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, 2000
<PAGE>
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, 2000
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, 2000 were outstanding 6,694,237 shares without par value, of
the registrant.
1 <PAGE>
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.......................10
PART II. Other Information:
Signatures...........................................................14
2 <PAGE>
FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CONDITION
(Dollar amounts in thousands, except per share data)
September 30, December 31,
2000 1999
(Unaudited)
ASSETS
Cash and due from banks $75,310 $58,075
Federal funds sold and short-term investments 0 190
Securities, available-for-sale 581,351 594,319
Loans:
Commercial, financial and agricultural 272,949 247,949
Real estate - construction 47,392 44,782
Real estate - mortgage 732,335 671,972
Installment 232,197 223,459
Lease financing 4,894 5,723
1,289,767 1,193,885
Less:
Unearned income -858 -1,987
Allowance for loan losses -19,367 -17,949
1,269,542 1,173,949
Accrued interest receivable 17,194 14,703
Premises and equipment, net 26,195 26,095
Other assets 29,692 37,870
TOTAL ASSETS $1,999,284 $1,905,201
LIABILITIES AND SHAREHOLDERS'
Deposits:
Noninterest-bearing $141,764 $148,230
Interest-bearing:
Certificates of deposit of $100 or more 235,490 218,515
Other interest-bearing deposits 904,601 889,370
1,281,855 1,256,115
Short-term borrowings 73,464 63,499
Other borrowings 445,226 382,322
Other liabilities 16,902 34,583
TOTAL LIABILITIES 1,817,447 1,736,519
Shareholders' equity:
Common stock, $.125 stated value per share;
Authorized shares--40,000,000
Issued shares--7,225,483 shares
in 2000 and 1999
Outstanding shares--6,694,237 in 2000
and 6,845,418 in 1999 903 903
Additional capital 66,680 66,680
Retained earnings 139,659 125,680
Accumulated other comprehensive income/(loss):
Unrealized gains/(losses) on
investments, net of tax -3,492 -7,819
Treasury shares at cost--531,246 in 2000
and 380,065 in 1999 -21,913 -16,762
TOTAL SHAREHOLDERS' EQUITY 181,837 168,682
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,999,284 $1,905,201
The accompanying notes are an integral part of the consolidated financial
statements.
3 <PAGE>
FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
Unaudited Unaudited Unaudited Unaudited
(Dollar amounts in thousands, except per share amounts)
INTEREST INCOME:
Loans $27,374 $24,772 $78,932 $71,887
Securities:
Taxable 7,627 7,104 23,104 21,329
Tax-exempt 2,085 2,001 6,289 6,030
9,712 9,105 29,393 27,359
Other interest income 48 23 246 505
TOTAL INTEREST INCOME 37,134 33,900 108,571 99,751
INTEREST EXPENSE:
Deposits 12,721 11,197 35,840 33,853
Other 8,210 5,495 22,717 15,450
TOTAL INTEREST EXPENSE 20,931 16,692 58,557 49,303
NET INTEREST INCOME 16,203 17,208 50,014 50,448
Provision for loan losses 1,140 1,084 3,189 3,644
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 15,063 16,124 46,825 46,804
NONINTEREST INCOME
Trust department 653 646 2,091 1,972
Service charges and fees
on deposits 1,193 1,009 3,468 2,859
Investment security
gains/(losses) -42 37 101 194
Other 2,040 958 4,325 3,396
3,844 2,650 9,985 8,421
NONINTEREST EXPENSES
Salaries and employee benefits 5,786 6,252 17,665 18,511
Occupancy expense 768 726 2,232 2,192
Equipment expense 943 941 2,752 2,689
Other 3,099 3,035 9,433 9,441
10,596 10,954 32,082 32,833
INCOME BEFORE INCOME TAXES
EXPENSE 8,311 7,820 24,728 22,392
Income Tax Expense 2,337 2,300 7,258 6,494
NET INCOME $5,974 $5,520 $17,470 $15,898
EARNINGS PER SHARE:
NET INCOME $0.89 $0.80 $2.59 $2.28
Weighted average number of
shares outstanding 6,696 6,942 6,742 6,988
The accompanying notes are an integral part of the consolidated financial
statements.
