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 March 31, 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 24,620,552 Shares
--------------------------------------- -----------------------
Class Outstanding at April 30, 1994
AMENDED
FINANCIAL
STATEMENTS
FIRST FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31,
1994 December 31,
(Unaudited) 1993
(Restated) (Restated)
(In thousands)
Cash $ 54,544 $ 63,241
Federal funds sold 11,348 21,873
Interest-earning deposits 8,141 25,768
---------- ----------
Cash and cash equivalents 74,033 110,882
Securities available for sale (at fair value):
Investment securities 30,763 84,487
Mortgage-related securities 303,326 347,137
Securities held to maturity:
Investment securities (fair value of
$133,683,000--1994 and $143,448,000
--1993) 135,864 143,568
Mortgage-related securities (fair
value of $1,086,171,000--1994
and $991,455,000--1993) 1,082,739 977,806
Loans receivable:
Held for sale 43,973 73,919
Held for investment 2,992,410 2,848,585
Foreclosed properties and
repossessed assets 6,320 6,817
Real estate held for investment or sale 17,028 16,810
Office properties and equipment 50,371 50,120
Intangible assets, less accumulated
amortization 30,747 31,392
Other assets 90,876 82,260
---------- ----------
$4,858,450 $4,773,783
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $4,157,773 $4,050,520
Borrowings 380,490 438,598
Advance payments by borrowers for
taxes and insurance 29,964 13,805
Other liabilities 40,576 37,025
---------- ----------
Total liabilities 4,608,803 4,539,948
---------- ----------
Stockholders' equity:
Serial preferred stock, $1 par value,
3,000,000 shares authorized; none
outstanding
Common stock, $1 par value, 30,000,000
shares authorized; shares issued and
outstanding: 24,602,752--1994;
23,586,827--1993 24,603 23,587
Additional paid-in capital 31,483 27,340
Net unrealized holding gain on securities
available for sale (3,851) 1,851
Retained earnings (substantially
restricted) 197,412 181,057
---------- ----------
Total stockholders' equity 249,647 233,835
---------- ----------
$4,858,450 $4,773,783
========== ==========
See notes to unaudited consolidated financial statements.
FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
March 31,
1994 1993
------ -----
(In thousands, except
per share amounts)
Interest income:
Mortgage loans $ 40,215 $ 38,303
Other loans 22,872 19,548
Mortgage-related securities 18,553 23,609
Investments 3,274 2,924
-------- --------
Total interest income 84,914 84,384
Interest expense:
Deposits 41,171 44,576
Borrowings 4,831 4,762
-------- --------
Total interest expense 46,002 49,338
-------- --------
Net interest income 38,912 35,046
Provision for losses on loans 1,380 2,844
-------- --------
37,532 32,202
Non-interest income:
Loan fees and service charges 2,010 1,930
Insurance and brokerage sales commissions 1,843 1,647
Deposit account service fees 1,840 1,715
Service fees on loans sold 1,316 1,619
Net gain on sale of mortgage loans 417 1,165
Net gain on sale of securities
available for sale 1,119 --
Other 1,188 592
-------- --------
Total non-interest income 9,733 8,668
-------- --------
Operating income 47,265 40,870
Non-interest expense:
Compensation, payroll taxes and benefits 11,712 11,350
Federal deposit insurance premiums 2,403 1,423
Occupancy expense 2,140 1,895
Data processing 1,815 2,187
Loan expenses 1,437 1,149
Telephone and postage 1,409 1,269
Amortization of intangible assets 1,344 1,155
Furniture and equipment 1,307 1,271
Marketing 1,042 774
Net cost of operations of foreclosed
properties 343 1,063
Other 2,507 2,146
-------- --------
Total non-interest expense 27,459 25,682
-------- --------
Income before income taxes 19,806 15,188
Income taxes 7,526 5,639
-------- --------
Net income $ 12,280 $ 9,549
======== ========
Earnings per share:
Primary $ .49 $ .40
Fully diluted $ .49 $ .40
Cash dividend per share $ .10 $ .075
See notes to unaudited consolidated financial statements.
FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For The Period Ended March 31, 1994
(Unaudited)
Net
Unrealized
Holding
Gain 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 $233,835
Net income 12,280 12,280
Cash dividend ($.10 per share) (2,538) (2,538)
Exercise of stock options 78 293 371
Issuance of common stock in
conjunction with acquisition 938 3,850 -- 6,613 11,401
Change in net unrealized holding
gain on securities available
for sale (5,702) (5,702)
------- ------- -------- -------- --------
BALANCES AT MARCH 31, 1994
(Restated) $24,603 $31,483 $ (3,851) $197,412 $249,647
======= ======= ======== ======== ========
See notes to unaudited consolidated financial statements.
FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
----------------------------
1994 1993
---------- -------
OPERATING ACTIVITIES (In thousands)
Net income $ 12,280 $ 9,549
Adjustments to reconcile net income to net cash provided
by operating activities:
(Increase) decrease in accrued interest on loans (1) 991
Increase in accrued interest on deposits 269 201
Mortgage loans originated for sale (97,132) (39,141)
Proceeds from sales of mortgage loans held for sale 139,583 82,175
Provision for depreciation 1,531 1,318
Provision for losses on loans 1,380 2,844
Provision for losses on real estate and other assets 225 1,137
Amortization of cost in excess of net assets of
acquired businesses 156 139
Amortization of core deposit intangibles 1,188 1,266
Amortization of purchased mortgage servicing rights 204 196
Net gain on sales of loans and assets (2,088) (1,341)
Other-net (407) 549
--------- ---------
Net cash provided by operating activities 57,188 59,883
INVESTING ACTIVITIES
Proceeds from sales of investment securities available for sale 45,541 --
Proceeds from maturities of investment securities held
to maturity 20,195 23,190
Purchases of investment securities held to maturity -- (17,865)
Proceeds from sales of mortgage-related securities available
for sale 12,459 81,287
Principal payments received on mortgage-related securities 97,092 89,255
Purchases of mortgage-related securities held to maturity (161,439) (138,982)
Proceeds from sale of finance company receivables 6,665 --
Principal received on loans receivable 130,080 114,083
Loans originated for portfolio (198,174) (198,721)
Additions to office properties and equipment (357) (2,167)
Proceeds from sales of foreclosed properties and
repossessed assets 1,949 2,646
Proceeds from sales of real estate held for investment -- 234
Business acquisitions (net of cash and cash equivalents acquired of
$4,593,000--1994; $186,100,000--1993):
Investment securities held to maturity (4,785) (22,775)
Mortgage-related securities available for sale -- (81,287)
Mortgage-related securities held to maturity (16,742) (145,098)
Loans receivable (96,748) (316,302)
Office properties (2,387) (7,452)
Intangible assets (699) (5,517)
Deposits and related accrued interest 114,297 702,236
Borrowings 750 71,897
Stockholders' equity 11,401 --
Other-net (494) (9,602)
--------- ---------
Net cash provided by (used in) investing activities (41,396) 139,060
FINANCING ACTIVITIES
Net decrease in deposits (7,313) (90,819)
Net increase in advance payments by borrowers for
taxes and insurance 15,697 12,414
Proceeds from borrowings 131,000 135,000
Repayments of borrowings (189,858) (284,367)
Proceeds from exercise of stock options 371 322
Payments of cash dividends to stockholders (2,538) (1,758)
--------- ---------
Net cash used in financing activities (52,641) (229,208)
--------- ---------
Decrease in cash and cash equivalents (36,849) (30,265)
Cash and cash equivalents at beginning of period 110,882 122,281
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 74,033 $ 92,016
========= =========
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 three 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 were 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.
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 March
31, 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 March 31, 1994,
mortgage-related securities and investment securities with a carrying value of
approximately $4.1 million were pledged as collateral for bonds in the aggregate
principal amount of $6.0 million. Additional bond issues totaling $7.61 million
are supported by letters of credit issued by First Financial, in lieu of
specific collateral. At March 31, 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 March 31, 1994 to
shareholders of record of the common stock on March 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 March 31, 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% 5.40% 7.73%
Core leverage capital 3.00 5.94 7.73
Risk-based capital 8.00 12.98 15.00
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. Under the OTS's prompt corrective action regulations, each of the
Banks was classified as well capitalized at March 31, 1994.
NOTE G - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
For The
Three Months Ended
March 31,
---------------------
1994 1993
------- -----
(In thousands)
Supplemental disclosure of cash flow information:
Cash paid or credited to accounts during
period for:
Interest on deposits and borrowings $ 45,863 $ 48,678
Income taxes 2,825 1,707
Non-cash investing activities:
Mortgage loans transferred to held
for sale portfolio 12,236 19,660
Loans receivable transferred to foreclosed
properties 1,357 1,848
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 Loan"). 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.
AMENDED
MANAGEMENT'S DISCUSSION & ANALYSIS
MANAGEMENT'S DISCUSSION AND ANALYSIS
COMPARISON OF THE CONSOLIDATED BALANCE SHEETS
AT MARCH 31, 1994 (UNAUDITED) WITH DECEMBER 31, 1993
General:
Total assets increased to $4.86 billion at March 31, 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
$4.43 billion and $4.16 billion at March 31, 1994 from $4.25 billion and $4.05
billion, respectively, at the end of 1993. Stockholders' equity at March 31,
1994 was $249.6 million, up from $233.8 million at year-end 1993.
