-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JQREC/CX0e7z64ScYUMt0yTRJWBVMeEuUELANmgmGWGwNB99YUp3jT4M/5uoXzNn 4W0dDwJ5IuZCT0Gh7D0vKw== 0000950137-05-003129.txt : 20050316 0000950137-05-003129.hdr.sgml : 20050316 20050316163351 ACCESSION NUMBER: 0000950137-05-003129 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20041231 FILED AS OF DATE: 20050316 DATE AS OF CHANGE: 20050316 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST FINANCIAL CORP /IN/ CENTRAL INDEX KEY: 0000714562 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 351546989 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-16759 FILM NUMBER: 05685904 BUSINESS ADDRESS: STREET 1: ONE FIRST FINANCIAL PLAZA CITY: TERRE HAUTE STATE: IN ZIP: 47807 BUSINESS PHONE: (812) 238-6000 MAIL ADDRESS: STREET 1: ONE FIRST FINANCIAL PLAZA CITY: TERRE HAUTE STATE: IN ZIP: 47807 FORMER COMPANY: FORMER CONFORMED NAME: TERRE HAUTE FIRST CORP DATE OF NAME CHANGE: 19850808 10-K 1 c93154e10vk.txt ANNUAL REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended Commission file number December 31, 2004 0-16759 FIRST FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) INDIANA 35-1546989 (State of Incorporation) (I.R.S. Employer Identification No.) One First Financial Plaza Terre Haute, IN 47807 (Address of principal executive offices) (Zip Code) Registrant's telephone number: (812) 238-6000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED -------------------------- ----------------------------------------- Common Stock, no par value Nasdaq Indicated 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, and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of regulation S-K is not contained herein, and will not be contained, to the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to the form 10-K. [X] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X] No [ ] As of June 30, 2004 the aggregate market value of the voting stock held by nonaffiliates of the registrant based on the average bid and ask prices of such stock was $393,720,021. (For purposes of this calculation, the Corporation excluded the stock owned by certain beneficial owners and management and the Corporation's ESOP.) Shares of Common Stock outstanding as of March 9, 2005--13,505,938 shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of the 2004 Annual Report to Shareholders are incorporated by reference into Parts I and II. Portions of the Definitive Proxy Statement for the First Financial Corporation Annual Meeting of Shareholders to be held April 20, 2005 are incorporated by reference into Part III. FORM 10-K CROSS-REFERENCE INDEX
PAGE PART I Item 1 Business ..... ............................................................................ 2 Item 2 Properties ................................................................................ 2 Item 3 Legal Proceedings ......................................................................... 2 Item 4 Submission of Matters to a Vote of Security Holders ....................................... 2 PART II Item 5 Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities ................................................. 3 Item 6 Selected Financial Data ................................................................... 3 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operation ...... 3 Item 7 A Quantitative and Qualitative Disclosures about Market Risk ............................... 3 Item 8 Financial Statements and Supplementary Data ............................................... 3 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosures ..... 3 Item 9 A Controls and Procedures ................................................................... 3,4 PART III Item 10 Directors and Executive Officers of Registrant ............................................ 4 Item 11 Executive Compensation .................................................................... 4 Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters ........................................................... 4 Item 13 Certain Relationships and Related Transactions ............................................ 4 Item 14 Principal Accountant Fees and Services .................................................... 4 PART IV Item 15 Exhibits and Financial Statement Schedules ................................................ 5 Signatures ................................................................................ 6
1 PART I ITEM 1. BUSINESS First Financial Corporation (the "Corporation") is a financial services holding company. The Corporation was originally organized as an Indiana corporation in 1984 to operate as a bank holding company. For more information on the Corporation's business, please refer to the following sections of the 2004 Annual Report to Shareholders, which are incorporated by reference into this Form 10-K: 1. Description of services, affiliations, number of employees, and competition, on pages 30 and 31. 2. Information regarding supervision of the Corporation, on page 12. 3. Details regarding competition, on page 30. ITEM 2. PROPERTIES First Financial Corporation is located in a four-story office building in downtown Terre Haute, Indiana that was first occupied in June 1988. It is leased to First Financial Bank N.A., a wholly-owned subsidiary (the Bank). The Bank also owns two other facilities in downtown Terre Haute. One is leased to another party and the other is a 50,000-square-foot building housing operations and administrative staff and equipment. In addition, the Bank holds in fee six other branch buildings. One of the branch buildings is a single-story 36,000-square-foot building which is located in a Terre Haute suburban area. Six other branch bank buildings are leased by the Bank. The expiration dates on five of the leases are June 30, 2012, May 31, 2011, February 14, 2011, December 31, 2008, and September 1, 2006. The sixth lease is on a month-to-month basis. Facilities of the Corporation's banking centers in Clay County include three offices in Brazil, Indiana and offices in Clay City and Poland, Indiana. All five buildings are held in fee. Facilities of the Corporation's banking centers in Vermillion County include two offices in Clinton, Indiana and offices in Cayuga and Newport, Indiana. All four buildings are held in fee. Facilities of the Corporation's banking centers in Sullivan County include offices in Sullivan, Carlisle, Dugger, Farmersburg and Hymera, Indiana. All five buildings are held in fee. Facilities of the Corporation's banking centers in Greene County include an office in Worthington, Indiana. This building is held in fee. Facilities of the Corporation's banking centers in Knox County include offices in Monroe City and Sandborn, Indiana. Both buildings are held in fee. Facilities of the Corporation's banking centers in Parke County include two offices in Rockville, Indiana and offices in Marshall, Montezuma and Rosedale, Indiana. All five buildings are held in fee. Facilities of the Corporation's subsidiary, First Crawford State Bank, include its main office in Robinson, Illinois and two branch facilities in Oblong and Sumner, Illinois. All three buildings are held in fee by First Crawford. The facility of the Corporation's subsidiary, The Morris Plan Company, includes an office facility in Terre Haute, Indiana. The building is leased by The Morris Plan Company. The expiration date on the lease is August 31, 2008. Facilities of the Corporation's subsidiary, Forrest Sherer, Inc., include its main office and one satellite office in Terre Haute, Indiana. The buildings are held in fee by Forrest Sherer, Inc. Facilities of the Corporation's subsidiary, First Community Bank, N.A., include its main office in Olney, Illinois, and five branch facilities in Olney, Lawrenceville, Fairfield, Newton and Charleston, Illinois. All of the buildings are held in fee by First Community Bank, N.A., except the Olney branch, which is leased. The expiration date on the lease is March 1, 2010. ITEM 3.LEGAL PROCEEDINGS There are no material pending legal proceedings which involve the Corporation or its subsidiaries, other than ordinary routine litigation incidental to its business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 2 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES See "Market and Dividend Information" on page 42 of the 2004 Annual Report. That portion of the Annual Report is incorporated by reference into this Form 10-K. ITEM 6. SELECTED FINANCIAL DATA See "Five Year Comparison of Selected Financial Data" on page 7 of the 2004 Annual Report to Shareholders. That portion of the Annual Report is incorporated by reference into this Form 10-K. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION See "Management's Discussion and Analysis" on pages 30 through 40 of the 2004 Annual Report to Shareholders. That portion of the Annual Report is incorporated by reference into this Form 10-K. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See "Interest Rate Risk" section of "Management's Discussion and Analysis" on pages 39 and 40 of the 2004 Annual Report to Shareholders. That portion of the Annual Report is incorporated by reference into this Form 10-K. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See "Consolidated Balance Sheets" on page 8, "Consolidated Statements of Income" on page 9, "Consolidated Statements of Changes in Shareholders Equity" on page 10, "Consolidated Statements of Cash Flows" on page 11, and "Notes to Consolidated Financial Statements" on pages 12-28. "Report of Independent Registered Public Accounting Firm on Financial Statements" can be found on page 29 of the 2004 Annual Report to Shareholders. Those portions of the Annual Report are incorporated by reference into this Form 10-K. Statistical disclosure by the Corporation includes the following information in the 2004 Annual Report to Shareholders, which is incorporated by reference into this Form 10-K: 1. "Volume/Rate Analysis," on page 32. 2. "Securities," on page 34. 3. "Loan Portfolio," on page 35. 4. "Allowance for Loan Losses," on page 36. 5. "Nonperforming Loans," on pages 37 and 38. 6. "Deposits," on page 38. 7. "Consolidated Balance Sheet-Average Balances and Interest Rates," on page 41. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None ITEM 9A. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES As of the end of the period covered by this report, we carried out an evaluation (the "Evaluation"), under the supervision and with the participation of our President and Chief Executive Officer ("CEO"), who serves as our principal executive officer, and Chief Financial Officer ("CFO"), who serves as our principal financial officer, of the effectiveness of our disclosure controls and procedures ("Disclosure Controls"). Based on the Evaluation, our CEO and CFO concluded that our Disclosure Controls are effective in alerting them in a timely way to material information required to be included in our periodic SEC reports. 3 CHANGES IN INTERNAL CONTROLS There was no change in the Corporation's internal control over financial reporting that occurred during the Corporation's fourth fiscal quarter of 2004 that has materially affected, or is reasonably likely to materially affect, the Corporation's internal control over financial reporting. MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING In reliance upon the Order of the Securities and Exchange Commission issued under Section 36 of the Securities and Exchange Act of 1934 (Release No. 50754, November 30, 2004), the Corporation has not included in this Report either (a) the annual report of its management on the internal control over financial reporting, as required by Item 308(a) of Regulation S-K, or (b) the related attestation report of a registered public accounting firm, as required by Item 308(b) of Regulation S-K. The Corporation will file this information by amending this Report on or before May 2, 2005. As of the date of this Report, the Corporation had not identified any material weakness in its internal control over financial reporting, and the Corporation's registered public accounting firm had not identified any such material weakness and communicated this finding to the Corporation. ITEM 9B. OTHER INFORMATION On December 21, 2004, the Corporation extended the term of the existing employment agreement between Mr. Lowery, First Financial Bank and the Corporation. The term of the employment agreement will now expire on December 31, 2009. The terms and conditions of the employment agreement are incorporated by reference from Exhibit 10.1 to this Form 10-K. On December 21, 2004, the Compensation Committee of the Company set the 2005 annual base salaries of the named executive officers and established the criteria under the Corporation's 2001 Long Term Incentive Plan. Salaries as established for the named executive officers and a summary of the Long Term Incentive Plan are included as Exhibit 10.4 to this Form 10-K. The Company also established the compensation to be paid to Directors for the year 2005. These amounts are set forth on Exhibit 10.3 to this Form 10-K. On February 5, 2005, the Company also approved the bonus amounts payable to the named executive officers for 2004. These amounts were as follows:
NAME AND PRINCIPAL POSITION 2004 BONUS AWARD 2004 AWARD UNDER THE 2001 LONG-TERM INCENTIVE PLAN (1) - ------------------------------- ---------------- ------------------------------------------------------ DONALD E. SMITH $150,000 $375,600 President and Chairman of the Corporation; Chairman of FFB NORMAN L. LOWERY $150,000 $312,800 Vice Chairman, CEO and Vice President of the Corporation; President and CEO of FFB MICHAEL A. CARTY $ 19,000 $ 74,000 CFO, Secretary and Treasurer of the Corporation; Senior Vice President of FFB RICHARD O. WHITE $ 16,000 $ 73,500 Senior Vice President of FFB THOMAS S. CLARY $ 16,000 $ 67,900 Senior Vice President of FFB and COO
(1)These amounts represent the amount awarded under the 2001 Long-Term Incentive Plan. Payment of these amounts will not begin until the earlier of January 1, 2015, or the January 1 immediately following the year in which the participant reaches the age of 65. These payments generally will be annuitized over a 180-month period. Interest accrues on these amounts at 3.50% from January 1, 2010, until payment begins. When payment begins, interest will accrue on the unpaid portion at a 7.00% annual rate compounded monthly. The plan requires vesting over a five year period. As such Mr. Clary, with two full years of vesting, is entitled to receive only 40% of his awarded amount at December 31, 2004. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT In accordance with the provisions of General Instruction G to Form 10-K, the information required for disclosure under Item 10 is not set forth herein because the Corporation intends to file with the Securities and Exchange Commission a definitive Proxy Statement pursuant to Regulation 14A not later than 120 days following the end of its 2004 fiscal year, which Proxy Statement will contain such information. The information required by Item 10 is incorporated by reference to such Proxy Statement. ITEM 11. EXECUTIVE COMPENSATION In accordance with the provisions of General Instruction G to Form 10-K, the information required for disclosure under Item 11 is not set forth herein because the Corporation intends to file with the Securities and Exchange Commission a definitive Proxy Statement pursuant to Regulation 14A not later than 120 days following the end of its 2004 fiscal year, which Proxy Statement will contain such information. The information required by Item 11 is incorporated by reference to such Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT In accordance with the provisions of General Instruction G to Form 10-K, the information required for disclosure under Item 12 is not set forth herein because the Corporation intends to file with the Securities and Exchange Commission a definitive Proxy Statement pursuant to Regulation 14A not later than 120 days following the end of its 2004 fiscal year, which Proxy Statement will contain such information. The information required by Item 12 is incorporated by reference to such Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In accordance with the provisions of General Instruction G to Form 10-K, the information required for disclosure under Item 13 is not set forth herein because the Corporation intends to file with the Securities and Exchange Commission a definitive Proxy Statement pursuant to Regulation 14A not later than 120 days following the end of its 2004 fiscal year, which Proxy Statement will contain such information. The information required by Item 13 is incorporated by reference to such Proxy Statement. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES In accordance with the provisions of General Instruction G to Form 10-K, the information required for disclosure under Item 14 is not set forth herein because the Corporation intends to file with the Securities and Exchange Commission a definitive Proxy Statement pursuant to Regulation 14A not later than 120 days following the end of its 2004 fiscal year, which Proxy Statement will contain such information. The information required by Item 14 is incorporated by reference to such Proxy Statement. 4 PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a)(1) The following consolidated financial statements of the Registrant and its subsidiaries are included in the 2004 Annual Report to Shareholders of First Financial Corporation attached: Consolidated Balance Sheets--December 31, 2004 and 2003 Consolidated Statements of Income--Years ended December 31, 2004, 2003, and 2002 Consolidated Statements of Changes in Shareholders' Equity--Years ended December 31, 2004, 2003, and 2002 Consolidated Statements of Cash Flows--Years ended December 31, 2004, 2003, and 2002 Notes to Consolidated Financial Statements (2) Schedules to the Consolidated Financial Statements required by Article 9 of Regulation S-X are not required, inapplicable, or the required information has been disclosed elsewhere. (3) Listing of Exhibits:
Exhibit Number Description - -------------- ------------------------------------------------------------------- 3.1 Amended and Restated Articles of Incorporation of First Financial Corporation, incorporated by reference to Exhibit 3(i) of the Corporation's Form 10-Q filed for the quarter ended September 30, 2002 3.2 Code of By-Laws of First Financial Corporation, incorporated by reference to Exhibit 3(ii) of the Corporation's Form 10-Q filed for the quarter ended September 30, 2002 10.1 Employment Agreement for Norman L. Lowery, dated January 1, 2004, incorporated by reference to Exhibit 10.2 to the Corporation's 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 Exhibit 10.3 of the Corporation's Form 10-Q filed for the quarter ended September 30, 2002 10.3 2005 Schedule of Director Compensation 10.4 2005 Schedule of Named Executive Officer Compensation 13 Annual Report 21 Subsidiaries 31.1 Certification pursuant to Rule 13a-14(a) for Annual Report of Form 10-K by Principal Executive Officer 31.2 Certification pursuant to Rule 13a-14(a) for Annual Report of Form 10-K by Principal Financial Officer 32.1 Certification pursuant to 18 U.S.C. Section 1350 of Principal Executive Officer 32.2 Certification pursuant to 18 U.S.C. Section 1350 of Principal Financial Officer
(b) Exhibits--Exhibits to (a)(3) listed above are attached to this report. (c) Financial Statements Schedules--No schedules are required to be submitted. See response to ITEM 15(a)(2). 5 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 Michael A. Carty, signed --------------------------------------------- Michael A. Carty, Secretary, Treasurer & CFO (Principal Financial Officer and Principal Accounting Officer) Date: March 15, 2005 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. NAME DATE Donald E. Smith, signed March 15, 2005 - ----------------------------------------------- Donald E. Smith, President and Director Michael A. Carty, signed March 15, 2005 - ----------------------------------------------- Michael A. Carty, Secretary, Treasurer & CFO (Principal Financial Officer and Principal Accounting Officer) W. Curtis Brighton, signed March 15, 2005 - ----------------------------------------------- W. Curtis Brighton, Director B. Guille Cox, Jr., signed March 15, 2005 - ----------------------------------------------- B. Guille Cox, Jr., Director Thomas T. Dinkel, signed March 15, 2005 - ----------------------------------------------- Thomas T. Dinkel, Director Anton H. George, signed March 15, 2005 - ----------------------------------------------- Anton H. George, Director Gregory L. Gibson, signed March 15, 2005 - ----------------------------------------------- Gregory L. Gibson, Director Norman L. Lowery, signed March 15, 2005 - ----------------------------------------------- Norman L. Lowery, Vice Chairman, CEO & Director (Principal Executive Officer) William A. Niemeyer, signed March 15, 2005 - ----------------------------------------------- William A. Niemeyer, Director Patrick O'Leary, signed March 15, 2005 - ----------------------------------------------- Patrick O'Leary, Director March 15, 2005 - ----------------------------------------------- Chapman J. Root II, Director Virginia L. Smith, signed March 15, 2005 - ----------------------------------------------- Virginia L. Smith, Director 6 EX-10.3 2 c93154exv10w3.txt 2005 SCHEDULE OF DIRECTOR COMPENSATION EXHIBIT 10.3 -- SCHEDULE OF DIRECTOR COMPENSATION COMPENSATION OF DIRECTORS. Each director of the Corporation is also a director of First Financial Bank ("FFB"), the lead subsidiary bank of the Corporation, and receives directors' fees from each organization. For 2005 a director of the Corporation and FFB will receive a fee of $750 for each board meeting attended. Non-employee directors also receive a fee for meetings attended of the Audit Committee of $1,000, the Compensation Committee of $1,000, the Governance/Nominating Committee of $1,000, and the Loan Discount Committee of $300. Each director also will receive from FFB a semi-annual director's fee of $2,500 on July 15th and December 16th. No non-employee director served as a director of any other subsidiary of the Corporation. Directors of the Corporation and FFB who are not yet 70 years of age may participate in a deferred director's fee program at each institution. Under this program, a director may defer $6,000 of his or her director's fees each year over a five-year period. When the director reaches the age of 65 or age 70, the director may elect to receive payments over a ten-year period. The amount of the deferred fees is used to purchase an insurance product which funds these payments. Each year from the initial date of deferral until payments begin at age 65 or 70, the Corporation accrues a non-cash expense which will equal in the aggregate the amount of the payments to be made to the director over the ten-year period. The Corporation expects that the cash surrender value of the insurance policy will offset the amount of expenses accrued. If a director fails for any reason other than death to serve as a director during the entire five-year period, or the director fails to attend at least 60 regular or special meetings, the amount to be received at age 65 or 70, as applicable, will be pro-rated appropriately. Directors also may be compensated under the Corporation's 2001 Long-Term Incentive Plan. Under this plan, directors may receive 90, 100 or 110 percent of the director's "award amount" if the Corporation and FFB attain certain goals established by the Corporation's Compensation Committee. See Exhibit 10.4 to this Form 10-K for a description of this plan. EX-10.4 3 c93154exv10w4.txt 2005 SCHEDULE OF NAMED EXECUTIVE OFFICER COMPENSATION . . . EXHIBIT 10.4 -- SCHEDULE OF NAMED EXECUTIVE OFFICER COMPENSATION BASE SALARY. For 2005, the named executive officers will receive the following base salaries:
NAME AND PRINCIPAL POSITION SALARY - --------------------------------------------------------- ----------- DONALD E. SMITH $517,984.22 President and Chairman of the Corporation; Chairman of FFB NORMAN L. LOWERY $417,218.92 Vice Chairman, CEO and Vice President of the Corporation; President and CEO of FFB MICHAEL A. CARTY $166,500.00 CFO, Secretary and Treasurer of the Corporation; Senior Vice President of FFB RICHARD O. WHITE $143,593.00 Senior Vice President of FFB THOMAS S. CLARY $140,600.00 Senior Vice President of FFB and COO
ANNUAL BONUS AMOUNTS. The Compensation Committee determines whether a bonus should be paid based primarily upon the overall performance of the Corporation. LONG-TERM INCENTIVE PLAN. Beginning in 1999 the Board began discussions with several consultants regarding compensation programs. These consultations and discussions focused on an analysis of compensation programs of other financial institutions and what actions were needed to provide comparable compensation packages to directors, officers and key employees. These discussions and the analysis of the information received culminated with the adoption by the Board in November 2000 of the 2001 Long-Term Incentive Plan, effective January 1, 2001. The plan expires on December 31, 2009. This plan was adopted after lengthy Board discussions with and consultation from Clarke Bardes Consulting. The plan is designed to enhance stockholder value of the Corporation by attracting and retaining directors, officers and other key employees and provide further incentive for directors, officers and other key employees to give their maximum effort to the continued growth and success of the Corporation. This is an unfunded, nonqualified plan of deferred compensation which is administered by the Compensation Committee. Directors and executive officers who are "highly compensated employees" within the meaning of Section 201(2) of ERISA, and who are age 65 of under are eligible to participate in the plan. The Compensation Committee has designated as participants in the plan all directors of the Corporation, the executive officers listed in the summary compensation table below, the presidents of its subsidiary banks and certain other officers. Individuals are not eligible to receive rewards of compensation under the plan after age 65. Messrs. Smith, Niemeyer and O'Leary are exempted from the age limitations of the plan at the plan's inception. Messrs. Niemeyer and O'Leary are non-employee directors of the Corporation. Rewards of compensation under the plan are based upon the specific "award amount" for each individual specified in the plan. There are four tiers of participants in the plan, with a different award amount specified for each tier. The award amounts were established after discussions with and receipt of advice from the Corporation's consultant, who had performed an analysis of a peer group of companies for the Corporation and the financial institution industry generally. Rewards of compensation equal 90, 100 or 110 percent of the individual's award amount. The percentage of the award made is dependent upon whether the Corporation and the subsidiary banks attain either the first, second or third target level of performance goals established by the Compensation Committee for the Corporation and each subsidiary bank. If the first target level is not attained, no award is made. If the first, second or third levels of the performance goals are attained, the award will equal 90, 100 or 110 percent of the award amount, respectively. Payments under the plan generally do not begin until the earlier of January 1, 2015, or the January 1 immediately following the year in which the participant reaches age 65. Payments are in cash only and are generally made in 180 equal consecutive monthly installments. Directors and executives become 100 percent vested in their awards if or when they have provided five years of service to the Corporation or the respective subsidiary. Awards for 2005 will be based on a weighted point total of the following target goals for the Corporation and its subsidiary banks: return on average assets, return on average equity, net after-tax income and corporate earnings per share. EMPLOYEE STOCK OWNERSHIP PLAN. The Corporation sponsors the First Financial Corporation Employee Stock Ownership Plan ("ESOP") and the First Financial Corporation Employees' Pension Plan ("Pension Plan") for the benefit of substantially all of the employees of the Corporation and its subsidiaries. These plans constitute a "floor offset" retirement program, so that the Pension Plan provides each participant with a minimum benefit which is offset by the benefit provided by the ESOP. Under the terms of the ESOP, the Corporation or its subsidiaries, as participating employers, may contribute Corporation common stock to the ESOP or contribute cash to the ESOP, which will be primarily invested in the Corporation's common stock. The amount of contributions, when they are made, is determined by the Board of Directors of the Corporation. No participant contributions are required or allowed under the ESOP. Participants have the right to direct the voting of the shares of the Corporation's stock allocated to their accounts under the ESOP on all corporate matters. DEFINED BENEFIT PLAN. The Pension Plan was adopted in conjunction with, but is separate from, the ESOP. The monthly guaranteed minimum benefit under the Pension Plan is reduced by the monthly benefit derived from the participant's vested portion of his ESOP account balance, calculated by the actuary for the Pension Plan as a single life annuity. The normal retirement benefit will begin at age 65 and be paid monthly for as long as the participant lives. The Corporation implemented a nonqualified supplemental retirement plan and a nonqualified deferred compensation plan to replace benefits lost due to the Internal Revenue Code limitations on benefits and compensation and limitations imposed on employer contributions under the ESOP and the pension plan. These plans are unfunded, and no contributions by the Corporation were made to these plans during the last three fiscal years. OTHER COMPENSATION PLANS. At various times in the past the Corporation has adopted certain broad-based employee benefit plans in which the executive officers are permitted to participate on the same terms as other corporation employees who meet applicable eligibility criteria, subject to any legal limitations on the amount that may be contributed or the benefits that may be payable under the plans. EX-13 4 c93154exv13.txt ANNUAL REPORT . . . EXHIBIT 13 - ANNUAL REPORT FIVE YEAR COMPARISON OF SELECTED FINANCIAL DATA
(Dollar amounts in thousands, except per share amounts) 2004 2003 2002 2001 2000 - ----------------------------- ---------- ---------- ---------- ---------- ---------- BALANCE SHEET DATA: Total assets $2,183,992 $2,223,057 $2,169,748 $2,041,905 $2,043,267 Securities 507,990 576,950 520,166 471,888 576,713 Net loans 1,463,871 1,429,525 1,432,564 1,348,461 1,298,006 Deposits 1,443,121 1,479,347 1,434,654 1,313,656 1,322,559 Borrowings 438,013 451,862 457,645 480,674 507,771 Shareholders' equity 268,335 255,279 241,971 217,511 191,223 INCOME STATEMENT DATA: Interest income 116,888 122,661 136,262 144,673 146,417 Interest expense 44,686 48,225 58,086 74,125 80,583 Net interest income 72,202 74,436 78,176 70,548 65,834 Provision for loan losses 8,292 7,455 9,478 6,615 4,392 Other income 35,754 30,819 30,468 21,468 13,610 Other expenses 63,656 62,461 63,317 53,329 42,703 Net income 28,009 26,493 28,640 24,196 23,213 PER SHARE DATA: Net income 2.07 1.95 2.10 1.78 1.72 Cash dividends .79 .70 .62 .57 .54 PERFORMANCE RATIOS: Net income to average assets 1.28% 1.21% 1.30% 1.19% 1.18% Net income to average shareholders' equity 10.45 10.57 12.01 11.33 12.98 Average total capital to average assets 13.24 12.45 11.73 11.38 9.97 Average shareholders' equity to average assets 12.23 11.43 10.80 10.46 9.10 Dividend payout 38.13 35.88 29.57 32.28 31.19
7 CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ----------------------- (Dollar amounts in thousands, except per share data) 2004 2003 - ---------------------------------------------------- ---------- ---------- ASSETS Cash and due from banks $ 94,928 $ 94,198 Federal funds sold 5,400 5,850 Securities available-for-sale 507,990 576,950 Loans, net of allowance of $19,918 in 2004 and $21,239 in 2003 1,443,953 1,408,286 Accrued interest receivable 12,016 13,073 Premises and equipment, net 31,154 29,322 Bank-owned life insurance 49,177 50,279 Goodwill 7,102 7,102 Other intangible assets 3,093 3,651 Other real estate owned 3,262 6,424 Other assets 25,917 27,922 ---------- ---------- TOTAL ASSETS $2,183,992 $2,223,057 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Non-interest-bearing $ 145,852 $ 179,517 Interest-bearing: Certificates of deposit of $100 or more 184,604 192,185 Other interest-bearing deposits 1,112,665 1,107,645 ---------- ---------- 1,443,121 1,479,347 Short-term borrowings 75,527 68,629 Other borrowings 362,486 383,233 Other liabilities 34,523 36,569 ---------- ---------- TOTAL LIABILITIES 1,915,657 1,967,778 Shareholders' equity Common stock, $.125 stated value per share, Authorized shares -- 40,000,000 Issued shares -- 14,450,966 Outstanding shares -- 13,535,770 in 2004 and 13,578,770 in 2003 1,806 1,806 Additional paid-in capital 67,519 67,181 Retained earnings 211,623 194,294 Accumulated other comprehensive income 8,357 11,463 Less: Treasury shares at cost -- 915,196 in 2004 and 872,196 in 2003 (20,970) (19,465) ---------- ---------- TOTAL SHAREHOLDERS' EQUITY 268,335 255,279 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,183,992 $2,223,057 ========== ==========
See accompanying notes. 8 CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, ------------------------------ (Dollar amounts in thousands, except per share data) 2004 2003 2002 - ---------------------------------------------------- -------- -------- -------- INTEREST AND DIVIDEND INCOME: Loans, including related fees $ 92,440 $ 96,536 $105,566 Securities: Taxable 15,315 15,714 19,129 Tax-exempt 7,055 7,816 8,326 Other 2,078 2,595 3,241 -------- -------- -------- TOTAL INTEREST AND DIVIDEND INCOME 116,888 122,661 136,262 INTEREST EXPENSE: Deposits 23,695 26,925 34,607 Short-term borrowings 1,017 431 687 Other borrowings 19,974 20,869 22,792 -------- -------- -------- TOTAL INTEREST EXPENSE 44,686 48,225 58,086 -------- -------- -------- NET INTEREST INCOME 72,202 74,436 78,176 Provision for loan losses 8,292 7,455 9,478 -------- -------- -------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 63,910 66,981 68,698 NON-INTEREST INCOME: Trust and financial services 3,918 3,762 3,419 Service charges and fees on deposit accounts 11,499 8,066 6,183 Other service charges and fees 6,794 8,063 5,369 Securities gains (losses) (165) 237 154 Insurance commissions 6,142 6,282 6,136 Gain on sale of mortgage loans 806 2,027 2,767 Gain on life insurance benefit 4,113 -- 3,916 Other 2,647 2,382 2,524 -------- -------- -------- TOTAL NON-INTEREST INCOME 35,754 30,819 30,468 NON-INTEREST EXPENSES: Salaries and employee benefits 37,876 36,696 36,528 Occupancy expense 3,904 3,830 3,707 Equipment expense 3,585 3,224 3,306 Other 18,291 18,711 19,776 -------- -------- -------- TOTAL NON-INTEREST EXPENSE 63,656 62,461 63,317 -------- -------- -------- INCOME BEFORE INCOME TAXES 36,008 35,339 35,849 Provision for income taxes 7,999 8,846 7,209 -------- -------- -------- NET INCOME $ 28,009 $ 26,493 $ 28,640 ======== ======== ======== EARNINGS PER SHARE: BASIC AND DILUTED $ 2.07 $ 1.95 $ 2.10 ======== ======== ======== Weighted average number of shares outstanding (in thousands) 13,525 13,588 13,652 ======== ======== ========
See accompanying notes. 9 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
ACCUMULATED ADDITIONAL OTHER COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY (Dollar amounts in thousands, except per share data) STOCK CAPITAL EARNINGS INCOME STOCK TOTAL - ---------------------------------------------------- ------ ---------- -------- ------------- -------- -------- BALANCE, JANUARY 1, 2002 $ 903 $66,680 $158,038 $ 8,299 $(16,409) $217,511 Comprehensive income: Net income -- -- 28,640 -- -- 28,640 Other comprehensive income, net of tax: Change in net unrealized gains/losses on securities available-for-sale, net -- -- -- 5,977 -- 5,977 -------- Total comprehensive income 34,617 Contribution of 41,500 shares to ESOP -- 129 -- -- 909 1,038 Treasury stock purchase (111,130 shares) -- -- -- -- (2,726) (2,726) Cash dividends, $ .62 per share -- -- (8,469) -- -- (8,469) ------ ------- -------- ------- -------- -------- BALANCE, DECEMBER 31, 2002 903 66,809 178,209 14,276 (18,226) 241,971 Comprehensive income: Net income -- -- 26,493 -- -- 26,493 Other comprehensive loss, net of tax: Change in net unrealized gains/losses on securities available-for-sale, net -- -- -- (2,813) -- (2,813) -------- Total comprehensive income 23,680 Two-for-one stock split (6,782,885 shares) 903 -- (903) -- -- -- Contribution of 40,000 shares to ESOP -- 372 -- -- 884 1,256 Treasury stock purchase (80,120 shares) -- -- -- -- (2,123) (2,123) Cash dividends, $ .70 per share -- -- (9,505) -- -- (9,505) ------ ------- -------- ------- -------- -------- BALANCE, DECEMBER 31, 2003 1,806 67,181 194,294 11,463 (19,465) 255,279 Comprehensive income: Net income -- -- 28,009 -- -- 28,009 Other comprehensive loss, net of tax: Change in net unrealized gains/losses on securities available-for-sale, net -- -- -- (3,106) -- (3,106) -------- Total comprehensive income -- -- -- -- -- 24,903 Contribution of 36,000 shares to ESOP -- 338 -- -- 825 1,163 Treasury stock purchase (79,000 shares) -- -- -- -- (2,330) (2,330) Cash dividends, $ .79 per share -- -- (10,680) -- -- (10,680) ------ ------- -------- ------- -------- -------- BALANCE, DECEMBER 31, 2004 $1,806 $67,519 $211,623 $ 8,357 $(20,970) $268,335 ====== ======= ======== ======= ======== ========
