SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Quarterly Period Ended June 30, 2004 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 August 11, 2004 there were outstanding 13,501,270 shares of common stock. FIRST FINANCIAL CORPORATION FORM 10-Q INDEX Page No. -------- PART I. Financial Information Item 1. Financial Statements: Consolidated Balance Sheets...................................................................... 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 2. Changes in Securities and Use of Proceeds................................................... 13 Item 4. Submission of Matters to a Vote of Security Holders......................................... 13 Item 6. Exhibits and Reports on Form 8-K............................................................ 13 Signatures.......................................................................................... 14 2 Part I - Financial Information Item 1. Financial Statements FIRST FINANCIAL CORPORATION CONSOLIDATED BALANCE SHEETS (Dollar amounts in thousands, except per share data) June 30, December 31, 2004 2003 ----------- ------------ (Unaudited) ASSETS Cash and due from banks $ 88,534 $ 94,198 Federal funds sold and short-term investments 6,750 5,850 Securities available-for-sale 534,998 567,733 Loans: Commercial, financial and agricultural 409,537 374,638 Real estate - construction 29,612 35,361 Real estate - mortgage 761,220 766,911 Installment 255,451 248,290 Lease financing 4,109 4,884 ----------- ----------- 1,459,929 1,430,084 Less: Unearned income (448) (559) Allowance for loan losses (21,815) (21,239) ----------- ----------- 1,437,666 1,408,286 Accrued interest receivable 11,513 13,073 Premises and equipment, net 31,067 29,322 Bank-owned life insurance 48,192 50,279 Goodwill 7,102 7,102 Other intangible assets 3,368 3,651 Other real estate owned 5,262 6,424 Other assets 37,469 37,139 ----------- ----------- TOTAL ASSETS $ 2,211,921 $ 2,223,057 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing $ 245,681 $ 179,517 Interest-bearing: Certificates of deposit of $100 or more 174,371 192,185 Other interest-bearing deposits 1,009,996 1,107,645 ----------- ----------- 1,430,048 1,479,347 Short-term borrowings 104,258 68,629 Other borrowings 385,307 383,233 Other liabilities 32,432 36,569 ----------- ----------- TOTAL LIABILITIES 1,952,045 1,967,778 ----------- ----------- Shareholders' equity: Common stock, $.125 stated value per share; Authorized shares -- 40,000,000 Issued shares-14,450,966 Outstanding shares -- 13,501,270 in 2004 and 13,578,770 in 2003 1,806 1,806 Additional capital 67,181 67,181 Retained earnings 206,043 194,294 Accumulated other comprehensive income 6,594 11,463 Treasury shares, at cost 949,696 in 2004 and 872,196 in 2003 (21,748) (19,465) ----------- ----------- TOTAL SHAREHOLDERS' EQUITY 259,876 255,279 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,211,921 $ 2,223,057 =========== =========== See accompanying notes. 3 FIRST FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME (Dollar amounts in thousands, except per share data) Three Months Ended Six Months Ended June 30, June 30, 2004 2003 2004 2003 ---- ---- ---- ---- (Unaudited) (Unaudited) INTEREST INCOME: Loans, including related fees $22,744 $24,332 $45,666 $49,067 Securities: Taxable 3,816 3,739 7,725 8,057 Tax-exempt 1,797 2,049 3,638 4,020 Other 468 656 1,072 1,298 ------- ------- ------- ------- TOTAL INTEREST INCOME 28,825 30,776 58,101 62,442 ------- ------- ------- ------- INTEREST EXPENSE: Deposits 5,853 6,853 11,926 14,155 Short-term borrowings 260 87 484 171 Other borrowings 4,959 5,158 10,005 10,509 ------- ------- ------- ------- TOTAL INTEREST EXPENSE 11,072 12,098 22,415 24,835 ------- ------- ------- ------- NET INTEREST INCOME 17,753 18,678 35,686 37,607 Provision for loan losses 1,923 2,303 3,846 4,530 ------- ------- ------- ------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 15,830 16,375 31,840 33,077 ------- ------- ------- ------- NON-INTEREST INCOME: Trust and financial services 1,011 1,042 2,024 1,956 Service charges and fees on deposit accounts 2,964 1,644 5,620 3,176 Other service charges and fees 1,838 1,710 3,368 3,826 Securities gains/ (losses), net 410 6 423 6 Insurance commissions 1,472 1,643 2,860 3,148 Gain on sale of mortgage loans 132 961 543 2,019 Gain on life insurance benefit - - 4,113 - Other 494 504 1,947 1,458 ------- ------- ------- ------- TOTAL NON-INTEREST