<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended Commission file number
December 31, 1998 0-16759
FIRST FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
INDIANA 35-1546989
(State of Incorporation) (I.R.S. Employer
Identification No.)
One First Financial Plaza 47807
Terre Haute, IN
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (812) 238-6000
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- ------------------- -----------------------------------------
Common Stock, no par value Nasdaq
Securities registered pursuant to Section 12(g) of the Act: None
Indicated by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of regulation 8-K is not contained herein, and will not be contained, to the
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to the
Form 10-K. X
---
As of January 31, 1999 the aggregate market value of the voting stock held
by nonaffiliates of the registrant based on the average bid and ask prices of
such stock was $247,314,761. (For purposes of this calculation, the Corporation
excluded the stock owned by certain beneficial owners and management and the
Corporation's ESOP.)
Shares of Common Stock outstanding as of January 31, 1999--7,100,061
shares.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Portions of the 1998 Annual Report to Shareholders are incorporated by
reference. Portions of the Definitive Proxy Statement for the First Financial
Corporation Annual Meeting to be held April 21, 1999 are incorporated by
reference into Part III.
<PAGE> 2
FORM 10-K CROSS-REFERENCE INDEX
<TABLE>
<CAPTION>
PAGE
----
PART I
<S> <C> <C>
Item 1 Business ............................................................................................ 2
Item 2 Properties .......................................................................................... 2
Item 3 Legal Proceedings ................................................................................... 2
Item 4 Submission of Matters to a Vote of Security Holders ................................................. 2
PART II
Item 5 Market for Registrant's Common Stock and Related Stockholder Matters ................................ 3
Item 6 Selected Financial Data ............................................................................. 3
Item 7 Management's Discussion and Analysis of Financial Conditions and Results of Operations .............. 3
Item 8 Financial Statements and Supplementary Data ......................................................... 3
Item 9 Changes in and Disagreement with Accountants on Accounting and Financial Disclosures ................ 3
PART III
Item 10 Directors and Executive Officers of Registrant ...................................................... 3
Item 11 Executive Compensation .............................................................................. 3
Item 12 Security Ownership of Certain Beneficial Owners and Management ...................................... 3
Item 13 Certain Relationships and Related Transactions ...................................................... 3
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K ..................................... 4
Signatures .......................................................................................... 5
</TABLE>
<PAGE> 3
PART I
ITEM 1. BUSINESS
First Financial Corporation became a multi-bank holding company in 1984. For
more information on the Bank's business, please refer to the following sections
of the 1998 Annual Report to Shareholders:
1. Description of bank services, affiliations, number of employees, and
competition, on page 29.
2. Information regarding supervision of the Bank, on page 14.
3. Details regarding competition, on page 29.
ITEM 2. PROPERTIES
First Financial Corporation (the Corporation) is located in a four-story
office building in downtown Terre Haute that was occupied in June 1988. It is
leased to Terre Haute First National Bank. This bank also owns two other
facilities in downtown Terre Haute. One is leased to another party and the other
is a 50,000-square-foot building housing operations and administrative staff and
equipment. In addition, the Bank holds in fee four other branch buildings. One
of the branch buildings is a single-story 44,000-square-foot building which is
located in a Terre Haute suburban area. Six other branch bank buildings are
leased by the Bank. The expiration dates on the leases are February 14, 2011,
May 31, 2011, December 31, 2003, June 30, 2002, September 1, 2001, and June 30,
1999.
Facilities of the Corporation's subsidiary, First State Bank, include
branches in Clay City and Poland, Indiana and two branch facilities in Brazil,
Indiana including the main office. The buildings are held in fee by First State.
Facilities of the Corporation's subsidiary, First Citizens State Bank of
Newport, include its main office in Newport, Indiana and three branch facilities
in Cayuga and Clinton, Indiana. All four buildings are held in fee by First
Citizens.
Facilities of the Corporation's subsidiary, First Farmers State Bank, include
its main office in Sullivan, Indiana and five branch facilities in Carlisle,
Dugger, Farmersburg, Hymera, and Worthington, Indiana. All six buildings are
held in fee by First Farmers.
The facility of the Corporation's subsidiary, First Ridge Farm State Bank,
includes an office facility in Ridge Farm, Illinois. The building is held in fee
by First Ridge Farm State.
Facilities of the Corporation's subsidiary, First Parke State Bank, include
its main office in Rockville, Indiana and three branch facilities in Marshall,
Montezuma and Rosedale, Indiana. All four buildings are held in fee by First
Parke.
The facility of the Corporation's subsidiary, First National Bank of
Marshall, is an office facility in Marshall, Illinois. The building is held in
fee by First National Bank of Marshall.
Facilities of the Corporation's subsidiary, First Crawford State Bank,
include its main office in Robinson, Illinois and two branch facilities in
Oblong and Sumner, Illinois. All three buildings are held in fee by First
Crawford.
The facility of the Corporation's subsidiary, The Morris Plan Company,
includes an office facility in Terre Haute, Indiana. The building is held in fee
by The Morris Plan Company.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings which involve the Corporation
or its subsidiaries that are expected to materially affect the Corporation's
future financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
2
<PAGE> 4
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
See "Market and Dividend information" on page 40 of the 1998 Annual Report.
ITEM 6. SELECTED FINANCIAL DATA
See "Five Year Comparison of Selected Financial Data" on page 9 of the 1998
Annual Report to Shareholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
See "Management's Discussion and Analysis" on pages 29 through 38 of the 1998
Annual Report to Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See "Consolidated Balance Sheets" on page 10, "Consolidated Statements of
Income" on page 11, "Consolidated Statements of Shareholders Equity" on page 12,
"Consolidated Statements of Cash Flows" on page 13, and "Notes to Consolidated
Financial Statement" on pages 14-27. "Responsibility for Financial Statements"
and "Report of Independent Accountants" can be found on page 28.
Statistical disclosure by Bank Holding Company include the following
information:
1. "Volume/Rate Analysis," on page 30.
2. "Loan Portfolio," on page 32.
3. "Allowance for Possible Loan Losses," on page 33.
4. "Under-Performing Loans," on page 34.
5. "Deposits," on page 35.
6. "Short-Term Borrowings," on page 35.
7. "Consolidated Balance Sheet-Average Balances and Interest Rates," on page
39.
ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
See pages 2 through 4 of the Annual Proxy Statement of First Financial
Corporation.
ITEM 11. EXECUTIVE COMPENSATION
See pages 4 through 6 of the Annual Proxy Statement of First Financial
Corporation.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See pages 9 through 10 of the Annual Proxy Statement of First Financial
Corporation.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See "Certain Relationships" on page 3, and "Transactions with Management" on
page 7 of the Annual Proxy Statement of First Financial Corporation.
3
<PAGE> 5
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) The following consolidated financial statements of the
Registrant and its subsidiaries are included in the Annual Report of
First Financial Corporation attached:
Consolidated Balance Sheets--December 31, 1998 and 1997
Consolidated Statements of Income--Years ended December 31, 1998,
1997, and 1996
Consolidated Statements of Shareholders' Equity--Years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flow--Years ended December 31, 1998,
1997 and 1996
Notes to Consolidated Financial Statements
(2) Schedules to the Consolidated Financial Statements required by
Article 9 of Regulation S-X are not required, inapplicable, or the
required information has been disclosed elsewhere.
(3) Listing of Exhibits:
Exhibit Number Description
-------------- ------------
21 Subsidiaries
(b) Reports on Forms 8-K--None
(c) Exhibits--Exhibits to (a) (3) listed above are attached to this report.
(d) Financial Statements Schedules--No schedules are required to be
submitted. See response to ITEM 14 (a) (2).
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
First Financial Corporation
/s/ Michael A. Carty
--------------------------------------
Michael A. Carty, Treasurer
(Principal Financial Officer
and Principal Accounting Officer)
Date: March 16, 1999
4
<PAGE> 1
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME DATE
- ---- ----
<S> <C>
Donald E. Smith, Signed March 16, 1999
- --------------------------------------------
Donald E. Smith, President & Director
(Principal Executive Officer)
John W. Perry, Signed March 16, 1999
- --------------------------------------------
John W. Perry, Secretary
Walter A. Bledsoe, Signed March 16, 1999
- --------------------------------------------
Walter A. Bledsoe, Director
B. Guille Cox, Jr., Signed March 16, 1999
- --------------------------------------------
B. Guille Cox, Jr., Director
Thomas T. Dinkel, Signed March 16, 1999
- --------------------------------------------
Thomas T. Dinkel, Director
Anton H. George, Signed March 16, 1999
- --------------------------------------------
Anton H. George, Director
March 16, 1999
- --------------------------------------------
Mari H. George, Director
Max Gibson, Signed March 16, 1999
- --------------------------------------------
Max Gibson, Director
Norman L. Lowery, Signed March 16, 1999
- --------------------------------------------
Norman L. Lowery, Director
William A. Niemeyer, Signed March 16, 1999
- --------------------------------------------
William A. Niemeyer, Director
Patrick O'Leary, Signed March 16, 1999
- --------------------------------------------
Patrick O'Leary, Director
John W. Ragle, Signed March 16, 1999
- --------------------------------------------
John W. Ragle, Director
March 16, 1999
- --------------------------------------------
Chapman J. Root II, Director
Virginia L. Smith, Signed March 16, 1999
- --------------------------------------------
Virginia L. Smith, Director
</TABLE>
5
<PAGE> 2
EXHIBIT 21--SUBSIDIARIES OF THE REGISTRANT
Terre Haute First National Bank is a wholly-owned subsidiary of the
Registrant. It is an national banking association. It is an Indiana corporation.
The bank conducts its business under the name of Terre Haute First National
Bank.
First State Bank is a wholly-owned subsidiary of the Registrant. It is a
state corporation in Indiana. The bank conducts its business under the name of
First State Bank.
First Citizens State Bank of Newport is a wholly-owned subsidiary of the
Registrant. It is a state corporation in Indiana. The bank conducts its business
under the name of First Citizens State Bank.
First Farmers State Bank is a wholly-owned subsidiary of the Registrant. It
is a state corporation in Indiana. The bank conducts its business under the name
of First Farmers State Bank.
First Ridge Farm State Bank is a wholly-owned subsidiary of the Registrant.
It is a state corporation in Illinois. The bank conducts its business under the
name of First Ridge Farm State Bank.
First Parke State Bank is a wholly-owned subsidiary of the Registrant. It is
a state corporation in Indiana. The bank conducts its business under the name of
First Parke State Bank.
First National Bank of Marshall is a wholly-owned subsidiary of the
Registrant. It is a national banking association. It is an Illinois corporation.
The bank conducts its business under the name of First National Bank.
First Crawford State Bank is a wholly-owned subsidiary of the Registrant. It
is a state corporation in Illinois. The bank conducts its business under the
name of First Crawford State Bank.
The Morris Plan Company is a wholly-owned subsidiary of the Registrant. It is
a state corporation in Indiana. The company conducts its business under the name
of The Morris Plan Company of Terre Haute, Inc.
