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 March 31, 1996
---------------------------------
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
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(Address of principal executive office)
(715) 341-0400
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(Registrant's telephone number, including area code)
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(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 29,896,372 Shares
- --------------------------------------- -----------------------
Class Outstanding at April 30, 1996
FIRST FINANCIAL CORPORATION
Form 10-Q Index
- --------------------------------------------------------------------------------
Part I - Financial Information
---------------------
Consolidated Balance Sheets as of March 31, 1996
(Unaudited) and December 31, 1995
Unaudited Consolidated Statements of Income for
the Three Months Ended March 31, 1996 and 1995
Unaudited Consolidated Statement of Changes In
Stockholders' Equity for the Three Months Ended
March 31, 1996
Unaudited Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 1996 and
1995
Notes to Unaudited Consolidated Financial Statements
Management's Discussion and Analysis:
Comparison of the Consolidated Balance Sheets
at March 31, 1996 (Unaudited) and December 31,
1995
Comparison of the Unaudited Consolidated Statements of
Income for the Three Months Ended March 31, 1996 and 1995
Part II - Other Information
-----------------
Item 6. Exhibits and Reports on Form 8-K
Signatures
- ----------
Exhibits
- --------
-1-
FIRST FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31,
1996 December 31,
(Unaudited) 1995
----------- ----
(In thousands)
Cash $ 99,857 $ 123,379
Federal funds sold 15,291 34,929
Interest-earning deposits 90,769 13,801
---------- ----------
Cash and cash equivalents 205,917 172,109
Securities available for sale (at fair value):
Investment securities 133,514 80,999
Mortgage-related securities 495,913 571,293
Securities held to maturity (at amortized cost):
Investment securities (fair
value of $112,431,000--1996
and 119,063,000--1995) 113,176 119,426
Mortgage-related securities
(fair value of $669,298,000
--1996 and $691,060,000--
1995) 675,569 699,468
Loans receivable:
Held for sale 45,283 26,651
Held for investment 3,535,091 3,590,149
Foreclosed properties and
repossessed assets 3,661 3,379
Real estate held for investment
or sale 8,212 8,289
Office properties and equipment,
at cost 51,548 51,124
Intangible assets, less
accumulated amortization 20,216 21,481
Other assets 131,103 126,740
---------- ----------
$5,419,203 $5,471,108
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits $4,495,035 $4,424,525
Borrowings 454,248 570,508
Advance payments by borrowers
for taxes and insurance 30,032 13,206
Other liabilities 42,317 77,952
---------- ----------
Total liabilities 5,021,632 5,086,191
---------- ----------
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:
29,885,122-March 31, 1996;
29,676,365-December 31, 1995; 29,885 29,676
Additional paid-in capital 50,747 49,756
Net unrealized loss on
securities available for sale (6,733) (6,021)
Common stock purchased by
employee benefit plan (271) (271)
Retained earnings 323,943 311,777
---------- ----------
Total stockholders' equity 397,571 384,917
---------- ----------
$5,419,203 $5,471,108
========== ==========
See notes to unaudited consolidated financial statements.
-2-
FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
March 31,
------------------
1996 1995
---- ----
(In thousands, except
per share amounts)
Interest income:
Mortgage loans $ 45,879 $ 45,523
Other loans 31,659 28,359
Mortgage-related securities 21,829 25,480
Investments 4,255 3,440
-------- --------
Total interest income 103,622 102,802
Interest expense:
Deposits 50,367 45,167
Borrowings 7,286 11,437
-------- --------
Total interest expense 57,653 56,604
-------- --------
Net interest income 45,969 46,198
Provision for losses on loans 1,900 2,119
-------- --------
44,069 44,079
Non-interest income:
Deposit account service fees 3,142 2,620
Loan fees and service charges 2,729 2,457
Insurance and brokerage sales
commissions 1,832 2,052
Service fees on loans sold 1,533 1,969
Gain on disposition of loans and
mortgage-related securities, net 274 48
Other 747 1,107
-------- --------
Total non-interest income 10,257 10,253
-------- --------
Operating income 54,326 54,332
-------- --------
Non-interest expense:
Compensation, payroll taxes
and benefits 12,083 13,177
Federal deposit insurance premiums 2,561 2,529
Occupancy 2,458 2,350
Data processing 1,865 1,725
Loan expenses 1,721 1,455
Telephone and postage 1,698 1,693
Marketing 1,657 2,115
Furniture and equipment 1,360 1,412
Amortization of intangible assets 1,264 1,311
Net cost from operations of fore-
closed properties 60 18
Acquisition-related costs -- 6,458
Other 2,668 2,755
-------- --------
Total non-interest expense 29,395 36,998
-------- --------
Income before income taxes and extra-
ordinary item 24,931 17,334
Income taxes 7,597 6,507
-------- --------
Income before extraordinary item 17,334 10,827
Extraordinary item (686) --
-------- --------
Net income $ 16,648 $ 10,827
======== ========
Earnings per share:
Primary:
Income before extraordinary item $ 0.57 $ 0.36
Extraordinary item (0.02) --
-------- --------
Net income $ 0.55 $ 0.36
======== ========
Fully diluted:
Income before extraordinary item $ 0.57 $ 0.36
Extraordinary item (0.02) --
-------- --------
Net income $ 0.55 $ 0.36
======== ========
Cash dividends per share $ 0.15 $ 0.12
======== ========
See notes to unaudited consolidated financial statements.
-3-
FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
Net
Unrealized
Common Holding Common
Stock and Loss on Stock
Additional Securities Purchased
Paid-In Available by ESOP Retained Stockholders'
Capital For Sale Plan Earnings Equity
------- -------- ---- -------- ------
(In thousands)
Balances at
December 31, 1995 $ 79,432 $ (6,021) $ (271) $311,777 $384,917
Net income for the
three months ended
March 31, 1996 16,648 16,648
Cash dividends paid
($0.15 per share) (4,482) (4,482)
Exercise of stock
options 1,200 1,200
Change in net un-
realized holding
loss on securities
available for
sale (712) (712)
-------- -------- ------- -------- --------
Balances at
March 31, 1996 $ 80,632 $ (6,733) $ (271) $323,943 $397,571
======== ======== ======= ======== ========
See notes to unaudited consolidated financial statements.
