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 September 30, 2005
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 .
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes x No .
--- ---
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes No x .
--- ---
As of November 3, 2005 there were outstanding 13,360,070 shares of common stock.
FIRST FINANCIAL CORPORATION
FORM 10-Q
INDEX
Page No.
--------
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...................................................... 12
Item 4. Controls and Procedures................................... 13
PART II. Other Information:
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds.................................................. 13
Item 6. Exhibits.................................................. 14
Signatures........................................................ 15
2
Part I -Financial Information
Item 1. Financial Statements
FIRST FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands, except per share data)
September 30, December 31,
2005 2004
------------- ------------
(Unaudited)
ASSETS
Cash and due from banks $ 68,394 $ 94,928
Federal funds sold and short-term investments 8,105 5,400
Securities available-for-sale 555,969 507,990
Loans:
Commercial, financial and agricultural 388,488 401,724
Real estate - construction 33,077 32,810
Real estate - mortgage 718,498 753,826
Installment 281,611 272,261
Lease financing 2,821 3,658
---------- ----------
1,424,495 1,464,279
Less:
Unearned income (333) (408)
Allowance for loan losses (16,294) (19,918)
---------- ----------
1,407,868 1,443,953
Accrued interest receivable 11,869 12,016
Premises and equipment, net 30,245 31,154
Bank-owned life insurance 55,365 49,177
Goodwill 7,102 7,102
Other intangible assets 2,686 3,093
Other real estate owned 3,593 3,262
Other assets 24,069 25,917
---------- ----------
TOTAL ASSETS $2,175,265 $2,183,992
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 178,060 $ 145,852
Interest-bearing:
Certificates of deposit of $100 or more 241,719 184,604
Other interest-bearing deposits 1,066,799 1,112,665
---------- ----------
1,486,578 1,443,121
Short-term borrowings 45,561 75,527
Other borrowings 343,878 362,486
Other liabilities 26,758 34,523
---------- ----------
TOTAL LIABILITIES 1,902,775 1,915,657
---------- ----------
Shareholders' equity:
Common stock, $.125 stated value per share;
Authorized shares--40,000,000
Issued shares-14,450,966
Outstanding shares--13,375,101 in 2005 and 13,535,770 in 2004 1,806 1,806
Additional paid-in capital 67,519 67,519
Retained earnings 223,885 211,623
Accumulated other comprehensive income 4,856 8,357
Treasury shares, at cost 1,075,865 in 2005 and 915,196 in 2004 (25,576) (20,970)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 272,490 268,335
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,175,265 $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 Nine Months Ended
September 30, September 30,
------------------ -----------------
2005 2004 2005 2004
------- ------- ------- -------
(Unaudited) (Unaudited)
INTEREST INCOME:
Loans including related fees $24,654 $23,235 $71,879 $68,901
Securities:
Taxable 4,211 3,624 11,958 11,349
Tax-exempt 1,561 1,712 4,731 5,350
Other 467 450 1,466 1,522
------- ------- ------- -------
TOTAL INTEREST INCOME 30,893 29,021 90,034 87,122
------- ------- ------- -------
INTEREST EXPENSE:
Deposits 7,132 5,740 19,577 17,666
Short-term borrowings 143 371 434 855
Other borrowings 4,933 5,063 14,717 15,068
------- ------- ------- -------
TOTAL INTEREST EXPENSE 12,208 11,174 34,728 33,589
------- ------- ------- -------
NET INTEREST INCOME 18,685 17,847 55,306 53,533
Provision for loan losses 2,608 2,223 8,614 6,069
------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 16,077 15,624 46,692 47,464
------- ------- ------- -------
NON-INTEREST INCOME:
Trust department income 1,001 1,024 2,857 3,048
Service charges and fees on deposit accounts 3,071 2,966 8,650 8,586
Other service charges and fees 1,837 1,723 4,857 5,091
Securities gains/(losses), net 545 21 570 444
Insurance commissions 1,516 1,737 4,393 4,597
Gains on sales of mortgage loans 336 199 959 742
Gain on life insurance benefits -- -- -- 4,113
Other 501 523 2,060 2,470
------- ------- ------- -------
TOTAL NON-INTEREST INCOME 8,807 8,193 24,346 29,091
------- ------- ------- -------
NON-INTEREST EXPENSES:
Salaries and employee benefits 9,560 9,224 28,444 27,973
Occupancy expense 980 1,002 2,892 2,987
Equipment expense 1,024 980 2,863 2,657
Other 4,401 4,669 12,884 13,662
------- ------- ------- -------
TOTAL NON-INTEREST EXPENSE 15,965 15,875 47,083 47,279
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 8,919 7,942 23,955 29,276
Provision for income taxes 2,596 1,967 6,329 6,287
