First Financial Corp
Annual Report 2008

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FIRST I^INANCI ORPORATION l005-0;i ^r^lehmting hiiings bervices APR 01 2009 SNL Financial, LC 1-800-969-4121 2008 ANNUAL REPORT •Ti,!i';S'i^-i'*i;«l#f!.'', Our Service Area Our Mission The mission of First Financial Corporation Is to be the FIRST choice for all your financial needs. Sliareliolder information •< N A S D Aq The common stock of First Financial Corporation is traded on the NASDAQ Global under the symbol THFF A copy of form 10-K, as filed with the Securities and Exchange Commission, is available upon written request to: Michael A. Carty, First Financial Corporation, P.O. Box 540, Terre Haute, IN 47808. ©2009 First Financial Corporation 2 0 08 A N N U AL REPORT Financial Highlights Dollar amounts in thousands, except per share amounts 2 0 08 2007 2 0 06 December 3 1, FORTHEYEAR Net income Net income per share Book value per share Cash dividends per share AT YEAR END Assets Deposits Loans, net Securities Shareholders' equit)^ NETINCOME in millions $25.6 $ 24,769 $ 25,580 $ 23,539 1.89 21.87 .89 1.94 21.49 .87 1.77 20.44 .85 $2,302,675 $2,231,562 $2,175,998 1,563,498 1,471,327 596,915 286,844 1,529,721 1,443,067 558,020 281,692 1,502,682 1,392,755 530,400 271,260 DEPOSITS in millions $2000 • $ 1 , 5 0 2 .7 ^ '" * ' ' ' ' ' •' 2006 2007 2008 2006 2007 2008 NET LOANS in millions SHAREHOLDERS' EQUITIT in millions Sl,443.1-.-».™«i5ItL 2006 2007 2008 2006 2007 2008 FIRST F I N A N C I AL C O R P O R A T I ON Letter to Shareholders To our Shareholders and Friends: It will be decades before our memories fade of 2008 and ofthe collapse, or near collapse, of many ofthe giants ofthe fmancial world. The news media are dominated by stories of bailouts and economic stimulus packages. Locally, businesses are failing and we all know someone who has lost his or her job. Our industry has been hard hit during the past year as fmancial institutions, one after another, have informed their constituents of less than satisfactory performance, which in some instances threatens their very essence and brings their long-term viability into question. For many companies, the only answer has been to par ticipate in the federal bailout program. We have no intention of criticizing the companies that elected to participate because we have no particular knowledge oftheir practices or circumstances. We are happy, however, to report to our shareholders that because ofour strong capital position and consistent perfor mance. First Financial Corporation did not apply for, nor did it accept, any federal bailout funds. National and International Recognition During the past year. First Financial Bank received several recognitions of Donald E. Smith Presicient and Chairman which we are extremely proud. The Banker, a London-based banking industry publication, again named First Financial Bank one the top 1,000 banks in the world and top 200 banks in the United States based on capital levels, return on assets, real profits growth and other performance factors. Bauer Financial Inc., a leading independent bank rating firm, honored First Financial Bank with its prestigious 5-Star Rating and TheStreet.com awarded us its highest "A" rating, placing First Financial in the top four percent of banks in America based on financial strength and stability. We appreciate these recognitions as they are tributes to our employees and their dedication to providing value to you, our shareholders. Financial Accomplishments The news of reckless and greedy behavior on Wall Street may lead some to believe poor performance was the norm for financial institutions in 2008. We are pleased to report otherwise. Our talented employees, commitment to customer relationships, dedication to outstanding service, quality products and unparalleled delivery system paved the way for a successful 2008. Our financial highlights for the year include: • Net income of $24.8 million; • Record net interest income of $81.5 million, up 8.96% over 2007; • Record net interest margin of 4.06%, up from 3.57% in 2007; • A continued strong capital position; • A 3.2% increase in total assets to $2.3 billion; • A 2.2% increase in total deposits to $1.6 billion; • Increased annual dividends for the 20th consecutive year. First Class Customer Service We remain committed to our customers and to adding value to their experience. During 2008, we expanded "First Class Service," a corporate-wide commitment to provide superior service that cannot be easily duplicated by our competition. We also instituted a monthly branch shopping program utilizing actual customers. We know great service is determined individually by customers, one at a time, so there is no better way to evaluate our service than by using our own customers. We are happy to report, based on these evaluations, each ofour branches exceeded customer satisfaction goals for 2008. 2 0 08 A N N U AL REPORT » ^ ^ ^ ^ _ . ^ ^ ^_ ^ ^ ^ ^K j B H ^ ^ ^y ^ ^ ^^ j ^ H ^^ ^ a ^^ Convenience is important to our customers. To further our commitment to being "Always Close to Fiome," we broke ground in February 2009 for our 49th banking center at Sycamore Terrace on Terre Haute's east side. This branch, together with our new drive- through ATM in Riley, Ind., allows us to better serve this developing retail center and south- eastern Vigo County. In 2008, we also introduced mobile banking, an extension ofour internet banking product. This service, valued by many ofour younger customers, allows them to manage accounts, transfer funds and pay bills conveniently using their cell phones. Enhancing the Communities We Serve During the year, hundreds of our employees contributed thousands of hours to civic and charitable causes. As an engaged community partner, to assist civic and charitable organiza tions in their fundraising efforts, the Corporation financially supported a variety of pro grams and events that make a substantial difference in the regions we serve. Following are several we would like to highlight: • For the past 32 years. First Financial Bank has invited local not-for-profit organizations Norman L. Lowery CEO and Vice Chairman to decorate our 12 Vigo County banking centers to celebrate "Christmas Around the World." Each organization receives a cash award for its creative efforts. First originated and continues to sponsor "Christmas in the Park," in which area organizations earn cash prizes for decorating the picnic shelters in Terre Haute's Deming Park. Now in its 23rd year, the event has become a popular holi