UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1993
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition report from __________ to __________
Commission File Number 0-11889
FIRST FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Wisconsin 39-1471963
(State of other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1305 Main Street
Stevens Point, Wisconsin 54481
(Address of principal executive office)
Registrant's telephone number, including area code (715) 341-0400
Securities registered pursuant to Section 12(b) of the Act Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 or Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
Based upon the closing price of the registrant's common stock as of
March 7, 1994, the aggregate market value of the voting stock held by
non-affiliates of the registrant is: $324,311,850.
As of March 7, 1994, 24,564,999 shares of the registrant's common
stock were outstanding.
Documents Incorporated by Reference.
Part II:
Portions of First Financial Corporation's 1993 Annual Report to
Shareholders.
Part III:
Portions of definitive proxy statement for the 1994 Annual Meeting of
Shareholders.
ITEM 1. BUSINESS
FIRST FINANCIAL CORPORATION
First Financial Corporation (the "Corporation"), which was formed in
1984, conducts business as a multiple savings and loan holding company. As a
Wisconsin corporation, the Corporation is authorized to engage in any activity
permitted by the Wisconsin Business Corporation Law.
The principal assets of the Corporation are all of the outstanding
stock of First Financial Bank, F.S.B., ("First Financial") and First
Financial-Port Savings Bank, F.S.B. ("Port") - collectively the "Banks". The
business of the Corporation is the business of the Banks. Other activities of
the Corporation could be funded by dividends paid by the Banks, borrowings or
the issuance of additional shares of capital stock. The Corporation is
headquartered at 1305 Main Street, Stevens Point, Wisconsin, 54481, telephone
number (715) 341-0400.
FIRST FINANCIAL BANK, F.S.B.
First Financial is a federally-chartered, stock savings institution
whose deposits are insured by the Savings Association Insurance Fund ("SAIF"),
as administered by the Federal Deposit Insurance Corporation ("FDIC"). Business
is conducted through 114 full-service branch offices, one limited loan
origination office, an insurance agency and an appraisal company in both
Wisconsin and Illinois. Based on total assets of $4.6 billion at December 31,
1993, First Financial is the largest thrift institution headquartered in
Wisconsin. The principal mortgage lending area of First Financial is Wisconsin
and Illinois. In addition to real estate loans, First Financial originates a
significant volume of consumer loans, manufactured housing loans, credit card
loans and student loans. Consumer, home equity and student lending activities
are principally conducted in Wisconsin and Illinois, while the credit card base
and resulting loans are principally centered in the Midwest. Manufactured
housing lending activity is conducted in Wisconsin, Illinois and other
Midwestern states. Nearly all long-term fixed-rate real estate mortgage loans
generated are sold in the secondary market and to other financial institutions
with First Financial retaining the servicing of those loans. First Financial
offers brokerage services and also operates a full-line independent insurance
agency and a real estate appraisal company.
First Financial has grown significantly through mergers and
acquisitions since its stock conversion in 1980, when First Financial had total
assets of $244 million and 14 branch offices in central Wisconsin. In 1984,
First Financial and First State Savings of Wisconsin ("First State"),
concurrently with First State's stock conversion, combined to form the
Corporation, which operated as a multiple savings and loan holding company from
1984 until late 1985 when the Corporation acquired First Savings Association of
Wisconsin ("First Savings"). At that time, all three institutions were merged
together. In 1988, First Financial acquired National Savings and Loan
Association of Milwaukee, Wisconsin through a merger conversion. By the end of
1988, First Financial's total assets had grown to $2.3 billion and First
Financial operated 63 full-service banking offices throughout Wisconsin.
Beginning in 1990, First Financial expanded into the southern Illinois
(suburban St. Louis) and Peoria, Illinois markets by acquiring Illini Federal
Savings and Loan Association of Fairview Heights ("Illini") in a voluntary
supervisory merger conversion and by purchasing the deposits and nine branch
banking offices of two former Peoria thrifts from the Resolution Trust
Corporation ("RTC"). Also during 1990, First Financial acquired two
western-Wisconsin area branch banking offices from the RTC. During 1992, First
Financial acquired ten additional branch banking offices in the Peoria market,
including eight from LaSalle Talman Bank, FSB ("Talman"), and two from the RTC.
In 1993, First Financial acquired Westinghouse Federal Bank, FSB d/b/a United
Federal Bank (United) of Galesburg, Illinois and also purchased the deposits and
the four Quincy, Illinois-area branch banking offices of Citizens Federal Bank,
a FSB (Citizens).
While pursuing its strategy of expansion by acquisition in Wisconsin
and Illinois, management of First Financial has also curtailed certain lending
activities outside of the Midwest in recent years. In 1988, First Financial
liquidated the West Coast mortgage banking operation which First Financial had
acquired as part of the acquisition of First Savings. This operation had
incurred continuing operating losses. Also in 1988, First Financial sold a
portion of its credit card loan portfolio, totaling $44.8 million, consisting of
loans concentrated in California, Texas, and the Northeastern states. First
Financial's credit card lending activities are now focused primarily on
Wisconsin, Illinois and other Midwestern states. During 1989, First Financial
also curtailed manufactured housing lending outside of the Midwest.
First Financial is a member of the Federal Home Loan ("FHL") Bank
System. First Financial is subject to comprehensive examination, supervision and
regulation by the Office of Thrift Supervision (the "OTS") and the FDIC, and is
also regulated by the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board") as to reserves required to be maintained against
deposits and certain other matters. See "Regulation".
FIRST FINANCIAL - PORT SAVINGS BANK, F.S.B.
Port is a federally-chartered stock savings institution, acquired by
the Corporation in 1989, whose deposits are insured by SAIF. Effective March 1,
1992, Port was converted to a federal savings bank charter, having operated as a
state-chartered stock savings institution prior to that date. Business is
conducted through three offices located in Ozaukee County, Wisconsin. Assets
totaled $99.5 million at December 31, 1993. In addition to real estate loans,
Port originates consumer loans, credit card loans and student loans. Port's
lending activities are principally conducted in Ozaukee County and surrounding
communities.
Port is a member of the FHL Bank System. Port is also subject to
comprehensive examination, supervision and regulation by the OTS and the FDIC,
and is also regulated by the Federal Reserve Board as to reserves required to be
maintained against deposits and certain other matters. See "Regulation".
RECENT DEVELOPMENT
On February 26, 1994, the Corporation acquired NorthLand Bank of
Wisconsin, SSB (NorthLand), of Ashland, Wisconsin, through an exchange of stock
valued at 130 percent of NorthLand's defined tangible stockholders' equity at
closing. Upon closing, NorthLand was merged into First Financial. The
transaction has been accounted for as a pooling-of-interests. As of December 31,
1993, NorthLand had total assets and shareholders' equity of $127.4 million and
$11.4 million, respectively.
FINANCIAL RATIOS
Year Ended December 31,
------------------------------------------
1993 1992 1991
---- ---- ----
Return on average assets* .98% .79% .58%
Return on average equity* 21.24 15.78 11.85
Average equity to average assets 4.62 4.99 4.86
Dividend payout ratio* 18.62 17.93 19.87
Net interest spread:
During the period 3.33 3.27 3.12
At end of period 3.29 3.27 3.27
<FN>
* Ratio for 1992 is based upon net income prior to the $5.6 million increase
in net income arising from the cumulative effect of a change in accounting
principle.
MARKET AREA AND COMPETITION
At December 31, 1993, the Banks conducted business from 117
full-service branch banking offices located in 53 Wisconsin and 35 Illinois
communities. The offices are located throughout most of Wisconsin and much of
downstate Illinois, including the Peoria and suburban St. Louis areas. These
offices include 27 locations in the Milwaukee Metropolitan Statistical Area
("MSA"), the largest in Wisconsin, and 29 locations in the Peoria and St. Louis
MSA's, Illinois' largest outside of Chicago.
In 1990, the counties in which the Banks had offices in Wisconsin and
Illinois had a total population of 5.0 million. Between 1980 and 1990, the
population of this area increased 1.4%, compared to 1.2% for the two-state area.
The median household income in these counties was $30,598 according to the 1990
Census, compared to $31,402 for the two-state area. It increased 63.1% between
1980 and 1990. This area, in both states, contains a diversity of major urban
and suburban areas, smaller less-urbanized communities and predominantly rural
areas. Some of the larger companies headquartered in First Financial's market
include Briggs & Stratton Company, A.O. Smith, General Electric Medical Systems,
Allen Bradley, Miller Brewing Company, Johnson Controls and Caterpillar.
First Financial also does business outside of Wisconsin and Illinois.
At December 31, 1993, the credit card loan portfolio of First Financial was
distributed approximately 42% to Wisconsin residents, 11% to Illinois, 5% to
California, 4% to Michigan, 3% to New York, 3% to Texas, 3% to Ohio and 29% to
other states. First Financial originates manufactured housing loans in
Wisconsin, Indiana, Ohio, Illinois, Iowa, Michigan, Minnesota and Missouri.
Consumer and student loans are made principally to Wisconsin, Illinois and other
Midwestern residents.
The Banks are subject to competition from other savings institutions as
well as commercial banks and credit unions in both attracting and retaining
deposits and in real estate and other lending activities. Competition for
deposits also comes from money market funds, bond funds, corporate debt and
government securities. Competition for the origination of real estate loans
comes principally from other savings institutions, commercial banks and mortgage
banking companies. Competition for manufactured housing loans is primarily from
other financial institutions or entities. Consumer loan competition principally
emanates from other savings institutions, commercial banks, automobile
manufacturers and their financing subsidiaries, consumer finance companies and
credit unions.
The principal methods used by competing financial institutions to
attract deposit accounts include rates of return, types of accounts, convenience
of office locations, and other services. The primary factors in competing for
loans are interest rates, loan fee charges, and timing and quality of service to
the borrower.
As a Wisconsin-based savings and loan holding company, the Corporation
may acquire savings institutions or savings and loan holding companies located
in the states of Illinois, Indiana, Iowa, Kentucky, Michigan, Minnesota,
Missouri, Ohio and Wisconsin ("Regional Compact States"). Further, the OTS's
statement of policy on branching by federally chartered savings institutions
permits nationwide branching. However, nationwide branching is not permitted to
the extent that it would result in formation of a multiple savings and loan
holding company (such as the Corporation) controlling savings institutions in
more than one state. Generally, the formation of multi-state multiple savings
and loan holding companies are prohibited unless one of three exemptions exists.
The first exemption authorizes a savings and loan holding company or any of its
savings institution subsidiaries to acquire an institution or operate branches
in another state following a supervisory acquisition. The second exemption
relates to grandfathered branching rights and the third exemption relates to
specific approvals under the laws of the state in which the acquired institution
or branches are located.
Additionally, OTS regulations allow federal savings institutions to
establish, in any state in which the institution has its home or a branch
office, agency offices which only service and originate (but do not approve)
loans and contracts, manage or sell real estate owned by the institution or
engage in such other activities (other than accepting payments on savings
accounts or approving loans) as may be approved by the District Director of the
OTS for the region in which the institution is located.
Management of the Corporation is not able to predict, at this time,
what new laws will be enacted, if any, or what effect such new laws would have
on the financial condition and prospects of the Corporation and the Banks.
SELECTED HISTORICAL FINANCIAL INFORMATION
The following tables present selected historical consolidated financial
information of the Corporation.
December 31,
-------------------------------------------------------------------
1993 (e) 1992 (f) 1991 1990 (g) 1989 (h)
---------- ---------- ---------- ---------- ---------
(Dollars in thousands)
Financial Condition and Other Data
Total assets............................ $4,773,783 $3,908,286 $3,220,002 $3,142,293 $2,456,695
Investments (a)......................... 275,696 163,800 104,022 186,139 137,839
Loans receivable and mortgage-related
securities............................ 4,173,528 3,457,466 2,847,175 2,685,162 2,125,376
Loans held for sale-net................. 73,919 54,840 38,061 53,103 16,888
Intangible assets....................... 31,392 23,278 20,388 23,178 5,505
Deposits................................ 4,050,520 3,206,112 2,935,645 2,883,214 2,098,234
Borrowings.............................. 438,598 461,948 77,243 60,351 177,253
Shareholders' equity (substantially
restricted)(b)........................ 233,835 194,095 164,535 149,576 137,081
Number of full-service offices.......... 117 94 86 86 67
Year Ended December 31,
-------------------------------------------------------------------
1993 (e) 1992 (f) 1991 1990 (g) 1989 (h)
---------- ---------- ---------- ---------- ---------
(In thousands except per share amounts)
Operating Data
Interest income......................... $ 340,123 $ 296,871 $ 300,081 $ 292,141 $ 235,890
Interest expense........................ 189,734 181,896 203,749 204,748 162,059
---------- ---------- ---------- ---------- ----------
Net interest income..................... 150,389 114,975 96,332 87,393 73,831
Provision for losses on loans........... (10,219) (13,851) (18,333) (16,044) (18,306)
Loan fees and servicing income.......... 14,112 12,961 15,143 15,884 14,510
Other non-interest income............... 16,034 14,348 13,628 13,996 12,344
Gain on sale of loans and securities.... 7,575 4,900 5,560 1,503 5,535
Non-interest expense.................... (105,804) (88,711) (81,395) (76,840) (64,868)
---------- ---------- ---------- ---------- ----------
Income before income taxes and the
cumulative effect of a change in
accounting principle ................. 72,087 44,622 30,935 25,892 23,046
Income taxes............................ 26,872 16,190 12,409 9,870 8,670
---------- ---------- ---------- ---------- ----------
Income before the cumulative effect of a
change in accounting principle......... 45,215 28,432 18,526 16,022 14,376
Cumulative effect of a change in
accounting principle (c).............. -- 5,600 -- -- --
---------- ---------- ---------- ---------- ----------
Net income.............................. $ 45,215 $ 34,032 $ 18,526 $ 16,022 $ 14,376
========== ========== ========== ========== ==========
Earnings per share (d):
Primary:
Income before the cumulative effect
of a change in accounting
principle ...................... (c) $ 1.88 $ 1.21 $ .80 $ .70 $ .63
Net income......................... 1.88 1.45 .80 .70 .63
Fully Diluted:
Income before extraordinary items
and the cumulative effect of a
change in accounting principle(c). $ 1.86 $ 1.19 $ .79 $ .70 $ .63
Net income......................... 1.86 1.43 .79 .70 .63
Cash dividends declared and paid per
share (f)............................. $ .35 $ .22 $ .16 $ .16 $ .15
<FN>
(a) Consists of federal funds sold, interest-earning deposits, and
investment securities.
(b) See Note L to the Corporation's consolidated financial statements.
(c) A $5.6 million credit was realized in 1992 from the cumulative effect
of the adoption of Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes". See Note A to the Corporation's
consolidated financial statements.
(d) Per share data have been adjusted to reflect A) a two-for-one stock
split distributed in March, 1993, B) a two-for-one stock split
distributed in April, 1992 and C) a ten percent stock dividend
distributed in March, 1989. See Note A to the Corporation's
consolidated financial statements.
(e) In 1993, First Financial acquired United and also purchased the
deposits and the four Quincy, Illinois-area branch banking offices of
Citizens. Each transaction has been accounted for as a purchase and
the related results of operations have been included in the
Corporation's consolidated financial statements since the respective
dates of acquisition. See Note B to the Corporation's consolidated
financial statements.
(f) During the first quarter of 1992, First Financial completed the
assumption of deposits and the purchase of branch facilities of ten
Peoria, Illinois-area branches including eight from the Talman and two
from the RTC. Each of these transactions was accounted for as a
purchase. See Note B to the Corporation's consolidated financial
statements.
(g) The Corporation completed the acquisition of Illini on January 19,
1990 and, at various dates during 1990, the assumption of the deposits
and purchase of certain assets of three former thrift institutions
from the RTC. Each of these transactions has been accounted for as a
purchase and the related results of operations have been included in
the Corporation's consolidated financial statements since the
respective dates of acquisition.
(h) The acquisition of Port was completed on May 31, 1989 and was
accounted for as a purchase. Accordingly, the results of Port's
operations have been included in the Corporation's consolidated
financial statements since that date.
Lending Activities (Including Mortgage-Related Securities)
General. The Banks have traditionally concentrated on origination of
conventional mortgage loans secured by first liens on one- to four-family
residences. The Banks also make loans which are insured by the FHA or partially
guaranteed by the VA as well as home loans on behalf of or for immediate sale to
the Wisconsin Department of Veterans Affairs ("WDVA"), the Wisconsin Housing and
Economic Development Authority ("WHEDA") and the Illinois Housing and
Development Authority (IHDA). At December 31, 1993, the Corporation's total loan
portfolio, including mortgage-related securities, amounted to $4.3 billion,
including mortgage loans totaling $2.1 billion of which $1.8 billion, or 41.1%
of the total loan portfolio, before net items, were loans secured by one- to
four-family residences. In addition, the Banks make long-term, first mortgage
real estate loans on multiple dwelling units and commercial properties, second
mortgages and short-term construction loans. As a means of better matching
maturities of its asset and liability products, the Banks have also originated
other types of high-yielding loan products which have either a short term to
maturity or contain adjustable-rate features. These products include education
loans, credit card loans, home equity loans, consumer loans principally
consisting of automobile collateral and manufactured housing loans consisting of
conventional loans, VA-guaranteed loans and FHA-insured loans. At December 31,
1993, these loans amounted to $888.8 million, or 20.7%, before net items, of the
total loan portfolio. Loans with terms up to 15 years and loans with adjustable
interest rates are originated for the Banks' own portfolios, while longer-term
fixed-rate mortgage loans are originated for sale in the secondary market. The
Federal Reserve Board is authorized to promulgate regulations limiting the
maximum interest rate that may apply during the term of adjustable-rate mortgage
loans originated by savings institutions such as the Banks. Under the regulation
adopted by the Federal Reserve Board, no specific interest rate limit is set,
but lenders are required to impose interest rate caps on all adjustable-rate
mortgage loans and all dwelling-secured consumer loans, including home equity
loans, which provide for interest rate adjustments. The regulation is applicable
to loans made after December 8, 1987.
The Banks also periodically purchase mortgage-related securities as a
lending alternative when excess liquidity is available. At December 31, 1993,
these securities amounted to $1.3 billion, or 30.9% of the total loan portfolio,
before net items. Included in mortgage-related securities are adjustable-rate
securities totaling $1.1 billion. The Banks also review the geographic
distribution of collateral when purchasing non-agency mortgage-related
securities. In an effort to decrease the concentration of collateral located in
the states of California, New York and New Jersey, the Banks have implemented a
policy of limiting the concentration of underlying collateral in those three
states to 15% of the total collateral underlying any new non-agency issue that
is purchased for the Banks' portfolio. For a related discussion of the
accounting for debt securities, including mortgage-related securities, see
"Investment Securities." For further discussion of the mortgage-related
securities portfolio, see Notes A and D to the Corporation's consolidated
financial statements, filed as an exhibit hereto.
The Company 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
include shareholders' equity, revised to $233.8 million from $234.7 million, and
stockholders' equity per share, revised to $9.91 from $9.95.
Loan Portfolio Composition. The following table sets forth information
concerning the composition of the Corporation's total loan portfolio including
loans held for sale and mortgage-related securities, on a consolidated basis,
before net items, by type of loan. Total loans receivable, including net items
but excluding loans held for sale and mortgage-related securities are set forth
in Note E to the Corporation's consolidated financial statements. The data
presented include the accounts of the Corporation (on a parent-company only
basis) and First Financial for all periods, Port since its acquisition in 1989,
and the balances of interest-sensitive assets and liabilities arising from the
1990, 1992 and 1993 acquisitions are included from the respective dates of the
related transactions.
December 31,
-------------------------------------------------------------------------------
1993 1992 1991
------------------------- ---------------------- ----------------------
Amount Percent Amount Percent Amount Percent
------- ---------- ------- ---------- ------- ----------
(Dollars in thousands)
Type of Loans
Real estate mortgage loans:
Conventional loans:
One- to four-family................. $1,766,519 41.1% $1,230,914 34.5% $1,084,541 37.0%
Multi-family........................ 183,619 4.3 155,798 4.4 133,965 4.6
FHA and VA............................ 36,410 .8 43,708 1.2 53,299 1.8
Commercial and other real estate...... 94,789 2.2 101,865 2.9 100,915 3.4
---------- ----- ---------- ----- ---------- -----
Total real estate mortgage loans....... 2,081,337 48.4 1,532,285 43.0 1,372,720 46.8
---------- ----- ---------- ----- ---------- -----
Other loans:
Credit card loans..................... 209,414 4.9 178,436 5.0 160,712 5.5
Home equity loans..................... 193,291 4.5 162,283 4.6 141,285 4.8
Education loans....................... 167,385 3.9 163,261 4.6 158,664 5.4
Manufactured housing loans............ 165,017 3.8 133,195 3.7 140,384 4.8
Consumer loans........................ 153,574 3.6 89,028 2.5 64,578 2.2
Other loans........................... 111 -- 3,298 .1 4,831 .1
---------- ----- ---------- ----- ---------- -----
Total other loans...................... 888,792 20.7 729,501 20.5 670,454 22.8
---------- ----- ---------- ----- ---------- -----
Total loans receivable before
net items........................... 2,970,128 69.1 2,261,786 63.5 2,043,174 69.6
Mortgage-related securities............ 1,324,943 30.9 1,301,589 36.5 893,733 30.4
---------- ----- ---------- ----- ---------- -----
Total Loans Receivable Before
Net Items And Mortgage-
Related Securities.................... $4,295,072 100.0% $3,563,375 100.0% $2,936,907 100.0%
========== ===== ========== ===== ========== =====
TABLE CONTINUED
December 31,
1990 1989
--------------------- ----------------------
Amount Percent Amount Percent
------- ---------- ------- ---------
(Dollars in thousands)
Type of Loans
Real estate mortgage loans:
Conventional loans:
One- to four-family................. $1,245,965 44.7% $1,104,530 50.3%
Multi-family........................ 133,485 4.8 95,161 4.3
FHA and VA............................ 59,286 2.1 59,769 2.7
Commercial and other real estate...... 111,569 4.0 129,079 5.9
---------- ----- ---------- -----
Total real estate mortgage loans....... 1,550,305 55.6 1,388,539 63.2
---------- ----- ---------- -----
Other loans:
Credit card loans..................... 152,320 5.5 142,946 6.5
Home equity loans..................... 113,426 4.0 98,877 4.5
Education loans....................... 144,054 5.2 125,445 5.8
Manufactured housing loans............ 155,466 5.6 174,123 7.9
Consumer loans........................ 99,514 3.6 98,034 4.5
Other loans........................... 5,166 .1 5,409 .2
---------- ----- ---------- -----
Total other loans...................... 669,946 24.0 644,834 29.4
---------- ----- ---------- -----
Total loans receivable before
net items........................... 2,220,251 79.6 2,033,373 92.6
Mortgage-related securities............ 569,085 20.4 162,056 7.4
---------- ----- ---------- -----
Total Loans Receivable Before
Net Items And Mortgage-
Related Securities.................... $2,789,336 100.0% $2,195,429 100.0%
========== ===== ========== =====
A summary of the Corporation's loan portfolio, before net items,
including loans held for sale and mortgage-related securities is set forth below
by adjustable-rate loans, short-term loans and fixed-rate loans.
December 31, 1993 December 31, 1992 December 31, 1991
--------------------- ---------------------- -------------------
Percent Percent Percent
Balance Of Total Balance Of Total Balance Of Total
--------- --------- --------- --------- --------- --------
(Dollars in thousands)
Adjustable-rate loans:
Mortgage-related securities............. $ 1,150,050 $1,140,581 $ 679,983
Mortgage loans.......................... 515,755 498,118 632,965
Education loans......................... 167,385 163,261 158,664
Home equity loans....................... 193,291 162,283 141,285
Manufactured housing loans.............. 5,857 7,111 10,626
Consumer loans.......................... 5,816 1,741 2,709
----------- ---------- ----------
Total............................... 2,038,154 47.5% 1,973,095 55.4% 1,626,232 55.4%
Short-term loans*:
Credit card loans....................... 209,414 178,436 160,712
Mortgage loans.......................... 230,054 158,351 120,028
Consumer loans.......................... 55,414 32,608 26,925
Deposit account loans................... 4,158 3,889 5,641
Manufactured housing loans.............. 1,443 5,761 5,461
---------- ---------- ----------
Total............................... 500,483 11.6 379,045 10.6 318,767 10.8
---------- ----- ---------- ----- ---------- -----
Total adjustable-rate and
short-term loans..................... 2,538,637 59.1 2,352,140 66.0 1,944,999 66.2
Loans having maturities greater than
three years:
Conventional mortgage loans............. 1,299,057 831,993 568,124
FHA/VA mortgage loans................... 36,470 43,823 51,603
Mortgage-related securities............. 174,893 161,008 213,750
Conventional manufactured
housing loans......................... 72,165 81,153 94,057
FHA/VA manufactured housing
loans................................. 85,552 39,170 30,240
Consumer loans.......................... 88,187 50,790 29,303
Other loans............................. 111 3,298 4,831
---------- ---------- ----------
Total fixed-rate loans.............. 1,756,435 40.9 1,211,235 34.0 991,908 33.8
---------- ----- ---------- ----- ---------- -----
Total............................... $4,295,072 100.0% $3,563,375 100.0% $2,936,907 100.0%
========== ===== ========== ===== ========== =====
<FN>
* Credit card and fixed-rate loans with remaining contractual life of three
years or less.
As of December 31, 1993, the total amount of loans held by the Banks
repricing or maturing after December 31, 1994 was $2.18 billion. Of these loans,
$1.84 billion have fixed rates of interest and $340.5 million have short-terms
or adjustable interest rates.
The following table sets forth, at December 31, 1993, the dollar amount
of loans maturing in the Banks' loan portfolios before net items, plus loans
held for sale and mortgage-related securities, based on either their contractual
terms to maturity or for the remaining time before the loans can be repriced
during the periods indicated.
1995 - 1997 - 1999 - 2004 - After
1994 1996 1998 2003 2013 2013 Total
---- -------- -------- -------- -------- ------ -------
(In thousands)
Real estate mortgage loans.................... $ 382,149 $147,791 $110,622 $395,785 $ 896,899 $ 89,499 $2,022,745
Construction mortgage loans................... 12,586 21,125 5,095 6,600 12,939 247 58,592
Mortgage-related securities................... 1,150,050 28,183 6 33,807 61,142 51,755 1,324,943
Credit card and home equity
loans...................................... 379,185 23,520 -- -- -- -- 402,705
Other loans*.................................. 189,974 51,927 62,439 107,956 63,988 9,803 486,087
---------- -------- -------- -------- ---------- -------- ----------
Total.................................. $2,113,944 $272,546 $178,162 $544,148 $1,034,968 $151,304 $4,295,072
========== ======== ======== ======== ========== ======== ==========
<FN>
* Includes consumer, manufactured housing and student loans.
One- to Four-Family First Mortgage Loans. The primary mortgage loan
product of the Banks is the single family home loan with some additional volume
being secured by two- to four-family residential units. In addition to a
conventional mortgage loan program, the Banks have available various other
programs including FHA-insured, VA-guaranteed, FmHA-guaranteed, Wisconsin and
Illinois state agency and veterans programs and jumbo mortgage loans in excess
of a specified balance. These mortgage loan products are originated using either
a fixed-rate, or an adjustable-rate of interest indexed primarily to one-year
U.S. Treasury securities yields, three-year Treasury securities yields or the
national cost of funds index as published by the FHL Banks. Original terms to
maturity vary from 15 years to 30 years. First Financial currently holds in its
portfolio loans for terms up to 15 years and generally sells fixed-rate mortgage
loans having maturities greater than 15 years in the secondary mortgage market.
Income-Producing Real Estate Property Loans. First Financial, through its
commercial mortgage real estate division, has sought to diversify its loan
portfolio through the origination of loans on selected income-producing real
estate properties, which meet strict internal underwriting guidelines. First
Financial also periodically seeks to limit its overall exposure relative to such
loans through the sale of participation interests and whole loans to other
financial institutions. First Financial provides servicing of these loans for
participants (see "Loan Servicing").
Among the projects financed by First Financial and Port are apartments,
office buildings, retail centers, medical clinics, industrial buildings, elderly
housing and other commercial real estate located primarily in Wisconsin,
Illinois and other Midwestern states. The level of originations of commercial
real estate loans, excluding multi-family mortgage loans, has declined
significantly in recent years because management has chosen to de-emphasize this
product due to market conditions and regulatory capital requirements. First
Financial has, beginning in 1993, emphasized multi-family mortgage loans,
targeting five- to twelve-family units. Multi-family and commercial real estate
lending involves greater risks than does one- to four-family residential
lending. The repayment of loans collateralized by income-producing real estate
is dependent upon the successful operation of the related real estate property
and also on the credit and net worth of the borrower and thus is subject to
conditions in the real estate market, interest-rate levels and overall economic
conditions. The underwriting process for such loans is structured to ascertain
that each property has sufficient value and market appeal to provide adequate
security for the loan and that the property will produce sufficient income to
meet minimum debt service coverage ratios established by the Banks, which vary
depending upon the property type. All properties are also inspected,
independently appraised in accordance with applicable regulatory standards, and
reviewed by a qualified engineer. Loans on such properties are generally not
permitted to exceed a loan-to-value ratio of 75%. Also, each borrower is
reviewed as to management talent, integrity, experience and available financial
resources. The Banks generally require the personal guarantee of the debt by all
parties holding a major equity interest in the secured property when the
owner/borrower is a business entity.
Additionally, the portfolio of income-producing properties is reviewed on
a continuing basis to identify any potential risk that exists for the Banks
through undue concentration of the portfolio in any one borrower, property type
or geographic location. These and other underwriting standards are documented in
written policy statements, which are periodically updated, and approved by the
Banks' respective Boards of Directors.
Lending terms for the Banks' income-producing real estate property loans
generally call for a maturity of three to fifteen years based upon an
amortization schedule of fifteen to thirty years and an interest rate
periodically adjustable based upon a cost of funds index.
Borrowers may experience cash flow from the property which is inadequate
to service the debt. This cash flow shortage may result in the failure to make
loan payments. Additionally, the repayment of loans secured by income-producing
properties is dependent on the successful operation of the related real estate
project and the financial strength of the borrower and thus, is subject to
adverse conditions in the real estate market or the economy in general.
Construction Loans. Loans made by the Banks to provide interim financing
for residential and commercial properties during the construction period are
typically originated for periods of six to eighteen months. These loans are
generally limited to 75% of value of the property upon completion. Construction
loan funds are periodically disbursed as construction progresses. At any stage
of construction, remaining undisbursed funds are in amounts estimated to be
adequate for completion or sale of the property.
Construction lending is generally considered to involve a higher level of
risk than lending secured by existing properties because properties securing
these loans are generally more speculative and more difficult to evaluate and
monitor. The Banks' risk of loss on construction or development loans is
dependent upon the accuracy of the initial estimate of the property's value at
completion of the project and the estimated cost of the project. If the estimate
of construction or development costs proves to be inaccurate, the Banks may be
required to advance funds beyond the amount originally committed to permit
completion of the project. If the estimate of the value proves to be inaccurate,
the lender may be confronted with a property having a value which is
insufficient to assure full repayment of the construction loan upon securing a
permanent mortgage loan. The Banks had construction loans outstanding of $58.6
million, at December 31, 1993, of which $53.1 million was collateralized by
residential real estate.
