EXHIBIT 13(a)
CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders
First Financial Corporation
We have audited the accompanying consolidated balance sheets of First Financial
Corporation as of December 31, 1995 and 1994, 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, 1995. 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 at December 31, 1995 and 1994, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995 in conformity with generally accepted accounting principles.
January 15, 1996
Milwaukee, Wisconsin
-1-
CONSOLIDATED BALANCE SHEETS
FIRST FINANCIAL CORPORATION
December 31,
1995 1994
----------- ----------
(Dollars in thousands)
ASSETS
Cash $ 123,379 $ 94,064
Federal funds sold 34,929 23,890
Interest-earning deposits 13,801 1,024
---------- ----------
CASH AND CASH EQUIVALENTS 172,109 118,978
Securities available for sale (at fair value):
Investment securities 80,999 68,959
Mortgage-related securities 571,293 201,373
Securities held to maturity:
Investment securities (fair value of
$119,063,000--1995 and $124,434,000
--1994) 119,426 129,301
Mortgage-related securities (fair value of
$691,060,000--1995 and $1,263,489,000
--1994) 699,468 1,301,118
Loans receivable:
Held for sale 26,651 11,736
Held for investment 3,590,149 3,458,711
Foreclosed properties and repossessed
assets 3,379 5,216
Real estate held for investment or sale 8,289 7,706
Office properties and equipment, at cost 51,124 53,927
Intangible assets, less accumulated
amortization 21,481 26,726
Other assets 126,740 118,073
---------- ----------
$5,471,108 $5,501,824
========== ==========
-2-
December 31,
1995 1994
---------- ----------
(Dollars in thousands)
LIABILITIES
Deposits $4,424,525 $4,381,455
Short-term borrowings 25,972 13,127
Federal Home Loan Bank and
other borrowings 544,536 695,319
Advance payments by borrowers for
taxes and insurance 13,206 15,986
Other liabilities 77,952 68,629
---------- ----------
TOTAL LIABILITIES 5,086,191 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: 29,676,365--1995;
29,125,858--1994 29,676 29,126
Additional paid-in capital 49,756 50,129
Net unrealized loss on securities
available for sale (6,021) (8,619)
Treasury stock (3,669)
Common stock purchased by employee
benefit plans (271) (1,608)
Retained earnings (substantially
restricted) 311,777 261,949
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 384,917 327,308
$5,471,108 $5,501,824
========== ==========
See notes to consolidated financial statements.
-3-
CONSOLIDATED STATEMENTS OF INCOME
FIRST FINANCIAL CORPORATION Year Ended December 31,
1995 1994 1993
------ -------- ------
(Dollars in thousands,
except per share amounts)
Interest income:
Mortgage loans $183,434 $176,914 $175,998
Other loans 120,256 100,755 84,595
Mortgage-related securities 98,821 89,379 89,965
Investments 14,797 14,816 16,153
-------- -------- --------
TOTAL INTEREST INCOME 417,308 381,864 366,711
Interest expense:
Deposits 196,823 174,819 179,766
Short-term borrowings 3,895 666
Federal Home Loan Bank and
other borrowings 33,453 28,737 22,727
-------- -------- --------
TOTAL INTEREST EXPENSE 234,171 204,222 202,493
-------- -------- --------
NET INTEREST INCOME 183,137 177,642 164,218
Provision for losses on loans 9,738 6,824 10,570
-------- -------- --------
NET INTEREST INCOME AFTER PROVISIONS
FOR LOSSES ON LOANS 173,399 170,818 153,648
Non-interest income:
Deposit account service fees 12,101 10,582 10,022
Loan fees and service charges 11,109 9,814 10,579
Service fees on loans sold 7,125 7,737 6,587
Insurance and brokerage sales commis-
sions 6,849 7,269 6,848
Net gain on sales of loans held for sale 2,703 2,732 8,324
Net gain (loss) on sales of securities
available for sale 1,182 1,104 (385)
Unrealized loss on impairment of
mortgage-related securities (9,000)
Other 3,222 3,056 2,783
-------- -------- --------
TOTAL NON-INTEREST INCOME 44,291 33,294 44,758
-------- -------- --------
217,690 204,112 198,406
Non-interest expense:
Compensation, payroll taxes and other
employee benefits 45,263 51,496 50,122
Federal deposit insurance premiums 10,169 10,291 7,953
Occupancy 9,006 9,157 8,497
Data processing 7,159 7,360 7,462
Acquisition-related costs 6,458
Telephone and postage 6,434 6,083 5,689
Loan expense 6,257 6,669 6,353
Marketing 5,941 5,004 4,210
Furniture and equipment 5,303 6,071 6,355
Amortization of intangible assets 5,245 5,365 6,427
Net cost of (income from) operations
of foreclosed properties (164) 1,123 3,293
Other 11,531 11,748 12,603
-------- -------- --------
TOTAL NON-INTEREST EXPENSE 118,602 120,367 118,964
-------- -------- --------
INCOME BEFORE INCOME TAXES 99,088 83,745 79,442
Income taxes 35,104 30,716 29,691
-------- -------- --------
NET INCOME $ 63,984 $ 53,029 $49,751
======== ======== ========
Earnings per share:
Primary $ 2.12 $ 1.78 $ 1.72
Fully diluted 2.11 1.77 1.71
Cash dividends paid per share $ .48 $ .40 $ .35
See notes to consolidated financial statements.
-4-
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FIRST FINANCIAL CORPORATION Net
Unrealized Common
Gain Stock
(Loss) On Purchased
Additional Securities by Employee Total
Common Paid-In Available Treasury Benefit Retained Stockholders'
Stock Capital For Sale Stock Plans Earnings Equity
------ --------- ---------- -------- --------- -------- ---------
(Dollars in thousands)
Balances at January 1, 1993 $27,999 $43,811 $ (87) $ 0 $(2,488) $170,744 $239,979
Net Income (including pooled
company) 49,751 49,751
Cash dividends ($.35 per share) (8,238) (8,238)
Exercise of stock options 321 591 912
Change in net unrealized gain
(loss) on securities available
for sale, net of tax (including
pooled company) 1,834 1,834
Other pre-merger transactions
of pooled company (462) 530 (4,126) 463 (3,595)
------ ------ ----- ------ ------ --------- ------
BALANCES AT DECEMBER 31, 1993 27,858 44,932 1,747 (4,126) (2,025) 212,257 280,643
Net income (including pooled
company) 53,029 53,029
Cash dividends ($.40 per share) (9,950) (9,950)
Exercise of stock options 279 1,316 1,595
Issuance of common stock in
conjunction with acquisition 938 3,850 6,613 11,401
Change in net unrealized gain
(loss) on securities available
for sale, net of tax (including
pooled company) (10,366) (10,366)
Other pre-merger transactions
of pooled company 51 31 457 417 956
------ ------ ------- ------ ------ --------- -------
BALANCES AT DECEMBER 31, 1994 29,126 50,129 (8,619) (3,669) (1,608) 261,949 327,308
Net income 63,984 63,984
Cash dividends ($.48 per share) (14,156) (14,156)
Exercise of stock options 504 2,520 3,024
Payment on ESOP loan 790 790
Change in net unrealized gain
(loss) on securities available
for sale, net of tax (including
pooled company) 2,598 2,598
Other pre-merger transactions
of pooled company 46 (2,893) 3,669 547 1,369
------- -------- ------- ------- ------- -------- --------
BALANCES AT DECEMBER 31, 1995 $29,676 $49,756 $(6,021) $ 0 $ (271) $311,777 $384,917
======= ======== ======= ======= ======= ======== ========
See notes to consolidated financial statements.
