EXHIBIT 13(b)
MANAGEMENT DISCUSSION & ANALYSIS
FIVE-YEAR SUMMARY (Dollars in thousands, except per share amounts)
1996 1995(b) 1994(b)(c) 1993(b)(d) 1992(b)(e)
---------- ---------- ---------- ---------- ----------
Income before extraordinary item or the
cumulative effect of an accounting change $ 50,458 $ 63,984 $ 53,029 $ 49,751 $ 30,376
Net income 49,772 63,984 53,029 49,751 36,976
Earnings per share (a):
Primary:
Income before extraordinary item or the
cumulative effect of an accounting change $ 1.33 $ 1.70 $ 1.42 $ 1.38 $ 0.92
Net income 1.31 1.70 1.42 1.38 1.14
Fully diluted:
Income before extraordinary item or the
cumulative effect of an accounting change $ 1.32 $ 1.69 $ 1.42 $ 1.37 $ 0.91
Net income 1.30 1.69 1.42 1.37 1.12
Interest income $ 419,050 $ 417,308 $ 381,864 $ 366,711 $ 325,057
Interest expense 231,741 234,171 204,222 202,493 198,058
Net interest income 187,309 183,137 177,642 164,218 126,999
Net gain (loss) on sales of loans and securities 3,490 3,885 (5,164) 7,939 4,606
Provisions for losses on loans 9,030 9,738 6,824 10,570 15,779
Other non-interest income 42,904 40,406 38,458 36,819 33,417
Non-interest expense 148,772 118,602 120,367 118,964 101,540
Total assets $5,700,431 $5,471,108 $5,501,824 $5,181,772 $4,309,067
Loans receivable and mortgage-related securities 5,163,256 4,887,561 4,972,938 4,532,456 3,795,083
Intangible assets 12,739 21,481 26,726 31,392 23,278
Deposits 4,444,932 4,424,525 4,381,455 4,388,122 3,531,062
Borrowings 769,526 570,508 708,446 455,797 487,237
Stockholders' equity 410,511 384,917 327,308 280,643 239,979
Shares outstanding (a) 36,802,484 37,095,456 36,407,323 34,822,610 34,998,891
Stockholders' equity per share (a) $ 11.15 $ 10.38 $ 8.99 $ 8.06 $ 6.86
Dividends paid per share (a) .510 .384 .320 .280 .176
Dividend payout ratio 39% 23% 23% 20% 16%
Return on average assets (f) 0.91% 1.17% .99% .99% .92%
Return on average equity (f) 12.48% 18.03% 17.21% 19.15% 17.57%
Average equity to average assets 7.32% 6.50% 5.72% 5.17% 5.25%
(a) As adjusted for a 5-for-4 stock split on December 30, 1996 and a 2-for-1
stock split on March 5, 1993.
(b) In February 1995, the company acquired FirstRock Bancorp, Inc. of Rockford,
Illinois in a stock-for-stock merger transaction. This transaction was
accounted for as a pooling-of-interests and, accordingly, results for all
periods presented have been restated to include the results of FirstRock,
except the earnings per share information for 1992 is based only on the
historical net income and weighted average shares of common stock and
common stock equivalents of the company prior to the October 2, 1992
conversion of FirstRock.
(c) In February 1994, the company acquired NorthLand Savings Bank of Wisconsin,
SSB of Ashland, Wisconsin in a stock-for-stock merger transaction. This
transaction was accounted for as a pooling-of-interests. Since the
NorthLand acquisition was immaterial in relation to the company, prior
years' results have not been restated.
(d) In January 1993, the company's major subsidiary, First Financial Bank,
acquired Westinghouse Federal Bank, FSB d/b/a United Federal Bank of
Galesburg, Illinois for cash. In addition, in August 1993, the company
completed the assumption of deposits and the purchase of the branch
facilities of four Quincy, Illinois-area branches of American Savings. Each
acquisition has been accounted for as a purchase.
(e) In separate transactions during 1992, the company completed the assumption
of deposits and the purchase of branch facilities of ten Peoria,
Illinois-area branches from the LaSalle Talman Bank, FSB and the Resolution
Trust Corporation. Each acquisition has been accounted for as a purchase.
(f) Ratio is based upon income prior to the extraordinary item or the
cumulative effect of an accounting change.
-1-
QUARTERLY DATA
The following table sets forth the company's unaudited quarterly income and
expense data for 1996 and 1995.
Dec. 31, Sept. 30, June 30, March 31, Dec. 31, Sept. 30, June 30, March 31,
1996 1996 1996 1996 1995 1995 1995 1995
-------- -------- -------- -------- -------- -------- -------- --------
Dollars in thousands, except per share amounts)
Interest income:
Loans and mortgage-related
securities $101,743 $102,397 $ 95,438 $ 99,367 $100,880 $101,258 $101,011 $ 99,362
Investments 4,689 4,660 6,501 4,255 3,739 3,895 3,723 3,440
-------- -------- -------- -------- -------- -------- -------- --------
Interest income 106,432 107,057 101,939 103,622 104,619 105,153 104,734 102,802
Interest expense:
Deposits 50,103 49,302 49,678 50,367 50,768 50,939 49,949 45,167
Borrowings 9,028 9,443 6,534 7,286 8,108 8,525 9,278 11,437
-------- -------- -------- -------- -------- -------- -------- --------
Interest expense 59,131 58,745 56,212 57,653 58,876 59,464 59,227 56,604
-------- -------- -------- -------- -------- -------- -------- --------
Net interest income 47,301 48,312 45,727 45,969 45,743 45,689 45,507 46,198
Provisions for losses on loans (2,100) (2,850) (2,180) (1,900) (2,673) (2,873) (2,073) (2,119)
Gain on sales of assets (a) 952 1,384 837 274 1,045 2,542 286 38
Non-interest income 11,437 10,986 10,541 9,983 9,862 10,220 10,083 10,215
-------- -------- -------- -------- -------- -------- -------- --------
57,590 57,832 54,925 54,326 53,977 55,578 53,803 54,332
Federal deposit insurance premiums (b) 1,997 31,339 2,542 2,561 2,594 2,517 2,529 2,529
Amortization of intangible assets (c) 902 5,524 1,265 1,264 1,311 1,312 1,311 1,311
Acquisition expense (d) -- -- -- -- -- -- -- 6,458
Other non-interest expense 25,114 26,208 24,486 25,570 21,426 23,941 24,663 26,700
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before income taxes and
extraordinary item 29,577 (5,239) 26,632 24,931 28,646 27,808 25,300 17,334
Income taxes (benefit) 10,337 (1,542) 9,051 7,597 9,587 10,015 8,995 6,507
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before extraordinary
item 19,240 (3,697) 17,581 17,334 19,059 17,793 16,305 10,827
Extraordinary item -- -- -- (686) -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) $ 19,240 $ (3,697) $ 17,581 $ 16,648 $ 19,059 $ 17,793 $ 16,305 $ 10,827
======== ======== ======== ======== ======== ======== ======== ========
Earnings (loss) per share:
Primary $ .51 $ (.10) $ .46 $ .44 $ .50 $ .47 $ .43 $ .29
Fully diluted .51 (.10) .46 .44 $ .50 $ .47 .43 .29
Cash dividends per share $ .150 $ .120 $ .120 $ .120 $ .096 $ .096 $ .096 $ .096
(a) Includes net gains and losses on the disposition of loans held for sale,
available for sale securities and other assets.
(b) On September 30, 1996 the Omnibus Appropriations Act of 1997 was signed
into law which provided for the recapitalization of the Savings Association
Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation and
resulted in a one-time charge to SAIF-insured institutions. The effect of
the charge on the company's third quarter 1996 results was $28.8 million
before taxes and $18.4 million net of taxes, or $0.48 per share.
(c) During the third quarter of 1996, the company changed its accounting for
certain goodwill and core deposit intangibles, relating primarily to
acquisitions in the early 1980's, to conform to the company's current
15-year maximum amortization term for such assets. The total charges during
the third quarter 1996 for goodwill and intangibles were $4.2 million
before taxes and $3.6 million net of taxes, or $0.10 per share.
(d) In February 1995, the company acquired FirstRock Bancorp, Inc. of Rockford,
Illinois through an exchange of stock. This transaction was accounted for
as a pooling-of-interests. In the first quarter of 1995, the company
incurred acquisition charges of $6.5 million before taxes and $4.0 million
net of taxes, or $0.10 per share.
-2-
SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS
This report contains certain "forward-looking statements." First Financial
Corporation ("FFC") desires to take advantage of the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995 and is including this
statement for the express purpose of availing itself of the protections of the
safe harbor with respect to all of such forward-looking statements. These
forward-looking statements, which are included in Management's Discussion and
Analysis and in the President's letter, describe future plans or strategies and
include FFC's expectations of future financial results. The words "believe,"
"expect," "anticipate," "estimate," "project," and similar expressions identify
forward-looking statements. FFC's ability to predict results or the effect of
future plans or strategies is inherently uncertain. Factors which could affect
actual results include but 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. These factors should be considered in evaluating the
forward-looking statements, and undue reliance should not be placed on such
statements.
