1
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, 2001
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Commission File Number 0-16759
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FIRST FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
INDIANA 35-1546989
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(State or other jurisdiction (I.R.S. Employer
Incorporation or organization) Identification No.)
One First Financial Plaza, Terre Haute, IN 47807
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(Address of principal executive office) (Zip Code)
(812)238-6000
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(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, 2001 were outstanding 6,855,456 shares without par value, of the
registrant.
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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.....................11
PART II. Other Information:
Signatures.................................................................................15
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FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CONDITION
(Dollar amounts in thousands, except per share data)
June 30, December 31,
2001 2000
---- ----
(Unaudited)
ASSETS
Cash and due from banks $ 61,267 $ 68,755
Federal funds sold and short-term investments - 4,175
Securities, available-for-sale 520,256 568,405
Loans:
Commercial, financial and agricultural 295,283 282,904
Real estate - construction 38,041 41,325
Real estate - mortgage 739,528 732,387
Installment 239,062 237,527
Lease financing 4,750 4,810
----------- -----------
1,316,664 1,298,953
Less:
Unearned income 853 947
Allowance for loan losses 17,478 19,072
----------- -----------
1,298,333 1,278,934
Accrued interest receivable 15,568 17,803
Premises and equipment, net 26,664 26,363
Bank-owned life insurance 46,384 45,037
Other assets 46,477 33,795
----------- -----------
TOTAL ASSETS $ 2,014,949 $ 2,043,267
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 138,503 $ 148,922
Interest-bearing:
Certificates of deposit of $100 or more 202,454 258,260
Other interest-bearing deposits 927,514 915,377
----------- -----------
1,268,471 1,322,559
Short-term borrowings 85,031 18,708
Other borrowings 423,786 489,063
Other liabilities 27,851 21,714
----------- -----------
TOTAL LIABILITIES 1,805,139 1,852,044
Shareholders' equity
Common stock, $.125 stated value per share; Authorized shares--40,000,000
Issues shares-7,225,483 shares in 2001 and 2000
Outstanding shares 6,855,456 in 2001 and 6,700,349 in 2000 903 903
Additional capital 66,680 66,680
Retailed earnings 149,506 141,653
Accumulated other comprehensive income (loss):
Unrealized gains/(losses) on investments, net of tax 8,660 3,900
Treasury shares at cost 370,027 in 2001 and 525,134 in 2000 (15,939) (21,913)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 209,810 191,223
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,014,949 $ 2,043,267
=========== ===========
See accompanying notes.
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FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Dollar amounts in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
---- ---- ---- ----
(Unaudited) (Unaudited)
INTEREST INCOME:
Loans $27,431 $26,302 $55,180 $51,558
Securities:
Taxable 6,262 7,782 13,205 15,477
Tax-exempt 2,078 2,101 4,148 4,204
------- ------- ------- -------
8,340 9,883 17,353 19,681
Other 709 101 1,415 198
------- ------- ------- -------
TOTAL INTEREST INCOME 36,480 36,286 73,948 71,437
INTEREST EXPENSE:
Deposits 12,447 11,554 25,830 23,119
Other 6,879 7,675 14,056 14,507
------- ------- ------- -------
TOTAL INTEREST EXPENSE 19,326 19,229 39,886 37,626
------- ------- ------- -------
NET INTEREST INCOME 17,154 17,057 34,062 33,811
Provision for loan losses 1,464 1,189 2,952 2,049
------- ------- ------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 15,690 15,868 31,110 31,762
NONINTEREST INCOME:
Trust department income 762 663 1,442 1,438
Service charges and fees on deposit accounts 1,426 1,222 2,634 2,275
Investment security gains/(losses) 172 143 172 143
Other 3,006 1,428 4,985 2,285
------- ------- ------- -------
5,366 3,456 9,233 6,141
------- ------- ------- -------
NONINTEREST EXPENSES:
Salaries and employee benefits 7,771 5,980 13,962 11,879
Occupancy expense 901 692 1,772 1,464
Equipment expense 790 849 1,742 1,809
Printing and supplies expenses 209 267 467 537
Other 3,840 2,872 7,030 5,797
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13,511 10,660 24,973 21,486
------- ------- ------- -------