4 <PAGE>
<TABLE>
FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
Three Months Ended
September 30, 2000 and 1999
<CAPTION>
Accumulated
Other
(Dollar amounts in thousands, Common Additional Retained Comprehensive Treasury
except per share data) Stock Capital Earnings Income/(Loss) Stock Total
<S> <C> <C> <C> <C> <C> <C>
Balance, July 1, 2000 $903 $66,680 $133,685 $-7,287 $-21,724 $172,257
Comprehensive income:
Net income 5,974 5,974
Change in net unrealized
gains/(losses) on securities,
net of tax 3,795 3,795
Total comprehensive income 9,769
Treasury stock purchase -189 -189
____________________________________________________________________
Balance, September 30, 2000 $903 $66,680 $139,659 $-3,492 $-21,913 $181,837
Balance, July 1, 1999 $903 $66,680 $117,875 $-1,541 $-11,849 $172,068
Comprehensive income:
Net income 5,520 5,520
Change in net unrealized
gains/(losses) on securities,
net of tax -3,278 -3,278
Total comprehensive income 2,242
Treasury stock purchase -2,047 -2,047
____________________________________________________________________
Balance, September 30, 1999 $903 $66,680 $123,395 $-4,819 $-13,896 $172,263
The accompanying notes are an integral part of the consolidated financial statements.
5 <PAGE>
FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
Nine Months Ended
September 30, 2000 and 1999
Accumulated
Other
(Dollar amounts in thousands, Common Additional Retained Comprehensive Treasury
except per share data) Stock Capital Earnings Income/(Loss) Stock Total
Balance, January 1, 2000 $903 $66,680 $125,680 $-7,819 $-16,762 $168,682
Comprehensive income:
Net income 17,470 17,470
Change in net unrealized
gains/(losses) on securities,
net of tax 4,327 4,327
Total comprehensive income 21,797
Cash dividends, $.52 per share -3,491 -3,491
Treasury stock purchase -5,151 -5,151
____________________________________________________________________
Balance, September 30, 2000 $903 $66,680 $139,659 $-3,492 $-21,913 $181,837
Balance, January 1, 1999 $903 $66,680 $110,566 $8,123 $-4,089 $182,183
Comprehensive income:
Net income 15,898 15,898
Change in net unrealized
gains/(losses) on securities,
net of tax -12,942 -12,942
Total comprehensive income 2,956
Cash dividends, $.44 per share -3,069 -3,069
Treasury stock purchase -9,807 -9,807
____________________________________________________________________
Balance, September 30, 1999 $903 $66,680 $123,395 $-4,819 $-13,896 $172,263
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
6 <PAGE>
FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
2000 1999
(Unaudited)
(Dollar amounts in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $17,470 $15,898
Adjustment to reconcile net income to net cash
provided by operating activities:
Net amortization of discounts on investments -1,668 161
Provision for loan losses 3,189 3,644
Securities gains -101 -194
Provision for depreciation and amortization 2,487 2,072
Other, net -11,789 1,135
NET CASH PROVIDED/(USED) BY OPERATING ACTIVITIES 9,588 22,716
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of available-for-sale securities 16,895 85,550
Maturities of available-for-sale securities 36,760 131,850
Purchases of available-for-sale securities -32,260 -166,321
Loans made to customers, net of repayments -98,003 -85,022
Net change in federal funds sold 190 -3,750
Additions to premises and equipment -2,460 -2,729
NET CASH PROVIDED/(USED) BY INVESTING ACTIVITIES -78,878 -40,422
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits 25,740 -27,186
Net change in short-term borrowings 9,965 -21,020
Minority interest investment in subsidiary 0 400
Dividends paid -6,933 -6,224
Purchase of treasury stock -5,151 -9,807
Proceeds from other borrowings 386,287 224,167
Repayments on other borrowings -323,383 -138,753
NET CASH PROVIDED/(USED) BY FINANCING ACTIVITIES 86,525 21,577
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 17,235 3,871
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 58,075 54,877
CASH AND CASH EQUIVALENTS, END OF PERIOD $75,310 $58,748
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest $58,624 $49,508
Income taxes paid $8,153 $7,715
The accompanying notes are an integral part of the consolidated financial
statements.