-5-
CONSOLIDATED STATEMENTS OF CASH FLOWS
FIRST FINANCIAL CORPORATION
Year Ended December 31,
1995 1994 1993
-------- -------- ------
(Dollars in thousands)
OPERATING ACTIVITIES
Net income $ 63,984 $ 53,029 $ 49,751
Adjustments to reconcile net income
to net cash provided by operating
activities:
Decrease (increase) in accrued
interest on loans (4,657) (2,563) 3,711
(Decrease) increase in accrued
interest on deposits 4,123 148 (1,928)
Loans originated for sale (210,150) (298,813) (1,005,655)
Proceeds from sales of loans held
for sale 211,658 443,931 1,051,358
Provision for depreciation 5,746 6,513 6,307
Provision for losses on loans 9,738 6,824 10,570
Provision for losses on real
estate and other assets 502 1,125 3,564
Unrealized loss on impairment of
mortgage-related securities 9,000
Amortization of cost in excess of
acquired businesses 832 873 554
Amortization of core deposit
intangibles 4,413 4,492 5,873
Amortization of mortgage
servicing rights 1,197 890 2,379
Net gain on sales of loans and other
assets (3,911) (4,076) (8,310)
Other 38,592 (1,971) 12,320
---------- ----------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 122,067 219,402 130,494
INVESTING ACTIVITIES
Proceeds from sales of investment
securities available for sale 18,759 65,088 45,000
Proceeds from sales of investment
securities held to maturity 6,235
Proceeds from maturities of investment
securities held to maturity 51,126 24,393 68,486
Proceeds from maturities of available
for sale investment securities 9,615 16,649
Purchases of available for sale
investment securities (15,770) (2,627) (80,000)
Purchases of investment securities held
to maturity (62,710) (7,610) (159,188)
Proceeds from sales of mortgage-related
securities available for sale 182,563 81,287
Principal payments received on
mortgage-related securities 233,949 292,219 392,557
Purchases of mortgage-related securities (594,952) (271,719)
Principal collected on loans
receivable 564,076 586,875 655,712
Loans originated for portfolio (726,877) (972,726) (1,114,424)
Additions to office properties and
equipment (3,473) (3,397) (6,864)
Proceeds from sales of foreclosed
properties and repossessed assets 8,048 8,745 18,605
Proceeds from sales of real estate
held for investment 18 14,042 293
-6-
CONSOLIDATED STATEMENTS OF CASH FLOWS--Continued
FIRST FINANCIAL CORPORATION Year Ended December 31,
1995 1994 1993
-------- -------- ------
(Dollars in thousands)
INVESTING ACTIVITIES--Continued
Business acquisitions, net of cash and
cash equivalents acquired of $4,593,000
--1994 and $443,795,000--1993
Loans receivable (96,748) (316,305)
Investment securities held to
maturity (4,785) (22,775)
Mortgage-related securities available
for sale (81,287)
Mortgage-related securities held to
maturity (16,742) (145,098)
Office properties and equipment (2,387) (8,445)
Intangible assets (699) (14,541)
Deposits and related accrued
interest 114,297 970,162
Borrowings 750 71,897
Stockholders' equity 11,401
Other--net (494) (9,813)
---------- ---------- ----------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 76,761 (386,145) 79,775
FINANCING ACTIVITIES
Net increase (decrease) in deposits 38,947 ( 96,257) (119,863)
Increase (decrease) in advance payments by
borrowers for taxes and insurance (2,780) 337 897
Funding of official checks for borrower
tax escrows (34,953)
Net increase in short-term borrowings 12,845 13,127
Proceeds of borrowings 1,094,623 1,119,527 836,807
Repayments of borrowings (1,245,406) (881,342) (940,783)
Proceeds from exercise of stock options 3,254 1,845 912
Proceeds from vesting of employee
benefit plans 1,929 416 463
Purchase of treasury stock (4,126)
Payments of cash dividends to
stockholders (14,156) (9,950) (8,238)
---------- ---------- ----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (145,697) 147,703 (233,931)
---------- ---------- ----------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 53,131 (19,040) (23,662)
Cash and cash equivalents at beginning of
year 118,978 138,018 161,680
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 172,109 $ 118,978 $ 138,018
========== ========== ==========
Supplemental disclosure of cash flow information: Cash paid or credited to
accounts for:
Interest on deposits and borrowings $ 230,501 $ 202,520 $ 203,506
Income taxes 35,138 34,111 31,511
Non-cash investing activities:
Investment securities transferred to
available-for-sale portfolio at
amortized cost 20,734 67,337 48,338
Mortgage-related securities transferred
to available-for-sale portfolio at
amortized cost 391,537 64,153 345,468
Mortgage loans transferred to loans
held for sale portfolio 15,467 26,028 60,238
Loans receivable transferred to
foreclosed properties 6,158 7,169 7,439
See notes to consolidated financial statements.
-7-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST FINANCIAL CORPORATION
December 31, 1995
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business: First Financial Corporation ("FFC") provides a full range of financial
services to individual customers in Wisconsin and Illinois through its
wholly-owned insured banking subsidiary, First Financial Bank ("FF Bank") and
its subsidiaries, all of which are wholly-owned. FFC and its subsidiary are
subject to competition from other financial institutions. FFC and its subsidiary
also are subject to the regulations of certain federal 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 FFC and FF Bank. Significant intercompany accounts
and transactions have been eliminated. Investments in joint ventures, which are
not material, are accounted for on the equity method.
The accompanying consolidated financial statements have been restated for an
acquisition, discussed in Note B, which has been accounted for as a
pooling-of-interests.
In preparing the consolidated financial statements in conformity with generally
accepted accounting principles, management is required to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates. Material estimates that are particularly susceptible to 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,
investments, mortgage-related securities, and mortgage servicing rights. In
connection with the determination of the allowance for loan losses and real
estate owned, management obtains independent appraisals for significant
properties.
Cash and Cash Equivalents: FFC considers its interest-earning deposits and
federal funds sold which have original maturities of three months or less to be
cash equivalents.
Investment And Mortgage Related-Securities Held-To-Maturity And
Available-For-Sale: Debt securities are classified as held-to- maturity when FFC
has the 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. At
-8-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
December 31, 1995 and 1994 the balances of stockholders' equity were decreased
by $6,021,000 and $8,619,000, net of $3,104,000 and $4,861,000 in deferred
income taxes. See Notes C and D. No securities are held by FFC in a trading
account.
In October 1995, the Financial Accounting Standards Board ("FASB") approved a
modification of Statement of Financial Accounting Standards ("SFAS") No. 115,
wherein from November 15, 1995 through December 31, 1995 FF Bank had the
opportunity to reconsider its classification of investment and mortgage-related
securities as held-to-maturity, trading, or available-for-sale. Accordingly, on
December 21, 1995, FFC chose to reclassify certain investments and
mortgage-related securities from held-to- maturity to available-for-sale. At the
date of transfer, the amortized cost of the investment and mortgage-related
securities was $20,734,000 and $391,537,000, respectively. The net unrealized
gain on those securities was $895,000 and $410,000, which is included in
stockholders' equity net of income tax effect of $322,000 and $148,000,
respectively.
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.
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.
In connection with the amortization of premiums and discounts and in determining
if declines in value are other than temporary, management estimates future cash
flows to be generated by pools of loans underlying the mortgage-related
securities. Included in this evaluation are such factors as i) estimated loan
prepayment rates, ii) a review of delinquencies, foreclosures, repossessions and
recovery rates relative to the underlying mortgage loans collateralizing each
security, iii) the level of available subordination or other credit
enhancements, iv) an assessment of the servicer of the underlying mortgage
portfolio and v) the rating assigned to each security by independent national
rating agencies.
Interest, Fees, And Discounts On Loans: Interest on loans is recorded using the
accrual method. Allowances ($914,000--1995; $719,000--1994) are established for
uncollected interest on non-accrual loans. Generally, a loan is classified as
non-accrual and the accrual of interest on such loan is discontinued when the
contractual payment of principal or interest has become more than 90 days past
due or management has serious doubts about further
-9-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
collectibility of principal or interest, even though the loan currently is
performing. When a loan is placed on non-accrual status, accrued but unpaid
interest is reversed. Generally, loans are restored to accrual status when the
obligation is brought current, has performed in accordance with the contractual
terms for a reasonable period of time and the ultimate collectibility of the
total contractual principal and interest is no longer in doubt.