-4-
FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
-----------------------------
1996 1995
---------- ---------
OPERATING ACTIVITIES (In thousands)
Net income $ 16,648 $ 10,827
Adjustments to reconcile net income to net cash provided
by operating activities:
Decrease (increase) in accrued interest on loans 1,178 (1,559)
Increase in accrued interest on deposits 3,180 1,695
Loans originated for sale (88,605) (22,105)
Proceeds from sales of loans held for sale 85,811 23,429
Provision for depreciation 1,394 1,491
Provision for losses on loans 1,900 2,119
Provision for losses on real estate and other assets -- 629
Unrealized loss on impairment of mortgage-related securities 2,150 --
Amortization of cost in excess of net assets of
acquired businesses 198 208
Amortization of core deposit intangibles 1,067 1,103
Amortization of mortgage servicing rights 478 181
Net gain on sales of loans and assets (2,424) (38)
Other-net (4,963) 8,366
--------- ---------
Net cash provided by operating activities 18,012 26,346
INVESTING ACTIVITIES
Proceeds from sales of investment securities available for sale 2,121 2,382
Proceeds from sales of mortgage-related securities available
for sale 91,527 --
Proceeds from maturities of investment securities held
to maturity 6,000 13,785
Proceeds from maturities of investment securities available for
sale 3,316 --
Purchases of investment securities held to maturity -- (25,353)
Purchase of investment securities available for sale (59,548) --
Principal payments received on mortgage-related securities 49,021 39,625
Principal received on loans receivable 179,678 123,783
Loans originated for portfolio (184,946) (165,125)
Additions to office properties and equipment (1,744) (1,538)
Proceeds from sales of foreclosed properties and
repossessed assets 1,449 2,008
--------- ---------
Net cash provided by (used in) investing activities 86,874 (10,433)
FINANCING ACTIVITIES
Net increase in deposits 67,330 19,971
Net increase in advance payments by borrowers for
taxes and insurance 16,826 17,715
Funding of official checks for borrower tax escrows (35,692) (34,953)
Net increase in short-term borrowings 46,059 73,303
Proceeds from borrowings 169,500 212,223
Repayments of borrowings (331,819) (305,746)
Proceeds from exercise of stock options 1,200 792
Proceeds from vesting of employee benefit plans -- 1,139
Payments of cash dividends to stockholders (4,482) (3,506)
--------- ---------
Net cash used in financing activities (71,078) (19,062)
--------- ---------
Increase (decrease) in cash and cash equivalents 33,808 (3,149)
Cash and cash equivalents at beginning of period 172,109 118,978
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 205,917 $ 115,829
========= =========
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 ("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 three months of 1996 are
not necessarily indicative of the results which may be expected for the entire
1996 fiscal year. The December 31, 1995 balance sheet included herein is derived
from the consolidated financial statements included in FFC's 1995 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 1995 Annual Report to
Shareholders. See Note B for information relative to business combinations.
NOTE B - FIRST FINANCIAL CORPORATION
At March 31, 1996, FFC conducted business as a nondiversified unitary
thrift holding company and its principal asset was all of 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. 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. 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.
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
-6-
results of FFC and FirstRock that are included in the first quarter 1995 results
of operations, are as follows:
Net
Total Income
Income (Loss)
------ ------
FFC $69,579 $ 9,348
FirstRock 5,383 (3,091)
------- -------
$74,962 $ 6,257
======= =======
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 for the three
months ended March 31, 1995.
NOTE C - EARNINGS PER SHARE
Primary and fully diluted earnings per share for the periods ended March
31, 1996 and 1995 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.
NOTE D - CONTINGENT LIABILITIES
FF 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 March 31, 1996,
mortgage-related securities with a carrying value of approximately $2.9 million
were pledged as collateral for bonds in the aggregate principal amount of $2.0
million. Additional bond issues totaling $7.1 million are supported by letters
of credit issued by FF Bank in lieu of specific collateral. At March 31, 1996,
each of the outstanding bonds for which FF Bank has entered into collateral
agreements or supported by letters of credit is current with regard to debt
service payments.
NOTE E - DIVIDENDS PAID OR DECLARED TO STOCKHOLDERS
The Board of Directors of FFC on February 21, 1996, declared a $0.15 per
share quarterly cash dividend payable on March 31, 1996 to shareholders of
record of FFC common stock on March 15, 1996.
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
-7-
leverage capital to adjusted tangible assets ratio and a risk-based capital
measurement based upon assets weighted for their inherent risk. As of March 31,
1996, FF Bank exceeded all OTS capital requirements as displayed below.
Required Actual
OTS FF Bank
Ratio Ratio
----- -----
Tangible capital 1.50% 6.74%
Core leverage capital 3.00 7.02
Risk-based capital 8.00 14.73
The OTS has adopted a final rule, effective March 4, 1994, disallowing any new
core deposit intangibles, acquired after the rule's effective date, from
counting as regulatory capital. Core deposit intangibles acquired prior to the
effective date have been grandfathered for purposes of this rule. At March 31,
1996, FFC had core deposit intangibles of $16.3 million, all of which have been
grandfathered from this OTS rule. The OTS has added an interest-rate risk
calculation 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. Final implementation of this
rule was pending at March 31, 1996. The OTS also has proposed to increase the
minimum required core capital ratio from the current 3.00% to a range of 4.00%
to 5.00% for all but the most healthy financial institutions. Management of FFC
and FF Bank do not believe these rules will significantly impact the capital
requirements of FF Bank or cause FF Bank to fail to meet its regulatory capital
requirements.
NOTE G - EXTRAORDINARY ITEM
In January 1996, FFC redeemed all of its outstanding 8% Subordinated
Notes due November 1999 (which aggregated $54,925,000 at the date of
redemption). The net after-tax cost associated with this redemption, $686,000 or
$0.02 per share, has been reported as an extraordinary charge. This transaction
was funded principally through a dividend from FF Bank. As a result of this
dividend, FF Bank's regulatory capital levels have decreased from those levels
reported at December 31, 1995, but remain at levels substantially in excess of
requirements.