6
<PAGE> 3
- --------------------------------------------------------------------------------
FIVE YEAR COMPARISON SELECTED FINANCIAL DATA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Dollar amounts in thousands,
except per share amounts) 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets $1,849,752 $1,634,936 $1,619,642 $1,545,307 $1,356,375
Investments 633,365 527,993 582,744 544,289 382,102
Net loans 1,111,765 1,005,799 918,767 879,516 857,039
Deposits 1,260,365 1,194,524 1,175,228 1,163,481 1,077,719
Long-term borrowings 96,138 37,237 70,561 56,750 25,672
Shareholders' equity 182,183 165,480 150,377 140,075 122,098
INCOME STATEMENT DATA:
Interest income 129,137 122,372 115,836 106,330 91,607
Interest expense 66,430 62,072 57,810 54,144 40,489
Net interest income 62,707 60,300 58,026 52,186 51,118
Provision for loan losses 5,396 5,382 4,461 2,563 2,674
Other income 10,611 8,957 7,849 7,922 7,382
Other expenses 42,567 39,629 39,280 38,690 37,616
Net income 18,558 18,100 15,971 13,897 13,325
PER SHARE DATA:
Net income 2.58 2.58 2.28 1.98 1.89
Cash dividends .84 72 .61 .51 .48
PERFORMANCE RATIOS:
Net income to average assets 1.07% 1.11% 1.03% .97% 1.00%
Net income to average
shareholders' equity 10.76 11.74 11.19 10.65 11.07
Average total capital
to average assets 10.71 10.13 9.80 9.84 9.75
Average shareholders' equity
to average assets 9.90 9.45 9.19 9.15 9.07
Dividend payout 32.54 28.06 26.85 25.58 25.22
</TABLE>
9
<PAGE> 4
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
(Dollar amounts in thousands) 1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 54,877 $ 53,815
Federal funds sold 450 280
Investments - available-for-sale 633,365 527,993
Loans 1,113,651 1,006,878
Less:
Unearned income 1,886 1,079
Allowance for loan losses 16,429 13,503
----------- -----------
1,095,336 992,296
Accrued interest receivable 14,704 14,086
Premises and equipment 24,426 24,925
Other assets 26,594 21,541
----------- -----------
TOTAL ASSETS $ 1,849,752 $ 1,634,936
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest-bearing $ 148,747 $ 162,880
Interest-bearing:
Certificates of deposit of $100,000 or more 196,773 195,487
Other interest-bearing deposits 914,845 836,157
----------- -----------
1,260,365 1,194,524
Short-term borrowings:
Federal funds purchased and securities sold
under agreements to repurchase 100,571 47,015
Treasury tax and loan open-end note 3,061 4,282
Advances from Federal Home Loan Bank 185,930 167,680
----------- -----------
289,562 218,977
Long-term borrowings:
Advances from Federal Home Loan Bank 89,519 30,596
Other borrowings 6,619 6,641
Other liabilities 21,504 18,718
----------- -----------
TOTAL LIABILITIES 1,667,569 1,469,456
Shareholders' equity
Common stock, $ .125 stated value per share,
authorized 10,000,000 shares, issued and outstanding
7,015,504 shares for 1997 and 7,225,483 shares for 1998
including treasury shares of 91,093 in 1998 903 877
Additional capital 66,680 59,787
Retained earnings 110,566 98,046
Accumulated other comprehensive income:
Unrealized gains on investments, net of tax 8,123 6,770
Less: Treasury shares at cost (4,089) --
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 182,183 165,480
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,849,752 $ 1,634,936
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
10
<PAGE> 5
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
(Dollar amounts in thousands, except per share data) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Loans $ 93,579 $ 83,653 $ 78,706
Investment securities:
Taxable 27,091 31,133 29,835
Tax-exempt 7,810 7,395 6,811
Other interest ncome 657 191 484
----------- ----------- -----------
TOTAL INTEREST INCOME 129,137 122,372 115,836
INTEREST EXPENSE:
Deposits 50,388 46,285 45,983
Short-term borrowings 11,260 12,672 7,077
Long-term borrowings 4,782 3,115 4,750
----------- ----------- -----------
TOTAL INTEREST EXPENSE 66,430 62,072 57,810
----------- ----------- -----------
NET INTEREST INCOME 62,707 60,300 58,026
Provision for loan losses 5,396 5,382 4,461
----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 57,311 54,918 53,565
OTHER INCOME:
Trust department income 2,179 1,973 1,797
Service charges on deposit accounts 1,317 1,340 1,431
Other service charges and fees 4,207 3,831 3,263
Investment securities gains (losses) 905 407 154
Other 2,003 1,406 1,204
----------- ----------- -----------
10,611 8,957 7,849
OTHER EXPENSES:
Salaries and employee benefits 23,519 22,041 21,222
Occupancy 2,823 2,870 2,939
Equipment 3,370 3,189 2,871
Printing and supplies 1,118 1,168 1,216
Other 11,737 10,361 11,032
----------- ----------- -----------
42,567 39,629 39,280
INCOME BEFORE INCOME TAXES 25,355 24,246 22,134
Income tax expense 6,797 6,146 6,163
----------- ----------- -----------
NET INCOME $ 18,558 $ 18,100 $ 15,971
=========== =========== ===========
EARNINGS PER SHARE:
NET INCOME $ 2.58 $ 2.58 $ 2.28
=========== =========== ===========
Weighted average number of shares outstanding in thousands 7,206 7,016 7,013
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
11
<PAGE> 6
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
Other
(Dollar amounts in thousands, Common Additional Retained Comprehensive Treasury
except per share data) Stock Capital Earnings Income Stock Total
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 $ 805 $ 36,048 $ 98,625 $ 6,535 $ (1,938) $ 140,075
Comprehensive income:
Net income - - 15,971 - - 15,971
Other comprehensive income, net of tax:
Unrealized gains on securities, net of
tax of $(1,064) - - - (1,976) - (1,976)
Less: reclassification adjustment
for gains included in net income,
net of tax of $69 - - - 129 - 129
---------
Total comprehensive income - - - - - 14,124
Stock dividend, 5% 36 9,177 (9,213) - - -
Treasury stock purchase - - - - (132) (132)
Treasury stock reissuance - - - - 600 600
Treasury stock retirement (6) (1,464) - - 1,470 -
Cash dividends, $ .61 per share - - (4,290) - - (4,290)
------ ---------- -------- -------- --------- ---------
Balance, December 31, 1996 835 43,761 101,093 4,688 - 150,377
Comprehensive income:
Net income - - 18,100 - - 18,100
Other comprehensive income, net of tax:
Unrealized gains on securities, net of
tax of $1,262 - - - 2,343 - 2,343
Less: reclassification adjustment
for gains included in net income,
net of tax of $141 - - - (261) - (261)
---------
Total comprehensive income - - - - - 20,182
Stock dividend, 5% 42 16,026 (16,068) - - -
Cash dividends, $ .72 per share - - (5,079) - - (5,079)
------ ---------- -------- -------- --------- ---------
Balance, December 31, 1997 877 59,787 98,046 6,770 - 165,480
Comprehensive income:
Net income - - 18,558 - - 18,558
Other comprehensive income, net of tax:
Unrealized gains on securities, net of
tax of $1,036 - - - 1,923 - 1,923
Less: reclassification adjustment
for gains included in net income,
net of tax of $307 - - - (570) - (570)
---------
Total comprehensive income - - - - - 19,911
Treasury stock purchase - - - - (4,089) (4,089)
Morris Plan acquisition 26 6,893 - - - 6,919
Cash dividends, $ .84 per share - - (6,038) - - (6,038)
------ ---------- -------- -------- --------- ---------
Balance, December 31, 1998 $ 903 $ 66,680 $110,566 $ 8,123 $ (4,089) $ 182,183
====== ========== ======== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
12
<PAGE> 7
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
(Dollar amounts in thousands, except per share data) 1998 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 18,558 $ 18,100 $ 15,971
Adjustments to reconcile net income to net cash
provided by operating activities:
Net amortization of discounts on investment securities (745) (1,978) (2,051)
Provision for loan losses 5,396 5,382 4,461
Investment securities gains (905) (407) (154)
Provision for depreciation and amortization 2,541 2,496 2,536
Provision for deferred income taxes (1,010) (1,055) (283)
Net (increase) decrease in accrued interest receivable (618) 899 (1,385)
Other, net 723 234 (282)
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 23,940 23,671 18,813
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease from purchases and maturities of
interest-bearing deposits with financial institutions -- 1,095 (17)
Sales and maturities of available-for-sale securities 219,154 229,606 167,416
Purchases of available-for-sale securities (315,933) (170,217) (207,659)
Loans made to customers, net of repayments (77,742) (89,608) (43,373)
Net decrease in federal funds sold 230 1,720 8,000
Additions to premises and equipment (2,398) (1,591) (3,037)
--------- --------- ---------
NET CASH USED BY INVESTING ACTIVITIES (176,689) (28,995) (78,670)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase from sales and
redemptions of certificates of deposit 32,063 21,620 18,549
Net increase (decrease) in other deposits 1,505 (2,324) (6,802)
Net increase in short-term borrowings 70,554 11,186 38,962
Cash dividends (5,624) (4,677) (3,720)
Proceeds from reissuance of treasury stock -- -- 600
Purchases of treasury stock (4,089) -- (132)
Cash acquired resulting from merger 470 -- --
Proceeds from long-term borrowings 58,932 -- 13,825
Repayments on long-term borrowings -- (33,324) (43)
--------- --------- ---------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 153,811 (7,519) 61,239
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,062 (12,843) 1,382
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 53,815 66,658 65,276
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 54,877 $ 53,815 $ 66,658
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 66,233 $ 63,243 $ 55,585
========= ========= =========
Income taxes $ 7,403 $ 7,367 $ 6,974
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
13
<PAGE> 8
- --------------------------------------------------------------------------------
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 accounts of
the parent company and its wholly-owned subsidiaries, Terre Haute First
National Bank of Vigo County, Indiana (Terre Haute First), The Morris Plan
Company of Terre Haute (Morris Plan), First State Bank of Clay County,
Indiana (First State), First Citizens State Bank of Newport, Indiana
(Citizens), First Farmers State Bank of Sullivan, Indiana (Farmers), First
Parke State Bank of Rockville, Indiana (Parke), First Ridge Farm State Bank
of Ridge Farm, Illinois (Ridge Farm), First National Bank of Marshall,
Illinois (Marshall) and First Crawford State Bank of Robinson, Illinois
(Crawford). All significant inter-company balances and transactions have
been eliminated. All dollar amounts, except per share amounts, presented in
these notes have been rounded to the nearest thousand.
The Corporation, which is headquartered in Terre Haute, Indiana, offers a
wide variety of financial services including commercial and consumer
lending, lease financing, trust account services and depositor services
through its nine subsidiaries.
Terre Haute First is the largest bank in Vigo County. It operates eleven
full-service banking branches within the county. It also has a main office
in downtown Terre Haute and an operations center/office building on South
Third Street in Terre Haute.
First State has five branch locations in Clay County, a county contiguous
to Vigo County. Citizens has four branches, all of which are located in
Vermillion County, a county contiguous to Vigo County. Farmers has six
branches of which five are located in Sullivan County and one in Greene
County. Sullivan County is contiguous to Vigo County. Morris Plan has one
branch and is located in Vigo County. Ridge Farm has one branch and is
located in Vermilion County, Illinois. Parke has four branches in Parke
County, a county contiguous to Vigo County. Marshall has one branch and is
located in Clark County, Illinois, a county contiguous to Vigo County.
Crawford has three branches of which two are located in Crawford County,
Illinois, and one in Lawrence County, Illinois.
The Corporation operates 36 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
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. The following is a summary of significant accounting policies
used in the consolidated financial statements.