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. FFC is amortizing these amounts, using the level yield method,
over the contractual life of the related loans. Such deferred fees are recorded
as income upon prepayment 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: Effective January 1, 1995, FFC adopted SFAS
or the ("Statement") No. 122, ("Accounting for Mortgage Servicing Rights"). SFAS
No. 122 requires that a mortgage banking enterprise recognize as a separate
asset the rights to service mortgage loans for others, whether those rights are
purchased or originated. In accordance with the Statement, an enterprise that
acquires mortgage servicing rights through either the origination or purchase of
mortgage loans and sells or securitizes those loans with servicing rights
retained should allocate the total cost of the mortgage loans to the mortgage
servicing rights and to the loans (without the mortgage servicing rights) based
on their relative fair values. As a result of the adoption of SFAS No. 122 in
1995, FFC realized a pre-tax gain of $1.7 million ($1.1 million after tax, or
$0.04 per share) upon the capitalization of originated mortgage servicing
rights.
Originated servicing rights resulting from the above adoption of SFAS No. 122,
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 and excess servicing rights generated prior to
the 1995 adoption of SFAS No. 122, for servicing income above the normal
servicing spread, are amortized over the estimated lives of the loans using the
level yield method, adjusted for
-10-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
prepayments, and are shown as a reduction of "Service Fees on Loans Sold" in the
consolidated statements of income.
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 and estimated collateral value.
A substantial portion of FF Bank's loans are collateralized by real estate in
Wisconsin and Illinois. Accordingly, the ultimate collectibility of a
substantial portion of FF Bank's 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.
Effective January 1, 1995, FFC adopted SFAS No. 114, ("Accounting by Creditors
for Impairment of a Loan"). Statement No. 114, which was amended by Statement
No. 118, requires that impaired loans be measured at the present value of
expected future cash flows discounted at the loan's effective interest rate, or,
as a practical expedient, at the loan's observable market price or the fair
value of the collateral if the loan is collateral dependent. The adoption of
Statements No. 114 and 118 had no effect on FFC's financial condition or results
of operations.
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
-11-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
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 ten to twenty years using the straight-line and accelerated
methods. The cost in excess of net assets of acquired businesses, aggregating
$4,164,000 and $4,996,000 at December 31, 1995 and 1994, respectively, is net of
accumulated amortization.
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 $17,317,000 and $21,730,000 at December 31,
1995 and 1994, respectively, are net of accumulated amortization.
Income Taxes: FFC and its subsidiary 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.
FFC 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 FFC's tax status.
Consequently, tax expense in future years may be impacted by changes in tax
rates and tax return limitations.
Per Share Amounts: 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. FFC's common equivalent shares consist entirely of stock
options. The resulting number of shares used in computing primary earnings per
share in 1995, 1994 and 1993 is 30,185,000, 29,855,000 and 28,851,000,
respectively. The resulting number of shares used in computing fully diluted
earnings per share in 1995, 1994 and 1993 is 30,334,000, 29,887,000 and
29,118,000, respectively.
Pending Accounting Changes: The FASB issued SFAS No. 123 ("Accounting for
Stock-Based Compensation") in October 1995 relative to financial accounting and
reporting standards for stock-based employee compensation plans. SFAS No. 123 is
effective for fiscal years beginning after December 15, 1995. The Statement
defines a fair value based method of accounting for employee stock options or
similar equity instruments and encourages all entities to adopt that method of
accounting for all employee stock compensation plans. However, the Statement
-12-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
also allows an entity to continue to measure compensation cost for these plans
using an intrinsic value based method of accounting prescribed by Accounting
Principles Board Opinion No. 25 ("APB No. 25"). Entities electing to retain the
accounting treatment under APB No. 25 must make pro forma footnote disclosures
of net income and earnings per share as if the fair value based method of
accounting defined in this statement has been applied. Management has not
decided which method it will elect.
Reclassifications: Certain 1994 and 1993 accounts have been reclassified to
conform to the 1995 presentations.
NOTE B--BUSINESS COMBINATIONS
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, the number of shares, and earnings per share for all
periods presented have been restated to include the results of FirstRock.
On February 28, 1995 FirstRock had assets (unaudited) of $376,473,000 and
shareholder's 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
1995 results of operations, are as follows:
Net
Total Income
Income (Loss)
------ ------
(Dollars in thousands)
FFC $69,579 $ 9,348
FirstRock 5,383 (3,091)
------- -------
$74,962 $ 6,257
======= =======
-13-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE B--BUSINESS COMBINATIONS--Continued
A reconciliation of total income, net income and earnings per share (unaudited),
as previously reported, with restated amounts for the years ended December 31,
1994 and 1993 follows:
Year Ended Year Ended
December 31, 1994 December 31, 1993
----------------- -----------------
Total Net Total Net
Income Income Income Income
------ ------ ------ ------
(Dollars in thousands, except per share amounts)
Operations:
Previously reported $381,944 $ 48,325 $377,844 $ 45,215
FirstRock 33,214 4,704 33,625 4,536
-------- -------- -------- --------
As restated $415,158 $ 53,029 $411,469 $ 49,751
======== ======== ======== ========
Earnings per share:
Primary:
Previously reported $ 1.91 $ 1.88
As restated 1.78 1.72
Fully diluted:
Previously reported $ 1.91 $ 1.86
As restated 1.77 1.71
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, FFC completed the acquisition of NorthLand Bank of
Wisconsin, SSB ("NorthLand") of Ashland, Wisconsin. FFC issued approximately
938,000 shares of common stock, valued in the aggregate at $14.2 million at the
time of the acquisition. The acquisition of NorthLand has been accounted for as
a pooling-of-interests. NorthLand was not material to the operations of FFC;
therefore, balances for prior years have not been restated. However, 1994
amounts have been adjusted to reflect the transaction as if it had occurred on
January 1, 1994. NorthLand, which was merged into FF Bank, had total assets and
stockholders' equity of $125.6 million (unaudited) and $11.4 million
(unaudited), respectively, at December 31, 1993.
-14-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE B--BUSINESS COMBINATIONS--Continued
Condensed 1993 operating results for NorthLand were as follows:
(Dollars in thousands)
1993
------
Net interest income $5,917
Provision for losses on loans (482)
Non-interest income 1,460
Non-interest expense (4,962)
Income taxes (858)
------
Net income $1,075
======
-15-
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 -----------------------
Cost Gains Losses Fair Value
--------- ------- ------- ----------
(Dollars in thousands)
December 31, 1995:
Available-for-sale:
U.S. Government and
federal agency
obligations $ 31,812 $ 916 $ 51 $ 32,677
Adjustable-rate mortgage
mutual fund 47,905 17 659 47,263
Corporate and bank notes
receivable (investment
grade) 997 62 1,059
-------- ------ ------ --------
$ 80,714 $ 995 $ 710 $ 80,999
======== ====== ====== ========
Held-to-maturity:
U.S. Government and
federal agency
obligations $113,519 $ 417 $ 777 $113,159
Corporate and bank notes
receivable (investment
grade) 4,859 2 11 4,850
State and municipal
obligations 1,048 8 2 1,054
-------- ------ ------ --------
$119,426 $ 427 $ 790 $119,063
======== ====== ====== ========
December 31, 1994:
Available-for-sale:
U.S. Government and
federal agency
obligations $ 21,088 $ 8 $ 505 $ 20,591
Adjustable-rate mortgage
mutual fund 47,227 2,147 45,080
Real estate investment
trust 2,371 172 2,543
Corporate and bank notes
receivable (investment
grade) 750 5 745
-------- ------ ------ --------
$ 71,436 $ 180 $2,657 $ 68,959
======== ====== ====== ========
Held-to-maturity:
U.S. Government and
federal agency
obligations $ 86,162 $ 1 $4,339 $ 81,824
Corporate and bank notes
receivable (investment
grade) 38,202 1 501 37,702
State and municipal
obligations 4,433 1 26 4,408
Certificates of deposit 504 4 500
-------- ------ ------ --------
$129,301 $ 3 $4,870 $124,434
======== ====== ====== ========
-16-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE C--INVESTMENT SECURITIES--Continued
The amortized cost and fair value of investment securities at December 31, 1995,
by contractual maturity or repricing date, are shown below.
