.
.
.
2003 ANNUAL REPORT
FIVE YEAR COMPARISON OF SELECTED FINANCIAL DATA
(Dollar amounts in thousands,
except per share amounts) 2003 2002 2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA:
Total assets $2,223,057 $2,169,748 $2,041,905 $2,043,267 $1,905,201
Securities 567,733 511,548 463,509 568,405 594,319
Net loans 1,429,525 1,432,564 1,348,461 1,298,006 1,191,898
Deposits 1,479,347 1,434,654 1,313,656 1,322,559 1,256,115
Borrowings 451,862 457,645 480,674 507,771 445,821
Shareholders' equity 255,279 241,971 217,511 191,223 168,682
INCOME STATEMENT DATA:
Interest income 122,661 136,262 144,673 146,417 133,576
Interest expense 48,225 58,086 74,125 80,583 66,815
Net interest income 74,436 78,176 70,548 65,834 66,761
Provision for loan losses 7,455 9,478 6,615 4,392 4,725
Other income 30,819 30,468 21,468 13,610 12,012
Other expenses 62,461 63,317 53,329 42,703 43,543
Net income 26,493 28,640 24,196 23,213 21,622
PER SHARE DATA:
Net income 1.95 2.10 1.78 1.72 1.55
Cash dividends .70 .62 .57 .54 .47
PERFORMANCE RATIOS:
Net income to average assets 1.21% 1.30% 1.19% 1.18% 1.16%
Net income to average
shareholders' equity 10.57 12.01 11.33 12.98 12.55
Average total capital
to average assets 12.45 11.73 11.38 9.97 10.13
Average shareholders' equity
to average assets 11.43 10.80 10.46 9.10 9.28
Dividend payout 35.88 29.57 32.28 31.19 30.10
FIRST FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31,
---------------------------------
(Dollar amounts in thousands, except per share data) 2003 2002
- -----------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 94,198 $ 96,043
Federal funds sold 5,850 50
Available-for-sale securities 567,733 511,548
Loans, net of allowance of $21,239 in 2003 and $21,249 in 2002 1,408,286 1,411,315
Accrued interest receivable 13,073 15,199
Premises and equipment, net 29,322 29,809
Bank-owned life insurance 50,279 47,736
Goodwill 7,102 7,102
Other intangible assets 3,651 4,289
Other real estate owned 6,424 5,006
Other assets 37,139 41,651
----------- -----------
TOTAL ASSETS $ 2,223,057 $ 2,169,748
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest-bearing $ 179,517 $ 146,585
Interest-bearing:
Certificates of deposit of $100 or more 192,185 200,325
Other interest-bearing deposits 1,107,645 1,087,744
----------- -----------
1,479,347 1,434,654
Short-term borrowings 68,629 34,355
Other borrowings 383,233 423,290
Other liabilities 36,569 35,478
----------- -----------
TOTAL LIABILITIES 1,967,778 1,927,777
Shareholders' equity
Common stock, $.125 stated value per share,
Authorized shares -- 40,000,000
Issued shares -- 14,450,966
Outstanding shares -- 13,578,770 in 2003 and 13,618,890 in 2002 1,806 903
Additional capital 67,181 66,809
Retained earnings 194,294 178,209
Accumulated other comprehensive income 11,463 14,276
Less: Treasury shares at cost -- 872,196 in 2003 and 832,076 in 2002 (19,465) (18,226)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 255,279 241,971
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,223,057 $ 2,169,748
=========== ===========
See accompanying notes.
2003 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
--------------------------------------------
(Dollar amounts in thousands, except per share data) 2003 2002 2001
- --------------------------------------------------------------------------------------------------------------------
INTEREST AND DIVIDEND INCOME:
Loans, including related fees $ 96,536 $105,566 $108,658
Securities:
Taxable 15,714 19,129 24,622
Tax-exempt 7,816 8,326 8,326
Other 2,595 3,241 3,067
-------- -------- --------
TOTAL INTEREST AND DIVIDEND INCOME 122,661 136,262 144,673
INTEREST EXPENSE:
Deposits 26,925 34,607 47,208
Short-term borrowings 431 687 2,514
Other borrowings 20,869 22,792 24,403
-------- -------- --------
TOTAL INTEREST EXPENSE 48,225 58,086 74,125
-------- -------- --------
NET INTEREST INCOME 74,436 78,176 70,548
Provision for loan losses 7,455 9,478 6,615
-------- -------- --------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 66,981 68,698 63,933
NON-INTEREST INCOME:
Trust and financial services 3,762 3,419 3,545
Service charges and fees on deposit accounts 8,066 6,183 5,470
Other service charges and fees 8,063 5,369 4,327
Securities gains 237 154 180
Insurance commissions 6,282 6,136 3,763
Gain on sale of mortgage loans 2,027 2,767 2,209
Gain on life insurance benefit -- 3,916 --
Other 2,382 2,524 1,974
-------- -------- --------
TOTAL NON-INTEREST INCOME 30,819 30,468 21,468
NON-INTEREST EXPENSES:
Salaries and employee benefits 36,696 36,528 30,544
Occupancy expense 3,830 3,707 3,692
Equipment expense 3,224 3,306 3,448
Other 18,711 19,776 15,645
-------- -------- --------
TOTAL NON-INTEREST EXPENSE 62,461 63,317 53,329
-------- -------- --------
INCOME BEFORE INCOME TAXES 35,339 35,849 32,072
Provision for income taxes 8,846 7,209 7,876
-------- -------- --------
NET INCOME $ 26,493 $ 28,640 $ 24,196
======== ======== ========
EARNINGS PER SHARE:
NET INCOME $ 1.95 $ 2.10 $ 1.78
======== ======== ========
Weighted average number of shares outstanding (in thousands) 13,588 13,652 13,600
======== ======== ========
See accompanying notes.
FIRST FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Accumulated
Other
(Dollar amounts in thousands, except per share Common Additional Retained Comprehensive Treasury
data) stock Capital Earnings Income Stock Total
- ------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 2001 $ 903 $ 66,680 $ 141,653 $ 3,900 $ (21,913) $ 191,223
Comprehensive income:
Net income - - 24,196 - - 24,196
Other comprehensive income, net of tax:
Change in net unrealized gains/losses
on available-for-sale securities - - - 4,399 - 4,399
---------
Total comprehensive income 28,595
Issuance of treasury stock (365,344 shares) - - - - 6,801 6,801
Treasury stock purchase (65,298 shares) - - - - (1,297) (1,297)
Cash dividends, $ .57 per share - - (7,811) - - (7,811)
--------- --------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 2001 903 66,680 158,038 8,299 (16,409) 217,511
Comprehensive income:
Net income - - 28,640 - - 28,640
Other comprehensive income, net of tax:
Change in net unrealized gains/losses
on available-for-sale securities - - - 5,977 - 5,977
---------
Total comprehensive income 34,617
Contribution of 41,500 shares to ESOP - 129 - - 909 1,038
Treasury stock purchase (111,130 shares) - - - - (2,726) (2,726)
Cash dividends, $ .62 per share - - (8,469) - - (8,469)
--------- --------- --------- --------- --------- ---------
BALANCE, DECEMBER 31, 2002 903 66,809 178,209 14,276 (18,226) 241,971
Comprehensive income:
Net income - - 26,493 - - 26,493
Other comprehensive income, net of tax:
Change in net unrealized gains/losses
on available-for-sale securities - - - (2,813) - (2,813)
---------
Total comprehensive income 23,680
Two-for-one stock split 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
========= ========= ========= ========= ========= =========
See accompanying notes.
2003 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
-------------------------------------------------
(Dollar amounts in thousands, except per share data) 2003 2002 2001
- ---------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 26,493 $ 28,640 $ 24,196
Adjustments to reconcile net income to net cash
provided by operating activities:
Net (accretion) amortization on securities 558 (941) (2,128)
Provision for loan losses 7,455 9,478 6,615
Securities gains (237) (154) (180)
Depreciation and amortization 2,883 2,950 3,500
Provision for deferred income taxes (252) (827) 110
Net change in accrued interest receivable 2,126 1,036 2,855
Contribution of shares to ESOP 1,256 1,038 -
Other, net 4,527 (6,342) (4,202)
--------- --------- ---------
NET CASH FROM OPERATING ACTIVITIES 44,809 34,878 30,766
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of available-for-sale securities 8,308 9,736 1,097
Maturities and principal reductions on available-for-sale securities 189,049 131,304 156,938
Purchases of available-for-sale securities (258,551) (140,015) (43,499)
Loans made to customers, net of repayments (5,844) 6,237 (57,521)
Net change in federal funds sold (5,800) 43,326 (39,201)
Purchase of Forrest Sherer Inc. - - (1,699)
Purchase of Community Financial Corp. - 14,554 -
Additions to premises and equipment (1,758) (2,442) (2,548)
--------- --------- ---------
NET CASH FROM INVESTING ACTIVITIES (74,596) 62,700 13,567
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits 44,693 (25,638) (8,903)
Net change in other short-term borrowings 34,274 (25,379) 35,888
Dividends paid (8,845) (8,209) (7,586)
Purchases of treasury stock (2,123) (2,726) (1,297)
Proceeds from other borrowings 18,013 21,006 78,923
Repayments on other borrowings (58,070) (28,794) (141,908)
--------- --------- ---------
NET CASH FROM FINANCING ACTIVITIES 27,942 (69,740) (44,883)
--------- --------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS (1,845) 27,838 (550)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 96,043 68,205 68,755
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 94,198 $ 96,043 $ 68,205
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 48,791 $ 58,925 $ 76,049
========= ========= =========
Income taxes $ 8,016 $ 11,388 $ 7,533
========= ========= =========
See accompanying notes.
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 (First Financial Bank, formerly known as Terre Haute
First), The Morris Plan Company of Terre Haute (Morris Plan), First State
Bank of Clay County, Indiana (State), First Citizens State Bank of
Vermillion County, Indiana (Citizens), First Farmers State Bank of Sullivan
County, Indiana (Farmers), First Parke State Bank of Parke County, Indiana
(Parke), First Crawford State Bank of Crawford County, Illinois (Crawford),
First Community Bank, N.A. of Richland County, Illinois (Community), First
Financial Reinsurance Company, a corporation incorporated in the country of
Turks and Caicos Islands (FFRC) and Forrest Sherer Inc., a full-line
insurance agency headquartered in Terre Haute, Indiana. Inter-company
transactions and balances have been eliminated.
