-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JCdfynt+vZj5I0JcDfwHLht5F58z1Jp6xPrVM+xsm1DauTIJPKCSy+LEGQceylUR eV3DU1Rp79kxMMyS0s62SQ== 0000950137-98-001100.txt : 19980324 0000950137-98-001100.hdr.sgml : 19980324 ACCESSION NUMBER: 0000950137-98-001100 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980323 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST FINANCIAL CORP /IN/ CENTRAL INDEX KEY: 0000714562 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 351546989 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-16759 FILM NUMBER: 98570785 BUSINESS ADDRESS: STREET 1: ONE FIRST FINANCIAL PLZ CITY: TERRE HAUTE STATE: IN ZIP: 47807 BUSINESS PHONE: 8122386000 MAIL ADDRESS: STREET 1: ONE FIRST FINANCIAL PLAZA CITY: TERRE HAUTE STATE: IN ZIP: 47807 FORMER COMPANY: FORMER CONFORMED NAME: TERRE HAUTE FIRST CORP DATE OF NAME CHANGE: 19850808 10-K405 1 10-K405 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, 1997 0-16759 FIRST FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) INDIANA 35-1546989 (State of Incorporation) (I.R.S. Employer Identification No.) One First Financial Plaza Terre Haute, IN 47807 (Address of principal executive offices) (Zip Code) Registrant's telephone number: (812) 238-6000 Securities registered pursuant to Section 12(b) of the Act: 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, 1998 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 $275,916,170. (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, 1998--7,015,483 shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of the 1997 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 15, 1998 are incorporated by reference into Part III. 2 FORM 10-K CROSS-REFERENCE INDEX
PAGE PART I Item 1 Business ............................................................................... 2 Item 2 Properties ............................................................................. 2 Item 3 Legal Proceedings ...................................................................... 2 Item 4 Submission of Matters to a Vote of Security Holders .................................... 2 PART II Item 5 Market for Registrant's Common 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 .............................................................................. 4, 5
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 1997 Annual Report to Shareholders: 1. Description of bank services, affiliations, number of employees, and competition, on page 31. 2. Information regarding supervision of the Bank, on page 18. 3. Details regarding competition, on page 31. 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 50,000 square foot building housed operations and administrative staff and equipment. In addition, the Bank holds in fee four other branch buildings and one of branch buildings is a single story 44,000 square foot which is located in a Terre Haute suburban area. Five other branch bank buildings are leased by the Bank. The expiration dates on the leases are February 14, 2011, May 31, 2011, September 1, 2001, June 30, 2002, 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 two branch facilities in Cayuga and Clinton, Indiana. All three 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. The facility 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. 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 4 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS See "Market and Dividend information" on page 41 of the 1997 Annual Report. ITEM 6. SELECTED FINANCIAL DATA See "Five Year Comparison of Selected Financial Data" on page 13 of the 1997 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 31 through 39 of the 1997 Annual Report to Shareholders. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See "Consolidated Balance Sheets" on page 14, "Consolidated Statements of Income" on page 15, "Consolidated Statements of Shareholders Equity" on page 16, "Consolidated Statements of Cash Flows" on page 17, and "Notes to Consolidated Financial Statement" on pages 18-29. "Responsibility for Financial Statements" and "Report of Independent Accountants" can be found on page 30. Statistical disclosure by Bank Holding Company include the following information: 1. "Volume/Rate Analysis," on page 32. 2. "Loan Portfolio," on page 34. 3. "Allowance for Possible Loan Losses," on page 35. 4. "Under-Performing Loans," on page 36. 5. "Deposits," on page 37. 6. "Short-Term Borrowings," on page 37. 7. "Consolidated Balance Sheet-Average Balances and Interest Rates," on page 40. 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 7 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 pages 7 and 8 of the Annual Proxy Statement of First Financial Corporation. 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, 1997 and 1996 Consolidated Statements of Income--Years ended December 31, 1997, 1996, and 1995 Consolidated Statements of Shareholders' Equity--Years ended December 31, 1997, 1996, 1995 and 1994 Consolidated Statements of Cash Flow--Years ended December 31, 1997, 1996 and 1995 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 Michael A. Carty, Signed ------------------------ Michael A. Carty, Treasurer (Principal Financial Officer and Principal Accounting Officer) Date: February 17, 1998 ------------------ 6 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. NAME DATE Donald E. Smith, signed February 17, 1998 - -------------------------------------- Donald E. Smith, President & Director (Principal Executive Officer) John W. Perry, signed February 17, 1998 - -------------------------------------- John W. Perry, Secretary Walter A. Bledsoe, signed February 17, 1998 - -------------------------------------- Walter A. Bledsoe, Director B. Guille Cox, Jr, signed February 17, 1998 - -------------------------------------- B. Guille Cox, Jr., Director Thomas T. Dinkel, signed February 17, 1998 - -------------------------------------- Thomas T. Dinkel, Director February 17, 1998 - -------------------------------------- Gregory L. Gibson, Director Anton H. George, signed February 17, 1998 - -------------------------------------- Anton H. George, Director - -------------------------------------- Mari H. George, Director Max Gibson, signed February 17, 1998 - -------------------------------------- Max Gibson, Director Norman L. Lowery, signed February 17, 1998 - -------------------------------------- Norman L. Lowery, Director - -------------------------------------- William A. Niemeyer, Director Patrick O'Leary, signed February 17, 1998 - -------------------------------------- Patrick O'Leary, Director John W. Ragle, signed February 17, 1998 - -------------------------------------- John W. Ragle, Director February 17, 1998 - -------------------------------------- Chapman J. Root II, Director February 17, 1998 - -------------------------------------- Virginia L. Smith, Director EX-21 2 SUBSIDIARIES OF THE REGISTRANT 1 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. 2 Five Year Comparison of Selected Financial Data
(Dollar amounts in thousands except per share amounts) 1997 1996 1995 1994 1993 - -------------------------------------------------------------------------------------------------------------------------- BALANCE SHEET DATA: Total assets $1,634,936 $1,619,642 $1,545,307 $1,356,375 $1,339,657 Investments 527,993 582,744 544,289 382,102 432,103 Net loans 1,005,799 918,767 879,516 857,039 796,205 Deposits 1,194,524 1,175,228 1,163,481 1,077,719 1,083,139 Long-term borrowings 37,237 70,561 56,750 25,672 41,337 Shareholders' equity 165,480 150,377 140,075 122,098 119,621 INCOME STATEMENT DATA: Interest income 122,372 115,836 106,330 91,607 92,329 Interest expense 62,072 57,810 54,144 40,489 41,482 Net interest income 60,300 58,026 52,186 51,118 50,847 Provision for loan losses 5,382 4,461 2,563 2,674 2,614 Other income 8,957 7,849 7,922 7,382 7,584 Other expenses 39,629 39,280 38,690 37,616 37,006 Net income 18,100 15,971 13,897 13,325 13,995 PER SHARE DATA: Net income 2.58 2.28* 1.98* 1.89* 1.98* Cash dividends .72 .61* .51* .48* .44* PERFORMANCE RATIOS: Net income to average assets 1.11% 1.03% .97% 1.00% 1.08% Net income to average shareholders' equity 11.74 11.19 10.65 11.07 12.87 Average total capital to average assets 10.13 9.80 9.84 9.75 9.16 Average shareholders' equity to average assets 9.45 9.19 9.15 9.07 8.42 Dividend payout 28.06 26.85 25.58 25.22 22.25