INCOME 8,321 7,510 20,898 15,589 ------- ------- ------- ------- NON-INTEREST EXPENSES: Salaries and employee benefits 9,396 8,990 18,749 18,002 Occupancy expense 1,015 978 1,985 2,044 Equipment expense 843 764 1,677 1,624 Other 4,618 4,641 8,993 9,128 ------- ------- ------- ------- TOTAL NON-INTEREST EXPENSE 15,872 15,373 31,404 30,798 ------- ------- ------- ------- INCOME BEFORE INCOME TAXES 8,279 8,512 21,334 17,868 Provision for income taxes 1,950 2,338 4,320 4,661 ------- ------- ------- ------- NET INCOME $ 6,329 $ 6,174 $17,014 $13,207 ======= ======= ======= ======= PER SHARE DATA: Basic and Diluted Earnings per share, $ 0.47 $ 0.45 $ 1.26 $ 0.97 ======= ======= ======= ======= Dividends per share $ 0.39 $ 0.34 $ 0.39 $ 0.34 ======= ======= ======= ======= Weighted average number of shares outstanding (in thousands) 13,517 13,582 13,537 13,585 ======= ======= ======= ======= See accompanying notes 4 FIRST FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Three Months Ended June 30, 2004 and 2003 (Dollar amounts in thousands, except per share data) (Unaudited) Accumulated Other Common Additional Retained Comprehensive Treasury Stock Capital Earnings Income/(Loss) Stock Total ------- ---------- -------- ------------- --------- --------- Balance, April 1, 2004 $ 1,806 $ 67,181 $204,979 $13,006 $(20,839) $266,133 Comprehensive income: Net income 6,329 6,329 Change in net unrealized gains/ (losses) on securities available for sale (6,412) (6,412) -------- Total comprehensive income/(loss) (83) Cash dividends, $.39 per share (5,265) (5,265) Treasury stock purchase (909) (909) ------- -------- -------- ------- -------- -------- Balance, June 30, 2004 $ 1,806 $ 67,181 $206,043 $ 6,594 $(21,748) $259,876 ======= ======== ======== ======= ======== ======== 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 securities available for sale 2,112 2,112 -------- Total comprehensive income 8,286 Cash dividends, $.34 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 ======= ======== ======== ======= ======== ======== See accompanying notes. 5 FIRST FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Six Months Ended June 30, 2004, and 2003 (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, 2004 $ 1,806 $ 67,181 $194,294 $11,463 $(19,465) $ 255,279 Comprehensive income Net income 17,014 17,014 Change in net unrealized gains/ (losses) on securities available for sale (4,869) (4,869) --------- Total comprehensive income 12,145 Cash dividends, $.39 per share (5,265) (5,265) Treasury stock purchase (2,283) (2,283) -------- -------- -------- ------- -------- --------- Balance, June 30, 2004 $ 1,806 $ 67,181 $206,043 $ 6,594 $(21,748) $ 259,876 ======== ======== ======== ======= ======== ========= 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 securities available for sale 720 720 --------- Total comprehensive income 13,927 Cash dividends, $.34 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 ======== ======== ======== ======= ======== ========= See accompanying notes. 6 FIRST FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollar amounts in thousands, except per share data) Six Months Ended June 30, 2004 2003 ---- ---- (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 17,014 $ 13,207 Adjustments to reconcile net income to net cash provided by operating activities: Net amortization/ (accretion) of premiums and discounts on securities 1,039 208 Provision for loan losses 3,846 4,530 Securities (gains)/losses, net (423) (6) Depreciation and amortization 1,500 1,448 Other, net (4,029) 6,486 -------- --------- NET CASH FROM OPERATING ACTIVITIES 18,947 25,873 -------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Sales of securities available for sale 24,857 - Maturities and principal reductions on securities available for sale 37,187 125,833 Purchases of securities available for sale (38,040) (154,103) Loans made to customers, net of repayments (33,251) 11,240 Net change in federal funds sold (900) (6,197) Proceeds from life insurance benefit 7,267 - Additions to premises and equipment (2,962) (863) -------- --------- NET CASH FROM INVESTING ACTIVITIES (5,842) (24,090) -------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net change in deposits (49,299) 29,846 Net change in short-term borrowings 35,629 (17,244) Dividends paid (4,890) (4,229) Purchase of treasury stock (2,283) (1,318) Proceeds from other borrowings 42,006 13 Repayments on other borrowings (39,932) (36,212) -------- --------- NET CASH FROM FINANCING ACTIVITIES (18,769) (29,144) -------- --------- NET CHANGE IN CASH AND CASH EQUIVALENTS (5,664) (27,361) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 94,198 96,043 -------- --------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 88,534 $ 68,682 ======== ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for interest $ 23,276 $ 26,096 ======== ========= Income taxes paid $ 5,757 $ 6,492 ======== ========= See accompanying notes. 