SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 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 24,653,127 Shares
--------------------------------------- -----------------------
Class Outstanding at July 31, 1994
AMENDED
FINANCIAL
STATEMENTS
FIRST FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
June 30, December 31,
1994 1994
(Unaudited) (Restated)
--------------- --------------
(In thousands)
Cash $ 82,852 $ 63,241
Federal funds sold 8,097 21,873
Interest-earning deposits 3,370 25,768
---------- ----------
Cash and cash equivalents 94,319 110,882
Securities available for sale (at fair value):
Investment securities 6,642 84,487
Mortgage-related securities 226,072 347,137
Securities held to maturity:
Investment securities (fair value of
$127,779,000--1994 and $143,448,000
--1993) 131,102 143,568
Mortgage-related securities (fair
value of $1,280,405,000--1994
and $1,160,230,000--1993) 1,292,315 977,806
Loans receivable:
Held for sale 12,186 73,919
Held for investment 3,050,792 2,848,585
Foreclosed properties and
repossessed assets 5,563 6,817
Real estate held for investment or sale 16,688 16,810
Office properties and equipment 49,432 50,120
Intangible assets, less accumulated
amortization 29,403 31,392
Other assets 93,288 82,260
---------- ----------
$5,007,802 $4,773,783
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $4,115,079 $4,050,520
Borrowings 556,376 438,598
Advance payments by borrowers for
taxes and insurance 44,406 13,805
Other liabilities 33,555 37,025
---------- ----------
Total liabilities 4,749,416 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: 24,636,627--1994;
23,586,827--1993 24,637 23,587
Additional paid-in capital 31,611 27,340
Net unrealized holding gain (loss) on
securities available for sale (340) 1,851
Retained earnings (substantially
restricted) 202,478 181,057
---------- ----------
Total stockholders' equity 258,386 233,835
---------- ----------
$5,007,802 $4,773,783
========== ==========
See notes to unaudited consolidated financial statements.
FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------
1994 1993 1994 1993
-------- -------- -------- ------
(In thousands, except
per share amounts)
Interest income:
Mortgage loans $ 40,257 $ 40,486 $ 80,472 $ 78,789
Other loans 23,588 19,496 46,460 39,044
Mortgage-related securities 21,162 22,720 39,715 46,329
Investments 2,630 2,307 5,904 5,231
-------- -------- -------- --------
Total interest income 87,637 85,009 172,551 169,393
Interest expense:
Deposits 40,908 41,388 82,079 85,964
Borrowings 6,231 5,618 11,062 10,380
-------- -------- -------- --------
Total interest expense 47,139 47,006 93,141 96,344
-------- -------- -------- --------
Net interest income 40,498 38,003 79,410 73,049
Provision for losses on loans 1,836 2,800 3,216 5,644
-------- -------- -------- --------
38,662 35,203 76,194 67,405
Non-interest income:
Loan fees and service charges 2,154 2,085 4,164 4,015
Insurance and brokerage sales
commissions 1,714 1,629 3,557 3,344
Deposit account service fees 1,997 1,895 3,837 3,514
Service fees on loans sold 1,283 1,594 2,599 3,241
Net gain on sale of loans 999 1,314 1,416 2,479
Net gain on sale of securities
available for sale 353 -- 1,472 --
Unrealized loss on impairment of
mortgage-related securities (9,000) -- (9,000) --
Other 492 467 1,680 1,059
-------- -------- -------- --------
Total non-interest income (loss) (8) 8,984 9,725 17,652
-------- -------- -------- --------
Operating income 38,654 44,187 85,919 85,057
Non-interest expense:
Compensation, payroll taxes and
benefits 11,276 11,032 22,988 22,382
Federal deposit insurance premiums 2,402 1,424 4,805 2,847
Occupancy expense 1,925 1,863 4,065 3,758
Data processing 1,727 1,827 3,542 4,014
Loan expenses 1,582 1,459 3,019 2,608
Telephone and postage 1,365 1,245 2,774 2,514
Amortization of intangible assets 1,344 1,784 2,688 2,939
Furniture and equipment 1,361 1,362 2,668 2,633
Marketing 1,040 1,211 2,082 1,985
Net cost of operations of foreclosed
properties 166 896 509 1,959
Other 2,356 2,554 4,863 4,700
-------- -------- -------- --------
Total non-interest expense 26,544 26,657 54,003 52,339
-------- -------- -------- --------
Income before income taxes 12,110 17,530 31,916 32,718
Income taxes 4,581 6,362 12,107 12,001
-------- -------- -------- --------
Net income $ 7,529 $ 11,168 $ 19,809 $ 20,717
======== ======== ======== ========
Earnings per share:
Primary $ 0.30 $ 0.47 $ 0.78 $ 0.87
Fully diluted $ 0.30 $ 0.46 $ 0.78 $ 0.86
Cash dividend per share $ 0.10 $ 0.075 $ 0.20 $ 0.15
See notes to unaudited consolidated financial statements.
FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For The Period Ended June 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
(Restated) $23,587 $27,340 $ 1,851 $181,057 $233,835
Net income 19,809 19,809
Cash dividend ($.20 per share) (5,001) (5,001)
Exercise of stock options 112 421 533
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 (2,191) (2,191)
------- ------- -------- -------- --------
BALANCES AT JUNE 30, 1994 $24,637 $31,611 $ (340) $202,478 $258,386
======= ======= ======== ======== ========
See notes to unaudited consolidated financial statements.
FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
1994 1993
---------- -------
(In thousands)
OPERATING ACTIVITIES
Net income $ 19,809 $ 20,717
Adjustments to reconcile net income to net cash provided
by operating activities:
(Increase) decrease in accrued interest on loans (1,272) 1,297
Increase in accrued interest on deposits 140 353
Mortgage loans originated for sale (149,042) (190,750)
Proceeds from sales of loans held for sale 248,606 182,012
Provision for depreciation 3,004 2,668
Provision for losses on loans 3,216 5,644
Provision for losses on real estate and other assets 225 1,971
Unrealized loss on impairment of mortgage-related securities 9,000 --
Amortization of cost in excess of net assets of
acquired businesses 312 277
Amortization of core deposit intangibles 2,376 2,662
Amortization of purchased mortgage servicing rights 353 416
Net gain on sales of loans and assets (3,450) (2,670)
Other-net (9,814) (4,293)
--------- ---------
Net cash provided by operating activities 123,463 20,304
INVESTING ACTIVITIES
Proceeds from sales of investment securities available for sale 65,088 --
Proceeds from maturities of investment securities held
to maturity 30,695 53,247
Purchases of investment securities held to maturity (1,523) (40,934)
Proceeds from sales of mortgage-related securities available
for sale 126,107 81,287
Principal payments received on mortgage-related securities 173,308 167,104
Purchases of mortgage-related securities held to maturity (486,927) (138,982)
Proceeds from sale of finance company receivables 6,665 --
Principal received on loans receivable 275,488 273,278
Loans originated for portfolio (430,514) (516,905)
Additions to office properties and equipment (1,159) (3,458)
Proceeds from sales of foreclosed properties and
repossessed assets 5,234 8,561
Proceeds from sales of real estate held for investment 98 245
Business acquisitions (net of cash and cash equivalents acquired of
$4,593,000--1994; $186,350,000--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) (316,302)
Office properties (2,387) (7,452)
Intangible assets (699) (5,276)
Deposits and related accrued interest 114,297 702,236
Borrowings 750 71,897
Stockholders' equity 11,401 --
Other-net (494) (9,593)
--------- ---------
Net cash provided by (used in) investing activities (232,847) 69,793
FINANCING ACTIVITIES
Net decrease in deposits (49,878) (100,692)
Net increase in advance payments by borrowers for
taxes and insurance 30,139 28,842
Proceeds from borrowings 499,000 475,000
Repayments of borrowings (381,972) (498,083)
Proceeds from exercise of stock options 533 755
Payments of cash dividends to stockholders (5,001) (3,524)
--------- ---------
Net cash provided by (used in) financing activities 92,821 (97,702)
--------- ---------
Decrease in cash and cash equivalents (16,563) (7,605)
Cash and cash equivalents at beginning of period 110,882 122,281
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 94,319 $ 114,676
========= =========
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 six 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
The Corporation conducts business as a non-diversified multiple thrift
holding company and its principal assets are all of the capital stock of First
Financial and Port. At present the primary business of the Corporation is the
business of First Financial and Port. The Corporation's activities are currently
comprised of providing limited administrative services to First Financial and
Port.
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 Six Months
Ended Ended
June 30, 1993 June 30, 1993
------------- -------------
(In thousands)
Net interest income $1,539 $3,021
Provision for losses on loans (118) (210)
Non-interest income 242 673
Non-interest expense (1,244) (2,527)
Income taxes (169) (386)
------ ------
Net income $ 250 $ 571
====== ======
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 June
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 June 30, 1994,
mortgage-related securities and investment securities with a carrying value of
approximately $4.5 million were pledged as collateral for bonds in the aggregate
principal amount of $2.8 million. Additional bond issues totaling $7.6 million
are supported by letters of credit issued by First Financial, in lieu of
specific collateral. At June 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 June 30, 1994 to
shareholders of record of the common stock on June 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 June 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% 5.45% 7.82%
Core leverage capital 3.00 5.86 7.82
Risk-based capital 8.00 13.14 14.92
The OTS has adopted a final rule which will add an interest-rate risk
component to the OTS risk-based capital requirement effective September 30,
1994. 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 the
Banks do not believe these rules will significantly impact the capital
requirements of the Banks or cause the Banks to fail to meet their respective
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. Neither Bank is subject to any PCA sanctions.
NOTE G - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
For The
Six Months Ended
June 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 $ 92,219 $ 95,768
Income taxes 13,881 12,806
Non-cash investing activities:
Loans transferred to held for sale
portfolio 36,415 32,304
Loans receivable transferred to foreclosed
properties 3,746 3,218
Mortgage-backed securities transferred to
available-for-sale portfolio 205,503 --
Change in net unrealized holding gain (loss)
on securities available for sale (3,041) --
NOTE H--PENDING ACCOUNTING CHANGE
In May, 1993, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 114, ("Accounting by Creditors for
Impairment of a 0Loan"). SFAS No. 114 is 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. 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.
