UNITED STATES
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, 2006
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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer Accelerated filer X Non-accelerated filer .
--- --- ---
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, 2006, the Registrant had outstanding 13,290,321 shares of
common stock, without par value.
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....................... 10
Item 3. Quantitative and Qualitative Disclosures about Market
Risk...................................................... 10
Item 4. Controls and Procedures................................... 13
PART II. Other Information:
Item 1. Legal Proceedings......................................... 14
Item 1A. Risk Factors............................................. 14
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds.................................................. 14
Item 5. Other Information......................................... 14
Item 6. Exhibits.................................................. 15
Signatures........................................................ 16
2
Part I - Financial Information
Item 1. Financial Statements
FIRST FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands, except per share data)
September December
30, 2006 31, 2005
----------- ----------
(Unaudited)
ASSETS
Cash and due from banks $ 67,900 $ 78,201
Federal funds sold and short-term investments 80 2,982
Securities available-for-sale 557,905 536,291
Loans:
Commercial, financial and agricultural 408,306 382,214
Real estate - construction 29,299 31,918
Real estate - mortgage 695,679 707,008
Installment 258,109 272,062
Lease financing 2,657 2,845
---------- ----------
1,394,050 1,396,047
Less:
Unearned income (255) (306)
Allowance for loan losses (15,822) (16,042)
---------- ----------
1,377,973 1,379,699
---------- ----------
Accrued interest receivable 12,989 12,537
Premises and equipment, net 31,261 31,270
Bank-owned life insurance 57,342 55,832
Goodwill 7,102 7,102
Other intangible assets 2,480 2,860
Other real estate owned 3,853 4,115
Other assets 22,884 26,029
---------- ----------
TOTAL ASSETS $2,141,769 $2,136,918
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 215,025 $ 182,416
Interest-bearing:
Certificates of deposit of $100 or more 209,282 189,493
Other interest-bearing deposits 1,053,295 1,093,009
---------- ----------
1,477,602 1,464,918
Short-term borrowings 17,014 26,224
Other borrowings 341,817 343,866
Other liabilities 27,845 32,587
---------- ----------
TOTAL LIABILITIES 1,864,278 1,867,595
---------- ----------
Shareholders' equity
Common stock, $.125 stated value per share;
Authorized shares--40,000,000
Issued shares-14,450,966
Outstanding shares--13,256,321 in 2006 and 13,373,570 in 2005 1,806 1,806
Additional paid-in capital 67,670 67,670
Retained earnings 235,526 223,710
Accumulated other comprehensive income 1,677 1,903
Treasury shares at cost 1,194,645 in 2006 and 1,077,396 in 2005 (29,188) (25,766)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 277,491 269,323
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,141,769 $2,136,918
========== ==========
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,
------------------ -----------------
2006 2005 2006 2005
-------- ------- ------- -------
(Unaudited) (Unaudited)
INTEREST INCOME:
Loans, including related fees $25,390 $24,654 $74,203 $71,879
Securities:
Taxable 5,488 4,211 16,355 11,958
Tax-exempt 1,578 1,561 4,651 4,731
Other 556 467 2,003 1,466
------- ------- ------- -------
TOTAL INTEREST INCOME 33,012 30,893 97,212 90,034
------- ------- ------- -------
INTEREST EXPENSE:
Deposits 9,693 7,132 27,251 19,577
Short-term borrowings 254 143 539 434
Other borrowings 4,821 4,933 14,271 14,717
------- ------- ------- -------
TOTAL INTEREST EXPENSE 14,768 12,208 42,061 34,728
------- ------- ------- -------
NET INTEREST INCOME 18,244 18,685 55,151 55,306
Provision for loan losses 2,495 2,608 5,343 8,614
------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 15,749 16,077 49,808 46,692
------- ------- ------- -------
NON-INTEREST INCOME:
Trust and financial services 1,021 1,001 2,938 2,857
Service charges and fees on deposit accounts 2,941 3,071 8,777 8,650
Other service charges and fees 1,325 1,837 3,952 4,857
Securities gains/ (losses), net (1) 545 8 570