7 FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The accompanying June 30, 2004 and 2003 consolidated financial statements are unaudited. The December 31, 2003 consolidated financial statements are as reported in the First Financial Corporation (the "Corporation") 2003 annual report. The following notes should be read together with notes to the consolidated financial statements included in the 2003 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. 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) June 30, December 31, 2004 2003 ------- ------------ Impaired loans with related allowance for loan losses calculated under SFAS No. 114 $14,015 $9,168 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, 2004 and December 31, 2003 are shown below. All securities are classified as available-for-sale. (000's) (000's) June 30, 2004 December 31, 2003 Amortized Cost Fair Value Amortized Cost Fair Value -------------- ---------- -------------- ---------- United States Government and its agencies $237,242 $249,518 $269,228 $272,009 Collateralized Mortgage Obligations 25,161 25,175 18,022 18,024 States and Municipal 145,295 150,960 152,719 161,990 Corporate Obligations 107,908 109,345 113,736 115,710 -------- -------- -------- -------- $515,606 $534,998 $553,705 $567,733 ======== ======== ======== ======== 4. Short-Term Borrowings Period - end short-term borrowings were comprised of the following: (000's) June 30, December 31, 2004 2003 -------- ------------ Federal Funds Purchased $ 97,944 $61,524 Repurchase Agreements 5,442 5,130 Note Payable - U.S. Government 872 1,975 -------- ------- $104,258 $68,629 ======== ======= 8 5. Other Borrowings Other borrowings at period-end are summarized as follows: (000's) June 30, December 31, 2004 2003 -------- ------------ FHLB advances $360,707 $358,633 Note payable to a financial institution 18,000 18,000 City of Terre Haute, Indiana economic development revenue bonds 6,600 6,600 -------- -------- $385,307 $383,233 ======== ======== 6. Components of Net Periodic Benefit Cost THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30, (000's) (000's) Post-Retirement Post-Retirement Pension Benefits Health Benefits Pension Benefits Health Benefits 2004 2003 2004 2003 2004 2003 2004 2003 ---- ---- ---- ---- ---- ---- ---- ---- Service cost $ 627 $ 542 $ 20 $ 25 $ 1,254 $ 1,083 $ 41 $ 51 Interest cost 542 507 61 63 1,084 1,013 122 126 Expected return on plan assets (700) (584) - - (1,400) (1,167) - - Amortization of transition obligation - - 15 15 - - 30 30 Amortization of prior service cost (4) (4) - - (9) (9) - - Amortization of net (gain) loss 61 64 34 30 123 129 68 60 ----- ----- ---- ---- ------- ------- ---- ---- Net Periodic Benefit Cost $ 526 $ 525 $130 $133 $ 1,052 $ 1,049 $261 $267 ===== ===== ==== ==== ======= ======= ==== ==== Employer Contributions First Financial Corporation previously disclosed in its financial statements for the year ended December 31, 2003 that it expected to contribute $1.57 and $1.2 million respectively to its Pension Plan and ESOP and $233,000 to the Post Retirement Health Benefits Plan in 2004. A contribution to the Pension Plan of $785,000 for the 6 months ended June 30, 2004 has been made. First Financial Corporation anticipates contributing an additional $788,000 and $1.2 million respectively to its Pension Plan and ESOP in 2004. Contributions of $177,000 have been made through the first half of 2004 for the Post Retirement Health Benefits plan. First Financial Corporation anticipates contributing an additional $150,000 to the Post Retirement Health Benefits plan in 2004. 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 2003. 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. 