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, 1995 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, 1995 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, 1995 were outstanding 5,753,304 shares without par value, of the registrant. 1 FIRST FINANCIAL CORPORATION FORM 10-Q INDEX Page No. PART I. Financial Information Item 1. Financial Statements: Consolidated Statements of Condition..............................3 Consolidated Statements of Income..................................4 Consolidated Statements of Cash Flows..............................5 Notes to Consolidated Financial Statements.......................6,7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...........8,9,10 PART II. Other Information: Item 4. Submission of Matters to a Vote of Security Holders............................................11 Signatures..............................................................12 2 FIRST FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CONDITION Sept. 30, December 31, 1995 1994 (Dollar amounts in thousands) Cash and due from banks $51,827 51,947 Federal funds sold and securities purchased under agreements to resell 2,700 23,725 Investments: Held to Maturity (market value of $174,281 and $168,879, respectively) 171,344 174,646 Available-For-Sale 242,340 178,272 Loans: Commercial, financial and agricultural 169,441 163,268 Real estate - construction 21,676 20,446 Real estate - mortgage 454,783 424,427 Installment 197,862 185,533 Lease financing 4,506 5,259 848,268 798,933 Less: Unearned income 1,318 1,882 Allowance for possible loan losses 10,200 9,649 836,750 787,402 Accrued interest receivable 11,198 9,704 Premises and equipment 23,000 20,011 Other assets 12,914 14,132 TOTAL ASSETS $1,352,073 $1,259,839 LIABILITIES AND SHAREHOLDERS' EQUITY Deposit: Noninterest-bearing $122,873 $125,106 Interest-bearing: Certificates of deposit of $100,000 or more 139,983 109,306 Other interest-bearing deposits 795,228 758,954 1,058,084 993,366 Short-term borrowings: Federal funds purchased and securities sold under agreements to repurchase 47,098 66,685 Treasury tax and loan open-end note 7,366 5,406 Advances from Federal Home Loan Bank 79,297 46,272 133,761 118,363 Other liabilities 10,812 9,919 Long-term debt 6,655 7,470 Long-term advances from Federal Home Loan Bank 20,228 18,168 TOTAL LIABILITIES 1,229,540 1,147,286 Shareholders' equity: Common stock, $.125 stated value per share; authorized 10,000,000 shares; issued 5,815,857 shares for 1995 and 1994, including treasury 727 693 shares of 62,553 for 1995 and 19,600 for 1994. Additional capital 33,150 25,498 Retained earnings 89,249 89,399 Unrealized gains(losses) on AFS securities, net of tax 1,345 (2,429) Less treasury shares, at cost (1,938) (608) TOTAL SHAREHOLDERS' EQUITY 122,533 112,553 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,352,073 $1,259,839 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, 1995 1994 1995 1994 (Amounts in thousands, except per share amounts) INTEREST INCOME: Loans $18,604 $16,006 $53,563 $45,956 Investment securities: Taxable 4,713 3,763 13,580 11,342 Tax-exempt 1,764 1,698 5,313 4,901 6,477 5,461 18,893 16,243 Other interest income 169 94 533 261 TOTAL INTEREST INCOME 25,250 21,561 72,989 62,460 INTEREST EXPENSE: Deposits 11,000 8,129 31,556 23,680 Other 2,051 1,347 5,642 3,702 TOTAL INTEREST EXPENSE 13,051 9,476 37,198 27,382 NET INTEREST INCOME 12,199 12,085 35,791 35,078 Provision for possible loan losses 543 471 1,623 1,864 NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN LOSSES 11,656 11,614 34,168 33,214 OTHER INCOME Trust department income 358 309 1,034 902 Service charges on deposit accounts 318 316 908 916 Other service charges and fees 770 667 2,332 1,965 Investment securities gains (losses) (3) 18 (27) 36 Other 246 273 872 1,322 1,689 1,583 5,119 5,141 OTHER EXPENSES Salaries and employee benefits 4,609 4,288 13,469 12,985 Occupancy expense 683 651 1,962 1,772 Equipment expense 506 512 1,509 1,524 Data processing expense 504 480 1,528 1,433 FDIC insurance expense (50) 546 1,037 1,640 Other 2,349 2,232 7,188 6,823 8,601 8,709 26,693 26,177 INCOME BEFORE INCOME TAXES 4,744 4,488 12,594 12,178 Income Tax Expense 1,289 1,271 3,432 3,330 NET INCOME $3,455 3,217 9,162 8,848 EARNINGS PER SHARE: $0.60 $0.55 $1.59 $1.52 Weighted average number of shares outstanding 5,764 5,818 5,774 5,818 The accompanying notes are an integral part of the consolidated financial statements. 