Manufactured Housing Loans. Through a series of dealer relationships in
Wisconsin and other Midwestern states, First Financial indirectly originates
manufactured housing loans. The dealers close the loans at their locations after
forwarding all necessary documentation to First Financial for underwriting,
processing, and credit checks in order to receive approval to originate the
loans for ultimate purchase by First Financial. Funds for the purchase of the
loan are disbursed directly to the dealers either by check or direct deposit.
The loans are either conventional or originated under the FHA-insured or
VA-guaranteed programs throughout the various states. The term of such loans is
usually up to 15 years at fixed interest rates.
Consumer and Other Loans. The Banks offer a variety of lending products
to meet the specific needs of consumers. These products include secured and
unsecured installment loans with fixed repayments, student loans, credit card
programs and home equity loans. Consumer loans are made directly with the
customer and are secured by automobiles, recreational vehicles, manufactured
homes, junior mortgages on real estate or deposit accounts. The Banks provide
financing on both new and used automobiles, recreational vehicles and
manufactured homes using different rates and terms to maturity to compensate for
the difference in the collateral value of the property and the related credit
risk. In addition to the secured consumer loans, the Banks extend unsecured
loans to qualified borrowers based upon their financial statements and
creditworthiness. The vast majority of the consumer loan originations are made
within Wisconsin and Illinois through the extensive branch network of the Banks.
Several student loan programs are offered by the Banks through three
guarantor programs, with the majority being originated within Wisconsin. The
various student lending programs meet a variety of borrower financial
qualifications with varying rate structures. Additionally, First Financial
offers a consolidation loan plan whereby various student loans can be combined
for the convenience and benefit of the borrower.
First Financial offers credit card programs to the general public and
have also placed additional emphasis on issuing cards through organizations
whose membership substantially meets the qualifying criteria ("affinity
programs"). Certain additional benefits can be linked to card usage under the
affinity programs. These affinity programs are related to the Visa/Mastercard
credit card programs operating on a nationwide basis. In addition to the regular
credit card products, First Financial also operates the BasiCard program which
offers the consumer a lower cost, no-frills charge card bearing an interest rate
of 14.9% applied to balances and advances.
During the last decade the Banks placed additional emphasis on their home
equity loan program. The new emphasis was tied to federal income tax law changes
which were brought about during 1986, causing consumers to look for a new
vehicle through which to finance future needs on a tax-deductible basis. As a
result of federal tax legislation adopted in 1987, however, interest on a home
equity line of credit is deductible only up to $100,000 of principal. The home
equity loan calls for a floating interest rate which is linked to the prime
interest rate and is secured by a mortgage, either a primary or a junior lien,
on the borrower's residence. As an additional convenience to consumers, the home
equity lines are generally tied to a Gold or a standard Mastercard credit card
account whereby consumers can conveniently draw against their approved line
through the use of their credit card. Fixed-rate non-revolving second mortgage
loans are also offered.
Loan Originations, Purchases and Sales. The Banks' loan originations come
from a number of sources. Residential mortgage loan originations are
attributable primarily to depositors, walk-in customers, referrals from real
estate brokers and builders, out-of-state originators and direct solicitations.
In addition, the Banks also acquire refinanced residential mortgage loans which
were previously originated by the Banks, but sold to and serviced for other
financial institutions. Prior to acquisition, these loans are refinanced to a
lower rate, as per the borrower's request. Commercial mortgage loan originations
are obtained by direct solicitation and referrals. VA-guaranteed, FHA-insured
and conventional manufactured housing loans are obtained from approved dealers.
Consumer loans are originated from walk-in customers, existing depositors and
mortgagors and direct solicitations. Student loans are originated from
solicitation of eligible students and from walk-in customers. First Financial
also periodically purchases student loan portfolios from other lenders.
Real estate loans are originated by loan officers in the Banks' offices.
Relative to First Financial's real estate loans, loans up to the FHLMC/FNMA
upper limit authority (currently $203,150 for single-family mortgage loans) for
one- to four-family residences are approved by an underwriter who is employed by
First Financial. Loans in excess of this amount up to $250,000 are approved by
designated officers. Loans in excess of $250,000 up to $1,500,000 are approved
by an officer loan committee. Loans in excess of $1,500,000 require approval of
the Executive Committee of the Board of Directors of First Financial, and loans
in excess of $5,000,000 require approval of First Financial's full Board of
Directors. The majority of conventional home mortgage loans are written to
comply with underwriting standards of FHLMC and/or FNMA to ensure that national
standards are being met and that First Financial's loans meet or exceed national
secondary market requirements. All loans are centrally reviewed by an
underwriting staff prior to final approval to ensure compliance with loan
underwriting policies. With respect to the appraisal of properties, borrowers
may use the appraisal subsidiary of First Financial or outside appraisers
preapproved by First Financial's Board of Directors. Relative to real estate
loan originations by Port, loans of up to $200,000 for one- to four-family
residences and all other loans under $100,000 can be approved by a designated
officer of Port. Loans above these parameters are approved by a committee
consisting of three officers and three outside directors. All loan approvals are
subsequently reviewed by the Board of Directors of Port.
In general, the Banks may lend up to 100% of the appraised value of real
property for residential purposes provided loans in excess of 80% have private
mortgage insurance, a government guarantee, additional collateral or a
combination of both. In practice, most of the Banks' mortgage loans are written
in the range of 75% to 95% loan-to-value ratio.
Real estate loans are secured by a first mortgage, subject to title
insurance and are covered by fire and casualty insurance. When appropriate,
flood insurance is also required. Related costs, together with private mortgage
insurance as required, are paid by the borrower.
The Banks encounter certain environmental risks in their lending
activities. Under federal and state environmental laws, lenders may become
liable for costs of cleaning up hazardous materials found on secured properties.
Certain states may also impose liens with higher priorities than first mortgages
on properties to recover funds used in such efforts. Although the foregoing
environmental risks are more usually associated with industrial and commercial
loans, environmental risks may be substantial for residential lenders, like the
Banks, since environmental contamination may render the secured property
unsuitable for residential use. In addition, the value of residential properties
may become substantially diminished by contamination of nearby properties. In
accordance with the guidelines of FNMA and FHLMC, appraisals for single-family
homes on which the Banks lend include comments on environmental influences and
conditions. The Banks attempt to control their exposure to environmental risks
with respect to loans secured by larger properties by monitoring available
information on hazardous waste disposal sites and requiring environmental
inspections of such properties prior to closing the loan. No assurance can be
given, however, that the value of properties securing loans in the Banks'
portfolios will not be adversely affected by the presence of hazardous materials
or that future changes in federal or state laws will not increase the Banks'
exposure to liability for environmental cleanup.
The following table shows loan and mortgage-related securities
originations, purchases, sales and repayment activities of the Banks on a
consolidated basis for 1993, 1992 and 1991.
Year Ended December 31,
---------------------------------------------
1993 1992 1991
---------- ---------- -------
(In thousands)
Loans originated:
Mortgage loans:
One- to four-family......................................... $1,045,795 $ 598,477 $ 295,206
Multi-family................................................ 85,719 54,643 28,900
Commercial real estate...................................... 10,712 6,821 5,956
Refinanced residential mortgage loans
previously sold and serviced for others.................... 187,066 294,477 44,334
---------- ---------- ----------
1,329,292 954,418 374,396
Consumer loans................................................. 136,766 93,967 59,854
Education loans................................................ 31,885 30,115 36,875
Home equity loans - net increase............................... 31,008 19,385 27,860
Credit card loans - net increase............................... 30,978 17,724 8,393
Manufactured housing loans..................................... 23,405 17,292 11,361
Refinanced manufactured housing loans pre-
viously sold and serviced for others......................... 36,953 -- --
Decrease (increase) in undisbursed
loan proceeds................................................. 8,142 322 (1,910)
---------- ---------- ----------
Total loans originated................................ 1,628,429 1,133,223 516,829
Mortgage-related securities purchased............................ 240,640 696,206 616,306
---------- ---------- ----------
Total originations and purchases...................... 1,869,069 1,829,429 1,133,135
---------- ---------- ----------
Loans and mortgage-related securities from
acquisitions (before net items)................................ 540,474 146 --
---------- ---------- ----------
Market valuation adjustment: available-
for-sale mortgage-related securities........................... 3,233 -- --
---------- ---------- ----------
Loan repayments and sales:
Repayments of loans and mortgage-related
securities.................................................. 949,794 711,259 504,342
Sales of one- to four-family real estate
loans ...................................................... 614,664 481,586 285,355
Sales of multi-family and commercial
real estate loans........................................... 25,621 9,128 10,179
Sales of mortgage-related securities........................... 81,294 812 154,506
Sales of manufactured housing loans............................ -- -- 503
Sales of indirect automobile loans............................. -- -- 30,679
---------- ---------- ----------
Total repayments and sales............................ 1,671,373 1,202,785 985,564
---------- ---------- ----------
Increase in total loans before net items
(excluding change in undisbursed loan
proceeds), including loans held for sale
and mortgage-related securities................................ $ 741,403 $ 626,790 $ 147,571
========== ========== ==========
First Financial has been actively engaged in secondary mortgage market
activities on a national basis through the sale of whole loans and
participations to pension funds, insurance companies, banks, other savings
institutions and governmental units such as FHLMC, FNMA, GNMA and special
Wisconsin programs. On a limited basis, the Banks and their predecessors have
purchased selected groups of loans or a portfolio of loans. First Financial also
periodically has used its loans to securitize mortgage-related securities sold
by registered broker-dealers. Sales of loans are used to provide additional
funds for lending, to generate servicing fee income and to reduce the risk
resulting from fluctuating interest rates and loan concentrations. Under loan
sales and participation agreements, First Financial sells mortgage loans on a
non-recourse basis and pays participants an agreed upon yield on the
participant's portion of the loan out of monthly payments received from the
borrowers. First Financial, in general, has forward commitments to sell all of
its fixed-rate mortgage loans, having maturities of greater than 15 years, which
are closed or approved and one-half of the amount of such loans pursuant to
accepted applications for loans. The sale of $30.7 million of indirect
automobile loans in 1991 was the result of management's decision to discontinue
this line of customer business.
Loan Servicing. The Banks have originated the majority of the loans they
service for others. They receive fees for those servicing activities, which
include collecting and remitting loan payments, inspecting the properties and
making certain insurance and tax payments on behalf of the borrowers. At
December 31, 1993, the Banks were servicing $1.30 billion of mortgage and
manufactured housing loans owned by others. Mortgage loans totaling $1.25
billion were being serviced for annual fees ranging from 1/4 to 1/2 of 1% of the
unpaid principal, and $50.0 million of manufactured housing loans were being
serviced for investors. Servicing fees retained on manufactured housing loans
average approximately 2.3% of the unpaid principal, reflecting the higher costs
of servicing these loans. The following table sets forth information as to the
Banks' loan servicing portfolio, net of loans in process, at the dates shown.
December 31,
-----------------------------------------------------
1993 1992
----------- ---------
Amount % Amount %
--------- --------- -------- -------
(Dollars in thousands)
Loans owned by the Banks......................... $2,951,000 69.0% $2,235,000 63.0%
Loans serviced for others........................ 1,301,000 31.0 1,311,000 37.0
---------- ----- ---------- -----
Total loans serviced....................... $4,252,000 100.0% $3,546,000 100.0%
========== ===== ========== =====
Information concerning the Banks' servicing income from loans serviced
for others is summarized in the following table for the periods indicated.
1993 1992 1991
-------- -------- ------
(Dollars in thousands)
Loan servicing income........................................... $ 5,233 $4,395 $6,920
Servicing spread for the year*.................................. .401% .307% .443%
<FN>
* The servicing spread represents the average fee earned as a percentage
of average balances of loans serviced for others, net of undisbursed
proceeds, as reduced by the periodic amortization of purchased and
capitalized excess mortgage servicing rights.
Net loan servicing income has decreased in 1993 and 1992 from the levels
experienced in 1991 and prior to 1991, as a result of A) a decrease in the
average servicing spread on serviced mortgage loans, B) a decline in the size of
the manufactured housing servicing portfolio due to management's decision to
restrict manufactured housing lending to the Midwest, and C) increased
amortization of purchased mortgage servicing rights and capitalized excess
servicing rights totaling $1.4 million, $3.5 million and $2.8 million for 1993,
1992 and 1991, respectively. The remaining purchased mortgage servicing rights,
which are amortized over the expected lives of the related loans using the level
yield method and are adjusted for prepayments, had a carrying value of $453,000
at the end of 1993.
Fee Income From Lending Activities. Loan origination and commitment fees
and certain direct loan origination costs are being deferred and the net amounts
amortized as an adjustment of the related loan's yield. The Banks are amortizing
these amounts, using the level yield method, over the contractual lives of the
related loans.
The Banks also receive other fees and charges relating to existing
mortgage loans which include prepayment penalties, late charges and fees
collected in connection with a change in borrower or other loan modifications.
Other types of loans also generate fee income for the Banks. These include
annual fees assessed on credit card accounts, transactional fees relating to
credit card usage and late charges on consumer loans and manufactured housing
loans.
Collateralized Industrial Development Revenue Bonds. Additional income
has been earned by First Financial and Port by offering loans and securities in
their portfolios to third parties for their use as collateral. The Banks have
previously entered into agreements under which mortgage loans and investment
securities held in portfolio are pledged as secondary collateral in connection
with the issuance of Industrial Development Revenue Bonds. The bonds were issued
by municipalities to finance multi-family or commercial real estate owned by
third parties unrelated to the Banks. Under the terms of these agreements, the
Banks i) issue uncollateralized letters of credit or ii) maintain, with a
trustee, mortgage loans or securities with a fair market value, as defined,
aggregating up to 180% of the outstanding principal balance of the bonds to
provide security for the payment of principal, interest and any mandatory
redemption premium owing on the bonds. The Banks continue to receive principal
and interest payments on the mortgage loans or securities used as collateral. If
any of such bonds were in default, the Banks would have the primary obligation
to either pay any amount in default or to acquire the bonds on which the default
had occurred. If the Banks were required to perform under these agreements, they
would foreclose on the existing mortgage, and security interest in, the real and
personal property financed with the proceeds of the bonds. The Banks have
discontinued this line of business and do not currently anticipate entering into
any new agreements, except for the purpose of facilitating the refinancing of
existing bond issues.
At December 31, 1993, certain mortgage-related securities and investment
securities with a carrying value of approximately $5,394,000 were pledged as
collateral for bonds in the aggregate of $3,341,000. Additional bond issues
totaling $7,610,000 are supported by letters of credit issued by First Financial
in lieu of specific collateral. The bond agreements have expiration dates
through 2008.
At December 31, 1993, each of the outstanding agreements was current with
regard to bond debt-service payments. Management has considered these agreements
in its review of the adequacy of allowances for losses relating to contingent
liabilities.
Usury Limitations. Federal law has preempted state usury law
interest-rate limitations on first-lien residential mortgage loans unless the
state legislature acted before a certain date to override the exemption. The
Wisconsin legislature acted to override the preemption and, therefore, loans
made by the Banks in Wisconsin are subject to Wisconsin usury limitations,
described below.
The Illinois legislature did not override the federal preemption, and at
present Illinois law imposes no ceiling on interest rates for residential real
estate loans, including junior mortgage loans. Additionally, in Illinois,
federally-insured savings institutions can charge the highest rate permitted any
other lender in Illinois. The Illinois State Legislature has allowed state banks
to charge any interest rate on any type of loan, and, thus, there are
effectively no ceilings on the interest rate which a federal savings bank may
charge on a loan in Illinois.
On November 1, 1981, Wisconsin enacted a comprehensive revision of its
usury statutes overriding federal preemption and deregulating interest rates.
After that date, maximum interest rates were eliminated for loans secured by
first lien mortgages on residential real estate. Maximum interest rates have
also been eliminated for most forms of fixed and variable rate consumer loans
made by savings institutions after October 31, 1984. Variable rate revolving
consumer loans which are not secured by real estate remain subject to a maximum
interest rate of 18%, except that the limit does not apply following notice to
the borrower if the auction yield on two-year U.S. Treasury notes exceeds 15%
per year for five consecutive weeks.
With respect to first-lien residential real estate loans, the 1981
Wisconsin usury legislation clarified the Wisconsin law requirement that
unearned interest be refunded. However, certain items are now deemed not to be
interest for purposes of calculating the rebate. These items include charges
paid to third parties, fees and other amounts required to be passed on to
secondary market purchasers of any loans, up to two points to the lender for
"loan administration", commitment fees, loan fees paid by third parties
("seller's points") and a prepayment penalty of not more than 60 days interest
on that amount of the prepayment which exceeds 20% of the original amount of the
loan, provided the prepayment is made within five years of the date of the loan
and the parties have agreed to such a prepayment penalty.
Since November 1, 1981, Wisconsin-chartered savings institutions have
been permitted to use two forms of interest-rate adjustment clauses in mortgage
loans secured by one- to four-family homes. Interest rates may either be
adjusted based on changes in an "approved index" ("indexed adjustable rate") or
by providing for no more than a 1% increase in the interest rate not more than
once during each six-month period and by permitting decreases in the interest
rate to be made at any time ("non-indexed adjustable rate"). An "approved index"
is defined as (i) the national average mortgage contract rate for major lenders
on the purchase of previously occupied houses, as computed by the FHL Banks;
(ii) the monthly average of weekly auction rates on U.S. Treasury bills with a
maturity of three months or six months made available by the Federal Reserve
Board; (iii) the monthly average yield on U.S. Treasury securities adjusted to a
constant maturity of one, two, three or five years, made available by the
Federal Reserve Board; or (iv) an index approved by the Wisconsin Commissioner
of Savings and Loans. Loans made after November 1, 1981, containing either form
of adjustment mechanism, are not subject to any maximum usury interest rate;
however, increases in the rate based on increases in the index are optional with
the lender. Adjustments under the non-indexed version are solely at the option
of the lender and if no increase is made during any six-month period, the lender
may accumulate such increases and impose them at any time. A notice to the
borrower is required at least 30 days prior to an interest rate adjustment
during which period the loan may be prepaid without penalty. Loans originated by
First Financial and Port prior to their respective conversions to a federal
savings bank charter are subject to the above provisions.
Other states in which First Financial makes loans have varying laws
concerning usury. Management believes that all loans made by First Financial in
other states are in compliance with the applicable usury provisions.
Collection Procedures - Residential and Commercial Mortgage Loans. Under
Wisconsin and Illinois law, a mortgage loan borrower is afforded a period of
time, subsequent to the entry of judgment and prior to sale of the mortgaged
property, within which to redeem the foreclosure judgment ("equity of
redemption"). During this period, the loan is generally a non-earning asset. The
length of the equity of redemption available in any case is dependent upon the
form of legal proceeding selected by the lender at the time the suit is
initiated and can vary between two months and one year. Further delays can be
incurred if bankruptcy proceedings intervene. A judgment of foreclosure for
residential mortgage loans will normally provide for the recovery of all sums
advanced by the mortgagor including, but not limited to, insurance, repairs,
taxes, appraisals, post-judgment interest, attorneys' fees, costs and
disbursements. The majority of foreclosure actions by the Banks follow a form
which provides for a six-month equity of redemption. Unless the right of
redemption is exercised, the Banks generally acquire title to the property
pursuant to public bidding at a sheriff's sale. Thereafter, the Banks attempt to
sell the property.
Collection Procedures - Non-Mortgage Loans. Collection procedures for
manufactured housing loans, credit card loans, consumer loans and student loans
are done in accordance with state and federal Fair Debt Collection Practices
Acts and, where applicable, governmental agencies procedures. The intent of the
collection procedures is either to assist the borrower in performing in
accordance with contract terms or to work out the problem loan in a timely
manner so as to minimize the Banks' loss. Generally, collection efforts are
started 10 to 15 days after the payment on account was due.
Procedures for Nonaccrual Loans, Delinquencies and Foreclosures.
Delinquent and problem loans are a normal part of any lending business. When a
borrower fails to make a required payment by the 15th day following the date on
which the payment is due, the loan is considered delinquent and internal
collection procedures generally are instituted. The borrower is contacted by a
Bank representative who seeks to determine the reason for the delinquency, and
attempts are made to effect a cure. In most cases deficiencies are cured
promptly. The loan status is reviewed and, where appropriate, the condition of
the property and the financial circumstances of the borrower are evaluated.
Based upon the results of any such investigation, (i) a repayment program of the
arrearage from the borrower may be accepted; (ii) evidence may be sought (in the
form of a listing contract) of efforts by the borrower to sell the property if
the borrower has stated that he is seeking to sell; (iii) a deed in lieu of
foreclosure or voluntary surrender of the property may be requested in
compliance with applicable laws; or (iv) foreclosure, replevin or collection
proceedings may be initiated.
A decision as to whether and when to initiate legal proceedings is based
upon such factors as the amount of the outstanding loan in relation to the
original indebtedness, the extent of delinquency and the borrower's ability and
willingness to cooperate in curing deficiencies. At a foreclosure sale,
representatives of the Banks will generally bid an amount reasonably equivalent
to the lower of the fair value of the foreclosed property or the amount of
judgment due to the Banks.
If the sum of the outstanding loan principal balance and costs of
foreclosure that have been capitalized exceed the fair market value of the
property, in the judgment of management, an allowance for loss in an amount
equal to such excess is established. In such circumstances, a deficiency
judgment may be sought against the borrower.
When one of the Banks acquires real estate through foreclosure or deed in
lieu of foreclosure, such real estate is placed on its books at the lower of the
carrying value of the loan or the fair market value of the real estate based
upon a current appraisal. Any reduction from the value previously recorded on
the books is charged against the appropriate allowance for loan losses.
Loan Delinquencies. The Banks monitor the delinquency status of their
respective loan portfolios on a regular basis and initiate borrower contact and
additional collection procedures as necessary at an early date. Delinquencies
and past due loans are, however, a normal part of the lending function. When the
delinquency reaches the status of greater than 90 days, the loans are placed on
a non-accrual basis until such time as the delinquency is reduced again to 90
days or less. Non-accrual loans at December 31, 1993 have been presented
separately as a part of the discussion of Non-Performing Assets in Management's
Discussion and Analysis, filed as an exhibit hereto. Delinquencies of 30 to 90
days are summarized as follows:
Balance At December 31,
---------------------------------
1993 1992
------ -----
(In thousands)
30 - 59 Days Delinquent
Residential real estate loans $ 5,844 $ 5,626
Commercial real estate loans 3,798 1,553
Manufactured housing loans 2,999 4,215
Credit card loans 1,988 1,594
Consumer, student and other loans 4,493 3,762
------- --------
$19,122 $ 16,750
======= ========
60 - 90 Days Delinquent
Residential real estate loans $ 1,111 $ 492
Commercial real estate loans 707 980
Manufactured housing loans 1,035 1,849
Credit card loans 904 782
Consumer, student and other loans 4,287 4,029
------- --------
$ 8,044 $ 8,132
======= ========
Total 30 - 90 Day Delinquent Loans
Residential real estate loans $ 6,955 $ 6,118
Commercial real estate loans 4,505 2,533
Manufactured housing loans 4,034 6,064
Credit card loans 2,892 2,376
Consumer, student and other loans 8,780 7,791
------- --------
$27,166 $ 24,882
======= ========
At December 31, 1993, the 30-90 day delinquencies increased $2.3 million
to $27.2 million from $24.9 million at year-end 1992. As a percent of total
loans receivable, loan delinquencies decreased from 1.13% at the end of 1992 to
0.93% at December 31, 1993 due to the greater size of the loan portfolio at the
later date resulting from the United acquisition. The $2.3 million increase, at
December 31, 1993, relates to i) the inclusion in the 30-59 day delinquency
category of a $3.4 million commercial real estate loan during 1993 (offset by
the return to satisfactory contractual performance of several other commercial
real estate loans), ii) an increase of $700,000 in delinquent student loans
(which are government guaranteed) delinquent 30-90 days, iii) a decrease of $2.0
million in manufactured housing loans delinquent 30-90 days and iv) an increase
of $800,000 of delinquent residential mortgage loans. The 1993 increase in
residential delinquencies relates to the addition of such loans following the
United acquisition.
All of these delinquent loans have been considered by management in its
evaluation of the adequacy of the allowances for loan losses.
Foreclosed Properties. Non-performing assets of $15.1 million and $29.9
million at December 31, 1993 and 1992, respectively, are discussed as a part of
Management's Discussion and Analysis, filed as an exhibit hereto. In that
discussion, it is noted that a portion of the balances of foreclosed properties
and other repossessed assets included in the non-performing assets at December
31, 1993 and 1992 are comprised of large (having a carrying value in excess of
$500,000) commercial real estate properties. A list of the properties referred
to in that discussion is presented below.
Carrying Value At December 31,
------------------------------
Property Type Location 1993 1992
- - ------------- -------- ------ -----
(In thousands)
Office Madison, Wisconsin $ 1,500 $1,573
Retail Milwaukee, Wisconsin 1,089 --
Office Phoenix, Arizona 700 1,020
Office/Retail Carpentersville, Illinois -- 3,425
Office Independence, Missouri -- 1,550
During 1993, the Illinois and Missouri properties were written down $1.4
million and, subsequently, sold and financed by First Financial at market terms.
A discussion of the commercial real estate foreclosures listed above, at
December 31, 1993, follows:
The office building in Madison, Wisconsin was acquired as a
result of the exercise of a previous industrial revenue bond
guarantee by First Financial whereby the bondholders were paid after
default by the borrower. The 100% occupancy level at December 31,
1993 is the same as last year and efforts to sell the building will
be management's primary focus in 1994 for this property. At December
31, 1993, the estimated fair value of this property was $1.5 million.
The retail property in Milwaukee, Wisconsin had previously
been developed and owned by a wholly-owned subsidiary of First
Financial. The subsidiary carried the property as real estate held
for investment prior to foreclosure in 1993 by First Financial. The
79% occupancy level at December 31, 1993 is a slight improvement over
the previous year and efforts to lease additional space will be
management's primary focus in 1994 for this property. At December 31,
1993, the estimated fair value of this property was $1.1 million.
The office building in Phoenix, Arizona had previously been
owned by a joint venture in which a wholly-owned subsidiary of First
Financial was a joint venturer. That subsidiary subsequently acquired
its co-venturer's interest and had carried this property as real
estate held for investment prior to foreclosure by First Financial.
The decrease in carrying value of this office building from $1.0
million at December 31, 1992 to $700,000 at December 31, 1993
reflects a writedown of this property to its current estimated fair
value. The overbuilt Phoenix market is a primary concern for the
project. The 45% occupancy level at December 31, 1993 is less than
the previous year. The property is currently under contract to sell
with a projected closing in the first quarter of 1994.
During 1992, the Corporation adopted an American Institute of Certified
Public Accountants' Statement of Position ("SOP"), "Accounting for the Results
of Operations of Foreclosed Assets Held For Sale". The SOP requires that
foreclosed properties be valued at fair value in lieu of the net realizable
value method previously used. Fair value calculations use a market rate of
interest to discount estimated cash flows compared to net realizable value
calculations in which an internal cost of funds rate was used.
The above listed foreclosed properties, as well as all other
non-performing assets, have been considered in the evaluation of the adequacy of
allowances for losses. See the Management Discussion and Analysis referred to
above for management's review of adequacy of allowances for losses relative to
these properties.
Classified Assets:
For regulatory purposes, the Banks utilize a comprehensive classification
system for thrift institution problem assets. This classification system
requires that problem assets be classified as "substandard", "doubtful" or
"loss", depending upon certain characteristics of the particular asset or group
of assets as defined by supervisory regulators.
An asset is classified "substandard" if it contains defined
characteristics relating to borrower net worth, paying capacity or value of
collateral which indicate that some loss is distinctly possible if noted
deficiencies are not corrected. "Doubtful" assets have the same characteristics
present in substandard assets but to a more serious degree so that it is
improbable that the asset could be collected or liquidated in full. "Loss"
assets are deemed to be uncollectible or of such minimal value that their
continuance as assets without being specifically reserved is not warranted.
Substandard and doubtful classifications require the establishment of prudent
general allowances for loss amounts while loss assets require a 100% specific
allowance or that the asset be charged off.
In general, classified assets include non-performing assets plus other
loans and assets, including contingent liabilities, meeting the criteria for
classification. Non-performing assets include loans or assets which were
previously loans i) which are not performing to a serious degree under the
contractual terms of the original notes or ii) for which known information about
possible credit problems of borrowers causes management to have serious doubts
as to the ability of such borrowers to comply with current contractual terms.
This non-performance characteristic impacts directly upon the interest income
normally expected from such assets. Specifically included are the loans held on
a non-accrual basis, real estate judgments subject to redemption, and foreclosed
properties for which the Bank has obtained title.
Classified assets, including non-performing assets, for the Banks, are
set forth in the following table, as of December 31, 1993 and 1992,
respectively.
December 31,
------------------------
1993 1992
-------- ------
(In thousands)
Classified assets:
Non-performing assets:
Non-accrual loans $ 8,240 $ 15,659
Foreclosed properties and other
repossessed assets 6,817 14,198
-------- --------
Total Non-Performing Assets 15,057 29,857
Add back valuation allowances netted against
foreclosed properties above 1,386 --
Adjustment for non-performing residential loans
not classified due to low loan-to-
appraisal value (707) (771)
Additional classified performing loans:
Residential real estate 1,919 --
Commercial real estate 9,747 7,240
Consumer (including manufactured housing
and credit cards) 241 378
Collateralized industrial development revenue
bond agreements -- 4,555
Other assets 757 1,945
-------- --------
Total Classified Assets $ 28,400 $ 43,204
======== ========
During the year ended December 31, 1993, classified assets decreased
$14.8 million to $28.4 million from the December 31, 1992 total of $43.2 million
as a result of the net effect of various 1993 events. As a percentage of total
assets, classified assets decreased from 1.11% at December 31, 1992 to 0.59% at
December 31, 1993.
The non-performing asset segment of classified assets similarly
decreased $14.8 million during 1993. For further discussions of such
non-performing assets, see Management's Discussion and Analysis, filed as an
exhibit hereto, as well as the "Foreclosed Properties" review immediately
preceding this discussion of classified assets. Offsetting changes in the
remaining classified asset categories are discussed below.
Performing commercial real estate loans which earlier had been
adversely classified due to the possible adverse effects of identifiable future
events increased $2.5 million in 1993. This increase is due to the net effect of
i) the improvement in delinquency status of loans, totaling $5.4 million, that
were in non-accrual status at year-end 1992 and are now included in the
adversely classified performing loan category, ii) the inclusion in this
category of a $1.1 million loan, to facilitate the 1993 sale of an office
foreclosure property, pending future contractual performance by the borrower and
offset by iii) the removal from classified asset status of a contractually
performing $4.2 million loan on a motel in Georgia, which had been previously
classified due to cash flow problems which have been resolved.
The increase in adversely classified performing residential mortgage
loans of $1.9 million relates to groups of performing residential mortgage loans
to several borrowers which have been adversely classified in 1993 due to the
possible impact of identifiable potential future events.
The collateralized industrial revenue bond agreement included above in
classified assets at December 31, 1992 was refinanced and removed from
classified assets in 1993.