day tradition; more than 100,000 people drive through the park each December to see the lighted displays. • First Financial Bank has sponsored the Vigo County School Corporation's Teacher ofthe Year Award for 25 years. This award recognizes a local educator for exceptional teaching ability. The recipient is presented with a plaque, a Waterford mantle clock and a cash award from First Financial Bank during a program at his or her school. First Financial Corporation also underwrites the Vigo County School Corporation's annual Academic Excellence Awards, which honor middle and high school students who have the highest grade-point average in their grade level. • First Financial Bank is a key sponsor for the Dancing with the Stars competition, a major fundraiser for C H A N C ES for Indiana Youth. Each year thousands of young people in our communities learn about substance abuse prevention through CFLANCES programs and services such as summer day camps and after school care. The organization has been recognized locally and nationally for its efforts in tobacco, alcohol and drug abuse prevention for children and teens. 175 Years of Continuous Senice In 2009, First Financial Bank observes its 175th anniversary. It is a significant milestone not only for our bank and our employees, but also for the communities we serve, where we have forged enduring partnerships that make them better places to live and work. As we celebrate our history, we renew our commitment to the values that sustained us and that still provide the foundation for fiature achievements—a strong focus on customer service and a clear vision to help people and businesses reach their fmancial goals. Our longevity and success cannot and should not be taken for granted. There are many we must thank for our outstanding performance. First, we would like to thank our customers for their loyalty and trust. Without them, we have no purpose. We would also like to thank our Directors for their vision and support. A special thanks goes to our dedicated employees, whose commitment and hard work are the bedrock ofour success. Finally, our thanks goes to you, our shareholders, for your continued support and confidence. ij^jt*^ ^ -^ Indianapolis, Indiana March 5, 2009 FIRST F I N A N C I AL CORPORATION Management's Report on Internal Control Over Financial Reporting The management of First Financial Corporation (the "Corporation") has prepared and is responsible for the preparation and accuracy ofthe consolidated financial statements and related financial information included in the Annual Report. The management of the Corporation is responsible for establishing and maintaining adequate internal contioi over finan cial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Corporation's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted account ing principles. The Corporation's internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of lecoids that, in leasonable detail, accuiately and fairly reflect the transactions and dispositions of the assets of the Corporation; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accoidance with generally accepted accounting principles, and that receipts and expenditures ofthe Corporation are being made only in accordance with authoiizations of management and directors ofthe Corporation; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition ofthe Corporation's assets that could have a material effect on the fmancial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections ofany evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because ofchanges in conditions, or that the degree of compliance with the policies oi ptocedures may deteriorate. Management assessed the Corporation's system of internal control over financial reporting as of Decembei 3 1, 2008, in relation to criteria foi effective internal control over financial reporting as described in "Internal Control-Integrated Framework," issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assess ment, management concluded that, as ofDecember 3 1, 2008, its system of internal control over financial reporting is effec tive and meets the criteria ofthe "Internal Control-Integrated Framework." Crowe Horwath LLP, independent tegisteted public accounting firm, has issued a report dated March 5, 2009 on the Corporation's internal control over financial reporting. Management's Discussion and Analysis Management's discussion and analysis reviews the financial condition of First Financial Corporation at December 31, 2008 and 2007, and the results ofits opeiations fot the three yeais ended December 31, 2008. Where appropriate, factors that may affect future financial performance are also discussed. The discussion should be read in conjunction with the accompanying consolidated financial statements, related footnotes and selected financial data. A cautionary note about forward-looking statements: In its oral and written communication. First Financial Corporation from time to time includes forward-looking statements, within the meaning ofthe Private Securities Litigation Reform Act of 1995. Such forward-looking statements can include statements about estimated cost savings, plans and objectives foi futuie opera tions and expectations about performance, as well as economic and market conditions and trends. They often can be identified by the use of words such as "expect," "may," "could," "intend," "project," "estimate," "believe" or "anticipate." First Financial Corporation may include forward-looking statements in filings with the Securities and Exchange Commission, in other written materials such as this Annual Report and in oral statements made by senioi management to analysts, investois, representatives of the media and otheis. It is intended that these fotward-looking statements speak only as of the date they are made, and First Financial Corporation undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the forward-looking statement is made or to reflect the occuirence of unanticipated events. By theit nature, foiwaid-looking statements are based on assumptions and are subject to risks, uncertainties and othei factois. Actual tesults may diffei mateiially from those contained in the foiward-looking statement. The discussion in this "Management's Discussion and Analysis of Results of Operations and Financial Condition" lists some of the factors which could cause actual results to vary materially from those in any forward-looking statements. Other uncertainties which could affect Fiist Financial Coiporation's futuie peiformance include the effects of competition, technological changes and regulatoty developments; changes in fiscal, monetary and tax policies; market, economic, operational, liquidity, credit and interest rate risks associated with First Financial Coiporation's business; inflation; competition in the financial services industiy; changes in general economic conditions, either nationally oi regionally, resulting in, among othei things, credit quality deterioration; and changes in securities markets. Investors should consider these risks, uncertainties and other factors in addition to those men tioned by First Financial Corporation in its other filings from time to time when considering any forward-looking statement. 