First Financial Corporation
2012 ANNUAL REPORT
TO THE STAKEHOLDERS
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The mission of First Financial Corporation
is to be the FIRST choice for all your financial needs.
One First Financial Plaza
Terre Haute, IN 47807
812/238/6000
800/511/0045
www.first-online.com
20122012
new service
locations
PUTNAM
PUTNAM
Greencastle
Greencastle
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LIVINGSTON
LIVINGSTON
Pontiac West
Pontiac
Pontiac Main
Madison Street
Gridley
Gridley
Brickyard Drive-
Bloomington
Bloomington
Towanda Plaza-
Bloomington
VERMILLION
VERMILION
MCLEAN
MCLEAN
Mahomet
Mahomet
Champaign
Champaign
Urbana
Urbana
CHAMPAIGN
CHAMPAIGN
COLES
COLES
Charleston
Charleston
Danville
Danville
Westville
Westville
Ridge Farm
Ridge Farm
Newport
VERMILLION
Cayuga
Cayuga
Marshall
Marshall
Newport
Montezuma
Montezuma
Rockville
Rockville
Clinton
Clinton
PARKE
PARKE
Rosedale
Rosedale
VIGO
VIGO
Seelyville
Seelyville
Terre Haute
Terre Haute
West Terre Haute
West Terre Haute
Brazil Dwntn
Brazil
Brazil
Brazil Eastside
CLAY
Poland
CLAY
Honey Creek Mall
Marshall
Marshall
CLARK
CLARK
Farmersburg
Farmersburg
Hymera
Hymera
Sullivan
Sullivan
Oblong
Oblong
Robinson
Dugger
Dugger
SULLIVAN
SULLIVAN
Carlisle
Clay City
Clay City
Worthington
Worthington
GREENE
GREENE
Newton
Newton
Robinson
Robinson
Motor Bank
JASPER CRAWFORD
JAPSER CRAWFORD
Lawrenceville
Lawrenceville
LAWRENCE
LAWRENCE
Olney
Olney
RICHLAND
RICHLAND
Sandborn
Sandborn
Vincennes
Vincennes
KNOX
KNOX
DAVIESS
DAVIESS
Washington
Washington
new personal
banking customers
WAYNE
F
F
WAYNE
Princeton
Princeton
GIBSON
GIBSON
VANDERBURGH
VANDERBURG
Evansville
Evansville
First Financial Banking Centers
INDIANA
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
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
Seelyville*
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
Sycamore Terrace*
2425 South State Road 46
812-238-6000
West Terre Haute*
309 National Avenue
812-238-6000
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
DAVIESS COUNTY
Washington*
300 East Main Street
812-257-8860
GIBSON COUNTY
Princeton*
1501 West Broadway
812-385-0235
GREENE COUNTY
Worthington*
9 North Commercial Street
812-875-3021
KNOX COUNTY
Sandborn
102 North Anderson Street
812-694-8462
Vincennes*
2707 North Sixth Street
812-882-4800
Vincennes*
619 Main Street Vincennes
812-886-9690
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
PUTNAM COUNTY
Greencastle*
101 South Warren Drive
765-653-4444
SULLIVAN COUNTY
Sullivan*
15 South Main Street
812-268-3331
Dugger*
879 South 3rd Street
812-648-2251
Farmersburg*
819 West Main Street
812-696-2106
Hymera*
102 South Main Street
812-383-4933
CRAWFORD COUNTY
Robinson*
108 West Main Street
618-544-8666
VERMILION COUNTY
Danville
One Towne Center
217-442-0362
Robinson Motor Bank*
602 West Walnut Street
618-544-3355
Danville Motor Bank*
101 West Main Street
217-443-3519
VANDERBURGH COUNTY
Evansville*
12600 Highway 41 North
812-868-8850
Oblong*
301 East Main Street
618-592-4252
VERMILLION COUNTY
Newport*
100 West Market Street
765-492-3321
JASPER COUNTY
Newton*
601 West Jourdan Street
618-783-2022
Cayuga
101 S. Division Street
765-492-3391
Clinton*
221 South Main Street
765-832-3504
Clinton Crown Hill*
1775 East State Road 163
765-832-5546
ILLINOIS
CHAMPAIGN COUNTY
Broadway*
410 North Broadway
217-351-2701
Mahomet IGA*
Eastwood Center IGA
217-586-5322
Neil Street*
1205 South Neil Street
217-352-6700
Philo Road*
2510 South Philo Road
217-344-1300
South Prospect*
1611 South Prospect Avenue
217-351-6620
CLARK COUNTY
Marshall*
215 North Michigan
217-826-6311
LAWRENCE COUNTY
Lawrenceville*
1601 State Street
618-943-3323
LIVINGSTON COUNTY
Madison Street*
521 West Madison Street
815-844-3171
Pontiac Main*
223 North Mill Street
815-844-3171
Pontiac West*
Route 116 & Route 66
815-844-3171
MCLEAN COUNTY
Brickyard Drive -
Bloomington*
#1 Brickyard Drive Suite 301
309-661-9993
Gridley
325 Center Street
309-747-2100
Towanda Plaza -
Bloomington*
1218 Towanda Avenue
888-876-2638
RICHLAND COUNTY
Olney*
240 East Chestnut Street
618-395-8676
Olney*
1110 South West Street
618-395-2112
Danville*
2750 North Vermilion Street
217-431-8750
Danville*
901 North Gilbert Street
217-431-3486
Danville*
421 South Gilbert Street
217-477-4510
Ridge Farm*
11 South State Street
217-247-2126
Westville*
101 East Main Street
217-267-2147
WAYNE COUNTY
Fairfield*
303 West Delaware
618-842-2145
Morris Plan Banking Center
817 Wabash Avenue
812-238-6063
INSURANCE
Forrest Sherer Insurance
of Terre Haute
24 North Ohio Street
812-232-0441
1219 Ohio Street
812-232-0441
Forrest Sherer Insurance
of Evansville
7525 East Virginia Street
812-232-0441
*First Plus 24-hour ATM available
at these locations
16 new service locations
COLES COUNTY
Charleston*
820 West Lincoln Avenue
217-345-4824
new or upgraded ATMs
expansion1254,00016
as part of our service expansion to the residents of southern indiana, First Financial was pleased to be able to purchase and
renovate four integra Bank branches. the bank re-opened as First Financial in october and held a Grand opening celebration of
the newly restored facilities in november. pictured here is the evansville branch located at 12600 Highway 41 north.
WWW.First-online .coM
First Financial corporation | 2012 annual report 1
Dear First Financial corporation shareholDers,
We are pleased to report 2012 was another year of solid performance for First Financial corporation with
net income of $32.8 million, the second highest net income in the history of the company. While this
was a notable accomplishment in itself, it also came while the First team was successfully adding Free-
star Bank’s nearly $400 million in assets to our balance sheet; introducing our products and services in
the growth markets of champaign-urbana, Bloomington-normal and pontiac, illinois; replacing and up-
grading our entire atM delivery channel; implementing a state-of-the-art branch automation system
and opening four new branches in southern indiana. as banks across the nation struggled with a slow
economy, the costs and complications of an ever increasing regulatory burden, and declining net interest
margins, we are pleased to advise we have delivered yet another year of consistent earnings.
2012 net interest income was $108.9 million, compared to the $99.2 million reported in 2011, an increase
of $9.7 million. non-interest income increased $6.2 million to $39.5 million from the $33.3 million of the
prior year. non-interest expense increased to $93.1 million in 2012, however most of the increase results
from the costs associated with the additional salary, benefits and one-time expenses related to the
acquisition of Freestar Bank, n.a., upgrades to our technology infrastructure and the opening of four new
banking centers in southern indiana. Book value per share at year-end 2012 was $28.01, a 5.9% increase
from the prior year and shareholders’ equity increased 7.3% to $372.1 million. return on assets was 1.13%.
We were pleased to deliver a dividend increase to you for the 24th consecutive year.
Maintaining our promise to be “always close to Home,” an expression of the convenience we provide to
our customers, we replaced and upgraded our entire Firstplus atM network in 2012 making all of our
atMs aDa compliant and adding new transaction capabilities. We also completed an agreement with a
convenience store chain to integrate our Firstplus atMs into store locations in indiana and illinois, allow-
ing us to offer First Financial customers surcharge-free access to their accounts while shopping in these
locations. Following a complete redesign, we launched a new website providing a customer friendly
interface enabling easier access for account management. at the same time, we launched a new mobile
banking application, enabling users to check account balances, make payments and find atM locations
while using their iphone, Blackberry or android. Finally, we purchased encore® branch automation software.
this technology will upgrade our teller and new account opening system, allowing us to better address
the needs of our customers no matter where they choose to bank with us.
letter to shareholders All this wAs Accomplished in A yeAr during which we mAde
severAl significAnt investments designed to expAnd our service AreA
And ensure thAt we mAke the improvements needed to stAy
on the leAding edge of technology for our customers And communities
2012 was another year of recognition for First Financial corporation and its associates as the company and its subsidiaries First Financial Bank and
Forrest sherer insurance were recognized for their strong and steady performance. the first quarter issue of Bank Director Magazine included First
Financial Bank in its “nifty 50” list of the best users of capital. Bank Director Magazine, on its Bank performance scorecard, ranked First Financial Bank
number 14 of 106 financial institutions in the $1 to $5 billion category based on a combination of profitability, capital strength and asset quality. in
May, seifreid & Brew llc designated First Financial Bank as a s&B top community Bank, “because of its exemplary performance of balancing risk and
reward” based on the s&B total risk/return composite ranking. in august, american Banker Magazine named First Financial Bank as one of its yearly
“standouts,” ranking it 55th among 229 mid-tier banks, based on a 3-year return on equity. We were especially gratified to receive positive recognition
from our customers as the terre Haute tribune-star and Danville commercial news reader’s choice awards again voted First Financial Bank as Best
Bank and Forrest sherer as Best insurance company.
We do not take our success for granted. it comes from thoughtful planning, steadfast implementation, uncompromised work ethic and most of all,
from the loyalty and abilities of our dedicated associates. We would like to thank our Board of Directors for their insight and support during this year
of investment and innovation as we positioned ourselves to maintain a tradition of award-winning performance. We are grateful to our customers
and the communities we serve for their support and we are particularly thankful to you, our shareholders, for your continued confidence in
First Financial corporation.
Donald e. smith
presiDent anD cHairMan
norman l. lowery
ceo anD Vice cHairMan
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First Financial corporation | 2012 annual report 3
Financial highlights
(Dollar amounts in thousands, except per share data)
2012
December 31
2011
2010
For the Year
Net income
$ 32,812
$ 37,195 $ 28,044
Net income per share
Book value per share
Cash dividends per share
2.48
28.01
0.95
2.83
2.14
26.38
24.46
0.94
0.92
at Year end
Assets
Deposits
Loans, net
Securities
$ 2,895,408
$ 2,954,061
$ 2,451,095
2,276,134
2,274,499
1,903,043
1,851,936
1,893,679
1,640,146
691,000
666,287
560,846
Shareholders’ equity
372,122
346,961
321,717
replaced 81 ATMs and upgraded 44 ATMs
highlights
2012 finAnciAl highlights
total assets
$ in thousands
$2,954,061
$2,895,408
$2,518,722
$2,302,675
$2,451,095
shareholDer inFormation
The common stock of First Financial Corporation
is traded on the NASDAQ Global under the symbol THFF.
8
0
0
2
9
0
0
2
0
1
0
2
1
1
0
2
2
1
0
2
earnings
per share
$2.83
$2.48
$2.14
$1.89
$1.73
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2
9
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2
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1
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2
another exciting upgrade is our development of a mobile bank-
ing app, which became available to customers in 2013. the app
enables users to check bank balances, make payments and locate
the nearest First Financial atM unit while they’re on-the-go using
their iphone, Blackberry or android phone.
$2,895,408
WWW.First-online .coM
First Financial corporation | 2012 annual report 5
THFF2012 Freestar anD Former integra Branch acquisitions a success
December 30, 2011 marked the completion of the acquisition of Freestar
Bank. We rang in 2011 by adding 11 new branch locations in east-cen-
tral illinois. Freestar, with its tradition of community-minded service, is
an outstanding fit for First Financial, and enables us to expand on our
already strong presence in illinois. the acquisition introduced us to the
communities of Bloomington-normal (home of illinois state university)
and champaign-urbana (home of the university of illinois) as well as
pontiac, Mahomet and Gridley, illinois. the integration of four integra
branches into First Financial expands our delivery area to customers in
princeton, Washington, Vincennes and evansville, indiana.
the additions of these new markets resulted in an increase of 4,000
personal banking customers to the First Financial family, a 14% increase,
and a 7% increase in commercial accounts.
consecutive years
dividend increase
24expansion expAnsion grows first finAnciAl fAmily
WWW.First-online .coM
First Financial corporation | 2012 annual report 7
improvement improvements mAke An impAct
WeBsite reDesign c ommissioneD
customers can expect a whole new look for First Financial Bank online in 2013, thanks to the redevelopment
and redesign of the website, which the bank undertook in 2012. We’re excited about the updated appearance;
however, we are even more excited about the new online capabilities it brings to customers. the new site
makes it easier for customers to execute a variety of transactions by improving the convenience and functionality
of the online banking experience.
an added Quicken®/Quickbooks® interface gives customers secure access to their First Financial accounts and
the ability to download transactions and account information directly into their Quicken® financial manage-
ment program. enhanced online capabilities for commercial customers include the ability to execute online
wire transfers.
teller/platForm sYstem upgraDeD
improved technology + increased efficiency = better service. that is an equation we believe in at First Financial
as evidenced by investment in the encore® branch automation system, from Harland Financial solutions. the
new system streamlines teller transaction processing and new account opening to reduce time-consuming
operational functions. this enables tellers to focus on what they do best—providing outstanding service.
moBile BanKing arriVes
another exciting upgrade for 2013 is the development of a mobile banking app which enables customers to
use their iphone, Blackberry or android phone to check balances, make payments and locate the nearest First
Financial atM while they are on-the-go. customers’ banking transactions and privacy information are always
as safe and secure as possible with reinforced security features. as we continue to refine and improve online
capabilities, we are also making it possible to meet customer needs with the potential to add services like
person-to-person payments and personal online deposits in the near future.
WWW.First-online .coM
First Financial corporation | 2012 annual report 9
atm upgraDes
in 2012, we upgraded or replaced all atMs. to facilitate this initiative, we conducted
a comprehensive review of existing technology and locations to ensure the
investment delivers the highest possible value to customers in terms of conve-
nience and functionality. this review guided decisions to replace 81 and upgrade
44 atMs in 2012.
all First Financial atMs are now aDa-compliant, providing lower screen height for
greater wheelchair accessibility at non-drive-thru locations, as well as voice guid-
ance, Braille signage and input controls for visually-impaired individuals. they also
have larger, color screens, clearer backgrounds, and enhanced readability.
Many of the new atMs feature the added functionality of sDM (scalable Deposit
Module) check and cash processing that enables customers to deposit both cash
and checks through a single slot without a deposit slip or envelope, offering greater
convenience and transaction speed. the new technology has an added benefit,
improving operational and cost efficiencies for the bank, along with a greener
process due to reduction of paper waste.
Bringing You more
First Financial is constantly developing new products and services designed to
make banking with us easier and more convenient than ever, including:
• Merchant capture system
• social security direct deposits
• Bundled/relationship accounts/pricing
•
• reloadable, pre-paid debit cards
•
innovative “automated teller” drive-up units – freestanding
“start Fresh” account for customers who may not qualify for traditional checking accounts
events Bring communities together
this year’s “Food for Friends” drive was once again successful in collecting food
and household supplies for hundreds of area families in need. “Food for Friends,”
now in its fourth year of operation, is a First Financial collaboration with area food
banks to aid in collecting and distributing much-needed food items for families
in the communities we serve. this year Food for Friends expands with collection
barrels for non-perishable foods placed in the western region banking centers.
investment investments pAy off for customers
Both the clay county YMca and terre Haute Boys & Girls club took kids fish-
ing with First Financial as part of our community service activities for youth.
First Financial once again sponsored many community-based events
including the Vigo and sullivan county 4-H fairs, the pontiac rodeo and
the pontiac Homecoming pork chop Dinner, both as an institution and
through the volunteer efforts of employees.
First Financial Bank is proud to support local law enforcement at the annual
police awards Dinner, hosted this year at indiana state university. national
night out promotes greater community awareness of the issues of crime
prevention and public safety; once again, First Financial Bank exhibited its
support through sponsorship.
WWW.First-online .coM
WWW.First-online .coM
First Financial corporation | 2012 annual report 11
Directors
First Financial Corporation
and First Financial Bank
W. curtis Brighton
B. Guille cox, Jr.
thomas t. Dinkel
anton Hulman George
Gregory l. Gibson
William r. Krieble
norman l. lowery
ronald K. rich
Donald e. smith
Virginia l. smith
William J. Voges
The Morris Plan Company
of Terre Haute Inc.
David l. Bailey
Jeffrey G. Belskus
thomas s. clary
Mark J. Fuson
norman D. lowery
James F. nasser
Jeffrey B. smith
Forrest Sherer Inc.
John W. Dinkel
J. Barton Douglas
norman l. lowery
John s. lukens
David W. Marietta
Dennis s. Michael
Jerry r. Mueller
robert F. prox iii
communitY Directors
First Financial Bank,
Clay Region
David l. Barr
James e. Brown (emeritus)
sam J. emmert
Max Gibson
rodger a. McHargue
John p. stelle
First Financial Bank,
Citizens Region
Henry J. antonini
robert DeVerter
Danny F. Wesch
terri M. Williamson
First Financial Bank,
Community Region
norman D. lowery
avery J. McKinney
V. Bruce Walkup
Jeffery l. Wilson
First Financial Bank,
Crawford Region
Jerry l. Bailey
W.J. chamblin
norman D. lowery
steven a. McGahey
V. Bruce Walkup
First Financial Bank,
Marshall Region
Fred s. Barth
William F. Meehling
norman p. Yeley
First Financial Bank,
Parke Region
James r. Bosley
thomas s. clary
charles a. cooper
First Financial Bank,
Sullivan Region
thomas s. clary
robert F. Dukes
Henry t. smith
robert e. springer
V. Bruce Walkup
BoArd of directors
seated, (left to right): William r. Krieble, norman l. lowery, Donald e. smith, thomas t. Dinkel and anton H. George
standing, (left to right): B. Guille cox, Jr., Virginia l. smith, William J. Voges, Gregory l. Gibson, W. curtis Brighton and ronald K. rich
WWW.First-online .coM
First Financial corporation | 2012 annual report 12
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 2012
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from _________ to ___________
Commission file number 0-16759
FIRST FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
INDIANA
(State of Incorporation)
35-1546989
(I.R.S. Employer Identification Number)
One First Financial Plaza
Terre Haute, Indiana
(Address of Registrant’s Principal Executive Offices)
47807
(Zip Code)
(812) 238-6000
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, no par value
Name of Exchange on Which Registered
The NASDAQ Stock Market LLC
(NASDAQ Global Select Market)
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known-seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such files). Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of “accelerated filer”, “large accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act of
1934.
Large accelerated filer Accelerated filer Non-accelerated filer
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No
As of June 30, 2012 the aggregate market value of the stock held by non-affiliates of the registrant based on the average bid and ask prices of
such stock was $375,338,651. (For purposes of this calculation, the Corporation excluded the stock owned by certain beneficial owners and
management and the Corporation’s Employee Stock Ownership Plan.)
Shares of Common Stock outstanding as of March 11, 2013—13,307,498 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement for the First Financial Corporation Annual Meeting of Shareholders to be held April 17, 2013 are
incorporated by reference into Part III.
FIRST FINANCIAL CORPORATION
2012 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
PART I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Item 6. Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item10. Directors, Executive Officers and Corporate Governance
Item11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder
Matters
Item 13. Certain Relationships and Related Transactions and Director Independence
Item 14. Principal Accountant Fees and Services
PART IV
Item 15. Exhibits and Financial Statement Schedules
Signatures
Exhibit 10.3
Exhibit 10.4
Exhibit 21
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
2
3
13
17
17
19
19
19
21
21
31
31
69
69
69
69
69
70
70
70
71
72
FIRST FINANCIAL CORPORATION
2012 ANNUAL REPORT ON FORM 10-K
PART I
ITEM 1. BUSINESS
FORWARD-LOOKING STATEMENTS
A cautionary note about forward-looking statements: In its oral and written communication, First Financial Corporation from time
to time includes forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements can include statements about estimated cost savings, plans and objectives for future operations and
expectations about performance, as well as economic and market conditions and trends. They often can be identified by the use of
words such as "expect," "may," "could," "intend," "project," "estimate," "believe" or "anticipate" or words of similar import. By their
nature, forward-looking statements are based on assumptions and are subject to risks, uncertainties and other factors. Actual results
may differ materially from those contained in the forward-looking statement. First Financial Corporation may include forward-
looking statements in filings with the Securities and Exchange Commission, in other written materials such as this Annual Report
and in oral statements made by senior management to analysts, investors, representatives of the media and others. It is intended that
these forward-looking statements speak only as of the date they are made, and First Financial Corporation undertakes no obligation
to update any forward-looking statement to reflect events or circumstances after the date on which the forward-looking statement
is made or to reflect the occurrence of unanticipated events.
