FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FIRST FINANCIAL CORPORATION September 30, 2000
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended September 30, 2000 Commission File Number 0-16759 FIRST FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) INDIANA 35-1546989 (State or other jurisdiction (I.R.S. Employer Incorporation or organization) Identification No.) One First Financial Plaza, Terre Haute, IN 47807 (Address of principal executive office) (Zip Code) (812) 238-6000 (Registrant's telephone number, including area code) 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 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 _____. As of September 30, 2000 were outstanding 6,694,237 shares without par value, of the registrant. 1
FIRST FINANCIAL CORPORATION FORM 10-Q INDEX PART I. Financial Information Page No. Item 1. Financial Statements: Consolidated Statements of Condition.............................3 Consolidated Statements of Income................................4 Consolidated Statements of Shareholders' Equity and Comprehensive Income...........................................5 Consolidated Statements of Cash Flows............................7 Notes to Consolidated Financial Statements.......................8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................10 PART II. Other Information: Signatures...........................................................14 2
FIRST FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CONDITION (Dollar amounts in thousands, except per share data) September 30, December 31, 2000 1999 (Unaudited) ASSETS Cash and due from banks $75,310 $58,075 Federal funds sold and short-term investments 0 190 Securities, available-for-sale 581,351 594,319 Loans: Commercial, financial and agricultural 272,949 247,949 Real estate - construction 47,392 44,782 Real estate - mortgage 732,335 671,972 Installment 232,197 223,459 Lease financing 4,894 5,723 1,289,767 1,193,885 Less: Unearned income -858 -1,987 Allowance for loan losses -19,367 -17,949 1,269,542 1,173,949 Accrued interest receivable 17,194 14,703 Premises and equipment, net 26,195 26,095 Other assets 29,692 37,870 TOTAL ASSETS $1,999,284 $1,905,201 LIABILITIES AND SHAREHOLDERS' Deposits: Noninterest-bearing $141,764 $148,230 Interest-bearing: Certificates of deposit of $100 or more 235,490 218,515 Other interest-bearing deposits 904,601 889,370 1,281,855 1,256,115 Short-term borrowings 73,464 63,499 Other borrowings 445,226 382,322 Other liabilities 16,902 34,583 TOTAL LIABILITIES 1,817,447 1,736,519 Shareholders' equity: Common stock, $.125 stated value per share; Authorized shares--40,000,000 Issued shares--7,225,483 shares in 2000 and 1999 Outstanding shares--6,694,237 in 2000 and 6,845,418 in 1999 903 903 Additional capital 66,680 66,680 Retained earnings 139,659 125,680 Accumulated other comprehensive income/(loss): Unrealized gains/(losses) on investments, net of tax -3,492 -7,819 Treasury shares at cost--531,246 in 2000 and 380,065 in 1999 -21,913 -16,762 TOTAL SHAREHOLDERS' EQUITY 181,837 168,682 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,999,284 $1,905,201 The accompanying notes are an integral part of the consolidated financial statements. 3
FIRST FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME Three Months Ended Nine Months Ended September 30, September 30, 2000 1999 2000 1999 Unaudited Unaudited Unaudited Unaudited (Dollar amounts in thousands, except per share amounts) INTEREST INCOME: Loans $27,374 $24,772 $78,932 $71,887 Securities: Taxable 7,627 7,104 23,104 21,329 Tax-exempt 2,085 2,001 6,289 6,030 9,712 9,105 29,393 27,359 Other interest income 48 23 246 505 TOTAL INTEREST INCOME 37,134 33,900 108,571 99,751 INTEREST EXPENSE: Deposits 12,721 11,197 35,840 33,853 Other 8,210 5,495 22,717 15,450 TOTAL INTEREST EXPENSE 20,931 16,692 58,557 49,303 NET INTEREST INCOME 16,203 17,208 50,014 50,448 Provision for loan losses 1,140 1,084 3,189 3,644 NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 15,063 16,124 46,825 46,804 NONINTEREST INCOME Trust department 653 646 2,091 1,972 Service charges and fees on deposits 1,193 1,009 3,468 2,859 Investment security gains/(losses) -42 37 101 194 Other 2,040 958 4,325 3,396 3,844 2,650 9,985 8,421 NONINTEREST EXPENSES Salaries and employee benefits 5,786 6,252 17,665 18,511 Occupancy expense 768 726 2,232 2,192 Equipment expense 943 941 2,752 2,689 Other 3,099 3,035 9,433 9,441 10,596 10,954 32,082 32,833 INCOME BEFORE INCOME TAXES EXPENSE 8,311 7,820 24,728 22,392 Income Tax Expense 2,337 2,300 7,258 6,494 NET INCOME $5,974 $5,520 $17,470 $15,898 EARNINGS PER SHARE: NET INCOME $0.89 $0.80 $2.59 $2.28 Weighted average number of shares outstanding 6,696 6,942 6,742 6,988 The accompanying notes are an integral part of the consolidated financial statements. 4
