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, 1997 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, 1997 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, 1997 were outstanding 6,681,876 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 Balance Sheets........................................3 Consolidated Statements of Income..................................4 Consolidated Statements of Cash Flows..............................5 Notes to Consolidated Financial Statements.........................6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................8 PART II. Other Information: Signatures..............................................................12 2 FIRST FINANCIAL CORPORATION CONSOLIDATED BALANCE SHEETS September 30, December 31, 1997 1996 (Dollar amounts in thousands) Cash and due from banks $65,329 $66,658 Interest-bearing deposits with financial institutions 299 1,095 Federal funds sold and securities purchased under agreements to resell 0 2,000 Investments: Available-For-Sale 565,532 582,744 Loans: Commercial, financial and agricultural 217,616 197,449 Real estate - construction 24,423 22,629 Real estate - mortgage 548,807 508,010 Installment 187,844 188,670 Lease financing 3,309 3,284 981,999 920,042 Less: Unearned income 1,049 1,275 Allowance for loan losses 13,110 10,756 967,840 908,011 Accrued interest receivable 15,401 14,985 Premises and equipment 25,190 26,137 Other assets 20,605 18,012 TOTAL ASSETS $1,660,196 $1,619,642 LIABILITIES AND SHAREHOLDERS' EQUITY Deposit: Noninterest-bearing $154,673 $141,492 Interest-bearing: Certificates of deposit of $100,000 or more 185,070 187,199 Other interest-bearing deposits 852,431 846,537 1,192,174 1,175,228 Short-term borrowings: Federal funds purchased and securities sold under agreements to repurchase 64,038 62,416 Treasury tax and loan open-end note 6,256 5,131 Advances from Federal Home Loan Bank 167,880 140,244 238,174 207,791 Other liabilities 15,004 15,685 Long-term debt 6,646 6,637 Long-term advances from Federal Home Loan Bank 45,757 63,924 TOTAL LIABILITIES 1,497,755 1,469,265 Shareholders' equity: Common stock, $.125 stated value per share; authorized 10,000,000 shares; issued and outstanding 835 835 6,681,876 1996 and 1997 Additional capital 43,761 43,761 Retained earnings 112,178 101,093 Unrealized gains on securities, net of tax 5,667 4,688 TOTAL SHAREHOLDERS' EQUITY 162,441 150,377 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,660,196 $1,619,642 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, 1997 1996 1997 1996 (amounts in thousands, except per share amounts) INTEREST INCOME: Loans $21,322 $19,952 $61,764 $58,390 Investment securities: Taxable 7,963 7,473 24,168 22,047 Tax-exempt 1,857 1,747 5,504 5,049 9,820 9,220 29,672 27,096 Other interest income 23 38 100 403 TOTAL INTEREST INCOME 31,165 29,210 91,536 85,889 INTEREST EXPENSE: Deposits 11,662 11,527 34,551 34,410 Other 3,992 3,077 11,803 8,249 TOTAL INTEREST EXPENSE 15,654 14,604 46,354 42,659 NET INTEREST INCOME 15,511 14,606 45,182 43,230 Provision for loan losses 1,251 1,207 3,988 2,910 NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 14,260 13,399 41,194 40,320 OTHER INCOME Trust income 485 435 1,470 1,293 Service charges on deposit accounts 334 363 1,010 1,076 Other service charges and fees 1,000 827 2,690 2,448 Investment securities gains 60 60 402 214 Other 318 215 903 851 2,197 1,900 6,475 5,882 OTHER EXPENSES Salaries and employee benefits 5,560 5,127 16,161 15,586 Occupancy expense 768 724 2,164 2,397 Equipment expense 752 846 2,283 2,058 Other 2,973 3,287 8,653 9,408 10,053 9,984 29,261 29,449 INCOME BEFORE INCOME TAXES 6,404 5,315 18,408 16,753 Income Tax Expense 1,785 1,670 4,984 5,087 NET INCOME $4,619 $3,645 $13,424 $11,666 EARNINGS PER SHARE $0.69 $0.55 $2.01 $1.75 Weighted average number of shares outstanding 6,682 6,682 6,682 6,677 The accompanying notes are in integral part of the consolidated financial statements. 4 FIRST FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended September 30, 1997 1996 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $13,424 $11,666 Adjustment to reconcile net income to net cash provided by operating activities: Provision for loan losses 3,988 2,910 Provision for depreciation and amortization 1,767 1,923 Net (increase) decrease in accrued interest receivable -416 -2,156 Other, net -2,743 -1,830 NET CASH PROVIDED BY OPERATING ACTIVITIES 16,020 12,513 CASH FLOWS FROM INVESTING ACTIVITIES: Net decrease from purchase and maturities of interest-bearing deposits with financial institutions 796 0 Sales and maturities of available-for-sale securities 149,156 119,896 Purchases of available-for-sale securities -129,281 -167,315 Loans made to customers, net of repayments -63,422 -36,306 Net decrease in federal funds sold 2,000 7,475 Additions to premises and equipment -1,092 -2,649 NET CASH USED BY INVESTING ACTIVITIES -41,843 -78,899 CASH FLOWS FROM FINANCING ACTIVITIES: Net increase from sales and redemptions of certificates of deposit 3,397 33,994 Net increase (decrease) in other deposits 13,549 -15,381 Net increase in short-term borrowings 30,383 20,662 Cash dividends -4,677 -3,760 Proceeds from reissuance of treasury stock 0 600 Purchase of treasury stock 0 -131 Net increase (decrease) from long-term debt -18,158 36,011 NET CASH PROVIDED BY FINANCING ACTIVITIES 24,494 71,995 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS - 1,329 5,609 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 66,658 65,276 CASH AND CASH EQUIVALENTS, END OF PERIOD $65,329 $70,885 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for interest $47,676 $42,245 Income taxes paid $5,153 $5,445 The accompanying notes are an integral part of the consolidated financial statements. 