-8-
NOTE H - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
For The
Three Months Ended
March 31,
--------------------
1996 1995
------- -----
(In thousands)
Supplemental disclosure of cash flow information:
Cash paid or credited to accounts during
period for:
Interest on deposits and borrowings $ 54,697 $ 54,211
Income taxes 710 1,140
Non-cash investing activities:
Mortgage loans transferred to held for sale
portfolio 15,453 421
Loans receivable transferred to foreclosed
properties 1,525 1,818
(Increase) decrease in net unrealized holding loss
on securities available for sale (712) 2,907
Mortgage loans securitized and transferred to
mortgage-related securities available for sale 41,448 --
NOTE I - ACCOUNTING CHANGE
During the third quarter of 1995, the Corporation adopted Statement of
Financial Accounting Standards ("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.
The first quarter of 1996 income includes gains of $843,000 ($550,000
after tax) resulting from the capitalization of such originated mortgage
servicing rights.
-9-
MANAGEMENT'S DISCUSSION AND ANALYSIS
COMPARISON OF THE CONSOLIDATED BALANCE SHEETS
AT MARCH 31, 1996 (UNAUDITED) WITH DECEMBER 31, 1995
General:
Total assets decreased to $5.419 billion at March 31, 1996 from $5.471
billion at December 31, 1995. Deposits increased to $4.495 billion at March 31,
1996 from $4.425 billion at year-end 1995 while borrowings decreased to $454.2
million from $570.5 million during the same time frame. Advance payments by
borrowers for taxes and insurance increased by $16.8 million between December
31, 1995 and March 31, 1996 and other liabilities decreased $35.6 million from
December 31, 1995 to March 31, 1996. Stockholders' equity at March 31, 1996 was
$397.6 million, up from $384.9 million at year-end 1995.
Liquidity and Capital Resources:
At March 31, 1996, total consolidated liquidity, consisting of cash,
cash equivalents, and investment securities represented 8.35% of FFC's total
assets compared with 6.81% at December 31, 1995. 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 March 31, 1996 increased by $80.1 million as compared
to December 31, 1995 liquidity as a result of the net effect of significant
changes in various categories of assets and liabilities during the three-month
interim period. Some of the more significant changes in these categories,
including liquid assets, can be summarized as follows:
Consolidated Balance Balance
Balance Sheet December 31, Increases March 31,
Classification 1995 (Decreases) 1996
- ------------------- ------------ ----------- --------
(In thousands)
Cash and cash equivalents $ 172,109 $ 33,808 $ 205,917
Securities available for
sale:
Investment securities 80,999 52,515 133,514
Mortgage-related
securities 571,293 (75,380) 495,913
Securities held to
maturity:
Investment securities 119,426 (6,250) 113,176
Mortgage-related
securities 699,468 (23,899) 675,569
Loans receivable, in-
cluding loans held
for sale 3,616,800 (36,426) 3,580,374
Office properties 51,124 424 51,548
Intangible assets 21,481 (1,265) 20,216
Deposits 4,424,525 70,510 4,495,035
Borrowings 570,508 (116,260) 454,248
Advance payments by
borrowers for taxes
and insurance 13,206 16,826 30,032
Other liabilities 77,952 (35,635) 42,317
Stockholders' equity 384,917 12,654 397,571
-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 levels are proper and that adequate
capital and borrowings are available through the capital markets, the Federal
Home Loan Bank ("FHLB") and other sources. For a discussion of regulatory
capital requirements, see Note F to the unaudited consolidated financial
statements.
On an unconsolidated basis, FFC had cash of $9.7 million. During the
first quarter of 1996, FFC redeemed its subordinated debt of $54.9 million (See
Note G to the unaudited consolidated financial statements). 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 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 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, decreased $36.4 million from
$3.617 billion at December 31, 1995 to $3.580 billion at March 31, 1996. Total
loans are summarized below as of the dates indicated.
March 31, December 31, Increase
1996 1995 (Decrease)
------------- ------------ ----------
(In thousands)
Real estate loans:
One- to four-family $1,977,705 $2,038,103 $ (60,398)
Multi-family 225,476 220,772 4,704
Commercial and non-residential 165,676 153,173 12,503
---------- ---------- ---------
Total real estate loans 2,368,857 2,412,048 (43,191)
Other loans:
Consumer 373,625 362,659 10,966
Home equity 278,810 284,700 (5,890)
Education 253,870 240,650 13,220
Credit cards 205,655 214,107 (8,452)
Manufactured housing 130,842 139,385 (8,543)
Business 15,942 17,198 (1,256)
Less net items to loans receivable (47,227) (53,947) 6,720
---------- ---------- ---------
Total loans (including loans held
for sale) $3,580,374 $3,616,800 $ (36,426)
========== ========== =========
The decrease in total loans during the first three months of 1996 was
primarily attributable to a $43.2 million decrease in real estate loans. This
decrease was the result of the net effect of i) originations of $188.6 million
offset by ii) repayments of $104.9 million, iii) loan sales of $85.8 million,
and iv) the securitization of $41.4 million of mortgage loans transferred to the
mortgage-related securities portfolio. For a further discussion of loan
origination activity, see "Loan Originations".
Consumer loans increased $11.0 million and education loans increased
$13.2 million in 1996 as customer usage of these products continues to grow.
Credit card loans decreased
-11-
$8.5 million in 1996 reflecting a seasonal decline in this portfolio.
Manufactured housing loan balances decreased $8.5 million as FFC had previously
ceased originating manufactured housing loans and the portfolio continues to
make scheduled repayments.
Mortgage loans held for sale were $45.3 million at March 31, 1996 as
compared to $26.7 million at the end of 1995. Off-balance sheet commitments to
extend credit and to sell mortgage loans totaled $60.5 million and $74.4
million, respectively, at March 31, 1996 as compared to $40.2 million and $43.3
million, respectively, at December 31, 1995. During the three months ended March
31, 1996, market interest rates generally fluctuated as compared to interest
rate levels at the end of 1995. The fair value of on-balance sheet mortgage
loans held for sale and off-balance sheet commitments to originate and sell
mortgage loans can vary substantially depending upon the movement of interest
rates. Management utilizes various methods to insulate 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 $99.3
million during the three months ended March 31, 1996 primarily as a result of
the net effect of i) the securitization of $41.4 million of mortgage loans
transferred to the mortgage-related securities portfolio offset by ii) sales of
MBSs having an aggregate par value of $90.3 million and iii) principal
repayments of $49.0 million. At the end of the first quarter, FF Bank had
commitments to purchase adjustable rate U.S. Government agency-backed MBSs
having an aggregate par value of $50.0 million. Also, see "Non-Performing MBSs"
for discussion of non-performing MBSs.