Available-For-Sale Held-To-Maturity
--------------------- ----------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ------- ---------- ------
(Dollars in thousands)
Due in one year or less $ 56,973 $ 56,335 $ 73,352 $ 72,660
Due after one year through
five years 23,741 24,664 45,502 45,816
Due after five years through
ten years 572 587
-------- -------- -------- --------
$ 80,714 $ 80,999 $119,426 $119,063
======== ======== ======== ========
During the years ended December 31, 1995, 1994 and 1993, investment securities
available for sale with a fair value at the date of sale of $18,759,000,
$65,088,000, and $45,000,000, respectively, were sold. The gross realized gains
on such sales totaled $1,182,000, $1,319,000, and $162,000 in 1995, 1994, and
1993, respectively. Gross realized losses on such sales totaled $544,000 and
$540,000 in 1994 and 1993, respectively.
Accrued interest on investment securities, including those securities classified
as federal funds sold, interest-earning deposits and short-term securities, was
$3,470,000 and $3,351,000 at December 31, 1995 and 1994, respectively.
-17-
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-to- maturity
mortgage-related securities.
Gross Unrealized
Amortized ------------------------
Cost Gains Losses Fair Value
--------- -------- ------- ------------
(Dollars in thousands)
December 31, 1995:
Available-for-sale:
Mortgage-backed securities:
Adjustable-rate $ 475,609 $ 4,462 $14,041 $ 466,030
Fixed-rate 38,580 88 587 38,081
Collateralized mortgage
obligations:
Adjustable-rate 55,331 843 65 56,109
Fixed-rate 11,182 23 132 11,073
---------- ------- ------- ----------
$ 580,702 $ 5,416 $14,825 $ 571,293
========== ======= ======= ==========
Held-to-maturity:
Mortgage-backed securities:
Adjustable-rate $ 333,410 $2,255 $ 2,784 $ 332,881
Fixed-rate 90,439 2,553 32 92,960
Collateralized mortgage
obligations:
Adjustable-rate 275,008 666 11,092 264,582
Fixed-rate 611 26 637
---------- ------- ------- ----------
$ 699,468 $ 5,500 $13,908 $ 691,060
========== ======= ======= ==========
December 31, 1994:
Available-for-sale:
Mortgage-backed securities:
Adjustable-rate $ 173,821 $ 29 $ 8,661 $ 165,189
Fixed-rate 16,043 1 922 15,122
Collateralized mortgage
obligations:
Adjustable-rate 9,982 494 9,488
Fixed-rate 12,529 955 11,574
---------- ------- ------- ----------
$ 212,375 $ 30 $11,032 $ 201,373
========== ======= ======= ==========
Held-to-maturity:
Mortgage-backed securities:
Adjustable-rate $ 830,916 $22,138 $ 808,778
Fixed-rate 141,331 $ 688 4,634 137,385
Collateralized mortgage
obligations:
Adjustable-rate 326,756 35 11,525 315,266
Fixed-rate 2,115 1 56 2,060
---------- ------- ------- ----------
$1,301,118 $ 724 $38,353 $1,263,489
========== ======= ======= ==========
-18-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE D--MORTGAGE-RELATED SECURITIES--Continued
The following tables summarize aggregate mortgage-related securities by security
type and issuer.
December 31, 1995 December 31, 1994
---------------------------------- ------------------------------------
Amortized Fair Carrying Amortized Fair Carrying
Issuer/Security Type Cost Value Value Cost Value Value
- -------------------- ---------- --------- -------- ---------- --------- ---------
(Dollars in thousands)
U.S. Government agencies:
Mortgage-backed certi-
ficates $ 347,177 $ 353,712 $ 349,216 $ 397,325 $ 383,830 $ 395,544
Collateralized mortgage
obligations 341,521 331,764 342,190 349,267 336,328 347,817
---------- ---------- ---------- ---------- ---------- ----------
Total agencies 688,698 685,476 691,406 746,592 720,158 743,361
---------- ---------- ---------- ---------- ---------- ----------
Private issuers:
Mortgage-backed certi-
ficates
Senior position 492,401 485,411 487,914 660,922 644,136 658,508
Mezzanine position 98,459 90,829 90,829 103,864 98,507 98,507
Collateralized mort-
gage obligations 612 637 612 2,115 2,061 2,115
---------- ---------- ---------- ---------- ---------- ----------
Total private issuers 591,472 576,877 579,355 766,901 744,704 759,130
---------- ---------- ---------- ---------- ---------- ----------
Totals $1,280,170 $1,262,353 $1,270,761 $1,513,493 $1,464,862 $1,502,491
========== ========== ========== ========== ========== ==========
Total carrying value per consolidated
financial statements, by classification:
Available-for-sale portfolio $ 571,293 $ 201,373
Held-to-maturity portfolio 699,468 1,301,118
---------- ----------
Total carrying value $1,270,761 $1,502,491
========== ==========
-19-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE D--MORTGAGE-RELATED SECURITIES--Continued
The mortgage-related securities portfolio at the end of 1995, excluding six
private-issuer securities downgraded to below investment grade (having an
aggregate carrying value of approximately $28,900,000), consisted of either i)
U.S. Government agency-backed securities or ii) securities rated at a minimum of
investment grade quality by at least one nationally recognized independent
rating agency as follows:
(Dollars in thousands)
Amortized Fair Carrying
Issuer Cost Value Value
- ------------------------- ----------- ---------- ----------
U.S. Government Agencies $ 688,698 $ 685,476 $ 691,406
Private issuers:
Securities rated AA or
above 503,325 498,101 500,403
Other securities of
investment grade 54,642 49,897 50,073
Securities rated below
investment grade 33,505 28,879 28,879
---------- ---------- ----------
$1,280,170 $1,262,353 $1,270,761
========== ========== ==========
In 1994, FFC recorded a $9.0 million permanent impairment loss on two of the
securities rated below investment grade. The other securities rated below
investment grade continue to be performing.
With the exception of collateralized mortgage obligations, noted in the tables
above, FFC does not invest in, nor is a party to, derivative investment
instruments.
No mortgage-related securities classified as available for sale were sold during
the year ended December 31, 1995. During the years ended December 31, 1994 and
1993, mortgage-related securities available for sale with a fair value at the
date of sale of $182,563,000 and $81,287,000, respectively, were sold. The gross
realized gains on such sales totaled $461,000 and $14,000 in 1994 and 1993,
respectively. The gross realized losses on such sales totaled $132,000 and
$21,000 in 1994 and 1993, respectively. The 1994 sales were related to sales of
mortgage-related securities previously classified as available for sale. The
1993 sales related to the mortgage-related securities portfolio acquired in a
prior acquisition which did not meet FFC's investment guidelines.
Accrued interest receivable on mortgage-related securities was $8,475,000 and
$8,394,000 at December 31, 1995 and 1994, respectively.
-20-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE E--LOANS RECEIVABLE
Loans receivable held for investment consist of the following:
December 31,
1995 1994
---------- ----------
(Dollars in thousands)
Real estate mortgage loans:
Residential (including multi-family) $2,176,659 $2,204,032
Commercial and other 136,714 134,715
Construction - residential (including
multi-family) 56,314 64,944
Construction - commercial 15,710 8,270
---------- ----------
Total real estate mortgage loans 2,385,397 2,411,961
Consumer and other loans:
Consumer 362,659 304,771
Home equity 284,700 240,915
Education 240,650 192,542
Credit card 214,107 200,747
Manufactured housing 139,385 152,674
Business 17,198 19,023
---------- ----------
Total consumer and other loans 1,258,699 1,110,672
---------- ----------
Total loans before net items 3,644,096 3,522,633
Less:
Allowances for losses 25,235 25,180
Undisbursed loan proceeds 28,992 36,809
Deferred net loan fees (costs) (977) 555
Discount on loans of acquired businesses 769 894
Unearned discounts (premiums) (72) 484
---------- ----------
53,947 63,922
---------- ----------
$3,590,149 $3,458,711
========== ==========
Accrued interest on loans receivable was $25,777,000 and $21,202,000 at December
31, 1995 and 1994, respectively.
The following table sets forth the composition of the non-residential real
estate loan portfolio, including both permanent and construction loans, by
geographic location of the related collateral properties.
