10-Q 1 c80847e10vq.txt QUARTERLY REPORT FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FIRST FINANCIAL CORPORATION September 30, 2003 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended September 30, 2003 ----------------------- Commission File Number 0-16759 ------- FIRST FINANCIAL CORPORATION --------------------------- (Exact name of registrant as specified in its charter) INDIANA 35-1546989 ------- ---------- (State or other jurisdiction (I.R.S. Employer Incorporation or organization) Identification No.) One First Financial Plaza, Terre Haute, IN 47807 ------------------------------------------ ----- (Address of principal executive office) (Zip Code) (812) 238-6000 -------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes __x___ No _____. Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes __x___ No _____. As of October 31, 2003, there were outstanding 13,605,770 shares without par value, of the registrant. 1 FIRST FINANCIAL CORPORATION FORM 10-Q INDEX PART I. Financial Information Page No. -------- Item 1. Financial Statements: Consolidated Statements of Condition................................3 Consolidated Statements of Income...................................4 Consolidated Statements of Shareholders' Equity.....................5 Consolidated Statements of Cash Flows...............................7 Notes to Consolidated Financial Statements..........................8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..........................9 Item 3. Interest Rate Risk and Quantitative and Qualitative Disclosures about Market Risk...............................11 Item 4. Controls and Procedures.....................................12 PART II. Other Information: Item 4. Submission of Matters to a Vote of Security Holders.........13 Item 6. Exhibits and Reports on Form 8-K............................14 Signatures...........................................................15 Certification of Financial Results...................................18 2 FIRST FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CONDITION (Dollar amounts in thousands, except per share data)
September 30, December 31, 2003 2002 ---- ---- (Unaudited) ASSETS Cash and due from banks $ 94,505 $ 96,043 Federal funds sold and short-term investments 5,600 50 Securities, available-for-sale 532,526 511,548 Loans: Commercial, financial and agricultural 358,554 331,316 Real estate - construction 36,333 42,930 Real estate - mortgage 772,242 789,618 Installment 265,286 268,067 Lease financing 5,262 1,281 ----------- ----------- 1,437,677 1,433,212 Less: Unearned income (599) (648) Allowance for loan losses (22,738) (21,249) ----------- ----------- 1,414,340 1,411,315 Accrued interest receivable 13,722 15,199 Premises and equipment, net 29,402 29,809 Bank-owned life insurance 49,643 47,736 Goodwill 7,102 7,102 Other intangible assets 3,805 4,289 Other real estate owned 4,858 5,006 Other assets 38,183 41,651 ----------- ----------- TOTAL ASSETS $ 2,193,686 $ 2,169,748 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing $ 175,327 $ 146,585 Interest-bearing: Certificates of deposit of $100 or more 198,253 200,325 Other interest-bearing deposits 1,076,587 1,087,744 ----------- ----------- 1,450,167 1,434,654 Short-term borrowings 76,762 34,355 Other borrowings 383,742 423,290 Other liabilities 29,082 35,478 ----------- ----------- TOTAL LIABILITIES 1,939,753 1,927,777 ----------- ----------- Shareholders' equity: Common stock, $.125 stated value per share; Authorized shares--40,000,000 Issued shares-14,450,966 Outstanding shares--13,605,770 in 2003 and 13,618,890 in 2002 1,806 903 Additional capital 67,181 66,809 Retained earnings 192,340 178,209 Accumulated other comprehensive income 11,266 14,276 Treasury shares, at cost - 845,196 in 2003 and 832,076 in 2002 (18,660) (18,226) ----------- ----------- TOTAL SHAREHOLDERS' EQUITY 253,933 241,971 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,193,686 $ 2,169,748 =========== ===========
