SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended June 30, 2005
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Commission File Number 0-16759
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FIRST FINANCIAL CORPORATION
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(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
(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 .
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No .
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As of August 1, 2005 there were outstanding 13,403,601 shares of common stock.
FIRST FINANCIAL CORPORATION
FORM 10-Q
INDEX
Page No.
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PART I. Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets.............................................................................3
Consolidated Statements of Income.......................................................................4
Consolidated Statements of Shareholders' Equity.........................................................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
Item 3. Quantitative and Qualitative Disclosures about Market Risk......................................11
Item 4. Controls and Procedures.........................................................................12
PART II. Other Information:
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.....................................13
Item 4. Submission of Matters to a Vote of Security Holders.............................................13
Item 6. Exhibits........................................................................................13
Signatures...............................................................................................14
2
Part I -Financial Information
Item 1. Financial Statements
FIRST FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands, except per share data)
June 30, December 31,
2005 2004
---- ----
(Unaudited)
ASSETS
Cash and due from banks $ 82,014 $ 94,928
Federal funds sold and short-term investments 6,302 5,400
Securities available-for-sale 496,967 507,990
Loans:
Commercial, financial and agricultural 405,660 401,724
Real estate - construction 31,946 32,810
Real estate - mortgage 741,685 753,826
Installment 279,233 272,261
Lease financing 2,964 3,658
----------- -----------
1,461,488 1,464,279
Less:
Unearned income (357) (408)
Allowance for loan losses (17,564) (19,918)
----------- -----------
1,443,567 1,443,953
Accrued interest receivable 11,808 12,016
Premises and equipment, net 30,592 31,154
Bank-owned life insurance 50,081 49,177
Goodwill 7,102 7,102
Other intangible assets 2,819 3,093
Other real estate owned 3,285 3,262
Other assets 23,222 25,917
----------- -----------
TOTAL ASSETS $ 2,157,759 $ 2,183,992
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 171,456 $ 145,852
Interest-bearing:
Certificates of deposit of $100 or more 201,929 184,604
Other interest-bearing deposits 1,116,223 1,112,665
----------- -----------
1,489,608 1,443,121
Short-term borrowings 7,808 75,527
Other borrowings 362,156 362,486
Other liabilities 29,642 34,523
----------- -----------
TOTAL LIABILITIES 1,889,214 1,915,657
----------- -----------
Shareholders' equity:
Common stock, $.125 stated value per share;
Authorized shares--40,000,000
Issued shares-14,450,966
Outstanding shares--13,403,601 in 2005 and 13,535,770 in 2004 1,806 1,806
Additional paid-in capital 67,519 67,519
Retained earnings 217,562 211,623
Accumulated other comprehensive income 6,413 8,357
Treasury shares, at cost 1,047,365 in 2005 and 915,196 in 2004 (24,755) (20,970)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 268,545 268,335
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,157,759 $ 2,183,992
=========== ===========
See accompanying notes.
3
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,
2005 2004 2005 2004
------- ------- ------- -------
(Unaudited) (Unaudited)
INTEREST INCOME:
Loans, including related fees $23,931 $22,744 $47,225 $45,666
Securities:
Taxable 3,990 3,816 7,747 7,725
Tax-exempt 1,518 1,797 3,170 3,638
Other 337 468 999 1,072
------- ------- ------- -------
TOTAL INTEREST INCOME 29,776 28,825 59,141 58,101
------- ------- ------- -------
INTEREST EXPENSE:
Deposits 6,492 5,853 12,445 11,926
Short-term borrowings 93 260 291 484
Other borrowings 4,913 4,959 9,784 10,005
------- ------- ------- -------