7 <PAGE>
FIRST FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying September 30, 2000 and 1999 consolidated financial statements
are unaudited. The December 31, 1999 consolidated financial statements are as
reported in the First Financial Corporation (the Corporation) 1999 annual
report. The following notes should be read together with notes to the
consolidated financial statements included in the 1999 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.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. SFAS No. 133, which will be adopted by
the Corporation in 2001, is not anticipated to have a material impact on the
Corporation's financial position or results of operations.
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 30,
2000 1999
Impaired loans with related allowance for
loan losses calculated under SFAS No. 114....... $3,984 $2,176
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 September 30,
2000 are shown below. All securities are classified as available-for-sale.
(000's)
September 30, 2000
Amortized Cost Fair Value
United States Government $167,664 $163,250
United States Government Agencies 200,818 195,653
State and Municipal 165,185 165,635
Other 57,813 56,813
$591,480 $581,351
8 <PAGE>
4. Short-Term Borrowings
Period-end short-term borrowings were comprised of the following:
(000's)
September 30, December 31,
2000 1999
Federal Funds Purchased $60,576 $19,559
Repurchase Agreements 7,250 35,718
Note Payable - U.S. Government 5,638 8,222
$73,464 $63,499
5. Other Borrowings
Other borrowings at period end are summarized as follows:
(000's)
September 30, December 31,
2000 1999
FHLB Advances $438,622 $375,713
City of Terre Haute, Indiana
Economic Development Revenue bonds 6,600 6,600
Other 4 9
$445,226 $382,322
6. Changes in Shareholders' Equity
Under the Corporation's common stock repurchase program announced in November,
1999, the Corporation has repurchased 531,246 shares as of September 30, 2000
compared to 380,065 shares as of December 31, 1999.
9 <PAGE>
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 1999.
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
For the nine months ended September 30, 2000, net income increased to $17.5
million from $15.9 million, a 9.9% improvement from the same period in 1999.
Basic earnings per share increased to $2.59 for the first three quarters of 2000
compared to $2.28 for 1999, a 13.6% improvement.
For the three months ended September 30, 2000, net income of $6.0 million was
8.2% higher than the $5.5 million reported in 1999 and earnings per share
increased to $.89, 11.3% higher than the $.80 reported for the third quarter
of 1999.
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
decreased to $50.0 million in the first nine months of 2000 from $50.4 million
in the same period of 1999. This decrease was the result of an inverted yield
curve and the purchase of treasury shares.
The inverted yield curve has resulted in the Corporation paying higher rates
to obtain the short-term liabilities which have been necessary to fund growth.
During the nine months ended September 30, 2000, loans increased $95.9 million
and total assets climbed 4.9% to $1.99 billion while deposits increased 2.0% or
$25.7 million. Also, through the nine months ended September, 30, 2000, the
Corporation has purchased treasury stock for $5.2 million. These funds were
extracted from the earning pool, lowering net interest income and increasing
earnings per share.
The impact of these factors is particularly evident in the third quarter's
results as net interest income decreased to $16.2 million from the $17.2 million
reported in 1999, while the net interest margin decreased to 3.73% in the third
quarter of 2000, from 4.22% reported in 1999. Management expects the fourth
quarter will yield similar results as growth will continue to be financed
through wholesale funding and treasury shares will continue to be purchased.
Noninterest Income
Noninterest income for the nine month period ending September 30, 2000, as
compared to the same period of 1999, increased $1.6 million, or 18.6%. The
increase was driven by higher service charges and fees on deposit products.
10 <PAGE>
Noninterest income for the third quarter increased by 45.1% to $3.8 million
from the $2.6 million reported in 1999. The increase is the result of
additional fee income generated by higher service charges and fees on deposit
products and by increased revenue from our financial services department.
