-----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, UUeEK6D6MBh7MUw6aO49R3Uh8NMidB2jK68bvMUbC4Su8nXa3Dfp+C3+QPdKdt9Z mKlHPWfNZgPsLdZz9Q6aGQ== 0000950137-06-003147.txt : 20060316 0000950137-06-003147.hdr.sgml : 20060316 20060316153740 ACCESSION NUMBER: 0000950137-06-003147 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20051231 FILED AS OF DATE: 20060316 DATE AS OF CHANGE: 20060316 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: 06691811 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 c03430e10vk.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, 2005 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 47807 Terre Haute, IN (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 ------------------- Common Stock, no par value Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X] Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [ ] No [X] Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, 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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] As of June 30, 2005 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 $373,528,465. (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 10, 2006--13,323,785 shares. DOCUMENTS INCORPORATED BY REFERENCE ----------------------------------- Portions of the 2005 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 19, 2006 are incorporated by reference into Part III. Form 10-K Cross-Reference Index
PAGE PART I Item 1 Business..................................................................................... 2 Item 1A Risk Factors................................................................................. 2 Item 1B Unresolved Staff Comments.................................................................... 4 Item 2 Properties................................................................................... 4 Item 3 Legal Proceedings............................................................................ 5 Item 4 Submission of Matters to a Vote of Security Holders.......................................... 5 PART II Item 5 Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.................................................... 5 Item 6 Selected Financial Data...................................................................... 5 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations........ 5 Item 7A Quantitative and Qualitative Disclosures about Market Risk................................... 5 Item 8 Financial Statements and Supplementary Data.................................................. 5 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosures........ 6 Item 9A Controls and Procedures...................................................................... 6 Item 9B Other Information............................................................................ 6 PART III Item 10 Directors and Executive Officers of Registrant............................................... 7 Item 11 Executive Compensation....................................................................... 7 Item 12 Security Ownership of Certain Beneficial Owners and Management............................... 7 Item 13 Certain Relationships and Related Transactions............................................... 7 Item 14 Principal Accountant Fees and Services....................................................... 7 PART IV Item 15 Exhibits and Financial Statement Schedules................................................... 7, 8 Signatures................................................................................... 8, 9
1 PART 1 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 2005 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 page 31. 2. Information regarding supervision of the Corporation, on page 12. 3. Details regarding competition, on page 31. ITEM 1A. RISK FACTORS THE CORPORATION IS SUBJECT TO INTEREST RATE RISK Interest and fees on loans and securities, net of interest paid on deposits and borrowings, are a large part of the Corporation's net income. Interest rates are key drivers of the Corporation's net interest margin and subject to many factors beyond the control of management. As interest rates change, net interest income is affected. Rapid increases in interest rates in the future could result in interest expense increasing faster than interest income because of mismatches in financial instrument maturities. Further, substantially higher interest rates generally reduce loan demand and may result in slower loan growth. Decreases or increases in interest rates could have a negative effect on the spreads between the interest rates earned on assets and the rates of interest paid on liabilities, and therefore decrease net interest income. THE CORPORATION IS SUBJECT TO LENDING RISK There are inherent risks associated with the Corporation's lending activities. These risks include, among other things, the impact of changes in interest rates and changes in the economic conditions in the markets where the Corporation operates as well as those across Indiana, Illinois and the United States. Increases in interest rates and/or weakening economic conditions could adversely impact the ability of borrowers to repay outstanding loans or the value of the collateral securing these loans. The Corporation is also subject to various laws and regulations that affect its lending activities. Failure to comply with applicable laws and regulations could subject the Corporation to regulatory enforcement action that could result in the assessment of significant civil money penalties against the Corporation. THE CORPORATION'S ALLOWANCE FOR POSSIBLE LOAN LOSSES MAY BE INSUFFICIENT The Corporation maintains an allowance for possible loan losses, which is a reserve established through a provision for possible loan losses charged to expense, that represents management's best estimate of probable losses that have been incurred within the existing portfolio of loans. The level of the allowance reflects management's continuing evaluation of industry concentrations; specific credit risks; loan loss experience; current loan portfolio quality; present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio. The determination of the appropriate level of the allowance for possible loan losses inherently involves a high degree of subjectivity and requires the Corporation to make significant estimates of current credit risks, all of which may undergo material changes. Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of the Corporation's control, may require an increase in the allowance for possible loan losses. In addition, bank regulatory agencies periodically review the Corporation's allowance for loan losses and may require an increase in the provision for possible loan losses or the recognition of further loan charge-offs, based on judgments different than those of management. In addition, if charge-offs in future periods exceed the allowance for possible loan losses, the Corporation will need additional provisions to increase the allowance for possible loan losses. Any increases in the allowance for possible loan losses will result in a decrease in net income and, possibly, capital, and may have a material adverse effect on the Corporation's financial condition and results of operations. THE CORPORATION OPERATES IN A HIGHLY COMPETITIVE INDUSTRY AND MARKET AREA The Corporation faces substantial competition in all areas of its operations from a variety of different competitors. Such competitors include banks and many other types of financial institutions, including, without limitation, savings and loans, credit unions, finance companies, brokerage firms, insurance companies, factoring companies 2 and other financial intermediaries. The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. Banks, securities firms and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking. Also, technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Many of the Corporation's competitors have fewer regulatory constraints and may have lower cost structures. The Corporation's ability to compete successfully depends on a number of factors, including, among other things: o The ability to develop, maintain and build upon long-term customer relationships based on top quality service, and safe, sound assets. o The ability to expand the Corporation's market position. o The scope, relevance and pricing of products and services offered to meet customer needs and demands. o The rate at which the Corporation introduces new products and services relative to its competitors. o Customer satisfaction with the Corporation's level of service. o Industry and general economic trends. Failure to perform in any of these areas could significantly weaken the Corporation's competitive position, which could adversely affect the Corporation's growth and profitability, which, in turn, could have a material adverse effect on the corporation's financial condition and results of operations. THE CORPORATION IS SUBJECT TO EXTENSIVE GOVERNMENT REGULATION AND SUPERVISION The Corporation, primarily through the Bank, is subject to extensive federal regulation and supervision. Banking regulations are primarily intended to protect depositors' funds, federal deposit insurance funds and the banking system as a whole, not shareholders. These regulations affect the Corporation's lending practices, capital structure, investment practices, and growth, among other things. Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect the Corporation in substantial and unpredictable ways. Such changes could subject the Corporation to additional costs, limit the types of financial services and products the Corporation may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things. Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could have a material adverse effect on the Corporation's business, financial condition and results of operations. While the Corporation has policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur. THE CORPORATION'S CONTROLS AND PROCEDURES MAY FAIL OR BE CIRCUMVENTED Management regularly reviews and updates the Corporation's internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of the Corporation's controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on the Corporation's business, results of operations and financial condition. THE CORPORATION IS DEPENDENT ON CERTAIN KEY MANAGEMENT AND STAFF The Corporation relies on key personnel to manage and operate its business. The loss of key staff may adversely affect our ability to maintain and manage these portfolios effectively, which could negatively affect our revenues. In addition, loss of key personnel could result in increased recruiting and hiring expenses, which could cause a decrease in the Corporation's net income. \ 3 THE CORPORATION'S INFORMATION SYSTEMS MAY EXPERIENCE AN INTERRUPTION OR BREACH IN SECURITY The Corporation relies heavily on communications and information systems to conduct its business. Any failure, interruption or breach in security of these systems could result in failures or disruptions in the Corporation's customer relationship management, general ledger, deposit, loan and other systems. While the Corporation has policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of its information systems, there can be no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions or security breaches of the Corporation's information systems could damage the Corporation's reputation, result in a loss of customer business, subject the Corporation to additional regulatory scrutiny, or expose the Corporation to civil litigation and possible financial liability, any of which could have a material adverse effect on the Corporation's financial condition and results of operations. THE CORPORATION CONTINUALLY ENCOUNTERS TECHNOLOGICAL CHANGE The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. The Corporation's future success depends, in part, upon its ability to address the needs of its customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in the Corporation's operations. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on the Corporation's business and, in turn, the Corporation's financial condition and results of operations. ITEM 1B. UNRESOLVED STAFF COMMENTS Not Applicable. 