------- ------- ------- -------
NET INCOME $ 6,323 $ 5,975 $17,626 $22,989
======= ======= ======= =======
PER SHARE DATA:
Basic and Diluted $ 0.47 $ 0.44 $ 1.31 $ 1.70
======= ======= ======= =======
Dividends per share $ -- $ -- $ 0.40 $ 0.39
======= ======= ======= =======
Weighted average number of
shares outstanding (in thousands) 13,395 13,501 13,457 13,525
======= ======= ======= =======
See accompanying notes
4
FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Three months Ended
September 30, 2005 and 2004
(Dollar amounts in thousands, except per share data)
(Unaudited)
Accumulated
Other
Common Additional Retained Comprehensive Treasury
Stock Capital Earnings Income/(Loss) Stock Total
------ ---------- -------- ------------- -------- --------
Balance, July 1, 2005 $1,806 $67,519 $217,562 $ 6,413 $(24,755) $268,545
Comprehensive income:
Net income 6,323 6,323
Change in net unrealized
gains/ (losses) on securities
available-for-sale (1,557) (1,557)
--------
Total comprehensive income/(loss) 4,766
Treasury stock purchase (821) (821)
------ ------- -------- ------- -------- --------
Balance, September 30, 2005 $1,806 $67,519 $223,885 $ 4,856 $(25,576) $272,490
====== ======= ======== ======= ======== ========
Balance, July 1, 2004 $1,806 $67,181 $206,043 $ 6,594 $(21,748) $259,876
Comprehensive income:
Net income 5,975 5,975
Change in net unrealized
gains/ (losses) on securities
available-for-sale 3,669 3,669
--------
Total comprehensive income/(loss) 9,644
Treasury stock purchase (46) (46)
------ ------- -------- ------- -------- --------
Balance, September 30, 2004 $1,806 $67,181 $212,018 $10,263 $(21,794) $269,474
====== ======= ======== ======= ======== ========
See accompanying notes.
5
FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Nine months Ended
September 30, 2005, and 2004
(Dollar amounts in thousands, except per share data)
(Unaudited)
Accumulated
Other
Common Additional 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 17,626 17,626
Change in net unrealized
gains/ (losses) on securities
available for sale (3,501) (3,501)
--------
Total comprehensive income 14,125
Cash dividends, $.40 per share (5,364) (5,364)
Treasury stock purchase (4,606) (4,606)
------ ------- -------- ------- -------- --------
Balance, September 30, 2005 $1,806 $67,519 $223,885 $ 4,856 $(25,576) $272,490
====== ======= ======== ======= ======== ========
Balance, January 1, 2004 $1,806 $67,181 $194,294 $11,463 $(19,465) $255,279
Comprehensive income
Net income 22,989 22,989
Change in net unrealized
gains/ (losses) on securities
available for sale (1,200) (1,200)
--------
Total comprehensive income 21,789
Cash dividends, $.39 per share (5,265) (5,265)
Treasury stock purchase (2,329) (2,329)
------ ------- -------- ------- -------- --------
Balance, September 30, 2004 $1,806 $67,181 $212,018 $10,263 $(21,794) $269,474
====== ======= ======== ======= ======== ========
See accompanying notes.
6
FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands, except per share data)
Nine months Ended
September 30,
--------------------
2005 2004
--------- --------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 17,626 $ 22,989
Adjustments to reconcile net income to net cash
provided by operating activities:
Net amortization/ (accretion) of premiums and
discounts on investments (734) 1,625
Provision for loan losses 8,614 6,069
Securities (gains), net (570) (444)
Gain on Life insurance benefit -- (4,113)
Depreciation and amortization 2,493 2,349
Other, net (3,828) 2,818
--------- --------
NET CASH FROM OPERATING ACTIVITIES 23,601 31,293
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of securities available-for-sale 11,900 31,346
Maturities and principal reductions on
securities available-for-sale 137,324 57,214
Purchases of securities available-for-sale (201,734) (39,723)
Loans made to customers, net of repayments 26,758 (43,088)
Net change in federal funds sold (2,705) 2,400
Proceeds from life insurance benefit -- 7,267
Additions to premises and equipment (1,177) (3,664)
--------- --------
NET CASH FROM INVESTING ACTIVITIES (29,634) 11,752
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits 43,457 (46,770)
Net change in short-term borrowings (29,966) (170)
Dividends paid (10,778) (10,155)
Purchase of treasury stock (4,606) (2,329)
Proceeds from other borrowings -- 85,006
Repayments on other borrowings (18,608) (85,742)
--------- --------
NET CASH FROM FINANCING ACTIVITIES (20,501) (60,160)
--------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS (26,534) (17,115)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 94,928 94,198
--------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 68,394 $ 77,083
========= ========
See accompanying notes.
