Annual Statements Open main menu

FIRST FINANCIAL CORP /IN/ - Quarter Report: 2009 March (Form 10-Q)

Form 10-Q
Table of Contents

 
 
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 March 31, 2009
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
             
Large accelerated filer o   Accelerated filer þ   Non-accelerated filer o (Do not check if a smaller reporting company)   Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
As of May 8, 2009, the registrant had outstanding 13,116,630 shares of common stock, without par value.
 
 

 

 


 

FORM 10-Q
INDEX
         
    Page No.  
       
 
       
       
 
       
    3  
 
       
    4  
 
       
    5  
 
       
    6  
 
       
    7  
 
       
    11  
 
       
    11  
 
       
    15  
 
       
       
 
       
    15  
 
       
    15  
 
       
    15  
 
       
    15  
 
       
    15  
 
       
    15  
 
       
    16  
 
       
    17  
 
       
 Exhibit 10.1
 Exhibit 31.1
 Exhibit 31.2
 Exhibit 32.1

 

2


Table of Contents

PART I — Financial Information
ITEM 1. Financial Statements
FIRST FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands, except per share data)
                 
    March 31,     December 31,  
    2009     2008  
            (unaudited)  
ASSETS
               
Cash and due from banks
  $ 51,267     $ 67,298  
Federal funds sold and short-term investments
          9,530  
Securities available-for-sale
    600,777       596,915  
Loans:
               
Commercial, financial and agricultural
    495,701       499,636  
Real estate — construction
    24,357       26,137  
Real estate — mortgage
    641,855       628,027  
Installment
    321,221       302,977  
Lease financing
    1,777       1,878  
 
           
 
    1,484,911       1,458,655  
Less:
               
Unearned Income
    (107 )     (128 )
Allowance for loan losses
    (17,029 )     (16,280 )
 
           
 
    1,467,775       1,442,247  
 
               
Cedit card loans held-for-sale
          12,800  
Restricted Stock
    26,227       26,227  
Accrued interest receivable
    12,132       13,081  
Premises and equipment, net
    32,166       32,145  
Bank-owned life insurance
    62,574       62,107  
Goodwill
    7,102       7,102  
Other intangible assets
    1,406       1,512  
Other real estate owned
    3,397       3,200  
Other assets
    29,024       28,511  
 
           
TOTAL ASSETS
  $ 2,293,847     $ 2,302,675  
 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Deposits:
               
Noninterest-bearing
  $ 230,536     $ 236,249  
Interest-bearing:
               
Certificates of deposit of $100 or more
    207,467       211,107  
Other interest-bearing deposits
    1,143,320       1,116,142  
 
           
 
    1,581,323       1,563,498  
Short-term borrowings
    38,816       21,500  
Other borrowings
    333,153       385,153  
Other liabilities
    44,638       45,680  
 
           
TOTAL LIABILITIES
    1,997,930       2,015,831  
Shareholders’ equity
               
Common stock, $.125 stated value per share;
Authorized shares-40,000,000
Issued shares-14,450,966
Outstanding shares-13,116,630 in 2009 and 13,116,630 in 2008
    1,806       1,806  
Additional paid-in capital
    68,654       68,654  
Retained earnings
    267,645       263,115  
Accumulated other comprehensive income (loss)
    (8,403 )     (12,946 )
Treasury shares at cost-1,334,336 in 2009 and 1,334,336 in 2008
    (33,785 )     (33,785 )
 
           
TOTAL SHAREHOLDERS’ EQUITY
    295,917       286,844  
 
           
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
  $ 2,293,847     $ 2,302,675  
 
           
See accompanying notes.

 

3


Table of Contents

FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Dollar amounts in thousands, except per share data)
                 
    Three Months Ended  
    March 31,  
    2009     2008  
    (unaudited)     (unaudited)  
INTEREST INCOME:
               
Loans, including related fees
  $ 22,907     $ 25,776  
Securities:
               
Taxable
    6,168       5,997  
Tax-exempt
    1,641       1,597  
Other
    470       917  
 
           
TOTAL INTEREST INCOME
    31,186       34,287  
 
               
INTEREST EXPENSE:
               
Deposits
    6,204       10,217  
Short-term borrowings
    143       367  
Other borrowings
    4,376       4,747  
 