<TABLE> FIRST FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME Three Months Ended September 30, 2000 and 1999 <CAPTION> Accumulated Other (Dollar amounts in thousands, Common Additional Retained Comprehensive Treasury except per share data) Stock Capital Earnings Income/(Loss) Stock Total <S> <C> <C> <C> <C> <C> <C> Balance, July 1, 2000 $903 $66,680 $133,685 $-7,287 $-21,724 $172,257 Comprehensive income: Net income 5,974 5,974 Change in net unrealized gains/(losses) on securities, net of tax 3,795 3,795 Total comprehensive income 9,769 Treasury stock purchase -189 -189 ____________________________________________________________________ Balance, September 30, 2000 $903 $66,680 $139,659 $-3,492 $-21,913 $181,837 Balance, July 1, 1999 $903 $66,680 $117,875 $-1,541 $-11,849 $172,068 Comprehensive income: Net income 5,520 5,520 Change in net unrealized gains/(losses) on securities, net of tax -3,278 -3,278 Total comprehensive income 2,242 Treasury stock purchase -2,047 -2,047 ____________________________________________________________________ Balance, September 30, 1999 $903 $66,680 $123,395 $-4,819 $-13,896 $172,263 The accompanying notes are an integral part of the consolidated financial statements. 5
FIRST FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME Nine Months Ended September 30, 2000 and 1999 Accumulated Other (Dollar amounts in thousands, Common Additional Retained Comprehensive Treasury except per share data) Stock Capital Earnings Income/(Loss) Stock Total Balance, January 1, 2000 $903 $66,680 $125,680 $-7,819 $-16,762 $168,682 Comprehensive income: Net income 17,470 17,470 Change in net unrealized gains/(losses) on securities, net of tax 4,327 4,327 Total comprehensive income 21,797 Cash dividends, $.52 per share -3,491 -3,491 Treasury stock purchase -5,151 -5,151 ____________________________________________________________________ Balance, September 30, 2000 $903 $66,680 $139,659 $-3,492 $-21,913 $181,837 Balance, January 1, 1999 $903 $66,680 $110,566 $8,123 $-4,089 $182,183 Comprehensive income: Net income 15,898 15,898 Change in net unrealized gains/(losses) on securities, net of tax -12,942 -12,942 Total comprehensive income 2,956 Cash dividends, $.44 per share -3,069 -3,069 Treasury stock purchase -9,807 -9,807 ____________________________________________________________________ Balance, September 30, 1999 $903 $66,680 $123,395 $-4,819 $-13,896 $172,263 The accompanying notes are an integral part of the consolidated financial statements. </TABLE> 6
FIRST FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended September 30, 2000 1999 (Unaudited) (Dollar amounts in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $17,470 $15,898 Adjustment to reconcile net income to net cash provided by operating activities: Net amortization of discounts on investments -1,668 161 Provision for loan losses 3,189 3,644 Securities gains -101 -194 Provision for depreciation and amortization 2,487 2,072 Other, net -11,789 1,135 NET CASH PROVIDED/(USED) BY OPERATING ACTIVITIES 9,588 22,716 CASH FLOWS FROM INVESTING ACTIVITIES: Sales of available-for-sale securities 16,895 85,550 Maturities of available-for-sale securities 36,760 131,850 Purchases of available-for-sale securities -32,260 -166,321 Loans made to customers, net of repayments -98,003 -85,022 Net change in federal funds sold 190 -3,750 Additions to premises and equipment -2,460 -2,729 NET CASH PROVIDED/(USED) BY INVESTING ACTIVITIES -78,878 -40,422 CASH FLOWS FROM FINANCING ACTIVITIES: Net change in deposits 25,740 -27,186 Net change in short-term borrowings 9,965 -21,020 Minority interest investment in subsidiary 0 400 Dividends paid -6,933 -6,224 Purchase of treasury stock -5,151 -9,807 Proceeds from other borrowings 386,287 224,167 Repayments on other borrowings -323,383 -138,753 NET CASH PROVIDED/(USED) BY FINANCING ACTIVITIES 86,525 21,577 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 17,235 3,871 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 58,075 54,877 CASH AND CASH EQUIVALENTS, END OF PERIOD $75,310 $58,748 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for interest $58,624 $49,508 Income taxes paid $8,153 $7,715 The accompanying notes are an integral part of the consolidated financial statements. 7
FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The accompanying September 30, 2000 and 1999 consolidated financial statements are unaudited. The December 31, 1999 consolidated financial statements are as reported in the First Financial Corporation (the Corporation) 1999 annual report. The following notes should be read together with notes to the consolidated financial statements included in the 1999 annual report. 1. The significant accounting policies followed by the Corporation and its subsidiaries for interim financial reporting are consistent with the accounting policies followed for annual financial reporting. All adjustments which are, in the opinion of management, necessary for a fair statement of the results for the periods reported have been included in the accompanying consolidated financial statements and are of a normal recurring nature. The Corporation reports financial information for only one segment, banking. SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. SFAS No. 133, which will be adopted by the Corporation in 2001, is not anticipated to have a material impact on the Corporation's financial position or results of operations. 2. A loan is considered to be impaired when, based upon current information and events, it is probable that the Corporation will be unable to collect all amounts due according to the contractual terms of the loan. Impairment is primarily measured based on the fair value of the loan's collateral. The following table summarizes impaired loan information. (000's) September 30, 2000 1999 Impaired loans with related allowance for loan losses calculated under SFAS No. 114....... $3,984 $2,176 Interest payments on impaired loans are typically applied to principal unless collection of the principal amount is deemed to be fully assured, in which case interest is recognized on a cash basis. 3. Securities The cost and fair value of the Corporation's investments at September 30, 2000 are shown below. All securities are classified as available-for-sale. (000's) September 30, 2000 Amortized Cost Fair Value United States Government $167,664 $163,250 United States Government Agencies 200,818 195,653 State and Municipal 165,185 165,635 Other 57,813 56,813 $591,480 $581,351 8
4. Short-Term Borrowings Period-end short-term borrowings were comprised of the following: (000's) September 30, December 31, 2000 1999 Federal Funds Purchased $60,576 $19,559 Repurchase Agreements 7,250 35,718 Note Payable - U.S. Government 5,638 8,222 $73,464 $63,499 5. Other Borrowings Other borrowings at period end are summarized as follows: (000's) September 30, December 31, 2000 1999 FHLB Advances $438,622 $375,713 City of Terre Haute, Indiana Economic Development Revenue bonds 6,600 6,600 Other 4 9 $445,226 $382,322 6. Changes in Shareholders' Equity Under the Corporation's common stock repurchase program announced in November, 1999, the Corporation has repurchased 531,246 shares as of September 30, 2000 compared to 380,065 shares as of December 31, 1999. 9
FIRST FINANCIAL CORPORATION ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations and Quantitative and Qualitative Disclosures About Market Risk The purpose of this discussion is to point out key factors in the Corporation's recent performance compared with earlier periods. The discussion should be read in conjunction with the financial statements beginning on page three of this report. All figures are for the consolidated entities. It is presumed the readers of these financial statements and of the following narrative have previously read the Corporation's annual report for 1999. Forward-looking statements contained in the following discussion are based on estimates and assumptions that are subject to significant business, economic and competitive uncertainties, many of which are beyond the Corporation's control and are subject to change. These uncertainties can affect actual results and could cause actual results to differ materially from those expressed in any forward-looking statements in this discussion. Summary of Operating Results For the nine months ended September 30, 2000, net income increased to $17.5 million from $15.9 million, a 9.9% improvement from the same period in 1999. Basic earnings per share increased to $2.59 for the first three quarters of 2000 compared to $2.28 for 1999, a 13.6% improvement. For the three months ended September 30, 2000, net income of $6.0 million was 8.2% higher than the $5.5 million reported in 1999 and earnings per share increased to $.89, 11.3% higher than the $.80 reported for the third quarter of 1999. The primary components of income and expense affecting net income are discussed in the following analysis. Net Interest Income The Corporation's primary source of earnings is net interest income, which is the difference between the interest earned on loans and other investments and the interest paid for deposits and other sources of funds. Net interest income decreased to $50.0 million in the first nine months of 2000 from $50.4 million in the same period of 1999. This decrease was the result of an inverted yield curve and the purchase of treasury shares. The inverted yield curve has resulted in the Corporation paying higher rates to obtain the short-term liabilities which have been necessary to fund growth. During the nine months ended September 30, 2000, loans increased $95.9 million and total assets climbed 4.9% to $1.99 billion while deposits increased 2.0% or $25.7 million. Also, through the nine months ended September, 30, 2000, the Corporation has purchased treasury