NOTE I--SUBSEQUENT EVENT
In July, 1994, the Corporation announced its intent to merge Port into
First Financial. This merger is subject to regulatory approval, which is
expected to be received by the fourth quarter of 1994. Management anticipates
that non-interest expense reductions, relating to the consolidation of various
support functions, will contribute approximately $0.02 per share to earnings on
an annualized basis in 1995.
AMENDED
MANAGEMENT'S DISCUSSION & ANALYSIS
MANAGEMENT'S DISCUSSION AND ANALYSIS
COMPARISON OF THE CONSOLIDATED BALANCE SHEETS
AT JUNE 30, 1994 (UNAUDITED) WITH DECEMBER 31, 1993
General:
Total assets increased to $5.01 billion at June 30, 1994 from $4.77
billion at December 31, 1993, primarily because of the NorthLand acquisition
completed in 1994. See Note B to the unaudited consolidated financial statements
for a discussion of this acquisition. Total loans and deposits increased to
$4.58 billion and $4.12 billion at June 30, 1994 from $4.25 billion and $4.05
billion, respectively, at the end of 1993. Stockholders' equity at June 30, 1994
was $258.4 million, up from $234.7 million at year-end 1993.
Liquidity and Capital Resources:
At June 30, 1994, total consolidated liquidity, consisting of cash,
cash equivalents, and investment securities represented 4.63% 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 June 30, 1994 decreased by
$116.3 million as compared to December 31, 1993 liquidity (including the $9.4
million of liquid assets received in connection with the NorthLand acquisition)
as a result of the net effect of significant changes in various categories of
assets and liabilities during the six-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 June 30,
Classification 1993 Acquisition (Decreases) 1994
- ------------------- ------------ ----------- ----------- --------
(In thousands)
Cash and cash equivalents $ 110,882 $ 4,593 $ (21,156) $ 94,319
Securities available for
sale:
Investment securities 84,487 -- (77,845) 6,642
Mortgage-related
securities 178,362 -- 47,710 226,072
Securities held to
maturity:
Investment securities 143,568 4,785 (17,251) 131,102
Mortgage-related
securities 1,147,891 16,742 127,682 1,292,315
Loans receivable, in-
cluding loans held
for sale 2,922,504 96,748 43,726 3,062,978
Office properties 50,120 2,387 (3,075) 49,432
Intangible assets 31,392 699 (2,688) 29,403
Deposits 4,050,520 114,297 (49,738) 4,115,079
Borrowings 438,598 750 117,028 556,376
Advance payments by
borrowers for taxes
and insurance 13,805 462 30,139 44,406
Stockholders' equity 234,685 11,401 12,300 258,386
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 $6.8 million and
subordinated debt of $55.0 million at June 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 fourth-quarter period.
Loans and Mortgage-Related Securities:
Total loans, including loans held for sale and mortgage-related
securities (MBSs), increased $332.6 million from $4.25 billion at December 31,
1993 to $4.58 billion at June 30, 1994. Total loans are summarized below as of
the dates indicated.
June 30, December 31, Increase
1994 1993 (Decrease)
------------- ------------ ----------
(In thousands)
Real estate loans:
One- to four-family $1,840,480 $1,797,990 $ 42,490
Multi-family 188,818 188,558 260
Commercial and non-residential 110,506 94,789 15,717
---------- ---------- ---------
Total real estate loans 2,139,804 2,081,337 58,467
Other loans:
Consumer 225,034 153,574 71,460
Home equity 212,342 193,291 19,051
Credit cards 187,630 209,414 (21,784)
Education 174,862 167,385 7,477
Manufactured housing 158,993 165,017 (6,024)
Business 20,750 111 20,639
Less net items to loans receivable (56,437) (47,625) (8,812)
---------- ---------- ---------
Total loans (including loans held
for sale) 3,062,978 2,922,504 140,474
MBSs 1,518,387 1,326,253 192,134
----------- ------------ ---------
Total loans and MBSs $4,581,365 $4,248,757 $ 332,608
========== ========== =========
The major components of the increase in total loans during the six
months of 1994 were a $192.1 million increase in MBSs, a $58.5 million increase
in mortgage loans, a $71.4 million increase in consumer loans and a $20.6
million increase in commercial business loans.
The increase in residential mortgage loans receivable at June 30, 1994
was primarily attributable to the NorthLand acquisition as the Banks' mortgage
loan originations were substantially offset by sales and repayments.
Consumer loans increased $71.4 million in 1994 primarily due to the
NorthLand acquisition as well as continuing success in marketing a second
mortgage product. Home equity loans have increased $19.0 million in 1994 as
customer usage of this product has continued to grow. Credit card loans
decreased $21.8 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 $6.0 million as the Corporation continues to restrict
new originations of such loans to the Midwest. The $20.7 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 $12.2 million at June 30, 1994.