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, 2003 2002 2003 2002 ---- ---- ---- ---- (Unaudited) (Unaudited) INTEREST INCOME: Loans including related fees $ 24,121 $ 26,314 $ 73,188 $ 79,737 Securities: Taxable 3,653 4,471 11,710 14,552 Tax-exempt 1,979 2,307 5,999 6,231 Other 647 743 1,945 2,460 --------- --------- --------- --------- TOTAL INTEREST INCOME 30,400 33,835 92,842 102,980 --------- --------- --------- --------- INTEREST EXPENSE: Deposits 6,488 8,631 20,643 26,482 Short-term borrowings 151 127 322 575 Other borrowings 5,230 5,784 15,739 17,084 --------- --------- --------- --------- TOTAL INTEREST EXPENSE 11,869 14,542 36,704 44,141 --------- --------- --------- --------- NET INTEREST INCOME 18,531 19,293 56,138 58,839 Provision for loan losses 2,318 2,273 6,848 6,621 --------- --------- --------- --------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 16,213 17,020 49,290 52,218 --------- --------- --------- --------- NON-INTEREST INCOME: Trust department income 890 864 2,846 2,572 Service charges and fees on deposit accounts 2,068 1,590 5,244 4,557 Other service charges and fees 2,530 1,412 6,356 3,841 Securities gains/(losses), net 152 - 158 (79) Insurance commissions 1,554 1,739 4,702 4,583 Gains/(losses) on sales of mortgage loans (220) 1,003 1,799 2,293 Other 336 831 1,794 2,130 --------- --------- --------- --------- TOTAL NON-INTEREST INCOME 7,310 7,439 22,899 19,897 --------- --------- --------- --------- NON-INTEREST EXPENSES: Salaries and employee benefits 8,961 9,466 26,963 26,823 Occupancy expense 946 882 2,990 2,691 Equipment expense 853 620 2,477 2,367 Other 4,818 5,468 13,946 14,720 --------- --------- --------- --------- TOTAL NON-INTEREST EXPENSE 15,578 16,436 46,376 46,601 --------- --------- --------- --------- INCOME BEFORE INCOME TAXES 7,945 8,023 25,813 25,514 Provision for income taxes 1,502 1,852 6,163 6,063 --------- --------- --------- --------- NET INCOME $ 6,443 $ 6,171 $ 19,650 $ 19,451 ========= ========= ========= ========= PER SHARE DATA: Basic and diluted earnings per share $ 0.47 $ 0.45 $ 1.45 $ 1.42 ========= ========= ========= ========= Dividends per share $ - $ - $ 0.34 $ 0.31 ========= ========= ========= ========= Weighted average number of shares outstanding (in thousands) 13,568 13,650 13,586 13,660 ========= ========= ========= =========
See accompanying notes 4 FIRST FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Three Months Ended September 30, 2003 and 2002 (Dollar amounts in thousands, except per share data) (Unaudited)
Accumulated Other Common Additional Retained Comprehensive Treasury Stock Capital Earnings Income Stock Total Balance, July 1, 2003 $ 903 $ 66,809 $186,800 $ 14,996 $(19,544) $249,964 Comprehensive income: Net income 6,443 6,443 Change in net unrealized gains/(losses) on available- for-sale securities (3,730) (3,730) -------- Total comprehensive income 2,713 Contribution of 40,000 shares to ESOP 372 884 1,256 Two for one stock split 903 (903) - -------- -------- -------- -------- -------- -------- Balance, September 30, 2003 $ 1,806 $ 67,181 $192,340 $ 11,266 $(18,660) $253,933 ======== ======== ======== ======== ======== ======== Balance, July 1, 2002 $ 903 $ 66,680 $167,081 $ 12,575 $(17,165) $230,074 Comprehensive income: Net income 6,171 6,171 Change in net unrealized gains/(losses) on available- for-sale securities 2,768 2,768 -------- Total comprehensive income 8,939 Treasury stock purchase (245) (245) -------- -------- -------- -------- -------- -------- Balance, September 30, 2002 $ 903 $ 66,680 $173,252 $ 15,343 $(17,410) $238,768 ======== ======== ======== ======== ======== ========
See accompanying notes. 5 FIRST FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Nine Months Ended September 30, 2003, and 2002 (Dollar amounts in thousands, except per share data) (Unaudited)
Accumulated Other Common Additional Retained Comprehensive Treasury Stock Capital Earnings Income/(Loss) Stock Total Balance, January 1, 2003 $ 903 $ 66,809 $178,209 $ 14,276 $(18,226) $241,971 Comprehensive income: Net income 19,650 19,650 Change in net unrealized gains/(losses) on available- for-sale securities (3,010) (3,010) -------- Total comprehensive income 16,640 Cash dividends, $.34 per share (4,616) (4,616) Contribution of 40,000 shares to ESOP 372 884 1,256 Treasury stock purchase (1,318) (1,318) Two for one stock split 903 (903) - -------- -------- -------- -------- -------- -------- Balance, September 30, 2003 $ 1,806 $ 67,181 $192,340 $ 11,266 $(18,660) $253,933 ======== ======== ======== ======== ======== ======== Balance, January 1, 2002 $ 903 $ 66,680 $158,038 $ 8,299 $(16,409) $217,511 Comprehensive income Net income 19,451 19,451 Change in net unrealized gains/(losses) on available-for- sale securities 7,044 7,044 -------- Total comprehensive income 26,495 Cash dividends, $.31 per share (4,237) (4,237) Treasury stock purchase (1,001) (1,001) -------- -------- -------- -------- -------- -------- Balance, September 30, 2002 $ 903 $ 66,680 $173,252 $ 15,343 $(17,410) $238,768 ======== ======== ======== ======== ======== ========