TOTAL INTEREST EXPENSE 11,498 11,072 22,520 22,415
======= ------- ------- -------
NET INTEREST INCOME 18,278 17,753 36,621 35,686
Provision for loan losses 3,783 1,923 6,006 3,846
------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 14,495 15,830 30,615 31,840
------- ------- ------- -------
NON-INTEREST INCOME:
Trust and financial services 881 1,011 1,856 2,024
Service charges and fees on deposit accounts 2,974 2,964 5,579 5,620
Other service charges and fees 1,403 1,838 3,020 3,368
Securities gains/ (losses), net 19 410 25 423
Insurance commissions 1,538 1,472 2,877 2,860
Gain on sale of mortgage loans 436 132 623 543
Gain on life insurance benefit - - - 4,113
Other 556 494 1,559 1,947
------- ------- ------- -------
TOTAL NON-INTEREST INCOME 7,807 8,321 15,539 20,898
------- ------- ------- -------
NON-INTEREST EXPENSES:
Salaries and employee benefits 9,620 9,396 18,884 18,749
Occupancy expense 923 1,015 1,912 1,985
Equipment expense 921 843 1,839 1,677
Other 4,313 4,618 8,483 8,993
------- ------- ------- -------
TOTAL NON-INTEREST EXPENSE 15,777 15,872 31,118 31,404
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 6,525 8,279 15,036 21,334
Provision for income taxes 1,533 1,950 3,733 4,320
------- ------- ------- -------
NET INCOME $ 4,992 $ 6,329 $11,303 $17,014
======= ======= ======= =======
EARNINGS PER SHARE:
Basic and Diluted $ 0.37 $ 0.47 $ 0.84 $ 1.26
======= ======= ======= =======
Dividends per share $ 0.40 $ 0.39 $ 0.40 $ 0.39
======= ======= ======= =======
Weighted average number
of shares outstanding (in thousands) 13,456 13,517 13,488 13,537
======= ======= ======= =======
See accompanying notes
4
FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Three Months Ended
June 30, 2005 and 2004
(Dollar amounts in thousands, except per share data)
(Unaudited)
Accumulated
Additional Other
Common Paid-in Retained Comprehensive Treasury
Stock Capital Earnings Income/(Loss) Stock Total
Balance, April 1, 2005 $ 1,806 $ 67,519 $217,934 $ 5,252 $(22,337) $270,174
Comprehensive income:
Net income 4,992 4,992
Change in net unrealized
gains/ (losses) on securities
available-for-sale 1,161 1,161
--------
Total comprehensive income 6,153
Cash dividends, $.40 per share (5,364) (5,364)
Treasury stock purchase (2,418) (2,418)
-------- -------- -------- -------- -------- --------
Balance, June 30, 2005 $ 1,806 $ 67,519 $217,562 $ 6,413 $(24,755) $268,545
======== ======== ======== ======== ======== ========
Balance, April 1, 2004 $ 1,806 $ 67,181 $204,979 $ 13,006 $(20,839) $266,133
Comprehensive income:
Net income 6,329 6,329
Change in net unrealized
gains/ (losses) on securities
available-for-sale (6,412) (6,412)
--------
Total comprehensive income/(loss) (83)
Cash dividends, $.39 per share (5,265) (5,265)
Treasury stock purchase (909) (909)
-------- -------- -------- -------- -------- --------
Balance, June 30, 2004 $ 1,806 $ 67,181 $206,043 $ 6,594 $(21,748) $259,876
======== ======== ======== ======== ======== ========
See accompanying notes.
5
FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Six Months Ended
June 30, 2005, and 2004
(Dollar amounts in thousands, except per share data)
(Unaudited)
Accumulated
Additional Other
Common Paid-in Retained Comprehensive Treasury
Stock Capital Earnings Income/(Loss) Stock Total
Balance, January 1, 2005 $ 1,806 $ 67,519 $211,623 $ 8,357 $(20,970) $268,335
Comprehensive income:
Net income 11,303 11,303
Change in net unrealized
gains/ (losses) on securities
available-for-sale (1,944) (1,944)
--------
Total comprehensive income 9,359
Cash dividends, $.40 per share (5,364) (5,364)
Treasury stock purchase (3,785) (3,785)
-------- -------- -------- -------- -------- --------
Balance, June 30, 2005 $ 1,806 $ 67,519 $217,562 $ 6,413 $(24,755) $268,545
======== ======== ======== ======== ======== ========
Balance, January 1, 2004 $ 1,806 $ 67,181 $194,294 $ 11,463 $(19,465) $255,279
Comprehensive income
Net income 17,014 17,014
Change in net unrealized
gains/ (losses) on securities
available-for-sale (4,869) (4,869)
--------
Total comprehensive income 12,145
Cash dividends, $.39 per share (5,265) (5,265)
Treasury stock purchase (2,283) (2,283)
-------- -------- -------- -------- -------- --------
Balance, June 30, 2004 $ 1,806 $ 67,181 $206,043 $ 6,594 $(21,748) $259,876
======== ======== ======== ======== ======== ========
</Table>
See accompanying notes.