First Financial Bank also has two investment subsidiaries, Portfolio
Management Specialists A (Specialists A) and Portfolio Management
Specialists B (Specialists B), which were established to hold and manage
certain securities as part of a strategy to manage taxable income and
reduce tax expense. Specialists A and Specialists B subsequently entered
into a limited partnership agreement, Global Portfolio Limited Partners. At
December 31, 2003, $230.9 million of securities were owned by these
subsidiaries.
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 ten subsidiaries.
First Financial Bank is the largest bank in Vigo County. It operates 12
full-service banking branches within the county and one each in Ridge Farm,
Illinois and Marshall, Illinois. It also has a main office in downtown
Terre Haute and an operations center/office building in southern Terre
Haute.
The Corporation operates 46 branches in west-central Indiana and
east-central Illinois. The Corporation's primary source of revenue is
derived from loans to customers, primarily middle-income individuals, and
investment activities.
REGULATORY AGENCIES: First Financial Corporation is a multi-bank holding
company and as such is regulated by various banking agencies. The holding
company is regulated by the Seventh District of the Federal Reserve System.
The national bank subsidiaries are regulated by the Office of the
Comptroller of the Currency. The state bank subsidiaries are jointly
regulated by their respective state banking organizations and the Federal
Deposit Insurance Corporation.
SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES: To prepare financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions based on available information.
These estimates and assumptions affect the amounts reported in the
financial statements and disclosures provided, and actual results could
differ. The allowance for loan losses, carrying value of intangible assets,
loan servicing rights and the fair values of financial instruments are
particularly subject to change.
CASH FLOWS: Cash and cash equivalents include cash and demand deposits with
other financial institutions. Net cash flows are reported for customer loan
and deposit transactions and short-term borrowings.
SECURITIES: The Corporation classifies all securities as "available for
sale." Securities are classified as available for sale when they might be
sold before maturity. Securities available for sale are carried at fair
value with unrealized holdings gains and losses, net of taxes, reported in
other comprehensive income within shareholders' equity. Other securities,
such as Federal Home Loan Bank stock, are carried at cost.
Interest income includes amortization of purchase premium or discount.
Realized gains and losses on sales are based on the amortized cost of the
security sold. Securities are written down to fair value if and when a
decline in fair value is not temporary.
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 reported on the interest method and includes
amortization of net deferred loan fees and costs over the loan term.
Interest income is not reported when full loan repayment is in doubt,
typically when the loan is impaired or payments are significantly past due.
Payments received on such loans are reported as principal reductions.
All interest accrued but not received for loans placed on nonaccrual is
reversed against interest income. Interest received on such loans is
accounted for on the cash-basis or cost-recovery method, until qualifying
for return to accrual. Loans are returned to accrual status when all the
principal and interest amounts contractually due are brought current and
future payments are reasonably assured.
2003 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is a valuation
allowance for probable incurred credit losses, increased by the provision
for loan losses and decreased by charge-offs less recoveries. Management
estimates the allowance balance required using past loan loss experience,
the nature and volume of the portfolio, information about specific borrower
situations and estimated collateral values, economic conditions and other
factors. Allocations of the allowance may be made for specific loans, but
the entire allowance is available for any loan that, in management's
judgment, should be charged off. Loan losses are charged against the
allowance when management believes the uncollectibility of a loan balance
is confirmed.
A loan is impaired when full payment under the loan terms is not expected.
Impairment is evaluated in total for smaller-balance loans of similar
nature such as residential mortgages, consumer and credit card loans, and
on an individual basis for other loans. If a loan is impaired, a portion of
the allowance is allocated so that the loan is reported, net, at the
present value of estimated future cash flows, using the loan's existing
rate, or at the fair value of collateral if repayment is expected solely
from the collateral.
FORECLOSED ASSETS: Assets acquired through or instead of loan foreclosures
are initially recorded at fair value when acquired, establishing a new cost
basis. If fair value declines, a valuation allowance is recorded through
expense. Costs after acquisition are expensed.
PREMISES AND EQUIPMENT: Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed over the useful lives of
the assets, which range from three to 39 years.
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 interest rates and
then, secondarily, as to geographic and prepayment characteristics. Any
impairment of a grouping is reported as a valuation allowance.
GOODWILL AND OTHER INTANGIBLE ASSETS: Goodwill results from prior business
acquisitions and represents the excess of the purchase price over the fair
value of acquired tangible assets and liabilities and identifiable
intangible assets. Upon adopting new accounting guidance in 2002, the
Corporation ceased amortizing goodwill. Goodwill is assessed at least
annually for impairment and any such impairment will be recognized in the
period identified. The effect on net income of ceasing goodwill
amortization in 2002 was $513 thousand.
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.
REPURCHASE AGREEMENTS: 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.
BENEFIT PLANS: Pension expense is the net of service and interest cost,
return on plan assets and amortization of gains and losses not immediately
recognized. The amount contributed is determined by a formula as decided by
the Board of Directors.
INCOME TAXES: Income tax expense is the total of the current year income
tax due or refundable and the change in deferred tax assets and
liabilities. Deferred tax assets and liabilities are the expected future
tax amounts for the temporary differences between carrying amounts and tax
bases of assets and liabilities, computed using enacted tax rates. A
valuation allowance, if needed, reduces deferred tax assets to the amount
expected to be realized.
FINANCIAL INSTRUMENTS: Financial instruments include credit instruments,
such as commitments to make loans and standby letters of credit, issued to
meet customer financing needs. The face amount for these items represents
the exposure to loss, before considering customer collateral or ability to
repay. Such financial instruments are recorded when they are funded.
DERIVATIVES: All derivative instruments are recorded at their fair values.
If derivative instruments are designated as fair value hedges, both the
change in the fair value of the hedge and in the fair value of the hedged
item are included in current earnings. Fair value adjustments related to
cash flow hedges are recorded in other comprehensive income and
reclassified to earnings when the hedged transaction is reflected in
earnings. Ineffective portions of hedges are reflected in income currently.
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.
FIRST FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMPREHENSIVE INCOME: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes unrealized gains
and losses on securities available for sale, which are also recognized as
separate components of equity.
LOSS CONTINGENCIES: Loss contingencies, including claims and legal actions
arising in the ordinary course of business, are recorded as liabilities
when the likelihood of loss is probable and an amount of range of loss can
be reasonably estimated. Management does not believe there are currently
such matters that will have a material effect on the financial statements.
DIVIDEND RESTRICTION: Banking regulations require maintaining certain
capital levels and may limit the dividends paid by the bank to the holding
company or by the holding company to shareholders.
FAIR VALUE OF FINANCIAL INSTRUMENTS: Fair values of financial instruments
are estimated using relevant market information and other assumptions, as
more fully disclosed in a separate note. Fair value estimates involve
uncertainties and matters of significant judgment regarding interest rates,
credit risk, prepayments and other factors, especially in the absence of
broad markets for particular items. Changes in assumptions or market
conditions could significantly affect the estimates.
OPERATING SEGMENT: While the Corporation's chief decision-makers monitor
the revenue streams of the various products and services, the identifiable
segments are not material and operations are managed and financial
performance is evaluated on a corporate-wide basis. Accordingly, all of the
Corporation's financial service operations are considered by management to
be aggregated in one reportable operating segment, which is banking.
ADOPTION OF NEW ACCOUNTING STANDARDS: During 2003, the Corporation adopted
FASB Statement 143, Accounting for Asset Retirement Obligations; FASB
Statement 145, Rescission of FASB Statement 4, 44 and 64, Amendment of FASB
13 and Technical Corrections; FASB Statement 146, Accounting for Cost
Associated with Exit or Disposal Activities; FASB Statement 149, Amendment
of Statement 133 on Derivative Investments and Hedging Activities; FASB
Statement 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equities; FASB Statement 132
(revised 2003), Employers' Disclosures about Pensions and Other
Postretirement Benefits; FASB Interpretation 45, Guarantor's Accounting and
Disclosure Requirements for Guarantees; and FASB Interpretation 46,
Consolidation of Variable Interest Entities. Adoption of the new standards
did not materially affect the Corporation's operating results or financial
condition.
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 fair value of derivatives is based
on the current fees or cost that would be charged to enter into or
terminate such arrangements.
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,
-----------------------------------------------------------------------------
2003 2002
--------------------------------- ---------------------------------
Carrying Fair Carrying Fair
(Dollar amounts in thousands) Value Value Value Value
- -----------------------------------------------------------------------------------------------------------------------
Cash and due from banks $ 94,198 $ 94,198 $ 96,043 $ 96,043
Federal funds sold 5,850 5,850 50 50
Available-for-sale securities 567,733 567,733 511,548 511,548
Loans 1,430,084 1,432,640 1,433,212 1,438,723
Accrued interest receivable 13,073 13,073 15,199 15,199
Deposits (1,479,347) (1,488,240) (1,434,654) (1,446,483)
Short-term borrowings (68,629) (68,629) (34,355) (34,355)
Federal Home Loan Bank advances (358,633) (363,413) (397,190) (399,145)
Other borrowings (24,600) (24,600) (26,100) (26,100)
Accrued interest payable (3,435) (3,435) (4,001) (4,001)
Derivative financial instruments - - 3 3
2003 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 $28.5 million and $23.7 million at
December 31, 2003 and 2002, respectively.
4. SECURITIES:
The fair value of available-for-sale securities and related gains and
losses recognized in accumulated other comprehensive income were as
follows:
December 31, 2003
--------------------------------------------------------------------
Unrealized
Amortized ----------------------------- Fair
(Dollar amounts in thousands) Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------
U.S. Government and its agencies $ 269,228 $ 4,143 $ (1,362) $ 272,009
Collateralized mortgage obligations 18,022 31 (29) 18,024
State and municipal 152,719 9,421 (150) 161,990
Corporate obligations 113,736 2,097 (123) 115,710
--------- --------- --------- ---------
TOTAL $ 553,705 $ 15,692 $ (1,664) $ 567,733
========= ========= ========= =========
December 31, 2002
--------------------------------------------------------------------
Unrealized
Amortized ----------------------------- Fair
(Dollar amounts in thousands) Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------
U.S. Government and its agencies $ 204,114 $ 8,451 $ (15) $ 212,550
Collateralized mortgage obligations 29,049 400 (3) 29,446
State and municipal 162,897 9,151 (316) 171,732
Corporate obligations 96,250 1,808 (238) 97,820
--------- --------- --------- ---------
TOTAL $ 492,310 $ 19,810 $ (572) $ 511,548
========= ========= ========= =========
The Corporation invests in the equity securities of financial services
companies. These investments are considered to be available-for-sale and
are included in other assets on the consolidated balance sheet. Cost was
$4.1 million and $3.9 million, and fair value was $9.2 million and $8.4
million at December 31, 2003 and 2002, respectively.