-3-
RESULTS OF OPERATIONS
COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1995
General. FFC reported net income of $49.8 million for 1996 as compared to $64.0
million for 1995. Net income for 1996 includes i) a one-time after-tax charge of
$18.4 million or $0.48 per share, associated with the recapitalization of the
Savings Association Insurance Fund ("SAIF") (see "Recent Legislative
Developments" for further information), ii) a one-time after-tax charge of $3.6
million or $0.10 per share relating to a change in accounting for the
amortization of goodwill and other intangible assets and iii) an extraordinary
after-tax charge of $686,000 or $0.02 per share, resulting from costs associated
with the early redemption of subordinated notes. Net income for 1995 includes a
one-time charge relating to the acquisition of FirstRock Bancorp, Inc.
("FirstRock") of Rockford, Illinois during the first quarter of 1995. The
acquisition charge aggregated $4.0 million or $0.10 per share on an after-tax
basis.
The returns on average assets and average equity, excluding the one-time charges
and extraordinary item, were 1.31% and 17.91%, respectively, for 1996 as
compared to 1.25% and 19.16%, respectively, for 1995.
Fully diluted earnings per share decreased to $1.30 in 1996 from $1.69 in 1995.
Excluding the impact of the factors noted above for both 1996 and 1995, fully
diluted earnings per share would have been $1.90 in 1996, up from $1.79 in 1995.
Net Interest Income. Net interest income increased $4.2 million during 1996
primarily due to an increase in average balances of interest-earning assets and
a decrease in interest-bearing liabilities from $5.21 billion and $5.02 billion,
respectively, in 1995 to $5.27 billion and $5.01 billion, respectively, in 1996.
The net interest margin of 3.56% for 1996 was up from the 3.51% reported for
1995. The increase in average interest-earning assets in 1996 was augmented by
an improvement in the earning-asset ratio from 103.78% in 1995 to 105.10% in
1996. The average yield on interest-earning assets (8.00% in 1995 versus 7.95%
in 1996) decreased by 5 basis points, which was similar to the 4 basis point
decrease in the average cost of interest-bearing liabilities (4.66% in 1995
versus 4.62% in 1996). At the end of 1996, FFC's net interest margin was 3.35%
as compared to 3.46% at year end 1995. The margin at the end of 1996 was
negatively impacted by the credit card and mortgage-related securities ("MBS")
sales during 1996, as discussed in "Loans Receivable" as well as "Non-
Performing MBSs". This factor, however, is offset by a higher level of
interest-earning assets and a greater earning asset ratio at the end of 1996.
Also, FFC's net interest margin is historically at its lowest point at year end
due to seasonal factors including, but not limited to, i) the disbursement of
borrowers' mortgage loan escrow accounts for real estate taxes, ii) high levels
of credit card activity during the fourth quarter, and iii) a slowdown in
residential purchase and construction mortgage loan activity in the fourth
quarter.
Provisions for Losses On Loans. The provisions for loan losses decreased
$700,000 to $9.0 million for 1996 compared to $9.7 million for the same period
in 1995. Charge-offs for 1996 exceeded provisions due to i) charge-offs relating
to the manufactured housing portfolio which were provided for in earlier
periods, ii) lower provisions were added for residential mortgage loans based on
current evaluations of the portfolio, and iii) the $47.9 million portion of the
credit card portfolio sold in 1996 had a greater level of charge-offs
-4-
than the retained portfolio. For further discussion of the allowances for losses
on loans and related loan portfolio information, see "Allowances for Losses on
Loans and Foreclosed Properties" and "Loans Receivable."
Non-Interest Income. Non-interest income increased $2.1 million to $46.4 million
for 1996 from $44.3 million in 1995. Deposit fee income increased $1.8 million
in 1996, primarily due to overdraft fees relating to the growth of the
"Absolutely Free Checking" product in 1996. Service fees on loans sold decreased
$900,000 in 1996 as the average servicing margin decreased due to competitive
conditions in the secondary mortgage market into which mortgage loans are sold.
Insurance and brokerage commissions increased $500,000 in 1996 as FFC's
insurance agency subsidiary realized continued growth. The net gain on
disposition of loans, MBSs, and investment securities decreased $400,000 in 1996
from 1995 levels due to the net effect of i) a net realized loss of $13.1
million on the sale of available-for-sale MBSs during 1996 (see "Non-Performing
MBSs"), ii) a $1.5 million gain on sale of available-for-sale investment
securities in 1996 as opposed to a $1.2 million gain in 1995, iii) an $11.2
million net gain realized on the previously mentioned sale of a credit card
affinity portfolio with outstanding balances of $47.9 million and iv) an
increase of $1.1 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 in 1996 due to the lower interest-rate
environment prevailing during the first half of 1996 as compared to 1995, as
borrowers shifted to longer-term fixed-rate financing. 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 volatility of interest rates and the volume of loan originations.
Thus, results of sales in any one period may not be indicative of future
results.
As a result of the credit card sale noted above, it is anticipated that FFC's
future earnings from its credit card portfolio will be lower until the size of
that portfolio increases through new account openings. During 1996, First
Financial Bank ("FF Bank") received regulatory approvals to charter a
limited-purpose national credit card bank ("CEBA-Bank") which now operates FFC's
credit card programs. The CEBA-Bank, an operating subsidiary of FF Bank, became
operational in late 1996 and has the authority to export Wisconsin rates and
fees nationwide to all FFC credit card customers under the National Bank Act. It
is expected that uniform application of law will i) reduce compliance costs, ii)
reduce the risk of violation of diverse and varied local laws and iii) allow FFC
to enhance its credit card rate and fee structure, thereby potentially
increasing FFC's profitability depending upon customer behavior and other
factors. However, it is not management's intention to expand the scope of FFC's
credit card operations beyond its Midwest regional markets as a result of the
formation of the CEBA-Bank.
Non-Interest Expense. Non-interest expense increased $30.2 million for 1996
primarily due to the one-time $28.8 million SAIF assessment charge and the $4.2
million goodwill accounting change. For further information on the charge
related to the recapitalization of the SAIF, see "Recent Legislative
Developments." On an ongoing basis, FFC's annual Federal Deposit Insurance
Corporation ("FDIC") assessment will decrease to 6.4 cents per $100 of
assessable deposits from the rate of 23 cents per $100 which was in effect prior
to the September 30, 1996 assessment. Based upon current levels of assessable
deposits, FFC's annual deposit insurance premium is expected to decline by
approximately $7.2 million, or $0.12 per share on an after-tax basis (excluding
funding costs related to the one-time
-5-
assessment). The $4.2 million increase in the amortization of goodwill and core
deposit intangibles relates primarily to FFC's re-evaluation of these
intangibles in accordance with Statement of Financial Accounting Standards
("Statement") No. 72 ("Accounting for Certain Acquisitions of Banking and Thrift
Institutions") with regard to early 1980's acquisitions. Excluding these items
and the $6.5 million acquisition-related charge in 1995, non-interest expenses
increased $3.6 million over 1995 levels. This increase consists primarily of
compensation and benefits expense due to i) normal employee merit increases in
1996 and ii) a lesser benefit ($1.5 million in 1996 versus $3.0 million in 1995)
realized from the utilization of an Employee Stock Ownership Plan ("ESOP"),
acquired in the FirstRock transaction, in place of FFC's normal profit sharing
contribution. The ESOP was used entirely in place of profit sharing in 1995,
while both the ESOP and profit sharing were used in 1996. 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. 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. As of
year end 1996, all ESOP shares have been fully allocated to FFC employees and no
future grandfathered benefit will be available.
Income Taxes. Income tax expense decreased $9.7 million for 1996 as compared to
1995. This decrease is related to i) the decrease in pre-tax income in 1996 as a
result of the noted one-time items and ii) the realization during 1996 of $3.4
million in credits upon the completion of a federal tax audit for the taxable
years 1989 through 1991 as well as the resolution of other tax matters. These
factors resulted in either refunds of taxes previously paid or a reduction in
deferred tax asset allowances which had been previously provided. As a result of
the above factors, FFC's effective tax rate declined from 35.4% in 1995 to 33.5%
in 1996.
Extraordinary Item. 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 net after-tax cost associated with this redemption, $686,000
or $0.02 per share, has been reported as an extraordinary charge in 1996.
Current and Pending Accounting Developments. The Financial Accounting Standards
Board ("FASB") issued Statement No. 123 ("Accounting for Stock Based
Compensation") which FFC adopted in 1996. The Statement requires that a fair
value based method be used to value employee compensation plans that include
stock based awards. The Statement permits a company to either recognize
compensation expense under Statement No. 123 or continue to use prior accounting
rules which do not consider the market value of stock in certain award plans. If
adoption of the Statement's fair value procedures are not used in the
computation of compensation expense in the income statement, the company must
disclose in a note to the financial statements the pro forma impact of adoption.