Off-balance sheet commitments to extend credit and to sell mortgage loans
totaled $33.2 million and $22.3 million, respectively, at June 30, 1994 as
compared to $62.3 million and $111.5 million, respectively, at December 31,
1993. During the six months ended June 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 $175.4 million
during the six months ended June 30, 1994 primarily as a result of (i) purchases
of $486.9 million of U.S. Government Agency adjustable-rate MBSs, ii) sales of
available-for-sale MBSs of $126.1 million, and (iii) repayments of $173.3
million. At the end of the second quarter, the Banks had commitments to purchase
U.S. Government Agency adjustable-rate MBSs totaling $41.9 million which will be
funded primarily through FHLB advances.
During the second quarter of 1994, all private-issue adjustable rate
MBSs with an ownership position junior to a more senior position (having a
carrying value of approximately $205.5 million) were transferred to the
available-for-sale portfolio due to deterioration in credit risk or other
factors. At June 30, 1994, such junior position private-issue MBSs held in the
available-for-sale portfolio had an aggregate carrying $157.5 million with a
fair value of $151.3 million. See "Non-Accrual MBSs".
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:
June 30, December 31,
1994 1993
---------- ------------
(In thousands)
Loans Delinquent 30-59 Days
Student loans $ 4,671 $ 4,014
Residential real estate loans 5,955 5,844
Manufactured housing loans 2,401 2,999
Credit card loans 2,056 1,988
Commercial real estate loans 988 3,798
Commercial business 465 --
Consumer and home equity 502 479
------- -------
$17,038 $19,122
======= =======
Loans Delinquent 60-90 Days
Student loans $ 4,410 $ 4,159
Residential real estate loans 1,075 1,111
Manufactured housing loans 897 1,035
Credit card loans 844 904
Commercial real estate loans 289 707
Commercial business -- --
Consumer and home equity 124 128
------- -------
$ 7,639 $ 8,044
======= =======
Total Loans Delinquent 30-90 Days
Student loans $ 9,081 $ 8,173
Residential real estate loans 7,030 6,955
Manufactured housing loans 3,298 4,034
Credit card loans 2,900 2,892
Commercial real estate loans 1,277 4,505
Commercial business 465 --
Consumer and home equity 626 607
------- -------
$24,677 $27,166
======= =======
At June 30, 1994, the 30-90 day delinquencies decreased $2.5 million to
$24.7 million from $27.2 million at year-end 1993. As a percent of total loans
receivable, loan delinquencies decreased from 0.93% at the end of 1993 to 0.81%
at June 30, 1994. The $2.5 million decrease, at June 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 $900,000 in delinquent
student loans (which are government guaranteed) delinquent 30-90 days, iii) a
decrease of $700,000 in manufactured housing loans delinquent 30-90 days and iv)
an increase of $500,000 of delinquent commercial business loans. The increase in
commercial business loan delinquencies relates to the acquisition of such loans
in the NorthLand transaction. 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, on the following page:
June 30, December 31,
1994 1993
---------- --------
(In thousands)
One- to four-family residential $ 5,357 $ 5,005
Multi-family residential 60 139
Commercial and other real estate 729 --
Manufactured housing 900 1,063
Credit cards 1,834 1,836
Commercial business 536 --
Consumer and other 333 197
------- -------
$ 9,749 $ 8,240
======= =======
Non-accrual loans increased $1.5 million to $9.7 million at June 30,
1994 from $8.2 million at December 31, 1993. As a percentage of net loans
receivable, non-accrual loans increased to 0.32% at June 30, 1994 from 0.28% at
December 31, 1993. The 1994 increase in non-accrual loans is related to
increases of $400,000, $700,000 and $500,000 in the residential mortgage,
commercial real estate mortgage and commercial business loan portfolios,
respectively. The residential mortgage and commercial business loan increases
relate primarily to such loans acquired in the NorthLand acquisition. The
commercial real estate mortgage increase relates to a purchased loan on a
recreational facility which became more seriously delinquent. Non-accrual loans
for the other loan portfolios decreased or remained at the same relative level
at June 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 two privately
issued junior position adjustable rate mortgage-backed securities, aggregating
approximately $21.2 million, on non-accrual status. 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. Both securities are
serviced by a California institution under the control of the Resolution Trust
Corporation (RTC). First Financial's junior position is senior to several
subordinate tranches, currently amounting to approximately 9.3% 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 $9.0 million writedown was recorded by
First Financial relative to the junior position securities reflecting a
permanent impairment of the portfolio. The amount of the writedown was based on
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 is adequate based upon its evaluations.
The Corporation has restated its December 31, 1993 balance sheet to
reflect a correction of an error relating to the misclassification of certain of
its mortgage-backed securities ("MBSs"). Subsequent to the filing of the Annual
Report on Form 10-K, management began investigating two delinquent MBSs serviced
by a California institution under the control of the RTC. In the second quarter
of 1994, the investigation showed that the Corporation held approximately $184.0
million of subordinated MBSs in its portfolio (in addition to the two delinquent
MBSs), and questions were raised as to how such mezzanine securities were
purchased under the Corporation's existing investment policy which requires the
purchase of senior tranche securities only. It was determined that investment
officers in 1991 and 1992 mistakenly interpreted the policy to permit the
purchase of mezzanine securities, which consisted of "a" senior tranche but not
"the" senior tranche. Since the inherent risk of ownership of the subordinated
securities could affect management's intent and/or ability to hold such
securities, it was determined that the classification held-tomaturity was in
error at December 31, 1993. All financial data contained herein has been
restated to reflect this reclassification as of December 31, 1993 which results
in treating these securities as available-for-sale upon the adoption of SFAS No.