Liquidity and Capital Resources:
At March 31, 1994, total consolidated liquidity, consisting of cash,
cash equivalents, and investment securities represented 4.95% 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 March 31, 1994 decreased by
$98.3 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 three-month interim period. Some of the more
significant changes in these categories, including liquid assets, can be
summarized as follows:
Consolidated Balance Balance
Statement Of December 31, From Other March 31,
Financial Condition 1993 NorthLand Increases 1994
Classification (Restated) Acquisition (Decreases) (Restated)
- ------------------- ------------- ------------ ---------- ---------
(In thousands)
Cash and cash equivalents $ 110,882 $ 3,193 $ (40,042) $ 74,033
Securities available for
sale:
Investment securities 84,487 -- (53,724) 30,763
Mortgage-related
securities 347,137 -- (43,811) 303,326
Securities held to
maturity:
Investment securities 143,568 4,785 (12,489) 135,864
Mortgage-related
securities 977,806 16,742 88,191 1,082,739
Loans receivable, in-
cluding loans held
for sale 2,922,504 96,748 17,131 3,036,383
Office properties 50,120 2,387 (2,136) 50,371
Intangible assets 31,392 699 (1,344) 30,747
Deposits 4,050,520 114,297 (7,044) 4,157,773
Borrowings 438,598 750 (58,858) 380,490
Advance payments by
borrowers for taxes
and insurance 13,805 462 15,697 29,964
Stockholders' equity 233,835 11,401 4,411 249,647
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 $5.4 million and
subordinated debt of $55.0 million at March 31, 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 $175.0 million from $4.25 billion at December 31,
1993 to $4.43 billion at March 31, 1994. Total loans are summarized below as of
the dates indicated.
March 31, December 31, Increase
1994 1993 (Decrease)
------------- ------------ ----------
(In thousands)
Real estate loans:
One- to four-family $1,845,180 $1,797,990 $ 47,190
Multi-family 190,009 188,558 1,451
Commercial and non-residential 102,735 94,789 7,946
---------- ---------- ---------
Total real estate loans 2,137,924 2,081,337 56,587
Other loans:
Credit cards 199,412 209,414 (10,002)
Home equity 196,547 193,291 3,256
Consumer 192,313 153,574 38,739
Education 171,554 167,385 4,169
Manufactured housing 162,425 165,017 (2,592)
Commercial business 20,672 111 20,561
Less net items to loans receivable (44,464) (47,625) 3,161
---------- ---------- ---------
Total loans (including loans held
for sale) 3,036,383 2,922,504 113,879
MBSs 1,386,065 1,324,943 61,122
----------- ------------ ---------
Total loans and MBSs $4,422,448 $4,247,447 $ 175,001
========== ========== =========
The major components of the increase in total loans during the three
months of 1994 were a $56.6 million increase in mortgage loans, a $38.7 million
increase in consumer loans and a $20.6 million increase in commercial business
loans.
The increase in residential mortgage loans receivable at March 31,
1994 was primarily attributable to the NorthLand acquisition as the Banks'
mortgage loan originations were substantially offset by sales and repayments.
Consumer loans increased $38.7 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 $3.3 million in 1994 as customer usage
of this product has continued to grow. Credit card loans decreased $10.0 million
in 1994 reflecting a seasonal decline in this portfolio. Manufactured housing
loan balances decreased $2.6 million as the Corporation continues to restrict
new originations of such loans to the Midwest. The $20.6 million increase in
commercial business loans reflects the acquisition of NorthLand's business loan
portfolio.
Mortgage loans held for sale were $44.0 million and $73.9 million at
March 31, 1994 and December 31, 1993, respectively. Off-balance sheet
commitments to originate and sell mortgage loans totaled $48.5 million and $46.7
million, respectively, at March 31, 1994. During the quarter ended March 31,
1994, market interest rates generally increased in excess of one percent, 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 engages in various
means of insulating 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. Given the recent move in interest rates, management believes
that the Corporation may have short term loss exposure relative to its
on-balance sheet and off-balance sheet mortgage banking activities. In addition,
loan originations resulting from refinancing transactions, and consequently
gains on sales of loans, may decrease during periods of rising interest rates.
As such, operations for the remainder of 1994 could be negatively impacted as a
result of the above-discussed risk factors.