4 FIRST FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended September 30, 1995 1994 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $9,162 $8,848 Adjustment to reconcile net income to net cash provided by operating activities: Provision for possible loan losses 1,623 1,864 Provision for depreciation and amortization 1,726 1,850 Net (increase) decrease in accrued interest receivable (1,494) (227) Other, net (636) 2,216 NET CASH PROVIDED BY OPERATING ACTIVITIES 10,381 14,551 CASH FLOWS FROM INVESTING ACTIVITIES: Net increase (decrease) from purchases and maturities of interest-bearing deposits with financial institutions 0 685 Sales and maturities of investment securities 0 195,139 Maturities of held-to-maturity securities 42,780 0 Sales and maturities of available-for-sale securities 33,156 0 Purchases of investment securities 0 (160,760) Purchases of investment securities: Held-to-maturity security (17,888) 0 Available-for-sale security (111,170) 0 Loans made to customers, net of repayments (50,947) (49,066) Net decrease in federal funds sold 21,025 24,770 Additions to premises and equipment (4,317) (1,151) NET CASH USED BY INVESTING ACTIVITIES (87,361) 9,617 CASH FLOWS FROM FINANCING ACTIVITIES: Net increase from sales and redemptions of certificates of deposit 92,840 15,174 Net decrease in other deposits (28,122) (25,135) Net increase (decrease) in short-term borrowings 15,397 10,423 Cash dividends (3,171) (2,965) Proceeds from reissuance of Treasury Stock 525 0 Purchase of treasury stock (1,855) 0 Net increase (decrease) from long-term debt 1,256 (15,257) Repayments of long-term debt (10) (129) NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 76,860 (17,889) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (120) 6,279 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 51,947 43,460 CASH AND CASH EQUIVALENTS, END OF PERIOD $51,827 $49,739 ======= ======= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for interest $34,952 $26,666 Income taxes paid $3,838 $2,542 The accompanying notes are an integral part of the consolidated financial statements. 5 FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. The accompanying September 30, 1995 and 1994 consolidated financial statements are unaudited. The December 31, 1994, consolidated statement of condition amounts are as reported in the Corporation's 1994 annual report. The significant accounting policies followed by First Financial 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. 2. The Corporation adopted Statements of Financial Standards No's 114 and 118 (SFAS 114), "Accounting by creditors for Impairment of a Loan" and "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures" as of January 1, 1995. SFAS 114 requires that certain impaired loans be measured based either on the present value of expected future cash flows discounted at the loan's effective interest rate, or the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. The adoption of SFAS 114 did not result in additional provisions for loan losses primarily because the majority of impaired loan valuations continue to be based on the fair value of collateral. The provision for loan and lease losses charged to expense is based upon each affiliate's past loan and lease loss experience and an evaluation of potential losses in the current loan and lease portfolio, including the evaluation of impaired loans under SFAS 114. A loan is considered to be impaired when based upon current information and events, it is probable that Corporation will be unable to collect all amounts due according to the contractual terms of the loan. Impairments is primarily measured based on the fair value of the loans collateral. Impairment losses are included in the provision for loan and lease losses. SFAS 114 does not apply to large groups of smaller balance homogeneous loans that are collectively evaluated for impairment, except for those loans restructured under a troubled debt restructuring. Loans collectively evaluated for impairment include certain smaller balance commercial loans, consumer loans, residential real estate loans, and credit card loans, and are not included in the data that follows. The following table summarizes impaired loan information. $(thousands).....................................................September 30, 1995 Impaired loans.......................................................$ 3,715 Impaired loans with related reserve for loan losses calculated under SFAS 114.......................................................... 3,597 Impaired loans with no realized reserve for loan losses calculated under SFAS 114...................................................... 118 September 30, 1995 Average impaired loans................................................$ 4,342 Interest income recognized on impaired loans.......................... 159 Cash basis interest income recognized on impaired loans................ 0 Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is fully assured, in which case interest is recognized on the cash basis for certain troubled debt restructuring which are included in the impaired loan data above. 