FIRST FINANCIAL CORP /IN/ - 10-Q Quarterly Report

Back to GetFilings.com

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE

SECURITIES EXCHANGE ACT OF 1934

FIRST FINANCIAL CORPORATION

June 30, 2003

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For Quarter Ended June 30, 2003
---------------

Commission File Number 0-16759
-------

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

INDIANA 35-1546989
- ------------------------------ -------------------
(State or other jurisdiction (I.R.S. Employer
Incorporation or organization) Identification No.)

One First Financial Plaza, Terre Haute, IN 47807
- ------------------------------------------ ----------
(Address of principal executive office) (Zip Code)

(812)238-6000
----------------------------------------------------
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No .
------ -----

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes x No .
------ -----

As of July 31, 2003 were outstanding 6,782,885 shares without par value, of the
registrant.

2

FIRST FINANCIAL CORPORATION

FORM 10-Q

INDEX

3

FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CONDITION
(Dollar amounts in thousands, except per share data)

See accompanying notes.

4

FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Dollar amounts in thousands, except per share data)

See accompanying notes.

5

FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Three Months Ended
June 30, 2003 and 2002
(Dollar amounts in thousands, except per share data)
(Unaudited)

See accompanying notes.

6

FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Six Months Ended
June 30, 2003, and 2002
(Dollar amounts in thousands, except per share data)
(Unaudited)

See accompanying notes.

7

FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)

See accompanying notes.

8

FIRST FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The accompanying June 30, 2003 and 2002 consolidated financial
statements are unaudited. The December 31, 2002 consolidated financial
statements are as reported in the First Financial Corporation (the Corporation)
2002 annual report. The following notes should be read together with notes to
the consolidated financial statements included in the 2002 annual report filed
with the Securities and Exchange Commission as an exhibit to Form 10-K.

1. The significant accounting policies followed by the Corporation and its
subsidiaries for interim financial reporting are consistent with the accounting
policies followed for annual financial reporting. All adjustments which are, in
the opinion of management, necessary for a fair statement of the results for the
periods reported have been included in the accompanying consolidated financial
statements and are of a normal recurring nature. The Corporation reports
financial information for only one segment, banking.

Newly Issued But Not Yet Effective Accounting Standards

The Financial Accounting Standards Board (FASB) recently issued two new
accounting standards, Statement 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities, and Statement 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equities,
both of which generally become effective in the quarter beginning July 1, 2003.

Because the Corporation does not have these instruments or is only nominally
involved in these activities, management does not expect the new accounting
standards to materially affect the Corporation's operating results or financial
condition.

2. A loan is considered to be impaired when, based upon current information and
events, it is probable that the Corporation will be unable to collect all
amounts due according to the contractual terms of the loan. Impairment is
primarily measured based on the fair value of the loan's collateral. The
following table summarizes impaired loan information:

Interest payments on impaired loans are typically applied to principal
unless collection of the principal amount is deemed to be fully assured, in
which case interest is recognized on a cash basis.

3. Securities

The amortized cost and fair value of the Corporation's investments at
June 30, 2003 are shown below. All securities are classified as
available-for-sale.

4. Short-Term Borrowings

Period-end short-term borrowings were comprised of the following:

9

5. Other Borrowings

Other borrowings at period-end are summarized as follows:

FIRST FINANCIAL CORPORATION

ITEMS 2. and 3. Management's Discussion and Analysis of Financial Condition and
Results of Operations and Quantitative and Qualitative Disclosures About
Market Risk

The purpose of this discussion is to point out key factors in the
Corporation's recent performance compared with earlier periods. The discussion
should be read in conjunction with the financial statements beginning on page
three of this report. All figures are for the consolidated entities. It is
presumed the readers of these financial statements and of the following
narrative have previously read the Corporation's annual report for 2002.

Forward-looking statements contained in the following discussion are
based on estimates and assumptions that are subject to significant business,
economic and competitive uncertainties, many of which are beyond the
Corporation's control and are subject to change. These uncertainties can affect
actual results and could cause actual results to differ materially from those
expressed in any forward-looking statements in this discussion.