After giving effect to the $16.7 million of MBSs acquired in the
NorthLand acquisition, the aggregate MBS portfolio increased $44.4 million
during the quarter ended March 31, 1994 as the net result of (i) purchases of
$161.4 million of U.S. Government Agency adjustable-rate MBSs, ii) sales of
available-for-sale MBSs of $12.3 million, (iii) repayments of $99.0 million, and
iv) available-for-sale MBS market value decreases of $5.7 million. At the end of
the first quarter, the Banks had commitments to purchase U.S. Government Agency
adjustable-rate MBSs totaling $284.7 million which will be funded through FHLB
advances.
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 on the following page:
March 31, December 31,
1994 1993
----------- --------
(In thousands)
Loans Delinquent 30-59 Days
Student loans $ 5,535 $ 4,014
Residential real estate loans 6,729 5,844
Manufactured housing loans 2,061 2,999
Credit card loans 1,889 1,988
Commercial real estate loans 411 3,798
Commercial business 288 --
Consumer and home equity 592 479
------- -------
$17,505 $19,122
======= =======
Loans Delinquent 60-90 Days
Student loans $ 5,442 $ 4,159
Residential real estate loans 1,311 1,111
Manufactured housing loans 860 1,035
Credit card loans 870 904
Commercial real estate loans 103 707
Commercial business -- --
Consumer and home equity 202 128
------- -------
$ 8,788 $ 8,044
======= =======
Total Loans Delinquent 30-90 Days
Student loans $10,977 $ 8,173
Residential real estate loans 8,040 6,955
Manufactured housing loans 2,921 4,034
Credit card loans 2,759 2,892
Commercial real estate loans 514 4,505
Commercial business 288 --
Consumer and home equity 794 607
------- -------
$26,293 $27,166
======= =======
At March 31, 1994, the 30-90 day delinquencies decreased $900,000 to
$26.3 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 0.87%
at March 31, 1994. The $900,000 decrease, at March 31, 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 $2.8 million in
delinquent student loans (which are government guaranteed) delinquent 30-90
days, iii) a decrease of $1.1 million in manufactured housing loans delinquent
30-90 days and iv) an increase of $1.0 million of delinquent residential
mortgage loans. The increase in residential mortgage 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, as follows:
March 31, December 31,
1994 1993
---------- --------
(In thousands)
One- to four-family residential $ 5,960 $ 5,005
Multi-family residential 76 139
Commercial and other real estate 682 --
Manufactured housing 883 1,063
Credit cards 1,880 1,836
Commercial business 1,210 --
Consumer and other 224 197
------- -------
$10,915 $ 8,240
======= =======
Non-accrual loans increased $2.7 million to $10.9 million at March 31,
1994 from $8.2 million at December 31, 1993. As a percentage of net loans
receivable, non-accrual loans increased to 0.36% at March 31, 1994 from 0.28% at
December 31, 1993. The 1994 increase in non-accrual loans is related to
increases of $1.0 million and $1.2 million in the residential 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. Non-accrual loans for the other loan portfolios
decreased or remained at the same relative level at March 31, 1994 as compared
to the end of 1993. The Banks had no troubled debt restructurings during the
first quarter of 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 second tranche 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 tranche. Both securities are serviced
by a California institution under the control of the RTC. First Financial's
second tranche position is senior to several subordinate tranches, currently
amounting to approximately 11% of the face value of the total portfolios in
question, which are designed to absorb losses in the underlying mortgage
portfolio. Discounted cash flow analyses performed by management (based upon
assumptions for delinquency levels, foreclosure rates and recovery ratios in
underlying portfolios) indicate that the subordinated tranches will adequately
protect First Financial in the future. As a result, management does not believe
that any material losses will be realized in connection with either of these
securities, although further delayed receipt of full monthly principal and
interest payments is probable. First Financial's portfolio of mortgage-related
securities totaled approximately $1.4 billion at March 31, 1994, and except for
one of the referenced securities which was recently downgraded, all of First
Financial's mortgage-related securities are rated at a minimum of investment
grade by at least one nationally recognized independent rating agency.
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 mezzanine 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 mezzanine securities could affect management's intent and/or
ability to hold such securities, it was determined that the classification
held-to-maturity 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. The reclassification was originally reported at June
30, 1994, the quarter when the error was discovered. The significant changes as
of March 31, 1994 include shareholders' equity, revised to $249.6 million from
$254.2 million, and stockholders' equity per share, revised to $10.15 from
$10.33.