FFC has elected not to recognize additional compensation expense under Statement
No. 123, but has provided necessary disclosures in Note Q to the consolidated
financial statements. As such, there is no effect of FFC's adoption of Statement
No. 123 on its results of operations.
The FASB has also issued Statement No. 125, ("Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities") which is
effective for transfers occurring after December 31, 1996. This Statement
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities based on a consistent
application of a financial-components approach that focuses on control.
-6-
The FASB subsequently issued Statement No. 127, in December, 1996, which
provided for the deferral of the effective date of certain provisions of
Statement No. 125 to years ending after December 31, 1997. Management believes
that the effect of adopting these Statements will not be material to FFC's
financial condition or the results of its operations.
-7-
RESULTS OF OPERATIONS
COMPARISON OF YEARS ENDED DECEMBER 31, 1995 AND 1994
General. FFC reported net income of $64.0 million for the year ended December
31, 1995, which represents an increase of $11.0 million from the $53.0 million
reported for 1994. Net income for 1995 included $4.0 million, or $0.10 per
share, of acquisition-related expenses incurred relative to the acquisition of
FirstRock during 1995. Earnings for 1994 were affected by an after-tax charge of
$5.9 million, or $0.16 per share, relating to allowances established to cover
possible losses on a portion of FFC's MBS portfolio. The FirstRock acquisition
was accounted for as a pooling-of-interests, and accordingly, financial
statements for all periods presented have been restated to include FirstRock's
operations. The annualized returns on average assets and average equity for
1995, excluding the acquisition charge, were 1.25% and 19.16%, respectively, as
compared to 0.99% and 17.21%, respectively, for 1994. Fully diluted earnings per
share increased to $1.69 per share for 1995 as compared to $1.42 per share
reported for 1994. Excluding the acquisition charge, fully diluted earnings
would have been $1.79 per share for 1995.
Net Interest Income. Net interest income increased $5.5 million to $183.1
million during 1995 from $177.6 million for 1994. The net interest margin, which
is net interest income as a percentage of average interest-earning assets,
increased to 3.51% for 1995 from 3.46% reported for 1994. Interest income and
interest expense increased $35.4 million and $30.0 million, respectively, for
1995 as compared to 1994. The average balances of interest-earning assets
increased from $5.14 billion in 1994 to $5.21 billion in 1995, while average
balances of interest-bearing liabilities increased to $5.02 billion in 1995 from
$4.98 billion in 1994. The increase in average interest-earning assets was
complemented by i) a slightly lower increase in the average cost on
interest-bearing liabilities (4.10% in 1994 versus 4.66% in 1995) than in the
average yield of interest-earning assets (7.43% in 1994 versus 8.00% in 1995)
and ii) an improvement in the ratio of earning assets to interest-bearing
liabilities to 103.78% in 1995 from 103.21% in 1994.
Provisions for Losses On Loans. Provisions for losses on loans increased to $9.7
million for 1995 compared to $6.8 million for 1994. The increased provisions for
losses on loans reflects i) growth in the overall loan portfolio during 1995 and
ii) increased net credit card charge-offs in 1995 as that portfolio continues to
increase in size. The increase in credit card charge-offs reflected a
traditionally higher experience for that portfolio, although FFC's experience is
well below national credit card averages.
Non-Interest Income. Non-interest income increased $11.0 million during 1995 as
compared to 1994 due to the net effect of several factors, the most significant
of which related to a 1994 pre-tax $9.0 million MBS impairment loss (see
"Non-Performing MBSs"). Deposit account service fees increased $1.5 million in
1995 as a result of i) increased overdraft fees relating to the growth of the
"Absolutely Free Checking" product during 1995 and ii) introduction of automated
teller machine charges in certain markets during 1995. Loan fees and service
charges increased $1.3 million in 1995 as a result of i) increased credit card
fees as that portfolio continued to grow and ii) increased interchange fees
resulting from a successful debit card program. Service fees on loans sold
decreased in 1995 as i) the loan servicing portfolio decreased from $2.42
billion at the end of 1994 to $2.33 billion at year end 1995 and ii) the average
servicing margin decreased in 1995 due to the continuing impact of competitive
conditions in the secondary market into which mortgage loans are sold.
-8-
Excluding the effect of i) a 1994 gain of $1.3 million on the sale of credit
card loans and ii) a $400,000 gain realized in 1994 upon the sale of the finance
company receivables of a savings bank which FFC acquired in 1994, gains on sales
of loans increased $1.7 million in 1995. This increase was due to a $1.7 million
gain realized in 1995 as a result of the capitalization of originated mortgage
servicing rights upon FFC's adoption of Statement No.
122 ("Accounting for Mortgage Servicing Rights").
Non-Interest Expense. Non-interest expenses decreased approximately $1.8 million
in 1995 as compared to 1994, primarily due to the net effect of i) acquisition
costs and charges totaling $6.5 million incurred relative to the FirstRock
acquisition and ii) the cost savings resulting from the consolidation of
operations following that acquisition. The acquisition costs included i)
transaction-related costs, including investment banker fees, attorney fees and
accounting fees, ii) payments relating to employment/change-in-control
agreements upon termination of certain FirstRock senior officers, iii) retention
bonuses and severance payments made to other FirstRock employees, iv) writedowns
of assets not needed by FFC in the conduct of FirstRock's business following the
acquisition and v) other writeoffs/accruals relating to those contracts and
business practices of FirstRock not having future value to FFC.
The 1995 decreases in non-interest expense resulting from the consolidation of
FirstRock operations are most noticeably apparent in the compensation and
benefits expense category, which declined $6.2 million in 1995 including $3.0
million resulting from the utilization of the former FirstRock's ESOP in place
of FFC's normal profit sharing contribution for 1995.
Non-interest expenses decreased as a percentage of average assets to 2.05% for
1995 as compared to 2.24% in 1994. The improvement in this ratio reflects i) the
aforementioned expense reductions resulting from the FirstRock acquisition, ii)
cost savings of $1.0 million realized after the 1994 consolidation of FFC's then
existing banking subsidiaries, iii) decreases in writedowns on foreclosed
commercial real estate and iv) ongoing expense control measures.
The ratio of controllable non-interest expenses to average total assets
decreased to 1.96% for 1995 as compared to 2.12% for 1994. In addition, FFC's
efficiency ratio improved to 47.89% for 1995 as compared to 52.58% for 1994.
Income Taxes. Income tax expense increased $4.4 million for 1995 over 1994. The
effective income tax rate, as a percent of pre-tax income, decreased to 35.4% in
1995 from 36.7% in 1994. The decrease in the effective tax rate for 1995 relates
to i) implementation of tax planning strategies and ii) the change in the
valuation allowance of certain deferred tax assets established in prior years.
Accounting Changes. Effective January 1, 1995, FFC adopted Statement No. 122,
which 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
acquiring mortgage servicing rights through either the origination or purchase
of mortgage loans and the subsequent sale or securitization of those loans with
servicing rights retained, should allocate the total cost of the mortgage loans
to the servicing rights and to the loans (without the mortgage servicing rights)
based on their relative fair values. As a result of the adoption of Statement
No. 122 in 1995, FFC realized
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pre-tax income of $1.7 million ($1.1 million after tax, or $0.03 per share) upon
the capitalization of originated mortgage servicing rights.
Effective January 1, 1995, FFC adopted Statement 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 significant effect on FFC's financial
condition or results of operations.
-10-
AVERAGE INTEREST-EARNING ASSETS, AVERAGE INTEREST-BEARING LIABILITIES, INTEREST
RATE SPREAD AND NET INTEREST MARGIN
The following table sets forth the weighted average yields earned on FFC's
consolidated loan and investment portfolios, the weighted average interest rates
paid on deposits and borrowings, the interest rate spread between yields earned
and rates paid and the net interest margin during the years 1996, 1995 and 1994.
