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 June 30, 2003 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended June 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 July 31, 2003 were outstanding 6,782,885 shares without par value, of the registrant. 2 FIRST FINANCIAL CORPORATION FORM 10-Q INDEX <Table> <Caption> Page No. -------- PART I. Financial Information Item 1. Financial Statements: Consolidated Statements of Condition ...................................................... 4 Consolidated Statements of Income ......................................................... 5 Consolidated Statements of Shareholders' Equity ........................................... 6 Consolidated Statements of Cash Flows ..................................................... 8 Notes to Consolidated Financial Statements ................................................ 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3. Interest Rate Risk and Quantitative and Qualitative Disclosures about Market Risk ... 10 Item 4. Controls and Procedures ............................................................. 13 PART II. Other Information: Item 4. Submission of Matters to a Vote of Security Holders ............................. 15 Item 6. Exhibits and Reports on Form 8-K ................................................ 15 Signatures ............................................................................... 16 Certification of Financial Results ....................................................... 19 </Table> 3 FIRST FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CONDITION (Dollar amounts in thousands, except per share data) <Table> <Caption> June 30, December 31, 2003 2002 ------------ ------------ (Unaudited) ASSETS Cash and due from banks $ 68,682 $ 96,043 Federal funds sold and short-term investments 6,247 50 Securities, available-for-sale 538,416 511,548 Loans: Commercial, financial and agricultural 348,144 331,316 Real estate - construction 34,686 42,930 Real estate - mortgage 766,323 789,618 Installment 264,638 268,067 Lease financing 4,649 1,281 ------------ ------------ 1,418,440 1,433,212 Less: Unearned income (567) (648) Allowance for loan losses (21,703) (21,249) ------------ ------------ 1,396,170 1,411,315 Accrued interest receivable 13,790 15,199 Premises and equipment, net 29,553 29,809 Bank-owned life insurance 49,006 47,736 Goodwill 7,102 7,102 Other intangible assets 3,960 4,289 Other real estate owned 4,381 5,006 Other assets 37,112 41,651 ------------ ------------ TOTAL ASSETS $ 2,154,419 $ 2,169,748 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing $ 188,128 $ 146,585 Interest-bearing: Certificates of deposit of $100 or more 195,102 200,325 Other interest-bearing deposits 1,081,270 1,087,744 ------------ ------------ 1,464,500 1,434,654 Short-term borrowings 17,111 34,355 Other borrowings 387,091 423,290 Other liabilities 35,753 35,478 ------------ ------------ TOTAL LIABILITIES 1,904,455 1,927,777 ------------ ------------ Shareholders' equity: Common stock, $.125 stated value per share; Authorized shares--40,000,000 Issued shares--7,225,483 Outstanding shares--6,782,885 in 2003 and 6,809,445 in 2002 903 903 Additional capital 66,809 66,809 Retained earnings 186,800 178,209 Accumulated other comprehensive income 14,996 14,276 Treasury shares, at cost - 442,598 in 2003 and 416,038 in 2002 (19,544) (18,226) ------------ ------------ TOTAL SHAREHOLDERS' EQUITY 249,964 241,971 ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,154,419 $ 2,169,748 ============ ============ </Table> See accompanying notes. 4 FIRST FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME (Dollar amounts in thousands, except per share data) <Table> <Caption> Three Months Ended Six Months Ended June 30, June 30, 2003 2002 2003 2002 ---------- ---------- ---------- ---------- (Unaudited) (Unaudited) INTEREST INCOME: Loans, including related fees $ 24,332 $ 26,888 $ 49,067 $ 53,423 Securities: Taxable 3,739 5,136 8,057 10,081 Tax-exempt 2,049 1,872 4,020 3,924 Other 656 944 1,298 1,717 ---------- ---------- ---------- ---------- TOTAL INTEREST INCOME 30,776 34,840 62,442 69,145 ---------- ---------- ---------- ---------- INTEREST EXPENSE: Deposits 6,853 8,874 14,155 17,851 Short-term borrowings 87 198 171 448 Other borrowings 5,158 5,688 10,509 11,300 ---------- ---------- ---------- ---------- TOTAL INTEREST EXPENSE 12,098 14,760 24,835 29,599 ---------- ---------- ---------- ---------- NET INTEREST INCOME 18,678 20,080 37,607 39,546 Provision for loan losses 2,303 2,416 4,530 4,348 ---------- ---------- ---------- ---------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 16,375 17,664 33,077 35,198 ---------- ---------- ---------- ---------- NON-INTEREST INCOME: Trust and financial services 1,042 866 1,956 1,708 Service charges and fees on deposit accounts 1,644 1,461 3,176 2,967 Other service charges and fees 1,710 1,174 3,826 2,429 Securities gains/(losses), net 6 (80) 6 (79) Insurance commissions 1,643 1,520 3,148 2,844 Gain on sale of mortgage loans 961 724 2,019 1,290 Other 504 620 1,458 1,299 ---------- ---------- ---------- ---------- TOTAL NON-INTEREST INCOME 7,510 6,285 15,589 12,458 ---------- ---------- ---------- ---------- NON-INTEREST EXPENSES: Salaries and employee benefits 8,990 8,848 18,002 17,357 Occupancy expense 978 870 2,044 1,809 Equipment expense 764 895 1,624 1,747 Other 4,641 4,724 9,128 9,252 ---------- ---------- ---------- ---------- TOTAL NON-INTEREST EXPENSE 15,373 15,337 30,798 30,165 ---------- ---------- ---------- ---------- INCOME BEFORE INCOME TAXES 8,512 8,612 17,868 17,491 Provision for income taxes 2,338 2,060 4,661 4,211 ---------- ---------- ---------- ---------- NET INCOME $ 6,174 $ 6,552 $ 13,207 $ 13,280 ========== ========== ========== ========== PER SHARE DATA: Basic and Diluted Earnings per share, $ 0.91 $ 0.96 $ 1.94 $ 1.94 ========== ========== ========== ========== Dividends per share $ 0.68 $ 0.62 $ 0.68 $ 0.62 ========== ========== ========== ========== Weighted average number of shares outstanding (in thousands) 6,791 6,802 6,793 6,832 ========== ========== ========== ========== </Table> See accompanying notes. 5 FIRST FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Three Months Ended June 30, 2003 and 2002 (Dollar amounts in thousands, except per share data) (Unaudited) <Table> <Caption> Accumulated Other Common Additional Retained Comprehensive Treasury Stock Capital Earnings Income Stock Total ---------- ---------- ---------- ------------- ---------- ---------- Balance, April 1, 2003 $ 903 $ 66,809 $ 185,242 $ 12,884 $ (18,949) $ 246,889 Comprehensive income: Net income 6,174 6,174 Change in net unrealized gains/(losses) on available- for-sale securities 2,112 2,112 ---------- Total comprehensive income 8,286 Cash dividends, $.68 per share (4,616) (4,616) Treasury stock purchase (595) (595) ---------- ---------- ---------- ------------- ---------- ---------- Balance, June 30, 2003 $ 903 $ 66,809 $ 186,800 $ 14,996 $ (19,544) $ 249,964 ========== ========== ========== ============= ========== ========== Balance, April 1, 2002 $ 903 $ 66,680 $ 164,766 $ 7,887 $ (16,925) $ 223,311 Comprehensive income: Net income 6,552 6,552 Change in net unrealized gains/(losses) on available- for-sale securities 4,688 4,688 ---------- Total comprehensive income 11,240 Cash dividends, $.62 per share (4,237) (4,237) Treasury stock purchase (240) (240) ---------- ---------- ---------- ------------- ---------- ---------- Balance, June 30, 2002 $ 903 $ 66,680 $ 167,081 $ 12,575 $ (17,165) $ 230,074 ========== ========== ========== ============= ========== ========== </Table> See accompanying notes. 6 FIRST FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Six Months Ended June 30, 2003, and 2002 (Dollar amounts in thousands, except per share data) (Unaudited) <Table> <Caption> 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 13,207 13,207 Change in net unrealized gains/(losses) on available- for-sale securities 720 720 ---------- Total comprehensive income 13,927 Cash dividends, $.68 per share (4,616) (4,616) Treasury stock purchase (1,318) (1,318) ---------- ---------- -------------- -------------- ---------- ---------- Balance, June 30, 2003 $ 903 $ 66,809 $ 186,800 $ 14,996 $ (19,544) $ 249,964 ========== ========== ============== ============== ========== ========== Balance, January 1, 2002 $ 903 $ 66,680 $ 158,038 $ 8,299 $ (16,409) $ 217,511 Comprehensive income Net income 13,280 13,280 Change in net unrealized gains/(losses) on available- for-sale securities 4,276 4,276 ---------- Total comprehensive income 17,556 Cash dividends, $.62 per share (4,237) (4,237) Treasury stock purchase (756) (756) ---------- ---------- -------------- -------------- ---------- ---------- Balance, June 30, 2002 $ 903 $ 66,680 $ 167,081 $ 12,575 $ (17,165) $ 230,074 ========== ========== ============== ============== ========== ========== </Table> See accompanying notes. 7 FIRST FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollar amounts in thousands) <Table> <Caption> Six Months Ended June 30, 2003 2002 ---------- ---------- (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 13,207 $ 13,280 Adjustments to reconcile net income to net cash provided by operating activities: Net amortization/(accretion) of premiums and discounts on securities 208 (765) Provision for loan losses 4,530 4,348 Securities (gains)/losses, net (6) 79 Depreciation and amortization 1,448 1,533 Other, net 6,486 (1,635) ---------- ---------- NET CASH FROM OPERATING ACTIVITIES 25,873 16,840 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Sales of available-for-sale securities -- 22,741 Maturities and principal reductions on available-for-sale securities 125,833 95,353 Purchases of available-for-sale securities (154,103) (138,308) Loans made to customers, net of repayments 11,240 9,725 Net change in federal funds sold (6,197) 40,210 