9 Management's Discussion and Analysis 2 0 08 A N N U AL REPORT Fiist Financial Corporation (the Corporation) is a financial services company. The Corporation, which is headquartered in Terre Haute, Ind., offers a wide variety of financial services including commercial, mortgage and consumer lending, lease financing, trust account services and depositor services through its three subsidiaries. At the close of business in 2008 the Corporation and its subsidiaries had 766 full-time equivalent employees. First Financial Bank is the largest bank in Vigo County, Ind. It operates 12 full-service banking branches within the county; five in Clay County, Ind.; one in Greene County, Ind.; three in Knox County, Ind.; five in Parke County, Ind.; one in Putnam County, Ind., five in Sullivan County, Ind.; four in VermiUion County, Ind.; one in Clark County, 111.; one in Coles County, 111.; three in Crawford County, 111.; one in Jasper County, 111.; two in Lawrence County, IU.; rwo in Richland County, IU.; one in Vermilion County, IU.; and one in Wayne County, 111. In addition to its branches, it has a main office in downtown Terre Haute and a 50,000-square-foot commercial building on South Third Street in Terre Haute, which serves as the Corporation's operations center and provides additional office space. Morris Plan has one office and is located in Vigo County. First Financial Bank and Morris Plan face competition from other financial institutions. These competitors consist of com mercial banks, a mutual savings bank and other financial institutions, including consumer fmance companies, insurance companies, brokerage firms and credit unions. The Corporation's business activities are centered in west-central Indiana and east-central Illinois. The Corporation has no for eign activities othei than periodically investing available funds in time deposits held in foreign branches of domestic banks. Forrest Sherer Inc. is a premier regional supplier of insurance, surety and other financial products. The Forrest Sherer brand is well recognized in the Midwest, with more than 55 professionals and over 87 years of successfiil service to both businesses and households in their market area. The agency has representation agreements with more than 40 regional and national insuieis to market their products of pioperty and casualty insurance, surety bonds, employee benefit plans, life insurance and annuities. CRITICAL ACCOUNTING POUCIES AND ESTIMATES The Management's Discussion and Analysis of Financial Condition and Results of Operations, as well as disclosures found else where in this report are based upon First Financial Corporation's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Corporation to make estimates and judgments that affect the reported amounts of assets, liabilities, rev enues, and expenses. Material estimates that are particularly susceptible to significant change in the near term relate to the deter mination of the allowance for loan losses, securities valuation and goodwill. Actual results could differ from those estimates. Allowance for loan losses. The allowance for loan losses represents management's estimate of losses inherent in the existing loan portfolio. The allowance fot loan losses is incieased by the piovision fot loan losses chaiged to expense and reduced by loans charged off net ofrecoveries. The allowance for loan losses is determined based on management's assessment of several factors: reviews and evaluations of specific loans, changes in the nature and volume of the loan portfolio, current economic conditions and the related impact on segments of the loan portfolio, historical loan loss experience and the level of classified and nonperforming loans. Loans are considered impaired if based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest according to the contractual terms of the loan agreement. When a loan is deemed impaired, impairment is measured by using the fair value of underlying collateral, the present value of the future cash flows discounted at the effective interest rate stipulated in the loan agreement, or the estimated market value of the loan. In measuring the fair value of the collateral, management uses assumptions (e.g., discount late) and methodologies (e.g., comparison to the recent selling price of similar assets) consistent with those that would be utilized by unrelated third parties. Changes in the financial condition oflndividual boiioweis, economic conditions, histoiical loss expeiience, oi the condition of the various markets in which collateral may be sold may affect the required level of the allowance for loan losses and the associated provision for loan losses. Should cash flow assumptions or market conditions change, a different amount may be recorded for the allowance for loan losses and the associated provision for loan losses. Securities valuation. Securities available-for-sale are carried at fair value, with unrealized holding gains and losses reported separately in accumulated othet comprehensive income (loss), net of tax. The Corporation obtains market values from a third party on a monthly basis in order to adjust the securities to fail value. Equity securities that do not have readily deter minable fair values are carried at cost. Additionally, all securities are required to be written down to fair value when a decline in fair value is other than temporary; therefore, future changes in the fair value of securities could have a significant impact on the Corporation's operating results. In deteimining whether a market value decline is other than temporary, management considers the reason for the decline, the extent of the decline and the duration of the decline. Changes in credit latings, financial condition of underlying debtors, default experience and market liquidity aflfect the con clusions on