See accompanying notes. 10 CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, --------------------------------- (Dollar amounts in thousands, except per share data) 2004 2003 2002 - ---------------------------------------------------- --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 28,009 $ 26,493 $ 28,640 Adjustments to reconcile net income to net cash provided by operating activities: Net (accretion) amortization on securities 2,092 558 (941) Provision for loan losses 8,292 7,455 9,478 Securities (gains) losses 165 (237) (154) Depreciation and amortization 3,184 2,883 2,950 Provision for deferred income taxes 1,648 (252) (827) Net change in accrued interest receivable 1,057 2,126 1,036 Contribution of shares to ESOP 1,163 1,256 1,038 Gains on life insurance benefit (4,113) -- (3,916) Other, net 1,842 5,126 (8,980) --------- --------- --------- NET CASH FROM OPERATING ACTIVITIES 43,339 45,408 28,324 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Sales of securities available-for-sale 11,466 8,308 9,736 Calls, maturities and principal reductions on securities available-for-sale 105,945 189,049 131,304 Purchases of securities available-for-sale (55,885) (259,156) (140,015) Loans made to customers, net of repayments (44,834) (5,844) 6,237 Net change in federal funds sold 450 (5,800) 43,326 Proceeds from life insurance benefit 7,267 -- 6,554 Purchase of Community Financial Corp. -- -- 14,554 Additions to premises and equipment (4,458) (1,758) (2,442) --------- --------- --------- NET CASH FROM INVESTING ACTIVITIES 19,951 (75,195) 69,254 --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net change in deposits (36,226) 44,693 (25,638) Net change in other short-term borrowings 6,898 34,274 (25,379) Dividends paid (10,155) (8,845) (8,209) Purchases of treasury stock (2,330) (2,123) (2,726) Proceeds from other borrowings 85,006 18,013 21,006 Repayments on other borrowings (105,753) (58,070) (28,794) --------- --------- --------- NET CASH FROM FINANCING ACTIVITIES (62,560) 27,942 (69,740) --------- --------- --------- NET CHANGE IN CASH AND CASH EQUIVALENTS 730 (1,845) 27,838 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 94,198 96,043 68,205 --------- --------- --------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 94,928 $ 94,198 $ 96,043 ========= ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 44,979 $ 48,791 $ 58,925 ========= ========= ========= Income taxes $ 6,501 $ 8,016 $ 11,388 ========= ========= =========
See accompanying notes. 11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES: BUSINESS ORGANIZATION: The consolidated financial statements of First Financial Corporation and its subsidiaries (the Corporation) include the parent company and its wholly-owned subsidiaries, First Financial Bank, N.A. of Vigo County, Indiana, The Morris Plan Company of Terre Haute (Morris Plan), First Crawford State Bank of Crawford County, Illinois (Crawford), First Community Bank, N.A. of Richland County, Illinois (Community), First Financial Reinsurance Company, a corporation incorporated in the country of Turks and Caicos Islands (FFRC) and Forrest Sherer Inc., a full-line insurance agency headquartered in Terre Haute, Indiana. Inter-company transactions and balances have been eliminated. First Financial Bank also has two investment subsidiaries, Portfolio Management Specialists A (Specialists A) and Portfolio Management Specialists B (Specialists B), which were established to hold and manage certain assets as part of a strategy to better manage various income streams and provide opportunities for capital creation as needed. Specialists A and Specialists B subsequently entered into a limited partnership agreement, Global Portfolio Limited Partners. Portfolio Management Specialists B also owns First Financial Real Estate, LLC. At December 31, 2004, $476.6 million of securities and loans were owned by these subsidiaries. Specialists A, Specialists B, Global Portfolio Limited Partners and First Financial Real Estate LLC are included in the consolidated financial statements. The Corporation, which is headquartered in Terre Haute, Indiana, offers a wide variety of financial services including commercial, mortgage and consumer lending, lease financing, trust account services and depositor services through its five subsidiaries. First Financial Bank is the largest bank in Vigo County. It operates 12 full-service banking branches within the county; one each in Ridge Farm, Illinois and Marshall, Illinois; five in Clay County, Indiana; one in Greene County, Indiana; two in Knox County, Indiana; five in Parke County, Indiana; five in Sullivan County, Indiana; and four in Vermillion County, Indiana. It also has a main office in downtown Terre Haute and an operations center/office building in southern Terre Haute. The Corporation operates 46 branches in west-central Indiana and east-central Illinois. The Corporation's primary source of revenue is derived from loans to customers, primarily middle-income individuals, and investment activities. REGULATORY AGENCIES: First Financial Corporation is a multi-bank holding company and as such is regulated by various banking agencies. The holding company is regulated by the Seventh District of the Federal Reserve System. The national bank subsidiaries are regulated by the Office of the Comptroller of the Currency. The state bank subsidiaries are jointly regulated by their respective state banking organizations and the Federal Deposit Insurance Corporation. SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES: To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and disclosures provided, and actual results could differ. The allowance for loan losses, carrying value of intangible assets, loan servicing rights and the fair values of financial instruments are particularly subject to change. CASH FLOWS: Cash and cash equivalents include cash and demand deposits with other financial institutions. Net cash flows are reported for customer loan and deposit transactions and short-term borrowings. SECURITIES: The Corporation classifies all securities as "available for sale." Securities are classified as available for sale when they might be sold before maturity. Securities available for sale are carried at fair value with unrealized holdings gains and losses, net of taxes, reported in other comprehensive income within shareholders' equity. Other securities, such as Federal Home Loan Bank stock, are carried at cost. Interest income includes amortization of purchase premium or discount. Premiums and discounts are amortized on the level yield method without anticipating prepayments. Mortgage-backed securities are amortized over the expected life. Realized gains and losses on sales are based on the amortized cost of the security sold. Declines in the fair value of securities below their cost that are other than temporary are reflected as realized losses. In estimating other-than-temporary losses, management considers: 1) the length of time and extent that fair value has been less than cost; 2) the financial condition and near term prospects of the issuer; and 3) the Corporation's ability and intent to hold the security for a period sufficient to allow for any anticipated recovery in fair value. LOANS: Loans that management has the intent and ability to hold for the foreseeable future until maturity or pay-off are reported at the principal balance outstanding, net of unearned interest, deferred loan fees and costs, and allowance for loan losses. Loans held for sale are reported at the lower of cost or market, on an aggregate basis. Interest income is accrued on the unpaid principal balance and includes amortization of net deferred loan fees and costs over the loan term without anticipating prepayments. Interest income is not reported when full loan repayment is in 12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS doubt, typically when the loan is impaired or payments are significantly past due. Payments received on such loans are reported as principal reductions. All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in managementis judgment, should be charged off. The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired or loans otherwise classified as substandard or doubtful. The general component covers non-classified loans and is based on historical loss experience adjusted for current factors. A loan is impaired when full payment under the loan terms is not expected. Impairment is evaluated in total for smaller-balance loans of similar nature such as residential mortgages, consumer and credit card loans, and on an individual basis for other loans. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows, using the loan's existing rate, or at the fair value of collateral if repayment is expected solely from the collateral. FORECLOSED ASSETS: Assets acquired through or instead of loan foreclosures are initially recorded at fair value when acquired, establishing a new cost basis. If fair value declines, a valuation allowance is recorded through expense. Costs after acquisition are expensed. PREMISES AND EQUIPMENT: Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed over the useful lives of the assets, which range from 3 to 33 years for furniture and equipment and 5 to 39 years for buildings and leasehold improvements. SERVICING RIGHTS: Servicing rights are recognized as assets for the allocated value of retained servicing rights on loans sold. Servicing rights are expensed in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on the fair value of the rights, using groupings of the underlying loans as to loan type and interest rate. Any impairment of a grouping is reported as a valuation allowance. BANK-OWNED LIFE INSURANCE: The Corporation has purchased life insurance policies on certain key executives. Bank-owned life insurance is recorded at its cash surrender value, or the amount that can be realized. GOODWILL AND OTHER INTANGIBLE ASSETS: Goodwill results from prior business acquisitions and represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. Goodwill is assessed at least annually for impairment and any such impairment will be recognized in the period identified. Other intangible assets consist of core deposit and acquired customer relationship intangible assets arising from the whole bank, insurance agency and branch acquisitions. They are initially measured at fair value and then are amortized on an accelerated method over their estimated useful lives, which are 12 and 10 years, respectively. LONG-TERM ASSETS: Premises and equipment and other long-term assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value. BENEFIT PLANS: Pension expense is the net of service and interest cost, return on plan assets and amortization of gains and losses not immediately recognized. The amount contributed is determined by a formula as decided by the Board of Directors. INCOME TAXES: Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. LOAN COMMITMENTS AND RELATED FINANCIAL INSTRUMENTS: Financial instruments include credit instruments, such as commitments to make loans and standby letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded. EARNINGS PER SHARE: Earnings per common share is net income divided by the weighted average number of common shares outstanding during the period. The Corporation does not have any potentially dilutive securities. Earnings and dividends per share are restated for stock splits and dividends through the date of issue of the financial statements. 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMPREHENSIVE INCOME: Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale, which are also recognized as separate components of equity. LOSS CONTINGENCIES: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount of range of loss can be reasonably estimated. Management does not believe there are currently such matters that will have a material effect on the financial statements. DIVIDEND RESTRICTION: Banking regulations require maintaining certain capital levels and may limit the dividends paid by the bank to the holding company or by the holding company to shareholders. FAIR VALUE OF FINANCIAL INSTRUMENTS: Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or market conditions could significantly affect the estimates. OPERATING SEGMENT: While the Corporation's chief decision-makers monitor the revenue streams of the various products and services, the identifiable segments are not material and operations are managed and financial performance is evaluated on a corporate-wide basis. Accordingly, all of the Corporation's financial service operations are considered by management to be aggregated in one reportable operating segment, which is banking. EFFECT OF NEWLY ISSUED BUT NOT YET EFFECTIVE ACCOUNTING STANDARDS: SOP 03-3 requires that a valuation allowance for loans acquired in a transfer, including in a business combination, reflect only losses incurred after acquisition and should not be recorded at acquisition. It applies to any loan acquired in a transfer that showed evidence of credit quality deterioration since it was made. The SOP is effective for fiscal years beginning after December 15, 2004. The effect of this new standard on the Corporation's financial position and results of operations is not expected to be material upon and after adoption. RECLASSIFICATIONS: Some items in prior year financial statements were reclassified to conform to the current presentation. 2. FAIR VALUES OF FINANCIAL INSTRUMENTS: Carrying amount is the estimated fair value for cash and due from banks, federal funds sold, short-term borrowings, Federal Home Loan Bank stock, accrued interest receivable and payable, demand deposits, short-term debt and variable-rate loans or deposits that reprice frequently and fully. Security fair values are based on market prices or dealer quotes, and if no such information is available, on the rate and term of the security and information about the issuer. For fixed-rate loans or deposits, variable rate loans or deposits with infrequent repricing or repricing limits, and for longer-term borrowings, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values. Fair value of debt is based on current rates for similar financing. The carrying amount and estimated fair value of financial instruments are presented in the table below and were determined based on the above assumptions:
DECEMBER 31, ----------------------------------------------------- 2004 2003 ------------------------- ------------------------- CARRYING FAIR CARRYING FAIR (Dollar amounts in thousands) VALUE VALUE VALUE VALUE - ----------------------------- ----------- ----------- ----------- ----------- Cash and due from banks $ 94,928 $ 94,928 $ 94,198 $ 94,198 Federal funds sold 5,400 5,400 5,850 5,850 Securities available-for-sale 507,990 507,990 576,950 576,950 Loans, net 1,443,953 1,448,791 1,408,286 1,410,842 Accrued interest receivable 12,016 12,016 13,073 13,073 Deposits (1,443,121) (1,449,322) (1,479,347) (1,488,240) Short-term borrowings (75,527) (75,527) (68,629) (68,629) Federal Home Loan Bank advances (337,886) (341,148) (358,633) (363,413) Other borrowings (24,600) (24,600) (24,600) (24,600) Accrued interest payable (3,142) (3,142) (3,435) (3,435)
14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. RESTRICTIONS ON CASH AND DUE FROM BANKS: Certain affiliate banks are required to maintain average reserve balances with the Federal Reserve Bank that do not earn interest. The amount of those reserve balances was approximately $33.2 million and $28.5 million at December 31, 2004 and 2003, respectively. 4. SECURITIES: The fair value of securities available-for-sale and related gains and losses recognized in accumulated other comprehensive income were as follows:
DECEMBER 31, 2004 ---------------------------------------- UNREALIZED AMORTIZED ----------------- FAIR (Dollar amounts in thousands) COST GAINS LOSSES VALUE - ----------------------------- --------- ------- ------- -------- U.S. Government entity mortgage-backed securities $227,927 $ 2,573 (1,472) $229,028 Collateralized mortgage obligations 19,895 12 (41) 19,866 State and municipal 137,206 7,263 (175) 144,294 Corporate obligations 104,754 1,333 (10) 106,077 Equities 4,280 4,445 -- 8,725 -------- ------- ------- -------- TOTAL $494,062 $15,626 $(1,698) $507,990 ======== ======= ======= ========
DECEMBER 31, 2003 ---------------------------------------- UNREALIZED AMORTIZED ----------------- FAIR (Dollar amounts in thousands) COST GAINS LOSSES VALUE - ----------------------------- --------- ------- ------- -------- U.S. Government entity mortgage-backed securities $269,228 $ 4,143 $(1,362) $272,009 Collateralized mortgage obligations 18,022 31 (29) 18,024 State and municipal 152,719 9,421 (150) 161,990 Corporate obligations 113,736 2,097 (123) 115,710 Equities 4,135 5,082 -- 9,217 -------- ------- ------- -------- TOTAL $557,840 $20,774 $(1,664) $576,950 ======== ======= ======= ========
As of December 31, 2004, the Corporation does not have any securities from any issuer, other than the U.S. Government, with an aggregate book or fair value that exceeds ten percent of shareholders' equity. Securities with a carrying value of approximately $33.0 million and $31.3 million at December 31, 2004 and 2003, respectively, were pledged as collateral for short-term borrowings and for other purposes. Below is a summary of the gross gains and losses realized by the Corporation on investment sales during the years ended December 31, 2004, 2003 and 2002, respectively.
