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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.