Insurance commissions 1,608 1,516 4,461 4,393
Gain on sale of mortgage loans 26 336 180 959
Other 144 501 1,376 2,060
------- ------- ------- -------
TOTAL NON-INTEREST INCOME 7,064 8,807 21,692 24,346
------- ------- ------- -------
NON-INTEREST EXPENSES:
Salaries and employee benefits 10,178 9,560 30,741 28,444
Occupancy expense 983 980 2,868 2,892
Equipment expense 1,043 1,024 3,211 2,863
Other 3,466 4,401 11,277 12,884
------- ------- ------- -------
TOTAL NON-INTEREST EXPENSE 15,670 15,965 48,097 47,083
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 7,143 8,919 23,403 23,955
Provision for income taxes 1,688 2,596 6,014 6,329
------- ------- ------- -------
NET INCOME $ 5,455 $ 6,323 $17,389 $17,626
------- ======= ======= =======
EARNINGS PER SHARE:
Basic and Diluted $ 0.41 $ 0.47 $ 1.31 $ 1.31
======= ======= ======= =======
Dividends per share $ -- $ -- $ 0.42 $ 0.40
======= ======= ======= =======
Weighted average number
of shares outstanding (in thousands) 13,261 13,395 13,302 13,457
======= ======= ======= =======
See accompanying notes
4
FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Nine months Ended
September 30, 2006 and 2005
(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, 2006 $1,806 $67,670 $223,710 $1,903 $(25,766) $269,323
Comprehensive income:
Net income 17,389 17,389
Change in net unrealized
gains/ (losses) on securities
available-for-sale (226) (226)
--------
Total comprehensive income 17,163
Cash dividends, $.42 per share (5,573) (5,573)
Treasury stock purchase (3,422) (3,422)
------ ------- -------- ------ -------- --------
Balance, September 30, 2006 $1,806 $67,670 $235,526 $1,677 $(29,188) $277,491
====== ======= ======== ====== ======== ========
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/(loss)
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
====== ======= ======== ====== ======== ========
See accompanying notes.
5
FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Three Months Ended
September 30, 2006, and 2005
(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, July 1, 2006 $1,806 $67,670 $230,071 $(3,632) $(28,839) $267,076
Comprehensive income:
Net income 5,455 5,455
Change in net unrealized
gains/ (losses) on securities
available-for-sale 5,309 5,309
--------
Total comprehensive income 10,764
Treasury stock purchase (349) (349)
------ ------- -------- ------- -------- --------
Balance, September 30, 2006 $1,806 $67,670 $235,526 $ 1,677 $(29,188) $277,491
====== ======= ======== ======= ========= ========
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 4,766
Treasury stock purchase (821) (821)
------ ------- -------- ------- -------- --------
Balance, September 30, 2005 $1,806 $67,519 $223,885 $ 4,856 $(25,576) $272,490
====== ======= ======== ======= ========= ========
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,
---------------------
2006 2005
--------- ---------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 17,389 $ 17,626
Adjustments to reconcile net income to net cash
provided by operating activities:
Net amortization (accretion) of premiums and discounts on investments (1,894) (734)
Provision for loan losses 5,343 8,614
Securities (gains), net (8) (570)
Depreciation and amortization 2,646 2,493
Other, net (478) (3,828)
--------- ---------
NET CASH FROM OPERATING ACTIVITIES 22,998 23,601
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of securities available-for-sale 737 11,900
Maturities and principal reductions on securities available-for-sale 124,118 137,324
Purchases of securities available-for-sale (144,942) (201,734)
Loans made to customers, net of repayments (6,257) 26,758
Net change in federal funds sold 2,902 (2,705)
Additions to premises and equipment (2,257) (1,177)
--------- ---------
NET CASH FROM INVESTING ACTIVITIES (25,699) (29,634)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits 12,684 43,457
Net change in short-term borrowings (9,210) (29,966)
Dividends paid (5,603) (10,778)
Purchase of treasury stock (3,422) (4,606)
Repayments on other borrowings (2,049) (18,608)
--------- ---------
NET CASH FROM FINANCING ACTIVITIES (7,600) (20,501)
--------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS (10,301) (26,534)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 78,201 94,928
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 67,900 $ 68,394
========= =========
See accompanying notes.