The discussion in Item 1A (Risk Factors) and Item 7 (Management's Discussion and Analysis of Results of Operations and
Financial Condition) of this Annual Report on Form 10-K, lists some of the factors which could cause actual results to vary
materially from those in any forward-looking statements. Other uncertainties which could affect First Financial Corporation's future
performance include the effects of competition, technological changes and regulatory developments; changes in fiscal, monetary and
tax policies; market, economic, operational, liquidity, credit and interest rate risks associated with First Financial Corporation's
business; inflation; competition in the financial services industry; changes in general economic conditions, either nationally or
regionally, resulting in, among other things, credit quality deterioration; and changes in securities markets. Investors should
consider these risks, uncertainties and other factors in addition to those mentioned by First Financial Corporation in its other filings
from time to time when considering any forward-looking statement.
GENERAL
First Financial Corporation (the “Corporation”) is a financial holding company. The Corporation was originally organized
as an Indiana corporation in 1984 to operate as a bank holding 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, depositor services and insurance
services through its three subsidiaries. At the close of business in 2012 the Corporation and its subsidiaries had 928 full-time
equivalent employees.
COMPANY PROFILE
First Financial Bank, N.A. (the “Bank”) is the largest bank in Vigo County, Ind. It operates 11 full-service banking
branches within the county; five in Clay County, Ind.; one in Daviess County, Ind.; one in Gibson County, Ind.; one in
Greene County, Ind.; four in Knox County, Ind.; five in Parke County, Ind.; one in Putnam County, Ind., five in Sullivan
County, Ind.; one in Vanderburgh, County.; four in Vermillion County, Ind.; five in Champaign County, Illinois; one in
Clark County, Ill.; one in Coles County, Ill.; three in Crawford County, Ill.; one in Jasper County, Ill.; one in Lawrence
County, Ill.; three in Livingston County, Illinois; four in McLean County, Illinois; two in Richland County, Ill.; seven
in Vermilion County, Ill.; and one in Wayne County, Ill. 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. The Morris Plan Company of Terre Haute, Inc.
(“Morris Plan”) has one office and is located in Vigo County. 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 58
professionals and over 91 years of successful service to both businesses and households in their market area. The agency has
representation agreements with more than 40 regional and national insurers to market their products of property and casualty
insurance, surety bonds, employee benefit plans, life insurance and annuities. FFB Risk Management Co., Inc. located in Las
Vegas, Nevada is a captive insurance subsidiary which insures various liability and property damage policies for First
Financial Corporation subsidiaries. On December 30, 2011 the Bank completed its acquisition of 100% of the stock of
Freestar Bank, National Association, of Pontiac, Illinois and merged Freestar Bank into the Bank. The Corporation paid
PNB Holding Co., the former owner of the stock of Freestar Bank, $47 million and assumed liabilities of PNB equal to
approximately $8.2 million. As a result of the acquisition, the Bank added Illinois banking offices in the communities of
Bloomington, Champaign, Urbana, Pontiac, Downs, Mahomet and Gridley, and acquired assets of approximately $400
million.
COMPETITION
First Financial Bank and Morris Plan face competition from other financial institutions. These competitors consist of
commercial banks, a mutual savings bank and other financial institutions, including consumer finance companies,
insurance companies, brokerage firms and credit unions.
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The Corporation's business activities are centered in west-central Indiana and east-central Illinois. The Corporation has no
foreign activities other than periodically investing available funds in time deposits held in foreign branches of domestic
banks.
REGULATION AND SUPERVISION
The Corporation and its subsidiaries operate in highly regulated environments and are subject to supervision and
regulation by several governmental regulatory agencies, including the Board of Governors of the Federal Reserve System
(the "Federal Reserve"), the Office of the Comptroller of the Currency (the “OCC”), the Federal Deposit Insurance
Corporation (the “FDIC”), and the Indiana Department of Financial Institutions (the “DFI”). The laws and regulations
established by these agencies are generally intended to protect depositors, not shareholders. Changes in applicable laws,
regulations, governmental policies, income tax laws and accounting principles may have a material effect on the
Corporation’s business and prospects. The following summary is qualified by reference to the statutory and regulatory
provisions discussed.
The Dodd-Frank Act
On July 21, 2010, financial regulatory reform legislation entitled the “Dodd-Frank Wall Street Reform and Consumer
Protection Act” (the “Dodd-Frank Act”) was signed into law. The Dodd-Frank Act implements far-reaching changes
across the financial industry, including provisions that, among other things, will:
• Centralize responsibility for consumer financial protection by creating a new agency, the Consumer
Financial Protection Bureau, responsible for implementing, examining, and enforcing compliance with
federal consumer financial laws.
• Create the Financial Stability Oversight Council that will recommend to the Federal Reserve increasingly
strict rules for capital, leverage, liquidity, risk management, and other requirements as companies grow in
size and complexity.
• Apply the same leverage and risk-based capital requirements that apply to insured depository institutions to
most bank holding companies.
• Require financial holding companies to be well capitalized and well managed. Impose more stringent capital
on bank holding companies and subject certain activities, including interstate mergers and acquisitions, to
higher capital conditions.
• Restrict the preemption of state law by federal law and disallow subsidiaries and affiliates of national banks
•
from availing themselves of such preemption.
Provide mortgage reform provisions regarding a customer’s ability to repay, restricting variable-rate lending
by requiring that the ability to repay variable-rate loans be determined by using the maximum rate that will
apply during the first five years of a variable-rate loan term, and making more loans subject to provisions for
higher cost loans and new disclosures. In addition, certain compensation for mortgage brokers based on
certain loan terms will be restricted.
• Require financial institutions to make a reasonable and good faith determination that borrowers have the
ability to repay loans for which they apply. If a financial institution fails to make such a determination, a
borrower can assert this failure as a defense to foreclosure.
• Require financial institutions to retain a specified percentage (5% or more) of certain non-traditional
mortgage loans and other assets in the event that they seek to securitize such assets.
• Change the assessment base for federal deposit insurance from the amount of insured deposits to
consolidated assets less tangible capital, eliminate the ceiling on the size of the Deposit Insurance Fund
(“DIF”), and increase the floor on the size of the DIF, which generally will require an increase in the level of
assessments for institutions with assets in excess of $10 billion.
• Make permanent the $250,000 limit for federal deposit insurance.
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Implement corporate governance revisions, including with regard to executive compensation, say on pay
votes, proxy access by shareholders, and clawback policies which apply to all public companies, not just
financial institutions.
• Repeal the federal prohibitions on the payment of interest on demand deposits, thereby permitting
depository institutions to pay interest on business transactions and other accounts.
• Amend the Electronic Fund Transfer Act (“EFTA”) to, among other things, give the Federal Reserve the
authority to establish rules regarding interchange fees charged for electronic debit transactions by payment
card issuers having assets over $10 billion and to enforce a new statutory requirement that such fees be
reasonable and proportional to the actual cost of a transaction to the issuer.
• Limit the hedging activities and private equity investments that may be made by various financial
institutions.
The Consumer Financial Protection Bureau (the “CFPB”), created by the Dodd-Frank Act as discussed above, is
responsible for administering federal consumer financial protection laws. The CFPB, which began operations on July 21,
2011, is an independent bureau within the Federal Reserve and has broad rule-making, supervisory and examination
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authority to set and enforce rules in the consumer protection area over financial institutions that have assets of $10 billion
or more. The CFPB also has data collecting powers for fair lending purposes for both small business and mortgage loans,
as well as authority to prevent unfair, deceptive and abusive practices.
Although many aspects of the Dodd-Frank Act remain subject to rulemaking, several provisions of the Dodd-Frank Act
have been implemented. In addition to the establishment of the CFPB, the Federal Reserve Board’s final rule
implementing the Dodd-Frank Act’s “Durbin Amendment,” which limits debit card interchange fees, was issued on July
21, 2011 for transactions occurring after September 30, 2011. The final rule established a cap on the fees banks with more
than $10 billion in assets can charge merchants for debit card transactions. The fee was set at $0.21 per transaction plus an
additional 5 bps of the transaction amount and $0.01 to cover fraud losses. The Federal Reserve Board also repealed
Regulation Q as mandated by the Dodd-Frank Act on July 21, 2011. Regulation Q was implemented as part of the Glass-
Steagall Act in the 1930’s and provided a prohibition against the payment of interest on demand deposits.
Because full implementation of the Dodd-Frank Act will occur over several years, it is difficult to anticipate the overall
financial impact on the Corporation, its customers or the financial industry generally. However, the impact is expected to
be substantial and may have an adverse impact on the Corporation’s financial performance and growth opportunities.
Provisions in the legislation that affect the payment of interest on demand deposits and interchange fees are likely to
increase the costs associated with deposits as well as place limitations on certain revenues those deposits may generate.
Provisions in the legislation that require revisions to the capital requirements of financial institutions could require the
Corporation and its financial institution subsidiaries to seek other sources of capital in the future.
BASEL III
In December 2010 and January 2011, the Basel Committee published the final texts of reforms on capital and liquidity
generally referred to as “Basel III.” Although Basel III is intended to be implemented by participating countries for large,
internationally active banks, its provisions are likely to be considered by United States banking regulators in developing
new regulations applicable to other banks in the United States, including the Bank.
For banks in the United States, among the most significant provisions of Basel III concerning capital are the following:
•
•
•
•
•
•
•
a minimum ratio of common equity to risk-weighted assets reaching 4.5%, plus an additional 2.5% as a capital
conservation buffer, by 2019 after a phase-in period;
a minimum ratio of Tier 1 capital to risk-weighted assets reaching 6.0% by 2019 after a phase-in period;
a minimum ratio of total capital to risk-weighted assets, plus the additional 2.5% capital conservation buffer,
reaching 10.5% by 2019 after a phase-in period;
an additional countercyclical capital buffer to be imposed by applicable national banking regulators periodically
at their discretion, with advance notice;
restrictions on capital distributions and discretionary bonuses applicable when capital ratios fall within the buffer
zone;
deduction from common equity of deferred tax assets that depend on future profitability to be realized; and
increased capital requirements for counterparty credit risk relating to over the counter derivatives, repos and
securities financing activities..
The Basel III provisions on liquidity include complex criteria establishing the liquidity coverage ratio (“LCR”) and the net
stable funding ratio (“NSFR”). The purpose of the LCR is to ensure that a bank maintains adequate unencumbered, high
quality liquid assets to meet its liquidity needs for 30 days under a severe liquidity stress scenario. The purpose of the
NSFR is to promote more medium and long-term funding of assets and activities, using a one-year horizon. Although
Basel III is described as a “final text,” it is subject to the resolution of certain issues and to further guidance and
modification, as well as to adoption by United States banking regulators, including decisions as to whether and to what
extent it will apply to United States banks that are not large, internationally active banks.
On June 7, 2012, the federal bank regulatory agencies issued a series of proposed rules that would revise their risk-based
and leverage capital requirements and their method for calculating risk-weighted assets to make them consistent with
Basel III and certain provisions of the Dodd-Frank Act. The three separate but related proposals are: (i) the “Basel III
Proposal,” which applies the Basel III capital framework to almost all U.S. banking organizations; (ii) the “Standardized
Approach Proposal,” which applies certain elements of the Basel II standardized approach for credit risk weightings to
almost all U.S. banking organizations; and (iii) the “Advanced Approaches Proposal,” which applies changes made to
Basel II and Basel III in the past few years to large U.S. banking organizations subject to the advanced Basel II capital
framework. The proposed rules would apply to all depository institutions, top-tier bank holding companies with total
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consolidated assets of $500 million or more, and top-tier savings and loan holding companies (“banking organizations”).
The comment period for these notices of proposed rulemaking ended October 22, 2012.
Among other things, the proposed rules establish a new Common Equity Tier 1 minimum capital requirement of 4.5% and
a higher minimum Tier 1 capital requirement of 6.0%. The proposed rules limit a banking organization’s capital
distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation
buffer” consisting of a specified amount of Common Equity Tier 1 capital in addition to the amount necessary to meet its
minimum risk-based capital requirements.
The Basel III implementation proposal provides for a number of deductions from and adjustments to CET1. These include,
for example, the requirement that mortgage servicing rights, deferred tax assets dependent upon future taxable income and
significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such
category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1. Under current capital
standards, the effects of accumulated other comprehensive income items included in capital are excluded for the purposes
of determining regulatory capital ratios. Under the Basel III Proposal, the effects of certain accumulated other
comprehensive items are not excluded, which could result in significant variations in the level of capital depending upon
the impact of interest rate fluctuations on the fair value of the Corporation’s securities portfolio. The Basel III Proposal
also requires the phase-out of certain hybrid securities, such as trust preferred securities, as Tier 1 capital of bank holding
companies in equal installments between 2013 and 2016. Trust preferred securities no longer included in Tier 1 capital
may nonetheless be included as a component of Tier 2 capital.
Implementation of the deductions and other adjustments to CET1 will begin on January 1, 2014 and will be phased-in over
a five-year period (20% per year). The implementation of the capital conservation buffer will begin on January 1, 2016 at
the 0.625% level and be phased in over a four-year period (increasing by that amount on each subsequent January 1, until
it reaches 2.5% on January 1, 2019).
The Basel III implementation proposal would also revise the “prompt corrective action” regulations described below by (i)
introducing a CET1 ratio requirement at each level (other than critically undercapitalized), with the required CET1 ratio
being 6.5% for well-capitalized status; (ii) increasing the minimum Tier 1 capital ratio requirement for each category, with
the minimum Tier 1 capital ratio for well-capitalized status being 8% (as compared to the current 6%); and (iii)
eliminating the current provision that provides that a bank with a composite supervisory rating of 1 may have a 3%
leverage ratio and still be adequately capitalized. The Basel III proposal does not change the total risk-based capital
requirement for any category.
In addition to the changes in capital requirements included within the Basel III Proposal, the Standardized Approach
Proposal revises a large number of the risk weights (or their methodologies) for bank assets that are used to determine the
capital ratios. For nearly every class of assets, the proposal requires a more complex, detailed and calibrated assessment of
credit risk and calculation of risk weightings. For example, under the current risk-weighting rules, residential mortgages
have a risk weighting of 50%. Under the proposed new rules, two categories of residential mortgage lending would be
created: (i) traditional lending would be category 1, where the risk weights range from 35 to 100%; and (ii) nontraditional
loans would fall within category 2, where the risk weights would range from 50 to 150%.
Because of the number of comments received by the regulatory agencies on the proposals discussed above, the regulatory
agencies have indicated that the date for the implementation of the proposed Basel III rules has been delayed . At this time
it is unclear when the Basel III regime will become effective in the United States, no guarantee that the proposals will be
adopted in their current form, what changes may be made before adoption, or when ultimate adoption will occur.
Requirements to maintain higher levels of capital or to maintain higher levels of liquid assets could adversely impact the
Corporation’s net income and return on equity.
The Corporation
The Bank Holding Company Act. Because the Corporation owns all of the outstanding capital stock of the Bank, it is
registered as a bank holding company under the federal Bank Holding Company Act of 1956 (“Act”) and is subject to
periodic examination by the Federal Reserve and required to file periodic reports of its operations and any additional
information that the Federal Reserve may require.
Investments, Control, and Activities. With some limited exceptions, the Bank Holding Company Act requires every bank
holding company to obtain the prior approval of the Federal Reserve before acquiring another bank holding company or
acquiring more than five percent of the voting shares of a bank (unless it already owns or controls the majority of such
shares).
Bank holding companies are prohibited, with certain limited exceptions, from engaging in activities other than those of
banking or of managing or controlling banks. They are also prohibited from acquiring or retaining direct or indirect
ownership or control of voting shares or assets of any company which is not a bank or bank holding company, other than
subsidiary companies furnishing services to or performing services for their subsidiaries, and other subsidiaries engaged in
6
activities which the Federal Reserve determines to be so closely related to banking or managing or controlling banks as to
be incidental to these operations. The Bank Holding Company Act does not place territorial restrictions on the activities
of such nonbanking-related activities.
Bank holding companies which meet certain management, capital, and Community Reinvestment Act of 1977 (“CRA”)
standards may elect to become a financial holding company, which would allow them to engage in a substantially broader
range of nonbanking activities than is permitted for a bank holding company, including insurance underwriting and
making merchant banking investments in commercial and financial companies.
The Corporation does not currently plan to engage in any activity other than owning the stock of the Bank.
Gramm-Leach-Bliley Financial Modernization Act. The Corporation is a financial holding company (“FHC”) within the
meaning of the Act. This Act restricts the business of FHC’s to financial and related activities. The Gramm-Leach-Bliley
Financial Modernization Act of 1999 (“GLB Act”), which amended the , provides the following:
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•
•
it allows bank holding companies that qualify as “financial holding companies” to engage in a broad range of
financial and related activities;
it allows insurers and other financial services companies to acquire banks;
it removes various restrictions that applied to bank holding company ownership of securities firms and mutual
fund advisory companies; and
it establishes the overall regulatory structure applicable to bank holding companies that also engage in insurance
and securities operations.
As a qualified FHC, the Corporation is eligible to engage in, or acquire companies engaged in, the broader range of
activities that are permitted by the GLB Act. These activities include those that are determined to be “financial in nature,”
including insurance underwriting, securities underwriting and dealing, and making merchant banking investments in
commercial and financial companies. If any of the Corporation’s banking subsidiaries ceases to be “well capitalized” or
“well managed” under applicable regulatory standards, the Federal Reserve Board may, among other things, place
limitations on the Corporation’s ability to conduct these broader financial activities or, if the deficiencies persist, require
the divestiture of the banking subsidiary. In addition, if any of the Corporation’s banking subsidiaries receives a rating of
less than satisfactory under the Community Reinvestment Act of 1977 (“CRA”), the Corporation would be prohibited
from engaging in any additional activities other than those permissible for bank holding companies that are not financial
holding companies. The Corporation’s banking subsidiaries currently meet these capital, management and CRA
requirements.
Capital Adequacy Guidelines for Bank Holding Companies. The Federal Reserve, as the regulatory authority for bank
holding companies, has adopted capital adequacy guidelines for bank holding companies. Bank holding companies with
assets in excess of $500 million must comply with the Federal Reserve's risk-based capital guidelines which require a
minimum ratio of total capital to risk-weighted assets (including certain off-balance sheet activities such as standby letters
of credit) of 8%. At least half of the total required capital must be "Tier 1 capital", consisting principally of common
stockholders' equity, non-cumulative perpetual preferred stock, a limited amount of cumulative perpetual preferred stock
and minority interest in the equity accounts of consolidated subsidiaries, less certain goodwill items. The remainder ("Tier
2 capital") may consist of a limited amount of subordinated debt and intermediate-term preferred stock, certain hybrid
capital instruments and other debt securities, cumulative perpetual preferred stock, and a limited amount of the general
loan loss allowance. In addition to the risk-based capital guidelines, the Federal Reserve has adopted a Tier 1 (leverage)
capital ratio under which the bank holding company must maintain a minimum level of Tier 1 capital to average total
consolidated assets of 3% in the case of bank holding companies which have the highest regulatory examination ratings
and are not contemplating significant growth or expansion. All other bank holding companies are expected to maintain a
ratio of at least 1% to 2% above the stated minimum.
Certain regulatory capital ratios for the Corporation as of December 31, 2012, are shown below:
Tier 1 Capital to Risk-Weighted Assets
Total Risk Based Capital to Risk-Weighted Asset
Tier 1 Leverage Ratio
15.38%
16.37%
11.43%
Dividends. The Federal Reserve's policy is that a bank holding company experiencing earnings weakness should not pay
cash dividends exceeding its net income or which could only be funded in ways that weaken the bank holding company's
financial health, such as by borrowing. Additionally, the Federal Reserve possesses enforcement powers over bank
holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices
or violations of applicable statutes and regulations. Among these powers is the ability to proscribe the payment of
dividends by banks and bank holding companies.
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Source of Strength. In accordance with Federal Reserve policy, the Corporation is expected to act as a source of financial
strength to the Bank and Morris Plan and to commit resources to support the Bank and Morris Plan in circumstances in
which the Corporation might not otherwise do so.
Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act") represents a comprehensive
revision of laws affecting corporate governance, accounting obligations and corporate reporting. Among other
requirements, the Sarbanes-Oxley Act established: (i) requirements for audit committees of public companies, including
independence and expertise standards; (ii) additional responsibilities regarding financial statements for the chief executive
officers and chief financial officers of reporting companies; (iii) standards for auditors and regulation of audits; (iv)
increased disclosure and reporting obligations for reporting companies regarding various matters relating to corporate
governance, and (v) new and increased civil and criminal penalties for violation of the securities laws.
The Bank and Morris Plan
General Regulatory Supervision. The Bank is a national bank organized under the laws of the United States of America
and is subject to the supervision of the OCC, whose examiners conduct periodic examinations of the Bank. The Bank
must undergo regular on-site examinations by the OCC and must submit quarterly and annual reports to the OCC
concerning its activities and financial condition.
Morris Plan is an Indiana-chartered institution and is subject to the supervision of the FDIC and the DFI, whose examiners
conduct periodic examinations of Morris Plan. Morris Plan must undergo regular on-site examinations by the FDIC and
the DFI and must submit quarterly and annual reports to the FDIC and the DFI concerning its activities and financial
condition.
The deposits of the Bank and Morris Plan are insured by the FDIC and are subject to the FDIC's rules and regulations
respecting the insurance of deposits. See "Deposit Insurance".
Lending Limits. The total loans and extensions of credit to a borrower outstanding at one time and not fully secured may
not exceed 15 percent of the bank's capital and unimpaired surplus. In addition, the total amount of outstanding loans and
extensions of credit to any borrower outstanding at one time and fully secured by readily marketable collateral may not
exceed 10 percent of the unimpaired capital and unimpaired surplus of the bank (this limitation is separate from and in
addition to the above limitation). If a loan is secured by United States obligations, such as treasury bills, it is not subject to
the legal lending limit.