whether securities are other-than-temporarily impaired. Additional losses may be recorded through earnings for other than temporary impairment, should there be an adverse change in the expected cash flows foi these investments. Results ofoperations — Summary for 2008 FIRST F I N A N C I AL CORPORATION GoodwUl. The canying value of goodwill requites management to use estimates and assumptions about the fait value of the repotting unit compared to its book value. An impairment analysis is prepared on an annual basis. Fair values ofthe reporting units are determined by an analysis which considers cash flows streams, profitability and estimated maiket val ues ofthe reporting unit. The majority ofthe Corporation's goodwill is recorded at Foiest Sheier, Inc. Management believes the accounting estimates related to the allowance for loan losses, valuation of investment securities and the valuation of goodwill ate "critical accounting estimates" because: (1) the estimates are highly susceptible to change from period to period because they require management to make assumptions concerning, among other factors, the changes in the types and volumes ofthe poitfolios, valuation assumptions, and economic conditions, and (2) the impact of lecognizing an impairment or loan loss could have a material effect on the Corporation's assets reported on the balance sheet as well as net income. Net income foi 2008 was $24.8 million, or $1.89 per share. This represents a 3.2% deciease in net income and a 2.6% decrease in earnings per share, compared to 2007. Return on assets at Decembei 3 1, 2008 decreased 6.0% to 1.09% com- paied to 1.16% at Decembei 31, 2007. NET INTEREST INCOME T he piincipal souice of the Coiporation's earnings is net interest income, which represents the difference between interest earned on loans and investments and the interest cost associated with deposits and other sources of funding. Net interest income was increased in 2008 to $81.5 million compared to $74.8 million in 2007. Total average inter est-earning assets grew to $2.14 billion in 2008 from $2.06 billion in 2007. The tax-equivalent yield on these assets decreased to 6 . 5 1% in 2008 from 6.98% in 2007. Total aveiage interest-bearing liabUities increased to $1.71 bUlion in 2008 fiom $1.65 biUion in 2007. T he average cost ofthese interest-bearing liabUities decieased to 3.06% in 2008 fiom 3 . 8 1% in 2007. The net interest margin increased from 3.92% in 2007 to 4.06% in 2008. This increase is primarily the result o f t he decreased costs of funding provided by interest-bearing liabilities. Earning asset yields decreased 47 basis points while the rate on interest-bearing liabilities decreased by 75 basis points. The following table sets forth the components of net interest income due to changes in volume and late. T he table information compaies 2008 to 2007 and 2007 to 2006. (Dollar amounts in thousands) Interest earned on interest-earning assets: Loans () (2) Taxable investment securities Tax-exempt investment securities () Federal funds sold Total interest income Interest paid on interest-bearing liabilities: Transaction accounts Time deposits Short-term borrowings Other borrowings Total interest expense Net interest income 2008 Compared to 2007 Increase (Decrease) Due to 2007 Compared to 2006 Increase (Decrease) Due to Volume Rate Volume/ Rate Total Volume Rate Volume/ Rate Total $3,218 $(8,261) $ (251) $ (5,294) $ 1,808 $ 3,459 $ 62 $ 5,329 2,172 (379) (35) 1,758 698 940 30 1,668 (244) 259 5,405 79 (389) (8,950) (1) (131) (418) (166) (261) (3,963) 870 (70) 3,306 (290) 54 4,163 (20) (5) 67 560 (21) 7,536 1,470 (1,013) 261 555 1,273 $4,132 (3,981) (5,468) (692) (1,189) (11,330) $ 2,380 (463) 189 (112) (34) (420) 2 (2,974) (6,292) (543) (668) (10,477) $ 6,514 $ (55) (82) 775 42 680 S 2,626 1,853 2,980 44 254 5,131 $ (968) $ (9) (9) 46 1 29 38 1,789 2,889 865 297 5,840 $ 1,696 (') For purposes ofthese 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%. Results of Operations — Summary for 2008 2 0 08 A N N U AL REPORT PROVISION FOR LOAN LOSSES The provision for loan losses charged to expense is based upon credit loss experience and the tesults of a detailed analysis estimating an apptopriate and adequate allowance for loan losses. The analysis includes the evaluation of impaired loans as prescribed under Statement ofFinancial Accounting Standards (SFAS) Nos. 114 and 118, pooled loans as prescribed under SFAS No. 5, and economic and other risk factors as outlined in various Joint Interagency Statements issued by the bank regulatory agencies. For the year ended December 31, 2008, the provision for loan losses was $7.9 miUion, an increase of $1.3 miUion, or 19.4%, compared to 2007. The increase was the result of sev eral components related to the analysis ofthe Corporation's Allowance for Loan and Lease Losses, including nonper forming and impaired loan ttends. Net charge-offs for 2008 were $6.9 miUion as compared to $7.4 million for 2007 and $6.8 million for 2006. Delinquent loans as a percentage oftotal outstanding loans increased to 2.4% at December 31, 2008 compared to 2.1% at December 31, 2007. Non-accrual loans increased 56.6% to $12.5 miUion at December 31, 2008 from $8.0 mUUon at Decembei 31, 2007. At Decembei 31, 2008, the resulting allowance foi loan losses was $16.3 mU lion OI 1.12% oftotal loans, net of unearned income. A year earlier the allowance was $15.4 miUion or 1.07% of total loans. NON-INTEREST INCOME Non-interest income of $25.4 miUion decreased $6.1 milUon from the $31.5 miUion earned in 2007. This decrease was directly related to the other-than-temporary impairment charge of $6.1 million recognized in the third quarter. Note 4 to the financial statements included in this report provides information about our processes for determining other-than-temporary impairment for 2008. There was no othei-than-tempoiary impairment recognized during 2007. NON-INTEREST EXPENSES Non-inteiest expenses incieased 2.6% to $66.4 miUion foi 2008 compared to $64.7 miUion foi 2007. Salaries and employee benefits incieased $1.9 million due primarily to increased benefit costs. Occupancy and equipment expenses were relatively unchanged. INCOME TAXES The Corporation's federal income tax provision was $7.8 miUion in 2008 compared to a provision of $9.4 mUlion in 2007. The overall effective tax rate in 2008 of 24.0% compares to a 2007 effective late of 26.8%. The Coipoiation had increased amounts of tax-exempt income relative to the total income in 2008 compaied to 2007. COMPARISON OF 2 0 07 TO 2 0 06 Net