*Restated to retroactively reflect 1997 stock dividend. 3 Consolidated Balance Sheets
Years Ended December 31, ------------------------ (Dollar amounts in thousands) 1997 1996 - --------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 53,815 $ 66,658 Interest-bearing deposits with financial institutions -- 1,095 Federal funds sold 280 2,000 Investment securities - available-for-sale 527,993 582,744 Loans 1,006,878 920,042 Less: Unearned income 1,079 1,275 Allowance for loan losses 13,503 10,756 ---------- ---------- 992,296 908,011 Accrued interest receivable 14,086 14,985 Premises and equipment 24,925 26,137 Other assets 21,541 18,012 ---------- ---------- TOTAL ASSETS $1,634,936 $1,619,642 ========== ========== LIABILITIES AND SHAREHOLDERS EQUITY Deposits: Non-interest-bearing $ 162,880 $ 141,492 Interest-bearing: Certificates of deposit of $100,000 or more 195,487 187,199 Other interest-bearing deposits 836,157 846,537 ---------- ---------- 1,194,524 1,175,228 Short-term borrowings: Federal funds purchased and securities sold under agreements to repurchase 47,015 62,416 Treasury tax and loan open-end note 4,282 5,131 Advances from Federal Home Loan Bank 167,680 140,244 ---------- ---------- 218,977 207,791 Long-term borrowings: Advances from Federal Home Loan Bank 30,596 63,924 Other borrowings 6,641 6,637 Other liabilities 18,718 15,685 ---------- ---------- TOTAL LIABILITIES 1,469,456 1,469,265 Shareholders' equity Common stock, $ .125 stated value per share, authorized 10,000,000 shares, issued and outstanding 7,015,504 shares for 1997 and 1996 877 835 Additional capital 59,787 43,761 Retained earnings 98,046 101,093 Unrealized gains on available-for-sale securities, net of taxes 6,770 4,688 ---------- ---------- TOTAL SHAREHOLDERS EQUITY 165,480 150,377 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS EQUITY $1,634,936 $1,619,642 ========== ==========
The accompanying notes are an integral part of the consolidated financial statements. 4 Consolidated Statements of Income
Years Ended December 31, ----------------------------- (Dollar amounts in thousands except per share data) 1997 1996 1995 - ---------------------------------------------------------------------------------------------- INTEREST INCOME: Loans $ 83,653 $ 78,706 $ 77,253 Investment securities: Taxable 31,133 29,835 20,857 Tax-exempt 7,395 6,811 7,271 Other interest income 191 484 949 -------- -------- -------- TOTAL INTEREST INCOME 122,372 115,836 106,330 INTEREST EXPENSE: Deposits 46,285 45,983 45,932 Short-term borrowings 12,672 7,077 5,792 Long-term borrowings 3,115 4,750 2,420 -------- -------- -------- TOTAL INTEREST EXPENSE 62,072 57,810 54,144 -------- -------- -------- NET INTEREST INCOME 60,300 58,026 52,186 Provision for loan losses 5,382 4,461 2,563 -------- -------- -------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 54,918 53,565 49,623 OTHER INCOME: Trust department income 1,973 1,797 1,560 Service charges on deposit accounts 1,340 1,431 1,588 Other service charges and fees 3,831 3,263 3,105 Investment securities gains (losses) 407 154 75 Other 1,406 1,204 1,594 -------- -------- -------- 8,957 7,849 7,922 OTHER EXPENSES: Salaries and employee benefits 22,041 21,222 19,505 Occupancy 2,870 2,939 2,944 Equipment 3,189 2,871 2,314 Data processing 131 787 2,031 FDIC insurance 189 38 1,275 Printing and supplies 1,168 1,216 1,220 Other 10,041 10,207 9,401 -------- -------- -------- 39,629 39,280 38,690 INCOME BEFORE INCOME TAXES 24,246 22,134 18,855 Income tax expense 6,146 6,163 4,958 -------- -------- -------- NET INCOME $ 18,100 $ 15,971 $ 13,897 ======== ======== ======== EARNINGS PER SHARE: NET INCOME $ 2.58 $ 2.28 $ 1.98 ======== ======== ======== Weighted average number of shares outstanding in thousands 7,016 7,013 7,017 ======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements. 5 Consolidated Statements of Shareholders Equity
(Dollar amounts in thousands except per share data) Common Additional Retained Unrealized Treasury Stock Capital Earnings Gains (Losses) Stock Total --------------------------------------------------------------------------------------------------------------------- Balance, January 1, 1994 $ 771 $ 28,396 $ 86,005 $ 4,449 $ -- $ 119,621 Net income -- -- 13,325 -- -- 13,325 Treasury stock purchase -- -- -- -- (608) (608) Unrealized losses on available-for-sale securities -- -- -- (6,878) -- (6,878) Cash dividends, $ .48 per share -- -- (3,362) -- -- (3,362) --------- --------- --------- --------- --------- --------- Balance, December 31, 1994 771 28,396 95,968 (2,429) (608) 122,098 Net income -- -- 13,897 -- -- 13,897 Stock dividend, 5% 34 7,652 (7,686) -- -- -- Treasury stock purchase -- -- -- -- (1,855) (1,855) Treasury stock reissuance -- -- -- -- 525 525 Unrealized gains on available-for-sale securities -- -- -- 8,964 -- 8,964 Cash dividends, $ .51 per share -- -- (3,554) -- -- (3,554) --------- --------- --------- --------- --------- --------- Balance, December 31, 1995 805 36,048 98,625 6,535 (1,938) 140,075 Net income -- -- 15,971 -- -- 15,971 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 -- Unrealized losses on available-for-sale securities -- -- -- (1,847) -- (1,847) Cash dividends, $ .61 per share -- -- (4,290) -- -- (4,290) --------- --------- --------- --------- --------- --------- Balance, December 31, 1996 835 43,761 101,093 4,688 -- 150,377 Net income -- -- 18,100 -- -- 18,100 Stock dividend, 5% 42 16,026 (16,068) -- -- -- Unrealized gains on available-for-sale securities -- -- -- 2,082 -- 2,082 Cash dividends, $ .72 per share -- -- (5,079) -- -- (5,079) --------- --------- --------- --------- --------- --------- Balance, December 31, 1997 $ 877 $ 59,787 $ 98,046 $ 6,770 $ -- $ 165,480 ========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 6 Consolidated Statements of Cash Flows
Years Ended December 31, ----------------------------- (Dollar amounts in thousands except per share data) 1997 1996 1995 - -------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 18,100 $ 15,971 $ 13,897 Adjustments to reconcile net income to net cash provided by operating activities: Net amortization of discounts on investment securities (1,978) (2,051) (1,890) Provision for loan losses 5,382 4,461 2,563 Investment securities gains (407) (154) (75) Provision for depreciation and amortization 2,496 2,536 2,484 Provision for deferred income taxes (1,055) (283) (213) Net (increase) decrease in accrued interest receivable 899 (1,385) (2,892) Other, net 234 (282) (1,647) --------- --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 23,671 18,813 12,227 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Net (increase) decrease from purchases and maturities of interest-bearing deposits with financial institutions 1,095 (17) (298) Sales and maturities of available-for-sale securities 229,606 167,416 126,305 Purchases of available-for-sale securities (170,217) (207,659) (271,893) Loans made to customers, net of repayments (89,608) (43,373) (25,000) Net increase in federal funds sold 1,720 8,000 14,325 Additions to premises and equipment (1,591) (3,037) (6,489) --------- --------- --------- NET CASH USED BY INVESTING ACTIVITIES (28,995) (78,670) (163,050) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase from sales and redemptions of certificates of deposit 21,620 18,549 89,633 Net decrease in other deposits (2,324) (6,802) (3,872) Net increase in short-term borrowings 11,186 38,962 49,579 Cash dividends (4,677) (3,720) (3,489) Proceeds from reissuance of treasury stock -- 600 525 Purchases of treasury stock -- (132) (1,855) Proceeds from long-term borrowings -- 13,825 31,098 Repayments on long-term borrowings (33,324) (43) (18) --------- --------- --------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES $ (7,519) $ 61,239 $ 161,601 --------- --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (12,843) 1,382 10,778 --------- --------- --------- CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 66,658 65,276 54,498 CASH AND CASH EQUIVALENTS, END OF YEAR $ 53,815 $ 66,658 $ 65,276 ========= ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 63,243 $ 55,585 $ 53,047 ========= ========= ========= Income taxes $ 7,367 $ 6,974 $ 5,577 ========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 7 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), 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 eight subsidiaries. Terre Haute First is the largest bank in Vigo County. It operates ten full-service banking branches within the county. It also has a main office in downtown Terre Haute and an operations enter/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 three 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. 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 33 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 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. 8 Notes to Consolidated Financial Statements (continued) 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 1997, 1996 or 1995, is recognized currently. The estimated useful life for equipment ranges from three to seven years and the estimated useful life for premises is 27.5 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. RECLASSIFICATIONS Certain amounts in the 1995 and 1996 consolidated financial statements have been reclassified to conform with the 1997 presentation. RECENTLY ISSUED ACCOUNTING STANDARDS Statement of Financial Accounting Standards (SFAS) No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," provides accounting and reporting standards based on a control-oriented "financial-components" approach for various transactions. Certain provisions of SFAS No. 125 are effective in 1997 and the remaining are effective in 1998. The effect of adopting SFAS No. 125 was not material to the Corporation's financial statements in 1997 and is not anticipated to be material to the financial statements in 1998. SFAS No. 128, "Earnings Per Share," changes the computational guidance for earnings per share information. Since the Corporation has no common stock equivalents, the adoption of SFAS No. 128 in 1997 had no impact on the Corporation's earnings per share. SFAS No. 130, "Reporting Comprehensive Income," establishes standards for reporting and the display of comprehensive income and its components. SFAS No. 130 will be adopted by the Corporation in 1998. This statement will result in additional financial statement disclosures upon adoption. SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," changes current practice by establishing a new framework for segment reporting. SFAS No. 131, which will be adopted by the Corporation in 1998, will have no impact on the Corporation's results of operations or financial condition, but may affect the financial statement reporting of business segments. 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, 1997 and 1996. 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 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. 9 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 sheet. 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, 1997 and 1996 were immaterial. The following table presents a summary of the carrying amounts and fair values of the Corporation's financial instruments at December 31, 1997 and 1996. December 31, ----------------------------------------------------- 1997 1996 ------------------------- ------------------------- Carrying Fair Carrying Fair (Dollar amounts in thousands) Value Value Value Value - ---------------------------------------------------------------------------------------------------------------- Cash and due from banks $ 53,815 $ 53,815 $ 66,658 $ 66,658 Interest-bearing deposits with financial institutions -- -- 1,095 1,095 Federal funds sold 280 280 2,000 2,000 Available-for-sale investment securities (Note 4) 527,993 527,993 582,744 582,744 Loans (Note 5) 1,006,878 1,005,362 920,042 921,020 Accrued interest receivable 14,086 14,086 14,985 14,985 Deposits (Note 8) 1,194,524 1,199,869 1,175,228 1,181,528 Short-term borrowings (Note 8) 218,977 218,977 207,791 207,791 Long-term borrowings (Note 9) 37,237 37,375 70,561 70,261
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 $13.4 million and $14.5 million at December 31, 1997 and 1996, respectively. 4. INVESTMENT SECURITIES: The amortized cost, estimated fair value and carrying value of investment securities are summarized as follows:
December 31, 1997 --------------------------------------------------------------- Unrealized Amortized ----------------- Fair Carrying (Dollar amounts in thousands) Cost Gains Losses Value Value - ---------------------------------------------------------------------------------------------------------------- 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 ========== ========= ========== ========== ==========
10 Notes to Consolidated Financial Statements (continued)
December 31, 1996 ---------------------------------------------------------- Unrealized Amortized ----------------- Fair Carrying (Dollar amounts in thousands) Cost Gains Losses Value Value - ----------------------------------------------------------------------------------------------------------- AVAILABLE-FOR-SALE: United States Government $ 58,087 $ 927 $ (42) $ 58,972 $ 58,972 United States Government agencies 329,437 3,337 (1,881) 330,893 330,893 Collateralized mortgage obligations 42,918 1,013 (370) 43,561 43,561 State and municipal 140,963 3,029 (533) 143,459 143,459 Corporate obligations 5,496 364 (1) 5,859 5,859 -------- -------- -------- -------- -------- TOTAL $576,901 $ 8,670 $ (2,827) $582,744 $582,744 ======== ======== ======== ======== ========
As of December 31, 1997, 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 $85.9 million and $123.2 million at December 31, 1997 and 1996, 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, 1997, 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 1997 are the weighted average yields computed on a tax equivalent basis, assuming a federal income tax rate of 35%.
Available-for-Sale ------------------------------ Weighted Amortized Fair Average (Dollar amounts in thousands) Cost Value Yields - ------------------------------------------------------------------------------------------------------------ Due in one year or less $ 93,872 $ 93,874 7.37% ==== Due after one but within five years 94,516 96,376 7.33% ==== Due after five but within ten years 100,515 103,404 7.78% ==== Due after ten years 23,734 24,671 7.72% ==== Mortgage backed securities 206,856 209,668 7.38% --------- ---------- ==== TOTAL $519,493 $ 527,993 ========= ==========
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, 1997, 1996 and 1995. Sales proceeds from available-for-sale securities aggregated $177.8 million, $135.0 million and $62.7 million in 1997, 1996 and 1995, respectively.