INVESTMENT SECURITIES The Corporation classifies all investment securities
as "available-for-sale." Securities classified as "available-for-sale"
represent securities that may be sold prior to maturity due to changes in
market interest rate risks, prepayment risk, the Corporation's management
of its income tax position, general liquidity needs, increases in loan
demand or similar factors. Available-for-sale securities are carried at
fair value, with the unrealized gains and losses recorded, net of tax, as a
separate component of comprehensive income and shareholders' equity.
Fluctuation in the securities' fair value, that is considered temporary in
nature, has no effect on net income. Realized gains and losses on the sales
of investment securities are based on the adjusted cost of the specific
security sold. The amortization of premiums and discounts is computed
primarily by the straight-line method over the lives of the investments.
LOANS Interest income on loans is recorded as earned. Loans are placed on
non-accrual at the time the loan is 90 days delinquent unless the credit is
well collateralized or in the process of collection.
LEASE FINANCING Terre Haute First provides equipment financing to
customers through a variety of lease arrangements principally classified as
direct financing leases. Leases are carried at the aggregate of lease
payments receivable plus estimated residual values. Unearned income on the
leases is amortized over the lease terms resulting in an approximate level
rate of return.
ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is maintained at a
level considered adequate to provide for loan losses and is based on
management's evaluation of potential losses in the loan portfolio, as well
as prevailing and anticipated economic conditions. These evaluations take
into consideration such factors as changes in the nature and volume of the
loan portfolio, current economic conditions that may affect the borrowers'
ability to pay, overall portfolio quality and review of specific problem
loans.
14
<PAGE> 9
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PREMISES AND EQUIPMENT Premises and equipment are recorded on the basis of
cost less accumulated depreciation. The provision for depreciation is
computed primarily by the straight-line method over the estimated useful
lives of the assets. Any gain or loss on the retirement of assets, which
was not significant in 1998, 1997 or 1996, is recognized currently. The
estimated useful life for equipment ranges from three to seven years and
the estimated useful life for premises is approximately 27 years.
INCOME TAXES The Corporation utilizes the liability method in accounting
for income taxes. Under this method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases.
CASH AND CASH EQUIVALENTS For purposes of cash flows, cash and cash
equivalents include cash and due from banks.
EARNINGS PER SHARE Earnings per share is calculated by dividing net income
for the period by the weighted average number of shares of common stock
outstanding during the period. The Corporation does not have any dilutive
securities.
RECLASSIFICATIONS Certain amounts in the 1996 and 1997 consolidated
financial statements have been reclassified to conform with the 1998
presentation.
RECENTLY ISSUED ACCOUNTING STANDARDS Effective January 1, 1998, the
Corporation adopted Statement of Financial Accounting Standards (SFAS) No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards
for the reporting and display of comprehensive income and its components in
a full set of general-purpose financial statements.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," establishes a new framework for segment reporting. The
Corporation adopted SFAS No. 131 in 1998 and determined that it has only
one segment of reporting as presented in the consolidated balance sheets
and statements of income. The Corporation does not have significant
revenues from external customers domiciled outside of the United State or
place significant reliance on major customers. As many of the assets of the
Corporation are used for the various products and services provided to
customers, an allocation of revenues and expenses for each major product or
service is considered impracticable to determine for the years ended
December 31, 1998, 1997 and 1996.
SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," was adopted by the Corporation in 1998. This
statement does not change the measurement or recognition of the benefit
plans, but it standardizes the disclosure requirements for pensions and
other postretirement benefits.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. SFAS No. 133, which will be adopted
by the Corporation in 2000, is not anticipated to have a material impact on
the Corporation's financial position or results of operations.
2. FAIR VALUES OF FINANCIAL INSTRUMENTS
These accompanying notes to the consolidated financial statements include
certain disclosures for financial instruments recorded on the consolidated
balance sheets at December 31, 1998 and 1997. The fair value estimates are
made at a discrete point in time based on relevant market and financial
instrument information. Since a market may not exist for a significant
portion of the Corporation's financial instruments, these estimates are
based on judgment regarding future expected loss experience, current
economic conditions, credit risk characteristics, and other factors. These
estimates are subjective in nature, involve uncertainties and matters of
significant judgment, and cannot be determined with precision. Changes in
assumptions could significantly affect the estimates. The fair value
estimates are based on existing on- and off-balance-sheet financial
instruments without attempting to estimate the value of anticipated future
business and values of assets and liabilities not considered financial
instruments. The following methodologies and assumptions were used to
estimate fair value disclosures for financial instruments:
CASH AND DUE FROM BANKS, INTEREST-BEARING DEPOSITS WITH FINANCIAL
INSTITUTIONS AND FEDERAL FUNDS SOLD: The carrying values for these
financial instruments approximate their fair values.
INVESTMENT SECURITIES: Fair values for investment securities are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments or dealer quotes.
LOANS: For variable-rate loans that reprice frequently with no significant
change in credit risk, carrying value approximates fair value. The fair
values for conforming residential mortgage loans are based on quoted market
prices of similar loans sold in the secondary market. The fair values for
residential mortgage loans held for investment, commercial loans, real
estate loans, consumer loans, and lease financing are estimated using
discounted cash flow analyses, using interest rates being
15
<PAGE> 10
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
offered for loans with similar terms and credit risk. For significant
non-performing loans, fair value is based upon discounted cash flows using
a rate commensurate with the credit risk or recent appraisals. The carrying
value of accrued interest, adjusted for credit risk, approximates its fair
value.
DEPOSITS: The fair values disclosed for non-interest- and interest-bearing
demand and savings deposits approximate their carrying values. The fair
value of retaining deposit relationships in the future, known as a core
deposit intangible which is material, is not considered in the fair value
disclosed nor is it recorded in the balance sheets. Fair values for fixed
rate time deposits are estimated using a discounted cash flow calculation
that applies interest rates currently being offered for deposits with
comparable maturities. The carrying value of accrued interest on deposits
approximates its fair value.
SHORT-TERM BORROWINGS: The fair values of federal funds purchased,
borrowings under repurchase agreements, and other short-term borrowings
approximate their carrying values.
LONG-TERM BORROWINGS: The fair values of the long-term borrowings are
estimated using discounted cash flow analyses, based on rates available to
the Corporation for similar types of borrowings.
OFF-BALANCE-SHEET INSTRUMENTS: Fair values for off-balance-sheet
instruments (guarantees and commitments) are based on fees currently
charged to enter similar agreements, considering the remaining terms of the
agreements and the counterparties' credit standing. The fair values of the
Corporation's off-balance-sheet financial instruments at December 31, 1998
and 1997 were immaterial.
The following table presents a summary of the carrying amounts and fair
values of the Corporation's financial instruments at December 31, 1998 and
1997.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------
1998 1997
------------------------- --------------------------
CARRYING FAIR CARRYING FAIR
(Dollar Amounts In Thousands) VALUE VALUE VALUE VALUE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and due from banks $ 54,877 $ 54,877 $ 53,815 $ 53,815
Federal funds sold 450 450 280 280
Available-for-sale investment securities (Note 4) 633,365 633,365 527,993 527,993
Loans (Note 5) 1,113,651 1,112,011 1,006,878 1,005,362
Accrued interest receivable 14,704 14,704 14,086 14,086
Deposits (Note 8) 1,260,365 1,270,450 1,194,524 1,199,869
Short-term borrowings (Note 8) 289,562 289,562 218,977 218,977
Long-term borrowings (Note 9) 96,138 97,935 37,237 37,375
</TABLE>
3. RESTRICTIONS ON CASH AND DUE FROM BANKS:
Certain affiliate banks are required to maintain average reserve balances
with the Federal Reserve Bank. The amount of those reserve balances was
approximately $15.4 million and $13.4 million at December 31, 1998 and
1997, respectively.
4. INVESTMENT SECURITIES:
The amortized cost, estimated fair value and carrying value of investment
securities are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
--------------------------------------------------------------
UNREALIZED
AMORTIZED ---------------------- FAIR CARRYING
(Dollar amounts in thousands) COST GAINS LOSSES VALUE VALUE
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AVAILABLE-FOR-SALE:
United States Government $168,813 $ 1,981 $ (111) $170,683 $170,683
United States Government agencies 222,586 2,086 (139) 224,533 224,533
Collateralized mortgage obligations 9,474 89 (8) 9,555 9,555
State and municipal 155,572 6,999 (335) 162,236 162,236
Corporate obligations 66,307 51 - 66,358 66,358
-------- --------- --------- -------- --------
TOTAL $622,752 $ 11,206 $ (593) $633,365 $633,365
======== ========= ========= ======== ========
</TABLE>
16
<PAGE> 11
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------------------------------
UNREALIZED
AMORTIZED ---------------------- FAIR CARRYING
(Dollar amounts in thousands) COST GAINS LOSSES VALUE VALUE
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AVAILABLE-FOR-SALE:
United States Government $ 81,149 $ 1,369 $ (47) $ 82,471 $ 82,471
United States Government agencies 240,627 1,991 (381) 242,237 242,237
Collateralized mortgage obligations 46,986 432 (75) 47,343 47,343
State and municipal 148,748 5,318 (129) 153,937 153,937
Corporate obligations 1,983 22 - 2,005 2,005
--------- ------- ------ --------- ---------
TOTAL $ 519,493 $ 9,132 $ (632) $ 527,993 $ 527,993
========= ======= ====== ========= =========
</TABLE>
As of December 31, 1998, the Corporation does not have any securities from any
issuer with an aggregate book value or fair value that exceeds ten percent of
shareholders' equity.
Investment securities with a par value amounting to approximately $89.3 million
and $85.9 million at December 31, 1998 and 1997, respectively, were pledged as
collateral for borrowings and for other purposes.
The carrying value and estimated fair values of investment securities as of
December 31, 1998, by contractual maturity, are shown below. Expected maturities
may differ from contractual maturities because borrowers have the right to call
or prepay obligations with or without penalties. Also shown for 1998 are the
weighted average yields computed on a tax equivalent basis, assuming a federal
income tax rate of 35%.
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE
------------------------- WEIGHTED
AMORTIZED FAIR AVERAGE
(Dollar amounts in thousands) COST VALUE YIELDS
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Due in one year or less $ 48,737 $ 48,854 5.77%
=====
Due after one but within five years 46,282 48,063 7.64%
=====
Due after five but within ten years 114,289 117,287 7.22%
=====
Due after ten years 114,512 117,281 7.53%
=====
Mortgage backed securities 298,932 301,880 6.96%
--------- --------- =====
TOTAL $ 622,752 $ 633,365
========= =========
</TABLE>
Below is a summary of the gross gains and losses and the net gain (loss)
realized by the Corporation from investments sold during the years ended
December 31, 1998, 1997 and 1998. Sales proceeds from available-for-sale
securities aggregated $111.5 million, $177.8 million and $135.0 million in 1998,
1997 and 1996, respectively.