           
TOTAL INTEREST EXPENSE
    10,723       15,331  
 
           
 
               
NET INTEREST INCOME
    20,463       18,956  
 
               
Provision for loan losses
    2,830       1,925  
 
           
 
               
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
    17,633       17,031  
 
               
NON-INTEREST INCOME:
               
Trust and financial services
    1,014       1,119  
Service charges and fees on deposit accounts
    2,497       2,792  
Other service charges and fees
    1,532       1,394  
Securities gains/(losses), net
          354  
Other-than-temporary impairment losses
    (2,979 )      
Insurance commissions
    1,439       1,559  
Gain on sales of mortgage loans
    576       225  
Other
    667       1,206  
 
           
TOTAL NON-INTEREST INCOME
    4,746       8,649  
 
               
NON-INTEREST EXPENSE:
               
Salaries and employee benefits
    10,180       10,333  
Occupancy expense
    1,092       1,049  
Equipment expense
    1,121       1,113  
Other
    4,304       3,929  
 
           
TOTAL NON-INTEREST EXPENSE
    16,697       16,424  
 
           
INCOME BEFORE INCOME TAXES
    5,682       9,256  
 
               
Provision for income taxes
    1,152       2,306  
 
           
NET INCOME
  $ 4,530     $ 6,950  
 
           
 
               
PER SHARE DATA
               
Basic and Diluted Earnings per Share
  $ 0.35     $ 0.53  
 
           
 
               
Weighted average number of shares outstanding (in thousands)
    13,117       13,123  
 
           
See accompanying notes.

 

4


Table of Contents

FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Three Months Ended
March 31, 2009, and 2008
(Dollar amounts in thousands, except per share data)
(Unaudited)
                                                 
                            Accoumulated              
                            Other              
    Common     Additional     Retained     Comprehensive     Treasury        
    Stock     Capital     Earnings     Income/(Loss)     Stock     Total  
 
                                               
Balance, January 1, 2008
  $ 1,806     $ 68,212     $ 250,011     $ (5,181 )   $ (33,156 )   $ 281,692  
 
                                               
Comprehensive income:
                                               
Net income
                6,950                   6,950  
Change in net unrealized gains/(losses) on securities available for-sale
                      5,345             5,345  
Change in net unrealized gains/ (losses) on retirement plans
                      128             128  
Total comprehensive income/(loss)
                                            12,423  
 
                                               
Treasury stock purchase
                            (887 )     (887 )
 
                                   
 
                                               
Balance, March 31, 2008
  $ 1,806     $ 68,212     $ 256,961     $ 292     $ (34,043 )   $ 293,228  
 
                                   
 
                                               
Balance, January 1, 2009
  $ 1,806     $ 68,654     $ 263,115     $ (12,946 )   $ (33,785 )   $ 286,844  
 
                                               
Comprehensive income:
                                               
Net income
                4,530                   4,530  
Change in net unrealized gains/(losses) on securities available for-sale
                      4,452             4,452  
Change in net unrealized gains/ (losses) on retirement plans
                      91             91  
Total comprehensive income/(loss)
                                            9,073  
 
                                               
Treasury stock purchase
                                   
 
                                   
 
                                               
Balance, March 31, 2009
  $ 1,806     $ 68,654     $ 267,645     $ (8,403 )   $ (33,785 )   $ 295,917  
 
                                   
See accompanying notes.

 

5


Table of Contents

FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands, except per share data)
                 
    Three Months Ended  
    March 31,  
    2009     2008  
    (Unaudited)        
CASH FLOWS FROM OPERATING ACTIVITIES:
               
 
               
Net Income
  $ 4,530     $ 6,950  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Net amortization (accretion) of premiums and discounts on investments
    (788 )     (680 )
Provision for loan losses
    2,830       1,925  
Securities (gains) losses
    2,979       (354 )
Gain on sale of other real estate
    (63 )     (55 )
Depreciation and amortization
    910       850  
Other, net
    1,952       2,616  
 
           
NET CASH FROM OPERATING ACTIVITIES
    12,350       11,252  
 
           
 
               
CASH FLOWS FROM INVESTING ACTIVITIES:
               
 
               