income fot 2007 was $25.6 mUUon oi $1.94 pet shaie compaied to $23.5 miUion in 2006 or $1.77 per share. This increased income was the result of improved net interest income combined with a reduction in the provision for loan losses. Net interest income was increased in 2007 to $74.8 million compared to $73.7 million in 2006. Total average inter est-earning assets grew to $2.06 billion in 2007 from $2.01 biUion in 2006. The tax-equivalent yield on these assets increased to 6.98% in 2007 from 6.77% in 2006. Total average inteiest-bearing liabUities incieased to $1.65 billion in 2007 from $1.64 billion in 2006. The average cost ofthese interest-bearing liabilities increased to 3.81% in 2007 from 3.48% in 2006. The net interest maigin decieased slightly from 3.93% in 2006 to 3.92% in 2007. This deciease is primarily the result ofthe increased costs of funding provided by interest-bearing liabilities. Earning asset yields increased 21 basis points while the rate on intetest-beating liabilities increased by 33 basis points.Non-interest income was improved by 9% while non-interest expense was held at the same level as 2006. Total average interest-earning assets increased in 2007 compared to 2006. The tax equivalent net interest margin was stable at 3.92% in 2007 from 3.93% in 2006. The provision for loan losses decreased $403 thousand from $7.0 miUion in 2006 to $6.6 miUion in 2007, and net charge-offs increased $542 thousand from $6.9 million in 2006 to $7.4 million in 2007. Delinquent loans as a percentage oftotal outstanding loans declined to 2 . 1% at December 31, 2007 compared to 2.3% at December 31, 2006. Non-accrual loans decreased 19.2% to $8.0 million at Decembef 31, 2007 from $9.9 million at December 31, 2006. Net non-interest income and expense declined $2.6 million from 2006 to 2007. Non-interest expenses increased just $70 thousand while non-interest income incieased $2.7 miUion. The inciease in non-interest income resulted from increased gains on sales of investment securities and loans in 2007. The pfovision for income taxes increased $2.0 million from 2006 to 2007, increasing the efifective tax rate ffom 23.8% in 2006 to 26.8% in 2007. Financial Condition — Summary FIRST F I N A N C I AL CORPORATION The Corporation's total assets increased 3.2% or $71.1 million at December 31, 2008, from a year earlier. AvaUable-for-sale securities increased $38.9 mUlion at December 31, 2008, from the previous year. Loans, net of unearned income, increased by $29.5 mUlion, to $1.46 bUlion. Deposits increased $33.8 miUion while borrow ings increased by $38.0 miUion. Total shareholders' equity increased $5.2 million to $286.8 miUion at Decembef 31, 2008. Net income was par tially offset by highef dividends and the continued repurchase of corporate stock. The Corporation decreased purchases of treasury stock in 2008, acquiring 52,744 shares at a cost of $1.5 mUlion compared to 174,962 shares during 2007 at a cost of $5.2 million. There were also 33,015 shares from the treasury with a value of $1.28 million that were contributed to the ESOP plan. Declines in the fair values of certain investment securi ties decreased other comprehensive income as the Corporation recorded a net unrealized loss on available-for- sale securities of $8.3 mUlion. Other comprehensive income also included an increase of $511 thousand related to the change in the unrealized gain on post-retirement benefits in accordance with SFAS No. 158. Following is an analysis of the components of the Corporation's balance sheet. SECURITIES The Corporation's investment strategy seeks ro maximize income from the investment poftfolio while using it as a risk management tool and ensufing safety of principal and capital. During 2008 the portfolio's balance increased by 6.97%. During 2008 the Federal Reserve decreased the fed funds tate by 4.00% to 0.25%. The average life ofthe portfolio declined from 4.08 years in 2007 to 3.84 years in 2008. The portfolio structure wUl continue to provide cash flows to be reinvested during 2009. Year-end securities maturity schedules were comprised of the following: 1 Year and Less Balance Rate 1 to 5 Years Balance Rate 5 to 10 Years Balance Rate Over 10 Years Rate Balance 2008 Totai (Dollar amounts in thousands) U.S. government sponsored entity mortgage-backed securities and agencies(i) Collateralized mortage obligations(i ) States and political subdivisions Corporate obligations 13,154 — S 937 4.34% - 6.85 Total Equities TOTAL 14,091 6.68 — — $14,091 $28,467 - 37,134 6,394 71,995 — $71,995 4.32% - 7.51 5.60 7.29 $ 88,761 4.69% 8 11.37 40,515 6.83 — — 5.77 — — 129,284 $129,284 $247,466 70,219 53,038 4,239 374,962 6,583 $381,545 5.54% 6.15 6.27 7.74 5.40 ^ $365,631 70,227 143,841 10,633 590,332 6,583 $596,915 (1) Distribution of maturities is based on the estimated average life of the asset. (Dollar amounts in thousands) U.S. government sponsored entity mortgage-backed securities and agencies(i) Collateralized mortgage obligations(0 States and political subdivisions Corporate obligations Total Equities TOTAL 1 Year and Less Balance Rate 1 to 5 Years Balance Rate 5 to 10 Years Balance Rate Over 10 Years Rate Balance 2007 Total $ 212 - 6,933 7,048 14,193 - ;i4,193 5.08% - 5.49 6.40 5.93 - $ 1,366 4.60% 4 11.50 7.37 _ 7.29 - 43,192 _ 44,562 - $44,562 $ 65,393 27 49,290 - 114,710 - $114,710 4.44% 6.94 7.54 5.77 - $222,732 77,144 47,100 29,795 376,771 7,784 $384,555 5.26% 5.27 6.19 5.54 5.40 - $289,703 77,175 146,515 36,843 550,236 7,784 $558,020 (0 Distribution of maturities is based on the estimated average life ofthe asset. 