Deposit Insurance. The Dodd-Frank Act has permanently increased the maximum amount of deposit insurance for
financial institutions per insured depositor to $250,000.
The deposits of the Bank and Morris Plan are insured up to the applicable limits under the DIF. The FDIC maintains the
DIF by assessing depository institutions an insurance premium. Pursuant to the Dodd-Frank Act, the FDIC is required to
set a DIF reserve ratio of 1.35% of estimated insured deposits and is required to achieve this ratio by September 30, 2020.
Also, the Dodd-Frank Act has eliminated the 1.50% ceiling on the reserve ratio and provides that the FDIC is no longer
required to refund amounts in the DIF that exceed 1.50% of insured deposits.
In connection with the Dodd-Frank Act’s requirement that insurance assessments be based on assets, the FDIC bases
assessments on an institution’s average consolidated assets (less average tangible equity) as opposed to its deposit level.
This may shift the burden of deposit premiums toward larger depository institutions which rely on funding sources other
than U.S. deposits.
Under the FDIC’s risk-based assessment system, insured institutions are required to pay deposit insurance premiums based
on the risk that each institution poses to the DIF. An institution’s risk to the DIF is measured by its regulatory capital
levels, supervisory evaluations, and certain other factors. An institution’s assessment rate depends upon the risk category
to which it is assigned. As noted above, pursuant to the Dodd-Frank Act, the FDIC will calculate an institution’s
assessment level based on its total average consolidated assets during the assessment period less average tangible equity
(i.e., Tier 1 capital) as opposed to an institution’s deposit level which was the previous basis for calculating insurance
assessments. Pursuant to the Dodd-Frank Act, institutions will be placed into one of four risk categories for purposes of
determining the institution’s actual assessment rate. The FDIC will determine the risk category based on the institution’s
capital position (well capitalized, adequately capitalized, or undercapitalized) and supervisory condition (based on exam
reports and related information provided by the institution’s primary federal regulator). The Bank paid a total FDIC
assessment of $1.88 million and Morris Plan paid a total FDIC assessment of $34 thousand in 2012.
During 2009, the FDIC adopted a rule requiring each insured institution to prepay on December 30, 2009 the estimated
amount of its quarterly assessments for the fourth quarter of 2009 and all quarters through the end of 2012 (in addition to
the regular quarterly assessment for the third quarter which was due on December 30, 2009). The prepaid amount is
recorded as an asset with a zero risk weight and the institution will continue to record quarterly expenses for FDIC deposit
insurance. Collection of the prepayment amount does not preclude the FDIC from changing assessment rates or revising
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the risk-based assessment system in the future. If events cause actual assessments during the prepayment period to vary
from the prepaid amount, institutions will pay excess assessments or receive a rebate of prepaid amounts not fully utilized
after the collection of assessments due in June 2013. The amount of the Bank’s prepayment was $8.96 million and the
amount of Morris Plan’s prepayment was $249 thousand.
In addition to the FDIC insurance premiums, the Bank and the Morris Plan are required to make quarterly payments on
bonds issued by the Financing Corporation (“FICO”), an agency of the Federal government established to recapitalize a
predecessor deposit insurance fund. These assessments will continue until the FICO bonds are repaid.
Transactions with Affiliates and Insiders. Pursuant to Sections 23A and 23B of the Federal Reserve Act and Regulation
W, the Bank and Morris Plan are subject to limitations on the amount of loans or extensions of credit to, or investments in,
or certain other transactions with, affiliates (including the Corporation) and insiders and on the amount of advances to
third parties collateralized by the securities or obligations of affiliates. Furthermore, within the foregoing limitations as to
amount, each covered transaction must meet specified collateral requirements. Compliance is also required with certain
provisions designed to avoid the taking of low quality assets. The Bank and Morris Plan are also prohibited from
engaging in certain transactions with certain affiliates and insiders unless the transactions are on terms substantially the
same, or at least as favorable to such institution or its subsidiaries, as those prevailing at the time for comparable
transactions with nonaffiliated companies.
Extensions of credit by the Bank or Morris Plan to their executive officers, directors, certain principal shareholders, and
their related interests must:
•
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be made on substantially the same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with third parties; and
not involve more than the normal risk of repayment or present other unfavorable features.
The Dodd-Frank Act also included specific changes to the law related to the definition of a “covered transaction” in
Sections 23A and 23B and limitations on asset purchases from insiders. With respect to the definition of a “covered
transaction,” the Dodd-Frank Act now defines that term to include the acceptance of debt obligations issued by an affiliate
as collateral for an institution’s loan or extension of credit to another person or company. In addition, a “derivative
transaction” with an affiliate is now deemed to be a “covered transaction” to the extent that such a transaction causes an
institution or its subsidiary to have a credit exposure to the affiliate. A separate provision of the Dodd-Frank Act states
that an insured depository institution may not “purchase an asset from, or sell an asset to” a bank insider (or their related
interests) unless (1) the transaction is conducted on market terms between the parties and (2) if the proposed transaction
represents more than 10 percent of the capital stock and surplus of the insured institution, it has been approved in advance
by a majority of the institution’s non-interested directors.
Dividends. Applicable law provides that a financial institution, such as the Bank or Morris Plan, may pay dividends from
its undivided profits in an amount declared by its Board of Directors, subject to prior regulatory approval if the proposed
dividend, when added to all prior dividends declared during the current calendar year, would be greater than the current
year's net income and retained earnings for the previous two calendar years.
Federal law generally prohibits the Bank or Morris Plan from paying a dividend to the Corporation if it would thereafter
be undercapitalized. The FDIC may prevent a financial institution from paying dividends if it is in default of payment of
any assessment due to the FDIC. In addition, payment of dividends by a bank may be prevented by the applicable federal
regulatory authority if such payment is determined, by reason of the financial condition of such bank, to be an unsafe and
unsound banking practice.
Community Reinvestment Act. The CRA requires that the federal banking regulators evaluate the records of a financial
institution in meeting the credit needs of its local community, including low and moderate income neighborhoods. These
factors are also considered in evaluating mergers, acquisitions, and applications to open a branch or facility. Failure to
adequately meet these criteria could result in the imposition of additional requirements and limitations on the Bank or on
Morris Plan.
Capital Regulations. The OCC has adopted risk-based capital ratio guidelines to which the Bank is subject. The
guidelines establish a systematic analytical framework that makes regulatory capital requirements more sensitive to
differences in risk profiles among banking organizations. Risk-based capital ratios are determined by allocating assets and
specified off-balance sheet commitments to four risk weighted categories, with higher levels of capital being required for
the categories perceived as representing greater risk.
These guidelines divide a bank's capital into two tiers. The first tier (Tier 1) includes common equity, certain non-
cumulative perpetual preferred stock (excluding auction rate issues) and minority interests in equity accounts of
consolidated subsidiaries, less goodwill and certain other intangible assets (except mortgage servicing rights and
purchased credit card relationships, subject to certain limitations). Supplementary (Tier 2) capital includes, among other
items, cumulative perpetual and long-term limited-life preferred stock, mandatory convertible securities, certain hybrid
9
capital instruments, term subordinated debt and the allowance for loan and lease losses, subject to certain limitations, less
required deductions. Banks are required to maintain a total risk-based capital ratio of 8%, of which 4% must be Tier 1
capital. The OCC may, however, set higher capital requirements when a bank's particular circumstances warrant. Banks
experiencing or anticipating significant growth are expected to maintain capital ratios, including tangible capital positions,
well above the minimum levels.
In addition, the OCC established guidelines prescribing a minimum Tier 1 leverage ratio (Tier 1 capital to adjusted total
assets as specified in the guidelines). These guidelines provide for a minimum Tier 1 leverage ratio of 3% for banks that
meet certain specified criteria, including that they have the highest regulatory rating and are not experiencing or
anticipating significant growth. All other banks are required to maintain a Tier 1 leverage ratio of 3% plus an additional
cushion of at least 1% to 2% basis points.
Certain actual regulatory capital ratios under the OCC's risk-based capital guidelines for the Bank at December 31, 2012,
are shown below:
Tier 1 Capital to Risk-Weighted Assets
Total Risk-Based Capital to Risk-Weighted Assets
Tier 1 Leverage Ratio
14.78%
15.67%
10.98%
The federal bank regulators also have issued a joint policy statement to provide guidance on sound practices for managing
interest rate risk. The statement sets forth the factors the federal regulatory examiners will use to determine the adequacy
of a bank's capital for interest rate risk. These qualitative factors include the adequacy and effectiveness of the bank's
internal interest rate risk management process and the level of interest rate exposure. Other qualitative factors that will be
considered include the size of the bank, the nature and complexity of its activities, the adequacy of its capital and earnings
in relation to the bank's overall risk profile, and its earning exposure to interest rate movements. The interagency
supervisory policy statement describes the responsibilities of a bank's board of directors in implementing a risk
management process and the requirements of the bank's senior management in ensuring the effective management of
interest rate risk. Further, the statement specifies the elements that a risk management process must contain.
The federal banking regulators have also issued regulations revising the risk-based capital standards to include a
supervisory framework for measuring market risk. The effect of these regulations is that any bank holding company or
bank which has significant exposure to market risk must measure such risk using its own internal model, subject to the
requirements contained in the regulations, and must maintain adequate capital to support that exposure. These regulations
apply to any bank holding company or bank whose trading activity equals 10% or more of its total assets, or whose trading
activity equals $1 billion or more. Examiners may require a bank holding company or bank that does not meet the
applicability criteria to comply with the capital requirements if necessary for safety and soundness purposes. These
regulations contain supplemental rules to determine qualifying and excess capital, calculate risk-weighted assets, calculate
market risk-equivalent assets and calculate risk-based capital ratios adjusted for market risk.
Morris Plan is also subject to the capital adequacy guidelines of the FDIC in its examination and regulation of Morris Plan.
In addition, the Bank and Morris Plan are also subject to the "prompt corrective action" regulations, which implement a
capital-based regulatory scheme designed to promote early intervention for troubled banks. This framework contains five
categories of compliance with regulatory capital requirements, including "well capitalized", "adequately capitalized",
"undercapitalized", "significantly undercapitalized", and "critically undercapitalized". As of December 31, 2012, the Bank
and Morris Plan were qualified as "well capitalized." It should be noted that a bank's capital category is determined solely
for the purpose of applying the "prompt corrective action" regulations and that the capital category may not constitute an
accurate representation of the bank's overall financial condition or prospects. The degree of regulatory scrutiny of a
financial institution increases, and the permissible activities of the institution decrease, as it moves downward through the
capital categories. Bank holding companies controlling financial institutions can be required to boost the institutions'
capital and to partially guarantee the institutions' performance.
Ability-to-Repay Requirement and Qualified Mortgage Rule. The Dodd-Frank Act contains additional provisions that
affect consumer mortgage lending. First, it significantly expands underwriting requirements applicable to loans secured by
1-4 family residential real property and augments federal law combating predatory lending practices. In addition to
numerous new disclosure requirements, the Dodd-Frank Act imposes new standards for mortgage loan originations on all
lenders, including banks and savings associations, in an effort to encourage lenders to verify a borrower’s ability to repay,
while also establishing a presumption of compliance for certain “qualified mortgages.” Most significantly, the new
standards limit the total points and fees that the Bank and/or a broker may charge on conforming and jumbo loans to 3% of
the total loan amount. In addition, the Dodd-Frank Act generally requires lenders or securitizers to retain an economic
interest in the credit risk relating to loans that the lender sells and other asset-backed securities that the securitizer issues if
the loans have not complied with the ability-to-repay standards. The risk retention requirement generally will be 5%, but
could be increased or decreased by regulation.
In 2013, the CFPB issued a final rule, effective January 10, 2014, that implements the Dodd-Frank Act’s ability-to-repay
requirements, and clarifies the presumption of compliance for “qualified mortgages.” Further, the final rule also clarifies
10
that qualified mortgages do not include “no-doc” loans and loans with negative amortization, interest-only payments,
balloon payments, terms in excess of 30 years, or points and fees paid by the borrower that exceed 3% of the loan amount,
subject to certain exceptions. In addition, for qualified mortgages, the monthly payment must be calculated on the highest
payment that will occur in the first five years of the loan, and the borrower’s total debt-to-income ratio generally may not
be more than 43%. The final rule also provides that certain mortgages that satisfy the general product feature requirements
for qualified mortgages and that also satisfy the underwriting requirements of Fannie Mae and Freddie Mac (while they
operate under federal conservatorship or receivership) or the U.S. Department of Housing and Urban Development,
Department of Veterans Affairs, or Department of Agriculture or Rural Housing Service are also considered to be
qualified mortgages. This second category of qualified mortgages will phase out as the aforementioned federal agencies
issue their own rules regarding qualified mortgages, the conservatorship of Fannie Mae and Freddie Mac ends, and, in any
event, after seven years.
As set forth in the Dodd-Frank Act, subprime (or higher-priced) mortgage loans are subject to the ability-to-repay
requirement, and the final rule provides for a rebuttable presumption of lender compliance for those loans. The final rule
also applies the ability-to-repay requirement to prime loans, while also providing a conclusive presumption of compliance
( i.e. , a safe harbor) for prime loans that are also qualified mortgages. Additionally, the final rule generally prohibits
prepayment penalties (subject to certain exceptions) and sets forth a 3-year record retention period with respect to
documenting and demonstrating the ability-to-repay requirement and other provisions.
USA Patriot Act. The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism Act of 2001 (the “USA Patriot Act”) is intended to strengthen the ability of U.S. Law Enforcement to
combat terrorism on a variety of fronts. The potential impact of the USA Patriot Act on financial institutions is significant
and wide-ranging. The USA Patriot Act contains sweeping anti-money laundering and financial transparency laws and
requires financial institutions to implement additional policies and procedures with respect to, or additional measures
designed to address, any or all of the following matters, among others: money laundering and currency crimes, customer
identification verification, cooperation among financial institutions, suspicious activities and currency transaction
reporting.
S.A.F.E. Act Requirements. Regulations issued under the Secure and Fair Enforcement for Mortgage Licensing Act of
2008 ( the “S.A.F.E. Act” ) require residential mortgage loan originators who are employees of institutions regulated by
the foregoing agencies, including national banks, to meet the registration requirements of the S.A.F.E. Act. The S.A.F.E.
Act requires residential mortgage loan originators who are employees of regulated financial institutions to be registered
with the Nationwide Mortgage Licensing System and Registry, a database created by the Conference of State Bank
Supervisors and the American Association of Residential Mortgage Regulators to support the licensing of mortgage loan
originators by the states. Employees of regulated financial institutions are generally prohibited from originating
residential mortgage loans unless they are registered.
Other Regulations
Federal law extensively regulates other various aspects of the banking business such as reserve requirements. Current
federal law also requires banks, among other things to make deposited funds available within specified time periods. In
addition, with certain exceptions, a bank and a subsidiary may not extend credit, lease or sell property or furnish any
services or fix or vary the consideration for the foregoing on the condition that (i) the customer must obtain or provide
some additional credit, property or services from, or to, any of them, or (ii) the customer may not obtain some other credit,
property or service from a competitor, except to the extent reasonable conditions are imposed to assure the soundness of
credit extended.
Interest and other charges collected or contracted by the Bank or Morris Plan are subject to state usury laws and federal
laws concerning interest rates. The loan operations are also subject to federal and state laws applicable to credit
transactions, such as the:
• Truth-In-Lending Act and state consumer protection laws governing disclosures of credit terms and
prohibiting certain practices with regard to consumer borrowers;
• Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the
public and public officials to determine whether a financial institution is fulfilling its obligation to help meet
the housing needs of the community it serves;
• Equal Credit Opportunity Act and other fair lending laws, prohibiting discrimination on the basis of race,
•
•
creed or other prohibited factors in extending credit;
Fair Credit Reporting Act of 1978 and Fair and Accurate Credit Transactions Act of 2003, governing the use
and provision of information to credit reporting agencies;
Fair Debt Collection Practices Act, governing the manner in which consumer debts may be collected by
collection agencies; and rules and regulations of the various federal agencies charged with the responsibility
of implementing such federal laws.
11
The deposit operations also are subject to the:
• Customer Information Security Guidelines. The federal bank regulatory agencies have adopted final
guidelines (the "Guidelines") for safeguarding confidential customer information. The Guidelines require
each financial institution, under the supervision and ongoing oversight of its Board of Directors, to create a
comprehensive written information security program designed to ensure the security and confidentiality of
customer information, protect against any anticipated threats or hazards to the security or integrity of such
information; protect against unauthorized access to or use of such information that could result in substantial
harm or inconvenience to any customer; and implement response programs for security breaches.
• Electronic Funds Transfer Act and Regulation E. The Electronic Funds Transfer Act, which is implemented
by Regulation E, governs automatic deposits to and withdrawals from deposit accounts and customers' rights
and liabilities arising from the use of automated teller machines and other electronic banking service.
• Gramm-Leach-Bliley Act, Fair and Accurate Credit Transactions Act. The Gramm-Leach-Bliley Act, the
Fair and Accurate Credit Transactions Act, and the implementing regulations govern consumer financial
privacy, provide disclosure requirements and restrict the sharing of certain consumer financial information
with other parties.
The federal banking agencies have established guidelines which prescribe standards for depository institutions relating to
internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, asset quality, earnings, compensation fees and benefits, and management compensation. The
agencies may require an institution which fails to meet the standards set forth in the guidelines to submit a compliance
plan. Failure to submit an acceptable plan or adhere to an accepted plan may be grounds for further enforcement action.
As noted above, the new Bureau of Consumer Financial Protection will have authority for amending existing consumer
compliance regulations and implementing new such regulations. In addition, the Bureau will have the power to examine
the compliance of financial institutions with an excess of $10 billion in assets with these consumer protection rules. The
Bank’s and Morris Plan’s compliance with consumer protection rules will be examined by the OCC and the FDIC,
respectively, since neither the Bank nor Morris Plan meet this $10 billion asset level threshold.
Enforcement Powers. Federal regulatory agencies may assess civil and criminal penalties against depository institutions
and certain "institution-affiliated parties", including management, employees, and agents of a financial institution, as well
as independent contractors and consultants such as attorneys and accountants and others who participate in the conduct of
the financial institution's affairs.
In addition, regulators may commence enforcement actions against institutions and institution-affiliated parties. Possible
enforcement actions include the termination of deposit insurance. Furthermore, regulators may issue cease-and-desist
orders to, among other things, require affirmative action to correct any harm resulting from a violation or practice,
including restitution, reimbursement, indemnifications or guarantees against loss. A financial institution may also be
ordered to restrict its growth, dispose of certain assets, rescind agreements or contracts, or take other actions as determined
by the regulator to be appropriate.
Effect of Governmental Monetary Policies. The Corporation's earnings are affected by domestic economic conditions and
the monetary and fiscal policies of the United States government and its agencies. The Federal Reserve Bank's monetary
policies have had, and are likely to continue to have, an important impact on the operating results of commercial banks
through its power to implement national monetary policy in order, among other things, to curb inflation or combat a
recession. The monetary policies of the Federal Reserve have major effects upon the levels of bank loans, investments and
deposits through its open market operations in United States government securities and through its regulation of the
discount rate on borrowings of member banks and the reserve requirements against member bank deposits. It is not
possible to predict the nature or impact of future changes in monetary and fiscal policies.
Available Information
The Corporation files annual reports on Form 10-K, quarterly reports on Form 10-Q, proxy statements and other
information with the Securities and Exchange Commission. Such reports, proxy statements and other information can be
read and copied at the public reference facilities maintained by the Securities and Exchange Commission at the Public
Reference Room, 100 F Street, NE, Washington, D.C. 20549. Information regarding the operation of the Public Reference
Room may be obtained by calling the Securities and Exchange Commission at 1-800-SEC-0330. The Securities and
Exchange Commission maintains a web site (http://www.sec.gov) that contains reports, proxy statements, and other
information. The Corporation’s filings are also accessible at no cost on the Corporation's website at www.first-
online.com.
12
ITEM 1A.
RISK FACTORS
Difficult conditions in the capital markets and the economy generally may materially adversely affect the
Corporation’s business and results of operations
From December 2007 through June 2009, the U.S. economy was in recession. Business activity across a wide range of
industries and regions in the U.S. was greatly reduced. Although economic conditions have begun to improve, certain
sectors, such as real estate, remain weak and unemployment remains high. Local governments and many businesses are
still in serious difficulty due to lower consumer spending and the lack of liquidity in the credit markets.
Market conditions also led to the failure or merger of several prominent financial institutions and numerous regional and
community-based financial institutions. These failures, as well as projected future failures, have had a significant negative
impact on the capitalization level of the deposit insurance fund of the FDIC, which, in turn, has led to a significant
increase in deposit insurance premiums paid by financial institutions.
The Corporation’s financial performance generally, and in particular the ability of borrowers to pay interest on and repay
principal of outstanding loans and the value of collateral securing those loans, as well as demand for loans and other
products and services that the Corporation offers, is highly dependent upon the business environment in the markets where
the Corporation operates and in the United States as a whole. A favorable business environment is generally characterized
by, among other factors, economic growth, efficient capital markets, low inflation, low unemployment, high business and
investor confidence, and strong business earnings. Unfavorable or uncertain economic and market conditions can be
caused by declines in economic growth, business activity or investor or business confidence; limitations on the availability
or increases in the cost of credit and capital; increases in inflation or interest rates; high unemployment, natural disasters,
or a combination of these or other factors.
The business environment has been adverse for many households and businesses in the United States and worldwide.
