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