At December 31, 1993, exclusive of non-performing assets, the major
concentration of classified assets consists of the approximately $9.7 million of
currently performing commercial real estate loans that have been classified due
to prior delinquency and/or the potential adverse effects of possible
identifiable future events or other factors. Loans in excess of $1.0 million
included in this category are noted below (in thousands):
Loan Amount Classified
------------------------------------
Property Type Of Property December 31, December 31,
Loan Collateral Location 1993 1992
- - ---------------- ---------------- ------------ ------------
Office/Land Sheboygan, Wisconsin $ 3,670 (a) $ 874
Motels Various-Tennessee 2,600 (a)(b) --
Office Independence, Missouri 1,091 (c) --
Motel Norcross, Georgia -- 4,229
<FN>
(a) Loan(s) were in non-accrual status at year-end 1992.
(b) Represents a 20% participating interest in loans totaling $14.6 million,
for which First Financial is the lead lender.
(c) Represents loan to finance the 1993 sale of a former foreclosed real
estate property. The loan has been classified pending future
performance by the borrower.
All adversely classified assets at December 31, 1993 have been considered
by management in its evaluation of the adequacy of allowances for losses.
Also, First Financial is closely monitoring the performance of two
privately issued second tranche adjustable rate mortgage-backed securities,
aggregating approximately $21 million. First Financial has not received full
monthly payments due on these securities since late 1993. The payments have been
interrupted due to delinquencies and foreclosures in the underlying 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 value of the total portfolios in questions) which are
designed to absorb losses in the underlying mortgage portfolio, and as a result,
management does not believe at this time that material losses will be realized
in connection with either or these securities. First Financial's portfolio of
mortgage-related securities totaled approximately $1.3 billion at December 31,
1993, and except for one of the referenced securities which was recently
downgraded, all of First Financial's mortgage-related securities are rated
investment grade by at least one nationally recognized independent rating
agency. (See Lending Activites (including Mortgage-Related Securities)).
Investment Activities
In addition to lending activities, the Banks conduct other investment
activities on an ongoing basis in order to diversify assets, obtain maximum
yield and meet levels of liquid assets required by regulatory authorities.
Investment decisions are made by authorized officers in accordance with policies
established by the boards of directors. In addition to satisfying regulatory
liquidity requirements, investments are used as part of the Banks' asset and
liability program to minimize the Banks' vulnerability to changing interest
rates. At December 31, 1993, 62.1% of the Banks' investments mature or reprice
within one year or less.
Certain of First Financial's investment policies relate to the term of
the investment. For example, First Financial invests in U.S. government, agency
and instrumentality obligations maturing in three years or less; obligations of
state and other political subdivisions maturing in two years or less;
certificates of deposits of insured institutions which will mature in nine
months or less; negotiable federal funds which will mature in nine months or
less; nonnegotiable federal funds which will mature in 30 days or less;
corporate debt obligations maturing in three years or less; and commercial paper
maturing in 270 days or less. Additionally, corporate debt obligations must be
rated in one of the four highest categories by a nationally recognized
investment rating service, and commercial paper must be rated in one of the two
highest categories by two nationally recognized rating services.
Other investment policies relate to the aggregate amount of certain
investments. For example, state and municipal general obligations and revenue
bonds are limited to 1% of assets; industrial revenue bonds to 2% of assets in
the aggregate and 1% of assets for any single issue; repurchase agreements to
10% of stockholders' equity plus an additional 10% if secured by readily
marketable collateral; banker's acceptances to no more than 1/4 of 1% of such
institution's total deposits; and all other obligations, except those of the
U.S. or guaranteed thereby, to the lesser of 10% of stockholders' equity or 1%
of total assets.
Subject to limitations of its investment policy, Port increases or
decreases its investments depending upon regulatory requirements, the
availability of funds and comparative yields in relation to its return on loans.
The primary responsibility for the investment function rests with executive
management of Port.
Management determines the appropriate classification of debt securities
(including mortgage-related securities) at the time of purchase and reevaluates
such designation as of each balance sheet date. Debt securities are classified
as held-to-maturity when the Corporation has the positive intent and ability to
hold the securities to maturity. Held-to-maturity securities are stated at
amortized cost.
Debt securities not classified as held-to-maturity are classified as
available-for-sale. Available-for-sale securities are stated at fair value with
the unrealized gains and losses (net of income tax effect) reported as a
separate component of stockholders' equity.
The cost of debt securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity, or in the case of mortgage-related securities, over the
estimated life of the security. Such amortization is included in interest income
from the related security. Interest and dividends are included in interest
income from the related securities. Realized gains and losses, and declines in
value judged to be other-than-temporary are included in net securities gains
(losses). The costs of securities sold is based on the specific identification
method.
For a breakdown of investment securities held by the Banks at certain
dates, see Note C to the Corporation's consolidated financial statements,
incorporated herein by reference.
The following table sets forth the maturity/repricing characteristics of
the Banks' investment securities at December 31, 1993 and the weighted average
yields of such securities.
After One, But After Five, But
Within One Year Within Five Years Within 10 Years After 10 Years
----------------- ------------------ ----------------- -----------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Yield Amount Yield Amount Yield Amount Yield
------- -------- ------- -------- ------- -------- ------- --------
(Dollars in thousands)
U.S. Government and agency
obligations.................. $ 77,456 5.15% $57,520 4.72% $ -- --% $4,988 7.65%
Adjustable-rate mortgage
mutual funds................. 34,585 4.42 -- -- -- -- -- --
Interest-earning deposits
in banks..................... 25,768 3.35 -- -- -- -- -- --
Federal funds sold............... 21,873 2.79 -- -- -- -- -- --
Corporate and bank notes
receivable................... 11,437 4.72 37,616 5.23 -- -- -- --
State and municipal
obligations.................. 20 6.05 3,983 3.72 350 8.00 100 8.00
-------- ------- ------ ------
Total........................ $171,139 4.40% $99,119 4.87% $ 350 8.00% $5,088 7.66%
======== ======= ====== ======
At December 31, 1993, the Banks had no investments in any issuer in
excess of 10% of net worth.
The following table sets forth the aggregate amortized cost and estimated
fair value of investment securities at the dates indicated.
December 31,
-------------------------------------
1993 1992 1991
-------- -------- ------
(In thousands)
U.S. Government and agency obligations.......................... $138,400 $ 40,828 $ 14,661
Corporate and bank notes
(investment grade).......................................... 49,053 52,020 26,638
Adjustable-rate mortgage mutual fund............................ 34,585 -- --
Interest-earning deposits....................................... 25,768 31,067 3,898
Federal funds sold.............................................. 21,873 29,100 42,870
State and municipal obligations................................. 4,453 598 598
Certificates of deposit......................................... -- 198 392
Commercial paper................................................ -- 9,989 14,965
-------- -------- --------
Total amortized cost........................................ $274,132 $163,800 $104,022
======== ======== ========
Total estimated fair value.................................. $275,576 $165,116 $104,817
======== ======== ========
Sources of Funds
General. Deposit accounts, sales of loans in the secondary market and
loan repayments are the primary sources of funds for use in lending and for
other general business purposes. In addition, the Banks derive funds from
maturity of investments, advances from the FHL Bank and other borrowings.
Repayments of loans and mortgage-related securities are a relatively stable
source of funds, while deposit inflows and outflows are significantly influenced
by general interest rates and money market and economic conditions. Borrowings
may be used on a short-term basis to compensate for reduction in normal sources
of funds such, as deposit inflows, at less than projected levels. They may also
be used on a longer-term basis to support expanded lending and investment
activities. The Banks have not generally solicited deposits outside the market
area served by their offices or used brokers to obtain deposits and have no
brokered deposits at December 31, 1993.
Deposit Activities. The Banks offer a variety of deposits having a wide
range of interest rates and terms.
The following table presents, by various interest-rate intervals, the
Banks' long-term (one year and over) certificates as of the date indicated.
December 31,
------------------------------------------
Interest Rate 1993 1992 1991
------------- -------- -------- ------
(In thousands)
3.50 - 4.00%........................................... $ 209,813
4.01 - 6.00%........................................... 1,434,598 $ 788,460 $ 149,698
6.01 - 8.00%........................................... 273,664 425,662 717,162
8.01 - 10.00%........................................... 242,502 394,585 768,772
---------- ---------- ----------
$2,160,577 $1,608,707 $1,635,589
========== ========== ==========
The following table presents, by various similar interest-rate intervals,
the amounts of long-term (one year and over) time deposits at December 31, 1993
maturing during the period indicated.
Interest Rates
-----------------------------------------------------------------------------
3.50-4.00% 4.01-6.00% 6.01-8.00% 8.01-10.00% Total
----------- ---------- ----------- ------------ -------
(In thousands)
Certificate accounts maturing
in the 12 months ending:
December 31, 1994................. $206,826 $ 670,222 $ 93,334 $132,118 $1,102,500
December 31, 1995................. 2,987 488,612 17,554 104,956 614,109
December 31, 1996................. -- 185,796 57,741 1,566 245,103
After December 31, 1996........... -- 89,968 105,035 3,862 198,865
-------- ---------- -------- -------- ----------
$209,813 $1,434,598 $273,664 $242,502 $2,160,577
======== ========== ======== ======== ==========
The following table presents the maturities of the Banks' certificates in
amounts of $100,000 or more at December 31, 1993 by time remaining to maturity.
December 31,
Maturities 1993
--------------
(In thousands)
January 1, 1994 through March 31, 1994........................ $ 48,170
April 1, 1994 through June 30, 1994........................... 20,654
July 1, 1994 through December 31, 1994........................ 35,872
January 1, 1995 and after..................................... 60,193
--------
$164,889
========
The Banks' deposit base at December 31, 1993 included $2.56 billion of
certificates of deposit with a weighted average rate of 5.01%. Of these
certificates of deposit, $1.50 billion with a weighted average rate of 4.71%
will mature during the 12 months ending December 31, 1994. The Banks will seek
to retain these deposits to the extent consistent with its long-term objective
of maintaining positive interest rate spreads. Depending upon interest rates
existing at the time such certificates mature, the Banks' cost of funds may be
significantly affected by the rollover of these funds.
Other Sources of Funds. The following table sets forth certain
information as to the Corporation's advances and other borrowings at the dates
and for the periods indicated. See Note J to the Corporation's consolidated
financial statements, incorporated herein by reference.
December 31,
------------------------------------------
1993 1992 1991
-------- -------- ------
(In thousands)
FHL Bank advances.............................................. $371,974 $397,193 $ 58,693
Subordinated notes............................................. 54,997 55,000 --
Industrial development revenue bonds........................... 6,410 9,755 6,550
Collateralized mortgage obligations............................ 5,217 -- --
Notes payable to bank.......................................... -- -- 12,000
-------- -------- --------
Total borrowings........................................ $438,598 $461,948 $ 77,243
======== ======== ========
Weighted average interest cost of total
borrowings during the year................................. 5.29% 4.98% 8.41%
Average month-end balance of short-term
borrowings................................................. -- $ 10,792 $ 15,700
Weighted average interest rate of short-term
borrowings during year..................................... -- 7.71% 8.59%
Weighted average interest rate of short-term
borrowings at end of year.................................. -- -- 6.50%
Service Corporations and Operating/Finance Subsidiaries
First Financial has i) five active, wholly-owned service corporations,
ii) an operating subsidiary, and iii) a limited-purpose finance subsidiary. Port
has no active service corporations. The net book value of First Financial's
aggregate investment in active service corporations at December 31, 1993 was as
follows (in thousands):
Wisconsin Insurance Management, Inc........................... $ 998
Appraisal Services, Inc....................................... 142
First Service Corporation of Wisconsin........................ 12
Illini Service Corporation.................................... --
Mortgage Finance Corporation.................................. --
------
Total..................................................... $1,152
======
Wisconsin Insurance Management, Inc. ("WIM") is a full-service,
independent insurance agency. This subsidiary offers a broad range of insurance
products, including hazard, mortgage, life and disability policies, to First
Financial's customers, as well as a full line of commercial and personal
coverages to the general public. Brokerage services are also provided through
this subsidiary. WIM had net income of $1.3 million, $1.3 million and $1.4
million for 1993, 1992 and 1991, respectively.
Appraisal Services, Inc. performs real estate appraisals for First
Financial's loan customers, governmental agencies and the general public.
Insurance valuations and ad valorem tax services for outside sources are also
performed. Appraisal Services, Inc., had net income of $111,000, $124,000 and
$90,000 for 1993, 1992 and 1991, respectively.
First Service Corporation of Wisconsin ("FSC") previously engaged in the
management and sale of commercial real estate and apartments for First Financial
and others, as well as acting as general partner for several real estate
partnerships. This subsidiary had a net loss of $207,000, $435,000 and $600,000
for 1993, 1992 and 1991, respectively. At December 31, 1993, FSC's activities
were sharply cut back and its principal assets were transferred to First
Financial. FSC's remaining function is to serve as general partner for the
remaining two real estate partnerships in each of which FSC has a minor
investment.
Illini Service Corporation ("ISC") was acquired in conjunction with the
Illini transaction and acts as nominal trustee on deeds of trust in Missouri.
ISC's sole corporate function is to provide the trustee's signature capability.
Mortgage Finance Corporation ("MFC") was a subsidiary of a former
mortgage banking affiliate of First Financial and acts as a nominal trustee on
deeds of trust in California and other states. MFC's sole corporate function is
to provide the trustee's signature capability on such deeds of trust acquired by
First Financial from the former affiliate.
First Financial Investments, Inc. ("FFII") is an operating subsidiary of
First Financial and was incorporated in 1991. FFII, which is located in the
State of Nevada, was formed for the purpose of managing a portion of First
Financial's investment portfolio (primarily mortgage-related securities
purchased subsequent to the recent Illinois-area acquisitions) having long-term
maturities. As an operating subsidiary, FFII's results of operations are
combined with First Financial's for financial and regulatory reporting purposes.
UFS Capital Corporation ("UFSCC"), which was acquired in conjunction with
the United acquisition, is a limited-purpose finance subsidiary of First
Financial and functions as an issuer of certain collateralized mortgage
obligation bonds. As a finance subsidiary, UFSCC's results of operations are
combined with First Financial's for financial and regulatory reporting purposes.
Employees of the Corporation
At December 31, 1993, the Corporation and its subsidiaries employed 1,320
full-time employees and 337 part-time employees. The Corporation promotes equal
employment opportunity and considers its employee relations to be good. The
Corporation's employees are not represented by any collective bargaining group.
The Corporation sponsors retirement plans covering all employees with one
or more years of service who are at least 21 years old. Additionally, the
Corporation maintains an employee benefit program providing, among other items,
hospitalization and major medical insurance, limited dental and life insurance,
and educational assistance. Such employee benefits are considered by management
to be competitive with employee benefits provided by other financial
institutions and major employers in the counties in which First Financial and
Port have offices.
Executive Officers
The following table sets forth information regarding each of the
executive officers of the Corporation and First Financial:
Age At
Executive December 31, Business Experience
Officer 1993 During Past Five Years
John C. Seramur 51 Mr. Seramur joined First Financial in 1966 and
serves as Director, President, Chief Executive
Officer and Chief Operating Officer of the
Corporation and First Financial. He has also
served as Chairman of the Board of Port since
May, 1989.
Robert M. Salinger 43 Mr. Salinger joined the Corporation as Corporate
Secretary and General Counsel in 1985. He also
serves as an Executive Vice President of First
Financial. In 1984, he had served as General
Counsel and Corporate Secretary for an
institution acquired by the Corporation. Prior to
1984, he was a partner in the law firm of Petrie
& Stocking, S.C., and associated with the law
firm of Whyte & Hirschboeck, S.C.
Donald E. Peters 44 Mr. Peters joined First Financial in 1982 and
serves as Executive Vice President - Retail
Banking of First Financial. Prior to 1982, he
was an officer of another thrift institution.
Harry K. Hammerling 43 Mr. Hammerling joined First Financial in 1984
and serves as Executive Vice President -
Administration and Servicing for First Financial.
From 1972 to 1984, he served as an officer of
First State.
Kenneth F. Csinicsek 54 Mr. Csinicsek joined First Financial in 1987 and
serves as Senior Vice President of Marketing and
Investor Relations. Prior to joining First
Financial, he served as president of another thrift
institution for two years and operated two
financial institution consulting firms over a
thirteen year period.
REGULATION
General
The Corporation, as a savings institution holding company (a "thrift
holding company"), and First Financial and Port, as federally chartered savings
banks, are subject to extensive regulation, supervision and examination by the
OTS as their primary federal regulator. First Financial and Port are also
subject to regulation, supervision and examination by the FDIC and as to certain
matters by the Federal Reserve Board.
In recent years there have been a significant number of changes in the
manner in which insured depository institutions and their holding companies are
regulated. Such changes have imposed additional regulatory restrictions on the
operations of insured depository institutions and their holding companies. In
particular, regulatory capital requirements for insured depository institutions
have increased significantly. The Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") requires the bank regulatory agencies to
impose certain sanctions on insured depository institutions which fail to meet
minimum capital requirements. In addition, the deposit premiums paid by insured
depository institutions have increased significantly in recent years and may
increase in the future.
Thrift Holding Company Regulation
General. Under the Home Owners Loan Act (the "HOLA"), the Corporation, as
a thrift holding company, is subject to regulation, supervision and examination
by, and the reporting requirements of, the OTS.
The HOLA permits, subject to a number of conditions, the acquisition by a
thrift holding company, such as the Corporation, of control of another thrift
institution or thrift holding company with prior written approval of the OTS,
including in certain situations an acquisition that would result in the creation
of a multiple thrift holding company controlling thrift institutions located in
more than one state. No director, officer, or controlling shareholder of the
Corporation may, except with the prior approval of the OTS, acquire control of
any thrift institution which is not a subsidiary of the Corporation.
Restrictions relating to service as an officer or director of an unaffiliated
holding company or thrift institution are applicable to the directors and
officers of the Corporation and its thrift institution subsidiaries and their
affiliates under the Depository Institutions Management Interlocks Act.
Under the HOLA, transactions engaged in by a thrift institution or one of
its subsidiaries with affiliates of the thrift institution generally are subject
to the affiliate transaction restrictions contained in Sections 23A and 23B of
the Federal Reserve Act. Section 23A of the Federal Reserve Act imposes both
quantitative and qualitative restrictions on transactions with an affiliate,
while Section 23B of the Federal Reserve Act requires, among other things, that
all transactions with affiliates be on terms substantially the same, and at
least as favorable, as the terms that would apply to, or would be offered in, a
comparable transaction with an unaffiliated party. Exemptions from, and waivers
of, the provisions of Sections 23A and 23B of the Federal Reserve Act may be
granted only by the Federal Reserve Board. The HOLA contains certain other
restrictions on loans and extensions of credit to affiliates, and authorizes the
OTS to impose additional restrictions on transactions with affiliates if the OTS
determines such restrictions are necessary to ensure the safety and soundness of
any thrift institution. Current OTS regulations are similar to Sections 23A and
23B of the Federal Reserve Act.
Restrictions on Activities of Multiple Savings and Loan Holding Companies.
As a multiple savings and loan holding company, the Corporation is prohibited
from engaging in any activities other than (i) furnishing or providing
management services for First Financial or Port; (ii) conducting an insurance
agency or escrow business; (iii) holding, managing or liquidating assets owned
or acquired from First Financial or Port; (iv) holding or managing properties
used or occupied by First Financial or Port; (v) acting as trustee under deeds
of trust; (vi) engaging in any other activity in which multiple savings and loan
holding companies were authorized by regulation to engage as of March 5, 1987;
and (vii) engaging in any activity which the Federal Reserve Board by regulation
has determined to be permissible for bank holding companies under Section 4(c)
of the Bank Holding Company Act (the "BHCA") (unless the Director of the OTS, by
regulation, prohibits or limits any such activity for savings and loan holding
companies). The activities in which multiple savings and loan holding companies
were authorized by regulation to engage in as of March 5, 1987, consist of
activities similar to those permitted for service corporations of federally
chartered savings institutions and include, among other things, various types of
lending activities, furnishing or performing clerical, accounting and internal
audit services primarily for affiliates, certain real estate development and
leasing activities and underwriting credit life or credit health and accident
insurance in connection with extension of credit by savings institutions or
their affiliates. The activities which the Federal Reserve Board by regulation
has permitted for bank holding companies under Section 4(c) of BHCA generally
consist of those activities that the Federal Reserve Board has found to be so
closely related to banking or managing or controlling banks as to be a proper
incident thereto, and include, among other things, various lending activities,
certain real and personal property leasing activities, certain securities
brokerage activities, acting as an investment or financial advisor subject to
certain conditions, and providing management consulting to depository
institutions subject to certain conditions. OTS regulations do not limit the
extent to which savings and loan holding companies and their non-savings
institutions subsidiaries may engage in activities permitted for bank holding
companies pursuant to Section 4(c)(8) of the BHCA, although prior OTS approval
is required to commence any such activity. The Corporation could be prohibited
from engaging in any activity (including those otherwise permitted under the
HOLA) not allowed for bank holding companies if First Financial or Port fail to
constitute a qualified thrift lender. See "-- Savings Institution Regulation --
Qualified Thrift Lender Requirement."
Savings Institution Regulation
General. First Financial and Port are subject to supervision and
regulation by the OTS. Under OTS regulations, First Financial and Port are
required to obtain annual audits by independent accountants and to be examined
periodically by the OTS. Examinations are required to be conducted no less
frequently than every 12 months. First Financial and Port are subject to
assessments by the OTS to cover the costs of such examinations. The OTS may
revalue assets of First Financial and Port, based upon appraisals, and require
the establishment of specific reserves in amounts equal to the difference
between such revaluation and the book value of the assets. The OTS is authorized
to promulgate regulations to ensure the safe and sound operations of savings
institutions and may impose various requirements and restrictions on the
activities of savings institutions. Additionally, under the FDICIA, the OTS has
recently proposed safety and soundness regulations relating to (i) internal
controls, information systems, and internal audit systems; (ii) loan
documentation; (iii) credit underwriting; (iv) interest rate exposure; (v) asset
growth; and (vi) compensation and benefit standards for officers, directors,
employees and principal shareholders. The HOLA requires that all regulations and
policies of the OTS for the safe and sound operations of savings institutions
are to be no less stringent than those established by the Office of the
Comptroller of the Currency (the "OCC") for national banks. First Financial and
Port, as members of the SAIF, are also subject to regulation and supervision by
the FDIC, in its capacity as administrator of the SAIF to ensure the safety and
soundness of the SAIF. See "Regulation--Savings Institution-- Insurance of
Deposits."
Capital Requirements. Under OTS regulations, savings institutions must
maintain (i) "core capital" in an amount of not less than 3% of total assets,
(ii) "tangible capital" in an amount not less than 1.5% of total assets and
(iii) a level of risk-based capital equal to 8.0% of risk-weighted assets.
Capital standards established by the OTS for savings institutions must
generally be no less stringent than those applicable to national banks. Under
OTS regulations, the term "core capital" generally includes common stockholders'
equity, noncumulative perpetual preferred stock and related surplus, and
minority interests in the equity accounts of consolidated subsidiaries less
intangible assets and certain investments in subsidiaries plus 90% of the fair
market value of readily marketable purchased mortgage servicing rights ("PMSRs")
(subject to certain conditions).
"Tangible capital" is core capital minus intangible assets and certain
investments in subsidiaries, provided, however, that savings institutions may
include 90% of the fair market value of readily marketable PMSRs as tangible
capital (subject to certain conditions, including any limitations imposed by the
FDIC on the maximum percentage of the tangible capital requirement that may be
satisfied with such servicing rights).
In establishing risk-based capital requirements for savings institutions,
the OTS may deviate from the risk-based capital standards applicable to national
banks to reflect interest-rate risk or other risks so long as such deviations,
in the aggregate, do not result in a materially lower risk-based capital
requirement for savings institutions than would be required under the national
bank standards.
In determining total risk-weighted assets for purposes of the risk-based
requirement, (i) each off-balance sheet asset must be converted to its
on-balance sheet credit equivalent amount by multiplying the face amount of each
such item by a credit conversion factor ranging from 0% to 100% (depending upon
the nature of the asset), (ii) the credit equivalent amount of each off-balance
sheet asset and each on-balance sheet asset must be multiplied by a risk factor
ranging from 0% to 100% (again depending upon the nature of the asset) and (iii)
the resulting amounts are added together and constitute total risk-weighted
assets. Total capital, for purposes of the risk-based capital requirement,
equals the sum of core capital plus supplementary capital (which, as defined,
includes the sum of, among other items, perpetual preferred stock not counted as
core capital, limited life preferred stock, subordinated debt, and general loan
and lease loss allowances up to 1.25% of risk-weighted assets) less certain
deductions. The amount of supplementary capital that may be counted towards
satisfaction of the total capital requirement may not exceed 100% of core
capital, and OTS regulations require the maintenance of a minimum ratio of core
capital to total riskweighted assets of 4.0%. At December 31, 1993, First
Financial and Port exceeded all capital requirements on a fully phased-in basis.
(See table under Regulatory Capital in Management's Discussion and Analysis,
included in the Corporation's 1993 Annual Report to Shareholders, which is
incorporated herein by reference.)
Under an OCC rule, all national banks must maintain "core" or "Tier 1"
capital of at least 3% of total assets. The rule further provides that a
national bank operating at or near the 3% capital level is expected to have
well-diversified risks, including no undue interest rate risk exposure;
excellent control systems; good earnings; high asset quality; high liquidity;
well-managed on and off-balance sheet activities; and in general be considered a
strong banking organization with a composite 1 rating under the CAMEL rating
system for banks. For all but the most highly rated banks meeting the above
conditions, the minimum leverage requirement will be 4% to 5% of total assets.
The OTS is required to issue capital standards that are no less stringent than
those applicable to national banks. The OTS has issued notice of a proposed
regulation that would require all but the most highly rated savings institutions
to maintain a minimum leverage ratio (defined as the ratio of core capital to
total assets) of between 4% and 5%. At December 31, 1993, First Financial and
Port had ratios of core capital to total assets of 5.78% and 7.38%,
respectively.
In August, 1993, the OTS issued new regulations, effective January 1,
1994, which add an interest-rate risk component to the risk-based capital
measurement. Under the new regulations, an institution's interest rate risk
exposure is measured based upon a 200 basis point change in market interest
rates. A savings institutions whose measured interest rate risk exposure is
greater then specified levels must deduct an interest-rate risk component when
calculating total capital for purposes of determining regulatory risk-based
capital levels. As of December 31, 1993, the Banks would not have been required
to deduct any interest-rate risk component under the OTS interest-rate risk
capital regulations. The new interest-rate risk requirements are not expected to
have any material effect on the Banks' ability to meet the risk-based capital
measurement. The OTS also is required to revise its risk-based capital standards
to ensure that its standards provide adequately for concentration of credit
risk, risk from nontraditional activities and actual performance and expected
risk of loss on multi-family mortgages. Further increases in capital
requirements are possible in future periods.
Capital requirements higher than the generally applicable minimum
requirement may be established for a particular savings institution if the OTS
determines that the institution's capital was or may become inadequate in view
of its particular circumstances. Individual minimum capital requirements may be
appropriate where the savings institution is receiving special supervisory
attention, has a high degree of exposure to interest rate risk, or poses other
safety or soundness concerns. No such requirements have been established for
First Financial or Port.
The following is a reconciliation of the Banks' equity capital under
generally accepted accounting principles ("GAAP") to regulatory capital at
December 31, 1993.
First
Financial Port
---------- --------
GAAP capital................................................ $276,138 $7,400
Less: intangible assets..................................... (3,070) --
Investment in subsidiaries and activities
not permitted for national banks.......................... (1,792) (59)
Other adjustments........................................... (321) --
-------- ------
Regulatory core capital (Tier 1)............................ $270,955 $7,341
======== ======
The following table sets forth the actual and required minimum levels of
regulatory capital for the Banks under applicable OTS regulations as of December
31, 1993.
Actual Required Actual Required
Amount Amount Excess Ratio Ratio Excess
-------- --------- -------- -------- --------- --------
(Dollars in Thousands)
First Financial:
Tangible capital $242,633 $ 69,881 $172,752 5.21% 1.50% 3.71%
Core capital 270,955 140,611 130,344 5.78 3.00 2.78
Risk-based capital 290,629 185,133 105,496 12.56 8.00 4.56
Port:
Tangible capital $ 7,341 $ 1,494 $ 5,847 7.38% 1.50% 5.88%
Core capital 7,341 2,987 4,354 7.38 3.00 4.38
Risk-based capital 7,865 4,325 3,540 14.55 8.00 6.55
Prompt Corrective Action. Pursuant to FDICIA, the federal banking agencies
are required to establish, by regulation, for each capital measure, the levels
at which an insured institution is well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized, and to take prompt corrective action with respect to insured
institutions which fall below minimum capital standards. The degree of
regulatory intervention mandated by FDICIA is tied to an insured institution's
capital category, with increasing scrutiny and more stringent restrictions being
imposed as an institution's capital declines. Any insured depository institution
which falls below the minimum capital standards must submit a capital
restoration plan. Effective December 19, 1992, the FDICIA requires any company
that controls an undercapitalized savings institution, in connection with the
submission of a capital restoration plan by the savings institution, to
guarantee that the institution will comply with the plan and to provide
appropriate assurances of performance. The aggregate liability of any such
controlling company under such guaranty is limited to the lesser of (i) 5% of
the savings institution's assets at the time it became undercapitalized; or (ii)
the amount necessary to bring the savings institution into capital compliance at
the time the institution fails to comply with the terms of its capital plan. If
either First Financial or Port becomes undercapitalized, the Corporation would
be required to provide such a guarantee. Both First Financial and Port were
classified as well capitalized, the highest capital category, at December 31,
1993.
Pursuant to FDICIA, undercapitalized institutions are precluded from
increasing their assets, acquiring other institutions, establishing additional
branches, or engaging in new lines of business without an approved capital plan
and an agency determination that such actions are consistent with the plan.
Savings institutions that are significantly undercapitalized may be required to
take one or more of the following actions: (i) raise additional capital so that
the institution will be adequately capitalized; (ii) be acquired by, or combined
with, another institution if grounds exist for appointing a receiver; (iii)
refrain from affiliate transactions; (iv) limit the amount of interest paid on
deposits to the prevailing rates of interest in the region where the institution
is located; (v) further restrict asset growth; (vi) hold a new election for
directors, dismiss any director or senior executive officer who held office for
more than 180 days immediately before the institution became undercapitalized,
or employ qualified senior executive officers; (vii) stop accepting deposits
from correspondent depository institutions; (viii) divest or liquidate any
subsidiary which the OTS determines poses a significant risk to the institution;
(ix) restrict payments of bonuses to or increases in compensation of executive
officers; and (x) obtain prior OTS approval of newly appointed executive
officers and directors. Any company which controls a significantly
undercapitalized savings institution may be required to: (i) divest or liquidate
any affiliate other than an insured depository institution; (ii) divest the
institution if the OTS determines that divestiture would improve the
institution's financial condition and future prospects; and (iii) if such
company is a bank holding company, refrain from making any capital distribution
without the prior approval of the Federal Reserve Board.
Critically undercapitalized institutions are subject to additional
restrictions. No later than 90 days after a savings institution becomes
critically undercapitalized, the OTS is required to appoint a conservator or
receiver for the institution, unless the OTS determines, with the concurrence of
the FDIC, that other action would better achieve the purpose of FDICIA. The OTS
must make periodic redeterminations that the alternative action continues to be
justified no less frequently than every 90 days. The OTS is required to appoint
a receiver if the institution remains critically undercapitalized nine months
later, unless the institution is in compliance with an approved capital plan and
the OTS and FDIC certify that the institution is viable.