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 three other facilities in downtown Terre Haute. Two are leased to other parties and the other is a 50,000-square-foot building housing operations and administrative staff and equipment. In addition, the Bank holds in fee five 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 center 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 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 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 center in Clark County include an office in Marshall, Illinois. This building is held in fee. Facilities of the Corporation's banking center in Coles County include an office in Charleston, Illinois. This building is held in fee. 4 Facilities of the Corporation's banking centers in Crawford County include one office and a drive-up facility in Robinson, Illinois and one office in Oblong, Illinois. All three buildings are held in fee. Facilities of the Corporation's banking center in Jasper County include an office in Newton, Illinois. This building is held in fee. Facilities of the Corporation's banking centers in Lawrence County include offices in Sumner and Lawrenceville, Illinois. Both of the buildings are held in fee. Facilities of the Corporation's banking centers in Richland County include two offices in Olney, Illinois. One building is held in fee and the other building is leased. The expiration date on the lease is March 1, 2010. Facilities of the Corporation's banking center in Vermilion County include an office in Ridge Farm, Illinois. This building is held in fee. Facilities of the Corporation's banking center in Wayne County include an office in Fairfield, Illinois. This building is held in fee. 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. 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 5 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 2005 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 2005 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 OPERATIONS See "Management's Discussion and Analysis" on pages 30 through 40 of the 2005 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 2005 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 28 of the 2005 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 2005 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 DISCLOSURES None 6 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 Vice 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 as defined in Rule 13a-15(e) of the Securities and Exchange Commission ("Disclosure Controls"). Based on the Evaluation, our CEO and CFO concluded that our Disclosure Controls are effective. 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 2005 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 See "Management's Report on Internal Control Over Financial Reporting" on page 30 of the 2005 Annual Report to Shareholders and "Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting" on page 29 of the 2005 Annual Report to Shareholders. That portion of the Annual Report is incorporated by reference in response to this Item 9A of this Form 10-K. ITEM 9B. OTHER INFORMATION On December 20, 2005, 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, 2010. The terms and conditions of the employment agreement are incorporated by reference from Exhibit 10.1 to this Form 10-K. On December 21, 2005, the Compensation Committee of the Company set the 2006 annual base salaries of the named executive officers and approved the 2005 bonus amounts payable to the named executive officers. 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 2006. These amounts are set forth on Exhibit 10.3 to this Form 10-K. 7 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 2005 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 2005 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 2005 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 2005 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 2005 fiscal year, which Proxy Statement will contain such information. The information required by Item 14 is incorporated by reference to such Proxy Statement. 8 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 2005 Annual Report to Shareholders of First Financial Corporation attached: Consolidated Balance Sheets--December 31, 2005 and 2004 Consolidated Statements of Income--Years ended December 31, 2005, 2004, and 2003 Consolidated Statements of Changes in Shareholders' Equity--Years ended December 31, 2005, 2004, and 2003 Consolidated Statements of Cash Flows--Years ended December 31, 2005, 2004, and 2003 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, 2005, incorporated by reference to Exhibit 10.2 to the Corporation's Form 10-Q filed for the quarter ended March 31, 2005 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 2006 Schedule of Director Compensation 10.4 2006 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). 9 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: February 21, 2006 ----------------- 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 February 21, 2006 - ----------------------- ----------------- Donald E. Smith, President and Director W. Curtis Brighton, signed February 21, 2006 - -------------------------- ----------------- W. Curtis Brighton, Director Michael A. Carty, signed February 21, 2006 - ------------------------ ----------------- Michael A. Carty, Secretary, Treasurer & CFO (Principal Financial Officer and Principal Accounting Officer) B. Guille Cox, Jr., signed February 21, 2006 - -------------------------- ----------------- B. Guille Cox, Jr., Director Thomas T. Dinkel, signed February 21, 2006 - ------------------------ ----------------- Thomas T. Dinkel, Director Anton H. George, signed February 21, 2006 - ----------------------- ----------------- Anton H. George, Director Gregory L. Gibson, signed February 21, 2006 - ------------------------- ----------------- Gregory L. Gibson, Director Norman L. Lowery, signed February 21, 2006 - ------------------------ ----------------- Norman L. Lowery, Vice Chairman, CEO & Director (Principal Executive Officer) Patrick O'Leary, signed February 21, 2006 - ----------------------- ----------------- Patrick O'Leary, Director Ronald K. Rich, signed February 21, 2006 - ---------------------- ----------------- Ronald K. Rich, Director Virginia L. Smith, signed February 21, 2006 - ------------------------- ----------------- Virginia L. Smith, Director
10 EX-10.3 2 c03430exv10w3.txt 2006 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 2006 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 $500, 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 c03430exv10w4.txt 2006 SCHEDULE OF NAMED EXECUTIVE OFFICER COMPENSATION . . . EXHIBIT 10.4--SCHEDULE OF NAMED EXECUTIVE OFFICER COMPENSATION BASE SALARY. For 2006, the named executive officers will receive the following base salaries:
NAME AND PRINCIPAL POSITION SALARY - --------------------------- ------ Donald E. Smith $538,708.78 President and Chairman of the Corporation; Chairman of FFB Norman L. Lowery $433,907.67 Vice Chairman, CEO and Vice President of the Corporation; President and CEO of FFB Michael A. Carty $173,500.00 CFO, Secretary and Treasurer of the Corporation; Senior Vice President of FFB Richard O. White $147,900.00 Senior Vice President of FFB Thomas S. Clary $145,525.00 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 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 of the Corporation and its subsidiaries. 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 (the "2001 Plan"), effective January 1, 2001. The 2001 Plan was adopted after lengthy Board discussions with and consultation from an independent consultant. The 2001 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. The 2001 Plan was frozen effective December 31, 2004 to exempt all amounts under the 2001 Plan from the application of Section 409A of the Internal Revenue Code of 1986, as amended (the "Code"). The Board adopted the 2005 Long-Term Incentive Plan (the "2005 Plan") as a replacement plan effective January 1, 2005. The terms of the 2005 Plan comply with Code Section 409A.Collectively the 2001 Plan and 2005 Plan are referred to as the "Plans." Directors and executive officers who are "highly compensated employees" within the meaning of Section 201(2) of the Employee Retirement Income Security Act of 1974, as amended, and who are age 65 or under are eligible to participate in the 2005 Plan. The Compensation Committee has designated as participants in the 2005 Plan all directors of the Corporation, the "named executive officers" of the Corporation, the presidents of its subsidiary banks and certain other officers. Individuals are not eligible to receive rewards of compensation under the Plans after age 65; however, the Compensation Committee exempted Messrs. Smith and O'Leary from the age limitations at each Plan's inception. Awards under the 2005 Plan are based upon the specific "award amount" for each individual specified. There are four tiers of participants, 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 institutions industry generally. Payments 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. If a Participant is a "key employee," as defined by Code Section 416(i), then payments will be suspended for the six-month period following the date payments were scheduled to begin. Payments are in cash only and are generally made in 180 equal consecutive monthly installments. Directors and executives become 100% vested in their awards if or when they have provided five years of service to the Corporation or the respective subsidiary by which they are employed. Awards for 2006 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. SAVINGS PLAN. The First Financial Corporation Employees" 401(k) Savings Plan (the "Savings Plan") is a qualified salary reduction plan within the meaning of Code Section 401(k). Under the Savings Plan all eligible employees may make before-tax contributions from their compensation to the Savings Plan Trust for their accounts. Subject to limits established under the Internal Revenue Code, contributions may be directed in any whole percentage between 1% and 15% of the employee's base compensation and certain variable pay including overtime pay, bonuses, commissions, but excluding welfare benefits, deferred compensation, reimbursements and expense allowances. Amounts contributed to the Savings Plan may be invested in certain investment choices. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN. The First Financial Corporation Supplemental Executive Retirement Plan (the "SERP") provides supplemental retirement benefits for a select group of management or highly compensated employees to help recompense the employees for benefits lost due to the imposition of Code limitations on benefits under the First Financial Corporation Employees' Pension Plan. Amounts payable under the SERP are offset by amounts payable under the First Financial Executives' Deferred Compensation Plan. The SERP was frozen effective December 31, 2004 to exempt all amounts under the SERP from Code Section 409A. The Board adopted The First Financial Corporation 2005 Supplemental Executive Retirement Plan (the "2005 SERP") as a replacement plan effective January 1, 2005. The 2005 SERP complies with Code Section 409A. Amounts payable under the 2005 SERP will be offset by amounts payable under The First Financial Corporation 2005 Executives' Deferred Compensation Plan. EXECUTIVES' DEFERRED COMPENSATION PLAN. The First Financial Executives' Deferred Compensation Plan (the "EDC Plan") permits a select group of management or highly compensated employees to elect to defer compensation from the employers without regard to the limitations imposed by the Internal Revenue Code on the benefits which may accrue to those employees under the First Financial Corporation Employee Stock Ownership Plan and to provide supplemental retirement benefits to help recompense the employees for benefits lost due to the imposition of Code limitations on the First Financial Corporation Employee Stock Ownership Plan. Amounts payable under the EDC Plan will offset amounts payable under the SERP. The EDC Plan was drafted to comply with Code Section 409A. The EDC Plan was frozen effective December 31, 2004 to exempt all amount under the SERP from Code Section 409A. The Board adopted The First Financial Corporation 2005 Executives' Deferred Compensation Plan (the "2005 DEC Plan") as a replacement plan effective January 1, 2005. The 2005 EDC Plan complies with Code Section 409A. Amounts payable under the 2005 EDC Plan will offset amounts payable under the 2005 SERP. EMPLOYEE STOCK OWNERSHIP PLAN. The Corporation sponsors the First Financial Corporation Employee Stock Ownership Plan (the "ESOP") and the First Financial Corporation Employees' Pension Plan (the "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. 