115.
First Financial's portfolio of mortgage-related securities totaled
approximately $1.52 billion at June 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 six months ended June 30, 1994 and 1993, follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1994 1993 1994 1993
-------- -------- -------- ------
(In thousands)
Allowances at beginning of period $23,963 $22,622 $23,266 $17,067
From acquired banks -- -- 816 4,885
Provisions 1,836 2,800 3,216 5,644
Charge-offs (2,254) (2,974) (4,418) (5,465)
Recoveries 231 546 896 863
------- ------- ------- -------
Allowances at end of period $23,776 $22,994 $23,776 $22,994
======= ======= ======= =======
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 Six Months Ended June 30, 1994
and 1993." An analysis of allowances, by loan category and percent of loans in
each category to total loans receivable, at the dates indicated, follows:
June 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 $ 6,367 3.19% $ 6,502 3.10%
Residential real estate 5,808 .29 5,877 .30
Manufactured housing 4,935 3.04 4,668 2.83
Commercial and non-resi-
dential real estate 3,386 3.30 4,010 4.23
Consumer 2,143 1.11 1,728 1.12
Home equity 456 .23 429 .22
Commercial business 629 3.04 -- --
Education 52 .03 52 .03
------- -------
$23,776 .78% $23,266 .80%
======= ===== ======= =====
The allowances for loan losses were $23.8 million, or 0.78% of loans
receivable, at June 30, 1994 compared to $23.3 million, or 0.80%, at December
31, 1993. The allowances for losses represented 244% of non-accrual loans at
June 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:
June 30, December 31,
1994 1993
----------- --------
(In thousands)
Foreclosed real estate properties $ 6,671 $ 8,040
Manufactured housing owned 192 115
Consumer and other repossessed assets 31 48
------- -------
6,894 8,203
Less allowances for losses (1,331) (1,386)
------- -------
$ 5,563 $ 6,817
======= =======
Foreclosed properties, net of allowances for losses, decreased $1.2
million to $5.6 million at June 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 six months ended June 30, 1994 and 1993, is
presented below.
Three Months Ended Six Months Ended
June 30, June 30,
1994 1993 1994 1993
---------------------- --------------------
(In thousands)
Allowances at beginning
of period $1,386 $1,514 $1,386 $ 552
Provisions 100 834 325 1,971
Charge-offs (155) (1,237) (380) (1,412)
------ ------ ------ ------
Allowances at end of
period $1,331 $1,111 $1,331 $1,111
====== ====== ====== ======
A list of the larger commercial real estate properties (having a
carrying amount of $500,000 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 June 30, December 31,
Type Property Location 1994 1993
- -------- ----------------- ------------ ------------
(In thousands)
Office Madison, Wisconsin $ -- $ 1,500
Retail Milwaukee, Wisconsin 1,089 1,089
Office Phoenix, Arizona -- 700
Both the Madison, Wisconsin and Arizona properties 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. Nonperforming 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:
June 30, December 31,
1994 1993
----------- --------
(In thousands)
Classified assets:
Non-performing assets:
Non-accrual loans $ 9,749 $ 8,240
Non-accrual MBSs 15,449 --
Foreclosed properties and other
repossessed assets 5,563 6,817
------- -------
Total Non-Performing Assets 30,761 15,057
Add back general valuation allowances net-
ted against foreclosed properties above 1,331 1,386
Adjustment for non-performing residential
loans not classified due to low
loan-to-appraisal value (941) (707)
Additional classified performing loans:
Residential real estate 3,083 1,919
Commercial real estate 8,616 9,747
Consumer and other 659 241
Other adversely classified assets 406 757
------- -------
Total Classified Assets $43,915 $28,400
======= =======
During the six months ended June 30, 1994, classified assets increased
$15.5 million to $43.9 million from $28.4 million at December 31, 1993 as a
result of the $15.4 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 0.88% at June
30, 1994.
The increase in non-accrual loans and the $1.2 million decrease in
foreclosed properties during the first six 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 June 30, December 31,
Loan Collateral Location 1994 1993
- ---------------- ---------- ------------ ------------
(In thousands)
Office/Land Sheboygan, Wisconsin $ 3,652 $3,670
Motels Various-Tennessee 2,579 (a) 2,600 (a)
Office Independence, Missouri -- 1,091 (b)
<FN>
(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 six months of 1994.
All adversely classified assets at June 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 $49.7 million during the six months ended June 30, 1994.
Although interest rates rose during 1994, the weighted average cost of deposits
of 4.02% at June 30, 1994 was slightly lower than the 4.06% reported at December
31, 1993 due to the repricing of higher rate certificates of deposit renewing
during 1994.
Advance payments by borrowers for taxes and insurance, excluding
$500,000 of such liabilities assumed in the NorthLand acquisition, increased by
$30.1 million during the first six 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 June 30, 1994, the Corporation's consolidated borrowings increased
to $556.4 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 June 30, 1994 was $258.4 million, or 5.16% 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 $19.8 million earned during the first six months of 1994, ii) cash
dividend payments to stockholders of $5.0 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 $3.0 million change in the carrying
value of securities available for sale. 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 $10.49 per share at June 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.
