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April 4,2006
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1-800-969-4121
F I R S T F I N A N C I A L C O R P O R A T I O N
LETTER TO SHAREHOLDERS
To OUT Shareholders and Friends:
In 2005 First Financial Corporation continued to pursue strategies
that have sustained our long-tcrm s~iccess. In particular, we laid the ground-
work for expanding into new markets, conipleted the consolidation of our
ctiarters, focuscd on outstanding sales and service, and worked toward
capturing more of each ciistomer’s business, all of which scrves to create
additional value for our shareholders.
2005 net income was $23.1 million. As the Federal Kesei-vc continued to
raise short-term rates, interesr income for the year increascd by $4.8 million
over 2004. We were able to iise thesc increases to our advanrage as our tier
interest income rose by $2.8 million or 2.75% over the previous year. O u r
net interest margin for 2005 increased 12 basis points to 3.92%
Non-interest income was $3.7 million less in 2005 than what was reported
for 2004. However, in 2004 the Corporation realized a gain of $4.1 million
on a Iifc insurance hencfir. When comparing all other non-interest income
items except thcse life insurance proceeds, non-interest income for 2005
increased hy $371 thousand. This increase was complemented by a $1 18
thousand rcduction in non-interest expcnsc, demonstrating the
Corporations’ commitment to operating cficiency.
There was less demand in 2005 for both consumer and commercial loans
due to a sluggish economy in our market area. During the year we restruc-
tiirrd our loan portfolio, an cffort that allowcd LIS to improvc asset quality as
well as reduce the time and resources allocated to underperforming credits.
February 2006. We continue to evaluate opportunities for growth that will create valuc for our shareholders. A
branch is proposcd in Greencastle, Indiana, to be completed later this year.
First is a custoincr-ccntric company dedicated to the success of our custoniers. We continually seek to improve
our products arid services in an effort to providc our customers with additional benefits, greater convenience and
better value.
Ovcr thc past year we concentrated on increasing the number of relationships we have with our customers. The
more relcationships we have with each customer, thc bcttcr we can serve them by offering “one-stop shopping” for
all their financial needs, from traditional banking services to investments and insurance. A n area of emphasis was
to inrroduce our c u w m c r s to thc array of insurance products offered through our €:orrest Sherer subsidiary. This
arid similar efforrs allow us to help our custotncrs succeed financially with comprehensive, personalized solutions
for saving, borrowing, investing and insuring their assets.
T h e First family takes pride in being engaged community partners in the markets we scrve. We are actively
involved in economic development in western lndiana and easrerri Illinois. We havc a long tradition of leadership
in communi ry scrvicc, both through corporate support for worthwhile programs and through employee involve-
ment in liundrcds of civic and charitable organizations. We are proud to provide job opportuniries to the local citi-
zenry and, in turn, to be a financial services company wherc ciistonicrs know the people who serve them.
In 2005 we were saddened at the passing of two great friends o f t h e Corporation: William “Bill” Niemeyer, who
served on the Board of Dircctors of First Financial Corporation for 41 years, and Larry Schopmeyer, President of
‘I’he Morris 1’1~11 Company and a member of our Community Rcgion Board of Directors. Their wise counsel and
unwavering support will be remembered and appreciated.
2005 was a year oftransition for several of our bank bodrds. Afrer 16 years as a dircctor of First Financial
Corporation, Chapman Root TI rctircd in July. Samuel Deahl, D.D.S., a Marshall Region director for 18 years,
retired in October arid Elizabcth Schmidt, a Crawford Rcgion director for 11 years, retired in December. We are
grateful for the insight, resourcefulness and sound judgment they shared with us. During the year we welcomed
Ronald K. Rich, Financial Representative with thc Northwcstcrn Mutual Financial Network, to the board of First
Financial Corpor,atiori arid Avery J. McKitmey, President and Owner of A.M. Transport Services in Olney, to our
Community Region board. Their knowledge and experiencc will bc invaluable.
We are pleased to recognize e x h member o f the First Financial Corporadon board and our regional boards for
their loyalty and leadership. On their behalf, we extend sincere qyrecixiori to our employees, who providc thc out-
standing custonicr scrvice that is our Ttrongest competitive advantage. We are especially gratefid to you, our share-
holders, for your confidence in rhe Corporation’s future.
Donald E. Smith
Presidcnt & Chairman
+&;,
Norman L. Lowery
Vice Chairman & CEO
F I R S T F I N A N C I A L C O R P O R A T I O N
CARING FOR OUR COMMUNITIES
First Financial Corporation affiliates are located in 32 cities
and towns in Indiana and Illinois. Each is unique, yet all share a sensc of history,
a desire ro build for the future and a commitment to provide their citizens with
(above left) IXrertors m d
guests of First Financial
Corporation tookpark in a
groundbreaking cerewony for
tbe new Vincennes banking
center in Februtiry.
(above right) First rmployees,
fimily mtwibers andfiiends
galhered it Saint Mary-of-the-
Woods College in October for
h e annual Sustm G. Komen
h e a t Canccr Founddtion &re
j;)r the Cure. First Financial
C’orporation is a goklsponsor f i r
the event.
an environment where all can grow and prosper. The same is true for our
Corporation. It is our history of working together to accomplish common
goals and ohjccrives that has helped us succeed both as a corporation and as
a corporate citizen.
In 2005 we completed the unification of bank holdings whcn First Crawford
State Bank and First Cornmuniry Bank N.A. became First Financial Rank in
February and Septcniber. Also i n February, we hroke ground for our newest
First Financial banking center in Vincennes, Indiana. This state-of-the-art, full-
service banking center totals over 4,000 square feet and includes five drive-up
service lanes, a 24-hour FirsrPlus ATM and a drive-up night drop box.
Agriculture has always been and remains a large part oflife in Indiana and
Illinois. First Financial Bank and our agri-business lenders arc committed to
providing thc best in financial services for area farmers and farm-related busi-
nesses. First Financial Bank in Clay County sponsors an annual Farmer‘s Share
Breakfast in conjunction with Ag Week, and bank personnel from Vigo and
Sullivan counties worked with rhe Vigo C o w r y Soil and Water Conservation
District to hring important information to area farmers about watershcd conser-
vation and the Conservation Security Program. ‘l’he Unitcd States Deparrnient
of Agriculture Rural Development program recognized thc Olney Kegion of
First Financial Bank as a million dollar lcnder for 2005. T h e guaranteed home
loan program helps familics purchase homes they might not be able to afford
with conventional loans.
O n April 28, a landmark was lost in Parke County whrn rhe Bridgeton Covered
Bridge was destroycd by arson. As devastating as rhis act was to the small corn-
inunity of Bridgcton, citizens in Parke and surroiinding counties, along with
rcsidents of thc state and beyond, united to raise funds to rcbuild the historic
2 0 0 5 A N N U A L R E P O R T
bridge. First Financial Bank, Parke Region, was proud to play a part i n thc
efforts by accepting contribu tioris to the Bridgeron Covered Bridge Association,
organizing a community document-shredding event at Rockville in August and
holding a silent auction o f birdhouses decorated by Parke County organi7ations
in December.
All communities must deal with complex issues that affect the lives of their citi-
zens and businesses. While the size and specifics o f the issues may he diffcrcnt,
the basic problems and solutions may be quitc similar. In May First Financial
Rank hosted thc annual Wabash Valley Mayors’ Breakfast in Terre Haute. T h e
gath cr i n g brings together area governrne ti t and economic d eve1 o p e n t leaders
for a morning of fellowship and inforrn,d discussion.
Each year First Financial Corporation helps celebrate and support the arts in
our communities. T h e Swope Art Muscum i n Terre Hautc i5 the home o f the
Wabash Vallcy Juricd Exhibition, one of thc oldest juried exhibirioris in rhe
state. First Financial was pleased to underwrite the 2005 exhibition that received
more than 500 entries from artists within a 150-milc radius ofTcrrc Hautc.
