10-Q 1 c99798e10vq.txt QUARTERLY REPORT 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.
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