INCOME BEFORE INCOME TAX EXPENSE 7,545 8,664 15,370 16,417
Income Tax Expense 1,762 2,583 3,680 4,921
------- ------- ------- -------
NET INCOME $ 5,783 $ 6,081 $11,690 $11,496
======= ======= ======= =======
EARNINGS PER SHARE:
Net Income $ 0.85 $ 0.90 $ 1.73 $ 1.70
======= ======= ======= =======
Weighted average number
of shares outstanding (in thousands) 6,802 6,729 6,749 6,765
======= ======= ======= =======
See accompanying notes
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FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
Three Months Ended
June 30, 2001, and 2000
(Dollar amounts in thousands)
(Unaudited)
Accumulated
Other
Common Additional Retained Comprehensive Treasury
Stock Capital Earnings Income/(Loss) Stock Total
Balance, April 1, 2001 $ 903 $ 66,680 $ 147,560 $ 9,315 $ (21,913) $ 202,545
Comprehensive income:
Net income 5,783 5,783
Change in net unrealized
gains/(losses) on securities,
net of tax (655) (655)
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Total comprehensive income 5,128
Cash dividends, $.56 per share (3,837) (3,837)
Issuance of treasury shares 6,801 6,801
Treasury stock purchase (827) (827)
--------- --------- --------- --------- --------- ---------
Balance, June 30, 2001 $ 903 $ 66,680 $ 149,506 $ 8,660 $ (15,939) $ 209,810
========= ========= ========= ========= ========= =========
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
========= ========= ========= ========= ========= =========
See accompanying notes.
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FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
Six Months Ended
June 30, 2001, and 2000
(Dollar amounts in thousands)
(Unaudited)
Accumulated
Other
Common Additional Retained Comprehensive Treasury
Stock Capital Earnings Income/(Loss) Stock Total
Balance, January 1, 2001 $ 903 $ 66,680 $ 141,653 $ 3,900 $ (21,913) $ 191,223
Comprehensive income:
Net income 11,690 11,690
Change in net unrealized
gains/(losses) on securities,
net of tax 4,760 4,760
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Total comprehensive income 16,450
Cash dividends, $.56 per share (3,837) (3,837)
Issuance of treasury shares 6,801 6,801
Treasury stock purchase (827) (827)
------- ---------- ------------ ------------- ---------- -----------
Balance, June 30, 2001 $ 903 $ 66,680 $ 149,506 $ 8,660 $ (15,939) $ 209,810
======= ========== ============ ============= ========== ===========
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
======= ========== ============ ============= ========== ===========
See accompanying notes.
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FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
Six Months Ended
June 30,
2001 2000
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(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 11,690 $ 11,496
Adjustment to reconcile net income to net cash
provided by operating activities:
Net accretion of discounts on investments (1,055) (1,096)
Provision for loan losses 2,952 2,049
Securities gains - (143)
Provision for depreciation and amortization 1,537 1,628
Other, net (1,744) (9,565)
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NET CASH PROVIDED/(USED) BY OPERATING ACTIVITIES 13,380 4,369
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CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of available-for-sale securities - 259
Maturities of available-for-sale securities 70,682 25,085
Purchases of available-for-sale securities (13,545) (20,272)
Loans made to customers, net of repayments (21,112) (73,828)
Net change in federal funds sold 4,175 (10,675)
Purchase of Forrest Sherer (1,699) -
Additions to premises and equipment (1,753) (1,867)
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NET CASH PROVIDED/(USED) BY INVESTING ACTIVITIES 36,692 (81,298)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits (54,088) (5,021)
Net change in short-term borrowings 66,323 58,880
Dividends paid (3,747) (3,442)
Treasury stock purchases (827) (4,962)
Proceeds from other borrowings 43,940 217,746
Repayments on other borrowings (109,217) (174,361)
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NET CASH PROVIDED/(USED) BY FINANCING ACTIVITIES (57,616) 88,840
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (7,488) 11,911
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 68,755 58,075
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 61,267 $ 69,986
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 41,384 $ 37,996
========= =========
Income taxes paid $ 3,842 $ 5,958
========= =========
See accompanying notes.