6
FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands, except per share data)
Six Months Ended
June 30,
2005 2004
---- ----
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 11,303 $ 17,014
Adjustments to reconcile net income to net cash
provided by operating activities:
Net amortization (accretion) of premiums and discounts on investments (362) 1,039
Provision for loan losses 6,006 3,846
Securities (gains), net (25) (423)
Depreciation and amortization 1,672 1,500
Other, net (1,154) (4,029)
-------- --------
NET CASH FROM OPERATING ACTIVITIES 17,440 18,947
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of securities available-for-sale 2,234 24,857
Maturities and principal reductions on securities available-for-sale 66,756 37,187
Purchases of securities available-for-sale (60,820) (38,040)
Loans made to customers, net of repayments (6,025) (33,251)
Net change in federal funds sold (902) (900)
Proceeds from life insurance benefit - 7,267
Additions to premises and equipment (836) (2,962)
-------- --------
NET CASH FROM INVESTING ACTIVITIES 407 (5,842)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits 46,487 (49,299)
Net change in short-term borrowings (67,719) 35,629
Dividends paid (5,414) (4,890)
Purchase of treasury stock (3,785) (2,283)
Proceeds from other borrowings - 42,006
Repayments on other borrowings (330) (36,932)
-------- --------
NET CASH FROM FINANCING ACTIVITIES (30,761) (18,769)
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS (12,914) (5,664)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 94,928 94,198
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 82,014 $ 88,534
======== ========
See accompanying notes.
7
FIRST FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying June 30, 2005 and 2004 consolidated financial statements
are unaudited. The December 31, 2004 consolidated financial statements are as
reported in the First Financial Corporation (the "Corporation") 2004 annual
report. The following notes should be read together with notes to the
consolidated financial statements included in the 2004 annual report filed with
the Securities and Exchange Commission as an exhibit to Form 10-K.
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,
2005 2004
----- ----
Impaired loans with related allowance for loan losses calculated under SFAS No. 114 $10,467 $16,240
Impaired loans with no related allowance for loan losses 2,920 2,582
------- -------
$13,387 $18,822
======= =======
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 amortized cost and fair value of the Corporation's investments at June
30, 2004 and December 31, 2004 are shown below. All securities are classified as
available-for-sale.
(000's) (000's)
June 30, 2005 December 31, 2004
Amortized Cost Fair Value Amortized Cost Fair Value
-------------- ---------- -------------- ----------
United States Government entity mortgage-
Backed securities $242,044 $241,662 $227,927 $229,028
Collateralized Mortgage Obligations 10,467 10,456 19,895 19,866
States and Municipal Obligations 130,515 136,674 137,206 144,294
Corporate Obligations 98,908 99,926 104,754 106,077
Equity Securities 4,344 8,249 4,280 8,725
-------- -------- -------- --------
$486,278 $496,967 $494,062 $507,990
======== ======== ======== ========
4. Short-Term Borrowings
Period-end short-term borrowings were comprised of the following:
(000's)
June 30, December 31,
2005 2004
---- -----
Federal Funds Purchased $ 885 $69,002
Repurchase Agreements 5,585 5,597
Note Payable - U.S. Government 1,338 928
------ -------
$7,808 $75,527
====== =======
8
5. Other Borrowings
Other borrowings at period-end are summarized as follows:
(000's)
June 30, December 31,
2005 2004
---- -----
FHLB advances $337,556 $337,886
Note payable to a financial institution 18,000 18,000
City of Terre Haute, Indiana economic development revenue bonds 6,600 6,600
-------- --------
$362,156 $362,486
6. Components of Net Periodic Benefit Cost
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30,
(000's) (000's)
Post-Retirement Post-Retirement
Pension Benefits Health Benefits Pension Benefits Health Benefits
2005 2004 2005 2004 2005 2004 2005 2004
- -----------------------------------------------------------------------------------------------------------------------------------
Service cost $ 701 $ 627 $ 35 $ 20 $ 1,403 $ 1,254 $ 70 $ 41
- -----------------------------------------------------------------------------------------------------------------------------------
Interest cost 622 542 80 61 1,245 1,084 160 122
- -----------------------------------------------------------------------------------------------------------------------------------
Expected return on plan assets (821) (700) - - (1,642) (1,400) - -