9 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, the valuation of originated mortgage servicing rights and the valuation of goodwill. See further discussion of these critical accounting policies in the 2003 Annual Report on Form 10-K. Summary of Operating Results Net income for the three months ended June 30, 2004 was $6.3 million, a 1.6% increase from the $6.2 million for the same period in 2003. Basic earnings per share for the quarter ended June 30, 2004 increased to $0.47, a 4.4% increase from the $0.45 for the same period in 2003. The year-to-date net income at June 30, 2004 was $17.0 million or $1.26 per share, compared to $13.2 million or $0.97 per share for the same period in 2003. These represent 28.8% and 29.9% increases in net income and earnings per share, respectively. 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 5.1% to $35.7 million in the first six months of 2004 from $37.6 million in the same period in 2003. The net interest margin decreased from 4.02% in 2003 to 3.77% in 2004, a 25 basis point 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 second quarter of 2004 increased $5.3 million, or 34.1%, over the same period of 2003. Life insurance proceeds account for $4.1 million. First Courtesy checking, a new product introduced in the fourth quarter of 2003 increased service charges on deposit income by $2.4 million. During the first 6 months of 2003, there were significantly more loans sold than during the same period of 2004. As a result, income from the sale of loans decreased $1.5 million from the prior period. An increase in interest rates has decreased the volume of loan refinancing, the result being a decrease in loans sold. Non-Interest Expenses Non-interest expenses increased $606 thousand, or 2.0%, due mainly to increases in employee salaries and fringe benefit programs. Allowance for Loan Losses The Corporation's provision for loan losses decreased to $3.8 million for the first six months of 2004 compared to $4.5 million in the same period of 2003. At June 30, 2004, the allowance for loan losses was 1.49% of net loans, the same as December 31, 2003. Net chargeoffs for the first six months of 2004 were $3.3 million compared to $4.1 million for the same period in 2003. 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 $21.8 million at June 30, 2004 is adequate. Commercial loans classified substandard or doubtful declined from approximately $70 million at December 31, 2003 to approximately $65 million at June 30, 2004. The increase in impaired loans and the majority of the increase in non-accrual loans is represented by previously identified credits for which a specific allocation had been established in determining the adequacy of the Allowance for Loan Losses. Therefore, the higher levels of non-accrual and impaired loans did not directly impact the level of the Allowance for Loan Losses. 10 Non-performing Loans Non-performing loans consist of (1) non-accrual loans on which the ultimate collectability of the full amount of interest is uncertain, (2) loans which have been renegotiated to provide for a reduction or deferral of interest or principal because of a deterioration in the financial position of the borrower, and (3) loans past due ninety days or more as to principal or interest. A summary of non-performing loans at June 30, 2004 and December 31, 2003 follows: (000's) June 30, 2004 December 31, 2003 ------------- ----------------- Non-accrual loans $19,124 $ 8,429 Restructured loans 324 542 ------- ------- 19,448 8,971 Accruing loans past due over 90 days 6,157 5,384 ------- ------- $25,605 $14,355 ======= ======= Ratio of the allowance for loan losses as a percentage of non-performing loans 85% 148% The following loan categories comprise significant components of the non-performing loans: (000's) . June 30, 2004 December 31, 2003 ------------- ----------------- Non-Accrual Loans: 1-4 family residential $ 1,957 $2,155 Commercial loans 15,613 4,697 Installment loans 1,554 1,577 ------- ------ $19,124 $8,429 ======= ====== Past due 90 days or more: 1-4 family residential $ 3,258 $2,321 Commercial loans 1,701 1,530 Installment loans 1,198 1,533 ------- ------ $ 6,157 $5,384 ======= ====== Interest Rate Sensitivity and Liquidity First Financial Corporation has established risk measures, limits, and policy guidelines for managing interest rate risk and liquidity. Responsibility for management of these functions resides with the Asset Liability Committee. The primary goal of the Asset Liability Committee is to maximize net interest income within the interest rate risk limits approved by the Board of Directors. Interest Rate Risk Management considers interest rate risk