The Corporation invested in bank-owned life insurance for an initial
premium of $45 million in 2000. The policies cover officers at the bank
subsidiaries and the Corporation is the beneficiary. These policies are
designated as separate account policies by the issuing insurance companies.
The Corporation records its investment in the policies at their current
surrender value, which is the fair value of the separate account assets
plus or minus the value/obligation under stable value guarantees issued by
the insurance companies. The stable value guarantees serve to set the
annual change in surrender value of the policies at annually agreed upon
levels by guaranteeing the period end value of the separate account assets.
As of December 31, 2003, 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 $31.3 million and $98.5 million at December
31, 2003 and 2002, respectively, were pledged as collateral for short-term
borrowings and for other purposes.
FIRST FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Below is a summary of the gross gains and losses realized by the Corporation
on investments during the years ended December 31, 2003, 2002 and 2001,
respectively.
(Dollar amounts in thousands) 2003 2002 2001
- ----------------------------- ------ ------ ------
Proceeds $8,308 $9,736 $1,097
Gross gains 237 154 180
Gross losses -- -- --
Contractual maturities of debt securities at year-end 2003 were as follows.
Securities not due at a single maturity date, primarily mortgage-backed
securities, are shown separately. Also shown are the tax equivalent yields,
computed using a 35% rate based on weighted average yields of securities
maturing during each time period.
Available-for-Sale
-----------------------------
Amortized Fair Average
(Dollar amounts in thousands) Cost Value Yields
----------------------------- --------- --------- -------
Due in one year or less $ 19,191 $ 19,476 7.32%
====
Due after one but within five years 65,958 69,144 6.83%
====
Due after five but within ten years 64,578 70,179 7.52%
====
Due after ten years 135,669 138,191 5.13%
====
Mortgage-backed securities, primarily issued by U.S.
Government agencies 268,309 270,743 3.91%
====
--------- ---------
TOTAL $ 553,705 $ 567,733
========= =========
The following table shows 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,
2003.
Less Than 12 Months More Than 12 Months Total
---------------------- ---------------------- ----------------------
Unrealized Unrealized Unrealized
(Dollar amounts in thousands) Fair Value Losses Fair Value Losses Fair Value Losses
- --------------------------------------- ---------- --------- ---------- ---------- ---------- ----------
U.S. Government and its agencies $ 87,414 $ (1,354) $ 121 $ (8) $ 87,535 $ (1,362)
Collateralized mortgage obligations 18,021 (29) -- -- 18,021 (29)
State and municipal obligations 4,140 (51) 484 (99) 4,624 (150)
Corporate obligations 25,453 (71) 945 (52) 26,398 (123)
---------- ---------- ---------- ---------- ---------- ----------
Total temporarily impaired securities $ 135,028 $ (1,505) $ (1,550) $ (159) $ 136,578 $ (1,664)
========== ========== ========== ========== ========== ==========
These losses represent negative adjustments to market value relative to the
rate of interest paid on the securities and not losses related to the
creditworthiness of the issuer. Management believes the full amount of
principal will be received upon maturity of these securities.
5. LOANS:
Loans are summarized as follows:
December 31,
-------------------------
(Dollar amounts in thousands) 2003 2002
- -------------------------------------- ---------- ----------
Commercial, financial and agricultural $ 374,638 $ 331,316
Real estate - construction 35,361 42,930
Real estate - mortgage 766,911 789,618
Installment 248,290 268,067
Lease financing 4,884 1,281
---------- ----------
Total gross loans 1,430,084 1,433,212
Less: unearned income (559) (648)
allowance for loan losses (21,239) (21,249)
---------- ----------
TOTAL $1,408,286 $1,411,315
========== ==========
2003 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 2003 the aggregate
dollar amount of these loans to directors and executive officers who held
office at the end of the year amounted to $65.6 million at the beginning of
the year. During 2003, advances of $29.0 million and repayments of $55.6
million were made with respect to related party loans for an aggregate
dollar amount outstanding of $39.0 million at December 31, 2003.
Loans serviced for others, which are not reported as assets, total
$374.9 million and $282.9 million at year-end 2003 and 2002.
Activity for capitalized mortgage servicing rights and the related valuation
allowance was as follows:
December 31,
-------------------------
(Dollar amounts in thousands) 2003 2002
- -------------------------------------- ---------- ----------
Servicing rights:
Beginning of year $ 2,548 $ 1,478
Additions 1,961 2,229
Amortized to expense (1,395) (1,159)
---------- ----------
End of year $ 3,114 $ 2.548
========== ==========
Valuation allowance:
Beginning of year $ 500 $ -
Additions expensed - 500
Reductions credited to expense (300) -
---------- ----------
End of year $ 200 $ 500
========== ==========
Third party valuations are conducted periodically for mortgage servicing
rights. Based on these valuations, fair values approximate carrying values.
6. ALLOWANCE FOR LOAN LOSSES:
Changes in the allowance for loan losses are summarized as follows:
December 31,
---------------------------------
(Dollar amounts in thousands) 2003 2002 2001
- ------------------------------------------ --------- --------- ----------
Balance at beginning of year $ 21,249 $ 18,313 $ 19,072
Addition resulting from acquisition - 1,711 -
Provision for loan losses 7,455 9,478 6,615
Recoveries of loans previously charged off 1,475 1,885 1,669
Loans charged off (8,940) (10,138) (9,043)
--------- --------- ---------
BALANCE AT END OF YEAR $ 21,239 $ 21,249 $ 18,313
========= ========= =========
Impaired loans were as follows:
December 31,
--------------------
(Dollar amounts in thousands) 2003 2002
- ---------------------------------------------------------- --------- --------
Year-end loans with no allocated allowance for loan losses $ 3,254 $ -
Year-end loans with allocated allowance for loan losses 5,914 8,812
--------- --------
TOTAL 9,168 8,812
========= ========
Amount of the allowance for loan losses allocated $ 2,835 $ 3,283
Average of impaired loans during the year 8,992 5,288
Nonperforming loans:
Loans past due over 90 days still on accrual 5,384 5,899
Non-accrual loans 8,429 11,807
FIRST FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. PREMISES AND EQUIPMENT:
Premises and equipment are summarized as follows:
December 31,
--------------------
(Dollar amounts in thousands) 2003 2002
- ---------------------------------------- -------- --------
Land $ 4,501 $ 4,512
Building and leasehold improvements 34,135 33,615
Furniture and equipment 26,542 25,368
-------- --------
65,178 63,495
Less accumulated depreciation (35,856) (33,686)
-------- --------
TOTAL $ 29,322 $ 29,809
======== ========
8. GOODWILL AND INTANGIBLE ASSETS:
The Corporation has goodwill totaling $7.1 million associated with the
acquisitions of The Morris Plan Company of Terre Haute in 1998 and Forrest
Sherer Inc. in 2001. No additional goodwill was recorded during 2003 or
2002. The Corporation completed its annual impairment testing of goodwill
during the second quarter and management does not believe any amount of the
goodwill is impaired. The $7.1 million of goodwill is net of accumulated
amortization of $737 thousand.
Goodwill is no longer amortized starting in 2002. Had this accounting
treatment been effective in 2001, net income for the year would not have
included goodwill amortization of $399 thousand and would have been $24.6
million. Earnings per share would have been $1.81.
Intangible assets subject to amortization at December 31, 2003 and 2002 are
as follows:
2003 2004
-------------------- ---------------------
Gross Accumulated Gross Accumulated
(Dollar amounts in thousands) Amount Amortization Amount Amortization
- ----------------------------- ------ ------------ ------- ------------
Customer list intangible $3,108 $ 1,086 $ 3,108 $ 730
Core deposit intangible 2,193 775 2,193 605
Non-compete agreements 500 289 500 177
------ ---------- ------- ---------
$5,801 $ 2,150 $ 5,801 $ 1,512
====== ========== ======= =========
Aggregate amortization expense was $638 thousand, $692 thousand and $826
thousand for 2003, 2002 and 2001, respectively.
Estimated amortization expense for the next five years is as follows:
In thousands
2004 $ 565
2005 533
2006 463
2007 392
2008 392
9. DEPOSITS AND SHORT-TERM BORROWINGS:
Scheduled maturities of time deposits were as follows:
In thousands
2004 $ 383,822
2005 184,527
2006 43,337
2007 61,541
2008 18,983
Thereafter 513
---------
$ 692,723
=========
2003 ANNUAL REPORT
Notes TO CONSOLIDATED FINANCIAL STATEMENTS
Year-end short-term borrowings were comprised of the following:
(Dollar amounts in thousands) 2003 2002
- ------------------------------ -------- --------
Federal funds purchased $ 61,524 $ 16,311
Repurchase agreements 5,130 13,237
Note payable - U.S. government 1,975 4,807
-------- --------
$ 68,629 $ 34,355
======== ========
Federal funds purchased are generally due in one day and bear interest at
market rates. Note payable - U.S. government is due on demand, secured by a
pledge of securities and bears interest at market rates.
10. OTHER BORROWINGS:
Other borrowings at December 31, 2003 and 2002 are summarized as follows:
(Dollar amounts in thousands) 2003 2002
- --------------------------------------------------------------- -------- --------
FHLB advances $358,633 $397,190
Note payable to a financial institution 18,000 19,500
City of Terre Haute, Indiana economic development revenue bonds 6,600 6,600
-------- --------
TOTAL $383,233 $423,290
======== ========
The aggregate minimum annual retirements of other borrowings are as follows:
2004 $ 49,659
2005 --
2006 273
2007 387
2008 52,419
Thereafter 280,495
--------
$383,233
========
All of the Corporation's Indiana subsidiary banks are members of the Federal
Home Loan Bank (FHLB) of Indianapolis and, accordingly, are permitted to
obtain advances. The advances from the FHLB, aggregating $358.6 million at
December 31, 2003, accrue interest, payable monthly, at annual rates varying
from 3.64% to 6.6%. The advances are due at various dates through August
2017. FHLB advances are, generally, due in full at maturity. They are
secured by eligible securities totaling $193.0 million and a blanket pledge
on real estate loan collateral. Certain advances may be prepaid, without
penalty, prior to maturity. The FHLB can adjust the interest rate from fixed
to variable on certain advances, but those advances may then be prepaid,
without penalty.
