THFF

Business Context and Reporting Period

Company: First Financial Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 1998
Business Overview: A financial holding company operating nine subsidiary banks in Indiana. The company completed the acquisition of Morris Plan Company of Terre Haute, Inc. on March 16, 1998. Due to a subsequent stock repurchase program, this acquisition is being accounted for as a purchase, resulting in $6.5 million of goodwill to be amortized over 15 years.

Key Financial Metrics

Capital Adequacy: Leverage ratio was 9.86% and total capital ratio was 17.26% as of September 30, 1998, exceeding regulatory minimums.

Material Changes vs. Prior Period

• Asset Growth: Total assets increased by approximately $127 million (7.8%) compared to December 31, 1997, driven primarily by a $81 million increase in the loan portfolio.
• Profitability: Net income for the nine months ended September 30, 1998, was $13.53 million, a slight increase of $0.11 million over the same period in 1997. However, basic earnings per share decreased from $1.91 to $1.87 due to an increase in the weighted average number of shares outstanding.
• Loan Losses: The provision for loan losses increased to $4.3 million for the nine-month period (up from $4.0 million in 1997). Net charge-offs rose to $2.4 million from $1.6 million, attributed to higher volume of charge-offs in problem consumer loans.
• Allowance Ratio: The allowance for loan losses increased to 1.50% of net loans (from 1.34% at year-end 1997) to cover the increased risk.
• Non-Performing Assets: Total underperforming assets increased to $11.65 million from $10.50 million at year-end 1997. Non-accrual loans rose to $4.08 million.

Outlook, Risks, and Management Commentary

• Interest Rate Risk: Management identifies interest rate risk as the most significant market risk. The company does not use derivative products. Simulations indicate that a 100 basis point increase in rates would increase net interest income by 2.18% over the next 12 months, while a 100 basis point decrease would reduce it by 4.07%.
• Liquidity: The company anticipates adequate liquidity to meet obligations, supported by $14.0 million in investments maturing within 12 months, $95.5 million in expected principal payments from mortgage-backed securities, and $70.8 million in federal agency securities expected to be called.
• Year 2000 Compliance: The company is in the validation stage of its Year 2000 program. Total estimated costs are $760,000, with $100,000 incurred through September 30, 1998. Management does not expect a material effect on financial condition but acknowledges risks related to third-party suppliers.
• Accounting Changes: The company adopted SFAS No. 130 (Reporting Comprehensive Income) effective January 1, 1998. Comprehensive income for the nine months ended September 30, 1998, was $15.34 million.

Investor Verification Checklist

• Loan Quality Trends: Verify the sustainability of the increase in net charge-offs ($2.4M vs $1.6M) and the adequacy of the 1.50% allowance ratio given the rise in consumer loan problems.
• Interest Rate Sensitivity: Assess the impact of the current interest rate environment on net interest income, noting the asymmetry in the earnings sensitivity profile (larger downside risk from rate decreases).
• Acquisition Integration: Monitor the amortization impact of the $6.5 million goodwill from the Morris Plan acquisition and its effect on future earnings.
• Year 2000 Execution: Confirm the completion of validation testing for core applications (Fiserv-CBS) and the readiness of contingency plans by the end of 1998.
• Share Count Dilution: Review the impact of the increased share count (7.225 million outstanding) on future earnings per share growth.