SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1995
--------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-11889
FIRST FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Wisconsin 39-1471963
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1305 Main Street, Stevens Point, Wisconsin 54481
(Address of principal executive office)
(715) 341-0400
(Registrant's telephone number, including area code)
(Former name, address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Common Stock, par value $1.00 per share 29,533,125 Shares
--------------------------------------- -----------------------
Class Outstanding at July 31, 1995
FIRST FINANCIAL CORPORATION
Form 10-Q Index
Part I - Financial Information
Consolidated Balance Sheets as of June 30, 1995
(Unaudited) and December 31, 1994
Unaudited Consolidated Statements of Income for
the Three Months and Six Months Ended June 30,
1995 and 1994
Unaudited Consolidated Statement of Changes In
Stockholders' Equity for the Six Months Ended
June 30, 1995
Unaudited Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 1995 and
1994
Notes to Unaudited Consolidated Financial Statements
Management's Discussion and Analysis:
Comparison of the Consolidated Balance Sheets
at June 30, 1995 (Unaudited) and December 31,
1994
Comparison of the Unaudited Consolidated Statements
of Income for the Three Months and Six Months Ended
June 30, 1995 and 1994
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
Signatures
Exhibits
-1-
FIRST FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
June 30,
1995 December 31,
(Unaudited) 1994
---------- -----------
(In thousands)
Cash $ 107,084 $ 94,064
Federal funds sold 12,480 23,890
Interest-earning deposits 9,552 1,024
---------- ----------
Cash and cash equivalents 129,116 118,978
Securities available for sale (at fair value):
Investment securities 61,019 68,959
Mortgage-related securities 197,087 201,373
Securities held to maturity (at amortized cost):
Investment securities (fair value
of $137,049,000--1995 and
$124,434,000--1994) 137,362 129,301
Mortgage-related securities (fair
value of $1,181,407,000--1995
and $1,263,755,000--1994) 1,198,261 1,301,118
Loans receivable:
Held for sale 27,661 11,736
Held for investment 3,514,944 3,458,711
Foreclosed properties and repossessed
assets 5,211 5,216
Real estate held for investment or sale 8,265 7,706
Office properties and equipment, at cost 52,504 53,927
Intangible assets, less accumulated
amortization 24,104 26,726
Other assets 123,718 118,073
---------- ----------
$5,479,252 $5,501,824
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $4,510,444 $4,381,455
Borrowings 520,606 708,446
Advance payments by borrowers for
taxes and insurance 51,706 15,986
Other liabilities 40,972 68,629
---------- ----------
Total liabilities 5,123,728 5,174,516
---------- ----------
Stockholders' equity:
Serial preferred stock, $1 par value,
3,000,000 shares authorized; none
outstanding
Common stock, $1 par value, 75,000,000
shares authorized; shares issued and
outstanding: 29,517,510-1995;
29,125,858-1994 29,518 29,126
Additional paid-in capital 48,927 50,129
Net unrealized loss on
securities available for sale (3,893) (8,619)
Treasury stock -- (3,669)
Common stock purchased by
employee benefit plans (1,061) (1,608)
Retained earnings (substantially
restricted) 282,033 261,949
---------- ----------
Total stockholders' equity 355,524 327,308
---------- ----------
$5,479,252 $5,501,824
========== ==========
See notes to unaudited consolidated financial statements.
-2-
FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -----------------------
1995 1994 1995 1994
--------- --------- --------- ------
(In thousands, except
per share amounts)
Interest income:
Mortgage loans $ 45,927 $ 43,746 $ 91,450 $ 87,461
Other loans 29,448 24,513 57,807 48,197
Mortgage-related securities 25,636 22,047 51,116 41,533
Investments 3,723 3,625 7,163 7,919
-------- -------- -------- --------
Total interest income 104,734 93,931 207,536 185,110
Interest expense:
Deposits 49,949 43,166 95,116 86,610
Borrowings 9,278 6,738 20,715 12,129
-------- -------- -------- --------
Total interest expense 59,227 49,904 115,831 98,739
-------- -------- -------- --------
Net interest income 45,507 44,027 91,705 86,371
Provision for losses on loans 2,073 1,894 4,192 3,362
-------- -------- -------- --------
43,434 42,133 87,513 83,009
Non-interest income:
Deposit account service fees 2,974 2,637 5,594 5,068
Loan fees and service charges 2,801 2,424 5,258 4,685
Insurance and brokerage sales
commissions 1,734 1,828 3,786 3,799
Service fees on loans sold 1,787 1,874 3,756 3,706
Net gain on sales of loans 245 1,054 282 2,391
Unrealized loss on impairment of
mortgage-related securities -- (9,000) -- (9,000)
Net gain on sales of securities
available for sale -- 301 11 1,237
Other 828 769 1,935 1,620
-------- -------- -------- --------
Total non-interest income 10,369 1,887 20,622 13,506
-------- -------- -------- --------
Operating income 53,803 44,020 108,135 96,515
Non-interest expense:
Compensation, payroll taxes
and benefits 10,960 12,963 24,137 26,330
Acquisition-related costs -- -- 6,458 --
Federal deposit insurance premiums 2,529 2,589 5,058 5,179
Occupancy 2,180 2,154 4,530 4,534
Marketing 2,062 1,133 4,177 2,270
Data processing 1,888 1,787 3,613 3,663
Telephone and postage 1,607 1,497 3,300 3,063
Loan expenses 1,547 1,726 3,002 3,342
Furniture and equipment 1,485 1,587 2,897 3,125
Amortization of intangible assets 1,311 1,344 2,622 2,688
Net cost (income) from operations
of foreclosed properties (25) 173 (7) 518
Other 2,959 2,982 5,714 5,976
-------- -------- -------- --------
Total non-interest expense 28,503 29,935 65,501 60,688
-------- -------- -------- --------
Income before income taxes 25,300 14,085 42,634 35,827
Income taxes 8,995 5,336 15,502 13,597
-------- -------- -------- --------
Net income $ 16,305 $ 8,749 $ 27,132 $ 22,230
======== ======== ======== ========
Earnings per share:
Primary $ 0.54 $ 0.29 $ 0.90 $ 0.74
Fully diluted $ 0.54 $ 0.29 $ 0.90 $ 0.74
Cash dividends per share $ 0.12 $ 0.10 $ 0.24 $ 0.20
See notes to unaudited consolidated financial statements.
-3-
FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For The Six Month Period Ended June 30, 1995
(Unaudited)
Net
Unrealized
Holding Common
Common Gain Stock
Stock and (Loss) On Purchased
Additional Securities by Employee
Paid-In Retained Available Treasury Benefit Stockholders
Capital Earnings For Sale Stock Plans (1) Equity
--------- -------- ---------- -------- ----------- ---------
(In thousands)
Balances at
December 31, 1994 $ 57,310 $226,045 $ (5,400) $ -- $ -- $277,955
Pooling-of-interests--
FirstRock Bancorp,
Inc. 21,945 35,904 (3,219) (3,669) (1,608) 49,353
-------- -------- -------- -------- -------- --------
Restated balances at
December 31, 1994 79,255 261,949 (8,619) (3,669) (1,608) 327,308
Net income for the
six months ended
June 30, 1995 27,132 27,132
Payment for fractional
shares (5) (5)
Cash dividends
($0.24 per share) (7,048) (7,048)
Exercise of stock
options 1,844 423 2,267
Payment on ESOP loan 38 38
Amortization of Retention
and Recognition Plan
(RRP) shares 31 31
Vesting of RRP shares at
acquisition 464 464
Reversion of unallocated
RRP shares to FFC (14) 14 --
Tax benefit related to
vested RRP shares and
non-incentive options
exercised 611 611
Treasury shares retired
upon acquisition of
FirstRock Bancorp,
Inc. (3,260) 3,260 --
Change in net unrealized
holding loss on
securities available
for sale 4,726 4,726
-------- -------- -------- -------- -------- --------
Balances at June 30,
1995 $ 78,445 $282,033 $ (3,893) $ -- $ (1,061) $355,524
======== ======== ======== ======== ======== ========
<FN>
(1) Balance at June 30, 1995 consists entirely of common stock purchased by the
Employee Stock Ownership Plan (ESOP).
See notes to unaudited consolidated financial statements.