Proceeds from sales of securities available-for-sale
    0       354  
Proceeds from sales of restricted stock
    0       2,387  
Calls, maturities and principal reductions on securities available-for-sale
    25,848       26,048  
Purchases of securities available-for-sale
    (24,481 )     (69,139 )
Loans made to customers, net of repayment
    (16,182 )     14,197  
Proceeds from sales of other real estate owned
    490       566  
Net change in federal funds sold
    9,530       (37,456 )
Additions to premises and equipment
    (825 )     (307 )
 
           
NET CASH FROM INVESTING ACTIVITIES
    (5,620 )     (63,350 )
 
           
 
               
CASH FLOWS FROM FINANCING ACTIVITIES:
               
 
               
Net change in deposits
    17,825       62,929  
Net change in short-term borrowings
    17,316       (1,315 )
Dividends paid
    (5,902 )     (5,785 )
Purchase of treasury stock
    0       (887 )
Proceeds from other borrowings
    20,000          
Repayments on other borrowings
    (72,000 )     (5,000 )
 
           
NET CASH FROM FINANCING ACTIVITIES
    (22,761 )     49,942  
 
           
 
               
NET CHANGE IN CASH AND CASH EQUIVALENTS
    (16,031 )     (2,156 )
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    67,298       70,082  
 
           
 
               
CASH AND CASH EQUIVALENTS, END OF PERIOD
  $ 51,267     $ 67,926  
 
           
See accompanying notes.

 

6


Table of Contents

FIRST FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying March 31, 2009 and 2008 consolidated financial statements are unaudited. The December 31, 2008 consolidated financial statements are as reported in the First Financial Corporation (the “Corporation”) 2008 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 2008 annual report filed with the Securities and Exchange Commission as an exhibit to Form 10-K.
1. Significant Accounting Policies
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. Allowance for Loan Losses
Activity for the three months ended March 31, 2009 and 2008 in the allowance for loan losses is as follows.
                 
    March 31,  
    2009     2008  
Balance at beginning of quarter
  $ 16,280     $ 15,351  
Provision for loan losses
    2,830       1,925  
Recoveries of loans previously charged off
    608       628  
Loans charged off
    (2,689 )     (2,461 )
 
           
Balance at end of quarter
  $ 17,029     $ 15,443  
 
           
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:
                 
    March 31,     December 31,  
    2009     2008  
Impaired Loans with related allowance for loan losses calculated under SFAS No. 114
  $ 17,462     $ 16,959  
Impaired Loans with no related allowance for loan losses
           
 
           
 
  $ 17,462     $ 16,959  
 
           
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)  
    March 31, 2009     December 31, 2008  
    Amortized Cost     Fair Value     Amortized Cost     Fair Value  
United States Government entity mortgage-backed securities
  $ 354,727     $ 368,567     $ 354,456     $ 365,631  
Collateralized Mortgage Obligations
    66,914       68,874       68,838       70,227  
State and Municipal Obligations
    144,339       148,238       143,224       143,841  
Corporate Obligations
    28,555       9,351       31,586       10,633  
Equity Securities
    5,659       5,747       5,649       6,583  
 
                       
 
  $ 600,194     $ 600,777     $ 603,753     $ 596,915  
 
                       
Gross unrealized losses on investment securities were $21.7 million as of March 31, 2009 and $23.9 million as of December 31, 2008. A majority of these losses represent negative adjustments to market value relative to the rate of interest paid on the securities and not losses related to the creditworthiness of the issuer. Management has the intent and ability to hold these investments for the foreseeable future and believes the value will recover as the securities approach maturity or market rates change. A significant portion of the unrealized losses relates to collateralized debt obligations (CDOs) that were separately evaluated under EITF 99-20, Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests that Continue to be Held by a Transferor in Securitized Financial Assets.