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. EMPLOYMENT AGREEMENT. FFB entered into an Employment Agreement with Norman L. Lowery, its President and Chief Executive Officer, effective January 1, 2006. The Employment Agreement is a five-year agreement which may be extended each year by the board of directors of FFB for an additional one-year term. Under the Employment Agreement, Mr. Lowery receives an annual salary equal to his current salary, which is $433,908 for 2006, subject to increases approved by the Board of Directors, and is entitled to participate in other bonus and fringe benefit plans available to the Corporation's and FFB's employees. If Mr. Lowery is terminated "without cause" or if he terminated for "good reason," and such termination does not occur within 12 months after a "change in control" (as such terms are defined in the Employment Agreement), he would receive an amount equal to the sum of his base salary and bonuses through the end of the then-current term of the Employment Agreement. He is entitled to receive cash reimbursements in an amount equal to his cost of obtaining all benefits which he would have been eligible to participate in or receive though the term of the Employment Agreement. If Mr. Lowery is terminated for other than "just cause" or is constructively discharged and this occurs within 12 months following a change in control, he would be entitled to an amount equal to the greater of the compensation and benefits described above if the termination did not occur within 12 months following a change in control; or, the product of 2.99 times the sum of (i) his base salary in effect as of the date of the change in control; (ii) an amount equal to the bonuses received by or payable to him in or for the calendar year prior to the year in which the change in control occurs; and (iii) cash reimbursements in an amount equal to his cost of obtaining for a period of three years, beginning on the date of termination, all benefits which he was eligible to participate in or receive. Mr. Lowery is also entitled to the payment provided for in the paragraph if a change in control occurs that was not approved by a majority of the Board of Directors. If Mr. Lowery qualifies as a "key employee" at the time of his separation from service, the Corporation may not make certain payments earlier than six months following the date of the his Separation from Service (or, if earlier, the date of his death). Payments to which Mr. Lowery would otherwise be entitled during the first six months following the date of his separation from service will be accumulated and paid to Mr. Lowery on the first day of the seventh month following his separation from service. If as a result of a change in control Mr. Lowery becomes entitled to any payments from FFB which are determined to be payments subject to the Code Section 280G, the amount due will be increased to include payment equal to the amount of excise tax imposed under Sections 280G and 4999 of the Code (the "Excise Tax Payment") and the amount necessary to provide the Excise Tax Payment net of all income, payroll and excise taxes. CHANGE IN CONTROL ARRANGEMENTS. For purposes of the 2001 Plan and the 2005 Plan (discussed above), if Mr. Smith is terminated within 12 months following a change in control, for reasons other than for "cause," "disability" or death, he will be paid the vested account balance under the 2001 and 2005 Long-Term Incentive Plans as of December 31, 2004 plus the "projected amount" under both Plans. The applicable amount shall be paid in one single sum, for each of the Plans, within 180 days following termination. For purposes of the Plans, if Mr. Lowery is terminated within 12 months following a change in control, for reasons other than for "cause," "disability" or death, he will be paid the vested account balance under both Plans as of December 31, 2004 plus the "projected amount" under both Plans. The applicable amount shall be paid in a single lump sum, for each of the Plans, within 180 days following termination. If as a result of a change in control Messrs. Smith or Lowery become entitled to any payments from the Corporation or FFB which are determined to be payments subject to the "golden parachute" rules of the Code, the amount due will be increased to include payment equal to the amount of excise tax imposed under Sections 280G and 4999 of the Code (the "Excise Tax Payment") and the amount necessary to provide the Excise Tax Payment net of all income, payroll and excise taxes. EX-13 4 c03430exv13.txt ANNUAL REPORT EXHIBIT 13--ANNUAL REPORT . . . EXHIBIT 13 2005 ANNUAL REPORT FIVE YEAR COMPARISON OF SELECTED FINANCIAL DATA
(Dollar amounts in thousands, except per share amounts) 2005 2004 2003 2002 2001 - ----------------------------- ---------- ---------- ---------- ---------- ---------- BALANCE SHEET DATA: Total assets $2,136,918 $2,183,992 $2,223,057 $2,169,748 $2,041,905 Securities 536,291 507,990 576,950 520,166 471,888 Loans, net of unearned fees 1,395,741 1,463,871 1,429,525 1,432,564 1,348,461 Deposits 1,464,918 1,443,121 1,479,347 1,434,654 1,313,656 Borrowings 370,090 438,013 451,862 457,645 480,674 Shareholders' equity 269,323 268,335 255,279 241,971 217,511 INCOME STATEMENT DATA: Interest income 121,647 116,888 122,661 136,262 144,673 Interest expense 47,469 44,686 48,225 58,086 74,125 Net interest income 74,178 72,202 74,436 78,176 70,548 Provision for loan losses 11,698 8,292 7,455 9,478 6,615 Other income 32,025 35,754 30,819 30,468 21,468 Other expenses 63,538 63,656 62,461 63,317 53,329 Net income 23,054 28,009 26,493 28,640 24,196 PER SHARE DATA: Net income 1.72 2.07 1.95 2.10 1.78 Cash dividends .82 .79 .70 .62 .57 PERFORMANCE RATIOS: Net income to average assets 1.07% 1.28% 1.21% 1.30% 1.19% Net income to average shareholders' equity 8.52 10.45 10.57 12.01 11.33 Average total capital to average assets 13.35 13.24 12.45 11.73 11.38 Average shareholders' equity to average assets 12.51 12.23 11.43 10.80 10.46 Dividend payout 47.57 38.13 35.88 29.57 32.28
7 FIRST FINANCIAL CORPORATION CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ---------------------------- (Dollar amounts in thousands, except per share data) 2005 2004 - ---------------------------------------------------- ----------- ----------- ASSETS Cash and due from banks $ 78,201 $ 94,928 Federal funds sold 2,982 5,400 Securities available-for-sale 536,291 507,990 Loans, net of allowance of $16,042 in 2005 and $19,918 in 2004 1,379,699 1,443,953 Accrued interest receivable 12,537 12,016 Premises and equipment, net 31,270 31,154 Bank-owned life insurance 55,832 49,177 Goodwill 7,102 7,102 Other intangible assets 2,860 3,093 Other real estate owned 4,115 3,262 Other assets 26,029 25,917 ----------- ----------- TOTAL ASSETS $ 2,136,918 $ 2,183,992 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Non-interest-bearing $ 182,416 $ 145,852 Interest-bearing: Certificates of deposit of $100 or more 189,493 184,604 Other interest-bearing deposits 1,093,009 1,112,665 ----------- ----------- 1,464,918 1,443,121 Short-term borrowings 26,224 75,527 Other borrowings 343,866 362,486 Other liabilities 32,587 34,523 ----------- ----------- TOTAL LIABILITIES 1,867,595 1,915,657 Shareholders' equity Common stock, $.125 stated value per share, Authorized shares -- 40,000,000 Issued shares -- 14,450,966 Outstanding shares -- 13,373,570 in 2005 and 13,535,770 in 2004 1,806 1,806 Additional paid-in capital 67,670 67,519 Retained earnings 223,710 211,623 Accumulated other comprehensive income 1,903 8,357 Less: Treasury shares at cost -- 1,077,396 in 2005 and 915,196 in 2004 (25,766) (20,970) ----------- ----------- TOTAL SHAREHOLDERS' EQUITY 269,323 268,335 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,136,918 $ 2,183,992 =========== ===========
See accompanying notes. 8 2005 ANNUAL REPORT CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, ----------------------------------------- (Dollar amounts in thousands, except per share data) 2005 2004 2003 - ---------------------------------------------------- ---------- ---------- ---------- INTEREST AND DIVIDEND INCOME: Loans, including related fees $ 96,388 $ 92,440 $ 96,536 Securities: Taxable 16,802 15,315 15,714 Tax-exempt 6,306 7,055 7,816 Other 2,151 2,078 2,595 ---------- ---------- ---------- TOTAL INTEREST AND DIVIDEND INCOME 121,647 116,888 122,661 INTEREST EXPENSE: Deposits 27,184 23,695 26,925 Short-term borrowings 783 1,017 431 Other borrowings 19,502 19,974 20,869 ---------- ---------- ---------- TOTAL INTEREST EXPENSE 47,469 44,686 48,225 ---------- ---------- ---------- NET INTEREST INCOME 74,178 72,202 74,436 Provision for loan losses 11,698 8,292 7,455 ---------- ---------- ---------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 62,480 63,910 66,981 NON-INTEREST INCOME: Trust and financial services 3,626 3,918 3,762 Service charges and fees on deposit accounts 11,732 11,499 8,066 Other service charges and fees 6,440 6,794 8,063 Securities gains (losses) 571 (165) 237 Insurance commissions 5,995 6,142 6,282 Gain on sale of mortgage loans 1,289 806 2,027 Gain on life insurance benefit -- 4,113 -- Other 2,372 2,647 2,382 ---------- ---------- ---------- TOTAL NON-INTEREST INCOME 32,025 35,754 30,819 NON-INTEREST EXPENSES: Salaries and employee benefits 38,617 37,876 36,696 Occupancy expense 3,796 3,904 3,830 Equipment expense 3,861 3,585 3,224 Other 17,264 18,291 18,711 ---------- ---------- ---------- TOTAL NON-INTEREST EXPENSE 63,538 63,656 62,461 ---------- ---------- ---------- INCOME BEFORE INCOME TAXES 30,967 36,008 35,339 Provision for income taxes 7,913 7,999 8,846 ---------- ---------- ---------- NET INCOME $ 23,054 $ 28,009 $ 26,493 ========== ========== ========== EARNINGS PER SHARE: BASIC AND DILUTED $ 1.72 $ 2.07 $ 1.95 ========== ========== ========== Weighted average number of shares outstanding (in thousands) 13,433 13,525 13,588 ========== ========== ==========
See accompanying notes. 9 FIRST FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
ACCUMULATED OTHER COMMON ADDITIONAL RETAINED COMPREHENSIVE TREASURY (Dollar amounts in thousands, except per share data) STOCK PAID-IN CAPITAL EARNINGS INCOME STOCK TOTAL - ---------------------------------------------------- -------- --------------- --------- ------------- -------- --------- BALANCE, JANUARY 1, 2003 $ 903 $ 66,809 $ 178,209 $ 14,276 $ (18,226) $ 241,971 Comprehensive income: Net income -- -- 26,493 -- -- 26,493 Other comprehensive income, 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 Comprehensive income: Net income -- -- 23,054 -- -- 23,054 Other comprehensive loss, net of tax: Change in net unrealized gains/losses on securities available-for-sale, net -- -- -- (6,454) -- (6,454) --------- Total comprehensive income -- -- -- -- -- 16,600 Contribution of 41,500 shares to ESOP -- 151 -- -- 993 1,144 Treasury stock purchase (203,700 shares) -- -- -- -- (5,789) (5,789) Cash dividends, $ .82 per share -- -- (10,967) -- -- (10,967) -------- -------- --------- --------- --------- --------- BALANCE, DECEMBER 31, 2005 $ 1,806 $ 67,670 $ 223,710 $ 1,903 $ (25,766) $ 269,323 ======== ======== ========= ========= ========= =========
See accompanying notes. 10 2005 ANNUAL REPORT CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, --------------------------------------- (Dollar amounts in thousands, except per share data) 2005 2004 2003 - --------------------------------------------------- --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 23,054 $ 28,009 $ 26,493 Adjustments to reconcile net income to net cash provided by operating activities: Net (accretion) amortization on securities (1,462) 2,092 558 Provision for loan losses 11,698 8,292 7,455 Securities (gains) losses (571) 165 (237) Depreciation and amortization 3,363 3,184 2,883 Provision for deferred income taxes 1,716 1,648 (252) Net change in accrued interest receivable (521) 1,057 2,126 Contribution of shares to ESOP 1,144 1,163 1,256 Gains on life insurance benefit -- (4,113) -- Other, net 592 1,842 5,126 --------- --------- --------- NET CASH FROM OPERATING ACTIVITIES 39,013 43,339 45,408 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Sales of securities available-for-sale 11,376 11,466 8,308 Calls, maturities and principal reductions on securities available-for-sale 373,741 105,945 189,049 Purchases of securities available-for-sale (422,141) (55,885) (259,150) Loans made to customers, net of repayments 49,806 (44,834) (5,844) Net change in federal funds sold 2,418 450 (5,800) Purchase of bank-owned life insurance (5,000) -- -- Purchase of customer list (338) -- -- Proceeds from life insurance benefit -- 7,267 -- Additions to premises and equipment (2,908) (4,458) (1,758) --------- --------- --------- NET CASH FROM INVESTING ACTIVITIES 6,954 19,951 (75,195) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net change in deposits 21,797 (36,226) 44,693 Net change in other short-term borrowings (49,303) 6,898 34,274 Dividends paid (10,779) (10,155) (8,845) Purchases of treasury stock (5,789) (2,330) (2,123) Proceeds from other borrowings -- 85,006 18,013 Repayments on other borrowings (18,620) (105,753) (58,070) --------- --------- --------- NET CASH FROM FINANCING ACTIVITIES (62,694) (62,560) 27,942 --------- --------- --------- NET CHANGE IN CASH AND CASH EQUIVALENTS (16,727) 730 (1,845) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 94,928 94,198 96,043 --------- --------- --------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 78,201 $ 94,928 $ 94,198 ========= ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 46,919 $ 44,979 $ 48,791 ========= ========= ========= Income taxes $ 5,413 $ 6,501 $ 8,016 ========= ========= =========