(Dollar amounts in thousands) 2004 2003 2002 - ----------------------------- ------- ------ ------ Proceeds $11,466 $8,308 $9,736 Gross gains 409 237 154 Gross losses -- -- --
Additional gains of $47 thousand in 2004 resulted from redemption premiums on called securities. A loss of $621 thousand was recorded for an impairment charge, as discussed in the following paragraph. The Corporation evaluates securities for other-than-temporary impairment on a quarterly basis. Factors considered include length of time impaired, reason for impairment, outlook and the Corporation's ability to hold the investment to allow for recovery of fair value. At December 31, 2004 the Corporation had one security that it considered to be other-than-temporarily impaired, and the Corporation wrote down the value of the investment to fair value. The security was a Federal National Mortgage Association (FNMA) Preferred stock issue that was purchased in the first quarter of 2000. The floating rate security adjusted in March of 2004 when the index rate was near its low. To compound the interest rate factor, FNMA was identified as having misstated earnings and restated financial results. They then elected to issue additional stock to recapitalize. This stock was sold at a discount which negatively affected previous 15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS issues outstanding. The confluence of these issues caused the Corporation to recognize that the value was other-than-temporarily impaired. The value of the security was written down by $621 thousand, which was recorded as expense and included in security gains (losses). Contractual maturities of debt securities at year-end 2004 were as follows. Securities not due at a single maturity or with no maturity date, primarily mortgage-backed and equity securities, are shown separately.
AVAILABLE-FOR-SALE -------------------- AMORTIZED FAIR (Dollar amounts in thousands) COST VALUE - ----------------------------- --------- -------- Due in one year or less $ 54,638 $ 55,098 Due after one but within five years 125,513 130,151 Due after five but within ten years 36,749 39,741 Due after ten years 49,702 50,210 -------- -------- 266,602 275,200 Mortgage-backed securities and equities 227,460 232,790 -------- -------- TOTAL $494,062 $507,990 ======== ========
The following tables show the securities' gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in continuous unrealized loss position, at December 31, 2004 and 2003.
DECEMBER 31, 2004 --------------------------------------------------------------------------- LESS THAN 12 MONTHS MORE THAN 12 MONTHS TOTAL ----------------------- ----------------------- ----------------------- UNREALIZED UNREALIZED UNREALIZED (Dollar amounts in thousands) FAIR VALUE LOSSES FAIR VALUE LOSSES FAIR VALUE LOSSES - ----------------------------- ---------- ---------- ---------- ---------- ---------- ---------- U.S. Government entity mortgage- backed securities $ 72,754 $(497) $40,497 $ (975) $113,251 $(1,472) Collateralized mortgage obligations 17,059 (41) -- -- 17,059 (41) State and municipal obligations 12,979 (110) 428 (65) 13,407 (175) Corporate obligations 2,000 (5) 1,506 (5) 3,506 (10) -------- ----- ------- ------- -------- ------- Total temporarily impaired securities $104,792 $(653) $42,431 $(1,045) $147,223 $(1,698) ======== ===== ======= ======= ======== =======
DECEMBER 31, 2003 --------------------------------------------------------------------------- LESS THAN 12 MONTHS MORE THAN 12 MONTHS TOTAL ----------------------- ----------------------- ----------------------- UNREALIZED UNREALIZED UNREALIZED (Dollar amounts in thousands) FAIR VALUE LOSSES FAIR VALUE LOSSES FAIR VALUE LOSSES - ----------------------------- ---------- ---------- ---------- ---------- ---------- ---------- U.S. Government entity mortgage- backed securities $ 87,414 $(1,354) $ 121 $ (8) $ 87,535 $(1,362) Collateralized mortgage obligations 18,021 (29) -- -- 18,021 (29) State and municipal obligations 4,140 (51) 484 (99) 4,624 (150) Corporate obligations 25,453 (71) 945 (52) 26,398 (123) -------- ------- ------ ----- -------- ------- Total temporarily impaired securities $135,028 $(1,505) $1,550 $(159) $136,578 $(1,664) ======== ======= ====== ===== ======== =======
These losses represent negative adjustments to market value relative to the rate of interest paid on the securities and not losses related to the creditworthiness of the issuer. Management has the intent and ability to hold for the foreseeable future and believes the value will recover as the securities approach maturity or market rates change. 16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. LOANS: Loans are summarized as follows:
DECEMBER 31, ----------------------- (Dollar amounts in thousands) 2004 2003 - ----------------------------- ---------- ---------- Commercial, financial and agricultural $ 401,724 $ 374,638 Real estate - construction 32,810 35,361 Real estate - mortgage 753,826 766,911 Installment 272,261 248,290 Lease financing 3,658 4,884 ---------- ---------- Total gross loans 1,464,279 1,430,084 Less: unearned income (408) (559) allowance for loan losses (19,918) (21,239) ---------- ---------- TOTAL $1,443,953 $1,408,286 ========== ==========
In the normal course of business, the Corporation's subsidiary banks make loans to directors and executive officers and to their associates. These related party loans are consistent with sound banking practices and are within applicable bank regulatory lending limitations. In 2004 the aggregate dollar amount of these loans to directors and executive officers who held office at the end of the year amounted to $39.0 million at the beginning of the year. During 2004, advances of $38.3 million and repayments of $43.2 million were made with respect to related party loans for an aggregate dollar amount outstanding of $34.1 million at December 31, 2004. Loans serviced for others, which are not reported as assets, total $391.9 million and $374.9 million at year-end 2004 and 2003. Activity for capitalized mortgage servicing rights (included in other assets) and the related valuation allowance was as follows:
DECEMBER 31, -------------------------- (Dollar amounts in thousands) 2004 2003 2002 - ----------------------------- ------ ------- ------- Servicing rights: Beginning of year $3,114 $ 2,548 $ 1,478 Additions 631 1,961 2,229 Amortized to expense (785) (1,395) (1,159) ------ ------- ------- End of year $2,960 $ 3,114 $ 2,548 ====== ======= ======= Valuation allowance: Beginning of year $ 200 $ 500 $ -- Additions expensed -- -- 500 Reductions credited to expense (200) (300) -- ------ ------- ------- End of year $ -- $ 200 $ 500 ====== ======= =======
Third party valuations are conducted periodically for mortgage servicing rights. Based on these valuations, fair values approximate carrying values. 6. ALLOWANCE FOR LOAN LOSSES: Changes in the allowance for loan losses are summarized as follows:
DECEMBER 31, ------------------------------ (Dollar amounts in thousands) 2004 2003 2002 - ----------------------------- -------- -------- -------- Balance at beginning of year $ 21,239 $21,249 $ 18,313 Addition resulting from acquisition -- -- 1,711 Provision for loan losses 8,292 7,455 9,478 Recoveries of loans previously charged off 1,771 1,475 1,885 Loans charged off (11,384) (8,940) (10,138) -------- ------- -------- BALANCE AT END OF YEAR $ 19,918 $21,239 $ 21,249 ======== ======= ========
17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Impaired loans were as follows:
DECEMBER 31, ---------------- (Dollar amounts in thousands) 2004 2003 - ----------------------------- ------- ------ Year-end loans with no allocated allowance for loan losses $ 2,582 $3,254 Year-end loans with allocated allowance for loan losses 16,240 5,914 ------- ------ TOTAL 18,822 9,168 ======= ====== Amount of the allowance for loan losses allocated $ 6,331 $2,835 Nonperforming loans: Loans past due over 90 days still on accrual 7,813 5,384 Non-accrual loans 19,862 8,429
Nonperforming loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.