First Financial Bank was a sponsor when the Terre Haute Symphony Orchestra
presented a concert in April honoring all veterans and celebrating the 60th
anniversary o f the end o f World War IT. T h e hank also participated i n the Arts
llliana presentation of Live Music Lunch, a concert series in downtown Terre
Haute on the Crossroads Plaza Stagc. Fairbanks Park, locatcd on thc hanks o f
thc Wabash Rwcr in Tcrrc Hautc, was the site where many Valley residents relived
memories from their younger days or just enjoyed the “oldies” at a sold-out con-
cert by Herman’s Hermits. The concert was presented by the ‘IErre Haute I’arks
and Rccreation Department with iiriderwriting from First Financid.
In 2005 the devastation of the Chlf Coast by multiple hurricancs brought out
the best in the citizens of our communities, state and nation. First Financial
Bank, in cooperation with a local television station, raiscd ovcr $1 00,000 for thc
victims o f 1 lurricane Katrina. Collection sites were set up at all First banks as
employees and local citizens came together to help thosc who had been affcctcd
by the storms.
First Firiancial Corporation is proud to sponsor many activities and events for
children and their families, young adults and students of all ages, that are not
only educ,itional and recrearional, but also offer opportunities for personal
(abovc Icft) Donnld E. S~nith,
chuirmun o f’First Financicll
C h p n i t i o n , und/ejJSmith,
board member o j ’ t h 7erre Huute
Boys and (;ids ( k b , present 200
ticketsfor an Indianapoli.c Colts
game to./immy Smith, director ff
the Boys and Girls Club.
(dbove cen ier) Area musicians
eritertuin downtown uJ.tYpart oJ’
“Live Music Lunch,” a midday
concert J,eries presented by Arts
llliana and sponsored by First
Financial Hank.
(above right) To raisefinds to
rebuild the historic Bridgeton
Covered Bridge in h k e Couniy,
First I’innncial Bank, Parke
Repon, auctiorrtd birdhouses
decorated and donated by local
organzwtionu. High bidder
Shirley Fetter (center) accepts her
birdhouse from First Financial
Bmk employees Linda Bnird and
Brenda Cooper.
F I R S T F I N A N C I A L C O R P O R A T I O N
growth and development. The annual Terre Haute Boys & Girls Club First
Fishing Club tcaches children in their siiinmer programs the art of fishing and
givcs them the opportunity to test their skills on private area lakes. First
Financial has long had an irirerest in auto racing and our support of the Terrc
Haute Quartcr Midget Association o#ers children an early start in the sport.
T h e same is truc of liiinting. Each year First Financial sponsors hunrer educa-
tion classes for area youngsters. The classes are taught with assistance from state
conservation offrcers and local volunteers.
The regions servcd by First Financial Corporation afiliates are honic to many
outstanding educational institutions. Ovcr the years, the Corporation has pro-
vided scoreboards, advertising support and underwriting for projects, gifts-in-
kind, and many volunteer hours to ensure that students are provided with the
educational and extra-curricular activities that make h e i r school cxperience
complete. First Financial employees present programs in schools throughout our
scrvice area to help children learn important skills such as money management
and budgeting. Hutidreds of schoolchildren tour our banking centers cach year.
Communities large and small have been affected by the problems caused by
methamphetamine use and production. Menibers of the meth awareness study
group of Leadership Wabash Valley Class )(xvIl used funds provided by First
Financial Rank to print materials promoting nieth awareness. T h e materials
were distributed to area junior high school students.
In 2005 First Financial Bank marked 171 years of continuous service to wcst-
central Tndiana and east-cenrral Illinois. This region has always been blesscd
with citizens who are dedicated to creating a better future for their families
and communitics. T h e directors arid staff of First Financial Corporation take
pride in being a part of this tradition and in providing both financial and
human resources that help cnsiire the futurc we are building is secure.
(above lcft) Employees ofFirsl
Financial Hank, Marshdl
Region, lined thr street in front
the bank to help welcome
of
reJ.erve troops home Jiom Iraq.
(abovc right) In May locul
government and economic
development leadm attended
the annual Wabash Wley
Mdyors’ Breakfast hosted by 1:irst
Financial Rank. Among the
guests were: Tom Fehrenbacher,
mayor, Olnty Ill.; Joe Hayden,
cizy councilninn, Robinson, Ill.:
Kevin Burke, mayor, %re
Haute, ha!; Ken Smith, mayor.
Murshall, Ill.; Mike Bledsoe,
president, town board of
Farmersburg, Ind.: Donald E,
Smith, chairmnn, First
Financial Corporution; Bernie
Gray, mayor, Hutsonville, Ill.;
Tim Boles, mayor. Sullivm,
Ind.; Dorman Clark, mnyor,
jawnville, ha!: Ron Shepard
mayor, Clinton, hid,; and Larry
Natalie, president, town board
uf Fairview, ha!
FIVE YEAR C o M P A R i s o N OF SELECTED FINANCIAL DATA
2 0 0 5 A N N U A L R E P O R T
(Dollar aiiiouiits in thousands,
exceot aer share ilrnoiiiits)
BALANCE SHEET DATA:
Total assets
Securities
Loans, net of unearned fees
Deposits
Borrowings
Shareholders' equity
INCOME STATEMENT DATA:
Interest income
Interest expense
Nct intcrcst income
Provision for loan losses
Other inconie
Other cxpcnses
Net incornc
PER SHARE DATA:
Net income
Cash dividends
PERFORMANCE RATIOS:
Net income to average assets
Net income to average
shareholders' equity
Average total capital
to average assets
Average sharcholders' equity
to average assets
Dividcnd payout
2005
2004
2003
2002
2001
$2,1363 18
536,23 1
1,395,741
1,464,9 18
370,090
269,323
$2,183,992
507,990
1,463,87 I
1,443,121
438,013
268,335
$2,223,057
576,950
1,429,525
1,479,347
45 1,862
255,279
$2,169,748
520,166
1,432,564
1,434,654
457,645
24 1,97 1
$2,041,905
471,888
1,348,461
1,313,656
480,674
217,511
121,647
47,469
74,178
1 1,698
32,025
63,538
23,054
1.72
.82
1 16,888
44,686
72,202
8,292
35,754
63,656
28,009
2.07
.79
122,661
48,225
74,436
7,455
30,819
62,46 1
26,493
1.95
.70
136,262
58,086
78,176
9,478
30,468
63,3 1 7
28,640
2.10
.62
144,673
74,125
70,548
6,6 15
2 1,468
53,323
24,196
1.78
.57
1.07%
1.28%
1.21%
1.30%
1.19%
8.52
13.35
12.51
47.57
10.45
13.24
12.23
38.13
10.57
12.45
11.43
35.88
12.0 1
11.73
10.80
29.57
11.33
11.38
10.46
32.28
W
CONSOLTIIATED BALANCE SHEETS
F I R S T F I N A N C I A L C O R P O R A T I O N
(Dollar amounts in thousatids, cxcrpr per sharc data)
ASSETS
Cash and due from hanks
Federal funds sold
Securities available-for-salc
Loans, net o f allowance o f $16,042 in 2005 and $1 9,918 in 2004
Accrucd interest receivable
Preniiscs arid equipnicn t, net
Bank-owned life insurance
Goodwill
Other iritangible assets
Other real estate owried
Other assets
T o m ASSETS
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Non-i t i terest-beari rig
In terest-bearing:
Certificates of dcposit of $100 or more
Other interest-hearing deposits
Short-term borrowings
Other borrowings
Clther liabilities
TOTAL LIARIIJTIES
Shareholders‘ cqiiity
Conirnon stock, $.I25 stated value per share,
Authorized shares - 40,000,000
Issued shares - 14,450,966
Outstanding shares - 13,373,570 in 2005 and 13,535,770 in 2004
Additional paid-in capital
Retained earnings
Accumulated other cnrnprehensivc income
Less: Trcasury shares at cost - 1,077,396 in 2005 arid 315,196 in 2004
T ~ A I .
