ (214,393) $ (229,904) $ 12,569 $ 128,891 $ 82,114
Cumulative GAP/Total assets 0.01% (4.24)% (4.55)% .25% 2.55% 1.63%
<FN>
(a) Investments are adjusted to include FHLB stock and other items totaling
$32.7 million as investments in the "Greater Than Ten Through 20 Years"
category.
(b) Investment and mortgage-related securities are presented at carrying value,
including net unrealized gain or loss on available-for-sale securities.
(c) Based upon 1) contractual maturity, 2) repricing date, if applicable, 3)
scheduled repayments of principal and 4) projected prepayments of principal
based upon the Corporation's historical experience as modified for current
market conditions.
(d) Includes loans held for sale.
(e) Deposits include $59.1 million of tax and insurance accounts and exclude
accrued interest on deposits of $3.6 million.
(f) The Corporation has assumed that its passbook savings, NOW accounts and
money market deposit 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 $3.4 million are included in
the "Greater Than Five Through Ten Years" category.
COMPARISON OF THE
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS AND NINE MONTHS ENDED
SEPTEMBER 30, 1994 AND 1993
Selected Income Statement Information:
Net income of $13.7 million for the third quarter of 1994 increased $2.4
million, or 21.4% from the $11.3 million reported for the same period in 1993.
The annualized returns on average assets and average equity for the third
quarter of 1994 improved to 1.09% and 20.91%, respectively, from 0.97% and
20.87%, respectively, as compared to the similar 1993 period. Fully diluted
earnings per share increased to $0.54 per share for the 1994 quarter as compared
to $0.46 per share reported for the third quarter of 1993.
Net income of $33.6 million for the nine months ended September 30, 1994
was up from the $32.0 million reported for the same period in 1993. Results for
1994 were negatively affected by a $9.0 million unrealized loss on the potential
impairment of MBSs (see Non-Accrual MBSs). This adjustment has resulted in lower
returns on average assets and average equity for the 1994 period. The annualized
returns on average assets and average equity decreased to 0.90% and 17.40%,
respectively, for the nine months ended September 30, 1994, as compared to 0.94%
and 20.55%, respectively, for the same period in 1993. Fully diluted earnings
per share was $1.32 per share for each of the nine month periods ended September
30, 1994 and 1993.
Net Interest Income:
Net interest income increased $4.1 million to $41.8 million during the
third quarter of 1994 from $37.7 million for the third quarter of 1993. The net
interest margin of 3.51% for the third quarter of 1994 was up from the 3.40%
reported for the third quarter of 1993. Interest income and interest expense
increased $5.1 million and $900,000, respectively, for the third quarter of 1994
as compared to 1993. The average balances of interest-earning assets and
interest-bearing liabilities increased from $4.479 billion and $4.402 billion,
respectively, in 1993 to $4.812 billion and $4.697 billion, respectively, in
1994. The ratio of average interest-earning assets to average interest-bearing
liabilities increased to 102.45% for the third quarter of 1994 as compared to
101.74% for the 1993 quarter. The 1994 increases in average balances are
primarily due to the asset growth funded via FHLB advances and the effect of
recent acquisitions (see Note B to the unaudited consolidated financial
statements). The increase in average interest-earning assets, as well as the
improved earning-asset ratio noted above, was complemented by a slightly greater
decrease in the average cost on interest-bearing liabilities (4.28% in 1993
versus 4.09% in 1994) than in the average yield of interest-earning assets
(7.61% in 1993 versus 7.50% in 1994). As discussed in the "Non-accrual MBS"
section, two MBSs were placed on non-accrual status during the first quarter of
1994. As a result of this action, interest income and net interest income have
been reduced by approximately $400,000 and $1.5 million for the quarter and the
nine months ended September 30, 1994, respectively. Future earnings, with
respect to these securities, will be negatively affected by approximately
$400,000 per quarter, or approximately 0.03% of earning assets.
Net interest income increased $10.5 million to $121.2 million during the
first nine months of 1994 from $110.7 million for the same period in 1993. The
net interest margin of 3.40% for the first nine months of 1994 was up from the
3.37% reported for the nine months of 1993. Interest income increased $8.2
million for the first nine months of 1994 as compared to 1993. Interest expense
decreased $2.3 million for the first nine months of 1994 as compared to the same
period in 1993. The average balances of interest-earning assets and
interest-bearing liabilities increased from $4.362 billion and $4.293 billion,
respectively, in 1993 to $4.742 billion and $4.633 billion in 1994,
respectively. The ratio of average interest-earning assets to average
interest-bearing liabilities increased to 102.35% for the nine months of 1994 as
compared to 101.60% for the 1993 period. The 1994 increases in average balances
again are due to the same reasons noted above. The increase in average
interest-earning assets, as well as the improved earning-asset ratio noted
above, were primarily responsible for the slight increase in the net interest
margin. The net interest spread remained at 3.30% in 1994 as the average yield
on interest-earning assets (7.78% in 1993 versus 7.39% in 1994) decreased in
proportion to the decrease in the average cost of interest-bearing liabilities
(4.48% in 1993 versus 4.09% in 1994).