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 ended March 31, 1994 and 1993, follows:
Three Months Ended
March 31,
----------------------
1994 1993
-------- ------
(In thousands)
Allowances at beginning of period $23,266 $17,067
From acquired banks 816 4,885
Provisions 1,380 2,844
Charge-offs (2,164) (2,491)
Recoveries 665 317
------- -------
Allowances at end of period $23,963 $22,622
======= =======
A discussion of loan loss provisions and charge-offs is presented in
"Management's Discussion and Analysis-Comparison of the Unaudited Consolidated
Statements of Income for the Three Months Ended March 31, 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:
March 31, 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 $ 6,775 3.40% $ 6,502 3.10%
Residential real estate 5,910 .29 5,877 .30
Manufactured housing 4,724 2.91 4,668 2.83
Commercial and non-residential
real estate 3,698 3.60 4,010 4.23
Consumer 2,049 1.07 1,728 1.12
Home equity 454 .23 429 .22
Commercial business 309 1.50 -- --
Education 44 .03 52 .03
------- -------
$23,963 .79% $23,266 .80%
======= ===== ======= =====
The allowances for loan losses increased to $24.0 million, or 0.79% of
loans receivable, at March 31, 1994 from $23.3 million, or 0.80%, at December
31, 1993. The allowances for losses also represented 220% of non-accrual loans
at March 31, 1994. 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:
March 31, December 31,
1994 1993
----------- --------
(In thousands)
Foreclosed real estate properties $ 7,433 $ 8,040
Manufactured housing owned 223 115
Consumer and other repossessed assets 50 48
------- -------
7,706 8,203
Less allowances for losses (1,386) (1,386)
------- -------
$ 6,320 $ 6,817
======= =======
Foreclosed properties, net of allowances for losses, decreased $500,000
to $6.3 million at March 31, 1994 from $6.8 million at December 31, 1993 due to
the sale of a large foreclosed commercial real estate property in 1994 (see
below).
A summary of the activity in allowances for losses on foreclosed
properties, for the three months ended March 31, 1994 and 1993, is presented
below.
Three Months Ended
March 31,
--------------------
1994 1993
------ -----
(In thousands)
Allowances at beginning of period $1,386 $ 552
Provisions 225 1,137
Charge-offs (225) (175)
------ ------
Allowances at end of period $1,386 $1,514
====== ======
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 March 31, December 31,
Type Property Location 1994 1993
- -------- ----------------- ------------ --------
(In thousands)
Office Madison, Wisconsin $ 1,500 $ 1,500
Retail Milwaukee, Wisconsin 1,089 1,089
Office Phoenix, Arizona -- 700
The Arizona property was 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 performing to a serious degree under
the contractual terms of the original notes, or ii) for which known information
about possible credit problems of borrowers causes management to have serious
doubts as to the ability of such borrowers to comply with current contractual
terms. This non-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:
March 31, December 31,
1994 1993
----------- --------
(In thousands)
Classified assets:
Non-performing assets:
Non-accrual loans $10,915 $ 8,240
Non-accrual MBSs 21,199 --
Foreclosed properties and other
repossessed assets 6,320 6,817
------- -------
Total Non-Performing Assets 38,434 15,057
Less non-accrual MBSs included above but
not adversely classified for regulatory
purposes (21,199) --
Add back general valuation allowances net-
ted against foreclosed properties above 1,386 1,386
Adjustment for non-performing residential
loans not classified due to low
loan-to-appraisal value (1,141) (707)
Additional classified performing loans:
Residential real estate 2,873 1,919
Commercial real estate 9,960 9,747
Consumer and other 596 241
Other adversely classified assets 718 757
------- -------
Total Classified Assets $31,627 $28,400
======= =======
During the three months ended March 31, 1994, classified assets
increased $3.2 million to $31.6 million from $28.4 million at December 31, 1993
primarily as a result of the $2.7 million increase in non-accrual loans. As a
percentage of total assets, classified assets increased from 0.60% at year-end
1993 to 0.65% at March 31, 1994.
The increase in non-accrual loans and the $500,000 decrease in
foreclosed properties during the first three months of 1994 have been discussed
above (see "Non-Accrual Loans" and "Foreclosed Properties").
The non-accrual MBSs of $21.2 million listed above (see "Non-Accrual
MBSs") in non-performing assets have been included in a "special mention"
category and have been excluded in determining adversely classified assets. As
noted above, management does not believe that any material losses will be
realized in connection with these MBSs based upon discounted cash flow analyses
performed relative to these securities.
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, are noted on the following page at the dates
indicated.
Loan Amount Classified
-----------------------------------------
Property Type Of Property March 31, December 31,
Loan Collateral Location 1994 1993
- ---------------- ---------- ------------ ------------
(In thousands)
Office/Land Sheboygan, Wisconsin $ 3,661 $3,670
Motels Various-Tennessee 2,560 (a) 2,600 (a)
Office Independence, Missouri -- 1,091 (b)
<FN>
(a) Represents a 20% interest in loans, aggregating $12.3 million, for which
First Financial is 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.
