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