Year Ended December 31,
1996 1995
---------------------------------- ----------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
---------- -------- ------- ---------- -------- -------
(Dollars in thousands)
Interest-earning assets:
Mortgage loans (1)(2) $2,281,284 $175,508 7.69% $2,384,057 $183,434 7.69%
Mortgage-related secur-
ities (1) 1,357,520 97,251 7.16 1,388,338 98,821 7.12
Other loans (1) 1,281,412 126,186 9.85 1,182,380 120,256 10.17
U.S. Government and agency
securities 173,351 10,285 5.93 127,598 6,709 5.26
Other securities 51,571 3,123 6.06 68,254 4,091 5.99
Cash equivalents 90,154 4,460 4.95 28,371 1,651 5.82
FHL Bank stock 33,101 2,237 6.76 35,323 2,346 6.64
---------- -------- ------ ---------- -------- ------
5,268,393 419,050 7.95 5,214,321 417,308 8.00
Interest-bearing liabilities:
Passbook 668,563 18,309 2.74 730,363 21,017 2.88
Checking 459,543 4,298 0.94 433,904 4,202 0.97
Money market accounts 343,759 11,215 3.26 311,479 10,450 3.36
Certificates 2,973,467 165,628 5.57 2,969,537 161,154 5.43
FHL Bank advances 448,842 24,900 5.55 444,110 26,742 6.02
Other borrowings 118,770 7,391 6.22 134,801 10,606 7.87
---------- -------- ------ ---------- -------- ------
5,012,944 231,741 4.62 5,024,194 234,171 4.66
---------- -------- ------ ---------- -------- ------
Net earning assets and
interest rate spread $ 255,449 3.33% $ 190,127 3.34%
========== ====== ========== ======
Earning asset ratio 105.10% 103.78%
========== ==========
Average interest-earning
assets, net interest income,
and net interest margin on
average interest-earning
assets $5,268,393 $187,309 3.56% $5,214,321 $183,137 3.51%
========== ======== ====== ========== ======== ======
1994
------------------------------------
Average Average
Balance Interest Rate
---------- -------- -----
Interest-earning assets:
Mortgage loans (1)(2) $2,304,429 $176,914 7.68%
Mortgage-related secur-
ities (1) 1,507,334 89,379 5.93
Other loans (1) 1,027,942 100,755 9.80
U.S. Government and agency
securities 121,521 6,331 5.21
Other securities 106,378 4,912 4.62
Cash equivalents 38,371 1,522 3.97
FHL Bank stock 34,416 2,051 5.96
---------- -------- ------
5,140,391 381,864 7.43
Interest-bearing liabilities:
Passbook 833,291 25,159 3.02
Checking 473,850 6,426 1.36
Money market accounts 297,604 8,943 3.00
Certificates 2,848,596 134,291 4.71
FHL Bank advances 436,019 21,335 4.89
Other borrowings 91,151 8,068 8.85
---------- -------- ------
4,980,511 204,222 4.10
---------- -------- ------
Net earning assets and
interest rate spread $ 159,880 3.33%
========== ======
Earning asset ratio 103.21%
==========
Average interest-earning
assets, net interest income,
and net interest margin on
average interest-earning
assets $5,140,391 $177,642 3.46%
========== ======== ======
(1) Includes non-accruing loans and/or MBSs.
(2) Includes loans held for sale.
-11-
RATE VOLUME ANALYSIS
The most significant impact on FFC's net income between periods is derived from
the interaction of changes in the volume of and rates earned or paid on
interest-earning assets and interest-bearing liabilities. The volume of earning
dollars in loans and investments, compared to the volume of interest-bearing
liabilities represented by deposits and borrowings, combined with the spread,
produces the changes in net interest income between periods.
The following table shows the relative contribution of changes in average volume
and average interest rates to changes in net interest income for the periods
indicated. The change in interest income and interest expense attributable to
changes in both volume and rate, which cannot be segregated, has been allocated
proportionately to the change due to volume and the change due to rate.
Year Ended December 31, 1996 Year Ended December 31, 1995
Compared to Year Ended Compared to Year Ended
December 31, 1995 December 31, 1994
--------------------------------------- -------------------------------------
Rate Volume Total Rate Volume Total
-------- -------- --------- -------- -------- -------
(Dollars in thousands)
Interest-earning assets:
Mortgage loans (1)(2) $ (19) $ (7,907) $ (7,926) $ 394 $ 6,126 $ 6,520
Mortgage-related securities (1) 635 (2,205) (1,570) 16,898 (7,456) 9,442
Other loans (1) (3,910) 9,840 5,930 3,908 15,593 19,501
U.S. Government and agency securities 943 2,633 3,576 59 319 378
Other securities 42 (1,010) (968) 1,226 (2,047) (821)
Cash equivalents (282) 3,091 2,809 592 (463) 129
FHL Bank stock 41 (150) (109) 240 55 295
-------- -------- -------- -------- -------- --------
Total $ (2,550) $ 4,292 1,742 $ 23,317 $ 12,127 35,444
======== ======== ======== ======== ======== ========
Interest-bearing liabilities:
Passbook $ (984) $ (1,724) (2,708) $ (1,140) $ (3,002) (4,142)
Checking (147) 243 96 (1,718) (506) (2,224)
Money market accounts (294) 1,059 765 1,077 430 1,507
Certificates 4,260 214 4,474 20,973 5,890 26,863
FHL Bank advances (2,124) 282 (1,842) 5,004 403 5,407
Other borrowings (2,049) (1,166) (3,215) (977) 3,515 2,538
-------- -------- -------- -------- -------- --------
Total $ (1,338) $ (1,092) (2,430) $ 23,219 $ 6,730 29,949
======== ======== ======== ======== ======== --------
Increase in net interest income $ 4,172 $ 5,495
======== ========
(1) Includes non-accruing loans and/or MBSs.
(2) Includes loans held for sale.
-12-
NET INTEREST MARGIN AT YEAR END
The following table sets forth the weighted average yields on FFC's loan, MBS,
and investment security portfolios, the weighted average cost of deposits and
borrowings, the interest rate spread between the yields and costs at each year
end as well as the resulting net interest margin at the indicated dates.
December 31,
1996 1995 1994
---- ---- ----
Weighted average yield:
Mortgage loans 7.69% 7.74% 7.65%
Mortgage-related securities 7.13 7.15 6.42
Other loans 9.57 9.99 9.81
Investments 6.21 5.64 5.40
----- ----- -----
Combined weighted average yield on
loans and investments 7.89 8.03 7.64
Weighted average cost:
Deposits and advance payments from
borrowers for taxes and insurance 4.59 4.55 4.14
Borrowings 5.58 6.31 6.07
----- ----- -----
Combined weighted average cost
of deposits and borrowings 4.73 4.75 4.41
----- ----- -----
Interest rate spread 3.16% 3.28% 3.23%
===== ===== =====
Net interest margin 3.35% 3.46% 3.37%
===== ===== =====
-13-
FINANCIAL CONDITION
GENERAL
Total assets of FFC were $5.70 billion at the end of 1996 compared to $5.47
billion at year-end 1995. Stockholders' equity increased to $410.5 million, or
7.20% of total assets, at December 31, 1996 from $384.9 million and 7.04%,
respectively, at the end of 1995.
LIQUIDITY AND CAPITAL RESOURCES
On an unconsolidated basis, FFC had cash of $35.6 million. During 1996, FFC
redeemed its subordinated debt of $54.9 million at par plus accrued interest
with the proceeds of a $50.0 million cash dividend received from FF Bank.
FF Bank is subject to certain regulatory limitations relative to its ability to
pay dividends to FFC. Management believes that FFC will not be adversely
affected by these dividend limitations and that projected future dividends from
FF Bank will be sufficient to meet the parent company's liquidity needs. See
Note L to the consolidated financial statements for further discussion of these
limitations. In addition to dividends from FF Bank, FFC also could sell capital
stock or debt issues through the capital markets as alternative sources of
funds.
FFC also has available an unused line-of-credit in the amount of $18,000,000
which is available through April 1997. The line-of-credit agreement contains
various covenants relative to the operations of FFC and FF Bank. All of such
covenants were met during 1996. See Note J to the consolidated financial
statements for further discussion.
FF Bank is required to maintain minimum levels of liquid assets as defined by
Office of Thrift Supervision ("OTS") regulations. This requirement, which may be
varied by the OTS, is based upon a percentage of average deposits and short-term
borrowings. The required ratio is currently 5%. FF Bank is currently in
compliance with this requirement. FF Bank's principal sources of funds are
amortization and prepayment of loan and MBS principal, deposits, sales of
mortgage loans originated for sale, FHL Bank advances, other borrowings and
funds provided from operations. These funds are used to meet loan commitments,
make other investments, fund deposit withdrawals and repay borrowings.
Total consolidated liquidity, consisting of cash, cash equivalents, short-term
securities and investment securities, decreased $23.5 million during 1996. Total
consolidated liquidity, as a percent of total assets, decreased from 6.81% at
the end of 1995 to 6.12% at the end of 1996, as a result of the net effect of
FFC's various operating, investing and financing activities.
Operating activities resulted in a net cash inflow of $148.7 million. Operating
cash flows for 1996 included earnings of $49.8 million and $320.1 million
realized from the sale of mortgage loans held for sale, less $225.2 million
disbursed for loans originated for sale.
Investing activities in 1996 resulted in a net cash outflow of $355.9 million.
Major investing activities resulting in cash outflows were $916.0 million for
the purchase of investment and mortgage-related securities and $825.9 million
for the origination of loans for portfolio. The
-14-
most significant cash inflows from investing activities were principal payments
of $669.6 million and $195.2 million received on loans receivable and MBSs,
respectively, as well as $97.3 million from the proceeds of maturities of
investment securities. In addition, $419.6 million was received upon the sale of
securities available for sale.
Financing activities for 1996 resulted in a net cash inflow of $189.2 million
represented by a net increase in deposits of $21.5 million and a net increase in
borrowings of $199.0 million, offset by cash outflows of $19.0 million in cash
dividends paid to FFC stockholders and $14.4 million for the purchase of
treasury stock.
