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 September 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 November 3, 2004 there were outstanding 13,499,770 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. Quantitative and Qualitative Disclosures About Market Risk...................................... 11 Item 4. Controls and Procedures......................................................................... 12 PART II. Other Information: Item 2. Unregistered Sales of Equity Securities and Use of Proceeds..................................... 13 Item 4. Submission of Matters to a Vote of Security Holders............................................. 13 Item 6. Exhibits........................................................................................ 13 Signatures.............................................................................................. 14 Part I - Financial Information Item 1. Financial Statements FIRST FINANCIAL CORPORATION CONSOLIDATED BALANCE SHEETS (Dollar amounts in thousands, except per share data) September 30, December 31, 2004 2003 ---- ---- (Unaudited) ASSETS Cash and due from banks $ 77,083 $ 94,198 Federal funds sold and short-term investments 3,450 5,850 Securities available-for-sale 515,715 567,733 Loans: Commercial, financial and agricultural 402,447 374,638 Real estate - construction 31,566 35,361 Real estate - mortgage 759,597 766,911 Consumer 270,602 248,290 Lease financing 3,832 4,884 ----------- ----------- 1,468,044 1,430,084 Less: Unearned income (437) (559) Allowance for loan losses (22,706) (21,239) ----------- ----------- 1,444,901 1,408,286 Accrued interest receivable 11,788 13,073 Premises and equipment, net 31,061 29,322 Bank-owned life insurance 48,638 50,279 Goodwill 7,102 7,102 Other intangible assets 3,227 3,651 Other real estate owned 4,541 6,424 Other assets 37,218 37,139 ----------- ----------- TOTAL ASSETS $ 2,184,724 $ 2,223,057 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest-bearing $ 243,684 $ 179,517 Interest-bearing: Certificates of deposit of $100 or more 181,974 192,185 Other interest-bearing deposits 1,006,919 1,107,645 ----------- ----------- 1,432,577 1,479,347 Short-term borrowings 68,459 68,629 Other borrowings 382,497 383,233 Other liabilities 31,717 36,569 ----------- ----------- TOTAL LIABILITIES 1,915,250 1,967,778 ----------- ----------- Shareholders' equity: Common stock, $.125 stated value per share; Authorized shares -- 40,000,000 Issued shares-14,450,966 Outstanding shares -- 13,499,770 in 2004 and 13,578,770 in 2003 1,806 1,806 Additional capital 67,181 67,181 Retained earnings 212,018 194,294 Accumulated other comprehensive income 10,263 11,463 Treasury shares, at cost 951,196 in 2004 and 872,196 in 2003 (21,794) (19,465) ----------- ----------- TOTAL SHAREHOLDERS' EQUITY 269,474 255,279 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,184,724 $ 2,223,057 =========== =========== See accompanying notes. 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, 2004 2003 2004 2003 ---- ---- ---- ---- (Unaudited) (Unaudited) INTEREST INCOME: Loans including related fees $ 23,235 $ 24,121 $ 68,901 $ 73,188 Securities Taxable 3,624 3,653 11,349 11,710 Tax-exempt 1,712 1,979 5,350 5,999 Other 450 647 1,522 1,945 -------- -------- -------- -------- TOTAL INTEREST INCOME 29,021 30,400 87,122 92,842 -------- -------- -------- -------- INTEREST EXPENSE: Deposits 5,740 6,488 17,666 20,643 Short-term borrowings 371 151 855 322 Other borrowings 5,063 5,230 15,068 15,739 -------- -------- -------- -------- TOTAL INTEREST EXPENSE 11,174 11,869 33,589 36,704 -------- -------- -------- -------- NET INTEREST INCOME 17,847 18,531 53,533 56,138 Provision for loan losses 2,223 2,318 6,069 6,848 -------- -------- -------- -------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 15,624 16,213 47,464 49,290 -------- -------- -------- -------- NON-INTEREST INCOME: Trust department income 1,024 890 3,048 2,846 Service charges and fees on deposit accounts 2,966 2,068 8,586 5,244 Other service charges and fees 1,723 2,530 5,091 6,356 Securities gains/(losses), net 21 152 444 158 Insurance commissions 1,737 1,554 4,597 4,702 Gains/(losses) on sales of mortgage loans 199 (220) 742 1,799 Gain on life insurance benefits - - 4,113 - Other 523 336 2,470 1,794 -------- -------- -------- -------- TOTAL NON-INTEREST INCOME 8,193 7,310 29,091 22,899 -------- -------- -------- -------- NON-INTEREST EXPENSES: Salaries and employee benefits 9,224 8,961 27,973 26,963 Occupancy expense 1,002 946 2,987 2,990 Equipment expense 980 853 2,657 2,477 Other 4,669 4,818 13,662 13,946 -------- -------- -------- -------- TOTAL NON-INTEREST EXPENSE 15,875 15,578 47,279 46,376 -------- -------- -------- -------- INCOME BEFORE INCOME TAXES 7,942 7,945 29,276 25,813 Provision for income taxes 1,967 1,502 6,287 6,163 -------- -------- -------- -------- NET INCOME $ 5,975 $ 6,443 $ 22,989 $ 19,650 ======== ======== ======== ======== PER SHARE DATA: Basic and diluted earnings per share $ 0.44 $ 0.47 $ 1.70 $ 1.45 ======== ======== ======== ======== Dividends per share $ - $ - $ 0.39 $ 0.34 ======== ======== ======== ======== Weighted average number of shares outstanding (in thousands) 13,501 13,568 13,525 13,586 ======== ======== ======== ======== See accompanying notes FIRST FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Three months Ended September 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, July 1, 2004 $ 1,806 $ 67,181 $ 206,043 $ 6,594 $ (21,748) $ 259,876 Comprehensive income: Net income 5,975 5,975 Change in net unrealized gains/ (losses) on securities available for sale 3,669 3,669 --------- Total comprehensive income/(loss) 9,644 Treasury stock purchase (46) (46) --------- --------- --------- --------- --------- --------- Balance, September 30, 2004 $ 1,806 $ 67,181 $ 212,018 $ 10,263 $ (21,794) $ 269,474 ========= ========= ========= ========= ========= ========= 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 securities available for sale (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 ========= ========= ========= ========= ========= ========= See accompanying notes. FIRST FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Nine months Ended September 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 22,989 22,989 Change in net unrealized gains/ (losses) on securities available for sale (1,200) (1,200) --------- Total comprehensive income 21,789 Cash dividends, $.39 per share (5,265) (5,265) Treasury stock purchase (2,329) (2,329) --------- --------- --------- --------- --------- --------- Balance, September 30, 2004 $ 1,806 $ 67,181 $ 212,018 $ 10,263 $ (21,794) $ 269,474 ========= ========= ========= ========= ========= ========= 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 securities available for sale (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 ========= ========= ========= ========= ========= ========= See accompanying notes. FIRST FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollar amounts in thousands, except per share data) Nine months Ended September 30, 2004 2003 ---- ---- (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 22,989 $ 19,650 Adjustments to reconcile net income to net cash provided by operating activities: Net amortization/ (accretion) of premiums and discounts on securities 1,625 491 Provision for loan losses 6,069 6,848 Securities (gains)/losses, net (444) (158) Gain on Life insurance benefit (4,113) - Depreciation and amortization 2,349 2,139 Contribution of shares to ESOP - 1,256 Other, net 2,818 (7,156) --------- --------- NET CASH FROM OPERATING ACTIVITIES 31,293 23,070 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Sales of securities available for sale 31,346 2,270 Maturities and principal reductions on securities available for sale 57,214 185,636 Purchases of securities available for sale (39,723) (204,200) Loans made to customers, net of repayments (43,088) (9,725) Net change in federal funds sold 2,400 (5,550) Proceeds from life insurance benefit 7,267 - Additions to premises and equipment (3,664) (1,248) --------- --------- NET CASH FROM INVESTING ACTIVITIES 11,752 (32,817) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net change in deposits (46,770) 15,513 Net change in short-term borrowings (170) 42,407 Dividends paid (10,155) (8,845) Purchase of treasury stock (2,329) (1,318) Proceeds from other borrowings 85,006 13 Repayments on other borrowings (85,742) (39,561) --------- --------- NET CASH FROM FINANCING ACTIVITIES (60,160) 8,209 --------- --------- NET CHANGE IN CASH AND CASH EQUIVALENTS (17,115) (1,538) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 94,198 96,043 --------- --------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 77,083 $ 94,505 ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for interest $ 34,997 $ 38,237 ========= ========= Income taxes paid $ 6,408 $ 6,761 ========= ========= See accompanying notes. FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The accompanying September 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) September 30, December 31, 2004 2003 ----- ---- Impaired loans with related allowance for loan losses calculated under SFAS No. 114 $17,720 $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 September 30, 2004 and December 31, 2003 are shown below. All securities are classified as available-for-sale. (000's) (000's) September 