Other assets adversely classified remained relatively unchanged
during the first three months of 1994.
All adversely classified assets and "special mention" assets at March
31, 1994, have been considered by management in its evaluation of the adequacy
of allowances for losses.
Deposits and Other Liabilities:
Deposits, excluding the $114.1 million resulting from the NorthLand
acquisition, decreased $6.8 million during the three months ended March 31,
1994. Although interest rates rose during 1994, the weighted average cost of
deposits of 4.06% at March 31, 1994 was the same as reported at December 31,
1993 due to the repricing of higher rate certificates of deposit renewing during
the first quarter of 1994.
Advance payments by borrowers for taxes and insurance, excluding
$500,000 of such liabilities assumed in the NorthLand acquisition, increased by
$15.7 million during the first three 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 March 31, 1994, the Corporation's consolidated borrowings decreased
to $380.5 million at March 31, 1994 from $438.6 million at December 31, 1993.
The decrease in borrowings is primarily attributable to the net effect of (i)
$750,000 of borrowings assumed by the Corporation when it acquired NorthLand,
offset by (ii) repayments of $10.0 million in longer-term FHLB advances and
(iii) a net reduction of $49.0 million in shorter-term FHLB advances in 1994.
Stockholders' Equity:
Stockholders' equity at March 31, 1994 was $249.6 million, or 5.14% of
total assets, as compared to $233.8 million, or 4.90% of total assets, at
December 31, 1993. The major changes in stockholders' equity included i) net
income of $12.3 million earned during the first three months of 1994, ii) cash
dividend payments to stockholders of $2.5 million, iii) $11.4 million additional
equity realized in the NorthLand acquisition, which was accounted for as a
pooling-of-interests, and iv) a decrease of $5.7 million in unrealized gains on
securities available for sale. See Note B to the unaudited consolidated
financial statements for a discussion of the accounting treatment of this
acquisition. Stockholders' equity per share increased from $9.91 per share at
year-end 1993 to $10.15 per share at March 31, 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 three months of 1994
and 1993, including loans originated for sale (but excluding MBSs), follows:
Three Months Ended March 31,
-------------------------------------------------------
1994 Percent 1993 Percent
-------- ------- -------- -------
(Dollars in thousands)
Loan Type
Mortgage:
One- to four-family $ 208,958 71.6% $116,265 51.0%
Multi-family 10,123 3.5 15,667 6.9
Commercial/non-residential 5,677 1.9 1,278 0.6
Refinanced one- to four-
family loans previously
sold and serviced for others 52 -- 59,325 26.0
---------- ----- -------- -----
224,810 77.0 192,535 84.5
Consumer 54,025 18.5 21,251 9.3
Student 4,856 1.7 6,643 2.9
Home equity-net 3,256 1.1 4,743 2.1
Manufactured housing 3,449 1.2 2,715 1.2
Commercial business 1,030 0.3 -- --
Refinanced manufactured
housing loans previously
sold and serviced for others 475 0.2 -- --
Credit cards-net -- -- -- --
---------- ----- -------- -----
Total loans originated 291,901 100.0% 227,887 100.0%
===== =====
Decrease in undisbursed loan
proceeds 3,405 9,975
---------- --------
Total loans disbursed $ 295,306 $237,862
========== ========
Total loan originations increased to $291.9 million for the first three
months of 1994 from $227.9 million for the same period in 1993. The 1994
increase of $64.0 million was primarily attributable to a $32.3 million increase
in mortgage loan originations and a $32.7 million increase in consumer lending.
One- to four-family mortgage loan originations and refinancings
increased $33.4 million to $209.0 million for the first three months of 1994 as
compared to $175.6 million for the same period in 1993 as i) the momentum of
mortgage loan refinancings carried into 1994 and also, ii) the Illinois regions
of First Financial continue to provide increased levels of lending. At March 31,
1994, one- to four-family mortgage loan applications in process and commitments
totaled $68.1 million and $44.0 million as compared to $84.2 million and $50.0
million at December 31, 1993. The decrease in applications and commitments
reflects the rise in interest rates in 1994 as borrower demand for refinancings
has slowed down.
Originations of multi-family residential mortgage loans were $5.5
million under the 1993 level. Commercial real estate loan originations remained
at relatively low levels again in 1994 due to regional market conditions.
Consumer loan originations increased $32.7 million to $54.0 million in
the first three months of 1994 primarily due to the continued success of a
second mortgage product and the expansion of Illinois markets after the 1993
acquisitions. Student loan and manufactured housing loan originations remained
in line with 1993 production levels.
Home equity loan balances increased $3.3 million for the first three
months of 1994 to $196.5 million as customer usage of this product continues to
grow.