6 Commercial loans and residential real estate loans are placed on nonaccrual at the time the loan is 90 days delinquent unless the credit is well secured and in the process of collection. Commercial loans are charged off at the time the loan becomes 180 days delinquent unless the loan is well secured and in the process of collection, or other extenuating circumstances support collection. Credit card loans and other unsecured personal credit lines are typically charged off no later than 180 days delinquent. Other consumer loans are typically charged off at 150 days delinquent. In all cases, loans must be placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful. The interest on these loans is accounted for on the cash basis or cost recovery method, until qualifying for return to accrual. Loans maybe returned to accrual status when all the principal and interest amounts contractually due are paid current. 3. In May, 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard No. 122, "Accounting for Mortgage Servicing Rights" (SFAS 122). SFAS 122 amends Statements of Financial Accounting Standard No 65. "Accounting for Certain Mortgage Banking Activities", to require that mortgage banking enterprises recognize as separate assets rights to service mortgage loans for others, however those mortgage servicing rights are acquired. SFAS 122 also requires that mortgage banking enterprises assess capitalized mortgage servicing rights based on the fair value of those rights on a desegregated basis. SFAS 122 applies to fiscal years beginning after December 15, 1995 however, earlier application is encouraged. The Corporation has yet to determine whether to adopt SFAS 122 early; however, if adopted during 1995 the impact on the Corporation's financial results is not expected to be material. 7 FIRST FINANCIAL CORPORATION ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The purpose of the review is to point out key factors in First Financial's recent performance, compared with earlier periods. The review should be read in conjunction with the financial statements beginning on Page 3 of this report. All figures are for the consolidated entities. It is presumed the readers of these financial statements and the following narrative have previously read the Corporation's annual report for 1994. At the May 16, 1995 meeting, the Board of Directors approved a 5% stock dividend to shareholders of record June 20, 1995. This stock dividend is reflected in the accompanying financial statements. Earnings Analysis Summary of Operating Results Net income for the first nine months of $9,162,000 represents a $314,000 increase or 3.5% from the $8,848,000 reported for the same period a year earlier. Earnings per share was $1.59 an increase of 4.6% from the $1.52 per share reported in the prior year. Net income for the current quarter of $3,455,000 represents a 7.4% increase or $238,000 from the $3,217,000 reported for the same quarter of 1994. Earnings per share increased to $.60 from $.55 for the same period. Net Interest Income First Financial 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. In the first nine months of 1995 net interest income increase $713,000 or 2% as compared to the same period in 1994. Although the net interest income is increased as compared to the same period of 1994, the net interest margin for the year decreased from 4.42% in 1994 to 4.22% in 1995. This decrease is caused by higher cost paid for interest bearing liabilities as the result of more competition for funds. Net interest income for the third quarter of 1995 increased only $114,000 due to the higher cost paid for interest bearing liabilities. Other Income Other income for the first nine months of 1995, as compared to the same period of 1994, remained almost unchanged. Significant decrease for the individual components occurred in the categories of "other income". The major contributing factor was the recovery of $425,000 in 1994 from a previous recorded loss. Other income for the third quarter of 1995 increased $106,000 or 6.7% as compared to the same quarter of 1994. There were no significant changes in any one category of other income. 8 Other Expenses For the first nine months of 1995, other expenses increased only 2.0% or $516,000. The main reason for this small increase was due to the favorable FDIC insurance adjustment which decreased the expense by $603,000 or 36.8%. Other expense for the three months ended September 30, 1995, were down $108,000 or 1.2%. These decreases are primarily the result of the favorable FDIC insurance adjustment. Analysis of Financial Condition Allowance for Possible Loan Losses The Corporation's provision for possible loan losses totaled $1,623,000 for the first nine months of 1995 compared to $1,864,000 for the same period a year earlier. The decreased provision is the result of fewer non-performing loans and an overall improvement in loan quality. At September 30, 1995, the allowance for possible loan losses was 1.20% of total loans, net of unearned income. This compares with an allowance of 1.21% at December 31, 1994. Net charge-offs for the first nine months of 1995 were $1,067,000 compared to $1,478,000 for the same period of 1994. The ratio of net charge-offs to average loans outstanding for the last five years ended December 31, 1994, was .43%. With this