-4-
FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
1995 1994
---------- -------
OPERATING ACTIVITIES (In thousands)
Net income $ 27,132 $ 22,230
Adjustments to reconcile net income to net cash provided
by operating activities:
Increase in accrued interest on loans (2,941) (1,460)
Increase in accrued interest on deposits 5,876 183
Mortgage loans originated for sale (79,680) (218,880)
Proceeds from sales of loans held for sale 64,883 333,287
Provision for depreciation 2,937 3,452
Provision for losses on loans 4,192 3,362
Provision for losses on real estate and other assets 644 225
Unrealized loss on impairment of mortgage-related securities -- 9,000
Amortization of cost in excess of net assets of
acquired businesses 416 312
Amortization of core deposit intangibles 2,206 2,376
Amortization of purchased mortgage servicing rights 423 583
Net gain on sales of loans and assets (325) (3,718)
Other-net 2,110 (23,754)
--------- ---------
Net cash provided by operating activities 27,873 127,198
INVESTING ACTIVITIES
Proceeds from sales of investment securities available for sale 33,771 36,643
Proceeds from maturities of investment securities held
to maturity 2,382 65,088
Purchases of investment securities held to maturity (35,333) (8,620)
Proceeds from sales of mortgage-related securities available
for sale -- 126,107
Principal payments received on mortgage-related securities 112,570 185,826
Purchases of mortgage-related securities held to maturity -- (492,345)
Proceeds from sale of finance company receivables -- 6,665
Principal received on loans receivable 259,151 322,837
Loans originated for portfolio (324,126) (510,236)
Additions to office properties and equipment (2,253) (1,339)
Proceeds from sales of foreclosed properties and
repossessed assets 3,705 5,414
Proceeds from sales of real estate held for investment -- 98
Business acquisitions (net of cash and cash equivalents acquired of
$4,593,000--1994):
Investment securities held to maturity -- (4,785)
Mortgage-related securities held to maturity -- (16,742)
Loans receivable -- (96,748)
Office properties -- (2,387)
Intangible assets -- (699)
Deposits and related accrued interest -- 114,297
Borrowings -- 750
Stockholders' equity -- 11,401
Other-net -- (494)
--------- ---------
Net cash provided by (used in) investing activities 49,867 (259,269)
FINANCING ACTIVITIES
Net increase (decrease) in deposits 123,113 (46,444)
Net increase in advance payments by borrowers for
taxes and insurance 35,720 30,207
Funding of official checks for borrower tax escrows (34,953) --
Proceeds from borrowings 1,125,319 527,450
Repayments of borrowings (1,313,159) (395,768)
Proceeds from exercise of stock options 2,267 538
Proceeds from vesting of employee benefit plans 1,139 208
Payments of cash dividends to stockholders (7,048) (5,001)
---------- ---------
Net cash provided by (used in) financing activities (67,602) 111,190
---------- ---------
Increase (decrease) in cash and cash equivalents 10,138 (20,881)
Cash and cash equivalents at beginning of period 118,978 138,018
---------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 129,116 $ 117,137
========== =========
See notes to unaudited consolidated financial statements.
-5-
FIRST FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - PRINCIPLES OF CONSOLIDATION
The unaudited consolidated financial statements include the accounts and
results of operations of First Financial Corporation (FFC) and its wholly-owned
subsidiary, First Financial Bank, FSB (FF Bank). Significant intercompany
accounts and transactions have been eliminated in consolidation. FFC uses the
calendar year as its fiscal year.
The financial statements reflect adjustments, all of which are of a
normal recurring nature, and in the opinion of management, necessary for a fair
statement of the results for the interim periods, and are presented on an
unaudited basis. The operating results for the first six months of 1995 are not
necessarily indicative of the results which may be expected for the entire 1995
fiscal year. The December 31, 1994 balance sheet included herein is derived from
the consolidated financial statements included in FFC's 1994 Annual Report to
Shareholders. The accompanying unaudited consolidated financial statements and
related notes should be read in conjunction with the consolidated financial
statements and related notes included in FFC's 1994 Annual Report to
Shareholders. See Note B for information relative to business combinations.
NOTE B - FIRST FINANCIAL CORPORATION
At June 30, 1995, FFC conducted business as a nondiversified unitary
thrift holding company and its principal asset was the capital stock of FF Bank.
The primary business of FFC is the business of FF Bank. FFC's activities are
currently comprised of providing limited administrative services to FF Bank.
On February 28, 1995, FFC acquired FirstRock Bancorp, Inc. ("FirstRock")
of Rockford, Illinois. In the acquisition, 4,366,412 shares of FFC common stock
were issued to FirstRock shareholders based upon an exchange ratio of 1.7893
shares of FFC common stock for each outstanding share of FirstRock common stock.
Upon closing, FirstRock's subsidiary, First Federal Savings Bank, FSB ("First
Federal") was merged into FF Bank with First Federal's six offices now operating
as branch banking offices of FF Bank. FirstRock was merged into FFC. The
transaction was accounted for as a pooling-of-interests and, accordingly,
financial statements for all periods presented have been restated to include the
results of FirstRock.
-6-
On February 28, 1995 FirstRock had assets (unaudited) of $376,473,000
and shareholders' equity (unaudited) of $48,430,000. The total income and net
income (loss) for the two-month period ended February 28, 1995 (unaudited),
which reflects the pre-merger results of FFC and FirstRock that are included in
the first quarter 1995 results of operations, are as follows:
Net
Total Income
Income (Loss)
------- -------
(In thousands)
FFC $69,579 $ 9,348
FirstRock 5,383 (3,091)
------- -------
$74,962 $ 6,257
======= =======
A reconciliation of total income, net income and earnings per share
(unaudited), as previously reported, with restated amounts for the three months
and six months ended June 30, 1994 follows:
Three Months Ended Six Months Ended
June 30, 1994 June 30, 1994
-------------------------- ----------------------
Total Net Total Net
Income Income Income Income
-------- ------- -------- -------
(In thousands)
Previously Reported $ 87,629 $ 7,529 $182,276 $ 19,809
FirstRock 8,189 1,220 16,340 2,421
-------- ------- -------- --------
As Restated $ 95,818 $ 8,749 $198,616 $ 22,230
======== ======= ======== ========
Earnings Per Share $ .29 $ .74
======= ========
As a result of the FirstRock acquisition, FFC and FirstRock incurred
expenses i) in conjunction with the acquisition itself and ii) relative to the
reorganization of FirstRock's operations following the acquisition. The
acquisition/transaction costs and charges aggregated $6.5 million on a pre-tax
basis and $4.0 million on an after-tax basis, or $0.14 per share during the
first quarter of 1995.
On February 26, 1994, the Corporation completed the acquisition of
NorthLand Bank of Wisconsin, SSB (NorthLand) of Ashland, Wisconsin. NorthLand
was merged into FF Bank. The Corporation issued approximately 938,000 shares of
common stock, valued in the aggregate at $14.2 million, at the time of the
acquisition. The acquisition of NorthLand had been accounted for as a
pooling-of-interests and 1994 amounts had been adjusted to reflect the
transaction as if it had occurred on January 1, 1994.
NOTE C - EARNINGS PER SHARE
Primary and fully diluted earnings per share for the periods ended June
30, 1995 and 1994 have been determined based on the weighted average number of
common shares outstanding during each period and common equivalent shares, using
the treasury share method, outstanding at the end of each period. FFC's common
stock equivalents consist entirely of stock options. Weighted average common
shares have been adjusted for all periods presented to reflect the restatement
for FirstRock shares. See Exhibit 11 to this Report for a detailed computation
of earnings per share.
-7-
NOTE D - CONTINGENT LIABILITIES
The Bank has previously entered into agreements whereby, for an annual
fee, certain securities are pledged as secondary collateral in connection with
the issuance of industrial development revenue bonds. At June 30, 1995,
mortgage-related securities and investment securities with a carrying value of
approximately $6.2 million were pledged as collateral for bonds in the aggregate
principal amount of $3.9 million. Additional bond issues totaling $7.2 million
are supported by letters of credit issued by FF Bank, in lieu of specific
collateral. At June 30, 1995, each of the outstanding collateral agreements was
current with regard to bond debt-service payments.
NOTE E - DIVIDENDS PAID OR DECLARED TO STOCKHOLDERS
The Board of Directors of FFC on May 17, 1995 declared a $0.12 per share
quarterly cash dividend payable on June 30, 1995 to shareholders of record of
FFC common stock on June 15, 1995.
NOTE F - REGULATORY CAPITAL REQUIREMENTS
Current Office of Thrift Supervision (OTS) regulatory capital
requirements for federally-insured thrift institutions include a tangible
capital to tangible assets ratio, a core leverage capital to adjusted tangible
assets ratio and a risk-based capital measurement based upon assets weighted for
their inherent risk. As of June 30, 1995, FF Bank exceeded all OTS capital
requirements as displayed below:
Required Actual
OTS FF Bank
Ratio Ratio
--------- --------
Tangible capital 1.50% 6.73%
Core leverage capital 3.00 7.06
Risk-based capital 8.00 14.83
The OTS also has a requirement for calculating an interest rate risk component
of capital. Under this requirement, savings institutions with "above normal"
interest rate risk exposure are subject to a deduction from total capital for
purposes of calculating their risk-based capital requirements. A savings
institution's interest rate risk is measured by the decline in the net portfolio
value of its assets (i.e., the difference between incoming and outgoing
discounted cash flows from assets, liabilities and off-balance-sheet contracts)
that would result from a hypothetical 200 basis point increase or decrease in
market interest rates (except when the three-month Treasury bond equivalent
yield falls below 4%, then the decrease will be equal to one-half of that
Treasury rate) divided by the estimated economic value of the institution's
assets. That dollar amount is deducted from the institution's total capital in
calculating risk-based capital. At June 30, 1995, FF Bank was not required to
deduct any amount from capital as a result of interest rate risk exposure.