(Dollar amounts in thousands) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------- Gross gains $ 722 $ 588 $ 202 Gross losses (315) (434) (127) ------ -------- ------ Net gain (loss) $ 407 $ 154 $ 75 ====== ======== ======
5. LOANS: Loans are summarized as follows:
December 31, ---------------------------------------- (Dollar amounts in thousands) 1997 1996 Carrying Carrying Value Value - --------------------------------------------------------------------------------------------------------- Commercial, financial and agricultural $ 229,855 $ 197,449 Real estate - construction 23,734 22,629 Real estate - mortgage 561,466 508,010 Installment 188,552 188,670 Lease financing 3,271 3,284 ---------- --------- TOTAL $1,006,878 $ 920,042 ========== =========
11 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 1997 the aggregate dollar amount of these loans to directors and executive officers who held office at the end of the year amounted to $29.3 million at the beginning of the year. During 1997, advances of $33.7 million and repayments of $26.3 million were made with respect to related party loans for an aggregate dollar amount of $36.7 million at December 31, 1997. The amount of such loans aggregated $27.3 million at December 31, 1996. 6. ALLOWANCE FOR LOAN LOSSES: Changes in the allowance for loan losses are summarized as follows:
December 31, ------------------------------------ (Dollar amounts in thousands) 1997 1996 1995 - ----------------------------------------------------------------------------------------- Balance at beginning of year $ 10,756 $ 10,616 $ 10,536 Provision for loan losses 5,382 4,461 2,563 Recoveries of loans previously charged off 1,180 1,080 1,338 Loans charged off (3,815) (5,401) (3,821) --------- -------- -------- BALANCE AT END OF YEAR $ 13,503 $ 10,756 $ 10,616 ========= ======== ========
7. PREMISES AND EQUIPMENT: Premises and equipment are summarized as follows:
December 31, ------------------------------------ (Dollar amounts in thousands) 1997 1996 - ----------------------------------------------------------------------------------------- Land $ 3,291 $ 3,266 Building and leasehold improvements 24,156 23,640 Furniture and equipment 21,187 21,539 ---------- --------- 48,634 48,445 Less accumulated depreciation (23,709) (22,308) ---------- --------- TOTAL $ 24,925 $ 26,137 ========== =========
8 DEPOSITS AND SHORT-TERM BORROWINGS: The carrying and fair values of deposits are as follows at December 31, 1997 and 1996:
1997 1996 ------------------------- --------------------------- Carrying Fair Carrying Fair (Dollar amounts in thousands) Value Value Value Value - ---------------------------------------------------------------------------------------------------------------------- Non-interest-bearing demand deposits $ 162,880 $ 162,880 $ 141,492 $ 141,492 Interest-bearing demand deposits 255,373 255,373 275,677 275,677 Savings deposits 105,870 105,870 111,555 111,555 Time deposits: $100,000 or more 195,487 195,851 187,199 189,748 Other time deposits 474,914 479,895 459,305 463,056 ------------ ----------- ------------ ------------- $ 1,194,524 $ 1,199,869 $ 1,175,228 $ 1,181,528 ============ =========== ============ =============
The aggregate carrying value of short-term borrowings was $219.0 million and $207.8 million at December 31, 1997 and 1996, respectively. The weighted average interest rate was 5.33% and 5.30% for 1997 and 1996, respectively. 12 Notes to Consolidated Financial Statements (continued) 9. LONG-TERM BORROWINGS: Long-term borrowings at December 31, 1997 and 1996 are summarized as follows:
1997 1996 -------------------- --------------------- Carrying Fair Carrying Fair (Dollar amounts in thousands) Value Value Value Value - ------------------------------------------------------------------------------------------------------- City of Terre Haute, Indiana adjustable tender economic development revenue bonds, series 1985 $ 6,600 $ 6,600 $ 6,600 $ 6,600 Other 41 41 37 37 ---------- -------- --------- --------- TOTAL $ 6,641 $ 6,641 $ 6,637 $ 6,637 ========== ======== ========= ========= Advances from the Federal Home Loan Bank 198,276 198,414 204,168 203,868 Advances classified as short-term borrowings (167,680) (167,680) (140,244) (140,244) ---------- -------- --------- --------- Advances classified as long-term borrowings $ 30,596 $ 30,734 $ 63,924 $ 63,624 ========== ======== ========= =========
The aggregate minimum annual retirements of long-term borrowings are as follows: 1998 $ 167,680 1999 15,645 2000 5,147 2001 5,179 2002 1,465 Thereafter 9,801 --------- $ 204,917 Less current portion (167,680) --------- $ 37,237 ========= The economic development revenue bonds (bonds) require periodic interest payments each year until maturity or redemption. The interest rate, which was 3.80% at December 31, 1997, and 4.20% at December 31, 1996, 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, 1998 and is deemed to be automatically extended without amendment for one year from the expiration date. No bonds were redeemed during 1997. 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 1997, there are no principal maturities of the bonds within the next five years. 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, 1997 and 1996, 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 $198.3 million at December 31, 1997, accrue interest at annual rates varying from 4.99% 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, 1997, with a required minimum ratio of collateral to advances of 160%. 13 10. INCOME TAXES: Income tax expense is summarized as follows:
(Dollar amounts in thousands) 1997 1996 1995 - -------------------------------------------------------------------------------- Federal: Currently payable $ 5,164 $ 4,772 $ 3,492 Deferred (833) (315) (150) -------- -------- --------- 4,331 4,457 3,342 State: Currently payable 2,037 1,750 1,679 Deferred (222) (44) (63) -------- -------- --------- 1,815 1,706 1,616 -------- -------- --------- TOTAL $ 6,146 $ 6,163 $ 4,958 ======== ======== =========
Income tax expense with respect to investment securities gains amounted to approximately $103 thousand, $43 thousand and $20 thousand in 1997, 1996 and 1995, respectively. The major components of deferred income taxes are as follows:
(Dollar amounts in thousands) 1997 1996 1995 - ------------------------------------------------------------------------------- Provision for loan losses $ (1,113) $ (364) $ (52) Lease financing (10) (96) 11 Depreciation 226 266 (3) Pension expense 95 (16) (3) Deferred compensation (19) (34) (130) Other, net (234) (114) (36) -------- -------- --------- TOTAL $ (1,055) $ (358) $ (213) ======== ======== =========
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:
(Dollar amounts in thousands) 1997 1996 1995 - -------------------------------------------------------------------------------- Federal income taxes computed at the statutory rate $ 8,486 $ 7,747 $ 6,454 Add (deduct) tax effect of: Nontaxable income from tax-exempt investments and loans (3,081) (2,228) (2,355) State tax, net of federal benefit 1,180 1,110 1,067 Investment tax credit (491) (280) (280) Other, net 52 (186) 72 -------- --------- --------- (2,340) (1,584) (1,496) -------- --------- --------- TOTAL $ 6,146 $ 6,163 $ 4,958 ======== ========= =========
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 1997 and 1996, are as follows:
(Dollar amounts in thousands) 1997 1996 - -------------------------------------------------------------------------------- Deferred tax assets: Loans, principally the allowance for loan losses $ 5,472 $ 4,359 Deferred compensation 570 551 Compensated absences, principally due to accrual for financial reporting purposes 267 251 Other 428 298 -------- -------- Total gross deferred tax assets $ 6,737 $ 5,459 -------- --------
14 Notes to Consolidated Financial Statements (continued) Deferred tax liabilities: Unrealized gains on available-for-sale securities (4,464) (3,120) Premises and equipment, principally due to differences in depreciation (1,168) (942) Lease financing, principally due to basis differences between tax and financial reporting (301) (311) Pensions, principally due to amounts that are nondeductible until paid (662) (567) Other (227) (315) ------- ------- Total gross deferred liabilities (6,822) (5,255) ------- ------- Net deferred tax assets (liabilities) $ (85) $ 204 ======= =======
11. SHAREHOLDERS EQUITY: At December 31, 1997 and 1996, approximately $38.6 million and $29.7 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. The Corporation's Board of Directors approved a 5% stock dividend on December 16, 1997, payable on January 23, 1998, to shareholders of record on January 9, 1998. All previously reported share and per share information has been restated. 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 $122.8 million and $121.7 million and commitments to extend credit of $3.9 million and $3.7 million as of December 31, 1997 and 1996, respectively. In addition, the Corporation had outstanding commitments of $2.5 million and $1.9 million under standby letters of credit as of December 31, 1997 and 1996, respectively. The fair values of the Corporation's off-balance-sheet financial instruments at December 31, 1997 and 1996 were immaterial. 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 $109 thousand, $623 thousand and none in 1997, 1996 and 1995, respectively. The Corporation contributed $726 thousand, $600 thousand and $525 thousand to the ESOP in 1997, 1996 and 1995, respectively. 15 Pension expense included the following components:
(Dollar amounts in thousands) 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------- Service cost - benefits earned $ 1,222 $ 957 $ 765 Interest cost on projected benefit obligation 1,527 870 777 Actual (return) loss on plan assets (9,913) (2,895) (1,252) Net amortization and deferral 8,371 1,740 240 -------- ------- -------- Total pension expense $ 1,207 $ 672 $ 530 ======== ======= ========
The information below sets forth the funded status of the Corporation's retirement program. Actuarial present value of benefits is based on service to date and present pay levels.