While economic conditions in the United States and worldwide have begun to improve, there can be no assurance that this
improvement will continue. Such conditions have affected, and could continue to adversely affect, the credit quality of the
Corporation’s loans, results of operations and financial condition.
In response to economic and market conditions, from time to time the Corporation has undertaken initiatives to reduce its
cost structure where appropriate. These initiatives may not be sufficient to meet current and future changes in economic
and market conditions and allow the Corporation to maintain profitability. In addition, costs actually incurred in
connection with these restructuring actions may be higher than our estimates of such costs or may not lead to the
anticipated cost savings.
Recently enacted and potential further financial regulatory reforms could have a significant impact on our
business, financial condition and results of operations
The Dodd−Frank Wall Street Reform and Consumer Protection Act (the “Dodd−Frank Act”), enacted in July 2010,
instituted major changes to the banking and financial institutions regulatory regimes in light of the recent performance of
and government intervention in the financial services sector. Many aspects of the Dodd-Frank Act are subject to
rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on the
Corporation. The changes resulting from the Dodd−Frank Act may impact the profitability of business activities, require
changes to certain business practices, impose more stringent capital, liquidity and leverage requirements or otherwise
adversely affect the Corporation’s business. In particular, the potential impact of the Dodd−Frank Act on the
Corporation’s operations and activities, both currently and prospectively, include, among others:
•
•
•
•
•
a reduction in the ability to generate or originate revenue−producing assets as a result of compliance with
heightened capital standards;
increased cost of operations due to greater regulatory oversight, supervision and examination of banks and
bank holding companies, and higher deposit insurance premiums;·
the limitation on the ability to raise new capital through the use of trust preferred securities, as any new
issuances of these securities will no longer be included as Tier 1 capital going forward;
a potential reduction in fee income due to limits on interchange fees applicable to larger institutions which
could effectively reduce the fees we can charge; and
the limitation on the ability to expand consumer product and service offerings due to anticipated stricter
consumer protection laws and regulations.
Further, the Corporation may be required to invest significant management attention and resources to evaluate and make
any changes necessary to comply with new statutory and regulatory requirements under the Dodd−Frank Act, which may
negatively impact results of operations and financial condition.
13
Contemplated and proposed legislation, state and federal programs, and increased government control or influence may
adversely affect the Corporation by increasing the uncertainty on its lending operations and expose it to increased losses.
Statutes and regulations may be altered which potentially increase the Corporation’s cost of service and underwrite
mortgage loans.
In June 2012 the respective federal bank regulatory agencies proposed for comment proposed rulemakings for new capital
standards generally consistent with Basel III. The comment period for these notices of proposed rulemakings has expired,
but final regulations have not yet been released and the federal bank regulatory agencies announced that the
implementation of the proposed rules under Basel III was indefinitely delayed. If and when implemented, Basel III would
require capital to be held in the form of tangible common equity, generally increase the required capital ratios, phase out
certain kinds of intangibles treated as capital and certain types of instruments, such as trust preferred securities, and change
the risk weightings of assets used to determine required capital ratios. Such changes, including changes regarding
interpretations and implementation, could affect the Corporation in substantial and unpredictable ways and could have a
material adverse effect on us. Further, among other things, such changes could subject us to additional costs and limit the
types of financial services and products we may offer.
The Corporation cannot predict whether there will be additional proposed laws or reforms that would affect the U.S.
financial system or financial institutions, whether or when such changes may be adopted, how such changes may be
interpreted and enforced or how such changes may impact the Corporation’s financial condition and results of operations.
However, the costs of complying with any additional laws or regulations could have a material adverse effect on the
Corporation’s financial condition and results of operations.
The recent repeal of federal prohibitions on payment of interest on business demand deposits could increase our
interest expense and have a material adverse effect on us
All federal prohibitions on the ability of financial institutions to pay interest on business demand deposit accounts were
repealed as part of the Dodd-Frank Act. As a result, some financial institutions have commenced offering interest on these
demand deposits to compete for customers. If competitive pressures require us to pay interest on these demand deposits to
attract and retain business customers, our interest expense would increase and our net interest margin would decrease. This
could have a material adverse effect on us. Further, the effect of the repeal of the prohibition could be more significant in a
higher interest rate environment as business customers would have a greater incentive to seek interest on demand deposits.
The Corporation is subject to interest rate risk
The Corporation’s earnings and cash flows are largely dependent upon the Corporation’s net interest income. Net interest
income is the difference between interest income earned on interest earning assets such as loans and securities and interest
expense paid on interest bearing liabilities such as deposits and borrowed funds. Interest rates are highly sensitive to many
factors that are beyond the Corporation’s control, including general economic conditions and policies of various
governmental and regulatory agencies. Changes in monetary policy, including changes in interest rates, could influence
not only the interest that is received on loans and securities and the interest that is paid on deposits and borrowings, but
such changes could also affect (i) the Corporation’s ability to originate loans and obtain deposits, and (ii) the fair value of
the Corporation’s financial assets and liabilities. Currently, the Corporation is in an asset-sensitive position. In a rising
interest rate environment, the Corporation may be unable to sell its lower-yielding mortgage loans, thus impacting its
ability to generate higher yielding loans which could adversely impact earnings.
The Corporation is subject to lending risk
There are inherent risks associated with the Corporation's lending activities. These risks include, among other things, the
impact of changes in interest rates and changes in the economic conditions in the markets where the Corporation operates
as well as those across Indiana, Illinois and the United States. Increases in interest rates and/or weakening economic
conditions could adversely impact the ability of borrowers to repay outstanding loans or the value of the collateral
securing these loans. Credit issues may continue to broaden during 2013 depending on the severity and duration of the
stagnant economy and the current credit cycle.
The Corporation originates commercial real estate loans, commercial loans, consumer loans and residential real estate
loans primarily within its market areas. Commercial real estate, commercial, and consumer loans may expose a lender to
greater credit risk than loans secured by residential real estate because the collateral securing these loans may not be sold
as easily as residential real estate. These loans also have greater credit risk than residential real estate for the following
reasons:
• Commercial Real Estate Loans. Repayment is dependent upon income being generated in amounts
sufficient to cover operating expenses and debt service.
• Commercial Loans. Repayment is dependent upon the successful operation of the borrower’s business.
• Consumer Loans. Consumer loans (such as personal lines of credit) are collateralized, if at all, with
assets that may not provide an adequate source of payment of the loan due to depreciation, damage, or
loss.
14
The Corporation is also subject to various laws and regulations that affect its lending activities. Failure to comply with
applicable laws and regulations could subject the Corporation to regulatory enforcement action that could result in the
assessment of significant civil money penalties against the Corporation.
The Corporation's allowance for loan losses may be insufficient
The Corporation maintains an allowance for loan losses, which is a reserve established through a provision for loan losses
charged to expense, that represents management's best estimate of probable incurred losses that are inherent within the
existing portfolio of loans. The level of the allowance reflects management's continuing evaluation of industry
concentrations; specific credit risks; loan loss experience; current loan portfolio quality; present economic, political and
regulatory conditions and unidentified losses inherent in the current loan portfolio. The determination of the appropriate
level of the allowance for loan losses inherently involves a high degree of subjectivity and requires the Corporation to
make significant estimates of current credit risks and future trends, all of which may undergo material changes. Changes
in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem
loans and other factors, both within and outside of the Corporation's control, may require an increase in the allowance for
loan losses. In addition, bank regulatory agencies periodically review the Corporation's allowance for loan losses and may
require an increase in the provision for loan losses or the recognition of further loan charge-offs, based on judgments
different than those of management. In addition, if charge-offs in future periods exceed the allowance for loan losses, the
Corporation will need additional provisions to increase the allowance for loan losses. Any increases in the allowance for
loan losses will result in a decrease in net income and, possibly, capital, and may have a material adverse effect on the
Corporation's financial condition and results of operations.
The Corporation may foreclose on collateral property and would be subject to the increased costs associated with
ownership of real property, resulting in reduced revenues and earnings
The Corporation forecloses on collateral property from time to time to protect its investment and thereafter owns and
operates such property, in which case it is exposed to the risks inherent in the ownership of real estate. The amount that
the Corporation, as a mortgagee, may realize after a default is dependent upon factors outside of its control, including, but
not limited to: (i) general or local economic conditions; (ii) neighborhood values; (iii) interest rates; (iv) real estate tax
rates; (v) operating expenses of the mortgaged properties; (vi) environmental remediation liabilities; (vii) ability to obtain
and maintain adequate occupancy of the properties; (viii) zoning laws; (ix) governmental rules, regulations and fiscal
policies; and (x) acts of God. Certain expenditures associated with the ownership of real estate, principally real estate
taxes, insurance, and maintenance costs, may adversely affect the income from the real estate. Therefore, the cost of
operating real property may exceed the income earned from such property, and the Corporation may have to advance
funds in order to protect its investment, or it may be required to dispose of the real property at a loss. These expenditures
and costs could adversely affect the Corporation’s ability to generate revenues, resulting in reduced levels of profitability.
The Corporation operates in a highly competitive industry and market area
The Corporation faces substantial competition in all areas of its operations from a variety of different competitors, many of
which are larger and may have more financial resources. Such competitors include banks and many other types of
financial institutions, including, without limitation, savings and loans, credit unions, finance companies, brokerage firms,
insurance companies, factoring companies and other financial intermediaries. The financial services industry could
become even more competitive as a result of legislative, regulatory and technological changes and continued
consolidation. Banks, securities firms and insurance companies can merge under the umbrella of a financial holding
company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance
(both agency and underwriting) and merchant banking. Also, technology has lowered barriers to entry and made it
possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and
automatic payment systems. Many of the Corporation's competitors have fewer regulatory constraints and may have lower
cost structures. Additionally, due to their size, many competitors may be able to achieve economies of scale and, as a
result, may offer a broader range of products and services as well as better pricing for those products and services than the
Corporation can.
The Corporation's ability to compete successfully depends on a number of factors, including, among other things:
• The ability to develop, maintain and build upon long-term customer relationships based on top quality
service, and safe, sound assets;
• The ability to expand the Corporation's market position;
• The scope, relevance and pricing of products and services offered to meet customer needs and demands;
• The rate at which the Corporation introduces new products and services relative to its competitors;
• Customer satisfaction with the Corporation's level of service; and
•
Industry and general economic trends.
15
Failure to perform in any of these areas could significantly weaken the Corporation's competitive position, which could
adversely affect the Corporation's growth and profitability, which, in turn, could have a material adverse effect on the
Corporation's financial condition and results of operations.
The Corporation is subject to extensive government regulation and supervision
The Corporation, primarily through the Bank, is subject to extensive federal regulation and supervision. Banking
regulations are primarily intended to protect depositors' funds, federal deposit insurance funds and the banking system as a
whole, not shareholders. These regulations affect the Corporation's lending practices, capital structure, investment
practices, and growth, among other things. Congress and federal regulatory agencies continually review banking laws,
regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies, including changes in
interpretation or implementation of statutes, regulations or policies, could affect the Corporation in substantial and
unpredictable ways. Such changes could subject the Corporation to additional costs, limit the types of financial services
and products the Corporation may offer and/or increase the ability of non-banks to offer competing financial services and
products, among other things. Failure to comply with laws, regulations or policies could result in sanctions by regulatory
agencies, civil money penalties and/or reputation damage, which could have a material adverse effect on the Corporation's
business, financial condition and results of operations. While the Corporation has policies and procedures designed to
prevent any such violations, there can be no assurance that such violations will not occur.
The Corporation is dependent on certain key management and staff
The Corporation relies on key personnel to manage and operate its business. The loss of key staff may adversely affect the
Corporation’s ability to maintain and manage these portfolios effectively, which could negatively affect the Corporation’s
revenues. In addition, loss of key personnel could result in increased recruiting and hiring expenses, which could cause a
decrease in the Corporation's net income.
The Corporation’s internal operations are subject to a number of risks
The Corporation’s internal operations are subject to certain risks, including but not limited to, data processing system
failures and errors, customer or employee fraud and catastrophic failures resulting from terrorist acts or natural disasters.
Operational risk resulting from inadequate or failed internal processes, people, and systems includes the risk of fraud by
employees or persons outside of our company, the execution of unauthorized transactions by employees, errors relating to
transaction processing and systems, and breaches of the internal control system and compliance requirements. This risk of
loss also includes potential legal actions that could arise as a result of the operational deficiency or as a result of
noncompliance with applicable regulatory standards.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new
technology-driven products and services. The effective use of technology increases efficiency and enables financial
institutions to better serve customers and to reduce costs. The Corporation's future success depends, in part, upon its
ability to address the needs of its customers by using technology to provide products and services that will satisfy
customer demands, as well as to create additional efficiencies in the Corporation's operations. Failure to successfully keep
pace with technological change affecting the financial services industry could have a material adverse impact on the
Corporation's business and, in turn, the Corporation's financial condition and results of operations.
The Corporation’s earnings could be adversely impacted by incidences of fraud and compliance failures that are
not within our direct control
Financial institutions are inherently exposed to fraud risk. A fraud can be perpetrated by a customer of the Bank, an
employee, a vendor, or members of the general public. We are most subject to fraud and compliance risk in connection
with the origination of loans, ACH transactions, ATM transactions and checking transactions. Our largest fraud risk,
associated with the origination of loans, includes the intentional misstatement of information in property appraisals or
other underwriting documentation provided to us by third parties. Compliance risk is the risk that loans are not originated
in compliance with applicable laws and regulations and our standards. There can be no assurance that we can prevent or
detect acts of fraud or violation of law or our compliance standards by the third parties that we deal with. Repeated
incidences of fraud or compliance failures would adversely impact the performance of our loan portfolio.
The Corporation's information systems may experience an interruption or breach in security
The Corporation relies heavily on communications and information systems to conduct its business. Any failure,
interruption or breach in security of these systems could result in failures or disruptions in the Corporation's customer
relationship management, general ledger, deposit, loan and other systems. While the Corporation has policies and
procedures designed to prevent or limit the effect of the failure, interruption or security breach of its information systems,
there can be no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that
they will be adequately addressed. The occurrence of any failures, interruptions or security breaches of the Corporation's
information systems could damage the Corporation's reputation, result in a loss of customer business, subject the
16
Corporation to additional regulatory scrutiny, or expose the Corporation to civil litigation and possible financial liability,
any of which could have a material adverse effect on the Corporation's financial condition and results of operations.
The Corporation has opened new offices
The Corporation has placed a strategic emphasis on expanding its banking office network. Executing this strategy carries
risks of slower than anticipated growth in the new offices, which require a significant investment of both financial and
personnel resources. Lower than expected loan and deposit growth in new offices can decrease anticipated revenues and
net income generated by those offices, and opening new offices could result in more additional expenses than anticipated
and divert resources from current core operations.
The geographic concentration of the Corporation’s markets makes the Corporation’s business highly susceptible to
local economic conditions
Unlike larger banking organizations that are more geographically diversified, the Corporation’s operations are currently
concentrated in three counties located in central Indiana. As a result of this geographic concentration, the Corporation’s
financial results depend largely upon economic conditions in these market areas. Deterioration in economic conditions in
the Corporation’s market could result in one or more of the following:
•
•
•
•
an increase in loan delinquencies;
an increase in problem assets and foreclosures;
a decrease in the demand for the Corporation’s products and services; and
a decrease in the value of collateral for loans, especially real estate, in turn reducing customers’ borrowing
power, the value of assets associated with problem loans and collateral coverage.
Future growth or operating results may require the Corporation to raise additional capital but that capital may not
be available or it may be dilutive
The Corporation is required by federal and state regulatory authorities to maintain adequate levels of capital to support its
operations. To the extent the Corporation’s future operating results erode capital or the Corporation elects to expand
through loan growth or acquisition it may be required to raise capital. The Corporation’s ability to raise capital will
depend on conditions in the capital markets, which are outside of its control, and on the Corporation’s financial
performance. Accordingly, the Corporation cannot be assured of its ability to raise capital when needed or on favorable
terms. If the Corporation cannot raise additional capital when needed, it will be subject to increased regulatory
supervision and the imposition of restrictions on its growth and business. These could negatively impact the Corporation’s
ability to operate or further expand its operations through acquisitions or the establishment of additional branches and may
result in increases in operating expenses and reductions in revenues that could have a material adverse effect on its
financial condition and results of operations.
The Corporation may not be able to pay dividends in the future in accordance with past practice
The Corporation has historically paid a semi-annual dividend to common stockholders. The payment of dividends is
subject to legal and regulatory restrictions. Any payment of dividends in the future will depend, in large part, on the
Corporation’s earnings, capital requirements, financial condition and other factors considered relevant by the
Corporation’s Board of Directors.
The price of the Corporation’s common stock may be volatile, which may result in losses for investors
General market price declines or market volatility in the future could adversely affect the price of the Corporation’s
common stock. In addition, the following factors may cause the market price for shares of the Corporation’s common
stock to fluctuate:
•
•
•
•
•
•
•
announcements of developments related to the Corporation’s business;
fluctuations in the Corporation’s results of operations;
sales or purchases of substantial amounts of the Corporation’s securities in the marketplace;
general conditions in the Corporation’s banking niche or the worldwide economy;
a shortfall or excess in revenues or earnings compared to securities analysts’ expectations;
changes in analysts’ recommendations or projections; and
the Corporation’s announcement of new acquisitions or other projects.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The Corporation is located in a four-story office building in downtown Terre Haute, Indiana that was first occupied in
17
June 1988. It is leased to the Bank. The Bank also owns two other facilities in downtown Terre Haute. One is available for
lease and the other is a 50,000-square-foot building housing operations and administrative staff and equipment. In addition, the
Bank holds in fee six other branch buildings. One of the branch buildings is a single-story 36,000-square-foot building which is
located in a Terre Haute suburban area. Four other branch bank buildings are leased by the Bank. The expiration dates on the
three leases are May 31, 2016, February 14, 2016 and May 31, 2014. The other lease is on a month to month basis.
Facilities of the Corporation’s banking center in Daviess County include an office in Washington, Indiana. This building
is held in fee.
Facilities of the Corporation’s banking centers in Clay County include three offices in Brazil, Indiana and offices in Clay
City and Poland, Indiana. All five buildings are held in fee.
Facilities of the Corporation’s banking centers in Vermillion County include two offices in Clinton, Indiana and offices in
Cayuga and Newport, Indiana. All four buildings are held in fee.
Facilities of the Corporation’s banking centers in Sullivan County include offices in Sullivan, Carlisle, Dugger,
Farmersburg and Hymera, Indiana. All five buildings are held in fee.
Facilities of the Corporation’s banking center in Gibson County include an office in Princeton, Indiana. This building is
held in fee.
Facilities of the Corporation’s banking center in Greene County include an office in Worthington, Indiana. This building
is held in fee.
Facilities of the Corporation’s banking centers in Knox County include offices in Monroe City, Sandborn and two in
Vincennes, Indiana. All four buildings are held in fee.
Facilities of the Corporation’s banking centers in Parke County include two offices in Rockville, Indiana and offices in
Marshall, Montezuma and Rosedale, Indiana. All five buildings are held in fee.
Facilities of the Corporation’s banking center in Putnam County include an office in Greencastle, Indiana. This building is
held in fee.
Facilities of the Corporation’s banking center in Vanderburgh County include an office in Evansville, Indiana. This
building is held in fee.
Facilities of the Corporation’s banking centers in Crawford County include its main office and a drive-up facility in
Robinson, Illinois and a branch facility in Oblong, Illinois. All three of the buildings are held in fee.
Facilities of the Corporation’s banking center in Lawrence County include an office in Lawrenceville, Illinois. This
building is held in fee.
Facilities of the Corporation’s banking centers in Livingston include three offices in Pontiac, Illinois. All of the buildings
are held in fee.
Facilities of the Corporation’s banking center in McLean County include two offices in Bloomington, Illinois, an office in
Downs, Illinois and an office in Gridley, Illinois. These building are all held in fee.
Facilities of the Corporation’s banking center in Wayne County include an office in Fairfield, Illinois. This building is
held in fee.
Facilities of the Corporation’s banking center in Jasper County include an office in Newton, Illinois. This building is held
in fee.
Facilities of the Corporation’s banking center in Coles County include an office in Charleston, Illinois. This building is
held in fee.
Facilities of the Corporation’s banking center in Clark County include an office in Marshall, Illinois. This building is held
in fee.
Facilities of the Corporation’s banking center in Champaign County include two offices in Champaign, Illinois, an office
in Mohomet, Illinois, and two offices in Urbana, Illinois. One of the banking centers in Champaign is held in fee while the land
is leased. The land lease expires September 6, 2036. One of the banking centers in Champaign is leased and the lease expires
on December 31, 2017. The banking center in Mohomet is leased and the lease expires on June 30, 2016. One of the banking
centers in Urbana is held in fee while the other banking center in Urbana is held in fee while the land is leased and the lease
18
expires on November 30, 2014.
Facilities of the Corporation’s banking center in Vermilion County include five offices in Danville, Illinois, an office in
Westville, Illinois, and an office in Ridge Farm, Illinois. One of the buildings in Danville is leased and the lease expires on
December 31, 2016 and the other six buildings are held in fee.
Facilities of the Corporation’s banking centers in Richland County include two offices in Olney, Illinois. One building is
held in fee and the other building is leased. The expiration date on the lease is March 1, 2015.
The facility of the Corporation’s subsidiary, The Morris Plan Company, includes an office facility in Terre Haute, Indiana.
The building is leased by The Morris Plan Company. The expiration date on the lease is October 31, 2020.
Facilities of the Corporation’s subsidiary, Forrest Sherer, Inc., include its main office and one satellite office in Terre
Haute, Indiana. The buildings are held in fee by Forrest Sherer, Inc.