SHAREHOLDERS’ EQUITY
December 31,
2005
2004
$
78,201
2,982
536,231
1,379,639
12,537
3 1,270
55,832
7,102
2,860
4,115
26,023
$2,136,318
$
94,928
5,400
507,990
1,443,953
12,016
31,154
49,177
7,102
3,033
3,262
25,917
$2,183,992
$ 182,416
$ 145,852
189,493
1,093,003
1 , 4 6 4 3 18
26,224
343,866
32,587
1,867,595
1,806
67,670
223,710
1,903
(25,766)
269,323
184,604
I, 1 12,665
1,443,12 1
75,527
362,486
34,523
1,915,657
1,806
67,5 19
21 1,623
8,357
(20,970)
268,335
TOTAL LIABILITIES A N D SHAREHOLDERS’ EQUITY
$2,136,918
$2,183,992
See accompanying notes.
W
CONSOLIDATED
STATEMENTS OF INCOME
2 0 0 5 A N N U A L R E P O R T
(Dollar aiiiouiits in thousands, except per share data)
INTEREST AND DIVIDEND INCOME:
Loans, including related fees
Securities:
‘I‘axable
Tax-exe nip t
O t h e r
TCYI’AL
IN’I’LWSI’ AND DIVIDKND
INCOME
INTEREST EXPENSE:
Deposits
Short-term borrowings
O t h e r borrowings
TOTAI. TN‘I’F.RFS’I’ EXI’KNSF.
NET INTEREST INCOME
Provision for loan losses
NIX INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES
NON-INTEREST INCOME:
I
,
lrust and financial services
Service charges and fees on deposit accounts
Other service charges and fees
Securities gains (I osscs)
Insurance commissions
Gain o n sale of mortgage loans
Gain on life insurance benefit
Other
TOTAL NON-INTEREST INCOME
NON-INTEREST EXPENSES:
Salaries and employee benefits
Occupancy expense
Equipment cxpc t i sc
Other
TOTAL NON-INTEREST EXPENSE
INCOME BEFORE INCOME TAXES
Provision for incomc taxa
NET INCOME
EARNINGS PER SHARE:
BASIC AND DILUTED
Years Ended December 31.
2005
2004
2003
$ 96,388
$ 92,440
$ 96,536
16,802
6,306
2,151
12 1,647
27,184
783
19,502
47,469
74,178
11.698
15,315
7,055
2,078
1 16,888
15,714
7,816
2,595
122,661
23,695
1,017
19,974
44,686
72,202
8,292
26,925
43 1
20,869
48,225
74,436
7,455
62,480
63,910
66,98 1
3,626
1 1,732
6,440
57 1
5,995
1,289
-
2,372
32,025
38,617
3,796
3,861
17,264
63,538
30,967
7,9 13
3,918
1 1,499
6,794
(165)
6,142
806
4,113
2,647
35,754
37,876
3,904
3,585
18,291
63,656
36,008
7,999
3,762
8,066
8,063
237
6,282
2,027
-
2,382
30,8 19
36,696
3,830
3,224
18,711
62,461
35,339
8,846
$ 23,054
$ 28,009
$ 26,493
$
1.72
$
2.07
$
1.95
Wcightcd avcragc nutiibcr of s h a m outstanding (in thousands)
13,433
13,525
13,588
Scc accorripanying noics.
F I R S T F I N A N C I A L C O R P O R A T I O N
CONSOLIDATED
STATEMENTS OF CHANGES
IN SHAREHOLDEKS’ EQUITY
( 1 ) o k i r amoiiiits in thousands, rxcept per sharc data)
Common
Stock
Additional
Paid-In Capital
Retained
Earnings
Comprehensive Treasury
Stock
Income
Total
Accumulated
Other
Balance, January 1,2003
$
303
$ 66,809
$178,209
$ 14,276 $(18,226) $241,971
C :o m p rehensive iiico m c:
Ner income
Other cornprehensivc incorne, net of tax:
Ctiarige in net un rcalized gains/losscs
on securities available-for-sale, tier
‘I’otal cotii preliensive iiicornc
-
26,493 -
-
26,493
-
-
(2,813)
-
(2,813)
23,680
Two-for-otic stock split (6,782,885 skares)
Chntributiori of40,000 shares to ESOP
Treasury stoclr purchase (80,120 sliarcs)
Cash dividends, $’ .70 per share
903
-
-
-
(903)
-
-
372
-
-
I (9,505)
-
-
-
-
-
884
(2,123)
-
I
1,256
(2,123)
(9,505)
Balance, December 3 I , 2003
1,806
67,181
1114,294
11,463
(19,465) 255,279
Cotnprehensive income:
Net iiicome
Other comprehcnsive loss, net of tax:
Change in net unrealized gains/losses
on securities available-for-sale, net
Total comprchensive income
-
28,003
-
-
28,009
-
-
(3,106)
-
(3,106)
24,903
Contribution of 36,000 shares to ESOP
Treasury stock purchase (79,000 shares)
Cash dividends, $ .79 per share
-
-
-
338
-
I
-
-
(10,680)
-
-
-
825
(2,330)
-
1,163
(2,330)
(10,680)
Balance, December 3 1,2004
1,806
67,519
21 1,623
8,357
(20,970) 268,335
Coin p rch cns ive income:
Nct income
Odier comprehensive loss, net of tax:
Change in net unrealized gaiidlosscs
on securities available-for-sale, nct
Total comp rch ensive income
Chitribtition of41,500 shares to ESOP
Treasury stock purchasc (203,700 shares)
Cash dividends, $ .82 per share
-
-
-
151
-
-
-
23,054
-
-
23,054
-
-
-
-
(10,967)
(6,454)
-
-
-
(6,454)
16,600
-
-
-
993
(5,789)
-
1,144
(5,789)
(10,967)
Balance, December 31,2005
$ 1,806
!$ 67,670 $223,710
$ 1,903 $ (25,766) $269,323
Scc accompanying notes.
CONSOLJDATED
STATEMENTS OF CASH FLOWS
2 0 0 5 A N N U A L R E P O R T
(l3olla1- ;iniounts in thous;inds, cxccpt pcr share. d;it;i)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net incotne
Adjustments ro reconcile net income to net cash
provided by operating activities:
Net (accretion) aniortization on securities
Provision for loan losses
Securities (gains) losses
Depreciation arid amortization
lhvision for deferred inconie taxes
Net change in accrued interest receivable
Contribution of shares to ESO1)
Gains on life insurance benefit
Other, net
NET CASH PKOM OIWA'I'INC; AC:'I'IVI'I'IES
Years Ended December 31.
2005
2004
2003
$ 23,054
$ 28,009
$ 26,493
(1,462)
1 1,698
(57 1 )
3,363
1,716
(521)
1,144
-
5 92
39.013
2,092
8,292
165
3,184
1,648
1,057
1,163
(4,113)
1,842
43.339
11,466
105,945
( 5 5,885)
(44,834)
450
-
-
7,267
(4,458)
19,951
558
7,455
(237)
2,883
(252)
2,126
1,256
-
5,126
45.408
8,308
189,049
(259,150)
(5,844)
(5,800)
-
-
-
(1,758)
(75,195)
44,633
34,274
(8,845)
(2,123)
18,013
( 5 8,070)
27.942
(1,845)
96,043
CASH FLOWS FROM INVESTING ACTlVlTlES:
Sales of securities available-for-sale
Calls, maturities and principal reductions o n securities available-for-sale
Purchases of securities available- for-sale
Loans made to customers, net of repayments
Net change in federal funds sold
Purchase of hank-owned life insurance
Purchase of ciistomcr list
Proceeds frotn life insurance benefit
Additions to premises and equipment
NET CASH FKOM INVLSI'ING AC:I'IVI*I'IES
11,376
373,74 1
(422,14 1 )
49,806
2,4 18
(5,000)
(338)
-
(2,908)
6,954
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in dcposits
Net change in other short-tcrm borrowings
Dividends paid
Purchases of treasury stock
Ilroceeds from other borrowings
Repayments on other borrowings
NW CASH FROM FINANCING AC'I'IVI'I'IES
NKl' CHANGE IN CASH AND CASfI EQUIVALLN'I'S
2 1,797
(49,303)
( 1 0,779)
(5,783)
-
( 1 8,620)
(62,694)
(16,727)
(36,226)
6,898
( 1 0 , I 5 5 )
(2,330)
85,006
(105,753)
(62,5 60)
730
CASH AND CASH EQIJIVALENTS, BE(:INNTNC: OF YEAR
94,928
94,198
CAS11 AND CASII EQUIVALENTS, END OF YEAR
$ 78,201
$ 94,928
$ 94,198
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest
Income taxes
Set. accompanying notcs.