-19-
Loan Originations:
A comparison of loan originations for the first six months of 1994 and
1993, including loans originated for sale (but excluding MBSs), is set forth
below:
Six Months Ended June 30,
-------------------------------------------------------
1994 Percent 1993 Percent
-------- ------- -------- -------
(Dollars in thousands)
Loan Type
- ----------
Mortgage:
One- to four-family $ 364,635 61.9% $404,668 57.5%
Multi-family 32,604 5.5 47,096 6.7
Commercial/non-residential 24,633 4.2 5,930 0.8
Refinanced one- to four-
family loans previously
sold and serviced for others 52 -- 156,044 22.2
---------- ----- -------- -----
421,924 71.6 613,738 87.2
Consumer 120,133 20.4 55,270 7.8
Student 16,785 2.8 10,314 1.5
Home equity-net 19,051 3.2 15,740 2.2
Manufactured housing 9,195 1.6 8,979 1.3
Commercial business 1,846 .3
Refinanced manufactured
housing loans previously
sold and serviced for others 475 .1 -- --
Credit cards-net -- -- -- --
---------- ----- -------- -----
Total loans originated 589,409 100.0% 704,041 100.0%
===== =====
Decrease (increase) in undis-
bursed loan proceeds (9,853) 3,614
---------- --------
Total loans disbursed $ 579,556 $707,655
========== ========
Total loan originations decreased to $589.4 million for the first six
months of 1994 from $704.0 million for the same period in 1993. This net 1994
decrease of $114.6 million was primarily attributable to i) a $191.8 million
decrease in mortgage loan originations and ii) a $64.8 million increase in
consumer lending.
One- to four-family mortgage loan originations and refinancings
decreased $196.0 million to $364.7 million for the first half of 1994 as
compared to $560.7 million for the same period in 1993. At June 30, 1994, one-
to four-family mortgage loan applications in process and commitments totaled
$44.8 million and $30.1 million as compared to $84.2 million and $50.0 million
at December 31, 1993. The decrease in originations, refinancings applications
and commitments reflects reduced borrower demand as interest rates have risen in
1994.
Originations of multi-family residential mortgage loans were $14.5
million under the 1993 level, while originations of commercial/non-residential
mortgage loans increased by $18.7 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 $64.8 million to $120.1 million in
the first six months of 1994 primarily due to increased volumes in a short-term
consumer first mortgage product, increased automobile financing and the
availability of additional Wisconsin markets after the NorthLand acquisition.
Student loan originations increased $6.5 million to $16.8 million during
the first six 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 $19.1 million for the first half of
1994 to $212.3 million as customer usage of this product continues to grow.
Credit card loans decreased $21.8 million in the first six months of
1994 due to i) the above noted sale of $13.0 million of 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 for such loans after calendar year-end.
Credit card loan balances totaled $187.6 million at June 30, 1994 compared to
$209.4 million at the end of 1993 and $176.8 million at June 30, 1993,
reflecting continued growth in this portfolio excluding seasonal factors and
despite the sale of the affinity group loans.
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 21 sets forth the combined estimated
maturity/repricing structure of the Corporation's consolidated interest-earning
assets (including net items) and interestcosting liabilities at June 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 June 30, 1994 was $122.5 million or 2.45% of total assets.
The one-year positive gap decreased $168.3 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 2.45%
at June 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 June 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 has issued a
final regulation that calls for further regulatory capital requirements based
upon this market value methodology effective September 30, 1994. 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 JUNE 30, 1994
Greater Greater Greater
Than One Than Three Than Five
Under Through Through Through
One Year Three Years Five Years Ten Years
---------- ----------- ----------- ----------
(Dollars in thousands)
Rate-sensitive assets:
Investments and interest-
earning deposits (a)(b) $ 83,828 $ 63,934 $ 760 $ 505
Mortgage-related securities (b) 1,435,078 55,908 20,380 5,285
Mortgage loans (c)(d):
Fixed-rate 203,453 335,759 262,848 447,467
Adjustable-rate 418,449 242,755 2,742 --
Other loans 664,961 153,127 68,728 51,794
---------- ---------- ---------- ----------
2,805,769 851,483 355,458 505,051
Rate-sensitive liabilities:
Deposits (e)(f) 2,239,195 1,157,483 355,694 232,651
Borrowings (g) 444,095 48,688 1,849 59,513
---------- ---------- ---------- ----------
2,683,290 1,206,171 357,543 292,164
---------- ---------- ---------- ----------
GAP (repricing difference) $ 122,479 $ (354,688) $ (2,085) $ 212,887
========== ========== ========== ==========
Cumulative GAP $ 122,479 $ (232,209) $ (234,294) $ (21,407)
========== ========== ========== ==========
Cumulative GAP/Total assets 2.45% (4.64)% (4.68)% (0.43)%
========== ========== ========== ==========
TABLE CONTINUED
Greater
Than Ten Greater
Through Than
20 Years 20 Years Total
---------- -------- -------
(Dollars in thousands)
Rate-sensitive assets:
Investments and interest-
earning deposits (a)(b) $ 32,876 $ -- $ 181,903
Mortgage-related securities (b) 1,736 -- 1,518,387
Mortgage loans (c)(d):
Fixed-rate 198,061 2,667 1,450,255
Adjustable-rate -- -- 663,946
Other loans 10,167 -- 948,777
-------- -------- ----------
242,840 2,667 4,763,268
Rate-sensitive liabilities:
Deposits (e)(f) 126,132 44,795 4,155,950
Borrowings (g) -- 2,231 556,376
-------- -------- ----------