Facilities of the Corporation’s subsidiary, FFB Management Co., Inc., include an office facility in Las Vegas, Nevada.
This office facility is leased.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Corporation or its subsidiaries is a party, other than ordinary
routine litigation incidental to its business.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES.
MARKET AND DIVIDEND INFORMATION
As of March 11, 2013 shareholders owned 13,307,498 shares of the Corporation's common stock. The stock is traded on the
NASDAQ Global Select Market under the symbol “THFF”. On March 11, 2013, approximately 3,806 shareholders held our
common stock.
Historically, the Corporation has paid cash dividends semi-annually and currently expects that comparable cash dividends will
continue to be paid in the future. The following table gives quarterly high and low trade prices and dividends per share during
each quarter for 2012 and 2011.
2012
2011
Quarter ended
March 31
June 30
September 30
December 31
Trade Price
Trade Price
High
$
36.84
$
32.23
$
32.93
$
32.18
Cash
Dividends
Low Declared High
35.00
30.31
33.98
27.09
33.91
28.25
34.23
28.07
$
$
$
$
$
$
$
$
$
$
0.48
0.47
Cash
Dividends
Low Declared
29.73
30.36
26.63
26.47
$
$
0.47
0.47
$
$
$
$
The Corporation periodically acquires shares of its common stock directly from shareholders in individually
negotiated transactions. The Corporation has not adopted a formal policy or adopted a formal program for repurchases of
shares of its common stock. There were no purchases of common stock by the Corporation during the quarter covered by
this report. The Corporation contributed 49,825 shares of treasury stock to the ESOP in November of 2012.
The graph below represents the five-year total return of the Corporation’s stock. The five year total return for our stock
during this time was 23.73%. During this same period, the return on The Russell 2000 Index was 19.09% and the SNL
Index of Banks $1 - $5 Billion actually had a negative return of 25.22%.
19
20
ITEM 6. SELECTED FINANCIAL DATA
FIVE YEAR COMPARISON OF SELECTED FINANCIAL DATA
(Dollar amounts in thousands, except per share amounts)
2012
2011
2010
2009
2008
BALANCE SHEET DATA
Total assets
Securities
Loans, net of unearned fees*
Deposits
Borrowings
Shareholders’ equity
INCOME STATEMENT DATA
Interest income
Interest expense
Net interest income
Provision for loan losses
Other income
Other expenses
Net income
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 shareholders’ equity
to average assets
Dividend payout
$
2,895,408
691,000
1,851,936
2,276,134
160,256
372,122
$
2,954,061
666,287
1,893,679
2,274,499
246,449
346,961
$
2,451,095
560,846
1,640,146
1,903,043
159,899
321,717
$
2,518,722
587,246
1,631,764
1,789,701
363,173
306,483
$
2,302,675
596,915
1,471,327
1,563,498
406,653
286,844
122,305
13,393
108,912
8,773
39,547
93,056
32,812
116,341
17,147
99,194
5,755
33,340
75,187
37,195
123,582
26,966
96,616
9,200
29,797
77,202
28,044
126,255
39,261
86,994
11,870
28,532
73,381
22,720
133,954
52,490
81,464
7,855
25,410
66,447
24,769
2.48
0.95
2.83
0.94
2.14
0.92
1.73
0.90
1.89
0.89
1.13%
1.49%
1.11%
0.95%
1.09%
9.02
13.25
12.55
38.40
10.88
14.57
13.68
33.29
8.73
13.56
12.76
43.08
7.54
13.25
12.56
51.99
8.61
13.28
12.60
47.10
* 2008 includes $12,800 of credit card loans that are held-for-sale
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Management's Discussion and Analysis of Financial Condition and Results of Operations, as well as disclosures found
elsewhere in this report are based upon First Financial Corporation's consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial
statements requires the Corporation to make estimates and judgments that affect the reported amounts of assets, liabilities,
revenues, and expenses. Material estimates that are particularly susceptible to significant change in the near term relate to the
determination of the allowance for loan losses, 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 probable incurred losses in
the existing loan portfolio. The allowance for loan losses is increased by the provision for loan losses charged to expense and
reduced by loans charged off, net of recoveries. The allowance for loan losses is determined based on management's
assessment of several factors: reviews and evaluations of specific loans, changes in the nature and volume of the loan
portfolio, current economic and nonperforming loans. Loans are considered impaired if, based on current information and
21
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,for loans deemed to be collateral dependent, the present value of the future cash flows
discounted at the effective interest rate stipulated in the loan agreement, or the estimated market value of the loan. In
measuring the fair value of the collateral, management uses assumptions (e.g., discount rate) and methodologies (e.g.,
comparison to the recent selling price of similar assets) consistent with those that would be utilized by unrelated third parties.
Changes in the financial condition of individual borrowers, economic conditions, historical loss experience, or the condition
of the various markets in which collateral may be sold may affect the required level of the allowance for loan losses and the
associated provision for loan losses. Should cash flow assumptions or market conditions change, a different amount may be
recorded for the allowance for loan losses and the associated provision for loan losses.
Securities valuation and potential impairment. Securities available-for-sale are carried at fair value, with unrealized
holding gains and losses reported separately in accumulated other 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 fair value. Equity
securities that do not have readily determinable fair values are carried at cost. Additionally, all securities are required to be
evaluated for other than temporary impairment (OTTI). In determining whether a market value decline is other than temporary,
management considers the reason for the decline, the extent of the decline, the duration of the decline and whether the
Corporation intends to sell a security or is more likely than not to be required to sell a security before recovery of its
amortized cost. If an entity intends to sell or it is more likely than not it will be required to sell the security before recovery of its
amortized cost basis, the OTTI shall be recognized in earnings equal to the entire difference between the investment's amortized
cost basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than
not that the entity will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the
OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of
the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is
recognized in earnings.
Changes in credit ratings, financial condition of underlying debtors, default experience and market liquidity affect the
conclusions 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 for these investments.
Goodwill. The carrying value of goodwill requires management to use estimates and assumptions about the fair value of the
reporting unit compared to its book value. An impairment analysis is prepared on an annual basis. Fair values of the reporting units are
determined by an analysis which considers cash flows streams, profitability and estimated market values of the reporting unit. The
majority of the Corporation's goodwill is recorded at First Financial Bank, N. A.
Management believes the accounting estimates related to the allowance for loan losses, valuation of investment securities and the
valuation of goodwill are "critical accounting estimates" because: (1) the estimates are highly susceptible to change from period to
period because they require management to make assumptions concerning, among other factors, the changes in the types and
volumes of the portfolios, valuation assumptions, and economic conditions, and (2) the impact of recognizing an impairment or loan
loss could have a material effect on the Corporation's assets reported on the balance sheet as well as net income.
RESULTS OF OPERATIONS - SUMMARY FOR 2012
COMPARISON OF 2012 TO 2011
Net income for 2012 was $32.8 million, or $2.48 per share. This represents a 11.8% decrease in net income and a 12.4% decrease in
earnings per share, compared to 2011. Return on assets at December 31, 2012 decreased 24.2% to 1.13% compared to 1.49% at
December 31, 2011.
The primary components of income and expense affecting net income are discussed in the following analysis. 2012 includes
income and expense associated with the purchase of Freestar Bank on December 30, 2011 that were not part of the results for
2011.
NET INTEREST INCOME
The principal source of the Corporation's earnings is net interest income, which represents the difference between interest
earned on loans and investments and the interest cost associated with deposits and other sources of funding .Net interest
income increased in 2012 to $108.9 million compared to $99.2 million in 2011. Total average interest earning assets
increased to $2.67 billion in 2012 from $2.33 billion in 2011. The tax-equivalent yield on these assets decreased to 4.80% in
2012 from 5.23% in 2011. Total average interest-bearing liabilities increased to $2.02 billion in 2012 from $1.76 billion
in 2011. The average cost of these interest-bearing liabilities decreased to 0.66% in 2012 from 0.98% in 2011.
The net interest margin decreased from 4.50% in 2011 to 4.30% in 2012. This decrease is primarily the result of the decreased
income provided by earning assets. Earning asset yields decreased 43 basis points while the rate on interest-bearing liabilities
decreased by 32 basis points.
22
CONSOLIDATED BALANCE SHEET - AVERAGE BALANCES AND INTEREST RATES
(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
2012
December 31,
2011
2010
Average
Balance
Interest
Yield/
Rate
Average
Balance
Interest
Yield/
Rate
Average
Balance
Interest
Yield/
Rate
$
1,863,014
498,509
243,070
67,240
2,671,833
100,083
13,541
14,651
44
128,319
5.37% 1,637,471
$
460,811
2.72%
204,921
6.03%
0.07%
25,117
4.80% 2,328,320
92,167
16,161
13,465
36
121,829
5.63% 1,636,254
$
469,945
3.51%
194,011
6.57%
0.14%
40,934
5.23% 2,341,144
96,786
18,597
13,415
59
128,857
5.92%
3.96%
6.91%
0.14%
5.50%
Non-interest earning assets:
Cash and due from banks
Premises and equipment, net
Other assets
Less allowance for loan losses
TOTALS
65,445
43,594
138,462
(20,134)
2,899,200
$
58,030
34,054
99,861
(22,154)
2,498,111
$
57,940
35,001
102,780
(20,083)
2,516,782
$
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Transaction accounts
Time deposits
Short-term borrowings
Other borrowings
Total interest-bearing
liabilities:
Non interest-bearing
liabilities:
Demand deposits
Other
Shareholders' equity
TOTALS
$
1,176,403
653,089
50,451
136,281
1,736
6,784
140
4,733
0.15%
1.04%
0.28%
3.47%
$
974,275
616,164
43,040
125,102
1,501
10,626
187
4,833
0.15%
1.72%
0.43%
3.86%
$
870,538
697,560
42,795
224,501
1,856
14,450
325
10,335
0.21%
2.07%
0.76%
4.60%
2,016,224
13,393
0.66% 1,758,581
17,147
0.98% 1,835,394
26,966
1.47%
439,206
79,894
2,535,324
363,876
2,899,200
$
336,038
61,693
2,156,312
341,799
2,498,111
$
300,760
59,461
2,195,615
321,167
2,516,782
$
Net interest earnings
$
114,926
$
104,682
$
101,891
Net yield on interest-
earning assets
4.30%
4.50%
4.35%
(1) For purposes of these computations, nonaccruing loans are included in the daily average loan amounts outstanding.
(2) Interest income includes the effect of tax equivalent adjustments using a federal tax rate of 35%.
23
The following table sets forth the components of net interest income due to changes in volume and rate. The table information
compares 2012 to 2011 and 2011 to 2010.
(Dollar amounts in thousands)
Interest earned on
interest-earning assets:
Loans (1) (2)
Taxable investment
securities
Tax-exempt investment
securities (2)
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
2012 Compared to 2011 Increase
(Decrease) Due to
2011 Compared to 2010 Increase
(Decrease) Due to
Volume
Rate
Volume/
Rate
Total Volume
Rate
Volume/
Rate
Total
$12,695
($4,201)
($579)
$7,915
$72
($4,688)
($3)
($4,619)
1,322
(3,644)
(298)
(2,620)
(361)
(2,116)
41
(2,436)
2,507
60
$16,584
(1,113)
(20)
($8,978)
(207)
(33)
($1,117)
1,187
7
$6,489
754
(23)
$442
(668)
0
($7,472)
(38)
0
$0
48
(23)
($7,030)
311
637
32
432
1,412
$15,172
(63)
(4,227)
(68)
(488)
(4,846)
($4,132)
235
(13)
(3,843)
(253)
(48)
(12)
(100)
(44)
(322)
(3,756)
($795) $10,245
221
(1,686)
2
(4,576)
(6,039)
$6,481
(515)
(2,418)
(139)
(1,662)
(4,734)
($2,738)
(61)
282
(1)
736
956
($956)
(355)
(3,822)
(138)
(5,502)
(9,817)
$2,787
(1)
outstanding.
(2)
For purposes of these computations, nonaccruing loans are included in the daily average loan amounts
Interest income includes the effect of tax equivalent adjustments using a federal tax rate of 35%.
PROVISION FOR LOAN LOSSES
The provision for loan losses charged to expense is based upon credit loss experience and the results of a detailed analysis
estimating an appropriate and adequate allowance for loan losses. The analysis includes the evaluation of impaired loans as
prescribed under Accounting Standards Codification (ASC-310), pooled loans as prescribed under ASC 450-10, 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, 2012, the provision for loan losses was $8.8 million net, an increase of $3.0 million, or 52.4%, compared to 2011.
The 2012 provision was reduced by $2.2 million for the offset of loans identified in the analysis of potential loan losses that
are subject to the loss share agreement with the FDIC. Of those anticipated losses, 80% can be reimbursed by the FDIC and
the FDIC indemnification asset has a corresponding increase of $2.2 million for those anticipated losses. The decrease was the
result of several components related to the analysis of the Corporation's Allowance for Loan and Lease Losses.
Net charge-offs for 2012 were $8.3 million as compared to $9.0 million for 2011 and $8.0 million for 2010. Non-accrual
loans decreased to $35.8 million at December 31, 2012 from $38.1 million at December 31, 2011. The decrease occurred
despite a $4.7 million increase in non-accruals from the acquisition of Freestar Bank on December 30, 2011. Loans past
due 90 days and still on accrual increased to $3.4 million compared to $2.0 million at December 31, 2011.
NON-INTEREST INCOME
Non-interest income of $39.5 million increased $6.2 million from the $33.3 million earned in 2011. Electronic banking fees and
gains from the sale of mortgage loans were the primary drivers of this increase.
NON-INTEREST EXPENSES
Non-interest expenses increased to $93.1 million for 2012 from $75.2 million for 2011. The largest increase was in salaries
and benefits at $ 10.8 million. Salaries increased $5.6 million while benefits increased $5.2 million. The salaries relate to
the acquisition of Freestar and staffing for the four new branch locations acquired from the FDIC. Those were expenses not
in the financial statement of previous years. The benefits expense increase of $5.2 million was primarily driven by an
increase in pension expense of $3.3 million. The pension plan was frozen for most employees during 2012. Other expenses
were up $4.9 million from 2011. Over $1 million of these were one-time costs associated with the acquisition and
integration of Freestar Bank.
24
INCOME TAXES
The Corporation's federal income tax provision was $13.8 million in 2012 compared to a provision of $14.4 million in 2011. The
overall effective tax rate in 2012 of 29.6% increased as compared to a 2011 effective rate of 27.9%.
COMPARISON OF 2011 TO 2010
Net income for 2011 was $37.2 million or $2.83 per share compared to $28.0 million in 2010 or $2.14 per share. This
increase in net income was primarily driven by the improved net interest margin of 15 basis points from 4.35% to 4.50%.
Net interest income increased $2.6 million in 2011 compared to 2010 as total average interest-earning assets remained stable.
This increase was primarily the result of the cost of funding declining at a faster pace than the decline in the earnings on earning
assets. The provision for loan losses decreased $3.4 million from $9.2 million in 2010 to $5.8 million in 2011. Net non-
interest income and expense decreased $5.6 million from 2010 to 2011. Non-interest expenses decreased $2.0 million while
non-interest income increased $3.5 million. The increase in non-interest income resulted primarily from reduced impairment
losses and lower non-interest expense resulted from reduced FDIC expense and reduced incentive expense.
The provision for income taxes increased $2.4 million from 2010 to 2011 and the effective tax rate decreased 2% in 2011
from 2010 as nontaxable income increased.
COMPARISON AND DISCUSSION OF 2012 BALANCE SHEET TO 2011
The Corporation's total assets decreased 2.0% or $58.7 million at December 31, 2012, from a year earlier. Available-for-
sale securities increased $24.7 million at December 31, 2012, from the previous year. Loans, net of unearned income, decreased
by $41.8 million to $1.85 billion. Deposits increased by $1.6 million while borrowings decreased by $86.2 million. Total
shareholders' equity increased $25.2 million to $372.1 million at December 31, 2012. Net income was partially offset by
higher dividends. There were also 49,825 shares from the treasury with a value of $1.44 million that were contributed to the
ESOP plan in 2012 compared to 46,250 shares with a value of $1.56 million in 2011.
Following is an analysis of the components of the Corporation's balance sheet.
SECURITIES
The Corporation's investment strategy seeks to maximize income from the investment portfolio while using it as a risk
management tool and ensuring safety of principal and capital. During 2012 the portfolio's balance increased by 3.7%. The
average life of the portfolio increased from 4.0 years in 2011 to 4.2 years in 2012. The portfolio structure will continue to
provide cash flows to be reinvested during 2013.
(Dollar amounts in thousands)
U.S. government sponsored
entity mortgage-backed
securities and agencies (1)
Collateralized mortgage obligations (1)
States and political subdivisions
Corporate obligations
Total
Equities
TOTAL
1 year and less
Over 10 Years
Balance Rate Balance Rate Balance Rate Balance Rate
5 to 10 years
1 to 5 years
2012
Total
$
1,382
40
11,165
-
12,587
$
3,261
4.78%
3.70%
1,096
4.13% 37,782
0.00%
-
4.20% 42,139
0.00%
$
62,178
6.06%
11,789
4.87%
81,539
3.92%
0.00%
-
4.11% 155,506
0.00%
$
12,587
$
42,139
$
155,506
4.60% 184,872
$
3.94% 220,395
68,999
3.61%
0.00%
6,122
4.03% 480,388
380
0.00%
480,768
$
5.75% 251,693
$
2.92% 233,320
3.87% 199,485
0.00%
6,122
4.11% 690,620
380
0.00%
691,000
$
(1) Distribution of maturities is based on the estimated life of the asset.
(Dollar amounts in thousands)
U.S. government sponsored
entity mortgage-backed
securities and agencies (1)
Collateralized mortgage obligations (1)
States and political subdivisions
Corporate obligations
Total
Equities
TOTAL
1 year and less
Over 10 Years
Balance Rate Balance Rate Balance Rate Balance Rate
5 to 10 years
1 to 5 years
2011
Total
2
$
-
8,465
-
8,467
7.50% 11,287
$
2,384
0.00%
7.22% 42,309
0.00%
-
7.22% 55,980
0.00%
$
83,897
4.01%
19,438
5.20%
71,071
6.17%
0.00%
-
5.69% 174,406
0.00%
$
8,467
$
55,980
$
174,406
4.44% 220,716
$
4.39% 126,125
73,736
5.40%
0.00%
4,771
4.83% 425,348
2,086
0.00%
427,434
$
4.37% 315,902
$
4.17% 147,947
6.03% 195,581
1.94%
4,771
4.57% 664,201
2,086
0.00%
666,287
$
(1) Distribution of maturities is based on the estimated life of the asset.
25
LOAN PORTFOLIO
Loans outstanding by major category as of December 31 for each of the last five years and the maturities at year end 2012 are
set forth in the following analyses.
(Dollar amounts in thousands)
Loan Category
Commercial
Residential
Consumer
TOTAL
2012
2011
2010
2009
2008
$
$
1,088,144
496,237
268,507
1,852,888
$
$
1,099,324
505,600
289,717
1,894,641
$
896,107
437,576
307,403
1,641,086
$
$
870,977
447,379
314,561
1,632,917
$
$
720,281
436,388
303,123
1,459,792
$
Credit card loans held-for-sale
$
-
$
-
$
-
$
-
$
12,800
(Dollar amounts in thousands)
MATURITY DISTRIBUTION
Commercial, financial and agricultural
Within
One Year
After One
But Within After Five
Five Years
Years
Total
$
421,495
$
538,980
$
127,669
$
1,088,144
496,237
268,507
1,852,888
$
$
$
114,053
13,616
127,669
$
$
167,611
371,369
538,980
TOTAL
Residential
Consumer
TOTAL
Loans maturing after one year with:
Fixed interest rates
Variable interest rates
TOTAL
26
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 of loans outstanding
at December 31,
2012
2011
2010
2009
2008
$
1,852,888
$
1,894,641
$
1,641,086
$
1,632,917
$
1,459,792
Average amount of loans by year
$
1,863,014
$
1,637,471
$
1,636,254
$
1,563,274
$
1,451,911
Allowance for loan losses at beginning of year
$
19,241
$
22,336
$
19,437
$
16,280
$
15,351
Loans charged off:
Commercial
Residential
Consumer
Total loans charged off
Recoveries of loans previously charged off:
Commercial
Residential
Consumer
Total recoveries
Net loans charged off
Provision charged to expense *
Balance at end of year
Ratio of net charge-offs during period
to average loans outstanding
4,176
2,598
3,640
10,414
5,336
2,811
2,969
11,116
7,099
872
4,503
12,474
2,997
1,881
6,783
11,661
2,406
1,274
5,914
9,594
644
100
1,387
2,131
8,283
11,000
21,958
$
938
95
1,108
2,141
8,975
5,880
19,241
$
2,319
258
1,934
4,511
7,963
10,862
22,336
$
574
523
1,851
2,948
8,713
11,870
19,437
$
704
101
1,863
2,668
6,926
7,855
16,280
$
0.44%
0.55%
0.49%
0.56%
0.48%
* In 2012 the provision charged to expense was reduced by $2.2 million for the increase to the FDIC
Indemnification asset. In 2011 and 2010 it was reduced by $125 thousand and $1.7 million, respectively.
The allowance is maintained at an amount management believes sufficient to absorb probable incurred losses in the loan
portfolio. Monitoring loan quality and maintaining an adequate allowance is an ongoing process overseen by senior
management and the loan review function. On at least a quarterly basis, a formal analysis of the adequacy of the allowance is
prepared and reviewed by management and the Board of Directors. This analysis serves as a point in time assessment of the
level of the allowance and serves as a basis for provisions for loan losses. The loan quality monitoring process includes assigning
loan grades and the use of a watch list to identify loans of concern.