At December 31, 1996, FFC had outstanding commitments to originate mortgage
loans totaling $30.2 million and no commitments outstanding to purchase loans.
At that date, FFC also had commitments outstanding to sell $20.7 million of
mortgage loans that were held for sale or for which FFC was committed to
originate. Loans held for sale totaled $19.1 million at the end of 1996. FFC had
commitments of $150.0 million to purchase U.S. Government agency-backed MBSs at
year-end 1996. Management believes liquidity levels are proper and that adequate
capital and borrowings are available through the capital markets, the FHL Bank
of Chicago and other sources.
-15-
LOANS RECEIVABLE
Total loans receivable, including loans held for sale, decreased to $3.51
billion at the end of 1996 from $3.62 billion at the end of 1995. The components
of this decrease are summarized, by type of loan collateral, as follows:
December 31, Increase
1996 1995 (Decrease)
----------- ----------- -----------
(Dollars in thousands)
Real estate mortgage loans:
One- to four-family $1,884,018 $2,038,103 $ (154,085)
Multi-family 238,766 220,772 17,994
Commercial and other 176,911 153,173 23,738
---------- ---------- ----------
Total real estate mortgage loans 2,299,695 2,412,048 (112,353)
Other loans:
Consumer 415,155 362,659 52,496
Home equity 296,749 284,700 12,049
Education 269,633 240,650 28,983
Credit cards 179,352 214,107 (34,755)
Manufactured housing 104,783 139,385 (34,602)
Business 11,728 17,198 (5,470)
Less: net items to loans receivable (64,276) (53,947) (10,329)
---------- ---------- ----------
Total loans receivable (including
loans held for sale) $3,512,819 $3,616,800 $ (103,981)
========== ========== ==========
The major components of the decrease of $104.0 million in total loans receivable
during 1996 were a $112.4 million decrease in real estate mortgage loans, a
$34.8 million decrease in credit card loans, and a $34.6 million decrease in
manufactured housing loans, offset by a $52.5 million increase in consumer loans
and a $29.0 million increase in education loans.
The aggregate real estate mortgage loans decreased $112.4 million during 1996
primarily due to the net effect of i) originations of $711.3 million offset by
ii) repayments of $417.8 million, iii) loan sales of $259.8 million, and iv) the
securitization of $161.1 million of seasoned fixed-term fixed-rate mortgage
loans transferred to the mortgage-related securities portfolio.
Credit card loan balances decreased $34.8 million in 1996 as the result of the
sale of a $47.9 million affinity group portfolio. Manufactured housing loan
balances decreased $34.6 million as FFC had previously ceased originating
manufactured housing loans and the portfolio continues to make scheduled
repayments.
Consumer loan balances increased $52.5 million and education loans increased
$29.0 million as originations outpaced repayments for these product lines.
Consumer loan balances were positively impacted by the continued success of a
shorter-term fixed-rate mortgage loan product.
MORTGAGE-RELATED SECURITIES
The total carrying value of the MBS portfolio increased $379.7 million to $1.65
billion at December 31, 1996 from $1.27 billion at the end of 1995. This
increase was primarily the net result of i) purchases of $803.3 million and ii)
the securitization of $161.1 million of
-16-
mortgage loans transferred to the mortgage-related securities portfolio, offset
by iii) sales of $395.3 million and iv) repayments of $195.2 million. At the end
of 1996, FFC had commitments of $150.0 million to purchase U.S. Government
agency-backed MBSs.
The following table sets forth, at the dates indicated, the composition of the
MBS portfolio including issuer, security type, amortized cost, fair value and
financial statement carrying value as well as classification according to
available-for-sale or held-to-maturity status. See Note D to the consolidated
financial statements for i) a further breakdown of the available- for-sale and
held-to-maturity classifications of the MBS portfolio and ii) a summary of gains
and losses realized upon the disposition of available-for-sale MBSs during the
past three years.
December 31, 1996 December 31, 1995
---------------------------------- -------------------------------------
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 $1,089,418 $1,097,105 $1,093,513 $ 347,177 $ 353,712 $ 349,215
Collateralized mortgage
obligations 283,033 273,169 282,894 341,521 331,764 342,190
---------- ---------- ---------- ---------- ---------- ----------
Total agencies 1,372,451 1,370,274 1,376,407 688,698 685,476 691,405
---------- ---------- ---------- ---------- ---------- ----------
Non-agency:
Mortgage-backed certi-
ficates:
Senior position 276,078 274,473 273,595 485,327 478,484 480,840
Subordinate position -- -- -- 105,534 97,756 97,905
Collateralized mort-
gage obligations 435 444 435 611 637 611
---------- ---------- ---------- ---------- ---------- ----------
Total non-agencies 276,513 274,917 274,030 591,472 576,877 579,356
---------- ---------- ---------- ---------- ---------- ----------
Totals $1,648,964 $1,645,191 $1,650,437 $1,280,170 $1,262,353 $1,270,761
========== ========== ========== ========== ========== ==========
Total carrying value per consolidated
financial statements, by classification:
Available-for-sale portfolio $1,048,085 $ 571,293
Held-to-maturity portfolio 602,352 699,468
---------- ----------
Total carrying value $1,650,437 $1,270,761
========== ==========
Since MBSs are asset-backed securities, they are subject to inherent risks based
upon the future performance of the underlying collateral (i.e., mortgage loans)
for these securities. Among these risks are prepayment risk and interest-rate
risk. Should general interest-rate levels decline, the MBS portfolio would be
subject to i) prepayments as borrowers typically would seek to obtain financing
at lower rates, ii) a decline in interest income received on adjustable-rate
MBSs, and iii) an increase in fair value of fixed-rate MBSs. Conversely, should
general interest-rate levels increase, the MBS portfolio would be subject to i)
a longer term to maturity as borrowers would be less likely to prepay their
loans, ii) an increase in interest income received on adjustable-rate MBSs, iii)
a decline in fair value of fixed-rate MBSs and iv) a decline in fair value of
adjustable-rate MBSs to an extent dependent upon the level of interest-rate
increases, the time period to the next interest-rate repricing date for the
individual security and the applicable periodic (annual and/or lifetime) cap
which could limit the degree to which the individual security could reprice
within a given time period.
As noted in the above table, included in FFC's MBS portfolio are non-agency MBSs
having a carrying value of $274.0 million at December 31, 1996. Unlike U.S.
Government agency MBSs which include a guarantee of principal and interest
payments on the underlying collateral, non-agency securities are generally
structured with a senior ownership position and subordinate ownership
position(s) providing credit support for the senior position. The
-17-
structure of non-agency MBSs may expose FFC to credit risk in addition to
interest-rate risk and prepayment risk as discussed above. In this regard,
management has instituted a monitoring system for tracking the major factors
affecting the performance of a non-agency MBS including i) delinquencies,
foreclosures, repossessions and recoveries relative to the underlying mortgage
loans collateralizing each security, ii) the level of available subordination or
other credit enhancements, iii) the competence of the servicer of the underlying
mortgage portfolio and iv) the rating assigned to each security by independent
national rating agencies. This ongoing monitoring process has confirmed that all
non-agency MBSs continue to be performing. Although management believes that
this portfolio of securities will continue to contractually perform based on its
review, there can be no assurance that such performance will continue in the
future should economic conditions, market conditions, or other factors change
significantly.
FFC's portfolio of MBSs totaled approximately $1.65 billion at the end of 1996
and consisted of either i) U.S. Government agency-backed or ii) rated investment
grade quality by at least one nationally recognized independent rating agency,
except as noted below:
Amortized Fair Carrying
Issuer Cost Value Value
- ----------------------------- ------------ ------------ ------------
(Dollars in thousands)
U.S. Government agencies $ 1,372,451 $ 1,370,274 $ 1,376,407
Non-agency:
Securities rated AA or
above 247,887 249,174 248,281
Securities rated below
AA, but of investment
grade 11,192 10,568 10,574
Securities rated below
investment grade 17,434 15,175 15,175
------------ ------------ ------------
$ 1,648,964 $ 1,645,191 $ 1,650,437
============ ============ ============
The non-agency securities rated below investment grade include four securities,
each security having been issued by an unrelated company, with an aggregate
carrying value of $15.2 million. Based upon i) the results of management's most
current review of the performance characteristics of the underlying mortgage
loans collateralizing these below-investment-grade securities and ii) the fact
that these securities continue to perform, management believes that these MBSs
have a net realizable value in excess of their indicated fair value and/or
amortized cost and that any indicated impairment in fair value is not permanent.
Management also has the intent and the ability to retain its investment in these
securities for a period of time sufficient to allow for any anticipated recovery
of market value.