stock for $5.2 million. These funds were extracted from the earning pool, lowering net interest income and increasing earnings per share. The impact of these factors is particularly evident in the third quarter's results as net interest income decreased to $16.2 million from the $17.2 million reported in 1999, while the net interest margin decreased to 3.73% in the third quarter of 2000, from 4.22% reported in 1999. Management expects the fourth quarter will yield similar results as growth will continue to be financed through wholesale funding and treasury shares will continue to be purchased. Noninterest Income Noninterest income for the nine month period ending September 30, 2000, as compared to the same period of 1999, increased $1.6 million, or 18.6%. The increase was driven by higher service charges and fees on deposit products. 10
Noninterest income for the third quarter increased by 45.1% to $3.8 million from the $2.6 million reported in 1999. The increase is the result of additional fee income generated by higher service charges and fees on deposit products and by increased revenue from our financial services department. Noninterest Expenses Noninterest expenses for the first nine months of 2000, as compared to the same period of 1999, decreased $.8 million due mainly to a 4.6% decrease in salaries and employee benefits. Noninterest expenses for the third quarter were $10.6 million, $.4 million less than the $11.0 million reported for the same period of 1999. Allowance for Loan Losses The Corporation's provision for loan losses decreased to $3.2 million for the first nine months of 2000 compared to $3.6 million in the same period of 1999. At September 30, 2000, the allowance for loan losses was 1.50% of net loans, the same level as December 31, 1999. Net chargeoffs for the first nine months of 2000 were $1.8 million compared to $2.2 million for the same period of 1999. The ratio of annual net chargeoffs to average loans outstanding for the five years ended December 31, 1999, was .33%. With this experience and based on management's review of the portfolio, management believes the allowance of $19.4 million at September 30, 2000, is adequate. Nonperforming Loans and Leases Nonperforming loans and leases consist of (1) nonaccrual loans and leases on which the ultimate collectability of the full amount of interest is uncertain, (2) loans and leases which have been renegotiated to provide for a reduction or deferral of interest or principal because of a deterioration in the financial position of the borrower, and (3) loans and leases past due ninety days or more as to principal or interest. A summary of nonperforming loans and leases at September, 2000 and December 31, 1999 follows: (000's) (000's) September 30, 2000 December 31, 1999 Nonaccrual loans and leases $4,470 $2,879 Renegotiated loans and leases 0 959 Ninety days past due loans and leases 5,993 5,229 Total nonperforming loans and leases $10,463 $9,067 Ratio of the allowance for loan losses as a percentage of nonperforming loans and leases 185% 198% 11
The following loan categories comprise significant components of the nonperforming loans at September 30, 2000 and December 31, 1999. Non-Accrual Loans: (000's) (000's) September 30, 2000 December 31, 1999 1-4 family residential $1,603 36% $1,617 56% Commercial loans 2,275 51 697 24 Installment loans 592 13 544 19 Other, various 0 0 21 1 $4,470 100% $2,879 100% Past due 90 days or more: 1-4 family residential $1,745 29% $2,927 56% Commercial loans 3,262 55 1,306 25 Installment loans 965 16 830 16 Other, various 21 0 166 3 $5,993 100% $5,229 100% There are no material industry concentrations within the nonperforming loans. Interest Rate Sensitivity and Liquidity The Corporation charges the nine subsidiary banks with monitoring and managing their individual sensitivity to fluctuations in interest rates and assuring that they have adequate liquidity to meet loan demand or any potential unexpected deposit withdrawals. This function is facilitated by the Asset/Liability Committee (the Committee). The primary goal of the committee is to maximize net interest income within the interest rate risk limits approved by the Board of Directors. This goal is accomplished throughsiiddiary bank's balance sheet liquidity and interest rate risk exposures due to the changes in economic conditions and interest rate levels. Interest Rate Risk and Quantitative and Qualitative Disclosures About Market Risk Management considers interest rate risk to be the Corporation's most significant market risk. Interest rate risk is the exposure to changes in net interest income as a result of changes in interest rates. Consistency in the Corporation's net income is largely dependent on the effective management of this risk. The Committee reviews a series of monthly reports to ensure that performance objectives are being met. It monitors and