Included in the $1.9 billion of loans outstanding at December 31, 2012 are $27.8 million of covered loans, those loans
acquired with the purchase of the First National Bank of Danville from the FDIC that are covered by the loss sharing
agreement.
Also included are $245 million of loan acquired on December 30, 2011 in the Freestar acquisition. These acquired loans
are recorded at fair value with no carryover of Freestar’s allowance for loan losses. The loans acquired had a contractual
balance due of $254 million. The acquired portfolio includes purchased credit impaired loans with a contractual balance
due of $29 million and a fair value of $20 million.
The analysis of the allowance for loan losses includes the allocation of specific amounts of the allowance to individual problem
loans, generally based on an analysis of the collateral securing those loans. Portions of the allowance are also allocated to
loan portfolios, based upon a variety of factors including historical loss experience, trends in the type and volume of the loan
portfolios, trends in delinquent and non-performing loans, and economic trends affecting our market. These components are
added together and compared to the balance of our allowance at the evaluation date. The Corporation’s unallocated allowance
position of $1.7 million at December 31, 2012 has increased from $505 thousand at December 31, 2011. The unallocated
position decreased in 2011. Management has determined the unallocated allowance position to be reasonable based on the
trend analysis of the loan portfolio. Non-performing loans of $58.8 million at December 31, 2012 increased from $56.4
million at December 31, 2011. There was an additional $4.7 million of non-accrual loans added with the acquisition of
Freestar Bank. Net charge-offs totaled $8.3 million compared to $9.0 million during 2011. The table below presents the
allocation of the allowance to the loan portfolios at year-end.
(Dollar amounts in thousands)
Commercial
Residential
Consumer
Unallocated
TOTAL ALLOWANCE FOR LOAN LOSSES
2012
Years Ended December 31,
2010
2011
2009
2008
$
$
$
$
$
12,119
2,728
3,889
505
19,241
12,809
2,873
4,551
2,103
22,336
12,218
1,546
5,032
641
19,437
9,963
1,485
4,483
349
16,280
$
$
$
$
$
10,987
5,426
3,879
1,666
21,958
27
NONPERFORMING LOANS
Management monitors the components and status of nonperforming loans as a part of the evaluation procedures used in determining
the adequacy of the allowance for loan losses. It is the Corporation's policy to discontinue the accrual of interest on loans where,
in management's opinion, serious doubt exists as to collectability. The amounts shown below represent non-accrual loans, loans
which have been restructured to provide for a reduction or deferral of interest or principal because of deterioration in the financial
condition of the borrower and those loans which are past due more than 90 days where the Corporation continues to accrue interest.
In 2012 there were two commercial loans totaling $5.1 million added to restructured loans and in 2010, and still outstanding the
increase in restructured loans was mainly due to adding commercial loans totaling $14.9 million to restructured loans.The remainder
is mostly smaller balance residential loans. The current economic environment has resulted in an increase in the use of restructured
loans as a means to manage problem loans. Some restructured loans are also on non-accrual and are only included in the total of
restructured loans.
(Dollar amounts in thousands)
Non-accrual loans
Restructured loans
Accruing loans past due over 90 days
2012
2011
2010
2009
2008
$
$
$
$
$
36,794
19,671
3,362
59,827
38,102
16,275
2,047
56,424
38,517
17,094
3,185
58,796
35,953
90
8,218
44,261
$
$
$
$
$
12,486
98
3,624
16,208
The ratio of the allowance for loan losses as a percentage of nonperforming loans was 37% at December 31, 2012, compared to 34% in
2011. The ratio of nonperforming loans excluding covered loans was 42% at December 31, 2012 and 41% at December 31, 2011. There
were $2.4 and $3.6 million of covered loans included in restructured loans in 2012 and 2011 respectively. The following loan categories
comprise significant components of the nonperforming loans at December 31, 2012 and 2011:
(Dollar amounts in thousands)
Non-accrual loans:
Commercial loans
Residential loans
Consumer loans
Past due 90 days or more:
Commercial loans
Residential loans
Consumer loans
(Dollar amounts in thousands)
Non-accrual loans:
Commercial loans
Residential loans
Consumer loans
Past due 90 days or more:
Commercial loans
Residential loans
Consumer loans
2012
2011
$
$
21,900
13,201
1,693
36,794
$
$
1,481
1,750
131
3,362
60%
36%
5%
100%
44%
52%
4%
100%
$
$
26,590
9,477
2,035
38,102
$
610
1,358
79
2,047
$
70%
25%
5%
100%
30%
66%
4%
100%
Covered Loans (also included above)
2012
2011
95%
5%
0%
100%
86%
14%
0%
100%
$
$
5,086
506
-
5,592
182
226
5
413
$
$
$
$
$
$
4,114
217
-
4,331
539
91
-
630
91%
9%
0%
100%
44%
55%
1%
100%
Management considers the present allowance to be appropriate and adequate to cover probable incurred losses inherent in the loan
portfolio based on the current economic environment. However, future economic changes cannot be predicted. Deteriorating
economic conditions could result in an increase in the risk characteristics of the loan portfolio and an increase in the potential for loan
losses.
28
DEPOSITS
The information below presents the average amount of deposits and rates paid on those deposits for 2012, 2011 and 2010.
(Dollar amounts in thousands)
Non-interest-bearing
demand deposits
Interest-bearing demand deposits
Savings deposits
Time deposits:
$100,000 or more
Other time deposits
TOTAL
2012
2011
2010
Amount
Rate
Amount
Rate
Amount
Rate
$
439,206
439,368
737,035
183,635
469,454
2,268,698
$
0.19%
0.13%
1.12%
1.01%
$
336,038
361,533
612,742
181,380
434,784
1,926,477
$
0.17%
0.15%
1.58%
1.79%
$
300,760
330,168
540,370
214,266
483,294
1,868,858
$
0.23%
0.20%
1.85%
2.17%
The maturities of certificates of deposit of $100 thousand or more outstanding at December 31, 2012, are summarized as follows:
(Dollar amounts in thousands)
3 months or less
Over 3 through 6 months
Over 6 through 12 months
Over 12 months
TOTAL
$
36,428
45,100
51,029
81,052
213,609
$
OTHER BORROWINGS
Advances from the Federal Home Loan Bank decreased to $119.7 million in 2012 compared to $140.2 million in 2011. The FHLB
advances acquired in the acquisition had a fair value of $16.6 million. Other borrowings acquired totaled $6.2 million in trust preferred
securities that were included in the assumption of liabilities of PNB Holding Co, the parent company of Freestar Bank. These securities
were called at the end of 2012. The Asset/Liability Committee reviews these investments and funding sources and considers the related
strategies on a monthly basis. See Interest Rate Sensitivity and Liquidity below for more information.
CAPITAL RESOURCES
Bank regulatory agencies have established capital adequacy standards which are used extensively in their monitoring and
control of the industry. These standards relate capital to level of risk by assigning different weightings to assets and certain off-
balance-sheet activity. As shown in the footnote to the consolidated financial statements ("Regulatory Matters"), the
Corporation's capital exceeds the requirements to be considered well capitalized at December 31, 2012.
First Financial Corporation's objective continues to be to maintain adequate capital to merit the confidence of its customers and
shareholders. To warrant this confidence, the Corporation's management maintains a capital position which they believe is sufficient
to absorb unforeseen financial shocks without unnecessarily restricting dividends to its shareholders. The Corporation's dividend
payout ratio for 2012 and 2011 was 38.4% and 33.3%, respectively. The Corporation expects to continue its policy of paying regular
cash dividends, subject to future earnings and regulatory restrictions and capital requirements.
INTEREST RATE SENSITIVITY AND LIQUIDITY
First Financial Corporation has established risk measures, limits and policy guidelines for managing interest rate risk and liquidity.
Responsibility for management of these functions resides with the Asset/Liability Committee. The primary goal of the
Asset/Liability Committee is to maximize net interest income within the interest rate risk limits approved by the Board of Directors.
Interest Rate Risk: Management considers interest rate risk to be the Corporation's most significant market risk. Interest rate risk
is the exposure to changes in net interest income as a result of changes in interest rates. Consistency in the Corporation's net
interest income is largely dependent on the effective management of this risk. The Asset/Liability position is measured using
sophisticated risk management tools, including earnings simulation and market value of equity sensitivity analysis. These tools
allow management to quantify and monitor both short-and long-term exposure to interest rate risk. Simulation modeling measures
the effects of changes in interest rates, changes in the shape of the yield curve and the effects of embedded options on net interest
income. This measure projects earnings in the various environments over the next three years. It is important to note that
measures of interest rate risk have limitations and are dependent on various assumptions. These assumptions are inherently
uncertain and, as a result, the model cannot precisely predict the impact of interest rate fluctuations on net interest income. Actual
results will differ from simulated results due to timing, frequency and amount of interest rate changes as well as overall
market conditions. The Committee has performed a thorough analysis of these assumptions and believes them to be valid and
theoretically sound. These assumptions are continuously monitored for behavioral changes.
The Corporation from time to time utilizes derivatives to manage interest rate risk. Management continuously evaluates the merits
of such interest rate risk products but does not anticipate the use of such products to become a major part of the Corporation's
risk management strategy.
29
The table below shows the Corporation's estimated sensitivity profile as of December 31, 2012. The change in interest rates
assumes a parallel shift in interest rates of 100 and 200 basis points. Given a 100 basis point increase in rates, net interest
income would increase 3.56% over the next 12 months and increase 6.40% over the following 12 months. Given a 100
basis point decrease in rates, net interest income would decrease 0.91% over the next 12 months and decrease 2.78% over
the following 12 months. These estimates assume all rate changes occur overnight and management takes no action as a result
of this change.
Basis Point
Interest Rate Change
Down 200
Down 100
Up 100
Up 200
Percentage Change in Net Interest Income
24 months
-5.17%
-2.78%
6.40%
10.50%
12 months
-1.70%
-0.91%
3.56%
4.91%
36 months
-7.45%
-3.98%
9.46%
16.97%
Typical rate shock analysis does not reflect management's ability to react and thereby reduce the effects of rate changes,
and represents a worst-case scenario.
Liquidity Risk Liquidity is measured by the bank's ability to raise funds to meet the obligations of its customers, including
deposit withdrawals and credit needs. This is accomplished primarily by maintaining sufficient liquid assets in the form
of investment securities and core deposits. The Corporation has $12.6 million of investments that mature throughout the
coming 12 months. The Corporation also anticipates $111.6 million of principal payments from mortgage-backed
securities. Given the current rate environment, the Corporation anticipates $8.9 million in securities to be called within
the next 12 months.
CONTRACTUAL OBLIGATIONS, COMMITMENTS, CONTINGENT LIABILITIES AND OFF-BALANCE SHEET
ARRANGEMENTS
The Corporation has various financial obligations, including contractual obligations and commitments that may require
future cash payments.
Contractual Obligations: The following table presents, as of December 31, 2012, significant fixed and determinable contractual
obligations to third parties by payment date. Further discussion of the nature of each obligation is included in the
referenced note to the consolidated financial statements.
Payments Due in
(Dollar amounts in thousands)
Deposits without a stated maturity
Consumer certificates of deposit
Short-term borrowings
Other borrowings
Note
Reference
11
12
$
or less
1,666,791
345,615
40,551
61,320
Three to
Three Years Five Years
$
-
-
$
61,864
200,528
-
-
10,791
47,594
Over Five
Years
$
-
1,336
-
-
$
Total
1,666,791
609,343
40,551
119,705
One year One year to
The Corporation has obligations under its pension, supplemental executive retirement plan and post-retirement medical
benefits plan as described in Note 15 to the consolidated financial statements.
Commitments: The following table details the amount and expected maturities of significant commitments as of December
31, 2012. Further discussion of these commitments is included in Note 14 to the consolidated financial statements.
(Dollar amounts in thousands)
Commitments to extend credit:
Unused loan commitments
Commercial letters of credit
Total Amount One year
Committed
or less
Over One
Year
$
362,010
7,717
$
183,456
4,109
$
178,554
3,608
Commitments to extend credit, including loan commitments, standby and commercial letters of credit do not necessarily
represent future cash requirements, in that these commitments often expire without being drawn upon.
OUTLOOK
The Corporation's primary market is west-central Indiana and east-central Illinois. The market is primarily driven by the
retail, higher education and health care industries. Typically, this market does not expand or contract at rates that are
experienced by both the state and national economies. It is not anticipated that labor conditions will improve dramatically in
2013, although a gradual improvement in both the labor markets and retail sales is anticipated. The Corporation anticipates
moderate growth opportunities in 2013.
30
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A.
The information contained under the caption “Management’s Discussion and Analysis of Financial Condition and
Results of Operations — Market Risk” on pages 28 and 29 of this Form 10-K is incorporated herein by reference in
response to this item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
M A NA GEME NT 'S RE POR T ON IN TE RN AL C ON T R OL OV E R FIN A NCI AL R EPORT IN G
The management of First Financial Corporation (the "Corporation") has prepared and is responsible for the preparation and
accuracy of the 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 control over financial
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 accounting principles. The
Corporation's internal control over financial reporting includes those policies and procedures that: (i) pertain to the
maintenance of records that, in reasonable detail, accurately 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 accordance with generally accepted accounting principles, and that receipts and expenditures of the Corporation are
being made only in accordance with authorizations of management and directors of the Corporation; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Corporation's assets
that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the Corporation's system of internal control over financial reporting as of December 31, 2012, in
relation to criteria for 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 assessment,
management concluded that, as of December 31, 2012, its system of internal control over financial reporting is effective and
meets the criteria of the "Internal Control—Integrated Framework."
Crowe Horwath LLP, independent registered public accounting firm, has issued a report dated March 15, 2013 on the
Corporation's internal control over financial reporting.
31
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of First Financial Corporation:
We have audited the accompanying consolidated balance sheets of First Financial Corporation as of December
31, 2012 and 2011 and the related consolidated statements of income and comprehensive income, changes in
shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2012. We also
have audited First Financial Corporation's internal control over financial reporting as of December 31, 2012,
based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). First Financial Corporation's management is responsible for
these financial statements, for maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying
Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion
on these financial statements and an opinion on the company's internal control over financial reporting based on
our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement and whether effective internal control over
financial reporting was maintained in all material respects. Our audits of the financial statements included
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. Our audit of internal control over financial reporting included obtaining an understanding
of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also
included performing such other procedures as we considered necessary in the circumstances. We believe that our
audits provide a reasonable basis for our opinions.
A company's internal control over financial reporting is a process 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 accounting principles. A company's internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of First Financial Corporation as of December 31, 2012 and 2011, and the results of its
operations and its cash flows for each of the three years in the period ended December 31, 2012, in conformity
with accounting principles generally accepted in the United States of America. Also in our opinion First Financial
Corporation maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2012, based on criteria established in Internal Control —Integrated Framework issued by the
COSO.
Crowe Horwath LLP
Indianapolis, Indiana March 15, 2013
32
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands, except per share data)
ASSETS
Cash and due from banks
Federal funds sold
Securities available-for-sale
Loans, net of allowance of $21,958 in 2012 and $19,241 in 2011
Restricted Stock
Accrued interest receivable
Premises and equipment, net
Bank-owned life insurance
Goodwill
Other intangible assets
Other real estate owned
FDIC Indemnification Asset
Other assets
TOTAL ASSETS
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Non-interest-bearing
Interest-bearing:
Certificates of deposit of $100 or more
Other interest-bearing deposits
Short-term borrowings
Other borrowings
Other liabilities
TOTAL LIABILITIES
Shareholders’ equity
Common stock, $.125 stated value per share;
Authorized shares-40,000,000
Issued shares-14,490,609 in 2012 and 14,450,966 in 2011.
Outstanding shares-13,287,348 in 2012 and 13,197,880 in 2011
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss)
Less: Treasury shares at cost-1,203,261 in 2012 and 1,253,086 in 2011
TOTAL SHAREHOLDERS’ EQUITY
December 31,
2012
2011
$
87,230
20,800
691,000
1,829,978
21,292
12,024
47,308
77,295
37,612
3,893
7,722
2,632
56,622
$
2,895,408
$
134,280
11,725
666,287
1,874,438
22,282
12,947
40,105
82,646
36,897
5,142
4,964
2,384
59,964
$
2,954,061
$
465,954
$
435,236
213,610
1,596,570
2,276,134
40,551
119,705
86,896
2,523,286
1,808
69,989
338,342
(7,472)
(30,545)
372,122
242,001
1,597,262
2,274,499
100,022
146,427
86,152
2,607,100
1,806
69,328
318,130
(10,494)
(31,809)
346,961
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
2,895,408
$
2,954,061
See accompanying notes.
33
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Dollar amounts in thousands, except per share data)
INTEREST AND DIVIDEND INCOME:
Loans, including related fees
Securities:
Taxable
Tax-exempt
Other
TOTAL INTEREST AND DIVIDEND INCOME
INTEREST EXPENSE:
Deposits
Short-term borrowings
Other borrowings
TOTAL INTEREST EXPENSE
NET INTEREST INCOME
Net Provision for loan losses
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES
NON-INTEREST INCOME:
Trust and financial services
Service charges and fees on deposit accounts
Other service charges and fees
Securities gain, net
Other-than-temporary loss
Total impairment loss
Loss recognized in other comprehensive income
Net impairment loss recognized in earnings
Insurance commissions
Gain on sale of mortgage loans
Other
TOTAL NON-INTEREST INCOME
NON-INTEREST EXPENSES:
Salaries and employee benefits
Occupancy expense
Equipment expense
Federal Deposit Insurance
Other
TOTAL NON-INTEREST EXPENSE
INCOME BEFORE INCOME TAXES
Provision for income taxes
NET INCOME
OTHER COMPREHENSIVE INCOME
Years Ended December 31,
2011
2010
2012
$
99,196
$
91,392
$
96,206
13,542
7,246
2,321
122,305
8,520
140
4,733
13,393
108,912
8,773
16,161
6,779
2,009
116,341
12,127
187
4,833
17,147
99,194
5,755
18,597
6,664
2,115
123,582
16,306
325
10,335
26,966
96,616
9,200
100,139
93,439
87,416
5,804
9,742
9,710
886
4,544
8,995
8,289
6
4,547
10,342
7,759
1,321
(11)
(110)
(4,260)
(11)
7,422
4,590
1,404
39,547
56,211
5,746
5,489
1,949
23,661
93,056
46,630
(110)
7,347
1,957
2,312
33,340
45,362
4,777
4,352
1,804
18,892
75,187
51,592
(4,260)
6,759
2,206
1,123
29,797
44,887
4,707
4,761
2,847
20,000
77,202
40,011
13,818
32,812
$
14,397
37,195
$
11,967
28,044
$
Change in unrealized gains/losses on securities, net of
reclassifications and taxes
Change in funded status of post retirement benefits, net of taxes
COMPREHENSIVE INCOME
$
$
$
691
2,331
35,834
$
$
$
8,857
(9,982)
36,070
$
$
$
449
(1,914)
26,579
EARNINGS PER SHARE:
BASIC AND DILUTED
Weighted average number of shares outstanding (in thousands)
See accompanying notes.
$
2.48
13,240
$
2.83
13,163
$
2.14
13,120
34
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollar amounts in thousands, except per share data) Stock
Capital
Earnings
Income/(Loss)
Stock
Total
Common Additional Retained Comprehensive Treasury
Balance, January 1, 2010
$
1,806
$
68,739
$
277,357
$
(7,904)
$
(33,515)
$
306,483
Accumulated
Other
Net income
Other comprehensive loss, net of tax:
Change in net unrealized gains/losses
on securities available-for-sale, net
Change in unrealized gains/losses on
post-retirement benefits
Contribution of 45,000 shares to ESOP
Treasury stock purchase (23,000 shares)
Cash Dividends, $.92 per share
-
-
-
-
-
-
-
-
-
-
-
205
28,044
-
-
-
-
(12,082)
Balance, December 31, 2010
1,806
68,944
293,319
Net income
Change in net unrealized
gains/(losses) on securities
available for-sale
Change in net unrealized gains/
(losses) on retirement plans
Contribution of 46,250 shares to ESOP
Cash Dividends, $.94 per share
-
-
-
-
-
-
-
-
-
384
37,195
-
-
-
(12,384)
-
-
-
-
-
-
-
449
(1,914)
-
-
-
1,142
(610)
-
28,044
449
(1,914)
1,347
(610)
(12,082)
(9,369)
(32,983)
321,717
8,857
(9,982)
-
-
-
1,174
-
37,195
8,857
(9,982)
1,558
(12,384)
Balance, December 31, 2011
1,806
69,328
318,130
(10,494)
(31,809)
346,961
Net income
Change in net unrealized
gains/(losses) on securities
available for-sale
Change in net unrealized gains/
(losses) on retirement plans
Omnibus Equity Incentive Plan
Contribution of 49,825 shares to ESOP
Cash Dividends, $.95 per share
Balance, December 31, 2012
See accompanying notes.