See accompanying notes. 11 FIRST FINANCIAL CORPORATION 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 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, 2005, $490.8 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 three subsidiaries. The Corporation's primary source of revenue is derived from loans to customers, primarily middle-income individuals, and investment activities. The Corporation operates 46 branches in west-central Indiana and east-central Illinois. First Financial Bank is the largest bank in Vigo County. It operates 12 full-service banking branches within the county; 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; four in Vermillion County, Indiana; one in Clark County, Illinois; one in Coles County, Illinois; three in Crawford County, Illinois; one in Jasper County, Illinois; two in Lawrence County, Illinois; two in Richland County, Illinois; one in Vermilion County, Illinois; and one in Wayne County, Illinois. It also has a main office in downtown Terre Haute and an operations center/office building in southern Terre Haute. 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 subsidiary is regulated by the Office of the Comptroller of the Currency. The state bank subsidiary is jointly regulated by the state banking organization and the Federal Deposit Insurance Corporation. SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES: To prepare financial statements in conformity with U.S. generally accepted accounting principles, 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. 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 doubt, typically when the loan is impaired or payments are significantly past due. 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. In all cases, loans are placed on non-accrual or charged-off if collection of principal or interest is considered doubtful. 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 experi- 12 2005 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ence, 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 management's 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. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans, are collectively evaluated for impairment and, accordingly, they are not separately identified for impairment disclosures. 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. FEDERAL HOME LOAN BANK (FHLB) STOCK: The Corporation is a member of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost and periodically evaluated for impairment. Because this stock is viewed as a long-term investment, impairment is based on ultimate recovery of par value. Both cash and stock dividends are reported as income. FHLB stock is included with securities. 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, and then secondarily as to loan type and investor. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Any impairment of a grouping is reported as a valuation allowance. Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income when earned. The amortization of mortgage servicing rights is netted against loan servicing fee income. 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 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. Deferred compensation and supplemental retirement plan expense allocates the benefits over years of service. DEFERRED COMPENSATION PLAN: A deferred compensation plan covers all directors. Under the plan, the Corporation pays each director, or their beneficiary, the amount of fees deferred plus interest over 10 years, beginning when the director achieves age 65. A liability is accrued for the obligation under these plans. The expense incurred for the deferred compensation for each of the last three years was $164 thousand, $160 thousand and $123 thousand, resulting in a deferred compensation liability of $2.2 million and $2.0 million as of year-end 2005 and 2004. LONG-TERM INCENTIVE PLAN: A long-term incentive plan provides for the payment of incentive rewards as a 10-year annuity to all directors and certain key officers. The plan expires December 31, 2009, and compensation expense is recognized over the service period. 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. Compensation expense for each of the last three years was $1.6 million, $1.5 million and $1.5 million, resulting in a liability of $7.3 million and $5.5 million as of year-end 2005 and 2004. 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 13 FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. 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. ADOPTION OF NEW ACCOUNTING STANDARDS: During 2005 the Corporation adopted SOP 03-3, which 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. This new standard had no effect on the Corporation's financial statements and results of operations. In May of 2005, the FASB issued statement 154, "Accounting Changes and Error Corrections," that provides guidance on reporting of accounting changes and correction of errors made in fiscal years beginning after the date of this statement. First Financial Corporation has adopted statement 154. The adoption of this statement had no effect on the financial statements included herein. In November of 2005, the FASB issued a staff position that amended FASB statement No. 115, "Accounting for Certain Investments in Debt and Equity Securities." This amendment addresses the measurement, accounting and disclosures for securities that have been recognized to be other than temporarily impaired as well as those that have not been recognized as other-than-temporarily impaired. First Financial Corporation has adopted these amendments that have had no effect on the financial statements included herein. 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, ------------------------------------------------------------ 2005 2004 ---------------------------- ---------------------------- CARRYING FAIR CARRYING FAIR (Dollar amounts in thousands) VALUE VALUE VALUE VALUE - ----------------------------- ----------- ----------- ----------- ----------- Cash and due from banks $ 78,201 $ 78,201 $ 94,928 $ 94,928 Federal funds sold 2,982 2,982 5,400 5,400 Securities available-for-sale 536,291 536,291 507,990 507,990 Loans, net 1,379,699 1,371,835 1,443,953 1,448,791 Accrued interest receivable 12,537 12,537 12,016 12,016 Deposits (1,464,918) (1,469,670) (1,443,121) (1,449,322) Short-term borrowings (26,224) (26,224) (75,527) (75,527) Federal Home Loan Bank advances (337,266) (338,849) (337,886) (341,148) Other borrowings (6,600) (6,600) (24,600) (24,600) Accrued interest payable (3,692) (3,692) (3,142) (3,142)
14 2005 ANNUAL REPORT 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 $2.1 million and $33.2 million at December 31, 2005 and 2004, respectively. 4. SECURITIES: The fair value of securities available-for-sale and related gross unrealized gains and losses recognized in accumulated other comprehensive income were as follows:
DECEMBER 31, 2005 ------------------------------------------------ UNREALIZED AMORTIZED --------------------- FAIR (Dollar amounts in thousands) COST GAINS LOSSES VALUE - ----------------------------- --------- -------- --------- -------- U.S. Government sponsored entity mortgage-backed securities and agencies $306,697 $ 787 $ (6,081) $301,403 Collateralized mortgage obligations 2,357 7 (4) 2,360 State and municipal 129,916 4,543 (414) 134,045 Corporate obligations 89,740 534 (50) 90,224 Equities 4,410 3,849 -- 8,259 -------- -------- -------- -------- TOTAL $533,120 $ 9,720 $ (6,549) $536,291 ======== ======== ======== ========
DECEMBER 31, 2004 ------------------------------------------------ UNREALIZED AMORTIZED --------------------- FAIR (Dollar amounts in thousands) COST GAINS LOSSES VALUE - ----------------------------- --------- -------- -------- -------- U.S. Government sponsored entity mortgage-backed securities and agencies $ 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 ========= ======== ======== ========
As of December 31, 2005, 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 $54.7 million and $33.0 million at December 31, 2005 and 2004, 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, 2005, 2004 and 2003, respectively.
(Dollar amounts in thousands) 2005 2004 2003 - ----------------------------- -------- -------- -------- Proceeds $ 11,376 $ 11,466 $ 8,308 Gross gains 537 409 237 Gross losses -- -- --
Additional gains of $34 thousand in 2005 and $47 thousand in 2004 resulted from redemption premiums on called securities. 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. There were no securities considered to be other-than-temporarily impaired at December 31, 2005. 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 by $621 thousand to its fair value and subsequently sold the security. 15 FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Contractual maturities of debt securities at year-end 2005 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 $ 42,057 $ 42,304 Due after one but within five years 104,704 107,242 Due after five but within ten years 35,626 37,450 Due after ten years 45,973 46,095 -------- -------- 228,360 233,091 Mortgage-backed securities and equities 304,760 303,200 -------- -------- TOTAL $533,120 $536,291 ======== ========
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, 2005 and 2004.
DECEMBER 31, 2005 ------------------------------------------------------------------------------ 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 sponsored entity mortgage-backed securities and agencies $206,666 $ (4,250) $ 57,222 $ (1,831) $263,888 $ (6,081) Collateralized mortgage obligations 904 (2) 1,334 (2) 2,238 (4) State and municipal obligations 14,509 (240) 8,994 (174) 23,503 (414) Corporate obligations 698 (2) 950 (48) 1,648 (50) -------- -------- -------- -------- -------- -------- Total temporarily impaired securities $222,777 $ (4,494) $ 68,500 $ (2,055) $291,277 $ (6,549) ======== ======== ======== ======== ======== ========
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 sponsored entity mortgage-backed securities and agencies $ 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) ======== ======== ======== ======== ======== ========
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 2005 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. LOANS: Loans are summarized as follows:
DECEMBER 31, ---------------------------- (Dollar amounts in thousands) 2005 2004 ----------- ----------- Commercial, financial and agricultural $ 382,214 $ 401,724 Real estate - construction 31,918 32,810 Real estate - mortgage 707,008 753,826 Installment 272,062 272,261 Lease financing 2,845 3,658 ----------- ----------- Total gross loans 1,396,047 1,464,279 Less: unearned income (306) (408) Allowance for loan losses (16,042) (19,918) ----------- ----------- TOTAL $ 1,379,699 $ 1,443,953 =========== ===========
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 2005 the aggregate dollar amount of these loans to directors and executive officers who held office at the end of the year amounted to $34.1 million at the beginning of the year. During 2005, advances of $19.6 million, repayments of $30.5 million and changes to persons included of $(1.2) million were made with respect to related party loans for an aggregate dollar amount outstanding of $22.0 million at December 31, 2005. Loans serviced for others, which are not reported as assets, total $416.6 million and $391.9 million at year-end 2005 and 2004. Activity for capitalized mortgage servicing rights (included in other assets) and the related valuation allowance was as follows:
DECEMBER 31, --------------------------------- (Dollar amounts in thousands) 2005 2004 2003 - ----------------------------- ------- ------- ------- Servicing rights: Beginning of year $ 2,960 $ 3,114 $ 2,548 Additions 735 631 1,961 Amortized to expense (764) (785) (1,395) ------- ------- ------- End of year $ 2,931 $ 2,960 $ 3,114 ======= ======= ======= Valuation allowance: Beginning of year $ -- $ 200 $ 500 Reductions credited to expense -- (200) (300) ------- ------- ------- End of year $ -- $ -- $ 200 ======= ======= =======
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) 2005 2004 2003 - ----------------------------- -------- -------- -------- Balance at beginning of year $ 19,918 $ 21,239 $ 21,249 Provision for loan losses 11,698 8,292 7,455 Recoveries of loans previously charged off 1,918 1,771 1,475 Loans charged off (17,492) (11,384) (8,940) -------- -------- -------- BALANCE AT END OF YEAR $ 16,042 $ 19,918 $ 21,239 ======== ======== ========
17 FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Impaired loans were as follows:
DECEMBER 31, ----------------------- (Dollar amounts in thousands) 2005 2004 - ----------------------------- --------- --------- Year-end loans with no allocated allowance for loan losses $ 500 $ 2,582 Year-end loans with allocated allowance for loan losses 3,622 16,240 --------- --------- TOTAL $ 4,122 $ 18,822 ========= ========= Amount of the allowance for loan losses allocated $ 1,657 $ 6,331 Nonperforming loans: Loans past due over 90 days still on accrual 6,354 7,813 Non-accrual loans 8,464 19,862
Nonperforming loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.