Under prompt corrective action regulations adopted by the OTS, an
institution will be considered (i) "well capitalized" if the institution has a
total risk-based capital ratio of 10% or greater, a Tier 1 or core capital to
risk-weighted assets ratio of 6% or greater, and a leverage ratio of 5% or
greater (provided that the institution is not subject to an order, written
agreement, capital directive or prompt corrective action directive to meet and
maintain a specific capital level for any capital measure); (ii) "adequately
capitalized" if the institution has a total risk-based capital ratio of 8% or
greater, a Tier 1 or core capital to risk-weighted assets ratio of 4% or
greater, and a leverage ratio of 4% or greater (3% or greater if the institution
is rated composite 1 in its most recent report of examination); (iii)
"undercapitalized" if the institution has a total risk-based capital ratio that
is less than 8%, a Tier 1 or core capital to risk-weighted assets ratio of less
than 4%, or a leverage ratio that is less than 4% (3% if the institution is
rated composite 1 in its most recent report of examination); (iv) "significantly
undercapitalized" if the institution has a total risk-based capital ratio that
is less than 6%, a Tier 1 or core capital to risk-weighted assets ratio that is
less than 3%, or a leverage ratio that is less than 3%; and (v) "critically
undercapitalized" if the institution has a ratio of tangible equity to total
assets that is less than or equal to 2%. The regulation also permits the OTS to
determine that a savings institution should be classified in a lower category
based on other information, such as the institution's examination report, after
written notice. Under the OTS's prompt corrective action regulations, at
December 31, 1993, each of First Financial and Port were classified as well
capitalized based on its capital ratios as of such date.
FDICIA prohibits any depository institution that is not well capitalized
from accepting deposits through a deposit broker. Previously, only troubled
institutions were prohibited from accepting brokered deposits. The FDIC may
allow adequately capitalized institutions that apply for a waiver to accept
brokered deposits. Institutions that receive a waiver are subject to limits on
the rates of interest they may pay on brokered deposits. FDICIA also prohibits
undercapitalized institutions from offering rates of interest on insured
deposits that significantly exceed the prevailing rate in their normal market
area or the area in which the deposits would otherwise be accepted.
Safety and Soundness Regulations. Under FDICIA, the OTS is required to
prescribe safety and soundness regulations relating to (i) internal controls,
information systems and internal audit systems; (ii) loan documentation; (iii)
credit underwriting; (iv) interest rate exposure; (v) asset growth; and (vi)
compensation and benefit standards for officers, directors, employees and
principal shareholders. In November, 1993, the OTS, along with the other federal
banking agencies, published revised proposed regulations for the purpose of
implementing this provision of FDICIA. As proposed, savings institutions, such
as the Banks, would be required, among other things, to maintain a ratio of
classified assets to total risk-based capital and allowances for loan losses not
eligible for inclusion in risk-based capital that is no greater than 1.0. At
December 31, 1993, First Financial and Port had a ratio of classified assets to
total risk-based capital and ineligible allowances of 0.10 and 0.05,
respectively. The proposed regulations also would impose safety and soundness
standards on holding companies such as the Corporation. Under the proposed
regulations, an institution or holding company not meeting one or more of the
safety and soundness standards would be required to file a compliance plan with
the appropriate federal banking agency. In the event that an institution or
holding company fails to submit an acceptable compliance plan or fails in any
material respect to implement an accepted compliance plan within the time
allowed by the agency, the institution or holding company would be required to
correct the deficiency and the appropriate federal agency would also be
authorized to: (i) restrict asset growth; (ii) require the institution or
holding company to increase its ratio of tangible equity to assets; (iii)
restrict the rates of interest that the institution may pay; or (iv) take any
other action that would better carry out the purpose of the corrective action.
Until adopted in final form, the Corporation is unable to predict the precise
effect of these regulations on the Corporation or the Banks.
Qualified Thrift Lender Requirement. In order for First Financial and Port
to exercise the powers granted to federally chartered savings institutions and
maintain full access to FHLB advances, they must meet the definition of a
"qualified thrift lender" ("QTL"). Pursuant to recent amendments effected by
FDICIA, a savings institution will be a QTL if the savings institution's
qualified thrift investments continue to equal or exceed 65% of the
institution's portfolio assets on a monthly average basis in nine out of every
12 months. Subject to certain exceptions, qualified thrift investments generally
consist of housing related loans and investments, certain obligations of federal
instrumentalities and certain groups of assets, such as consumer loans, to a
limited extent. The term "portfolio assets" means the savings institution's
total assets minus goodwill and other intangible assets, the value of property
used by the savings institution to conduct its business, and liquid assets held
by the savings institution in an amount up to 20% of its total assets.
OTS regulations provide that any savings institution that fails to meet
the definition of a QTL must either convert to a bank charter, other than a
savings bank charter, or limit its future investments and activities (including
branching and payments of dividends) to those permitted for both savings
institutions and national banks. Additionally, any such savings institution that
does not convert to a bank charter will be ineligible to receive further FHLB
advances and, beginning three years after the loss of QTL status, will be
required to repay all outstanding FHLB advances and dispose of or discontinue
any preexisting investment or activities not permitted for both savings
institutions and national banks. Further, within one year of the loss of QTL
status, the holding company of a savings institution that does not convert to a
bank charter must register as a bank holding company and will be subject to all
statutes applicable to bank holding companies.
Both First Financial and Port are QTLs under the current test with
investments in qualified thrift investments substantially in excess of required
limits.
Liquidity. Under applicable federal regulations, savings institutions are
required to maintain an average daily balance of liquid assets (including cash,
certain time deposits, certain bankers' acceptances, certain corporate debt
securities and highly rated commercial paper, securities of certain mutual funds
and specified United States government, state or federal agency obligations)
equal to a monthly average of not less than a specified percentage of the
average daily balance of the savings institution's net withdrawable deposits
plus short-term borrowings. Under the HOLA, this liquidity requirement may be
changed from time to time by the Director of the OTS to any amount within the
range of 4% to 10% depending upon economic conditions and the deposit flows of
member institutions, and currently is 5%. Savings institutions are also required
to maintain an average daily balance of short-term liquid assets at a specified
percentage (currently 1%) of the total of the average daily balance of its net
withdrawable deposits and short-term borrowings. First Financial and Port are in
compliance with these liquidity requirements.
Loans to One Borrower Limitations. The HOLA generally requires savings
institutions to comply with the loans to one borrower limitations applicable to
national banks. National banks generally may make loans to a single borrower in
amounts up to 15% of their unimpaired capital and surplus, plus an additional
10% of capital and surplus for loans secured by readily marketable collateral.
FIRREA provides exceptions under which a savings institution may make loans to
one borrower in excess of the generally applicable national bank limits. A
savings institution may make loans to one borrower in excess of such limits
under one of the following circumstances: (i) for any purpose, in any amount not
to exceed $500,000; (ii) to develop domestic residential housing units, in an
amount not to exceed the lesser of $30 million or 30% of the savings
institution's unimpaired capital and unimpaired surplus, provided other
conditions are satisfied; or (iii) to finance the sale of real property acquired
in satisfaction of debts previously contracted in good faith in amounts up to
50% of the savings institution's unimpaired capital and unimpaired surplus.
However, the OTS has modified the third standard by limiting loans to one
borrower to finance the sale of real property acquired in satisfaction of debts
to 15% of unimpaired capital and surplus. That rule provides, however, that
purchase money mortgages received by a savings institution to finance the sale
of such real property do not constitute "loans" (provided the savings
institution is not placed in a more detrimental position holding the note than
holding the real estate) and, therefore, are not subject to the loans to one
borrower limitations. Neither First Financial nor Port has loans to any one
borrower in violation of these regulations.
Commercial Real Property Loans. HOLA limits the aggregate amount of
commercial real estate loans that a federal savings institution may make to an
amount not in excess of 400% of the savings institution's capital. First
Financial and Port are in compliance with this limitation.
Limitation on Capital Distributions. An OTS rule imposes limitations on
all capital distributions by savings institutions (including dividends, stock
repurchases and cash-out mergers). Under the rule, a savings institution is
classified as a tier 1 institution, a tier 2 institution or a tier 3
institution, depending on its level of regulatory capital both before and after
giving effect to a proposed capital distribution. A tier 1 institution (i.e.,
one that both before and after a proposed capital distribution has net capital
equal to or in excess of its fully phased-in regulatory capital requirement) and
a tier 2 institution (i.e., one that both before and after a proposed capital
distribution has net capital equal to its then-applicable minimum capital
requirement but would fail to meet its fully phased-in capital requirement
either before or after the distribution) would be allowed to make certain
capital distributions in specified amounts in any calendar year without prior
regulatory approval. A tier 3 institution (i.e., one that either before or after
a proposed capital distribution fails to meet its then-applicable minimum
capital requirement) may not make any capital distributions without the prior
written approval of the OTS or the OTS may prohibit a capital distribution. For
purposes of this regulation, First Financial and Port are tier 1 institutions
and all capital distributions made by the Banks in 1993 were in compliance with
these regulations.
Effective December 19, 1992, FDICIA prohibits an insured depository
institution from declaring any dividend, making any other capital distribution,
or paying a management fee to a controlling person if, following the
distribution or payment, the institution would be classified as
undercapitalized, significantly undercapitalized or critically undercapitalized.
The OTS has indicated that it intends to review its existing capital
distribution regulations to determine whether amendments are necessary based on
FDICIA. In the interim, the OTS has indicated that it intends for the
permissibility of capital distributions to be determined by the prompt
corrective action regulations recently adopted under FDICIA. A savings
institution permitted to make a capital contribution under the prompt corrective
action regulation may do so only if the amount and type would also be permitted
under the OTS's existing capital distribution regulation.
Limitation on Equity Risk Investments. First Financial and Port are
generally prohibited from investing directly in equity securities and real
estate (other than that used for offices and related facilities or acquired
through, or in lieu of, foreclosure or on which a contract purchaser has
defaulted). In addition, existing regulations limit the aggregate investment by
savings institutions in certain equity risk investments, including equity
securities, real estate, service corporations and operating subsidiaries and
loans for the purchase of land and construction loans made after February 27,
1987 on non-residential properties with loan-to-value ratios exceeding 80%.
First Financial and Port are in compliance with the requirements of the equity
risk investment limitations.
Activities of Subsidiaries. FIRREA requires a savings institution seeking
to establish a new subsidiary, acquire control of an existing company (after
which it would be a subsidiary), or conduct a new activity through a subsidiary,
to provide 30 days prior notice to the FDIC and the OTS and conduct any
activities of the subsidiary in accordance with regulations and orders of the
OTS. The OTS has the power to require a savings institution to divest any
subsidiary or terminate any activity conducted by a subsidiary that the OTS
determines is a serious threat to the financial safety, soundness or stability
of such savings institution or is otherwise inconsistent with sound banking
practices.
Insurance of Deposits. Federal deposit insurance is required for all
federally chartered savings institutions. Savings institutions' deposits are
insured to a maximum of $100,000 for each insured account by the SAIF. As
SAIF-insured institutions, First Financial and Port are subject to regulation
and supervision by the FDIC, to the extent deemed necessary by the FDIC to
ensure the safety and soundness of the SAIF. The FDIC is entitled to have access
to reports of examination of First Financial and Port made by the OTS and all
reports of condition filed by First Financial and Port with the OTS, and may
require First Financial and Port to file such additional reports as the FDIC
determines to be advisable for insurance purposes. The FDIC may determine by
regulation or order that any specific activity poses a serious threat to the
SAIF and that no SAIF member may engage in the activity directly. The FDIC is
also authorized to issue and enforce such regulations or orders as it deems
necessary to prevent actions of savings institutions that pose a serious threat
to SAIF.
Insurance premiums are paid in semiannual assessments. Under the
risk-based assessment system adopted pursuant to FDICIA, the FDIC is required to
calculate a savings institution's semiannual assessment based on (i)The
probability that the insurance fund will incur a loss with respect to the
institution (taking into account the institution's asset and liability
concentration), (ii) the potential magnitude of any such loss, and (iii) the
revenue and reserve needs of the insurance fund. Until December 31, 1997, the
minimum semi-annual assessments under the risk-based assessment system must
equal or exceed the assessments that would have applied prior to enactment of
FDICIA. The semiannual assessment imposed on the Banks may be higher depending
on SAIF revenue and expense levels, and the risk classification applied to the
Banks. Effective January 1, 1998, the FDIC is required to set SAIF semiannual
assessments rates in an amount sufficient to increase the reserve ratio of the
SAIF to 1.25% of insured deposits over no more than a 15 year period. FDICIA
also gives the FDIC the authority to establish a higher reserve ratio.
As part of the risk-based deposit insurance system, the deposit insurance
assessment rate was increased from .23% of an institution's assessment base
(generally all insured accounts subject to certain adjustments) to an assessment
rate within the range of .25% to .31% for all BIF and SAIF members, depending on
the assessment risk classifications assigned to each institution, effective
January 1, 1993. Each BIF and SAIF member is assigned to one of three capital
groups: "well capitalized," "adequately capitalized," or "less than adequately
capitalized." Such terms are defined in the same manner as under the OTS's
prompt corrective action regulation (discussed above), except that "less than
adequately capitalized" includes any institution that is not well capitalized or
adequately capitalized. Within each capital group, institutions are assigned to
one of three supervisory subgroups -- "healthy (institutions that are
financially sound with only a few minor weaknesses), "supervisory concern"
(institutions with weaknesses which, if not corrected could result in
significant deterioration of the institution and increased risk to BIF or SAIF)
or "substantial supervisory concern" (institutions that pose a substantial
probability of loss to the BIF or SAIF unless corrective action is taken). The
FDIC will place each institution into one of nine assessment risk
classifications based on the institution's capital group and supervisory
subgroup classification. The deposit insurance rate for each Bank under these
regulations is currently .23% and each of the Banks is "well capitalized" under
the transitional regulations. There can be no assurance that premiums will not
further increase in the future.
During the five-year period following enactment of FIRREA, savings
institutions are precluded from engaging in any transaction which would result
in a conversion from SAIF to BIF insurance (subject to certain exceptions for
limited branch sales and supervisory transactions). FDICIA expanded the list of
permitted conversion transactions that may be effected during the five-year
moratorium. Under FDICIA, BIF and SAIF insured institutions may merge,
consolidate or engage in asset transfer and liability assumption transactions.
The resulting institution will continue to be subject to BIF and SAIF
assessments in relation to that portion of its combined deposit base which is
attributable to the deposit base of its respective predecessor BIF and SAIF
institutions. After August 9, 1994, the resulting institution may apply to the
FDIC to convert all of its deposits to either insurance fund upon payment of the
then applicable entrance and exit fees for each fund.
Insurance of deposits may be terminated by the FDIC after notice and
hearing, upon a finding by the FDIC that the savings institution has engaged in
unsafe or unsound practices, is in an unsafe or unsound condition to continue
operations, or has violated any applicable law, rule, regulation, order or
condition imposed by, or written agreement with, the FDIC. Additionally, if
insurance termination proceedings are initiated against a savings institution,
the FDIC may temporarily suspend insurance on new deposits received by an
institution under certain circumstances. The Corporation is not aware of any
activity or condition which could result in a termination of the deposit
insurance of First Financial or Port.
Under the Federal Deposit Insurance Act, as amended by FIRREA, a savings
institution may be held liable to the FDIC for any loss incurred by the FDIC in
connection with the default of a commonly controlled savings institution or in
connection with the provision of assistance by the FDIC to a commonly controlled
savings institution in danger of default. First Financial and Port are commonly
controlled for purposes of this provision of FIRREA. Accordingly, if a receiver,
conservator or other legal custodian is appointed for one of the institutions,
or if the FDIC is required to provide financial assistance to one of the
institutions, the other institution could be held liable to the FDIC for any
loss incurred in connection with such appointment or assistance.
FDICIA requires any company that has control of an undercapitalized
savings institution, in connection with the submission of a capital restoration
plan by the savings institution, to guarantee that the institution will comply
with the plan and provide appropriate assurances of performance. The aggregate
liability of any such controlling company under such guaranty is limited to the
lesser of (i) 5% of the savings institution's assets at the time it became
undercapitalized; or (ii) the amount necessary to bring the savings institution
into capital compliance at the time the institution fails to comply with the
terms of its capital plan. If either Bank becomes undercapitalized the
Corporation will be required to guarantee performance of the capital plan
submitted under the FDICIA as a condition to OTS approval.
Federal Home Loan Bank System
The Federal Home Loan Bank System consists of 12 regional FHLBs, each
subject to supervision and regulation by the Federal Housing Finance Board (the
"FHFB"). The FHLBs provide a central credit facility for member savings
institutions. First Financial and Port, as members of the FHLB of Chicago, are
required to own shares of capital stock in the FHLB of Chicago in an amount at
least equal to 1% of the aggregate principal amount of unpaid residential
mortgage loans, home purchase contracts and similar obligations at the beginning
of each year, or 1/20 of the their advances (borrowings) from the FHLB,
whichever is greater. First Financial and Port are in compliance with this
requirement. The maximum amount which the FHLB of Chicago will advance
fluctuates from time to time in accordance with changes in policies of the FHFB
and the FHLB of Chicago, and the maximum amount generally is reduced by
borrowings from any other source. In addition, the amount of FHLB advances that
a savings institution may obtain will be restricted in the event the institution
fails to constitute a QTL. See "-- Qualified Thrift Lender Requirement."
Federal Reserve System
The Federal Reserve Board has adopted regulations that require savings
institutions to maintain nonearning reserves of 3% on the first $51.9 million
and 10% on the remaining balance of net transaction accounts (primarily NOW and
regular checking accounts). First Financial and Port are in compliance with
these requirements. These reserves may be used to satisfy liquidity requirements
imposed by the OTS. Because required reserves must be maintained in the form of
cash or a noninterest-bearing account at a Federal Reserve Bank, the effect of
this reserve requirement is to reduce the amount of the institution's
interest-earning assets.
Savings institutions also have the authority to borrow from the Federal
Reserve "discount window." Federal Reserve Board regulations, however, require
savings institutions to exhaust all FHLB sources before borrowing from a Federal
Reserve Bank.
TAXATION
Federal
The Corporation files on behalf of itself, First Financial, Port, and
their subsidiaries a calendar tax year consolidated federal income tax return.
Income and expense are reported on the accrual method of accounting.
Savings institutions, such as the Banks, are generally taxed in the same
manner as other corporations. Unlike other corporations, however, qualifying
savings institutions that meet certain definitional tests relating to the nature
of their supervision, income, assets and business operations are allowed to
establish a reserve for bad debts and each tax year are permitted to deduct
additions to that reserve on qualifying real property loans using the more
favorable of the following two alternative methods: (i) a method based on the
institution's actual loss experience (the "experience" method) or (ii) a method
based upon a specified percentage of the institution's taxable income (the
"percentage of taxable income method"). Qualifying real property loans are, in
general, loans secured by interests in improved real property. The addition to
the reserve for nonqualifying loans must be computed under the experience
method. In recent years, First Financial generally has computed additions to its
reserves for losses on qualifying loans using the experience method and Port has
used the percentage of taxable income method (PTI). It is anticipated that each
Bank will continue to use its respective methods in future years.
Under the PTI, a qualifying institution may deduct 8% of its taxable
income, subject to the limitations discussed below. The net effect of the PTI
deduction is that the effective federal income tax rate on income computed
without regard to actual bad debts would be 32.20%. Under the experience method,
a qualifying institution is permitted to deduct the amount needed to increase
the tax loss reserve to a prescribed level after charge-offs. The prescribed
level is calculated as the greater of an amount based on average loan losses
over the current and previous five years or the balance in the tax loss reserve
at December 31, 1987 (the base year). The experience method deduction is limited
to the extent the tax loan loss reserve exceeds the prescribed level.
The amount of bad debt deduction that a savings institution may claim with
respect to additions to its reserve for bad debts is subject to certain
limitations. First, the deduction may be eliminated entirely (regardless of the
method of computation) if at least 60% of the savings institution's assets do
not fall within certain designated categories. Second, the PTI deduction is
limited to the amount by which the sum of surplus and undivided profits at the
beginning of the tax year is less than 12% of total deposits and withdrawable
accounts at the close of such year. Third, the amount of the bad debt deduction
attributable to qualifying real property loans computed using PTI is permitted
only to the extent that the institution's reserve for losses on qualifying real
property loans at the close of the taxable year, taking into account the
addition to the reserve for that taxable year, does not exceed 6% of such loans
outstanding at that time. Finally, the amount of the PTI deduction is reduced,
but not below zero, by the amount of the addition to reserves for losses on
nonqualifying loans for the taxable year. The Banks do not expect that these
restrictions will operate to limit the amount of their otherwise available bad
debt deductions in the reasonably foreseeable future.
To the extent that the Banks make distributions to their stockholder that
are considered withdrawals from that excess bad debt reserve, the amounts
withdrawn will be included in the Banks' taxable income. The amount considered
to be withdrawn by such a distribution will be the amount of the distribution,
plus the amount necessary to pay the tax with respect to the withdrawal.
Dividends paid out of the Banks' current or accumulated earnings and profits as
calculated for federal income tax purposes, however, will not be considered to
result in withdrawals from their bad debt reserves. Distributions in excess of
the Banks' current and accumulated earnings and profits, distributions in
redemptions of stock, and distributions in partial or complete liquidation of
one of the Banks will be considered to result in withdrawals from that Banks'
bad debt reserves. At December 31, 1993, First Financial and Port had $69.9
million and $3.5 million, respectively, in accumulated federal income tax bad
debt reserves that would not be available for distribution to their stockholder
without the imposition of additional tax.
Depending on the composition of its items of income and expense, a savings
institution may be subject to the alternative minimum tax (AMT) to the extent
the AMT exceeds the regular tax liability. AMT is calculated by multiplying
alternative minimum taxable income (AMTI) by 20%. AMTI equals regular taxable
income increased by certain tax preferences, including depreciation deductions
in excess of that allowable for alternative minimum tax purposes, the amount of
the bad debt reserve deduction claimed in excess of the deduction based on the
experience method, and 75% of the excess of adjusted current earnings (ACE) over
AMTI. ACE is defined as AMTI adjusted for certain items such as accelerated tax
depreciation, tax exempt interest, the dividends received deduction, and other
tax preferences. Only 90% of AMTI may be reduced by net operating loss
carryovers and most alternative minimum tax paid may be used as a credit against
regular tax paid in future years.
State
The Corporation and the Banks are headquartered in Wisconsin and have
significant operations in Illinois. The State of Wisconsin imposes a corporate
franchise tax measured by the separate Wisconsin taxable income of each of the
members. The State of Illinois imposes a corporate income tax based on the
apportionment of Illinois taxable income by the entire group to their Illinois
activities. The current corporate tax rates imposed by Wisconsin and Illinois
are 7.9% and 7.3% respectively. First Financial also has an operating subsidiary
(FFII) located in Nevada which manages a portion of the Bank's investment
portfolio. The income of FFII is only subject to taxation in Nevada which
currently does not impose a corporate income or franchise tax other than a
nominal registration fee.
Examinations
The Internal Revenue Service (IRS) has examined the consolidated federal income
tax returns of the Corporation and the Banks through 1988. The IRS is currently
examining the consolidated returns of the Corporation and the Banks for 1989,
1990 and 1991. The separate Wisconsin state income tax returns of the members of
the group through 1986 are closed to examination by the Wisconsin Department of
Revenue (WDR) due to the expiration of the statute of limitations. However, the
WDR is currently examining earlier returns of a previously acquired institution
due to the utilization by First Financial of Wisconsin net operating losses
carried forward from that institution.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" is filed at Exhibit 13(b) hereto.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Corporation's consolidated financial statements are filed at Exhibit
13(a) hereto. Quarterly financial information is included as a part of
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" filed at Exhibit 13(b) hereto. Schedule 28(a) includes the required
schedule for "Guarantees of Securities of Other Issuers".
SIGNATURE
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
Exhibit Index
13 (A) First Financial Corporation Financial Statements
13 (B) First Financial Corporation Management Discussion & Analysis
24 Consent of Ernst & Young LLP
EXHIBIT 13 (A)
Consolidated Financial Statements
FIRST FINANCIAL CORPORATION
December 31, 1993
(Restated)
CONSOLIDATED BALANCE SHEETS
FIRST FINANCIAL CORPORATION
December 31,
1993 1992
---------- -------
(In Thousands)
ASSETS
Cash $ 63,241 $ 62,114
Federal funds sold 21,873 29,100
Interest-earning deposits 25,768 31,067
---------- ----------
CASH AND CASH EQUIVALENTS 110,882 122,281
Securities available-for-sale (at fair value):
Investment securities 84,487
Mortgage-related securities 347,137
Securities held-to-maturity:
Investment securities (fair value of
$143,448,000--1993 and $104,949,000--1992) 143,568 103,633
Mortgage-related securities (fair value of
$991,455,000--1993 and $1,314,270,000
--1992) 977,806 1,301,589
Loans receivable:
Held for sale 73,919 54,840
Held for investment 2,848,585 2,155,877
Foreclosed properties and repossessed
assets 6,817 14,198
Real estate held for investment or sale 16,810 17,101
Office properties and equipment 50,120 42,367
Intangible assets, less accumulated
amortization 31,392 23,278
Other assets 82,260 73,122
---------- ----------
$4,773,783 $3,908,286
========== ==========
LIABILITIES
Deposits $4,050,520 $3,206,112
Borrowings 438,598 461,948
Advance payments by borrowers for
taxes and insurance 13,805 11,521
Other liabilities 37,025 34,610
---------- ----------
TOTAL LIABILITIES 4,539,948 3,714,191
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: 23,586,827--1993;
23,266,414--1992 23,587 23,266
Additional paid-in capital 27,340 26,749
Net unrealized holding gain on securi-
ties available-for-sale 1,851
Retained earnings (substantially
restricted) 181,057 144,080
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 233,835 194,095
$4,773,783 $3,908,286
========== ==========
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
FIRST FINANCIAL CORPORATION
Year Ended December 31,
1993 1992 1991
-------- -------- ------
(In Thousands,
Except Per Share Amounts)
Interest income:
Mortgage loans $160,372 $131,206 $143,574
Mortgage-related securities 86,052 83,040 67,650
Other loans 81,272 73,148 75,204
Investments 12,427 9,477 13,653
-------- -------- --------
TOTAL INTEREST INCOME 340,123 296,871 300,081
Interest expense:
Deposits 169,741 174,042 199,768
Borrowings 19,993 7,854 3,981
-------- -------- --------
TOTAL INTEREST EXPENSE 189,734 181,896 203,749
-------- -------- --------
NET INTEREST INCOME 150,389 114,975 96,332
Provision for losses on loans 10,219 13,851 18,333
-------- -------- --------
NET INTEREST INCOME AFTER PROVISIONS
FOR LOSSES ON LOANS 140,170 101,124 77,999
Non-interest income:
Loan fees and service charges 8,879 8,566 8,223
Deposit account service fees 7,567 5,933 5,053
Insurance and brokerage sales commissions 6,276 5,666 5,681
Service fees on loans sold 5,233 4,395 6,920
Net gain on sale of mortgage loans 7,997 4,859 3,241
Net gain (loss) on sale of securities
available-for-sale (422) 41 2,319
Other 2,191 2,749 2,894
-------- -------- --------
TOTAL NON-INTEREST INCOME 37,721 32,209 34,331
-------- -------- --------
177,891 133,333 112,330
Non-interest expense:
Compensation, payroll taxes and other
employee benefits 43,765 37,177 34,047
Occupancy 7,534 5,973 6,558
Data processing 7,462 6,622 6,339
Federal deposit insurance premiums 7,341 6,968 6,276
Amortization of intangible assets 6,427 3,713 2,790
Loan expense 6,059 4,234 3,947
Furniture and equipment 5,256 3,902 3,754
Telephone and postage 5,068 4,668 4,683
Marketing 3,801 2,572 3,077
Net cost of operations of foreclosed
properties 3,501 4,772 2,703
Other 9,590 8,110 7,221
-------- -------- --------
TOTAL NON-INTEREST EXPENSE 105,804 88,711 81,395
-------- -------- --------
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE 72,087 44,622 30,935
Income taxes 26,872 16,190 12,409
-------- -------- --------
INCOME BEFORE CUMULATIVE EFFECT OF
A CHANGE IN ACCOUNTING PRINCIPLE 45,215 28,432 18,526
Cumulative effect on prior years of changing
the method of accounting for income taxes 5,600
-------- -------- --------
NET INCOME $ 45,215 $ 34,032 $ 18,526
======== ======== ========
CONSOLIDATED STATEMENTS OF INCOME--Continued
FIRST FINANCIAL CORPORATION
Year Ended December 31,
1993 1992 1991
-------- -------- ------
(In Thousands,
Except Per Share Amounts)
Earnings per share:
Primary:
Income before cumulative effect of a
change in accounting principle $ 1.88 $ 1.21 $ .80
Cumulative effect of accounting change .24
-------- -------- --------
NET INCOME $ 1.88 $ 1.45 $ .80
======== ======== ========
Fully Diluted:
Income before cumulative effect of a
change in accounting principle $ 1.86 $ 1.19 $ .79
Cumulative effect of accounting change .24
-------- -------- --------
NET INCOME $ 1.86 $ 1.43 $ .79
======== ======== ========
Dividends paid per share $ .35 $ .22 $ .16
======== ======== ========
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FIRST FINANCIAL CORPORATION
Net
Unrealized
Holding
Gain On
Additional Securities Total
Common Paid-In Available Retained Stockholders'
Stock Capital For Sale Earnings Equity
------- ---------- ----------- --------- -------------
(In Thousands)
Balances at January 1, 1991 $22,979 $26,295 $100,302 $149,576
Net income 18,526 18,526
Cash dividends ($.16 per share) (3,682) (3,682)
Exercise of stock options 59 56 115
------- ------- -------- --------
BALANCES AT DECEMBER 31, 1991 23,038 26,351 115,146 164,535
Net income 34,032 34,032
Cash dividends ($.22 per share) (5,098) (5,098)
Exercise of stock options 228 398 626
------- ------- -------- --------
BALANCES AT DECEMBER 31, 1992 23,266 26,749 144,080 194,095
Net income 45,215 45,215
Cash dividends ($.35 per share) (8,238) (8,238)
Net unrealized holding gain
recognized upon reclassifi-
cation of securities to
available-for-sale portfolio
at December 31, 1993, net of
deferred income taxes of
$1,842,000 $ 1,851 1,851
Exercise of stock options 321 591 912
------- ------- -------- --------- --------
BALANCES AT DECEMBER 31, 1993 $23,587 $27,340 $ 1,851 $181,057 $233,835
======= ======= ======== ======== ========
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FIRST FINANCIAL CORPORATION
Year Ended December 31,
1993 1992 1991
-------- -------- ------
(In Thousands)
OPERATING ACTIVITIES
Net income $ 45,215 $ 34,032 $ 18,526
Adjustments to reconcile net income
to net cash provided by operating
activities:
Cumulative effect of change in
accounting principle (5,600)
Decrease (increase) in accrued
interest on loans 3,678 (107) 1,989
Decrease in accrued interest on
deposits (1,670) (3,783) (2,053)
Mortgage loans originated for sale (599,126) (392,515) (157,571)
Proceeds from sales of mortgage
loans held for sale 648,282 495,573 299,278
Provision for depreciation 5,516 4,441 4,044
Provision for losses on loans 10,219 13,851 18,333
Provision for losses on real
estate and other assets 3,564 5,019 3,082
Amortization of cost in excess of
acquired businesses 554 592 628
Amortization of core deposit
intangibles 5,873 3,121 2,162
Amortization of purchased mortgage
servicing rights 1,283 2,566 1,637
Net gain on sales of loans and other
assets (7,772) (5,023) (6,027)
Other (7,523) (72) (7,618)
---------- ---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 108,093 152,095 176,410
INVESTING ACTIVITIES
Proceeds from sales of investment
securities available-for-sale 45,000 20,012
Proceeds from maturities of investment
securities held-to-maturity 60,886 213,480 395,650
Purchases of available-for-sale
investment securities (80,000)
Purchases of investment securities held-
to-maturity (126,409) (280,109) (311,736)
Proceeds from sales of mortgage-related
securities available-for-sale 81,287 853 156,825
Principal payments received on
mortgage-related securities 364,046 287,538 137,152
Purchases of mortgage-related securities (240,640) (696,206) (616,306)
Proceeds from sale of consumer loans 30,679
Principal collected on loans
receivable 575,093 394,627 339,764
Loans originated for portfolio (1,029,303) (740,708) (359,258)
Additions to office properties and
equipment (5,546) (6,538) (5,314)
Proceeds from sales of foreclosed
properties and repossessed assets 17,832 22,763 13,259
Proceeds from sales of real estate
held for investment 293 569 3,897
CONSOLIDATED STATEMENTS OF CASH FLOWS--Continued
FIRST FINANCIAL CORPORATION
Year Ended December 31,
1993 1992 1991
-------- -------- ------
(In Thousands)
INVESTING ACTIVITIES--Continued
Business acquisitions, net of cash and
cash equivalents acquired of $443,795,000--
1993; $316,401,000--1992
Loans receivable (316,305) (146)
Investment securities held-to-maturity (22,775)
Mortgage-related securities available-
for-sale (81,287)
Mortgage-related securities held-to-
maturity (145,098)
Office properties and equipment (8,445) (397)
Real estate held for investment (3,400)
Intangible assets (14,541) (6,603)
Deposits and related accrued interest 970,162 327,134
Borrowings 71,897
Other--net (9,813) (187)
---------- ---------- ---------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 106,334 (467,318) (215,388)
FINANCING ACTIVITIES
Net increase (decrease) in deposits (124,084) (52,884) 54,484
Increase (decrease) in advance payments by
borrowers for taxes and insurance 831 2,572 (1,294)
Decrease in short-term borrowings (12,000) (3,700)
Proceeds of borrowings 826,500 1,014,920 97,500
Repayments of borrowings (921,747) (618,215) (76,908)
Proceeds from exercise of stock options 912 626 115
Payments of cash dividends to stockholders (8,238) (5,098) (3,682)
---------- ---------- ----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (225,826) 329,921 66,515
---------- ---------- ----------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (11,399) 14,698 27,537
Cash and cash equivalents at beginning of year
122,281 107,583 80,046
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 110,882 $ 122,281 $ 107,583
========== ========== ==========
Supplemental disclosure of cash flow information:
Cash paid or credited to accounts during
period for:
Interest on deposits and borrowings $ 190,806 $ 184,310 $ 206,573
Income taxes 28,399 19,738 12,463
Non-cash investing activities:
Investment securities transferred to
available-for-sale portfolio (at amortized
cost) 48,338 20,012
Mortgage-related securities transferred
to available-for-sale portfolio (at
amortized cost) 345,468 812 154,506
Mortgage loans transferred to loans
held for sale portfolio 60,238 114,978 162,707
Loans receivable transferred to
foreclosed properties 7,350 14,963 9,710
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST FINANCIAL CORPORATION
December 31, 1993
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business: First Financial Corporation (the Corporation) provides a full range of
financial services to individual customers through its subsidiaries in Wisconsin
and Illinois. The Corporation is subject to competition from other financial
institutions. The Corporation and its subsidiaries also are subject to the
regulations of certain federal and state agencies and undergo periodic
examinations by those regulatory authorities.