experience and based on management's review of the portfolio, management believes the allowance of $10,200,000 at September 30, 1995 is adequate. Underperforming Assets The following is a listing of all categories of non-performing assets which includes potential problem loans at September 30, 1995 and December 31, 1994. (000') (000') 9-30-95 12-31-94 Nonaccrual Loans $3,243 $3,481 Restructured Loans 185 217 $3,428 $3,698 Past due > 90 days 3,089 1,992 Land sold on contract 1,079 519 Total non performing asset $7,596 $6,209 The ratio of the allowance for loan losses as a percentage of non- performing loans was 155% at September 30, 1995 which represents an decrease of 15% from December 31, 1994. This decrease is the result of an increase in the amount of loans past due 90 days or more amounting to $1,097,000 or 55%. There was no one significant factor which effected this increase but on a consolidated basis each category of loans increased a small amount. 9 The following loan categories comprise significant components of the non-performing loans at September 30, 1995: Non-Accrual Loans 1. 1-4 family residential: $457 thousand or 14% or non-accrual loans 2. Commercial loans: $2.0 million or 61% or non-accrual loans Past due > 90 days 1. 1-4 family residential: $1.2 million or 35% or past due loans 2. Installment loans: $803 thousand or 24% or past due loans 3. Commercial loans: $771 thousand or 24% or past due loans 4. Construction and land Development $393 thousand or 12% or past due loans There are no material industry concentrations within the non-performing loans. In addition to the above under-performing loans, certain loans are felt by management to be impaired for reasons other than the current repayment status. Such reasons may include but not be limited to previous payment history, bankruptcy proceedings, industry concerns, or information related to a specific borrower that may result in a negative future event to that borrower. In accordance with the guide III item III. C 2, the Corporation had $2.1 million of doubtful loans which are still in accrual status. Liquidity and Interest Rate Sensitivity The Corporation's objective in liquidity management is to manage the assets and liabilities to meet the needs of borrowers while allowing for the possibility of deposit withdrawals. Part of the strategy in maintaining a satisfactory level of liquidity is to structure a maturity schedule for the investment and loan portfolios that will allow for fluctuations in the availability of funds. Within the next twelve months $113,424,000 of investments will mature which represents 30.0% of the investment portfolio. Investments with maturities of one to five years comprise an additional 51.4% of the investment portfolio. The investment maturities along with the normal run-off of loans coupled with a large supply of unpledged securities for repurchase agreements, federal funds purchased, additional negotiable certificates of deposits, and other available borrowings affords the Corporation flexibility in funding loan growth and meeting other market opportunities as they present themselves. During the next twelve months the Corporation will either reprice or mature a total of $454,715,000 of assets. In this same period a total of $546,744,000 of liabilities will either be repriced or mature. Thus, the ratio of rate sensitive assets to rate sensitive liabilities as measured on a static basis, is 83% as September 30, 1995. The Corporation will continue to monitor this relationship to determine if it is appropriate to maintain a satisfactory level of net interest margin, while considering interest rate sensitivity. Capital Adequacy As of September 30, 1995, the Corporation's leverage ratio was 9.26% which compared 9.30% at December 31, 1994. At September 30, 1995, the Corporation's tier II capital ratio was 15.43% compared to 15.30% at December 31, 1994. 10 FIRST FINANCIAL CORPORATION PART II OTHER INFORMATION ITEM 4. Submission of Matters to a Vote of Security Holders (a) The Annual meeting of the shareholders of the Corporation was held on April 19, 1995. (b) The following were elected Directors of the Corporation: Walter A. Bledsoe, B. Guille Cox, Jr., Thomas T. Dinkel, Welby M. Frantz, Anton Hulman George, Mari Hulman George, Gregory L. Gibson, Max Gibson, Norman L. Lowery, William Niemeyer, Patrick O'Leary, John W. Ragle, Chapman J. Root II, Donald E. Smith, and Virginia Smith. (c) The shareholders unanimously approved the annual report of the Corporation and unanimously approved the actions of the Directors and Officers of the Corporation for the fiscal year ended December 31, 1994. No other information is required to be filed under Part II of this form. 11 FIRST FINANCIAL CORPORATION 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, 1995 By (Signature) Donald E. Smith, President Date: November 10, 1995 By (Signature) John W. Perry, Secretary Date: November 10, 1995 By (Signature) Michael A. Carty, Treasurer 12 14