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, 1998 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, 1998 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, 1998 were outstanding 7,225,483 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 comprehensive Income....................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 PART II. Other Information: Item 4. Submission of Matters to a Vote of Security Holders............................................13 Signatures..............................................................14 2 FIRST FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CONDITION March 31, Dec. 31, 1998 1997 (Unaudited) (Amounts in thousands) Cash and due from banks $58,728 $53,815 Federal funds sold and securities purchased under agreements to resell 10,200 280 Investments Available-For-Sale 550,802 527,993 Loans: Commercial, financial and agricultural 228,216 229,855 Real estate - construction 24,457 23,734 Real estate - mortgage 588,644 561,466 Installment 198,977 188,552 Lease financing 3,142 3,271 1,043,436 1,006,878 Less: Unearned income 1,020 1,079 Allowance for loan losses 15,197 13,503 1,027,219 992,296 Accrued interest receivable 13,271 14,086 Premises and equipment 24,870 24,925 Other assets 23,612 21,541 TOTAL ASSETS $1,708,702 $1,634,936 LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing $137,187 $162,880 Interest-bearing: Certificates of deposit of $100,000 or more 213,839 195,487 Other interest-bearing deposits 897,242 836,157 1,248,268 1,194,524 Short-term borrowings: Federal funds purchased and securities sold under agreements to repurchase 42,604 47,015 Treasury tax and loan open-end note 4,548 4,282 Advances from Federal Home Loan Bank 185,498 167,680 232,650 218,977 Other liabilities 17,525 18,718 Long-term debt 6,635 6,641 Long-term advances from Federal Home Loan Bank 29,913 30,596 TOTAL LIABILITIES 1,534,991 1,469,456 Shareholders' equity: Common stock, $.125 stated value per share; authorized 10,000,000 shares; issued and outstanding 7,225,483 shares for 1998 and 7,015,504 for 1997 903 877 Additional capital 60,309 59,787 Retained earnings 106,480 98,046 Accumulated other comprehensive income: Unrealized gains on investment securities, net of tax 6,019 6,770 TOTAL SHAREHOLDERS' EQUITY 173,711 165,480 TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY 1,708,702 $1,634,936 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 1998 1997 (Unaudited) (Amounts in thousands, except per share data) INTEREST INCOME: Loans $22,604 $19,940 Investment securities: Taxable 6,613 8,107 Tax-exempt 1,964 1,783 8,577 9,890 Other interest income 298 20 TOTAL INTEREST INCOME 31,479 29,850 INTEREST EXPENSE: Deposits 12,191 11,304 Other 3,883 3,881 TOTAL INTEREST EXPENSE 16,074 15,185 NET INTEREST INCOME 15,405 14,665 Provision for loan losses 1,407 1,401 NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 13,998 13,264 OTHER INCOME Trust department income 582 490 Service charges on deposit accounts 320 332 Other service charges and fees 1,080 892 Investment securities gains 352 231 Other 282 414 Total Other Income 2,616 2,359 OTHER EXPENSES Salaries and employee benefits 5,994 5,275 Occupancy expense 704 694 Equipment expense 818 762 Other 2,990 2,880 Total Other Expenses 10,506 9,611 INCOME BEFORE INCOME TAXES EXPENSE 6,108 6,012 Income Tax Expense 1,608 1,581 NET INCOME $ 4,500 $ 4,431 EARNINGS PER SHARE: $ 0.62 $ 0.63 Weighted average number of shares outstanding 7,225 7,016 The accompanying notes are an integral part of the consolidated financial statements. 4 FIRST FINANCIAL CORPORATION Consolidated Statements of Comprehensive Income Three Months Ended March 31 1998 1997 (Unaudited) (Amounts in thousands, except per share data) Net Income $4,500 $4,431 Other Comprehensive income, net of tax: Unrealized losses on securities: Unrealized holding losses arising during period -522 -3,797 Less: reclassification adjustment for gains included in net income -229 - 150 Other comprehensive income -751 -3,947 Comprehensive Income $3,749 $ 484 5 FIRST FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended March 31, 1998 1997 (Unaudited) (Amounts in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 4,500 $4,431 Adjustment to reconcile net income to net cash provided by operating activities: Provision for loan losses 1,407 1,401 Depreciation and amortization 637 640 Net decrease (increase) in accrued interest receivable 815 -134 Other, net -344 1,652 NET CASH PROVIDED BY OPERATING ACTIVITIES 7,015 7,990 CASH FLOWS FROM INVESTING ACTIVITIES: Increase from purchase and maturities of interest-bearing deposits with financial institutions 0 -4 Sales and maturities of available-for-sale securities 87,284 37,213 Purchases of available-for-sale securities -105,125 -54,195 Loans made to customers, net of repayments -6,328 -5,967 Net (increase) decrease in federal funds sold -9,520 2,000 Additions to premises and equipment - 598 -317 NET CASH USED BY INVESTING ACTIVITIES -34,287 -21,270 CASH FLOWS FROM FINANCING ACTIVITIES: Net increase from sales and redemptions of certificates of deposit 61,528 13,173 Net decrease in other deposits -40,057 - 5,640 Net increase in short-term borrowings 13,673 6,728 Cash dividends -2,740 -2,338 Net (decrease) increase from long-term debt - 684 3,714 Repayments of long-term debt - 5 - 4 NET CASH PROVIDED BY FINANCING ACTIVITIES 31,715 15,633 NET INCREASE IN CASH AND CASH EQUIVALENTS 4,443 2,353 CASH AND CASH EQUIVALENTS, BEGINNING OF QUARTER 54,285 66,658 CASH AND CASH EQUIVALENTS, END OF QUARTER $58,728 $69,011 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the quarter for interest $15,537 $14,855 Income taxes paid $531 $326 The accompanying notes are an integral part of the consolidated financial statements. 