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FIRST FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying June 30, 2001 and 2000 consolidated financial statements
are unaudited. The December 31, 2000 consolidated financial statements are as
reported in the First Financial Corporation (the Corporation) 2000 annual
report. The following notes should be read together with notes to the
consolidated financial statements included in the 2000 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.
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, December 31,
2001 2000
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Impaired loans with related allowance for loan losses calculated under
SFAS No. 114.................................................................. $7,421 $6,422
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, 2001
are shown below. All securities are classified as available-for-sale.
(000's)
June 30, 2001
Amortized Cost Fair Value
-------------- ----------
United States Government $139,371 $141,078
United States Government Agencies 136,624 138,776
States and Municipal 163,833 169,127
Other 70,709 71,275
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$510,537 $520,256
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4. Short-Term Borrowings
Period-end short term borrowings were comprised of the following:
(000's)
June 30, December 31,
2001 2000
---- ----
Federal Funds Purchased $ 55,488 $ 5,510
Repurchase Agreements 24,706 12,269
Note Payable - U.S. Government 4,837 929
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$ 85,031 $ 18,708
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5. Other Borrowings
Other borrowings at period-end are summarized as follows:
(000's)
June 30, December 31,
2001 2000
---- ----
FHLB Advances $417,186 $482,460
City of Terre Haute, Indiana Economic Development Revenue bonds 6,600 6,600
Other - 3
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$423,786 $489,063
======== ========
6. Derivatives
Effective January 1, 2001, the Corporation implemented FAS 133, a new
accounting standard. This standard requires all derivatives to be recorded at
fair value and carried on the statement of condition. Unless designated as
hedges, changes in the fair value of derivatives are recorded in the statement
of income.
During 2000, the Corporation entered into an interest rate swap with a
notional principal balance of $10 million. The agreement requires the
Corporation to make variable rate payments, based on LIBOR, which rate was 3.84%
at June 30, 2001, and entitles the Corporation to receive fixed rate payments at
a rate of 6.817%. The swap has a 24-month term and was entered into to hedge a
similar maturity fixed rate certificate of deposit special that generated
approximately $13 million in deposits. At June 30, 2001, the interest rate swap
contract has a fair value of $472 thousand, which is approximately the same
amount as the fair value adjustment to the hedged certificates of deposit. The
interest rate swap is included in time deposits on the statement of condition.
Management monitors the continuing effectiveness of the interest rate swap as a
hedge and believes it continues to be an effective hedge. Net settlement income
or expense is included in interest expense. The Corporation is exposed to credit
loss in the event the counterparty does not perform under the agreement in an
amount equal to the rate differential when the fixed rate exceeds the variable
rate.
During 2001 the Corporation purchased an interest rate cap contract with a
notional principal balance of $50 million. The agreement requires the
counterparty to pay the Corporation the excess of the 3 month LIBOR over 6.00%.
The cap has a 36 month term which runs through March, 2004. No payments are
currently required under the agreement. The agreement was entered into to help
protect the Corporation's net interest income should interest rates increase in
excess of the cap's trigger amount. The interest rate cap is carried at fair
value, approximately $383 thousand at June 30, 2001, and is included in other
assets on the statement of condition. The fair value exceeds the amortized basis
by $117 thousand, which was included in the statement of income.
7. Acquisitions
Effective May 1, 2001, the Corporation acquired Forrest Sherer, Inc, a full
lines insurance agency headquartered in Terre Haute, Indiana. The purchase price
was $8.5 million of which $1.7 million was paid in cash and $6.8 million of
stock (182,672 shares) of the Corporation was issued. The acquisition will be
accounted for using the purchase method of accounting. Its results of operations
are included in the Corporation's financial statements only after acquisition.
Management expects total intangible assets will aggregate to approximately
$8.4 million. However, appraisals are currently being performed on the assets of
Forrest Sherer, Inc. to properly allocate the purchase price to various items.
Until this effort is completed, specific amounts allocated to intangible assets
such as customer lists and goodwill cannot be accurately identified.
Once the fair value determination is concluded, the Corporation will begin to
record amortization expense.
The following table presents proforma revenue, net income and earnings per
share determined as if the acquisition had been consummated at January 1, 2000.