See accompanying notes. 6 FIRST FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollar amounts in thousands)
Nine Months Ended September 30, 2003 2002 ---- ---- (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 19,650 $ 19,451 Adjustments to reconcile net income to net cash provided by operating activities: Net amortization/(accretion) of premiums/discounts on securities 491 (1,133) Provision for loan losses 6,848 6,621 Securities (gains)/losses (158) 79 Depreciation and amortization 2,139 2,137 Contribution of shares to ESOP 1,256 - Other, net (7,156) 1,509 --------- --------- NET CASH FROM OPERATING ACTIVITIES 23,070 28,664 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Sales of available-for-sale securities 2,270 22,741 Maturities and principal reductions on available-for-sale securities 185,636 125,663 Purchases of available-for-sale securities (204,200) (165,556) Loans made to customers, net of repayments (9,725) 14,316 Net change in federal funds sold (5,550) 37,893 Purchase of First Community Financial Corp. - 14,554 Additions to premises and equipment (1,248) (1,484) --------- --------- NET CASH FROM INVESTING ACTIVITIES (32,817) 48,127 --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net change in deposits 15,513 (20,829) Net change in short-term borrowings 42,407 (34,475) Dividends paid (8,845) (8,210) Purchase of treasury stock (1,318) (1,001) Proceeds from other borrowings 13 21,006 Repayments on other borrowings (39,561) (28,760) --------- --------- NET CASH FROM FINANCING ACTIVITIES 8,209 (72,269) --------- --------- NET CHANGE IN CASH AND CASH EQUIVALENTS (1,538) 4,522 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 96,043 68,205 --------- --------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 94,505 $ 72,727 ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for interest $ 38,237 $ 45,527 ========= ========= Income taxes paid $ 6,761 $ 8,547 ========= =========
See accompanying notes. 7 FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The accompanying September 30, 2003 and 2002 consolidated financial statements are unaudited. The December 31, 2002 consolidated financial statements are as reported in the First Financial Corporation (the Corporation) 2002 annual report. The following notes should be read together with notes to the consolidated financial statements included in the 2002 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. The Financial Accounting Standards Board (FASB) recently issued two new accounting standards, Statement 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, and Statement 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equities, both of which generally became effective beginning July 1, 2003. Because the Corporation does not have these instruments or is only nominally involved in these activities, the adoption of these new accounting standards did not materially affect the Corporation's operating results or financial condition. Basic/diluted earnings per share is net income divided by the weighted average number of shares outstanding during the period. Dividends per share are based upon when the dividends were declared. On September 30, 2003, the Board of Directors approved a two-for-one stock split. The number of shares outstanding, earnings per share and dividends per share have been restated for the stock split as if it had occurred on the first day of the earliest date being presented in this report. 2. A loan is considered to be impaired when, based upon current information and events, it is probable that the Corporation will be unable to collect all amounts due according to the contractual terms of the loan. Impairment is primarily measured based on the fair value of the loan's collateral. The following table summarizes impaired loan information:
(000's) September 30, December 31, 2003 2002 ---- ---- Impaired loans with related allowance for loan losses calculated under SFAS No. 114 $9,746 $8,812
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 at September 30, 2003 are shown below. All securities are classified as available-for-sale.