Critical Accounting Policies

Certain of the Corporation's accounting policies are important to the
portrayal of the Corporation's financial condition and results of operations,
since they require management to make difficult, complex or subjective
judgments, some of which may relate to matters that are inherently uncertain.
Estimates associated with these policies are susceptible to material changes as
a result of changes in facts and circumstances. Facts and circumstances which
could effect these judgments include, but without limitation, changes in
interest rates, in the performance of the economy or in the financial condition
of borrowers. Management believes that its critical accounting policies include
determining the allowance for loan losses, determining the fair value of
securities and other financial instruments, determining the pension and
post-retirement benefit obligation and the valuation of originated mortgage
servicing rights.

Summary of Operating Results

Net income for the six months ended June 30, 2003 was $13.2 million, a
0.5% decrease from the $13.3 million for the same period in 2002. Basic earnings
per share remained stable at $1.94 through the second quarter of 2003 which
equaled the $1.94 through the second quarter of 2002.

The primary components of income and expense affecting net income are
discussed in the following analysis.

Net Interest Income

The Corporation's primary source of earnings is net interest income,
which is the difference between the interest earned on loans and other
investments and the interest paid for deposits and other sources of funds. Net
interest income decreased $1.9 million or 4.9% to $37.6 million in the first six
months of 2003 from $39.5 million in the same period of 2002. This was the
result of a decrease of $52.4 million in average interest earning assets
primarily due to continued refinancing activity and the sale of those lower
rate, fixed rate mortgage loans, in the secondary market. The net interest
margin decreased from 4.08% in 2002 to 4.02% in 2003, a 6 basis point or 1.5%
decrease driven by a greater decline in the yield on earning assets than in the
average cost of funds.

10

Non-Interest Income

Non-interest income through the second quarter of 2003 increased $3.1
million, or 25.1%, over the same period of 2002. Mortgage interest rates
continue to hover at all-time lows, which have stimulated significant mortgage
loan volume, especially in the refinancing area. Selling these lower rate,
fixed-rate mortgages in the secondary market has been the over-riding strategy
of the Corporation. This increased mortgage activity has resulted in $1.5
million of additional non-interest income from capitalized mortgage servicing
rights, increased loan servicing and origination fees and net cash gains on
sales in the secondary market, which is almost half of the $3.1 million increase
in non-interest income. Other major contributors to non-interest income include
increases in loan and deposit fees, insurance commissions, and trust and
financial services fees, which are heavily influenced by stock market conditions
which have seen recent improvement.

Non-Interest Expenses

Non-interest expenses increased $633 thousand, or 2.1%, due mainly to
increases in employee salaries and fringe benefit programs.

Allowance for Loan Losses

The Corporation's provision for loan losses increased to $4.5 million
for the first six months of 2003 compared to $4.3 million in the same period of
2002. At June 30, 2003, the allowance for loan losses was 1.53% of net loans, an
increase from 1.48% at December 31, 2002. Net chargeoffs for the first six
months of 2003 were $4.1 million compared to $4.2 million for the same period of
2002. Based on management's analysis of the current portfolio, an evaluation
that includes consideration of historical loss experience and potential loss
exposure on identified problem loans, management believes the allowance of $21.7
million at June 30, 2003 is adequate.

Under-performing Loans

Under-performing loans consist of (1) non-accrual loans on which the ultimate
collectability of the full amount of interest is uncertain, (2) loans which have
been renegotiated to provide for a reduction or deferral of interest or
principal because of a deterioration in the financial position of the borrower,
and (3) loans past due ninety days or more as to principal or interest. A
summary of under-performing loans at June 30, 2003 and December 31, 2002
follows:

The following loan categories comprise significant components of the
under-performing loans:

Interest Rate Sensitivity and Liquidity

First Financial Corporation has established risk measures, limits and
policy guidelines for managing interest rate risk and liquidity. Responsibility
for management of these functions resides with the Asset Liability Committee.
The primary goal of the Asset Liability Committee is to maximize net interest
income within the interest rate risk limits approved by the Board of Directors.