7
FIRST FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying September 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 information presented does not include
all information and footnotes required by U.S. generally accepted accounting
procedures for complete financial statements. 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. Some items in the prior
year financial statements were reclassified to conform to the current
presentation.
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, December 31,
2005 2004
------------- ------------
Impaired loans with related allowance for loan
losses calculated under SFAS No. 114 $3,464 $16,240
Impaired loans with no related allowance for loan losses 1,373 2,582
------ -------
$4,837 $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 are
shown below. All securities are classified as available-for-sale.
(000's) (000's)
September 30, 2005 December 31, 2004
--------------------------- ---------------------------
Amortized Cost Fair Value Amortized Cost Fair Value
-------------- ---------- -------------- ----------
United States Government entity mortgage-
Backed securities $281,598 $279,639 $227,927 $229,028
Collateralized Mortgage Obligations 6,265 6,262 19,895 19,866
States and Municipal Obligations 131,880 137,610 137,206 144,294
Corporate Obligations 123,757 124,416 104,754 106,077
Equity Securities 4,376 8,042 4,280 8,725
-------- -------- -------- --------
$547,876 $555,969 $494,062 $507,990
======== ======== ======== ========
4. Short-Term Borrowings
Period-end short-term borrowings were comprised of the following:
(000's)
----------------------------
September 30, December 31,
2005 2004
------------- ------------
Federal Funds Purchased $ 4,720 $69,002
Repurchase Agreements 39,406 5,597
Note Payable - U.S. Government 1,435 928
------- -------
$45,561 $75,527
======= =======
8
5. Other Borrowings
Other borrowings at period-end are summarized as follows:
(000's)
----------------------------
September 30, December 31,
2005 2004
------------- ------------
FHLB advances $337,278 $337,886
Note payable to a financial institution -- 18,000
City of Terre Haute, Indiana economic
development revenue bonds 6,600 6,600
-------- --------
$343,878 $362,486
======== ========
6. Components of Net Periodic Benefit Cost
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 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 $ 647 $ 35 $ 21 $ 2,104 $ 1,940 $106 $ 62
Interest cost 622 551 80 61 1,867 1,653 239 183
Expected return on plan assets (821) (700) -- -- (2,463) (2,100) -- --
Amortization of transition obligation -- -- 15 15 -- -- 45 45
Amortization of prior service cost 14 14 -- -- 42 42 -- --
Amortization of net (gain) loss 62 61 63 34 185 184 188 102
----- ----- ---- ---- ------- ------- ---- ----
Net Periodic Benefit Cost $ 578 $ 573 $193 $131 $ 1,735 $ 1,719 $578 $392
===== ===== ==== ==== ======= ======= ==== ====
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 $1.1 million for the 9 months ended September 30, 2005 has been made.
First Financial Corporation anticipates contributing an additional $350,000 and
$1.2 million respectively to its Pension Plan and ESOP in 2005. Contributions of
$209,000 have been made through the first nine months of 2005 for the Post
Retirement Health Benefits plan. First Financial Corporation anticipates
contributing an additional $91,000 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
Critical Accounting Policies
Certain of the Corporation's accounting policies are important to the
portrayal of the Corporation's financial condition and results of operations,
since they require management to make difficult, complex or subjective
judgments, some of which may relate to matters that are inherently uncertain.
Estimates associated with these policies are susceptible to material changes as
a result of changes in facts and circumstances. Facts and circumstances which
could affect these judgments include, but without limitation, changes in
interest rates, in the performance of the economy or in the financial condition
of borrowers. Management believes that its critical accounting policies include
determining the allowance for loan losses and the valuation of goodwill. See
further discussion of these critical accounting policies in the 2004 Annual
Report on Form 10-K.