<TABLE>
<CAPTION>
(Dollar amounts in thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross gains $ 967 $ 722 $ 588
Gross losses (62) (315) (434)
--------- --------- -----
Net gain $ 905 $ 407 $ 154
========= ========= =====
</TABLE>
5. LOANS:
Loans are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1998 1997
----------- -----------
CARRYING CARRYING
(Dollar amounts in thousands) VALUE VALUE
- ------------------------------------------------------------------------
<S> <C> <C>
Commercial, financial and agricultural $ 233,080 $ 229,855
Real estate - construction 32,880 23,734
Real estate - mortgage 636,615 561,466
Installment 205,251 188,552
Lease financing 5,825 3,271
----------- -----------
TOTAL $ 1,113,651 $ 1,006,878
=========== ===========
</TABLE>
17
<PAGE> 12
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
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 1998 the
aggregate dollar amount of these loans to directors and executive officers
who held office at the end of the year amounted to $38.5 million at the
beginning of the year. During 1998, advances of $50.1 million and
repayments of $45.2 million were made with respect to related party loans
for an aggregate dollar amount of $43.4 million at December 31, 1998. The
amount of such loans aggregated $36.7 million at December 31, 1997.
6. ALLOWANCE FOR LOAN LOSSES:
Changes in the allowance for loan losses are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
(Dollar amounts in thousands) 1998 1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 13,503 $ 10,756 $ 10,616
Allowance resulting from merger 970 - -
Provision for loan losses 5,396 5,382 4,461
Recoveries of loans previously charged off 1,196 1,180 1,080
Loans charged off (4,636) (3,815) (5,401)
--------- --------- --------
BALANCE AT END OF YEAR $ 16,429 $ 13,503 $ 10,756
========= ========= ========
</TABLE>
7. PREMISES AND EQUIPMENT:
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
(Dollar amounts in thousands) 1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 3,632 $ 3,291
Building and leasehold improvements 24,772 24,156
Furniture and equipment 22,202 21,187
--------- --------
50,606 48,634
Less accumulated depreciation (26,180) (23,709)
--------- --------
TOTAL $ 24,426 $ 24,925
========= ========
</TABLE>
8. DEPOSITS AND SHORT-TERM BORROWINGS:
The carrying and fair values of deposits are as follows at December 31,
1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------------------------- --------------------------
CARRYING FAIR CARRYING FAIR
(Dollar amounts in thousands) VALUE VALUE VALUE VALUE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Non-interest-bearing demand deposits $ 148,747 $ 148,747 $ 162,880 $ 162,880
Interest-bearing demand deposits 291,211 291,211 255,373 255,373
Savings deposits 115,181 115,181 105,870 105,870
- --------------------------------------------------------------------------------------------------------------------------
Time deposits:
$100,000 or more 196,773 198,196 195,487 195,851
Other time deposits 508,453 517,115 474,914 479,895
----------- ---------- ---------- ----------
$ 1,260,365 $1,270,450 $1,194,524 $1,199,869
=========== ========== ========== ==========
</TABLE>
The aggregate carrying value of short-term borrowings was $289.6 million
and $219.0 million at December 31, 1998 and 1997, respectively. The
weighted average interest rate was 5.40% and 5.33% for 1998 and 1997,
respectively.
18
<PAGE> 13
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The amounts and interest rates related to federal funds purchased and
securities sold under agreements to repurchase are presented below:
<TABLE>
<CAPTION>
(Dollar amounts in thousands) 1998 1997 1996
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Average amount outstanding $ 45,266 $ 46,907 $ 30,476
Maximum amount outstanding at a month end 102,513 74,774 72,337
Average interest rate during year 5.51% 5.68% 5.54%
Interest rate at year end 5.60% 6.00% 6.25%
</TABLE>
The amounts and interest rates for advances from the Federal Home Loan Bank
are as follows:
<TABLE>
<CAPTION>
(Dollar amounts in thousands) 1998 1997 1996
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Average amount outstanding $ 228,038 $ 213,629 $ 166,096
Maximum amount outstanding at a month end 275,744 220,969 204,169
Average interest rate during year 5.32% 5.21% 5.20%
Interest rate at year end 5.31% 5.78% 5.94%
</TABLE>
9. LONG-TERM BORROWINGS:
Long-term borrowings at December 31, 1998 and 1997 are summarized as
follows:
<TABLE>
<CAPTION>
1998 1997
------------------------- --------------------------
CARRYING FAIR CARRYING FAIR
(Dollar amounts in thousands) VALUE VALUE VALUE VALUE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
City of Terre Haute, Indiana adjustable tender
economic development revenue bonds, series 1985 $ 6,600 $ 6,600 $ 6,600 $ 6,600
Other 19 19 41 41
----------- ----------- ---------- ----------
TOTAL $ 6,619 $ 6,619 $ 6,641 $ 6,641
=========== =========== ========== ==========
Advances from the Federal Home Loan Bank 275,449 277,246 198,276 198,414
Advances classified as short-term borrowings (185,930) (185,930) (167,680) (167,680)
----------- ----------- ---------- ----------
Advances classified as long-term borrowings $ 89,519 $ 91,316 $ 30,596 $ 30,734
=========== =========== ========== ==========
</TABLE>
The aggregate minimum annual retirements of long-term borrowings are as
follows:
1999 $ 185,930
2000 45,657
2001 30,847
2002 1,995
2003 6,260
Thereafter 11,379
---------
$282,068
Less current portion (185,930)
---------
$ 96,138
=========
The economic development revenue bonds (bonds) require periodic interest
payments each year until maturity or redemption. The interest rate, which
was 4.10% at December 31, 1998, and 3.80% at December 31, 1997, is
determined by a formula which considers rates for comparable bonds and is
adjusted periodically based on the frequency selected by the bondholder at
the date of purchase. The bonds are collateralized by a first mortgage on
the Corporation's headquarters building. The bonds mature December 1, 2015,
and bondholders may periodically require earlier redemption.
The Corporation may use funds available under a letter of credit from
another financial institution to repay principal on bonds redeemed during
the term of the letter of credit. The letter of credit expires November 1,
1999 and is deemed to be automatically extended without amendment for one
year from the expiration date. No bonds were redeemed during 1998. Assuming
that any redemptions required under the bonds will be funded by the letter
of credit, or by other similar borrowings, if redemptions occur after 1998,
there are no principal maturities of the bonds within the next five years.
19
<PAGE> 14
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
The above debt agreements require the Corporation to meet certain financial
covenants. The most restrictive 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, 1998 and 1997, the Corporation was in
compliance with all of its debt covenants.
All of the Corporation's Indiana subsidiary banks are members of the
Federal Home Loan Bank (FHLB) of Indianapolis and, accordingly, are
permitted to obtain advances. The advances from the FHLB, aggregating
$275.4 million at December 31, 1998, accrue interest at annual rates
varying from 4.8% to 8.0%. The advances are due at various dates through
September 2017.
FHLB advances must be secured by eligible collateral as specified by the
FHLB. Accordingly, the Corporation has a blanket pledge of its first
mortgage loan portfolio as collateral for the advances outstanding at
December 31, 1998, with a required minimum ratio of collateral to advances
of 160%.
10. INCOME TAXES:
Income tax expense is summarized as follows:
<TABLE>
<CAPTION>
(Dollar amounts in thousands) 1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal:
Currently payable $ 5,526 $ 5,164 $ 4,772
Deferred (886) (833) (315)
-------- --------- ---------
4,640 4,331 4,457
State:
Currently payable 2,289 2,037 1,750
Deferred (132) (222) (44)
-------- --------- ---------
2,157 1,815 1,706
-------- --------- ---------
TOTAL $ 6,797 $ 6,146 $ 6,163
======== ========= =========
</TABLE>
Income tax expense with respect to investment securities gains amounted
to approximately $243 thousand, $103 thousand and $43 thousand in 1998,
1997 and 1996, respectively.
The major components of deferred income taxes are as follows:
<TABLE>
<CAPTION>
(Dollar amounts in thousands) 1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Provision for loan losses $ (781) $ (1,113) $ (364)
Lease financing (97) (10) (96)
Depreciation 82 226 266
Pension expense 130 95 (16)
Deferred compensation (18) (19) (34)
Other, net (334) (234) (114)
-------- --------- ---------
TOTAL $ (1,018) $ (1,055) $ (358)
======== ========= =========
</TABLE>
The reconciliation of income tax expense with the amount computed by
applying the statutory federal income tax rate to income before income
taxes is summarized as follows:
<TABLE>
<CAPTION>
(Dollar amounts in thousands) 1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income taxes computed
at the statutory rate $ 8,829 $ 8,486 $ 7,747
Add (deduct) tax effect of:
Nontaxable income from
tax-exempt investments and loans (3,016) (3,081) (2,228)
State tax, net of federal benefit 1,402 1,180 1,110
Investment tax credit (587) (491) (280)
Other, net 169 52 (186)
-------- --------- ---------
(2,032) (2,340) (1,584)
-------- --------- ---------
TOTAL $ 6,797 $ 6,146 $ 6,163
======== ========= =========
</TABLE>
20
<PAGE> 15
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1998 and
1997, are as follows:
<TABLE>
<CAPTION>
(Dollar amounts in thousands) 1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Loans, principally the allowance for loan losses $ 6,646 $ 5,472
Deferred compensation 588 570
Compensated absences, principally due to accrual
for financial reporting purposes 282 267
Other 705 428
-------- --------
Total gross deferred tax assets $ 8,221 $ 6,737
-------- --------
Deferred tax liabilities:
Unrealized gains on available-for-sale securities (5,409) (4,464)
Premises and equipment, principally due to differences in depreciation (1,250) (1,168)
Lease financing, principally due to basis differences between tax
and financial reporting (204) (301)
Pensions, principally due to amounts that are nondeductible until paid (792) (662)
Other (307) (227)
-------- --------
Total gross deferred liabilities (7,962) (6,822)
-------- --------
Net deferred tax assets (liabilities) $ 259 $ (85)
======== ========
</TABLE>
11. SHAREHOLDERS' EQUITY:
At December 31, 1998 and 1997, approximately $42.0 million and $38.6
million, respectively, of undistributed earnings of the subsidiary banks,
included in consolidated retained earnings, were available for distribution
to the parent company as dividends without regulatory approval. In practice,
the Corporation further limits dividends to maintain adequate capital.
12. COMMITMENTS AND CONTINGENCIES:
In the normal course of business, the Corporation is subject to various
claims and other pending and possible legal actions. Management believes
that the results of these claims and possible legal actions will not have a
material adverse effect on the Corporation's financial position or results
of operations.
13. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK:
The Corporation grants loans to customers primarily in west central
Indiana and east central Illinois. Substantially all loans are
collateralized by specific items including accounts receivable; inventory;
property, plant and equipment; consumer assets; residential and commercial
real estate and income-producing commercial properties.
The Corporation is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include conditional commitments and
standby letters of credit. The financial instruments involve to varying
degrees, elements of credit and interest rate risk in excess of amounts
recognized in the financial statements. The Corporation's maximum exposure
to credit loss in the event of nonperformance by the other party to the
financial instrument for commitments to make loans is limited generally by
the contractual amount of those instruments. The Corporation follows the
same credit policy to make such commitments as is followed for those loans
recorded in the consolidated financial statements.
The Corporation had unused lines of credit of $159.0 million and $122.8
million and commitments to extend credit of $7.2 million and $3.9 million as
of December 31, 1998 and 1997, respectively. In addition, the Corporation
had outstanding commitments of $2.4 million and $2.5 million under standby
letters of credit as of December 31, 1998 and 1997, respectively. The fair
values of the Corporation's off-balance-sheet financial instruments at
December 31, 1998 and 1997 were immaterial.
21
<PAGE> 16
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
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). 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 $350 thousand, $109 thousand and $623 thousand in 1998, 1997 and 1996,
respectively. The Corporation contributed $750 thousand, $726 thousand and
$600 thousand to the ESOP in 1998, 1997 and 1996, respectively.