$ 46,919
$ 5,413
$ 44,973
$ 6,501
$ 48,791
$ 8,016
NOTES TO CONSOLI~ATED
FINANC~AL STATEMENTS
F I R S T F I N A N C I A L C O R P O R A T I O N
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:
* 7
BUSINF.SS
Organization: ‘I’hc corisolidated financial statements of First Financial Corporation arid its subsidiaries (the Chporation) include
the parent coriipariy a n d i t s wholly-owned subsidiaries, First Financial Sank, N.A. of Vigo County, Indiana, ‘I’hc Morris Plan
Company of Terre Hautc (Morris I’lan), First Financial Reinsurance Company, :I corporation incorporated in the country of
Turks and Caicos Islands (F’FIIC) arid Forrest Shcrcr Inc., a full-line insurance agency headquartered in Terre Haute, Indiana.
Inter-company transactions arid lialances have bccri eliminated.
First Financial Rank also has t w o investiiiciit subsidiaries, Portfolio Management Specialists A (Specialists A) and Portfolio
Management Specialists R (Specialists E), which were established to hold arid rrianage certain assets as part of a strategy to ketter
nlaila c various income strcairis and provide opportunities for capital ci-eation as nccdcd. Specialists A a d Specialists R subsc-
cpent f: y entered into a limited partnership agreement, Global Porrfolio Limited Par-rners. Portfolio Management Specialists R also
owns First Financial Kea1 Estate, LLC. At Ikcernber 31, 2005, $400.8 million of securities and loans were owned by thcsc sub-
sidiaries. Specialists A, Specialists R, Global Portfolio Limited Partriers anci First Financial Real Estate LLC are included in the
coiisolidatcd financial stateiiiciits.
‘l’hc Corporation, which is hcadc uartered in ‘l’crre Haute, Indiana, offers a wide variuty or firiancial services including commer-
cial, mortgage arid consumer lei1 d ing, lcase financing, trusl account services and dzpositor services through its three subsidiaries.
‘l’hc Corpofiition’s primary source of reve~iuc is derived from loans to customers, primarily middle-inconic individuals, a n d
investment activities.
1 he Corporation operates 46 branches in west-central Indiana arid east-central Illinois. First Financial Uaiik is the lai-gest bank in
Vigo County. It operates 12 full-service haiilcing branches within the county; five in Clay County, Indiana; one i n Greene
County, Indiana; two in Knox County, Indiana; f h e in Puke County, Indiana; five i n Sullivan County, Indiana; four in
Verniillion County, Indiana; o m in Clark Coii~ity, Illinois; one in Coles County, Illinois; three in Crawford County, Illinois; one
in Jasper County, Illinois; two in Lawrence C:ounry, Illinois; two in Richlalid County, Illinois; oiic in Vcrrriilion Couiity, Illinois;
and one in Wayne County, Illinois. It also has a main office in downtown Terrc Haute antl a n operations ceriter/ofice building in
southern ‘I’crre Haute.
Regulatory Agencies: First Financial Corporation is a multi-bank holding coiiipariy and as such i s regulated by various banking
agencies. ‘lhc holding company is regularcd by the Seventh District of the Federal Reserve System. The national batik subsidiary
is regulated ky the Office of the Coniptrollcr of the Currcncy. ‘I’lic state bank subsidiary is jointly regulated by the State baiiliing
organization arid the Federal Deposit Insurance Corporation.
SIGNIFICANT ACCOUN*I*ING
Use of Estimates: To prepare f;nancial statements in conformity with US. generally accepted accounting principles, rnanage-
rnent makcs estimates and assurnptions based on available information. These estiiiiatcs arid assumptions affect the anioiiiits
reported in the finaricial stateinents and disclosures provided, and actual results could tlit‘fer. ‘I’hc allowance for loan losses, w r y -
ing value of intangible assets, loan servicing rights and the fair values of financial instrurrients are particularly subject to changc.
Cash Flows: Cash arid cash equivalents include cash arid demand deposits with other thincia1 institutions. Net cash flows are
reported for customer loan and deposit transactions and short-term ljorrowiiigs.
Securities: The Corporation classities all securities as “availablc for sale.” Securitics arc classitied as available for sale when they
might he sold before maturity. Securities available for sale are carried at fair value with unrealized holdings gains and losses, net of
taxes, reported in other comprehensive income within shareboldcrs’ cquity.
Interest income includes amortization of purcllasc premium or discount. Premiums arid discounts are aiiiortized o n the level
yield method without anticipating prepayments. Mortga e-backed securities are amortized over the expected life. Realized
gains and losses o n sales are based o n the aiiiortizcd cost o F the sccurity sold. Decliiics in the fair value of securities below their
cost that ai-e other than temporary arc reflected as realized losses. In estimating other-than-temporary losses, iiiailagcincnt con-
siders: 1) the length of time and extent that fair value has bccn less than cost; 2 ) the financial condition anci near tcriri
prospects of the issuer; and 3 ) the Corporation’s ability antl intent to hold the security for a period sufXcicnt to allow for any
anticipated recovery in Liir value.
Loans: Loans that iiianagemeiit has the intent and ability to hold for the heseeable fiitiirc until maturity or pay-off are
reported at the principal balance outstanding, net of unearned interest, deferred loan fees and costs, and allowance for loan
losses. Loans held for sale are reported at the lower of cost or market, o n a n aggregate basis.
Interest incorne is accrued on the unpaid principal txilatice and iricludes amortization of net deferred loan fees and costs over
the loan rerni without anticiparing prepayments, lntcrcst income is not reported when fiill loan repayment is in douht, typical-
ly when the loan is impaired or payments arc significantly past due.
All iiitercst accrued hut not rcccived for loans placed o n nonaccrual is reversed against interest income. Interest received on such
loans is accountcd for o n the cash-basis or cost-recovery method, until qualifying for return to accrual. Loam are returned to
accrual status when all the principal and interest amoiiiits contractually due arc brought wrrent and future payments arc reason-
ably assured. In all cases, loans are placed on noli-accrual or charged-off if collectioii of principal or interest is considered doubtful.
Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred crcdit losses. Loan losses
arc ctlarged against thc allowance wlicn rnanagement bclicves the uncollcctibility of a loan balance is confiriiicd. Subsequent
recoveries, if any, are credited to the allowance. Mariagement estiiiiatcs the allowance balance required using past loan loss expcri-
eiicc, the riatiire and volutrie of the portfolio, inforimtion akout specifk borrower situations and estimated collateral values,
POLICIES
I
W
NOTES TO CONSOLIDA'I'EI) F I N A N C I A L STATEMENTS
2 0 0 5 A N N U A L R E P O R T
cconorriic conditions and other factors. Allocations of the allowancc may be made for s ecific loans, hut the entire ~ I ~ O W ~ I J C ~
available for any loan that, in rnanagerrient's judgment, should be charged off. ?'he a1 P owaiicc consists of' specific arid general
is
components. The specific component relates to loans that arc individually classified as impaired or loans otherwise classified as
substandard or doubtfill. Thc general component covers non-classified loans and is based on historical loss experience adjusted
for current factors.
A loan is irripaired when full payment under the loan ternis is not expected. Im Iairment is evaluated in total for smaller-balance
lc)ans of similar natiirc such as residential rriortpges, consumer and credit card / oans, atid on an individual basis for othcr loans.
If a loari is irnpaired, a portion of the allowaiicc is allocated so that tlic l ~ a r i is reported, net, a t the present value of estimated
fiiturc cash flows, using the loan's existing rare, or a t the fair value of collateral if' repayment is cxpcctcd solcly from the collateral.