controls interest rate risk through earnings simulation. Simulation modeling measures the effects of changes in interest rates, changes in the shape of the yield curve, and changes in prepayment speeds on net interest income. The primary measure of Interest Rate Risk is "Earnings at Risk." This measure projects the earnings effect of various rate movements over the next three years on net interest income. It is important to note that measures of interest rate risk have limitations and are dependent upon certain assumptions. These assumptions are inherently uncertain and, as a result, the model cannot precisely predict the impact of interest rate fluctuations on net interest income. Actual results will differ from simulated results due to timing, frequency and amount of interest rate changes as well as overall market conditions. The Committee has performed a thorough analysis and believes the assumptions to be valid and theoretically sound. The relationships are continuously monitored for behavioral changes. 12
In its interest rate risk management, the Corporation currently does not utilize any derivative products and is not engaged in securities trading activity. The Corporation instead invests in assets whose value is derived from an underlying asset. These assets include government agency issued mortgage- backed securities. The performance of these assets in changing rate environments is included in the following table. The table below shows the Corporation's estimated earnings sensitivity profile as of September 30, 2000. Given a 100 basis point increase in rates, net interest income would decrease 5.18% over the next 12 months and decrease 5.38% over the second 12 month period. A 100 basis point decrease would result in a 2.54% increase in net interest income over the next 12 months and a 2.54% increase over the second 12 month period. These estimates assume all rates changed overnight and management took no action as a result of this change. Basis Point Percentage Change in Net Interest Income Interest Rate Change 12 months 24 months 36 months Down 300 2.04% 2.49% 2.09% Down 200 3.27 3.43 .38 Down 100 2.54 2.54 1.03 Up 100 -5.18 -5.38 -3.81 Up 200 -10.43 -10.95 -7.78 Up 300 -15.87 -16.70 -11.69 The Corporation does have assets and liabilities which contain embedded options, most notably callable agency securities and putable Federal Home Loan Bank advances. The securities pay a premium rate and the advances charge a discounted rate in exchange for the option. Therefore, there is a benefit to current income from using these products. Management believes these put and call options are clearly and closely related to the underlying instruments and are not considered derivatives under SFAS 133. Typical rate shock analysis does not reflect management's ability to react and thereby reduce the effects of rate changes, and represents a worst case scenario. The model assumes no actions are taken and prices change to the full extent of the rate shock. Liquidity Risk Liquidity is measured by each bank's ability to raise funds to meet the obligations from its customers, including deposit withdrawals and credit needs. This is accomplished primarily by maintaining sufficient liquid assets in the form of investment securities and core deposits. The Corporation has $9.3 million of investments that mature throughout the coming 12 months. The Corporation also anticipates $31.8 million of principal payments from mortgage- backed securities. Given the current interest rate environment, the Corporation anticipates $23.9 million of securities to be called within the next 12 months. With these sources of funds, the Corporation currently anticipates adequate liquidity to meet the expected obligations of its customers. Financial Condition The Corporation experienced asset growth of $94.1 million, or 4.9% since year end. This compares to the asset reduction of $3.6 million or .2% for the same period of 1999. This growth was the result of an increase in net loans outstanding of $95.9 million. The growth was funded by a 16.5% increase, or $62.9 million, in Federal Home Loan Bank advances and a $10.0 million increase in short-term borrowings, primarily federal funds purchased. Capital Adequacy As of September 30, 2000, the Corporation's leverage ratio was 9.26% compared to 9.36% at December 31, 1999. At September 30, 2000, the Corporation's total risk-based capital ratio, which includes Tier II capital, was 15.60% compared to 15.91% at December 31, 1999. These amounts exceed minimum regulatory capital requirements. 13
FIRST FINANCIAL CORPORATION PART II OTHER INFORMATION FORM 10-Q 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 (Registrant) Date: November 10, 2000 By (Signature) Donald E. Smith, Chairman Date: November 10, 2000 By (Signature) Norman L. Lowery, Vice Chairman Date: November 10, 2000 By (Signature) Michael A. Carty, Treasurer 14