Pension expense included the following components:
<TABLE>
<CAPTION>
(Dollar amounts in thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits earned $ 1,183 $ 1,222 $ 957
Interest cost on projected benefit obligation 2,091 1,527 870
Expected return on plan assets (2,361) (1,505) (997)
Net amortization and deferral (159) (37) (158)
-------- --------- -------
Total pension expense $ 754 $ 1,207 $ 672
======== ========= =======
</TABLE>
The information below sets forth the 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.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
(Dollar amounts in thousands) 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at January 1 $ 29,577 $ 20,393
Service cost 1,183 1,222
Interest cost 2,091 1,527
Actuarial (gain) loss (5,075) 6,975
Benefits paid (278) (540)
-------- --------
Benefit obligation at December 31 27,498 29,577
-------- --------
Reconciliation of fair value of plan assets:
Fair value of plan assets at January 1 29,562 18,847
Actual return on plan assets (4,605) 10,252
Employer contributions 1,075 1,003
Benefits paid (278) (540)
-------- --------
Fair value of plan assets at December 31 25,754 29,562
-------- --------
Funded status:
Funded status at December 31 (1,744) (15)
Unrecognized transition obligation (348) (522)
Unrecognized prior service cost 64 79
Unrecognized net actuarial cost 4,017 2,126
-------- --------
Prepaid pension asset recognized in the consolidated balance sheets $ 1,989 $ 1,668
-------- --------
Principal assumptions used:
Discount rate 6.50% 7.00%
Rate of increase in compensation levels 5.00% 5.00%
Expected long-term rate of return on plan assets 8.00% 8.00%
</TABLE>
22
<PAGE> 17
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Corporation also provides medical benefits to its employees subsequent
to their retirement. Accrued postretirement benefits as of December 31,
1998 and 1997 are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING DECEMBER 31,
---------------------------------
(Dollar amounts in thousands) 1998 1997
---------------------------------------------------------------------------------
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at January 1 $ 2,452 $ 2,299
Service cost 48 41
Interest cost 165 166
Plan participants' contributions 15
Actuarial (gain) loss 59 117
Actual benefits paid (133) (171)
--------- ---------
Benefit obligation at December 31 $ 2,606 $ 2,452
========= =========
Reconciliation of funded status:
Funded status $ 2,606 $ 2,452
Unrecognized transition obligation $ (905) $ (966)
Unrecognized net gain (loss) (807) (777)
--------- ---------
Accrued benefit cost $ 894 $ 709
========= =========
</TABLE>
The postretirement benefits paid in 1998 and 1997 of $133 thousand and
$171 thousand, respectively, were fully funded by company and participant
contributions. There were no other changes to plan assets in 1998 and
1997.
Weighted-average assumptions as of December 31:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING DECEMBER 31,
----------------------------------
1998 1997
----------------------------------------------------------------------------------
<S> <C> <C>
Discount rate 6.50% 7.00%
Initial weighted health care cost trend rate 9.50% 10.00%
Ultimate health care cost trend rate 5.50% 5.50%
</TABLE>
Pension expense included the following components:
<TABLE>
<CAPTION>
OTHER BENEFITS
---------------------------------
(Dollar amounts in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 48 $ 41 $ 50
Interest cost 165 166 169
Amortization of transition obligation 60 61 60
Recognized actuarial loss 30 25 41
--------- -------- --------
Net periodic benefit cost $ 303 $ 293 $ 320
========= ======== ========
</TABLE>
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:
<TABLE>
<CAPTION>
1% POINT 1% POINT
INCREASE DECREASE
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Effect on total of service and interest cost
components $ 6 $ (6)
Effect of postretirement benefit obligation $ 96 $ (89)
</TABLE>
23
<PAGE> 18
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
15. THE MORRIS PLAN COMPANY ACQUISITION:
In March 1998, the Corporation completed its acquisition of The Morris Plan
Company of Terre Haute, Inc. (Morris Plan), whose assets total approximately
$38 million. In exchange for all of the outstanding common stock of Morris
Plan, the Corporation issued 210,000 shares of its common stock. The
acquisition was accounted for using purchase accounting and resulted in
goodwill of $2.4 million, which will be amortized over approximately 15
years.
16. REGULATORY MATTERS:
The Corporation is 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 CorporationOs financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Corporation must meet specific capital guidelines
that involve quantitative measures of the Corporation's assets, liabilities,
and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Corporation's capital amounts and classification
are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation to maintain minimum amounts and ratios of Total and
Tier I Capital to risk-weighted assets, and of Tier I Capital to average
assets. Management believes, as of December 31, 1998 and 1997, that the
Corporation meets all capital adequacy requirements to which it is subject.
As of December 31, 1998, 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.
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
---------------------- ------------------- ------------------------
(Dollar amounts in thousands) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1998
Total Capital
(to Risk-Weighted Assets) $ 185,429 16.29% > $91,077 > 8.0% > $113,846 > 10.0%
Tier I Capital - - - -
(to Risk-Weighted Assets) 171,171 15.04% > 45,538 > 4.0% > 68,308 > 6.0%
Tier I Capital - - - -
(to Average Assets) 171,171 9.83% > 69,668 > 4.0% > 87,085 > 5.0%
- - - -
AS OF DECEMBER 31, 1997
Total Capital
(to Risk-Weighted Assets) $ 171,624 17.10% > $80,270 > 8.0% > $100,338 > 10.0%
Tier I Capital - - - -
(to Risk-Weighted Assets) 158,626 15.81% > 40,135 > 4.0% > 60,203 > 6.0%
Tier I Capital - - - -
(to Average Assets) 158,626 9.73% > 65,230 > 4.0% > 81,537 > 5.0%
- - - -
</TABLE>
24
<PAGE> 19
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
17. PARENT COMPANY CONDENSED FINANCIAL STATEMENTS:
The parent company's condensed balance sheets as of December 31, 1998
and 1997, and the related condensed statements of income and retained
earnings and cash flows for each of the three years in the period ended
December 31, 1998, are as follows:
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
(Dollar amounts in thousands) 1998 1997
----------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash deposits in affiliated banks $ 11,054 $ 3,590
Investments in bank subsidiaries 167,721 160,943
Land and headquarters building, net 7,075 7,238
Other 8,816 5,551
---------- ----------
TOTAL ASSETS $ 194,666 $ 177,322
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Long-term borrowings $ 7,080 $ 7,224
Dividends payable 3,154 2,740
Other liabilities 2,249 1,878
---------- ----------
TOTAL LIABILITIES 12,483 11,842
---------- ----------
SHAREHOLDERS' EQUITY:
Common stock 903 877
Additional capital 66,680 59,787
Retained earnings 110,566 98,046
Unrealized gains on available-for-sale investments
of bank subsidiaries, net of taxes 8,123 6,770
Less: Treasury shares at cost (4,089) -
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 182,183 165,480
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 194,666 $ 177,322
========== ==========
</TABLE>
25
<PAGE> 20
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
(Dollar amounts in thousands) 1998 1997 1996
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income:
Dividends from bank subsidiaries $ 17,815 $ 6,431 $ 5,008
Other income 899 933 861
--------- ---------- ----------
Total income 18,714 7,364 5,869
Expenses:
Interest on long-term borrowings 335 355 354
Other operating expenses 1,684 1,498 1,254
--------- ---------- ----------
Total operating expenses 2,019 1,853 1,608
--------- ---------- ----------
Income before income taxes and equity
in undistributed earnings of bank subsidiaries 16,695 5,511 4,261
Income tax credit 738 457 329
--------- ---------- ----------
Income before equity in undistributed
earnings of bank subsidiaries 17,433 5,968 4,590
Equity in undistributed earnings of bank subsidiaries 1,125 12,132 11,381
--------- ---------- ----------
Net income 18,558 18,100 15,971
Retained earnings at beginning of year 98,046 101,093 98,625
--------- ---------- ----------
116,604 119,193 114,596
Cash dividends (6,038) (5,079) (4,290)
Stock dividends - (16,068) (9,213)
--------- ---------- ----------
Retained earnings at end of year $ 110,566 $ 98,046 $ 101,093
========= ========== ==========
</TABLE>
26
<PAGE> 21
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
(Dollar amounts in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $18,558 $ 18,100 $ 15,971
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 172 171 171
Equity in undistributed earnings of bank subsidiaries (1,125) (12,132) (11,381)
Increase (decrease) in other liabilities 286 (11) (965)
(Increase) decrease in other assets (542) (282) 22
------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 17,349 5,846 3,818
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term borrowings (145) (116) (117)
Proceeds from reissuance of treasury stock (27) - 600
Purchase of treasury stock (4,089) - (131)
Dividends paid (5,624) (4,677) (3,721)
------- -------- --------
NET CASH USED BY FINANCING ACTIVITIES (9,885) (4,793) (3,369)
------- -------- --------
NET INCREASE IN CASH 7,464 1,053 449
CASH, BEGINNING OF YEAR 3,590 2,537 2,088
------- -------- --------
CASH, END OF YEAR $11,054 $ 3,590 $ 2,537
======= ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 311 $ 360 $ 368
======= ======== ========
Income taxes $ 7,403 $ 7,367 $ 6,974
======= ======== ========
</TABLE>
27
<PAGE> 22
- --------------------------------------------------------------------------------
RESPONSIBILITY FOR FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of First Financial Corporation:
The management of First Financial Corporation has prepared and is
responsible for the preparation and accuracy of the financial statements and
other information included in this report. The financial statements have been
prepared in accordance with generally accepted accounting principles and where
appropriate, include amounts based on judgments and estimates by management.
To fulfill its responsibility, the Corporation maintains and continues to
refine a system of internal accounting controls and procedures to provide
reasonable assurance that (i) the Corporation's assets are safeguarded; (ii)
transactions are executed in accordance with proper management authorization;
and (iii) financial records are reliable for the preparation of financial
statements. The design, monitoring and revision of internal accounting control
systems involve, among other things, management judgments with respect to the
relative costs and expected benefits of such control procedures.
Management assessed First Financial Corporation's internal control
structure over financial reporting as of December 31, 1998. This assessment was
based on criteria for effective internal control over financial reporting
described in "Internal Control -- Integrated Framework" issued by the Committee
of Sponsoring Organizations of the Treadway Commission. Based on this
assessment, management believes that the Corporation maintained an effective
internal control structure over financial reporting as of December 31, 1998.
PricewaterhouseCoopers L.L.P. performs an independent audit of the
Corporation's financial statements for the purpose of determining that such
statements are presented in conformity with generally accepted accounting
principles and their report appears below. The independent accountants are
appointed based upon recommendations by the Examining and Trust Audit Committee
and approved by the Board of Directors.
The Examining and Trust Audit Committee of the Board of Directors, composed
of three outside directors, meets periodically with the Corporation's management
and the independent accountants to discuss the audit scope and findings as well
as address internal control systems and financial reporting matters. The
independent accountants have direct access to the Examining and Trust Audit
Committee.
/s/ Donald E. Smith /s/ Michael A. Carty
- ------------------- --------------------
Donald E. Smith Michael A. Carty
President & Chief Executive Officer Treasurer
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of First Financial Corporation:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income and shareholders' equity and of cash
flows present fairly, in all material respects, the financial position of First
Financial Corporation and its subsidiaries at December 31, 1998 and 1997, and
the results of their operations and cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe our audits provide a reasonable
basis for the opinion expressed above.