7
FIRST FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying September 30, 2006 and 2005 consolidated financial
statements are unaudited. The December 31, 2005 consolidated financial
statements are as reported in the First Financial Corporation (the
"Corporation") 2005 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
2005 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 financials 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 December
30, 2006 31, 2005
--------- --------
Impaired loans with related allowance for loan losses
calculated under SFAS No. 114 $1,850 $3,622
Impaired loans with no related allowance for loan losses 504 500
------ ------
$2,354 $4,122
====== ======
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, 2006 December 31, 2005
--------------------------- ---------------------------
Amortized Cost Fair Value Amortized Cost Fair Value
-------------- ---------- -------------- ----------
United States Government entity mortgage-
backed securities $336,992 $332,041 $306,697 $301,403
Collateralized Mortgage Obligations 111 118 2,357 2,360
State and Municipal Obligations 136,151 139,450 129,916 134,045
Corporate Obligations 77,340 77,854 89,740 90,224
Equity Securities 4,518 8,442 4,410 8,259
-------- -------- -------- --------
$555,112 $557,905 $533,120 $536,291
======== ======== ======== ========
4. Short-Term Borrowings
Period-end short-term borrowings were comprised of the following:
(000's)
--------------------
September December
30, 2006 31, 2005
--------- --------
Federal Funds Purchased $10,974 $19,032
Repurchase Agreements 4,919 5,579
Note Payable - U.S. Government 1,121 1,613
------- -------
$17,014 $26,224
======== =======
8
5. Other Borrowings
Other borrowings at period-end are summarized as follows:
(000's)
--------------------
September December
30, 2006 31, 2005
--------- --------
FHLB advances $335,217 $337,266
City of Terre Haute, Indiana economic development revenue bonds 6,600 6,600
-------- --------
$341,817 $343,866
======== ========
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
---------------- --------------- ---------------- ---------------
2006 2005 2006 2005 2006 2005 2006 2005
----- ----- ---- ---- ------- ------- ---- ----
Service cost $ 749 $ 701 $ 29 $ 35 $ 2,248 $ 2,104 $ 87 $106
Interest cost 591 622 75 80 1,773 1,867 226 239
Expected return on plan assets (698) (821) -- -- (2,095) (2,463) -- --
Amortization of transition obligation -- -- 15 15 -- -- 45 45
Amortization of prior service cost 14 14 -- -- 42 42 -- --
Amortization of net (gain) loss 191 62 60 63 572 185 180 188
----- ----- ---- ---- ------- ------- ---- ----
Net Periodic Benefit Cost $ 847 $ 578 $179 $193 $ 2,540 $ 1,735 $538 $578
===== ===== ==== ==== ======= ======= ==== ====
Employer Contributions
First Financial Corporation previously disclosed in its financial
statements for the year ended December 31, 2005 that it expected to contribute
$1.5 and $1.2 million respectively to its Pension Plan and ESOP and $294,000 to
the Post Retirement Health Benefits Plan in 2006. First Financial Corporation
anticipates contributing $1.5 and $1.2 million respectively to its Pension Plan
and ESOP in 2006. Contributions of $261,000 have been made through the third
quarter of 2006 for the Post Retirement Health Benefits plan. First Financial
Corporation anticipates contributing an additional $71,000 to the Post
Retirement Health Benefits plan in 2006.
7. Recent Accounting Pronouncements
FASB Interpretation No. 48 - In June 2006, the Financial Accounting
Standards Board (FASB) issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109" (FIN
48), which prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. FIN 48 is effective for fiscal years
beginning after December 15, 2006. We are still evaluating the impact, if any,
the adoption of FIN 48 will have on our financial statements.
SFAS No. 157 -- In September 2006, the Financial Accounting Standards Board
(FASB) issued Statement No. 157, Fair Value Measurements. This Statement defines
fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements. This Statement establishes a fair
value hierarchy about the assumptions used to measure fair value and clarifies
assumptions about risk and the effect of a restriction on the sale or use of an
asset. The new standard is effective for fiscal years beginning after November
15, 2007. The Company does not believe that the adoption of SFAS No. 157 will
have a material impact to the financial statements.
SPAS No. 158 -- In September 2006, the Financial Accounting Standards Board
(FASB) issued Statement No. 158 Employers' Accounting for Defined Benefit
Pension and Other Postretirement Plans -- an amendment of FASB Statements No.
87, 88, 106 and 132(R). This Statement requires an employer to recognize the
overfunded or underfunded status of a defined benefit postretirement plan (other
than a multiemployer plan) as an asset or liability in its statement of
financial position and to recognize changes in the funded status in the year in
which the changes occur through comprehensive income. Defined benefit plan
assets and obligations are to be measured as of the date of the employer's
fiscal year-end. The employer must disclose in the notes to the financial
statements additional information about certain effects on net periodic benefit
cost for the next fiscal year that arise from delayed recognition of gains and
losses, prior service costs or credits, and transition asset or obligation. The
new standard is effective for employers with publicly traded equity securities
as of the end of the fiscal year ending after December 15, 2006. The Company has
not completed it's evaluation of the impact of the adoption of SFAS No. 158. The
Corporation currently has a
9
prepaid asset in the financial statements and anticipates recording a liability
under this new accounting standard, as the projected benefit obligation exceeds
the fair value of plan assets.