Interest Rate Risk

Management considers interest rate risk to be the Corporation's most
significant market risk. Interest rate risk is the exposure to changes in net
interest income as a result changes in interest rates. Consistency in the
Corporation's net interest income is largely dependent on the effective
management of this risk.

The Asset Liability position is measured using sophisticated risk
management tools, including earning simulation and market value of equity
sensitivity analysis. These tools allow management to quantify and monitor both
short-term and long-term exposure to interest rate risk. Simulation modeling
measures the effects of changes in interest rates, changes in the shape of the
yield curve and the effects of embedded options on net interest income. This
measure projects earnings in the various environments over the next three years.
It is important to note that measures of interest rate risk have limitations and
are dependent on various assumptions. These assumptions are inherently uncertain
and, as a result, the model cannot precisely predict the impact of interest rate
fluctuations on net interest income. Actual results will differ from simulated
results due to timing, frequency and amount of interest rate changes as well as
overall market conditions. The Committee has performed a thorough analysis of
these assumptions and believes them to be valid and theoretically sound. These
assumptions are regularly monitored for behavioral changes.

The Corporation from time to time utilizes derivatives to manage
interest rate risk. Management regularly evaluates the merits of such interest
rate risk management products and strategies but does not anticipate the use of
such products will become a major part of the Corporation's risk management
strategy.

The table below shows the Corporation's estimated sensitivity profile
as of June 30, 2003. The change in interest rates assumes a parallel shift in
interest rates of 100 and 200 basis points. Given a 100 basis point increase in
rates, net interest income would increase 3.93% over the next 12 months and
increase 7.41% over the following 12 months. Given a 100 basis point decrease in
rates, net interest income would decrease 4.37% over the next 12 months and
decrease 7.78% over the following 12 months. These estimates assume all rate
changes occur overnight and management takes no action as a result of this
change.

Typical rate shock analysis does not reflect management's ability to
react and thereby reduce the effect of rate changes, and represents a worst-case
scenario.

12

Liquidity Risk

Liquidity is measured by each bank's ability to raise funds to meet the
obligations of its customers, including deposit withdrawals and credit needs.
This is accomplished primarily by maintaining sufficient liquid assets in the
form of investment securities and core deposits. The Corporation has $7.8
million of investments that mature throughout the coming 12 months. The
Corporation also anticipates $87.3 million of principal payments from
mortgage-backed securities. Given the current rate environment, the Corporation
anticipates $18.0 million in securities to be called within the next 12 months.
With these sources of funds, the Corporation currently anticipates adequate
liquidity to meet the expected obligations of its customers.

Financial Condition

Comparing the second quarter of 2003 to 2002, average loans are down
$31.0 million due primarily to continued refinancing and sales of fixed-rate
mortgage loans. Average deposits were up $4.4 million. These resources were used
to pay down average bank borrowings by $49.3 million. Average shareholders'
equity increased $9.0 million, or 3.8%. Strong financial performance and
increased unrealized gains on securities pushed book value per share up 9.4% to
$36.85 in 2003 from $33.70 at June 30, 2002. Book value per share is calculated
by dividing the total equity by the number of shares outstanding.

Capital Adequacy

As of June 30, 2003, the most recent notification from the respective
regulatory agencies categorized the Corporation and its subsidiary banks as well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized the Corporation must maintain minimum total
risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the
table. There are no conditions or events since that notification that management
believes have changed the Corporation's category.

ITEM 4. Controls and Procedures

(a) As of the end of the quarterly period covered by this report, an evaluation
was carried out under the supervision and with the participation of First
Financial Corporation's management, including our Chief Executive Officer and
Chief Financial Officer, of the effectiveness of our disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14(c) under the Securities
Exchange Act of 1934). Based on their evaluation, our Chief Executive Officer
and Chief Financial Officer have concluded that the Corporation's disclosure
controls and procedures were effective as of such date.

