Business Context and Reporting Period
Company: First Financial Corporation
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and six months ended June 30, 2009
Business Overview: A holding company for First Financial Bank, operating primarily in Indiana. The company reported as an accelerated filer with 13,116,630 shares of common stock outstanding as of July 31, 2009.
Key Financial Metrics
| Metric | Q2 2009 (3 Months) | Q2 2008 (3 Months) | YTD 2009 (6 Months) | YTD 2008 (6 Months) |
|---|---|---|---|---|
| Net Income | $4.62 million | $7.14 million | $9.15 million | $14.09 million |
| Earnings Per Share (Basic/Diluted) | $0.35 | $0.55 | $0.70 | $1.07 |
| Net Interest Income | $20.58 million | $19.96 million | $41.04 million | $38.92 million |
| Net Interest Margin (YTD) | 4.02% (vs. 3.93% in 2008) | |||
| Provision for Loan Losses | $2.86 million | $1.74 million | $5.69 million | $3.66 million |
| Total Assets | $2.35 billion (June 30, 2009) | |||
| Total Loans (Net) | $1.52 billion (June 30, 2009) | |||
| Total Deposits | $1.58 billion (June 30, 2009) | |||
| Shareholders' Equity | $292.66 million (June 30, 2009) | |||
| Cash and Cash Equivalents | $54.66 million (June 30, 2009) |
Material Changes vs. Prior Period
- Profitability Decline: Net income decreased 35% in Q2 2009 compared to Q2 2008, and 35% on a year-to-date basis. This was driven by increased provisions for loan losses and non-interest expenses.
- Loan Loss Provisions: The provision for loan losses increased by $1.13 million in Q2 and $2.03 million YTD compared to the prior year, reflecting a conservative approach to problem credits and rising non-performing loans.
- Non-Interest Expenses: Expenses rose by $1.8 million in Q2 2009, primarily due to a special FDIC assessment of 5 basis points on total assets less Tier 1 capital.
- Asset Growth: Total loans increased by 5.85% ($85.4 million) compared to the same period in 2008, while deposits decreased by 1.6% ($26.2 million).
- Impairment Charges: The company recorded $1.59 million in net impairment losses on securities in Q2 2009 and $4.57 million YTD, related to Collateralized Debt Obligations (CDOs). No such charges were recorded in the comparable 2008 periods.
Outlook, Risks, and Unusual Items
- Acquisition Activity: On July 2, 2009, the company acquired the First National Bank of Danville, IL, from the FDIC. The transaction included approximately $144 million in deposits and $133 million in assets (including $90 million in loans) under a "Whole Bank and Loss Share" agreement.
- Non-Performing Assets: Non-performing loans increased significantly to $36.6 million (up from $16.2 million at year-end 2008), driven by a rise in non-accrual commercial loans. The allowance for loan losses covered 47% of non-performing loans, down from 100% at year-end 2008.
- Investment Portfolio: Gross unrealized losses on investment securities totaled $26.6 million. Management determined that three CDOs were other-than-temporarily impaired (OTTI), resulting in a write-down of $22.86 million through earnings. Management does not intend to sell other securities with unrealized losses.
- Capital Adequacy: The subsidiary banks remain categorized as "well capitalized" by regulators. Total risk-based capital for the Corporation was 17.05% as of June 30, 2009.
- Interest Rate Risk: The company is asset-sensitive; a 100 basis point increase in rates is projected to increase net interest income by 1.27% over the next 12 months.
Investor Verification Checklist
- Asset Quality: Verify the trend in non-accrual commercial loans, which more than doubled from $9.2 million to $26.3 million in six months.
- FDIC Assessment Impact: Confirm the full-year impact of the special FDIC assessment on non-interest expenses.
- Acquisition Integration: Monitor the integration of the First National Bank of Danville assets and the effectiveness of the FDIC loss share agreement.
- Securities Valuation: Review the ongoing valuation of CDOs and other Level 3 assets for potential future OTTI charges.
- Liquidity Position: Assess the impact of the $26 million deposit outflow on funding costs and liquidity management.