SAB 108 -- In September 2006, the Securities and Exchange Commission (SEC)
issued Staff Accounting Bulletin No. 108 (SAB 108). SAB 108 provides
interpretive guidance on how the effects of the carryover or reversal of prior
year misstatements should be considered in quantifying a potential current year
misstatement. Prior to SAB 108, companies might evaluate the materiality of
financial statement misstatements using either the income statement or balance
sheet approach, with the income statement approach focusing on new misstatements
added in the current year, and the balance sheet approach focusing on the
cumulative amount of misstatement present in a company's balance sheet.
Misstatements that would be material under one approach can be viewed as
immaterial under another approach, and not be corrected. SAB 108 now requires
that companies view financial statement misstatements as material if they are
material according to either the income statement or balance sheet approach.
This statement is effective as of the end of the fiscal year ending after
December 15, 2006. The Corporation is currently evaluating the impact of
adopting SAB 108 on the consolidated financial statements.
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 2005.
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, 2005,
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.
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 2005 Annual
Report on Form 10-K.
Summary of Operating Results
Net income for the nine months ended September 30, 2006 was $17.4 million
compared to $17.6 million for the same period in 2005. Basic earnings per share
was the same for those periods at $1.31 per average share outstanding. The three
months ending on September 30, 2006 produced $5.5 million and $0.41 per share
compared to $6.3 million and $0.47 per share for the same period in 2005.
10
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
was down $155 thousand in the first nine months of 2006 from the same period in
2005. The net interest margin was one basis point higher at 3.92% in 2006 from
3.91% in 2005. The net interest income for the third quarter of 2006 at $18.2
million was down $441 thousand from the same period in 2005.
Non-Interest income
Non-interest income for the first nine months of 2006 was $21.7 million.
The strategy of holding mortgage loans in the portfolio has the effect of
reducing non-interest income. Loan fees are deferred and amortized over the life
of the loan when retained, rather than recognized upon sale. Additionally, there
are reduced gains from the sale of loans. This was the primary difference
between current year results and the $24.3 million of non-interest income for
the same period in 2005 when loans were being sold. Deposit fee income, however,
increased due to the higher level of deposits in 2006. Gains from the sale of
investment securities are also down $562 thousand when compared year over year
through September 30. Non-interest income for the three months ended September
30, 2006 was $7.1 million compared to $8.8 million for the third quarter of
2005. Gains on investment securities and loan sales combined accounted for $856
thousand of this $1.7 million decrease.
Non-Interest Expenses
The Corporation's non-interest expense for the nine months ended September
30, 2006 compared to the same period in 2005 increased by $1.0 million.
Equipment expenses and personnel costs were higher during the first nine months
of 2006 compared to the same period of 2005. Cost increases included merit
increases in salaries and higher benefit costs, as well as the new banking
center in Vincennes, Indiana opened early in 2006. The effective tax rate for
2006 has increased to 25.7% compared to 26.4% for 2005. The non-interest expense
for the three months ended September 30, 2006 was less than the same period of
2005 by $295 thousand.
Provision for Loan Losses
The Corporation's provision for loan losses decreased $3.3 million for the
nine months ended September 30, 2006 compared to the same period of 2005. Net
charge-offs for the first nine months of 2006 were $5.6 million compared to
$12.2 million for the same period in 2005. The provision for loan losses was
virtually the same for the third quarter of 2006 compared to 2005. The allowance
for loan losses as a percentage of total loans has remained relatively stable at
1.14% as of September 30, 2006, compared to 1.15% as of December 31, 2005.
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, 2006 and December 31, 2005
follows:
(000's)
--------------------
September December
30, 2006 31, 2005
--------- --------
Non-accrual loans $10,152 $ 8,464
Restructured loans 52 57
------- -------
10,204 8,521
Accruing loans past due over 90 days 4,702 6,354
------- -------
$14,906 $14,875
======= =======
Ratio of the allowance for loan losses
as a percentage of non-performing loans 106% 108%
11
The following loan categories comprise significant components of the
nonperforming loans:
(000's)
--------------------------------------
September 30, 2006 December 31, 2005
------------------ -----------------
Non-Accrual Loans:
1-4 family residential $ 1,593 $1,118
Commercial loans 6,585 5,888
Installment loans 1,974 1,458
------- ------
$10,152 $8,464
======= ======
Past due 90 days or more:
1-4 family residential $ 2,094 $3,197
Commercial loans 1,983 1,554
Installment loans 625 1,603
------- ------
$ 4,702 $6,354
======= ======
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 continuously monitored for behavioral changes.
