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THFF > SEC Filings for THFF > Form 10-Q on 8-Aug-2013All Recent SEC Filings

Show all filings for FIRST FINANCIAL CORP /IN/ | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for FIRST FINANCIAL CORP /IN/


8-Aug-2013

Quarterly Report

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 financial statements for 2012 in the 10-K filed for the fiscal year ended December 31, 2012.

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 Form 10-K for the year ended December 31, 2012, 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 and valuing investment securities. See further discussion of these critical accounting policies in the 2012 Form 10-K.

Summary of Operating Results

Net income for the three and six months ended June 30, 2013 was $6.4 and $14.1 million respectively compared to $8.7 and $16.1 million for the same period of 2012. Basic earnings per share decreased to $0.48 for the second quarter of 2013 compared to $0.66 for same period of 2012. Year to date earnings per share at June 30, 2013 is $1.06 compared to $1.22 for the same period of 2012. Return on Assets and Return on Equity were 0.88% and 6.78% respectively, for the three months ended June 30, 2013 compared to 1.20%and 9.43% for the three months ended June 30, 2012. Return on Assets and Equity were 0.96% and 7.49% respectively, for the six months ended June 30, 2013 compared to 1.11%and 8.96% for the six months ended June 30, 2012.

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 decreased $1.9 million in the three months ended June 30, 2013 to $25.7 million from $27.7 million in the same period in 2012. The net interest margin for the three months ended June 30, 2013 is 4.09% compared to 4.42% for the same period of 2012, a 7.5% decrease, driven by a greater decline in income realized on earning assets than the decline in the costs of funding. Net interest income for the six months ended June 30, 2013 decreased 5.3% or $2.9 million to $51.9 million from the $54.8 million for the six months ended June 30, 2012.

Non-Interest Income

Non-interest income for the three months ended June 30, 2013 was $9.7 million, a decrease of $0.1 million from the $9.8 million for the same period of 2012. Non-interest income for the six months ended June 30, 2013 was $0.3 million higher than the same period of 2012. Security gains decrease in 2013 offset increases in other areas of non-interest income.

Non-Interest Expenses

The Corporation's non-interest expense for the quarter ended June 30, 2013 increased by $0.3 million to $23.4 million compared to the same period in 2012. Salaries and fringe benefits decreased $178 thousand. For the six months ended June 30, 2013 non-interest expense of $45.6 million decreased $0.9 million over the same period of 2012. Salaries and benefits were reduced $1.0 million. Other expenses in 2012, which include many costs from the acquisition of Freestar bank were reduced $489 thousand in the first six months of 2013 compared to the same periods of 2012.

Allowance for Loan Losses

The Corporation's provision for loan losses increased $1.2 million to $6.0 million for the first half of 2013 compared to $4.8 million for the same period of 2012 and was $3.0 million for the second quarter of 2013 compared to $1.8 million in 2012. Net charge offs for the second quarter of 2013 were $5.8 million compared to $1.4 million for the same period of 2012. Net charge offs for the six months ended June 30, 2013 were the same at $4.8 million compared to the same period of 2012. For the six months ended June 30, 2013 and 2012, net charge-offs to average loans and leases were 0.53% and 0.51%, respectively. The majority of the loans charged off in the second quarter were reserved for in prior quarters. Provision expense is also impacted by changes in the FDIC indemnification asset. For the quarter ended June 30, 2013, these changes increases the provision by $260 thousand compared to a decrease of $1.4 million in 2012. For the six months ended June 30, 2013, these changes increased the provision by $1.0 million compared to a decrease of $914 thousand in 2012. During 2013, the volume of impaired loans and specific allocations for these loans increased as compared to the same period of 2012. The allowance for loan losses has increased to $22.1 million at June 30, 2013 compared to $22.0 million at December 31, 2012. 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. Non-performing loans decreased to $47.6 million at June 30, 2013 compared to $59.8 million at December 31, 2012. A summary of non-performing loans at June 30, 2013 and December 31, 2012 follows:

                                                    (000's)
                                          June 30,       December 31,
                                            2013             2012
Non-accrual loans                         $  27,554     $       36,794
Restructured loans                           18,212             19,671
Accruing loans past due over 90 days            980              3,362
                                          $  46,746     $       59,827
Ratio of the allowance for loan losses
as a percentage of non-performing loans        47.3 %             36.7 %

The following loan categories comprise significant components of the nonperforming loans:

                                     (000's)
                           June 30,       December 31,
                             2013             2012
Non-accrual loans
Commercial loans           $  19,623     $       21,900
Residential loans              6,395             13,201
Consumer loans                 1,536              1,693
                           $  27,554     $       36,794

Past due 90 days or more
Commercial loans           $     298     $        1,481
Residential loans                597              1,750
Consumer loans                    85                131
                           $     980     $        3,362

The following table is information on the non-accrual loans at June 30, 2013 and December 31, 2012 that were from the acquisition of assets from The First National Bank of Danville and are included in non-accrual loans above.

                                      (000's)
                             June 30,      December 31,
                               2013            2012
Non-accrual loans
Commercial loans            $    2,395     $       4,114
1-4 family residential             280               217
Installment loans                    -                 -
                            $    2,675     $       4,331

Past due 90 days or more:
Commercial loans            $        0     $         539
Residential loans                   24                91
Consumer loans                       -                 -
                            $       24     $         630

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 June 30, 2013. 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 2.37% over the next 12 months and increase 5.46% over the following 12 months. Given a 100 basis point decrease in rates, net interest income would decrease 0.95% over the next 12 months and decrease 2.68% 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                       -1.67 %             -4.69 %             -6.74 %
Down 100                       -0.95               -2.68               -3.94
Up 100                          2.37                5.46                9.27
Up 200                          2.49                8.59               16.41

Typical rate shock analysis does not reflect management's ability to react and thereby reduce the effect of rate changes, and represents a worst-case scenario.

Liquidity Risk

Liquidity represents an institution's ability to provide funds to satisfy demands from depositors, borrowers, and other creditors by either converting assets into cash or accessing new or existing sources of incremental funds. Generally the Corporation relies on deposits, loan repayments and repayments of investment securities as its primary sources of funds. The Corporation has $15.1 million of investments that mature throughout the next 12 months. The Corporation also anticipates $103.3 million of principal payments from mortgage-backed securities. Given the current rate environment, the Corporation anticipates $7.8 million in securities to be called within the next 12 months. The Corporation also has unused borrowing capacity available with the Federal Home Loan Bank of Indianapolis and several correspondent banks. With these many sources of funds, the Corporation currently anticipates adequate liquidity to meet the expected obligations of its customers.

Financial Condition

Comparing the first six months of 2013 to the same period in 2012, loans, net of unearned discount, have decreased to $1.80 billion from $1.88 billion. Deposits remained stable at $2.3 billion at June 30, 2013, substantially the same as at June 30, 2012. Shareholders' equity increased 2.8% or $10.1 million. This financial performance increased book value per share 2.3% to $27.68 at June 30, 2013 from $27.07 at June 30, 2012. Book value per share is calculated by dividing the total shareholders' equity by the number of shares outstanding.

Capital Adequacy

As of June 30, 2013, 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.

                                                June 30, 2013       December 31, 2012       To Be Well Capitalized

Total risk-based capital
Corporation                                              16.92 %                 16.37 %                        N/A
First Financial Bank                                     16.04 %                 15.67 %                      10.00 %

Tier I risk-based capital
Corporation                                              15.90 %                 15.38 %                        N/A
First Financial Bank                                     15.13 %                 14.78 %                       6.00 %

Tier I leverage capital
Corporation                                              11.96 %                 11.43 %                        N/A
First Financial Bank                                     11.34 %                 10.98 %                       5.00 %

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