 

7


Table of Contents

Based upon a down grade in credit rating during the quarter and an analysis of expected cash flows, we determined that two CDO’s included in corporate obligations were other-than-temporarily impaired and wrote our investments in those CDO’s totaling $3.2 million down to their fair value of $198 thousand (or 6.3% of par value) at March 31, 2009. The impact of this impairment charge to current quarter and year income was $1.8 million, net of tax.
Corporate obligations include three additional investments in CDOs consisting of pooled trust preferred securities in which the issuers are primarily banks. One of these CDOs with a par value of $2.3 million is rated BAA1, is not in the scope of EITF 99-20 and is not considered to be other-than-temporarily impaired based on its credit quality. Two of these CDOS, totaling $19.0 million in par value and $2.3 million in market value, are rated CA and are included in the scope of EITF 99-20. The Company evaluates the CDOS for possible other-than-temporary impairment by comparing original cash flow expectations to a current projection of cash flows, which are developed by considering past and current issuer defaults and deferrals, expected future defaults and the allocation of projected payments to the various note classes. A stress analysis is also performed to determine the maximum future default experience that can occur before impacting the cash flows of the Company’s note class. At March 31, 2009, the EITF 99-20 cash flow projections indicated no adverse change in these CDOs and the stress analyses continued to indicate that the collateral position is more than sufficient to cover projected future defaults. Therefore, we believe the unrealized losses on these CDOs relate to market conditions and these investments are not considered other-than-temporarily impaired as of March 31, 2009.
4. Fair Value
Statement of Financial Accounting Standard (“SFAS”) No. 157 establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) of identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level I prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The fair value of securities available for sale is determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).
For those securities that cannot be priced using quoted market prices or observable inputs a Level 3 valuation is determined. These securities are primarily trust preferred securities, which are priced using Level 3 due to current market illiquidity. The fair value of these securities is computed based upon discounted cash flows estimated using payment, default and recovery assumptions believed to reflect the assumptions of market participants. Cash flows are discounted at appropriate market rates, including consideration of credit spreads and illiquidity discounts.
                 
    Fair Value Measurements Using  
    March 31,     December 31,  
    2009     2008  
Securities available-for-sale (1)
               
Level 1
  $ 2,015     $ 2,827  
Level 2
    591,601       586,094  
Level 3
    7,161       7,994  
 
           
Carrying Value
  $ 600,777     $ 596,915  
 
           
     
(1)   The fair value of securities reported using Level 3 inputs include certain investments in bank equities and collateralized debt obligations for which Level 1 and Level 2 inputs are not available.

 

8


Table of Contents

The table below presents a reconciliation and income statement classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the quarters ended March 31, 2009 and 2008.
                 
    Fair Value Measurements Using Significant  
    Unobservable Inputs (Level 3)  
    March 31,     March 31  
    2009     2008  
Beginning Balance
  $ 7,994     $ 33,745  
Total gains or losses (realized/unrealized)
    (781 )     (1,674 )
Purchase
           
Settlements
           
Paydowns and Maturities
    (52 )     (238 )
Transfers into Level 3
           
 
           
Ending Balance
  $ 7,161     $ 31,833  
 
           
Changes in unrealized gains and losses recorded in earnings for the three months ended March 31, 2009 for Level 3 assets and liabilities that are still held at March 31, 2009 were approximately $3.0 million.
All impaired loans disclosed in footnote 2 are valued at Level 3 and are carried at a fair value of $12.4 million, net of a valuation allowance of $5.1 million at March 31, 2009. The impact to the provision for loan losses for the three months ending March 31, 2009 was $945 thousand. Fair value is measured based on the value of the collateral securing those loans, and is determined using several methods. Generally the fair value of real estate is determined based on appraisals by qualified licensed appraisers. If an appraisal is not available, the fair value may be determined by using a cash flow analysis, a broker’s opinion of value, the net present value of future cash flows, or an observable market price from an active market. Fair value on non real estate loans is determined using similar methods. In addition, business equipment may be valued by using the net book value from the business’ financial statements.
5. Short-Term Borrowings
Period-end short-term borrowings were comprised of the following:
                 
    (000’s)  
    March 31,     December 31,  
    2009     2008  
 
               
Federal Funds Purchased
  $ 15,627     $ 1,111  
Repurchase Agreements
    20,071       19,405  
Note Payable — U.S. Government
    3,118       984  
 
           
 
  $ 38,816     $ 21,500  
 
           
6. Other Borrowings
Other borrowings at period-end are summarized as follows:
                 
    (000’s)  
    March 31,     December 31,  
    2009     2008  
 
               
FHLB Advances
  $ 326,553     $ 378,553  
City of Terre Haute, Indiana economic development revenue bonds
    6,600       6,600  
 
           
 