On December 31, 2003, the Corporation entered into a revolving credit loan
agreement (Note) with a financial institution. The total principal amount of
loans outstanding at one time under this Note may not exceed $20 million.
The Note matures on December 31, 2004, but is renewable annually, and
requires quarterly payments of interest and a commitment fee of 0.15% on the
average daily amount of the commitment. The Note bears an interest rate
equal to the average daily federal funds rate plus 0.875% and adjusts daily.
At December 31, 2003, the interest rate was 1.87%. The Note is unsecured but
requires the Corporation to meet certain financial covenants. The
Corporation was in compliance with all its debt covenants. The proceeds from
this loan were used to repay an outstanding line of credit with similar
terms.
The economic development revenue bonds (bonds) require periodic interest
payments each year until maturity or redemption. The interest rate, which
was 1.2% at December 31, 2003, and 1.6% at December 31, 2002, is determined
by a formula which considers rates for comparable bonds and is adjusted
periodically. The bonds are collateralized by a first mortgage on the
Corporation's headquarters building. The bonds mature December 1, 2015, but
bondholders may periodically require earlier redemption.
The Corporation maintains a letter of credit with another financial
institution, which could be used to repay the bonds, should they be called.
The letter of credit expires November 1, 2004, and will be automatically
extended for one year should the bonds still be outstanding. Assuming
redemption will be funded by the letter of credit, or by other similar
borrowings, there are no anticipated principal maturities of the bonds
within the next five years.
The debt agreement for the bonds requires the Corporation to meet certain
financial covenants. These covenants require the Corporation to maintain a
Tier I capital ratio of at least 6.2% and net income to average assets of
0.6%. At December 31, 2003 and 2002, the Corporation was in compliance with
all of its debt covenants.
FIRST FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. INCOME TAXES:
Income tax expense is summarized as follows:
(Dollar amounts in thousands) 2003 2002 2001
- ----------------------------- -------- ------- -------
Federal:
Currently payable $ 8,046 $ 6,880 $ 6,413
Deferred (544) (960) 68
-------- ------- -------
7,502 5,920 6,481
State:
Currently payable 1,052 1,156 1,353
Deferred 292 133 42
-------- ------- -------
TOTAL 1,344 1,289 1,395
-------- ------- -------
$ 8,846 $ 7,209 $ 7,876
======== ======= =======
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) 2003 2002 2001
- --------------------------------------------------- -------- -------- --------
Federal income taxes computed at the statutory rate $ 12,369 $ 12,547 $ 11,225
Add (deduct) tax effect of:
Tax exempt income (3,738) (5,705) (3,683)
State tax, net of federal benefit 873 838 907
Affordable housing credits (507) (604) (604)
Other, net (151) 133 31
-------- -------- --------
TOTAL $ 8,846 $ 7,209 $ 7,876
======== ======== ========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 2003 and
2002, are as follows:
(Dollar amounts in thousands) 2003 2002
- ------------------------------------------------------- -------- ---------
Deferred tax assets:
Loan losses provision $ 8,480 $ 8,340
Deferred compensation 2,792 2,173
Compensated absences 467 468
Post-retirement benefits 721 594
State net operating loss carry forward 348 602
Other 641 131
-------- ---------
GROSS DEFERRED ASSETS 13,449 12,308
-------- ---------
Deferred tax liabilities:
Net unrealized gains on available-for-sale securities (7,644) (9,518)
Depreciation (1,184) (1,144)
Federal Home Loan Bank stock dividends (821) --
Originated servicing rights (1,158) (803)
Pensions (1,339) (1,652)
Other (2,185) (2,199)
-------- ---------
GROSS DEFERRED LIABILITIES (14,331) (15,316)
-------- ---------
NET DEFERRED TAX ASSETS (LIABILITIES) $ (882) $ (3,008)
======== =========
2003 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND DERIVATIVE
INSTRUMENTS:
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
standby 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 $235.3 million and
$230.8 million as of December 31, 2003 and 2002. In addition, the
Corporation had outstanding commitments of $5.6 million and $5.8 million
under standby letters of credit as of December 31, 2003 and 2002,
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.
During 2001 the Corporation purchased an interest rate cap contract with a
notional principal balance of $50 million. The agreement requires the
counterparty to pay the Corporation the excess of the 3-month LIBOR over
6.00%. The cap has a 36-month term which runs through March 2004. No
payments are currently required under the agreement. The agreement was
entered into to help protect the Corporation's net interest income should
interest rates increase in excess of the cap's trigger amount. The interest
rate cap had no value at December 31, 2003.
13. 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
$1.55 million, $1.32 million and $1.15 million in 2003, 2002 and 2001. The
Corporation contributed $1.26 million, $1.04 million and $350 thousand to
the ESOP in 2003, 2002 and 2001.
The Corporation uses a measurement date of December 31, 2003.
Pension expense included the following components:
(Dollar amounts in thousands) 2003 2002 2001
- --------------------------------------------- ------- ------- -------
Service cost - benefits earned $ 2,166 $ 2,065 $ 698
Interest cost on projected benefit obligation 2,025 1,880 1,766
Expected return on plan assets (2,334) (2,062) (1,679)
Net amortization and deferral 240 181 296
------- ------- -------
Total pension expense $ 2,097 $ 2,064 $ 1,081
======= ======= =======
The information on the next page sets forth the projected change in benefit
obligation, reconciliation of plan assets, and the funded status of the
Corporation's retirement program. Actuarial present value of benefits is
based on service to date and present pay levels.
FIRST FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands) 2003 2002
- -------------------------------------------- --------- --------
Change in benefit obligation:
Benefit obligation at January 1 $ 31,274 $ 30,293
Service cost 2,166 2,065
Interest cost 2,025 1,880
Actuarial (gain) loss 4,057 (2,349)
Benefits paid (3,222) (615)
--------- --------
Benefit obligation at December 31 36,300 31,274
--------- --------
Reconciliation of fair value of plan assets:
Fair value of plan assets at January 1 29,296 25,887
Actual return on plan assets 5,790 1,665
Employer contributions 2,801 2,359
Benefits paid (3,222) (615)
--------- --------
Fair value of plan assets at December 31 34,665 29,296
--------- --------
Funded status:
Funded status at December 31 (1,635) (1,978)
Unrecognized prior service cost (195) (213)
Unrecognized net actuarial cost 6,839 6,496
--------- --------
Prepaid pension asset recognized in the
consolidated balance sheets $ 5,009 $ 4,305
========= ========
The accumulated benefit obligation for the defined benefit pension plan was
$30,788 and $25,943 at year end 2003 and 2002.
Principal assumptions used:
Discount rate 6.00% 6.50%
Rate of increase in compensation levels 4.00 4.00
Expected long-term rate of return on plan assets 8.00 8.00
The expected long-term rate of return was estimated using market benchmarks
for equities and bonds applied to the plan's target asset allocation.
Management estimated the rate by which plan assets would perform based on
historical experience as adjusted for changes in asset allocations and
expectations for future return on equities as compared to past periods.
PLAN ASSETS -- The Corporation's pension plan weighted-average asset
allocation for the years 2003 and 2002 by asset category are as follows:
Pension Plan ESOP
Pension Plan ESOP Percentage of Plan Assets Percentage of Plan
Target Allocation Target Allocation at December 31, Assets at December 31,
Asset Category 2004 2004 2003 2002 2003 2002
- -------------- ---- ---- ---- ---- ---- ----
Equity securities 63-63% 99-99% 61% 54% 98% 99%
Debt services 35-35 0-0 30 35 0 0
Real estate 0-0 0-0 0 0 0 0
Other 2-2 1-1 9 11 2 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 98% invested in corporate stock. Other
investment allocations include 8% in fixed income securities and 4% in cash.
Equity securities include First Financial Corporation common stock in the
amount of $25.9 million (75 percent of total plan assets) and $21.2 million
(72 percent of total plan assets) at December 31, 2003, and 2002,
respectively.
2003 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTRIBUTIONS -- The Corporation expects to contribute $1.57 million to
its pension plan and $1.2 million to ESOP in 2004.
The Corporation also provides medical benefits to its employees
subsequent to their retirement. The Corporation uses a measurement date
of December 31, 2003. Accrued post-retirement benefits as of December
31, 2003 and 2002 are as follows:
December 31,
---------------------
(Dollar amounts in thousands) 2003 2002
----------------------------- -------- -------
Change in benefit obligation:
Benefit obligation at January 1 $ 4,081 $ 3,430
Service cost 102 76
Interest cost 252 226
Plan participants' contributions 90 58
Actuarial (gain) loss 256 647
Actual benefits paid (497) (356)
-------- -------
Benefit obligation at December 31 $ 4,284 $ 4,081
======== =======
Reconciliation of funded status:
Funded status $ 4,284 $ 4,081
Unrecognized transition obligation (603) (663)
Unrecognized net gain (loss) (2,167) (2,031)
-------- -------
Accrued benefit cost $ 1,514 $ 1,387
======== =======
The post-retirement benefits paid in 2003 and 2002 of $497 thousand and
$356 thousand, respectively, were fully funded by company and
participant contributions. There were no other changes to plan assets
in 2003 and 2002.
Weighted-average assumptions as of December 31:
December 31,
------------------
2003 2002
---- ----
Discount rate 6.00% 6.50%
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) 2003 2002 2001
----------------------------- ------ ------ ------
Service cost $ 102 $ 76 $ 63
Interest cost 252 226 215
Amortization of transition obligation 60 60 60
Recognized actuarial loss 120 80 54
------ ------ ------
Net periodic benefit cost $ 534 $ 442 $ 392
====== ====== ======
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
Increase Decrease
-------- --------
Effect on total of service and interest cost components $ 26 $ (20)
Effect on post-retirement benefit obligation 302 (235)
CONTRIBUTIONS -- The Corporation expects to contribute $233 thousand to its
other post-retirement benefit plan in 2004.
FIRST FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. OTHER COMPREHENSIVE INCOME:
Other comprehensive income components and related taxes were as
follows:
(Dollar amounts in thousands) December 31,
----------------------------- -----------------------------
2003 2002 2001
------- ------- -------
Unrealized holding gains and losses on available-for-sale securities $(4,450) $10,116 $ 7,512
Reclassification adjustments for gains and losses later
recognized in income (237) (154) (180)
------- ------- -------
Net unrealized gains and losses (4,687) 9,962 7,332
Tax effect 1,874 (3,985) (2,933)
------- ------- -------
Other comprehensive income $(2,813) $ 5,977 $ 4,399
======= ======= =======
15. 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, 2003,
approximately $57.2 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 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 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 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, 2003
and 2002, that the Corporation meets all capital adequacy requirements
to which it is subject.