2 0 08 A N N U AL REPORT Financial Condition — Summary LOAN PORTFOLIO Loans outstanding by major category as ofDecember 31 for each ofthe last five yeais and the maturities at year- end 2008 are set forth in the following analyses. (Dollar amounts in thousands) Loan Category Commercial, financial and agricultural Real estate - construction Real estate - mortgage Consumer Lease financing TOTAL 2008 2007 2006 2005 2004 $ 499,636 26,137 628,027 302,977 1,878 $1,458,655 $ 461,086 29,637 673,355 262,858 2,275 $1,429,211 $ 407,995 33,336 691,989 257,065 2,604 $1,392,989 $ 382,214 $ 401,724 32,810 753,826 272,261 3,658 $1,396,047 $1,464,279 31,918 707,008 272,062 2,845 Credit card loans held-for-sale $ 12,800 $ 14,068 - - - (Dollar amounts in thousands) Maturity Distribution Commercial, financial and agricultural Real estate - construction TOTAL Real estate - mortgage Consumer Lease financing TOTAL Credit card loans held-for-sale Loans maturing after one year with: Fixed interest rates Variable interest rates TOTAL Within One Year After One But Within Five Years After Five Years Total $ 234,037 8,925 $ 242,962 $ 219,900 9,471 $ 229,371 $ $ $ 45,699 7,741 53,440 499,636 26,137 525,773 628,027 302,977 1,878 $1,458,655 1 12,800 $ 80,757 $ 38,737 14,703 148,614 $ 229,371 $ 53,440 FIRST F I N A N C I AL CORPORATION Financial Condition — Summary ALLOWANCE FOR LOAN LOSSES The activity in the Corporation's allowance for loan losses is shown in the following analysis: (Dollar amounts in thousands) Amount ofloans outstanding at December 31, 2008 2007 2006 2005 2004 $1,458,655 $1,429,211 $1,392,989 $1,396,047 $1,464,279 Average amount of loans by year $1,451,911 $1,409,051 $1,384,138 $1,441,247 $1,452,572 Allowance for loan losses at beginning ofyear Loans charged off: Commercial, financial and agricultural Real estate - mortgage Consumer Leasing Total loans charged off Recoveries of loans previously charged off: Commercial, financial and agricultural Real estate - mortgage Consume! Leasing Total recoveries Net loans chaiged off Provision charged to expense Balance at end ofyear Ratio of net charge-offs during period to average loans outstanding $ 15,351 $ 16,169 $ 16,042 $ 19,918 $ 21,239 2,406 1,274 5,914 9,594 704 101 1,863 2,668 6,926 7,855 3,433 1,026 5,712 5 10,176 389 139 2,250 2,778 7,398 6,580 2,066 1,617 6,826 6,093 2,590 8,809 10,509 17,492 1,262 187 2,204 3,653 6,856 6,983 284 343 1,291 1,918 15,574 11,698 16,042 1.08% 4,080 623 6,680 1 11,384 452 37 1,281 1 1,771 9,613 8,292 19,918 .66% $ 16,280 $ 15,351 t. 16,169 $ .48% .53% .50% The allowance is maintained at an amount management believes sufficient to absorb probable incurred losses in the loan portfolio. Monitoring loan quality and maintaining an adequate allowance is an ongoing process overseen by senior management and the loan leview function. On at least a quartetly basis, a foimal analysis of the adequacy of the allowance is prepared and reviewed by management and the Board of Directors. This analysis serves as a point in time assessment of the level of the allowance and serves as a basis for provisions for loan losses. The loan quality monitoiing piocess includes assigning loan grades and the use of a watch list to identify loans of concern. The analysis of the allowance for loan losses includes the allocation of specific amounts of the allowance to individ ual pioblem loans, generally based on an analysis of the collateral securing those loans. Portions of the allowance are also allocated to loan portfolios, based upon a variety of factors including histoiical loss experience, trends in the type and volume of the loan portfolios, trends in delinquent and non-performing loans, and economic trends affecting our market. These components are added together and compared to the balance of our allowance at the evaluation date. The following table presents the allocation of the allowance to the loan poitfolios at yeai-end. ^^ Financial Condition — Summary 2 0 08 A N N U AL REPORT (Dollar amounts in thousands) Commeicial, financial and agiicultuial Real estate - moitgage Consume! Years Ended December 3 1, 2008 $10,181 1,517 4,582 2007 $10,090 1,245 4,016 2006 $ 9,043 1,364 5,762 2005 $ 8,148 867 7,027 2004 $11,840 850 7,228 TOTAL ALLOWANCE FOR LOAN LOSSES $16,280 $15,351 $16,169 $16,042 $19,918 NONPERFORMING LOANS Management monitois the components and status of nonpeiforming loans as a part of the evaluation procedures used in determining the adequacy of the allowance for loan losses. It is the Corporation's policy to discontinue the accrual of interest on loans where, in management's opinion, seiious doubt exists as to collectibility. The amounts shown below lepiesent non-accrual loans, loans which have been restiuctuied to piovide for a reduction or deferral of interest or principal because of deterioration in the financial condition of the boiiowei and those loans which are past due more than 90 days where the Corporation continues to accrue interest. (Dollar amounts in thousands) Non-accfual loans Restiuctuied loans Acciuing loans past due ovei 90 days 2008 $12,486 98 3,624 $16,208 2007 $ 7,971 50 4,462 $12,483 2006 $ 9,893 52 4,691 $14,636 2005 $ 8,464 57 6,354 $14,875 2004 $19,862 430 7,813 $28,105 The ratio ofthe allowance foi loan losses as a peicentage of nonpeiforming loans was 100% at December 31, 2008, compared to 123% in 2007. The following loan categories comprise significant components of the nonperforming loans at December 31, 2008 and 2007: (Dollar amounts in thousands) Non-accrual loans: 1-4 family residential Commeicial loans Consumer loans Past due 90 days or more: I -4 family residential Commercial loans Consumer loans 2008 2007 $ 1,835 9,210 1,441 $12,486 $ 1,495 1,582 54Z $ 3,624 14% 74 12 100% 4 1% 44 15 100% $ 2,574 3,938 1,459 $ 7,971 $ 1,230 2,795 437 $ 4,462 32% 50 18 100% 28% 62 10 100% FiRST F I N A N C I AL CORPORATION Financial Condition — Summary DEPOSITS The information below presents the average amount of deposits and rates paid on those deposits for 2008, 2007 and 2006. (Dollar amounts in thousands) Amount Rate Amount Rate Amount Rate 2008 2007 2006 Non-interest-bearing demand deposits Inteiest-beaiing demand deposits Savings deposits Time deposits: $100,000 or more Other time deposits TOTAL $ 236,628 247,017 433,179 183,664 459,916 $1,560,404 1.11% 1.60% 3.67% 3.54% $ 226,822 198,368 410,919 189,501 477,114 $1,502,724 0.94% 2.62% 4.66% 4.30% $ 206,839 201,928 410,458 188,572 480,116 $1,487,913 1.14% 1.87% 4.27% 4.01% The maturities of certificates ofdeposit of $100 thousand or more outstanding at December 31, 2008, are summa rized as follows: 3 months or less Over 3 through 6 months Over 6 through 12 months Over 12 months TOTAL $ 50,721 56,779 53,173 50,434 $211,107 2 0 08 A N N U AL REPORT Financial Condition — Summary OTHER BORROWINGS Advances from the Federal Home Loan Bank increased to $378.6 million in 2008 compared to $334.7 million in 2007. The Asset/Liability Committee leviews these investments and funding souices and considers the related strate gies on a weekly basis. See Interest Rate Sensitivity and Liquidity below for more information. CAPITAL RESOURCES Bank regulatory agencies have established capital adequacy standards which are used extensively in their monitor ing and control of the industry. These standards relate capital to level of risk by assigning different weightings to assets and ceitain off-balance-sheet activity. As shown in the footnote to the consolidated financial statements ("Regulatoiy Matteis"), the