Basis Of Financial Statement Presentation: The consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
and include the accounts of the Corporation and its wholly-owned subsidiaries,
First Financial Bank, FSB (First Financial) and First Financial - Port Savings
Bank, FSB (Port), collectively the Banks, and their subsidiaries, all of which
are wholly-owned. Significant intercompany accounts and transactions have been
eliminated. Investments in joint ventures, which are not material, are accounted
for on the equity method.
In preparing financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
date of the balance sheet and revenues and expenses for the period. Actual
results could differ significantly from those estimates. Material estimates that
are particularly susceptible to significant change in the near-term relate to
the determination of the allowance for loan losses, the valuation of real estate
acquired in connection with foreclosures or in satisfaction of loans as well as
the valuation of intangible assets. In connection with the determination of the
allowance for loan losses and real estate owned, management obtains independent
appraisals for significant properties.
Investment And Mortgage Related Securities Held-To-Maturity And
Available-For-Sale: Management determines the appropriate classification of debt
securities at the time of purchase and reevaluates such designation as of each
balance sheet date. Debt securities are classified as held-to-maturity when the
Corporation has the positive intent and ability to hold the securities to
maturity. Held-to-maturity securities are stated at amortized cost.
Debt securities not classified as held-to-maturity are classified as
available-for-sale. Available-for-sale securities are stated at fair value, with
the unrealized gains and losses, net of tax, reported as a separate component of
stockholders' equity as of December 31, 1993.
The amortized cost of debt securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity, or in the case of mortgage-related securities, over the
estimated life of the security. Such amortization is included in interest income
from the related security.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
Interest and dividends are included in interest income from the related
securities. Realized gains and losses, and declines in value judged to be
other-than-temporary are included in net securities gains (losses). The cost of
securities sold is based on the specific identification method.
Short-term securities include certificates of deposit, commercial paper,
banker's acceptances and similar instruments.
The Corporation considers its interest-earning deposits which have original
maturities of three months or less to be cash equivalents.
Interest, Fees, And Discounts On Loans: Interest on loans is recorded using the
accrual method. Allowances ($651,000--1993; $1,193,000--1992) are established
for uncollected interest on loans for which any payments are more than 90 days
past due.
Loan origination and commitment fees and certain direct loan origination costs
are being deferred and the net amounts amortized as an adjustment to the related
loan's yield. The Corporation is amortizing these amounts, using the level yield
method, over the contractual life of the related loans.
Unearned discounts on consumer, home improvement and manufactured housing loans
are amortized over the term of the loans using a method which approximates the
level yield method.
The discounts on loans of acquired businesses are being amortized using the
level yield method, adjusted for prepayments.
Loans Held For Sale: Loans held for sale are recorded at the lower of aggregate
cost or market value and generally consist of current production of certain
fixed-rate first mortgage loans. Fees received from the borrower are deferred
and recorded as an adjustment of the sales price.
Fees For Loans Serviced For Others: Servicing fees, on loans sold to and
serviced for others, are recognized when related loan payments are received. Any
premium or discount recorded at the time of sale (reflecting the present value
of the difference between the contractual interest rate of the loans sold and
the yield to the investor, adjusted for an estimated normal servicing fee) is
recognized in loan servicing income over the estimated lives of the related
loans using the level yield method adjusted periodically for prepayments.
Purchased servicing rights resulting from the valuation of loan servicing
acquired in business acquisitions or in the purchase of loan servicing rights
from other financial institutions are amortized over the estimated lives of the
loans using the level yield method, adjusted for prepayments and are shown as a
reduction of "Servicing Fees on Loans Sold" in the consolidated statements of
income.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
Foreclosed Properties And Repossessed Assets: Real estate and manufactured homes
which were acquired by foreclosure or by deed in lieu of foreclosure and other
repossessed assets are carried at the lower of cost or fair value. Costs
relating to the development and improvement of property are capitalized; holding
costs are charged to expense.
Allowances For Losses: Allowances for losses on loans, foreclosed properties and
repossessed assets are established when a loss is probable and can be reasonably
estimated. These allowances are provided based on past experience and on
prevailing market conditions. Management's evaluation of loss considers various
factors including, but not limited to, general economic conditions, loan
portfolio composition, prior loss experience, estimated sales price and holding
and selling costs.
A substantial portion of the Banks' loans are collateralized by real estate in
Wisconsin and Illinois. Accordingly, the ultimate collectibility of a
substantial portion of the Banks' loan portfolio and the recovery of a
substantial portion of the carrying amount of real estate owned are susceptible
to changes in market conditions in Wisconsin and Illinois.
Management believes that the allowances for losses on loans, foreclosed
properties and repossessed assets are adequate. While management uses available
information to recognize losses, future additions to the allowances may be
necessary based on changes in economic conditions. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Banks' allowances for losses. Such agencies may require
the Banks to recognize additions to the allowances based on their judgments of
information available to them at the time of their examination.
Real Estate Held For Investment Or Sale: Real estate held for investment or sale
includes land, buildings and equipment. These investments are carried at the
lower of initial cost plus capitalized development period interest and real
estate taxes, less accumulated depreciation, or estimated fair value.
Depreciation And Amortization: The cost of office properties and equipment and
real estate held for investment or sale is being depreciated principally by the
straight-line method over the estimated useful lives of the assets. The cost of
leasehold improvements is being amortized on the straight-line method over the
lesser of the term of the respective lease or estimated economic life.
Intangible Assets: The cost in excess of net assets of acquired businesses is
being amortized over twenty to twenty-five years using the straight-line and
accelerated methods. The cost in excess of net assets of acquired businesses,
aggregating $3,070,000 and $3,624,000 at December 31, 1993 and 1992,
respectively, is net of accumulated amortization.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
The premiums resulting from the valuation of core deposits acquired in business
combinations or in the purchase of branch offices are amortized over the
estimated useful life of seven to ten years using the level yield method. Core
deposit intangibles, aggregating $28,322,000 and $19,654,000 at December 31,
1993 and 1992, respectively, are net of accumulated amortization.
Income Taxes: The Corporation and its subsidiaries file a consolidated federal
income tax return and separate state income tax returns. Financial statement
provisions are made in the income tax expense accounts for deferred taxes
applicable to income and expense items reported in different periods than for
income tax purposes.
The Corporation accounts for income taxes using the liability method. Deferred
income tax assets and liabilities are adjusted regularly to amounts estimated to
be receivable or payable based on current tax law and the Corporation's tax
status. Consequently, tax expense in future years may be impacted by changes in
tax rates and tax return limitations.
Earnings Per Share: Primary and fully diluted earnings per share are 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, as adjusted for two-for-one stock splits in 1993 and 1992.
The Corporation's common equivalent shares consist entirely of stock options.
The resulting number of shares used in computing primary earnings per share in
1993, 1992 and 1991 is 24,112,000, 23,498,000 and 23,114,000, respectively. The
resulting number of shares used in computing fully diluted earnings per share in
1993, 1992 and 1991 is 24,369,000, 23,860,000 and 23,395,000, respectively.
Accounting Changes: Effective January 1, 1992, the Corporation changed its
method of accounting for income taxes from the deferred method to the liability
method required by Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes." As permitted under this statement, prior years'
financial statements were not restated. The cumulative effect of the adoption of
SFAS No. 109 as of January 1, 1992 was to increase net income by $5,600,000 or
$0.24 per share for 1992. The primary component of this credit resulted from the
recognition of a deferred tax asset in relation to the cumulative excess of book
loan loss provisions over certain limited amounts previously claimed as income
tax deductions, as defined by SFAS No. 109.
In May, 1993, the Financial Accounting Standards Board (FASB) issued SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities". As
permitted under the Statement, the Corporation has elected to adopt the
provisions of the new standard as of the end of its current fiscal year. In
accordance with SFAS No. 115, prior period financial statements have not been
restated to reflect the change in accounting principle. As a result of adopting
SFAS No. 115, the December 31, 1993 balance of stockholders' equity was
increased by $1,851,000 (net of $1,382,000 in deferred income taxes) to reflect
the net unrealized holding gain on securities classified as available-for-sale
previously carried at the lower of amortized cost or fair value.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
Pending Accounting Change: In May, 1993, the FASB issued SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan". SFAS No. 114 requires that
impaired loans be measured at the present value of expected future cash flows
discounted at the loan's original effective interest rate or, as a practical
expedient, at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. SFAS No. 114 is effective for
fiscal years beginning after December 15, 1994. Management does not believe that
the adoption of SFAS No. 114 will have a material impact on the Corporation's
financial condition or results of operations.
Reclassifications: Certain 1991 and 1992 accounts have been
reclassified to conform to the 1993 presentations.
NOTE B--BUSINESS COMBINATIONS
On January 4, 1993, First Financial acquired Westinghouse Federal Bank, FSB,
d/b/a United Federal Bank (United), of Galesburg, Illinois for an aggregate cash
purchase price of approximately $53.0 million. United was merged with and into
First Financial. The Corporation did not issue any stock as a result of this
transaction. The acquisition of United by First Financial has been accounted for
as a purchase with United's nineteen branch offices now operating as branches of
First Financial. The assets and liabilities of United were recorded at their
estimated fair value at the date of acquisition; results of operations have been
included in the 1993 consolidated Corporation income from January 1, 1993. Prior
to purchase accounting and postacquisition restructuring transactions, United
had total assets, deposits and stockholder's equity of $821,000,000,
$694,000,000 and $54,000,000, respectively.
Had the United acquisition been consummated on January 1, 1991, the
Corporation's operating results on a pro-forma basis before the cumulative
effect of a change in accounting principle, as adjusted for the effect of fair
market values used in the purchase method of accounting, would have been as
follows:
Year Ended December 31,
1992 1991
-------- ------
(In Thousands, Except
Per Share Amounts)
Total income $397,086 $412,903
Net income 40,112 26,325
Earnings per share:
Primary 1.74 1.14
Fully diluted 1.72 1.13
Also, in August, 1993, First Financial completed the assumption of deposits
(approximately $268,000,000) and the purchase of the branch facilities of the
four Quincy, Illinois-area branches of another thrift. The acquisition of these
offices, now operating as branches of First Financial, was accounted for as a
purchase and, consequently, the related accounts and results of operations are
included in the Corporation's consolidated financial statements from the date of
acquisition.
In two transactions during the first quarter of 1992, First Financial completed
the assumption of deposits (approximately $327,000,000) and the purchase of the
office facilities of ten Peoria, Illinois-area branches. Each transaction was
accounted for as a purchase with the acquired offices now operating as branch
offices of First Financial; consequently, the related accounts and results of
operations are included in the Corporation's consolidated financial statements
from the date of acquisition.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE C--INVESTMENT SECURITIES
The following is a summary of available-for-sale investment securities and
held-to-maturity investment securities.
Gross Unrealized
Amortized ---------------------- Estimated
Cost Gains Losses Fair Value
--------- ----- ------ ----------
(In Thousands)
At December 31, 1993:
Available-For-Sale:
U.S. Government and
federal agency
obligations $ 48,338 $1,608 $ 44 $ 49,902
Adjustable-rate mortgage
mutual fund 34,585 34,585
-------- ------ ----- --------
$ 82,923 $1,608 $ 44 $ 84,487
======== ====== ===== ========
Held-To-Maturity:
Corporate and bank notes
receivable (investment
grade) $ 49,053 $ 328 $ 60 $ 49,321
U.S. Government and
federal agency
obligations 90,062 101 516 89,647
State and municipal
obligations 4,453 27 4,480
-------- ------ ----- --------
$143,568 $ 456 $ 576 $143,448
======== ====== ===== ========
At December 31, 1992:
Held-to-maturity:
Corporate and bank notes
receivable (investment
grade) $ 52,020 $ 108 $194 $ 51,934
U.S. Government and
federal agency
obligations 40,828 1,411 11 42,228
Commercial paper 9,989 9,989
State and municipal
obligations 598 2 600
Certificates of deposit 198 198
-------- ------ ---- --------
$103,633 $1,521 $205 $104,949
======== ====== ==== ========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE C--INVESTMENT SECURITIES--Continued
The amortized cost and estimated fair value of investment securities at December
31, 1993, by contractual maturity, are shown below.
Available-For-Sale Held-To-Maturity
------------------------- ------------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
---------- ---------- ---------- ----------
(In Thousands)
Due in one year or less $ 64,718 $ 65,170 $ 58,328 $ 58,066
Due after one year through
five years 14,210 14,329 84,790 84,932
Due after five years through
ten years 350 350
Due after ten years 3,995 4,988 100 100
-------- -------- -------- --------
$ 82,923 $ 84,487 $143,568 $143,448
======== ======== ======== ========
During the years ended December 31, 1993 and 1992, investment securities
available-for-sale with a fair value at the date of sale of $45,000,000 and
$20,012,000, respectively, were sold. The gross realized losses on such sales
totaled $415,000 in 1993 and gross realized gains on such sales totaled $12,000
in 1992. There were no sales of available-for-sale investment securities in
1991.
Accrued interest on investment securities, including those securities classified
as federal funds sold, interest-earning deposits and short-term securities, was
$3,003,000 and $1,558,000 at December 31, 1993 and 1992, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE D--MORTGAGE-RELATED SECURITIES
The following is a summary of available-for-sale and held-tomaturity
mortgage-related securities.
Gross Unrealized
Amortized ---------------------- Estimated
Cost Gains Losses Fair Value
----------- ------ ------ ----------
(In Thousands)
At December 31, 1993:
Available-for-sale:
Adjustable-rate mortgage-
backed securities $ 315,572 $ 5,217 $3,765 $ 317,024
Adjustable-rate collater-
alized mortgage
obligations 29,896 217 30,113
---------- ------- ------ ----------
$ 345,468 $ 5,434 $3,765 $ 347,137
========== ======= ====== ==========
Held-to-maturity:
Mortgage-backed securities:
Adjustable-rate $ 802,007 $ 7,846 $ 815 $ 809,038
Fixed-rate 171,637 6,572 4 178,205
Collateralized mortgage
obligations:
Adjustable-rate 957 1 956
Fixed-rate 3,205 51 3,256
---------- ------- ------ ----------
$ 977,806 $14,469 $ 820 $ 991,455
========== ======= ====== ==========
At December 31, 1992:
Mortgage-backed securities:
Adjustable-rate $1,140,581 $ 7,847 $3,193 $1,145,235
Fixed-rate 161,008 8,030 3 169,035
---------- ------- ------ ----------
$1,301,589 $15,877 $3,196 $1,314,270
========== ======= ====== ==========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE D--MORTGAGE-RELATED SECURITIES--Continued
The following tables summarize aggregate mortgage-related securities by issuer.
Gross Unrealized
Amortized ----------------------- Estimated
Cost Gains Losses Fair Value
--------- ------- ------ ----------
(In Thousands)
At December 31, 1993:
Private issuers $1,165,421 $15,145 $4,580 $1,175,986
Federal Home Loan Mortgage
Corporation (FHLMC) 71,411 2,787 1 74,197
Federal National Mortgage
Association (FNMA) 68,133 1,201 2 69,332
Government National Mort-
gage Association (GNMA) 18,309 770 2 19,077
---------- ------- ------ ----------
$1,323,274 $19,903 $4,585 $1,338,592
========== ======= ====== ==========
At December 31, 1992:
Private issuers $1,168,888 $ 9,746 $3,193 $1,175,441
FHLMC 108,865 5,153 114,018
FNMA 13,377 341 13,718
GNMA 10,459 637 3 11,093
---------- ------- ------ ----------
$1,301,589 $15,877 $3,196 $1,314,270
========== ======= ====== ==========
At December 31, 1993, the private issuers category above includes securities
with an amortized cost of $1,080,000,000 which have been AA rated by an
independent rating agency. Other securities in the private issuer category are,
at a minimum, of investment grade quality.
During the years ended December 31, 1993, 1992 and 1991, mortgage-related
securities available-for-sale with a fair value at the date of sale of
$81,287,000, $853,000 and $156,825,000, respectively, were sold. The gross
realized gains on such sales totaled $14,000, $41,000 and $3,221,000 in 1993,
1992 and 1991, respectively. The gross realized losses on such sales totaled
$21,000 and $901,000, respectively, in 1993 and 1991. The 1993 sales related to
the restructuring of the mortgage-related securities portfolio acquired in the
United acquisition.
Accrued interest receivable on mortgage-related securities was $7,285,000 and
$8,637,000 at December 31, 1993 and 1992, respectively.
The Company 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
include shareholders' equity, revised to $233.8 million from $234.7 million, and
stockholders' equity per share, revised to $9.91 from $9.95.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE E--LOANS RECEIVABLE
Loans receivable held for investment consist of the following:
December 31,
1993 1992
---------- -------
(In Thousands)
Real estate mortgage loans:
Residential (including multi-family) $1,855,298 $1,301,582
Commercial and other 93,528 97,204
Construction - residential (including
multi-family) 58,132 73,998
Construction - commercial 460 4,661
---------- ----------
Total real estate mortgage loans 2,007,418 1,477,445
Consumer-related loans:
Credit card 209,414 178,436
Home equity 193,291 162,283
Education 167,385 163,261
Manufactured housing 165,017 133,195
Consumer 153,574 89,028
Other 111 3,298
---------- ----------
Total consumer-related loans 888,792 729,501
---------- ----------
Total loans before net items 2,896,210 2,206,946
Less:
Allowances for losses 23,266 17,067
Undisbursed loan proceeds 18,705 26,847
Deferred loan fees 2,591 2,357
Discount on loans of acquired businesses 1,979 3,546
Unearned discounts 1,084 1,252
---------- ----------
47,625 51,069
---------- ----------
$2,848,585 $2,155,877
========== ==========
The following table sets forth the composition of the commercial real estate
loan portfolio, including both conventional and construction loans, by
geographic location of the related collateral properties.
December 31,
1993 1992
----------------- -----------
Percent Percent
Of Of
Property Location Amount Total Amount Total
-------- -------- ------ --------
(Dollars in Thousands)
Wisconsin $ 67,257 71.6% $ 79,311 77.9%
Illinois 6,816 7.3 2,967 2.9
Minnesota 4,749 5.1 4,941 4.8
Georgia 4,170 4.4 4,229 4.2
Tennessee 2,874 3.0 2,924 2.9
Arizona 2,029 2.1 2,029 2.0
Texas 1,854 2.0 1,887 1.8
Other 4,239 4.5 3,577 3.5
-------- ----- -------- -----
$ 93,988 100.0% $101,865 100.0%
======== ===== ======== =====
Accrued interest on loans receivable was $16,895,000 and $15,491,000 at December
31, 1993 and 1992, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE F--FORECLOSED PROPERTIES AND REPOSSESSED ASSETS
Foreclosed properties and repossessed assets are summarized as follows:
December 31,
1993 1992
------ -----
(In Thousands)
Real estate owned $ 5,804 $11,527
Real estate judgments subject to redemption 2,236 2,761
Manufactured housing owned 115 256
Repossessed collateral assets 48 206
------- -------
8,203 14,750
Less allowance for losses 1,386 552
------- -------
$ 6,817 $14,198
======= =======
NOTE G--ALLOWANCE FOR LOSSES
A summary of the activity in the allowance for loan losses follows:
Year Ended December 31,
1993 1992 1991
------ ------ -----
(In Thousands)
Balance at beginning of year $17,067 $16,706 $15,644
Acquired bank's allowance 4,885
Provisions 10,219 13,851 18,333
Charge-offs (10,294) (14,727) (18,643)
Recoveries 1,389 1,237 1,372
------- ------- -------
BALANCE AT END OF YEAR $23,266 $17,067 $16,706
======= ======= =======
A summary of the activity in the allowance for losses on foreclosed properties
and repossessed assets follows. The provisions for losses are included in the
Consolidated Statements of Income in "Net Cost of Operations of Foreclosed
Properties."
Year Ended December 31,
1993 1992 1991
------ ------ -----
(In Thousands)
Balance at beginning of year $ 552 $ 738 $1,023
Provisions 3,519 4,794 2,947
Charge-offs (2,685) (4,980) (3,232)
------ ------ ------
BALANCE AT END OF YEAR $1,386 $ 552 $ 738
====== ====== ======
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE H--OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized as follows:
December 31,
1993 1992
-------- ------
(In Thousands)
Land and parking lot improvements $11,328 $ 8,796
Office buildings and improvements 44,785 36,510
Furniture and equipment 31,498 24,775
Leasehold improvements 2,171 1,660
------- -------
89,782 71,741
Less allowances for depreciation and
amortization 39,662 29,374
------- -------
$50,120 $42,367
======= =======
NOTE I--DEPOSITS
Deposits are summarized as follows:
December 31, 1993 December 31, 1992
Weighted Weighted
Average Average
Amount Rate Amount Rate
---------- ---------- -------- ---------
(Dollars in Thousands)
Checking accounts:
Interest-bearing $ 280,401 1.76% $ 174,969 2.29%
Non-interest-bearing 82,637 -- 49,759 --
---------- ----------
Total checking
accounts 363,038 1.36 224,728 1.78
Passbook accounts 812,138 2.76 751,811 3.74
Variable-rate insured
money market accounts 311,085 2.83 296,181 3.46
Certificate accounts:
Less than one year 400,478 3.64 321,034 4.19
One to two years 666,896 3.99 561,796 4.58
Two to three years 653,834 4.72 494,890 6.61
Three to four years 307,711 5.78 143,281 7.48
Four years or more 532,136 7.24 408,740 8.10
---------- ----------
Total certificates 2,561,055 5.01 1,929,741 6.00
---------- ----------
4,047,316 4.06% 3,202,461 4.94%
==== ====
Accrued interest 3,204 3,651
---------- ----------
$4,050,520 $3,206,112
========== ==========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE I--DEPOSITS--Continued
Aggregate annual maturities of certificate accounts at December 31, 1993 are as
follows (in thousands):
Matures During
Year Ended
December 31,
------------
1994 $1,488,542
1995 628,272
1996 245,467
1997 69,127
1998 123,484
Thereafter 6,163
----------
$2,561,055
==========
Interest expense on deposits consists of the following:
Year Ended December 31,
1993 1992 1991
---------- ---------- -------
(In Thousands)
Passbook $ 25,953 $ 27,154 $ 14,275
Checking 5,427 4,658 7,445
Variable-rate insured
money market 9,497 10,921 16,547
Certificates 128,864 131,309 161,501
-------- -------- --------
$169,741 $174,042 $199,768
======== ======== ========
NOTE J--BORROWINGS
At December 31, 1993, the Corporation has an unused line-of-credit in the amount
of $18,000,000. The line-of-credit is available to the Corporation for
working-capital purposes or for potential future acquisitions. Under the terms
of the line-of-credit, which is available through April, 1994, interest on
outstanding notes would be payable at the lender's then prevailing prime rate.
The line-of-credit agreement contains various covenants relative to the
operations of the Corporation and First Financial. Included among the covenants
are restrictions on levels of total borrowings and the interest-bearing
asset/liability ratio for the Corporation, on a consolidated basis, and a
requirement that First Financial maintain a minimum riskbased regulatory capital
of 8.0%. All of such covenants are met at December 31, 1993. In addition, the
Corporation has pledged its stock in First Financial as collateral for the
line-of-credit.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE J--BORROWINGS-Continued
Borrowings are comprised of the following:
December 31,
1993 1992
---------------------------- ----------------------
Weighted Weighted
Average Average
Maturity Amount Rate Amount Rate
---------- -------- ---------- -------- ----------
(Dollars in Thousands)
Federal Home Loan Bank: On Demand $140,500 3.24% $237,000 3.73%
1993 60,000 4.58
1994 60,053 5.18 50,000 4.78
1995 150,000 4.61 50,000 5.38
1996 21,228 6.48
1997 31 7.00 31 7.00
2000 162 7.00 162 7.00
Subordinated Notes 1999 54,997 8.51 55,000 8.51
Collateralized mortgage
obligations 2003 5,217 8.43
Industrial Development
Revenue Bonds: 1994 2,585 10.11
2021 6,410 7.04 7,170 7.03
-------- --------
$438,598 4.91% $461,948 4.87%
======== ===== ======== =====
Aggregate annual payments on borrowings at December 31, 1993 are, as follows (in
thousands):
Matures During
Year Ended
December 31,
--------------
1994 $201,044
1995 150,491
1996 20,536
1997 136
1998 115
Thereafter through 2021 61,059
--------
433,381
Collateralized Mortgage
Obligations 5,217
--------
$438,598
========
First Financial is required to maintain unencumbered first mortgage loans in its
portfolio aggregating at least 167% of the amount of outstanding advances from
the Federal Home Loan Bank as collateral. In addition, these borrowings are
collateralized by Federal Home Loan Bank stock of $29,832,000 at December 31,
1993, which is included in "Other Assets" in the consolidated balance sheets.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE J--BORROWINGS--Continued
Subordinated notes (the Notes) are payable at maturity on November 1, 1999.
Interest at the rate of 8% per annum is payable monthly. The Notes are
redeemable at par plus accrued interest on or after November 1, 1995 in whole or
in part at the option of the Corporation. Under the terms of the indenture
relating to the Notes, the ability of the Corporation to incur additional
indebtedness, pay cash dividends or make other capital distributions is limited
under certain circumstances. The indenture does not limit the ability of the
Corporation's subsidiaries to incur indebtedness (except for indebtedness that
is guaranteed by, or secured by, property of the Corporation). Unamortized
issuance costs relating to the Notes totaled $1,625,000 and $1,903,000 at
December 31, 1993, and 1992, respectively, which is being amortized using the
interest method.
UFS Capital Corporation, the Corporation's wholly-owned finance subsidiary, has
issued the collateralized mortgage obligations. Principal repayments are
scheduled in varying amounts through January, 2003. The obligations are
collateralized by mortgage-backed securities with a carrying value of $5,640,000
and a fair value of $5,693,000 at December 31, 1993.
Industrial Development Revenue Bonds are payable in ten annual installments
ranging from $90,000 to $150,000 with additional payments of $1,910,000 and
$3,320,000 due October 1, 2012 and 2021, respectively. Interest is payable
semi-annually. The bonds were issued to refinance an apartment project which was
sold in 1992. The bonds are collateralized by mortgage-backed securities with a
carrying value of $9,278,000 at December 31, 1993. First Financial has a loan
receivable from the buyer of $5,947,000 at December 31, 1993, which is secured
by a first mortgage on the apartment project.