December 31,
1995 1994
----------------------- -------------------------
Percent Percent
Of Of
Property Location Amount Total Amount Total
----------------- -------- ------- ------- --------
(Dollars in thousands)
Wisconsin $ 96,196 63.1% $ 93,530 65.4%
Illinois 30,734 20.2 23,401 16.4
Minnesota 7,343 4.8 7,525 5.3
Georgia 4,021 2.6 4,106 2.9
Iowa 2,547 1.7 2,588 1.8
Arizona 2,492 1.6 2,503 1.7
Tennessee 2,399 1.6 2,829 2.0
Other 6,692 4.4 6,503 4.5
-------- ----- -------- -----
$152,424 100.0% $142,985 100.0%
======== ===== ======== =====
-21-
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,
1995 1994
------ ------
(Dollars in thousands)
Real estate owned $ 2,531 $ 3,592
Real estate judgments subject to redemption 1,436 2,503
Manufactured housing owned 303 171
Repossessed collateral assets 102 96
------- -------
4,372 6,362
Less allowance for losses 993 1,146
------- -------
$ 3,379 $ 5,216
======= =======
NOTE G--ALLOWANCES FOR LOSSES
A summary of the activity in the allowance for loan losses follows:
Year Ended December 31,
1995 1994 1993
------ ------ ------
(Dollars in thousands)
Balance at beginning of year $25,180 $25,905 $19,540
Acquired banks' allowance 816 4,885
Provisions 9,738 6,824 10,570
Charge-offs (11,087) (9,872) (10,486)
Recoveries 1,404 1,507 1,396
------- ------- -------
BALANCE AT END OF YEAR $25,235 $25,180 $25,905
======= ======= =======
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 (Income From) Operations of
Foreclosed Properties."
Year Ended December 31,
1995 1994 1993
------ ------ ------
(Dollars in thousands)
Balance at beginning of year $1,146 $3,561 $3,377
Provisions 60 1,000 3,519
Charge-offs (213) (3,415) (3,335)
------ ------ ------
BALANCE AT END OF YEAR $ 993 $1,146 $3,561
====== ====== ======
-22-
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,
1995 1994
-------- ------
(Dollars in thousands)
Land and parking lot improvements $12,160 $12,143
Office buildings and improvements 52,083 51,708
Furniture and equipment 36,814 38,437
Leasehold improvements 2,850 2,602
------- -------
103,907 104,890
Less allowances for depreciation and
amortization 52,783 50,963
------- -------
$51,124 $53,927
======= =======
NOTE I--DEPOSITS
Deposits are summarized as follows:
December 31, 1995 December 31, 1994
Weighted Weighted
Average Average
Amount Rate Amount Rate
--------- -------- ---------- --------
(Dollars in thousands)
Checking accounts:
Interest-bearing $ 321,929 1.17% $ 333,144 1.46%
Non-interest-bearing 151,274 143,210
---------- ----------
Total checking
accounts 473,203 0.78 476,354 1.01
Passbook accounts 687,960 2.67 780,883 2.92
Variable-rate insured
money market accounts 310,545 3.45 321,421 3.51
Certificate accounts (by original maturity):
Less than one year 698,031 5.62 349,650 4.42
One to two years 1,022,663 5.91 842,256 4.54
Two to three years 500,308 5.31 780,653 4.97
Three to four years 260,684 5.27 284,651 5.23
Four years or more 462,914 6.16 541,493 6.48
---------- ----------
Total certificates 2,944,600 5.72 2,798,703 5.09
---------- ----------
4,416,308 4.56% 4,377,361 4.15%
==== ====
Accrued interest 8,217 4,094
---------- ----------
$4,424,525 $4,381,455
========== ==========
-23-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE I--DEPOSITS--Continued
Aggregate annual maturities of certificate accounts at December 31, 1995 are as
follows:
(Dollars in thousands)
Matures During
Year Ended
December 31,
--------------
1996 $1,916,572
1997 646,650
1998 201,264
1999 92,456
2000 83,975
Thereafter 3,683
----------
$2,944,600
==========
Interest expense on deposits consists of the following:
Year Ended December 31,
1995 1994 1993
-------- -------- ------
(Dollars in thousands)
Passbook $ 21,017 $ 25,159 $ 26,932
Checking 4,202 6,426 7,302
Variable-rate insured
money market 10,450 8,943 9,266
Certificates 161,154 134,291 136,266
-------- -------- --------
$196,823 $174,819 $179,766
======== ======== ========
NOTE J--BORROWINGS
Short term borrowings of $25,972,000 and $13,127,000 at December 31, 1995 and
1994, respectively, consisted of sales of securities under agreements to
repurchase the identical securities (reverse repurchase agreements). The reverse
repurchase agreements had a weighted average rate of 5.89% and 5.76% at December
31, 1995 and 1994, respectively. All agreements outstanding at the end of 1995
had maturity dates within ninety days. These agreements are treated as
financings with the obligations to repurchase securities reflected as a
liability and the dollar amount of the securities underlying the agreements
remaining in the asset accounts. The securities underlying the agreements are
held by the counter-party brokers in FF Bank's account. The agreements were
collateralized by mortgage-related securities having a fair value of $27,786,000
and $13,395,000 at December 31, 1995 and 1994, respectively. Based upon
month-end balances, securities sold under agreements to repurchase averaged
$59,092,000 and $14,006,000 during 1995 and 1994, respectively. The maximum
amount outstanding at any month-end was $100,454,000 and $45,742,000 during 1995
and 1994, respectively.
-24-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE J--BORROWINGS-Continued
At December 31, 1995, FFC has an unused line-of-credit in the amount of
$18,000,000. The line-of-credit is available to FFC for working-capital purposes
or for potential future acquisitions. Under the terms of the line-of-credit,
which is available through April, 1996, 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 FFC and FF Bank.
Included among the covenants are restrictions on levels of total borrowings and
the interest-bearing asset/liability ratio for FFC, on a consolidated basis, and
a requirement that FF Bank maintain a minimum risk-based regulatory capital of
8.0%. All of such covenants are met at December 31, 1995. In addition, FFC would
pledge its stock in FF Bank as collateral should the line-of-credit be drawn
upon.
Federal Home Loan Bank ("FHL Bank") advances and other borrowings are comprised
of the following:
December 31,
1995 1994
----------------------- -----------------------
Weighted Weighted
Average Average
Maturity Amount Rate Amount Rate
-------- ------- -------- ------- --------
(Dollars in thousands)
Federal Home Loan Bank: On Demand $154,401 5.95% $450,050 6.01%
1995 150,250 4.61
1996 320,367 5.81 21,309 6.20
1997 31 7.00 31 7.00
2000 162 7.00 162 7.00
2001 100 5.50 100 5.50
2003 307 2.50 307 2.50
Subordinated notes 1996 54,925 8.51 54,977 8.51
Collateralized mortgage
obligations Various 8,024 18.65 11,818 15.35
Industrial development
revenue bonds Various 6,219 7.10 6,315 7.07
-------- --------
$544,536 6.33% $695,319 6.08%
======== ===== ======== =====
-25-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE J--BORROWINGS--Continued
Aggregate maturities on borrowings, including short-term borrowings, at December
31, 1995 are as follows. Payments on collateralized mortgage obligations are
included based upon estimated prepayments on the underlying mortgage portfolios.
(Dollars in thousands)
Matures During
Year Ended
December 31,
--------------
1996 $555,665
1997 3,277
1998 2,707
1999 1,914
2000 883
Thereafter through 2021 6,062
--------
$570,508
========
FF Bank is required to maintain unencumbered first mortgage loans in its
portfolio aggregating at least 167% of the amount of outstanding advances from
the FHL Bank as collateral. In addition, these borrowings are collateralized by
FHL Bank stock of $35,456,000 at December 31, 1995, which is included in "Other
Assets" in the consolidated balance sheets.
Subordinated notes ("the Notes") are payable at maturity on November 1, 1999.
Interest at the rate of 8% per annum is payable monthly. Under the terms of the
indenture relating to the Notes, the ability of FFC 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 FFC's
subsidiary to incur indebtedness (except for indebtedness that is guaranteed by,
or secured by, property of FFC). Unamortized issuance costs relating to the
Notes totaled $1,068,000 and $1,346,000 at December 31, 1995, and 1994,
respectively, and are being amortized using the interest method. The Notes were
redeemed by FFC at par plus accrued interest on January 15, 1996.
UFS Capital Corporation and FFS Funding Corporation, FF Bank's wholly-owned
finance subsidiaries, have 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 $11,443,000 and a fair value of $11,809,000 at December 31, 1995.