-8-
The OTS also has proposed to increase the minimum required core capital
ratio from the current 3% level to a range of 4% to 5% for all but the most
highly rated financial institutions. While the OTS has not taken final action on
such proposal, it has adopted a prompt corrective action ("PCA") regulation that
classifies any savings institution with a core capital ratio of less than 4% (3%
for the most highly rated institutions) as "undercapitalized." FF Bank is not
subject to any PCA sanctions.
NOTE G - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
For The
Six Months Ended
June 30,
1995 1994
------- -----
(In thousands)
Supplemental disclosure of cash flow information:
Cash paid or credited to accounts during
period for:
Interest on deposits and borrowings $110,255 $ 97,646
Income taxes 17,516 15,201
Non-cash investing activities:
Mortgage loans transferred to held for sale
portfolio 846 36,415
Loans receivable transferred to foreclosed
properties 3,704 3,916
Change in net unrealized holding loss
on securities available for sale (4,726) (3,041)
-9-
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following Management's Discussion and Analysis, including the
comparison of balance sheet and income statement data, reflects the restatement
of all prior period financial data to include FirstRock. See Note B to the
Financial Statements.
COMPARISON OF THE CONSOLIDATED BALANCE SHEETS
AT JUNE 30, 1995 (UNAUDITED) WITH DECEMBER 31, 1994
General:
Total assets decreased to $5.479 billion at June 30, 1995 from $5.502
billion at December 31, 1994. The $23.0 million decrease in total assets relates
primarily to the $102.9 million decrease in mortgage-related securities held to
maturity offset by an increase of $72.2 million in loans receivable. Deposits
increased to $4.510 billion at June 30, 1995 from $4.381 billion at year-end
1994 while borrowings decreased to $520.6 million from $708.4 million during the
same time frame. Advance payments by borrowers for taxes and insurance increased
by $35.7 million between December 31, 1994 and June 30, 1995 and other
liabilities decreased $27.7 million from December 31, 1994 to June 30, 1995.
Borrowers' advance payments routinely show net increases throughout the first
three quarters of the year as receipts exceed insurance premiums and taxes paid
during each quarter. The higher other liabilities balance at year-end 1994
represented the outstanding real estate property tax checks issued to
municipalities on behalf of the borrowers and as those checks were paid during
the early months of 1995 other liabilities decreased significantly.
Stockholders' equity at June 30, 1995 was $355.5 million, up from $327.3 million
at year-end 1994.
Liquidity and Capital Resources:
At June 30, 1995, total consolidated liquidity, consisting of cash,
cash equivalents, and investment securities, represented 5.98% of FFC's total
assets compared with 5.77% at December 31, 1994. The Bank is in compliance with
requirements relating to minimum levels of liquid assets as defined by OTS
regulations. The ongoing management of liquid assets is an integral part of
FFC's overall asset/liability management program as described below under
"Asset/Liability Management." The cash and securities portfolios are among the
most flexible assets available for shorter term liability matching. Total
consolidated liquidity at June 30, 1995 increased by $10.3 million as compared
to December 31, 1994 liquidity as a result of the net effect of significant
changes in various categories of assets and liabilities during the six-month
interim period. Some of the more significant changes in these categories,
including liquid assets, can be summarized as follows:
Consolidated
Statement Of Balance Balance
Financial Condition December 31, Increases June 30,
Classification 1994 (Decreases) 1995
- ------------------- ------------ ----------- --------
(In thousands)
Cash and cash equivalents $ 118,978 $ 10,138 $ 129,116
Securities available for
sale:
Investment securities 68,959 (7,940) 61,019
Mortgage-related
securities 201,373 (4,286) 197,087
Securities held to
maturity:
Investment securities 129,301 8,061 137,362
Mortgage-related
securities 1,301,118 (102,857) 1,198,261
Loans receivable, in-
cluding loans held
for sale 3,470,447 72,158 3,542,605
Office properties 53,927 (1,423) 52,504
Intangible assets 26,726 (2,622) 24,104
Deposits 4,381,455 128,989 4,510,444
Borrowings 708,446 (187,840) 520,606
Advance payments by
borrowers for taxes
and insurance 15,986 35,720 51,706
Other liabilities 68,629 (27,657) 40,972
Stockholders' equity 327,308 28,216 355,524
-10-
Changes noted in the "Increases (Decreases)" column of the preceding
table are discussed below in the related sections of "Management's Discussion
and Analysis."
Management believes liquidity and capital levels are proper and that
additional capital and borrowings, if needed, are available through the capital
markets, the Federal Home Loan Bank (FHLB) and other sources. For a discussion
of regulatory capital requirements, see Note F to the unaudited consolidated
financial statements.
On an unconsolidated basis, FFC had cash of $10.9 million and
subordinated debt of $55.0 million at June 30, 1995. The principal ongoing
sources of funds for FFC are dividends from FF Bank. Applicable rules and
regulations of the OTS impose limitations on capital distributions by savings
institutions such as FF Bank. Savings institutions such as FF Bank which have
capital in excess of all fully phased-in capital requirements before and after a
proposed capital distribution are permitted, after giving prior notice to the
OTS, to make capital distributions during a calendar year up to the greater of
(i) 100% of net income to date during the calendar year, plus the amount that
would reduce by 1/2 its "surplus capital ratio" (the excess capital over its
fully phased-in capital requirements) at the beginning of the calendar year, or
(ii) 75% of its net income over the most recent four-quarter period.
Total Loans Receivable and Held for Sale:
Total loans, including loans held for sale, increased $72.2 million from
$3.470 billion at December 31, 1994 to $3.543 billion at June 30, 1995. Total
loans are summarized below as of the dates indicated.
June 30, December 31, Increase
1995 1994 (Decrease)
------------- ------------ ----------
(In thousands)
Real estate loans:
One- to four-family $2,054,075 $2,064,232 $ (10,157)
Multi-family 214,144 215,703 (1,559)
Commercial and non-residential 153,487 143,762 9,725
---------- ---------- ---------
Total real estate loans 2,421,706 2,423,697 (1,991)
Other loans:
Consumer 332,807 304,771 28,036
Home equity 271,009 240,915 30,094
Education 220,587 192,542 28,045
Credit cards 197,770 200,747 (2,977)
Manufactured housing 137,725 152,674 (14,949)
Business 16,451 19,023 (2,572)
Less net items to loans receivable (55,450) (63,922) 8,472
---------- ---------- ---------
Total loans (including loans held
for sale) $3,542,605 $3,470,447 $ 72,158
========== ========== =========
-11-
The major components of the increase in total loans during the first
six months of 1995 were a $28.0 million increase in consumer loans, a $28.0
million increase in education loans and a $30.1 million increase in home equity
loans.
Consumer loans increased $28.0 million in 1995 due to continuing
success in marketing a second mortgage product and increased automobile
financing. Student loans have increased during the first six months of 1995
primarily as a result of increased government guaranteed portfolio acquisitions
from other lenders. Home equity loans have increased $30.1 million in 1995 as
customer usage of this product has continued to grow. Credit card loans
decreased $3.0 million in 1995 reflecting a seasonal decline in this portfolio.
Manufactured housing loan balances decreased $14.9 million as FFC exited the
manufactured housing lending business in late 1994 due to unfavorable pricing
practices by competitors.
Mortgage loans held for sale were $27.7 million at June 30, 1995 as
compared to $11.7 million at the end of 1994. Off-balance sheet commitments to
extend credit and to sell mortgage loans totaled $36.3 million and $44.6
million, respectively, at June 30, 1995 as compared to $31.7 million and $12.4
million, respectively, at December 31, 1994. During the six months ended June
30, 1995, market interest rates generally decreased as compared to interest rate
levels at the end of 1994, and continue to fluctuate. The fair value of
onbalance sheet mortgage loans held for sale and off-balance sheet commitments
to originate and sell mortgage loans can vary substantially depending upon the
movement of interest rates. Management utilizes various methods to insulate FFC
from the effects of such interest-rate movements, principally by securing
forward commitments to sell loans in the secondary mortgage market. However,
there can be no assurance that these means will be totally effective. Future
operations may be affected by the above-discussed risk factors.
Mortgage-Related Securities:
The mortgage-related securities (MBS) portfolio decreased $107.1
million during the six months ended June 30, 1995 primarily as a result of
principal repayments of $112.6 million. At the end of the second quarter, FF
Bank had no commitments to purchase MBSs. Also, see "Non-Accrual MBSs" for
discussion of non-performing MBSs.