(Dollar amounts in thousands) 2005 2004 2003 - ----------------------------- --------- --------- --------- Average of impaired loans during the year $ 11,992 $ 14,794 $ 8,992 Interest income recognized during impairment 126 436 583 Cash-basis interest income recognized 11 315 --
It was not practicable to determine the amount of cash basis interest income recognized for 2003. 7. PREMISES AND EQUIPMENT: Premises and equipment are summarized as follows:
DECEMBER 31, ---------------------- (Dollar amounts in thousands) 2005 2004 - ----------------------------- -------- -------- Land $ 5,617 $ 5,617 Building and leasehold improvements 35,290 35,102 Furniture and equipment 29,887 27,928 -------- -------- 70,794 68,647 Less accumulated depreciation (39,524) (37,493) -------- -------- TOTAL $ 31,270 $ 31,154 ======== ========
Aggregate depreciation expense was $2.79 million, $2.62 million and $2.24 million for 2005, 2004 and 2003, respectively. 8. GOODWILL AND INTANGIBLE ASSETS: The Corporation completed its annual impairment testing of goodwill during the second quarter of 2005. Management does not believe any amount of the goodwill is impaired. Intangible assets subject to amortization at December 31, 2005 and 2004 are as follows:
2005 2004 --------------------------- -------------------------- GROSS ACCUMULATED GROSS ACCUMULATED (Dollar amounts in thousands) AMOUNT AMORTIZATION AMOUNT AMORTIZATION - ----------------------------- --------- ------------ --------- ------------ Customer list intangible $ 3,446 $ 1,692 $ 3,108 $ 1,390 Core deposit intangible 2,193 1,117 2,193 939 Non-compete agreements 500 470 500 379 --------- --------- --------- --------- $ 6,139 $ 3,279 $ 5,801 $ 2,708 ========= ========= ========= =========
Aggregate amortization expense was $571 thousand, $558 thousand and $638 thousand for 2005, 2004 and 2003, respectively. Estimated amortization expense for the next five years is as follows:
In thousands 2006 $ 497 2007 425 2008 425 2009 425 2010 425
18 2005 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. DEPOSITS Scheduled maturities of time deposits for the next five years are as follows:
2006 $ 348,575 2007 166,817 2008 75,671 2009 32,139 2010 18,094
10. SHORT-TERM BORROWINGS A summary of the carrying value of the Corporation's short-term borrowings at December 31, 2005 and 2004 is presented below:
(Dollar amounts in thousands) 2005 2004 - ----------------------------- --------- --------- Federal funds purchased $ 19,032 $ 69,002 Repurchase agreements 5,579 5,597 Other short-term borrowings 1,613 928 --------- --------- $ 26,224 $ 75,527 ========= =========
(Dollar amounts in thousands) 2005 2004 - ----------------------------- --------- --------- Average amount outstanding $ 25,927 $ 71,745 Maximum amount outstanding at a month end 54,808 103,386 Average interest rate during year 3.16% 1.46% Interest rate at year-end 3.77% 2.34%
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, 2005 and 2004 are summarized as follows:
(Dollar amounts in thousands) 2005 2004 - ----------------------------- --------- --------- FHLB advances $ 337,266 $ 337,886 Note payable to a financial institution -- 18,000 City of Terre Haute, Indiana economic development revenue bonds 6,600 6,600 --------- --------- TOTAL $ 343,866 $ 362,486 ========= =========
The aggregate minimum annual payments of other borrowings are as follows:
2006 $ 8,665 2007 766 2008 52,632 2009 22,916 2010 257,594 Thereafter 1,293 ---------- $ 343,866 ==========
19 FIRST FINANCIAL CORPORATION 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 $337.3 million at December 31, 2005, accrue interest, payable monthly, at annual rates, primarily fixed, varying from 3.28% to 6.60% with a weighed average rate of 5.46%. 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 $129.9 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, 2004, 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 could not exceed $20 million. The Note was paid off in the third quarter of 2005. The Note bore an interest rate equal to the average daily federal funds rate plus 0.875% and adjusted daily. The Note was unsecured but required the Corporation to meet certain financial covenants. The Corporation complied with all its debt covenants. These covenants included maintaining a primary capital-to-assets ratio higher than 6.2%, net income that exceeded a 0.6% return on average assets, an allowance for loan and lease losses that did not fall below .75% of gross loans and dividend declarations that were not in excess of 42% of net income. The economic development revenue bonds (bonds) require periodic interest payments each year until maturity or redemption. The interest rate, which was 3.58% at December 31, 2005, and 2.0% at December 31, 2004, 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 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, 2005 and 2004, the Corporation was in compliance with all of its debt covenants. 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, 2005, 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. 12. INCOME TAXES: Income tax expense is summarized as follows:
(Dollar amounts in thousands) 2005 2004 2003 - ----------------------------- --------- --------- --------- Federal: Currently payable $ 6,202 $ 5,884 $ 8,046 Deferred 1,334 1,282 (544) --------- --------- --------- 7,536 7,166 7,502 State: Currently payable (5) 467 1,052 Deferred 382 366 292 --------- --------- --------- 377 833 1,344 --------- --------- --------- TOTAL $ 7,913 $ 7,999 $ 8,846 ========= ========= =========
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) 2005 2004 2003 - ----------------------------- --------- --------- --------- Federal income taxes computed at the statutory rate $ 10,839 $ 12,603 $ 12,369 Add (deduct) tax effect of: Tax exempt income (2,902) (4,889) (3,738) State tax, net of federal benefit 245 541 873 Affordable housing credits (327) (327) (507) Other, net 58 71 (151) --------- --------- --------- TOTAL $ 7,913 $ 7,999 $ 8,846 ========= ========= =========
20 2005 ANNUAL REPORT 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, 2005 and 2004, are as follows:
(Dollar amounts in thousands) 2005 2004 - ----------------------------- ------------- ------------- Deferred tax assets: Loan losses provision $ 6,454 $ 7,927 Deferred compensation 4,012 3,417 Compensated absences 494 481 Post-retirement benefits 920 698 State net operating loss carry forward 78 243 Other 981 929 ------------- ------------- GROSS DEFERRED ASSETS 12,939 13,695 ============= ============= Deferred tax liabilities: Net unrealized gains on securities available-for-sale (1,268) (5,571) Depreciation (1,440) (1,512) Federal Home Loan Bank stock dividends (1,519) (1,221) Mortgage servicing rights (1,176) (1,176) Pensions (2,394) (2,048) Other (3,012) (2,624) ------------- ------------- GROSS DEFERRED LIABILITIES (10,809) (14,152) ------------- ------------- NET DEFERRED TAX ASSETS (LIABILITIES) $ 2,130 $ (457) ============= =============
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 $270.0 million and $245.9 million as of December 31, 2005 and 2004. In addition, the Corporation had outstanding commitments of $6.9 million and $5.3 million under commercial letters of credit as of December 31, 2005 and 2004, 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. Commitment and contingent liabilities are summarized as follows at December 31:
(Dollar amounts in thousands) 2005 2004 - ----------------------------- ------------- ------------- Home equity $ 32,338 $ 32,523 Credit card lines 46,276 52,695 Commercial operating lines 24,270 15,937 Other commitments 169,226 147,871 ------------- ------------- $ 272,110 $ 249,026 Commercial letters of credit 6,933 5,319
The majority of commercial operating lines and home equity lines are variable rate, while the majority of other commitments to fund loans are fixed rate. Since many commitments to make loans expire without being used, these amounts do not necessarily represent future cash commitments. Collateral obtained upon exercise of the commitment is determined using management's credit evaluation of the borrower, and may include accounts receivable, inventory, property, land and other items. The approximate duration of these commitments is generally one year or less. 21 FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 $1.41 million, $1.42 million and $1.55 million in 2005, 2004 and 2003. The Corporation contributed $1.14 million, $1.16 million and $1.26 million to the ESOP in 2005, 2004 and 2003. The Corporation uses a measurement date of December 31, 2005. Pension expense included the following components:
(Dollar amounts in thousands) 2005 2004 2003 - ----------------------------- ------------- ------------- ------------- Service cost -- benefits earned $ 2,725 $ 2,508 $ 2,166 Interest cost on projected benefit obligation 2,451 2,168 2,025 Expected return on plan assets (3,285) (2,799) (2,334) Net amortization and deferral 229 227 240 ------------- ------------- ------------- Total pension expense $ 2,120 $ 2,104 $ 2,097 ============= ============= =============
The following information sets forth the change in projected 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) 2005 2004 - ----------------------------- ------------- ------------- Change in benefit obligation: Benefit obligation at January 1 $ 42,820 $ 36,300 Service cost 2,725 2,508 Interest cost 2,451 2,168 Actuarial (gain) loss (1,831) 3,102 Benefits paid (3,624) (1,258) ------------- ------------- Benefit obligation at December 31 42,541 42,820 ------------- ------------- Reconciliation of fair value of plan assets: Fair value of plan assets at January 1 41,007 34,665 Actual return on plan assets (5,445) 5,017 Employer contributions 2,550 2,583 Benefits paid (3,624) (1,258) ------------- ------------- Fair value of plan assets at December 31 34,488 41,007 ------------- ------------- Funded status: Funded status at December 31 (8,053) (1,813) Unrecognized prior service cost (158) (177) Unrecognized net actuarial cost 14,214 7,562 ------------- ------------- Prepaid pension asset recognized in the consolidated balance sheets $ 6,003 $ 5,572 ============= =============
22 2005 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The accumulated benefit obligation for the defined benefit pension plan was $34,206 and $37,202 at year-end 2005 and 2004. Principal assumptions used: Discount rate 5.50% 5.75% Rate of increase in compensation levels 3.75 3.75 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. PLAN ASSETS -- The Corporation's pension plan weighted-average asset allocation for the years 2005 and 2004 by asset category are as follows:
PENSION PLAN ESOP PENSION PLAN ESOP PERCENTAGE OF PLAN PERCENTAGE OF PLAN TARGET ALLOCATION TARGET ALLOCATION ASSETS AT DECEMBER 31, ASSETS AT DECEMBER 31, ASSET CATEGORY 2006 2006 2005 2004 2005 2004 - -------------- ----------------- ----------------- ---------------------- ---------------------- Equity securities 40-60% 100-100% 64% 63% 99% 99% Debt securities 40-60 0-0 35 35 0 0 Other 0-0 0-0 1 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 $22.1 million (64 percent of total plan assets) and $30.7 million (75 percent of total plan assets) at December 31, 2005 and 2004, respectively. CONTRIBUTIONS -- The Corporation expects to contribute $1.5 million to its pension plan and $1.2 million to its ESOP in 2006. ESTIMATED FUTURE PAYMENTS -- The following benefit payments, which reflect expected future service, are expected:
PENSION BENEFITS (Dollar amounts in thousands) 2006 $ 436 2007 512 2008 595 2009 708 2010 853 2011--2015 6,725
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. Expenses related to the plan were $193 thousand in 2005 and $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 $618 thousand after five years, which reflects expected future service. The plan is unfunded and has a measurement date of December 31. 23 FIRST FINANCIAL CORPORATION 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, 2005. Accrued post-retirement benefits as of December 31, 2005 and 2004 are as follows:
DECEMBER 31, -------------------------------- (Dollar amounts in thousands) 2005 2004 - ----------------------------- ------------- ------------- Change in benefit obligation: Benefit obligation at January 1 $ 6,021 $ 4,284 Service cost 141 83 Interest cost 319 243 Plan participants' contributions 143 119 Actuarial (gain) loss (736) 1,681 Benefits paid (388) (389) ------------- ------------- Benefit obligation at December 31 $ 5,500 $ 6,021 ============= ============= Reconciliation of funded status: Funded status $ 5,500 $ 6,021 Unrecognized transition obligation (482) (543) Unrecognized net gain (loss) (2,726) (3,712) ------------- ------------- Accrued benefit cost $ 2,292 $ 1,766 ============= =============
The post-retirement benefits paid in 2005 and 2004 of $388 thousand and $389 thousand, respectively, were fully funded by company and participant contributions. There were no other changes to plan assets in 2005 and 2004. Weighted-average assumptions as of December 31:
DECEMBER 31, ---------------------- 2005 2004 ---- ---- Discount rate 5.50% 5.50% 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) 2005 2004 2003 - ----------------------------- ------------ ------------ ------------ Service cost $ 141 $ 83 $ 102 Interest cost 319 243 252 Amortization of transition obligation 60 60 60 Recognized actuarial loss 250 137 120 ------------ ------------ ------------ Net periodic benefit cost $ 770 $ 523 $ 534 ============ ============ ============
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 $ 58 $ (42) Effect on post-retirement benefit obligation 127 (113)