December 31, ------------------------------------- (Dollar amounts in thousands) 1997 1996 - --------------------------------------------------------------------------------------------------------------------- Vested $ 27,714 $ 9,091 Nonvested 101 487 --------- --------- Accumulated benefits obligation 27,815 9,578 Additional amounts related to projected pay increases 1,762 3,729 --------- --------- Total projected benefit obligation 29,577 $ 13,307 Assets at fair value, consisting primarily of the Corporation's common stock $ 29,562 $ 18,847 --------- --------- Excess (deficiency) of assets over projected benefits (15) 5,540 Unrecognized net (gain) loss 2,126 (3,522) Unrecognized prior service cost 79 95 Unrecognized net transition asset (522) (697) --------- --------- Prepaid pension asset recognized in the statement of condition 1,668 $ 1,416 ========= ========= Principal assumptions used: Discount rate 7.00% 7.50% ========= ========= Rate of increase in compensation levels 7.00% 7.50% ========= ========= Expected long-term rate of return on plan assets 8.00% 7.00% ========= =========
The Corporation also provides medical benefits to its employees subsequent to their retirement. Accrued postretirement benefits as of December 31, 1997 and 1996 are as follows:
December 31, ------------------------------------- (Dollar amounts in thousands) 1997 1996 - --------------------------------------------------------------------------------------------------------------------- Accumulated postretirement benefit obligation (APBO): Retirees $ 1,602 $ 1,607 Active employees fully eligible to retire and receive benefits 137 46 Active employees not fully eligible 713 778 -------- --------- Total APBO 2,452 2,431 Unamortized transition obligation (1,743) (1,843) -------- --------- Accrued postemployment benefit liability $ 709 $ 588 ======== ========= Net periodic postretirement benefit cost for 1997 included the following components: Service cost - benefits attributed to service during the period $ 41 $ 50 Interest cost on accumulated postretirement benefit obligation 166 168 Amortization of transition obligation over 20 years 86 102 -------- -------- Net periodic postretirement benefit cost $ 293 $ 320 ========= ========
The assumed discount rate used in determining the accumulated postretirement benefit was 7.0% and the assumed medical care cost trend rate was 4.5%. 16 Notes to Consolidated Financial Statements (continued) 15. PENDING MERGER: In December 1997, the Corporation reached an agreement to merge with Morris Plan Company of Terre Haute, Inc., whose assets total approximately $38 million. The merger, which will involve an exchange of common stock, is expected to be completed in the first quarter of 1998, subject to customary closing conditions, including regulatory approvals. 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 Corporation's 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, 1997 and 1996, that the Corporation meets all capital adequacy requirements to which it is subject. As of December 31, 1997, the most recent notification from the respective regulatory agencies categorized the Corporation and its subsidiary banks as adequately 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.
To Be Well Capitalized For Capital Under Prompt Corrective Actual Adequacy Purposes Action Provisions --------------- ------------------ ------------------------- (Dollar amounts in thousands) Amount Ratio Amount Ratio Amount Ratio - ------------------------------------------------------------------------------------------------------- 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% - - - - AS OF DECEMBER 31, 1996 Total Capital (to Risk-Weighted Assets) $155,852 16.00% > $77,908 > 8.0% > $97,385 > 10.0% - - - - Tier I Capital (to Risk-Weighted Assets) 145,096 14.90% > 38,954 > 4.0% > 58,431 > 6.0% - - - - Tier I Capital (to Average Assets) 145,096 9.35% > 62,105 > 4.0% > 77,632 > 5.0% - - - -
17 17. PARENT COMPANY CONDENSED FINANCIAL STATEMENTS: The parent company's condensed balance sheets as of December 31, 1997 and 1996, 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, 1997, are as follows: BALANCE SHEETS
December 31, ------------------------------------- (Dollar amounts in thousands) 1997 1996 - ------------------------------------------------------------------------------------------------------------------- ASSETS Cash deposits in affiliated banks $ 3,590 $ 2,537 Investments in bank subsidiaries 160,943 147,192 Land and headquarters building, net 7,238 7,402 Other 5,551 4,466 ---------- ---------- TOTAL ASSETS $ 177,322 $ 161,597 ========== ========== LIABILITIES AND SHAREHOLDERS EQUITY LIABILITIES: Long-term borrowings $ 7,224 $ 7,340 Dividends payable 2,740 2,338 Other liabilities 1,878 1,542 ---------- ---------- TOTAL LIABILITIES 11,842 11,220 ---------- ---------- SHAREHOLDERS' EQUITY: Common stock 877 835 Additional capital 59,787 43,761 Retained earnings 98,046 101,093 Unrealized gains on available-for-sale securities of bank subsidiaries, net of taxes 6,770 4,688 ---------- ---------- TOTAL SHAREHOLDERS EQUITY 165,480 150,377 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS EQUITY $ 177,322 $ 161,597 ========== ========== STATEMENTS OF INCOME AND RETAINED EARNINGS Year Ended December 31, ------------------------------------------ (Dollar amounts in thousands) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------ Income: Dividends from bank subsidiaries $ 6,431 $ 5,008 $ 5,383 Other income 933 861 848 ---------- ---------- ---------- Total income 7,364 5,869 6,231 Expenses: Interest on long-term borrowings 355 354 460 Other operating expenses 1,498 1,254 765 ---------- ---------- ---------- Total operating expenses 1,853 1,608 1,225 ---------- ---------- ---------- Income before income taxes and equity in undistributed earnings of bank subsidiaries 5,511 4,261 5,006 Income tax credit 457 329 97 ---------- ---------- ---------- Income before equity in undistributed earnings of bank subsidiaries 5,968 4,590 5,103 Equity in undistributed earnings of bank subsidiaries 12,132 11,381 8,794 ---------- ---------- ---------- Net income 18,100 15,971 13,897 Retained earnings at beginning of year 101,093 98,625 95,968 ---------- ---------- ---------- 119,193 114,596 109,865 Cash dividends (5,079) (4,290) (3,554) Stock dividends (16,068) (9,213) (7,686) ---------- ---------- ---------- Retained earnings at end of year $ 98,046 $ 101,093 $ 98,625 ========== ========== ==========
18 Notes to Consolidated Financial Statements (continued)
STATEMENTS OF CASH FLOWS Years Ended December 31, ------------------------------------------- (Dollar amounts in thousands) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 18,100 $ 15,971 $ 13,897 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 171 171 165 Equity in undistributed earnings of bank subsidiaries (12,132) (11,381) (8,794) Increase (decrease) in other liabilities (11) (965) 540 (Increase) decrease in other assets (282) 22 5 --------- -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 5,846 3,818 5,813 CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on long-term borrowings (116) (117) (914) Proceeds from reissuance of treasury stock - 600 525 Purchase of treasury stock - (131) (1,855) Dividends paid (4,677) (3,721) (3,489) --------- -------- -------- NET CASH USED BY FINANCING ACTIVITIES (4,793) (3,369) (5,733) --------- -------- -------- NET INCREASE IN CASH 1,053 449 80 CASH, BEGINNING OF YEAR 2,537 2,088 2,008 --------- -------- -------- CASH, END OF YEAR $ 3,590 $ 2,537 $ 2,088 ========= ======== ======== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 360 $ 368 $ 458 ========= ======== ======== Income taxes $ 7,367 $ 6,974 $ 5,577 ========= ======== ========
19 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, 1997. 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, 1997. Coopers & Lybrand 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 independent 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 We have audited the accompanying consolidated balance sheets of First Financial Corporation and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of First Financial Corporation and subsidiaries as of December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ Coopers & Lybrand L.L.P. Indianapolis, Indiana January 23, 1998 20 Management's Discussion and Analysis Management's discussion and analysis reviews the financial condition of First Financial Corporation at December 31, 1997 and 1996, and the results of its operations for the three years ended December 31, 1997. 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 eight subsidiaries. The Corporation's principal subsidiary is Terre Haute First National Bank (Terre Haute First) located in Vigo County. The Corporation's other seven 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), First National Bank of Marshall, Illinois (Marshall), and First Crawford State Bank of Robinson, Illinois (Crawford). At the close of business in 1997 the Corporation and its subsidiaries had 694 full time equivalent employees. Terre Haute First is the largest bank in Vigo County. It operates ten 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 three 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. 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 faces competition from other financial institutions in Vigo County. These competitors include three 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, two credit unions and one brokerage firm in Vermillion County, Indiana. - FARMERS -- Two commercial banks and one brokerage firm in Sullivan County, Indiana, and three commercial banks and one savings and loan 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 five commercial banks and one savings and loan 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. 21 Results of Operations -- Summary for 1997 Net income for 1997 was $18.1 million or $2.58 per share. The increased earnings over 1996 net income of $16.0 million or $2.28 per share were primarily the result of improved net interest income and non-interest income while maintaining non-interest expense at almost the same level as 1996. 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 $1,534.9 million in 1997 from $1,451.3 million in 1996 and the yield on these assets increased to 8.28% in 1997 from 8.25% in 1996. Total average interest-bearing liabilities amounted to $1,329.5 million in 1997 compared to $1,263.9 million in 1996, and the yield on these interest-bearing liabilities increased to 4.67% in 1997 from 4.57% in 1996. On a tax equivalent basis, net interest income increased $3.1 million from $61.9 million in 1996 to $65.0 million in 1997. Net interest margin decreased from 4.27% in 1996 to 4.24% in 1997. This decrease is primarily the result of higher costs for interest-bearing liabilities. The following table sets forth the components of net interest income due to changes in volume and rate. The table information compares 1997 to 1996 and 1996 to 1995.