- -----------------------------------------------------------------------------------------------------------------------------------
Amortization of transition obligation - - 15 15 - - 30 30
- -----------------------------------------------------------------------------------------------------------------------------------
Amortization of prior service cost 14 (4) - - 28 (9) - -
- -----------------------------------------------------------------------------------------------------------------------------------
Amortization of net (gain) loss 62 61 63 34 123 123 125 68
- -----------------------------------------------------------------------------------------------------------------------------------
Net Periodic Benefit Cost $ 578 $ 526 $ 193 $ 130 $ 1,157 $ 1,052 $ 385 $ 261
===================================================================================================================================
Employer Contributions
First Financial Corporation previously disclosed in its financial
statements for the year ended December 31, 2004 that it expected to contribute
$1.5 and $1.2 million respectively to its Pension Plan and ESOP and $300,000 to
the Post Retirement Health Benefits Plan in 2005. A contribution to the Pension
Plan of $700,000 for the 6 months ended June 30, 2005 has been made. First
Financial Corporation anticipates contributing an additional $800,000 and $1.2
million respectively to its Pension Plan and ESOP in 2005. Contributions of
$149,000 have been made through the first half of 2005 for the Post Retirement
Health Benefits plan. First Financial Corporation anticipates contributing an
additional $151,000 to the Post Retirement Health Benefits plan in 2005.
ITEMS 2. and 3. 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 2004.
This Quarterly Report on Form 10-Q contains forward-looking statements.
Forward-looking statements provide current expectations or forecasts of future
events and are not guarantees of future performance, nor should they be relied
upon as representing management's views as of any subsequent date. The
forward-looking statements are based on management's expectations and are
subject to a number of risks and uncertainties. Although management believes
that the expectations reflected in such forward-looking statements are
reasonable, actual results may differ materially from those expressed or implied
in such statements. Risks and uncertainties that could cause actual results to
differ materially include, without limitation, the Corporation's ability to
effectively execute its business plans; changes in general economic and
financial market conditions; changes in interest rates; changes in the
competitive environment; continuing consolidation in the financial services
industry; new litigation or changes in existing litigation; losses, customer
bankruptcy, claims and assessments; changes in banking regulations or other
regulatory or legislative requirements affecting the Corporation's business; and
changes in accounting policies or procedures as may be required by the Financial
Accounting Standards Board or other regulatory agencies. Additional information
concerning factors that could cause actual results to differ materially from
those expressed or implied in the forward-looking statements is available in the
Corporation's Annual Report on Form 10-K for the year ended December 31, 2004,
and subsequent filings with the United States Securities and Exchange Commission
(SEC). Copies of these filings are available at no cost on the SEC's Web site at
www.sec.gov or on the Corporation's Web site at www.first-online.com. Management
may elect to update forward-looking statements at some future point; however, it
specifically disclaims any obligation to do so.
9
Summary of Operating Results
Net income for the three months ended June 30, 2005 was $5.0 million, a
21.1% decrease from the $6.3 million for the same period in 2004. Basic earnings
per share for the quarter ended June 30, 2005 decreased to $0.37, a 21.3%
decrease from the $0.47 for the same period in 2004. The year-to-date net income
at June 30, 2005 was $11.3 million or $0.84 per share, compared to $17.0 million
or $1.26 per share for the same period in 2004. These represent 33.6% and 33.3%
decreases in net income and earnings per share, respectively.
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 $935,000 to $36.6 million in the first six months of 2005 from $35.7
million in the same period in 2004. During the same period the net interest
margin increased from 3.77% in 2004 to 3.95% in 2005, a 18 basis point increase
driven by a greater increase in the yield on earning assets than in the average
cost of funds. The net interest income for the three months ended June 30, 2005
was $18.3 million, an increase of $525,000 over the $17.8 million for the same
period of 2004.