Interest Spread:
The following table sets forth the weighted average yield earned on the
Corporation's interest-earning assets, the weighted average interest rate paid
on deposits and borrowings, the net spread between yield earned and rates paid
and the net interest margin during the three months and the nine months ended
September 30, 1994 and 1993. A comparison of similar data as of September 30,
1994 and 1993 is also shown. Balances of interest-sensitive assets and
liabilities arising from the Citizens acquisition are included from the date of
acquisition and the balances relating to the NorthLand acquisition are included
from January 1, 1994. See Note B to the unaudited financial statements for
further discussion of these acquisitions.
For the For the
Three Months Ended Nine Months Ended At
September 30, September 30, September 30,
------------------ ----------------- -------------
1994 1993 1994 1993 1994 1993
---- ---- ---- ---- ---- ----
Weighted average yield on
interest-earning assets 7.50% 7.61% 7.39% 7.78% 7.48% 7.55%
Weighted average rate paid
on deposit accounts and
borrowings 4.09 4.28 4.09 4.48 4.18 4.25
Interest spread 3.41% 3.33% 3.30% 3.30% 3.30% 3.30%
Net interest margin (net
interest income divided
by earning assets) 3.51% 3.40% 3.40% 3.37% 3.39% 3.37%
The interest spread increased to 3.41% for the three months ended September 30,
1994 from 3.33% for the same period in 1993 due to the factors noted above. The
interest spread was at 3.30% for each of the nine month periods ended September
30, 1994 and 1993. The interest spread and the net interest margin were 3.30%
and 3.39%, respectively, at September 30, 1994 as compared to 3.30% and 3.37%,
respectively, at September 30, 1993. Although the net interest margin at
September 30, 1994 is somewhat lower than at the end of recent periods due to
market factors, point-in time calculation methodology and the MBS non-accrual
situation, the increase in average earning assets and the earning asset ratio
should positively impact net interest income during the remainder of 1994 and
offset the negative effects of potential higher interest rates.
Provisions For Losses on Loans:
Provisions for loan losses decreased $500,000 and $2.9 million for the third
quarter and the first nine months, respectively, of 1994 as compared to the 1993
periods. The 1994 decreases in provisions for loan losses reflects the lower
nine-month 1994 charge-off experience as well as a lower level of delinquencies
in the first nine months of 1994.
The following table summarizes the Corporation's net charge-off experience by
category for the three months and nine months ended September 30, 1994 and 1993.
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------- --------------------
1994 1993 1994 1993
------ ----- ------ -----
Net Net Net Net
Charge-offs Charge-offs Charge-offs Charge-offs
(Recoveries) (Recoveries) (Recoveries) (Recoveries)
----------- ------------ ------------ -----------
Loan Type (Dollars in thousands)
Credit cards $1,454 $1,393 $4,589 $3,848
Manufactured housing 292 412 870 1,833
Residential real estate 221 (5) (54) 332
Consumer and other 69 97 153 41
Commercial real estate 200 -- 200 445
Commercial business 105 -- 105 --
------- ------- ------- -------
$2,341 $1,897 $5,863 $6,499
======= ======= ======= =======
Net charge-offs as a
percent of average loans
outstanding (annualized) 0.30% 0.27% 0.25% 0.32%
======= ======= ======== =======
The OTS and the FDIC, as an integral part of their supervisory examination
process, periodically review the Banks' allowances for losses. These agencies
may require the Banks to recognize additions to the allowances based upon their
judgment of information available to them at the time of their examination. The
regularly scheduled 1993 supervisory examinations of the Banks were completed in
late 1993 and no material corrective actions were required. The 1994 supervisory
examination is currently in progress.
Management of the Corporation and the Banks believe that the current level
of provisions for losses are sufficient based upon its allowance criteria. See
"Allowances for Loan Losses" for further discussion.
Non-Interest Income:
Non-interest income decreased $2.3 million during the third quarter of 1994
as compared to the same period in 1993 primarily due to a $2.3 million decrease
in gains on sales of loans. Deposit fee income decreased $100,000 in 1994.
Insurance and brokerage sales commissions increased $100,000 as First
Financial's insurance agency subsidiary continues to perform well. The $100,000
increase in losses on sales of available-for-sale securities in 1994 relates to
the sale of MBSs as the Corporation acted to dispose of junior position MBSs
transferred to available-for-sale status (see "Loans and Mortgage-Related
Securities"). Gains realized from the sale of loans decreased $2.3 million to
$300,000 in 1994. 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 loans held for sale can fluctuate significantly from period to
period depending upon the volatility of interest rates and the volume of loan
originations. Thus, results of sales in any one period may not be indicative of
future results. As a result of the recent rise in interest rates, management
believes it is unlikely that gains on sales of loans for the remainder of 1994
will be at levels reported in 1993.