-12-
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:
Carrying Value At
-------------------------------
March 31, December 31,
1996 1995
----------- ------------
(In Thousands)
Issuer/Security Type
U.S. Government agencies:
Mortgage-backed certificates $ 357,211 $ 349,216
Collateralized mortgage
obligations 303,451 342,190
---------- ----------
Total agencies 660,662 691,406
---------- ----------
Private issuers:
Mortgage-backed certificates
Senior position 463,840 487,914
Mezzanine position 46,417 90,829
Collateralized mortgage
obligations 563 612
---------- ----------
Total private issuers 510,820 579,355
---------- ----------
Totals $1,171,482 $1,270,761
========== ==========
Total carrying value per
consolidated financial
statements, by classification:
Available-for-sale portfolio $ 495,913 $ 571,293
Held-to-maturity portfolio 675,569 699,468
---------- ----------
Total carrying value $1,171,482 $1,270,761
========== ==========
During the first quarter of 1996, FFC reduced its holdings of private issue
MBSs by $68.6 million from $579.4 million at the end of 1995 to $510.8 million
at March 31, 1996. This decrease included a $44.4 million reduction in mezzanine
position MBSs due to i) the sale of two securities, at a nominal loss, having an
aggregate par value of $42.8 million and ii) a $2.2 million writedown of two
mezzanine MBSs (See "Non-Performing MBSs").
FFC's portfolio of MBSs totaled approximately $1.17 billion at March 31,
1996 and, except for those securities discussed in "Non-Performing MBSs," were
either i) U.S. Government agency-backed or ii) rated at a minimum of investment
grade quality by at least one nationally recognized independent rating agency.
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. Non-
-13-
accrual loans are presented separately in the following section. Loan
delinquencies of 90 days or less, for the dates indicated, are summarized in the
following chart:
March 31, December 31,
1996 1995
------------- -----------
(In thousands)
Loans Delinquent 30-59 Days
Residential real estate $ 8,352 $ 7,945
Manufactured housing 1,486 2,888
Credit card 2,440 2,555
Commercial real estate 486 303
Consumer, student and other 9,347 9,519
------- -------
$22,111 $23,210
======= =======
Loans Delinquent 60-90 Days
Residential real estate $ 905 $ 1,193
Manufactured housing 743 766
Credit card 1,276 1,315
Commercial real estate 686 606
Consumer, student and other 9,436 9,734
------- -------
$13,046 $13,614
======= =======
Total Loans Delinquent 30-90 Days
Residential real estate $ 9,257 $ 9,138
Manufactured housing 2,229 3,654
Credit card 3,716 3,870
Commercial real estate 1,172 909
Consumer, student and other 18,783 19,253
------- -------
$35,157 $36,824
======= =======
At March 31, 1996, the 30-90 day delinquencies decreased $1.6 million to
$35.2 million from $36.8 million at year-end 1995. As a percent of total loans
receivable, these loan delinquencies decreased from 1.02% at the end of 1995 to
0.98% at March 31, 1996. The decrease primarily relates to the net effect of i)
a decrease of $1.5 million in manufactured housing loans delinquent 30-90 days,
ii) a decrease of $1.1 million in student loans (which are government
guaranteed) delinquent 30-90 days and iii) an increase of $500,000 of delinquent
commercial business loans. 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:
March 31, December 31,
1996 1995
------------- --------
(In thousands)
One- to four-family residential $ 6,162 $ 6,449
Multi-family residential 790 873
Commercial and other real estate 99 162
Manufactured housing 1,113 926
Consumer and other 4,638 3,836
------- -------
$12,802 $12,246
======= =======
-14-
Non-accrual loans increased $600,000 to $12.8 million at March 31, 1996
from $12.2 million at December 31, 1995. As a percentage of net loans
receivable, non-accrual loans increased slightly to 0.36% at March 31, 1996 from
0.34% at December 31, 1995. The 1996 net increase in non-accrual loans is
related primarily to an increase of $400,000 in delinquent commercial business
loans. Consumer loan, manufacturing housing loan and credit card loan
non-accrual totals also increased by lesser amounts. These increases were offset
partially by a combined decrease in non-accrual residential mortgage loan and
commercial real estate loan balances. The increase in non-accrual commercial
business loans reflects a more aggressive stance on resolving the somewhat
higher overall delinquencies in this declining portfolio acquired in a prior
acquisition. The other smaller increases and decreases reflect stable collection
and monitoring processes. FFC has no significant troubled debt restructurings
during 1996.
All loans included in non-accrual status have been considered by
management in its review of the adequacy of allowances for loan losses.
Non-Performing MBSs:
At March 31, 1996, FFC had two non-performing MBSs, held in the
available for sale portfolio, with an amortized cost of $10.7 million, net of
writedowns, and a carrying value of $8.0 million. Each of these MBSs is a
mezzanine security, which is subordinate to the senior position of that issue
but is structured to be superior to other subordinate positions designed to
absorb first losses. FFC has not received full monthly payments on these
securities since 1993. The payments have been interrupted due to delinquencies
and foreclosures in the underlying mortgage portfolio and substantially all of
the cash flows are currently directed to owners of the senior position(s).
Further delayed receipt of payments is probable. The underlying loans comprising
these securities had been serviced by a California institution under the control
of the Resolution Trust Corporation ("RTC"). During 1994 and 1995, servicing was
transferred from the RTC to the trustee and subsequently to a third-party
servicer. Availability of current information as to future performance of these
MBSs continues to be limited.
In 1994, independent national rating agencies downgraded these mezzanine
securities to below investment grade. Subsequently, losses of $10.3 million,
including $2.2 million in 1996, have been recorded reflecting permanent
impairment of these securities having an original aggregate par value of
approximately $21.8 million. The writedowns have been based upon information
from the rating agencies as well as discounted cash flow analyses performed by
management, using current assumptions for delinquency levels, foreclosure rates,
recovery ratios in the underlying portfolios, market prices, and other factors.
Relative to one mezzanine issue, having a carrying value of $3.3 million at
March 31, 1996, the subordinated positions to FFC have been eliminated and
principal losses, which were anticipated in the aforementioned writedowns, of
approximately $1.9 million have been realized to date, including $1.2 million
during 1996. FFC's mezzanine position for the second issue, having a carrying
value of $4.7 million, remains superior to subordinate positions amounting to
2.80% of the aggregate par value of that issue at March 31, 1996.
