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 March 31, 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 March 31, 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 March 31, 2000 were outstanding 6,762,368 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.................5 Consolidated Statements of Cash Flows...........................6 Notes to Consolidated Financial Statements......................7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............9 Item 3. Quantitative and Qualitative Disclosures About Market Risk........................................9 PART II. Other Information: Signatures..........................................................13 2 FIRST FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CONDITION March, 31 December, 31 2000 1999 (Unaudited) ASSETS (Amounts in thousands) Cash and due from banks $58,965 $58,075 Federal funds sold and securities purchased under agrrement to resell 11,970 190 Securities, available-for-sale 593,673 594,319 Loans: Commercial, financial and agricultural 261,113 247,949 Real estate - construction 47,704 44,782 Real estate - mortgage 689,668 671,972 Installment 225,417 223,459 Lease financing 4,785 5,723 1,228,687 1,193,885 Less: Unearned income -761 -1,987 Allowance for loan losses -18,684 -17,949 1,209,242 1,173,949 Accrued interest receivable 14,740 14,703 Premises and equipment, net 26,293 26,095 Other assets 38,822 37,870 TOTAL ASSETS $1,953,705 $1,905,201 LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing $146,741 $148,230 Interest-bearing: Certificates of deposit of $100 or more 215,804 218,515 Other interest-bearing deposits 885,074 889,370 1,247,619 1,256,115 Short-term borrowings 93,655 63,499 Other borrowings 423,449 382,322 Other liabilities 18,633 34,583 TOTAL LIABILITIES 1,783,356 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--6,762,368 in 2000 and 6,845,418 in 1999 903 903 Additional capital 66,680 66,680 Retained earnings 131,095 125,680 Accumulated other comprehensive income: Unrealized (losses) gains on investments, net of tax -8,649 -7,819 Less: Treasury shares at cost--463,115 in 2000 and 380,065 in 1999 19,680 16,762 TOTAL SHAREHOLDERS' EQUITY 170,349 168,682 TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $1,953,705 $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 March 31 2000 1999 (Unaudited) (Amounts in thousands, except per share data) INTEREST INCOME: Loans $25,256 $23,434 Investment securities: Taxable 7,695 6,999 Tax-exempt 2,103 1,999 9,798 8,998 Other interest income 97 334 TOTAL INTEREST INCOME 35,151 32,766 INTEREST EXPENSE: Deposits 11,565 11,431 Other 6,832 4,852 TOTAL INTEREST EXPENSE 18,397 16,283 NET INTEREST INCOME 16,754 16,483 Provision for loan losses 860 1,482 NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 15,894 15,001 OTHER INCOME Trust department 775 737 Service charges and fees on deposit accounts 1,053 872 Investment securities gains 0 24 Other 857 1,214 2,685 2,847 OTHER EXPENSES Salaries and employee 5,899 6,064 Occupancy expense 772 735 Equipment expense 960 883 Other 3,195 3,203 10,826 10,885 INCOME BEFORE INCOME TAX EXPENSE 7,753 6,963 Income Tax Expense 2,338 1,971 NET INCOME $5,415 $ 4,992 EARNINGS PER SHARE: NET INCOME $0.80 $ 0.71 Weighted average number of shares outstanding 6,802 7,046 The accompanying notes are an integral part of the consolidated financial statements. 4 FIRST FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Three Months Ended March 31, 2000 and 1999 Accumulated Other (Dollar amounts in thousands, Common Additional Retained Comprehensive Treasury except per share data) Stock Capital Earnings Income Stock Total Balance, January 1, 2000 $903 $66,680 $125,680 $-7,819 $-16,762 $168,682 Comprehensive income: Net income 5,415 5,415 Changes in net unrealized gains / losses on securities, net of tax and reclassification adjustments -830 -830 Total comprehensive income 4,585 Treasury stock purchased -2,918 2,918 __________________________________________________________________ Balance, March 31, 2000 $903 $66,680 $131,095 $-8,649 $-19,680 $170,349 Balance, January 1, 1999 $903 $66,680 $110,566 $8,123 $-4,089 $182,183 Comprehensive income: Net income 4,992 4,992 Change in net unrealized gains/losses on securities, net of tax and reclassification adjustments -2,135 -2,135 Total comprehensive income 2,857 Treasury stock purchased -7,760 -7,760 Balance, March 31, 1999 $903 $66,680 $115,558 $5,988 $-11,849 $177,280 The accompanying notes are an integral part of the consolidated financial statements. 