Key assumptions include the add back of merger-related expenses paid by Forrest
Sherer of approximately $160 thousand and the amortization of the expected $8.4
million intangible asset over a twelve year life.
Six months ended June 30,
(000's omitted
except per share data)
2001 2000
---- ----
Revenue $85,293 $80,241
Net income 11,465 11,648
Earnings per share $ 1.67 $ 1.68
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During March 2001, the Corporation executed a definitive agreement to
acquire Community Financial Corporation (Community), based in Olney, Illinois.
Consummation of the transaction is subject to a variety of conditions,
regulatory approval and approval by the shareholders of Community. This
transaction will also be accounted for using the purchase method. The cash
purchase price for each share of Community is dependent upon a number of
variables and conditions. Management expects to consummate this transaction in
late 2001.
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 2000.
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 for the six months ended June 30, 2001 was $11.7 million, a 1.7%
improvement from the $11.5 million in the same period in 2000. Basic earnings
per share increased to $1.73 for the second quarter of 2001 compared to $1.70
for 2000, a 1.8% improvement.
The primary components of income and expense affecting net income are
discussed in the following analysis.
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 paid for deposits and other sources of funds. Net interest income
increased to $34.1 million in the first six months of 2001 from $33.8 million in
the same period of 2000. This was the result of an increase of $79 million in
average interest earning assets and an increase of $42 million in average
interest bearing liabilities.
Loans and non-taxable investments experienced higher yields for the
six-month period ended June 30, 2001 compared to the same period in 2000.
However, the higher yield on these assets was largely offset by higher costs of
funds, particularly time deposits. The Corporation's net interest margin (tax
equivalent net interest income divided by average earnings assets) declined to
3.90% for the six months ended June 30, 2001, compared to 3.97% for the prior
year.
During the twelve months ended June 30, 2001, loans increased $50.6 million
and total assets climbed 1.2% to $2.0 billion while deposits increased 1.4% or
$17.4 million. Also during 2000, the Corporation purchased treasury stock for
$5.0 million. These funds were extracted from the earning asset pool, lowering
net interest income, but increasing earnings per share.
Noninterest Income
Noninterest income for the six month period ending June 30, 2001, as
compared to the same period of 2000, increased $3.1 million, or 50.4%. This was
attributed to significantly higher gains recognized in the secondary mortgage
market, increases in fee-based income, an increase in commissions generated by a
reinsurance subsidiary, and insurance commission income from recently acquired
Forrest Sherer, Inc.
Noninterest income for the three months ended June 30, 2001 increased 55.3%
to $5.4 million from the $3.5 million reported for the same period in 2000.
Causes for this increase are the same as those identified in the previous
paragraph.
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Noninterest Expenses
Noninterest expenses for the first six months of 2001, as compared to the
same period of 2000, increased $16.23% due mainly to a 17.6% increase in
salaries and employee benefits and occupancy expenses. During the second quarter
of 2001, the Corporation recorded an expense of $930 thousand related to a newly
established incentive compensation plan for key employees. Also included in
noninterest expenses is $686 thousand of Forrest Sherer, Inc.'s expenses since
the acquisition date of May 1, 2001.
Noninterest expenses for the three months ended June 30, 2001 increased
16.2% to $13.5 million from $10.7 million reported for the same period in 2000.
Causes for this increase are the same as those identified in the previous
paragraph.
Allowance for Loan Losses
The Corporation's provision for loan losses increased to $3.0 million for the
first six months of 2001 compared to $2.0 million in the same period of 2000. At
June 30, 2001, the allowance for loan losses was 1.33% of net loans, a decrease
from 1.47% at December 31, 2000. Net chargeoffs for the first six months of 2001
were $4.5 million compared to only $.9 million for the same period of 2000. The
increased provision and chargeoffs are substantially in response to one specific
problem credit, a steel manufacturing company. Based on historical loss
experience and management's review of the current portfolio, management believes
the allowance of $17.5 million at June 30, 2001, 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 30, 2001 and December 31, 2000 follows:
(000's)
June 30, 2001 December 31, 2000
------------- -----------------
Nonaccrual loans and leases $ 7,564 $ 8,316
Renegotiated loans and leases 125 735
Ninety days past due loans and leases 6,495 5,499
------- -------
Total nonperforming loans and leases $14,184 $14,550
======= =======
Ratio of the allowance for loan losses
as a percentage of nonperforming loans and leases 123% 131%
The following loan categories comprise significant components of the
nonperforming loans at June 30, 2001 and December 31, 2000.