The following tables set forth, at the dates indicated, the
composition of the MBS portfolio including issuer, security type and financial
statement carrying value as well as classification according to
available-for-sale or held-to-maturity status:
-12-
Carrying Value At
June 30, December 31,
1995 1994
----------- --------
(In thousands)
Issuer/Security Type
U.S. Government agencies:
Mortgage-backed certificates $ 377,711 $ 395,544
Collateralized mortgage
obligations 344,566 347,817
---------- ----------
Total agencies 722,277 743,361
---------- ----------
Private issuers:
Mortgage-backed certificates
Senior position 574,926 658,508
Mezzanine position 97,430 98,507
Collateralized mortgage
obligations 715 2,115
---------- ----------
Total private issuers 673,071 759,130
---------- ----------
Totals $1,395,348 $1,502,491
========== ==========
Total carrying value per consolidated financial statements,
by classification:
Available-for-sale portfolio $ 197,087 $ 201,373
Held-to-maturity portfolio 1,198,261 1,301,118
---------- ----------
Total carrying value $1,395,348 $1,502,491
========== ==========
Loan Delinquencies:
FFC monitors the delinquency status of its loan portfolio on a constant
basis and initiates a borrower contact and additional collection procedures as
necessary at an early date. Delinquencies and past due loans are, however, a
normal part of the lending function. When the delinquency reaches the status of
greater than 90 days, the loans are placed on a non-accrual basis until such
time as the delinquency is reduced again to 90 days or less. Nonaccrual loans
are presented separately in the following section. Loan delinquencies of 90 days
or less, for the dates indicated, are summarized in the following chart:
June 30, December 31,
1995 1994 (a)
------------- ------------
(In thousands)
Loans Delinquent 30-59 Days
Residential real estate $ 6,746 $ 8,796
Manufactured housing 2,179 2,886
Credit card 2,171 1,964
Commercial real estate 244 1,079
Consumer, student and other 6,438 7,219
------- -------
$17,778 $21,944
======= =======
Loans Delinquent 60-90 Days
Residential real estate $ 1,165 $ 1,950
Manufactured housing 792 974
Credit card 1,014 883
Commercial real estate 705 1,696
Consumer, student and other 5,583 5,835
------- -------
$ 9,259 $11,338
======= =======
Total Loans Delinquent 30-90 Days
Residential real estate $ 7,911 $10,746
Manufactured housing 2,971 3,860
Credit card 3,185 2,847
Commercial real estate 949 2,775
Consumer, student and other 12,021 13,054
------- -------
$27,037 $33,282
======= =======
<FN>
(a) The restated December 31, 1994 30-90 delinquent loan balances totaling $33.3
million have been adjusted from the $31.8 million presented in the March 31,
1995 Form 10-Q.
At June 30, 1995, the 30-90 day delinquencies decreased $6.3 million to
$27.0 million from $33.3 million at year-end 1994. As a percent of total loans
receivable, loan delinquencies decreased from 0.96% at the end of 1994 to 0.76%
at June 30, 1995. The decrease relates to the net effect of i) the return to
satisfactory contractual performance of various commercial real estate loans,
ii) a decrease of $600,000 in student loans (which are government guaranteed)
delinquent 30-90 days, iii) a decrease of $2.8 million of delinquent residential
real estate loans, iv) a decrease of $900,000 in manufactured housing loans
delinquent 30-90 days, and v) an increase of $400,000 in credit card delinquent
balances. The overall decrease of $2.8 million in 30-90 day delinquent
residential mortgages was offset by a $400,000 transfer to non-accrual status
for certain multi-family residential mortgages, reflected below. All delinquent
loans have been considered by management in its evaluation of the adequacy of
the allowances for loan losses.
Non-Accrual Loans:
FFC places loans into a non-accrual status when loans are contractually
delinquent more than 90 days. If appropriate, loans may be placed into
non-accrual status prior to becoming 90 days delinquent based upon management's
analysis. Non-accrual loans are summarized, for the dates indicated, in the
following table:
June 30, December 31,
1995 1994
------------- --------
(In thousands)
One- to four-family residential $ 5,201 $ 5,706
Multi-family residential 1,026 585
Commercial and other real estate 227 271
Manufactured housing 890 1,034
Credit cards 2,207 2,031
Consumer and other 559 937
------- -------
$10,110 $10,564
======= =======
Non-accrual loans decreased $500,000 to $10.1 million at June 30, 1995
from $10.6 million at December 31, 1994. As a percentage of net loans
receivable, non-accrual loans decreased slightly to 0.29% at June 30, 1995 from
0.30% at December 31, 1994. The 1995 decrease in non-accrual loans relates to a
decrease of $300,000 in the commercial business loan portfolio and $100,000
decreases for residential mortgage, manufactured housing and consumer loans.
These decreases were offset partially by a $200,000 increase in non-accrual
credit card loan balances. All of these relatively minor fluctuations
demonstrate the stability of the collection and monitoring processes during a
period including a significant acquisition. FFC has had no troubled debt
restructurings during 1995.
All loans included in non-accrual status have been considered by
management in its review of the adequacy of allowances for loan losses.
-14-
Non-Accrual MBSs:
At June 30, 1995 and December 31, 1994, FFC had two non-accrual MBS's
having a net carrying value, after reduction for specific reserves, of $12.9
million and $15.5 million, respectively. The decrease in carrying value relates
to the reclassification of the related reserve for loss from a general reserve
to a specific reserve. Each of these MBSs is a mezzanine security, which is
subordinate to the senior position of that issue but still superior to other
subordinate positions designed to absorb first losses. FFC's mezzanine position
is superior to subordinate positions amounting to 4.14% of the current aggregate
par value of the securities in question. Independent national rating agencies
downgraded these two securities as well as an unrelated senior position
security, having a net carrying value of $8.7 million, of the same issuer during
1994. The senior position security continues to be a performing asset.
Also, during 1995, independent national rating agencies have downgraded,
to below investment grade, MBSs of two unrelated issuers in which FFC has senior
ownership positions having a net carrying value of $7.8 million at June 30,
1995. These senior position securities continue to be performing securities and
are superior to subordinate positions amounting to 7.50% of the current
aggregate par value of the securities in question.
The aggregate par and net carrying values of the above discussed MBSs
rated below investment grade were $38.8 million and $29.6 million, respectively,
at June 30, 1995.
Management believes that the carrying value of the above referenced
securities is fairly stated based upon its evaluations, including information
from the rating agencies as well as discounted cash flow analyses performed by
management, which are based upon reasonable assumptions for future delinquency
levels, foreclosure rates and recovery ratios in the underlying portfolios.
Management also has the intent and ability to retain its investment in these
securities for a period of time sufficient to allow for anticipated recovery of
fair value.
FFC's portfolio of MBSs totaled approximately $1.40 billion at June 30,
1995, and except for the two non-accrual MBSs, all of FFC's mortgage-related
securities were performing assets. Additionally, with the exception of the
downgraded securities noted above, all of FFC's mortgage-related securities are
i) rated at a minimum of investment grade by at least one nationally recognized
independent rating agency, or ii) are government agency backed issues.
Allowances for Loan Losses:
FFC's loan portfolios and off-balance sheet financial guarantees are
evaluated on a continuing basis to determine the additions to the allowances for
losses and the related balance in the allowances. These evaluations consider
several factors including, but not limited to, general economic conditions, loan
portfolio compositions, loan delinquencies, prior loss experience, and
management's estimation of future potential losses. The evaluation of allowances
for loan losses includes a review of both known loan problems as well as a
review of potential problems based upon historical trends and ratios.
-15-
A summary of activity in the allowances for loan losses, for the six
months ended June 30, 1995 and 1994, follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ --------------------
1995 1994 1995 1994
-------- -------- -------- ------
(In thousands)
Allowances at beginning of period $25,149 $26,643 $25,180 $25,905
From acquired bank -- -- -- 816
Provisions 2,073 1,894 4,192 3,362
Charge-offs (2,961) (2,285) (5,499) (4,496)
Recoveries 382 256 770 921
------- ------- ------- -------
Allowances at end of period $24,643 $26,508 $24,643 $26,508
======= ======= ======= =======
A discussion of loan loss provisions and charge-offs is presented in
"Management's Discussion and Analysis--Comparison of the Unaudited Consolidated
Statements of Income for the Six Months Ended June 30, 1995 and 1994." An
analysis of allowances by loan category and the percentage of such allowances by
category and in the aggregate to loans receivable at the dates indicated,
follows:
June 30, 1995 December 31, 1994
--------------------------- ----------------------
As Percentage As Percentage
Allowance Of Total Loans Allowance Of Total Loans
Amount In Category Amount In Category
----------- --------------- ----------- -----------------
(Dollars in thousands)
Credit cards $ 6,699 3.39% $ 6,737 3.36%
Residential real estate 6,718 .30 6,990 .32
Manufactured housing 3,462 2.51 4,267 2.79
Commercial and non-resi-
dential real estate 3,826 2.49 3,632 2.53
Consumer 2,791 .84 2,444 .80
Home equity 554 .20 487 .20
Commercial business 550 3.34 577 3.03
Education 43 .02 46 .02
------- -------
$24,643 .70% $25,180 .73%
======= ===== ======= =====
The allowances for loan losses were $24.6 million, or 0.70% of loans
receivable, at June 30, 1995 compared to $25.2 million, or 0.73%, at December
31, 1994. The allowances for losses represented 244% of non-accrual loans at
June 30, 1995 as compared to 238% at the end of 1994. Management believes that
the allowances for losses are sufficient based upon current evaluations.