1997 Compared to 1996 1996 Compared to 1995 Increase (Decrease) Due to Increase (Decrease) Due to ------------------------------------------- ------------------------------------------- Volume/ Volume/ (Dollar amounts in thousands) Volume Rate Rate Total Volume Rate Rate Total - ------------------------------------------------------------------------------------------------------------------------- Interest earned on interest-earning assets: Loans (1) $5,987 $(647) $ (49) $5,291 $ 388 $1,057 $ 5 $1,450 Taxable investment securities 1,133 218 8 1,359 8,698 183 77 8,958 Tax-exempt investment securities (1) 528 503 26 1,057 (803) 115 (8) (696) Federal funds sold (325) (4) 3 (326) (483) (14) 7 (490) Interest-bearing deposits: Domestic (31) 8 (4) (27) 4 14 1 19 ------ ----- ------ ------ ------ ------ ----- ------ Total interest income $7,292 $ 78 $ (16) $7,354 $7,804 $1,355 $ 82 $9,241 ------ ----- ------ ------ ------ ------ ----- ------ Interest paid on interest-bearing liabilities: Savings deposits (331) (501) 16 (816) 291 (509) (14) (232) Time deposits 843 270 6 1,119 1,447 (1,119) (46) 282 Federal funds purchased and securities sold under agreement to repurchase 911 41 22 974 (699) (67) 19 (747) Other 2,678 243 64 2,985 5,181 (431) (387) 4,363 ------ ----- ------ ------ ------ ------ ----- ------ Total interest expense 4,101 53 108 4,262 6,220 (2,126) (428) 3,666 ------ ----- ------ ------ ------ ------ ----- ------ Net interest income $3,191 $ 25 $ (124) $3,092 $1,584 $3,481 $ 510 $5,575 ====== ===== ====== ====== ====== ====== ===== ======
(1) Changes in interest income include the effect of tax equivalent adjustments using a federal tax rate of 35%. 22 Results of Operations -- Summary for 1997 (continued) 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 1997 as compared to $4.5 million for 1996. This increase reflects the increased lending activity of the Corporation and general concern for the relatively high levels of debt held by consumers. Net charge-offs for 1997 decreased to $2.6 million from $4.3 million in 1996. At December 31, 1997, the resulting allowance for loan losses was $13.5 million or 1.34% of total loans, net of unearned income. A year earlier the allowance was $10.8 million or 1.17% of total loans. OTHER INCOME Other income increased significantly in 1997 to $9.0 million from $7.8 million earned in 1996. Most components of other income increased in 1997 compared to the same period in 1996. Trust department income, other service charges and fees, investment securities gains and all other income increased $176 thousand, $568 thousand, $253 thousand and $202 thousand, respectively. These increases are the result of a focused effort to increase fee-based income. OTHER EXPENSES Other expenses totaled $39.6 million for 1997 compared to $39.3 million for 1996. This represents an increase of $349 thousand or 0.9% for 1997. Salaries and related benefits, the largest component of this group, increased from $21.2 million to $22.0 million or 3.9%. Equipment expense increased $318 thousand with the conversion to an internal data processing system from a facilities management agreement with an external vendor. The increase in equipment expense was offset by a decrease in data processing expense by $656 thousand. This minor increase in other expenses helped to reduce the Corporation's efficiency ratio to 53.6% for 1997 from 56.1% for 1996. INCOME TAXES The Corporation's federal income tax provision was $4.3 million in 1997 compared to a provision of $4.5 million in 1996. The overall effective tax rate in 1997 of 25.3% compares to a 1996 effective rate of 27.8%. COMPARISON OF 1996 TO 1995 Net income for 1996 was $16.0 million or $2.28 per share compared to $13.9 million in 1995 or $1.98 per share. This increased income was primarily the result of improved net interest income and a reduction in FDIC insurance expense by $1.2 million and data processing expenses by $1.2 million. Net interest income increased $5.8 million in 1996 as compared to 1995. The improved net interest income resulted primarily from higher net yields. Net yield on interest-earning assets was 4.27% for 1996 and 4.20% for 1995. 23 Financial Condition -- Summary The Corporation's total assets increased to a record $1,635 million at December 31, 1997, up from $1,620 million a year earlier. Loans, net of unearned income, increased by $87.0 million, to $1,006 million. The 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, 1997, were $198.3 million, of which $167.7 million represents short-term obligations. Total shareholders' equity at December 31, 1997, was $165.5 million compared to $150.4 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, 1997, are set forth in the following analysis.