Non-Interest Income
Non-interest income decreased $5.4 million to $15.5 million at June 30,
2005 from $20.9 million for the six months ended June 30, 2004. This was largely
the result of a non-taxable gain of $4.1 million on a life insurance benefit
received in the first quarter of 2004. Security gains the six months ended June
30, 2005 were $25 thousand compared to $423 thousand for the same period of 2004
Non-interest income for the three months ended June 30, 2005 was $7.8 million
compared to $8.3 million for the same period of 2004. Other services charges and
fees account for $435 thousand of the $514 thousand decrease.
Non-Interest Expenses
Non-interest expenses decreased $286 thousand from $31.4 million for the
six months ended June 30, 2004 to $31.1 million for the same period of 2005. The
non-interest expense for the three months ended June 30, 2005 was $15.8 million
compared to $15.9 million for the same period of 2004. This is due mainly to
cost savings from consolidating our affiliated banks into one bank.
Allowance for Loan Losses
The Corporation's provision for loan losses increased to $6.0 million for
the first six months of 2005 compared to $3.8 million in the same period of
2004. At June 30, 2005, the allowance for loan losses was 1.22% of net loans.
Net chargeoffs for the first six months of 2005 were $8.4 million compared to
$3.3 million for the same period in 2004. Based on management's analysis of the
current portfolio, an evaluation that includes consideration of historical loss
experience and potential loss exposure on identified problem loans, management
believes the allowance of $17.6 million at June 30, 2005 is adequate. Loans
classified substandard, doubtful, or loss declined from approximately $72
million at December 31, 2004 to approximately $66 million at June 30, 2005, and
includes two credits expected to be sold in the third quarter totaling $7.4
million. The Provision for Loan Losses was increased by $1.5 million during the
quarter due primarily to additional losses relating to the recent decision to
sell certain problem loan relationships to a third party in order to mitigate
the unknown risks associated with anticipated litigation and liquidation of the
credits. The sales are expected to be completed during the third quarter. The
loan balances have already been charged down to an amount equal to the expected
net sale proceeds.
10
Non-performing Loans
Non-performing loans, which include the aforementioned $7.4 million in loans
anticipated to be sold, consist of (1) non-accrual loans on which the ultimate
collectability of the full amount of interest is uncertain, (2) loans 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 past due ninety days or more as to principal or interest. A
summary of non-performing loans at June 30, 2005 and December 31, 2004 follows:
(000's)
June 30, 2005 December 31, 2004
------------- -----------------
Non-accrual loans $17,787 $19,862
Restructured loans 392 430
------- -------
18,179 20,292
Accruing loans past due over 90 days 7,429 7,813
------- -------
$25,608 $28,105
======= =======
Ratio of the allowance for loan losses
as a percentage of non-performing loans 69% 71%
The following loan categories comprise significant components of
the non-performing loans:
(000's)
June 30, 2005 December 31, 2004
------------- -----------------
Non-Accrual Loans:
1-4 family residential $ 1,192 $ 608
Commercial loans 14,814 17,635
Installment loans 1,781 1,619
------- -------
$17,787 $19,862
======= =======
Past due 90 days or more:
1-4 family residential $ 3,990 $ 3,723
Commercial loans 1,551 2,159
Installment loans 1,888 1,931
------- -------
$ 7,429 $ 7,813
======= =======
Interest Rate Sensitivity and Liquidity
First Financial Corporation has established risk measures, limits, and
policy guidelines for managing interest rate risk and liquidity. Responsibility
for management of these functions resides with the Asset Liability Committee.
The primary goal of the Asset Liability Committee is to maximize net interest
income within the interest rate risk limits approved by the Board of Directors.
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 interest income is largely dependent on the effective
management of this risk.
The Asset Liability position is measured using sophisticated risk
management tools, including earning simulation and market value of equity
sensitivity analysis. These tools allow management to quantify and monitor both
short-term and long-term exposure to interest rate risk. Simulation modeling
measures the effects of changes in interest rates, changes in the shape of the
yield curve and the effects of embedded options on net interest income. This
measure projects earnings in the various environments over the next three years.
It is important to note that measures of interest rate risk have limitations and
are dependent on various 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 of
these assumptions and believes them to be valid and theoretically sound. These
assumptions are regularly monitored for behavioral changes.