The Corporation from time to time utilizes derivatives to manage interest
rate risk. Management continuously evaluates the merits of such interest rate
risk products but does not anticipate the use of such products to 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, 2006. 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 decrease 4.45% over the next 12 months and
decrease 1.76% over the following 12 months. Given a 100 basis point decrease in
rates, net interest income would increase 1.31% over the next 12 months and
decrease 1.55% 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 3.62 -2.53 -4.56
Down 100 1.31 -1.55 -8.87
Up 100 -4.45 -1.76 1.76
Up 200 -12.60 -7.65 -.76
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.
12
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 $12.7
million of investments that mature throughout the coming 12 months. The
Corporation also anticipates $68.7 million of principal payments from
mortgage-backed securities. Given the current rate environment, the Corporation
anticipates $22.3 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
In the first nine months of 2006 loans are down $1.9 million from the end
of 2005. Deposits are up $12.7 million. Investments increased $21.6 million.
Short and long term borrowings decreased $11.3 million. The percentage of the
allowance for loan and lease losses remained virtually the same at 1.14% of
loans at September 30, 2006 compared to 1.15% at December 31,2005. The
Corporation's equity increased $8.2 million.
Capital Adequacy
As of September 30, 2006, the most recent notification from the respective
regulatory agencies categorized the subsidiary banks as well capitalized under
the regulatory framework for prompt corrective action regulations. To be
categorized as well capitalized the banks 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 bank's category. Below are the actual and required
capital ratios for the Corporation and lead bank.
To Be Well
September 30, 2006 December 31, 2005 Capitalized
------------------ ----------------- -----------
Total risk-based capital ratio
Corporation 17.68% 16.99% N/A
First Financial Bank 17.79% 17.09% 10.00%
Tier I risk-based capital ratio
Corporation 16.69% 15.99% N/A
First Financial Bank 16.98% 16.20% 6.00%
Tier I leverage capital ratio
Corporation 12.51% 11.89% N/A
First Financial Bank 11.31% 11.94% 5.00%
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, 2006, 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 September 30, 2006 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 was no change in the Corporation's
internal control over financial reporting that occurred during the quarter ended
September 30, 2006 that have materially affected, or is reasonably likely to
materially affect, the Corporation's internal control over financial reporting.
13
PART II - Other Information
ITEM 1. Legal Proceedings.
There are no material pending legal proceedings, other than routine
litigation incidental to the business of the Corporation or its subsidiaries, to
which the Corporation or any of the subsidiaries is a party or of which any of
their respective property is subject. Further, there is no material legal
proceeding in which any director, officer, principal shareholder, or affiliate
of the Corporation or any of its subsidiaries, or any associate of such
director, officer, principal shareholder or affiliate is a party, or has a
material interest, adverse to the Corporation or any of its subsidiaries.
ITEM 1A. Risk Factors.
There have been no material changes in the risk factors from those
disclosed in the Corporation's 2005 Annual Report on Form 10-K.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(a) None.
(b) Not applicable.
(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.
(c)
Total Number Of Shares (d)
(a) (b) 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 *
---------------- -------------- ---------------------- -------------------
July 1 - 31, 2006 -- -- N/A N/A
August 1 - 31, 2006 11,700 29.85 N/A N/A
September 1 - 30, 2006 -- N/A N/A
Total 11,700 29.85 N/A N/A
* The Corporation has not adopted a formal policy or program regarding
repurchases of its shares of stock.
ITEM 5. Other Information.
Not applicable.
14
ITEM 6. Exhibits.
Exhibit No.: Description of Exhibit:
------------ -----------------------
3.1 Amended and Restated Articles of Incorporation of First
Financial Corporation, incorporated by reference to Exhibit 3(i)
of 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 Exhibit 3(ii) of the Corporation's Form 10-Q filed
for the quarter ended September 30, 2002.
10.1 Employment Agreement for Norman L. Lowery, dated March 29, 2006
and effective January 1, 2006, incorporated by reference to
Exhibit 10.1 to the Corporation's Form 8-K filed on March 31,
2006.