(Dollar amounts in thousands) 1997 1996 1995 1994 1993 - -------------------------------------------------------------------------------------------------------------------------- LOAN CATEGORY Commercial, financial and agricultural $ 229,855 $197,449 $180,858 $174,371 $165,501 Real estate - construction 23,734 22,629 22,882 21,428 18,404 Real estate - mortgage 561,466 508,010 460,060 455,673 430,699 Installment 188,552 188,670 213,696 203,689 179,346 Lease financing 3,271 3,284 4,151 5,259 7,121 ------------ -------- -------- -------- -------- TOTAL $ 1,006,878 $920,042 $881,647 $860,420 $801,071 ============ ======== ======== ========= ======== After One Within But Within After Five (Dollars amounts in thousands) One Year Five Years Years Total - -------------------------------------------------------------------------------------------------------------------------- MATURITY DISTRIBUTION Commercial, financial and agricultural $168,168 $ 49,729 $ 11,958 $229,855 Real estate - construction 13,033 6,559 4,142 23,734 -------- -------- -------- ------- TOTAL $181,201 $ 56,288 $ 16,100 $253,589 ======== ======== ======== ======== Real estate - mortgage 561,466 Installment 188,552 Lease financing 3,271 ---------- TOTAL $1,006,878 ========== Loans maturing after one year with: Fixed interest rates $ 28,893 $ 14,367 Variable interest rates 27,395 1,733 --------- ---------- TOTAL $ 56,288 $ 16,100 ========= ==========
24 Financial Condition -- Summary (continued) ALLOWANCE FOR LOAN LOSSES The activity in the Corporation's allowance for loan losses is shown in the following analysis:
(Dollar amounts in thousands) 1997 1996 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------------- Amount of loans outstanding at December 31, $1,006,878 $920,042 $881,647 $860,420 $801,071 ========== ======== ======== ======== ======== Average amount of loans by year $ 953,008 $885,964 $881,559 $823,983 $752,712 ========== ======== ======== ======== ======== Allowance for loan losses at beginning of year $ 10,756 $ 10,616 $ 10,536 $ 10,024 $ 10,735 Loans charged off: Commercial, financial and agricultural 487 2,577 1,364 1,578 1,471 Real estate - mortgage 596 207 293 150 1,442 Installment 2,732 2,615 2,016 1,422 1,251 Leasing - 2 148 2 103 ---------- -------- -------- -------- -------- Total loans charged off 3,815 5,401 3,821 3,152 4,267 ---------- -------- -------- -------- -------- Recoveries of loans previously charged off: Commercial, financial and agricultural 260 426 727 460 484 Real estate - mortgage 163 147 138 131 99 Installment 747 500 466 390 332 Leasing 10 7 7 9 27 ---------- -------- -------- -------- -------- Total recoveries 1,180 1,080 1,338 990 942 ---------- -------- -------- -------- -------- Net loans charged off 2,635 4,321 2,483 2,162 3,325 Provision charged to expense 5,382 4,461 2,563 2,674 2,614 ---------- -------- -------- -------- -------- Balance at end of year $ 13,503 $ 10,756 $ 10,616 $ 10,536 $ 10,024 ========== ======== ======== ======== ======== Ratio of net charge-offs during period to average loans outstanding .28% .49% .28% .26% .44% ========== ======== ======== ======== ========
Management anticipates $1.6 million of commercial, financial and agricultural loans, $328 thousand of real estate-mortgage loans, $1.7 million of installment loans, and $5 thousand of leases will be charged off for 1998. The remaining $9.9 million or 73% of the allowance will be available for losses resulting from unforeseen circumstances. 25 \ 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 possible 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 1997, 1996 and 1995, under the original terms of the loans is $377 thousand, $263 thousand and $333 thousand, respectively. The Corporation recorded interest income on such loans in the amounts of $135 thousand, $152 thousand and $63 thousand for 1997, 1996 and 1995, respectively.
(Dollar amounts in thousands) 1997 1996 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------------- Non-accrual loans $3,866 $2,504 $3,130 $3,593 $2,998 Restructured loans 17 34 185 217 1,259 ------ ------ ------ ------ ------ 3,883 2,538 3,315 3,810 4,257 Accruing loans past due 4,384 5,296 5,809 2,287 1,385 ------ ------ ------ ------ ------ $8,267 $7,834 $9,124 $6,097 $5,642 ====== ====== ====== ====== ======
The ratio of the allowance for loan losses as a percentage of under-performing loans was 163% at December 31, 1997, compared to 137% in 1996. This increase is the result of a decrease in the amount of loans past due 90 days or more and an increase in the allowance for loan losses which resulted primarily from a decrease in net loans charged off for 1997. The following loan categories comprise significant components of the non-performing loans at December 31, 1997:
(Dollar amounts in thousands) - ----------------------------------------------------------------------------------------------------------------------- Non-accrual loans: 1-4 family residential $ 728 19% Commercial loans 1,622 42 Installment loans 872 23 Other, various 644 16 ------- --- 3,866 100% ======= === Past due 90 days or more: 1-4 family residential $ 2,785 64% Commercial loans 112 3 Installment loans 851 19 Other, various 636 14 ------- --- $ 4,384 100% ======= ====
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, 1997 the Corporation had $439 thousand of doubtful loans which are still in accrual status. 26 Financial Condition -- Summary (continued) DEPOSITS Total deposits increased to $1,194.5 million at December 31, 1997, from $1,175.2 million at December 31, 1996. 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 1997, 1996 and 1995.
1997 1996 1995 ------------------------------------------------------------------------- (Dollar amounts in thousands) Amount Rate Amount Rate Amount Rate - ---------------------------------------------------------------------------------------------------------------------- Non-interest-bearing demand deposits $ 127,924 $ 134,303 $ 128,172 Interest-bearing demand deposits 278,898 2.40% 282,331 2.59% 264,305 2.73% Savings deposits 109,587 2.46% 119,167 2.44% 126,319 2.56% Time deposits: $100,000 or more 191,953 5.65% 229,338 5.45% 160,125 5.71% Other time deposits 478,381 5.44% 425,563 5.47% 469,117 5.61% ------------ ---------- ---------- TOTAL $ 1,186,743 $1,190,702 $1,148,038 ============ ========== ==========
The maturities of certificates of deposit of $100 thousand or more outstanding at December 31, 1997, are summarized as follows (in thousands of dollars): 3 months or less $ 50,292 Over 3 through 6 months 35,323 Over 6 through 12 months 29,577 Over 12 months 80,295 ---------- TOTAL $ 195,487 ========== SHORT-TERM BORROWINGS A summary of the carrying value of the Corporation's short-term borrowings at December 31, 1997, 1996 and 1995 is presented below:
(Dollar amounts in thousands) 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------- Federal funds purchased $ 24,850 $ 38,130 $ 51,800 Securities sold under agreements to repurchase 22,165 24,286 17,861 Advances from Federal Home Loan Bank 167,680 140,244 95,296 Other short-term borrowings 4,282 5,131 3,872 --------- -------- -------- $ 218,977 $207,791 $168,829 ========= ======== ========
Federal funds purchased amounted to $24.9 million in 1997 compared to $38.1 million in 1996. Securities sold under agreements to repurchase decreased slightly by $2.1 million in 1997 from the same period in 1996. Advances from the Federal Home Loan Bank increased to $167.7 million in 1997 compared to $140.2 million in 1996. 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 1996 and 1997. As of December 31, 1997, the total investments in such programs totaled $75.9 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. 27 The amounts and interest rates related to federal funds purchased and securities sold under agreements to repurchase are presented below:
(Dollar amounts in thousands) 1996 1995 1997 - -------------------------------------------------------------------------------- Average amount outstanding $ 46,907 $ 30,476 $ 42,741 Maximum amount outstanding at a month end 74,774 72,733 71,267 Average interest rate during year 5.68% 5.54% 5.75% Interest rate at year end 6.00% 6.25% 6.00%
Capital Resources As of December 31, 1997, the Corporation's shareholders' equity was $165.5 million, an increase of 10.0% from the 1996 level of $150.4 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, 1997. 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 1997 and 1996 was 28.1% and 26.9%, respectively. The Corporation expects to continue its policy of paying regular cash dividends, subject to future earnings and regulatory restrictions and capital requirements. Interest Rate Sensitivity and Liquidity First Financial Corporation charges the eight 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 and is not engaged in trading activity. The Corporation instead invests in assets whose value is derived from an underlying asset. These assets are mostly government agency issued mortgage-backed securities. The performance of these assets in changing rate environments is included in the following table. 28 Financial Condition -- Summary (continued) The table below shows the Corporation's estimated earnings sensitivity profile as of December 31, 1997. Given a 100 basis point increase in rates, net interest income would decrease 2.08% over the next 12 months and decrease 2.35% over the next 24 months. A 100 basis point decrease would result in a 0.90% increase in net interest income over the next 12- and 24-month periods. These estimates assume all rates changed overnight and management took no action as a result of this change.