126,132 47,026 4,712,326
-------- -------- ----------
GAP (repricing difference) $116,708 $(44,359) $ 50,942
======== ======== ==========
Cumulative GAP $ 95,301 $ 50,942
======== ========
Cumulative GAP/Total assets 1.90% 1.02%
======== ========
<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 $44.4 million of tax and insurance accounts and exclude
accrued interest on deposits of $3.5 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 $4.5 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 SIX MONTHS ENDED
JUNE 30, 1994 AND 1993
Selected Income Statement Information:
Net income of $7.5 million and $19.8 million for the three months and
six months, respectively, ended June 30, 1994 was down from the $11.2 million
and $20.7 million reported for the same periods in 1993. The primary reason for
the 1994 decline in net income relates to the $9.0 million unrealized loss on
the impairment of MBSs (see NonAccrual MBSs). The annualized return on average
assets decreased to 0.61% and 0.80% for the three months and six months ended
June 30, 1994, respectively, as compared to 0.98% and 0.92%, respectively, for
the same periods in 1993. The annualized returns on average equity decreased to
11.73% and 15.60% for the quarter and the six months ended June 30, 1994 as
compared to 21.52% and 20.39%, respectively, for the same periods in 1993.
Primary earnings per share decreased to $0.30 and $0.78 per share for the three
months and six months ended June 30, 1994, respectively, as compared to $0.47
and $0.87 per share, respectively, for the similar time frames in 1993.
Net Interest Income:
Net interest income increased $2.5 million to $40.5 million during the
second quarter of 1994 from $38.0 million for the second quarter of 1993. The
net interest margin of 3.39% for the second quarter of 1994 was down from the
3.49% reported for the second quarter of 1993. Interest income and interest
expense increased $2.6 million and $100,000, respectively, for the second
quarter of 1994 as compared to 1993. The average balances of interest-earning
assets and interest-bearing liabilities increased from $4.36 billion and $4.282
billion, respectively, in 1993 to $4.766 billion and $4.657 billion,
respectively, in 1994. The ratio of average interest-earning assets to average
interest-bearing liabilities increased to 102.33% for the second quarter of 1994
as compared to 101.21% for the 1993 quarter. The 1994 increases in average
balances are primarily due to the Citizens and NorthLand 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 offset by a slightly greater decrease in the average yield on
interest-earning assets (7.80% in 1993 versus 7.36% in 1994) than in the average
cost of interest-bearing liabilities (4.40% in 1993 versus 4.06% 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
$1.1 million for the quarter and the six months ended June 30, 1994,
respectively, upon the reversal of interest accruals relating to these
securities. 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 $6.4 million to $79.4 million during the
first half of 1994 from $73.0 million for the first half of 1993. The net
interest margin of 3.34% for the first half of 1994 was down from the 3.40%
reported for the first half of 1993. Interest income increased $3.2 million for
the first half of 1994 as compared to 1993. Interest expense decreased $3.2
million for the first six months of 1994 as compared to the same period in 1993.
The average balances of interest-earning assets and interest-bearing liabilities
increased from $4.302 billion and $4.238 billion, respectively, in 1993 to
$4.706 billion and $4.601 billion in 1994, respectively. The ratio of average
interest-earning assets to average interest-bearing liabilities increased to
102.30% for the first half of 1994 as compared to 101.51% for the 1993 period.
The 1994 increases in average balances again are primarily due to the Citizens
and NorthLand acquisitions. The increase in average interest-earning assets, as
well as the improved earning-asset ratio noted above, was offset by a slightly
greater decrease in the average yield on interest-earning assets (7.87% in 1993
versus 7.33% in 1994) than in the average cost of interest-bearing liabilities
(4.58% in 1993 versus 4.08% in 1994).
Interest Spread:
The following table sets forth the weighted average yield earned on the
Corporation's consolidated loan and investment portfolios, 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 six months ended June 30, 1994 and 1993. A comparison of similar data as of
June 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 Six Months Ended At
June 30, June 30, June 30,
------------------- ----------------- ---------------
1994 1993 1994 1993 1994 1993
---- ---- ---- ----- ---- ----
Weighted average yield on
interest-earning assets 7.36% 7.80% 7.33% 7.87% 7.33% 7.74%
Weighted average rate paid
on deposit accounts and
borrowings 4.06 4.40 4.08 4.58 4.11 4.39
----- ----- ----- ----- ----- -----
Interest spread 3.30% 3.40% 3.25% 3.29% 3.22% 3.35%
===== ===== ===== ===== ===== =====
Net interest margin (net
interest income divided
by earning assets) 3.39% 3.49% 3.34% 3.40% 3.29% 3.43%
===== ===== ===== ===== ===== =====
The interest spread decreased to 3.30% and 3.25% for the three months and
six months ended June 30, 1994 from 3.40% and 3.29% for the same periods in 1993
due to the factors noted above. The interest spread and the net interest margin
were 3.22% and 3.29%, respectively, at June 30, 1994 as compared to 3.35% and
3.43%, respectively, at June 30, 1993. Although the net interest margin at June
30, 1994 is somewhat lower than at the end of recent periods due to market
factors 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, to some extent, the negative effects of
a potential lower net interest margin should rates rise.