Noninterest Expenses
Noninterest expenses for the first nine months of 2000, as compared to the
same period of 1999, decreased $.8 million due mainly to a 4.6% decrease in
salaries and employee benefits.
Noninterest expenses for the third quarter were $10.6 million, $.4 million
less than the $11.0 million reported for the same period of 1999.
Allowance for Loan Losses
The Corporation's provision for loan losses decreased to $3.2 million for
the first nine months of 2000 compared to $3.6 million in the same period of
1999. At September 30, 2000, the allowance for loan losses was 1.50% of net
loans, the same level as December 31, 1999. Net chargeoffs for the first nine
months of 2000 were $1.8 million compared to $2.2 million for the same period
of 1999. The ratio of annual net chargeoffs to average loans outstanding for
the five years ended December 31, 1999, was .33%. With this experience and
based on management's review of the portfolio, management believes the allowance
of $19.4 million at September 30, 2000, 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
September, 2000 and December 31, 1999 follows:
(000's) (000's)
September 30, 2000 December 31, 1999
Nonaccrual loans and leases $4,470 $2,879
Renegotiated loans and leases 0 959
Ninety days past due loans and leases 5,993 5,229
Total nonperforming loans and leases $10,463 $9,067
Ratio of the allowance for loan
losses as a percentage of
nonperforming loans and leases 185% 198%
11 <PAGE>
The following loan categories comprise significant components of the
nonperforming loans at September 30, 2000 and December 31, 1999.
Non-Accrual Loans:
(000's) (000's)
September 30, 2000 December 31, 1999
1-4 family residential $1,603 36% $1,617 56%
Commercial loans 2,275 51 697 24
Installment loans 592 13 544 19
Other, various 0 0 21 1
$4,470 100% $2,879 100%
Past due 90 days or more:
1-4 family residential $1,745 29% $2,927 56%
Commercial loans 3,262 55 1,306 25
Installment loans 965 16 830 16
Other, various 21 0 166 3
$5,993 100% $5,229 100%
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 throughsiiddiary
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.
12 <PAGE>
In its interest rate risk management, the Corporation currently does not
utilize any derivative products and is not engaged in securities trading
activity. The Corporation instead 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 is included in the following table.
The table below shows the Corporation's estimated earnings sensitivity
profile as of September 30, 2000. Given a 100 basis point increase in rates,
net interest income would decrease 5.18% over the next 12 months and decrease
5.38% over the second 12 month period. A 100 basis point decrease would result
in a 2.54% increase in net interest income over the next 12 months and a 2.54%
increase over the second 12 month period. 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 2.04% 2.49% 2.09%
Down 200 3.27 3.43 .38
Down 100 2.54 2.54 1.03
Up 100 -5.18 -5.38 -3.81
Up 200 -10.43 -10.95 -7.78
Up 300 -15.87 -16.70 -11.69
The Corporation does have 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
are not considered derivatives under SFAS 133. 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.
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 $9.3
million of investments that mature throughout the coming 12 months. The
Corporation also anticipates $31.8 million of principal payments from mortgage-
backed securities. Given the current interest rate environment, the Corporation
anticipates $23.9 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
The Corporation experienced asset growth of $94.1 million, or 4.9% since year
end. This compares to the asset reduction of $3.6 million or .2% for the same
period of 1999. This growth was the result of an increase in net loans
outstanding of $95.9 million. The growth was funded by a 16.5% increase, or
$62.9 million, in Federal Home Loan Bank advances and a $10.0 million increase
in short-term borrowings, primarily federal funds purchased.
Capital Adequacy
As of September 30, 2000, the Corporation's leverage ratio was 9.26% compared
to 9.36% at December 31, 1999.
At September 30, 2000, the Corporation's total risk-based capital ratio, which
includes Tier II capital, was 15.60% compared to 15.91% at December 31, 1999.
These amounts exceed minimum regulatory capital requirements.
13 <PAGE>
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 10, 2000 By (Signature)
Donald E. Smith, Chairman
Date: November 10, 2000 By (Signature)
Norman L. Lowery, Vice Chairman
Date: November 10, 2000 By (Signature)
Michael A. Carty, Treasurer
14 <PAGE>