Industrial Development Revenue Bonds are payable in ten annual installments
ranging from $100,000 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
-26-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE J--BORROWINGS--Continued
bonds were issued to refinance an apartment project which was previously sold.
The bonds are collateralized by mortgage-backed securities with a carrying value
of $8,360,000 at December 31, 1995. FF Bank has a loan receivable from the buyer
of $5,818,000 at December 31, 1995, which is secured by a first mortgage on the
apartment project.
NOTE K--INCOME TAXES
The provision for income taxes consists of the following:
Year Ended December 31,
1995 1994 1993
----------- ---------- -------
(Dollars in thousands)
Current:
Federal $31,425 $30,743 $28,596
State 2,435 1,903 3,475
------- ------- -------
33,860 32,646 32,071
Deferred (credit):
Federal 1,091 (2,080) (2,075)
State 153 150 (305)
------- ------- -------
1,244 (1,930) (2,380)
------- ------- -------
$35,104 $30,716 $29,691
======= ======= =======
The provision for income taxes differs from that computed at the federal
statutory corporate tax rate as follows:
Year Ended December 31,
1995 1994 1993
----------- ---------- -------
(Dollars in thousands)
Income before income taxes $99,088 $83,745 $79,442
======= ======= =======
Tax at federal statutory rate (35%) $34,681 $29,311 $27,805
Add (deduct) effect of:
State income taxes (net of
federal income taxes) 1,682 2,019 2,363
Other (1,259) (614) (477)
------- ------- -------
INCOME TAX PROVISION $35,104 $30,716 $29,691
======= ======= =======
-27-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE K--INCOME TAXES--Continued
The significant components of the net deferred tax asset (liability) are as
follows:
Deferred Tax
Asset (Liability)
---------------------
At December 31,
1995 1994
------- ------
(Dollars in thousands)
Deferred loan fees and other
loan yield adjustments $ 1,088 $ 1,930
Excess tax depreciation (2,262) (2,379)
Loan loss allowances 11,648 12,367
Deferred compensation 2,185 1,849
Excess book deposit base
intangible amortization 2,636 2,471
FHL Bank stock dividend (1,084) (868)
Market valuation adjustments 3,029 4,648
Tax net operating loss
carryforwards 1,804 1,641
Other (847) (549)
-------- -------
18,197 21,110
Valuation allowance for
deferred tax assets (2,499) (3,797)
-------- -------
$ 15,698 $17,313
======== =======
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
subsidiary, deposit base intangibles and other timing differences. When
realized, the tax benefit for these items will be used to reduce current tax
expense for that period.
FF Bank qualifies under provisions of the Internal Revenue Code ("IRC") which
permit as a deduction from taxable income allowable bad debt deductions which,
particularly in prior years, significantly exceeded actual losses and the
financial statement loan loss provisions. A deferred tax liability is not
required for these excess tax deductions accumulated prior to the base year (as
defined by the IRC) because they meet the indefinite reversal criteria of
Accounting Principal Board Opinion No. 23, "Accounting for Income Taxes -
Special Areas". If these excess base year accumulations totaling $79,243,000 are
used for any purpose other than to absorb bad debt losses, income taxes of
approximately $31,804,000 would be imposed at the then-applicable rates,
resulting in a charge to operations since no provision for income taxes has been
made.
-28-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE L--STOCKHOLDERS' EQUITY
The Board of Directors of FFC 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.
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 FF Bank are insured to the maximum allowable amounts by the Savings
Association Insurance Fund ("SAIF") as administered by the Federal Deposit
Insurance Corporation ("FDIC"). As a SAIF-insured institution, FF Bank is
required to meet tangible, core and risk-based regulatory capital requirements
as determined by the Office of Thrift Supervision ("OTS").
FF Bank's various OTS regulatory capital measurements at December 31, 1995 are
set forth below:
(Dollars in thousands)
Stockholder's equity $417,830
Add: Net unrealized loss on securities
available for sale 5,944
Less:
Core deposit intangibles (17,317)
Goodwill (4,380)
Non-qualifying investment in subsidiary (1,163)
Other (715)
--------
TANGIBLE CAPITAL 400,199
Add: Qualifying intangibles 17,317
--------
CORE CAPITAL 417,516
Add: Qualifying general allowances for
loan losses 25,235
Less: Other (207)
RISK-BASED CAPITAL $442,544
========
-29-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE L--STOCKHOLDERS' EQUITY--Continued
The following table compares FF Bank's regulatory capital with OTS capital
requirements at December 31, 1995:
Actual Required Actual Required
Amount Amount Excess Ratio Ratio Excess
------- -------- ------ ------ --------- ------
(Dollars in thousands)
Tangible capital $400,199 $ 82,251 $317,948 7.30% 1.50% 5.80%
Core capital 417,516 165,021 252,495 7.59 3.00 4.59
Risk-based
capital 442,544 223,850 218,694 15.82 8.00 7.82
The OTS has adopted a final rule, which was effective in 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. The OTS has also added an interest-rate risk calculation
such that an institution with a measured interest-rate risk exposure, as
defined, greater than specified levels must deduct an interest rate risk
component when calculating the OTS risk-based capital requirement. Final
implementation of this rule was pending at the end of 1995. Management of FFC
and FF Bank do not believe these rules will significantly impact the capital
requirements of FF Bank or cause it to fail to meet its regulatory capital
requirements.
Under the terms of the Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA"), FF Bank is 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, 1995, management believes that FF Bank had capital in excess of the
requirements to be a "well capitalized" institution under the PCA provisions of
FDICIA.
Applicable rules and regulations of the OTS impose limitations on dividends by
FF Bank. 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 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
-30-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE L--STOCKHOLDERS' EQUITY--Continued
institution's 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 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.
NOTE M--EMPLOYEE BENEFIT PLANS
FFC 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. FFC follows the intrinsic value method of accounting.
Therefore, because the plan provides that option prices will not be less than
the fair market value of the stock at the grant date, no compensation expense is
recorded as a result of these options. 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. The options 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, 1993 2,468,941 $ 1.68 - $ 9.44
Granted 40,500 13.63 - 15.00
Exercised (348,741) 1.70 - 9.44
Cancelled (8,000) 4.90 - 9.44
--------- ---------------
Balance December 31, 1993 2,152,700 1.68 - 15.00
Granted 175,250 14.75 - 16.75
Exercised (333,254) 1.68 - 9.44
Cancelled (27,784) 4.90 - 16.75
--------- ---------------
Balance December 31, 1994 1,966,912 3.09 - 16.75
Granted 28,000 15.75 - 21.38
Exercised (566,218) 3.09 - 15.00
Cancelled ( 5,750) 14.75 - 16.75
--------- ---------------
BALANCE DECEMBER 31, 1995 1,422,944 $ 3.09 - $21.38
========= ===============
Options for 1,035,994 shares and 1,271,238 shares were exercisable at December
31, 1995 and 1994, respectively. At December 31, 1995, options for 611,000
shares were available for future grant.
FFC sponsors a defined-contribution profit sharing plan which covers all full
time employees who have completed one year of service and are at least
twenty-one years old. Corporate contributions are discretionary. Expense for
this plan
-31-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE M--EMPLOYEE BENEFIT PLANS--Continued
for 1994 and 1993 was $3,353,000 and $3,666,000, respectively. There was no
expense related to this plan for 1995.
FFC 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, 1995, the projected future obligation
under this plan amounted to $1,792,000, 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
$215,000, $227,000, and $434,000 for 1995, 1994 and 1993, respectively.
FFC sponsors an unfunded defined-benefit retirement plan for all outside
directors. At December 31, 1995, the projected future obligation under this plan
totaled $1,325,000, 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 $126,000,
$183,000 and $122,000 in 1995, 1994 and 1993, respectively.
During 1995, as part of the acquisition of FirstRock, FF Bank acquired the
existing Employee Stock Ownership Plan ("ESOP"), originally established in 1992.