Large groups of smaller balance homogcncous loans, such as consumer and residential real estate IO~IJS, are collectivcly cvaluatcd
for impairrncrit and, accordingly, they are not separately identified for inipairmcnt disclosures.
Foreclosed Asscts: Assets acquired through or instead of loari heclosures are initially recorded a t fair value when acquired,
cstablishing a new cost 1)asis. If tiir value declines, a valuation allowancc is recorded through expense. Costs after acquisition
a re expensed.
Premises and Equipment: Land is carried a t cost. Premises and equipment are
Lkprcciation is cornpuicd over the useful lives of the assets, which range f'roni 3 to
39 years for buildings and leasehold improvements.
Federal Home Loan Bank (FHLB) Stock: 'l'he Corporation is a mcmbcr o l the FHLR system. Memhers are required to vwn a cer-
tain anioiiiit of stock bascd on the level of bori-owings and other factors, and may invest in additional amounts. FHLH stock is car-
ried at cost and periodically evaluated for impairnicnt. Because this stock is viewed as a long-term investment, impairment is based
on ultimate recovery of par value. Both cash arid stock dividends are reported as income. FHLB stock is included with securities.
Servicing Rights: Servicing rights are recognized as assets for the allocated value of retained servicing rights o n loans sold. servicing
rights arc cxpcriscd in proportion to, and over the period of, estimated net servicing revenues. Irnpirrncnt is evaluated hased on the
fair value of the rights, using groupings of'thc underlying loans as to loan type and interest rate, and then secondarily as to loan type
and investor. Fair value is determined using prices for similar assets with similar charactcrisrics, when available, or hased upon dis-
counted cadi flows using mal-ket-based assumptions. Any impairrncnt of a grouping is reported as a valuation allowance.
Servicing fee income is recorded for fees earned for servicing loans. The fees are based o n a contractual percentage of the out-
standing principal or a fixed arriourit per loan and ai-e recorded as income when earned. 'Ihc amortization of rnortgage servicing
rights is netted against loan servicing fee income.
Bank-Owned Life Insurance: The Corporation has purchased life insurance policies on certain key executives. Bank-owned life
insurance is recorded at its cash surrender value. or the amount that can bc rcalizcd.
Goodwill and Other Intangible Assets: Goodwill resiilts from business ac uisitioris arid represents the excess of the purchase
red a t cost less accumulated dcprcciation.
ycars for liirniturc arid equipment and 5 to
price over the fair value of acquired tangible assets and liabilities and identi I iablc iritmgiblc assets. Goodwill is
annually for impairment and any such inipairrricrit will ke recognized in the period identifkd.
Other intangilile assets consist of core deposit and acquired ciistoniet relationship intangible assets arising from the whole bank,
insurance agency and branch acquisitions. They are initially measured at fair value and then arc amortized on an accelerated
method over their estimated usefiil lives, which arc 12 arid 10 ycars, respectively.
Long-Term Assets: Premises and equipment a d othcr long-tcrrn assets are reviewed for impairment when events indicate their
carrying aino~int nlay not bc rccovcrable from future undiscounted cash flows. If impaired, the assets arc recorded at Fair value.
Benefit Plans: I'cnsion expense is the net of service and interest cost, return on plan assets arid amortization of gains and losses
not immediately recognized. 'I'he amount contributed is determined by a formula as decided by the Board of LXrcctors. Deferred
conipcrisatioii arid supplernerital retirement plan expense allocates the bcncfks over years of service.
Deferred Compensation Plan: A deferred compensation
director, or their bcncfkiary, thc afnount of fees deferred p Y u s interest over 10 ycars, bcgirinirig when the director achieves age 65.
Ian covers all directors. IJnder the plan, the Corporation pays cach
A liability is accrued for the obligation iinder these plans. The expense incurred for the deferred compensation for each of' thc last
three years was $164 thousand, $160 thousand and $123 thousand, resulting in a deferred compensation liability of $2.2 million
and $2.0 million as of yur-end 2005 and 2004.
Long-Term Incentive Plan: A long-tei-m incentive plan provides for the payincnt of incentive rewards as a 1 0-year annuity to all
directors and certain key officers. 'l'hc plan expires Uecerriber 3 1, 2009, and compensation expense is recognized ovcr thc service
period. I'ayments under the plan generally do not begin until the earlier ofJanuary 1, 2015, or the Jariiiary I immediately follow-
ing the yeai- in which the participant rcachcs age 65. Chmpensation expense for each of the last thrcc years was $1.6 rnillion, $ I .5
million arid $1.5 inillion, resulting in a liability of $7.3 million and $5.5 million as of year-end 2005 and 2004.
Income '&xes: liicoiiic tax expense is the total of the current year income tax due or rcfiindable arid the change in deferred tax
assets and liabilities. Ikferrcd ax assets arid liakilities are the expected fiiture tax aiiioiiiits for the temporary differences between
carrying arriounts a n d tax bases of assets and liabilities, cornputed using enacted tax rates. A valuation allowancc, if needed,
reduces deferred tax assets to the amount expected to be realized.
1,oan Corriniitrnents and Related Financial Instruments: Financial instru
ts include credit instruments, such as commit-
rrients to make loans a n d standby letters of credit, issued to meet custome nancing needs. The face aiiiount for these items
represents the exposure to loss, before considering customer collateral or ab
to repay. Such financial instruments are record-
cd when they are fiinded.
NOTES TO CONSOLlDATED FINANCIAL STATEMENTS
F I R S T F I N A N C I A L C O R P O R A T I O N
Earnings Per Sharc: Earnings er comtno~i share is net income divided by the weighted avcragc riurnher of coinnion shares out-
standing during the period. T R e Corporation does not have any potentially dilutive securities. Earnings and dividends per share
are restated for stock splits and dividends through the date of issue of the financial statements.
Comprehensive Income: Cornpreherisivc income consists of‘ net income and other corriprehensive income. Other comprehen-
sivc income includes unrcalizcd gnins and losses on securities availablc ror sale, whish arc also recognized as sepxatc corripo-
nents of equity
Loss Contingencies: Loss contingcncics, including claims and legal actions arising in the ordinary coiirse of‘busiriess, are recorded
as liabilities when the likelihood of loss is probablc and an amoiint of range of loss can he reasoilably estirnated. Management does
not believe there are currently such matters that will have a material effect on the financial statements.
Dividend Restriction: Ranking regulations require maintaining certain capital levels and may liniit the dividends paid by thc
bank to the holding corripany o r by thc holdirig company to sharcholders.
Fair Value of Financial Instruments: Fair values of financial instruments are estiniatccl using relevant market inforrnation and
other assutnptions, as niorc fiilly disclosed in a separate note. Fair value estimates involve iinccrtaintics arid matters of significarit
judgment regarding interest rates, credit risk, prepaymcnts and other- factors, especially in the absence of broad markets for partic-
ular items. Changes in assumptions or market coriditions could significantly affect the estimates.
Operating Segnient: While the Corporation’s chief clecision-makers rrionitor the revenue streams of the various products and ser-
vices, the idcntifiahle segments arc not material and operatioris are managed and firiaricial performance is cvaluated on a corpo-
ratc-wide basis. Accordingly, all of the Corporation’s financial service opcrations are considcrcd by management to bc aggregated
in one reporrable operating segment, which is banking.
Adoption of New Accounting Standards: During 2005 the Corporation adopted SOP 0.3-3, which requires that a valuation
allowance for loans acquired in a transfer, includirig in a busincss cornbination, reflect only losses incurred after acquisition and
should riot be recorded at acquisition. It applies to any loan acquired in a transfer that showed evidciicc of credit c~tiality dctcriora-
tion since it was made. This new standard had n o effect on thc Corporation’s financial statements and results of operations.
In May of 2005, the FASR issucd statement 154, “Accounting Changes and Error (hrrections,” that provides guidance on
reporting of accounting changes and correction of errors nladc iri fiscal years bcginning after the date of this statement. First
Financial Corporation has adopted statement 154. The adoption of this statement had no effect on the financial statcnicnts
included herein.
