10-Q 1 0001.txt 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 June 30, 2000 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, 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 June 30, 2000 were outstanding 6,700,349 shares without par value, of the registrant. 1 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......................9 PART II. Other Information: Signatures....................................................14 2 FIRST FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CONDITION (Dollar amounts in thousands, except per share data) June 30, December 31, 2000 1999 (Unaudited) ASSETS Cash and due from banks $69,986 $58,075 Federal funds sold and short-term investments 10,865 190 Securities, available-for-sale 591,304 594,319 Loans: Commercial, financial and agricultural 270,304 247,949 Real estate - construction 47,605 44,782 Real estate - mortgage 713,738 671,972 Installment 229,478 223,459 Lease financing 5,007 5,723 1,266,132 1,193,885 Less: Unearned income -887 -1,987 Allowance for loan losses -19,055 -17,949 1,246,190 1,173,949 Accrued interest receivable 16,418 14,703 Premises and equipment, net 26,419 26,095 Other assets 29,851 37,870 TOTAL ASSETS $1,991,033 $1,905,201 LIABILITIES AND SHAREHOLDERS' Deposits Noninterest-bearing $133,969 $148,230 Interest-bearing: Certificates of deposit of $100 or more 204,007 218,515 Other interest-bearing deposits 913,118 889,370 1,251,094 1,256,115 Short-term borrowings 122,379 63,499 Other borrowings 425,707 382,322 Other liabilities 19,596 34,583 TOTAL LIABILITIES 1,818,776 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--6,700,349 in 2000 and 6,845,418 in 1999 903 903 Additional capital 66,680 66,680 Retained earnings 133,685 125,680 Accumulated other comprehensive income : Unrealized (losses) gains on investments, net of tax -7,287 -7,819 Treasury shares at cost--525,134 in 2000 and 380,065 in 1999 -21,724 -16,762 TOTAL SHAREHOLDERS' EQUITY 172,257 168,682 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,991,033 $1,905,201 The accompanying notes are an integral part of the consolidated financial statements. 3 FIRST FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME Three Months Ended Six Months Ended June 30, June 30, 2000 1999 2000 1999 Unaudited Unaudited Unaudited Unaudited (Dollar amounts in thousands, except per share amounts) INTEREST INCOME: Loans $26,302 $23,681 $51,558 $47,115 Securities: Taxable 7,782 7,226 15,477 14,225 Tax-exempt 2,101 2,030 4,204 4,029 9,883 9,256 19,681 18,254 Other interest income 101 148 198 482 TOTAL INTEREST INCOME 36,286 33,085 71,437 65,851 INTEREST EXPENSE: Deposits 11,554 11,225 23,119 22,656 Other 7,675 5,103 14,507 9,955 TOTAL INTEREST EXPENSE 19,229 16,328 37,626 32,611 NET INTEREST INCOME 17,057 16,757 33,811 33,240 Provision for loan losses 1,189 1,078 2,049 2,560 NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 15,868 15,679 31,762 30,680 NONINTEREST INCOME Trust department income 663 589 1,438 1,326 Service charges and fees on deposit accounts 1,222 1,027 2,275 1,899 Investment security gains 143 133 143 157 Other 1,428 1,175 2,285 2,389 3,456 2,924 6,141 5,771 NONINTEREST EXPENSES Salaries and employee 5,980 6,195 11,879 12,259 Occupancy expense 692 731 1,464 1,466 Equipment expense 849 865 1,809 1,748 Other 3,139 3,203 6,334 6,406 10,660 10,994 21,486 21,879 INCOME BEFORE INCOME TAXES EXPENSE 8,664 7,609 16,417 14,572 Income Tax Expense 2,583 2,223 4,921 4,194 NET INCOME $6,081 $5,386 $11,496 $10,378 EARNINGS PER SHARE: NET INCOME $0.90 $0.77 $1.70 $1.48 Weighted average number of shares outstanding 6,729 6,975 6,765 7,010 The accompanying notes are an integral part of the consolidated financial statements. 4 FIRST FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME Three Months Ended June 30, 2000 and 1999
Accumulated Other (Dollar amounts in thousands, Common Additional Retained Comprehensive Treasury except per share data) Stock Capital Earnings Income Stock Total 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 Balance, April 1, 1999 $903 $66,680 $115,558 $5,988 $-11,849 $177,280 Comprehensive income: Net income 5,386 5,386 Change in net unrealized gains/(losses) on securities, net of tax -7,529 -7,529 Total comprehensive income -2,143 Cash dividends, $.44 per share -3,069 -3,069 ______________________________________________________________________ Balance, June 30, 1999 $903 $66,680 $117,875 $-1,541 $-11,849 $172,068
The accompanying notes are an integral part of the consolidated financial statements. 5 FIRST FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME Six Months Ended June 30, 2000 and 1999