Summary of Operating Results
The net income for the quarter ended September 30, 2005 was $6.3 million or
$0.47 per share, compared to $6.0 million or $0.44 per share for the same period
in 2004. These represent 5.8% and 6.8% increases in net income and earnings per
share, respectively.Net income for the nine months ended September 30, 2005 was
$17.6 million, a 23.5% decrease from the $23.0 million for the same period in
2004. The year-to-date net income for 2004 included a $4.1 million non taxable
gain on life insurance benefit. The decrease in net income in 2005 when adjusted
for this gain is $1.3 million or 6.6% less than 2004. Basic earnings per share
for the nine months ended September 30, 2005 was $1.31 compared to $1.70 for the
same period in 2004. The gain on life insurance in 2004 accounted for $0.30 of
this decrease in earnings per share
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. For the three months
ended September 30, 2005 the net interest income of $18.7 million was a 4.7%
increase over the $17.8 million for the same period of 2004. Net interest income
increased $1.8 million or 3.3% to $55.3 million in the first nine months of 2005
from $53.5 million in the same period in 2004. The net interest margin increased
from 3.77% in 2004 to 3.91% in 2005, a 14 basis point increase driven by a
greater increase in the yield on earning assets than in the average cost of
funds.
Non-Interest Income
Non-interest income for the three months ended September 30, 2005 was $8.8
million, a 7.5% increase compared to the $8.2 million for the same period of
2004. Much of this increase can be attributed to the gain on sale of securities.
Year-to-date non-interest income for 2005 decreased $4.7 million, or 16.3%, over
the same period of 2004. The decrease in year-to-date non-interest income was
only $600 thousand when adjusted for the gain from life insurance proceeds in
2004 of $4.1 million. Loan fees, insurance commissions and trust fees were down
a combined $653,000.
Non-Interest Expenses
Non-interest expenses for the nine months ended September 30, 2005 at $47.1
million was slightly less than the $47.3 million reported for the same period of
2004. Efficiencies from the consolidation of subsidiaries that were completed in
the third quarter of 2005 contributed to the lower levels in non-interest
expenses. Non-interest expenses for the three months ended September 30, 2005
were $90 thousand dollars higher at $16.0 million than the $15.9 million for the
same period of 2004.
10
Allowance for Loan Losses
The Corporation's provision for loan losses increased to $8.6 million for
the first nine months of 2005 compared to $6.1 million in the same period of
2004. Net charge-off's for the first nine months of 2005 were $12.2 million
compared to $4.6 million for the same period in 2004 as management chose to
charge off several non-performing loans that were previously reserved for.
Management also chose to sell other non-performing loans which accelerated the
realization of potential losses and created the need to increase the provision.
As a result of exiting these credits, total problem loans declined from $99.7
million at December 31, 2004 to $79.6 million at September 30, 2005. The
decrease in impaired loans and in non-accrual loans is a factor in determining
the adequacy of the allowance for loan losses. With the lower levels of
non-accrual and impaired loans the needed level of the allowance for loan losses
has declined. 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 $16.3 million at September 30, 2005 is adequate. The loss provision
for the three months ended September 30, 2005 was $2.6 million compared to $2.3
million for the same period of 2004. The net charge-off's for the respective
periods were $3.9 million compared to $1.3 million.
Provision for Income Taxes
Income taxes for the nine months ended September 30, 2005 increased by $42
thousand from the same period in 2004. The effective tax rate was 26.4% and
21.5% for the 2005 and 2004 nine month periods. The income tax effective rate
for 2004 adjusted for the non taxable gain on life insurance benefit would have
been 25.0%. Tax exempt loan and investment income was less for the nine months
ended September 30, 2005 than the same period of 2004 by $772 thousand. The
effective tax rate for the three months ended September 30, 2005 was 29.0%
compared to 24.8% for the same period of 2004. This again was impacted by the
lower level of non taxable income.
Non-performing Loans
Non-performing loans 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 September 30, 2005 and December 31, 2004
follows:
(000's)
--------------------------------------
September 30, 2005 December 31, 2004
------------------ -----------------
Non-accrual loans $ 8,696 $19,862
Restructured loans 368 430
------- -------
9,064 20,292
Accruing loans past due over 90 days 7,039 7,813
------- -------
$16,103 $28,105
======= =======
Ratio of the allowance for loan losses
as a percentage of non-performing loans 101% 71%
The following loan categories comprise significant components of the
non-performing loans:
(000's)
--------------------------------------
September 30, 2005 December 31, 2004
------------------ -----------------
Non-Accrual Loans:
1-4 family residential $1,391 $ 608
Commercial loans 5,794 17,635
Installment loans 2,511 1,619
------ -------
$8,696 $19,862
====== =======
Past due 90 days or more:
1-4 family residential $3,609 $ 3,723
Commercial loans 1,717 2,159
Installment loans 1,713 1,931
------ -------
$7,039 $ 7,813
====== =======
11
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.
