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
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FIRST FINANCIAL CORPORATION
---------------------------
(Exact name of registrant as specified in its charter)
INDIANA 35-1546989
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(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
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(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