(000's) (000's) September 30, 2003 December 31, 2002 Amortized Cost Fair Value Amortized Cost Fair Value -------------- ---------- -------------- ---------- United States Government and its agencies $155,735 $156,901 $204,114 $212,550 Collateralized mortgage obligations 88,119 90,052 29,049 29,446 State and municipal 154,970 163,924 162,897 171,732 Corporate obligations 119,669 121,649 96,250 97,820 -------- -------- -------- -------- $518,493 $532,526 $492,310 $511,548 ======== ======== ======== ========
8 4. Short-Term Borrowings Period-end short-term borrowings were comprised of the following:
(000's) September 30, December 31, 2003 2002 ---- ---- Federal Funds Purchased $ 67,572 $ 16,311 Repurchase Agreements 6,279 13,237 Note Payable - U.S. Government 2,911 4,807 -------- -------- $ 76,762 $ 34,355 ======== ========
5. Other Borrowings Other borrowings at period-end are summarized as follows:
(000's) September 30, December 31, 2003 2002 ---- ---- FHLB Advances $359,142 $397,190 Note Payable to a Financial Institution 18,000 19,500 City of Terre Haute, Indiana Economic Development Revenue bonds 6,600 6,600 -------- -------- $383,742 $423,290 ======== ========
FIRST FINANCIAL CORPORATION 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 2002. Forward-looking statements contained in the following discussion are based on estimates and assumptions that are subject to significant business, economic and competitive uncertainties, many of which are beyond the Corporation's control and are subject to change. These uncertainties can affect actual results and could cause actual results to differ materially from those expressed in any forward-looking statements in this discussion. 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 effect 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, determining the fair value of securities and other financial instruments, determining the pension and post-retirement benefit obligation and the valuation of originated mortgage servicing rights. Summary of Operating Results Net income for the nine months ended September 30, 2003 was $19.6 million, a 1.0% improvement from the $19.5 million in the same period in 2002. Basic earnings per share increased to $1.45 through the third quarter of 2003 compared to $1.42 for 2002, a 2.1% improvement. Quarterly results for the third period of 2003 showed net income of $6.4 million, which represents a 4.4% increase over net income of $6.2 million in the third quarter of 2002. Compared to the same quarter last year, earnings per share increased 4.4% to $0.47 per share from $0.45 per share. The primary components of income and expense affecting net income are discussed in the following analysis. 9 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 to $56.1 million in the first nine months of 2003 from $58.8 million in the same period of 2002, a 4.6%, or $2.7 million decrease. This was the result of a decrease of $41.4 million in average interest earning assets and a decrease of $31.6 million in average interest bearing liabilities. The net interest margin decreased from 4.1% in 2002 to 4.0% in 2003, a 2.2% decrease driven by a greater decline in the yield on earning assets than in the average cost of funds. Non-Interest Income Non-interest income through the third quarter of 2003 increased $3.0 million, or 15.1%, over the same period of 2002. Mortgage interest rates continue to hover at all-time lows, which have stimulated significant mortgage loan volume, especially in the refinancing area. Selling these lower rate, fixed-rate mortgages in the secondary market has been the over-riding strategy of the Corporation. This increased mortgage activity has resulted in $1.4 million of additional non-interest income from capitalized mortgage servicing rights, increased loan servicing and origination fees and net cash gains on sales in the secondary market, which is almost half of the $3.0 million increase in non-interest income. Other major contributors to non-interest income include increases in loan and deposit fees, insurance commissions, and trust and financial services fees. Non-Interest Expenses Non-interest expenses decreased $858 thousand when comparing the third quarter only expenses of 2003 to those of 2002. In the third quarter of 2002 there were two adjustments recorded that increased non-interest expense; one for $652 thousand for increased pension plan expenses due to the increased number of qualified participants entering the plan from the most recent acquisitions of Forrest Sherer, Inc. and First Community Bank, N.A., and the second was a $468 thousand supplies inventory adjustment. These two adjustments are offset by 2003 third quarter increases in salaries and fringes of $147 thousand and increase in property tax expenses of $144 thousand due to refunds received in 2002 for incorrectly assessed properties. Non-interest expenses year-to-date decreased $225 thousand due to the same reasons above however the offsets using year to date balances are an increase in 2003 salaries of $792 thousand and increases in property tax expenses at $168 thousand due to refunds received in 2002 for incorrectly assessed properties. Allowance for Loan Losses The Corporation's provision for loan losses increased to $6.8 million for the first nine months of 2003 compared to $6.6 million in the same period of 2002. At September 30, 2003, the allowance for loan losses was 1.58% of total loans, an increase from 1.48% at December 31, 2002. Net chargeoffs for the first nine months of 2003 were $5.4 million compared to $5.8 million for the same period of 2002. Based on management's analysis of the current portfolio, an evaluation that includes consideration of historical loss experience and potential loss exposure on identified problem loans, management believes the allowance of $22.7 million at September 30, 2003 is adequate. Under-performing Loans and Leases Under-performing loans consist of (1) nonaccrual 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 under-performing loans and leases at September 30, 2003 and December 31, 2002 follows:
(000's) September 30, 2003 December 31, 2002 ------------------ ----------------- Non-accrual loans $10,681 $11,807 Restructured loans 369 546 ------- ------- 11,050 12,353 Accruing loans past due over 90 days 8,623 5,899 ------- ------- $19,673 $18,252 ======= =======
Ratio of the allowance for loan losses as a percentage of under-performing loans 116% 116% The following loan categories comprise significant components of the under-performing loans: 10
(000's) September 30, 2003 December 31, 2002 ------------------ ----------------- Non-Accrual Loans: 1-4 family residential $ 1,986 $ 2,382 Commercial loans 7,179 7,813 Installment loans 1,516 1,612 Other, various - - ------- ------- $10,681 $11,807 ======= ======= Past due 90 days or more: 1-4 family residential $ 2,767 $ 2,817 Commercial loans 3,816 1,934 Installment loans 2,040 1,128 Other, various - 20 ------- ------- $ 8,623 $ 5,899 ======= =======
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 and Quantitative and Qualitative Disclosures About Market 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 income is largely dependent on the effective management of this risk. The Asset Liability position is measured using sophisticated risk management tools, including earning simulation and market value of equity sensitivity analysis. These tools allow management to quantify and monitor both short-term and long-term exposure to interest rate risk. Simulation modeling measures the effects of changes in interest rates, changes in the shape of the yield curve and the effects of embedded options on net interest income. This measure projects earnings in the various environments over the next three years. It is important to note that measures of interest rate risk have limitations and are dependent on various assumptions. These assumptions are inherently uncertain and, as a result, the model cannot precisely predict the impact of interest rate fluctuations on net interest income. Actual results will differ from simulated results due to timing, frequency and amount of interest rate changes as well as overall market conditions. The Committee has performed a thorough analysis of these assumptions and believes them to be valid and theoretically sound. These assumptions are regularly monitored for behavioral changes. The Corporation from time to time utilizes derivatives to manage interest rate risk. Management regularly evaluates the merits of such interest rate risk management products and strategies but does not anticipate the use of such products will become a major part of the Corporation's risk management strategy. The table below shows the Corporation's estimated sensitivity profile as of September 30, 2003. 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 2.03% over the next 12 months and increase 4.57% over the following 12 months. Given a 100 basis point decrease in rates, net interest income would decrease 3.94% over the next 12 months and decrease 7.02% 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 -9.89 -17.18 -22.06 Down 100 -3.94 -7.02 -9.70 Up 100 2.03 4.57 7.33 Up 200 4.20 9.17 14.91 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. 11 Liquidity Risk Liquidity is measured by each bank's ability to raise funds to meet the obligations from 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 $9.0 million of investments that mature throughout the coming 12 months. The Corporation also anticipates $36.0 million of principal payments from mortgage-backed securities. Given the current interest rate environment, the Corporation anticipates $22.7 million of 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 third quarter of 2003 to the same period in 2002, average assets are down $24.5 million, or 1.11%. Average loans account for $18.5 million of this decrease due to continued refinancing and sales of fixed-rate mortgage loans. Average cash and short-term investments, down $10.4 million, average deposits, up $3.3 million, and earnings were used to reduce average bank borrowings by $38.4 million. Average shareholders' equity increased $11.3 million, or 4.8%. Strong financial performance increased book value per share 6.6% to $18.66 at September 30, 2003 from $17.50 at September 30, 2002, after the effect of the two-for-one stock split. Capital Adequacy As of September 30, 2003, the most recent notification from the respective regulatory agencies categorized the Corporation and its subsidiary banks as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Corporation must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Corporation's category.