(Dollar amounts in thousands) 2004 2003 2002 - ----------------------------- ------- ------ ------ Average of impaired loans during the year $14,794 $8,992 $5,288 Interest income recognized during impairment 436 583 643 Cash-basis interest income recognized 315 -- --
It was not practicable to determine the amount of cash basis interest income recognized for 2003 or 2002. 7. PREMISES AND EQUIPMENT: Premises and equipment are summarized as follows:
DECEMBER 31, ------------------- (Dollar amounts in thousands) 2004 2003 - ----------------------------- -------- -------- Land $ 5,617 $ 4,501 Building and leasehold improvements 35,102 34,135 Furniture and equipment 27,928 26,542 -------- -------- 68,647 65,178 Less accumulated depreciation (37,493) (35,856) -------- -------- TOTAL $ 31,154 $ 29,322 ======== ========
Aggregate depreciation expense was $2.62 million, $2.24 million and $2.26 million for 2004, 2003 and 2002, respectively. 8. GOODWILL AND INTANGIBLE ASSETS: The Corporation completed its annual impairment testing of goodwill during the second quarter of 2004. Management does not believe any amount of the goodwill is impaired. Intangible assets subject to amortization at December 31, 2004 and 2003 are as follows:
2004 2003 --------------------- --------------------- GROSS ACCUMULATED GROSS ACCUMULATED (Dollar amounts in thousands) AMOUNT AMORTIZATION AMOUNT AMORTIZATION - ----------------------------- ------ ------------ ------ ------------ Customer list intangible $3,108 $1,390 $3,108 $1,086 Core deposit intangible 2,193 939 2,193 775 Non-compete agreements 500 379 500 289 ------ ------ ------ ------ $5,801 $2,708 $5,801 $2,150 ====== ====== ====== ======
Aggregate amortization expense was $558 thousand, $638 thousand and $692 thousand for 2004, 2003 and 2002, respectively. Estimated amortization expense for the next five years is as follows:
In thousands ------------ 2005 $540 2006 463 2007 392 2008 392 2009 392
18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. DEPOSITS Scheduled maturities of time deposits for the next five years are as follows: 2005 $333,584 2006 106,260 2007 115,808 2008 19,229 2009 43,109
10. SHORT-TERM BORROWINGS A summary of the carrying value of the Corporation's short-term borrowings at December 31, 2004 and 2003 is presented below:
(Dollar amounts in thousands) 2004 2003 - ----------------------------- ------- ------- Federal funds purchased $69,002 $61,524 Repurchase agreements 5,597 5,130 Other short-term borrowings 928 1,975 ------- ------- $75,527 $68,629 ======= =======
(Dollar amounts in thousands) 2004 2003 - ----------------------------- -------- ------- Average amount outstanding $ 71,745 $32,153 Maximum amount outstanding at a month end 103,386 91,376 Average interest rate during year 1.46% 1.45% Interest rate at year-end 2.34% 1.15%
Federal funds purchased are generally due in one day and bear interest at market rates. Other borrowings, primarily note payable-U.S. government, are due on demand, secured by a pledge of securities and bear interest at market rates. Substantially all repurchase agreement liabilities represent amounts advanced by various customers. Securities are pledged to cover these liabilities, which are not covered by federal deposit insurance. The Corporation maintains possession of and control over these securities. 11. OTHER BORROWINGS: Other borrowings at December 31, 2004 and 2003 are summarized as follows:
(Dollar amounts in thousands) 2004 2003 - ----------------------------- -------- -------- FHLB advances $337,886 $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 -------- -------- TOTAL $362,486 $383,233 ======== ========
The aggregate minimum annual retirements of other borrowings are as follows: 2005 $ 25,223 2006 2,065 2007 763 2008 52,632 2009 22,916 Thereafter 258,887 -------- $362,486 ========
19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Corporation's subsidiary banks are members of the Federal Home Loan Bank (FHLB) and accordingly are permitted to obtain advances. The advances from the FHLB, aggregating $337.9 million at December 31, 2004, accrue interest, payable monthly, at annual rates, primarily fixed, varying from 3.28% to 6.6%. The advances are due at various dates through August 2017. FHLB advances are, generally, due in full at maturity. They are secured by eligible securities totaling $183.9 million and a blanket pledge on real estate loan collateral. Certain advances may be prepaid, without penalty, prior to maturity. The FHLB can adjust the interest rate from fixed to variable on certain advances, but those advances may then be prepaid, without penalty. On December 31, 2003, the Corporation entered into a revolving credit loan agreement (Note) with a financial institution. The total principal amount of loans outstanding at one time under this Note may not exceed $20 million. The Note matured on December 31, 2004, but was renewed for one year and requires quarterly payments of interest and a commitment fee of 0.15% on the average daily amount of the commitment. The Note bears an interest rate equal to the average daily federal funds rate plus 0.875% and adjusts daily. At December 31, 2004, the interest rate was 3.125%. The Note is unsecured but requires the Corporation to meet certain financial covenants. The Corporation was in compliance with all its debt covenants. These covenants include maintaining a primary capital-to-assets ratio higher than 6.2%, net income that exceeds a 0.6% return on average assets, an allowance for loan and lease losses that does not fall below .75% of gross loans and dividend declarations that are not in excess of 42% of net income. The proceeds from this loan were used to repay an outstanding line of credit with similar terms. The economic development revenue bonds (bonds) require periodic interest payments each year until maturity or redemption. The interest rate, which was 2.0% at December 31, 2004, and 1.2% at December 31, 2003, is determined by a formula which considers rates for comparable bonds and is adjusted periodically. The bonds are collateralized by a first mortgage on the Corporation's headquarters building. The bonds mature December 1, 2015, but bondholders may periodically require earlier redemption. The Corporation maintains a letter of credit with another financial institution, which could be used to repay the bonds, should they be called. The letter of credit expired November 1, 2004, and was automatically extended for one year. Assuming redemption will be funded by the letter of credit, or by other similar borrowings, there are no anticipated principal maturities of the bonds within the next five years. The debt agreement for the bonds requires the Corporation to meet certain financial covenants. These covenants require the Corporation to maintain a Tier I capital ratio of at least 6.2% and net income to average assets of 0.6%. At December 31, 2004 and 2003, the Corporation was in compliance with all of its debt covenants. 12. INCOME TAXES: Income tax expense is summarized as follows:
(Dollar amounts in thousands) 2004 2003 2002 - ----------------------------- ------ ------ ------ Federal: Currently payable $5,884 $8,046 $6,880 Deferred 1,282 (544) (960) ------ ------ ------ 7,166 7,502 5,920 State: Currently payable 467 1,052 1,156 Deferred 366 292 133 ------ ------ ------ 833 1,344 1,289 ------ ------ ------ TOTAL $7,999 $8,846 $7,209 ====== ====== ======
The reconciliation of income tax expense with the amount computed by applying the statutory federal income tax rate of 35% to income before income taxes is summarized as follows:
(Dollar amounts in thousands) 2004 2003 2002 - ----------------------------- ------- ------- ------- Federal income taxes computed at the statutory rate $12,603 $12,369 $12,547 Add (deduct) tax effect of: Tax exempt income (4,889) (3,738) (5,705) State tax, net of federal benefit 541 873 838 Affordable housing credits (327) (507) (604) Other, net 71 (151) 133 ------- ------- ------- TOTAL $ 7,999 $ 8,846 $ 7,209 ======= ======= =======
20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 2004 and 2003, are as follows:
(Dollar amounts in thousands) 2004 2003 - ----------------------------- -------- -------- Deferred tax assets: Loan losses provision $ 7,927 $ 8,480 Deferred compensation 3,417 2,792 Compensated absences 481 467 Post-retirement benefits 698 721 State net operating loss carry forward 243 348 Other 929 641 -------- -------- GROSS DEFERRED ASSETS 13,695 13,449 -------- -------- Deferred tax liabilities: Net unrealized gains on securities available-for-sale (5,571) (7,644) Depreciation (1,512) (1,184) Federal Home Loan Bank stock dividends (1,221) (821) Mortgage servicing rights (1,176) (1,158) Pensions (2,048) (1,339) Other (2,624) (2,185) -------- -------- GROSS DEFERRED LIABILITIES (14,152) (14,331) -------- -------- NET DEFERRED TAX ASSETS (LIABILITIES) $ (457) $ (882) ======== ========
13. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK: The Corporation is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include conditional commitments and commercial letters of credit. The financial instruments involve to varying degrees, elements of credit and interest rate risk in excess of amounts recognized in the financial statements. The Corporation's maximum exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to make loans is limited generally by the contractual amount of those instruments. The Corporation follows the same credit policy to make such commitments as is followed for those loans recorded in the consolidated financial statements. The Corporation's customers had unused lines of credit of $245.9 million and $235.3 million as of December 31, 2004 and 2003. In addition, the Corporation had outstanding commitments of $5.3 million and $5.6 million under commercial letters of credit as of December 31, 2004 and 2003, respectively. The majority of these commitments bear variable interest rates. The Corporation is exposed to credit loss in the event the counterparties to such agreements do not perform in accordance with the agreements. 14. RETIREMENT PLANS: Substantially all employees of the Corporation are covered by a retirement program that consists of a defined benefit plan and an employee stock ownership plan (ESOP). Plan assets consist primarily of the Corporation's stock and obligations of U.S. Government agencies. Benefits under the defined benefit plan are actuarially determined based on an employee's service and compensation, as defined, and funded as necessary. Assets in the ESOP are considered in calculating the funding to the defined benefit plan required to provide such benefits. Any shortfall of benefits under the ESOP are to be provided by the defined benefit plan. The ESOP may provide benefits beyond those determined under the defined benefit plan. Contributions to the ESOP are determined by the Corporation's Board of Directors. The Corporation made contributions to the defined benefit plan of $1.42 million, $1.55 million and $1.32 million in 2004, 2003 and 2002. The Corporation contributed $1.16 million, $1.26 million and $1.04 million to the ESOP in 2004, 2003 and 2002. The Corporation uses a measurement date of December 31, 2004. 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Pension expense included the following components:
(Dollar amounts in thousands) 2004 2003 2002 - ----------------------------- ------- ------- ------- Service cost - benefits earned $ 2,508 $ 2,166 $ 2,065 Interest cost on projected benefit obligation 2,168 2,025 1,880 Expected return on plan assets (2,799) (2,334) (2,062) Net amortization and deferral 227 240 181 ------- ------- ------- Total pension expense $ 2,104 $ 2,097 $ 2,064 ======= ======= =======
The following information sets forth the projected change in benefit obligation, reconciliation of plan assets, and the funded status of the Corporation's retirement program. Actuarial present value of benefits is based on service to date and present pay levels.
(Dollar amounts in thousands) 2004 2003 - ----------------------------- ------- ------- Change in benefit obligation: Benefit obligation at January 1 $36,300 $31,274 Service cost 2,508 2,166 Interest cost 2,168 2,025 Actuarial (gain) loss 3,102 4,057 Benefits paid (1,258) (3,222) ------- ------- Benefit obligation at December 31 42,820 36,300 ------- ------- Reconciliation of fair value of plan assets: Fair value of plan assets at January 1 34,665 29,296 Actual return on plan assets 5,017 5,790 Employer contributions 2,583 2,801 Benefits paid (1,258) (3,222) ------- ------- Fair value of plan assets at December 31 41,007 34,665 ------- ------- Funded status: Funded status at December 31 (1,813) (1,635) Unrecognized prior service cost (177) (195) Unrecognized net actuarial cost 7,562 6,924 ------- ------- Prepaid pension asset recognized in the consolidated balance sheets $ 5,572 $ 5,094 ======= =======
The accumulated benefit obligation for the defined benefit pension plan was $37,202 and $30,788 at year end 2004 and 2003. Principal assumptions used: Discount rate 5.75% 6.00% Rate of increase in compensation levels 3.75 4.00 Expected long-term rate of return on plan assets 8.00 8.00
The expected long-term rate of return was estimated using market benchmarks for equities and bonds applied to the plan's target asset allocation. Management estimated the rate by which plan assets would perform based on historical experience as adjusted for changes in asset allocations and expectations for future return on equities as compared to past periods. 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PLAN ASSETS -- The Corporation's pension plan weighted-average asset allocation for the years 2004 and 2003 by asset category are as follows:
PENSION PLAN ESOP PERCENTAGE OF PLAN PERCENTAGE OF PLAN PENSION PLAN ESOP ASSETS AT DECEMBER 31, ASSETS AT DECEMBER 31, TARGET ALLOCATION TARGET ALLOCATION ---------------------- ---------------------- ASSET CATEGORY 2005 2005 2004 2003 2004 2003 - -------------- ----------------- ----------------- ---- ---- ---- ---- Equity securities 40-65% 99-99% 63% 63% 99% 99% Debt securities 20-50 0-0 35 35 0 0 Real estate 0-0 0-0 0 0 0 0 Other 0-5 1-1 2 2 1 1 --- --- --- --- TOTAL 100% 100% 100% 100%
The investment objective for the retirement program is to maximize total return without exposure to undue risk. Asset allocation favors equities, with a target allocation of approximately 88%. This target includes the Corporation's ESOP, which is 99% invested in corporate stock. Other investment allocations include fixed income securities and cash. Equity securities include First Financial Corporation common stock in the amount of $30.7 million (75 percent of total plan assets) and $25.9 million (75 percent of total plan assets) at December 31, 2004, and 2003, respectively. CONTRIBUTIONS -- The Corporation expects to contribute $1.5 million to its pension plan and $1.2 million to its ESOP in 2005. ESTIMATED FUTURE PAYMENTS -- The following benefit payments, which reflect expected future service, are expected:
PENSION BENEFITS (Dollar amounts in thousands) ----------------------------- 2005 $ 415 2006 432 2007 480 2008 527 2009 603 2010-2014 4,897
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN -- The Corporation has established a Supplemental Executive Retirement Plan (SERP) for certain executive officers. The provisions of the SERP allow the Plan's participants who are also participants in the Corporation's defined benefit pension plan to receive supplemental retirement benefits to help recompense for benefits lost due to imposition of IRS limitations on benefits under the Corporation's tax qualified defined benefit pension plan. Expense related to the plan was $187 thousand in 2004. There was no expense recorded in connection with this plan in years prior to 2004. The SERP has expected benefit payments of $507 thousand after five years, which reflects expected future service. The plan is unfunded and has a measurement date of December 31. 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Corporation also provides medical benefits to its employees subsequent to their retirement. The Corporation uses a measurement date of December 31, 2004. Accrued post-retirement benefits as of December 31, 2004 and 2003 are as follows:
DECEMBER 31, ----------------- (Dollar amounts in thousands) 2004 2003 - ---------------------------- ------- ------- Change in benefit obligation: Benefit obligation at January 1 $ 4,284 $ 4,081 Service cost 83 102 Interest cost 243 252 Plan participants' contributions 119 40 Actuarial (gain) loss 1,681 256 Benefits paid (389) (447) ------- ------- Benefit obligation at December 31 $ 6,021 $ 4,284 ======= ======= Reconciliation of funded status: Funded status $ 6,021 $ 4,284 Unrecognized transition obligation (543) (603) Unrecognized net gain (loss) (3,712) (2,167) ------- ------- Accrued benefit cost $ 1,766 $ 1,514 ======= =======
The post-retirement benefits paid in 2004 and 2003 of $389 thousand and $447 thousand, respectively, were fully funded by company and participant contributions. There were no other changes to plan assets in 2004 and 2003. Weighted-average assumptions as of December 31:
DECEMBER 31, ----------- 2004 2003 ---- ---- Discount rate 5.50% 6.00% Initial weighted health care cost trend rate 7.50 7.50 Ultimate health care cost trend rate 5.00 5.00
Post-retirement health benefit expense included the following components:
YEARS ENDED DECEMBER 31, ------------------------ (Dollar amounts in thousands) 2004 2003 2002 - ---------------------------- ---- ---- ---- Service cost $ 83 $102 $ 76 Interest cost 243 252 226 Amortization of transition obligation 60 60 60 Recognized actuarial loss 137 120 80 ---- ---- ---- Net periodic benefit cost $523 $534 $442 ==== ==== ====
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans A one-percentage-point change in the assumed health care cost trend rates would have the following effects:
1% POINT 1% POINT (Dollar amounts in thousands) INCREASE DECREASE - ----------------------------- -------- -------- Effect on total of service and interest cost components $ 39 $ (28) Effect on post-retirement benefit obligation 139 (123)
CONTRIBUTIONS -- The Corporation expects to contribute $300 thousand to its other post-retirement benefit plan in 2005. 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ESTIMATED FUTURE PAYMENTS -- The following benefit payments, which reflect expected future service, are expected:
POST-RETIREMENT MEDICAL BENEFITS (Dollar amounts in thousands) -------------------------------- 2005 $ 327 2006 334 2007 354 2008 368 2009 385 2010-2014 2,219
15. OTHER COMPREHENSIVE INCOME (LOSS): Other comprehensive loss components and related taxes were as follows:
DECEMBER 31, --------------------------- (Dollar amounts in thousands) 2004 2003 2002 - ----------------------------- ------- ------- ------- Unrealized holding gains and (losses) on securities available-for-sale $(5,347) $(4,450) $10,116 Reclassification adjustments for (gains) and losses later recognized in income 165 (237) (154) ------- ------- ------- Net unrealized gains and losses (5,182) (4,687) 9,962 Tax effect 2,076 1,874 (3,985) ------- ------- ------- Other comprehensive income (loss) $(3,106) $(2,813) $ 5,977 ======= ======= =======