Non-interest income decreased $10.2 million during the first nine months of
1994 as compared to 1993 with the primary decreases relating to i) the $9.0
million MBS impairment loss (see "Non-Accrual MBSs"), and ii) a $3.4 million
drop in gains on sales of loans. Increases of $200,000 in deposit account
service fees, $300,000 in insurance and brokerage sales commissions and $1.4
million in gains on sales of available-for-sale securities were offset by the
$3.4 million decrease in gains on sales of loans held for sale and a $300,000
decrease in service fees on loans sold as a result of a lower average servicing
spread and the reclassification of certain guaranty fees against interest income
in 1994. Other income increased $800,000 for the first nine months of 1994, as
compared to 1993, due to a $400,000 gain realized on the sale of finance company
receivables of NorthLand during the first quarter of 1994. The net gains on
sales of loans for the first nine months of 1994 decreased $3.4 million as noted
above to $1.7 million, including a $1.2 million gain on the sale of credit card
loans, aggregating $13.0 million, upon the termination of a credit card affinity
group relationship. The $1.4 million of net gains on sales of available-for-sale
securities relates to actions taken by management to i) protect the value of
that portfolio as interest rates rose sharply in the first half of 1994 and ii)
to dispose of junior position MBSs transferred to available-for-sale status (See
"Loans and Mortgage-Related Securities").
Non-Interest Expense:
Non-interest expenses decreased approximately $900,000 for the quarter ended
September 30, 1994 and increased $800,000 for the nine months ended September
30, 1994, as compared to the similar periods in 1993. The level of non-interest
expenses reflects i) inherent increases in the expanded scope of operations as a
result of the 1993 and 1994 acquisitions, ii) effective cost controls, iii)
reductions in writedowns of foreclosed commercial real estate properties in 1994
and iv) a higher level of federal deposit insurance costs. The major categories
of non-interest expense affected by acquisitions are compensation, occupancy and
federal deposit insurance.
Federal deposit insurance expense increased $200,000 and $2.1 million,
respectively, in the three months and nine months ended September 30, 1994 as
compared to 1993 due in part to the increase in insured deposits as a result of
the recent acquisitions. However, also affecting the nine-month comparison was a
reduction in the level of premiums assessed to the Banks in 1993 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.
The net cost of operations of foreclosed properties decreased $1.0 million
and $2.5 million for the three months and the nine months ended September 30,
1994, respectively, as compared to 1993 when a higher level of writedowns was
experienced relative to foreclosed commercial real estate properties.
Non-interest expenses decreased as a percentage of average assets to 2.12%
and 2.17%, respectively, for the third quarter and first nine months of 1994 as
compared to 2.35% and 2.33% for the same periods in 1993. The improvement in
this ratio is reflective of i) the growth in the Corporation's assets resulting
from acquisitions, ii) the effectiveness of the consolidation of operations
after the acquisitions in 1993 and 1994, iii) decreases in writedowns on
foreclosed commercial real estate and iv) ongoing expense control measures.
Controllable non-interest expenses, which exclude the amortization of
intangible assets and the net cost of operations of foreclosed properties,
decreased to 2.01% and 2.05% of average assets for the three months and nine
months ended September 30, 1994 as compared to 2.09% and 2.10% for the same
periods in 1993. 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 51.03% and 52.55% for the three
months and nine months ended September 30, 1994, respectively, as compared to
54.40% and 54.06% for the 1993 periods.
See Note I to the unaudited consolidated financial statements re the impact
on non-interest expenses of the merger of Port into First Financial.
Income Taxes:
Income tax expense increased $800,000 and $900,000 for the third quarter and
first nine months of 1994, respectively, as compared to the same periods in
1993. The effective income tax rate, as a percent of pre-tax income, decreased
from 37.18% for the third quarter of 1993 to 35.25% in 1994 and remained level
at 36.86% for the first nine months of 1994 as compared to 36.85% for the 1993
period. The decrease in the effective tax rate for the 1994 quarter relates to
an adjustment arising to a change in filing status for state tax purposes.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits:
Exhibit 11 - Computation of Earnings Per Share.
Exhibit 27 - Financial Data Schedules
b. Reports on Form 8-K - None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST FINANCIAL CORPORATION
Date: November 10, 1994 /s/ John C. Seramur
----------------------------------------
John C. Seramur, President
(Chief Executive Officer) and Director
Date: November 10, 1994 /s/ Thomas H. Neuschaefer
----------------------------------------
Thomas H. Neuschaefer
Vice President, Treasurer and Chief
Financial Officer