CONTRIBUTIONS -- The Corporation expects to contribute $294 thousand to its other post-retirement benefit plan in 2006. 24 2005 ANNUAL REPORT 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) 2006 $ 294 2007 312 2008 324 2009 338 2010 355 2011--2015 2,047
15. OTHER COMPREHENSIVE INCOME (LOSS): Other comprehensive loss components and related taxes were as follows:
DECEMBER 31, --------------------------------------------------- (Dollar amounts in thousands) 2005 2004 2003 - ----------------------------- ------------- ------------- ------------- Unrealized holding gains and (losses) on securities available-for-sale $ (10,186) $ (5,347) $ (4,450) Reclassification adjustments for (gains) and losses later recognized in income (571) 165 (237) ------------- ------------- ------------- Net unrealized gains and losses (10,757) (5,182) (4,687) Tax effect 4,303 2,076 1,874 ------------- ------------- ------------- Other comprehensive income (loss) $ (6,454) $ (3,106) $ (2,813) ============= ============= =============
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, 2005, approximately $25.8 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, 2005 and 2004, that the Corporation meets all capital adequacy requirements to which it is subject. As of December 31, 2005, the most recent notification from the respective regulatory agencies categorized the subsidiary banks as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the banks 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 banks' 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 2005 and 2004. 25 FIRST FINANCIAL CORPORATION 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 -- 2005 $ 273,207 16.99% $ 128,637 8.0% N/A N/A Corporation -- 2004 269,405 16.55% 130,239 8.0% N/A N/A First Financial Bank -- 2005 262,282 17.09% 122,804 8.0% 153,506 10.0% First Financial Bank -- 2004 243,390 17.09% 113,956 8.0% 142,445 10.0% TIER I RISK-BASED CAPITAL Corporation -- 2005 $ 257,165 15.99% $ 64,319 4.0% N/A N/A Corporation -- 2004 249,487 15.32% 65,120 4.0% N/A N/A First Financial Bank -- 2005 248,727 16.20% 61,402 4.0% 92,103 6.0% First Financial Bank -- 2004 227,880 16.00% 56,978 4.0% 85,467 6.0% TIER I LEVERAGE CAPITAL Corporation -- 2005 $ 257,165 11.89% $ 86,532 4.0% N/A N/A Corporation -- 2004 249,487 11.42% 87,391 4.0% N/A N/A First Financial Bank -- 2005 248,727 11.94% 83,355 4.0% 104,194 5.0% First Financial Bank -- 2004 227,880 11.82% 77,143 4.0% 96,429 5.0%
17. PARENT COMPANY CONDENSED FINANCIAL STATEMENTS: The parent company's condensed balance sheets as of December 31, 2005 and 2004, and the related condensed statements of income and cash flows for each of the three years in the period ended December 31, 2005, are as follows: CONDENSED BALANCE SHEETS
DECEMBER 31, ------------------------------- (Dollar amounts in thousands) 2005 2004 - ----------------------------- ------------- ------------- ASSETS Cash deposits in affiliated banks $ 8,364 $ 9,710 Investments in subsidiaries 267,335 282,435 Land and headquarters building, net 6,244 6,156 Other 8,613 9,709 ------------- ------------- TOTAL ASSETS $ 290,556 $ 308,010 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES Borrowings $ 10,636 $ 28,636 Dividends payable 5,603 5,414 Other liabilities 4,994 5,625 ------------- ------------- TOTAL LIABILITIES 21,233 39,675 SHAREHOLDERS' EQUITY 269,323 268,335 ------------- ------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 290,556 $ 308,010 ============= =============
26 2005 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONDENSED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, ------------------------------------------------ (Dollar amounts in thousands) 2005 2004 2003 - ----------------------------- ------------ ------------- ------------- Dividends from subsidiaries $ 33,828 $ 13,670 $ 12,418 Other income 1,013 967 1,006 Interest on borrowings (943) (703) (663) Other operating expenses (3,017) (2,931) (2,759) ------------ ------------- ------------- Income before income taxes and equity in undistributed earnings of subsidiaries 30,881 11,003 10,002 Income tax benefit 1,177 909 907 ------------ ------------- ------------- Income before equity in undistributed earnings of subsidiaries 32,058 11,912 10,909 Equity in undistributed earnings of subsidiaries (9,004) 16,097 15,584 ------------ ------------- ------------- Net income $ 23,054 $ 28,009 $ 26,493 ============ ============= =============
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, ------------------------------------------------ (Dollar amounts in thousands) 2005 2004 2003 - ----------------------------- ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 23,054 $ 28,009 $ 26,493 Adjustments to reconcile net income to net cash provided by operating activities: Provision for depreciation and amortization 258 206 215 Equity in undistributed earnings of subsidiaries 9,004 (16,097) (15,584) Contribution of shares to ESOP 1,144 1,163 1,256 Increase (decrease) in other liabilities 479 416 1,626 (Increase) decrease in other assets (392) 869 852 ------------ ------------ ------------ NET CASH FROM OPERATING ACTIVITIES 33,547 14,566 14,858 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of furniture and fixtures (325) -- (34) ------------ ------------ ------------ NET CASH FROM INVESTING ACTIVITIES (325) -- (34) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from borrowings -- -- 18,236 Principal payments on long-term borrowings (18,000) -- (19,500) Purchase of treasury stock (5,789) (2,330) (2,123) Dividends paid (10,779) (10,155) (8,845) ------------ ------------ ------------ NET CASH FROM FINANCING ACTIVITIES (34,568) (12,485) (12,232) ------------ ------------ ------------ NET (DECREASE) INCREASE IN CASH (1,346) 2,081 2,592 CASH, BEGINNING OF YEAR 9,710 7,629 5,037 ------------ ------------ ------------ CASH, END OF YEAR $ 8,364 $ 9,710 $ 7,629 ============ ============ ============ Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 938 $ 678 $ 663 ============ ============ ============ Income taxes $ 5,413 $ 6,501 $ 8,016 ============ ============ ============
27 FIRST FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 18. SELECTED QUARTERLY DATA (UNAUDITED)
2005 ------------------------------------------------------------------------- NET PROVISION INTEREST INTEREST INTEREST FOR LOAN NET NET INCOME (Dollar amounts in thousands) INCOME EXPENSE INCOME LOSSES INCOME PER SHARE - ----------------------------- -------- -------- -------- --------- -------- ---------- March 31 $ 29,365 $ 11,022 $ 18,343 $ 2,223 $ 6,311 $ .48 June 30 $ 29,776 $ 11,498 $ 18,278 $ 3,783 $ 4,992 $ .37 September 30 $ 30,893 $ 12,208 $ 18,685 $ 2,608 $ 6,323 $ .46 December 31 $ 31,613 $ 12,741 $ 18,872 $ 3,084 $ 5,428 $ .41
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. ---------- 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, 2005 and 2004, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2005. 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, 2005 and 2004, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of First Financial Corporation's internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report, dated February 21, 2006, expressed an unqualified opinion thereon. /s/ Crowe Chizek and Company LLC Indianapolis, Indiana February 21, 2006 28 2005 ANNUAL REPORT REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING To the Shareholders and Board of Directors of First Financial Corporation: We have audited management's assessment, included in the accompanying "Report on Internal Control Over Financial Reporting," that First Financial Corporation (Corporation) maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in "Internal Control--Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). First Financial Corporation's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Corporation's internal control over financial reporting based on our audit. We conducted our audit 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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U. S. generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management's assessment that First Financial Corporation maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on criteria established in "Internal Control--Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also in our opinion, First Financial Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in "Internal Control--Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets as of December 31, 2005 and 2004, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2005 of First Financial Corporation and our report dated February 21, 2006 expressed an unqualified opinion. /s/ Crowe Chizek and Company LLC Indianapolis, Indiana February 21, 2006 29 FIRST FINANCIAL CORPORATION MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING The management of First Financial Corporation (the "Corporation") has prepared and is responsible for the preparation and accuracy of the consolidated financial statements and related financial information included in the Annual Report. The management of the Corporation is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Corporation's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Corporation's internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Corporation; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Corporation are being made only in accordance with authorizations of management and directors of the Corporation; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Corporation's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the Corporation's system of internal control over financial reporting as of December 31, 2005, in relation to criteria for effective internal control over financial reporting as described in "Internal Control--Integrated Framework," issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concluded that, as of December 31, 2005, its system of internal control over financial reporting is effective and meets the criteria of the "Internal Control--Integrated Framework." Crowe Chizek and Company LLC, independent registered public accounting firm, has issued an attestation report dated February 21, 2006 on management's assessment of the Corporation's internal control over financial reporting. MANAGEMENT'S DISCUSSION AND ANALYSIS Management's discussion and analysis reviews the financial condition of First Financial Corporation at December 31, 2005 and 2004, and the results of its operations for the three years ended December 31, 2005. 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. 30 2005 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS First Financial Corporation (the Corporation) is a financial services company. The Corporation, which is headquartered in Terre Haute, Ind., offers a wide variety of financial services including commercial, mortgage and consumer lending, lease financing, trust account services and depositor services through its three subsidiaries. At the close of business in 2005 the Corporation and its subsidiaries had 808 full-time equivalent employees. First Financial Bank is the largest bank in Vigo County, Ind. It operates 12 full-service banking branches within the county; five in Clay County, Ind.; one in Greene County, Ind.; two in Knox County, Ind.; five in Parke County, Ind.; five in Sullivan County, Ind.; four in Vermillion County, Ind.; one in Clark County, Ill.; one in Coles County, Ill.; three in Crawford County, Ill.; one in Jasper County, Ill.; two in Lawrence County, Ill.; two in Richland County, Ill.; one in Vermilion County, Ill.; and one in Wayne County, Ill. 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. First Financial Bank and Morris Plan face competition from other financial institutions. These competitors consist of commercial banks, a mutual savings bank and other financial institutions, including consumer finance companies, insurance companies, brokerage firms and credit unions. 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. 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 62 professionals and over 85 years of successful service to both businesses and 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 FIRST FINANCIAL CORPORATION RESULTS OF OPERATIONS -- SUMMARY FOR 2005 Net income for 2005 was $23.1 million, or $1.72 per share. This represents a 17.7% decrease in net income and a 16.9% decrease in earnings per share, compared to 2004. 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 increased $2 million to $74.2 million in 2005. Total average interest-earning assets decreased to $2.01 billion in 2005 from $2.04 billion in 2004. The tax-equivalent yield on these assets increased to 6.28% in 2005 from 6.00% in 2004. Total average interest-bearing liabilities of $1.74 billion in 2004 decreased to $1.71 billion in 2005. The average cost of these interest-bearing liabilities increased to 2.77% in 2005 from 2.56% in 2004. The net interest margin increased from 3.81% in 2004 to 3.92% in 2005. This increase is primarily the result of the increased yield on earning assets having a larger impact than the increased cost of interest-bearing liabilities. Earning assets yields increased 28 basis points while the cost of interest-bearing liabilities increased by 21 basis points. The costs of funding earning assets were reduced as more funding was provided by lower cost deposits, including non-interest bearing deposits, than borrowings in 2005 compared to 2004. The following table sets forth the components of net interest income due to changes in volume and rate. The table information compares 2005 to 2004 and 2004 to 2003.