As of December 31, 2003, the most recent notification from the
respective regulatory agencies categorized the Corporation and its
subsidiary banks as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as adequately capitalized
the Corporation must maintain minimum total risk-based, Tier I
risk-based and Tier I leverage ratios as set forth in the table. There
are no conditions or events since that notification that management
believes have changed the Corporation's category.
The following table presents the actual and required capital amounts
and related ratios for the Corporation and the lead bank, First
Financial Bank, N.A., at year end 2003 and 2002.
2003 ANNUAL REPORT
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 - 2003 $252,924 15.67% > or = $129,081 > or = 8.0% > or = $161,351 > or =10.0%
Corporation - 2002 235,985 14.83% > or = 127,296 > or = 8.0% > or = 159,120 > or =10.0%
First Financial Bank - 2003 169,725 16.35% > or = 83,039 > or = 8.0% > or = 103,799 > or =10.0%
First Financial Bank - 2002 149,778 15.56% > or = 76,992 > or = 8.0% > or = 96,241 > or =10.0%
TIER I RISK-BASED CAPITAL
Corporation - 2003 $232,746 14.43% > or = $ 64,540 > or = 4.0% > or = $ 96,811 > or = 6.0%
Corporation - 2002 216,078 13.58% > or = 63,648 > or = 4.0% > or = 95,472 > or = 6.0%
First Financial Bank - 2003 157,920 15.21% > or = 41,520 > or = 4.0% > or = 62,280 > or = 6.0%
First Financial Bank - 2002 139,590 14.50% > or = 38,496 > or = 4.0% > or = 57,744 > or = 6.0%
TIER I LEVERAGE CAPITAL
Corporation - 2003 $232,746 10.67% > or = $ 87,278 > or = 4.0% > or = $109,097 > or = 5.0%
Corporation - 2002 216,078 9.79% > or = 88,323 > or = 4.0% > or = 110,404 > or = 5.0%
First Financial Bank - 2003 157,920 11.78% > or = 53,605 > or = 4.0% > or = 67,006 > or = 5.0%
First Financial Bank - 2002 139,590 10.85% > or = 51,446 > or = 4.0% > or = 64,308 > or = 5.0%
16. PARENT COMPANY CONDENSED FINANCIAL STATEMENTS:
The parent company's condensed balance sheets as of December 31, 2003
and 2002, and the related condensed statements of income and cash flows
for each of the three years in the period ended December 31, 2003, are
as follows:
CONDENSED BALANCE SHEETS
December 31,
-----------------------
(Dollar amounts in thousands) 2003 2002
----------------------------- -------- --------
ASSETS
Cash deposits in affiliated banks $ 7,629 $ 5,037
Investments in subsidiaries 269,062 256,608
Land and headquarters building, net 6,351 6,516
Other 10,137 10,688
-------- --------
TOTAL ASSETS $293,179 $278,849
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Borrowings $ 28,636 $ 29,900
Dividends payable 4,891 4,229
Other liabilities 4,373 2,749
-------- --------
TOTAL LIABILITIES 37,900 36,878
SHAREHOLDERS' EQUITY 255,279 241,971
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $293,179 $278,849
======== ========
FIRST FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED STATEMENTS OF INCOME
Years Ended December 31,
------------------------------------
(Dollar amounts in thousands) 2003 2002 2001
----------------------------- -------- -------- --------
Dividends from subsidiaries $ 12,418 $ 5,676 $ 10,485
Other income 1,006 913 971
Interest on borrowings (663) (673) (314)
Other operating expenses (2,759) (2,953) (2,801)
-------- -------- --------
Income before income taxes and equity
in undistributed earnings of subsidiaries 10,002 2,963 8,341
Income tax benefit 907 1,074 863
-------- -------- --------
Income before equity in
undistributed earnings of subsidiaries 10,909 4,037 9,204
Equity in undistributed earnings of subsidiaries 15,584 24,603 14,992
-------- -------- --------
Net income $ 26,493 $ 28,640 $ 24,196
======== ======== ========
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31,
------------------------
(Dollar amounts in thousands) 2003 2002 2001
- ----------------------------- ---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 26,493 $ 28,640 $ 24,196
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for depreciation and amortization 215 258 360
Equity in undistributed earnings of subsidiaries (15,584) (24,603) (14,992)
Contribution of shares to ESOP 1,256 1,038 -
Increase (decrease) in other liabilities 1,626 (202) 571
(Increase) decrease in other assets 852 (127) (1,009)
-------- -------- --------
NET CASH FROM OPERATING ACTIVITIES 14,858 5,004 9,126
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture and fixtures (34) (49) (55)
Purchase of Community Financial Corp. - (14,699) -
Purchase of Forrest Sherer Inc. - - (1,699)
-------- -------- --------
NET CASH FROM INVESTING ACTIVITIES (34) (14,748) (1,754)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 18,236 22,300 1,500
Principal payments on long-term borrowings (19,500) (500) (180)
Purchase of treasury stock (2,123) (2,726) (1,297)
Dividends paid (8,845) (8,209) (7,586)
-------- -------- --------
NET CASH FROM FINANCING ACTIVITIES (12,232) 10,865 (7,563)
-------- -------- --------
NET (DECREASE) INCREASE IN CASH 2,592 1,121 (191)
CASH, BEGINNING OF YEAR 5,037 3,916 4,107
-------- -------- --------
CASH, END OF YEAR $ 7,629 $ 5,037 $ 3,916
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 663 $ 644 $ 314
======== ======== ========
Income taxes $ 8,016 $ 11,388 $ 7,533
======== ======== ========
2002 ANNUAL REPORT
RESPONSIBILITY FOR FINANCIAL STATEMENTS
To the Shareholders and Board of Directors of First Financial Corporation:
The management of First Financial Corporation has prepared and is
responsible for the preparation and accuracy of the financial statements and
other information included in this report. The financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America and where appropriate, include amounts based on
judgments and estimates by management.
To fulfill its responsibility, the Corporation maintains and continues
to refine a system of internal accounting controls and procedures to provide
reasonable assurance that (i) the Corporation's assets are safeguarded; (ii)
transactions are executed in accordance with proper management authorization;
and (iii) financial records are reliable for the preparation of financial
statements. The design, monitoring and revision of internal accounting control
systems involve, among other things, management judgments with respect to the
relative costs and expected benefits of such control procedures.
Management assessed First Financial Corporation's internal control
structure over financial reporting as of December 31, 2003. This assessment was
based on criteria for effective internal control over financial reporting
described in "Internal Control -- Integrated Framework" issued by the Committee
of Sponsoring Organizations of the Treadway Commission. Based on this
assessment, management believes that the Corporation maintained an effective
internal control structure over financial reporting as of December 31, 2003.
Crowe Chizek and Company LLC performs an independent audit of the
Corporation's financial statements for the purpose of determining that such
statements are presented in conformity with accounting principles generally
accepted in the United States of America and their report appears below. The
independent accountants are appointed based upon recommendations by the Audit
Committee and approved by the Board of Directors.
The Audit Committee of the Board of Directors, composed of three
outside directors, meets periodically with the Corporation's management and the
independent accountants to discuss the audit scope and findings as well as
address internal control systems and financial reporting matters. The
independent accountants have direct access to the Audit Committee.
/s/ Norman L. Lowery /s/ Michael A. Carty
Chief Executive Officer Treasurer
REPORT OF INDEPENDENT AUDITORS
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, 2003 and 2002, and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for each of the three years in the period ended December 31, 2003. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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, 2003 and 2002, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2003, in conformity with accounting principles generally accepted
in the United States of America.
/s/ Crowe Chizek and Company LLC
Indianapolis, Indiana
January 16, 2004
FIRST FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
Management's discussion and analysis reviews the financial condition of First
Financial Corporation at December 31, 2003 and 2002, and the results of its
operations for the three years ended December 31, 2003. Where appropriate,
factors that may affect future financial performance are also discussed. The
discussion should be read in conjunction with the accompanying consolidated
financial statements, related footnotes and selected financial data.
A cautionary note about forward-looking statements: In its oral and written
communication, First Financial Corporation from time to time includes
forward-looking statements, within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements can include
statements about estimated cost savings, plans and objectives for future
operations and expectations about performance, as well as economic and market
conditions and trends. They often can be identified by the use of words such as
"expect," "may," "could," "intend," "project," "estimate," "believe" or
"anticipate." First Financial Corporation may include forward-looking statements
in filings with the Securities and Exchange Commission, in other written
materials such as this Annual Report and in oral statements made by senior
management to analysts, investors, representatives of the media and others. It
is intended that these forward-looking statements speak only as of the date they
are made, and First Financial Corporation undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which the forward-looking statement is made or to reflect the occurrence of
unanticipated events.
By their nature, forward-looking statements are based on assumptions and are
subject to risks, uncertainties and other factors. Actual results may differ
materially from those contained in the forward-looking statement. The discussion
in this "Management's Discussion and Analysis of Results of Operations and
Financial Condition" lists some of the factors which could cause actual results
to vary materially from those in any forward-looking statements. Other
uncertainties which could affect First Financial Corporation's future
performance include the effects of competition, technological changes and
regulatory developments; changes in fiscal, monetary and tax policies; market,
economic, operational, liquidity, credit and interest rate risks associated with
First Financial Corporation's business; inflation; competition in the financial
services industry; changes in general economic conditions, either nationally or
regionally, resulting in, among other things, credit quality deterioration; and
changes in securities markets. Investors should consider these risks,
uncertainties and other factors in addition to those mentioned by First
Financial Corporation in its other filings from time to time when considering
any forward-looking statement.
First Financial Corporation (the Corporation) is a financial services company.
The Corporation, which is headquartered in Terre Haute, Indiana, offers a wide
variety of financial services including commercial, mortgage and consumer
lending, lease financing, trust account services and depositor services through
its ten subsidiaries. At the close of business in 2003 the Corporation and its
subsidiaries had 834 full-time equivalent employees.
First Financial Bank is the largest bank in Vigo County. It operates 12
full-service banking branches within the county, one branch in Marshall,
Illinois, and one branch in Ridge Farm, Illinois. 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.