NON-PERFORMING ASSETS
Non-performing assets (consisting of impaired and non-accrual loans,
non-performing MBSs, foreclosed properties, and other repossessed collateral
assets) decreased to $16.0 million at December 31, 1996 from $29.8 million at
December 31, 1995. The 1996 decrease in non-performing assets relates primarily
to the sale of two non-agency MBSs during 1996 (see "Non-Performing MBSs" below)
and the sale of $1.3 million of real estate held for sale in 1996. Other loan
and asset category fluctuations substantially offset. As a percentage of total
assets, non-performing assets decreased from 0.54% at December 31, 1995 to 0.28%
at December 31, 1996. During the five years ended December 31, 1996, FFC has not
had any troubled debt restructurings. Non-performing assets are summarized as
follows for the dates indicated:
-18-
December 31,
1996 1995 1994 1993 1992
------ ------ ------ ------ -----
(Dollars in thousands)
Non-accrual loans:
One- to four-family
residential $ 6,325 $ 6,449 $ 5,706 $ 6,361 $ 7,320
Multi-family residential 1,607 873 585 374 314
Commercial real estate 98 162 271 340 6,496
Manufactured housing 1,164 926 1,034 1,063 1,295
Consumer and other 2,794 3,836 2,968 2,117 1,961
------- ------- ------- ------- -------
Total non-accrual loans 11,988 12,246 10,564 10,255 17,386
Non-performing MBSs -- 12,858 15,455 -- --
Real estate judgments 3,074 1,436 2,503 2,236 2,761
Real estate foreclosed
properties 584 1,538 2,446 6,126 17,262
Real estate held for sale -- 1,309 1,089 -- --
Repossessed collateral assets 339 405 267 163 462
------- ------- ------- ------- -------
Total non-performing
assets $15,985 $29,792 $32,324 $18,780 $37,871
======= ======= ======= ======= =======
Non-accrual loans as a
percentage of net loans .34% .34% .30% .33% .71%
Non-performing assets as a
percentage of total assets .28% .54% .59% .36% .88%
Non-Accrual and Impaired Loans. FFC places loans into a non-accrual status when
loans are contractually delinquent more than ninety days. When a loan is placed
on non-accrual status, previously accrued but unpaid interest is reversed.
Non-accrual loans have remained steady as a percentage of net loans at .34% at
December 31, 1996 and 1995. Total non-accrual loans decreased by $200,000 from
year end 1995 to December 31, 1996. The major factors of this net decrease were
the $700,000 increase in multi-family residential non-accrual loans offset by a
$1.0 million decrease in consumer and other non-accrual loans during 1996. The
$1.0 million decrease was split between credit card non-accrual loans of
$600,000 and small commercial business non-accrual loans of $400,000.
Non-accrual loans, in the aggregate, resulted in the nonrecognition of $900,000,
$900,000 and $700,000 of interest which would have been reflected in 1996, 1995
and 1994 income, respectively, if the loans had been contractually current.
The increase in non-accrual multi-family residential mortgage loans related to a
group of such loans to one borrower. Management is closely monitoring this
situation to correct the delinquent status.
Non-accrual credit card loans increased throughout most of 1996, similar to the
national trend for credit card accounts, but dropped to the year-end 1996 levels
as a result of the sale of an affinity credit card portfolio which was
experiencing higher than average delinquencies and charge-offs. FFC's overall
delinquency ratios for credit card accounts at year end 1996 remain
approximately 25% below national averages despite trending upward during 1995
and 1996.
For purposes of measuring impaired loans as defined in Statement No. 114,
"Impairment of Loans", FFC considers all categories of loans, except
multi-family, commercial and other, and business loans as homogeneous categories
and therefore not subject to impairment
-19-
measurement of individual loans. Impaired loans as determined in accordance with
Statement No. 114 are not significant.
Non-Performing MBSs. During 1996, FFC sold two non-agency MBSs which had been
non-performing at the end of 1995 and had an amortized cost of $12.9 million.
Each of these MBSs was structured as 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 had not received full
monthly payments on these securities since 1993. The payments had been
interrupted due to delinquencies and foreclosures in the underlying mortgage
portfolio and all of the cash flows were directed to owners of the senior
position. 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. In 1994, independent
national rating agencies downgraded these mezzanine securities to below
investment grade. At that time, a writedown of $9.0 million was recorded
reflecting permanent impairment of these securities. Subsequently, the positions
subordinate to FFC were eliminated and management determined that the value of
the collateral properties was deteriorating more rapidly than anticipated. Based
on this deterioration and the low probability for future improvement in the
condition of these securities, FFC sold these securities at nominal value and
realized a further loss of $12.8 million in 1996.
Also during 1996, FFC sold the remainder of its mezzanine/subordinated MBS
portfolio, having an aggregate remaining amortized cost of $90.2 million, at a
loss of $4.2 million.
To minimize the risk to FFC from holding such non-agency securities, FFC will
not purchase any mezzanine or subordinated position MBSs and has further
strengthened the criteria for other potential non-agency MBS purchases. FFC has
not purchased any non- agency MBSs since 1992. See "Mortgage-Related Securities"
for further information relative to non-agency MBSs.
Other Non-Performing Assets. Real estate judgments and foreclosed properties
increased $700,000 from year-end 1995 to December 31, 1996, primarily consisting
of one- to four-family or small multi-family properties located in the Midwest.
FFC has no non-performing real estate held for sale at December 31, 1996.
Summary. Levels of non-performing and impaired (as defined) assets have declined
significantly during the five-year period ended December 31, 1996 due to i) the
disposition of the remaining low quality assets received in the acquisition of a
troubled thrift institution in 1985, ii) improved collection and liquidation
efforts and iii) management's decision to restrict lending primarily to
Wisconsin, Illinois and other selected Midwestern states, offset by
non-performing MBSs as discussed above.
All non-performing and impaired assets have been considered by management in its
review of the adequacy of allowances for losses or the carrying value of the
asset.
ALLOWANCES FOR LOSSES ON LOANS AND FORECLOSED PROPERTIES
FFC's loan portfolios, foreclosed properties and off-balance sheet financial
guarantees are evaluated on a continuing basis to determine the necessity for
establishing additional
-20-
allowances for losses. These evaluations consider several factors including, but
not limited to, general economic conditions, collateral value, loan portfolio
composition, prior loss experience and management's estimate of future potential
losses. This evaluation also includes a review of both known loan problems as
well as potential problems based upon historical trends and ratios. The
allowances for losses on foreclosed properties are maintained at levels deemed
adequate to absorb potential future declines in the estimated fair value of the
properties.
A summary of activity in the allowances for losses on loans follows:
Year Ended December 31,
1996 1995 1994 1993 1992
------ ------ ------ ------ -----
(Dollars in thousands)
Balance at beginning of year $25,235 $25,180 $25,905 $19,540 $17,493
Charge-offs:
Residential real estate (1,046) (1,111) (864) (839) (1,691)
Commercial real estate (52) (3) (288) (501) (1,044)
Manufactured housing (1,210) (1,397) (1,477) (2,731) (4,212)
Credit card (8,906) (7,912) (6,658) (5,890) (6,142)
Consumer-related (659) (383) (371) (525) (524)
Commercial (272) (281) (214) -- (1,367)
------- ------- ------- ------- -------
Total charge-offs (12,145) (11,087) (9,872) (10,486) (14,980)
------- ------- ------- ------- -------
Recoveries:
Residential real estate 137 147 604 138 242
Commercial real estate -- 80 -- -- 3
Manufactured housing 158 204 181 179 288
Credit card 757 878 593 653 584
Consumer-related 56 86 127 426 131
Commercial -- 9 2 -- --
------- ------- ------- ------- -------
Total recoveries 1,108 1,404 1,507 1,396 1,248
------- ------- ------- ------- -------
Net charge-offs (11,037) (9,683) (8,365) (9,090) (13,732)
Provisions for losses 9,030 9,738 6,824 10,570 15,779
Acquired banks' allowances -- -- 816 4,885 --
------- ------- ------- ------- -------
Balance at end of year $23,228 $25,235 $25,180 $25,905 $19,540
======= ======= ======= ======= =======
Ratio of net charge-offs to
average loans outstanding .31% .27% .25% .31% .59%
Ratio of allowances for losses
on loans to average loans
outstanding .65% .71% .76% .87% .84%
Ratio of allowances for losses
on loans to non-accrual
loans 194% 206% 238% 253% 112%
-21-
A summary of the activity in the allowance for losses on foreclosed properties
follows:
Year Ended December 31,
1996 1995 1994 1993 1992
------ ------ ------ ------ -----
(Dollars in thousands)
Balance at beginning of year $ 993 $1,146 $3,561 $3,377 $2,569
Charge-offs (347) (213) (3,415) (3,335) (5,016)
Provision (467) 60 1,000 3,519 5,824
------ ------ ------ ------ ------
Balance at end of year $ 179 $ 993 $1,146 $3,561 $3,377
====== ====== ====== ====== ======
The provisions for losses on foreclosed properties are included in the
consolidated statements of income in "Net cost of (income from) operations of
foreclosed properties."