16. REGULATORY MATTERS: The Corporation and its bank affiliates are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory--and possibly additional discretionary--actions by regulators that, if undertaken, could have a direct material effect on the Corporation's financial statements. Further, the Corporation's primary source of funds to pay dividends to shareholders is dividends from its subsidiary banks and compliance with these capital requirements can affect the ability of the Corporation and its banking affiliates to pay dividends. At December 31, 2004, approximately $31.7 million of undistributed earnings of the subsidiary banks, included in consolidated retained earnings, were available for distribution to the Corporation without regulatory approval. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and banks must meet specific capital guidelines that involve quantitative measures of the Corporation's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Corporation's and Banks' capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Corporation and Banks to maintain minimum amounts and ratios of Total and Tier I Capital to risk-weighted assets, and of Tier I Capital to average assets. Management believes, as of December 31, 2004 and 2003, that the Corporation meets all capital adequacy requirements to which it is subject. As of December 31, 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 adequately 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. The following table presents the actual and required capital amounts and related ratios for the Corporation and the lead bank, First Financial Bank, N.A., at year end 2004 and 2003. 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TO BE WELL CAPITALIZED FOR CAPITAL UNDER PROMPT CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS ---------------- ----------------- ----------------------- (Dollar amounts in thousands) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO - ----------------------------- -------- ----- -------- ----- -------- ----- TOTAL RISK-BASED CAPITAL Corporation - 2004 $269,405 16.55% $130,239 8.0% $162,799 10.0% Corporation - 2003 252,924 15.67% $129,081 8.0% $161,351 10.0% First Financial Bank - 2004 243,390 17.09% 113,956 8.0% 142,445 10.0% First Financial Bank - 2003 230,616 16.25% 113,521 8.0% 141,902 10.0% TIER I RISK-BASED CAPITAL Corporation - 2004 $249,487 15.32% $ 65,120 4.0% $ 97,680 6.0% Corporation - 2003 232,746 14.43% $ 64,540 4.0% $ 96,811 6.0% First Financial Bank - 2004 227,880 16.00% 56,978 4.0% 85,467 6.0% First Financial Bank - 2003 214,275 15.10% 56,761 4.0% 85,141 6.0% TIER I LEVERAGE CAPITAL Corporation - 2004 $249,487 11.42% $ 87,391 4.0% $109,239 5.0% Corporation - 2003 232,746 10.67% $ 87,278 4.0% $109,097 5.0% First Financial Bank - 2004 227,880 11.82% 77,143 4.0% 96,429 5.0% First Financial Bank - 2003 214,275 11.29% 75,888 4.0% 94,859 5.0%
17. PARENT COMPANY CONDENSED FINANCIAL STATEMENTS: The parent company's condensed balance sheets as of December 31, 2004 and 2003, and the related condensed statements of income and cash flows for each of the three years in the period ended December 31, 2004, are as follows: CONDENSED BALANCE SHEETS
DECEMBER 31, ------------------- (Dollar amounts in thousands) 2004 2003 - ----------------------------- -------- -------- ASSETS Cash deposits in affiliated banks $ 9,710 $ 7,629 Investments in subsidiaries 282,435 269,062 Land and headquarters building, net 6,156 6,351 Other 9,709 10,137 -------- -------- TOTAL ASSETS $308,010 $293,179 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES Borrowings $ 28,636 $ 28,636 Dividends payable 5,414 4,891 Other liabilities 5,625 4,373 -------- -------- TOTAL LIABILITIES 39,675 37,900 SHAREHOLDERS' EQUITY 268,335 255,279 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $308,010 $293,179 ======== ========
26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONDENSED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, --------------------------- (Dollar amounts in thousands) 2004 2003 2002 - ----------------------------- ------- ------- ------- Dividends from subsidiaries $13,670 $12,418 $ 5,676 Other income 967 1,006 913 Interest on borrowings (703) (663) (673) Other operating expenses (2,931) (2,759) (2,953) ------- ------- ------- Income before income taxes and equity in undistributed earnings of subsidiaries 11,003 10,002 2,963 Income tax benefit 909 907 1,074 ------- ------- ------- Income before equity in undistributed earnings of subsidiaries 11,912 10,909 4,037 Equity in undistributed earnings of subsidiaries 16,097 15,584 24,603 ------- ------- ------- Net income $28,009 $26,493 $28,640 ======= ======= =======
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, ------------------------------ (Dollar amounts in thousands) 2004 2003 2002 - ----------------------------- -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 28,009 $ 26,493 $ 28,640 Adjustments to reconcile net income to net cash provided by operating activities: Provision for depreciation and amortization 206 215 258 Equity in undistributed earnings of subsidiaries (16,097) (15,584) (24,603) Contribution of shares to ESOP 1,163 1,256 1,038 Increase (decrease) in other liabilities 416 1,626 (202) (Increase) decrease in other assets 869 852 (127) -------- -------- -------- NET CASH FROM OPERATING ACTIVITIES 14,566 14,858 5,004 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of furniture and fixtures -- (34) (49) Purchase of Community Financial Corp. -- -- (14,699) -------- -------- -------- NET CASH FROM INVESTING ACTIVITIES -- (34) (14,748) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from borrowings -- 18,236 22,300 Principal payments on long-term borrowings -- (19,500) (500) Purchase of treasury stock (2,330) (2,123) (2,726) Dividends paid (10,155) (8,845) (8,209) -------- -------- -------- NET CASH FROM FINANCING ACTIVITIES (12,485) (12,232) (10,865) -------- -------- -------- NET (DECREASE) INCREASE IN CASH 2,081 2,592 1,121 CASH, BEGINNING OF YEAR 7,629 5,037 3,916 -------- -------- -------- CASH, END OF YEAR $ 9,710 $ 7,629 $ 5,037 ======== ======== ======== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 678 $ 663 $ 644 ======== ======== ======== Income taxes $ 6,501 $ 8,016 $ 11,388 ======== ======== ========
27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 18. SELECTED QUARTERLY DATA (UNAUDITED)
2004 ----------------------------------------------------------------- NET PROVISION INTEREST INTEREST INTEREST FOR LOAN NET NET INCOME (Dollar amounts in thousands) INCOME EXPENSE INCOME LOSSES INCOME PER SHARE - ----------------------------- -------- -------- -------- --------- ------- ---------- March 31 $29,276 $11,343 $17,933 $1,923 $10,685 $.79 June 30 $28,825 $11,072 $17,753 $1,923 $ 6,329 $.47 September 30 $29,021 $11,174 $17,847 $2,223 $ 5,975 $.44 December 31 $29,766 $11,097 $18,669 $2,223 $ 5,020 $.37
In the first quarter of 2004, the Corporation realized $4.1 million of income from gain on a life insurance benefit.
2003 ----------------------------------------------------------------- NET PROVISION INTEREST INTEREST INTEREST FOR LOAN NET NET INCOME (Dollar amounts in thousands) INCOME EXPENSE INCOME LOSSES INCOME PER SHARE - ----------------------------- -------- -------- -------- --------- ------- ---------- March 31 $31,666 $12,737 $18,929 $2,227 $7,033 $.52 June 30 $30,776 $12,098 $18,678 $2,303 $6,174 $.46 September 30 $30,400 $11,869 $18,531 $2,318 $6,443 $.47 December 31 $29,819 $11,521 $18,298 $ 607 $6,843 $.50
28 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL STATEMENTS To the Shareholders and Board of Directors of First Financial Corporation: We have audited the accompanying consolidated balance sheets of First Financial Corporation as of December 31, 2004 and 2003, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2004. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Financial Corporation as of December 31, 2004 and 2003, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. (CROWE CHIZEK AND COMPANY LLC) Crowe Chizek and Company LLC Indianapolis, Indiana March 8, 2005 29 MANAGEMENT'S DISCUSSION AND ANALYSIS Management's discussion and analysis reviews the financial condition of First Financial Corporation at December 31, 2004 and 2003, and the results of its operations for the three years ended December 31, 2004. Where appropriate, factors that may affect future financial performance are also discussed. The discussion should be read in conjunction with the accompanying consolidated financial statements, related footnotes and selected financial data. A cautionary note about forward-looking statements: In its oral and written communication, First Financial Corporation from time to time includes forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements can include statements about estimated cost savings, plans and objectives for future operations and expectations about performance, as well as economic and market conditions and trends. They often can be identified by the use of words such as "expect," "may," "could," "intend," "project," "estimate," "believe" or "anticipate." First Financial Corporation may include forward-looking statements in filings with the Securities and Exchange Commission, in other written materials such as this Annual Report and in oral statements made by senior management to analysts, investors, representatives of the media and others. It is intended that these forward-looking statements speak only as of the date they are made, and First Financial Corporation undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the forward-looking statement is made or to reflect the occurrence of unanticipated events. By their nature, forward-looking statements are based on assumptions and are subject to risks, uncertainties and other factors. Actual results may differ materially from those contained in the forward-looking statement. The discussion in this "Management's Discussion and Analysis of Results of Operations and Financial Condition" lists some of the factors which could cause actual results to vary materially from those in any forward-looking statements. Other uncertainties which could affect First Financial Corporation's future performance include the effects of competition, technological changes and regulatory developments; changes in fiscal, monetary and tax policies; market, economic, operational, liquidity, credit and interest rate risks associated with First Financial Corporation's business; inflation; competition in the financial services industry; changes in general economic conditions, either nationally or regionally, resulting in, among other things, credit quality deterioration; and changes in securities markets. Investors should consider these risks, uncertainties and other factors in addition to those mentioned by First Financial Corporation in its other filings from time to time when considering any forward-looking statement. First Financial Corporation (the Corporation) is a financial services company. The Corporation, which is headquartered in Terre Haute, Indiana, offers a wide variety of financial services including commercial, mortgage and consumer lending, lease financing, trust account services and depositor services through its five subsidiaries. At the close of business in 2004 the Corporation and its subsidiaries had 810 full-time equivalent employees. First Financial Bank is the largest bank in Vigo County. It operates 12 full-service banking branches within the county; one each in Ridge Farm, Illinois and Marshall, Illinois; five in Clay County, Indiana; one in Greene County, Indiana; two in Knox County, Indiana; five in Parke County, Indiana; five in Sullivan County, Indiana; and four in Vermillion County, Indiana. In addition to its branches, it has a main office in downtown Terre Haute and a 50,000-square-foot commercial building on South Third Street in Terre Haute, which serves as the Corporation's operations center and provides additional office space. Morris Plan has one office and is located in Vigo County. Crawford has two branches in Crawford County, Illinois, and one branch in Lawrence County, Illinois. Community has six branches, of which two are located in Richland County, Illinois; one in Lawrence County, Illinois; one in Wayne County, Illinois; one in Jasper County, Illinois; and one in Coles County, Illinois. First Financial Bank and Morris Plan face competition from other financial institutions. These competitors consist of 13 commercial banks, a mutual savings bank and other financial institutions, including consumer finance companies, insurance companies, brokerage firms and credit unions. The two other bank subsidiaries have similar competition in their primary market areas. The number of competitors of each subsidiary is as follows: - CRAWFORD -- Four commercial banks, two credit unions and four brokerage firms in Crawford County, Illinois, and seven commercial banks and one credit union in Lawrence County, Illinois. - COMMUNITY -- Four commercial banks, three brokerage firms and three consumer finance companies in Richland County, Illinois; eight commercial banks, one credit union and two consumer finance companies in Lawrence County, Illinois; five commercial banks, one brokerage firm and one consumer finance company in Wayne County, Illinois; three commercial banks, one insurance company and two brokerage firms in Jasper County, Illinois; seven commercial banks, three savings and loans, six credit unions, two insurance companies; five brokerage firms and six consumer finance companies in Coles County, Illinois. The Corporation's business activities are centered in west-central Indiana and east-central Illinois. The Corporation has no foreign activities other than periodically investing available funds in time deposits held in foreign branches of domestic banks. 30 MANAGEMENT'S DISCUSSION AND ANALYSIS Forrest Sherer Inc. is a premier regional supplier of insurance, surety and other financial products. The Forrest Sherer brand is well recognized in the Midwest, with more than 60 professionals and over 80 years of successful service to both small and large businesses and to households in their market area. The agency has representation agreements with more than 40 regional and national insurers to market their products of property and casualty insurance, surety bonds, employee benefit plans, life insurance and annuities. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The Management's Discussion and Analysis of Financial Condition and Results of Operations, as well as disclosures found elsewhere in this report are based upon First Financial Corporation's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Corporation to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and goodwill. Actual results could differ from those estimates. ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses represents management's estimate of losses inherent in the existing loan portfolio. The allowance for loan losses is increased by the provision for loan losses charged to expense and reduced by loans charged off, net of recoveries. The allowance for loan losses is determined based on management's assessment of several factors: reviews and evaluations of specific loans, changes in the nature and volume of the loan portfolio, current economic conditions and the related impact on segments of the loan portfolio, historical loan loss experience and the level of classified and nonperforming loans, Loans are considered impaired if, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest according to the contractual terms of the loan agreement. When a loan is deemed impaired, impairment is measured by using the fair value of underlying collateral, the present value of the future cash flows discounted at the effective interest rate stipulated in the loan agreement, or the estimated market value of the loan. In measuring the fair value of the collateral, management uses assumptions (e.g., discount rate) and methodologies (e.g., comparison to the recent selling price of similar assets) consistent with those that would be utilized by unrelated third parties. Changes in the financial condition of individual borrowers, economic conditions, historical loss experience, or the condition of the various markets in which collateral may be sold may affect the required level of the allowance for loan losses and the associated provision for loan losses. Should cash flow assumptions or market conditions change, a different amount may be recorded for the allowance for loan losses and the associated provision for loan losses. GOODWILL. The carrying value of goodwill requires management to use estimates and assumptions about the fair value of the reporting unit compared to its book value. An impairment analysis is prepared on an annual basis. Fair values of the reporting units are determined by an analysis which considers cash flows streams, profitability and estimated market values of the business unit. The majority of the Corporation's goodwill is recorded at Forest Sherer, Inc. Management believes the accounting estimates related to the allowance for loan losses and the valuation of goodwill are "critical accounting estimates" because: (1) the estimates are highly susceptible to change from period to period because they require management to make assumptions concerning, among other factors, the changes in the types and volumes of the portfolios, valuation assumptions, and economic conditions, and (2) the impact of recognizing an impairment or loan loss could have a material effect on the Corporation's assets reported on the balance sheet as well as net income. 31 RESULTS OF OPERATIONS -- SUMMARY FOR 2004 Net income through the fourth quarter of 2004 was $28.0 million, or $2.07 per share. This represents a 5.7% increase in net income and a 6.15% increase in earnings per share. 2004 net income was favorably affected by $4.1 million in life insurance proceeds which increased 2004 earnings per share by $.30. NET INTEREST INCOME The principal source of the Corporation's earnings is net interest income, which represents the difference between interest earned on loans and investments and the interest cost associated with deposits and other sources of funding. Net interest income of $72.2 million was down by $2.2 million for 2004, the result of a 25 basis point decrease in the net interest margin. Total average interest-earning assets increased to $2.06 billion in 2004 from $2.04 billion in 2003. The tax-equivalent yield on these assets decreased to 6.00% in 2004 from 6.38% in 2003. Total average interest-bearing liabilities of $1.74 billion in 2004 increased from $1.73 billion in 2003. The average cost of these interest-bearing liabilities decreased to 2.56% in 2004 from 2.78% in 2003. On a tax equivalent basis, net interest income decreased $4.2 million from $82.0 million in 2003 to $77.8 million in 2004. The net interest margin decreased from 4.02% in 2003 to 3.81% in 2004. This decrease is primarily the result of the decreased yield on earning assets having a larger impact than the decreased cost of interest-bearing liabilities. Earning assets yields decreased 38 basis points while the cost of liabilities decreased by 22 basis points. The following table sets forth the components of net interest income due to changes in volume and rate. The table information compares 2004 to 2003 and 2003 to 2002.