In November of 2005, the FASR issucd a staff position that amended FASR statenlent No. 1 15, “Accounting for Certain
lnvestnicnts in Deht and Equity Securities.” This aiiicridnierit addresses the mcasurerrient, accounting and disclosures for securi-
ties that have been rccogriized to be other than tern orarily inipircd as well as those that have riot heen recognized as other-than-
temporarily impaired. First Financial Corporation [as adopted these arneiidiiicrits that have had no effect on the financial statc-
mefits included herein.
Reclassifications: Sonic iterris in prior year financial statements were rcclassified to conforiii to the cui-rent presenration.
2.
FAIR VALUES OF FINANCIAL INSTRUMENTS:
Carrying amount is the cstimared fair valuc for cash and due from banks, federal funds sold, short-term borrowings, Federal
Honic Loan Rank stock, accrued interest receivable and payable, denland deposits, short-term debt arid variable-rate loans or
deposits that reprice frequently and fully. Security fair values are based o n markct prices o r dealer quotes, and if n o such infornm
tion is available, o n the ratc arid term of the security arid information about the issuer. For fixed-rate loans or deposits, variable
rate loans or deposits with infrequent repricing or repricing h i t s , and fur longer-term borrowings, fair vahc is based on dis-
counted cash flows using ciirrcnt market rates applied to the estimated life and credit risk. Fair vducs for impajred loans arc esti-
rriated using discounted cash tlow analysis or underlying collateral values. Fair valuc of debt is t)ased on ciirrcnt rates for similar
financing.
The carrying amoiint arid estimated fair valuc of financial instruments are presented in ttic table helow and wcrc determined
based on tlic ahove sssuniptions:
December 31,
2005
2004
(Dollar :i moil n t s in thousands)
Cash and due from hanks
Federal funds sold
Sccurities available-for-sale
I m n s , net
Accrued interest rcceivable
Deposits
Short-term borrowings
Fedcral HOITW Loan Bank advances
Other borrowings
Accrued interest payable
Fair
Value
Carrylng
Value
Carrying
Value
$ 78,201
2,982
536,291
1,379,699
12,537
$ 78,201 $
2,382
536,29 1
I ,371,835
12,537
94,928
5,400
5 07,390
1,443,953
12,016
(1,464,‘) 1 8 ) (1,469,670) (1,443,12 1 )
(75,527)
(337,886)
(24,600)
(3,142)
(26,224)
(337,266)
(6,600)
(3,632)
(26,224)
(338,849)
(6,600)
(3,692)
Fair
Value
$ 94,928
5,400
507,990
1,448,73 1
12,016
(1,449,322)
(75,527)
(341,1.48)
(24,600)
(3,142)
NOTES ’ro CONSOLTDATED
FINANCIAL STATEMENTS
2 0 0 5 ANNUAL R E P O R T
3. RESTRICTIONS ON CASH AND DUE FROM BANKS:
Certain affiliate banks are rrqiiired to rriairitain average reserve balances with thc Fcdcral Reserve Bank that do not
earn interest. ‘l’he amount of those reserve balances was approxirnarely $2.1 million and $33.2 million at December
3 I , 2005 and 2004, respectively.
4. SECURITIES:
‘I‘he fair value of securities available-for-sale and related gross unrealized gains arid losses rccogn jzcd in accumulated
other comprchcnsivc incomc wcrc as follows:
(Dollar amounts in thousands)
U.S. Government sponsored entity
mortgage-baLked securities and agencies
Collateralized mortgage obligations
State and municipal
C : o r p r a t e ohligations
Equities
TOTAL
(Llollar ainoiiiits in thousands)
U.S. Governinelit sponsored entity
mortgage-backed securities and agencies
C.hllateral ized mortgage o hl igatio t i s
State arid rriiinicipal
Corporate obligations
Equities
TOTAL
Amortized
cost
$306,697
2,357
129,9 16
89,740
4,4 10
$533,120
Amortized
cost
$227,927
19,895
137,206
104,754
4,280
$434,062
December 31.2005
Unreallzed
Gains
Losses
Fair
Value
$
787
7
4,543
534
3,849
$ 9,720
$(G,081)
( 4 )
(414)
( 5 0 )
-
$(6,549)
$30 1,403
2,360
134,045
90,224
8,259
$53629 1
December 31,2004
Unreallzed
Gains
Losses
Fair
Value
$ 2,573
12
7,263
1,333
4,445
$ 15,626
$(1,472) $229,028
19,866
144,294
106,077
8,725
$(1,698) $507,990
(41)
( 1 7 5 )
( 1 0 )
-
As of December 31, 2005, the Corporation does not have any securities from any issuer, other than the U.S.
Govcrntnent, with an aggregate hook or fair valuc that exceeds ten percent of shareholders‘ equity.
Securities with a carrying value of approximatrly $54.7 million and $33.0 million a t Decernber 31, 2005 and 2004,
respectively, were pledged as collateral for short-term borrowings and for other purposes.
Relow is a summary of the gross gains and losscs rcalizcd by thc Corporation on investment sales during the years
erided December 31, 2005, 2004 arid 2003, respectively.
(Doll,ir ~ i i i i w n i 9 i n i h n i i s ~ i n d s )
Proceeds
.
.
I ~ o s s gams
Gross losses
( 7 .
2005
$11,376
537
-
2004
$11,466
409
I
2003
$8,308
237
-
AclditionA girls of $34 thousand in 2005 arid $47 thousand in 2004 resiilted from redernprion premiums on called
securities.
The Corporation ev,iluatcs sccuriries for other-than-rcmporary impairrtient on a quarterly basis. Factors considered
include lengrh o f t i m e itnpaired, reason for irripairmenr, outlook atid the Corporation’s ability to hold the irivcstnictit
to allow for recovery of fair value. There were no securities considered to hc otlicr-than-temporarily impaired at
Dccernbcr 31, 2005. A t Dcccmber 31, 2004, the Corporation had o w security that it considered to hc other-than-
tct-nporarily impaired, and the Corporation wrote down the value of the investment by $621 thousand to its fair
value and d x q u c n t l y wld the security.
N OT ES TO C o N s L I DAY' ED F I NAN c 1 A L S T A ~ M EN T s
F I R S T F I N A N C I A L C O R P O R A T I O N
C:ontractual maturities o f debt securities at year-end 2005 were as follows. Securities not due at a sitiglc nlaturity or
with no tnaturity datc, primarily mortgage-backed and equity securities, are shown separately
(Dollar arnoiints in thousands)
DLK in one year o r less
Due after one but within five years
Due after five but within ten years
Due after ten years
Mortgage-hacked securities and eqtiities
Tc )TAL
Available-for-Sale
Fair
Value
Amortized
cost
$ 42,057 $ 42,304
107,242
104,704
37,450
35,626
46,095
45,973
228,360
233,091
304,760 303,200
$533,120 $536,291
The following tables show die securities' gross unrealized losses and fair value, aggregated by investment category
a n d lengdi of ti mc that individual securities have been in continuous unrealized loss positim, at December 31 , 2005
and 2004.