Also in 1994, independent national rating agencies downgraded, to below
investment grade, an unrelated senior position security of the above noted
issuer. This senior position security had a carrying value of $5.9 million at
March 31, 1996. During 1995, independent national rating agencies downgraded, to
below investment grade, additional MBSs of three
-15-
unrelated issuers in which FFC had senior ownership positions having a carry
value of $12.4 million at March 31, 1996. The aggregate par value, amortized
cost and carrying value of all of the above discussed senior-position MBSs rated
below investment grade, each of which is held in the available for sale
portfolio, were $21.0 million, $21.0 million and $18.3 million, respectively, at
March 31, 1996. These senior position securities continue to be performing
assets and are superior to subordinate positions amounting to 3.9% of the
current aggregate par value of the related mortgage pool securities at March 31,
1996.
As part of its current investment policy, FFC does not purchase any
subordinated position MBSs and has further strengthened the criteria for private
issuer MBS purchases.
Management has taken writedowns relating to the above referenced
securities based upon its evaluations, including information from the rating
agencies as well as discounted cash flow analyses performed by management, which
are based upon certain assumptions for future delinquency levels, foreclosure
rates and recovery ratios in the underlying portfolios. There can be no
assurance that these evaluations will remain the same in the future should
economic conditions, market conditions, or other factors differ significantly
from the assumptions used. As such, further writedowns could be experienced in
the future. Management 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.
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.
A summary of activity in the allowances for loan losses, for the three
months ended March 31, 1996 and 1995, follows:
Three Months Ended
March 31,
----------------------
1996 1995
-------- ------
(In thousands)
Allowances at beginning of period $25,235 $25,180
Provisions 1,900 2,119
Charge-offs (3,133) (2,538)
Recoveries 234 388
------- -------
Allowances at end of period $24,236 $25,149
======= =======
A discussion of loan loss provisions and charge-offs is presented in
"Management's Discussion and Analysis--Comparison of the Unaudited Consolidated
Statements of Income for the Three Months Ended March 31, 1996 and 1995." An
analysis of allowances by loan
-16-
category and the percentage of such allowances by category and in the aggregate
to loans receivable at the dates indicated, follows:
March 31, 1996 December 31, 1995
--------------------------- ----------------------
As Percentage As Percentage
Allowance Of Total Loans Allowance Of Total Loans
Amount In Category Amount In Category
------ ----------- ------ -----------
(Dollars in thousands)
Credit cards $ 6,321 3.07% $ 6,425 3.00%
Residential real estate 7,211 .33 7,726 .34
Manufactured housing 2,824 2.16 3,034 2.18
Commercial and non-resi-
dential real estate 3,723 2.25 3,823 2.50
Consumer 3,103 .83 3,029 .84
Home equity 569 .20 562 .20
Commercial business 436 2.73 585 3.40
Education 49 .02 51 .02
------- -------
$24,236 .68% $25,235 .70%
======= ===== ======= =====
The allowances for loan losses were $24.2 million, or 0.68% of loans
receivable, at March 31, 1996 compared to $25.2 million, or 0.70%, at December
31, 1995. The allowances for losses represented 189.31% of non-accrual loans at
March 31, 1996 as compared to 206.07% at the end of 1995. 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:
March 31, December 31,
1996 1995
------------- ----------
(In thousands)
Foreclosed real estate properties $ 4,164 $ 3,967
Manufactured housing owned 274 303
Consumer and other repossessed assets 91 102
------- -------
4,529 4,372
Less allowances for losses ( 868) (993)
------- -------
$ 3,661 $ 3,379
======= =======
Foreclosed properties, net of allowances for losses, increased $300,000
to $3.7 million at March 31, 1996 from $3.4 million at December 31, 1995.
-17-
A summary of the activity in allowances for losses on foreclosed
properties, for the three months ended March 31, 1996 and 1995, is presented
below.
Three Months Ended
March 31,
---------------------
1996 1995
-------- ------
(In thousands)
Allowances at beginning
of period $ 993 $1,146
Provisions -- 15
Charge-offs (125) (66)
------ ------
Allowances at end of
period $ 868 $1,095
====== ======
The allowances for losses on foreclosed properties have been maintained
at levels adequate to provide for reasonable potential losses within the
existing foreclosed property portfolio. The most recent additions of foreclosed
properties have predominantly been residential properties with lower risks which
allows for the reduction of the allowance balance while realizing losses from
the past portfolio of properties.
A large commercial real estate properties (having a carrying amount of
$1.0 million or greater) included in foreclosed properties, for the dates
indicated, is presented below. Also included is a previously foreclosed property
(Milwaukee) which was transferred to FFC and is currently classified as a real
estate investment held for sale. These properties are carried at the lower of
cost or fair value.
Carrying Value At
-----------------------------------
Property March 31, December 31,
Type Property Location 1996 1995
- -------- ----------------- ------------- -------------
(In thousands)
Retail Milwaukee, Wisconsin $ 1,056 $ 1,089
Retail Fort Worth, Texas 1,000 1,000
All of the above foreclosed real estate properties, repossessed assets
and real estate investments held for sale 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
-18-
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 non-accrual loans,
non-performing MBSs or assets i) which were previously loans which are not
substantially performing under the contractual terms of the original notes, or
ii) for which known information about possible credit problems of borrowers
causes management to have serious doubts as to the ability of such borrowers to
comply with current contractual terms. This non-performing characteristic
impacts directly upon the interest income normally expected from such assets.