FFC's allowances for losses on loans decreased $2.0 million to $23.2 million at
December 31, 1996 from $25.2 million at December 31, 1995. The ratio of
allowances for losses on loans to average loans also decreased from year-end
1995 to year-end 1996, from .71% to .65%, respectively. Management believes the
reduced allowances were warranted based on the detailed analysis of the
allowance levels appropriate for the various loan categories based on historical
data and current trends.
While the aggregate allowances decreased from year-end 1995 to year-end 1996,
some decreases in allowances for certain loan products were offset by increases
for others. The major decreases in allowances were a $1.2 million reduction in
the allowance for the manufactured housing loan portfolio which continues to
shrink since FFC exited that market, and a $1.1 million reduction in the
residential mortgage loan allowance based on management's analysis of recent
loss experience and the resolution of certain past problem borrower multiple
loan groupings. The residential mortgage portfolio consists of large numbers of
relatively homogeneous loans.
The credit card loan allowance for loss was increased by $400,000 and the
consumer loan allowance was increased by $500,000, from year-end 1995 to
year-end 1996. The credit card allowance increase reflects management's desire
to maintain a higher ratio of allowances to loans, namely 3.78% at December 31,
1996 versus 3.00% a year earlier, based on recent experience. While FFC
continues to experience loss levels lower than industry norms, they are still
higher than FFC's historical levels. Consumer loan loss allowances were
increased due primarily to the growth of the product during 1996. Loss
experience for consumer loans in 1996 has also increased nominally to .10% of
the consumer loan base from .05% the prior year.
The 1996 provisions for losses on loans and foreclosed properties totaled $9.0
million and $(467,000), respectively, compared to the $9.7 million and $60,000
during 1995. The $1.9 million reduction in the residential mortgage provision
for losses in 1996 was substantially offset by the $1.8 million increase in the
provision for credit card losses. The remaining provisions for loan losses for
other loan products decreased by a total of $600,000. The provisions for losses
for the years 1994 to 1996 remain at significantly lower levels compared to 1992
when FFC's charge-off experience reflected certain portfolios received from an
earlier acquisition which required larger allowances for losses. Also, see "Non-
Performing Assets" for further discussion of this trend.
FFC also, in the past, has undertaken off-balance sheet financial guarantees,
totaling $7.3 million at December 31, 1996, whereby letters of credit have been
issued for industrial
-22-
development revenue bonds which were issued by municipalities to finance real
estate owned by third parties. Management has considered these guarantees, all
of which are performing, in its review of the adequacy of the allowance for
losses. See Note N to the consolidated financial statements for further
discussion of off-balance sheet financial guarantees.
Management believes that the December 31, 1996, loss allowances for loans and
foreclosed properties are adequate based upon its current evaluation of loan
delinquencies, non-performing and impaired assets, charge-off trends, economic
conditions and other factors. Management also continues to pursue all practical
and legal methods of collection, repossession and disposal, and adheres to high
underwriting standards in the origination process, in order to minimize the
necessity for such provisions in the future.
-23-
A detailed analysis of FFC's allowances for losses on loans and related
charge-off information follows for the dates and years indicated:
At December 31, 1996 At December 31, 1995
-------------------- --------------------
Net Charge-offs Net Charge-offs
Allowance As A Percent Allowance As A Percent
As A Percent Of Average As A Percent Of Average
Of Outstanding Related Loans Of Outstanding Related Loans
Allowance Loans In For The Year Allowance Loans In For The Year
Type of Loan Amount Category Ended 12/31/96 Amount Category Ended 12/31/95
- ------------ --------- ---------- -------------- --------- ---------- --------------
(Dollars in thousands)
Residential real estate $ 6,610 .31% .04% $ 7,726 .34% .04%
Commercial real estate 3,621 2.00 .03 3,823 2.50 (.05)
Manufactured housing 1,814 1.73 .86 3,034 2.18 .83
Credit cards 6,783 3.78 4.04 6,425 3.00 3.51
Consumer 3,462 .83 .10 3,029 .84 .05
Education 23 .01 .01 51 .02 --
Home equity 572 .19 .07 562 .20 .04
Commercial 343 2.92 1.96 585 3.40 1.59
------- -------
$23,228 .66% .31% $25,235 .70% .27%
======= ===== ===== ======= ===== =====
At December 31, 1994
------------------------
Net Charge-offs
Allowance As A Percent
As A Percent Of Average
Of Outstanding Related Loans
Allowance Loans In For The Year
Type of Loan Amount Category Ended 12/31/94
- ------------ --------- ---------- --------------
Residential real estate $ 6,990 .31% .01%
Commercial real estate 3,632 2.53 .22
Manufactured housing 4,267 2.79 .81
Credit cards 6,737 3.36 3.09
Consumer 2,444 .80 .08
Education 46 .02 --
Home equity 487 .20 .02
Commercial 577 3.03 1.02
-------
$25,180 .73% .25%
======= ===== ======
FFC's allowances for losses on loans were allocated to various loan categories
as follows for the dates indicated:
At December 31,
1996 1995 1994
------------------------ ---------------------- -----------------------
Percent Of Percent Of Percent Of
Loans In Each Loans In Each Loans In Each
Category To Category To Category To
Type of Loan Amount Total Loans Amount Total Loans Amount Total Loans
- ------------ ------ ------------- ------ ------------- ------ -------------
(Dollars in thousands)
Residential real estate $ 6,610 59.2% $ 7,726 61.5% $ 6,990 64.5%
Commercial real estate 3,621 5.1 3,823 4.2 3,632 4.1
Manufactured housing 1,814 2.9 3,034 3.8 4,267 4.3
Credit cards 6,783 5.0 6,425 5.8 6,737 5.7
Consumer and other 4,057 27.5 3,642 24.2 2,977 20.9
Commercial 343 .3 585 .5 577 .5
------- ----- ------- ----- ------- -----
$23,228 100.0% $25,235 100.0% $25,180 100.0%
======= ===== ======= ===== ======= =====
At December 31,
1993 1992
----------------------- -------------------------
Percent Of Percent Of
Loans In Each Loans In Each
Category To Category To
Type of Loan Amount Total Loans Amount Total Loans
- ------------ ------ ------------- ------ ------------
Residential real estate $ 6,792 67.6% $ 4,140 64.5%
Commercial real estate 5,353 3.6 5,281 4.9
Manufactured housing 4,668 5.1 4,325 5.3
Credit cards 6,502 6.5 4,034 7.2
Consumer and other 2,590 17.2 1,760 18.1
Commercial -- -- -- --
------- ----- ------- -----
$25,905 100.0% $19,540 100.0%
======= ===== ======= =====
-24-
DEPOSITS
Deposits increased $20.4 million during 1996 including interest credits of
$166.7 million offset by net cash outflows of $146.3 million. The weighted
average cost of deposits of 4.60% at the end of 1996 was slightly higher than
the 4.56% reported at the end of 1995.
BORROWINGS
At December 31, 1996, FFC's consolidated borrowings increased to $769.5 million
from $570.5 million at the end of 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. This redemption was offset by a $248.7
million increase in shorter-term FHL Bank advances used to fund the purchase of
primarily adjustable rate U.S. Government agency MBSs. The weighted average cost
of borrowings decreased to 5.58% at the end of 1996 as compared to 6.31% at
year-end 1995.
STOCKHOLDERS' EQUITY
Stockholders' equity at December 31, 1996 was $410.5 million or 7.20% of total
assets, compared to $384.9 million or 7.04% of total assets at December 31,
1995. The dollar increase in stockholders' equity resulted from the net effect
of i) net income of $49.8 million, ii) cash dividend payments to stockholders of
$19.0 million, iii) the purchase of treasury stock shares at a cost of $14.4
million (see "Stock Repurchase Program") and iv) an improvement of $7.3 million
in the net unrealized holding gain on available-for-sale securities.
Stockholders' equity per share, as adjusted for the five-for-four stock split on
December 30, 1996, increased from $10.38 per share at year-end 1995 to $11.15
per share at year-end 1996.
STOCK REPURCHASE PROGRAM
During the fourth quarter of 1996, FFC announced a six-month 5% stock repurchase
program whereby up to 1,875,000 shares would be repurchased. As of year end, the
company had repurchased 648,395 shares at an average cost of $22.28 per share.
REGULATORY CAPITAL
FF Bank is subject to various OTS capital measurements, as formulated under the
Federal Deposit Insurance Corporation Improvement Act ("FDICIA"), and had
regulatory capital well in excess of all such requirements at December 31, 1996
as summarized below:
OTS Capital Ratios
Actual Required
Ratio Ratio Excess
----- ----- ------
Tangible capital 6.20% 1.50% 4.70%
Core capital 6.39 3.00 3.39
Risk-based capital 13.91 8.00 5.91
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
-25-
purposes of this rule. At December 31, 1996, FFC had core deposit intangibles of
$11.4 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 these rules was pending at the end of 1996.
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.
For a more detailed discussion of regulatory capital requirements, see Note L to
the consolidated financial statements.
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.
Summary gap information for FFC is presented below as of year end 1996 and 1995.