Credit card loans decreased $10.0 million in the first quarter of 1994.
This net decrease is 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 $199.4 million at March 31, 1994 compared to $209.4 million at
the end of 1993 and $172.3 million at March 31, 1993, reflecting continued
growth in this portfolio excluding the seasonal downturn.
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 March 31, 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 March 31, 1994 was $293.7 million or 6.05% of total assets.
The one-year positive gap increased $2.9 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 6.05%
at March 31, 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 March 31, 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 MARCH 31, 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) $ 97,406 $ 82,248 $ 5,774 $ 589
Mortgage-related securities (b) 1,298,988 72,456 14,585 8
Mortgage loans (c)(d):
Fixed-rate 240,004 387,725 331,083 545,484
Adjustable-rate 418,504 193,972 2,959 50
Other loans 649,789 163,172 62,705 35,694
---------- ---------- ---------- ----------
2,704,691 899,573 417,106 581,825
Rate-sensitive liabilities:
Deposits (e)(f) 2,168,193 1,248,068 356,631 234,401
Borrowings (g) 242,783 74,114 1,849 59,513
---------- ---------- ---------- ----------
2,410,976 1,322,182 358,480 293,914
---------- ---------- ---------- ----------
GAP (repricing difference) $ 293,715 $ (422,609) $ 58,626 $ 287,911
========== ========== ========== ==========
Cumulative GAP $ 293,715 $ (128,894) $ (70,268) $ 217,643
========== ========== ========== ==========
Cumulative GAP/Total assets 6.05% (2.65)% (1.45)% 4.48%
========== ========== ========== ==========
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) $ 32,791 $ -- $ 218,808
Mortgage-related securities (b) 28 -- 1,386,065
Mortgage loans (c)(d):
Fixed-rate 5,012 177 1,509,485
Adjustable-rate -- -- 615,485
Other loans 53 -- 911,413
---------- ------ ----------
37,884 177 4,641,256
Rate-sensitive liabilities:
Deposits (e)(f) 130,531 46,249 4,184,073
Borrowings (g) -- 2,231 380,490
---------- ------ ----------
130,531 48,480 4,564,563
---------- ------ ----------
GAP (repricing difference) $(92,647) $(48,303) $ 76,693
========== ======= ==========
Cumulative GAP $124,996 $ 76,693
========== ======= ==========
Cumulative GAP/Total assets 2.57% 1.58%
========== ======= ==========
<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 $30.0 million of tax and insurance accounts and exclude
accrued interest on deposits of $3.7 million.
(f) The Corporation has assumed that its passbook savings, NOW accounts and
money market accounts would have projected annual withdrawal rates, based
upon the Corporation's historical experience, of 26%, 34% and 42%,
respectively.
(g) Collateralized mortgage obligations totaling $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 ENDED
MARCH 31, 1994 AND 1993
Selected Income Statement Information:
Net income of $12.3 million for the first quarter of 1994 was up $2.8
million, or a 29.5% increase, from the $9.5 million reported for the first
quarter of 1993. Momentum from low interest rates in 1993 and the 1993
acquisitions were the major factors contributing to the improved 1994 results.
The annualized returns on average assets and average stockholders' equity
increased to 1.01% and 19.55%, respectively, for the first quarter of 1994 as
compared to 0.86% and 19.24%, respectively, for the same period in 1993. Primary
and fully diluted earnings per share increased to $0.49 per share for the first
quarter of 1994 from $0.40 per share in 1993.
Net Interest Income:
Net interest income increased $3.9 million to $38.9 million during the
first quarter of 1994 from $35.0 million for the first quarter of 1993. The net
interest margin of 3.30% for the first quarter of 1994 was the same as reported
during the first quarter of 1993. Interest income and interest expense increased
$500,000 and $3.3 million, respectively, for the first quarter of 1994 as
compared to 1993. The average balances of interest-earning assets and
interest-bearing liabilities increased from $4.244 billion and $4.194 billion,
respectively, in 1993 to $4.646 billion and $4.542 billion in 1994,
respectively. The ratio of average interest-earning assets to average
interest-bearing liabilities increased to 102.29% for the first 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. 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 of interest-bearing liabilities (4.77% in 1993 versus 4.11%
in 1994) than in the average yield on interest-earning assets (7.95% in 1993
versus 7.32% 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 were reduced by
approximately $700,000 upon the reversal of interest accruals relating to these
securities. Future earnings will be negatively affected by approximately
$400,000 per quarter, or approximately 0.03% of earning assets, until payments
on these securities resume.