(000's)
June 30, 2001 December 31, 2000
------------- -----------------
Non-Accrual Loans:
1-4 family residential $1,752 23% $1,601 19%
Commercial loans 4,689 62 6,019 72
Installment loans 1,123 15 696 9
Other, various - - - -
------ ------ ------ ------
$7,564 100% $8,316 100%
====== ====== ====== ======
Past due 90 days or more:
1-4 family residential $1,805 28% $1,667 30%
Commercial loans 3,540 55 2,986 54
Installment loans 1,147 17 818 15
Other, various 3 - 28 1
------ ------ ------ ------
$6,495 100% $5,499 100%
====== ====== ====== ======
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There are no material industry concentrations within the nonperforming 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.
As outlined in Note 6, the Corporation makes limited use of derivatives to
facilitate its interest rate risk management activities. At June 30, 2001,
derivatives include a $10 million interest rate swap directly related to a
certificate of deposit special and a $50 million interest rate cap designed to
help protect net interest income should rates rise significantly in the near
term. The Corporation currently does not invest in derivative products for
short-term gain, nor is engaged in securities trading activity. The Corporation
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 and the impact of derivatives are
included in the following table.
The table below shows the Corporation's estimated earnings sensitivity
profile as of June 30, 2001. Given a 100 basis point increase in rates, net
interest income would decrease 2.83% over the next 12 months and decrease 2.82%
over the second 12 month period. A 100 basis point decrease would result in a
2.86% increase in net interest income over the next 12 months and a 3.05%
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.
Percentage Change in Net Interest Income
Basis Point ----------------------------------------
Interest Rate Change 12 months 24 months 36 months
------------------------------------------------------------------
Down 300 2.16 2.99 -3.03
Down 200 3.47 3.93 -.06
Down 100 2.86 3.05 1.07
Up 100 -2.83 -2.82 -.82
Up 200 -5.58 -5.32 -1.29
Up 300 -7.73 -6.95 -.81
The Corporation does have other assets and liabilities, which contain
embedded 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 from using these products. Management believes these
put and call options are clearly and closely related to the underlying
instruments and that they are therefore not considered derivatives. 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.
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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 $15.8
million of investments that mature throughout the coming 12 months. The
Corporation also anticipates $77.0 million of principal payments from
mortgage-backed securities. Given the current interest rate environment, the
Corporation anticipates $19.8 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
Strong earnings, unrealized gains on securities and the issuance of stock
to acquire Forrest Sherer increased shareholders' equity 21.8% to $209.8 million
as of June 30, 2001 compared to $172.3 million on June 30, 2000. Book value per
share increased 19.4% over this same period to $30.60 from $25.71. Total assets
increased 1.2% or $23.9 million from June 30, 2000. This growth was in loans,
which increased 4.0%, or $50.6 million.
The Corporation experienced a reduction in total assets of $28.3 million or
1.4% since year end. With lower fixed rates offered in the market recently, the
Corporation has sold various mortgage loans in the secondary market. Also cash
and investments were used to fund the decrease in deposits of $54.1 million
since year end of which $55.8 million represented certificates of deposits in
excess of $100 thousand.
Capital Adequacy
As of June 30, 2001, the Corporation's leverage ratio was 9.37% compared to
9.33% at December 31, 2000.
At June 30, 2001, the Corporation's total risk-based capital ratio, which
includes Tier II capital, was 14.77% compared to 15.39% at December 31, 2000.
These amounts exceed minimum regulatory capital requirements.
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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
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(Registrant)
Date: August 10, 2001 By /s/ Donald E. Smith
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Donald E. Smith, Chairman
Date: August 10, 2001 By /s/ Norman L. Lowery
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Norman L. Lowery, Vice Chairman
Date: August 10, 2001 By /s/ Michael A. Carty
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Michael A. Carty, Treasurer
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