10.2 2001 Long-Term Incentive Plan of First Financial Corporation,
incorporated by reference to Exhibit 10.3 of the Corporation's
Form 10-Q filed for the quarter ended September 30, 2002.
10.3 2006 Schedule of Director Compensation, incorporated by
reference to Exhibit 10.3 of the Corporation's Form 10-K filed
for the fiscal year ended December 31, 2005.
10.4 First Amendment to 2001 Long-Term Incentive Plan of First
Financial Corporation.
10.5 Second Amendment to 2001 Long-Term Incentive Plan of First
Financial Corporation.
10.6 2006 Schedule of Named Executive Officer Compensation,
incorporated by reference to Exhibit 10.4 of the Corporation's
Form 10-K filed for the fiscal year ended December 31, 2005.
10.7 First Financial Executives' Supplemental Retirement Plan.
10.8 First Amendment to First Financial Corporation Executives'
Supplemental Retirement Plan.
10.9 Second Amendment to First Financial Corporation Executives'
Supplemental Retirement Plan.
10.10 First Financial Corporation Executives' Deferred Compensation
Plan.
10.11 First Amendment to First Financial Corporation Executives'
Deferred Compensation Plan.
31.1 Sarbanes-Oxley Act 302 Certification for Quarterly Report on
Form 10-Q for the quarter ended September 30, 2006 by Principal
Executive Officer, dated November 3, 2006.
31.2 Sarbanes-Oxley Act 302 Certification for Quarterly Report on
Form 10-Q for the quarter ended September 30, 2006 by Principal
Financial Officer, dated November 3, 2006.
32.1 Certification, dated November 3, 2006, of Principal Executive
Officer and Principal Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act on Form 10-Q for the quarter ended
September 30, 2006.
15
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, 2006 By /s/ Donald E. Smith
-------------------------------------
Donald E. Smith, Chairman
Date: November 3, 2006 By /s/ Norman L. Lowery
-------------------------------------
Norman L. Lowery, Vice Chairman and
CEO
Date: November 3, 2006 By /s/ Michael A. Carty
-------------------------------------
Michael A. Carty, Treasurer and CFO
16
Exhibit Index
Exhibit No.: Description of Exhibit:
------------ -----------------------
3.1 Amended and Restated Articles of Incorporation of First Financial
Corporation, incorporated by reference to Exhibit 3(i) of 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 Exhibit 3(ii) of the Corporation's Form 10-Q filed
for the quarter ended September 30, 2002.
10.1 Employment Agreement for Norman L. Lowery, dated March 29, 2006
and effective January 1, 2006, incorporated by reference to
Exhibit 10.1 to the Corporation's Form 8-K filed on March 31,
2006.
10.2 2001 Long-Term Incentive Plan of First Financial Corporation,
incorporated by reference to Exhibit 10.3 of the Corporation's
Form 10-Q filed for the quarter ended September 30, 2002.
10.3 2006 Schedule of Director Compensation, incorporated by reference
to Exhibit 10.3 of the Corporation's Form 10-K filed for the
fiscal year ended December 31, 2005.
10.4 First Amendment to 2001 Long-Term Incentive Plan of First
Financial Corporation.
10.5 Second Amendment to 2001 Long-Term Incentive Plan of First
Financial Corporation.
10.6 2006 Schedule of Named Executive Officer Compensation,
incorporated by reference to Exhibit 10.4 of the Corporation's
Form 10-K filed for the fiscal year ended December 31, 2005.
10.7 First Financial Executives' Supplemental Retirement Plan.
10.8 First Amendment to First Financial Corporation Executives'
Supplemental Retirement Plan.
10.9 Second Amendment to First Financial Corporation Executives'
Supplemental Retirement Plan.
10.10 First Financial Corporation Executives' Deferred Compensation
Plan.
10.11 First Amendment to First Financial Corporation Executives'
Deferred Compensation Plan.
31.1 Sarbanes-Oxley Act 302 Certification for Quarterly Report on
Form 10-Q for the quarter ended September 30, 2006 by Principal
Executive Officer, dated November 3, 2006.
31.2 Sarbanes-Oxley Act 302 Certification for Quarterly Report on
Form 10-Q for the quarter ended September 30, 2006 by Principal
Financial Officer, dated November 3, 2006.
32.1 Certification, dated November 3, 2006, of Principal Executive
Officer and Principal Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act on Form 10-Q for the quarter ended
September 30, 2006.
17