  $ 333,153     $ 385,153  
 
           

 

9


Table of Contents

7. Components of Net Periodic Benefit Cost
                                 
    Three Months Ended March 31,  
    (000’s)  
                    Post-Retirement  
    Pension Benefits     Health Benefits  
    2009     2008     2009     2008  
Service cost
  $ 768     $ 758     $ 27     $ 31  
Interest cost
    693       727       60       60  
Expected return on plan assets
    (910 )     (823 )            
Amortization of transition obligation
                15       15  
Net amortization of prior service cost
    (5 )     (5 )            
Net amortization of net (gain) loss
    116       182       0       3  
 
                       
Net Periodic Benefit Cost
  $ 662     $ 839     $ 102     $ 109  
 
                       
Employer Contributions
First Financial Corporation previously disclosed in its financial statements for the year ended December 31, 2008 that it expected to contribute $1.7 and $1.3 million respectively to its Pension Plan and ESOP and $175,000 to the Post Retirement Health Benefits Plan in 2009. Contributions of $46,782 have been made through the first quarter of 2009 for the Post Retirement Health Benefits plan.
8. New accounting standards
FAS No. 157, “Fair Value Measurements,” 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 standard was effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued Staff Position (FSP) 157-2, Effective Date of FASB Statement No. 157. This FSP delays the effective date of FAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The impact of adoption was not material. In October 2008, the FASB issued Staff Position (FSP) 157-3, “Determining the Fair Value of a Financial Asset when the Market for That Asset Is Not Active.” This FSP clarifies the application of FAS 157 in a market that is not active. The impact of adoption was not material. In April 2009, the FASB issued Staff Position (FSP) 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.” This FASB Staff Position (FSP) provides additional guidance for estimating fair value in accordance with FASB Statement No. 157, “Fair Value Measurements,” when the volume and level of activity for the asset or liability have significantly decreased. This FSP also includes guidance on identifying circumstances that indicate a transaction is not orderly. This issue is effective for reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. Early adoption has been deemed unnecessary and the impact of adoption is not expected to be material.
FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” requires disclosures about fair value of financial instruments in interim reporting periods of publicly traded companies that were previously only required to be disclosed in annual financial statements. The provisions of FSP FAS 107-1 and APB 28-1 are effective for the Company’s interim period ending on June 30, 2009. As FSP FAS 107-1 and APB 28-1 amends only the disclosure requirements about fair value of financial instruments in interim periods, the adoption of FSP FAS 107-1 and APB 28-1 is not expected to affect the Corporation’s statements of income and condition.
FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments,” amends current other-than-temporary impairment guidance in GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This FSP does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. The provisions of FSP FAS 115-2 and FAS 124-2 are effective for the Company’s interim period ending on June 30, 2009. Management is currently evaluating the effect that the provisions of FSP FAS 115-2 and FAS 124-2 may have on the Corporation’s statements of income and condition.

 

10


Table of Contents

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 2008.
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, 2008, 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, 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 2008 Annual Report on Form 10-K.
Summary of Operating Results
Net income for the three months ended March 31, 2009 was $4.53 million compared to $6.95 million for the same period of 2008. Basic earnings per share decreased to $0.35 for the first quarter of 2009 compared to $0.53 for 2008. Return on Assets and return on Equity were 0.79% and 6.17% respectively, compared to 1.23%and 9.62% for the three months ended March 31, 2008.
The primary components of income and expense affecting net income are discussed in the following analysis.
Net Interest Income
The Corporation’s primary source of earnings is net interest income, which is the difference between the interest earned on loans and other investments and the interest paid for deposits and other sources of funds. Net interest income increased to $20.5 million in the first three months of 2009 from $19.0 million in the same period in 2008, an 8.0% increase. The net interest margin increased to 4.03% in 2009 from 3.85% in 2008, a 4.7% increase, driven by a greater decline in the costs of funding than the decline in the income realized on earning assets.
Non-Interest Income
Non-interest income for the quarter was $4.7 million compared to $8.6 million for the first quarter of 2008. The decrease was largely due to the aforementioned other-than-temporary impairment charge. The Corporation chose to fully recognize the losses related to certain collateralized debit obligations (CDO’s). The Corporation did not choose early adoption of the Financial Accounting Standards Board’s revised pronouncements and staff positions because of the confusing e income statement presentation which would have reflected losses on the above mentioned CDO’s in excess of the cost. Non-interest income was also less due to the recognition of a gain on VISA stock included in the first three months of 2008.