11
The Corporation from time to time utilizes derivatives to manage interest
rate risk. Management regularly evaluates the merits of such interest rate risk
management products and strategies but does not anticipate the use of such
products will become a major part of the Corporation's risk management strategy.
The table below shows the Corporation's estimated sensitivity profile as of
June 30, 2005. The change in interest rates assumes a parallel shift in interest
rates of 100 and 200 basis points. Given a 100 basis point increase in rates,
net interest income would increase 3.98% over the next 12 months and increase
7.44% over the following 12 months. Given a 100 basis point decrease in rates,
net interest income would decrease 2.66% over the next 12 months and decrease
6.31% over the following 12 months. These estimates assume all rate changes
occur overnight and management takes 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 200 -7.93 -15.55 -20.53
Down 100 -2.66 -6.31 -8.97
Up 100 3.98 7.44 10.19
Up 200 4.75 11.42 17.01
Typical rate shock analysis does not reflect management's ability to react
and thereby reduce the effect of rate changes, and represents a worst-case
scenario.
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 $12.5
million of investments that mature throughout the coming 12 months. The
Corporation also anticipates $100.6 million of principal payments from
mortgage-backed securities. Given the current rate environment, the Corporation
anticipates $14.1 million in 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
Comparing the first six months of 2005 to the year 2004, average loans are
up $12.4 million. Average borrowings are down $77.2 million. Reduction in the
average investments of $84.5 million was used to fund loans and reduce
borrowings. Average shareholders' equity increased $9.8 million, or 3.7%. Strong
financial performance pushed book value per share up 4.1% to $20.04 in 2005 from
$19.25 at June 30, 2004. Book value per share is calculated by dividing the
total equity by the number of shares outstanding.
Capital Adequacy
As of June 30, 2005, the most recent notification from the respective
regulatory agencies categorized the Corporation and its subsidiary banks as well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized the Corporation must maintain minimum total
risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the
table. There are no conditions or events since that notification that management
believes have changed the Corporation's category.
To Be Well
June 30, 2005 December 31, 2004 Capitalized
------------- ----------------- -----------
Total risk-based capital ratio 16.64% 16.55% >= 10.0%
Tier I risk-based capital ratio 15.55% 15.32% >= 6.0%
Tier I leverage capital ratio 11.77% 11.42% >= 5.0%
ITEM 4. Controls and Procedures
First Financial Corporation's management is responsible for establishing
and maintaining effective disclosure controls and procedures, as defined under
Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. As of June
30, 2005, an evaluation was performed under the supervision and with the
participation of management, including the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Corporation's disclosure controls and procedures. Based on that evaluation,
management including the Chief Executive Officer and Chief Financial Officer,
concluded that disclosure controls and procedures as of June 30, 2005 were
effective in ensuring material information required to be disclosed in this
Quarterly Report on Form 10-Q was recorded, processed, summarized, and reported
on a timely basis. Additionally, there were no changes in the Corporation's
internal control over financial reporting that occurred during the quarter ended
June 30, 2005 that have materially affected, or are reasonably likely to
materially affect, the Corporation's internal control over financial reporting.
12
PART II - Other Information
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(c) Purchases of Equity Securities
The Corporation periodically acquires shares of its common stock
directly from shareholders in individually negotiated transactions. The
Corporation has not adopted a formal policy or adopted a formal program for
repurchases of shares of its common stock. Following is certain information
regarding shares of common stock purchased by the Corporation during the quarter
covered by this report.
<Table>
<Caption>
- ----------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d)
Total Number Of Shares
Purchased As Part Of Maximum Number Of
Total Number Of Average Price Publicly Announced Shares That May Yet
Shares Purchased Paid Per Share Plans Or Programs * Be Purchased *
- ----------------------------------------------------------------------------------------------------------------------
April 1 - 30, 2005 0 N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------------------
May 1-31, 2005 72,837 27.25 N/A N/A
- ----------------------------------------------------------------------------------------------------------------------
June 1-30, 2005 15,500 27.91 N/A N/A
- ----------------------------------------------------------------------------------------------------------------------
Total 88,337 27.37 N/A N/A
- ----------------------------------------------------------------------------------------------------------------------
</Table>
* The Corporation has not adopted a formal policy or program
regarding repurchases of its shares of stock.