Provisions For Losses on Loans:
Provisions for loan losses decreased $1.0 million and $2.4 million,
respectively, for the second quarter and the first six months of 1994 as
compared to the 1993 periods. The 1994 decreases in provisions for loan losses
reflects the lower 1994 charge-off experience as well as a lower level of
delinquencies in 1994.
The following table summarizes the Corporation's net charge-off
experience by category for the three months and six months ended June 30, 1994
and 1993.
For the Three Months For the Six Months
Ended June 30, Ended June 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 $
$1,219 $3,135 $2,455
Manufactured housing 209 746 578 1,421
Residential real estate 66 180 (275) 337
Consumer and other 40 (162) 84 (56)
Commercial real estate -- 445 -- 445
Commercial business -- -- -- --
------ ------ ------ ------
$2,023 $2,428 $3,522 $4,602
====== ====== ====== ======
Net charge-offs as a
percent of average loans
outstanding (annualized) .26% .36% .23% .35%
====== ====== ====== ======
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 the fourth quarter of 1993 and no material corrective actions
were required.
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 $9.0 million during the second quarter of
1994 as compared to the same period in 1993 as the net result of several
significant factors. The most significant factor was the $9.0 million loss
recorded relative to the impairment of two MBSs (see "Non-Accrual MBSs").
Deposit fee income increased $100,000 in 1994 as compared to 1993 due to
increased levels of transaction-related accounts acquired in the recent
acquisitions. Insurance and brokerage sales commissions also increased $100,000
as First Financial's insurance agency subsidiary continues to perform well. The
$400,000 increase in gains on sales of available-for-sale securities in 1994
relates to the sale of securities as the Corporation acted i) to protect the
value of that portfolio as interest rates rose during 1994 and ii) 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
$300,000 to $999,000 in 1994, including a gain of $1.2 million on the sale of
credit card loans totaling $13.0 million upon the termination of a credit card
affinity group relationship. 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 $8.0 million during the first six months
of 1994 as compared to 1993 for principally the same reasons noted above with
the primary decrease again relating to the MBS impairment loss. Increases of
$300,000 in deposit account service fees, $300,000 in insurance and brokerage
sales commissions and $1.5 million in gains on sales of available-for-sale
securities were offset by a $1.1 million decrease on sales of loans held for
sale and a $600,000 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 $600,000 for the first
half 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.
Non-Interest Expense:
Non-interest expenses decreased approximately $200,000 and increased
$1.7 million for the quarter and six months ended June 30, 1994, respectively,
as compared to 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 and iii) reductions in writedowns of
foreclosed commercial real estate properties in 1994. The major categories of
non-interest expense affected by acquisitions are compensation, occupancy and
federal deposit insurance.
Federal deposit insurance expense increased $1.0 million and $2.0
million, respectively, in the three months and six months ended June 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 this 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. Each of the Banks currently qualifies for the lowest FDIC
assessment rate. The Banks are subject, however, to potential future rate
increases by the FDIC.
The net cost of operations of foreclosed properties decreased $700,000
and $1.5 million for the three months and the six months ended June 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
2.14% and 2.19%, respectively, for the second quarter and first half of 1994 as
compared to 2.34% and 2.32% for the second quarter and first half of 1993. The
improvement in this ratio is reflective of the growth in the Corporation's
assets resulting from acquisitions, effectiveness of the consolidation of
operations after the acquisitions in 1993 and 1994, as well as 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 2.02% and 2.06% of average assets for the three months and six
months ended June 30, 1994 as compared to 2.11% for both 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 52.00% and 53.20% for the three months and six months ended June 30,
1994, respectively, as compared to 52.51% and 53.89% for the same periods in
1993.
Income Taxes:
Income tax expense decreased $1.8 million and increased $100,000 for the
second quarter and first six months of 1994, respectively, as compared to the
same periods in 1993 primarily due to the impact of the $9.0 million MBS
impairment loss reserve (see "NonAccrual MBSs"). The effective income tax rate,
as a percent of pre-tax income, increased slightly from 36.29% for the second
quarter of 1993 to 37.83% in 1994 and from 36.68% for the first half of 1993 to
37.93% for the same period in 1994. The increase in the effective income tax
rate relates to 1993 legislation increasing the federal tax rate from 34% to 35%
for taxable income in excess of $10.0 million, and other factors.
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: January 26, 1995 \s\ Thomas H. Neuschaefer
--------------------------
Thomas H. Neuschaefer
Vice President, Treasurer and Chief
Financial Officer