2005 COMPARED TO 2004 2004 COMPARED TO 2003 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) $ (726) $ 4,592 $ (37) $ 3,829 $ 2,473 $(7,717) $ (194) $(5,438) securities (564) 2,129 (78) 1,487 (541) 147 (5) (399) Tax-exempt investment securities(2) (835) (947) 56 (1,726) (1,593) (413) 42 (1,964) Federal funds sold 212 45 189 446 (25) 47 (24) (2) ------- ------- ------- ------- ------- ------- ------- ------- Total interest income (1,913) 5,819 130 4,036 (314) (7,936) (181) (7,803 ------- ------- ------- ------- ------- ------- ------- ------- Interest paid on interest-bearing liabilities: Transaction accounts 206 2,804 149 3,159 460 (816) (87) (443) Time deposits 16 314 -- 330 (2,298) (544) 55 (2,787) Short-term borrowings (653) 1,169 (750) (234) 448 68 70 586 Other borrowings (1,054) 614 (32) (472) (847) (50) 2 (895) ------- ------- ------- ------- ------- ------- ------- ------- Total interest expense (1,485) 4,901 (633) 2,783 (2,237) (1,342) 40 (3,539) ------- ------- ------- ------- ------- ------- ------- ------- Net interest income $ (428) $ 918 $ 763 $ 1,253 $ 2,551 $(6,594) $ (221) $(4,264) ======= ======= ======= ======= ======= ======= ======= =======
(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 2005 ANNUAL REPORT RESULTS OF OPERATIONS -- SUMMARY FOR 2005 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, 2005, the provision for loan losses was $11.7 million, an increase of $3.4 million, or 41.1%, compared to 2004. 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 2005 were $15.6 million as compared to $9.6 million for 2004, classified credits were reduced by $12.5 million, or 17.3%, from prior year totals and nonperforming loans decreased by $13.2 million. During the year commercial and real estate credits were identified for sale and written down to realizable value. This caused both an increase in provision for loan losses as well as decreased nonperforming loans and classified credits. Changes in bankruptcy statutes increased the amount of charge-offs of consumer credits in the second half of 2005. At December 31, 2005, the resulting allowance for loan losses was $16.0 million or 1.15% of total loans, net of unearned income. A year earlier the allowance was $19.9 million or 1.36% of total loans. NON-INTEREST INCOME Non-interest income of $32.0 million decreased $3.8 million from the $35.8 million earned in 2004. Excluding the $4.1 million non-taxable gain on life insurance benefit realized in 2004, the non-interest income is up by $384 thousand. Increased gains on loan and security sales were partially offset by reduced income from insurance commissions and trust fees. NON-INTEREST EXPENSES Non-interest expenses totaled $63.5 million for 2005 compared to $63.7 million for 2004. Salaries and employee benefits increased $741 thousand or 2.0%. Occupancy expense decreased 2.8% or $108 thousand while equipment expense increased by 7.7% or $276 thousand. All other expenses decreased to $17.3 million from $18.3 million in 2004. Consolidation of affiliate banks, which has contributed to the control of non-interest expenses, was completed in the third quarter of 2005. INCOME TAXES The Corporation's federal income tax provision was $7.9 million in 2005 compared to a provision of $8.0 million in 2004. The overall effective tax rate in 2004 of 22.2% compares to a 2005 effective rate of 25.6%. The life insurance benefit received in 2004 was not subject to income tax, thereby reducing the effective tax rate. COMPARISON OF 2004 TO 2003 Net income for 2004 was $28.0 million or $2.07 per share compared to $26.5 million in 2003 or $1.95 per share. This increased income was primarily the result of increased non-interest income in 2004 from a gain on life insurance benefit of $4.1 million. Total average interest-earning assets decreased $1.8 million in 2004 from $2.04 billion in 2003. The tax equivalent net interest margin decreased to 3.81% in 2004 from 4.02% in 2003. 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 increased $837 thousand from $7.5 million in 2003 to $8.3 million in 2004, and net charge-offs increased $2.1 million from $7.5 million in 2003 to $9.6 million in 2004. There was a $3.7 million improvement in net non-interest income and expense from 2003 to 2004. Non-interest expenses increased $1.2 million while non-interest income increased $4.9 million. The majority of this increase in non-interest income was the result of the gain on life insurance benefit of $4.1 million realized in 2004. The provision for income taxes fell $847 thousand from 2003 to 2004, reducing the effective tax rate from 25.0% in 2003 to 22.2% in 2004. This decrease in the effective tax rate was the result of the increase in non-taxable income from the gain on life insurance benefit realized in 2004. Without this gain the effective tax rate would have been 25.1%. 33 FIRST FINANCIAL CORPORATION FINANCIAL CONDITION -- SUMMARY The Corporation's total assets decreased 2.2% or $47.1 million at December 31, 2005, from a year earlier. Available-for-sale securities increased $28.3 million at December 31, 2005, from the previous year. Loans, net of unearned income, decreased by $68.3 million, to $1.40 billion. Deposits increased $21.8 million while borrowings decreased by $67.9 million. Total shareholders' equity increased $988 thousand to $269.3 million at December 31, 2005. Net income was partially offset by higher dividends and the continued repurchase of corporate stock. The Corporation had higher purchases of treasury stock in 2005, acquiring 203,700 shares at a cost of $5.8 million compared to 79,000 shares during 2004 at a cost of $2.3 million. There were also 41,500 shares from the treasury with a value of $1.14 million that were contributed to the ESOP plan. Increased interest rates reduced other comprehensive income as the Corporation recorded a net unrealized loss on available-for-sale securities of $6.5 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-temporarily 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 2005 the portfolio's balance increased by 5.57%. During 2005 the Federal Reserve increased the fed funds rate by 2.00% to 4.25%. The average life of the portfolio was extended from 4.00 years to 4.36 years. The portfolio structure will continue to provide cash flows to be reinvested during 2006. 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 ---------------------------------------------------------------------------- 2005 (Dollar amounts in thousands) BALANCE RATE BALANCE RATE BALANCE RATE BALANCE RATE TOTAL - -------------------------------------- ------- ---- -------- ---- -------- ---- ------- ---- ------- U.S. government sponsored entity mortgage-backed securities and agencies $11,759 4.28% $284,815 4.56% $ 4,829 5.50% -- --% $301,403 Collateralized mortgage obligations(1) 2,215 4.22 145 9.73 -- -- -- -- 2,360 States and political subdivisions 29,760 4.24 66,383 3.25 34,591 1.63 3,311 3.31 134,045 Corporate obligations 6,679 4.88 37,901 5.75 2,860 5.41 42,784 5.09 90,224 ------- -------- ------- ------ -------- Total 50,413 4.33 389,244 4.45 42,280 2.33 46,095 4.96 528,032 ------- -------- ------- ------ -------- Equities -- -- -- -- -- -- 8,259 -- 8,259 ------- -------- ------- ------ -------- TOTAL $50,413 $389,244 $42,280 $54,354 $536,291 ======= ======== ======= ======= ========
(1) Distribution of maturities is based on the estimated average life of the asset. 34 2005 ANNUAL REPORT 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 year end 2005 are set forth in the following analyses.