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
September 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 3.10% over the next 12 months and
increase 6.25% over the following 12 months. Given a 100 basis point decrease in
rates, net interest income would decrease 4.31% over the next 12 months and
decrease 7.60% over the following 12 months. These estimates assume all rate
changes occur overnight and management takes no action as a result of this
change.
Percentage Change in Net Interest Income
Basis Point ----------------------------------------
Interest Rate Change 12 months 24 months 36 months
- -------------------- --------- --------- ---------
Down 200 -9.02 -15.76 -20.47
Down 100 -4.31 -7.60 -10.03
Up 100 3.10 6.25 8.87
Up 200 2.79 8.24 13.31
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 $42.2
million of investments that mature throughout the coming 12 months. The
Corporation also anticipates $69.6 million of principal payments from
mortgage-backed securities. Given the current rate environment, the Corporation
anticipates $18.7 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 nine months of 2005 to the year ended 2004 average
loans decreased by $11.9 million. Average deposits have increased by $33.6
million. Average borrowings decreased $6.6 million. Average shareholders' equity
increased $3.6 million, or 1.3%. The Corporation's financial performance
increased book value per share by 2.8% to $20.37 in 2005 from $19.82 at December
31, 2004. Book value per share is calculated by dividing the total equity by the
number of shares outstanding.
12
Capital Adequacy
As of September 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
September 30, 2005 December 31, 2004 Capitalized
------------------ ----------------- -----------
Total risk-based capital ratio 16.64% 16.55% > or = 10.0%
Tier I risk-based capital ratio 15.65% 15.32% > or = 6.0%
Tier I leverage capital ratio 11.99% 11.42% > or = 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
September 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 concluded that disclosure controls and procedures as of September 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 September 30, 2005 that have materially affected, or are
reasonably likely to materially affect, the Corporation's internal control over
financial reporting.
PART II - Other Information
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds.
(c) Purchases of Equity Securities by the Issuer
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.
(c)
Total Number Of Shares (d)
(a) (b) Purchased As Part Maximum Number
Total Number Of Average Price Of Publicly Announced Of Shares That May
Shares Purchased Paid Per Share Plans Or Programs * Yet Be Purchased *
---------------- -------------- ---------------------- ------------------
July 1 - 31, 2005 -- N/A N/A N/A
August 1-31, 2005 11,000 29.14 N/A N/A
September 1-30, 2005 17,500 28.62 N/A N/A
Total 28,500 28.82 N/A N/A
* The Corporation has not adopted a formal policy or program regarding
repurchases of its shares of stock.
13
Item 6 Exhibits
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, 2002.
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, 2002.
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, 2002.
10.3 2005 Schedule of Director Compensation, incorporated by reference
to the Corporation Form 10-K filed for the fiscal year ended
December 31, 2004.
10.4 2005 Schedule of Named Executive Officer Compensation,
incorporated by reference to the Corporation Form 10-K filed for
the fiscal year ended December 31, 2004.
31.1 Rule 13a -14 (a) Certification for Quarterly Report on Form 10-Q
for the quarter ended September 30, 2005 by Principal Executive
Officer, dated November 3, 2005.
31.2 Rule 13a -14 (a) Certification for Quarterly Report on Form 10-Q
for the quarter ended September 30, 2005 by Principal Financial
Officer, dated November 3, 2005.
32.1 Section 1350 Certification, dated November 3, 2005, of Principal
Executive Officer and Principal Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
14
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 3, 2005 By /s/ Donald E. Smith
-------------------------------------
Donald E. Smith, Chairman
Date: November 3, 2005 By /s/ Norman L. Lowery
-------------------------------------
Norman L. Lowery, Vice Chairman & CEO
(Principal Executive Officer)
Date: November 3, 2005 By /s/ Michael A. Carty
-------------------------------------
Michael A. Carty, Treasurer & CFO
(Principal Financial Officer)
15
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, 2002.
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, 2002.
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, 2002.
10.3 2005 Schedule of Director Compensation, incorporated by reference
to the Corporation Form 10-K filed for the fiscal year ended
December 31, 2004.
10.4 2005 Schedule of Named Executive Officer Compensation,
incorporated by reference to the Corporation Form 10-K filed for
the fiscal year ended December 31, 2004.
31.1 Rule 13a -14 (a) Certification for Quarterly Report on Form 10-Q
for the quarter ended September 30, 2005 by Principal Executive
Officer, dated November 3, 2005.
31.2 Rule 13a -14 (a) Certification for Quarterly Report on Form 10-Q
for the quarter ended September 30, 2005 by Principal Financial
Officer, dated November 3, 2005.
32.1 Section 1350 Certification, dated November 3, 2005, of Principal
Executive Officer and Principal Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
16