2004 COMPARED TO 2003 2003 COMPARED TO 2002 INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO ------------------------------------- -------------------------------------- VOLUME/ VOLUME/ (Dollar amounts in thousands) VOLUME RATE RATE TOTAL VOLUME RATE RATE TOTAL - ----------------------------- ------- ------- ------- ------- ------- ------- ------- -------- Interest earned on interest-earning assets: Loans (1) (2) $ 2,473 $(7,717) $(194) $(5,438) $(1,132) $(6,632) $ 71 $ (7,693) Taxable investment securities (541) 147 (5) (399) 362 (3,706) (70) (3,414) Tax-exempt investment securities (2) (1,593) (413) 42 (1,964) (252) (1,045) 15 (1,282) Federal funds sold (25) 47 (24) (2) (295) (134) 107 (322) ------- ------- ----- ------- ------- ------- ----- -------- Total interest income 314 (7,936) (181) (7,803) (1,317) (11,517) 123 (12,711) ------- ------- ----- ------- ------- ------- ----- -------- Interest paid on interest-bearing liabilities: Transaction accounts 460 (816) (87) (443) 789 (2,786) (331) (2,328) Time deposits (2,298) (544) 55 (2,787) (1,217) (4,326) 188 (5,355) Short-term borrowings 448 68 70 586 10 (262) (4) (256) Other borrowings (847) (50) 2 (895) (1,837) (93) 8 (1,922) ------- ------- ----- ------- ------- ------- ----- -------- Total interest expense (2,237) (1,342) 40 (3,539) (2,255) (7,467) (139) (9,861) ------- ------- ----- ------- ------- ------- ----- -------- Net interest income $ 2,551 $(6,594) $(221) $(4,264) $ 938 $(4,050) $ 262 $ (2,850) ======= ======= ===== ======= ======= ======= ===== ========
(1) For purposes of these computations, nonaccruing loans are included in the daily average loan amounts outstanding. (2) Interest income includes the effect of tax equivalent adjustments using a federal tax rate of 35%. 32 RESULTS OF OPERATIONS -- SUMMARY FOR 2004 PROVISION FOR LOAN LOSSES The provision for loan losses charged to expense is based upon credit loss experience and the results of a detailed analysis estimating an appropriate and adequate allowance for loan losses. The analysis includes the evaluation of impaired loans as prescribed under Statement of Financial Accounting Standards (SFAS) Nos. 114 and 118, pooled loans as prescribed under SFAS No. 5, and economic and other risk factors as outlined in various Joint Interagency Statements issued by the bank regulatory agencies. For the year ended December 31, 2004, the provision for loan losses was $8.3 million, an increase of $837 thousand, or 11.2%, compared to 2003. The increase was the result of several components related to the analysis of the Corporation's Allowance for Loan and Lease Losses. Although net charge-offs for 2004 were $9.6 million as compared to $7.4 million for 2003, $2.0 million of these charge-offs were the result of management's decision to sell a classified credit to reduce the possibility of potentially greater losses in the future. Classified credits were reduced by $4.5 million, or 4.3%, from prior year totals, and although nonperforming loans increased substantially from the prior year as a result of aggressively placing classified credits into non-accrual status, specific allocation of the allowance to these credits increased only nominally. At December 31, 2004, the resulting allowance for loan losses was $19.9 million or 1.36% of total loans, net of unearned income. A year earlier the allowance was $21.2 million or 1.49% of total loans. NON-INTEREST INCOME Non-interest income of $35.8 million increased $5.0 million from the $30.8 million earned in 2003. $4.1 million of this increase is from gain on a life insurance benefit. Increased income of $3.4 million from fees on deposit accounts, generated by the introduction of a new service, First Courtesy Coverage, exceeded reductions of $2.5 million in income from lower volume of mortgage loan sales and other service fees, consisting primarily of fees generated from loan production. There was also a loss on securities available-for-sale as the result of a $621 thousand impairment of a security. NON-INTEREST EXPENSES Non-interest expenses totaled $63.7 million for 2004 compared to $62.5 million for 2003. This represents an increase of $1.2 million or 1.9% for 2004. Salaries and employee benefits, the largest component of this group, increased from $36.7 million to $37.9 million or 3.3%. Occupancy expense increased 1.9% or $74 thousand while equipment expense increased by $361 thousand. Other non-interest expense decreased by $420 thousand to $18.3 million from $18.7 million in 2003. INCOME TAXES The Corporation's federal income tax provision was $8.0 million in 2004 compared to a provision of $8.8 million in 2003. The overall effective tax rate in 2004 of 22.2% compares to a 2003 effective rate of 25.0%. The life insurance benefits received in 2004 were not subject to income tax, thereby reducing the effective tax rate. COMPARISON OF 2003 TO 2002 Net income for 2003 was $26.5 million or $1.95 per share compared to $28.6 million in 2002 or $2.10 per share. This decreased income was primarily the result of increased non interest income in 2002 from gain on life insurance benefit of $3.9 million. Total average interest-earning assets decreased to $2.04 billion in 2003 from $2.07 billion in 2002. The net interest margin decreased to 4.02% in 2003 from 4.10% in 2002. This decrease is primarily the result of funding costs decreasing at a slower rate than the yield on earning assets. The provision for loan losses decreased $2.0 million, from $9.5 million in 2002 to $7.5 million in 2003, and net charge-offs decreased $788 thousand from $8.3 million in 2002 from $7.5 million in 2003. The majority of the decreased provision was the result of a $3.9 million decrease in underperforming loans. There was a $1.2 million improvement in net non-interest income and expense from 2002 to 2003. Non-interest expense decreased $856 thousand while non-interest income increased $351 thousand. This increase in non-interest income was achieved despite there being no gain on life insurance benefit in 2003. The gain on life insurance benefit in 2002 was $3.9 million. The provision for income taxes increased $1.6 million from 2002 to 2003, increasing the effective tax rate from 20.1% in 2002 to 25.0% in 2003. The lower effective tax rate for 2002 was impacted by the receipt of a non-taxable $3.9 million life insurance benefit. 33 FINANCIAL CONDITION -- SUMMARY The Corporation's total assets decreased 1.8% or $39.1 million at December 31, 2004, from a year earlier. Securities available-for-sale decreased $69.0 million at December 31, 2004, from the previous year. Loans, net of unearned income, increased by $34.3 million, to $1.46 billion. Deposits decreased 2.45% or $36.2 million. Total shareholders' equity increased to $268.3 million at December 31, 2004, compared to $255.3 million a year earlier. Higher net income was partially offset by increased dividends and the continued repurchase of corporate stock. During 2004, 79,000 shares were acquired at a cost of $2.3 million. There were also 36,000 shares from the treasury with a value of $1.2 million contributed to the Employee Stock Ownership Plan. In addition, during 2004, the Corporation recorded a net unrealized loss on available-for-sale securities of $3.1 million. While this fluctuation in fair value decreased shareholders' equity, no loss is recognized in net income unless the security is actually sold or considered to be other than temporally impaired. Following is an analysis of the components of the Corporation's balance sheet. SECURITIES The Corporation's investment strategy seeks to maximize income from the investment portfolio while using it as a risk management tool and ensuring safety of principal and capital. During 2004 the portfolio's size declined by 11.95%. During this time the Corporation took additional steps to position the portfolio for a rising interest rate environment. The average life of the portfolio was reduced from 5.47 years to 4.00 years. Interest rates have in fact risen during the second half of 2004. The portfolio structure will continue to provide cashflows to be reinvested during 2005. Year-end securities maturity schedules were comprised of the following:
1 YEAR AND LESS 1 TO 5 YEARS 5 TO 10 YEARS OVER 10 YEARS --------------- --------------- -------------- -------------- 2004 (Dollar amounts in thousands) BALANCE RATE BALANCE RATE BALANCE RATE BALANCE RATE TOTAL - ----------------------------- ------- ---- -------- ---- ------- ---- ------- ---- -------- U.S. government entity mortgage-backed securities $36,000 3.95 $190,162 4.53 $ 2,866 5.28 -- -- $229,028 Collateralized mortgage obligations(1) 19,663 4.20 203 9.78 -- -- -- -- 19,866 States and political subdivisions 23,987 3.87 80,349 3.64 34,594 1.77 5,364 3.00 144,294 Corporate obligations 11,172 7.78 46,016 4.19 4,043 4.34 44,846 4.62 106,077 ------- -------- ------- ------- -------- Total 90,822 4.46 316,730 4.26 41,503 2.26 50,210 4.44 499,265 ------- -------- ------- ------- -------- Equities -- -- -- -- -- -- 8,725 -- 8,725 ------- -------- ------- ------- -------- TOTAL $90,822 $316,730 $41,503 $58,935 $507,990 ======= ======== ======= ======= ========
(1) Distribution of maturities is based on the estimated average life of the asset. 34 FINANCIAL CONDITION -- SUMMARY LOAN PORTFOLIO Loans outstanding by major category as of December 31 for each of the last five years and the maturities at yearend 2004 are set forth in the following analyses.
(Dollar amounts in thousands) 2004 2003 2002 2001 2000 - ----------------------------- ---------- ---------- ---------- ---------- ---------- LOAN CATEGORY Commercial, financial and agricultural $ 401,724 $ 374,638 $ 331,316 $ 302,496 $ 282,904 Real estate - construction 32,810 35,361 42,930 34,610 41,325 Real estate - mortgage 753,826 766,911 789,618 757,345 732,387 Installment 272,261 248,290 268,067 249,710 237,527 Lease financing 3,658 4,884 1,281 5,023 4,810 ---------- ---------- ---------- ---------- ---------- TOTAL $1,464,279 $1,430,084 $1,433,212 $1,349,184 $1,298,953 ========== ========== ========== ========== ==========
AFTER ONE WITHIN BUT WITHIN AFTER FIVE (Dollar amounts in thousands) ONE YEAR FIVE YEARS YEARS TOTAL - ----------------------------- -------- ---------- ---------- ---------- MATURITY DISTRIBUTION Commercial, financial and agricultural $227,403 $129,893 $44,428 $ 401,724 Real estate - construction 15,503 10,338 6,969 32,810 -------- -------- ------- ---------- TOTAL $242,906 $140,231 $51,397 434,534 ======== ======== ======= Real estate - mortgage 753,826 Installment 272,261 Lease financing 3,658 ---------- TOTAL $1,464,279 ========== Loans maturing after one year with: Fixed interest rates $ 52,588 $48,399 Variable interest rates 87,643 2,998 -------- ------- TOTAL $140,231 $51,397 ======== =======
35 FINANCIAL CONDITION -- SUMMARY ALLOWANCE FOR LOAN LOSSES The activity in the Corporation's allowance for loan losses is shown in the following analysis:
(Dollar amounts in thousands) 2004 2003 2002 2001 2000 - ----------------------------- ---------- ---------- ---------- ---------- ---------- Amount of loans outstanding at December 31, $1,464,279 $1,430,084 $1,433,212 $1,349,184 $1,298,953 ========== ========== ========== ========== ========== Average amount of loans by year $1,452,572 $1,417,026 $1,432,290 $1,315,725 $1,256,505 ========== ========== ========== ========== ========== Allowance for loan losses at beginning of year $ 21,239 $ 21,249 $ 18,313 $ 19,072 $ 17,949 Addition resulting from acquisition -- -- 1,711 -- -- Loans charged off: Commercial, financial and agricultural 4,080 2,253 4,627 4,079 1,055 Real estate - mortgage 623 1,101 892 557 406 Installment 6,680 5,586 4,619 4,395 3,196 Leasing 1 -- -- 12 6 ---------- ---------- ---------- ---------- ---------- Total loans charged off 11,384 8,940 10,138 9,043 4,663 ---------- ---------- ---------- ---------- ---------- Recoveries of loans previously charged off: Commercial, financial and agricultural 452 432 840 819 578 Real estate - mortgage 37 166 110 60 28 Installment 1,281 877 935 790 788 Leasing 1 -- -- -- -- ---------- ---------- ---------- ---------- ---------- Total recoveries 1,771 1,475 1,885 1,669 1,394 ---------- ---------- ---------- ---------- ---------- Net loans charged off 9,613 7,465 8,253 7,374 3,269 Provision charged to expense 8,292 7,455 9,478 6,615 4,392 ---------- ---------- ---------- ---------- ---------- Balance at end of year $ 19,918 $ 21,239 $ 21,249 $ 18,313 $ 19,072 ========== ========== ========== ========== ========== Ratio of net charge-offs during period to average loans outstanding .66% .53% .58% .56% .26% ========== ========== ========== ========== ==========
The allowance is maintained at an amount management believes sufficient to absorb probable incurred losses in the loan portfolio. Monitoring loan quality and maintaining an adequate allowance is an ongoing process overseen by senior management and the loan review function. On at least a quarterly basis, a formal analysis of the adequacy of the allowance is prepared and reviewed by management and the Board of Directors. This analysis serves as a point in time assessment of the level of the allowance and serves as a basis for provisions for loan losses. The loan quality monitoring process includes assigning loan grades and the use of a watch list to identify loans of concern. The analysis of the allowance for loan losses includes the allocation of specific amounts of the allowance to individual problem loans, generally based on an analysis of the collateral securing those loans. Portions of the allowance are also allocated to loan portfolios, based upon a variety of factors including historical loss experience, trends in the type and volume of the loan portfolios, trends in delinquent and non-performing loans, and economic trends affecting our market. These components are added together and compared to the balance of our allowance at the evaluation date. The following table presents the allocation of the allowance to the loan portfolios at year-end. 36 FINANCIAL CONDITION -- SUMMARY
YEARS ENDED DECEMBER 31, ----------------------------------------------- (Dollar amounts in thousands) 2004 2003 2002 2001 2000 - ----------------------------- ------- ------- ------- ------- ------- Commercial, financial and agricultural $11,840 $13,844 $12,993 $11,151 $10,771 Real estate - mortgage 850 1,254 1,471 1,330 1,060 Installment 7,228 6,141 5,856 4,489 3,509 Leasing -- -- 15 17 8 Unallocated -- -- 914 1,326 3,724 ------- ------- ------- ------- ------- TOTAL ALLOWANCE FOR LOAN LOSSES $19,918 $21,239 $21,249 $18,313 $19,072 ======= ======= ======= ======= =======
NONPERFORMING LOANS Management monitors the components and status of nonperforming loans as a part of the evaluation procedures used in determining the adequacy of the allowance for loan losses. It is the Corporation's policy to discontinue the accrual of interest on loans where, in management's opinion, serious doubt exists as to collectibility. The amounts shown below represent non-accrual loans, loans which have been restructured to provide for a reduction or deferral of interest or principal because of deterioration in the financial condition of the borrower and those loans which are past due more than 90 days where the Corporation continues to accrue interest.