5 FIRST FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended March 31, 2000 1999 (Unaudited) (Amounts in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 5,415 $4,992 Adjustment to reconcile net income to net cash provided by operating activities: Net amortization of discounts on investments -533 -375 Provision for loan losses 860 1,482 Securities gains 0 -24 Provision for depreciation and amortization 821 703 Other, net -13,622 3,034 NET CASH PROVIDED BY OPERATING ACTIVITIES -7,059 9,812 CASH FLOWS FROM INVESTING ACTIVITIES: Sale of available-for-sale securities 116 11,006 Maturities of available-for-sale securities 17,213 89,899 Purchases of available-for-sale securities -17,402 -65,032 Loans made to customers, net of repayments -35,606 -7,034 Net increase in federal funds sold -11,780 -26,960 Additions to premises and equipment -1,019 -909 NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES -48,478 970 CASH FLOWS FROM FINANCING ACTIVITIES: Net change in deposits -8,496 -20,085 Net (decrease) increase in short-term borrowings 30,156 -4,279 Dividends paid -3,442 -3,154 Purchase of treasury stock -2,918 -7,760 Proceeds from other borrowings 147,491 37,099 Repayments on other borrowings -106,364 -21,271 NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES 56,427 -19,450 NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS 890 -8,668 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 58,075 54,877 CASH AND CASH EQUIVALENTS, END OF PERIOD $58,965 $46,209 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for interest $17,978 $16,327 Income taxes paid $592 $721 The accompanying notes are an integral part of the consolidated financial statements. 6 FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The accompanying March 31, 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) March 31, 2000 1999 Impaired loans with related allowance for loan losses calculated under SFAS No. 114...................$1,588 $3,033 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 securities at March 31, 2000 are shown below. All securities are classified as available-for-sale. (000's) March 31, 2000 Amortized Cost Fair Value Available-For-Sale: United States Government $184,419 $177,007 United States Government Agencies 210,911 203,668 State and Municipal 165,036 162,667 Other 51,339 50,340 $611,705 $593,682 7 4. Short-Term Borrowings Period-end short-term borrowings were comprised of the following: March 31, December 31, 2000 1999 Federal Funds Purchased $69,847 $19,559 Repurchase Agreements 23,123 35,718 Note Payable - U.S. Government 685 8,222 $93,655 $63,499 5. Other Borrowings Long term borrowings at period end are summarized as follows: March 31, December 31, 2000 1999 FHLB Advances $416,842 $375,713 City of Terre Haute, Indiana Economic Development Revenue Bonds 6,600 6,600 Other 7 9 $423,449 $382,322 6. Changes in Shareholders' Equity Under the Corporation's common stock repurchase program announced in November, 1999, the Corporation has repurchased 463,115 shares as of March 31, 2000 compared to 380,065 shares as of December 31, 1999. 8 FIRST FINANCIAL CORPORATION ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations and ITEM 3 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 Net income of $5.4 million was up 8.5% from the $5.0 million reported in 1999. Basic earnings per share was up 12.7% from the $.71 reported in the first quarter of 1999 to $.80 per share for the same period in 2000. The increased earnings are the result of a 1.6% increase in net interest income and a 42% decrease in the provision for loan losses from the same period for 1999. 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 incurred for deposits and other sources of funds. Net interest income increased to $16.8 million in the first three months of 2000 from $16.5 million in the same period of 1999 due to an increase in earning asset volume while the net interest margin decreased to 3.99% in 2000 from 4.08% in the same period of 1999. This decrease resulted from a shift in the liability mix to higher cost products. Other Income Other income for the three month period ending March 31, 2000, as compared to the same period of 1999 decreased $.2 million or 5.7%. The reduction was the result of a $.4 million or 29.4% decrease in other income, primarily gains or losses incurred in the sale of residential real estate loans. Other Expenses Other expenses for the first three months of 2000, as compared to the same period of 1999, remained relatively the same with slight increases in occupancy and equipment costs offset by a 2.7% decrease in salaries and employee benefits. Allowance for Loan Losses The Corporation's provision for loan losses decreased to $860 thousand for the first three months of 2000 compared to $1.5 million in the same period of 1999. 