/s/ PricewaterhouseCoopers L L P
- --------------------------------
Indianapolis, Indiana
January 22, 1999
28
<PAGE> 23
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Management's discussion and analysis reviews the financial condition of First
Financial Corporation at December 31, 1998 and 1997, and the results of its
operations for the three years ended December 31, 1998. 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.
Forward-looking statements contained in the following discussion are based on
estimates and assumptions that are subject to significant business, economic and
competitive uncertainties, many of which are beyond the Corporation's control
and are subject to change. These uncertainties can affect actual results and
could cause actual results to differ materially from those expressed in any
forward-looking statements in this discussion.
First Financial Corporation (the Corporation) is a multi-bank holding company.
The Corporation, which is headquartered in Terre Haute, Indiana, offers a wide
variety of financial services including commercial and consumer lending, lease
financing, trust account services and depositor services through its nine
subsidiaries. The Corporation's principal subsidiary is Terre Haute First
National Bank (Terre Haute First) located in Vigo County. The Corporation's
other eight wholly-owned bank subsidiaries are First State Bank of Clay County,
Indiana (First State), First Citizens State Bank of Newport, Indiana (Citizens),
First Farmers State Bank of Sullivan, Indiana (Farmers), First Ridge Farm State
Bank of Ridge Farm, Illinois (Ridge Farm), First Parke State Bank of Rockville,
Indiana (Parke), The Morris Plan Company of Vigo County, Indiana (Morris Plan),
First National Bank of Marshall, Illinois (Marshall), and First Crawford State
Bank of Robinson, Illinois (Crawford). At the close of business in 1998 the
Corporation and its subsidiaries had 712 full time equivalent employees.
Terre Haute First is the largest bank in Vigo County. It operates eleven
full-service banking branches within the county. In addition to its branches, it
has a main office in downtown Terre Haute and a 50,000-square-foot commercial
building on South Third Street in Terre Haute, which serves as the Corporation's
operations center and provides additional office space.
First State has five branch locations in Clay County, a county contiguous to
Vigo County. Citizens has four branches, all of which are located in Vermillion
County, a county contiguous to Vigo County. Farmers has six branches of which
five are located in Sullivan County and one in Greene County. Sullivan County is
contiguous to Vigo County. Morris Plan has one branch and is located in Vigo
County. Ridge Farm has one branch and is located in Vermilion County, Illinois.
Parke has four branches in Parke County, a county contiguous to Vigo County.
Marshall has one branch and is located in Clark County, Illinois, a county
contiguous to Vigo County. Crawford has two branches in Crawford County,
Illinois, and one branch in Lawrence County, Illinois.
Terre Haute First and Morris Plan face competition from other financial
institutions in Vigo County. These competitors consist of two commercial banks,
a mutual savings bank and other financial institutions, including consumer
finance companies, brokerage firms and credit unions. The seven other bank
subsidiaries have similar competition in their primary market areas. The number
of competitors of each subsidiary is as follows:
- FIRST STATE -- Three commercial banks, two credit unions and one brokerage
firm in Clay County, Indiana.
- CITIZENS -- Three commercial banks and two credit unions in Vermillion
County, Indiana.
- FARMERS-- Two commercial banks and one brokerage firm in Sullivan County,
Indiana, and three commercial banks, one savings and loan, and one credit
union in Greene County, Indiana.
- PARKE-- Two commercial banks, five credit unions and two brokerage firms in
Parke County, Indiana.
- RIDGE FARM-- Four commercial banks, three savings and loan, ten credit
unions and four brokerage firms in Vermilion County, Illinois.
- MARSHALL -- Three commercial banks and one savings and loan in Clark
County, Illinois.
- 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.
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.
29
<PAGE> 24
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS -- SUMMARY FOR 1998
- --------------------------------------------------------------------------------
Net income for 1998 increased to $18.6 million from $18.1 million in 1997
although earnings per share remained the same at $2.58 for both years. This
increase was primarily the result of improved net interest income and
non-interest income. The primary components of income and expense affecting
net income are discussed in the following analysis.
NET INTEREST INCOME
The principal source of the Corporation's earnings is net interest income,
which represents the difference between interest earned on loans and
investments and the interest cost associated with deposits and other sources
of funding.
Total average interest-earning assets increased to $1,641.0 million in 1998
from $1,534.9 million in 1997. However, the yield on these assets decreased to
8.15% in 1998 from 8.28% in 1997. Total average interest-bearing liabilities
amounted to $1,406.8 million in 1998 compared to $1,329.5 million in 1997, and
the yield on these interest-bearing liabilities increased to 4.72% in 1998
from 4.67% in 1997.
On a tax equivalent basis, net interest income increased $2.3 million from
$65.0 million in 1997 to $67.3 million in 1998. The net interest margin
decreased from 4.24% in 1997 to 4.10% in 1998. This decrease is primarily the
result of declining rates earned on loans and investments.
The following table sets forth the components of net interest income due to
changes in volume and rate. The table information compares 1998 to 1997 and
1997 to 1996.
<TABLE>
<CAPTION>
1998 COMPARED TO 1997 1997 COMPARED TO 1996
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
------------------------------------- -------------------------------------
VOLUME/ VOLUME/
(Dollar amounts in thousands) VOLUME RATE RATE TOTAL VOLUME RATE RATE TOTAL
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest earned on
interest-earning assets:
Loans (1) (2) $10,055 $ (438) $ (52) $ 9,565 $5,987 $(647) $ (49) $ 5,291
Taxable investment
securities (1,696) (2,481) 135 (4,042) 1,133 218 8 1,359
Tax-exempt
investment
securities (2) 615 22 1 638 528 503 26 1,057
Federal funds sold 518 (4) (14) 500 (325) (4) 3 (326)
Interest-bearing
deposits:
Domestic (34) (34) 34 (34) (31) 8 (4) (27)
------- ------- ----- ------- ------ ----- ------ -------
Total interest income $ 9,458 $(2,935) $ 104 $ 6,627 $7,292 $ 78 $ (16) $ 7,354
------- ------- ----- ------- ------ ----- ------ -------
Interest paid on
interest-bearing liabilities:
Savings deposits 16 (40) - (24) (331) (501) 16 (816)
Time deposits 3,430 638 59 4,127 843 270 6 1,119
Federal funds purchased
and securities sold
under agreement to
repurchase (93) (79) 3 (169) 911 41 22 974
Other 933 (475) (34) 424 2,678 243 64 2,985
------- ------- ----- ------- ------ ----- ------ -------
Total interest expense 4,286 44 28 4,358 4,101 53 108 4,262
------- ------- ----- ------- ------ ----- ------ -------
Net interest income $ 5,172 $(2,979) $ 76 $ 2,269 $3,191 $ 25 $ (124) $ 3,092
======= ======= ===== ======= ====== ===== ====== =======
</TABLE>
(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%.
30
<PAGE> 25
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES
The provision for loan losses is established by charging current earnings
with an amount which will maintain the allowance for loan losses at a level
sufficient to provide for losses in the Corporation's loan portfolio.
Management considers several factors in determining the provision,
including loss experience, changes in the composition of the portfolio, the
financial condition of borrowers, economic trends, and general economic
conditions. The provision for loan losses totaled $5.4 million for 1998 and
1997.
Net charge-offs for 1998 increased to $3.4 million from $2.6 million in
1997. At December 31, 1998, the resulting allowance for loan losses was
$16.4 million or 1.48% of total loans, net of unearned income. A year
earlier the allowance was $13.5 million or 1.34% of total loans.
OTHER INCOME
Other income increased 17.8% in 1998 to $10.6 million from $9.0 million
earned in 1997. Most components of other income increased in 1998 compared
to the same period in 1997. Trust department income, other service charges
and fees, investment securities gains and all other income increased $206
thousand, $376 thousand, $498 thousand and $597 thousand, respectively.
These increases are the result of a focused effort to increase fee-based
income.
OTHER EXPENSES
Other expenses totaled $42.6 million for 1998 compared to $39.6 million for
1997. This represents an increase of $3.0 million or 7.6% for 1998.
Salaries and related benefits, the largest component of this group,
increased from $22.0 million to $23.5 million or 6.8%. The primary reason
for this was an increase in the number of full-time equivalent employees to
712 in 1998 compared to 694 at the end of 1997 and higher insurance costs.
All other expenses for 1998 increased to $11.7 million from $10.4 million
as compared to 1997. No one significant factor contributed to this
increase.
INCOME TAXES
The Corporation's federal income tax provision was $4.6 million in 1998
compared to a provision of $4.3 million in 1997. The overall effective tax
rate in 1998 of 26.8% compares to a 1997 effective rate of 25.3%.
COMPARISON OF 1997 TO 1996
Net income for 1997 was $18.1 million or $2.58 per share compared to $16.0
million in 1996 or $2.28 per share. This increased income was primarily the
result of improved net interest income and non-interest income while
maintaining non-interest expense at almost the same level as 1996.
Although net interest income increased $3.1 million in 1997 as compared to
1996, the net interest margin decreased slightly from 4.27% in 1996 to
4.24% in 1997. This decrease is primarily the result of the higher costs of
interest-bearing liabilities.
31
<PAGE> 26
- --------------------------------------------------------------------------------
FINANCIAL CONDITION -- SUMMARY
- --------------------------------------------------------------------------------
The Corporation's total assets increased to a record $1,850 million at December
31, 1998, up from $1,635 million a year earlier. Loans, net of unearned income,
increased by $106.0 million, to $1,112 million. The single largest increase in
loans related to real estate mortgages, which increased from $561.5 million in
1997 to $636.6 million in 1998. The increase resulted primarily because of
favorable interest rates. The overall increase in loans was primarily funded by
deposits and advances from the Federal Home Loan Bank. Advances from the Federal
Home Loan Bank at December 31, 1998, were $275.4 million, of which $185.9
million represents short-term obligations. Total shareholders' equity at
December 31, 1998, was $182.2 million compared to $165.5 million a year earlier.
Following is an analysis of the components of the Corporation's balance sheet.
Information describing the components of the Corporation's investment
securities, the market value, maturities and weighted average yields of the
investments is included in Note 4 of the notes to the consolidated financial
statements.
LOAN PORTFOLIO
Loans outstanding by major category as of December 31 for each of the last
five years and the maturities and interest sensitivity of the loans
outstanding as of December 31, 1998, are set forth in the following analysis.