NOTE K--INCOME TAXES
The provision for income taxes, for the years ended December 31, consists of the
following:
Deferred
Liability Method Method
------------------------------ --------
1993 1992 1991
----------- ---------- --------
(In Thousands)
Current:
Federal $26,029 $17,492 $12,624
State 3,043 692 2,404
------- ------- -------
29,072 18,184 15,028
Deferred (credit):
Federal (1,875) (2,005) (2,615)
State (325) 11 (4)
------- ------- -------
(2,200) (1,994) (2,619)
------- ------- -------
$26,872 $16,190 $12,409
======= ======= =======
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE K--INCOME TAXES--Continued
The provision for income taxes, for the years ended December 31, differs from
that computed at the federal statutory corporate tax rate as follows:
Deferred
Liability Method Method
------------------------------ ---------
1993 1992 1991
----------- ---------- -------
(In Thousands)
Income before income taxes and
cumulative effect of a change
in accounting principle $72,087 $44,622 $30,935
======= ======= =======
Tax at federal statutory rate (35%-
1993 and 34%-1992 and 1991) $25,230 $15,171 $10,518
Add (deduct) effect of:
State income taxes (net of
federal income taxes) 2,061 329 1,625
Goodwill amortization 301 291 213
Other (720) 399 53
------- ------- -------
INCOME TAX PROVISION $26,872 $16,190 $12,409
======= ======= =======
The components of the provision (credit) for deferred income taxes, for the
years ended December 31, and the deferred tax asset (liability) as of December
31, are as follows:
Provision (Credit) For
Deferred Income Taxes Deferred Tax
--------------------------------------- --------------------
Deferred Asset (Liability)
Liability Method Method December 31,
-------------------- --------- -------------------
1993 1992 1991 1993 1992
----- ----- ----- ----- -----
(In Thousands)
Deferred loan fees and other
loan yield adjustments $ (737) $(2,088) $(1,077) $ 3,255 $ 2,268
Excess tax depreciation 67 (172) (312) (1,575) (1,535)
Loan loss reserves (1,164) (673) (341) 8,737 7,355
Deferred compensation (154) (178) (237) 1,919 1,725
Excess book core deposit
intangible amortization (367) (240) 2,294 1,883
FHL Bank stock dividend (3) 462 398 (868) (851)
Internal Revenue Service
examination (1,350)
Market valuation adjustments (1,823)
Tax net operating loss
carryforwards 1,553 1,436
Other 431 (58) 300 (103) 251
------- ------- ------- -------- -------
(1,427) (2,947) (2,619) 13,389 12,532
Valuation allowance for
deferred tax assets (273) 953 (3,547) (3,333)
------- ------- ------- -------- -------
$(2,200) $(1,994) $(2,619) $ 9,842 $ 9,199
======= ======= ======= ======== =======
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE K--INCOME TAXES--Continued
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
For financial reporting purposes, a valuation allowance has been recognized to
offset deferred tax assets related to state net operating loss carryforwards of
subsidiaries, core deposit intangibles and other timing differences. When
realized, the tax benefit for these items will be used to reduce current tax
expense for that period.
Previously the Banks qualified under provisions of the Internal Revenue Code
which permitted as a deduction from taxable income allowable bad debt deductions
which significantly exceeded actual experience and the financial statement loan
loss provisions. A deferred tax liability was not required on these excess tax
bad debt reserves. At December 31, 1993,the Banks' tax bad debt reserves are
approximately $73,395,000. Upon the adoption of SFAS No. 109 as of January 1,
1992, the Banks were required to establish a deferred tax liability for the
excess of its tax bad debt reserves over the balance at the close of the base
year. The amount of the base year reserves is considered to meet the indefinite
reversal criteria of Accounting Principle Board Opinion No. 23, "Accounting for
Income Taxes-Special Area," and accordingly is not subject to deferred taxes.
The Banks' base year tax bad debt reserves are approximately $70,104,000. Income
taxes would be imposed at the then applicable rates if the Banks were to use
these reserves for any purpose other than to absorb bad debt losses.
NOTE L--STOCKHOLDERS' EQUITY
The Board of Directors declared a two-for-one stock split of the Corporation's
common stock to stockholders of record on March 13, 1992,payable on April 16,
1992. This stock split was effected in the form of a 100% stock dividend by the
distribution of shares. The par value of the common stock remained at $1.00. On
February 17, 1993, the Board of Directors declared an additional two-for-one
stock split payable on March 5, 1993 to stockholders of record on February 24,
1993. All numbers of shares and per share amounts included in the financial
statements and notes thereto have been adjusted to reflect these distributions.
The Board of Directors of the Corporation is authorized to issue preferred stock
in series and to establish the voting powers, other special rights of the shares
of each such series and the qualifications and restrictions thereof. Preferred
stock may rank prior to the common stock as to dividend rights, liquidation
preferences or both, and may have full or limited voting rights.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE L--STOCKHOLDERS' EQUITY--Continued
Under Wisconsin state law, preferred stockholders would be entitled to vote as a
separate class or series in certain circumstances, including any amendment which
would adversely change the specific terms of such series of stock or which would
create or enlarge any class or series ranking prior thereto in rights and
preferences. No preferred stock has been issued.
Deposits in the Banks are insured to the maximum allowable amounts by the
Savings Association Insurance Fund (SAIF) as administered by the Federal Deposit
Insurance Corporation (FDIC). As SAIF-insured institutions, the Banks are
required to meet tangible, core and risk-based regulatory capital requirements
as determined by the Office of Thrift Supervision (OTS). Tangible capital
generally consists of stockholder's equity minus certain intangible assets. Core
capital generally consists of stockholder's equity. The risk-based capital
requirements presently address credit risk related to both recorded assets and
off-balance sheet commitments and obligations.
The Banks' various OTS regulatory capital measurements at December 31, 1993 are
set forth below.
First
Financial Port
---------- ------
(In Thousands)
Bank's stockholder's equity $275,288 $7,400
Less:
Core deposit intangibles (28,322)
Goodwill (3,070)
Investment in subsidiaries
and activities not permitted for
national banks (1,792) (59)
Purchased mortgage servicing rights
adjustment (44)
Other (277)
-------- -------
TANGIBLE CAPITAL 241,783 7,341
Add: qualifying intangibles 28,322
-------- -------
CORE CAPITAL 270,105 7,341
Add: qualifying general allowances for
loan losses 19,674 524
-------- ------
RISK-BASED CAPITAL $289,779 $7,865
======== ======
The following table compares the Banks' regulatory capital with OTS capital
requirements at December 31, 1993:
Actual Required Actual Required
Amount Amount Excess Ratio Ratio Excess
------- --------- ------ ------- -------- -------
(Dollars in Thousands)
First Financial:
Tangible capital $241,783 $ 69,868 $171,914 5.19% 1.50% 3.69%
Core capital 270,105 140,585 129,520 5.76 3.00 2.76
Risk-based capital 289,779 185,100 104,679 12.52 8.00 4.52
Port:
Tangible capital $ 7,341 $ 1,494 $ 5,847 7.38% 1.50% 5.88%
Core capital 7,341 2,987 4,354 7.38 3.00 4.38
Risk-based capital 7,865 4,325 3,540 14.55 8.00 6.55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE L--STOCKHOLDERS' EQUITY--Continued
The OTS has adopted a final rule which would add an interest-rate risk component
to the OTS risk-based capital requirement effective July 1, 1994. The OTS has
adopted another final rule, effective March 4, 1994, disallowing any new core
deposit intangibles, acquired after the rule's effective date, from counting as
regulatory capital. Core deposit intangibles acquired prior to the effective
date have been grandfathered for purposes of this rule. The OTS also has
proposed to increase the 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.
Under the terms of the Federal Deposit Insurance Corporation Improvement Act of
1991 (FDICIA), the Banks are further subject 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,
additional restrictions on dividends and capital distributions. As of December
31, 1993, management believes that both Banks had capital in excess of the
requirements to be "well capitalized" institutions under the PCA provisions of
FDICIA.
Applicable rules and regulations of the OTS impose limitations on dividends by
the Banks. Within those limitations, certain "safe harbor" dividends are
permitted, subject to providing the OTS at least 30 days' advance notice. The
safe harbor amount is based upon an institution's regulatory capital level.
Thrift institutions which have capital in excess of all fully phased-in capital
requirements before and after the proposed dividend are permitted to make
capital distributions during any calendar year up to the greater of (i) 100% of
net income to date during the calendar year, plus one-half of the surplus over
such institution's fully-phased-in capital requirements at the beginning of the
calendar year, or (ii) 75% of net income over the most recent four-quarter
period. Additional restrictions would apply to an institution which does not
meet its fully phased-in capital requirement before or after a proposed
dividend. In addition, as a result of the PCA provisions of FDICIA, the OTS has
indicated that it intends to review existing regulations on dividends to
determine whether amendments are necessary based on such provisions. In the
interim, the OTS has indicated that it intends to determine the permissibility
of dividends consistent with the PCA provisions of FDICIA.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE M--EMPLOYEE BENEFIT PLANS
The Corporation has a stock option plan under which shares of common stock are
reserved for the grant of both incentive and non-incentive stock options to
directors, officers and employees. The plan provides that option prices will not
be less than the fair market value of the stock at the grant date. The date on
which the options are first exercisable, generally two or more years from the
grant date, is determined by the Stock Option Committee of the Board of
Directors and expire no later than ten years from the grant date.
A summary of stock option activity follows:
Number Of Option Price
Shares Per Share
--------- ---------------
Balance January 1, 1991 928,388 $ .85 - $ 4.19
Exercised (59,800) .85 - 3.69
Cancelled (21,560) 1.68 - 3.09
--------- ---------------
Balance December 31, 1991 847,028 .85 - 4.19
Granted 1,394,000 6.38 - 9.44
Exercised (230,876) .85 - 4.19
Cancelled (5,000) 3.09 - 8.00
--------- ---------------
Balance December 31, 1992 2,005,152 1.68 - 9.44
Granted 40,500 13.63 - 15.00
Exercised (348,741) 1.70 - 9.44
Cancelled (8,000) 6.38 - 9.44
--------- ---------------
BALANCE DECEMBER 31, 1993 1,688,911 $ 1.68 - $15.00
========= ===============
Options for 322,411 shares and 603,100 shares were exercisable at December 31,
1993 and 1992, respectively. At December 31, 1993, options for 784,500 shares
were available for future grant.
The Corporation sponsors a defined-contribution profit sharing plan which covers
all full time Wisconsin-based employees who have completed one year of service
and are at least twenty-one years old. Corporate contributions are
discretionary. Expense for this plan for 1993, 1992 and 1991 was $3,666,000,
$2,950,000 and $1,650,000, respectively.
The Corporation sponsors a supplemental executive retirement plan for certain
executive officers, which is funded through life insurance and provides
additional benefits at retirement. At December 31, 1993, the projected future
obligation under this plan amounted to $2,465,000, which is being accrued
through a combination of annual amortization of prior service costs plus current
annual provisions for additional service costs and interest. Expense for this
plan was $434,000 and $166,000 for 1993 and 1992, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE M--EMPLOYEE BENEFIT PLANS--Continued
The Corporation sponsors an unfunded defined-benefit retirement plan for all
outside directors. At December 31, 1993, the projected future obligation under
this plan totaled $1,271,000, which is being accrued through a combination of
annual amortization of prior service costs plus current annual provisions for
additional service costs and interest. Expense for this plan was $122,000,
$280,000 and $273,000 in 1993, 1992 and 1991, respectively.
The Corporation also sponsors a defined-benefit pension plan covering
substantially all of its Illinois-based employees (the Illinois Plan). Benefits
are based upon a formula using years of service and the participant's
compensation during the term of employment.
The following tables set forth the Illinois Plan's funded status and amounts
recognized in the consolidated financial statements:
December 31,
1993 1992
-------- ------
(In Thousands)
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including
vested benefits of $2,289,000--1993 and
$1,766,000--1992 $ 2,373 $ 1,813
======= ========
Plan assets at fair value, primarily fixed
income securities $ 3,939 $ 3,907
Projected benefit obligation 2,516 2,107
------- --------
Plan assets in excess of projected
benefit obligation 1,423 1,800
Unrecognized net gain from past experience
different from that assumed and effects
of changes in assumptions 620 378
Unrecognized net transition asset (1,432) (1,560)
------- --------
Prepaid pension cost included in other assets $ 611 $ 618
======= ========
Net pension benefits for the Illinois Plan include the following components:
Year Ended December 31,
1993 1992 1991
-------- -------- ------
(In Thousands)
Service cost--benefits earned during the
period $ 259 $ 87 $ 90
Interest cost on projected benefit
obligation 197 165 149
Actual return on plan assets (327) (302) (312)
Net amortization and deferral (122) (129) (111)
----- ------ -----
Net periodic pension expense (benefit) $ 7 $ (179) $(184)
===== ====== =====
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE M--EMPLOYEE BENEFIT PLANS--Continued
The principal actuarial assumptions used to develop the net pension benefit for
the Illinois Plan were as follows:
Year Ended December 31,
1993 1992 1991
-------- -------- ------
Weighted average discount rate 7.25% 8.00% 8.00%
Rate of increase in future compensation 5.00 6.00 6.00
Expected long-term rate of return on plan assets 7.75 8.00 8.00
The Corporation does not, as a policy, offer post-retirement benefits other than
profit sharing, pensions, and certain supplemental retirement benefits noted
above.
NOTE N--FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Corporation is a party to financial instruments with offbalance-sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and financial
guarantees and involve, to varying degrees, elements of credit and interest-rate
risk in excess of the amount recognized in the consolidated balance sheets. The
contract amounts of those instruments reflect the extent of involvement First
Financial has in particular classes of financial instruments.
The Corporation's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
financial guarantees written is represented by the contractual amount of those
instruments. The Corporation uses the same credit policies in making commitments
and conditional obligations as it does for on-balance-sheet instruments.
Financial instruments whose contract amounts represent credit risk are as
follows:
December 31,
1993 1992
-------- ------
(In Thousands)
Commitments to extend credit:
Fixed rate (6.25% to 8.75% at
December 31, 1993) $ 52,079 $ 15,630
Adjustable rate 10,259 6,834
Commitments to purchase adjustable-rate
mortgage-related securities 87,753 25,000
Unused lines of credit:
Credit cards 702,364 550,668
Home equity 250,344 190,623
Loans sold with recourse 59,000 119,000
Financial guarantees written 10,951 18,346
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE N--FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK -- Continued
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. As some such commitments expire without being drawn
upon, the total commitment amounts do not necessarily represent future cash
requirements. The Corporation evaluates each customer's creditworthiness on a
case-by-case basis. With the exception of credit card lines-of-credit, the
Corporation generally extends credit only on a secured basis. Collateral
obtained varies but consists primarily of one- to four-family residences and
income-producing commercial properties.
Commitments to extend credit on a fixed-rate basis expose the Corporation to a
certain amount of interest-rate risk if market rates of interest increase
substantially during the commitment period. Similar risks exist relative to
loans classified as held for sale, which totaled $73,919,000 at December 31,
1993. This exposure, however, is mitigated by the hedge of firm commitments to
sell the majority of these loans. Commitments outstanding to sell mortgage loans
at December 31, 1993 amount to $111,500,000.
Financial guarantees represent agreements whereby, for an annual fee, certain of
the Banks' mortgage loans, investments and mortgage-backed securities are
pledged as collateral for Industrial Development Revenue Bonds which were issued
by municipalities to finance commercial or multi-family real estate owned by
third parties. In the event the third party borrowers default on principal or
interest payments on the bonds, the Banks are required to either pay the amount
in default or acquire the then outstanding bonds. First Financial and Port may
foreclose on the underlying real estate to recover amounts in default.
Management has considered these agreements in its review of the adequacy of the
allowance for losses. At December 31, 1993, certain mortgage-related securities
and investment securities with a carrying value of approximately $5,394,000 were
pledged as collateral for bonds in the aggregate of $3,341,000. Additional bond
issues totaling $7,610,000 are supported by letters of credit issued by First
Financial in lieu of specific collateral. The bond agreements have expiration
dates through 2008.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE O--FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires
disclosure of fair value information about financial instruments, whether or not
recognized in the balance sheet, for which it is practicable to estimate that
value. In cases where quoted market prices are not available, fair values are
based on estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. In that regard, the derived
fair value estimates cannot be substantiated by comparison to independent
markets and, in many cases, could not be realized in immediate settlement of the
instrument. SFAS No. 107 excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not necessarily represent the
underlying value of the Corporation. The Corporation does not routinely measure
the market value of financial instruments because such measurements represent
point-in-time estimates of value. It is generally not the intent of the
Corporation to liquidate and therefore realize the difference between market
value and carrying value and even if it were, there is no assurance that the
estimated market values could be realized. Thus, the information presented is
not particularly relevant to predicting the Corporation's future earnings or
cash flows.
The following methods and assumptions were used by the Corporation in estimating
its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance
sheet for cash and short-term instruments approximate those assets' fair
values.
Accrued interest income and expense: Accrued interest income and expense
are carried at the respective book value.
Investment and mortgage-related securities: Fair values for investment and
mortgage-related securities are based on quoted market prices, where
available. If quoted market prices are not available, fair values are based
on quoted market prices of comparable instruments.
Loans receivable: For variable-rate mortgage loans that reprice frequently
and with no significant change in credit risk, fair values are based on
carrying values. The fair values for residential mortgage loans are based
on quoted market prices of similar loans sold in conjunction with
securitization transactions, adjusted for differences in loan
characteristics. The fair values for commercial real estate loans, rental
property mortgage loans and consumer and other loans are estimated using
discounted cash flow analyses and using interest rates currently being
offered for loans with similar terms to borrowers of similar credit
quality.
Mortgage servicing rights: Due to the lack of practicability, the fair
value of mortgage loan servicing rights has not been determined and is not
presented below. These rights, which consist of the Corporation's
contractual right to service loans for others, represent a distinct income
producing intangible asset that could be realized by selling those rights
to another institution. The value of those rights, except to the extent
that purchased mortgage servicing rights exist, is not reflected in the
Corporation's consolidated balance sheets.
Federal Home Loan Bank stock: Federal Home Loan Bank stock is carried at
cost which is its redeemable value since the market for this stock is
limited.
Deposits: The fair values disclosed for interest-bearing and
non-interest-bearing checking accounts, passbook accounts and money market
accounts are, by definition, equal to the amount payable on demand at the
reporting date (i.e., their carrying amounts). The fair values of
fixed-rate certificates of deposit are estimated using a discounted cash
flow calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly maturities of the
outstanding certificates of deposit.
Borrowings: The fair values of the Corporation's long-term borrowings are
estimated using discounted cash flow analyses, based on the Corporation's
current incremental borrowing rates for similar types of borrowing
arrangements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE O--FAIR VALUES OF FINANCIAL INSTRUMENTS--Continued
Off-balance-sheet instruments: Fair values for the Corporation's
off-balance-sheet instruments (lending commitments and unused lines of
credit) are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements, the
counterparties' credit standing and discounted cash flow analyses. The fair
value of these off-balance-sheet items approximates the recorded amounts of
the related fees and is not material at December 31, 1993 and 1992.
The carrying amounts and fair values of the Corporation's financial instruments
consisted of the following.
December 31,
1993 1992
-------------------- -------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ----------- ----------
(In Thousands)
Cash equivalents $ 47,641 $ 47,641 $ 60,167 $ 60,167
Investment securities available-
for-sale $ 84,487 $ 84,487
Investment securities held-to-
maturity $ 143,568 $ 143,448 $ 103,633 $ 104,949
Federal Home Loan Bank stock $ 29,832 $ 29,832 $ 22,244 $ 22,244
Mortgage-related securities
available-for-sale $ 347,137 $ 347,137
Mortgage-related securities
held-to-maturity $ 977,806 $ 991,455 $1,301,589 $1,314,270
Loans held for sale $ 73,919 $ 74,567 $ 54,840 $ 55,280
Loans receivable:
Real estate $1,973,172 $1,997,107 $1,436,947 $1,453,626
Credit cards 202,912 202,912 174,845 174,845
Home equity 192,862 192,862 163,397 163,397
Education 167,333 167,333 160,298 160,298
Manufactured housing 160,349 177,230 128,544 141,183
Consumer and other 151,957 152,177 91,846 93,321
---------- ---------- ---------- ----------
$2,848,585 $2,889,621 $2,155,877 $2,186,670
========== ========== ========== ==========
Accrued interest receivable $ 27,183 $ 27,183 $ 25,686 $ 25,686
Deposits:
Checking $ 363,038 $ 363,038 $ 224,728 $ 224,728
Passbooks 812,138 812,138 751,811 751,811
Money market 311,085 311,085 296,181 296,181
Certificates 2,561,055 2,587,730 1,929,741 1,959,075
---------- ---------- ---------- ----------
$4,047,316 $4,073,991 $3,202,461 $3,231,795
========== ========== ========== ==========
Borrowings:
Federal Home Loan Bank
advances $ 371,974 $ 373,317 $ 397,193 $ 397,251
Collateralized mortgage obli-
gations 5,217 5,296
Subordinated notes 54,997 55,547 55,000 55,000
Industrial development revenue
bonds 6,410 6,776 9,755 10,008
---------- ---------- ---------- ----------
$ 438,598 $ 440,936 $ 461,948 $ 462,259
========== ========== ========== ==========
Accrued interest payable $ 4,535 $ 4,535 $ 5,285 $ 5,285
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE P--MORTGAGE BANKING ACTIVITIES
Loans serviced for investors amounted to $1,302,000,000, $1,311,000,000 and
$1,556,000,000 at December 31, 1993, 1992 and 1991, respectively. These loans
are not reflected in the consolidated financial statements. The Banks originate
mortgage loans which, depending upon whether the loans meet the Banks'
investment objectives, may be sold in the secondary mortgage market or to other
private investors. All loans are currently sold on a nonrecourse basis and the
servicing of these loans is retained by the Banks. At December 31, 1993, 1992
and 1991, $59,000,000, $119,000,000 and $150,000,000, respectively, of the
serviced loans were sold with recourse. Of these recourse loans, approximately
$47,000,000, $104,000,000 and $128,000,000 were federally-insured or
federally-guaranteed at December 31, 1993, 1992 and 1991, respectively. In
addition, management has considered the remaining uninsured or non-guaranteed
balance in the determination of the adequacy of the allowance for losses.
Direct origination and servicing costs for mortgage banking activities cannot be
presented as these operations are integrated with and not separable from the
origination and servicing of portfolio loans, and, as a result, cannot be
accurately estimated.
Mortgage banking activities are summarized as follows:
At Or For The Year Ended
December 31,
1993 1992 1991
-------- -------- ------
(In Thousands)
Consolidated balance sheet information:
Mortgage loans held for sale $ 73,919 $ 54,840 $ 38,061
Unamortized purchased mortgage
servicing rights and capitalized
excess servicing (included in
"Other Assets") 473 1,756 4,322
Consolidated statement of income information:
Service fees on loans
sold (gross) $ 6,621 $ 7,898 $ 9,830
Amortization of purchased
mortgage servicing rights
and capitalized excess
servicing (1,388) (3,503) (2,910)
-------- -------- --------
Service fees on loans
sold (net) $ 5,233 $ 4,395 $ 6,920
======== ======== ========
Gain on sales of mortgage loans
held for sale $ 7,997 $ 4,859 $ 3,241
Consolidated statement of cash flow information:
Mortgage loans originated for
sale $599,126 $392,515 $157,571
Mortgage loans transferred to
held for sale portfolio 60,238 114,978 162,707
Sales of mortgage loans held for
sale 648,282 495,573 299,278
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE Q--LITIGATION
The Banks are involved in certain lawsuits in the course of their general
lending business and other operations. The Corporation believes there are sound
defenses against the claims asserted therein and is vigorously defending these
actions. Management, after review with its legal counsel, is of the opinion that
the ultimate disposition of its litigation will not have a material effect on
the Corporation's financial condition.
NOTE R--PENDING BUSINESS COMBINATION
On October 13, 1993, the Corporation entered into a definitive agreement to
acquire NorthLand Bank of Wisconsin, SSB (NorthLand), of Ashland, Wisconsin,
through an exchange of stock valued in the aggregate in the range of 130 to 135
percent of NorthLand's defined tangible stockholders' equity at closing, subject
to certain adjustments. Upon closing, NorthLand will be merged into First
Financial. The acquisition is subject to approval by the shareholders of
NorthLand. This transaction is expected to close during the first quarter of
1994 and will be accounted for as a pooling-of-interests. As of December 31,
1993, NorthLand had total assets and shareholders' equity of $127.4 million
(unaudited) and $11.4 million (unaudited), respectively.
NOTE S--FIRST FINANCIAL CORPORATION PARENT COMPANY ONLY
FINANCIAL INFORMATION
BALANCE SHEETS
December 31,
1993 1992
-------- ------
(In Thousands)
ASSETS
Cash and cash equivalents $ 4,878 $ 35,161
Investment in subsidiaries 282,983 212,755
Prepaid expenses and other assets 2,471 2,217
-------- --------
$290,332 $250,133
======== ========
LIABILITIES
Subordinated notes $ 54,997 $ 55,000
Other liabilities 650 1,038
-------- --------
TOTAL LIABILITIES 55,647 56,038
STOCKHOLDERS' EQUITY
Common stock 23,587 23,266
Additional paid-in capital 27,340 26,749
Retained earnings 183,758 144,080
-------- --------
TOTAL STOCKHOLDERS' EQUITY 234,685 194,095
-------- --------
$290,332 $250,133
======== ========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE S--FIRST FINANCIAL CORPORATION PARENT COMPANY ONLY
FINANCIAL INFORMATION--Continued
STATEMENTS OF INCOME
Year Ended December 31,
1993 1992 1991
-------- -------- ------
(In Thousands)
Interest income from subsidiaries $ 255 $ 758 $ 248
Interest expense on borrowings 4,736 1,696 552
------- ------- -------
NET INTEREST EXPENSE (4,481) (938) (304)
Equity in net income from subsidiaries 49,027 34,841 18,774
------- ------- -------
44,546 33,903 18,470
Management fees paid to subsidiaries 735
Other expenses 482 288 73
------- ------- -------
INCOME BEFORE INCOME TAXES 43,329 33,615 18,397
Income tax credits (1,886) (417) (129)
------- ------- -------
NET INCOME $45,215 $34,032 $18,526
======= ======= =======
STATEMENTS OF CASH FLOWS
Year Ended December 31,
1993 1992 1991
-------- -------- ------
(In Thousands)
OPERATING ACTIVITIES
Net income $45,215 $34,032 $18,526
Adjustments to reconcile net income
to net cash used in operating
activities:
Equity in net income of subsidiaries (49,027) (34,841) (18,774)
Other (645) 159 (1,032)
------- ------- -------
NET CASH USED IN OPERATING ACTIVITIES (4,457) (650) (1,280)
INVESTING ACTIVITIES
Dividends from subsidiaries 5,500 23,200 1,000
Investment in subsidiaries (24,000) (26,000) (3,500)
------- ------- -------
NET CASH USED IN INVESTING ACTIVITIES (18,500) (2,800) (2,500)
FINANCING ACTIVITIES
Proceeds from short-term borrowings 8,000 6,300
Repayment of short-term borrowings (20,000)
Proceeds from issuance of
subordinated debt 53,051
Exercise of stock options 912 626 115
Cash dividends paid (8,238) (5,098) (3,682)
------- ------- -------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (7,326) 36,579 2,733
------- ------- -------
Increase (decrease) in cash and cash
equivalents (30,283) 33,129 (1,047)
Cash and cash equivalents at beginning
of year 35,161 2,032 3,079
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 4,878 $35,161 $ 2,032
======= ======= =======
REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS
Board of Directors and Stockholders
First Financial Corporation
We have audited the accompanying consolidated balance sheets of First Financial
Corporation and subsidiaries as of December 31, 1993 and 1992, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1993. These
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of First Financial
Corporation and subsidiaries at December 31, 1993 and 1992, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1993 in conformity with generally accepted
accounting principles.
As discussed in Note A to the consolidated financial statements, the Corporation
changed its method of accounting for income taxes in 1992 and its method of
accounting for certain debt and equity securities in 1993.
January , 1995
Milwaukee, Wisconsin
MANAGEMENT AND AUDIT COMMITTEE REPORT
Management is responsible for the preparation, content and integrity of
the financial statements and all other financial information included in this
annual report. The financial statements have been prepared in accordance with
generally accepted accounting principles.
The Corporation maintains a system of internal controls designed to
provide reasonable assurance as to the integrity of financial records and the
protection of assets. The system of internal controls includes written policies
and procedures, proper delegation of authority, organizational division of
responsibilities and the careful selection and training of qualified personnel.
In addition, the internal auditors and independent auditors periodically test
the system of internal controls.
Management recognizes that the cost of a system of internal controls
should not exceed the benefits derived and that there are inherent limitations
to be considered in the potential effectiveness of any system. However,
management believes that the system of internal controls provides reasonable
assurances that financial transactions are recorded properly to permit the
preparation of reliable financial statements.
The Audit Committee of the Board of Directors is composed of outside
directors and has the responsibility for the recommendation of the independent
auditors for the Corporation. The committee meets regularly with the independent
auditors and internal auditors to review the scope of their audits and audit
reports and to discuss any action to be taken. The independent auditors and the
internal auditors have free access to the Audit Committee.
/s/ John C. Seramur
- - ---------------------------
John C. Seramur
President and Chief Executive Officer
/s/ Thomas H. Neuschaefer
- - ---------------------------
Thomas H. Neuschaefer
Senior Vice President
/s/ Dr. George R. Leach
- - ---------------------------
Dr. George R. Leach
Chairman, Audit Committee
January 17, 1994
EXHIBIT 13 (B)
FIRST FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION
December 31, 1993
(Restated)
TEN-YEAR SUMMARY (Dollars in thousands, except per share amounts)
1993 (a) 1992 (b) 1991 1990 (c) 1989 (d)
--------- --------- -------- --------- ---------
Income (loss) before extraordinary
items and the cumulative effect of
an accounting change $ 45,215 $ 28,432 $ 18,526 $ 16,022 $ 14,376
Net income (loss) $ 45,215 $ 34,032 $ 18,526 $ 16,022 $ 14,376
Earnings per share (f):
Primary:
Income (loss) before extraordinary
items and the cumulative effect
of an accounting change $ 1.88 $ 1.21 $ .80 $ .70 $ .63
Net income (loss) 1.88 1.45 .80 .70 .63
Fully Diluted:
Income (loss) before extraordinary
items and the cumulative effect
of an accounting change $ 1.86 $ 1.19 $ .79 $ .70 $ .63
Net income (loss) 1.86 1.43 .79 .70 .63
Interest income $ 340,123 $ 296,871 $ 300,081 $ 292,141 $ 235,890
Interest expense 189,734 181,896 203,749 204,748 162,059
Net interest income 150,389 114,975 96,332 87,393 73,831
Provisions for losses on loans 10,219 13,851 18,333 16,064 18,306
Non-interest income 37,721 32,209 34,331 31,383 32,389
Non-interest expense 105,804 88,711 81,395 76,840 64,868
Total assets 4,773,783 3,908,286 3,220,002 3,142,293 2,456,695
Loans receivable and held for sale
(includes mortgage-related securities) 4,247,447 3,512,306 2,885,236 2,738,265 2,142,264
Intangible assets 31,392 23,278 20,388 23,178 5,505
Deposits 4,050,520 3,206,112 2,935,645 2,883,214 2,098,234
Borrowings 438,598 461,948 77,243 60,351 177,253
Stockholders' equity 233,835 194,095 164,535 149,576 137,081
Shares outstanding (f) 23,586,827 23,266,414 23,038,404 22,978,604 22,915,604
Stockholders' equity per share (f) 9.91 8.34 7.14 6.51 5.98
Dividends declared per share (f) .35 .22 .16 .16 .15
Return (loss) on average assets (h) .98% .79% .58% .54% .60%
Return (loss) on average equity (h) 21.24% 15.78% 11.85% 11.21% 10.82%
Average equity to average assets 4.62% 4.99% 4.86% 4.78% 5.59%
TABLE CONTINUED
1988 1987 (e) 1986 (e) 1985 (e) 1984 (e)
-------- --------- --------- --------- ---------
Income (loss) before extraordinary
items and the cumulative effect of
an accounting change $ 10,769 $ 6,252 $ 9,324 $ (11,909) $ (2,826)
Net income (loss) $ 14,553 $ 11,279 $ 13,186 $ (9,527) $ (1,239)
Earnings per share (f):
Primary:
Income (loss) before extraordinary
items and the cumulative effect
of an accounting change $ .49 $ .33 $ .37 $ (.69) $ (.15)
Net income (loss) .66 .59 .57 (.56) (.06)
Fully Diluted:
Income (loss) before extraordinary
items and the cumulative effect
of an accounting change $ .49 $ .33 $ .37 $ (.69) $ (.15)
Net income (loss) .66 .59 .57 (.56) (.06)
Interest income $ 212,809 $ 206,546 $ 220,054 $ 240,718 $ 249,449
Interest expense 204,748 162,059 143,069 139,223 160,204
Net interest income 87,393 73,831 69,740 67,323 59,850
Provisions for losses on loans 16,185 8,777 9,302 11,405 3,829
Non-interest income 30,060 41,471 43,853 35,274 33,746
Non-interest expense 65,550 86,109 80,365 80,867 68,949
Total assets 2,300,129 2,169,911 2,124,190 2,173,063 2,381,170
Loans receivable and held for sale
(includes mortgage-related securities) 2,026,445 1,824,726 1,743,169 1,747,593 1,891,381
Intangible assets 6,197 9,196 11,666 12,662 13,680
Deposits 1,969,217 1,889,018 1,800,316 1,913,174 1,996,741
Borrowings 155,568 119,912 182,682 128,605 246,912
Stockholders' equity 126,248 105,559 96,048 83,656 94,511
Shares outstanding (f) 22,841,464 19,241,340 19,091,924 18,394,480 18,330,680
Stockholders' equity per share (f) 5.53 (g) (g) (g) (g)
Dividends declared per share (f) .14 .11 .09 .09 .08
Return (loss) on average assets (h) .48% .29% .43% (.53)% (.11)%
Return (loss) on average equity (h) 11.21% 10.82% 9.06% 6.16% 10.51%
Average equity to average assets 5.35% 4.70% 4.10% 3.85% 3.93%
<FN>
(a) In January, 1993, the Corporation's major subsidiary First Financial Bank,
FSB (First Financial) acquired Westinghouse Federal Bank, FSB, d/b/a
United Federal Bank ("United"), of Galesburg, Illinois for cash. In
addition, in August, 1993, the Corporation completed the assumption of
deposits and the purchase of the branch facilities of four Quincy,
Illinois-area branches of American Savings. Each acquisition has been
accounted for as a purchase.