Coiporation's capital exceeds the requirements to be consideied well capitalized at December 31, 2008. First Financial Coipoiation's objective continues to be to maintain adequate capital to meiit the confidence of its customers and shaieholdeis. To wairant this confidence, the Corporation's management maintains a capital posi tion which they believe is sufficient to absorb unforeseen financial shocks without unnecessarily restricting divi dends to its shaieholdeis. The Coiporation's dividend payout ratio for 2008 and 2007 was 47.1% and 44.8%, respectively. The Corporation expects to continue its policy of paying regular cash dividends, subject to future earnings and regulatoiy restrictions and capital requirements. INTEREST RATE SENSITIVITY AND LIQUIDITY First Financial Corporation has established lisk measuies, limits and policy guidelines for managing interest late risk and liquidiry. Responsibility for management of these functions lesides with the Asset Liability Committee. The pri mary goal of the Asset Liability Committee is to maximize net interest income within the interest rate risk limits appioved by the Board of Directors. Interest Rate Risk: Management considers interest rate risk to be the Corporation's most significant market risk. Interest rate risk is the exposure to changes in net interest income as a lesult of changes in inteiest fates. Consistency in the Cot potation's net interest income is largely dependent on the effective management of this risk. The Asset Liability position is measufed using sophisticated risk management tools, including earnings simulation and market value of equity sensitivity analysis. These tools allow management to quantify and monitof both shoft- and long-term exposure to interest rate fisk. Simulation modeling measures the effects of changes in interest fates, changes in the shape of the yield curve and the effects of embedded options on net interest income. This measure projects earnings in the various environments over the next three years. It is important to note that measures of interest rate risk have limitations and are dependent on various assumptions. These assumptions afe inherently unceftain and, as a result, the model cannot precisely predict the impact of interest rate fluctuations on net interest income. Actual tesults will differ from simulated results due to timing, frequency and amount of interest rate changes as well as overall market conditions. The Committee has performed a thorough analysis of these assump tions and believes them to be valid and theoretically sound. These assumptions are continuously monitored for behavioral changes. The Corporation from time to time utilizes derivatives to manage interest rate risk. Management continuously eval uates the merits of such interest rate risk products but does not anticipate the use of such products to become a major part ofthe Corporation's risk management strategy. The table on the following page shows the Corporation's estimated sensitivity profile as ofDecember 31, 2008. The change in interest rates assumes a parallel shift in interest rates of 100 and 200 basis points. Given a 100 basis point incfease in rates, net interest income would increase 0.15% over the next 12 months and increase 1.79% over the following 12 months. Given a 100 basis point decrease in rates, net interest income would increase 3.53% over the next 12 months and increase 3.69% over the following 12 months. These estimates assume all rate changes occur overnight and management takes no action as a result of this change. Financial Condition — Summary FIRST F I N A N C I AL C O R P O R A T I ON Basis Point Interest Rate Change D o wn 200 D o wn 100 Up 100 Up 200 Percentage Change in Net Interest Income 36 months 24 months 3.74% 3.68% 3.69 3.75 3.66 1.79 5.94 1.99 12 months 3.53% 3.53 .15 -1.13 Typical rate shock analysis does not reflect management's ability to react and thereby reduce the effects of rate changes, and represents a worst-case scenario. Liquidity Risk: Liquidity is measufed by the bank's ability to raise funds to meet the obligations of its customers, including deposit withdrawals and credit needs. This is accomplished pfimarily by maintaining sufficient liquid assets in the form ofinvestment securities and core deposits. T he Cofporation has $14.1 million of investments that mature throughout the coming 12 m o n t h s. T he Corporation also anticipates $180.0 miUion ofprincipal payments from mortgage-backed secutities. Given the cufrent rate environment, the Corporation anticipates $25.6 mUlion in securities to be called within the next 12 m o n t h s. CONTRACTUAL OBLIGATIONS, COMMITMENTS, CONTINGENT LIABILITIES AND OFF-BALANCE SHEET ARRANGEMENTS T he Corporation has various financial obligations, including contractual obligations and commitments, that may require future cash payments. Contractual Obligations: T he following table pfesents, as ofDecember 3 1, 2008, significant fixed and determinable contractual obligations to third parties by payment date. Furthet discussion of the nature of each obligation is included in the referenced note to the consolidated financial statements. (Dollar amounts in thousands) Deposits without a stated maturity Consumer certificates of deposit Short-term borrowings O t h er borrowings Payments Due In Note Reference One Year or Less One to Three Years Three to Five Years Over Five Years $927,151 446,158 21,500 97,416 $ $ $ 138,751 - 204,478 51,330 - 76,187 108 - 7,072 10 11 Total $927,151 636,347 21,500 385,153 C o m m i t m e n t s: T he foUowing table details the a m o u nt and expected maturities of significant commitments as of December 3 finan- December 3 1, 2 0 0 8. Further discussion ofthese commitments is included in N o te 13 to the consolidated cial statements (Dollar amounts in thousands) C o m m i t m e n ts to extend credit: Unused loan commitments Commercial letters ofcredit Total Amount Committed One Year or Less Over One Year $302,141 16,230 $194,088 11,262 $108,053 4,968 Commitments to extend credit, including loan commitments, standby and commercial letters of credir do not neces sarily represenr future cash requirements, in that these commitments often expire without being drawn upon. OUTLOOK T he Corporation's primary market is west-central Indiana and east-central Illinois. T he market is pfimatily driven by the retail, higher education and health care industries. Typically, this mafket does not expand of contract at rates that are experienced by b o th the state and national economies. According to the