Specifically included are the loans held on a non-accrual basis, non-performing
MBSs, and 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:
March 31, December 31,
1996 1995
------------- ------------
(In thousands)
Classified assets:
Non-performing assets:
Non-accrual loans $12,802 $12,246
Non-performing MBSs 10,700 12,858
Real estate held for sale by FFC 1,277 1,309
Foreclosed properties and other
repossessed assets 3,661 3,379
------- -------
Total Non-Performing Assets 28,440 29,792
Add back general valuation allowances net-
ted against foreclosed properties above 868 993
Adjustment for non-performing residential
loans not classified due to low
loan-to-appraisal value (800) (584)
Adjustment for real estate held for sale
not included in FF Bank classified
assets (1,277) (1,309)
Additional classified performing loans:
Residential real estate 1,130 1,013
Commercial real estate 6,258 5,890
Consumer and other 791 698
------- -------
Total Classified Assets $35,410 $36,493
======= =======
During the three months ended March 31, 1996, classified assets
decreased $1.1 million to $35.4 million from $36.5 million at December 31, 1995
as the net result of the $2.2 million decrease in the carrying value of two
non-accrual mortgage-backed securities referred to previously (see
"Non-Performing MBSs"), the $600,000 increase in non-accrual loans (see
"Non-Accrual Loans") and a $400,000 increase in performing commercial real
estate loans which are classified based on certain characteristics identified as
potential weaknesses. Other smaller fluctuations tended to offset and are
considered normal. As a percentage of total assets, classified assets decreased
from 0.67% at year-end 1995 to 0.65% at March 31, 1996.
The following table sets forth, at the dates indicated, the performing
commercial real
-19-
estate mortgage loan (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 March 31, December 31,
Loan Collateral Location 1996 1995
- ---------------- ---------- ------------- ------------
(In thousands)
Office/Land Sheboygan, Wisconsin $ 3,583 $3,596
All adversely classified assets at March 31, 1996, have been
considered by management in its evaluation of the adequacy of allowances for
losses.
Deposits and Other Liabilities:
Deposits increased $70.5 million during the three months ended March
31, 1996 due to the success of a new program for short-term certificate of
deposit accounts. The weighted average cost of deposits of 4.52% at March 31,
1996 was slightly lower than the 4.55% reported at December 31, 1995.
Advance payments by borrowers for taxes and insurance increased by
$16.8 million during the first three months of 1996 as a result of the normal
cumulative monthly escrow deposits made by borrowers less interim payments of
taxes and insurance premiums.
Other liabilities decreased $35.6 million from December 31, 1995 to
March 31, 1996. The higher other liabilities balance at year-end 1995
represented the outstanding real estate property tax checks issued to
municipalities on behalf of the borrowers and as those checks were paid during
the first quarter, other liabilities decreased significantly.
Borrowings:
At March 31, 1996, FFC's consolidated borrowings decreased to $454.2
million from $570.5 million at December 31, 1995. In January 1996, FFC redeemed
all of its outstanding 8% Subordinated Notes due November, 1999, which
aggregated $54.9 million at the date of redemption. The remainder of the
decrease in borrowings is primarily attributable to a net decrease in
shorter-term FHLB advances and reserve repurchase agreements of $60.4 million.
Stockholders' Equity:
Stockholders' equity at March 31, 1996 was $397.6 million, or 7.34% of
total assets, as compared to $384.9 million, or 7.04% of total assets, at
December 31, 1995. The major changes in stockholders' equity included i) net
income of $16.6 million earned during the first three months of 1996 offset by
ii) cash dividend payments to stockholders of $4.5 million. Stockholders' equity
per share increased from $12.97 per share at year-end 1995 to $13.30 per share
at March 31, 1996.
Regulatory Capital:
As set forth in Note F to the unaudited consolidated financial
statements, FF Bank exceeds all regulatory capital requirements mandated by the
OTS and FDIC.
-20-
Loan Originations:
A comparison of loan originations for the first three months of 1996
and 1995, including loans originated for sale (but excluding MBSs), is set forth
below:
Three Months Ended March 31,
-------------------------------------------------------
1996 Percent 1995 Percent
-------- ------- -------- -------
(Dollars in thousands)
Loan Type
- ----------
Mortgage:
One- to four-family $ 161,156 60.1% $ 84,330 46.9%
Multi-family 9,554 3.6 7,751 4.3
Commercial/non-residential 17,885 6.7 8,798 4.9
---------- ----- ---------- -----
Total mortgage origina-
tions 188,595 70.4 100,879 56.1
Consumer 57,981 21.6 47,058 26.2
Student 20,973 7.8 23,976 13.3
Home equity-net -- -- 6,858 3.8
Commercial business 509 .2 1,155 .6
---------- ----- ---------- ----
Total loans originated 268,058 100.0% 179,926 100.0%
===== =====
Decrease in undisbursed loan
proceeds 5,493 7,304
---------- ----------
Total loans disbursed $ 273,551 $ 187,230
========== ==========
Total loan originations increased to $268.1 million for the first three
months of 1996 from $179.9 million for the same period in 1995. This net 1996
increase of $88.2 million was primarily attributable to a $87.7 million increase
in mortgage loan originations.
One- to four-family mortgage loan originations increased $76.9 million
to $161.2 million for the first three months of 1996 as compared to $84.3
million for the same period in 1995. At March 31, 1996, one- to four-family
mortgage loan applications in process and commitments totaled $102.7 million and
$49.8 million, respectively, as compared to $51.2 million and $24.7 million at
December 31, 1995. The increase in originations, applications in process, and
commitments reflects increased borrower demand as interest rates declined during
1996. Approximately 21% of originations for the first quarter of 1996 were
adjustable-rate mortgage loans which are held for investment purposes. With the
decrease in interest rates compared to the first quarter of 1995, borrower
preference has turned toward fixed-rate mortgage loans. Longer-term fixed-rate
mortgages are normally sold into the secondary market.
Consumer loan originations increased $10.9 million to $58.0 million in
the first three months of 1996 as customer usage of this product continues to
grow.
Student loan originations decreased $3.0 million to $21.0 million during
the first three months of 1996 as a result of a decrease in government
guaranteed portfolio acquisitions from other lenders.
Home equity loan balances decreased $5.9 million to $278.8 million as
refinancing and payoffs led to record repayment levels for the product line in
the first three months of 1996.
Credit card loans decreased $8.5 million in the first three months of
1996 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
-21-
part of the year due to normal seasonal reductions of consumer demand following
the calendar year end.
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 March 31, 1996.
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, 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 significantly from those assumed in calculating the data in the table.
FFC's consolidated negative one-year interest-rate sensitivity gap at
March 31, 1996 was $172.1 million or 3.18% of total assets. The one-year
negative gap decreased $27.7 million from the December 31, 1995 negative gap of
$199.8 million or 3.65% of total assets at that date.
FFC's consolidated one-year negative gap position of 3.18% at March 31,
1996 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.