Interest Spread:
The table on the following page 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 ended March 31, 1994 and 1993. A comparison of similar data as of March
31, 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
Three Months Ended At
March 31, March 31,
---------------------- ----------------------
1994 1993 1994 1993
-------- -------- -------- ------
Weighted average yield on
interest-earning assets 7.32% 7.95% 7.36% 7.91%
Weighted average rate paid
on deposit accounts and
borrowings 4.11 4.77 4.14 4.62
----- ----- ----- -----
Interest spread 3.21% 3.18% 3.22% 3.29%
===== ===== ===== =====
Net interest margin (net
interest income divided
by earning assets) 3.30% 3.30% 3.31% 3.37%
===== ===== ===== =====
The interest spread increased slightly to 3.21% for the three months
ended March 31, 1994 from 3.18% for the same period in 1993 due to the factors
noted above. The interest spread and the net interest margin were 3.22% and
3.31%, respectively, at March 31, 1994 as compared to 3.29% and 3.37%,
respectively, at March 31, 1993. Although the net interest margin at March 31,
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 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 continue to rise.
Provisions For Losses on Loans:
Provisions for loan losses decreased $1.4 million to $1.4 million for the
first quarter of 1994 as compared to $2.8 million for the 1993 period. The 1994
decrease in provisions for loan losses reflects the lower 1994 charge-off
experience as well as a recovery received in the first quarter of 1994, relating
to the settlement of a lawsuit brought by the Corporation regarding purchased
mortgage loans acquired in a 1990 acquisition.
The following table summarizes the Corporation's net charge-off
experience by category for the quarters ended March 31, 1994 and 1993.
For The Quarters Ended March 31,
----------------------------------------
1994 1993
------------ ---------
Net Net
Charge-offs Charge-of fs
(Recoveries) (Recoveries)
------------- ------------
Loan Type (Dollars in thousands)
Credit cards $1,427 $1,236
Manufactured housing 369 675
Residential real estate (341) 157
Consumer and other 44 106
Commercial real estate -- --
Commercial business -- --
------ ------
$1,499 $2,174
====== ======
Net charge-offs as a
percent of average loans
outstanding (annualized) .20% .34%
====== ======
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 increased $1.0 million to $9.7 million for the first
quarter of 1994 compared to $8.7 million for the same period in 1993 as the net
result of several significant factors. 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
increased $200,000 as First Financial's insurance agency subsidiary continues to
perform well. The major increase in non-interest income in 1994 relates to gains
of $1.1 million on the sale of fixed-rate securities available for sale as the
Corporation acted to protect the value of that portfolio as interest rates rose
during 1994. Gains realized from the sale of long-term fixed-rate mortgage loans
in the secondary mortgage market decreased $800,000 to $400,000 in 1994,
including a writedown of $250,000 representing a lower of cost or market
adjustment relative to the mortgage loans held-for-sale portfolio at March 31,
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
mortgage 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 Expense:
Non-interest expenses increased approximately $1.8 million for the
quarter ended March 31, 1994 as compared to 1993. The higher level of
non-interest expenses reflects inherent increases in the expanded scope of
operations as a result of the 1993 and 1994 acquisitions. The major categories
of non-interest expense affected by acquisitions are compensation, occupancy,
federal deposit insurance and amortization of intangible assets.
Federal deposit insurance expense increased $1.0 million in the first
quarter of 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. In addition, each of the Banks
qualifies for the lowest FDIC assessment rate and management of the Corporation
believes that the Banks will continue to qualify for the lowest FDIC assessment
rate, thus enabling the Banks to keep deposit insurance expense under control.
The Banks, however, do not have control over potential future rate increases by
the FDIC.
The increase of $300,000 in loan expenses for the three months ended
March 31, 1994 represent the impact of higher 1994 mortgage loan production as
well as the cost of an ongoing program to attract new credit card accounts
through affinity groups.
The net cost of operations of foreclosed properties decreased $800,000
for the three months of 1994 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
2.26% for the first quarter of 1994 as compared to 2.31% for the first quarter
of 1993 due to the increased asset level of the Corporation resulting from
acquisitions. The improvement in this ratio is reflective of the 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,
remained stable at 2.12% of average assets for the three months ended March 31,
1994 as compared to 2.11% for the same period 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
54.71% for the quarter ended March 31, 1994 as compared to 55.37% for the same
period in 1993.
Income Taxes:
Income tax expense increased $1.9 million for the first quarter of 1994
as compared to the same period in 1993 primarily due to the increase in pre-tax
income in 1994. As a percent of pre-tax income, the effective income tax rate
increased slightly from 37.1% for the first quarter of 1993 to 38.0% in 1994.
The increase in the effective income tax rate primarily relates to 1993
legislation increasing the federal tax rate from 34% to 35% for taxable income
in excess of $10.0 million.
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