-
-
-
-
-
2
-
-
-
-
486
175
32,812
-
-
-
(12,600)
-
-
-
691
2,331
-
-
-
1,264
-
32,812
691
2,331
488
1,439
(12,600)
$
1,808
$
69,989
$
338,342
$
(7,472)
$
(30,545)
$
372,122
35
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands, except per share data)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income
Adjustments to reconcile net income to net cash
provided by operating activities:
Net (accretion) amortization on securities
Provision for loan losses
Securities impairment loss recognized in earnings
Securities (gains) losses
Depreciation and amortization
Provision for deferred income taxes
Net change in accrued interest receivable
Contribution of shares to ESOP
Stock compensation expense
Gain on sale of mortgage loans
Loss on sales of other real estate
Other, net
NET CASH FROM OPERATING ACTIVITIES
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of securities available-for-sale
Calls, maturities and principal reductions on securities available-for-sale
Purchases of securities available-for-sale
Loans made to customers, net of payments
Net change in federal funds sold
Purchase of bank owned life insurance
Redemption of bank owned life insurance
Redemption of restricted stock
Purchase of restricted stock
Purchase of customer list
Cash received from sale of mortgage loans
Cash received (disbursed) from purchase of business unit
Sale of other real estate
Additions to premises and equipment
NET CASH FROM INVESTING ACTIVITIES
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits
Net change in other short-term borrowings
Dividends paid
Purchases of treasury stock
Proceeds from other borrowings
Repayments on other borrowings
NET CASH FROM FINANCING ACTIVITIES
NET CHANGE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
CASH AND CASH EQUIVALENTS, END OF YEAR
Years Ended December 31,
2011
2010
2012
$
32,812
$
37,195
$
28,044
3,492
8,773
11
(886)
5,105
(143)
923
1,439
488
(4,590)
69
7,160
54,653
25,812
142,475
(194,475)
(137,684)
(9,075)
(1,551)
9,180
1,185
(186)
(114)
167,227
-
4,285
(10,945)
(3,866)
274
5,755
110
(6)
3,897
624
500
1,558
-
(1,957)
370
(7,739)
40,581
25
139,179
(134,770)
(106,012)
1,044
(4,500)
-
4,952
-
-
86,601
14,849
4,573
(1,476)
4,465
(840)
9,200
4,260
(1,321)
4,643
(5,940)
797
1,347
-
(2,206)
283
10,293
48,560
12,248
223,862
(211,062)
(132,997)
16,472
-
-
2,527
-
-
116,462
(609)
3,727
(2,406)
28,224
149
(59,471)
(12,425)
-
-
(26,090)
(97,837)
(47,050)
134,280
87,230
$
10,202
36,746
(12,231)
-
-
(3,994)
30,723
75,769
58,511
134,280
$
113,180
3,670
(11,940)
(610)
2,000
(208,944)
(102,644)
(25,860)
84,371
58,511
$
SUPPLEMENTAL DISCLOSURES OF CASH FLOW AND NONCASH INFORMATION:
Cash paid for the year for:
Interest
Income Taxes
See accompanying notes.
$
$
13,837
12,638
$
$
17,358
16,565
$
$
28,051
15,713
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:
B U S I N E S S
Organization: The consolidated financial statements of First Financial Corporation and its subsidiaries (the Corporation) include
the parent company and its wholly-owned subsidiaries, First Financial Bank, N.A. headquartered in Vigo County, Indiana, The
Morris Plan Company of Terre Haute (Morris Plan), Forrest Sherer Inc., a full-line insurance agency headquartered in Terre
Haute, Indiana, and FFB Risk Management Co., Inc., a captive insurance subsidiary headquartered in Las Vegas, Nevada. Inter-
company transactions and balances have been eliminated.
First Financial Bank also has two investment subsidiaries, Portfolio Management Specialists A (Specialists A) and Portfolio
Management Specialists B (Specialists B), which were established to hold and manage certain assets as part of a strategy to better
manage various income streams and provide opportunities for capital creation as needed. Specialists A and Specialists B
subsequently entered into a limited partnership agreement, Global Portfolio Limited Partners. Portfolio Management Specialists
B also owns First Financial Real Estate, LLC. At December 31, 2012, $583.7 million of securities and loans were owned by these
subsidiaries. Specialists A, Specialists B, Global Portfolio Limited Partners and First Financial Real Estate LLC are included in the
consolidated financial statements.
The Corporation, which is headquartered in Terre Haute, Indiana, offers a wide variety of financial services including
commercial, mortgage and consumer lending, lease financing, trust account services and depositor services through its four
subsidiaries. The Corporation's primary source of revenue is derived from loans to customers, primarily middle-income
individuals, and investment activities.
The Corporation operates 68 branches in west-central Indiana and east-central Illinois. First Financial Bank is the largest
bank in Vigo County. It operates 11 full-service banking branches within the county; one in Daviess County, Indiana.; five
in Clay County, Indiana; one in Gibson County, Indiana.; one in Greene County, Indiana; four in Knox County, Indiana;
five in Parke County, Indiana; one in Putnam County, Indiana; five in Sullivan County, Indiana; one in Vanderburgh County,
Indiana,; four in Vermillion County, Indiana; five in Champaign County, Illinois; one in Clark County, Illinois; one in Coles
County, Illinois; three in Crawford County, Illinois; one in Jasper County, Illinois; one in Lawrence County, Illinois; three in
Livingston County, Illinois; four in McLean County, Illinois; two in Richland County, Illinois; six in Vermilion County,
Illinois; and one in Wayne County, Illinois. It also has a main office in downtown Terre Haute and an operations center/office
building in southern Terre Haute.
Regulatory Agencies: First Financial Corporation is a multi-bank holding company and as such is regulated by various banking
agencies. The holding company is regulated by the Seventh District of the Federal Reserve System. The national bank
subsidiary is regulated by the Office of the Comptroller of the Currency. The state bank subsidiary is jointly regulated by the state
banking organization and the Federal Deposit Insurance Corporation.
SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates: To prepare financial statements in conformity with U.S. generally accepted accounting principles,
management makes estimates and assumptions based on available information. These estimates and assumptions affect the
amounts reported in the financial statements and disclosures provided, and actual results could differ. The allowance for loan
losses, goodwill, carrying value of intangible assets, loan servicing rights, other-than-temporary securities impairment and the fair
values of financial instruments are particularly subject to change.
Cash Flows: Cash and cash equivalents include cash and demand deposits with other financial institutions. Net cash flows are
reported for customer loan and deposit transactions and short-term borrowings. Non-cash transactions include loans transferred
to other real estate of $7.1 million, $3.5 million and $4.5 million for the years ended December 31, 2012, 2011 and 2010
respectively.
Securities: The Corporation classifies all securities as "available for sale." Securities are classified as available for sale when
they might be sold before maturity. Securities available for sale are carried at fair value with unrealized holdings gains and losses,
net of taxes, reported in other comprehensive income within shareholders' equity.
Interest income includes amortization of purchase premium or discount. Premiums and discounts are amortized on the level
yield method without anticipating prepayments. Mortgage-backed securities are amortized over the expected life. Realized
gains and losses on sales are based on the amortized cost of the security sold. Management evaluates securities for other-than
temporary impairment (OTTI) at least on a quarterly basis, and more frequently when economic or market conditions
warrant such an evaluation.
Loans: Loans that management has the intent and ability to hold for the foreseeable future until maturity or pay-off are
reported at the principal balance outstanding, net of unearned interest, purchase premiums and discounts, deferred loan fees
and costs, and allowance for loan losses. Loans held for sale are reported at the lower of cost or market, on an aggregate basis.
Interest income is accrued on the unpaid principal balance and includes amortization of net deferred loan fees and costs over the
loan term without anticipating prepayments. The recorded investment in loans includes accrued interest receivable and net
deferred loan fees and costs over the loan term without anticipating prepayments. Interest income is not reported when full
loan repayment is in doubt, typically when the loan is impaired or payments are significantly past due. Past-due status is based
on the contractual terms of the loan.
All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such
loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to
accrual status when all the principal and interest amounts contractually due are brought current and future payments are
37
reasonably assured. In all cases, loans are placed on non-accrual or charged-off if collection of principal or interest is considered
doubtful. The above policies are consistent for all segments of loans.
Certain Purchased Loans: The Corporation purchases individual loans and groups of loans, some of which have shown
evidence of credit deterioration since origination. These purchased loans are recorded at the amount paid, such that there is no
carryover of the seller's allowance for loan losses. After acquisition, losses are recognized by an increase in the allowance for loan
losses. Such purchased loans are accounted for individually. The Corporation estimates the amount and timing of expected cash
flows for each purchased loan, and the expected cash flows in excess of amount paid are recorded as interest income over the
remaining life of the loan (accretable yield). The excess of the loan's contractual principal and interest over expected cash flows
is not recorded (nonaccretable difference).
Over the life of the loan, expected cash flows continue to be estimated. If the present value of expected cash flows is less than the
carrying amount, a provision for loan loss is recorded. If the present value of expected cash flows is greater than the carrying
amount, it is recognized as part of future interest income.
Concentration of Credit Risk: Most of the Corporation's business activity is with customers located within west central
Indiana and east central Illinois. Therefore, the Corporation's exposure to credit risk is significantly affected by changes in the
economy of this area. A major economic downturn in this area would have a negative effect on the Corporation's loan portfolio.
Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan
losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed.
Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past
loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated
collateral values, economic conditions and other factors. Allocations of the allowance may be made for specific loans, but the
entire allowance is available for any loan that, in management's judgment, should be charged off. The allowance consists of
specific and general components. The specific component relates to loans that are individually classified as impaired or loans
otherwise classified as substandard or doubtful. The general component covers non-classified loans and is based on historical
loss experience adjusted for current factors.
A loan is impaired when full payment under the loan terms is not expected. Loans for which the terms have been modified,
and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified
as impaired. Impairment is evaluated in total for smaller-balance loans of similar nature such as residential mortgages and
consumer loans, and on an individual basis for other loans. If a loan is impaired, a portion of the allowance is allocated so that
the loan is reported, net, at the present value of estimated future cash flows, using the loan's existing rate, or at the fair value of
collateral if repayment is expected solely from the collateral. Large groups of smaller balance homogeneous loans, such as
consumer and residential real estate loans, are collectively evaluated for impairment and, accordingly, they are not separately
identified for impairment disclosures.
The general component covers non-classified loans and is based on historical loss experience adjusted for current factors. The
historical loss experience is based on the actual loss history experienced over the most recent four years, using a weighted
average which places more emphasis on the more current years within the loss history window. This actual loss experience is
supplemented with other current factors based on the risks present for each portfolio segment. These current factors include
consideration of the following: levels of and trends in delinquent, classified, and impaired loans; levels of and trends in charge-
offs and recoveries; national and local economic trends and conditions; changes in lending policies and procedures; trends in
volume and terms of loans; experience, ability, and depth of lending management and other relevant staff; credit
concentrations; value of underlying collateral for collateral dependent loans; and other external factors such as competition and
legal and regulatory requirements. The following portfolio segments have been identified: commercial loans, residential loans
and consumer loans. A characteristic of the commercial loan segment is that the loans are for business purchases. A
characteristic of the residential loan segment is that the loans are secured by residential properties. A characteristic of the
consumer loan segment is that the loans are to for automobiles and other consumer purchases. Local economic conditions,
including elevated unemployment rates, resulted in higher consumer loan delinquencies. For these reasons, consumer loans
have the highest adjustments to the historical loss rate. These same factors along with declining real estate values resulted in
the residential loan portfolio segment having the next highest level of adjustment to the historical loss rate. The commercial
loan portfolio segment had the lowest level of adjustment to the historical loss rate. Adjustments were made for the increasing
levels of and trends in delinquent, classified and impaired commercial loans. Commercial loans are generally well secured,
which mitigates the risk of loss and has contributed to the low historical loss rate.
FDIC Indemnification Asset: The FDIC indemnification asset results from the loss share agreements in the 2009 FDIC-
assisted transaction. The asset is measured separately from the related covered assets as they are not contractually embedded in
the assets and are not transferable with the assets should the Corporation choose to dispose of them. It represents the
acquisition date fair value of expected reimbursements from the FDIC which was determined to be $12.1 million. Pursuant to
the terms of the loss sharing agreement, covered loans and other real estate are subject to a stated loss threshold whereby the
FDIC will reimburse the Corporation for up to 95% of losses incurred. These expected reimbursements do not include
reimbursable amounts related to future covered expenditures. These cash flows are discounted to reflect a metric of uncertainty
of the timing and receipt of the loss sharing reimbursement from the FDIC. This asset decreases when losses are realized and
claims are paid by the FDIC or when customers repay their loans in full and expected losses do not occur. This asset also
increases when estimated future losses increase. When estimated future losses increase, the Corporation records a provision for
loan losses and increases its allowance for loan losses accordingly. The related increase in the FDIC indemnification asset is
recorded as an offset to the provision for loan losses. During 2012, 2011 and 2010, the provision for loan losses was offset by
$2.2 million, $125 thousand and $1.7 million related to the increases in the FDIC indemnification asset.
Foreclosed Assets: Assets acquired through or instead of loan foreclosures are initially recorded at fair value less estimated
selling costs when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair
38
valueless estimated costs to sell. If fair value declines, a valuation allowance is recorded through expense. Costs after acquisition
are expensed.
Premises and Equipment: Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed over the useful lives of the assets, which range from 3 to 33 years for furniture and equipment and 5
to 39 years for buildings and leasehold improvements.
Restricted Stock: Restricted stock includes Federal Home Loan Bank (FHLB) of Indianapolis and Chicago and Federal Reserve
stock. This restricted stock is carried at cost and periodically evaluated for impairment. Because this stock is viewed as a long-term
investment, impairment is based on ultimate recovery of par value. Both cash and stock dividends are reported as income.
Servicing Rights: Servicing rights are recognized separately when they are acquired through sales of loans. When mortgage loans
are sold, servicing rights are initially recorded at fair value with the income statement effect recorded in gains on sales of loans.
Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on third-
party valuations that incorporate assumptions that market participants would use in estimating future net servicing income,
such as the cost to service, the discount rate, ancillary income, prepayment speeds and default rates and losses. All classes of servicing
assets are subsequently measured using the amortization method, which requires servicing rights to be amortized into non-interest
income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans.
Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to carrying amount. Impairment is
determined by stratifying rights into groupings based on predominant risk characteristics, such as interest rate, loan type and
investor type. Impairment is recognized through a valuation allowance for an individual grouping, to the extent that fair value is
less than the carrying amount. If the Corporation later determines that all or a portion of the impairment no longer exists for a
particular grouping, a reduction of the allowance may be recorded as an increase to income. Changes in valuation allowances are
reported with Other Service Fees on the income statement. The fair values of servicing rights are subject to significant
fluctuations as a result of changes in estimated and actual prepayment speeds and default rates and losses.
Servicing fee income, which is included in Other Service Fees on the income statement, is for fees earned for servicing loans.
The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income
when earned. The amortization of mortgage servicing rights is netted against loan servicing fee income. Servicing fees totaled $1.3
million, $1.2 million and $1.2 million for the years ended December 31, 2012, 2011 and 2010. Late fees and ancillary fees related
to loan servicing are not material.
Stock based compensation: Compensation cost is recognized for restricted stock awards and units issued to employees
based on the fair value of these awards at the date of grant. Market price of the Corporation’s common stock at the date
of grant is used for restricted stock awards. Compensation expense is recognized over the requisite service period.
Transfers of Financial Assets: Transfers of financial assets are accounted for as sales, when control over the assets has been
relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the
Corporation, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or
exchange the transferred assets, and the Corporation does not maintain effective control over the transferred assets through an
agreement to repurchase them before their maturity.
Bank-Owned Life Insurance: The Corporation has purchased life insurance policies on certain key executives. Bank-owned life
insurance is recorded at its cash surrender value, or the amount that can be realized. Income on the investments in life insurance
is included in other interest income.
Goodwill and Other Intangible Assets: Goodwill resulting from business combinations prior to January 1, 2009 represents
the excess of the purchase price over the fair value of the net assets of businesses acquired. Goodwill resulting from business
combinations after January 1, 2009 represents the future economic benefits arising from other assets acquired that are not
individually identified and separately recognized. Goodwill and intangible assets acquired in a purchase business combination and
determined to have an indefinite useful life are not amortized, but tested for impairment at least annually. The Corporation has selected
November 30 as the date to perform the annual impairment test. Intangible assets with definite useful lives are amortized over their
estimated useful lives to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on our balance sheet.
Other intangible assets consist of core deposit and acquired customer list intangible assets arising from the whole bank, insurance agency
and branch acquisitions. They are initially measured at fair value and then are amortized on an accelerated basis over their estimated
useful lives, which are 12 and 10 years, respectively.
Long-Term Assets: Premises and equipment and other long-term assets are reviewed for impairment when events indicate their carrying
amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.
Benefit Plans: Pension expense is the net of service and interest cost, return on plan assets and amortization of gains and losses not
immediately recognized. The amount contributed is determined by a formula as decided by the Board of Directors. Deferred compensation and
supplemental retirement plan expense allocates the benefits over years of service.
Employee Stock Ownership Plan: Shares of treasury stock are issued to the ESOP and compensation expense is recognized based
upon the total market price of shares when contributed.
Deferred Compensation Plan: A deferred compensation plan covers all directors. Under the plan, the Corporation pays each director, or
their beneficiary, the amount of fees deferred plus interest over 10 years, beginning when the director achieves age 65. A liability is
accrued for the obligation under these plans. The expense incurred for the deferred compensation for each of the last three years was
$142 thousand, $144 thousand and $183 thousand, resulting in a deferred compensation liability of $2.6 million at both December
31, 2012 and 2011.
Incentive Plans: A long-term incentive plan established in 2000 provides for the payment of incentive rewards as a 15-year annuity to all
directors and certain key officers. That plan was in place through December 31, 2009, and compensation expense is recognized over the
service period. Payments under the plan generally do not begin until the earlier of January 1, 2015, or the January 1 immediately
following the year in which the participant reaches age 65. There was no compensation expense related to this plan for 2012, 2011and
2010. There is a liability of $15.0 million and $15.4 million as of year-end 2012 and 2011. In 2010 the Corporation adopted
39
incentive compensation plans designed to reward key officers based on certain performance measures. The short-term portion of
the plan is paid out within 75 days of year end and the long-term plan vests over a three year period and will payout within 75 days
of the three year vesting period beginning with December 31, 2012. The compensation expense related to the plans in 2012, 2011
and 2010 was $1.3 million, $972 thousand and $2.2 million, respectively, and resulted in a liability of $1.6 million at December
31, 2012 and $2.2 million at December 31, 2011.
The Omnibus Equity Incentive Plan is a long term incentive plan that was designed to align the interests of participants with the
interest of shareholders. Under the plan, awards may be made based on certain performance measures. The grants are made in
restricted stock units that are subject to a vesting schedule.
Income Taxes: Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets
and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between
carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed,
reduces deferred tax assets to the amount expected to be realized.
A tax position is recognized as a benefit only if it is "more likely than not" that the tax position would be sustained in a tax
examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is
greater than 50% likely of being realized on examination. For tax positions not meeting the "more likely than not" test, no tax
benefit is recorded
The Corporation recognizes interest and/or penalties related to income tax matters in income tax expense.
Loan Commitments and Related Financial Instruments: Financial instruments include credit instruments, such as commitments to
make loans and standby letters of credit, issued to meet customer financing needs. The face amount for these items represents the
exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are
funded.
Earnings Per Share: Earnings per common share is net income divided by the weighted average number of common shares
outstanding during the period. The Corporation does not have any potentially dilutive securities. Earnings and dividends per
share are restated for stock splits and dividends through the date of issue of the financial statements.
Comprehensive Income: Comprehensive income consists of net income and other comprehensive income. Other comprehensive
income includes unrealized gains and losses on securities available for sale and changes in the funded status of the retirement
plans, which are also recognized as separate components of equity.
Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are
recorded as liabilities when the likelihood of loss is probable and an amount of range of loss can be reasonably estimated.
Management does not believe there are currently such matters that will have a material effect on the financial statements.
Dividend Restriction: Banking regulations require maintaining certain capital levels and may limit the dividends paid by the
bank to the holding company or by the holding company to shareholders.
Fair Value of Financial Instruments: Fair values of financial instruments are estimated using relevant market information and other
assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant
judgment regarding interest rates, credit risk, prepayments and other factors, especially in the absence of broad markets for particular
items. Changes in assumptions or market conditions could significantly affect the estimates.
Operating Segment: While the Corporation's chief decision-makers monitor the revenue streams of the various products and
services, the operating results of significant segments are similar and operations are managed and financial performance is evaluated
on a corporate-wide basis. Accordingly, all of the Corporation's financial service operations are considered by management to be
aggregated in one reportable operating segment, which is banking.
Adoption of New Accounting Standards: In October 2012, the Financial Accounting Standards Board (“FASB”) issued
guidance on the subsequent accounting for an indemnification asset recognized at the acquisition date as a result of a
government assisted acquisition of a financial institution. When an entity recognizes such an indemnification asset and
subsequently a change in the cash flows expected to be collected on the indemnification asset occurs as a result of a change
in the cash flows expected to be collected on the indemnified asset, the guidance requires the entity to recognize the change
in the measurement of the indemnification asset on the same basis as the indemnified assets. Any amortization of changes in
value of the indemnification asset should be limited to the lesser of the term of the indemnification agreement and the
remaining life of the indemnified assets. The amendments are effective for fiscal years beginning on or after December 15,
2012 and early adoption is permitted. The amendments are to be applied prospectively to any new indemnification assets
acquired after the date of adoption and to indemnification assets existing as of the date of adoption arising from a
government-assisted acquisition of a financial institution. The effect of adopting this standard did not have a material effect
on the Corporation’s operating results or financial condition.