First State has five branch locations in Clay County, a county contiguous to
Vigo County. Citizens has four branches, all of which are located in Vermillion
County, a county contiguous to Vigo County. Farmers has eight branches, of which
five are located in Sullivan County, two in Knox County and one in Greene
County. Sullivan County is contiguous to Vigo County. Morris Plan has one office
and is located in Vigo County. Parke has five branches in Parke County, a county
contiguous to Vigo County. Crawford has two branches in Crawford County,
Illinois, and one branch in Lawrence County, Illinois. Community has six
branches, of which two are located in Richland County, Illinois; one in Lawrence
County, Illinois; one in Wayne County, Illinois; one in Jasper County, Illinois;
and one in Coles County, Illinois.
First Financial Bank and Morris Plan face competition from other financial
institutions in Vigo County. These competitors consist of three commercial
banks, a mutual savings bank and other financial institutions, including
consumer finance companies, insurance companies, brokerage firms and credit
unions. The six other bank subsidiaries have similar competition in their
primary market areas. The number of competitors of each subsidiary is as
follows:
- - FIRST STATE -- Three commercial banks, two credit unions and one brokerage
firm in Clay County, Indiana.
- - CITIZENS -- Three commercial banks and two credit unions in Vermillion
County, Indiana.
- - FARMERS -- Two commercial banks and one brokerage firm in Sullivan County,
Indiana, and three commercial banks, one savings and loan, and one credit
union in Greene County, Indiana.
- - PARKE -- Two commercial banks, five credit unions and two brokerage firms
in Parke County, Indiana.
- - CRAWFORD -- Four commercial banks, two credit unions and four brokerage
firms in Crawford County, Illinois, and seven commercial banks and one
credit union in Lawrence County, Illinois.
2003 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
- - COMMUNITY -- Four commercial banks, three brokerage firms and three
consumer finance companies in Richland County, Illinois; eight commercial
banks, one credit union and two consumer finance companies in Lawrence
County, Illinois; five commercial banks, one brokerage firm and one
consumer finance company in Wayne County, Illinois; three commercial banks,
one insurance company and two brokerage firms in Jasper County, Illinois;
seven commercial banks, three savings and loans, six credit unions, two
insurance companies; five brokerage firms and six consumer finance
companies in Coles County, Illinois.
The Corporation's business activities are centered in west-central Indiana and
east-central Illinois. The Corporation has no foreign activities other than
periodically investing available funds in time deposits held in foreign branches
of domestic banks.
Forrest Sherer Inc. is a premier regional supplier of insurance, surety and
other financial products. The Forrest Sherer brand is well recognized in the
Midwest, with more than 60 professionals and 80 years of successful service to
both small and large businesses and to households in their market area. The
agency has representation agreements with more than 40 regional and national
insurers to market their products of property and casualty insurance, surety
bonds, employee benefit plans, life insurance and annuities.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Management's Discussion and Analysis of Financial Condition and Results of
Operations, as well as disclosures found elsewhere in this report are based upon
First Financial Corporation's consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
the Corporation to make estimates and judgments that affect the reported amounts
of assets, liabilities, revenues, and expenses. Material estimates that are
particularly susceptible to significant change in the near term relate to the
determination of the allowance for loan losses, the valuation of the mortgage
servicing rights and goodwill. Actual results could differ from those estimates.
ALLOWANCE FOR LOSSES. The allowance for loan losses is maintained at a
level believed adequate by management to absorb probable losses inherent in
the consolidated loan portfolio. Management's evaluation of the adequacy of
the allowance is an estimate based on reviews of individual loans,
assessments of the impact of current and anticipated economic conditions on
the portfolio, and historical loss experience. The allowance represents
management's best estimate, but significant downturns in circumstances
relating to loan quality and economic conditions could result in a
requirement for additional allowance in the near future. Likewise, an
upturn in loan quality and improved economic conditions may result in a
decline in the required allowance. In either instance unanticipated changes
could have a significant impact on operating earnings.
The allowance is increased through a provision charged to operating
expense. Uncollectible loans are charged-off through the allowance.
Recoveries of loans previously charged off are added to the allowance. A
loan is considered impaired when it is probable that contractual interest
and principal payments will not be collected either for the amounts or by
the dates as scheduled in the loan agreement. The Corporation's policy for
recognizing income on impaired loans is to accrue interest unless a loan is
placed on nonaccrual status.
MORTGAGE SERVICING RIGHTS. Servicing rights are recognized as separate
assets when loans are sold with servicing retained. Capitalized servicing
rights are amortized into noninterest income in proportion to, and over the
period of, the estimated future net servicing income of the underlying
financial assets. Servicing rights are valued based upon their estimated
fair value. The Corporation periodically utilizes the services of a third
party to determine the fair value of these assets. Negative adjustments to
value (referred to as impairment), if any, are recognized through a
valuation allowance by charges against mortgage servicing income. Valuation
of mortgage servicing rights is depended on many factors, including
anticipated life, prepayment speeds, economic conditions and discount
rates. A change in these and other factors could result in higher or lower
amortization and impairment.
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, the capitalization, amortization and valuations of mortgage servicing
rights 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, rates of
future prepayments, valuation assumptions, and anticipated 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.
FIRST FINANCIAL CORPORATION
RESULTS OF OPERATIONS -- SUMMARY FOR 2003
Net income through the fourth quarter of 2003 was $26.5 million, or $1.95
per share. This represents a 7.5% reduction in net income and a 7.14%
decrease in earnings per share. 2002 net income was favorably affected by
$3.9 million in life insurance proceeds received in the fourth quarter,
which increased 2002 earnings per share by $ .29. Comparing 2003
performance against 2002 net income before the insurance proceeds would
have shown a $1.6 million or 6.4% increase while earnings per share would
have shown a $ .12 or 6.6.% increase.
Net interest income of $74.4 million was down by $3.8 million for 2003, the
result of a $29.5 million decrease in average earning assets and an 8 basis
point decrease in the net interest margin.
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.
Total average interest-earning assets decreased to $2.04 billion in 2003
from $2.07 billion in 2002. The tax-equivalent yield on these assets
decreased to 6.38% in 2003 from 6.90% in 2002. Total average
interest-bearing liabilities of $1.74 billion in 2003 was essentially the
same in 2002. The average cost of these interest-bearing liabilities
decreased to 2.78% in 2003 from 3.34% in 2002.
On a tax equivalent basis, net interest income decreased $2.9 million from
$84.9 million in 2002 to $82.0 million in 2003. The net interest margin
decreased from 4.10% in 2002 to 4.02% in 2003. This decrease is primarily
the result of the decreased yield on earning assets having a larger impact
than the decreased cost of interest-bearing liabilities, both of which
decreased in excess of 50 basis points.
The following table sets forth the components of net interest income due to
changes in volume and rate. The table information compares 2003 to 2002 and
2002 to 2001.
2003 Compared to 2002 2002 Compared to 2001
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) $ (1,132) $ (6,632) $ 71 $(7,693) $ 9,653 $(11,340) $(1,005) $ (2,692)
Taxable investment
securities 362 (3,706) (70) (3,414) 1,193 (6,378) (309) (5,494)
Tax-exempt investment
securities (2) (252) (1,045) 15 (1,282) 153 (48) - 105
Federal funds sold (295) (134) 107 (322) 277 (84) (87) 106
-------- --------- ------ ------- -------- -------- ------- --------
Total interest income (1,317) (11,517) 123 (12,711) 11,276 (17,850) (1,401) (7,975)
-------- --------- ------ ------- -------- -------- ------- --------
Interest paid on
interest-bearing liabilities:
Transaction accounts 789 (2,786) (331) (2,328) 1,517 (4,296) (647) (3,426)
Time deposits (1,217) (4,326) 188 (5,355) 2,852 (11,169) (858) (9,175)
Short-term borrowings 10 (262) (4) (256) (1,112) (1,282) 567 (1,827)
Other borrowings (1,837) (93) 8 (1,922) (622) (1,015) 26 (1,611)
------- --------- -------- ------- -------- -------- ------- --------
Total interest expense (2,255) (7,467) (139) (9,861) 2,635 (17,762) (912) (16,039)
------- --------- -------- ------- -------- -------- ------- --------
Net interest income $ 938 $ (4.050) $ 262 $(2,850) $ 8,641 $ (88) $ (489) $ 8,064
======== ========= ===== ======= ======== ======== ======= ========
(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%.
2003 ANNUAL REPORT
RESULTS OF OPERATIONS -- SUMMARY FOR 2003
PROVISION FOR LOAN LOSSES
The provision for loan losses is established by charging current earnings
with an amount which will maintain the allowance for loan losses at a level
sufficient to provide for probable incurred losses in the Corporation's
loan portfolio. Management considers several factors in determining the
provision, including loss experience, changes in the composition of the
portfolio, the financial condition of borrowers, economic trends, and
general economic conditions. The provision for loan losses totaled $7.4
million and $9.5 million for 2003 and 2002, respectively. During the fourth
quarter of 2003 management improved the Corporation's position in three
classified credits thereby allowing a reduction in the provision expense
during that period to $607 thousand from the $2.3 million expensed during
the third quarter. This also contributed to a reduction of non-performing
loans from $17.7 million in 2002 to $13.8 million in 2003.
Net charge-offs for 2003 decreased to $7.5 million from $8.3 million in
2002. At December 31, 2003, the resulting allowance for loan losses was
$21.2 million or 1.49% of total loans, net of unearned income. A year
earlier the allowance was $21.2 million or 1.48% of total loans.
NON-INTEREST INCOME
Non-interest income of $30.8 million increased $300 thousand from the $30.5
million earned in 2002. Service charges and fees on deposit accounts and
other service charges and fees increased $1.9 million and $2.7 million,
respectively. These increases are the result of a focused effort to
increase fee-based income.
Trust and financial services commissions increased by $300 thousand.
Non-interest income for 2002 included a $3.9 million life insurance benefit
payment from bank-owned life insurance policies.
NON-INTEREST EXPENSES
Non-interest expenses totaled $62.5 million for 2003 compared to $63.3
million for 2002. This represents a decrease of $800 thousand or 1.3% for
2003. Salaries and related benefits, the largest component of this group,
increased from $36.5 million to $36.9 million, less than 1%. Occupancy
expense increased 3.3% or $100 thousand while equipment expense decreased
by $100 thousand. All other non-interest expense decreased by $1.1 million
to $18.7 million from $19.8 million in 2002.