9 At March 31, 2000, the allowance for loan losses was 1.52% of net loans. This compares with an allowance of 1.50% at December 31, 1999. Net chargeoffs for the first three months of 1999 were $.1 million compared to $.5 million for the same period of 1999. The ratio of net chargeoffs to average loans outstanding for the last 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 $18.6 million at March 31, 2000 is adequate. Underperforming Assets Underperforming assets consist primarily 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 oor deferral of interest or principal because of a deterioration in the financial position of the borrower, (3) loans and leases past due ninety days or more as to principal or interest and (4) land sold on contract. A summary of Underperforming assets at March 31, 2000 and December 31, 1999 follows: (000') (000') March 31, 2000 December 31, 1999 Nonaccrual loans and leases $ 2,570 $ 2,879 Renegotiated loans and leases 700 959 Land sold on contract and others 3,155 3,248 Total non-performing assets 6,425 7,086 Ninety days past due loans and leases 5,251 5,229 Total Underperforming assets $11,676 $12,315 Ratio of the allowance for loan losses as a percentage of non-performing assets 291% 253% Ratio of the allowance for loan losses as a percentage of Underperforming assets 160% 146% The following loan categories comprise significant components of the under-performing loans at March 31, 2000 and December 31, 1999. Non-Accrual Loans: (000's) (000's) March 31, 2000 December 31, 1999 1-4 family residential $1,235 48% $1,617 56% Commercial loans 733 28 697 24 Installment loans 524 21 544 19 Other, various 78 3 21 1 $2,570 100% $2,879 100% Past due 90 days or more: 1-4 family residential $1,861 35% $2,927 56% Commercial loans 2,310 44 1,306 25 Installment loans 889 17 830 16 Other, various 191 4 166 3 $5,251 100% $5,229 100% There are no material industry concentrations within the Underperforming loans. 10 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 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 through management of the subsidiary 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. The Committee 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. 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 March 31, 2000. Given a 100 basis point increase in rates, net interest income would decrease .62% over the next 12 months and decrease 1.61% over the second 12 month period. A 100 basis point decrease would result in a .84% decrease in net interest income over the next 12 months and a .73% decrease 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 -.39% -.08% -2.23% Down 200 .17 .35 -1.79 Down 100 -.84 -.73 -2.86 Up 100 -.62 -1.61 6.85 Up 200 -2.47 -2.68 -.54 Up 300 - 2.86 -3.20 -1.14 The Corporation uses products which contain 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 by using these products. 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. 11 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 $10.7 million of investments that mature throughout the coming 12 months. The Corporation also anticipates $31.0 million of principal payments from mortgage- backed securities. Given the current interest rate environment, the Corporation anticipates $1.4 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 $48.5 million for first quarter or 2.5% since year end. This compares to the $15.7 million for the same period of 1999. This growth was the result of an increase in net loans outstanding of $35.3 million and increased federal funds sold and securities purchased under agreements to resell of $11.8 million. The growth was funded by a 10.7% increase, $41.1 million, in other borrowings, Federal Home Loan Bank advances, and a $30.1 million increase in Short-term borrowings. Capital Adequacy As of March 31, 2000 the Corporation's leverage ratio was 8.82% compared to 9.18% at December 31, 1999. At March 31, 2000 the Corporation's total capital, which includes Tier II capital, was 14.95% compared to 15.91% at December 31, 1999. These amounts exceed minimum regulatory capital requirements. 12 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: May 12, 2000 By (Signature) Donald E. Smith, Chairman Date: May 12, 2000 By (Signature) Norman L. Lowery, Vice Chairman Date: May 12, 2000 By (Signature) Michael A. Carty, Treasurer 13