<TABLE>
<CAPTION>
(Dollar amounts in thousands) 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
LOAN CATEGORY
Commercial, financial and agricultural $ 233,080 $ 229,855 $197,449 $180,858 $174,371
Real estate - construction 32,880 23,734 22,629 22,882 21,428
Real estate - mortgage 636,615 561,466 508,010 460,060 455,673
Installment 205,251 188,552 188,670 213,696 203,689
Lease financing 5,825 3,271 3,284 4,151 5,259
---------- ---------- -------- -------- --------
TOTAL $1,113,651 $1,006,878 $920,042 $881,647 $860,420
========== ========== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AFTER ONE
WITHIN BUT WITHIN AFTER FIVE
(Dollar amounts in thousands) ONE YEAR FIVE YEARS YEARS TOTAL
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MATURITY DISTRIBUTION
Commercial, financial and agricultural $153,106 $52,670 $27,304 $ 233,080
Real estate - construction 12,773 8,666 11,441 32,880
-------- ------- ------- ----------
TOTAL $165,879 $61,336 $38,745 $ 265,960
======== ======= ======= ==========
Real estate - mortgage 636,615
Installment 205,251
Lease financing 5,825
----------
TOTAL $1,113,651
==========
Loans maturing after one year with:
Fixed interest rates $31,080 $31,779
Variable interest rates 30,256 6,966
------- -------
TOTAL $61,336 $38,745
======= =======
</TABLE>
32
<PAGE> 27
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES
The activity in the Corporation's allowance for loan losses is shown in the
following analysis:
<TABLE>
<CAPTION>
(Dollar amounts in thousands) 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Amount of loans outstanding
at December 31, $1,113,651 $1,006,878 $920,042 $881,647 $860,420
========== ========== ======== ======== ========
Average amount of loans by year $1,066,537 $ 953,008 $885,964 $881,559 $823,983
========== ========== ======== ======== ========
Allowance for loan losses
at beginning of year $ 13,503 $ 10,756 $ 10,616 $ 10,536 $ 10,024
Allowance resulting from acquisition 970 - - - -
Loans charged off:
Commercial, financial and agricultural 1,195 487 2,577 1,364 1,578
Real estate - mortgage 614 596 207 293 150
Installment 2,827 2,732 2,615 2,016 1,422
Leasing - - 2 148 2
---------- ---------- -------- -------- --------
Total loans charged off 4,636 3,815 5,401 3,821 3,152
---------- ---------- -------- -------- --------
Recoveries of loans previously charged off:
Commercial, financial and agricultural 461 260 426 727 460
Real estate - mortgage 101 163 147 138 131
Installment 634 747 500 466 390
Leasing - 10 7 7 9
---------- ---------- -------- -------- --------
Total recoveries 1,196 1,180 1,080 1,338 990
---------- ---------- -------- -------- --------
Net loans charged off 3,440 2,635 4,321 2,483 2,162
Provision charged to expense 5,396 5,382 4,461 2,563 2,674
---------- ---------- -------- -------- --------
Balance at end of year $ 16,429 $ 13,503 $10,756 $ 10,616 $ 10,536
========== ========== ======== ======== ========
Ratio of net charge-offs during period
to average loans outstanding .32% .28% .49% .28% .26%
========== ========== ======== ======== ========
</TABLE>
Management anticipates $1.6 million of commercial, financial and agricultural
loans, $393 thousand of real estate-mortgage loans, $2.1 million of installment
loans, and $10 thousand of leases will be charged off for 1998.
33
<PAGE> 28
- --------------------------------------------------------------------------------
FINANCIAL CONDITION -- SUMMARY (Continued)
- --------------------------------------------------------------------------------
UNDER-PERFORMING LOANS
Management monitors the components and status of under-performing loans as a
part of the evaluation procedures used in determining the adequacy of the
allowance for loan losses. It is the Corporation's policy to discontinue the
accrual of interest on loans where, in management's opinion, serious doubt
exists as to collectibility. The amounts shown below represent non-accrual
loans, loans which have been restructured to provide for a reduction or
deferral of interest or principal because of deterioration in the financial
condition of the borrower and those loans which are past due more than 90 days
where the Corporation continues to accrue interest. The interest income for
non-accrual and restructured loans that would have been recorded in 1998, 1997
and 1996, under the original terms of the loans is $495 thousand, $377
thousand and $263 thousand, respectively. The Corporation recorded interest
income on such loans in the amounts of $149 thousand, $135 thousand and $152
thousand for 1998, 1997 and 1996, respectively.
<TABLE>
<CAPTION>
(Dollar amounts in thousands) 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accrual loans $ 4,103 $3,866 $2,504 $3,130 $3,593
Restructured loans 7 17 34 185 217
------- ------ ------ ------ ------
$ 4,110 3,883 2,538 3,315 3,810
Accruing loans past due 8,184 4,384 5,296 5,809 2,287
------- ------ ------ ------ ------
$12,294 $8,267 $7,834 $9,124 $6,097
======= ====== ====== ====== ======
</TABLE>
The ratio of the allowance for loan losses as a percentage of under-performing
loans was 134% at December 31, 1998, compared to 163% in 1997. This decrease
is the result of an increase in the amount of loans past due 90 days or more
amounting to $8.2 million as compared to $4.4 million in 1997. This increase
was primarily the result of a few commercial loans amounting to $2.7 million
which became past due 90 days or more and a general increase in loan
delinquencies in most categories of loans on a consolidated basis. These loans
are secured and management anticipates significant principal payments in the
first half of 1999.
The following loan categories comprise significant components of the
under-performing loans at December 31, 1998:
<TABLE>
<CAPTION>
(Dollar amounts in thousands)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Non-accrual loans:
1-4 family residential $1,927 47%
Commercial loans 587 14
Installment loans 879 22
Other, various 710 17
------ ---
$4,103 100%
====== ===
Past due 90 days or more:
1-4 family residential $3,456 42%
Commercial loans 2,963 36
Installment loans 590 7
Other, various 1,175 15
------ ---
$8,184 100%
====== ===
</TABLE>
There are no material concentrations by industry within the under-performing
loans.
In addition to the above under-performing loans, certain loans are felt by
management to be impaired for reasons other than current repayment status.
Such reasons may include, but not be limited to previous payment history,
bankruptcy proceedings, industry concerns, or information related to a
specific borrower that may result in a negative future event to that borrower.
At December 31, 1998 the Corporation had $2.0 million of doubtful loans which
are still in accrual status.
34
<PAGE> 29
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DEPOSITS
Total deposits increased to $1,260.4 million at December 31, 1998, from
$1,194.5 million at December 31, 1997. 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 1998, 1997 and 1996.
<TABLE>
<CAPTION>
1998 1997 1996
---------------- ---------------- ------------------
(Dollar amounts in thousands) AMOUNT RATE AMOUNT RATE AMOUNT RATE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Non-interest-bearing
demand deposits $ 133,259 $ 127,924 $ 134,303
Interest-bearing demand deposits 277,051 2.43% 278,898 2.40% 282,331 2.59%
Savings deposits 112,078 2.35% 109,587 2.46% 119,167 2.44%
Time deposits:
$100,000 or more 205,028 5.69% 191,953 5.65% 229,338 5.45%
Other time deposits 527,640 5.56% 478,381 5.44% 425,563 5.47%
---------- ---------- ----------
TOTAL $1,255,056 $1,186,743 $1,190,702
========== ========== ==========
</TABLE>
The maturities of certificates of deposit of $100 thousand or more outstanding
at December 31, 1998, are summarized as follows (in thousands of dollars):
<TABLE>
<CAPTION>
<S> <C>
3 months or less $ 21,008
Over 3 through 6 months 41,958
Over 6 through 12 months 45,698
Over 12 months 88,109
--------
TOTAL $196,773
========
</TABLE>
SHORT-TERM BORROWINGS
A summary of the carrying value of the Corporation's short-term borrowings at
December 31, 1998, 1997 and 1996 is presented below:
<TABLE>
<CAPTION>
(Dollar amounts in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal funds purchased $ 48,022 $ 24,850 $ 38,130
Securities sold under agreements to repurchase 52,549 22,165 24,286
Advances from Federal Home Loan Bank 185,930 167,680 140,244
Other short-term borrowings 3,061 4,282 5,131
-------- -------- --------
$289,562 $218,977 $207,791
======== ======== ========
</TABLE>
Federal funds purchased amounted to $48.0 million in 1998 compared to $24.9
million in 1997. Securities sold under agreements to repurchase was $52.5
million in 1998, up from $22.2 million a year earlier.
Advances from the Federal Home Loan Bank increased to $185.9 million in 1998
compared to $167.7 million in 1997. The major reasons for the increase were
temporary liquidity requirements and the arbitrage of several investments with
these funds. The difference between the investment yield and borrowing rate
provided a positive return to the Corporation. The difference in spread was
either matched in index (LIBOR) or the Corporation assumed basis and/or option
risk. With its increase in capital, the Corporation chose to add more leverage
to the balance sheet and increase net interest income. This strategy was
primarily implemented in the fourth quarter of 1995 and continued in 1997 and
1998. As of December 31, 1998, the total investments in such programs totaled
$117.6 million. The Asset/Liability Committee reviews these investments and
considers the related strategies on a weekly basis. See Interest Rate
Sensitivity and Liquidity on the following page for more information.
35
<PAGE> 30
- --------------------------------------------------------------------------------
FINANCIAL CONDITION -- SUMMARY (continued)
- --------------------------------------------------------------------------------
The amounts and interest rates related to federal funds purchased and
securities sold under agreements to repurchase are presented below:
<TABLE>
<CAPTION>
(Dollar amounts in thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Average amount outstanding $ 45,266 $ 46,907 $30,476
Maximum amount outstanding at a month end 102,513 74,774 72,337
Average interest rate during year 5.51% 5.68% 5.54%
Interest rate at year end 5.60% 6.00% 6.25%
</TABLE>
CAPITAL RESOURCES
As of December 31, 1998, the Corporation's shareholders' equity was $182.2
million, an increase of 10.1% from the 1997 level of $165.5 million. 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, 1998.
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 1998 and 1997 was 32.5% and 28.1%, respectively. The
Corporation expects to continue its policy of paying regular cash dividends,
subject to future earnings and regulatory restrictions and capital
requirements.
INTEREST RATE SENSITIVITY AND LIQUIDITY
First Financial Corporation charges the nine subsidiary banks with monitoring
and managing their individual sensitivity to fluctuations in interest rates
and assuring that they have adequate liquidity to meet loan and deposit demand
or any potential unexpected deposit withdrawals. This function is facilitated
by the Asset/Liability Committee. The primary goal of the committee is to
maximize net interest income within the interest rate risk limits approved by
the Board of Directors. This goal is accomplished through management of the
subsidiary banks' balance sheet liquidity and interest rate risk exposures due
to the changes in economic conditions and interest rate levels.
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 income is largely dependent on the effective management of
this risk.
The Committee reviews a series of monthly reports to ensure that performance
objectives are being met. The Committee monitors and controls interest rate
risk through earnings simulation. Simulation modeling measures the effects of
changes in interest rates, changes in the shape of the yield curve, and
changes in prepayment speeds on net interest income. The primary measure of
Interest Rate Risk is "Earnings at Risk." This measure projects the earnings
effect of various rate movements over the next three years on net interest
income. It is important to note that measures of interest rate risk have
limitations and are dependent upon certain 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 and believes the assumptions to be valid and
theoretically sound. The relationships are continuously monitored for
behavioral changes.
In its interest rate risk management, the Corporation currently does not
utilize any derivative products nor does it have a trading account. The
Corporation does invest in assets whose value is derived from an underlying
asset. These assets are mostly government agency issued mortgage-backed
securities and callable agency securities. The performance of these assets in
changing rate environments is included in the following table.
36
<PAGE> 31
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The table below shows the Corporation's estimated earnings sensitivity
profile as of December 31, 1998. Given a 100 basis point increase in rates,
net interest income would decrease 0.86% over the next 12 months and
decrease 1.74% over the next 24 months. A 100 basis point decrease would
result in a 9.06% decrease in net interest income over the next 12 months
and a 10.12% decrease over the next 24 months. These estimates assume all
rates changed overnight and management took no action as a result of this
change.