INCOME TAXES
The Corporation's federal income tax provision was $8.8 million in 2003
compared to a provision of $7.2 million in 2002. The overall effective tax
rate in 2003 of 25.0% compares to a 2002 effective rate of 20.1%. Over the
past three years management has implemented a strategy which focuses on the
taxability of income on securities. This strategy has benefitted the
Corporation as state income tax expense has declined every year, despite
increased income before tax. The life insurance benefit received in 2002
was not subject to income tax, thereby further reducing the effective tax
rate for 2002.
COMPARISON OF 2002 TO 2001
Net income for 2002 was $28.6 million or $2.10 per share compared to $24.2
million in 2001 or $1.78 per share. This increased income was primarily the
result of increased net interest income of $7.6 million. Total average
interest-earning assets increased to $2.07 billion in 2002 from $1.92
billion in 2001. The net interest margin increased from 4.00% in 2001 to
4.10% in 2002. This increase is primarily the result of funding costs
decreasing faster than the yield on earning assets.
The provision for loan losses increased $2.9 million, from $6.6 million in
2001 to $9.5 million in 2002, and net charge-offs increased to $8.2 million
in 2002 from $7.4 million in 2001. The majority of the increased provision
was the result of an increase in underperforming loans.
There was a $988 thousand negative change in net non-interest income and
expense from 2001 to 2002. The increase primarily relates to the salary and
related benefit costs with the addition of First Community Bank, N.A. and
Forrest Sherer Inc.
The provision for income taxes fell $667 thousand from 2001 to 2002,
reducing the effective tax rate from 24.6% in 2001 to 20.1% in 2002. The
year 2002 was the second year of a new tax strategy focusing on the
taxability of income and securities described above in the income tax
section and was further impacted by the receipt of a non-taxable $3.9
million life insurance benefit.
FIRST FINANCIAL CORPORATION
FINANCIAL CONDITION -- SUMMARY
The Corporation's total assets increased 2.4% or $53.3 million at
December 31, 2003, from a year earlier. Available-for-sale securities
increased $56.2 million at December 31, 2003, from the previous year.
Loans, net of unearned income, decreased by $3.0 million, to $1.4
billion. This decrease was the result of selling approximately $185.0
million of real estate loans in the secondary market. This decreased
real estate mortgage loans by $22.7 million. Stronger demand for
commercial loans resulted in a $43.3 million increase, while economic
and competitive pressures resulted in a decrease of $19.8 million in
installment loans outstanding.
Total shareholders' equity increased to $255.3 million at December 31,
2003, compared to $242.0 million a year earlier. Higher net income was
offset by increased dividends and the continued repurchase of corporate
stock. During 2003, 80,120 shares were acquired at a cost of $2.1
million. There were also 40,000 shares from the treasury with a value
of $1.2 million that were contributed to the ESOP plan. In addition,
during 2003, the Corporation recorded a net unrealized loss on
available-for-sale securities of $2.8 million. While this fluctuation
in fair value decreased shareholders' equity, no loss is recognized in
net income unless the security is actually sold.
Following is an analysis of the components of the Corporation's balance
sheet. Information describing the components of the Corporation's
securities portfolio, and the market value, maturities and weighted
average yields of the securities is included in Note 4 of the notes to
the consolidated financial statements.
LOAN PORTFOLIO
Loans outstanding by major category as of December 31 for each of the last
five years and the maturities at year-end 2003 are set forth in the
following analyses.
(Dollar amounts in thousands) 2003 2002 2001 2000 1999
----------------------------- ---- ---- ---- ---- ----
LOAN CATEGORY
Commercial, financial and agricultural $ 374,638 $ 331,316 $ 302,496 $ 282,904 $ 247,949
Real estate - construction 35,361 42,930 34,610 41,325 44,782
Real estate - mortgage 766,911 789,618 757,345 732,387 671,972
Installment 248,290 268,067 249,710 237,527 223,459
Lease financing 4,884 1,281 5,023 4,810 5,723
------------ ------------ ------------ ------------ ------------
TOTAL $ 1,430,084 $ 1,433,212 $ 1,349,184 $ 1,298,953 $ 1,193,885
============ ============ ============ ============ ============
After One
Within But Within After Five
(Dollar amounts in thousands) One Year Five Years Years Total
- -------------------------------------- --------- ---------- ---------- ----------
MATURITY DISTRIBUTION
Commercial, financial and agricultural $ 228,396 $ 107,434 $ 38,808 $ 374,638
Real estate - construction 13,773 15,053 6,535 35,361
--------- --------- -------- ----------
TOTAL $ 242,169 $ 122,487 $ 45,343 409,999
========= ========= ========
Real estate - mortgage 766,911
Installment 248,290
Lease financing 4,884
----------
TOTAL $1,430,084
==========
Loans maturing after one year with:
Fixed interest rates $ 50,596 $ 41,823
Variable interest rates 71,891 3,520
--------- --------
TOTAL $ 122,487 $ 45,343
========= ========
2003 ANNUAL REPORT
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) 2003 2002 2001 2000 1999
- ----------------------------- ---- ---- ---- ---- ----
Amount of loans outstanding
at December 31, $ 1,430,084 $ 1,433,212 $ 1,349,184 $ 1,298,953 $ 1,193,885
============ ============ ============ ============ ============
Average amount of loans by year $ 1,417,026 $ 1,432,290 $ 1,315,725 $ 1,256,505 $ 1,151,968
============ ============ ============ ============ ============
Allowance for loan losses
at beginning of year $ 21,249 $ 18,313 $ 19,072 $ 17,949 $ 16,429
Addition resulting from acquisition - 1,711 - - -
Loans charged off:
Commercial, financial and agricultural 2,253 4,627 4,079 1,055 344
Real estate - mortgage 1,101 892 557 406 932
Installment 5,586 4,619 4,395 3,196 3,034
Leasing - - 12 6 -
------------ ------------ ------------ ------------ ------------
Total loans charged off 8,940 10,138 9,043 4,663 4,310
------------ ------------ ------------ ------------ ------------
Recoveries of loans previously charged off:
Commercial, financial and agricultural 432 840 819 578 170
Real estate - mortgage 166 110 60 28 142
Installment 877 935 790 788 788
Leasing - - - - 5
------------ ------------ ------------ ------------ ------------
Total recoveries 1,475 1,885 1,669 1,394 1,105
------------ ------------ ------------ ------------ ------------
Net loans charged off 7,465 8,253 7,374 3,269 3,205
Provision charged to expense 7,455 9,478 6,615 4,392 4,725
------------ ------------ ------------ ------------ ------------
Balance at end of year $ 21,239 $ 21,249 $ 18,313 $ 19,072 $ 17,949
============ ============ ============ ============ ============
Ratio of net charge-offs during period
to average loans outstanding .53% .58% .56% .26% .28%
============ ============ ============ ============ ============
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.
FIRST FINANCIAL CORPORATION
FINANCIAL CONDITION -- SUMMARY
Years Ended December 31,
--------------------------------------------------------------
(Dollar amounts in thousands) 2003 2002 2001 2000 1999
- ----------------------------- ---- ---- ---- ---- ----
Commercial, financial and agricultural $ 13,844 $ 12,993 $ 11,151 $ 10,771 $ 6,990
Real estate -- mortgage 1,254 1,471 1,330 1,060 1,348
Installment 6,141 5,856 4,489 3,509 3,506
Leasing - 15 17 8 3
Unallocated - 914 1,326 3,724 6,102
--------- --------- --------- --------- ----------
TOTAL ALLOWANCE FOR LOAN LOSSES $ 21,239 $ 21,249 $ 18,313 $ 19,072 $ 17,949
========= ========= ========= ========= ==========
UNDER-PERFORMING LOANS
Management monitors the components and status of under-performing 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. The interest income for non-accrual and
restructured loans that would have been recorded in 2003, 2002 and
2001, under the original terms of the loans is $1.3 million, $1.4
million and $1.1 million, respectively. The Corporation recorded
interest income on such loans in the amounts of $583 thousand, $643
thousand and $535 thousand for 2003, 2002 and 2001, respectively.
(Dollar amounts in thousands) 2003 2002 2001 2000 1999
---------------------------- ---- ---- ---- ---- ----
Non-accrual loans $ 8,429 $ 11,807 $ 8,854 $ 8,316 $ 2,879
Restructured loans 542 546 590 735 959
--------- --------- --------- --------- ---------
8,971 12,353 9,444 9,051 3,838
Accruing loans past due over 90 days 5,384 5,899 4,925 5,499 5,229
--------- --------- --------- --------- ---------
$ 14,355 $ 18,252 $ 14,369 $ 14,550 $ 9,067
========= ========= ========= ========= =========
The ratio of the allowance for loan losses as a percentage of
under-performing loans was 148% at December 31, 2003, compared to 116%
in 2002. This results from the $3.9 million decrease in
under-performing loans while maintaining the allowance at $21.2
million. The following loan categories comprise significant components
of the under-performing loans at December 31, 2003:
(Dollar amounts in thousands)
-----------------------------
Non-accrual loans:
1-4 family residential $ 2,155 26%
Commercial loans 4,697 56
Installment loans 1,577 18
Other, various - -
-------- ---
$ 8,429 100%
======== ===
Past due 90 days or more:
1-4 family residential $ 2,321 44%
Commercial loans 1,530 28
Installment loans 1,533 28
Other, various - -
-------- ---
$ 5,384 100%
======== ===
There are no material concentrations by industry within the
under-performing loans.
2003 ANNUAL REPORT
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, 2003, approximately $70.4 million of
commercial loans are graded doubtful or substandard, including the $4.4
million of non-accrual and past-due commercial loans listed above. This
compares to $51.4 million in 2002, which included $9.7 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
Total deposits increased to $1.48 billion at December 31, 2003, from
$1.43 billion at December 31, 2002. The Corporation experienced a
fluctuation between deposit types due to a rate-sensitive market
environment. The information below presents the average amount of
deposits and rates paid on those deposits for 2003, 2002 and 2001.