6 FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. The accompanying March 31, 1998 and 1997 consolidated financial statements are unaudited. The December 31, 1997, consolidated balance sheet amounts are as reported in the First Financial Corporation's (Corporation) 1997 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. On March 16, 1998, the Corporation completed its previously announced acquisition of Morris Plan Company of Terre Haute, Inc,. (Morris Plan). In exchange for all of the outstanding common shares of Morris Plan, the Corporation issued 210,000 shares of its common stock. The acquisition has been accounted for as a pooling of interests. The Corporation's consolidated financial statements for periods prior to the acquisition have not been restated because the acquisition would not result in material changes to previously reported statements. Effective January 1, 1998 the Corporation adopted Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income". SFAS N0. 130 establishes standards for the reporting and display of comprehensive income and, its components in a full set of general-purpose financial statements. The Corporation's comprehensive income, determined in accordance with the provisions of the statement, was $3.7 million and $484,000 for the three months ended March 31, 1998 and 1997, respectively. Accumulated other comprehensive income at December 31, 1997 and March 31, 1998 was $6.8 and $6.0 million respectively. 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 1998 1997 Impaired loans with related reserve for loan losses calculated under SFAS 114.......................................................... 1,440 1,998 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. Interest income on commercial loans and residential real estate loans is no longer accrued 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 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 status or charged off at an earlier date if collection of principal or interest is considered doubtful. 7 The interest on these loans is accounted for on the cash basis or cost recovery method, until qualifying for return to accrual status. Loans may be returned to accrual status when all the principal and interest amounts contractually due are paid. 3. The cost and fair value of the Corporation's investments at March 31, 1998 are shown below. All investments are considered as available-for-sale. (000's) March 31, 1998 Amortized Cost Fair Value Available-For-Sale: United States Government $126,653 $128,040 United States Government Agencies 215,920 216,940 State and Municipal 150,070 154,649 Other 50,846 51,173 $543,489 $550,802 8 FIRST FINANCIAL CORPORATION ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The purpose of this discussion is to point out key factors in First Financial'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 the following narrative have previously read the Corporation's annual report for 1997. 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 The Corporation's net income for the current quarter was up slightly to $4.5 million from $4.4 million in 1997, a 2.27% increase. Although net interest income was up $740 thousand, over 5%, the first quarter results were impacted by expenses resulting from the recent completion of the acquisition of Morris Plan in Terre Haute. As a result, earnings per share for 1998 were diluted by $.01 to $.62 by the acquisition. The acquisition is expected to have a positive impact on net income by the end of 1998. 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 three months of of 1998 net interest income increased to $15.4 million from $14.7 million in the same period of 1997. This increase was the result of continued growth in earning assets and an increase in the net interest margin from 4.16% in 1997 to 4.18% in 1998. Other Income Other income for the three month period ending March 31, 1998, as compared to the same period of 1997 increased $257,000 or 10.9%. Trust department income, other service fee income, and gains from sale of investment securities all increased to $582,000, $1,080,000 and $352,000 or 18.8%, 21.1% and 52.4% respectively compared to the same period of 1997 due to increased service volume or increased service charges. These increases were partially offset by decreased other income which declined $132,000 or 32%. 