(b) Changes in Internal Controls. There have been no significant changes in the
Corporation's internal controls or in other factors that could significantly
affect these controls subsequent to the date of the evaluation thereof,
including any corrective actions with regard to significant deficiencies and
material weaknesses.

(c) Limitations on the Effectiveness of Controls. The Corporation's management,
including its principal executive officer and principal financial officer, does
not expect that the Corporation's disclosure controls and procedures and other
internal controls will prevent all error and all fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further,
the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within the Corporation have been detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control.

The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can only be
reasonable assurance that any design will succeed in achieving its stated goals
under all potential future conditions; over time, control may become inadequate
because of changes in conditions, or the degree of compliance with the policies
or procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and
not be detected.

13

(d) CEO and CFO Certifications. Appearing as an exhibit to this report there are
Certifications of the Corporation's principal executive officer and principal
financial officer. The Certifications are required in accord with Section 302 of
the Sarbanes-Oxley Act of 2002 (the "Section 302 Certifications"). This Item of
this report which you are currently reading is the information concerning the
evaluation referred to in the Section 302 Certifications and this information
should be read in conjunction with the Section 302 Certifications for a more
complete understanding of the topics presented.

14

FIRST FINANCIAL CORPORATION
PART II OTHER INFORMATION

ITEM 4. Submission of Matters to a Vote of Security Holders

(a) The Annual meeting of the shareholders of the Corporation was held
on April 16, 2003

(b) The following were elected Directors of the Corporation for a
three year term by majority vote as follows:

The following was elected Director of the Corporation for a one year
term by majority vote as follows:

Chapman J. Root II. 5,771,080 138,720

(c) The shareholders unanimously approved the annual report of the
Corporation and unanimously approved the actions of the Directors
and Officers of the Corporation for the Fiscal year ended December
31, 2002.

ITEM 6. Exhibits and Reports on Form 8-K.

(a). Exhibits

3(i) Amended and Restated Articles of Incorporation of First
Financial Corporation, by reference to Exhibit 3(i) to Form 10-Q
as filed for September 30, 2002

3(ii) Code of By-Laws of First Financial Corporation, by reference
to Exhibit 3(ii) to Form 10-Q as filed for September 30, 2002.

10.1 Deferred Compensation Agreement and Split Dollar Insurance
Agreement for Donald E. Smith, by reference to Exhibit 10.1 to
Form 10-Q as filed for September 30, 2002.

10.2 Employment Agreement for Norman L. Lowery, by reference to
Exhibit 10.2 to Form 10-Q as filed for March 31, 2003.

10.3 2001 Long-Term Incentive Plan of First Financial Corporation,
by reference to Exhibit 10.3 to Form 10-Q as filed for September
30, 2002.

31.1 Sarbanes-Oxley Act of 2002, Section 302 Certification of
Chief Executive Officer

31.2 Sarbanes-Oxley Act of 2002, Section 302 Certification of
Chief Financial Officer

32.1 Sarbanes-Oxley Act of 2002, Section 906 Certification of
Chief Executive and Chief Financial Officers

(b) Form 8-K reports filed during the quarter of the fiscal year for
which this report is filed.

Form 8-K was filed in connection with the press release dated
April 24, 2003, announcing quarterly results of operations.

Form 8-K was filed in connection with the press release dated May
22, 2003, announcing a semi-annual dividend.

15

FIRST FINANCIAL CORPORATION
PART II OTHER INFORMATION
FORM 10-Q
SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

FIRST FINANCIAL CORPORATION
(Registrant)

Date: August 8, 2003 By /s/ DONALD E. SMITH
-------------------------------
Donald E. Smith, Chairman

Date: August 8, 2003 By /s/ NORMAN L. LOWERY
-------------------------------
Norman L. Lowery, Vice Chairman

Date: August 8, 2003 By /s/ MICHAEL A. CARTY
-------------------------------
Michael A. Carty, Treasurer

16