2003 2002 2001
-------------------- ------------------- -------------------
(Dollar amounts in thousands) Amount Rate Amount Rate Amount Rate
- -------------------------------- ------------ ---- ------------ ---- ---------- -----
Non-interest-bearing
demand deposits $ 177,712 $ 202,438 $ 148,931
Interest-bearing demand deposits 231,590 .63% 198,503 .97% 170,990 1.28%
Savings deposits 357,989 .80% 328,506 1.43% 287,012 2.74%
Time deposits:
$100,000 or more 197,946 2.87% 193,504 3.07% 198,575 5.32%
Other time deposits 517,364 3.27% 554,341 3.97% 495,940 5.36%
------------ ------------ ----------
TOTAL $ 1,482,601 $ 1,477,292 $1,301,448
============ ============ ==========
The maturities of certificates of deposit of $100 thousand or more
outstanding at December 31, 2003, are summarized as follows:
3 months or less $ 41,229
Over 3 through 6 months 25,033
Over 6 through 12 months 12,596
Over 12 months 113,327
--------
TOTAL $192,185
========
SHORT-TERM BORROWINGS
A summary of the carrying value of the Corporation's short-term
borrowings at December 31, 2003, 2002 and 2001 is presented below:
(Dollar amounts in thousands) 2003 2002 2001
- ----------------------------- ---- ---- ----
Federal funds purchased $ 61,524 $ 16,311 $ 9,920
Repurchase agreements 5,130 13,237 37,400
Other short-term borrowings 1,975 4,807 7,276
-------- --------- --------
$ 68,629 $ 34,355 $ 54,596
=======- ========= ========
The amounts and interest rates related to federal funds purchased and
repurchase agreements are presented below:
(Dollar amounts in thousands) 2003 2002 2001
- ----------------------------- ---- ---- ----
Average amount outstanding $ 32,153 $ 24,857 $ 59,603
Maximum amount outstanding at a month end 91,376 66,485 81,330
Average interest rate during year 1.45% 2.73% 4.46%
Interest rate at year-end 1.15% 1.63% 2.32%
FIRST FINANCIAL CORPORATION
FINANCIAL CONDITION -- SUMMARY
OTHER BORROWINGS
Advances from the Federal Home Loan Bank decreased to $358.6 million in
2003 compared to $397.2 million in 2002. Increased deposits funded the
reduction in advances and generally had a lower cost. The
Asset/Liability Committee reviews these investments and considers the
related strategies on a weekly basis. See Interest Rate Sensitivity and
Liquidity below for more information. The Corporation borrowed $20
million from a financial institution during 2002 to purchase Community
Financial Corp. The outstanding balance on this loan at year end was
$18.0 million.
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, 2003.
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 2003
and 2002 was 35.9% and 29.6%, 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, 2003. The change in interest
rates assumes a parallel shift in interest rates of 100 and 200 basis
points. Given a 100 basis point increase in rates, net interest income
would increase 1.72% over the next 12 months and increase 3.83% over
the following 12 months. Given a 100 basis point decrease in rates, net
interest income would decrease 3.78% over the next 12 months and
decrease 6.45% over the following 12 months. These estimates assume all
rate changes occur overnight and management takes no action as a result
of this change.
2003 ANNUAL REPORT
FINANCIAL CONDITION -- SUMMARY
Percentage Change in Net Interest Income
----------------------------------------
Basis Point
Interest Rate Change 12 months 24 months 36 months
- -------------------- --------- --------- ---------
Down 200 -10.00% -16.65% -22.36%
Down 100 - 3.78 -6.45 -9.66
Up 100 1.72 3.83 7.04
Up 200 3.66 7.78 14.49
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 $10.2 million of
investments that mature throughout the coming 12 months. The
Corporation also anticipates $48.8 million of principal payments from
mortgage-backed securities. Given the current rate environment, the
Corporation anticipates $26.3 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, 2003, significant fixed and determinable contractual obligations to
third parties by payment date. Further discussion of the nature of each
obligation is included in the reference note to the consolidated
financial statements.
Payments Due In
-----------------------------------------------------------------------
One to Three to Over
Note One Year Three Five Five
(Dollar amounts in thousands) Reference or Less Years Years Years Total
- ----------------------------- --------- --------- --------- ----- -------- ---------
Deposits without a stated maturity $ 786,624 $ - $ - $ - $ 786,624
Consumer certificates of deposit 9 383,822 227,864 80,524 513 692,723
Short-term borrowings 9 68,629 - - - 68,629
Other borrowings 10 49,659 660 52,419 280,495 383,233
COMMITMENTS: The following table details the amount and expected
maturities of significant commitments as of December 31, 2003. Further
discussion of these commitments is included in Note 12 to the
consolidated financial statements.
Total Amount One Year Over One
(Dollar amounts in thousands) Committed or Less Year
- ----------------------------- ------------ ---------- ----------
Commitments to extend credit:
Unused loan commitments $ 235,328 $ 101,428 $ 133,900
Standby letters of credit 5,619 5,604 15
Commitments to extend credit, including loan commitments, standby
letters of credit and commercial letters of credit do not necessarily
represent future cash requirements, in that these commitments often
expire without being drawn upon.
OUTLOOK
The Corporation's primary market, the Wabash Valley, has experienced an
improved economic climate similar to that of the national economy
during 2003. Historically, the Wabash Valley has not grown as fast as
the state or national economy and conversely, it has not slowed as much
as the state or national economy. The local economy continues to be
driven by retail, higher education and health-related industries.
During 2003 the area unemployment rate declined, and there continues to
be a number of new projects being developed. There are, however, no
significant growth opportunities currently available in our primary
market area.
The Corporation also continues to look for merger or acquisition
opportunities throughout the Wabash Valley that share First Financial's
mission of quality service to their customers. These smaller
institutions increasingly realize the need to align with an
organization that has the resources to compete on a regional level.
With the largest retail presence in the Wabash Valley, First Financial
is poised to provide these resources.
FIRST FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEET - AVERAGE BALANCES AND INTEREST RATES
December 31,
----------------------------------------------------------------------------------------------
2003 2002 2001
----------------------------- ------------------------------ ------------------------------
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) $1,417,026 98,565 6.96% $1,432,290 106,258 7.42% $1,315,725 108,950 8.28%
Taxable investment securities 416,403 15,714 3.77 408,666 19,128 4.68 389,776 24,622 6.32
Tax-exempt investments (2) 203,021 15,938 7.85 206,034 17,220 8.36 204,205 17,115 8.38
Federal funds sold 5,129 52 .99 24,129 374 1.55 11,877 268 2.26
---------- -------- ------- ---------- -------- ------ ---------- -------- ------
Total interest-earning assets 2,041,579 130,269 6.38% 2,071,119 142,980 6.90% 1,921,583 150,955 7.86%
-------- ======= -------- ====== -------- ======
Non-interest earning assets:
Cash and due from banks 80,261 67,319 58,703
Premises and equipment, net 29,634 29,763 26,624
Other assets 63,753 60,356 53,168
Less allowance for loan losses (22,242) (20,487) (18,796)
---------- ---------- ----------
TOTALS $2,192,985 $2,208,070 $2,041,282
========== ========== ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Transaction accounts $ 589,579 4,315 .73% $ 527,009 6,643 1.26% $ 458,002 10,069 2.20%
Time deposits 715,310 22,610 3.16 747,845 27,964 3.74 694,515 37,139 5.35
Short-term borrowings 35,262 431 1.22 34,759 687 1.98 62,321 2,514 4.03
Other borrowings 392,540 20,869 5.32 426,961 22,792 5.34 438,123 24,403 5.57
---------- -------- ------- ---------- -------- ------ ---------- -------- ------
Total interest-bearing
liabilities: 1,732,691 48,225 2.78% 1,736,574 58,086 3.34% 1,652 ,961 74,125 4.48%
-------- ======= -------- ====== -------- ======
Non interest-bearing
liabilities:
Demand deposits 177,712 202,438 148,931
Other 30,441 30,643 25,871
---------- ---------- ----------
1,940,844 1,969,655 1,827,763
Shareholders' equity 252,141 238,415 213,519
---------- ---------- ----------
TOTALS $2,192,985 $2,208,070 $2,041,282
========== ========== ==========
Net interest earnings $ 82,044 $ 84,894 $ 76,830
======== ======== ========
Net yield on
interest-earning assets 4.02% 4.10% 4.00%
======= ====== ======
(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%.
2003 ANNUAL REPORT
MARKET AND DIVIDEND INFORMATION
At year-end 2003 shareholders owned 13,578,770 shares of the
Corporation's common stock. The stock is traded over-the-counter under
the NASDAQ National Market System with the symbol THFF. Such
over-the-counter market quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
Historically, the Corporation has paid cash dividends semi-annually and
currently expects that comparable cash dividends will continue to be
paid in the future. The following table gives quarterly high and low
trade prices and dividends per share during each quarter for 2003 and
2002.
2003 2002
-------------------------------- --------------------------------
Bid Quotation Cash Bid Quotation Cash
Dividends Dividends
Quarter ended High Low Declared High Low Declared
------------- ---- --- -------- ---- --- ---------
March 31 $ 31.50 $ 28.77 $ 22.42 $21.35
June 30 $ 32.25 $ 27.50 $ .34 $ 25.71 $21.68 $ .31
September 30 $ 28.74 $ 23.56 $ 26.50 $22.28
December 31 $ 24.65 $ 23.36 $ .36 $ 26.84 $24.30 $ .31
SELECTED QUARTERLY DATA (UNAUDITED)
2003
--------------------------------------------------------------------------
Net Provision
Interest Interest Interest for Loan Net Net Income
(Dollar amounts in thousands) Income Expense Income Losses Income Per Share
- ---------------------------- -------- --------- --------- --------- -------- ----------
March 31 $ 31,666 $ 12,737 $ 18,929 $ 2,227 $ 7,033 $ .52
June 30 $ 30,776 $ 12,098 $ 18,678 $ 2,303 $ 6,174 $ .46
September 30 $ 30,400 $ 11,869 $ 18,531 $ 2,318 $ 6,443 $ .47
December 31 $ 29,819 $ 11,521 $ 18,298 $ 607 $ 6,843 $ .50
2002
--------------------------------------------------------------------------
Net Provision
Interest Interest Interest for Loan Net Net Income
(Dollar amounts in thousands) Income Expense Income Losses Income Per Share
- ---------------------------- -------- --------- --------- --------- -------- ----------
March 31 $ 34,305 $ 14,839 $ 19,466 $ 1,932 $ 6,728 $ .49
June 30 $ 34,840 $ 14,760 $ 20,080 $ 2,416 $ 6,552 $ .48
September 30 $ 33,835 $ 14,542 $ 19,293 $ 2,273 $ 6,171 $ .45
December 31 $ 33,282 $ 13,945 $ 19,337 $ 2,857 $ 9,189 $ .68