<TABLE>
<CAPTION>
PERCENTAGE CHANGE IN NET INTEREST INCOME
BASIS POINT -----------------------------------------
INTEREST RATE CHANGE 12 MONTHS 24 MONTHS 36 MONTHS
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Down 200 -18.79% -20.67% -28.54%
Down 100 -9.06 -10.12 -14.14
Up 100 -0.86 -1.74 -2.18
Up 200 -1.65 -2.73 -5.62
</TABLE>
In the near term both the up and down scenarios show decreasing earnings.
This is due to the use of products containing options, most notably
callable agency securities and putable Federal Home Loan Bank advances. The
securities pay a premium rate and the advances charge a discounted rate in
exchange for the option. Therefore, there is a benefit to current income by
using these products. 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. The model assumes no actions
are taken and prices change to the full extent of the rate shock.
LIQUIDITY RISK
Liquidity is measured by each bank's ability to raise funds to meet the
obligations from 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 $47.6 million of investments that mature throughout the
coming 12 months. The Corporation also anticipates $99.1 million of
principal payments from mortgage-backed securities. Given the current rate
environment, the Corporation anticipates $67.0 million in securities to be
called within 1999 or the next 12 months.
OUTLOOK
The Wabash Valley, the Corporation's primary market area, performed
similarly to the national economy for 1998. Recently, this market area has
not experienced the economic expansion that the rest of the Midwest and
particularly Indiana has experienced. Because of limited economic growth
prospects in the Wabash Valley, new business will predominantly come from
existing customers and customers currently being served by other local
financial institutions. To increase loans, the Corporation recently has
prudently begun soliciting and obtaining business in locations in the
Wabash Valley not previously served.
The Corporation also continues to look for merger or acquisition
opportunities throughout the Wabash Valley that share First Financial's
mission of quality service to their customers. These smaller institutions
increasingly realize the need to align with an organization that has the
resources to compete on a regional level. With the largest retail presence
in the Wabash Valley, First Financial is poised to provide these resources.
Like most other financial institutions, the Corporation has placed a high
emphasis on marketing efforts. The goal is to attain a greater share of
each customer's financial activities, commonly called "share of the
wallet." To this end, First Financial has established a full-service
brokerage, expanded its trust activities and is currently evaluating the
delivery of certain insurance products. These activities are expected to
provide an increased amount of fee-based income in the future.
YEAR 2000
The Year 2000 problem concerns the inability of information systems to
properly recognize and process date-sensitive information beginning on
December 31, 1999. The Corporation has developed a Year 2000 team
responsible for ensuring that its information technology (IT) systems and
software and non-IT systems are Year 2000 compliant in time to minimize any
significant detrimental effects on operations and service to customers.
37
<PAGE> 32
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Corporation is currently in the validation stage of a five-step Year
2000 program. The awareness, assessment and renovation steps have been
completed for all mission-critical applications. The validation stage
includes the necessary software and hardware testing that is required as
well as ongoing discussions with vendors and customers on the success of
their validation efforts. The Corporation utilizes Fiserv-CBS software for
processing all of its core applications. The testing of this software began
on September 1, 1998, and was substantially completed by the end of 1998.
The Corporation will focus on maintaining the internal core processing
system's readiness from now until the Year 2000. In addition, the Company
will continue to manage third party system relationships, update disaster
recovery and contingency plans, and will also continue to test secondary
computer systems. The Corporation is confident that the remainder of the
systems Year 2000 testing will be substantially completed by June 30, 1999.
The Corporation is in the process of corresponding with its major
commercial loan customers and major suppliers and vendors to asses the
credit risk related to the Year 2000 problem as well as the risk of
business interruption. The majority of the Corporation's non-IT related
systems have been assessed as Year 2000 compliant or are in the final
testing phase which will be completed by June 30, 1999.
The total estimated cost related to the Year 2000 issue, including the cost
of replacing equipment, is $790,000. Total costs incurred through December
31, 1998, is approximately $130,000. The Corporation does not expect that
the cost relating to the Year 2000 project will have a material effect on
the results of its operations or financial condition.
The above expectations are subject to inherent uncertainties of the Year
2000 problem, including the readiness of third-party suppliers and
regulatory agencies that the Corporation depends upon to meet customers'
needs. The failure to correct a material problem could result in an
interruption or failure of normal business activities or operations. Such
failures could materially affect the Corporation's ability to meet
customers' needs and ultimately affect its results of operations and
financial condition. The Corporation believes that with the successful
completion of its Year 2000 program, the possibility of significant
interruptions will be reduced.
Concurrently with the Year 2000 program described above, the Corporation is
developing contingency plans intended to mitigate the possible disruption
in business operations that may result from the Year 2000 problem and is
estimating the costs for such plans. Contingency plans may include
increasing cash in the vault, ordering extra forms/supplies, increasing
allowance for loan loss allocation for Year 2000 credit risk, establishing
trigger dates for activating alternative solutions/vendors, identifying
possible alternative vendors, preparing for some manual preparation of
checks, forms, etc., and other appropriate measures. Once developed,
contingency plans and related cost estimates will be continually refined as
information becomes available.
38
<PAGE> 33
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET -- AVERAGE BALANCES AND INTEREST RATES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------------------------------
1998 1997 1996
---------------------------- ---------------------------- -----------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
(Dollar amounts in thousands) BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans (1) (2) $1,066,537 $ 93,977 8.81% $ 953,008 $ 84,411 8.86% $ 885,964 $ 79,120 8.93%
Taxable investment securities 413,941 27,091 6.54 437,791 31,133 7.11 421,745 29,774 7.06
Tax-exempt investment
securities (2) 148,383 12,015 8.10 140,768 11,377 8.08 133,914 10,320 7.71
Federal funds sold 12,131 657 5.42 2,822 157 5.56 8,612 484 5.62
Interest-bearing deposits
in other banks:
Domestic - - - 509 34 6.68 1,040 61 5.87
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
Total interest-earning assets $1,640,992 $133,740 8.15% $1,534,898 $127,112 8.28% $1,451,275 $119,759 8.25%
-------- ==== -------- ==== -------- ====
Non-interest earning assets:
Cash and due from bank $ 54,909 $ 49,725 57,919
Premises and equipment, net 24,723 25,515 26,598
Other assets 36,766 32,913 28,883
Less allowance for loan losses (15,690) (12,302) (10,644)
---------- ---------- ----------
TOTALS $1,741,700 $1,630,749 $1,554,031
========== ========== ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Savings deposits 389,129 9,375 2.41% 388,485 9,399 2.42% 401,498 10,215 2.54%
Time deposits 732,668 41,013 5.60 670,334 36,886 5.50 654,901 35,767 5.46
Federal funds purchased
and securities sold under
agreement to repurchase 45,266 2,494 5.51 46,907 2,663 5.68 30,476 1,689 5.54
Other 239,710 13,549 5.65 223,789 13,124 5.86 177,036 10,139 5.73
---------- -------- ---- ---------- -------- ---- ---------- -------- ----
Total interest-bearing
liabilities: $1,406,773 $ 66,431 4.72% $1,329,515 $ 62,072 4.67% $1,263,911 $ 57,810 4.57%
-------- ==== -------- ==== -------- ====
Non interest-bearing
liabilities:
Demand deposits 133,259 127,924 134,303
Other 29,223 19,154 13,053
---------- ---------- ----------
1,569,255 1,476,593 1,411,267
Shareholders' equity 172,445 154,156 142,764
---------- ---------- ----------
TOTALS $1,741,700 $1,630,749 $1,554,031
========== ========== ==========
Net interest earnings $ 67,309 $ 65,040 $ 61,949
========= ======== ========
Net yield on interest-earning assets 4.10% 4.24% 4.27%
==== ==== ====
</TABLE>
(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%.
39
<PAGE> 34
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
EFFECTS OF INFLATION
The effects of inflation on an enterprise's reported results of operations
vary depending on the components of the enterprise's assets and liabilities.
Except for a bank's premises and equipment, which comprise a relatively small
portion of total assets, a bank's assets and liabilities are primarily
monetary in nature. Consequently, because a bank's monetary assets exceed
monetary liabilities, banks generally experience a loss in purchasing power
during periods of inflation. However, when considering the effects of
inflation on banks, it is important to remember that interest rates, which
affect the bank's costs for funds, do not always move in correlation with
consumer prices.
MARKET AND DIVIDEND INFORMATION
At year-end 1998 shareholders owned 7,134,390 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 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
--------------------------- ---------------------------
Bid Quotation Cash Bid Quotation Cash
Dividends Dividends
Quarter ended High Low Declared High Low Declared
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
March 31 $56.50 $51.75 $35.72 $33.33
June 30 54.00 47.13 $ .40 35.47 31.42 $ .33
September 30 51.00 41.50 38.58 33.81
December 31 49.38 38.88 $ .44 57.62 37.14 $ .39
</TABLE>
40
<PAGE> 35
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SELECTED QUARTERLY DATA
<TABLE>
<CAPTION>
1998
----------------------------------------------------------------------------------------
NET PROVISION
INTEREST INTEREST INTEREST FOR LOAN NET NET INCOME
(Dollar amounts in thousands) INCOME EXPENSE INCOME LOSSES INCOME PER SHARE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
March 31 $31,479 $16,074 $15,405 $1,407 $4,500 $ .62
June 30 32,106 16,585 15,521 1,549 4,170 $ .58
September 30 32,589 16,768 15,821 1,345 4,860 $ .67
December 31 32,963 17,003 15,960 1,095 5,028 $ .71
<CAPTION>
1997
----------------------------------------------------------------------------------------
NET PROVISION
INTEREST INTEREST INTEREST FOR LOAN NET NET INCOME
(Dollar amounts in thousands) INCOME EXPENSE INCOME LOSSES INCOME PER SHARE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
March 31 $29,850 $15,185 $14,665 $1,401 $4,431 $ .63
June 30 30,521 15,515 15,006 1,336 4,374 .62
September 30 31,165 15,654 15,511 1,251 4,619 .66
December 31 30,836 15,718 15,118 1,394 4,676 .67
</TABLE>
41
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 54,877
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 450
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 633,365
<INVESTMENTS-MARKET> 633,365
<LOANS> 1,111,765
<ALLOWANCE> 16,429
<TOTAL-ASSETS> 1,849,752
<DEPOSITS> 1,260,365
<SHORT-TERM> 289,562
<LIABILITIES-OTHER> 21,504
<LONG-TERM> 96,138
0
0
<COMMON> 903
<OTHER-SE> 181,280
<TOTAL-LIABILITIES-AND-EQUITY> 1,849,752
<INTEREST-LOAN> 93,579
<INTEREST-INVEST> 34,901
<INTEREST-OTHER> 657
<INTEREST-TOTAL> 129,137
<INTEREST-DEPOSIT> 50,388
<INTEREST-EXPENSE> 66,430
<INTEREST-INCOME-NET> 62,707
<LOAN-LOSSES> 5,396
<SECURITIES-GAINS> 905
<EXPENSE-OTHER> 42,567
<INCOME-PRETAX> 25,355
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,558
<EPS-PRIMARY> 2.58
<EPS-DILUTED> 2.58
<YIELD-ACTUAL> 4.10
<LOANS-NON> 4,103
<LOANS-PAST> 8,184
<LOANS-TROUBLED> 7
<LOANS-PROBLEM> 2,000
<ALLOWANCE-OPEN> 14,473
<CHARGE-OFFS> 4,636
<RECOVERIES> 1,196
<ALLOWANCE-CLOSE> 5,396
<ALLOWANCE-DOMESTIC> 16,429
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