(Dollar amounts in thousands) 2005 2004 2003 2002 2001 - -------------------------------------- ---------- ---------- --------- ---------- ---------- LOAN CATEGORY Commercial, financial and agricultural $ 382,214 $ 401,724 $ 374,638 $ 331,316 $ 302,496 Real estate - construction 31,918 32,810 35,361 42,930 34,610 Real estate - mortgage 707,008 753,826 766,911 789,618 757,345 Installment 272,062 272,261 248,290 268,067 249,710 Lease financing 2,845 3,658 4,884 1,281 5,023 ---------- ---------- ---------- ---------- ---------- TOTAL $1,396,047 $1,464,279 $1,430,084 $1,433,212 $1,349,184 ========== ========== ========== ========== ==========
AFTER ONE WITHIN BUT WITHIN AFTER FIVE (Dollar amounts in thousands) ONE YEAR FIVE YEARS YEARS TOTAL - ----------------------------- -------- ---------- ---------- --------- MATURITY DISTRIBUTION Commercial, financial and agricultural $197,534 $151,941 $32,739 $ 382,214 Real estate - construction 17,342 7,740 6,836 31,918 -------- -------- ------- ---------- TOTAL $214,876 $159,681 $39,575 414,132 ======== ======== ======= Real estate - mortgage 707,008 Installment 272,062 Lease financing 2,845 ---------- TOTAL $1,396,047 ========== Loans maturing after one year with: Fixed interest rates $ 59,011 $34,335 Variable interest rates 100,670 5,240 -------- ------- TOTAL $159,681 $39,575 ======== =======
35 FIRST FINANCIAL CORPORATION 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) 2005 2004 2003 2002 2001 - ------------------------------------------- ---- ---- ---- ---- ---- Amount of loans outstanding at December 31, $1,396,047 $1,464,279 $1,430,084 $1,433,212 $1,349,184 ========== ========== ========== ========== ========== Average amount of loans by year $1,441,247 $1,452,572 $1,417,026 $1,432,290 $1,315,725 ========== ========== ========== ========== ========== Allowance for loan losses at beginning of year $ 19,918 $ 21,239 $ 21,249 $ 18,313 $ 19,072 Addition resulting from acquisition -- -- -- 1,711 -- Loans charged off: Commercial, financial and agricultural 6,093 4,080 2,253 4,627 4,079 Real estate - mortgage 2,590 623 1,101 892 557 Installment 8,809 6,680 5,586 4,619 4,395 Leasing -- 1 -- -- 12 ---------- ---------- ---------- ---------- ---------- Total loans charged off 17,492 11,384 8,940 10,138 9,043 ---------- ---------- ---------- ---------- ---------- Recoveries of loans previously charged off: Commercial, financial and agricultural 284 452 432 840 819 Real estate - mortgage 343 37 166 110 60 Installment 1,291 1,281 877 935 790 Leasing -- 1 -- -- -- ---------- ---------- ---------- ---------- ---------- Total recoveries 1,918 1,771 1,475 1,885 1,669 ---------- ---------- ---------- ---------- ---------- Net loans charged off 15,574 9,613 7,465 8,253 7,374 Provision charged to expense 11,698 8,292 7,455 9,478 6,615 ---------- ---------- ---------- ---------- ---------- Balance at end of year $ 16,042 $ 19,918 $ 21,239 $ 21,249 $ 18,313 ========== ========== ========== ========== ========== Ratio of net charge-offs during period to average loans outstanding 1.08% .66% .53% .58% .56% ========== ========== ========== ========== ==========
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 2005 ANNUAL REPORT FINANCIAL CONDITION -- SUMMARY
YEARS ENDED DECEMBER 31, ------------------------------------------------------- (Dollar amounts in thousands) 2005 2004 2003 2002 2001 - -------------------------------------- ------ ------- ------- ------- ------- Commercial, financial and agricultural $ 8,148 $11,840 $13,844 $12,993 $11,151 Real estate -- mortgage 867 850 1,254 1,471 1,330 Installment 7,027 7,228 6,141 5,856 4,489 Leasing -- -- -- 15 17 Unallocated -- -- -- 914 1,326 ------- ------- ------- ------- ------- TOTAL ALLOWANCE FOR LOAN LOSSES $16,042 $19,918 $21,239 $21,249 $18,313 ======= ======= ======= ======= =======
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) 2005 2004 2003 2002 2001 - ------------------------------------ ------ ------- ------- ------- ------ Non-accrual loans $ 8,464 $19,862 $ 8,429 $11,807 $ 8,854 Restructured loans 57 430 542 546 590 Accruing loans past due over 90 days 6,354 7,813 5,384 5,899 4,925 ------- ------- ------- ------- ------- $14,875 $28,105 $14,355 $18,252 $14,369 ======= ======= ======= ======= =======
The ratio of the allowance for loan losses as a percentage of nonperforming loans was 108% at December 31, 2005, compared to 71% in 2004. The following loan categories comprise significant components of the nonperforming loans at December 31, 2005 and 2004:
(Dollar amounts in thousands) 2005 2004 - ----------------------------- ---- ---- Non-accrual loans: 1-4 family residential $ 1,118 13% $ 608 3% Commercial loans 5,888 70 17,635 89 Installment loans 1,458 17 1,619 8 ------- --- ------- --- $ 8,464 100% $19,862 100% ======= === ======= === Past due 90 days or more: 1-4 family residential $ 3,197 51% $ 3,723 47% Commercial loans 1,554 24 2,159 28 Installment loans 1,603 25 1,931 25 ------- --- ------- --- $ 6,354 100% $ 7,813 100% ======= === ======= ===
Non-performing loans were significantly reduced during 2005 as a result of sales and charge-offs of commercial credits. This also reduced the amount of the allowance for loan losses allocated to commercial loans. There are no material concentrations by industry within the nonperforming loans. 37 FIRST FINANCIAL CORPORATION 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, 2005, approximately $52.0 million of commercial loans are graded doubtful or substandard, including $8.2 million of non-accrual and past-due commercial loans listed on the previous page. This compares to $56.5 million in 2004, which included $18.7 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 The information below presents the average amount of deposits and rates paid on those deposits for 2005, 2004 and 2003.
2005 2004 2003 -------------------- ------------------ ---------------------- (Dollar amounts in thousands) AMOUNT RATE AMOUNT RATE AMOUNT RATE - -------------------------------- ---------- ----- ---------- ---- ---------- -------- Non-interest-bearing demand deposits $ 153,027 $ 150,944 $ 177,712 Interest-bearing demand deposits 294,344 .77% 259,859 .50% 231,590 .63% Savings deposits 392,791 1.21% 392,635 .65% 357,989 .80% Time deposits: $100,000 or more 185,436 3.11% 163,890 2.86% 197,946 2.87% Other time deposits 457,685 3.11% 478,706 3.04% 517,364 3.27% ---------- ---------- ---------- TOTAL $1,483,283 $1,446,034 $1,482,601 ========== ========== ==========
The maturities of certificates of deposit of $100 thousand or more outstanding at December 31, 2005, are summarized as follows:
3 months or less $ 28,602 Over 3 through 6 months 22,312 Over 6 through 12 months 22,675 Over 12 months 115,904 -------- TOTAL $189,493 ========
38 2005 ANNUAL REPORT FINANCIAL CONDITION -- SUMMARY OTHER BORROWINGS Advances from the Federal Home Loan Bank decreased to $337.3 million in 2005 compared to $337.9 million in 2004. The Asset/Liability Committee reviews these investments and funding sources 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, 2005. 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 2005 and 2004 was 47.6% and 38.1%, 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, 2005. 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 decrease .32% over the next 12 months and increase 2.26% over the following 12 months. Given a 100 basis point decrease in rates, net interest income would decrease 2.89% over the next 12 months and decrease 5.77% 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 FIRST FINANCIAL CORPORATION FINANCIAL CONDITION -- SUMMARY
PERCENTAGE CHANGE IN NET INTEREST INCOME BASIS POINT ----------------------------------------- INTEREST RATE CHANGE 12 MONTHS 24 MONTHS 36 MONTHS - -------------------- --------- --------- --------- Down 200 -6.22% -12.11% -17.45% Down 100 -2.89 -5.77 -8.50 Up 100 -0.32 2.26 5.14 Up 200 -5.44 -0.63 5.36
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 $14.3 million of investments that mature throughout the coming 12 months. The Corporation also anticipates $71.9 million of principal payments from mortgage-backed securities. Given the current rate environment, the Corporation anticipates $18.5 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, 2005, 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 $823,190 $ -- $ -- $ -- $823,190 Consumer certificates of deposit 348,575 242,488 50,233 432 641,728 Short-term borrowings 10 26,224 -- -- -- 26,224 Other borrowings 11 8,665 53,398 280,510 1,293 343,866
COMMITMENTS: The following table details the amount and expected maturities of significant commitments as of December 31, 2005. Further discussion of these commitments is included in Note 13 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 $270,017 $144,962 $125,055 Commercial letters of credit 6,933 6,933 --
Commitments to extend credit, including loan commitments, standby 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 2005 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 2005 ANNUAL REPORT CONSOLIDATED BALANCE SHEET -- AVERAGE BALANCES AND INTEREST RATES
DECEMBER 31, -------------------------------------------------------------------------------------------------- 2005 2004 2003 ------------------------------ ------------------------------ ------------------------------ 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) $1,441,247 96,957 6.73% $1,452,572 93,128 6.41% $1,417,026 98,565 6.96% Taxable investment securities 387,269 16,802 4.39 402,063 15,315 3.81 416,403 15,714 3.77 Tax-exempt investments (2) 171,802 12,248 7.13 182,727 13,974 7.65 203,021 15,938 7.85 Federal funds sold 13,772 496 3.60 2,628 50 1.90 5,129 52 .99 ---------- ------- ---- ---------- ------- ---- --------- ------- ---- Total interest-earning assets 2,014,090 126,503 6.28% 2,039,990 122,467 6.00% 2,041,579 130,269 6.38% ------- ==== ------- ==== ------- ==== Non-interest earning assets: Cash and due from banks 74,005 77,443 80,261 Premises and equipment, net 30,720 30,610 29,634 Other assets 62,779 66,177 63,753 Less allowance for loan losses (18,298) (22,052) (22,242) ---------- ---------- ---------- TOTALS $2,163,296 $2,192,168 $2,192,985 ========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing liabilities: Transaction accounts $ 687,135 7,031 1.02% $ 652,494 3,872 .59% $ 589,579 4,315 .73% Time deposits 643,121 20,153 3.13 642,596 19,823 3.08 715,310 22,610 3.16 Short-term borrowings 25,766 783 3.04 71,926 1,017 1.41 35,262 431 1.22 Other borrowings 356,728 19,502 5.47 376,600 19,974 5.30 392,540 20,869 5.32 ---------- ------- ---- ---------- ------- ---- --------- ------- ---- Total interest-bearing liabilities: 1,712,750 47,469 2.77% 1,743,616 44,686 2.56% 1,732,691 48,225 2.78% ------- ==== ------- ==== ------- ==== Non interest-bearing liabilities: Demand deposits 153,027 150,944 177,712 Other 26,942 29,519 30,441 ---------- ---------- ---------- 1,892,719 1,924,079 1,940,844 Shareholders' equity 270,577 268,089 252,141 ---------- ---------- ---------- TOTALS $2,163,296 $2,192,168 $2,192,985 ========== ========== ========== Net interest earnings $79,034 $77,781 $82,044 ======= ======= ======= Net yield on interest-earning assets 3.92% 3.81% 4.02% ==== ==== ====
(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%. FIRST FINANCIAL CORPORATION MARKET AND DIVIDEND INFORMATION At year-end 2005 shareholders owned 13,373,570 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 2005 and 2004.
2005 2004 ---------------------------- ------------------------------ TRADE PRICE CASH TRADE PRICE CASH DIVIDENDS DIVIDENDS Quarter ended HIGH LOW DECLARED HIGH LOW DECLARED - ------------- ------ ------ --------- ------ ------ --------- March 31 $34.48 $29.55 $31.49 $28.50 June 30 $29.57 $25.39 $.40 $32.43 $27.81 $.39 September 30 $31.99 $25.70 $32.91 $30.38 December 31 $28.29 $25.75 $.42 $37.07 $30.72 $.40
42 EX-21 5 c03430exv21.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. 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. EX-31.1 6 c03430exv31w1.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 officer(s) 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and l5d-15(f)) 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) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purpose in accordance with generally accepted accounting principles; (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, 2006 Norman L. Lowery, signed - ------------------------ Norman L. Lowery Vice Chairman and CEO EX-31.2 7 c03430exv31w2.txt CERTIFICATION OF 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 officer(s) 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and l5d-15(f)) 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) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purpose in accordance with generally accepted accounting principles; (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, 2006 Michael A. Carty, signed - ------------------------ Michael A. Carty Secretary, Treasurer and CFO EX-32.1 8 c03430exv32w1.txt 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, 2005 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, 2006 Norman L. Lowery, signed - ------------------------ Norman L. Lowery EX-32.2 9 c03430exv32w2.txt 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, 2005 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, 2006 Michael A. Carty, signed - ------------------------ Michael A. 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