Accumulated Other (Dollar amounts in thousands, Common Additional Retained Comprehensive Treasury except per share data) Stock Capital Earnings Income Stock Total 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 Balance, January 1, 1999 $903 $66,680 $110,566 $8,123 $-4,089 $182,183 Comprehensive income: Net income 10,378 10,378 Change in net unrealized gains/(losses) on securities, net of tax -9,664 -9,664 Total comprehensive income 714 Cash dividends, $.44 per share -3,069 -3,069 Treasury stock purchase -7,760 -7,760 ______________________________________________________________________ Balance, June 30, 1999 $903 $66,680 $117,875 $-1,541 $-11,849 $172,068
The accompanying notes are an integral part of the consolidated financial statements. 6 FIRST FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended June 30, 2000 1999 (Unaudited) (Dollar amounts in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $11,496 $10,378 Adjustment to reconcile net income to net cash provided by operating activities: Net amortization of discounts on investments -1,096 -133 Provision for loan losses 2,049 2,560 Securities gains 0 -157 Provision for depreciation and amortization 1,628 1,358 Other, net -9,565 3,439 NET CASH PROVIDED/(USED) BY OPERATING ACTIVITIES 4,512 17,445 CASH FLOWS FROM INVESTING ACTIVITIES: Sales of available-for-sale securities 116 38,281 Maturities of available-for-sale securities 25,085 117,820 Purchases of available-for-sale securities -20,272 -121,925 Loans made to customers, net of repayments -73,828 -42,602 Net increase in federal funds sold -10,675 100 Additions to premises and equipment -1,867 -1,260 NET CASH PROVIDED/(USED) BY INVESTING ACTIVITIES -81,441 -9,586 CASH FLOWS FROM FINANCING ACTIVITIES: Net change in deposits -5,021 6,583 Net increase (decrease) in short-term borrowings 58,880 -10,114 Dividends paid -3,442 -3,154 Purchase of treasury stock -4,962 -7,760 Proceeds from other borrowings 217,746 40,122 Repayments on other borrowings -174,361 -24,432 NET CASH PROVIDED/(USED) BY FINANCING ACTIVITIES 88,840 1,245 NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS 11,911 9,104 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 58,075 54,877 CASH AND CASH EQUIVALENTS, END OF PERIOD $69,986 $63,981 SUPPLEMENTAL DISCLOSURES OF CASH FLOW Cash paid during the period for interest $37,996 $33,140 Income taxes paid $5,958 $3,689 The accompanying notes are an integral part of the consolidated financial statements. 7 FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The accompanying June 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) June 30, 2000 1999 Impaired loans with related allowance for loan losses calculated under SFAS No. 114.......... $2,395 $2,902 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, 2000 are shown below. All securities are classified as available-for-sale. (000's) June 30, 2000 Amortized Cost Fair Value United States Government $181,317 $174,976 United States Government Agencies 208,329 200,776 State Municipal 166,513 165,256 Other 51,397 50,296 $607,556 $591,304 8 4. Short-Term Borrowings Period-end short-term borrowings were comprised of the following: June 30, December 31, 2000 1999 Federal Funds Purchased $103,970 $19,559 Repurchase Agreements 13,747 35,718 Note Payable - U.S. Government 4,662 8,222 $122,379 $63,499 5. Other Borrowings Long term borrowings at period end are summarized as follows: June 30, December 31, 2000, 1999 FHLB $419,101 $375,713 City of Terre Haute, Indiana Economic Development Revenue bonds 6,600 6,600 Other 6 9 $425,707 $382,322 6. Changes in Shareholders' Equity Under the Corporation's common stock repurchase program announced in November, 1999, the Corporation has repurchased 525,134 shares as of June 30, 2000 compared to 380,065 shares as of December 31, 1999. 9 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 Net income of $11.5 million was up 10.6% from the $10.4 million reported in 1999. Basic earnings per share was up 14.9% from the $1.48 reported in the second quarter of 1999 to $1.70 per share for the same period in 2000. The increased earnings are the result of a 1.2% increase in net interest income and a 20% decrease in the provision for loan losses from the same period for 1999. For the three month period ended June 30, 2000, net income of $6.1 million was 12.9% higher than the $5.4 million reported in 1999. Earnings per share of $.90 for the second quarter is 16.9% higher than the $.77 reported for the second quarter of 1999. Increased net interest income and a slight reduction in non-interest expense is the primary reason for the improved performance. 