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
June 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 June 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 June 30, 2000 were outstanding 6,700,349 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......................9
PART II. Other Information:
Signatures....................................................14
2
FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CONDITION
(Dollar amounts in thousands, except per share data)
June 30, December 31,
2000 1999
(Unaudited)
ASSETS
Cash and due from banks $69,986 $58,075
Federal funds sold and short-term investments 10,865 190
Securities, available-for-sale 591,304 594,319
Loans:
Commercial, financial and agricultural 270,304 247,949
Real estate - construction 47,605 44,782
Real estate - mortgage 713,738 671,972
Installment 229,478 223,459
Lease financing 5,007 5,723
1,266,132 1,193,885
Less:
Unearned income -887 -1,987
Allowance for loan losses -19,055 -17,949
1,246,190 1,173,949
Accrued interest receivable 16,418 14,703
Premises and equipment, net 26,419 26,095
Other assets 29,851 37,870
TOTAL ASSETS $1,991,033 $1,905,201
LIABILITIES AND SHAREHOLDERS'
Deposits
Noninterest-bearing $133,969 $148,230
Interest-bearing:
Certificates of deposit of $100 or more 204,007 218,515
Other interest-bearing deposits 913,118 889,370
1,251,094 1,256,115
Short-term borrowings 122,379 63,499
Other borrowings 425,707 382,322
Other liabilities 19,596 34,583
TOTAL LIABILITIES 1,818,776 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--6,700,349 in 2000 and
6,845,418 in 1999 903 903
Additional capital 66,680 66,680
Retained earnings 133,685 125,680
Accumulated other comprehensive income :
Unrealized (losses) gains on investments,
net of tax -7,287 -7,819
Treasury shares at cost--525,134 in 2000 and
380,065 in 1999 -21,724 -16,762
TOTAL SHAREHOLDERS' EQUITY 172,257 168,682
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,991,033 $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 Six Months Ended
June 30, June 30,
2000 1999 2000 1999
Unaudited Unaudited Unaudited Unaudited
(Dollar amounts in thousands, except per share amounts)
INTEREST INCOME:
Loans $26,302 $23,681 $51,558 $47,115
Securities:
Taxable 7,782 7,226 15,477 14,225
Tax-exempt 2,101 2,030 4,204 4,029
9,883 9,256 19,681 18,254
Other interest income 101 148 198 482
TOTAL INTEREST INCOME 36,286 33,085 71,437 65,851
INTEREST EXPENSE:
Deposits 11,554 11,225 23,119 22,656
Other 7,675 5,103 14,507 9,955
TOTAL INTEREST EXPENSE 19,229 16,328 37,626 32,611
NET INTEREST INCOME 17,057 16,757 33,811 33,240
Provision for loan losses 1,189 1,078 2,049 2,560
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 15,868 15,679 31,762 30,680
NONINTEREST INCOME
Trust department income 663 589 1,438 1,326
Service charges and fees on
deposit accounts 1,222 1,027 2,275 1,899
Investment security gains 143 133 143 157
Other 1,428 1,175 2,285 2,389
3,456 2,924 6,141 5,771
NONINTEREST EXPENSES
Salaries and employee 5,980 6,195 11,879 12,259
Occupancy expense 692 731 1,464 1,466
Equipment expense 849 865 1,809 1,748
Other 3,139 3,203 6,334 6,406
10,660 10,994 21,486 21,879
INCOME BEFORE INCOME TAXES
EXPENSE 8,664 7,609 16,417 14,572
Income Tax Expense 2,583 2,223 4,921 4,194
NET INCOME $6,081 $5,386 $11,496 $10,378
EARNINGS PER SHARE:
NET INCOME $0.90 $0.77 $1.70 $1.48
Weighted average number of
shares outstanding 6,729 6,975 6,765 7,010
The accompanying notes are an integral part of the consolidated financial
statements.
4
FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
Three Months Ended
June 30, 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, April 1, 2000 $903 $66,680 $131,095 $-8,649 -19,680 $170,349
Comprehensive income:
Net income 6,081 6,081
Change in net unrealized
gains/(losses) on securities,
net of tax 1,362 1,362
Total comprehensive income 7,443
Cash dividends, $.52 per share -3,491 -3,491
Treasury stock purchase -2,044 -2,044
______________________________________________________________________
Balance, June 30, 2000 $903 $66,680 $133,685 $-7,287 $-21,724 $172,257
Balance, April 1, 1999 $903 $66,680 $115,558 $5,988 $-11,849 $177,280
Comprehensive income:
Net income 5,386 5,386
Change in net unrealized
gains/(losses) on securities,
net of tax -7,529 -7,529
Total comprehensive income -2,143
Cash dividends, $.44 per share -3,069 -3,069
______________________________________________________________________
Balance, June 30, 1999 $903 $66,680 $117,875 $-1,541 $-11,849 $172,068
The accompanying notes are an integral part of the consolidated financial
statements.