To Be Well September 30, 2003 December 31, 2002 Capitalized ------------------ ----------------- ----------- Total risk-based capital ratio 15.50% 14.83% =>10.0% Tier I risk-based capital ratio 14.25% 13.58% =>6.0% Tier I leverage capital ratio 10.75% 9.79% =>5.0%
ITEM 4. Controls and Procedures (a) As of the end of the quarterly period covered by this report, an evaluation was carried out under the supervision and with the participation of First Financial Corporation's management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) under the Securities Exchange Act of 1934). Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the Corporation's disclosure controls and procedures were effective as of such date. (b) Changes in Internal Controls. There have been no significant changes in the Corporation's internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation thereof, including any corrective actions with regard to significant deficiencies and material weaknesses. (c) Limitations on the Effectiveness of Controls. The Corporation's management, including its principal executive officer and principal financial officer, does not expect that the Corporation's disclosure controls and procedures and other internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Corporation have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can only be reasonable assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. 12 (d) CEO and CFO Certifications. Appearing as an exhibit to this report there are Certifications of the Corporation's principal executive officer and principal financial officer. The Certifications are required in accord with Section 302 of the Sarbanes-Oxley Act of 2002 (the "Section 302 Certifications"). This Item of this report which you are currently reading is the information concerning the evaluation referred to in the Section 302 Certifications and this information should be read in conjunction with the Section 302 Certifications for a more complete understanding of the topics presented. 13 FIRST FINANCIAL CORPORATION PART II - OTHER INFORMATION ITEM 4. Submission of Matters to a Vote of Security Holders (a) The Annual meeting of the shareholders of the Corporation was held on April 16, 2003 (b) The following were elected Directors of the Corporation for a three year term by majority vote as follows: Votes for Votes Against --------- ------------- Thomas T. Dinkel 5,883,523 26,277 Mari H. George 5,908,621 1,179 Norman L. Lowery 5,528,405 381,395 Patrick O'Leary 5,802,113 107,687 The following was elected Director of the Corporation for a one year term by majority vote as follows: Chapman J. Root II. 5,771,080 138,720 (c) The shareholders unanimously approved the annual report of the Corporation and unanimously approved the actions of the Directors and Officers of the Corporation for the Fiscal year ended December 31, 2002. ITEM 6. Exhibits and Reports on Form 8-K. (a). Exhibits 3(i) Amended and Restated Articles of Incorporation of First Financial Corporation, by reference to Exhibit 3(i) to Form 10-Q as filed for September 30, 2002 3(ii) Code of By-Laws of First Financial Corporation, by reference to Exhibit 3(ii) to Form 10-Q as filed for September 30, 2002. 10.1 Deferred Compensation Agreement and Split Dollar Insurance Agreement for Donald E. Smith, by reference to Exhibit 10.1 to Form 10-Q as filed for September 30, 2002. 10.2 Employment Agreement for Norman L. Lowery, by reference to Exhibit 10.2 to Form 10-Q as filed for March 31, 2003. 10.3 2001 Long-Term Incentive Plan of First Financial Corporation, by reference to Exhibit 10.3 to Form 10-Q as filed for September 30, 2002. 31.1 Sarbanes-Oxley Act of 2002, Section 302 Certification of Chief Executive Officer 31.2 Sarbanes-Oxley Act of 2002, Section 302 Certification of Chief Financial Officer 32.1 Sarbanes-Oxley Act of 2002, Section 906 Certification of Chief Executive and Chief Financial Officers (b) Form 8-K reports filed during the quarter of the fiscal year for which this report is filed. Form 8-K was filed in connection with the press release dated July 22, 2003, announcing the 2nd quarter earnings. Form 8-K was filed in connection with the press release dated September 10, 2003, announcing a two-for-one stock split. 14 FIRST FINANCIAL CORPORATION PART II OTHER INFORMATION FORM 10-Q 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 7, 2003 By /s/ DONALD E. SMITH ---------------------- Donald E. Smith, Chairman Date: November 7, 2003 By /s/ NORMAN L. LOWERY --------------------------- Norman L. Lowery, Vice Chairman Date: November 7, 2003 By /s/ MICHAEL A. CARTY ------------------------ Michael A. Carty, Treasurer 15