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 incurred for deposits and other sources of funds. Net interest income increased to $33.8 million in the first six months of 2000 from $33.2 million in the same period of 1999 due to an increase in earning asset volume while the net interest margin decreased to 3.97% in 2000 from 4.09% in the same period of 1999. This decrease resulted from a shift in the liability mix to higher cost sources. Net interest income increased to $17.1 million in the second quarter of 2000, from the $16.8 million reported in 1999, while the net interest margin decreased to 3.95% in the second quarter of 2000, from 4.11% reported in 1999. Noninterest Income Noninterest income for the six month period ending June 30, 2000, as compared to the same period of 1999, increased $.4 million or 6.4%. The increase was driven by higher service charges and fees on deposit products. Noninterest income for the second quarter increased by 18.2% to $3.5 million from the $2.9 million reported in 1999. The increase is the result of additional fee income generated through the sale of products and services. 10 Noninterest Expenses Noninterest expenses for the first six months of 2000, as compared to the same period of 1999, decreased $.4 million due mainly to a 3.1% decrease in salaries and employee benefits. Noninterest expenses for the second quarter were $10.7 million, $.3 million less than the $11.0 million reported for the same period of 1999. All categories of other expenses were slightly lower for the three month period ended June 30, 2000. Allowance for Loan Losses The Corporation's provision for loan losses decreased to $2 million for the first six months of 2000 compared to $2.6 million in the same period of 1999. At June 30, 2000, the allowance for loan losses was 1.53% of net loans. This compares with an allowance of 1.50% at December 31, 1999. Net chargeoffs for the first six months of 1999 were $.9 million compared to $1.2 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 $19.1 million at June 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 June, 2000 and December 31, 1999 follows: (000's) (000's) June 30, 2000 December 31, 1999 Nonaccrual loans and leases $3,864 $2,879 Renegotiated loans and leases 239 959 Ninety days past due loans and leases 4,311 5,229 Total nonperforming loans and leases $8,414 $9,067 Ratio of the allowance for loan losses as a percentage of nonperforming loans and leases 226% 198% 11 The following loan categories comprise significant components of the underperforming loans at June 30, 2000 and December 31, 1999. Non-Accrual Loans: (000's) (000's) June 30, 2000 December 31, 1999 1-4 family residential $1,203 31% $1,617 56% Commercial loans 2,037 53 697 24 Installment loans 624 16 544 19 Other, various 0 0 21 1 $3,864 100% $2,879 100% Past due 90 days or more: 1-4 family residential $1,668 39% $2,927 56% Commercial loans 1,971 46 1,306 25 Installment loans 661 15 830 16 Other, various 11 0 166 3 $4,311 100% $5,229 100% There are no material industry concentrations within the underperforming 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. 12 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 June 30, 2000. Given a 100 basis point increase in rates, net interest income would decrease 2.18% over the next 12 months and decrease 2.52% over the second 12 month period. A 100 basis point decrease would result in a .45% decrease in net interest income over the next 12 months and a .20% 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. Basis Point Percentage Change in Net Interest Income Interest Rate Change 12 months 24 months 36 months Down 300 -2.42% -1.33% -7.05% Down 200 -1.47 -.84 -4.64 Down 100 -.45 -.20 -2.10 Up 100 -2.18 -2.52 -.62 Up 200 -4.61 -5.36 -1.52 Up 300 -7.83 -9.15 -3.39 The Corporation uses products which contain 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 by using these products. 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 $9.1 million of investments that mature throughout the coming 12 months. The Corporation also anticipates $2.7 million of principal payments from mortgage- backed securities. Given the current interest rate environment, the Corporation anticipates $1.6 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 $85.8 million, or 4.5% since year end. This compares to the asset reduction of $3.6 million or a .2% for the same period of 1999. This growth was the result of an increase in net loans outstanding of $72.2 million and increased federal funds sold and short-term investments of $10.7 million. The growth was funded by an 11.4% increase, or $43.4 million, Federal Home Loan Bank advances and a $58.9 million increase in short-term borrowings primarily federal funds purchased. Capital Adequacy As of June 30, 2000, the Corporation's leverage ratio was 9.15% compared to 9.36% at December 31, 1999. At June 30, 2000, the Corporation's total capital, which includes Tier II capital, was 15.49% compared to 15.91% at December 31, 1999. These amounts exceed minimum regulatory capital requirements. 13 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: August 11, 2000 By (Signature) Donald E. Smith, Chairman Date: August 11, 2000 By (Signature) Norman L. Lowery, Vice Chairman Date: August 11, 2000 By (Signature) Michael A. Carty, Treasurer 14