The plan covers substantially all employees with more than one year of service
who have attained the age of twenty-one. The ESOP owes $271,000 to FFC at
December 31, 1995 relating to the cost of the remaining 55,450 FFC shares held
by the ESOP at that date. During 1995, the ESOP was utilized in lieu of FFC's
profit sharing plan, resulting in the distribution of approximately 161,000 FFC
shares to employees. The ESOP shares, which were purchased in 1992, are
grandfathered from Statement of Position ("SOP") No. 93-6 issued by the American
Institute of Certified Public Accountants. As such, expense for ESOP shares
allocated to FFC employees was recorded at cost as opposed to market value as
required by SOP No. 93-6 for shares acquired after 1992. The expense related to
ESOP distributions for 1995, 1994 and 1993 was $828,000, $231,000 and $231,000,
respectively.
FFC also sponsors a defined-benefit pension plan covering substantially all of
its Illinois-based employees (the "Retirement Plan"). Benefits are based upon a
formula using years of service and the participant's compensation during the
term of employment.
-32-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE M--EMPLOYEE BENEFIT PLANS--Continued
The following tables set forth the Retirement Plan's funded status and amounts
recognized in the consolidated financial statements:
December 31,
1995 1994
-------- ------
(Dollars in thousands)
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including
vested benefits of $2,971,000--1995 and
$2,621,000--1994 $ 3,126 $ 2,677
======== =======
Plan assets at fair value, primarily fixed
income securities $ 4,143 $ 3,704
Projected benefit obligation 3,238 2,770
-------- -------
Plan assets in excess of projected
benefit obligation 905 934
Unrecognized prior service cost 201 194
Unrecognized net loss from past experience
different from that assumed and effects
of changes in assumptions 500 729
Unrecognized net transition asset (1,175) (1,303)
-------- -------
Prepaid pension cost included in other assets $ 431 $ 554
======== =======
Net periodic expense for the Retirement Plan, as determined by actuarial
consultants, was $238,000, $504,000 and $432,000 in 1995, 1994 and 1993,
respectively.
The principal actuarial assumptions used to develop the net pension benefit for
the Retirement Plan were as follows:
Year Ended December 31,
1995 1994 1993
-------- -------- ------
Weighted average discount rate 7.25% 8.25% 7.25%
Rate of increase in future compensation 5.00 5.00 5.00
Expected long-term rate of return on plan
assets 8.50 8.50 7.75
FFC does not, as a policy, offer post-retirement benefits other than profit
sharing, ESOP, pensions and certain supplemental retirement benefits noted
above.
NOTE N--FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
FFC is a party to financial instruments with off-balance-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
-33-
CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE N--FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK--
Continued
balance sheets. The contract amounts of those instruments reflect the extent of
involvement FFC has in particular classes of financial instruments.
FFC'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. FFC 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,
1995 1994
-------- --------
(Dollars in thousands)
Commitments to extend credit:
Fixed rate (6.55% to 9.75% at
December 31, 1995) $ 19,398 $ 8,279
Adjustable rate 20,778 23,394
Unused lines of credit:
Credit cards 837,341 764,953
Home equity 360,189 308,347
Business lines 1,158 858
Other 8,800 8,800
Loans sold with recourse 37,000 44,000
Financial guarantees written 10,995 11,215
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. FFC evaluates each customer's creditworthiness on a case-by-case
basis. With the exception of credit card lines-of-credit, FFC 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 FFC 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 $26,651,000 at December 31, 1995. This exposure,
however, is mitigated by the hedge of firm commitments to sell certain of these
loans. Commitments outstanding to sell mortgage loans at December 31, 1995
amount to $43,300,000.
-34-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE N--FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK--
Continued
All loans currently sold to others are sold on a non-recourse basis with the
servicing of these loans being retained by FF Bank. At December 31, 1995, 1994
and 1993, $37,000,000, $44,000,000 and $59,000,000, respectively, of the
serviced loans were previously sold with recourse. Of these recourse loans,
approximately $27,000,000, $36,000,000 and $47,000,000 were federally-insured or
federally-guaranteed at December 31, 1995, 1994 and 1993, respectively. In
addition, management has considered the remaining uninsured or non-guaranteed
balance in the determination of the adequacy of the allowance for losses.
Financial guarantees represent agreements whereby, for an annual fee, certain of
FF Bank's 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, FF Bank is required to either pay the amount in default
or acquire the then outstanding bonds. FF Bank 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, 1995, certain mortgage-related securities and investment securities
with a carrying value of approximately $6,280,000 were pledged as collateral for
bonds in the aggregate principal amount of $3,890,000. Additional bond issues
totaling $7,105,000 are supported by letters of credit issued by FF Bank, in
lieu of specific collateral. The bond agreements have expiration dates through
2008.
Except for the above-noted commitments to originate and/or sell mortgage loans
in the normal course of business, FFC and FF Bank have not undertaken the use of
off-balance sheet derivative financial instruments for any purpose.
-35-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE O--FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement 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. Statement 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 FFC. FFC 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 FFC 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 FFC's future earnings or cash flows.
The following methods and assumptions were used by FFC 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: The fair value of accrued interest
income and expense approximates 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 fixed-rate 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
-36-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE O--FAIR VALUES OF FINANCIAL INSTRUMENTS--Continued
loans are estimated using discounted cash flow analyses and interest rates
currently being offered for loans with similar terms to borrowers of
similar credit quality.
Mortgage servicing rights: Mortgage loan servicing rights, which consist of
FFC'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. Due to lack of practicability, the value of
those rights, except to the extent that purchased or originated (after
January 1, 1995) mortgage servicing rights exist, is not reflected in FFC's
consolidated balance sheets.
Federal Home Loan Bank stock: FHL Bank stock is carried at cost which is
its redeemable value since the market for this stock is restricted.
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 FFC's long-term borrowings are estimated
using discounted cash flow analyses, based on FFC's current incremental
borrowing rates for similar types of borrowing arrangements.
Off-balance-sheet instruments: Fair values for FFC'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, 1995 and 1994.
-37-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE O--FAIR VALUES OF FINANCIAL INSTRUMENTS--Continued
The carrying amounts and fair values of FFC's financial instruments consist of
the following:
December 31,
1995 1994
-------------------------- --------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- --------- ---------- ---------
(Dollars in thousands)
Cash equivalents $ 48,730 $ 48,730 $ 24,914 $ 24,914
Investment securities avail-
able for sale $ 80,999 $ 80,999 $ 68,959 $ 68,959
Investment securities held
to maturity $ 119,426 $ 119,063 $ 129,301 $ 124,434
Federal Home Loan Bank stock $ 35,456 $ 35,456 $ 34,918 $ 34,918
Mortgage-related securities
available for sale $ 571,293 $ 571,293 $ 201,373 $ 201,373
Mortgage-related securities
held to maturity $ 699,468 $ 691,060 $1,301,118 $1,263,489
Loans held for sale $ 26,651 $ 27,001 $ 11,736 $ 11,797
Loans receivable:
Real estate $2,341,370 $2,365,415 $2,360,878 $2,297,848
Credit cards 208,213 208,213 194,538 194,538
Home equity 286,500 286,500 242,298 242,298
Education 241,022 241,022 192,697 192,697
Manufactured housing 136,759 140,536 148,499 151,823
Consumer and other 376,285 378,506 319,801 311,075
---------- ---------- ---------- ----------
$3,590,149 $3,620,192 $3,458,711 $3,390,279
========== ========== ========== ==========
Accrued interest receivable $ 37,722 $ 37,722 $ 32,947 $ 32,947
Deposits:
Checking $ 473,203 $ 473,203 $ 476,354 $ 476,354
Passbooks 687,960 687,960 780,883 780,883
Money market 310,545 310,545 321,421 321,421
Certificates 2,944,600 2,951,564 2,798,703 2,738,147
---------- ---------- ---------- ----------
$4,416,308 $4,423,272 $4,377,361 $4,316,805
========== ========== ========== ==========
Short-term borrowings $ 25,972 $ 27,786 $ 13,127 $ 13,395
Federal Home Loan Bank
and other borrowings:
Federal Home Loan Bank
advances $ 475,367 $ 475,457 $ 622,209 $ 621,590
Collateralized mortgage
obligations 8,024 9,309 11,818 13,049
Subordinated notes 54,925 54,925 54,977 53,103
Industrial development
revenue bonds 6,220 6,605 6,315 5,058
---------- ---------- ---------- ----------
$ 544,536 $ 546,296 $ 695,319 $ 692,800
========== ========== ========== ==========
Accrued interest payable $ 10,585 $ 10,585 $ 7,160 $ 7,160
-38-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE P--MORTGAGE BANKING ACTIVITIES
Loans serviced for investors amounted to $2,326,000,000, $2,424,000,000 and
$2,068,000,000 at December 31, 1995, 1994 and 1993, respectively. These loans
are not reflected in the consolidated financial statements. FF Bank originates
mortgage loans which, depending whether the loans meet FF Bank's investment
objectives, may be sold in the secondary mortgage market or to other private
investors.