30, 2004 December 31, 2003 Amortized Cost Fair Value Amortized Cost Fair Value -------------- ---------- -------------- ---------- United States Government and its agencies $232,159 $234,614 $269,228 $272,009 Collateralized Mortgage Obligations 25,055 25,062 18,022 18,024 States and Municipal 139,812 148,183 152,719 161,990 Corporate Obligations 106,221 107,856 113,736 115,710 -------- -------- -------- -------- $503,247 $515,715 $553,705 $567,733 ======== ======== ======== ======== 4. Short-Term Borrowings Period - end short-term borrowings were comprised of the following: (000's) September 30, December 31, 2004 2003 ---- ---- Federal Funds Purchased $59,415 $61,524 Repurchase Agreements 7,542 5,130 Note Payable - U.S. Government 1,502 1,975 ------- ------- $68,459 $68,629 ======= ======= 5. Other Borrowings Other borrowings at period-end are summarized as follows: (000's) September 30, December 31, 2004 2003 ---- ----- FHLB advances $357,897 $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 -------- -------- $382,497 $383,233 ======== ======== 6. Components of Net Periodic Benefit Cost THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 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 $ 1,881 $ 1,625 $ 61 $ 76 Interest cost 542 507 61 63 1,626 1,520 183 189 Expected return on plan assets (700) (584) - - (2,100) (1,751) - - Amortization of transition obligation - - 15 15 - - 45 45 Amortization of prior service cost (4) (4) - - (13) (13) - - Amortization of net (gain) loss 61 64 34 30 184 193 102 90 ------- ------- ------- ------- ------- ------- ------- ------- Net Periodic Benefit Cost $ 526 $ 525 $ 130 $ 133 $ 1,578 $ 1,574 $ 391 $ 400 ======= ======= ======= ======= ======= ======= ======= ======= 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 $1.2 million for the 9 months ended September 30, 2004 has been made. First Financial Corporation anticipates contributing an additional $392,000 and $1.2 million respectively to its Pension Plan and ESOP in 2004. Contributions of $230,000 have been made through the first nine months of 2004 for the Post Retirement Health Benefits plan. First Financial Corporation anticipates contributing an additional $70,000 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. 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 nine months ended September 30, 2004 was $23.0 million, a 16.8% increase from the $19.7 million for the same period in 2003. Basic earnings per share for the nine months ended September 30, 2004 increased to $1.70, a 17.2% increase from the $1.45 for the same period in 2003. The net income for the quarter ended September 30, 2004 was $6.0 million or $0.44 per share, compared to $6.4 million or $0.47 per share for the same period in 2003. These represent 7.3% and 6.4% decreases 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 $2.6 million or 4.6% to $53.5 million in the first nine months of 2004 from $56.1 million in the same period in 2003. The net interest margin decreased from 4.00% in 2003 to 3.77% in 2004, a 23 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 third quarter of 2004 increased $6.2 million, or 27.0%, over the same period of 2003. Life insurance proceeds account for $4.1 million of this increase. First Courtesy checking, a new product introduced in the fourth quarter of 2003 increased service charges on deposit income by $3.3 million. During the first 9 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 $1.1 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 $903 thousand, or 2.0%, due mainly to increases in salaries and employee benefit programs. Allowance for Loan Losses The Corporation's provision for loan losses decreased to $6.1 million for the first nine months of 2004 compared to $6.8 million in the same period of 2003. At September 30, 2004, the allowance for loan losses was 1.55% of net loans, an increase of 6.9% of the allowance for loan losses balance at December 31, 2003. Net chargeoffs for the first nine months of 2004 were $4.6 million compared to $5.4 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 $22.7 million at September 30, 2004 is adequate. Commercial loans classified substandard or doubtful declined from approximately $70 million at December 31, 2003 to approximately $60 million at September 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. Provision for Income Taxes Income taxes for the nine months ended September 30, 2004 increased by $124 thousand from the same period in 2003. The effective tax rate was 21.5% and 23.9% for the 2004 and 2003 periods. Income taxes for the third quarter of 2004 increased by $465 thousand. The effective tax rates for the respective quarters were 24.8% and 18.9%. Income taxes for the third quarter of 2003 were favorably impacted by the satisfactory resolution of prior year tax strategies. 