Percentage Change in Net Interest Income Basis Point ---------------------------------------- Interest Rate Change 12 months 24 months 36 months - ------------------------------------------------------------------------------ Down 300 -0.17% 0.22% -2.75% Down 200 1.25 1.37 -0.52 Down 100 0.90 0.90 0.02 Up 100 -2.08 -2.35 -1.71 Up 200 -4.07 -4.31 -2.93 Up 300 -5.90 -5.88 -3.67
LIQUIDITY RISK Liquidity is measured by the 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 $5.7 million of investments that mature throughout the coming 12 months. The Corporation also anticipates $36.2 million of principal payments from mortgage-backed securities. Given the current rate environment, the Corporation anticipates $43.7 million of Federal Agency Securities to be called within 1998 or the next 12 months. Outlook The Wabash Valley, the Corporation's primary market area, performed similarly to the national economy for 1997. 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 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. As part of the expansion into other financial service areas, the Corporation recently announced an agreement to merge with Morris Plan Company of Terre Haute, Inc. Morris Plan has assets of approximately $38 million and primarily serves the market segment that consumer finance companies target. The merger is expected to be completed in the first quarter of 1998, subject to the customary closing conditions, including regulatory approvals. The Corporation has established a Year 2000 (YR2000) team which is meeting and discussing issues related to YR2000. This team has the background and financial support to complete the early-stage assessment of YR2000 issues. The Corporation is also in the process of obtaining statements of direction from all of its hardware and software vendors to determine their plans for resolving the YR2000 issue. The statements of direction from the vendors have indicated that the vendors have already resolved the issue or have scheduled a release that will include YR2000 date fixes. The goal of the YR2000 team is to install all software updates by the first quarter of 1999. In addition, testing has been scheduled to perform daily processing on December 31, 1999, January 1, 2000, and February 29, 2000. The Corporation believes that YR2000 costs will not have a material adverse effect on the Corporation's financial position or future results of operations. 29 Consolidated Balance Sheet -- Average Balances and Interest Rates
December 31, ----------------------------------------------------------------------------------- 1997 1996 ----------------------------------------------------------------------------------- Average Yield/ Average Yield/ (Dollar amounts in thousands) Balance Interest Rate Balance Interest Rate - ------------------------------------------------------------------------------------------------------------------------------ ASSETS Interest-earning assets: Loans (1) (2) $ 953,008 $ 84,411 8.86% $ 885,964 $ 79,120 8.93% Taxable investment securities 437,791 31,133 7.11 421,745 29,774 7.06 Tax-exempt investment securities (2) 140,768 11,377 8.08 133,914 10,320 7.71 Federal funds sold 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 $1,534,898 $ 127,112 8.28% $ 1,451,275 $ 119,759 8.25% --------- ==== --------- ==== Non-interest earning assets: Cash and due from bank $ 49,725 57,919 Premises and equipment, net 25,515 26,598 Other assets 32,913 28,883 Less allowance for loan losses (12,302) (10,644) ---------- ----------- TOTALS $1,630,749 $ 1,554,031 ========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing liabilities: Savings deposits 388,485 9,399 2.42% 401,498 10,215 2.54% Time deposits 670,334 36,886 5.50 654,901 35,767 5.46 Federal funds purchased and securities sold under agreement to repurchase 46,907 2,663 5.68 30,476 1,689 5.54 Other 223,789 13,124 5.86 177,036 10,139 5.73 ---------- --------- ---- ----------- --------- ---- Total interest-bearing liabilities: $1,329,515 $ 62,072 4.67% $ 1,263,911 $ 57,810 4.57% --------- ==== --------- ==== Non interest-bearing liabilities: Demand deposits 127,924 134,303 Other 19,154 13,053 1,476,593 1,411,267 Shareholders' equity 154,156 142,764 ---------- ----------- TOTALS $1,630,749 $ 1,554,031 ========== =========== Net interest earnings $ 65,040 $ 61,949 ========= ========= Net yield on interest-earning assets 4.24% 4.27% ===== ==== December 31, --------------------------------------- 1995 --------------------------------------- Average Yield/ (Dollar amounts in thousands) Balance Interest Rate - ---------------------------------------------------------------------------------- ASSETS Interest-earning assets: Loans (1) (2) $ 881,559 $ 77,670 8.81% Taxable investment securities 297,450 20,816 7.00 Tax-exempt investment securities (2) 144,443 11,016 7.63 Federal funds sold 17,070 974 5.71 Interest-bearing deposits in other banks: Domestic 957 42 4.39 ---------- -------- ---- Total interest-earning assets $1,341,479 $110,518 8.24% -------- ==== Non-interest earning assets: Cash and due from bank 51,917 Premises and equipment, net 22,719 Other assets 22,004 Less allowance for loan losses (10,916) ---------- TOTALS $1,427,203 ========== LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing liabilities: Savings deposits 390,624 10,447 2.67% Time deposits 629,242 35,485 5.64 Federal funds purchased and securities sold under agreement to repurchase 42,741 2,436 5.70 Other 93,327 5,776 6.19 ---------- -------- ---- Total interest-bearing liabilities: $1,155,934 $ 54,144 4.68% -------- ==== Non interest-bearing liabilities: Demand deposits 128,172 Other 12,553 --------- 1,296,659 Shareholders' equity 130,544 ---------- TOTALS $1,427,203 ========== Net interest earnings $ 56,374 ======== Net yield on interest-earning assets 4.20% ====
(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 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 1997 shareholders owned 7,015,504 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 1997 and 1996.
1997 1996* ----------------------------- ----------------------------- Bid Quotation Cash Bid Quotation Cash --------------- Dividends --------------- Dividends Quarter ended High Low Declared High Low Declared - -------------------------------------------------------------------------------------------------------------------------- March 31 $35.72 $33.33 $31.75 $28.58 June 30 35.47 31.42 $ .33 29.94 27.44 $ .28 September 30 38.58 33.81 31.42 29.05 December 31 57.62 37.14 $ .39 35.23 30.23 $ .33
Selected Quarterly Data
1997 ------------------------------------------------------------------------- Net Provision Interest Interest Interest for Loan Net Net Income (Dollar amounts in thousands) Income Expense Income Losses Income Per Share* - -------------------------------------------------------------------------------------------------------------- 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 1996 ------------------------------------------------------------------------- Net Provision Interest Interest Interest for Loan Net Net Income (Dollar amounts in thousands) Income Expense Income Losses Income Per Share* - -------------------------------------------------------------------------------------------------------------- March 31 $28,248 $13,870 $14,378 $ 735 $4,059 $ .58 June 30 28,431 14,185 14,246 968 3,962 .57 September 30 29,210 14,604 14,606 1,207 3,645 .52 December 31 29,947 15,151 14,796 1,551 4,305 .61
*Restated to retroactively reflect 1997 stock dividend. EX-27 3 FINANCIAL DATA SCHEDULE
9 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 53,815 0 280 0 527,993 527,993 527,993 1,005,799 13,503 1,634,936 1,194,524 218,977 18,718 37,237 0 0 877 164,603 1,634,936 83,653 38,528 191 122,372 46,285 62,072 60,300 5,382 407 39,629 24,246 24,246 0 0 18,100 2.58 2.58 4.24 3,866 4,384 17 439 10,756 3,815 1,180 13,503 13,503 0 0
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