Foreclosed Properties and Repossessed Assets:
Foreclosed properties and other repossessed assets are summarized, for
the dates indicated, as follows:
June 30, December 31,
1995 1994
------------- --------
(In thousands)
Foreclosed real estate properties $ 6,034 $ 6,095
Manufactured housing owned 153 171
Consumer and other repossessed assets 110 96
------- -------
6,297 6,362
Less allowances for losses (1,086) (1,146)
------- -------
$ 5,211 $ 5,216
======= =======
-16-
Foreclosed properties, net of allowances for losses, remained stable at
$5.2 million at both June 30, 1995 and December 31, 1994.
A summary of the activity in allowances for losses on foreclosed
properties, for the six months ended June 30, 1995 and 1994, is presented below.
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
1995 1994 1995 1994
(In thousands)
Allowances at beginning
of period $1,095 $1,393 $1,146 $1,386
Provisions 15 100 30 332
Charge-offs (24) (162) (90) (387)
------ ------ ------ ------
Allowances at end of
period $1,086 $1,331 $1,086 $1,331
====== ====== ====== ======
The larger commercial real estate properties (having a carrying amount
of $1.0 million or greater) included in foreclosed properties, for the dates
indicated, are presented below. These properties are carried at the lower of
cost or fair value.
Carrying Value At
Property June 30, December 31,
Type Property Location 1995 1994
- -------- ----------------- ------------- --------
(In thousands)
Retail Milwaukee, Wisconsin $ 1,089 $ 1,089
Retail Fort Worth, Texas 1,012 1,012
All of the above foreclosed real estate properties and repossessed
assets have been considered by management in its evaluation of the adequacy of
allowances for losses.
Classified Assets, Including Non-Performing Assets:
For regulatory purposes, FF Bank utilizes a comprehensive classification
system for thrift institution problem assets. This classification system
requires that problem assets be classified as "substandard," "doubtful" or
"loss," depending upon certain characteristics of the particular asset or group
of assets as defined by supervisory regulations.
An asset is classified "substandard" if management believes it contains
defined characteristics relating to borrower net worth, paying capacity or value
of collateral which indicate that some loss is distinctly possible if noted
deficiencies are not corrected. "Doubtful" assets have the same characteristics
present in substandard assets but to a more serious degree, to the belief of
management, such that it is improbable that the asset could be collected or
liquidated in full. "Loss" assets are deemed to be uncollectible or of such
minimal value that their continuance as assets without being specifically
reserved is not warranted. Substandard and doubtful classifications require the
establishment of prudent general allowance for loss amounts, while loss assets,
to the extent that such assets are classified as a "loss," require a 100%
specific allowance or that the asset be charged off.
In general, classified assets include non-performing assets plus other
loans and assets, including contingent liabilities (see Note D), meeting the
criteria for classification. Nonperforming assets include loans or assets i)
which were previously loans which are not substantially performing under the
contractual terms of the original notes, or ii) for which known information
about possible credit problems of borrowers causes management to have
-17-
serious doubts as to the ability of such borrowers to comply with current
contractual terms. This non-performing characteristic impacts directly upon the
interest income normally expected from such assets. Specifically included are
the loans held on a non-accrual basis, real estate judgments subject to
redemption and foreclosed properties for which FF Bank has obtained title.
Classified assets, including non-performing assets, for FF Bank,
categorized by type of asset are set forth in the following table:
June 30, December 31,
1995 1994
------------- --------
(In thousands)
Classified assets:
Non-performing assets:
Non-accrual loans $10,110 $10,564
Non-accrual MBSs 12,908 15,455
Real estate held for sale by FFC 1,327 1,089
Foreclosed properties and other
repossessed assets 5,211 5,216
------- -------
Total Non-Performing Assets 29,556 32,324
Add back general valuation allowances net-
ted against foreclosed properties above 1,086 1,146
Adjustment for non-performing residential
loans not classified due to low
loan-to-appraisal value (735) (414)
Adjustment for real estate held for sale not
included in FF Bank classified assets (1,327) (1,089)
Additional classified performing loans:
Residential real estate 1,449 1,858
Commercial real estate 6,197 8,057
Consumer and other 729 672
Other adversely classified assets -- 135
------- -------
Total Classified Assets $36,955 $42,689
======= =======
During the six months ended June 30, 1995, classified assets decreased
$5.7 million to $37.0 million from $42.7 million at December 31, 1994 primarily
as a result of the $2.6 million decrease in the carrying value of two
non-accrual mortgage-backed securities referred to previously (see "Non-Accrual
MBSs") and a $1.9 million decrease in classified performing commercial real
estate loans. As a percentage of total assets, classified assets decreased from
0.78% at year-end 1994 to 0.67% at June 30, 1995.
The decrease in non-accrual loans and the decrease in foreclosed
properties during the first six months of 1995 have been discussed above (see
"Non-Accrual Loans" and "Foreclosed Properties").
-18-
The following table sets forth, at the dates indicated, performing
commercial real estate mortgage loans (in excess of $1.0 million) included in
classified assets, due to the possible adverse effects of identifiable future
events.
Loan Amount Classified
Property Type Of Property June 30, December 31,
Loan Collateral Location 1995 1994
- ---------------- ---------- ------------- --------
(In thousands)
Office/Land Sheboygan, Wisconsin $ 3,613 $3,633
Motels Various-Tennessee -- 2,553 (a)
<FN>
(a) Represents FF Bank's 20% interest in loans, aggregating $12.3 million,
for which FF Bank is also the lead lender. The loans have been removed
from the classification listing based upon the receipt of certain
contractual principal payments in early 1995.
Other adversely classified assets remained relatively unchanged during
the first six months of 1995.
All adversely classified assets at June 30, 1995, have been considered
by management in its evaluation of the adequacy of allowances for losses.
Deposits and Other Liabilities:
Deposits increased $129.0 million during the six months ended June 30,
1995, primarily due to the success of a new program for short-term certificates
of deposit. The weighted average cost of deposits of 4.54% at June 30, 1995 was
higher than the 4.15% reported at December 31, 1994 due to rising certificate of
deposit rates and more aggressive pricing of certain certificate of deposit
products during 1995.
Advance payments by borrowers for taxes and insurance increased by
$35.7 million during the first six months of 1995 as a result of the normal
cumulative monthly deposits made by borrowers less interim payments of taxes and
insurance premiums.
Borrowings:
At June 30, 1995, FFC's consolidated borrowings decreased $187.8
million to $520.6 million from $708.4 million at December 31, 1994. The decrease
in borrowings is primarily attributable to the net effect of i) repayments of
$125.0 million in long-term and $146.1 million in short-term FHLB advances and
ii) a net increase in short-term reverse repurchase agreements of $86.0 million.
Stockholders' Equity:
Stockholders' equity at June 30, 1995 was $355.5 million, or 6.49% of
total assets, as compared to $327.3 million, or 5.95% of total assets, at
December 31, 1994. The major changes in stockholders' equity included i) net
income of $27.1 million earned during the first six months of 1995, ii) cash
dividend payments to stockholders of $7.0 million, and iii) a $4.7 million
increase in the carrying value of securities available for sale due to market
conditions. Stockholders' equity per share increased from $11.24 per share at
year-end 1994 to $12.04 per share at June 30, 1995.
-19-
Regulatory Capital:
As set forth in Note F to the unaudited consolidated financial
statements, FF Bank exceeds all fully phased-in regulatory capital requirements
mandated by the OTS.
Loan Originations:
A comparison of loan originations for the first six months of 1995 and
1994, including loans originated for sale (but excluding MBSs), is set forth
below:
Six Months Ended June 30,
1995 Percent 1994 Percent
-------- ------- -------- -------
(Dollars in thousands)
Loan Type
Mortgage:
One- to four-family $ 195,499 49.2% $ 457,545 62.1%
Multi-family 12,630 3.2 36,440 4.9
Commercial/non-residential 10,733 2.7 29,769 4.0
Refinanced one- to four-
family loans previously
sold and serviced for others -- -- 21,961 3.0
---------- ----- ---------- -----
218,862 55.1 545,715 74.0
Consumer 105,563 26.6 131,764 17.9
Student 41,026 10.3 17,511 2.4
Home equity-net 30,092 7.6 27,321 3.7
Manufactured housing -- -- 9,195 1.2
Commercial business 1,677 .4 5,346 .7
Refinanced manufactured
housing loans previously
sold and serviced for others -- -- 475 .1
Credit cards-net -- -- -- --
---------- ----- ---------- -----
Total loans originated 397,220 100.0% 737,327 100.0%
===== =====
(Increase) decrease in undisbursed
loan proceeds 6,586 (8,211)
---------- ----------
Total loans disbursed $ 403,806 $ 729,116
========== ==========
Total loan originations decreased to $397.2 million for the first six
months of 1995 from $737.3 million for the same period in 1994. This net 1995
decrease of $340.1 million was primarily attributable to a $326.9 million
decrease in mortgage loan originations.