5 FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. The accompanying September 30, 1997 and 1996 consolidated financial statements are unaudited. The December 31, 1996, consolidated balance sheet amounts are as reported in the Corporation's 1996 annual report. The significant accounting policies followed by First Financial Corporation and its subsidiaries for interim financial reporting are consistent with the accounting policies followed for annual financial reporting. All adjustments, which are in the opinion of management necessary for a fair statement of the results for the periods reported, have been included in the accompanying consolidated financial statements and are of a normal recurring nature. 2. A loan is considered to be impaired when, based upon current information and events, it is probable that the Corporation will be unable to collect all amounts due according to the contractual terms of the loan. Impairment is primarily measured based on the fair value of the loan's collateral. The following table summarizes impaired loan information. (000'S) September, 1997 1996 Impaired loans...............................................$ 1,782 $3,211 Impaired loans with related reserve for loan losses calculated under SFAS 114............................................... 1,782 3,196 Impaired loans with no related reserve for loan losses calculated under SFAS 114.................................... 0 15 Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is deemed to be fully assured, in which case interest is recognized on a cash basis. 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 may be returned to accrual status when all the principal and interest amounts contractually due are paid. 6 3. The cost and fair value of the Corporation's investments at September 30, 1997 are shown below. All investments are considered as available-for-sale. (000's) September 30, 1997 Amortized Cost Fair Value Available-For-Sale: United States Government $ 6,488 $ 6,487 United States Government Agencies 382,886 386,036 State and Municipal 142,851 146,722 Other 26,264 26,287 $558,489 $565,532 ======== ======== 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 consolidated financial statements beginning on Page 3 of this report. All figures are for the consolidated entities. It is presumed the reader of these consolidated financial statements and the following narrative have previously read the Corporation's annual report for 1996. Summary of Operating Results The Corporation's reported earnings of $13,424,000 for the first nine months of 1997 reflects a 15.1% increase above the same period for 1996, while the third quarter net income of $4,619,000 reflects a 26.7% increase over the third quarter of 1996. Earnings per share results of $2.01 and $0.69 for the nine and three month period respectively, reflect similar increases from the respective prior year's $1.75 and $0.55 per share. 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 1997 net interest income increased to $45,182,000 from $43,230,000 in the same period of 1996. The higher net interest income was attributable solely to higher volume which more than offset a declining spread in interest rates that decreased from 4.31% in 1996 to 4.24% in 1997. This decrease was the result of both a lower yield on earnings asset and a higher cost of funds for 1997. For the third quarter of 1997 net interest income increased $905,000 or 6.2% as compared to the same quarter of 1996. Again, the increase was due to higher volume while the net interest margin remained almost unchanged at 4.32% in 1997 compared to 4.33% for 1996. Other Income Other income for the nine months of 1997, as compared to the same period of 1996, increased $593,000 or 10.1%. Most other income categories increased due to increased service volume or increased service charges. Third quarter other income for 1997 increased $297,000 or 15.6% as compared to third quarter of 1996. The increases in the third quarter were also due to higher volume and service charges. Other Expenses Other expenses for the first nine months of 1997, as compared to the same period of 1996, decreased to $29,261,000 from $29,449,000. The Corporation changed it's data processing service from a facilities management firm to an in-house operation which impacted data processing expenses favorably, decreasing to $98,000 in 1997 from $726,000 for the same period of 1996. These savings were partially offset by increased equipment expenses which grew by $225,000 or 10.9%. Occupancy expenses decreased by $233,000 or 9.7% compared to the same period of 1996 due to real and personal property tax reduction. Third quarter other expenses for 1997 remained almost unchanged at $10,053,000 compared to $9,984,000 for the same quarter of 1996. Third quarter expenses were also impacted by savings in data processing expenses and property taxes. 