9 Other Expenses Other expenses for the first three months of 1998, as compared to the same period of 1997, increased to $10.5 million from $9.6 million. Most categories of other expenses increased due to overall growth and expenses related to the acquisition of Morris Plan. Allowance for Loan Losses The Corporation's provision for loan losses remained almost the same at $1,407,000 for the first three months of 1998 compared to $1,401,000 in the same period a year earlier. At March 31, 1998, the allowance for loan losses was 1.46% of net loans. This compares with an allowance of 1.34% at December 31, 1997. Net chargeoffs for the first three months of 1998 were $683,000 compared to $443,000 for the same period of 1997. The ratio of net chargeoffs to average loans outstanding for the last five years ended December 31, 1997, was .35%. With this experience and based on management's review of the portfolio, management believes the allowance of $15.2 million at March 31, 1998 is adequate. Underperforming Assets Underperforming assets consist of (1) nonaccrual loans and leases on which the ultimate collectibility 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, (3) loans and leases past due ninety days or more as to principal or interest and (4) land sold on contract and others. A summary of underperforming assets at March 31, 1998 and December 31, 1997 follows: ($000's) March 31, 1998 December 31, 1997 Nonaccrual loans and leases $ 4,699 $3,866 Renegotiated loans and leases 10 17 Land sold on contract and others 2,162 2,236 Total nonperforming assets $ 6,871 $6,119 Ninety days past due loans and leases 4,610 4,384 Total underperforming assets $11,481 $10,503 Ratio of the allowance for loan losses as a percentage of nonperforming assets 221% 221% Ratio of the allowance for loan losses as a percentage of underperforming assets 132% 129% 10 The following loan categories comprise significant components of the underperforming loans at March 31, 1998 and December 31, 1997. Non-Accrual Loans (000') (000') March 31, 1998 December 31, 1997 1-4 family residential $1,139 24% $ 728 19% Commercial loans 1,017 22 1,622 42 Installment loans 921 20 872 23 Other, various 1,622 34 644 16 $4,699 100% $3,866 100% Past due 90 days or more 1-4 family residential $2,805 61% $2,785 64% Commercial loans 501 11 112 3 Installment loans 502 11 851 19 Other, various 802 17 636 14 $4,610 100% $4,384 100% There are no material industry concentrations within the under- 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 March 31, 1998 the Corporation had $369,000 of doubtful loans which are still in accrual status. Interest Rate Sensitivity and Liquidity First Financial 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 banks' balance sheet liquidity and interest rate risk exposures due to the changes in economic conditions and interest rate levels. Interest Rate 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. 11 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 trading activity. The Corporation instead invests in assets whose value is derived from an underlying asset. These assets are mostly 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, 1998. Given a 100 basis point increase in rates, net interest income would increase 1.34% over the next 12 months and decrease 1.11% over the next 24 months. A 100 basis point decrease would result in a 2.45% decrease in net interest income over the next 12 months and a 1.20% decrease over the next 24 months. 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 -10.64% -6.57% -15.28% Down 200 - 5.80 -3.19 -9.14 Down 100 - 2.45 -1.20 -4.26 Up 100 1.34 -1.11 .80 Up 200 3.03 -1.28 2.80 up 300 5.55 .93 7.67 Liquidity Risk Liquidity is measured by each bank's ability to raise funds to meet the obligations of 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 $9.9 million of investments that mature throughout the coming 12 months. The Corporation also anticipates $47.2 million of principal payments from mortgage-backed securities. Given the current rate environment, the Corporation anticipates $47.8 million of Federal Agency Securities to be called within 1998 or the next 12 months. Capital Adequacy As of March 31, 1998 the Corporation's leverage ratio was 9.87% which compared 9.68% at December 31, 1997. At March 31, 1998 the Corporation's total capital which includes Tier II capital was 17.38% compared to 17.10% at December 31, 1997.These amounts exceed minimum regulatory capital requirements. 12 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 15, 1998. (b) The following were elected Directors of the Corporation for a three year term: Walter A. Bledsoe, William Niemeyer, John Ragle, and Donald E. 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, 1997. No other information is required to be filed under Part II of this form. 13 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: May 13, 1998 By (Signature) Donald E. Smith, President Date: May 13, 1998 By (Signature) John W. Perry, Secretary Date: May 13, 1998 By (Signature) Michael A. Carty, Treasurer 14