One- to four-family mortgage loan originations and refinancings
decreased $284.0 million to $195.5 million for the first six months of 1995 as
compared to $479.5 million for the same period in 1994. At June 30, 1995, one-
to four-family mortgage loan applications in process and commitments totaled
$73.2 million and $28.2 million as compared to $42.6 million and $23.3 million
at December 31, 1994. The decrease in originations and refinancings reflects
reduced borrower demand as interest rates have risen during 1994 and 1995. The
recent decline in interest rates has led to the increase in commitments and
applications in process. Approximately 55% of originations for the first six
months of 1995 were adjustable-rate mortgage loans which are held for investment
purposes. With the decrease in interest rates, borrower preference has recently
turned toward fixed-rate mortgage loans. Longer term fixed-rate mortgages are
normally sold into the secondary market.
Originations of multi-family and commercial/non-residential loans
decreased $42.8 million to $23.4 million for the first six months of 1995 as
compared to $66.2 million for the same period in 1994. Commercial real estate
loan originations remain at relatively low levels in 1995 due to regional market
conditions and the competitive environment.
-20-
Consumer loan originations decreased $26.2 million to $105.6 million in
the first six months of 1995 primarily due to decreased volumes of refinancings
through FF Bank's short-term consumer first mortgage product.
Student loan originations increased $23.5 million to $41.0 million
during the first six months of 1995 as a result of increased government
guaranteed portfolio acquisitions and subsequent origination referrals from
other smaller lenders who are exiting this product line because of costly audit
requirements recently imposed by the Department of Education.
Home equity loan balances increased $30.1 million for the first six
months of 1995 to $271.0 million as customer usage of this product continues to
grow.
Credit card loans decreased $3.0 million in the first six months of 1995
due to net decreases in credit card loan balances which are included in loan
repayments in FFC's consolidated statement of cash flows. Credit card balances
traditionally decrease in the first part of the year due to normal seasonal
reductions of consumer demand following the calendar year end. However, credit
card balances have increased to $197.8 million at June 30, 1995 from $187.6
million at June 30, 1994, reflecting the continuing year-to-year increase in
this portfolio.
FFC exited the manufactured housing lending business in late 1994 due to
pricing practices by competitors.
Asset/Liability Management:
The objective of FFC'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.
The table on page 23 sets forth the combined estimated
maturity/repricing structure of FFC's consolidated interest-earning assets
(including net items) and interest-costing liabilities at June 30, 1995.
Assumptions regarding prepayment and withdrawal rates are based upon FFC's
historical experience, and management believes such assumptions are reasonable.
The table does not necessarily indicate the impact of general interest rate
movements on FFC's net interest income because repricing of certain categories
of assets and liabilities through,
-21-
for example, prepayments of loans and withdrawals of deposits, is beyond FFC's
control. As a result, certain assets and liabilities indicated as repricing
within a stated period may in fact reprice at different times and at different
rate levels. Further, in the event of a change in interest rates, prepayment and
early withdrawal levels may deviate from those assumed in calculating the data
in the table.
FFC's consolidated negative one-year interest-rate sensitivity gap at
June 30, 1995 was $189.5 million or 3.46% of total assets. The one-year negative
gap increased $83.4 million from the December 31, 1994 negative gap of $106.1
million or 1.93% of total assets at that date.
FFC's consolidated one-year negative gap position of 3.46% at June 30,
1995 falls within management's current operating range of a 10% positive gap
position to a 10% negative gap position. In view of the current interest-rate
environment and the related impact on customer behavior, management believes
that it is extremely important to weigh and balance the effect of
asset/liability management decisions in the short-term in its efforts to
maintain net interest margins and acceptable future profitability. As such,
management believes that it has been able to achieve a consistent net interest
margin while still meeting its asset/liability management objectives.
In this regard and in compliance with OTS regulations, FF Bank also
measures and evaluates interest-rate risk via a separate methodology. The net
market value of interest-sensitive assets and liabilities is determined by
measuring the net present value of future cash flows under varying interest rate
scenarios in which interest rates would theoretically increase or decrease up to
400 basis points on a sudden and prolonged basis. This theoretical analysis at
the end of the second quarter of 1995 indicated that FF Bank's current financial
position should adequately protect FF Bank, and thus FFC, from the effects of
rapid rate changes. The OTS also requires an interest-rate risk capital
measurement such that an institution with a measured interest-rate risk exposure
greater than specified levels must deduct an interest-rate risk component when
calculating the OTS risk-based capital requirement. See Note F to the unaudited
consolidated financial statements for further information. At June 30, 1995, FF
Bank was not required to deduct an interest-rate risk component under the OTS
regulations.
-22-
FIRST FINANCIAL CORPORATION CONSOLIDATED GAP ANALYSIS AT JUNE 30, 1995
Three Greater Greater Greater
Months Four Months Than One Than Three Than Five
and Through Through Through Through
Under One Year Three Years Five Years Ten Years
--------- ---------- ----------- ----------- ----------
(Dollars in thousands)
Rate-sensitive assets:
Investments and interest-
earning deposits, including
federal funds (a)(b) $ 104,048 $ 40,305 $ 75,317 $ 106 $ 637
Mortgage-related securities (b) 345,063 919,748 61,567 23,154 30,420
Mortgage loans (c)(d):
Fixed-rate 61,596 156,419 364,219 268,714 413,701
Adjustable-rate 177,791 382,328 402,420 -- --
Other loans 637,236 177,979 193,170 81,339 62,842
---------- ---------- ---------- ---------- --------
1,325,734 1,676,779 1,096,693 373,313 507,600
Rate-sensitive liabilities:
Deposits (e)(f):
Checking 107,527 25,117 62,661 48,749 75,991
MMDA 100,525 40,531 93,132 48,429 40,923
Savings (passbook) 287,457 202,832 70,650 50,868 73,250
Certificates of deposit 623,420 1,376,037 818,864 199,231 33,867
Borrowings 403,424 25,095 25,555 59,586 1,716
---------- ---------- ---------- ---------- --------
1,522,353 1,669,612 1,070,862 406,863 225,747
---------- ---------- ---------- ---------- --------
GAP (repricing difference) $ (196,619) $ 7,167 $ 25,831 $ (33,550) $281,853
========== ========== ========== ========== ========
Cumulative GAP $ (196,619) $ (189,452) $ (163,621) $ (197,171) $ 84,682
========== ========== ========== ========== ========
Cumulative GAP/Total assets (3.59)% (3.46)% (2.99)% (3.60)% 1.55%
========== ========== ========== ========== ========
FIRST FINANCIAL CORPORATION CONSOLIDATED GAP ANALYSIS AT JUNE 30, 1995
***** TABLE CONTINUED FROM THE PREVIOUS PAGE *****
Greater
Than Ten Greater
Through Than
20 Years 20 Years Total
---------- -------- --------
(Dollars in thousands)
Rate-sensitive assets:
Investments and interest-
earning deposits, including
federal funds (a)(b) $ 35,456 $ -- $ 255,869
Mortgage-related securities (b) 14,574 822 1,395,348
Mortgage loans (c)(d):
Fixed-rate 144,861 3,780 1,413,290
Adjustable-rate -- -- 962,539
Other loans 14,210 -- 1,166,776
-------- ---------- -----------
209,101 4,602 5,193,822
Rate-sensitive liabilities:
Deposits (e)(f):
Checking 66,543 36,481 423,069
MMDA 10,388 1,154 335,082
Savings (passbook) 46,618 10,935 742,610
Certificates of deposit -- -- 3,051,419
Borrowings 1,910 3,320 520,606
-------- ---------- -----------
125,459 51,890 5,072,786
-------- ---------- -----------
GAP (repricing difference) $ 83,642 $ (47,288) $ 121,036
======== ========== ===========
Cumulative GAP $168,324 $ 121,036
======== ==========
Cumulative GAP/Total assets 3.07% 2.21%
======== ==========
<FN>
(a) Investments are adjusted to include FHLB stock and other items totaling
$35.5 million as investments in the "Greater Than Ten Through 20 Years"
category.
(b) Investment and mortgage-related securities are presented at carrying value,
including net unrealized gain or loss on available-for-sale securities.
(c) Based upon 1) contractual maturity, 2) repricing date, if applicable, 3)
scheduled repayments of principal and 4) projected prepayments of principal
based upon the FFC's historical experience as modified for current market
conditions.
(d) Includes loans held for sale.
(e) Deposits include $51.7 million of tax and insurance accounts and exclude
accrued interest on deposits of $10.0 million.
(f) FFC has assumed that its passbook savings, NOW accounts and money market
deposit accounts would have projected annual withdrawal rates, based upon FFC's
historical experience, of 26%, 34% and 42%, respectively.