to be the Corporation's most significant market risk. Interest rate risk is the exposure to changes in net interest income as a result of changes in interest rates. Consistency in the Corporation's net interest income is largely dependent on the effective management of this risk. The Asset Liability position is measured using sophisticated risk management tools, including earning simulation and market value of equity sensitivity analysis. These tools allow management to quantify and monitor both short-term and long-term exposure to interest rate risk. Simulation modeling measures the effects of changes in interest rates, changes in the shape of the yield curve and the effects of embedded options on net interest income. This measure projects earnings in the various environments over the next three years. It is important to note that measures of interest rate risk have limitations and are dependent on various assumptions. These assumptions are inherently uncertain and, as a result, the model cannot precisely predict the impact of interest rate fluctuations on net interest income. Actual results will differ from simulated results due to timing, frequency, and amount of interest rate changes as well as overall market conditions. The Committee has performed a thorough analysis of these assumptions and believes them to be valid and theoretically sound. These assumptions are regularly monitored for behavioral changes. 11 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, 2004. 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 1.76% over the next 12 months and increase 5.38% over the following 12 months. Given a 100 basis point decrease in rates, net interest income would decrease 1.73% over the next 12 months and decrease 5.73% over the following 12 months. These estimates assume all rate changes occur overnight and management takes no action as a result of this change. Percentage Change in Net Interest Income Basis Point ---------------------------------------- Interest Rate Change 12 months 24 months 36 months - -------------------- --------- --------- --------- Down 200 -6.18 -14.02 -20.59 Down 100 -1.73 -5.73 - 9.44 Up 100 1.76 5.38 9.16 Up 200 1.85 8.91 16.52 Typical rate shock analysis does not reflect management's ability to react and thereby reduce the effect of rate changes, and represents a worst-case scenario. Liquidity Risk Liquidity 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 $37.4 million of investments that mature throughout the coming 12 months. The Corporation also anticipates $63.2 million of principal payments from mortgage-backed securities. Given the current rate environment, the Corporation anticipates $13.1 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 first six months of 2004 to the year 2003, average loans are up $8.2 million. Average deposits are up $9.9 million. Average shareholders' equity increased $24.1 million, or 10.1%. Strong financial performance pushed book value per share up 4.4% to $19.25 in 2004 from $18.43 at June 30, 2003. Book value per share is calculated by dividing the total equity by the number of shares outstanding. Capital Adequacy As of June 30, 2004, 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 June 30, 2004 December 31, 2003 Capitalized ------------- ----------------- ----------- Total risk-based capital ratio 16.26% 15.67% >or=10.0% Tier I risk-based capital ratio 15.01% 14.43% >or= 6.0% Tier I leverage capital ratio 11.00% 10.67% >or= 5.0% ITEM 4. Controls and Procedures First Financial Corporation's management is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. As of June 30, 2004, an evaluation was performed under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Corporation's disclosure controls and procedures. Based on that evaluation, management concluded that disclosure controls and procedures as of June 30, 2004 were effective in ensuring material information required to be disclosed in this Quarterly Report on Form 10-Q was recorded, processed, summarized, and reported on a timely basis. Additionally, there were no changes in the Corporation's internal control over financial reporting that occurred during the quarter ended June 30, 2004 that have materially affected, or are reasonably likely to materially affect, the Corporation's internal control over financial reporting. 