Ratio of Cumulative
Negative Gap To Total Assets
One Year Three Years Five Years
-------- ----------- ----------
December 31, 1996 (1.80)% (5.00)% (2.56)%
December 31, 1995 (3.65) (4.01) (3.15)
FFC's consolidated one-year negative gap decreased to $102.6 million, or 1.80%
of total assets, at the end of 1996 from $199.8 million, or 3.65% of total
assets, at the end of 1995. FFC's consolidated one-year negative gap position of
1.80% at December 31, 1996 falls within management's currently acceptable range
of 10% positive to 10% negative. Traditionally, management of FFC has not
utilized off-balance sheet derivative financial instruments as part of its
efforts to control interest-rate risk and no such instruments were utilized
during 1996. In view of the current interest-rate environment and the related
impact on customer behavior, management believes that it is important to weigh
and balance the effect of asset/liability management decisions in the short-term
in its efforts to maintain net interest margins and acceptable future
profitability. As such, management believes that it has
-26-
been able to achieve a consistent net interest margin while still meeting
asset/liability management objectives.
In this regard, FF Bank also measures and evaluates interest-rate risk via a
separate methodology pursuant to OTS regulations. 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
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 proposed 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 its OTS risk-based capital
requirement. The final implementation of this rule was pending at the end of
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 December 31, 1996, FF Bank would not
have been required to deduct an interest-rate risk component under this
regulation.
Asset/Liability Repricing Schedule. The table below sets forth the combined
estimated maturity/repricing structure of FFC's interest-earning assets
(including net items) and interest-costing liabilities at December 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. Certain shortcomings
are inherent in the method of analysis presented in the gap table. For example,
although certain assets and liabilities may have similar maturities or periods
to repricing, they may react in different degrees to changes in market interest
rates. Also, the interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while interest rates
on other types may lag behind changes in market rates. Additionally, certain
assets, such as adjustable-rate loans, have features which restrict changes in
interest rates on a short-term basis and over the life of the asset. Further, in
the event of a change in interest rates, prepayment and early withdrawal levels
could deviate significantly from those assumed in calculating the data in the
table.
-27-
FIRST FINANCIAL CORPORATION CONSOLIDATED GAP ANALYSIS AT DECEMBER 31, 1996
Three Four Greater Greater Greater Greater
Months 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) $ 80,404 $ 8,179 $ 44,806 $ 40,236 $ 402 $ 36,229
Mortgage-related securities (b) 569,592 799,540 99,017 63,711 78,390 39,867
Mortgage loans:
Fixed-rate (c)(d) 57,803 140,067 302,409 203,495 241,228 147,922
Adjustable-rate (c) 192,552 671,286 284,050 -- -- --
Other loans 708,093 179,611 203,455 81,079 72,940 24,449
----------- ----------- ----------- ----------- ----------- -----------
1,608,444 1,798,683 933,737 388,521 392,960 248,467
Rate-sensitive liabilities:
Deposits (e)(f):
Checking 123,018 26,010 64,951 50,731 79,414 71,768
Money market accounts 88,496 73,045 122,100 45,036 38,055 9,661
Passbook 266,302 195,488 52,655 37,911 54,592 34,744
Certificates of deposit 603,778 1,375,615 872,114 114,108 3,265 --
Borrowings 757,191 769 4,621 1,119 597 1,910
----------- ----------- ----------- ----------- ----------- -----------
1,838,785 1,670,927 1,116,441 248,905 175,923 118,083
----------- ----------- ----------- ----------- ----------- -----------
GAP (repricing difference) $ (230,341) $ 127,756 $ (182,704) $ 139,616 $ 217,037 $ 130,384
=========== =========== =========== =========== =========== ===========
Cumulative GAP $ (230,341) $ (102,585) $ (285,289) $ (145,673) $ 71,364 $ 201,748
=========== =========== =========== =========== =========== ===========
Cumulative GAP/Total Assets (4.04)% (1.80)% (5.00)% (2.56)% 1.25% 3.54%
=========== =========== =========== =========== =========== ===========
FIRST FINANCIAL CORPORATION CONSOLIDATED GAP ANALYSIS AT DECEMBER 31, 1996
Greater
Than
20 Years Total
---------- --------
Rate-sensitive assets:
Investments and interest-
earning deposits, including
federal funds (a)(b) $ 41,440 $ 251,696
Mortgage-related securities (b) 320 1,650,437
Mortgage loans:
Fixed-rate (c)(d) 2,380 1,095,304
Adjustable-rate (c) -- 1,147,888
Other loans -- 1,269,627
----------- -----------
44,140 5,414,952
Rate-sensitive liabilities:
Deposits (e)(f):
Checking 39,105 454,997
Money market accounts 1,073 377,466
Passbook 8,153 649,845
Certificates of deposit -- 2,968,880
Borrowings 3,319 769,526
----------- -----------
51,650 5,220,714
----------- -----------
GAP (repricing difference) $ (7,510) $ 194,238
========== ===========
Cumulative GAP $ 194,238
===========
Cumulative GAP/Total Assets 3.41%
===========
(a) Investments are adjusted to include FHL Bank stock totaling $36.2 million
as investments in the "Greater Than Ten Through 20 Years" category.
(b) Investment and mortgage-related securities are presented at carrying value,
including net unrealized holding gain 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 $13.4 million of advance payments by borrowers for tax and
insurance and exclude accrued interest of $7.1 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.
-28-
RECENT LEGISLATIVE DEVELOPMENTS
The deposits of savings institutions such as FF Bank are insured up to
applicable limits under the SAIF of the FDIC. Deposits of commercial banks are
insured under the Bank Insurance Fund ("BIF") of the FDIC. Insured institutions
pay assessments to the applicable fund based on assessment rate schedules
determined by the law and FDIC regulation. Premium levels for the BIF and the
SAIF are set in order to permit the funds to be capitalized at a level equal to
1.25% of total deposits insured by the fund. As the funds reach their designated
ratios, the FDIC has authority to lower fund premium assessments to rates
sufficient to maintain the designated reserve ratio.
Historically, BIF and SAIF assessment schedules had been identical. In May 1995,
the BIF achieved its designated ratio and the FDIC lowered BIF premium rates for
most BIF-insured institutions. Based on various assessment rate modifications,
the majority of BIF members currently pay only a $2,000 minimum annual premium.
The SAIF had not achieved its designated reserve ratio and was not anticipated
to do so prior to the year 2001. Premium rates for SAIF-insured members were
being assessed at an average of 23.4 cents per $100 of deposits. As a result of
the modified assessment rate provisions, SAIF member institutions such as FF
Bank were placed at a competitive disadvantage based on higher deposit insurance
premium obligations.
Congress passed legislation to address this premium disparity. The "Deposit
Insurance Funds Act of 1996" ("DIFA") was included as part of an Omnibus
Appropriations Act of 1997 that was signed into law on September 30, 1996.
Pursuant to the terms of the DIFA, the FDIC was directed to impose a special
assessment on SAIF-assessable deposits at a rate that would cause the SAIF to
achieve its designated reserve ratio of 1.25% of SAIF-insured deposits as of
October 1, 1996. Pursuant to the final rule issued by the FDIC on October 16,
1996, the special assessment rate was determined to be 65.7 basis points. This
special assessment resulted in a one-time pre-tax charge to FF Bank of
approximately $28.8 million. With this recapitalization, future BIF and SAIF
premiums will be more comparable and FDIC deposit insurance expense for FF Bank
is anticipated to be significantly lower in future periods.
The DIFA also provides for the merger of BIF and SAIF into a single Deposit
Insurance Fund. This provision is projected to be effective January 1, 1999,
assuming that no insured depository institution is a thrift on that date. This
legislation contemplates that the thrift charter will be phased out over that
period of time. The DIFA also calls for the Secretary of the Treasury to
undertake a study concerning the development of a common charter for all insured
depository institutions and the abolition of separate and distinct charters for
banks and thrifts.
-29-
MARKET PRICE AND DIVIDEND INFORMATION
FFC's common stock trades on the Nasdaq National Market tier of The Nasdaq Stock
MarketSM ("NASDAQ") under the symbol of FFHC. At December 31, 1996, FFC had
36,802,484 outstanding shares and 4,262 shareholders of record.
The following table presents market price information and cash dividends paid on
FFC's common stock. The prices displayed represent high and low sales prices,
for each quarter over the past two years, as reported by NASDAQ. All per share
data have been adjusted to reflect a 5-for-4 stock split distributed in
December, 1996.
Market Price Cash
High Low Dividend
---- --- --------
Quarter Ended:
December 31, 1996 $24.750 $18.800 $ .150
September 30, 1996 19.300 17.200 .120
June 30, 1996 19.300 16.600 .120
March 31, 1996 18.400 15.600 .120
December 31, 1995 $19.000 $16.200 $ .096
September 30, 1995 17.300 13.600 .096
June 30, 1995 14.400 12.200 .096
March 31, 1995 13.000 10.800 .096
-30-