-22-
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 first quarter of 1996 indicates that FF Bank's current financial position
should adequately protect FF Bank, and thus FFC, from the effects of rapid rate
changes. The OTS has added an interest-rate risk capital calculation 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. The final implementation of this rule
was pending at March 31, 1996 as the OTS has delayed the effective date of the
regulation pending its adoption of a process by which an institution may appeal
an OTS interest-rate risk capital deduction determination. At March 31, 1996, FF
Bank would not have been required to deduct an interest-rate risk component
under the OTS regulations.
-23-
FIRST FINANCIAL CORPORATION CONSOLIDATED GAP ANALYSIS AT MARCH 31, 1996
Three Greater Greater Greater Greater
Months Four Months Than One Than Three Than Five Than Ten
and Through Through Through Through Through
Under One Year Three Years Five Years Ten Years 20 Years
--------- ---------- ----------- ----------- ---------- ----------
(Dollars in thousands)
Rate-sensitive assets:
Investments and interest-
earning deposits, including
federal funds (a)(b) $ 180,391 $ 45,924 $ 39,177 $ 68,014 $ 573 $ 51,078
Mortgage-related securities (b) 535,294 524,767 38,176 25,641 33,491 13,598
Mortgage loans:
Fixed-rate (c)(d) 73,632 167,195 367,673 259,854 323,104 130,833
Adjustable-rate (c) 174,843 474,955 354,363 -- -- --
Other loans 681,238 204,422 206,632 85,058 57,181 16,099
---------- ---------- ---------- ---------- -------- --------
1,645,398 1,417,263 1,006,021 438,567 414,349 211,608
Rate-sensitive liabilities:
Deposits (e)(f):
Checking 124,331 26,215 65,456 51,113 79,988 72,133
Money market accounts 97,654 43,274 99,433 51,706 43,691 11,091
Passbook 274,374 198,762 60,677 43,687 62,909 40,037
Certificates of deposit 631,950 1,397,917 822,381 153,779 10,859 --
Borrowings 419,931 20,345 5,113 2,797 832 1,910
---------- ---------- ---------- ---------- -------- --------
1,548,240 1,686,513 1,053,060 303,082 198,279 125,171
---------- ---------- ---------- ---------- -------- --------
GAP (repricing difference) $ 97,158 $ (269,250) $ (47,039) $ 135,485 $216,070 $ 86,437
========== ========== ========== ========== ======== ========
Cumulative GAP $ 97,158 $ (172,092) $ (219,131) $ (83,646) $132,424 $218,861
========== ========== ========== ========== ======== ========
Cumulative GAP/Total assets 1.79% (3.18)% (4.04)% (1.54)% 2.44% 4.04%
========== ========== ========== ========== ======== ========
Greater
Than
20 Years Total
-------- --------
Rate-sensitive assets:
Investments and interest-
earning deposits, including
federal funds (a)(b) $ -- $ 385,157
Mortgage-related securities (b) 515 1,171,482
Mortgage loans:
Fixed-rate (c)(d) 3,292 1,325,583
Adjustable-rate (c) -- 1,004,161
Other loans -- 1,250,630
---------- -----------
3,807 5,137,013
Rate-sensitive liabilities:
Deposits (e)(f):
Checking 39,629 458,865
Money market accounts 1,232 348,081
Passbook 9,392 689,838
Certificates of deposit -- 3,016,886
Borrowings 3,320 454,248
---------- -----------
53,573 4,967,918
---------- -----------
GAP (repricing difference) $ (49,766) $ 169,095
========== ===========
Cumulative GAP $ 169,095
==========
Cumulative GAP/Total assets 3.12%
==========
<FN>
(a) Investments are adjusted to include FHLB stock totaling $32.4 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 FFC's historical experience as modified for current market
conditions.
(d) Includes loans held for sale.
(e) Deposits include $30.0 million of advance payments by borrowers for tax and
insurance and exclude accrued interest on deposits of $11.4 million.
(f) FFC has assumed that its passbook savings, checking accounts and money
market accounts would have projected annual withdrawal rates, based upon
FFC's historical experience, of 26%, 34% and 42%, respectively.
</FN>
-24-
COMPARISON OF THE
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED
MARCH 31, 1996 AND 1995
Selected Income Statement Information:
For the first quarter of 1996, FFC reported income, before an
extraordinary charge, of $17.3 million and net income of $16.6 million. In
comparison, net income of $10.8 million was reported for the first quarter of
1995. The 1996 extraordinary charge of $686,000, or $0.02 per share, resulted
from costs associated with the early redemption of FFC's outstanding
subordinated notes originally scheduled to mature in November 1999. First
quarter 1995 results included a $4.0 million acquisition charge, or $0.14 per
share, related to the FirstRock acquisition.
Fully diluted earnings per share for the 1996 quarter amounted to $0.57
per share prior to the extraordinary charge, while net income per share was
$0.55 per share as compared to $0.36 per share for the 1995 quarter. Excluding
the 1996 extraordinary item and the 1995 acquisition charge, the annualized
return on assets for the first quarter of 1996 increased to 1.28% from 1.08% for
1995, while the annualized return on average equity for the first quarter of
1996 was 17.71%, compared to 17.79% for the first quarter of 1995.
Net Interest Income:
Net interest income decreased $200,000 to $46.0 million during the
first quarter of 1996 from $46.2 million for the first quarter of 1995,
primarily due to a decrease in average balances of interest-earning assets and
interest-bearing liabilities from $5.243 billion and $5.084 billion,
respectively, in 1995 to $5.175 billion and $4.942 billion, respectively, in
1996. The net interest margin of 3.54% for the first quarter of 1996, however,
was up from the 3.46% reported for the first quarter of 1995. The decrease in
average interest-earning assets in 1996 was offset by an improvement in the
earning-asset ratio from 103.13% in 1995 to 104.71% in 1996. The average yield
of interest-earning assets (7.84% in 1995 versus 8.01% in 1996) increased by 17
basis points, which was the same as the increase in the average cost of
interest-bearing liabilities (4.51% in 1995 versus 4.68% in 1996).
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
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months ended March 31, 1996 and 1995. A comparison of similar data at March 31,
1996 and 1995 is also shown.