National Bufeau of Economic Research, the nation entefed an economic recession in December 2007. It is anticipated that the econ omy will continue to struggle well into 2009 with some improvement in the latter half of the yean Contraction in both laboi and retail sales will affect the local market as well. Therefore, the Corporation anticipates limited growth opportunities in 2009. Consolidated Balance Sheet — Average Balances and Interest Rates 2 0 08 A N N U AL REPORT 2008 December 3 1, 2007 2006 Average Balance Interest Yield/ Rate Average Balance Interest Yield/ Rate Average Balance Interest Yield/ Rate (Dollar amounts in thousands) ASSETS Interest-earning assets: Loans (1) (2) Taxable investment securities Tax-exempt investments (2) Federal funds sold Total interest-earning assets $1,451,911 485,194 184,574 19,729 2,141,408 100,510 25,303 13,188 507 139,508 6.92% 5.22 7.14 2.57 6.51% $1,409,051 444,220 188,012 14,756 2,056,039 105,804 7.51% 5.30 23,545 7.10 13,354 5.20 768 6.98% 143,471 $1,384,138 430,492 176,044 16,203 2,006,877 100,475 21,877 12,794 788 135,934 7.26% 5.08 7.27 4.87 6.77% Non-interest earning assets: Cash and due from banks Premises and equipment, net O t h er assets Less allowance for loan losses TOTALS 58,676 32,524 64,952 (15,539) $2,282,021 61,655 32,762 64,801 (15,665) $2,199,592 66,302 31,309 59,363 (16,533) $2,147,318 LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing liabilities: Tiansaction accounts Time deposits Short-term borrowings Other borrowings Total interest-bearing $ 680,196 643,580 37,352 353,598 9,660 23,036 1,068 18,726 1.42% 3.58 2.86 5.30 $ 609,287 666,615 32,140 343,767 12,634 29,322 1,611 19,394 2.07% $ 612,387 4.40 668,687 5.01 15,759 343,014 5.64 10,845 26,440 746 19,098 1.77% 3.95 4.73 5.57 liabilities: 1,714,726 52,490 3.06% 1,651,809 62,961 3.81% 1,639,847 57,129 3.48% Non interest-bearing liabilities: Demand deposits Other 236,628 43,045 1,994,399 Shareholders' equity TOTALS 287,622 $2,282,021 226,822 42,974 1,921,605 277,987 $2,199,592 206,839 25,958 1,872,644 274,674 $2,147,318 Net interest earnings $ 87,018 $ 80,510 $ 78,805 Net yield on interest-earning assets assets 4.06% 3.92% 3.93% (') For purposes ofthese 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%. FIRST F I N A N C I AL CORPORATION MARKET AND DIVIDEND INFORMATION At year-end 2008 shareholders owned 13,116,630 shares ofthe Corporation's common stock. The stock is traded on the NASDAQ Global under the symbol T H FF Histoiically, the Coiporation has paid cash dividends semi-annually and currently expects that comparable cash dividends will continue to be paid in the futuie. The following table gives quaiterly high and low trade prices and dividends per share during each quarter for 2008 and 2007. 2008 Trade Price Cash Dividends Low Declared Quarter ended March 31 June 30 September 30 December 31 High $32.06 $33.31 $49.30 $47.70 $25.30 $28.16 $30.05 $31.01 $ .44 $ .45 2007 Trade Price High $35.74 $32.45 $32.78 $32.29 Low $28.20 $27.26 $23.48 $26.93 Cash Dividends Declared $ .43 $ .44 TOTAL RETURN PERFORMANCE 160 150 A First Financial Corporation • Russell 2000 SNL $1B-$5B Bank Index 140 120 X 0) TJ 12/31'03 12/31/O'l 12/31/05 12/31/06 12/31/07 12/31/08 INDIANA First Financial Bank N.A. Vigo County Terre Haute Main Office* One First Financial Plaza Sixth & Wabash 812-238-6000 Honey Creek Mall* U.S. 41 South 812-238-6000 Indiana State University* Hulman Memorial Union 812-238-6000 Industrial Park* 1749 East Industrial Drive 812-238-6000 Maple Avenue* 4065 Maple Avenue 812-238-6000 Meadows* 350 South 25th Street 812-238-6000 Plaza North* Ft. Harrison & Lafayette 812-238-6000 Seelyvllle* 9520 East U.S. 40 812-238-6000 Southland* 3005 South Seventh Street 812-238-6000 Springhill* 4500 U.S. 41 South 812-238-6000 West Terre Haute* 309 National Avenue 812-238-6000 Westminster Village 1120 East Davis Drive 812-238-6000 The Morris Plan Company of Terre Haute 817 Wabash Avenue 812-238-6063 F I R ST B A N K I NG C E N T E RS First Financial Bank N.A. Clay County Brazil* 7995 North State Road 59 812-443-4481 Brazil Downtown* 18 North Walnut 812-448-3357 Brazil Eastside* 2180 East National Avenue 812-448-8110 Clay City* 502-504 Main Street 812-939-2145 Poland* 8490 East State Road 42 812-986-2115 First Financial Bank N.A. Greene County Worthington* 9 North Commercial Street 812-875-3021 First Financial Bank N.A. Knox County Monroe City* 201 West First Street 812-743-5151 Sandborn 102 North Anderson Street 812-694-8462 Vincennes* 2707 North Sixth Street 812-882-4800 First Financial Bank N.A. Parke County Rockville* 1311 North Lincoln Road 765-569-3171 Rockville Downtown* 120 East Ohio Street 765-569-3442 Marshall 10 South Main Street 765-597-2261 Montezuma* 232 East Crawford Street 765-245-2706 Rosedale 62 East Central Street 765-548-2266 First Financial Bank N.A. Putnam County Greencastle* 101 South Warren Drive 765-653-4444 First Financial Bank N.A. Sullivan County Sullivan* 15 South Main Street 812-268-3331 Carlisle* 8571 Old US 41 South 812-398-4100 Dugger 8100 East Main Street 812-648-2251 Farmersburg* 819 West Main Street 812-696-2106 Hymera 102 South Main Street 812-383-4933 First Financial Bank N.A. Vermillion County Newport* 100 West Market Street 765-492-3321 Cayuga 211 Curtis Street 765-492-3391 Clinton* 221 South Main Street 765-832-3504 Clinton Crown Hill* 1775 East State Road 163 765-832-5546 ILUNOIS First Financial Bank N.A. Clark County Marshall* 215 North Michigan 217-826-6311 First Financial Bank N.A. Coles County Charleston* 820 West Uncoln Avenue 217-345-4824 First Financial Bank N.A. Crawford County Robinson* 108 West Main Street 618-544-8666 Robinson Motor Bank* (Drive-Through Only) 602 West Walnut Street 618-544-3355 Oblong* 301 East Main Street 618-592-4252 First Financial Bank N.A. Jasper County Newton* 601 West Jourdan Street 618-783-2022 First Financial Bank N.A. Lawrence County Lawrenceville* 1601 State Street 618-943-3323 Sumner 211 South Christy 618-936-2321 First Financial Bank N.A. Richland County Olney* 240 East Chestnut Street 618-395-8676 Olney* 1110 South West Street 618-395-2112 First Financial Bank N.A. Vermilion County Ridge Farm* 11 South State Street 217-247-2126 First Financial Bank N.A. Wayne County Fairfield* 303 West Delaware 618-842-2145 *FirstPlus 24-hour ATM available at these locations L 1 FIRST FINANCIAL CORPORATION O NE FIRST FINANCIAL PLAZA TERRE HAUTE, INDIANA 47807 812-238-6000 • 800-511-0045 www.first-online.com i I- •U:^.^i-:.^|.^>f-^ l^*:*^'! 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