-23-
COMPARISON OF THE
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS AND SIX MONTHS ENDED
JUNE 30, 1995 AND 1994
Selected Income Statement Information:
Net income of $16.3 million for the second quarter of 1995 represents
an increase of $7.6 million from the $8.7 million reported for the second
quarter of 1994. Earnings for the second quarter of 1994 were affected by a
one-time after-tax charge of $5.9 million, or $0.20 per share, relating to
reserves established to cover possible losses on a portion of FFC's MBS
portfolio. The annualized returns on average assets and average equity for the
second quarter of 1995 were 1.19% and 18.76%, respectively, as compared to 0.65%
and 11.62%, respectively for the 1994 period. Fully diluted earnings per share
increased to $0.54 per share for the 1995 quarter as compared to the restated
$0.29 per share reported for the second quarter of 1994.
Net income of $27.1 million for the six months ended June 30, 1995
represents an increase of $4.9 million from the $22.2 million reported for the
same period in 1994. Net income for 1995 includes a charge for acquisition costs
incurred relative to the acquisition of FirstRock during the first quarter of
1995. The acquisition charge aggregated $6.5 million on a pre-tax basis and $4.0
million on an after-tax basis, or $0.14 per share. Earnings for the first six
months of 1994 were affected by the one-time MBS charge referred to above. The
annualized returns on average assets and average equity for the first six months
of 1995, excluding the acquisition charge, were 1.14% and 18.28%, respectively,
as compared to 0.84% and 14.86%, respectively, for the restated 1994 period.
Fully diluted earnings per share increased to $0.90 per share for the first six
months of 1995 as compared to the restated $0.74 per share reported for the
first six months of 1994. Excluding the acquisition charge, fully diluted
earnings per share would have been $1.04 per share for the first six months of
1995.
Net Interest Income:
Net interest income increased $1.5 million to $45.5 million during the
second quarter of 1995 from $44.0 million for the second quarter of 1994. The
net interest margin of 3.47% for the second quarter of 1995 was up from the
3.42% reported for the second quarter of 1994. Interest income and interest
expense increased $10.8 million and $9.30 million, respectively, for the second
quarter of 1995 as compared to 1994. The average balances of interest-earning
assets and interest-bearing liabilities increased from $5.352 billion and $5.127
billion, respectively, in 1994 to $5.483 billion and $5.225 billion,
respectively, in 1995. The 1995 increases in average balances are primarily due
to the asset growth funded via deposit inflows and FHLB advances. The increase
in average interest-earning assets was complemented by a slightly greater
increase in the average yield of interest-earning assets (7.33% in 1994 versus
8.02% in 1995) than in the average cost on interest-bearing liabilities (4.03%
in 1994 versus 4.70% in 1995).
Net interest income increased $5.3 million to $91.7 million during the
first half of 1995 from $86.4 million for the first half of 1994. The net
interest margin of 3.47% for the first half of 1995 was up from the 3.38%
reported for the first half of 1994. Interest income increased $22.4 million for
the first half of 1995 as compared to 1994. Interest expense increased $17.1
million for the first six months of 1995 as compared to the same period in 1994.
The average balances of interest-earning assets and interest-bearing liabilities
-24-
increased from $5.317 billion and $5.076 billion, respectively, in 1994 to
$5.482 billion and $5.234 billion in 1995, respectively. The ratio of average
interest-earning assets to average interest-bearing liabilities increased
slightly to 103.3% for the first half of 1995 as compared to 103.2% for the 1994
period.
Interest Spread:
The following table sets forth the weighted average yield earned on
FFC's interest-earning assets, the weighted average interest rate paid on
deposits and borrowings, the net spread between yield earned and rates paid and
the net interest margin during the three months and six months ended June 30,
1995 and 1994. A comparison of similar data as of June 30, 1995 and 1994 is also
shown.
For the For the
Three Months Ended Six Months Ended At
June 30, June 30, June 30,
----------------- ----------------- --------------
1995 1994 1995 1994 1995 1994
-------- ------- -------- ------- -------- ------
Weighted average yield on
interest-earning assets 8.02% 7.33% 7.93% 7.30% 8.01% 7.30%
Weighted average rate paid
on deposit accounts and
borrowings 4.70 4.03 4.61 4.05 4.74 4.07
----- ----- ----- ----- ----- -----
Interest spread 3.32% 3.30% 3.32% 3.25% 3.27% 3.23%
===== ===== ===== ===== ===== =====
Net interest margin (net
interest income as a
percentage of earning
assets) 3.47% 3.42% 3.47% 3.38% 3.40% 3.30%
===== ===== ===== ===== ===== =====
The interest spread increased to 3.32% for both the three and six months
ended June 30, 1995 from 3.30% and 3.25% for the same periods in 1994 due to the
factors noted above. The interest margin was 3.47% for both the three months and
six month periods ended June 30, 1995 as compared to 3.42% and 3.38% for the
same periods in 1994. The interest spread and the net interest margin were 3.27%
and 3.40%, respectively, at June 30, 1995 as compared to 3.23% and 3.30%,
respectively, at June 30, 1994.
Provisions For Losses on Loans:
Provisions for loan losses increased $200,000 and $800,000 respectively,
for the second quarter and the first six months of 1995 as compared to the 1994
periods. The 1995 increase in provisions for loan losses primarily reflects the
growth in FFC's loan portfolio as average loans receivable increased from $3.294
billion and $3.265 billion for the quarter and six months ended June 30, 1994,
respectively, as compared to $3.544 billion and $3.526 billion for the 1995
periods.
The following table summarizes FFC's net charge-off experience by
category for the six months ended June 30, 1995 and 1994.
-25-
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------------- --------------------
1995 1994 1995 1994
------------ ----------- ---------- -------
Net Net Net Net
Charge-offs Charge-offs Charge-offs Charge-offs
(Recoveries) (Recoveries) (Recoveries) (Recoveries)
Loan Type (Dollars in thousands)
Credit cards $1,733 $1,708 $3,174 $3,135
Manufactured housing 251 209 691 578
Residential real estate 436 72 564 (222)
Consumer and other 50 40 13 84
Commercial business 109 -- 287 --
------ ------ ------ ------
$2,579 $2,029 $4,729 $3,575
====== ====== ====== ======
Net charge-offs as a
percent of average loans
outstanding (annualized) 0.29% 0.25% 0.27% 0.22%
====== ====== ====== ======
The net charge-offs for all displayed periods are greater than the
provisions for loan losses for each respective period. The three months and six
months ended June 30, 1995 show net charge-offs in excess of provisions
approximating $500,000 for both periods. This is primarily the result of
reducing manufactured housing loan loss provisions as FFC exited this product
line in 1994 and portfolio losses being sustained are absorbed by existing
allowance balances.
The OTS and the FDIC, as an integral part of their supervisory
examination process, periodically review FF Bank's allowances for losses. These
agencies may require FF Bank to recognize additions to the allowances based upon
their judgment of information available to them at the time of their
examination. A regularly scheduled supervisory examination was completed in late
1994 and no material corrective actions were required.
Management of FFC and FF Bank believe that the current level of
provisions for losses are sufficient based upon its allowance criteria. See
"Allowances for Loan Losses" for further discussion.
Non-Interest Income:
Non-interest income increased $8.5 million during the second quarter of
1995 as compared to the same period in 1994 primarily due to the second quarter
1994 $9.0 million MBS loss reserve. Deposit fee income increased $400,000 in
1995 from the same period in 1994. Loan fees increased $400,000 to $2.8 million
for the second quarter of 1995 from the same period in 1994 due to increased
levels of activity-related credit card and debit card fees. Service fees on
loans sold decreased in the second quarter of 1995 from 1994 levels due to
changing the method of accounting for agency guaranty fees on serviced loans
acquired in the FirstRock transaction. The $300,000 decrease in gain on sales of
availablefor-sale securities in 1995 relates to the 1994 sales of securities as
FFC acted to protect the value of the available-for-sale portfolio as interest
rates rose during 1994. Gains realized from the sale of loans decreased $900,000
in 1995 from 1994 levels due to the net effect of i) a higher level of gains on
secondary mortgage market sales in 1995 and ii) a $1.2 million gain realized in
1994 upon the sale of credit card loans upon the termination of a credit card
affinity group relationship. FFC sells long-term, fixed-rate mortgage loans in
the normal course of interest-rate risk management. Gains or losses realized
from the sale of loans held
-26-
for sale can fluctuate significantly from period to period depending upon the
volatility of interest rates and the volume of loan originations. Thus, results
of sales in any one period may not be indicative of future results.
Non-interest income increased $7.1 million to $20.6 million in the first
half of 1995 from $13.5 million for the first half of 1994. Again, the 1994 MBS
reserve accounted for the major portion of that increase. For the first half of
1995, deposit fee income and loan related fee income increased $500,000 and
$600,000, respectively, compared to the first half of 1994. Insurance and
brokerage sales commissions were at $3.8 million for both the 1995 and 1994
periods. Net gains on sales of loans decreased $2.1 million in the first half of
1995 for the reasons noted above as well as a $400,000 gain realized on the sale
of finance company receivables of NorthLand during the first quarter of 1994.