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,
1995 1994 1993
-------- -------- ------
(Dollars in thousands)
Consolidated balance sheet information:
Mortgage loans held for sale $ 26,651 $ 11,736 $ 104,653
Unamortized mortgage servicing
rights and capitalized
excess servicing (included in
"Other Assets") 8,395 7,880 4,441
Consolidated statement of income information:
Service fees on loans
sold (gross) $ 8,383 $ 8,806 $ 9,822
Amortization of mortgage
servicing rights and
capitalized excess
servicing (1,258) (1,069) (3,235)
-------- -------- ----------
Service fees on loans
sold (net) $ 7,125 $ 7,737 $ 6,587
======== ======== ==========
Gain on sales of mortgage loans held for sale (included $1.7 million in
1995 as a result of change in accounting method)
(See Note A) $ 2,703 $ 1,455 $ 8,324
Consolidated statement of cash flow information:
Mortgage loans originated for
sale $210,150 $298,813 $1,005,655
Mortgage loans transferred to
held for sale portfolio 15,467 26,028 60,238
Sales of mortgage loans held for
sale 211,658 418,895 1,051,358
NOTE Q--LITIGATION
FF Bank is involved in certain lawsuits in the course of its general lending
business and other operations. FFC 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
-39-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE Q--LITIGATION--Continued
disposition of its litigation will not have a material effect on FFC's financial
condition.
NOTE R--REGULATORY ISSUES
FF Bank's deposits are insured by the SAIF of the FDIC. Deposit insurance
premiums to both the SAIF and the Bank Insurance Fund ("BIF") of the FDIC were
identical when both funds were created in 1989, with an eight cent differential
between the premiums paid by well-capitalized institutions and the premiums paid
by under-capitalized institutions (23 cents to 31 cents per $100 of assessable
deposits). Deposit insurance premiums for the SAIF and the BIF, which insures
deposits in national and state-chartered banks, are set to facilitate each fund
achieving its designated reserve ratio. In August 1995, the FDIC determined that
the BIF had achieved its designated reserve ratio and lowered BIF deposit
insurance premium rates for all but the riskiest institutions. Effective January
1, 1996, BIF deposit insurance premiums for well-capitalized banks were further
reduced to the statutory minimum of $2,000 per institution per year. Because the
SAIF remains significantly below its designated reserve ratio, SAIF deposit
insurance premiums were not reduced and remain at 0.23% to 0.31% of deposits,
based upon an institution's supervisory evaluations and capital levels. The
current discrepancy in deposit insurance premiums between the BIF and the SAIF
could place FF Bank at a competitive disadvantage to BIF insured institutions.
The current financial condition of the SAIF has resulted in proposed legislation
to recapitalize the SAIF through a one-time special assessment (of approximately
80 cents to 85 cents per $100 of assessable SAIF deposits as of March 31, 1995)
and in legislation to then merge the SAIF into the BIF. If the special
assessment is enacted, a special one-time assessment of approximately $24.0
million, net of tax effect, would be imposed on FF Bank. After the special
assessment, it is expected that the SAIF would achieve its designated reserve
ratio and that SAIF premium rates would then become comparable to BIF rates. The
proposed legislation also contemplates a merger of the SAIF into the BIF, which
would require separate legislation. FFC is unable to predict whether this
legislation will be enacted or the amount or applicable retroactive date of any
one-time assessment or the rates that would then apply to assessable SAIF
deposits.
Legislation also has been proposed that could eliminate the federal savings
association charter. If such legislation is enacted, FF Bank would be required
to convert its federal savings bank charter to either a national bank charter or
to a state depository institution charter. Pending legislation may provide
relief as to recapture of the bad debt deduction for federal tax purposes that
otherwise would be applicable if FF Bank converted its charter, provided that FF
Bank meets a proposed residential loan origination requirement. Pending
legislation also may
-40-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL COPORATION
NOTE R--REGULATORY ISSUES--Continued
result in FFC becoming regulated at the holding company level by the Federal
Reserve Board rather than by the OTS. Regulation by the Federal Reserve Board
could subject FFC to capital requirements that are not currently applicable to
FFC as a holding company under OTS regulation and may result in statutory
limitations on the type of business activities in which FFC may engage at the
holding company level, which business activities currently are not restricted.
FFC is unable to predict whether such legislation will be enacted or, if
enacted, whether it will contain relief as to the recapture of bad debt
deductions previously taken.
-41-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE S--FIRST FINANCIAL CORPORATION PARENT COMPANY ONLY
FINANCIAL INFORMATION
BALANCE SHEETS
December 31,
1995 1994
-------- -------
(Dollars in thousands)
ASSETS
Cash and cash equivalents $ 13,613 $ 10,195
Investment securities available for sale 4,668 4,492
Investment in subsidiary 417,830 364,116
Prepaid expenses and other assets 5,068 5,965
-------- --------
$441,179 $384,768
======== ========
LIABILITIES
Subordinated notes $ 54,925 $ 54,977
Other liabilities 1,066 875
-------- --------
TOTAL LIABILITIES 55,991 55,852
STOCKHOLDERS' EQUITY
Common stock 29,676 29,126
Additional paid-in capital 49,756 50,129
Retained earnings 311,777 261,949
Net unrealized loss on
securities available for sale (6,021) (8,619)
Treasury stock (3,669)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 385,188 328,916
-------- --------
$441,179 $384,768
======== ========
STATEMENTS OF INCOME
Year Ended December 31,
1995 1994 1993
-------- -------- ------
(Dollars in thousands)
Interest income $ 920 $ 644 $ 732
Interest expense on borrowings 4,675 4,686 4,736
------- ------- -------
NET INTEREST EXPENSE (3,755) (4,042) (4,004)
Equity in net income from subsidiary 68,028 56,903 53,359
------- ------- -------
64,273 52,861 49,355
Management fees paid to subsidiary 660 628 735
Other expenses 1,807 1,080 628
------- ------- -------
INCOME BEFORE INCOME TAX CREDITS 61,806 51,153 47,992
Income tax credits (2,178) (1,876) (1,759)
------- ------- -------
NET INCOME $63,984 $53,029 $49,751
======= ======= =======
-42-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
FIRST FINANCIAL CORPORATION
NOTE S--FIRST FINANCIAL CORPORATION PARENT COMPANY ONLY
FINANCIAL INFORMATION--Continued
STATEMENTS OF CASH FLOWS
Year Ended December 31,
1995 1994 1993
-------- -------- ------
(Dollars in thousands)
OPERATING ACTIVITIES
Net income $63,984 $53,029 $49,751
Adjustments to reconcile net income
to net cash used in operating
activities:
Equity in net income of subsidiary (68,028) (56,903) (53,359)
Other 1,649 218 (723)
------- ------- -------
NET CASH USED IN OPERATING
ACTIVITIES (2,395) (3,656) (4,331)
INVESTING ACTIVITIES
Cash dividends from subsidiary 16,945 16,200 5,500
Investment in subsidiary (24,000)
Purchase of investments (1,500)
Proceeds from maturity and sale
of investments 5,237
------ ------- -------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 16,945 16,200 (14,763)
FINANCING ACTIVITIES
Purchase of treasury stock (4,126)
Exercise of stock options 3,024 1,595 912
Cash dividends paid (14,156) (9,950) (8,238)
------- ------- -------
NET CASH USED IN
FINANCING ACTIVITIES (11,132) (8,355) (11,452)
------- ------- -------
Increase (decrease) in cash and cash
equivalents 3,418 4,189 (30,546)
Cash and cash equivalents at beginning
of year 10,195 6,006 36,552
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $13,613 $10,195 $ 6,006
======= ======= =======
-43-