Purchase of First Community Financial Corp. -- 14,554 Additions to premises and equipment (863) (944) ---------- ---------- NET CASH FROM INVESTING ACTIVITIES (24,090) 43,331 ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Net change in deposits 29,846 (25,277) Net change in short-term borrowings (17,244) (25,292) Dividends paid (4,229) (3,973) Purchase of treasury stock (1,318) (756) Proceeds from other borrowings 13 21,006 Repayments on other borrowings (36,212) (17,509) ---------- ---------- NET CASH FROM FINANCING ACTIVITIES (29,144) (51,801) ---------- ---------- NET CHANGE IN CASH AND CASH EQUIVALENTS (27,361) 8,370 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 96,043 68,205 ---------- ---------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 68,682 $ 76,575 ========== ========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for interest $ 26,096 $ 30,672 ========== ========== Income taxes paid $ 6,492 $ 3,330 ========== ========== </Table> See accompanying notes. 8 FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The accompanying June 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. Newly Issued But Not Yet Effective Accounting Standards 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 become effective in the quarter beginning July 1, 2003. Because the Corporation does not have these instruments or is only nominally involved in these activities, management does not expect the new accounting standards to materially affect the Corporation's operating results or financial condition. 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: <Table> <Caption> (000's) June 30, December 31, 2003 2002 ------------ ------------ Impaired loans with related allowance for loan losses calculated under SFAS No. 114 $ 8,765 $ 8,812 </Table> 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 June 30, 2003 are shown below. All securities are classified as available-for-sale. <Table> <Caption> (000's) June 30, 2003 Amortized Cost Fair Value -------------- -------------- United States Government and its agencies $ 186,183 $ 188,170 Collateralized Mortgage Obligations 64,850 67,415 States and Municipal 163,436 176,102 Corporate Obligations 103,697 106,729 -------------- -------------- $ 518,166 $ 538,416 ============== ============== </Table> 4. Short-Term Borrowings Period-end short-term borrowings were comprised of the following: <Table> <Caption> (000's) June 30, December 31, 2003 2002 ------------ ------------ Federal Funds Purchased $ 4,975 $ 16,311 Repurchase Agreements 10,573 13,237 Note Payable - U.S. Government 1,563 4,807 ------------ ------------ $ 17,111 $ 34,355 ============ ============ </Table> 9 5. Other Borrowings Other borrowings at period-end are summarized as follows: <Table> <Caption> (000's) June 30, December 31, 2003 2002 ------------ ------------ FHLB advances $ 362,491 $ 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 ------------ ------------ $ 387,091 $ 423,290 ============ ============ </Table> 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 six months ended June 30, 2003 was $13.2 million, a 0.5% decrease from the $13.3 million for the same period in 2002. Basic earnings per share remained stable at $1.94 through the second quarter of 2003 which equaled the $1.94 through the second quarter of 2002. 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 or 4.9% to $37.6 million in the first six months of 2003 from $39.5 million in the same period of 2002. This was the result of a decrease of $52.4 million in average interest earning assets primarily due to continued refinancing activity and the sale of those lower rate, fixed rate mortgage loans, in the secondary market. The net interest margin decreased from 4.08% in 2002 to 4.02% in 2003, a 6 basis point or 1.5% decrease driven by a greater decline in the yield on earning assets than in the average cost of funds. 10 Non-Interest Income Non-interest income through the second quarter of 2003 increased $3.1 million, or 25.1%, 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 $1.5 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 $3.1 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, which are heavily influenced by stock market conditions which have seen recent improvement. Non-Interest Expenses Non-interest expenses increased $633 thousand, or 2.1%, due mainly to increases in employee salaries and fringe benefit programs. Allowance for Loan Losses The Corporation's provision for loan losses increased to $4.5 million for the first six months of 2003 compared to $4.3 million in the same period of 2002. At June 30, 2003, the allowance for loan losses was 1.53% of net loans, an increase from 1.48% at December 31, 2002. Net chargeoffs for the first six months of 2003 were $4.1 million compared to $4.2 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 $21.7 million at June 30, 2003 is adequate. Under-performing Loans Under-performing loans consist of (1) non-accrual