(Dollar anioLint\ In thousands)
U.S. Government 5ponsored entity
December 31,2005
Less Than l 2 Months
More Than 12 Months
Total
Falr Value
Unreallzed
Losses
Falr Value
Unrealized
Losses
Fair Value
Unreallzed
Losses
Collateralized mortgage obligations
State and municipd obligations
Corporate obligations
mortgage-backed securities and agencies $206,666 $ (4,250) $57,222
1,334
8,994
950
$222,777 $(4,494) $68,500
Total temporarily impaired securities
904
14,509
698
( 2 )
(240)
$( 1,831) $263,888 $(6,08 1 )
( 4 )
(414)
(50)
$(2,055) $291,277 $(G,549)
2,238
23,503
1,648
(2)
(174)
(48 1
( 2 ) - -
~~-
-~~
(Dollar amouriis in thousands)
U.S. Government sponsored entity
December 31.2004
Less Than 12 Months
More Than 12 Months
Total
Falr Value
Unrealized
Losses
Falr Value
Unrealized
Losses
Fair Value
Unrealized
Losses
mortgage-backed securities arid agcncics $ 72,754 $
Chllateralized mortgage obligations
State arid municipal obligations
Corporate obligations
Total temporarily itnpired securities
17,059
12,979
2,000
!J
(437) $40,437
(41
-
( 1 I O )
(375) $1 13,25 1
I 17,059
13,407
3,506
- - - ~ - -
(41
(175)
( 1 0)
$(I ,045) $147,223 $(1,698)
( 5 ) - 1,506 - (5 1
$(1,472)
( 6 5 )
428
$104,792 $(653) $42,431
These losses represent negative adjustments to market value relative to the rate o f interest paid on the seuritics atid
not losses related to the creditworthiness of thc issuer. Management has thc intent md ability to hold for the foresee-
able future and believes the value will reLover as the semrities a p p r o ~ ~ h maturity or market rates chmge.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
2 0 0 5 A N N U A L R E P O R T
5. LOANS:
Loans are summarized as follows:
(Dollar amoiiii ts in thousands)
Commercial, financial and agricultural
Keal estate - construction
Keal estate - niortgage
Installment
Lease financing
Total gross loans
Less: unearned income
Allowancc for loan losses
TOTAL
December 31.
2005
$ 382,214
31,918
707,008
272,062
2,845
1,396,047
(306)
(1 6,042)
$1,379,699
2004
$ 401,724
32,810
753,826
272,261
3,658
1,464,279
(408)
( 1 9 3 1 8 )
$1,443,953
In the nornial course of business, rhe Corporarioris subsidiary banks mdke loans to directors arid executive officers and
to their associates. These related parry loans are consistent with sound banking practices and are within applicable bank
regulatory lending limitations. Tn 2005 the aggregate dollar anioutit of these loans to directors and executive officers
who held officc at thc cnd of the year amounted to $34.1 million at the beginning o f the ycar. During 2005, advances
of $19.6 million, repayments of $30.5 million arid changes to persons included o f $(1.2) million were made with
respecr to related party loans for an aggregdte dollar amoiint outstanding of $22.0 million at December 31, 2005.
Loans serviud for others, which are not reported as assets, total $4 16.6 million and $39 1.3 million at year-end 2005
and 2004.
Acriviry for capitalized mortgage servicing rights (included in other assets) and the related valuation allowance
was as follows:
(Dollar amounts in thousands)
Servicing righrs:
Beginning of year
Additions
Amortized to expense
End of year
Val iiation allowance:
Beginning o f year
Reductions credited to expense
E d of year
December 31,
200s
2004
2003
$ 2,960
73 5
(764)
$ 2,931
$ 3,114
63 1
(785)
$ 2,960
$ 2,548
1,961
(1,395)
$ 3,114
$
-
$
200
$
500
, , 1 hird party valuations are conducted periodically for niortgage servicing rights. Rased on these valuations, fair values
approximate carrying values.
6. ALLOWANCE FOR LOAN LOSSES:
Changes in the allowance for loan losses are summarized as follows:
(1)ollar amounts in thousands)
Balance ;it beginning of year
Provision for loan losses
Recoveries of loans previously charged off
Loans charged off
BALANCE A I ' END OF YKAR
December 31,
200s
$ 19,918
11,698
1,918
2004
$21,239
8,292
1,77 1
2003
$21,249
7,455
1,475
NOTES TO CONSOLTDA'I'ED FINANCIAL STATEMENTS
F I R S T F I N A N C I A L C O R P O R A T I O N
Impaired loans were as follows:
(Dullar amounts in thotlsatids)
Year-end loans with no allocated allowance for loan losses
Year-end loatis with allocated allowance for loan losses
TOTAL
Amount of the allowance for loan losses allocated
Nonperforming loans:
1,oans past due over 90 days still on accrual
Non-accrual loans
200s
!b
500
3,622
$ 4,122
$ 1,657
6,354
8,464
December 31,
2004
$ 2,582
16,240
$1 8,822
$ 6,331
7,813
19,862
Nonperforming loans include horh smaller balance homogeneous loans that are collectivcly evaluated for impair-
nient and individually classified impaired loans.
(13ollar aiiioiiiits in t1ious;inds)
Average of impaired loans during the year
Interest income recognized during impairment
Cash-basis intcresr income recognized
2005
$11,992
126
1 1
2004
$14,794
436
315
2005
$ 8,992
583
-
It was riot practicable to dctertnine the amount o f cash basis intercst income recognizcd for 2003.
7. PREMISES AND EQUIPMENT:
Premises and equipment are summarized as follows:
(Dollar a m ~ i i n t s in thousatids)
Land
Building and leasehold improvements
Furniture and equipment
Less accumulated depreciation
TOTAL
December 31,
200s
$ 5,617
35,290
23,887
70,794
(33,524)
$ 31,270
2004
$ 5,617
35,102
27,928
68,647
(37,493)
$ 31,154
Aggregate depreciation expense was $2.79 million,
respectively.
62 million and $2.24 million for 00 2004 and 2003,
8. GOODWILL AND INTANGIBLE ASSETS:
T h e Corporation completed irs annual i m p i r m e n t testing of goodwill during the second quarter of 2005.
Management does not believe any amount of the goodwill is impaired.
Intangible asscts subject to amortization at December 31, 2005 and 2004 art: as follows:
(Dollar amount\ in thousands)
Customer list intangible
Core deposit i ntangible
Non-co m pe te + p z n i e n t s
2005
2004
Gross
Amount
$3,446
2,133
500
$6,139
Accumulated
Arnortlzatlon
$1,692
1 , l 17
470
$3,273
Gross
Amount
$3,108
2,193
500
$5,801
Accumulated
Amortization
$1,390
939
379
$2,708
Aggregate amortization expense was $57 1 thousand, $558 thousand and $638 thousand for 2005, 2004 and
2003, respectively.
Estimxed amortization expense for the next five years is as follows:
2006
2007
2008
2009
2010
In I l l C l l l ~ l l l d *
$ 497
425
425
425
425
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
2 0 0 5 ANNUAL R E P O R T
9. DEPOSITS
Scheduled maturities of time deposits for the next five years are a s follows:
2006
2007
2008
2003
2010
$348,575
166,817
75,671
32,139
18,094
10. SHORT-TERM BORROWINGS
A sumrnary of the carrying value of the Corporation's short-term borrowings at December 3 1, 2005 and 2004 is
presented below:
(Dollar ainoiiiits in thousands)
Federal funds purchased
Repurchase agrcctncnts
Other shorr-term borrowings
(Dolkir amoiiiits in thouhand.;)
Average amount outstanding
Maximum amount outstanding a t a month end
Avcragc intcrcst ratc during year
Interest rate a t year-end
2005
$1 9,032
5,579
1,613
$26,224
200s
$25,927
54,808
3.16%
3.77%
2004
$63,002
5,597
328
$75,527
2004
$ 71,745
103,386
1.46%
2.34%
Federal funds purchased are generally duc in one day and bear interest at marker Tares. Other borrowings, primari-
ly note paphle-U.S. government, arc due on detnarid, secured by a pledge of securities arid bear interest at mar-
ket rates.
Subsrantially all repurchase agreement liabilities represent amounts advanced by various customers. Securities arc
pledged to cover these liabilities, which are not covered by federal dcposit insurancc. Thc Corporation maintains pos-
session of and control over these securities.