(b) In separate transactions during 1992, the Corporation completed the
assumption of deposits and the purchase of branch facilities of ten
Peoria, Illinois-area branches from the LaSalle Talman Bank, FSB and the
Resolution Trust Corporation (RTC). Each acquisition has been accounted
for as a purchase.
(c) The Corporation completed the acquisition of Illini Federal Savings and
Loan Association (Illini) in January, 1990 and, at various dates during
1990, the assumption of the deposits and purchase of certain assets of
three former thrift institutions from the RTC. Each of these transactions
has been accounted for as a purchase and the related results of operations
have been included in the consolidated financial statements since the
respective dates of acquisition.
(d) The Corporation completed the acquisition of First Financial-Port Savings
Bank, S.A. (Port) in May, 1989. This cash acquisition was accounted for as
a purchase and the results of Port's operations have been included in the
financial statements since that date.
(e) Restated, except per share data, to reflect the March, 1988 merger-
conversion of National Savings & Loan (National) which was accounted for
as a pooling-of-interests.
(f) As adjusted for a 2-for-1 stock split of March 5, 1993, a 2-for-1 stock
split of April 16, 1992, a 10% stock dividend of March 31, 1989, and for
a 2-for-1 stock split of September 30, 1985.
(g) Stockholders' equity per share is not meaningful due to the National
merger-conversion in 1988.
(h) Ratio is based upon income (loss) prior to extraordinary items and the
cumulative effect of an accounting change.
QUARTERLY DATA
The following table sets forth the Corporation's unaudited quarterly income and
expense data for 1992 and 1993.
Dec. 31, Sept. 30, June 30, March 31, Dec. 31, Sept. 30, June 30, March 31,
1993 1993 (a) 1993 1993 (b) 1992 1992 1992 1992 (c)
-------- ---------- -------- --------- -------- --------- -------- ---------
(Dollars in thousands, except per share amounts)
Interest income:
Loans and mortgage-related
securities $81,507 $82,027 $82,702 $81,460 $74,919 $72,329 $71,347 $68,799
Investments 4,022 3,174 2,307 2,924 2,171 2,223 3,022 2,061
------- ------- ------- ------- ------- ------- ------- -------
Interest income 85,529 85,201 85,009 84,384 77,090 74,552 74,369 70,860
Interest expense:
Deposits 41,412 42,365 41,388 44,576 40,510 43,082 46,195 44,255
Borrowings 4,456 5,157 5,618 4,762 3,983 1,710 861 1,300
------- ------- ------- ------- ------- ------- ------- -------
Interest expense 45,868 47,522 47,006 49,338 44,493 44,792 47,056 45,555
------- ------- ------- ------- ------- ------- ------- -------
Net interest income 39,661 37,679 38,003 35,046 32,597 29,760 27,313 25,305
Provisions for losses on loans (2,395) (2,180) (2,800) (2,844) (3,546) (2,666) (3,501) (4,138)
Gain on sales of assets (d) 2,445 2,657 1,329 1,341 1,423 1,735 481 1,384
Non-interest income 7,631 7,336 7,655 7,327 6,618 6,510 7,132 6,926
------- ------- ------- ------- ------- ------- ------- -------
47,342 45,492 44,187 40,870 37,092 35,339 31,425 29,477
Non-interest expense 26,003 27,462 26,657 25,682 22,604 23,474 21,937 20,696
------- ------- ------- ------- ------- ------- ------- -------
Income before income taxes and
cumulative effect of a change
in accounting principle 21,339 18,030 17,530 15,188 14,488 11,865 9,488 8,781
Income taxes 8,167 6,704 6,362 5,639 5,353 4,335 3,368 3,134
------- ------- ------- ------- ------- ------- ------- -------
Income before cumulative effect
of a change in accounting
principle 13,172 11,326 11,168 9,549 9,135 7,530 6,120 5,647
Cumulative effect of a change in
accounting principle (e) -- -- -- -- -- -- -- 5,600
------- ------- ------- ------- ------- ------- ------- -------
Net income $13,172 $11,326 $11,168 $ 9,549 $ 9,135 $ 7,530 $ 6,120 $11,247
======= ======= ======= ======= ======= ======= ======= =======
Earnings per share (f):
Primary:
Income before cumulative
effect of an accounting
change (e) $ .54 $ .48 $ .47 $ .40 $ .38 $ .33 $ .26 $ .24
Net income .54 .48 .47 .40 .38 .33 .26 .48
Fully Diluted:
Income before cumulative
effect of an accounting
change (e) $ .54 $ .46 $ .46 $ .40 $ .38 $ .32 $ .25 $ .24
Net income .54 .46 .46 .40 .38 .32 .25 .48
Cash dividends per share (f) $ .10 $ .10 $ .075 $ .075 $ .06 $ .06 $ .05 $ .05
<FN>
(a) The American Savings acquisition was completed in August, 1993 and results
of operations have been included from the date of acquisition.
(b) The United acquisition was completed in January, 1993 and the related
results of operations have been included from January 1, 1993.
(c) The 1992 acquisitions were completed in the first quarter and the results
of the related operations have been included since the dates of
acquisition.
(d) Includes net gains (losses) on sales of loans, mortgage-related
securities, investment securities and other assets.
(e) The change in accounting principle relates to the adoption of Statement of
Financial Accounting Standards No. 109 in the first quarter of 1992.
(f) Per share data have been adjusted to reflect the 2-for-1 stock splits
distributed in March, 1993 and April, 1992.
Results of Operations
Comparison of Years Ended December 31, 1993 and 1992
General. Net income increased 59.1% to $45.2 million in 1993 from the $28.4
million earned in 1992 prior to the 1992 $5.6 million cumulative effect of a
change in accounting for income taxes upon the adoption of Statement of
Financial Accounting Standards (SFAS) No. 109. Continued low interest rates and
the 1993 acquisitions, principally the acquisition of Westinghouse Federal Bank,
FSB, d/b/a United Federal Bank (United) of Galesburg, Illinois, played important
roles in the significantly improved results for 1993. The returns on average
assets and average stockholders' equity for 1993 were 0.98% and 21.23%,
respectively, as compared to 0.79% and 15.78%, respectively, for 1992 before
giving effect to the change in accounting principle. Primary earnings per share,
prior to the change in accounting principle, increased 55.4% to $1.88 for 1993
from $1.21 for 1992.
Net Interest Income. Net interest income increased $35.4 million to $150.4
million during 1993 from $115.0 million for 1992. The net interest margin
increased from 3.35% for 1992 to 3.41% for 1993 due to the effect of the lower
cost of funds in 1993 reflecting the current low interest-rate environment and a
continued improvement in the ratio of interest-earning assets to
interest-costing liabilities in 1993 as compared to the 1992. Interest income
increased $43.2 million and interest expense increased $7.8 million,
respectively for 1993 as compared to 1992. The average balances of
interest-earning assets and interest-costing liabilities increased from $3.43
billion and $3.38 billion, respectively, in 1992 to $4.41 billion and $4.34
billion, respectively, in 1993. The ratio of average interest-earning assets to
average interest-costing liabilities increased from 101.43% in 1992 to 101.68%
in 1993. The 1993 increases in average balances are primarily due to the 1993
acquisitions. The improvement in the ratio of interest-earning assets to
interest-costing liabilities was complemented by a slightly greater decrease in
the average cost of interest-costing liabilities (5.38% in 1992 versus 4.37% in
1993) than in the average yield on interest-earning assets (8.65% in 1992 versus
7.70% in 1993.) These various factors are reflected in the rate/volume analysis,
of changes in net interest income, which indicates a net increase of $30.7
million from volume-related factors and a net increase of $4.7 million from
rate-related factors.
At the end of 1993, the Corporation's net interest margin was 3.36% as compared
to 3.32% at the end of 1992. Historically the Corporation's net interest margin
has been at its lowest point at year-end due to seasonal factors. Although the
1993 acquisitions contributed to lower margins than historically experienced by
the Corporation, the combination of the low interest-rate environment during
1993 and asset/liability management decisions made during 1993 have enabled the
Corporation to continue to build the net interest margin to a higher level at
the end of 1993.
Provisions for Losses On Loans. Provisions for losses on loans decreased $3.7
million from $13.9 million for 1992 compared to $10.2 million for 1993,
reflecting a continuing lower level of charge-offs experienced in 1993. For a
further discussion of allowances for loan losses on loans and related loan
portfolio information, see "Allowances for Loan and Foreclosure Losses" and
"Loans and Mortgage-Related Securities."
Non-Interest Income. Non-interest income increased $5.5 million to $37.7 million
for 1993 compared to $32.2 million for 1992 as the net result of several
significant factors. Gains realized on an increased volume of sales of mortgage
loans, including loans originated for sale and refinanced mortgage loans
transferred to held for sale status, increased $3.1 million in 1993 as compared
to 1992. The increased volume of such sales is directly related to the low
interest-rate environment experienced throughout 1993. The Corporation's
subsidiary banks, First Financial Bank, FSB and First Financial-Port Savings
Bank, FSB (the Banks), sell long-term fixed-rate mortgage loans in the normal
course of interest-rate risk management. Gains or losses realized from the sale
of mortgage loans held for sale can fluctuate significantly from year to year
depending upon the volatility of interest rates and the volume of loan
originations. Thus, results of sales in any one year may not be indicative of
future results. In this regard, many observers believe that refinancing
activities in 1994 will be down from 1993. As such, management does not believe
that 1994 gains on sales of mortgage loans will be at 1993 levels. Deposit
account service fees increased $1.7 million for 1993 as compared to 1992. The
1993 acquisitions and pricing changes were the major reasons for the increase in
these fees. Net fees earned relative to loans serviced for others increased
$800,000 to $5.2 million in 1993 from $4.4 million in 1992 as a net result of i)
a decrease in the average servicing spread on mortgage loans serviced for
others, ii) a slight decrease in the size of the mortgage loan servicing
portfolio, iii) a decrease in the size of the manufactured housing loan
servicing portfolio due to the refinancing of loans previously serviced for
others and iv) decreased 1993 charges to adjust the amortization of the carrying
value of purchased and capitalized excess mortgage servicing rights. The 1993
charges of $1.4 million were $2.1 million less than similar charges of $3.5
million in 1992 and reflect changes in loan prepayment assumptions, revised for
recent experience, used in management's periodic review of the value of these
servicing rights. At the end of 1993, the carrying value of servicing rights
have been reduced to $473,000. Thus, amortization of such rights in the future
will be significantly less than in recent years, which will favorably affect
servicing income in the future.
Net losses on sales of available-for-sale securities in 1993 amounted to
$422,000 as compared to a gain of $41,000 in 1992. A loss of $415,000 was
realized upon the disposition of a $45.0 million available-for-sale investment,
in an adjustable-rate mortgage mutual fund during late 1993, for liquidity
purposes. This investment was acquired during 1993 for such purposes. The
remaining $7,000 loss was realized upon the sale of $81.3 million of
mortgage-related securities (MBS) acquired in conjunction with the United
acquisition. These MBSs were classified as available-for-sale to facilitate the
restructuring of the mortgage-related securities portfolio acquired from United.
Non-Interest Expense. Non-interest expense increased $17.1 million for the year
ended December 31, 1993 to $105.8 million as compared to $88.7 million for 1992.
The higher level of non-interest expense reflects inherent increases in the
expanded scope of operations as a result of the 1993 acquisitions. The major
categories of non-interest expense affected by acquisitions are compensation,
occupancy, furniture and equipment, federal deposit insurance, marketing and
amortization of core deposit intangibles.
Federal deposit insurance expense increased $300,000 in 1993 due to an increase
in insured deposits as a result of acquisitions. The full effect of the increase
was offset by a reduction in premiums charged by the Federal Deposit Insurance
Corporation (FDIC) as the FDIC allowed a one-time premium reduction
(approximately $1.5 million) representing the Banks' previously unutilized
credits, from the dissolved Secondary Reserve of the Federal Savings and Loan
Insurance Corporation. The Banks' credits in the Secondary Reserve had been
written-off in 1987 due to the uncertainty of recoverability. In addition, each
of the Banks qualifies for the lowest FDIC assessment rate and management of the
Corporation believes that the Banks will continue to qualify for the lowest FDIC
assessment rate, thus enabling the Banks to keep deposit insurance expense under
control. The Banks, however, do not have control over potential future rate
increases by the FDIC.
The increase of $1.8 million in loan expenses for 1993 represents the impact of
higher 1993 mortgage loan production as well as the cost of a program to attract
new credit card accounts through affinity groups.
The net cost of operations of foreclosed properties decreased $1.3 million in
1993 as compared to 1992, when an increased level of writedowns was experienced
relative to foreclosed commercial real estate properties.
Non-interest expense decreased as a percentage of average assets to 2.29% in
1993 as compared to 2.46% in 1992. The improvement in this ratio is reflective
of the effectiveness of the consolidation of operations after the acquisitions
in 1993 and 1992. In addition, the Corporation's efficiency ratio (which
represents the ratio of controllable expenses to net interest income plus
recurring non-interest income) improved to 53% for 1993 as compared to 56% for
1992.
Income Taxes. Income tax expense increased $10.7 million for 1993 as compared to
1992 due to the increase in pre-tax income in 1993 and other factors. As a
percent of pre-tax income, the effective income tax rate increased slightly from
36.3% for 1992 to 37.3% in 1993. The increase in the effective income tax rate
primarily relates to i) increased provisions for Illinois taxes as the
Corporation's scope of operations has increased in that state subsequent to the
recent acquisitions and ii) the 1993 increase in the federal tax rate from 34%
to 35% for taxable income in excess of $10.0 million.
Accounting Change. The Financial Accounting Standards Board (FASB) issued SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity Securities" in
May, 1993. As permitted under the Statement, the Corporation adopted the
provisions of the new standard as of the end of 1993. As a result of adopting
SFAS No. 115, stockholders' equity was increased by $1.9 million (net of
deferred income taxes) at December 31, 1993 to reflect the net unrealized
holding gain on securities, having an estimated fair value of approximately
$431.6 million, classified as availablefor-sale at the end of 1993 and which had
been previously recorded at amortized cost.
Pending Accounting Change. In May, 1993, the FASB also issued SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan". SFAS No. 114 requires that
impaired loans be measured at the present value of expected future cash flows
discounted at the loan's original effective interest rate or, as a practical
expedient, at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. SFAS No. 114 is effective for
fiscal years beginning after December 15, 1994. Management does not believe that
the adoption of SFAS No. 114 will have a material impact on the Corporation's
financial condition or results of operations.
Results of Operations
Comparison of Years Ended December 31, 1992 and 1991
General. Net income increased to $34.0 million in 1992 from $18.5 million in
1991. Net income for 1992, prior to a $5.6 million credit representing the
cumulative effect of a change in accounting for income taxes, increased 53.5% to
$28.4 million from the $18.5 million earned in 1991. The returns on average
assets and average stockholders' equity for 1992, before giving effect to the
change in accounting principle, were 0.79% and 15.78%, respectively, as compared
to 0.58% and 11.85%, respectively, for 1991. Earnings per share, prior to the
change in accounting, increased 51.3% to $1.21 for 1992 from $0.80 for 1991.
Net Interest Income. Net interest income increased $18.6 million to $115.0
million during 1992 from $96.3 million for 1991. The net interest margin
increased from 3.17% for 1991 to 3.35% for 1992 due to a lower cost of funds in
1992 reflecting a declining interest-rate environment, managed asset growth by
the Banks in 1992 and an improvement in the ratio of interest-earning assets to
interest-costing liabilities in 1992 as compared to the 1991. Interest income
decreased $3.2 million and interest expense decreased $21.8 million,
respectively for 1992 as compared to 1991. The average balances of
interest-earning assets and interest-costing liabilities increased from $3.042
billion and $3.019 billion, respectively, in 1991 to $3.431 billion and $3.383
billion, respectively, in 1992. The ratio of average interest-earning assets to
average interest-costing liabilities increased from 100.76% in 1991 to 101.43%
in 1992. The 1992 increases in average balances are due to internal growth as
well as the 1992 acquisitions. The improvement in the ratio of interest-earning
assets to interest-costing liabilities was complemented by a greater decrease in
the average cost of interest-costing liabilities (6.75% in 1991 versus 5.38% in
1992) than in the average yield on interest-earning assets (9.87% in 1991 versus
8.65% in 1992.) These factors are reflected in the analysis of changes in net
interest income arising from factors relating to the volume of interest-bearing
dollars and the rates paid on those dollars. This analysis indicates an increase
of $17.5 million from volume-related factors and $1.1 million from rate-related
factors.
Provisions for Losses On Loans. Provisions for losses on loans decreased $4.4
million from $18.3 million for 1991 compared to $13.9 million for 1992,
reflecting a lower level of charge-offs experienced in 1992 as well as
management's actions to build a higher level of loan loss allowances during 1991
for the manufactured housing and commercial real estate portfolios. The
Corporation's allowances for losses on loans increased to $17.1 million, or
0.77% of loans receivable, at December 31, 1992 from $16.7 million and 0.82%,
respectively, at December 31, 1991. The decrease in allowances as a percentage
of loans receivable was attributable to the growth of the loan portfolio in
1992. This growth was concentrated in single-family mortgage loans, which
portfolio historically has a much lower loss experience than the non-mortgage
loan portfolios. In addition, the manufactured housing and commercial real
estate loan portfolios decreased in 1992, further contributing to the lower
allowance ratio at year-end 1992 since these portfolios historically had higher
loss experience.
Non-Interest Income. Non-interest income decreased $2.1 million to $32.2 million
for 1992 compared to $34.3 million for 1991 as the net result of several
significant factors. Gains realized on an increased volume of sales of mortgage
loans, including loans originated for sale and refinanced mortgage loans
transferred to available for sale status, increased $1.7 million in 1992 as
compared to 1991. The increased volume of such sales is directly related to the
declining interest-rate environment experienced throughout 1992. Deposit account
service fees increased $800,000 for 1992 as compared to 1991. Pricing changes
initiated in the last half of 1991 and early 1992 were the major reason for the
increase in these fees. Net fees earned relative to loans serviced for others
decreased $2.5 million to $4.4 million in 1992 from $6.9 million in 1991 as a
result of i) a decrease in the average servicing spread on mortgage loans
serviced for others, ii) a decrease in the size of the mortgage loan servicing
portfolio, iii) a decrease in the size of the manufactured housing loan
servicing portfolio due to management's decision to restrict manufactured
housing lending to the Midwest and iv) increased 1992 charges to adjust the
amortization of the carrying value of purchased and capitalized excess mortgage
servicing rights. The 1992 charges of $3.5 million were $700,000 over similar
charges of $2.8 million in 1991 and reflect changes in loan prepayment
assumptions, revised for recent experience, used in management's periodic review
of the value of these servicing rights.
Gains on sales of MBSs declined from $2.3 million in 1991 to $41,000 in 1992.
During 1991, an asset/liability management decision was made to conform the
composition of the MBS portfolio, of previously acquired institutions, to
existing investment policies. As such, all long-term fixed-rate MBSs, totaling
$45.5 million, were sold in late 1991. Also, in 1990, an asset/liability
management decision was made to limit purchases of MBSs to no more than a two
percent premium to par value. During 1991, this policy was extended to include
all similar securities already held in First Financial's MBS portfolio. At that
time, approximately $111.3 million of MBSs having unamortized premiums exceeding
two percent of par value were sold. During 1992, the Corporation had one minor
MBS sale, for $853,000, when Port sold its longer-term fixed-rate MBS portfolio.
Non-Interest Expense. Non-interest expense increased approximately $7.3 million
for 1992 as compared to 1991 for the reasons noted below. Such expenses
decreased as a percentage of average assets to 2.46% for 1992 as compared to
2.53% for 1991. The higher dollar level of non-interest expense reflects
inherent increases in the expanded scope of operations as a result of the 1992
acquisitions (each of which was accounted for as a purchase) in addition to
increased writedowns of foreclosed real estate properties during 1992.
Provisions for losses on foreclosed real estate properties (primarily commercial
real estate) increased $1.8 million in 1992 as compared to 1991 (see "Foreclosed
Properties"). Increases in other categories of non-interest expense were
primarily the result of the 1992 acquisitions (i.e., compensation, FDIC
insurance of accounts premiums, and amortization of core deposit intangibles).
Income Taxes. Income tax expense increased $3.8 million for 1992 as compared to
1991. As a percent of pre-tax income, however, the effective tax rate declined
from 40.11% for 1991 to 36.28% for 1992. The decrease in the effective tax rate
was the result of low Nevada state income taxes on an operating subsidiary of
First Financial, which was formed in late 1991. This subsidiary manages an
investment portfolio having long-term maturities. Previously, this portfolio was
managed by First Financial in Wisconsin and subject to applicable taxes at
higher state tax rates.
Accounting Change. In February, 1992, the FASB issued SFAS No. 109, "Accounting
for Income Taxes." As permitted by the Statement, the Corporation adopted SFAS
No. 109 in 1992. The cumulative effect of the adoption of SFAS No. 109 on prior
years, through December 31, 1991, resulted in an increase in net income of $5.6
million, or $0.24 per share, in 1992. The primary component of this change
resulted from the recognition of a deferred tax asset in relation to the
cumulative excess of book loan loss provisions over certain limited amounts
previously claimed as income tax deductions, as defined in SFAS No. 109.
MARKET PRICE AND DIVIDEND INFORMATION
The Corporation's common stock trades on the NASDAQ National Market System
(NASDAQ) under the NASDAQ listing symbol of FFHC. At December 31, 1993, the
Corporation had 23,586,827 outstanding shares and 3,512 shareholders of record.
The following table presents market price information and cash dividends paid on
First Financial Corporation's common stock. The prices displayed represent high
and low sales prices, for each quarter over the past two years, as reported by
NASDAQ. The data in the table have been adjusted for the two-for-one stock
splits distributed in March, 1993 and April, 1992.
Market Price
----------------------- Cash
High Low Dividend
----- ----- --------
Quarter Ended:
December 31, 1993 $19.750 $14.250 $ .10
September 30, 1993 18.000 13.500 .10
June 30, 1993 15.750 12.250 .075
March 31, 1993 16.000 11.250 .075
December 31, 1992 $11.750 $ 7.500 $ .06
September 30, 1992 9.313 7.250 .06
June 30, 1992 8.500 6.375 .05
March 31, 1992 7.500 5.625 .05
AVERAGE INTEREST-EARNING ASSETS, AVERAGE INTEREST-COSTING LIABILITIES,
INTEREST RATE SPREADAND NET INTEREST MARGIN
The following table sets forth the weighted average yields earned on the
Corporation's consolidated loan and investment portfolios, the weighted average
interest rates paid on deposits and borrowings, the interest rate spread between
yields earned and rates paid and the net interest margin during the years 1993,
1992 and 1991. Balances of interest-sensitive assets and liabilities arising
from the 1992 and 1993 acquisitions are included from the respective dates of
the related transactions.
Year Ended December 31,
------------------------------------------------------------
1993 1992
---------------------------------- ----------------
Average Average Average
Balance Interest Rate Balance
---------- -------- ------- ----------
(Dollars in thousands)
Interest-earning assets:
Mortgage loans (1)(2) $1,957,288 $160,372 8.19% $1,416,264
Mortgage-related securities 1,410,941 86,052 6.10 1,137,275
Other loans (1) 789,073 81,272 10.30 681,537
U.S. Government and agency 106,138 5,709 5.38 31,659
Other securities 56,194 3,050 5.43 62,584
Cash equivalents 66,716 1,952 2.93 80,906
FHL Bank stock 28,540 1,716 6.01 21,004
---------- -------- ------ ----------
4,414,890 340,123 7.70 3,431,229
Interest-costing liabilities:
Passbook 798,058 25,953 3.25 635,382
Checking 636,008 14,924 2.35 548,643
Certificates 2,529,824 128,864 5.09 2,041,100
FHL Bank advances 310,911 14,205 4.57 127,618
Other borrowings 67,264 5,788 8.60 30,163
---------- -------- ------ ----------
4,342,065 189,734 4.37 3,382,906
---------- -------- ------ ----------
Net earning assets and
interest rate spread $ 72,825 3.33% $ 48,323
========== ====== ==========
Earning asset ratio 101.68% 101.43%
========== ==========
Average interest-earning
assets, net interest income,
and net interest margin on
average interest-earning
assets $4,414,890 $150,389 3.41% $3,431,229
========== ======== ===== ==========
TABLE CONTINUED
Year Ended December 31,
-----------------------------------------------------------------------
1992 1991
------------------------- -----------------------
Average Average Average
Interest Rate Balance Interest Rate
-------- ------- ---------- -------- -----
(Dollars in thousands)
Interest-earning assets:
Mortgage loans (1)(2) $131,206 9.26% $1,427,702 $143,574 10.06%
Mortgage-related securities 83,040 7.30 764,895 67,650 8.84
Other loans (1) 73,148 10.73 645,424 75,204 11.65
U.S. Government and agency 2,036 6.43 18,326 1,521 8.30
Other securities 3,245 5.19 93,678 7,060 7.54
Cash equivalents 2,929 3.62 72,539 3,755 5.18
FHL Bank stock 1,267 6.03 19,363 1,317 6.80
-------- ------ ---------- -------- ------
296,871 8.65 3,041,927 300,081 9.87
Interest-costing liabilities:
Passbook 27,154 4.27 285,496 14,275 5.00
Checking 15,579 2.84 531,754 23,992 4.51
Certificates 131,309 6.43 2,154,524 161,501 7.50
FHL Bank advances 5,445 4.27 31,487 2,500 7.95
Other borrowings 2,409 7.99 15,852 1,481 9.34
-------- ------ ---------- -------- ------
181,896 5.38 3,019,113 203,749 6.75
-------- ------ ---------- -------- ------
Net earning assets and
interest rate spread 3.27% $ 22,814 3.12%
====== ========== ======
Earning asset ratio 100.76%
=======
Average interest-earning
assets, net interest income,
and net interest margin on
average interest-earning
assets $114,975 3.35% $3,041,927 $ 96,332 3.17%
======== ===== ========== ======== =====
<FN>
(1) Includes non-accruing loans.
(2) Includes loans held for sale.
RATE VOLUME ANALYSIS
The most significant impact on the Corporation's net income between periods is
derived from the interaction of changes in the volume of and rates earned or
paid on interest-earning assets and interest-costing liabilities. The volume of
earning dollars in loans and investments, compared to the volume of
interestcosting liabilities represented by deposits and borrowings, combined
with the spread, produces the changes in net interest income between periods.
The following table shows the relative contribution of changes in average volume
and average interest rates on changes in net interest income for the periods
indicated. The change in interest income and interest expense attributable to
changes in both volume and rate, which cannot be segregated, has been allocated
proportionately to the change due to volume and the change due to rate.
Year Ended December 31, 1993 Year Ended December 31, 1992
Compared to Year Ended Compared to Year Ended
December 31, 1992 December 31, 1991
--------------------------------------- ---------------------------------------
Rate Volume Total Rate Volume Total
-------- -------- --------- -------- -------- -------
(In thousands)
Interest-earning assets:
Mortgage loans, including
loans held for sale $(16,509) $ 45,675 $ 29,166 $(11,226) $ (1,142) $(12,368)
Mortgage-related securities (15,016) 18,028 3,012 (13,315) 28,705 15,390
Other loans (3,047) 11,171 8,124 (6,126) 4,070 (2,056)
U.S. Government and agency (384) 4,057 3,673 (401) 916 515
Other securities 147 (342) (195) (1,848) (1,967) (3,815)
Cash equivalents (510) (467) (977) (1,223) 397 (826)
FHL Bank stock (4) 453 449 (156) 106 (50)
-------- -------- -------- -------- -------- --------
Total $(35,323) $ 78,575 43,252 $(34,295) $ 31,085 (3,210)
======== ======== ======== ========
Interest-costing liabilities:
Passbook $ (7,294) $ 6,093 (1,201) $ (2,343) $ 15,222 12,879
Checking (2,930) 2,275 (655) (9,153) 740 (8,413)
Certificates (30,384) 27,939 (2,445) (22,016) (8,176) (30,192)
FHL Bank advances 412 8,348 8,760 (1,621) 4,566 2,945
Other borrowings 200 3,179 3,379 (242) 1,170 928
-------- -------- -------- -------- -------- --------
Total $(39,996) $ 47,834 7,838 $(35,375) $ 13,522 (21,853)
======== ======== -------- ======== ======== --------
Increase in net interest
income $ 35,414 $ 18,643
======== ========
NET INTEREST MARGIN AT YEAR-END
The following table sets forth the weighted average yields on the Corporation's
loan and investment portfolios, the weighted average cost of deposits and
borrowings, the interest rate spread between the anticipated yields and costs
and the resulting net interest margin at the indicated dates.