 

11


Table of Contents

Non-Interest Expenses
The Corporation’s non-interest expense for the quarter ended March 31, 2009 compared to the same period in 2008 increased by $274 thousand or 1.7%. FDIC insurance increased for the three months ended March 31, 2009, as compared to the three months ended March 31, 2008. The increase in 2009 is due to an overall increase in the assessment by the FDIC effective January 1, 2009. Insurance assessments range from 0.12% to 0.50% of total deposits for the first quarter 2009 assessment period only. The first quarter 2009 final assessment rate will not be finalized by the FDIC until the end of June 2009. All expense recorded is an estimate of the actual assessment rate. Effective April 1, 2009, insurance assessments will range from 0.07% to 0.78%, depending on an institution’s risk classification, as well as its unsecured debt, secured liability and brokered deposits. In addition, under an interim rule, the FDIC proposes to impose a 20 basis point emergency special assessment on insured depository institutions on June 30, 2009. The emergency special assessment would be collected on September 30, 2009. The interim rule also authorizes the FDIC to impose an additional emergency special assessment after June 30, 2009, of up to 10 basis points, if necessary to maintain public confidence in federal deposit insurance.
Income tax expense for the quarter of $1.1 million was 50% less than the first quarter of 2008 as income before tax was less and the effective tax rate decreased from 24.9% to 20.3% as tax exempt income was a higher proportion of total income for the quarter.
Allowance for Loan Losses
The Corporation’s provision for loan losses increased $905 thousand for the first three months of 2009 compared to the same period of 2008. Net charge-offs for the first three months of 2009 were higher by $248 thousand and the volume of impaired and non-performing loans both increased. The allowance for loan losses has increased from 1.11% of gross loans, or $16.3 million at December 31, 2008 to 1.15% of gross loans, or $17.0 million at March 31, 2009. Based on management’s analysis of the current portfolio, an evaluation that includes consideration of historical loss experience, non-performing loans trends, and probable incurred losses on identified problem loans, management believes the allowance is adequate.
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. At December 31, 2008 there were a significant volume of loans that were identified as impaired that were not initially put on non-accrual. These loans were put on non-accrual in the first quarter of 2009. A summary of non-performing loans at March 31, 2009 and December 31, 2008 follows:
                 
    (000’s)  
    March 31,     December 31,  
    2009     2008  
Non-accrual loans
  $ 24,183     $ 12,486  
Restructured loans
    97       98  
Accruing loans past due over 90 days
    5,173       3,624  
 
           
 
  $ 29,453     $ 16,208  
 
           
 
               
Ratio of the allowance for loan losses as a percentage of non-performing loans
    58 %     100 %

 

12


Table of Contents

The following loan categories comprise significant components of the nonperforming loans:
                 
    (000’s)  
    March 31,     December 31,  
    2009     2008  
Non-accrual loans
               
1-4 family residential
  $ 2,348     $ 1,835  
Commercial loans
    20,310       9,210  
Installment loans
    1,525       1,441  
 
           
 
  $ 24,183     $ 12,486  
 
           
 
               
Past due 90 days or more
               
1-4 family residential
  $ 1,036     $ 1,495  
Commercial loans
    3,740       1,582  
Installment loans
    397       547  
 
           
 
  $ 5,173     $ 3,624  
 
           
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 March 31, 2009. 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 0.21% over the next 12 months and increase 1.84% over the following 12 months. Given a 100 basis point decrease in rates, net interest income would increase 2.12% over the next 12 months and increase 2.09% over the following 12 months. These estimates assume all rate changes occur overnight and management takes no action as a result of this change.
                         
Basis Point   Percentage Change in Net Interest Income  
Interest Rate Change   12 months     24 months     36 months  
Down 200
    2.83 %     2.80 %     2.76 %
Down 100
    2.12       2.09       2.06  
Up 100
    0.21       1.84       4.06  
Up 200
    -0.62       2.46       7.04  
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.