11. OTHER BORROWINGS:
Other horrowings at Ilecemher 3 I , 2005 and 2004 arc summarized as follows:
(1)ollar amount\ i n t h o i i w i d \ )
FHLB advances
Note payable to A finmcial institution
City of Terre Hmte, Iridima economic ctevelopmeiit revenue bonds
TOTAL
2005
$337,266
-
6,600
$343,866
2004
$337,886
18,000
6,600
$362,486
T h e aggregate tninitnum aririiial pdyments of other borrowings are as follows:
2006
2007
2008
2003
20 1 0
Thereafter
$ 8,665
766
52,632
22,916
257,594
1,293
$343,866
NOTES TO CONSOLIDATED FINANCTAL S'lATEMENl'S
F I R S T F I N A N C I A L C O R P O R A T I O N
The Corporation's subsidiary hanks are members of the lecteral Home Loan Bank (FHTB) and accordingly are perniittcd to
obtain advances. The advances fi.01~1 the FHLB, aggregating $337.3 million at December 31, 2005, accrue int.erest, payablc
rnonthly, at anniral rates, primarily fixed, varying from 3.28% to 6.60% with a weighed average rate of 5.46%. The
advances are due at various datcs through August 2017. FIILB advances are, gencrally, due in full at rnaturity. They arc
securcd by eligible securities totaling $129.9 million and a blanket plcdgc on real estate loan collateral. Certain advances
rnay be prepaid, without penalty, prior to maturity. 'l'he FHLB can adjust the intcrcst rate from fixcd to variable on ccrtain
advances, but thosc advances may then be prepaid, without penalty.
On December 31, 2004, the Corporation entercd into a revolving credit loan agrecrnenr (Note) with a fitlaticia1 institution.
The total priticipal amount of loans outstanding at one tirne under this Note could not excccd $20 million. The Note was
paid off in the third quarter of 2005. The Notc bore an intcrcst rare equal to the average daily fcdcral funds ratc plus 0.875%
atid adjusted daily. l'he Notc was iinsecurcd b u r required the Corporation to rrieet certain finamial covcnants. The
Corporation coinplicd with all its dcbr covenants. These covenants included maintaining a primary capital-to-assets ratio
higher than 6.2%, net income that excccdcd a 0.6% return oti average asscts, an allowancc for loan and leasc losses that did
not Fall below .75% of gross loans and divictend declarations that wcre not in excess of42Yo of net income.
The economic development rcvenue bonds (honds) requirc periodic interest payments each ycar unril maturity or redernp-
tion. The interest rate, which was 3.58% at Deccmher 3 1 , 2005, and 2.0% at Deccinher 31, 2004, is detertriinect by a for-
mula which considers ratcs for comparable bonds and is adjusted periodically. I'he bonds are collateralizcd by a first mort-
gage on the Corporation's hcadquarters building. The bonds matiire Deceinhcr 1 , 201 5 , but bondholders may periodically
rcquire earlier redemption.
The debt agreement for the bonds requires thc Corporation to incct certain financial covenants. Thcse covenants rcquire the
Corporacioti to maintain a l'ier I capital ratio of at lcast 6.2% and nct income to average assets of 0.604). A t December 31,
2005 and 2004, the Chporation was i n compliance with all of its debt covenants.
The Corpordtion inaiiitains a letter of crcdit with anothcr financial institution, which could be irsed to rcpay the bonds,
should they bc called. The letter of credit expired November 1 , 2005, and was automatically extended for one year.
Assuming redemption will be fuiidcd by the letter of credit, or by other sitnilar borrowings, there are no anticipated princi-
pal maturities ofche bonds within the next five years.
12. INCOME TAXES:
Incomc tax expense is summarized as follows:
(Dollar :irno~i iics in thousands)
Federal:
Currently p;ty;able
Deferred
State:
Currently payable
Deferred
TOTAL
2005
2004
2003
$ 6,202
1,334
7,536
$ 5,884
1,282
7,166
$ 8,046
(544)
7,502
(5 1
382
377 - -
1,052
292
1,344
$ 8,846
_
467
366
833
$ 7,999
_
$ 7,913
.~
~
The reconciliation of income tax expense with the amount computed by applying the statutory federal income
tax rate of35% to income before income taxcs is siinimarizcd as follows:
(Dollar amounts in thousands)
Fedcral income taxes computed at the statutory rate
Add (deduct) tax effcct of:
~
~
~
9nnR
$10,833
2004
$12,603
2005
$12,369
Tax exempt income
State tax, ncr of federal hcriefit
Mordable housing crcdirs
Other, net
TOTAL
(2,902)
24 5
(327)
58
$ 7,913
(4,889)
54 1
(327)
71
(3,738)
873
(507)
( 1 5 1 ) - -
$ 8,846 - -
$ 7,999
NOTFS TO CONSOLIDATED FINANCIAL STATEMENTS
2 0 0 5 A N N U A L R E P O R T
T h e tax effecrs of rerriporary differences that give rise to significant portions of the deferred tax assets and liabili-
tics at Deccrnbcr 31, 2005 and 2004, are as follows:
( 1 ) O l h l a m O l l l l r S 111 thousands)
Dcfcrrcd tax aswts:
Lom losses provision
Deferred compensation
Co m pc nsa tcd abscn ces
Po5t-retirctnenr benefirs
State net operating loss carry f o r w d
Othcr
GROSS DFFFRRFD ASSFTS
Deferred rax liabilities:
Net iirirealized gains on securities available-for-sale
Depreciation
Fcdcral Homc 1,oati Rank stock dividends
Mortgage servicing righrs
Perisi o t i s
Othcr
GROSS D F F F R R F ~
Nk:r D w ~ R R ~ I ) T A X ASSETS (LIABILITIES)
LIARIT TTTES
2005
2004
$ 6,454
4,012
494
920
78
98 1
12,939
$ 7,927
3,417
48 1
698
243
929
13,695
(1,268)
(1,440)
(1,519)
(1,176)
(2,334)
(3,012)
(10,809)
$ 2,130
(5,571 )
(1,512)
(1,221 )
(1,176)
(2,048 )
(2,624)
(14,152)
( 4 5 7 )
$
13. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK:
The Corporation is a party to financial jtistrtmients wirh off-balance-sheet risk in the normal course of business to
meet thc financing nccds of its customers. These financial instruments include conditional commitments and com-
tncrcial lcttcrs o f crcdir. The fitiaricial instriiments involve to varying degrees, elements of credit and interest rate risk
in cxccss of anioiin ts recognized in the financial statements. 'I'he Corporation's inaxiinum exposure to credit loss i t i
the event o f nonperformaticc by the other party to the financial instrument for commitments to make loans is limit-
ed generally by the contractual amoutit of those insrruments. Tlie Corporation follows the same credit policy to
makc such comniittncnts as is followed for those loans recorded in the consolidated financial statements.
T h e Corporatjotis ciistotiiers had iiriiised lines of credit of $270.0 million and $245.9 million as of Dcccmber 31,
2005 arid 2004. In addition, tlie Corporation had outstanding comrnitmcnts of $6.9 million and $5.3 niilliori iirider
commercial letters of credit as o f Dcccniber 31, 2005 arid 2004, respectively. Tlie majority of these commitments
bear variable interest rates. Thc Corporatjon is exposed to credit loss in the event the counterparties to such agree-
ments do not pcrforrii i n accordance with tlie agreements.
C:ommitment and contingent liabilitics are summarized as follows at December 31:
( h l l a r :inloutits in rhoussnils)
Home equity
Ckdit card lines
C.hrntncrcial opcratitig lines
Other commitments
Commercial letters of credit
2005
$ 32,338
46,276
24,270
163,226
$272,110
6,933
2004
$ 32,523
52,695
15,937
147,871
$249,026
5,319
Thc riiajority of corxirriercidl operating lines and home equity lines are variahlc ratc, while the rnajoriry of other
ccmirnittnenrs to fiirid loms are fixed rate. Since many commitmcnts to makc loans expirc without being used,
thcse anioii~i ts do not riecessdrily represent future cash commitments. Collateral obtaiticd upon cxercise of the com-
mjttnent is deterrriined using management's credit evaluation of the borrower, and rnay include accounts reLeivablr,
inventory, property, larid md other items. The approximate duration of thcsc comrnj mien ts is generJly one year or
less.
NOTES TO CONSOLIDATF,D FINANCIAL STATEMEN’I’S
F I R S T F I N A N C I A L C O R P O R A T I O N
14. RETIREMENT PLANS:
Substatitially all employee5 of the Corporation are covcred by A retirement program t h ~ t consists of a defined benefit
pl,in arid an employee stock ownership plan (ESOP). Plan
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