For the
Three Months Ended At
March, 31, March 31,
------------------ ---------------
1996 1995 1996 1995
---- ---- ---- ----
Weighted average yield on
interest-earning assets 8.01% 7.84% 7.97% 7.89%
Weighted average rate paid
on deposits and borrowings 4.68 4.51 4.63 4.69
----- ----- ----- -----
Interest spread 3.33% 3.33% 3.34% 3.20%
===== ===== ===== =====
Net interest margin (net
interest income divided
by earning assets) 3.54% 3.46% 3.51% 3.32%
===== ===== ===== =====
The interest spread remained stable at 3.33% for both the three months
ended March 31, 1996 and 1995 due to the factors noted above. The interest
margin was 3.54% for the three month period ended March 31, 1996 as compared to
3.46% for the first quarter of 1995. The interest spread and the net interest
margin were 3.34% and 3.51%, respectively, at March 31, 1996 as compared to
3.20% and 3.32%, respectively, at March 31, 1995.
Provisions For Losses on Loans:
Provisions for loan losses decreased slightly, by $200,000, for the first
quarter of 1996 as compared to the 1995 period. Charge-offs for the first
quarter of 1996 exceed provisions due to i) previously provided for charge-offs
related to the manufactured housing portfolio and ii) lower provisions added to
the loss allowances for residential mortgage loans based on current evaluations
of the portfolio.
The following table summarizes FFC's net charge-off experience by
category for the three months ended March 31, 1996 and 1995.
For the Three Months
Ended March 31,
-------------------------------
1996 1995
------------ -----------
Net Net
Charge-offs Charge-offs
(Recoveries) (Recoveries)
------------ ------------
Loan Type (Dollars in thousands)
Credit cards $2,116 $1,441
Manufactured housing 192 440
Residential real estate 353 128
Consumer and other 69 (37)
Commercial business 169 178
------ ------
$2,899 $2,150
====== ======
Net charge-offs as a
percent of average loans
outstanding (annualized) 0.32% 0.25%
====== ======
The $700,000 increase in net charge-offs for the quarter ended March 31,
1996 versus the same period in 1995 relates primarily to the increase in credit
card loan net charge-offs. While the current increased level of credit card loan
net charge-offs is following the national
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trend, FFC's experience is at a somewhat lower percentage than the national
averages. Management has increased the provisions for losses allocated to credit
card loss allowances to keep pace with net charge-off experience and has
increased the allowance at March 31, 1996 to 3.07% of credit card loan balances
from 3.00% as of December 31, 1995.
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 by the OTS was
completed in early 1996 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 was reported at $10.3 million for each of the
quarters ended March 31, 1996 and 1995. Deposit fee income increased $500,000 in
1996. Insurance and brokerage sales commissions decreased $300,000 as FFC's
insurance agency subsidiary realized a one-time premium in the first quarter of
1995. The gain on disposition of loans and MBSs increased $300,000 in 1996 due
to the net effect of i) a realized gain of $1.2 million on the sale of
available-for-sale MBSs during the first quarter of 1996, ii) an unrealized loss
of $2.2 million recorded as a result of the impairment writedown of two
mezzanine MBSs (see "Non-Performing MBSs") and iii) an increase of $1.2 million
on gains achieved upon the sale of loans in the secondary mortgage market and
the realization of related originated mortgage servicing rights ("OMSRs"). Gains
realized from the sale of loans, and the recognition of related OMSRs, increased
$1.2 million in 1996 due to the lower interest-rate environment prevailing
during the first quarter of 1996 as borrowers shifted to longer term fixed-rate
financing and as a result of a change in accounting methodology. (See Note I to
Unaudited Consolidated Financial Statements). 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 for sale and the recognition of
related OMSRs 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.
Other income declined $400,000 in 1996 from 1995 as a result of interest
realized in 1995 upon the settlement of open federal income tax issues relating
to taxable years ending prior to 1989.
Non-Interest Expense:
Non-interest expenses decreased approximately $7.6 million for the
quarter ended March 31, 1996 as compared to the same period in 1995, primarily
due to i) acquisition costs, totaling $6.5 million, incurred relative to the
1995 FirstRock acquisition and ii) the consolidation of operations following
that aquisition. Non-interest expenses, excluding the FFC acquisition charge,
decreased as a percentage of average assets to 2.17% for the first quarter of
1996 as compared to 2.22% for the same period in 1995. Controllable non-interest
expenses, which exclude the amortization of intangible assets and the net cost
of operations of foreclosed properties, decreased to 2.07% of average assets for
the three
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months ended March 31, 1996 as compared to 2.13% for the same period in 1995. In
addition, FFC's efficiency ratio (which represents the ratio of controllable
expenses to recurring income) improved to 50.17% for the three months ended
March 31, 1996, as compared to 51.79% for the corresponding 1995 period.
Income Taxes:
Income tax expense increased $1.1 million for the first quarter of 1996
as compared to the first quarter of 1995 primarily as a result of a 43.8%
increase in pretax income which was offset by the realization of a $1.4 million
credit upon the completion of a federal tax audit for the taxable years 1989
through 1991. Upon completion of the audit, the settlement of certain issues
resulted either in refunds of taxes previously paid or on which deferred tax
allowances had been previously provided. Excluding the impact of the refund, the
effective income tax rate, as a percent of pre-tax income, decreased slightly to
36.0% for the first quarter of 1996 from 37.5% in 1995.
Regulatory Issues:
FF Bank's deposits are insured by the Savings Association Insurance
Fund ("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. 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
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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 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 or the effect on
regulatory capital requirements.
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FORWARD-LOOKING STATEMENTS
Various discussions in this Quarterly Report filed with the Securities
and Exchange Commission ("SEC") include certain forward-looking statements based
on management's current expectations. Those factors which could cause future
results to vary from these expectations include, and are not limited to, i)
general market rates, ii) general economic conditions, iii)
legislative/regulatory changes, iv) monetary and fiscal policies of the U.S.
Treasury and the Federal Reserve, v) changes in the quality or composition of
FFC's loan and investment portfolios, vi) demand for loan products, vii) deposit
flows, viii) competition, ix) demand for financial services in FFC's markets,
and x) changes in accounting principles, policies or guidelines. Additional
factors are described in FFC's other public reports filed with the SEC.
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PART II. OTHER INFORMATION
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
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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: May 10, 1996 /s/ John C. Seramur
--------------------
John C. Seramur, President
(Chief Executive Officer) and Director
Date: May 10, 1996 /s/ Thomas H. Neuschaefer
--------------------------
Thomas H. Neuschaefer
Vice President, Treasurer and Chief
Financial Officer
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