At December 31,
---------------------------------
1993 1992 1991
---- ---- ----
Weighted average yield:
Mortgage loans 7.73% 8.74% 9.75%
Mortgage-related securities 5.82 6.72 8.48
Other loans 10.00 10.45 11.25
Investments 4.84 4.80 5.73
----- ----- -----
Combined weighted average yield on
loans and investments 7.42 8.17 9.54
Weighted average cost:
Deposits and advance payments from
borrowers for taxes and insurance 4.05 4.91 6.27
Borrowings 4.91 4.81 6.57
----- ----- -----
Combined weighted average cost
of deposits and borrowings 4.13 4.90 6.27
----- ----- -----
Interest rate spread 3.29% 3.27% 3.27%
===== ===== =====
Net interest margin 3.36% 3.32% 3.28%
===== ===== =====
FINANCIAL CONDITION
GENERAL
Total assets of the Corporation increased to $4.77 billion at the end of 1993
from $3.91 billion at year-end 1992 as a result of the 1993 acquisitions.
Stockholders' equity was $233.8 million, or 4.90% of total assets, at December
31, 1993 compared to $194.1 million and 4.97%, respectively, at the end of 1992.
LIQUIDITY AND CAPITAL RESOURCES
On an unconsolidated basis, the Corporation had cash of $4.9 million and
subordinated debt of $55.0 million at December 31, 1993. Management anticipates
that the subordinated debt will be repaid in the future from proceeds of cash
dividends from its subsidiary Banks or issuance of stock.
The Banks are subject to certain regulatory limitations relative to their
ability to pay dividends to the Corporation. Management believes that the
Corporation will not be adversely affected by these dividend limitations and
that projected future dividends from the Banks will be sufficient to meet the
parent company's liquidity needs. See Note L to the consolidated financial
statements for further discussion of these limitations. In addition to dividends
from the Banks, the Corporation could also sell capital stock or debt issues
through the capital markets as alternative sources of funds.
The Corporation also has available an unused line-of-credit in the amount of
$18,000,000 which is available through April, 1994. The line-of-credit agreement
contains various covenants relative to the operations of the Corporation and
First Financial. All of such covenants were met. See Note J to the consolidated
financial statements for further discussion. In addition, the Corporation has
pledged its stock in First Financial as collateral for the line-of-credit.
The Banks are required to maintain minimum levels of liquid assets as defined by
the Office of Thrift Supervision ("OTS") regulations. This requirement, which
may be varied by the OTS, is based upon a percentage of deposits and short-term
borrowings. The required ratio is currently 5%. Both Banks are in compliance
with this requirement. The Banks' principal sources of funds are amortization
and prepayment of loan principal, deposits, sales of mortgage loans originated
for sale, Federal Home Loan (FHL) Bank advances, other borrowings and funds
provided from operations. These funds are used to meet loan commitments, make
other investments, fund deposit withdrawals and repay borrowings.
Total consolidated liquidity, consisting of cash, cash equivalents, short-term
securities and investment securities, increased $113.0 million during 1993.
Total consolidated liquidity, as a percent of total assets, increased from 5.78%
at the end of 1992 to 7.10% of total assets at the end of 1993, as a result of
the net effect of the Corporation's various operating, investing and financing
activities.
Operating activities resulted in a net cash inflow of $108.1 million. Operating
cash flows included earnings of $45.2 million for 1993 and $648.3 million
realized from the sales of mortgage loans available for sale, less $599.1
million disbursed for loans originated for sale.
Investing activities resulted in a net cash inflow of $106.3 million. The most
significant cash inflows in 1993 from investing activities were principal
payments of $575.1 million and $364.0 million received on loans receivable and
MBSs, respectively, as well as $60.9 million from the proceeds of maturities of
investment securities. In addition, $126.4 million was realized upon the sale of
securities available for sale. Major investing activities resulting in cash
outflows were $240.6 million for the purchase of MBSs, $1.03 billion for the
origination of loans for portfolio and $206.4 million for the purchase of
securities. In addition, cash of $443.8 million was received in conjunction with
the 1993 acquisitions representing primarily $970.2 million of assumed deposits
less $565.5 million of loans and securities acquired. As a result of adopting
SFAS No. 115, securities having an estimated fair value of $262.8 million, and
previously carried at the lower of amortized cost or estimated fair value, were
classified as available-for sale.
Financing activities for 1993 resulted in a net cash outflow of $225.8 million
represented by a $124.1 million net deposit outflows, a net decrease in
borrowings of $95.2 million and $8.2 million in cash dividends paid to our
stockholders.
At December 31, 1993, the Banks had outstanding commitments to originate
mortgage loans totaling $62.3 million and had no commitments outstanding to
purchase loans. At that date, the Banks also had commitments outstanding to sell
$111.5 million of mortgage loans that were held for sale or for which the Banks
were committed to originate. Loans held for sale totaled $73.9 million at the
end of 1993. In addition, First Financial had commitments to purchase $87.8
million of adjustable-rate MBSs at year-end 1993. Management believes liquidity
levels are proper and that adequate capital and borrowings are available through
the capital markets, the FHL Bank of Chicago and other sources.
LOANS AND MORTGAGE-RELATED SECURITIES
Total loans, including loans held for sale and MBSs, increased to $4.25 billion
at the end of 1993 from $3.51 billion at the end of 1992. The components of this
increase are summarized, by type of loan collateral, as follows:
December 31, Increase
1993 1992 (Decrease)
----------- ----------- -----------
(In thousands)
Real estate mortgage loans:
One- to four-family $1,797,990 $1,267,108 $ 530,882
Multi-family 188,558 163,312 25,246
Commercial and other 94,789 101,865 (7,076)
---------- ---------- ----------
Total real estate mortgage loans 2,081,337 1,532,285 549,052
Other loans:
Credit cards 209,414 178,436 30,978
Home equity 193,291 162,283 31,008
Education 167,385 163,261 4,124
Manufactured housing 165,017 133,195 31,822
Consumer and other 153,685 92,326 61,359
Less: net items to loans receivable (47,625) (51,069) 3,444
---------- ---------- ----------
Total loans (including loans
held for sale) 2,922,504 2,210,717 711,787
Mortgage-related securities 1,324,943 1,301,589 23,354
---------- ---------- ----------
Total loans and mortgage-related
securities $4,247,447 $3,512,306 $ 735,141
========== ========== ==========
One- to four-family residential mortgage loans increased $530.9 million during
1993. The increase in residential mortgage loans during 1993 is attributable to
the United acquisition and high levels of originations and refinancings as a
result of the continuing low interest-rate environment during 1993. In addition,
First Financial refinanced approximately $187.1 million of mortgage loans that
were previously serviced for others. Such refinanced loans typically are
fixed-rate residential mortgage loans. The Corporation has retained in its loan
portfolio certain fixed-rate mortgage loans with shorter maturities as well as
all adjustable-rate mortgage loans. The Corporation typically sells longer-term
fixed-rate mortgage loans as a part of its ongoing interest-rate risk management
program. Income-producing real estate loans increased $18.1 million in 1993 with
a continuing change in emphasis as multi-family residential loans increased
$25.2 million and commercial real estate mortgage loans decreased $7.1 million.
Consumer loans increased $61.4 million in 1993 due to the United acquisition as
well as increased marketing efforts and a new second mortgage product. Both the
credit card loan and home equity loan portfolios increased $31.0 million during
1993 as the Corporation continues to promote growth in these product areas in
order to diversify the loan portfolio and to provide higher yielding assets.
Manufactured housing loans increased $31.8 million primarily due to the
refinancing of $37.0 million of such loans which had previously been serviced
for others.
After giving effect to the $226.4 million of MBSs received in the United
acquisition, the MBS portfolio declined $203.0 million during 1993 primarily as
the net result of i) purchases of $240.6 million of adjustable-rate MBSs, ii)
repayments of $364.0 million and iii) sales of $81.3 million of MBSs acquired in
the United transaction (as management restructured the United MBS portfolio to
meet the Corporation's investment portfolio guidelines). There were no sales of
MBSs during 1993 other than the above-mentioned post-merger restructuring sales.
In conjunction with the adoption of SFAS No. 115, the Banks transferred MBSs
with a cost of $175.4 million and a fair value of $178.4 million to the
available-for-sale portfolio at the end of 1993.
The Company 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
include shareholders' equity, revised to $233.8 million from $234.7 million, and
stockholders' equity per share, revised to $9.91 from $9.95.
NON-PERFORMING ASSETS
Non-performing assets (consisting of non-accrual loans, foreclosed properties
and other repossessed collateral assets) decreased to $15.1 million at December
31, 1993 from $29.9 million at December 31, 1992. As a percentage of total
assets, non-performing assets decreased from 0.76% at December 31, 1992 to 0.32%
at December 31, 1993. During the five years ended December 31, 1993, the
Corporation has not had any troubled debt restructurings. Non-performing assets
are summarized as follows for the dates indicated:
December 31,
-------------------------------------------------------
1993 1992 1991 1990 1989
------ ------ ------ ------ -----
(Dollars in thousands)
Non-accrual loans:
One- to four-family
residential $ 5,005 $ 5,660 $ 8,717 $ 9,904 $ 5,022
Multi-family residential 139 314 332 891 1,464
Commercial real estate -- 6,478 2,624 497 684
Manufactured housing 1,063 1,295 1,851 2,021 6,376
Consumer and other 2,033 1,912 2,965 3,229 3,497
------- ------- ------- ------- -------
Total non-accrual loans 8,240 15,659 16,489 16,542 17,043
Real estate judgments 2,236 2,761 3,572 7,746 5,762
Real estate foreclosed
properties 4,418 10,975 21,065 21,518 21,380
Repossessed collateral assets 163 462 889 2,143 3,688
------- ------- ------- ------- -------
Total non-performing
assets $15,057 $29,857 $42,015 $47,949 $47,873
======= ======= ======= ======= =======
Non-accrual loans as a
percentage of net loans .28% .71% .83% .76% .86%
Non-performing assets as a
percentage of total assets .32% .76% 1.30% 1.52% 1.95%
The Corporation places loans into a non-accrual status when loans are
contractually delinquent more than ninety days. Such loans have decreased as a
percentage of net loans to 0.28% at December 31, 1993 from .71% at December 31,
1992 showing an improvement in most categories with a significant $6.5 million
decrease in the commercial mortgage real estate loan category. This decrease
represents the improvement in the contractual delinquency and subsequent removal
from non-accrual status of several large commercial real estate mortgage loans.
The non-accrual loans, in the aggregate, at December 31, 1993, 1992 and 1991
represented $700,000, $1.2 million and $1.3 million of interest which would have
been reflected in 1993, 1992 and 1991 income, respectively, if the loans had
been contractually current.
Another significant factor in the 1993 decrease in non-performing assets was the
$7.0 million decline in real estate judgments and foreclosed properties from
$13.7 million at the end of 1992 to $6.7 million at year-end 1993. This decline
is directly related to the sale and/or writedown of several large commercial
real estate properties during 1993. As a result of these dispositions, the
Corporation has been able to reduce its inventory of large (having a carrying
value in excess of $500,000) commercial real estate properties owned from four
properties totaling $7.6 million at December 31, 1992 to three properties
totaling $3.3 million at December 31, 1993. The remainder of the real estate
foreclosed properties consist primarily of one- to four-family and smaller
multi-family residential real estate located in the Midwest.
Non-performing assets have declined significantly during the five year period
ending December 31, 1993 due to i) the disposition of such properties acquired
in the acquisition of a troubled thrift institution in 1985, ii) improved
collection efforts, and iii) a management decision to restrict lending primarily
to Wisconsin, Illinois and other selected Midwestern states.
All of the above non-accrual loans and foreclosed properties have been
considered by management in the review of the adequacy of allowances for losses.
ALLOWANCES FOR LOSSES ON LOANS AND FORECLOSED PROPERTIES
The Corporation's loan portfolios, foreclosed properties and offbalance sheet
financial guarantees are evaluated on a continuing basis to determine the
additions to the allowances for losses and the related balance in the
allowances. These evaluations consider several factors including, but not
limited to, general economic conditions, loan portfolio composition, prior loss
experience and management's estimation of future potential losses. The
evaluation of allowances for loan losses includes a review of both known loan
problems as well as a review of potential problems based upon historical trends
and ratios. The allowances for losses on foreclosed properties are determined by
reducing the carrying value of such foreclosed properties to the estimated fair
value.
A summary of activity in the allowances for losses on loans follows:
Year Ended December 31,
------------------------------------------------------------
1993 1992 1991 1990 1989
------ ------ ------ ------ -----
(Dollars in thousands)
Balance at beginning of year $17,067 $16,706 $15,644 $13,673 $11,922
Charge-offs:
Residential real estate (691) (1,579) (1,916) (1,260) (1,884)
Commercial real estate (501) (968) (2,107) (5,422) (2,407)
Manufactured housing (2,731) (4,212) (7,365) (7,650) (7,362)
Credit card (5,890) (6,142) (5,550) (5,248) (5,255)
Consumer-related (481) (459) (654) (742) (933)
Commercial -- (1,367) (1,051) -- --
------- ------- ------- ------- -------
Total charge-offs (10,294) (14,727) (18,643) (20,322) (17,841)
------- ------- ------- ------- -------
Recoveries:
Residential real estate 131 231 218 546 116
Commercial real estate -- 3 1 -- --
Manufactured housing 179 288 272 450 94
Credit card 653 584 653 656 509
Consumer-related 426 131 228 664 524
------- ------- ------- ------- -------
Total recoveries 1,389 1,237 1,372 2,316 1,243
------- ------- ------- ------- -------
Net charge-offs (8,905) (13,490) (17,271) (18,006) (16,598)
Provisions for losses 10,219 13,851 18,333 16,044 18,306
Acquired banks' allowances 4,885 -- -- 3,933 43
------- ------- ------- ------- -------
Balance at end of year $23,266 $17,067 $16,706 $15,644 $13,673
======= ======= ======= ======= =======
Ratio of net charge-offs to
average loans outstanding .32% .64% .83% .82% .83%
A summary of the activity in the allowance for losses on foreclosed properties
follows.
Year Ended December 31,
-----------------------------------------------------------
1993 1992 1991 1990 1989
------ ------ ------ ------ -----
(In thousands)
Balance at beginning of year $ 552 $ 738 $1,023 $ 750 $ 760
Charge-offs (2,685) (4,980) (3,232) (577) (1,013)
Provision 3,519 4,794 2,947 754 957
Acquired banks' allowances -- -- -- 96 46
------ ------ ------ ------ ------
Balance at end of year $1,386 $ 552 $ 738 $1,023 $ 750
====== ====== ====== ====== ======
The provisions for losses on foreclosed properties are included in the
consolidated statements of income in "net cost of operations of foreclosed
properties."
The Corporation's allowance for losses on loans increased to $23.3 million, or
0.80% of loans receivable, at December 31, 1993 from $17.1 million and 0.77%,
respectively, at the end of 1992. The increase in the allowance relates to a
rise in loans receivable in 1993 as well as allowances acquired in conjunction
with the United acquisition. The 1993 provisions for losses on loans and
foreclosed properties totaled $10.2 million and $3.5 million, respectively,
compared to $13.9 million and $4.8 million, respectively, for 1992. The
provision for losses has been significantly lower in 1993 and 1992 compared to
the 1989-1991 period as the Banks' charge-off experience has improved due to the
decrease in non-performing assets during this period. See "Non-Performing
Assets" for further discussion.
The most significant change in allowances for individual loan portfolios took
place in the allowance for credit card losses. The allowance for credit card
loan losses increased to 3.10% of outstanding balances at the end of 1993 from
2.26% at year-end 1992. The increase in the credit card allowance relates to the
1993 growth of that portfolio and to management's decision to build the
allowance for this portfolio to a higher level. Credit card loan charge-offs
leveled off at $5.9 million compared to $6.1 million and $5.6 million for 1992
and 1991, respectively. First Financial's credit card loan charge-offs, 2.87%
for 1993 and 3.44% for 1992, have been historically well below national
averages.
The allowance for losses on residential mortgage loans increased to $5.9
million, or 0.30% of such loans, at the end of 1993 as compared to $3.3 million,
or 0.23%, at the end of 1992. The growth in the allowance relates to the
increase in the residential mortgage portfolio during 1993 and the allowance
acquired in the United acquisition. Charge-offs of residential mortgage loans as
a percentage of average outstandings decreased to 0.03% in 1993 from 0.10% in
1992.
The level of charge-offs for the commercial real estate loan portfolio for 1993
and 1992 were significantly lower than in 1991 and 1990 when $2.1 million and
$5.4 million, respectively, of such loans were transferred to loss status by
management in the course of reviews of such loans. The allowance for commercial
real estate loan losses increased, as a percentage of outstandings, to 4.23% at
the end of 1993 from 3.91% at the end of 1993.
Commercial loan charge-offs in 1991 and 1992 of $1.1 million and $1.4 million,
respectively, were directly related to the writedown of a working capital loan,
to a limited partnership, for an apartment project located in Milwaukee,
Wisconsin. This loan was acquired in the acquisition of a troubled thrift
institution in 1985. The Corporation has no commercial loans in its loan
portfolio at the end of 1993.
The Banks have also, in the past, undertaken off-balance sheet financial
guarantees, totaling $11.0 million at December 31, 1993, whereby certain of the
Banks' assets, primarily MBSs, are pledged as collateral for Industrial
Development Revenue Bonds which were issued by municipalities to finance real
estate owned by third parties. Management has considered these guarantees, all
of which are performing, in its review of the adequacy of allowance for possible
losses relating to contingent liabilities. See Note N to the consolidated
financial statements for further discussion of off-balance sheet financial
guarantees.
Management believes that the December 31, 1993, allowances for loan and
foreclosed property losses are adequate based upon the current evaluation of
loan delinquencies, non-performing assets, charge-off trends, economic
conditions and other factors. Management also continues to pursue all practical
and legal methods of collection, repossession and disposal, as well as adhering
to high underwriting standards in the origination process, in order to continue
to reduce provisions for losses of all types in future years.
A detailed analysis of the Corporation's allowances for losses on loans and
related charge-off information is as follows for the dates and periods
indicated:
At December 31, 1993 At December 31, 1992
-------------------- --------------------
1993
Charge-offs
Allowance As A Percent Allowance
As A % Of Of Average As A % Of
Outstanding Related Loans Outstanding
Allowance Loans In For The Year Allowance Loans In
Type of Loan Amount Category Ended 12/31/93 Amount Category
- - ------------ --------- ---------- -------------- --------- ----------
(Dollars in thousands)
Residential real estate $ 5,877 .30% .03% $ 3,301 .23%
Commercial real estate 4,010 4.23 .51 3,986 3.91
Manufactured housing 4,668 2.83 1.85 4,325 3.25
Credit cards 6,502 3.10 2.87 4,034 2.26
Consumer 1,728 1.12 -- 860 .97
Education 52 .03 .01 269 .16
Home equity 429 .22 .02 292 .18
Commercial -- -- -- -- --
------- -------
$23,266 .80% .32% $17,067 .77%
======= ===== ===== ======= =====
TABLE CONTINUED
At December 31, 1991
--------------------
1992 1991
Charge-offs Charge-offs
As A Percent Allowance As A Percent
Of Average As A % Of Of Average
Related Loans Outstanding Related Loans
For The Year Allowance Loans In For The Year
Type of Loan Ended 12/31/92 Amount Category Ended 12/31/91
- - ------------ -------------- --------- ---------- --------------
(Dollars in thousands)
Residential real estate .10% $ 2,679 .21% .13%
Commercial real estate .94 4,628 4.59 1.98
Manufactured housing 2.90 4,492 3.20 4.88
Credit cards 3.44 2,734 1.70 3.32
Consumer .08 510 .79 .26
Education .09 288 .18 .12
Home equity .08 285 .20 .04
Commercial 34.23 1,090 22.60 20.90
----- -----
.64% $16,706 .82% .83%
===== ======= ===== =====
The Corporation's allowances for losses on loans were allocated to various loan
categories as follows for the dates indicated:
December 31,
1993 1992 1991
------------------------ ---------------------- -----------------------
(Dollars in thousands)
Percent Of Percent Of Percent Of
Loans in Each Loans In Each Loans In Each
Category to Category to Category to
Type of Loan Amount Total Loans Amount Total Loans Amount Total Loans
- - ------------ ------ ------------- ------ ------------- ------ -------------
Residential real estate $ 5,877 66.9% $ 3,301 63.2% $ 2,679 62.3%
Commercial real estate 4,010 3.2 3,986 4.5 4,628 4.9
Manufactured housing 4,668 5.6 4,325 5.9 4,492 6.9
Credit cards 6,502 7.0 4,034 7.9 2,734 7.9
Consumer and other 2,209 17.3 1,421 18.4 1,083 17.8
Commercial -- -- -- .1 1,090 .2
------- ----- ------- ----- ------- -----
$23,266 100.0% $17,067 100.0% $16,706 100.0%
======= ===== ======= ===== ======= =====
TABLE CONTINUED
1990 1989
------------------------ ----------------------
(Dollars in thousands)
Percent Of Percent Of
Loans In Each Loans In Each
Category to Category to
Type of Loan Amount Total Loans Amount Total Loans
- - ------------ ------ ------------- ------ -------------
Residential real estate $ 3,312 64.8% $ 457 62.0%
Commercial real estate 4,349 5.1 6,073 6.4
Manufactured housing 2,259 7.0 2,229 8.5
Credit cards 3,195 6.8 3,342 7.0
Consumer and other 969 16.1 1,004 15.8
Commercial 1,560 .2 568 .3
----- ----- ----- ----
$15,644 100.0% $13,673 100.0%
======= ===== ======= =====
DEPOSITS
Deposits increased $844.0 million to $4.05 billion at December 31, 1993. This
growth was achieved primarily as a result of acquisitions. The weighted-average
cost of deposits decreased to 4.06% at year-end 1993 compared to 4.94% at
year-end 1992, as a result of continued lower market rates during 1993.
BORROWINGS
The Corporation's total borrowings decreased from $461.9 million at year-end
1992 to $438.6 million at the end of 1993. The weighted average cost of
borrowings increased slightly to 4.91% at the end of 1993 as compared to 4.81%
at year-end 1992, representing a moderate lengthening of the average maturity of
the Banks' borrowings.
STOCKHOLDERS' EQUITY
Stockholders' equity at December 31, 1993 was $233.8 million, or 4.90% of total
assets, compared to $194.1 million and 4.97%, respectively, at December 31,
1992. The dollar increase in stockholders' equity resulted from net income of
$45.2 million and a $1.9 million increase in stockholders' equity recorded upon
the adoption of SFAS No. 115 as offset by cash dividend payments to stockholders
of $8.2 million. Stockholders' equity per share increased from $8.34 per share
at year-end 1992 to $9.91 per share at year-end 1993.
REGULATORY CAPITAL
The Corporation's subsidiary Banks are each subject to various individual OTS
capital measurements. Both First Financial and Port have regulatory capital well
in excess of OTS requirements at December 31, 1993, as summarized below:
OTS Capital Ratios
Actual Required
Ratio Ratio Excess
Tangible capital:
First Financial 5.19% 1.50% 3.69%
Port 7.38 1.50 5.88
Core leverage capital:
First Financial 5.76% 3.00% 2.76%
Port 7.38 3.00 4.38
Risk-based capital:
First Financial 12.52% 8.00% 4.52%
Port 14.55 8.00 6.55
In addition, First Financial and Port each meet the definition of a "well
capitalized" thrift institution at year-end 1993 per FDIC rules employing OTS
measurements.
The OTS has issued a final regulation relating to capital requirements based
upon interest-rate risk effective July 1, 1994. In addition, under the terms of
FDICIA the OTS is required to revise its risk-based capital standards to reflect
various risk factors. Management believes that the Banks will not need
additional capital to meet this regulation. The OTS has adopted another final
rule, effective March 4, 1994, disallowing any new core deposit intangibles,
acquired after the rule's effective date, from counting as regulatory capital.
Core deposit intangibles acquired prior to the effective date have been
grandfathered for purposes of this rule. The OTS also has proposed to increase
the core capital requirement from the current 3.00% level to between 4.00% and
5.00%, for all but the most healthy thrift institutions. The additional
requirements could potentially increase the current requirement levels.
Management of the Corporation believes that the Banks will continue to exceed
these regulatory capital requirements in the future through core earnings.
For a more detailed discussion of regulatory capital requirements, see Note L to
the consolidated financial statements.
ASSET/LIABILITY MANAGEMENT
The objective of the Corporation's asset/liability policy is to manage
interest-rate risk so as to maximize net interest income over time in changing
interest-rate environments. To this end, management believes that strategies for
managing interest-rate risk must be responsive to changes in the interest-rate
environment and must recognize and accommodate the market demands for particular
types of deposit and loan products.
Interest-bearing assets and liabilities can be analyzed by measuring the
magnitude by which such assets and liabilities are interest-rate sensitive and
by monitoring an institution's interest-rate sensitivity "gap." An asset or
liability is determined to be interest-rate sensitive within a specific time
frame if it matures or reprices within that time period. An interest-rate
sensitivity "gap" is defined as the difference between the amount of
interest-earning assets anticipated to mature or reprice within a specific time
period and the amount of interest-costing liabilities anticipated to mature or
reprice within the same time period. A gap is considered positive when the
amount of interest-rate sensitive assets exceeds the amount of interest-rate
sensitive liabilities that mature or reprice within a given time frame. A gap is
considered negative when the amount of interest-rate sensitive liabilities
exceeds the amount of interest-rate sensitive assets that mature or reprice
within a specified time period.
Summary gap information for the Corporation is presented below as of December
31, 1993, 1992 and 1991.
Ratio of Cumulative
Positive (Negative) Gap To Total Assets
----------------------------------------------------------
One Year Three Years Five Years
--------- ----------- ----------
December 31, 1993 6.07% (2.63)% (2.57)%
December 31, 1992 4.85 (2.48) (1.88)
December 31, 1991 6.72 (3.04) (4.75)
The Corporation's positive one-year gap increased to $289.5 million, or 6.09% of
total assets, at the end of 1993 from $189.5 million, or 4.85% of total assets,
at the end of 1992. The Corporation's consolidated one-year positive gap
position of 6.07% at December 31, 1993 falls within management's currently
acceptable range of 10% positive to 10% negative. In view of the current low
interest-rate environment and the related impact on customer behavior,
management believes that it is important to weigh and balance the effect of
asset/liability management decisions in the short-term in its efforts to
maintain net interest margins and acceptable future profitability. As such,
management believes that it has been able to achieve a consistent net interest
margin while still meeting asset/liability management objectives.
In this regard, the Banks also measure and evaluate interest-rate risk via a
separate methodology. The net "market value" of interest-sensitive assets and
liabilities is determined by measuring the net present value of future cash
flows under varying interest-rate scenarios in which interest rates would
theoretically increase or decrease up to 400 basis points on a sudden and
prolonged basis. This complex theoretical analysis at December 31, 1993
indicates that the Banks' current financial position should adequately protect
the Banks, and thus the Corporation, from the effects of rapid rate changes. The
OTS has issued final regulations, as noted above, that call for further
regulatory capital requirements based upon this market value methodology
effective July 1, 1994. Management of the Corporation anticipates that current
asset/liability management practices should place the Banks in compliance with
this regulation and that further capital will not be required as a result
thereof.
Asset/Liability Repricing Schedule. The table on the following page sets forth
the combined estimated maturity/repricing structure of the Banks'
interest-earning assets (including net items) and interest-costing liabilities
at December 31, 1993. Assumptions regarding prepayment and withdrawal rates are
based upon the Banks' historical experience, and management believes such
assumptions are reasonable. The table does not necessarily indicate the impact
of general interest-rate movements on the Banks' net interest income because
repricing of certain categories of assets and liabilities through, for example,
prepayments of loans and withdrawals of deposits, is beyond the Banks' control.
As a result, certain assets and liabilities indicated as repricing within a
stated period may in fact reprice at different times and at different rate
levels. Certain shortcomings are inherent in the method of analysis presented in
the gap table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as adjustable-rate loans, have
features which restrict changes in interest rates on a short-term basis and over
the life of the asset. Further, in the event of a change in interest rates,
prepayment and early withdrawal levels could deviate significantly from those
assumed in calculating the data in the table.
FIRST FINANCIAL CORPORATION CONSOLIDATED GAP ANALYSIS AT DECEMBER 31, 1993
Greater Greater Greater Greater
Than One Than Three Than Five Than Ten Greater
Under Through Through Through Through Than
One Year Three Years Five Years Ten Years 20 Years 20 Years Total
---------- ----------- ---------- --------- ---------- ---------- --------
(Dollars in thousands)
Rate-sensitive assets:
Investments and
interest-earning
deposits (a)(b) $ 171,139 $ 91,963 $ 7,156 $ 350 $ 34,920 $ -- $ 305,528
Mortgage-related
securities (b) 1,231,797 78,928 14,181 7 30 -- 1,324,943
Mortgage loans:
Fixed-rate (c)(d) 249,674 403,126 296,706 511,556 19,365 170 1,480,597
Adjustable-rate (c)(d) 412,109 148,930 2,348 99 -- -- 563,486
Other loans 645,602 144,477 30,963 55,200 2,179 -- 878,421
----------- ----------- ----------- ----------- ----------- ----------- -----------
2,710,321 867,424 351,354 567,212 56,494 170 4,552,975
Rate-sensitive liabilities:
Deposits (e)(f) 2,219,743 1,112,718 348,282 208,028 126,978 45,372 4,061,121
Borrowings (g) 201,044 171,027 251 61,046 1,910 3,320 438,598
----------- ----------- ----------- ----------- ----------- ----------- -----------
2,420,787 1,283,745 348,533 269,074 128,888 48,692 4,499,719
----------- ----------- ----------- ----------- ----------- ----------- -----------
GAP (repricing
difference) $ 289,534 $ (416,321) $ 2,821 $ 298,138 $ (72,394) $ (48,522) $ 53,256
=========== =========== =========== =========== =========== =========== ===========
Cumulative GAP $ 289,534 $ (126,787) $ (123,966) $ 174,172 $ 101,778 $ 53,256
=========== =========== =========== =========== =========== ===========
Cumulative GAP/Total
Assets 6.07% (2.66)% (2.60)% 3.65% 2.13% 1.11%
=========== ============ =========== =========== =========== ===========
<FN>
(a) Investments are adjusted to include FHL Bank stock and other items
totaling $29.8 million as investments in the "Greater than Ten Through 20
Years" category.
(b) Investment and mortgage-related securities are presented at carrying
value, including net unrealized holding gain on available-for-sale
securities.
(c) Based upon 1) contractual maturity, 2) repricing date, if applicable, 3)
scheduled repayments of principal and 4) projected prepayments of
principal based upon the Corporation's historical experience as modified
for current market conditions.
(d) Includes loans held for sale.
(e) Deposits include $13.8 million of advance payments by borrowers for tax
and insurance and exclude accrued interest of $3.2 million.
(f) The Corporation has assumed that its passbook savings, NOW accounts and
money market accounts would have projected annual withdrawal rates, based
upon the Corporation's historical experience, of 26%, 34% and 42%,
respectively.
(g) Collateralized mortgage obligations totaling $5.2 million are included in
the "Greater Than Five Through Ten Years" category.