5
FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
Six Months Ended
June 30, 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 11,496 11,496
Change in net unrealized
gains/(losses) on securities,
net of tax 532 532
Total comprehensive income 12,028
Cash dividends, $.52 per share -3,491 -3,491
Treasury stock purchase -4,962 -4,962
______________________________________________________________________
Balance, June 30, 2000 $903 $66,680 $133,685 $-7,287 $-21,724 $172,257
Balance, January 1, 1999 $903 $66,680 $110,566 $8,123 $-4,089 $182,183
Comprehensive income:
Net income 10,378 10,378
Change in net unrealized
gains/(losses) on securities,
net of tax -9,664 -9,664
Total comprehensive income 714
Cash dividends, $.44 per share -3,069 -3,069
Treasury stock purchase -7,760 -7,760
______________________________________________________________________
Balance, June 30, 1999 $903 $66,680 $117,875 $-1,541 $-11,849 $172,068
The accompanying notes are an integral part of the consolidated financial
statements.
6
FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
June 30,
2000 1999
(Unaudited)
(Dollar amounts in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $11,496 $10,378
Adjustment to reconcile net income to net cash
provided by operating activities:
Net amortization of discounts on investments -1,096 -133
Provision for loan losses 2,049 2,560
Securities gains 0 -157
Provision for depreciation and amortization 1,628 1,358
Other, net -9,565 3,439
NET CASH PROVIDED/(USED) BY OPERATING ACTIVITIES 4,512 17,445
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of available-for-sale securities 116 38,281
Maturities of available-for-sale securities 25,085 117,820
Purchases of available-for-sale securities -20,272 -121,925
Loans made to customers, net of repayments -73,828 -42,602
Net increase in federal funds sold -10,675 100
Additions to premises and equipment -1,867 -1,260
NET CASH PROVIDED/(USED) BY INVESTING ACTIVITIES -81,441 -9,586
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits -5,021 6,583
Net increase (decrease) in short-term borrowings 58,880 -10,114
Dividends paid -3,442 -3,154
Purchase of treasury stock -4,962 -7,760
Proceeds from other borrowings 217,746 40,122
Repayments on other borrowings -174,361 -24,432
NET CASH PROVIDED/(USED) BY FINANCING ACTIVITIES 88,840 1,245
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS 11,911 9,104
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 58,075 54,877
CASH AND CASH EQUIVALENTS, END OF PERIOD $69,986 $63,981
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
Cash paid during the period for interest $37,996 $33,140
Income taxes paid $5,958 $3,689
The accompanying notes are an integral part of the consolidated financial
statements.
7
FIRST FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying June 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)
June 30,
2000 1999
Impaired loans with related allowance for
loan losses calculated under SFAS No. 114.......... $2,395 $2,902
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 June 30, 2000
are shown below. All securities are classified as available-for-sale.
(000's)
June 30, 2000
Amortized Cost Fair Value
United States Government $181,317 $174,976
United States Government Agencies 208,329 200,776
State Municipal 166,513 165,256
Other 51,397 50,296
$607,556 $591,304
8
4. Short-Term Borrowings
Period-end short-term borrowings were comprised of the following:
June 30, December 31,
2000 1999
Federal Funds Purchased $103,970 $19,559
Repurchase Agreements 13,747 35,718
Note Payable - U.S. Government 4,662 8,222
$122,379 $63,499
5. Other Borrowings
Long term borrowings at period end are summarized as follows:
June 30, December 31,
2000, 1999
FHLB $419,101 $375,713
City of Terre Haute, Indiana
Economic Development Revenue bonds 6,600 6,600
Other 6 9
$425,707 $382,322
6. Changes in Shareholders' Equity
Under the Corporation's common stock repurchase program announced in
November, 1999, the Corporation has repurchased 525,134 shares as of June 30,
2000 compared to 380,065 shares as of December 31, 1999.
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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
Net income of $11.5 million was up 10.6% from the $10.4 million reported in
1999. Basic earnings per share was up 14.9% from the $1.48 reported in the
second quarter of 1999 to $1.70 per share for the same period in 2000.
The increased earnings are the result of a 1.2% increase in net interest
income and a 20% decrease in the provision for loan losses from the same period
for 1999.