8 Allowance for Loan Losses The Corporation's provision for loan losses totaled $3,988,000 for the first nine months of 1997 compared to $2,910,000 in the same period a year earlier. This represents a $1,078,000 increase to properly reserve for the increases in lending activity and underperforming loans during the year. At September 30, 1997, the allowance for loan losses was 1.34% of net loans. This compares with an allowance of 1.17% at December 31, 1996. Net chargeoffs for the first nine months of 1997 were $1,634,000 compared to $2,939,000 for the same period of 1996. The ratio of net chargeoffs to average loans outstanding for the last five years ended December 31, 1996, was .37%. With this experience and based on management's review of the portfolio, management believes the allowance of $13,110,000 at September 30, 1997 is adequate. Underperforming Assets The following is a listing of all categories of non-performing assets which includes potential problem loans at September 30, 1997 and December 31, 1996. September 30, 1997 December 31, 1996 (000') (000') Nonaccrual Loans $ 3,181 $ 2,504 Restructured Loans 377 34 $ 3,558 $ 2,538 Past due > 90 days $ 5,607 $ 5,296 Land sold on contract and others 1,837 1,871 Total non-performing asset $11,002 $ 9,705 ======= ======= The ratio of the allowance for loan losses as a percentage of non-performing assets (exclusive of land sold on contract) was 143% at September 30, 1997 compared to 137% at December 31, 1996. 9 The following loan categories comprise significant components of the non-performing loans at September 30, 1997 Non-Accrual Loans: September 30, 1997 December 31, 1996 (000') (000') 1-4 family residential $ 610 19% $ 287 12% Commercial loans 1,603 50 1,420 57 Installment loans 369 12 469 18 Other, various 599 19 328 13 $3,181 100% $2,504 100% ====== ==== ====== ==== Past due 90 days or more: 1-4 family residential $3,415 61% $2,256 43% Commercial loans 799 14 1,125 21 Installment loans 845 15 943 18 Non farm nonresidential properties 202 4 848 16 Other, various 346 6 124 2 $5,607 100% $5,296 100% ====== ==== ====== ==== There are no material concentrations by industry 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. At September 30, 1997 the Corporation had $674,000 of doubtful loans which are still in accrual status. INTEREST RATE SENSITIVITY AND LIQUIDITY First Financial Corporation charges the eight subsidiary banks with monitoring and managing their individual sensitivity to fluctuations in interest rates and assuring that they have adequate liquidity to meet loan and deposit demand. 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. 10 Interest Rate Risk The Committee reviews a series of monthly reports to insure that performance objectives are being met and monitors interest rate risk through earnings simulation. Simulation modeling measures the effects of interest rate changes on net interest income. The primary measure of interest rate risk is Earnings At Risk. This measure projects the effect of various rate movements over the next three years. The Corporation's Earnings At Risk as of September 30, 1997 are summarized below. Given a 100 basis point increase in rates, the simulation modeling indicates net income would increase .04% over the next 12 months. A 100 basis point decrease would result in a .28% decrease in net income. Earnings At Risk YEAR 1 YEAR 2 YEAR 3 DOWN 300 -2.45% -4.06% -7.34% DOWN 200 - .95 -2.03 -4.30 DOWN 100 - .28 - .85 -2.00 UP 100 .04 - .09 .91 UP 200 .16 .21 2.29 UP 300 .45 .67 3.79 Liquidity Risk Liquidity is measured by the Corporation's ability to raise funds to meet the obligation from its customers, including deposit withdrawals and credit needs. At September 30, 1997, the Corporation has $8,175,000 of investments that mature throughout the coming twelve months. The Corporation also anticipates $22,948,000 of principal from mortgage backed securities. Given the current rate environment the Corporation anticipates $80,025,000 of Federal Agency Securities will be called within the next year. Based on these estimates, the Corporation anticipates it will have adequate funds to meet the needs of customers. Capital Adequacy As of September 30, 1997 the Corporation's leverage ratio was 9.6% which compared to 9.35% at December 31, 1996. At September 30, 1997, the Corporation's total capital, which includes Tier II capital, was 16.97% compared to 16.00% at December 31, 1996. These amounts exceed minimum regulatory capital requirements. 11 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 13, 1997 By (Signature) Donald E. Smith, President Date: November 13, 1997 By (Signature) John W. Perry, Secretary Date: November 13, 1997 By (Signature) Michael A. Carty, Treasurer 12