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 20, 2005
(b) The following were elected Directors of the Corporation for a three year
term as follows:
<Table>
<Caption>
Votes for Votes Against
--------- -------------
B. Guille Cox, Jr 11,290,217 202,211
Anton H. George 11,281,748 210,581
Gregory L. Gibson 11,401,048 91,280
Virginia L. Smith 11,389,226 103,102
</Table>
The following was elected Director of the Corporation for a two year term:
<Table>
<Caption>
Votes for Votes Against
--------- -------------
W. Curtis Brighton 11,438,669 53,659
</Table>
The following individual's terms as directors continued after the meeting:
Thomas T. Dinkel; Norman L. Lowery; Patrick O'Leary; Chapman J. Root, II;
William A. Niemeyer; and, Donald E. Smith. As previously reported, Mr. Root
resigned on June 21, 2005, and the Board of Directors appointed Ronald K. Rich
to complete his unexpired term.
(c) At the annual meeting, the only item for consideration was the election of
the five directors. The vote tabulation for the election of such Directors is
set forth above.
Item 6 Exhibits
<Table>
<Caption>
Exhibit No: Description of Exhibit:
- ----------- -----------------------
3.1 Amended and Restated Articles of Incorporation of First Financial
Corporation, incorporated by reference to the Corporation's Form
10-Q filed for the quarter ended September 30, 2004.
3.2 Code of By-Laws of First Financial Corporation, incorporated by
reference to the Corporation's Form 10-Q filed for the quarter
ended September 30, 2004.
10.1 Employment Agreement for Norman L. Lowery, dated January 1, 2005,
by reference to Exhibit 10-2 to the Corporation Form 10-Q filed
for the quarter ended March 31, 2005.
10.2 2001 Long-Term Incentive Plan of First Financial Corporation,
incorporated by reference to the Corporation's Form 10-Q filed
for the quarter ended September 30, 2004.
31.1 Rule 13a -14 (a) Certification for Quarterly Report on Form 10-Q
for the quarter ended June 30, 2005 by Principal Executive
Officer, dated August 8, 2005.
31.2 Rule 13a -14 (a) Certification for Quarterly Report on Form 10-Q
for the quarter ended June 30, 2005 by Principal Financial
Officer, dated August 8, 2005.
32.1 Section 1350 Certification, dated August 8, 2005, of Principal
Executive Officer and Principal Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
</Table>
13
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 8, 2005 By /s/ Donald E. Smith
------------------------------
Donald E. Smith, Chairman
Date: August 8, 2005 By /s/ Norman L. Lowery
------------------------------
Norman L. Lowery, Vice Chairman & CEO
(Principal Executive Officer)
Date: August 8, 2005 By /s/ Michael A. Carty
------------------------------
Michael A. Carty, Treasurer & CFO
(Principal Financial Officer)
14
Exhibit Index
Exhibit No: Description of Exhibit:
- ---------- -----------------------
3.1 Amended and Restated Articles of Incorporation of
First Financial Corporation, incorporated by
reference to the Corporation's Form 10-Q filed for
the quarter ended September 30, 2004.
3.2 Code of By-Laws of First Financial Corporation,
incorporated by reference to the Corporation's Form
10-Q filed for the quarter ended September 30, 2004.
10.1 Employment Agreement for Norman L. Lowery, dated
January 1, 2005, by reference to Exhibit 10-2 to the
Corporation Form 10-Q filed for the quarter ended
March 31, 2005.
10.2 2001 Long-Term Incentive Plan of First Financial
Corporation, incorporated by reference to the
Corporation's Form 10-Q filed for the quarter ended
September 30, 2004.
31.1 Rule 13a -14 (a) Certification for Quarterly Report on
Form 10-Q for the quarter ended June 30, 2005 by Principal
Executive Officer, dated August 8, 2005.
31.2 Rule 13a -14 (a) Certification for Quarterly Report on
Form 10-Q for the quarter ended June 30, 2005 by Principal
Financial Officer, dated August 8, 2005.
32.1 Section 1350 Certification, dated August 8, 2005, of
Principal Executive Officer and Principal Financial
Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
15