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 September 30, 2004 and December 31, 2003 follows: (000's) September 30, 2004 December 31, 2003 ------------------ ----------------- Non-accrual loans $21,965 $ 8,429 Restructured loans 430 542 ------- ------- 22,395 8,971 Accruing loans past due over 90 days 6,123 5,384 ------- ------- $28,518 $14,355 ======= ======= Ratio of the allowance for loan losses as a percentage of non-performing loans 80% 148% The following loan categories comprise significant components of the non-performing loans: (000's) . September 30, 2004 December 31, 2003 ------------------ ----------------- Non-Accrual Loans: 1-4 family residential $ 2,095 $ 2,155 Commercial loans 18,364 4,697 Installment loans 1,506 1,577 ------- ------- $21,965 $ 8,429 ======= ======= Past due 90 days or more: 1-4 family residential $ 2,993 $ 2,321 Commercial loans 1,445 1,530 Installment loans 1,685 1,533 ------- ------- $ 6,123 $ 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. 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, 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 2.92% over the next 12 months and increase 7.47% over the following 12 months. Given a 100 basis point decrease in rates, net interest income would decrease 2.64% over the next 12 months and decrease 7.15% 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 100 -2.64 -7.15 -10.16 Down 50 -1.31 -3.59 -5.12 Up 100 2.92 7.47 10.68 Up 200 4.44 13.51 20.14 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 $33.2 million of investments that mature throughout the coming 12 months. The Corporation also anticipates $75.4 million of principal payments from mortgage-backed securities. Given the current rate environment, the Corporation anticipates $18.7 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 nine months of 2004 to the year ended 2003, average loans are up $10.3 million. Average deposits are down $13.4 million. Average shareholders' equity increased $25.4 million, or 9.7%. Strong financial performance pushed book value per share up 7.0% to $19.96 in 2004 from $18.66 at September 30, 2003. Book value per share is calculated by dividing the total equity by the number of shares outstanding. Capital Adequacy As of September 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 September 30, 2004 December 31, 2003 Capitalized ------------------ ----------------- ---------------- Total risk-based capital ratio 16.67% 15.67% > or = 10.0% Tier I risk-based capital ratio 15.42% 14.43% > or = 6.0% Tier I leverage capital ratio 11.40% 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 September 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 September 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 September 30, 2004 that have materially affected, or are reasonably likely to materially affect, the Corporation's internal control over financial reporting. PART II - Other Information Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. (e) Purchases of Equity Securities by the Issuer 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* July 1-31, 2004 0 $ 0 N/A N/A August 1-31, 2004 0 0 N/A N/A September 1-30, 2004 1,500 31.00 N/A N/A ----- ------ --- --- Total 1,500 $31.00 N/A N/A ===== ====== === === * The Corporation has not adopted a formal policy or program regarding repurchases of its shares of stock. ITEM 6. 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 September 30, 2004 by Principal Executive Officer, dated November 3, 2004. 31.2 Sarbanes-Oxley Act 302 Certification for Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 by Principal Financial Officer, dated November 3, 2004. 32.1 Certification, dated November 3, 2004, of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 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 3, 2004 By /s/ Donald E. Smith --------------------------------- Donald E. Smith, Chairman Date: November 3, 2004 By /s/ Norman L. Lowery ------------------------------------- Norman L. Lowery, Vice Chairman & CEO (Principal Executive Officer) Date: November 3, 2004 By /s/ Michael A. Carty ---------------------------------- Michael A. Carty, Treasurer & CFO (Principal Financial Officer) 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 September 30, 2004 by Principal Executive Officer, dated November 3, 2004. 31.2 Sarbanes-Oxley Act 302 Certification for Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 by Principal Financial Officer, dated November 3, 2004. 32.1 Certification, dated November 3, 2004, of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.