12 PART II - Other Information Item 2. Changes in Securities and Use of Proceeds. (e) Purchases of Equity Securities The Corporation periodically acquires shares of its common stock directly from shareholders in individually negotiated transactions. The Corporation has not adopted a formal policy or adopted a formal program for repurchases of shares of its common stock. Following is certain information regarding shares of common stock purchased by the Corporation during the quarter covered by this report. (c) Total Number Of Shares (d) (a) (b) Purchased As Part Of Maximum Number Of Total Number Of Average Price Publicly Announced Plans Shares That May Yet Shares Purchased Paid Per Share Or Programs * Be Purchased * ---------------- -------------- ------------------------ ------------------- April 1 - 30, 2004 5,000 29.85 N/A N/A May 1-31, 2004 18,500 29.14 N/A N/A June 1-30, 2004 7,500 29.35 N/A N/A Total 31,000 29.31 N/A N/A * The Corporation has not adopted a formal policy or program regarding repurchases of its shares of stock. 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 21, 2004 (b) The following were elected Directors of the Corporation for a three year term as follows: Votes for Votes Against --------- ------------- Chapman J. Root II 10,964,305 3,376 William H. Niemeyer 10,930,018 37,663 Donald E. Smith 9,780,695 1,186,985 ITEM 6(a). Exhibits. Exhibit No: Description of Exhibit: - ----------- ----------------------- 3.1 Amended and Restated Articles of Incorporation of First Financial Corporation, incorporated by reference to the Corporation's Form 10-Q filed for the quarter ended September 30, 2003. 3.2 Code of By-Laws of First Financial Corporation, incorporated by reference to the Corporation's Form 10-Q filed for the quarter ended September 30, 2003. 10.1 Employment Agreement for Norman L. Lowery, dated January 1, 2004, by reference to Exhibit 10-2 to the Corporation Form 10-Q filed for the quarter ended March 31, 2004. 10.2 2001 Long-Term Incentive Plan of First Financial Corporation, incorporated by reference to the Corporation's Form 10-Q filed for the quarter ended September 30, 2003. 31.1 Sarbanes-Oxley Act 302 Certification for Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 by Principal Executive Officer, dated August 11, 2004. 31.2 Sarbanes-Oxley Act 302 Certification for Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 by Principal Financial Officer, dated August 11, 2004. 32.1 Certification, dated August 11, 2004, of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ITEM 6(b). Reports filed on Form 8-K. First Financial Corporation filed the following Forms 8-K: - Form 8-K, pursuant to item 12, was filed on April 29, 2004 in connection with the press release dated April 27, 2004, announcing quarterly results of operations. - Form 8-K, pursuant to item 9, was filed on May 21, 2004 in connection with the press release dated May 19, 2004, announcing the dividends. 13 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 11, 2004 By /s/ Donald E. Smith --------------------------------- Donald E. Smith, Chairman Date: August 11, 2004 By /s/ Norman L. Lowery ------------------------------------- Norman L. Lowery, Vice Chairman & CEO (Principal Executive Officer) Date: August 11, 2004 By /s/ Michael A. Carty --------------------------------------- Michael A. Carty, Treasurer & CFO (Principal Financial Officer) 14 Exhibit Index Exhibit No: Description of Exhibit: - ----------- ----------------------- 3.1 Amended and Restated Articles of Incorporation of First Financial Corporation, incorporated by reference to the Corporation's Form 10-Q filed for the quarter ended September 30, 2003. 3.2 Code of By-Laws of First Financial Corporation, incorporated by reference to the Corporation's Form 10-Q filed for the quarter ended September 30, 2003. 10.1 Employment Agreement for Norman L. Lowery, dated January 1, 2004, by reference to Exhibit 10-2 to the Corporation Form 10-Q filed for the quarter ended March 31, 2004. 10.2 2001 Long-Term Incentive Plan of First Financial Corporation, incorporated by reference to the Corporation's Form 10-Q filed for the quarter ended September 30, 2003. 31.1 Sarbanes-Oxley Act 302 Certification for Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 by Principal Executive Officer, dated August 11, 2004. 31.2 Sarbanes-Oxley Act 302 Certification for Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 by Principal Financial Officer, dated August 11, 2004. 32.1 Certification, dated August 11, 2004, of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 15