loans on which the ultimate collectability of the full amount of interest is uncertain, (2) loans which have been renegotiated to provide for a reduction or deferral of interest or principal because of a deterioration in the financial position of the borrower, and (3) loans past due ninety days or more as to principal or interest. A summary of under-performing loans at June 30, 2003 and December 31, 2002 follows: <Table> <Caption> (000's) June 30, 2003 December 31, 2002 --------------- ----------------- Non-accrual loans $ 12,082 $ 11,807 Restructured loans 181 546 --------------- ----------------- 12,263 12,353 Accruing loans past due over 90 days 4,858 5,899 --------------- ----------------- $ 17,121 $ 18,252 =============== ================= Ratio of the allowance for loan losses as a percentage of under-performing loans 127% 116% </Table> The following loan categories comprise significant components of the under-performing loans: <Table> <Caption> (000's) June 30, 2003 December 31, 2002 ---------------- ----------------- Non-Accrual Loans: 1-4 family residential $ 2,581 $ 2,382 Commercial loans 7,960 7,813 Installment loans 1,541 1,612 Other, various -- -- ---------------- ----------------- $ 12,082 $ 11,807 ================ ================= </Table> 11 <Table> <Caption> Past due 90 days or more: 1-4 family residential $ 2,727 $ 2,817 Commercial loans 884 1,934 Installment loans 1,247 1,128 Other, various -- 20 ---------- ---------- $ 4,858 $ 5,899 ========== ========== </Table> 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 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 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 June 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 3.93% over the next 12 months and increase 7.41% over the following 12 months. Given a 100 basis point decrease in rates, net interest income would decrease 4.37% over the next 12 months and decrease 7.78% over the following 12 months. These estimates assume all rate changes occur overnight and management takes no action as a result of this change. <Table> <Caption> Basis Point Percentage Change in Net Interest Income ---------------------------------------- Interest Rate Change 12 months 24 months 36 months ---------- ---------- ------------ Down 200 -9.95 -17.56 -21.13 Down 100 -4.37 -7.78 -9.66 Up 100 3.93 7.41 9.50 Up 200 7.78 14.48 18.85 </Table> Typical rate shock analysis does not reflect management's ability to react and thereby reduce the effect of rate changes, and represents a worst-case scenario. 12 Liquidity Risk Liquidity is measured by each bank's ability to raise funds to meet the obligations of its customers, including deposit withdrawals and credit needs. This is accomplished primarily by maintaining sufficient liquid assets in the form of investment securities and core deposits. The Corporation has $7.8 million of investments that mature throughout the coming 12 months. The Corporation also anticipates $87.3 million of principal payments from mortgage-backed securities. Given the current rate environment, the Corporation anticipates $18.0 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 second quarter of 2003 to 2002, average loans are down $31.0 million due primarily to continued refinancing and sales of fixed-rate mortgage loans. Average deposits were up $4.4 million. These resources were used to pay down average bank borrowings by $49.3 million. Average shareholders' equity increased $9.0 million, or 3.8%. Strong financial performance and increased unrealized gains on securities pushed book value per share up 9.4% to $36.85 in 2003 from $33.70 at June 30, 2002. Book value per share is calculated by dividing the total equity by the number of shares outstanding. Capital Adequacy As of June 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. <Table> <Caption> To Be Well June 30, 2003 December 31, 2002 Capitalized ------------------ ------------------ ------------------ Total risk-based capital ratio 15.41% 14.83% =>10.0% Tier I risk-based capital ratio 14.15% 13.58% =>6.0% Tier I leverage capital ratio 10.29% 9.79% =>5.0% </Table> 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. 13 (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. 14 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: <Table> <Caption> 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 </Table> 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 April 24, 2003, announcing quarterly results of operations. Form 8-K was filed in connection with the press release dated May 22, 2003, announcing a semi-annual dividend. 15 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: August 8, 2003 By /s/ DONALD E. SMITH ------------------------------- Donald E. Smith, Chairman Date: August 8, 2003 By /s/ NORMAN L. LOWERY ------------------------------- Norman L. Lowery, Vice Chairman Date: August 8, 2003 By /s/ MICHAEL A. CARTY ------------------------------- Michael A. Carty, Treasurer 16