 

13


Table of Contents

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 $12.9 million of investments that mature throughout the coming 12 months. The Corporation also anticipates $185.2 million of principal payments from mortgage-backed securities. Given the current rate environment, the Corporation anticipates $33.9 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 quarter of 2009 to the same period in 2008, net loans are up 4.1% or $57.5 million. Deposits are down $11.3 million at March 31, 2009, a 0.7% decrease from the balances at the same time in 2008 primarily from reduced public funds deposits. The investment portfolio and federal funds sold declined by $51.6 million. Shareholders’ equity increased $2.7 million. The financial performance increased book value per share 0.8% to $22.56 at March 31, 2009 from $22.38 at March 31, 2008. Book value per share is calculated by dividing the total shareholders’ equity by the number of shares outstanding.
Capital Adequacy
As of March 31, 2009, the most recent notification from the respective regulatory agencies categorized the subsidiary banks as well capitalized under the regulatory framework for prompt corrective action. 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 capital ratios for the Corporation and lead bank.
                         
    March 31, 2009     December 31, 2008     To Be Well Capitalized  
 
                       
Total risk-based capital
                       
Corporation
    17.78 %     17.32 %     N/A  
First Financial Bank
    17.54 %     17.11 %     10.00 %
 
                       
Tier I risk-based capital
                       
Corporation
    16.81 %     16.40 %     N/A  
First Financial Bank
    16.72 %     16.34 %     6.00 %
 
                       
Tier I leverage capital
                       
Corporation
    12.89 %     12.72 %     N/A  
First Financial Bank
    12.79 %     12.64 %     5.00 %

 

14


Table of Contents

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 March 31, 2009, an evaluation was performed under the supervision and with the participation of management, including the principal executive officer and principal 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 principal executive officer and principal financial officer, concluded that the Corporation’s disclosure controls and procedures as of March 31, 2009 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 March 31, 2009 that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.
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 1 A. Risk Factors
There have been no material changes in the risk factors from those disclosed in the Corporation’s 2008 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. There were no shares purchased by the Corporation during the quarter covered by this report. The Corporation has not adopted a formal policy or program regarding repurchases of its shares of stock.
ITEM 3. Defaults upon Senior Securities
Not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 5. Other Information
Not applicable.

 

15


Table of Contents

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 25, 2009 and effective January 1, 2009.
       
 
  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    
2009 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, 2008.
       
 
  10.4    
2009 Schedule of Named Executive Officer Compensation, incorporated by reference to the Corporation’s Form 10-K filed for the fiscal year ended December 31, 2008.
       
 
  31.1    
Sarbanes-Oxley Act 302 Certification for Quarterly Report on Form 10-Q for the quarter ended March 31, 2009 by Principal Executive Officer, dated May 8, 2009
       
 
  31.2    
Sarbanes-Oxley Act 302 Certification for Quarterly Report on Form 10-Q for the quarter ended March 31, 2009 by Principal Financial Officer, dated May 8, 2009.
       
 
  32.1    
Certification, dated May 8, 2009, of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2005 on Form 10-Q for the quarter ended March 31, 2009.

 

16


Table of Contents

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: May 8, 2009  By:   /s/ Donald E. Smith    
    Donald E. Smith, Chairman   
       
Date: May 8, 2009  By:   /s/ Norman L. Lowery    
    Norman L. Lowery, Vice Chairman and CEO   
     
Date: May 8, 2009  By:   /s/ Michael A. Carty    
    Michael A. Carty, Treasurer and CFO   

 

17


Table of Contents

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 25, 2009 and effective January 1, 2009.
       
 
  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    
2009 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, 2008.
       
 
  10.4    
2009 Schedule of Named Executive Officer Compensation, incorporated by reference to the Corporation’s Form 10-K filed for the fiscal year ended December 31, 2008.
       
 
  31.1    
Sarbanes-Oxley Act 302 Certification for Quarterly Report on Form 10-Q for the quarter ended March 31, 2009 by Principal Executive Officer, dated May 8, 2008
       
 
  31.2    
Sarbanes-Oxley Act 302 Certification for Quarterly Report on Form 10-Q for the quarter ended March 31, 2009 by Principal Financial Officer, dated May 8, 2008.
       
 
  32.1    
Certification, dated May 8, 2009, of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2005 on Form 10-Q for the quarter ended March 31, 2009.

 

18