Net gains on sales of available-for-sale securities decreased $1.2 million in
1995 from 1994 for the reasons noted above.
Non-Interest Expense:
Non-interest expenses decreased approximately $1.4 million for the
quarter ended June 30, 1995 as compared to the same period in 1994, primarily
due to consolidation of operations in the second quarter of 1995 following the
FirstRock acquisition. Non-interest expenses increased $4.8 million to $65.5
million for the first half of 1995 as compared to 1994 due to the net effect of
i) acquisition costs and charges, totaling $6.5 million, incurred relative to
the FirstRock acquisition and ii) the aforementioned cost savings resulting from
the consolidation of operations following that acquisition. The acquisition
costs include i) transaction-related costs, including investment banker fees,
attorneys fees and accounting fees, ii) payments relating to
employment/change-in-control agreements upon termination of certain FirstRock
senior officers, iii) retention bonuses and severance payments made to other
FirstRock employees, iv) writedowns of assets not needed by FFC in the conduct
of FirstRock's business following the acquisition, and v) other
writeoffs/accruals relating to those contracts and business practices of
FirstRock not having future value to FFC.
The 1995 decreases in non-interest expense, resulting from the
consolidation of FirstRock operations, are most noticeably apparent in the
compensation and benefits expense category, which declined $2.0 million and $2.2
million, respectively, for the quarter and six months ended June 30, 1995.
Employee benefits expense has also been reduced $600,000 through the first six
months of 1995 due to the anticipated use of the Employee Stock Ownership Plan
(ESOP), inherited from FirstRock, in place of or in conjunction with FFC's
normal profit sharing plan contribution for 1995. The ESOP shares, which were
purchased in 1992, are grandfathered from Statement of Position (S.O.P.) No.
93-6 issued by the American Institute of Certified Public Accountants. As such,
expense for ESOP shares to be granted to FFC employees will be at cost as
opposed to market value as required by S.O.P.
No. 93-6 for shares acquired after 1992.
Non-interest expenses decreased as a percentage of average assets to
2.08% and 2.15%, respectively, for the quarter and six months ended June 30,
1995 as compared to 2.24% and 2.28%, respectively, for the same periods in 1994.
The improvement in this ratio is reflective of i) the growth in FFC's assets,
ii) the effectiveness of the consolidation of operations after the FirstRock and
NorthLand acquisitions, iii) decreases in writedowns on foreclosed commercial
real estate and iv) ongoing expense control measures.
-27-
Controllable non-interest expenses, which exclude the amortization of
intangible assets and the net cost of operations of foreclosed properties,
decreased to 1.98% and 2.06%, respectively, of average assets for the quarter
and six months ended June 30, 1995 as compared to 2.12% and 2.16% for the same
periods in 1994. In addition, FFC's efficiency ratio (which represents the ratio
of controllable expenses to net interest income plus recurring non-interest
income) improved to 48.90% and 50.36%, respectively, for the three months and
six months ended June 30, 1995, as compared to 53.06% and 54.37%, respectively,
for the corresponding 1994 periods.
The Federal Deposit Insurance Corporation (FDIC) has proposed to lower
deposit insurance assessments for financial institutions insured by the Bank
Insurance Fund (BIF) of the FDIC from the current maximum of 23 cents per $100
of deposits to as low as 4 cents per $100 of deposits. At the current time, no
similar decrease has been proposed for those institutions insured by the Savings
Association Insurance Fund (SAIF) of the FDIC. FF Bank's deposits are insured by
the SAIF. This potential disparity could place SAIF-insured institutions, such
as FF Bank, at a competitive disadvantage with BIF-insured institutions.
In this regard, FFC recently filed an application with the Wisconsin
Commissioner of Savings and Loans to organize a de novo stock savings bank,
First Financial Savings Bank, SSB ("FFSB"). Applications also were filed with
the OTS and FDIC to obtain necessary regulatory approvals and federal deposit
insurance for FFSB. It is expected that the savings accounts of FFSB will be
insured by the BIF. FFSB is being organized to take advantage of the proposed
lower insurance of accounts assessments for BIF-insured institutions compared to
SAIF-insured institutions. The application filed with the Wisconsin Commissioner
has been conditionally approved, subject to FDIC approval. The FDIC and OTS
applications are pending. However, processing of those applications has been
suspended as the OTS and FDIC await further regulatory and/or legislative action
with respect to the BIF-SAIF assessment disparity. Current legislative proposals
pending before Congress include plans which would result in equal assessments
for BIF and SAIF insured institutions, but would also require a one time
assessment of up to 90 basis points on SAIF insured deposits. If such a solution
were enacted into law, the organization of FFSB would be unnecessary. However,
there can be no assurance that a regulatory or legislative solution to the
BIF-SAIF assessment disparity will be adopted, and if not, whether FFC will
receive regulatory approval to organize FFSB.
Income Taxes:
Income tax expense increased $3.7 million to $9.0 million for the second
quarter of 1995 as compared to $5.3 million for 1994 due to the increased
pre-tax income in 1995 as a result of i) continuing improved core earnings in
1995 and ii) the $9.0 million MBS loss reserve recorded in 1994.
Income tax expense increased $1.9 million to $15.5 million for the first
half of 1995 from $13.6 million for the first half of 1994. The increase relates
to the same factors cited for the second quarter as offset by tax credits
relating to the FirstRock acquisition costs and charges. The effective income
tax rate decreased to 36.4% in 1995 from 38.0% in 1994.
-28-
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
a. On April 19, 1995 the Corporation held an Annual Meeting of
Shareholders (the "Annual Meeting").
b. Set forth below is certain information with respect to i)
individuals nominated for election as directors at the Annual
Meeting and ii) continuing directors whose terms do not expire
until future annual meetings.
Nominated for For Term
Three-Year Terms To Expire
---------------- ----------
James O. Heinecke 1998
Paul C. Kehrer 1998
Ignatius H. Robers 1998
John H. Sproule 1998
Norman L. Wanta 1998
Continuing Directors
----------------------
Robert S. Gaiswinkler 1997
Gordon M. Haferbecker 1997
Robert T. Kehr 1996
Robert P. Konopacky 1996
Dr. George R. Leach 1997
John C. Seramur 1997
Ralph R. Staven 1996
Arlyn G. West 1996
c. Set forth below is a description of the matters voted upon at
the Annual Meeting. The number of votes cast for, or withheld
and abstentions is set forth below:
Five directors were elected for a term of three years. A list of
these directors (including the votes for or withheld) is noted
below:
Votes For Votes Withheld
James O. Heinecke 24,245,496 271,443
Paul C. Kehrer 24,160,433 356,714
Ignatius H. Robers 24,240,565 276,373
John H. Sproule 24,233,695 275,460
Norman L. Wanta 24,168,160 348,779
d. Not applicable.
-29-
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits:
Exhibit 11 - Computation of Earnings Per Share.
Exhibit 27 - Financial Data Schedules
b. Reports on Form 8-K - none.
-30-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST FINANCIAL CORPORATION
Date: August 11, 1995 /s/ John C. Seramur
--------------------
John C. Seramur, President
(Chief Executive Officer) and Director
Date: August 11, 1995 /s/ Thomas H. Neuschaefer
--------------------------
Thomas H. Neuschaefer
Vice President, Treasurer and Chief
Financial Officer
-31-
EXHIBIT 11
FIRST FINANCIAL CORPORATION
COMPUTATION OF EARNINGS PER SHARE
For The For The
Three Months Ended Six Months Ended
June 30, June 30,
------------------ --------------
1995 1994 1995 1994
------ ------ ------ -----
(In thousands, except
per share data)
PRIMARY EARNINGS PER SHARE
Net income $16,305 $ 8,749 $27,132 $22,230
======= ======= ======= =======
Shares:
Weighted average common shares
outstanding 29,351 28,898 29,270 28,863
Shares from assumed exercise of options
(as determined by the treasury stock
method) 736 958 756 960
------- ------- ------- -------
Common and common equivalent shares 30,087 29,856 30,026 29,823
======= ======= ======= =======
Primary Earnings Per Common Share $ .54 $ .29 $ .90 $ .74
======= ======= ======= =======
FULLY DILUTED EARNINGS PER SHARE
Net income $16,305 $ 8,749 $27,132 $22,230
======= ======= ======= =======
Shares:
Weighted average common shares
outstanding 29,351 28,898 29,270 28,863
Shares from assumed exercise of options
(as determined by the treasury stock
method) 785 968 830 982
------- ------- ------- -------
Common and common equivalent shares 30,136 29,866 30,100 29,845
======= ======= ======= =======
Fully Diluted Earnings Per Common Share $ .54 $ .29 $ .90 $ .74
======= ======= ======= =======
-32-