(Dollar amounts in thousands) 2004 2003 2002 2001 2000 - ----------------------------- ------- ------- ------- ------- ------- Non-accrual loans $19,862 $ 8,429 $11,807 $ 8,854 $ 8,316 Restructured loans 430 542 546 590 735 Accruing loans past due over 90 days 7,813 5,384 5,899 4,925 5,499 ------- ------- ------- ------- ------- $28,105 $14,355 $18,252 $14,369 $14,550 ======= ======= ======= ======= =======
The ratio of the allowance for loan losses as a percentage of nonperforming loans was 71% at December 31, 2004, compared to 148% in 2003. The increase of $13.8 million in nonperforming loans consists mostly of credits that were classified in prior reporting periods. Specific losses expected on these credits were identified and considered in the allowance for loan losses in the current and prior periods. The following loan categories comprise significant components of the nonperforming loans at December 31, 2004 and 2003:
(Dollar amounts in thousands) 2004 2003 - ----------------------------- ------------- ------------ Non-accrual loans: 1-4 family residential $ 608 3% $2,155 26% Commercial loans 17,635 89 4,697 56 Installment loans 1,619 8 1,577 18 ------- --- ------ --- $19,862 100% $8,429 100% ======= === ====== === Past due 90 days or more: 1-4 family residential $ 3,723 47% $2,321 44% Commercial loans 2,159 28 1,530 28 Installment loans 1,931 25 1,533 28 ------- --- ------ --- $ 7,813 100% $5,384 100% ======= === ====== ===
There are no material concentrations by industry within the nonperforming loans. 37 FINANCIAL CONDITION -- SUMMARY An element of the Corporation's asset quality management process is the ongoing review and grading of each affiliate's commercial loan portfolio. At December 31, 2004, approximately $56.5 million of commercial loans are graded doubtful or substandard, including $18.7 million of non-accrual and past-due commercial loans listed on the previous page. This compares to $70.4 million in 2003, which included $4.4 million of non-performing loans. The classification of these loans, however, does not imply that management expects losses on each of these loans, but believes that a higher level of scrutiny is prudent under the circumstances. Many of these loans are still accruing and are, generally, performing in accordance with their loan agreements. However, for reasons such as previous payment history, bankruptcy proceedings, industry concerns or information specific to that borrower, it is the opinion of management that these loans require close monitoring. DEPOSITS Total deposits decreased to $1.44 billion at December 31, 2004, from $1.48 billion at December 31, 2003. The Corporation experienced a fluctuation between deposit types due to a rate-sensitive market environment. The information below presents the average amount of deposits and rates paid on those deposits for 2004, 2003 and 2002.
2004 2003 2002 ----------------- ----------------- ----------------- (Dollar amounts in thousands) AMOUNT RATE AMOUNT RATE AMOUNT RATE - ----------------------------- ---------- ---- ---------- ---- ---------- ---- Non-interest-bearing demand deposits $ 150,944 $ 177,712 $ 202,438 Interest-bearing demand deposits 259,859 .50% 231,590 .63% 198,503 .97% Savings deposits 392,635 .65% 357,989 .80% 328,506 1.43% Time deposits: $100,000 or more 163,890 2.86% 197,946 2.87% 193,504 3.07% Other time deposits 478,706 3.04% 517,364 3.27% 554,341 3.97% ---------- ---------- ---------- TOTAL $1,446,034 $1,482,601 $1,477,292 ========== ========== ==========
The maturities of certificates of deposit of $100 thousand or more outstanding at December 31, 2004, are summarized as follows: 3 months or less $ 32,405 Over 3 through 6 months 2,517 Over 6 through 12 months 12,807 Over 12 months 136,875 -------- TOTAL $184,604 ========
38 FINANCIAL CONDITION -- SUMMARY OTHER BORROWINGS Advances from the Federal Home Loan Bank decreased to $337.9 million in 2004 compared to $358.6 million in 2003. The Asset/Liability Committee reviews these investments and considers the related strategies on a weekly basis. See Interest Rate Sensitivity and Liquidity below for more information. CAPITAL RESOURCES Bank regulatory agencies have established capital adequacy standards which are used extensively in their monitoring and control of the industry. These standards relate capital to level of risk by assigning different weightings to assets and certain off-balance-sheet activity. As shown in the footnote to the consolidated financial statements ("Regulatory Matters"), the Corporation's capital exceeds the requirements to be considered well capitalized at December 31, 2004. First Financial Corporation's objective continues to be to maintain adequate capital to merit the confidence of its customers and shareholders. To warrant this confidence, the Corporation's management maintains a capital position which they believe is sufficient to absorb unforeseen financial shocks without unnecessarily restricting dividends to its shareholders. The Corporation's dividend payout ratio for 2004 and 2003 was 38.1% and 35.9%, respectively. The Corporation expects to continue its policy of paying regular cash dividends, subject to future earnings and regulatory restrictions and capital requirements. 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 earnings simulation and market value of equity sensitivity analysis. These tools allow management to quantify and monitor both short-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 continuously monitored for behavioral changes. The Corporation from time to time utilizes derivatives to manage interest rate risk. Management continuously evaluates the merits of such interest rate risk products but does not anticipate the use of such products to become a major part of the Corporation's risk management strategy. The table on the following page shows the Corporation's estimated sensitivity profile as of December 31, 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 3.94% over the next 12 months and increase 7.79% over the following 12 months. Given a 100 basis point decrease in rates, net interest income would decrease 2.23% over the next 12 months and decrease 7.23% over the following 12 months. These estimates assume all rate changes occur overnight and management takes no action as a result of this change. 39 FINANCIAL CONDITION -- SUMMARY
PERCENTAGE CHANGE IN NET INTEREST INCOME BASIS POINT ---------------------------------------- INTEREST RATE CHANGE 12 MONTHS 24 MONTHS 36 MONTHS - -------------------- --------- --------- --------- Down 200 -0.67% -3.40% -5.05% Down 100 -2.23 -7.23 -10.41 Up 100 3.94 7.79 10.93 Up 200 5.56 13.53 20.13
Typical rate shock analysis does not reflect management's ability to react and thereby reduce the effects 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 $13.6 million of investments that mature throughout the coming 12 months. The Corporation also anticipates $91.7 million of principal payments from mortgage-backed securities. Given the current rate environment, the Corporation anticipates $18.9 million in securities to be called within the next 12 months. CONTRACTUAL OBLIGATIONS, COMMITMENTS, CONTINGENT LIABILITIES AND OFF-BALANCE SHEET ARRANGEMENTS The Corporation has various financial obligations, including contractual obligations and commitments, that may require future cash payments. CONTRACTUAL OBLIGATIONS: The following table presents, as of December 31, 2004, significant fixed and determinable contractual obligations to third parties by payment date. Further discussion of the nature of each obligation is included in the referenced note to the consolidated financial statements.
PAYMENTS DUE IN ---------------------------------------------------------------------- NOTE ONE YEAR ONE TO THREE TO OVER FIVE (Dollar amounts in thousands) REFERENCE OR LESS THREE YEARS FIVE YEARS YEARS TOTAL - ----------------------------- --------- -------- ----------- ---------- --------- -------- Deposits without a stated maturity $824,597 $ -- $ -- $ -- $824,597 Consumer certificates of deposit 333,584 222,068 62,338 534 618,524 Short-term borrowings 10 75,527 -- -- -- 75,527 Other short-term borrowings 11 25,223 2,828 75,548 258,887 362,486
COMMITMENTS: The following table details the amount and expected maturities of significant commitments as of December 31, 2004. Further discussion of these commitments is included in Note 12 to the consolidated financial statements.
TOTAL AMOUNT ONE YEAR OVER ONE (Dollar amounts in thousands) COMMITTED OR LESS YEAR - ----------------------------- ------------ -------- -------- Commitments to extend credit: Unused loan commitments $245,892 $117,528 $128,364 Commercial letters of credit 5,319 5,319 --
Commitments to extend credit, including loan commitments, standby letters of credit and commercial letters of credit do not necessarily represent future cash requirements, in that these commitments often expire without being drawn upon. OUTLOOK The Corporation's primary market is west-central Indiana and east-central Illinois. Typically, this market does not expand or contract at rates that are experienced by both the state and national economies. This area continues to be driven primarily by the retail, higher education and health care industries. During 2004 the area's employment data were mixed. East-central Illinois generally experienced falling unemployment rates while west-central Indiana experienced rising rates. A number of projects remain under development; however, there are limited significant growth opportunities currently available. 40 CONSOLIDATED BALANCE SHEET - AVERAGE BALANCES AND INTEREST RATES
DECEMBER 31, ------------------------------------------------------------------------------------------------ 2004 2003 2002 ------------------------------ ------------------------------ ------------------------------ AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ (Dollar amounts in thousands) BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE - ----------------------------- ---------- -------- ------ ---------- -------- ------ ---------- -------- ----- ASSETS Interest-earning assets: Loans (1) (2) $1,452,572 93,128 6.41% $1,417,026 98,565 6.96% $1,432,290 106,258 7.42% Taxable investment securities 402,063 15,315 3.81 416,403 15,714 3.77 408,666 19,128 4.68 Tax-exempt investments (2) 182,727 13,974 7.65 203,021 15,938 7.85 206,034 17,220 8.36 Federal funds sold 2,628 50 1.90 5,129 52 .99 24,129 374 1.55 ---------- -------- ---- ---------- -------- ---- ---------- -------- ---- Total interest-earning assets 2,039,990 122,467 6.00% 2,041,579 130,269 6.38% 2,071,119 142,980 6.90% -------- ==== -------- ==== -------- ==== Non-interest earning assets: Cash and due from banks 77,443 80,261 67,319 Premises and equipment, net 30,610 29,634 29,763 Other assets 66,177 63,573 60,356 Less allowance for loan losses (22,052) (22,242) (20,487) ---------- ---------- ---------- TOTALS $2,192,168 $2,192,985 $2,208,070 ========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing liabilities: Transaction accounts $ 652,494 3,872 .59% $ 589,579 4,315 .73% $ 527,009 6,643 1.26% Time deposits 642,596 19,823 3.08 715,310 22,610 3.16 747,845 27,964 3.74 Short-term borrowings 71,926 1,017 1.41 35,262 431 1.22 34,759 687 1.98 Other borrowings 376,600 19,974 5.30 392,540 20,869 5.32 426,961 22,792 5.34 ---------- -------- ---- ---------- -------- ---- ---------- -------- ---- Total interest-bearing liabilities: 1,743,616 44,686 2.56% 1,732,691 48,225 2.78% 1,736,574 58,086 3.34% -------- ==== -------- ==== -------- ==== Non interest-bearing liabilities: Demand deposits 150,944 177,712 202,438 Other 29,519 30,441 30,643 ---------- ---------- ---------- 1,945,079 1,940,844 1,969,655 Shareholders' equity 268,089 252,141 238,415 ---------- ---------- ---------- TOTALS $2,192,168 $2,192,985 $2,208,070 ========== ========== ========== Net interest earnings $ 77,781 $ 82,044 $ 84,894 ======== ======== ======== Net yield on interest- earning assets 3.81% 4.02% 4.10% ==== ==== ====
(1) For purposes of these computations, nonaccruing loans are included in the daily average loan amounts outstanding. (2) Interest income includes the effect of tax equivalent adjustments using a federal tax rate of 35%. 41 MARKET AND DIVIDEND INFORMATION At year-end 2004 shareholders owned 13,535,770 shares of the Corporation's common stock. The stock is traded over-the-counter under the NASDAQ National Market System with the symbol THFF. Such over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. Historically, the Corporation has paid cash dividends semi-annually and currently expects that comparable cash dividends will continue to be paid in the future. The following table gives quarterly high and low trade prices and dividends per share during each quarter for 2004 and 2003.
2004 2003 --------------------------- --------------------------- BID QUOTATION CASH BID QUOTATION CASH --------------- DIVIDENDS --------------- DIVIDENDS Quarter ended HIGH LOW DECLARED HIGH LOW DECLARED - ------------- ------ ------ --------- ------ ------ --------- March 31 $29.73 $29.33 $24.65 $23.36 June 30 $32.06 $31.67 $.39 $28.74 $23.56 $.34 September 30 $31.36 $30.90 $32.25 $27.50 December 31 $35.03 $34.88 $.40 $31.50 $28.77 $.36
42 EX-21 5 c93154exv21.txt SUBSIDIARIES EXHIBIT 21 -- SUBSIDIARIES OF THE REGISTRANT First Financial Bank N.A. is a wholly-owned subsidiary of the Registrant. It is an national banking association. It is an Indiana corporation. The bank conducts its business under the name of First Financial Bank N.A. First Crawford State Bank is a wholly-owned subsidiary of the Registrant. It is an Illinois corporation. The bank conducts its business under the name of First Crawford State Bank. The Morris Plan Company is a wholly-owned subsidiary of the Registrant. It is an Indiana corporation. The company conducts its business under the name of The Morris Plan Company of Terre Haute, Inc. Forrest Sherer, Inc., is a wholly-owned subsidiary of the Registrant. It is an Indiana corporation. It is a full-line insurance agency and conducts its business under the name Forrest Sherer, Inc. First Community Bank is a wholly-owned subsidiary of the Registrant. It is a national banking association. It is an Illinois corporation. The bank conducts its business under the name of First Community Bank N.A. EX-31.1 6 c93154exv31w1.txt CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER EXHIBIT 31.1 -- CERTIFICATION PURSUANT TO RULE 13a-14(a) FOR ANNUAL REPORT OF FORM 10-K BY PRINCIPAL EXECUTIVE OFFICER I, Norman L. Lowery, certify that: 1) I have reviewed this annual report on Form 10-K of First Financial Corporation; 2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4) The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) [reserved] (c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5) The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: March 15, 2005 Norman L. Lowery, Signed - ---------------------------- Norman L. Lowery Vice Chairman and CEO EX-31.2 7 c93154exv31w2.txt CERTIFICATION PRINCIPAL FINANCIAL OFFICER EXHIBIT 31.2 -- CERTIFICATION PURSUANT TO RULE 13a-14(a) FOR ANNUAL REPORT OF FORM 10-K BY PRINCIPAL FINANCIAL OFFICER I, Michael A. Carty, certify that: 1) I have reviewed this annual report on Form 10-K of First Financial Corporation; 2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4) The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) [reserved] (c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5) The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: March 15, 2005 Michael A. Carty, Signed - --------------------------------- Michael A. Carty Secretary, Treasurer and CFO EX-32.1 8 c93154exv32w1.txt SECTION 1350 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER EXHIBIT 32.1 -- CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of First Financial Corporation (the "Corporation") on Form 10-K for the year ended December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Norman L. Lowery, Vice Chairman and CEO of the Corporation, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934;and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation. This certification is furnished solely pursuant to 18 U.S.C. section 1350 and is not being filed for any other purpose. Date: March 15, 2005 Norman L. Lowery, Signed - --------------------------------- Norman L. Lowery EX-32.2 9 c93154exv32w2.txt SECTION 1350 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER EXHIBIT 32.2 -- CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of First Financial Corporation (the "Corporation") on Form 10-K for the year ended December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Michael A. Carty, Secretary, Treasurer and CFO of the Corporation, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934;and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation. This certification is furnished solely pursuant to 18 U.S.C. section 1350 and is not being filed for any other purpose. Date: March 15, 2005 Michael A. Carty, Signed - --------------------------------- Michael A. 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