For the three month period ended June 30, 2000, net income of $6.1 million
was 12.9% higher than the $5.4 million reported in 1999. Earnings per share of
$.90 for the second quarter is 16.9% higher than the $.77 reported for the
second quarter of 1999. Increased net interest income and a slight reduction
in non-interest expense is the primary reason for the improved performance.
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 $33.8 million in the first six months of 2000 from $33.2
million in the same period of 1999 due to an increase in earning asset volume
while the net interest margin decreased to 3.97% in 2000 from 4.09% in the same
period of 1999. This decrease resulted from a shift in the liability mix to
higher cost sources.
Net interest income increased to $17.1 million in the second quarter of
2000, from the $16.8 million reported in 1999, while the net interest margin
decreased to 3.95% in the second quarter of 2000, from 4.11% reported in 1999.
Noninterest Income
Noninterest income for the six month period ending June 30, 2000, as
compared to the same period of 1999, increased $.4 million or 6.4%. The
increase was driven by higher service charges and fees on deposit products.
Noninterest income for the second quarter increased by 18.2% to $3.5
million from the $2.9 million reported in 1999. The increase is the result of
additional fee income generated through the sale of products and services.
10
Noninterest Expenses
Noninterest expenses for the first six months of 2000, as compared to the
same period of 1999, decreased $.4 million due mainly to a 3.1% decrease in
salaries and employee benefits.
Noninterest expenses for the second quarter were $10.7 million, $.3 million
less than the $11.0 million reported for the same period of 1999. All categories
of other expenses were slightly lower for the three month period ended June 30,
2000.
Allowance for Loan Losses
The Corporation's provision for loan losses decreased to $2 million for the
first six months of 2000 compared to $2.6 million in the same period of 1999.
At June 30, 2000, the allowance for loan losses was 1.53% of net loans. This
compares with an allowance of 1.50% at December 31, 1999. Net chargeoffs for
the first six months of 1999 were $.9 million compared to $1.2 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 $19.1 million at June 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 June, 2000 and December 31, 1999 follows:
(000's) (000's)
June 30, 2000 December 31, 1999
Nonaccrual loans and leases $3,864 $2,879
Renegotiated loans and leases 239 959
Ninety days past due loans and leases 4,311 5,229
Total nonperforming loans and leases $8,414 $9,067
Ratio of the allowance for loan losses as a
percentage of nonperforming loans and leases 226% 198%
11
The following loan categories comprise significant components of the
underperforming loans at June 30, 2000 and December 31, 1999.
Non-Accrual Loans:
(000's) (000's)
June 30, 2000 December 31, 1999
1-4 family residential $1,203 31% $1,617 56%
Commercial loans 2,037 53 697 24
Installment loans 624 16 544 19
Other, various 0 0 21 1
$3,864 100% $2,879 100%
Past due 90 days or more:
1-4 family residential $1,668 39% $2,927 56%
Commercial loans 1,971 46 1,306 25
Installment loans 661 15 830 16
Other, various 11 0 166 3
$4,311 100% $5,229 100%
There are no material industry concentrations within the underperforming 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 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. 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 June 30, 2000. Given a 100 basis point increase in rates, net
interest income would decrease 2.18% over the next 12 months and decrease 2.52%
over the second 12 month period. A 100 basis point decrease would result in a
.45% decrease in net interest income over the next 12 months and a .20% 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 -2.42% -1.33% -7.05%
Down 200 -1.47 -.84 -4.64
Down 100 -.45 -.20 -2.10
Up 100 -2.18 -2.52 -.62
Up 200 -4.61 -5.36 -1.52
Up 300 -7.83 -9.15 -3.39
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.
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 $9.1
million of investments that mature throughout the coming 12 months. The
Corporation also anticipates $2.7 million of principal payments from mortgage-
backed securities. Given the current interest rate environment, the Corporation
anticipates $1.6 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 $85.8 million, or 4.5% since
year end. This compares to the asset reduction of $3.6 million or a .2% for the
same period of 1999. This growth was the result of an increase in net loans
outstanding of $72.2 million and increased federal funds sold and short-term
investments of $10.7 million. The growth was funded by an 11.4% increase, or
$43.4 million, Federal Home Loan Bank advances and a $58.9 million increase in
short-term borrowings primarily federal funds purchased.
Capital Adequacy
As of June 30, 2000, the Corporation's leverage ratio was 9.15% compared to
9.36% at December 31, 1999.
At June 30, 2000, the Corporation's total capital, which includes Tier II
capital, was 15.49% 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: August 11, 2000 By (Signature)
Donald E. Smith, Chairman
Date: August 11, 2000 By (Signature)
Norman L. Lowery, Vice Chairman
Date: August 11, 2000 By (Signature)
Michael A. Carty, Treasurer
14