In July 2012, the FASB amended existing guidance relating to testing indefinite-lived intangible assets for impairment. The
amendment permits an assessment of qualitative factors to determine whether the existence of events and circumstances
indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of
events and circumstances, it is concluded that it is not more likely than not that the indefinite-lived intangible asset is impaired,
then no further action is required. However, after the same assessment, if it is concluded that it is more like than not that the
indefinite-lived intangible asset is impaired, then a quantitative impairment test should be performed whereby the fair value of
the indefinite-lived intangible asset is compared to the carrying amount. The amendments in this guidance are effective for
annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is
permitted. The effect of adopting this standard did not have a material effect on the Corporation’s operating results or financial
condition.
In September 2011, the FASB amended existing guidance relating to goodwill impairment testing. The amendment permits an
assessment of qualitative factors to determine whether the existence of events or circumstances leads to a determination that it
is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing these events or
circumstances, it is concluded that it is not more likely than not that the fair value of a reporting unit is less than its carrying
amount, then performing the two-step impairment test is unnecessary. The amendments in this guidance are effective for
40
annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The effect of
adopting this standard did not have a material effect on the Corporation’s operating results or financial condition.
2. FAIR VALUES OF FINANCIAL INSTRUMENTS:
Accounting guidance establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used
to measure fair value:
Level 1: Quoted prices (unadjusted) of identical assets or liabilities in active markets that the entity has the ability to access as of
the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as such as quoted prices for similar assets or liabilities;
quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market
data.
Level 3: Significant unobservable inputs that reflect a reporting entity's own assumptions about the assumptions that market
participants would use in pricing an asset or liability.
The fair value of securities available-for-sale is determined by obtaining quoted prices on nationally recognized securities
exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt
securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities' relationship
to other benchmark quoted securities (Level 2 inputs).
For those securities that cannot be priced using quoted market prices or observable inputs, a Level 3 valuation is determined. These
securities are primarily trust preferred securities, which are priced using Level 3 due to current market illiquidity and certain
investments in bank equities and state and municipal securities. The fair value of the trust preferred securities is obtained from a third
party provider without adjustment. As described previously, management obtains values from other pricing sources to validate the
Standard & Poors pricing that they currently utilize. The fair value of certain investments in bank equities is based on the prices of
recent stock trades and is considered Level 3 because these stocks are not publicly traded. The fair value of state and municipal
obligations are derived by comparing the securities to current market rates plus an appropriate credit spread to determine an estimated value.
Illiquidity spreads are then considered. Credit reviews are performed on each of the issuers. The significant unobservable inputs used in
the fair value measurement of the Corporation’s state and municipal obligations are credit spreads related to specific issuers.
Significantly higher credit spread assumptions would result in significantly lower fair value measurement. Conversely, significantly
lower credit spreads would result in a significantly higher fair value measurement.
The fair value of derivatives is based on valuation models using observable market data as of the measurement date (Level 2 inputs).
December 31, 2012
Fair Value Measurment Using
(Dollar amounts in thousands)
U.S. Government entity mortgage-backed securities
Mortgage-backed securities, residential
Mortgage-backed securities, commercial
Collateralized mortgage obligations
State and municipal obligations
Collateralized debt obligations
Equity Securities
TOTAL
Derivative Assets
Derivative Liabilities
Level 1
-
$
-
-
-
-
-
380
380
$
(Dollar amounts in thousands)
U.S. Government entity mortgage-backed securities
Mortgage-backed securities, residential
Mortgage-backed securities, commercial
Collateralized mortgage obligations
State and municipal obligations
Collateralized debt obligations
Equity Securities
TOTAL
Derivative Assets
Derivative Liabilities
There were no transfers between Level 1 and Level 2 during 2012 and 2011.
Level 1
-
$
-
-
-
-
-
375
375
$
41
Carrying Value
$
1,886
244,676
5,131
233,320
199,485
6,122
380
691,000
$
$
Level 2
Level 3
-
$
-
-
-
9,911
6,122
-
16,033
1,886
244,676
5,131
233,320
189,574
-
-
674,587
2,053
(2,053)
December 31, 2011
Fair Value Measurment Using
$
$
$
Level 3
-
$
-
-
-
9,525
4,771
1,711
16,007
$
Carrying Value
$
4,013
311,788
101
147,947
195,581
4,771
2,086
666,287
$
Level 2
$
4,013
311,788
101
147,947
186,056
-
-
649,905
2,447
(2,447)
$
$
The table below presents a reconciliation and income statement classification of gains and losses for all assets measured at fair value on a
recurring basis using significant unobservable inputs (Level 3) for the twelve months ended December 31, 2012 and 2011.
Fair Value Measurements Using SignificantUnobservable Inputs (Level 3)
December 31, 2012
Beginning balance, January 1
Total realized/unrealized gains or losses
Included in earnings
Included in other comprehensive income
Transfers & Purchases
Settlements
Ending balance, December 31
Beginning balance, January 1
Total realized/unrealized gains or losses
Included in earnings
Included in other comprehensive income
Transfers & Purchases
Settlements
Ending balance, December 31
State and Collateralized
municipal
obligations
$
9,525
debt
obligations
$
4,771
Total
$
16,007
-
-
1,186
(800)
9,911
$
(96)
1,556
-
(109)
6,122
$
(542)
1,556
1,186
(2,174)
16,033
$
December 31, 2011
State and Collateralized
municipal
obligations
$
-
debt
obligations
$
2,190
-
-
9,672
(147)
9,525
$
-
2,581
-
-
4,771
$
Total
$
3,708
-
2,774
9,672
(147)
16,007
$
Equities
$
1,711
(446)
-
-
(1,265)
$
-
Equities
$
1,518
-
193
-
-
1,711
$
There were no unrealized gains and losses recorded in earnings for the year ended December 31, 2012or
2011.
The fair value for certain local municipal securities with a fair value of $1.2 million as of December 31, 2012 were acquired and
classified Level 3 because of a lack of observable market data for these investments due to a little market activity for these
securities. The fair value for certain local municipal securities with a fair value of $9.7 million as of December 31, 2011 was
transferred out of Level 2 into Level 3 because of a lack of observable market data for these investments due to a decrease in the
market activity for this security.
Impaired loans disclosed in footnote 7, which are measured for impairment using the fair value of collateral, are valued at Level 3.
They are carried at a fair value of $26.0 million, after a valuation allowance of $7.6 million at December 31, 2012 and at a fair value
of $28.4 million, net of a valuation allowance of $4.3 million at December 31, 2011. The impact to the provision for loan
losses for the twelve months ended December 31, 2012 and December 31, 2011 was $4.2 million and $3.3 million, respectively.
Other real estate owned is valued at Level 3. Other real estate owned at December 31, 2012 with a value of $7.7 million was
reduced $234 thousand for fair value adjustment. At December 31, 2012 other real estate owned was comprised of $5.7 million
from commercial loans and $2.0 million from residential loans. Other real estate owned at December 31, 2011 with a value of
$5.0 million was reduced $892 thousand for fair value adjustment. At December 31, 2011 other real estate owned was comprised
of $2.8 million from commercial loans and $2.2 million from residential loans.
Fair value is measured based on the value of the collateral securing those loans, and is determined using several methods.
Generally the fair value of real estate is determined based on appraisals by qualified licensed appraisers. Appraisals for real
estate generally use three methods to derive value: cost, sales or market comparison and income approach. The cost method
bases value on the cost to replace current property. The market comparison evaluates the sales price of similar properties in
the same market area. The income approach considers net operating income generated by the property and the investor’s
required return. The final fair value is based on a reconciliation of these three approaches. If an appraisal is not available, the
fair value may be determined by using a cash flow analysis, a broker’s opinion of value, the net present value of future cash
flows, or an observable market price from an active market. Fair value of other real estate is based upon the current appraised
values of the properties as determined by qualified licensed appraisers and the Company’s judgment of other relevant market
conditions. Appraisals are obtained annually and reductions in value are recorded as a valuation through a charge to expense.
The primary unobservable input used by management in estimating fair value are additional discounts to the appraised value
to consider market conditions and the age of the appraisal, which are based on management’s past experience in resolving
these types of properties. These discounts range from 5% to 20%. Other real estate and impaired loans carried at fair value are
primarily comprised of smaller balance properties.
42
The following table presents quantitative information about recurring and non-recurring Level 3 fair value measurements at
December 31, 2012.
Fair Value
Valuation T echnique(s)
Unobservable Input(s)
Range
State and municipal obligations
$
9,911
Discounted cash flow
Discount rate
Probability of default
3.05%-5.50%
0%
Other real estate
$
7,722
Sales comparison/income approach Discount rate for age
5.00%-20.00%
Impaired Loans
25,948
Sales comparison/income approach Discount rate for age
of appraisal and market
conditions
of appraisal and market
0.00%-50.00%
conditions
The following table presents loans identified as impaired by class of loans as of December 31, 2012 and 2011.
(Dollar amounts in thousands)
Commercial
Commercial & Industrial
Farmland
Non Farm, Non Residential
Agriculture
All Other Commercial
Residential
First Liens
Home Equity
Junior Liens
Multifamily
All Other Residential
Consumer
Motor Vehicle
All Other Consumer
TOTAL
(Dollar amounts in thousands)
Commercial
Commercial & Industrial
Farmland
Non Farm, Non Residential
Agriculture
All Other Commercial
Residential
First Liens
Home Equity
Junior Liens
Multifamily
All Other Residential
Consumer
Motor Vehicle
All Other Consumer
TOTAL
December 31, 2012
Allowance
for Loan
Losses
Allocated
$
3,153
191
293
-
52
126
-
-
3,794
-
Fair Value
$
13,945
700
7,093
-
1,157
1,128
179
-
1,746
-
Carrying
Value
$
17,098
891
7,386
-
1,209
1,254
179
-
5,540
-
-
-
33,557
$
-
-
7,609
$
-
-
25,948
$
December 31, 2011
Allowance
for Loan
Losses
Allocated
$
2,664
49
957
-
66
190
-
347
-
-
Fair Value
$
15,226
842
8,303
-
1,451
1,773
-
532
250
-
Carrying
Value
$
17,890
891
9,260
-
1,517
1,963
-
879
250
-
-
-
32,650
$
-
-
4,273
$
-
-
28,377
$
43
The carrying amounts and estimated fair values of financial instruments are shown below. Carrying amount is the estimated fair value
for cash and due from banks, federal funds sold, accrued interest receivable and payable, demand deposits, short-term and certain other
borrowings, and variable-rate loans or deposits that reprice frequently and fully. Security fair values are determined as previously
described. It is not practicable to determine the fair value of restricted stock due to restrictions placed on their transferability. For the
FDIC indemnification asset the carrying value is the estimated fair value as it represents amounts to be received from the FDIC in the
near term. For fixed-rate loans or deposits, variable rate loans or deposits with infrequent repricing or repricing limits, and for longer-
term borrowings, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk.
Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values. Fair value of debt is
based on current rates for similar financing. The fair value of off-balance sheet items is not considered material.
The carrying amount and estimated fair value of assets and liabilities are presented in the table below and were determined based
on the above assumptions:
(Dollar amounts in thousands)
Cash and due from banks
Federal funds sold
Securities available—for--sale
Restricted stock
Loans, net
FDIC Indemnification Asset
Accrued interest receivable
Deposits
Short—term borrowings
Federal Home Loan Bank advances
Accrued interest payable
(Dollar amounts in thousands)
Cash and due from banks
Federal funds sold
Securities available-for-sale
Restricted stock
Loans, net
FDIC Indemnification Asset
Accrued interest receivable
Deposits
Short-term borrowings
Federal Home Loan Bank advances
Other borrowings
Accrued interest payable
December 31, 2012
Carrying
Value
$
87,230
20,800
691,000
21,292
1,829,978
2,632
12,024
(2,276,134)
(40,551)
(119,705)
(1,163)
---------------------- Fair Value -----------------------
Level 1
Level 2
$
21,333
-
380
n/a
-
-
-
-
-
-
-
$
65,897
20,800
674,587
n/a
-
2,632
2,980
(2,280,910)
(40,551)
(124,933)
(1,163)
Level 3
-
$
-
16,033
n/a
1,916,256
-
9,044
-
-
-
-
Total
$
87,230
20,800
691,000
n/a
1,916,256
2,632
12,024
(2,280,910)
(40,551)
(124,933)
(1,163)
December 31, 2011
$
Carrying
Value
134,280
11,725
666,287
22,282
1,874,438
2,384
12,947
(2,274,499)
(100,022)
(140,231)
(6,196)
(1,829)
---------------------- Fair Value -----------------------
Level 1
Level 2
$
19,356
-
375
n/a
$
114,924
11,725
649,905
n/a
-
-
-
-
-
-
-
-
2,384
3,303
(2,279,739)
(100,022)
(144,089)
(6,196)
(1,829)
Level 3
$
-
-
16,007
n/a
1,888,263
-
9,644
-
-
-
-
-
$
Total
134,280
11,725
666,287
n/a
1,888,263
2,384
12,947
(2,279,739)
(100,022)
(144,089)
(6,196)
(1,829)
3. RESTRICTIONS ON CASH AND DUE FROM BANKS:
Certain affiliate banks are required to maintain average reserve balances with the Federal Reserve Bank. The amount of
those reserve balances was approximately $9.2 million and $9.3 million at December 31, 2012 and 2011, respectively.
4. SECURITIES:
The fair value of securities available-for-sale and related gross unrealized gains and losses recognized in accumulated other
comprehensive income were as follows:
44
(Dollar amounts in thousands)
U.S. Government entity mortgage-backed securities
Mortgage-backed securities, residential
Mortgage-backed securities, commercial
Collateralized mortgage obligations
State and municipal obligations
Collateralized debt obligations
Equity Securities
TOTAL
(Dollar amounts in thousands)
U.S. Government entity mortgage-backed securities
Mortgage-backed securities, residential
Mortgage-backed securities, commercial
Collateralized mortgage obligations
State and municipal obligations
Collateralized debt obligations
Equity Securities
TOTAL
Amortized
Cost
$1,807
231,316
5,146
230,739
187,044
12,243
320
$668,615
Amortized
Cost
$3,979
296,646
98
144,850
183,854
14,031
1,596
$645,054
December 31, 2012
Unrealized
Gains
$79
13,373
1
2,827
12,518
1,761
60
$30,619
Losses
$
-
(13)
(16)
(246)
(77)
(7,882)
-
($8,234)
December 31, 2011
Unrealized
Gains
$34
15,142
3
3,097
11,738
150
490
$30,654
Losses
-
$
-
-
-
(11)
(9,410)
-
($9,421)
Fair Value
$1,886
244,676
5,131
233,320
199,485
6,122
380
$691,000
Fair Value
$4,013
311,788
101
147,947
195,581
4,771
2,086
$666,287
As of December 31, 2011, the Corporation does not have any securities from any issuer, other than the U.S. Government, with
an aggregate book or fair value that exceeds ten percent of shareholders' equity.
Securities with a carrying value of approximately $333.1 million and $264.0 million at December 31, 2012 and 2011,
respectively, were pledged as collateral for short-term borrowings and for other purposes.
Below is a summary of the gross gains and losses realized by the Corporation on investment sales during the years ended December
31, 2012, 2011 and 2010, respectively.
(Dollar amounts in thousands)
Proceeds
Gross gains
Gross losses
2012
$
25,812
891
(5)
2011
$
25
2
-
2010
$
12,248
1,507
(213)
Additional gains of $2 thousand and losses of $2 thousand in 2012 and $4 thousand and $27 thousand of gains, respectively in 2011
and 2010 resulted from redemption premiums on called securities.
Contractual maturities of debt securities at year-end 2012 were as follows. Securities not due at a single maturity or with no
maturity date, primarily mortgage-backed and equity securities, are shown separately.
(Dollar amounts in thousands)
Due in one year or less
Due after one but within five years
Due after five but within ten years
Due after ten years
Mortgage-backed securities and equities
TOTAL
Available-for-Sale
Amortized
Cost
Fair
Value
$
$
11,022
37,097
87,877
295,837
431,833
236,782
668,615
11,205
38,879
93,326
297,402
440,812
250,188
691,000
$
$
45
The following tables show the securities' gross unrealized losses and fair value, aggregated by investment category and length
of time that individual securities have been in continuous unrealized loss position, at December 31, 2012 and 2011.
Less Than 12 Months
(Dollar amounts in thousands)
Mortgage-backed securities, residential
Mortgage-backed securities, commercial
Collateralized mortgage obligations
Fair Value
7,245
$
5,086
46,121
Unrealized
Losses
$
(13)
(16)
(246)
State and municipal obligations
8,611
(77)
December 31, 2012
More Than 12 Months
Fair Value
$
-
Unrealized
Losses
$
-
Total
Fair Value
7,245
$
5,086
46,121
Unrealized
Losses
$
(13)
(16)
(246)
8,611
(77)
Collateralized debt obligations
Total temporarily impaired securities
-
67,063
$
-
(352)
$
4,032
4,032
$
(7,882)
(7,882)
$
4,032
71,095
$
(7,882)
(8,234)
$
Less Than 12 Months
December 31, 2011
More Than 12 Months
Total
(Dollar amounts in thousands)
State and municipal obligations
Collateralized debt obligations
Total temporarily impaired securities
Fair Value
1,110
$
-
1,110
$
Unrealized
Losses
$
(11)
-
(11)
$
Fair Value
-
$
3,603
3,603
$
Unrealized
Losses
-
$
(9,410)
(9,410)
$
Fair Value
$
1,110
3,603
4,713
$
Unrealized
Losses
$
(11)
(9,410)
(9,421)
$
The Corporation held 36 investment securities with an amortized cost greater than fair value as of December 31, 2012. The
unrealized losses on mortgage-backed and state and municipal obligations represent negative adjustments to market value
relative to the rate of interest paid on the securities and not losses related to the creditworthiness of the issuer. Management does
not intend to sell and it is not more likely than not that management would be required to sell the securities prior to their
anticipated recovery. Management believes the value will recover as the securities approach maturity or market rates change.
Management evaluates securities for other-than-temporary impairment ("OTTI") at least on a quarterly basis, and more frequently when
economic or market conditions warrant such an evaluation. The investment securities portfolio is evaluated for OTTI by segregating the
portfolio into two general segments and applying the appropriate OTTI model.
Investment securities are generally evaluated for OTTI under FASB ASC 320, Investments—Debt and Equity Securities. However,
certain purchased beneficial interests, including non-agency mortgage-backed securities, asset-backed securities, and collateralized debt
obligations, that had credit ratings at the time of purchase of below AA are evaluated using the model outlined in FASB ASC 325-40,
Beneficial Interests in Securitized Financial Assets.
In determining OTTI under the FASB ASC-320 model, management considers many factors, including: (1) the length of time and
the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3)
whether the market decline was affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the security or
more likely than not will be required to sell the security before its anticipated recovery. The assessment of whether an other-than-
temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to
management at a point in time.
The second segment of the portfolio uses the OTTI guidance provided by FASB ASC-325 that is specific to purchase beneficial
interests that, on the purchase date, were rated below AA. Under the FASB ASC-325 model, the Corporation compares the present value
of the remaining cash flows as estimated at the preceding evaluation date to the current expected remaining cash flows. An OTTI is
deemed to have occurred if there has been an adverse change in the remaining expected future cash flows.
When OTTI occurs under either model, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the
security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any
current-period credit loss. If an entity intends to sell or it is more likely than not it will be required to sell the security before
recovery of its amortized cost basis, less any current-period credit loss, the OTTI shall be recognized in earnings equal to the entire
difference between the investment's amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to
sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized
cost basis less any current-period loss, the OTTI shall be separated into the amount representing the credit loss and the amount
related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash
flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors is recognized in other
comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes
the new amortized cost basis of the investment.
Gross unrealized losses on investment securities were $8.2 million as of December 31, 2012 and $9.4 million as of December 31,
2011. A majority of these losses represent negative adjustments to fair value relative to the illiquidity in the markets on the
securities and not losses related to the creditworthiness of the issuer.
A significant portion of the total unrealized losses relates to collateralized debt obligations that were separately evaluated under FASB
ASC 325-40, Beneficial Interests in Securitized Financial Assets. Based upon qualitative considerations, such as a downgrade in
credit rating or further defaults of underlying issuers during the year, and an analysis of expected cash flows, we determined that
three CDOs included in collateralized debt obligations were other-than-temporarily impaired. Those three CDO’s have a
contractual balance of $27.3 million at December 31, 2012 which has been reduced to $5.4 million by $1.0 million of interest
46
payments received, $15.0 million of cumulative OTTI charges recorded through earnings to date and $6.0 million recorded in other
comprehensive income. The severity of the OTTI recorded varies by security, based on the analysis described below, and ranges, at
December 31, 2012 from 28% to 91%. The temporary impairment recorded in other comprehensive income is due to factors other
than credit loss, mainly current market illiquidity. These securities are collateralized by trust preferred securities issued primarily by
bank holding companies, but certain pools do include a limited number of insurance companies. The market for these securities has
become very illiquid, there are very few new issuances of trust preferred securities and the credit spreads implied by current prices
have increased dramatically and remain very high, resulting in significant non-credit related impairment. The Corporation uses
the OTTI evaluation model to compare the present value of expected cash flows to the previous estimate to determine if there are
adverse changes in cash flows during the year. The OTTI model considers the structure and term of the CDO and the financial
condition of the underlying issuers. Specifically, the model details interest rates, principal balances of note classes and underlying
issuers, the timing and amount of interest and principal payments of the underlying issuers, and the allocation of the payments to
the note classes. Cash flows are projected using a forward rate LIBOR curve, as these CDOs are variable-rate instruments. An
average rate is then computed using this same forward rate curve to determine an appropriate discount rate (3 month LIBOR plus
margin ranging from 160 to 180 basis points). The current estimate of expected cash flows is based on the most recent trustee reports
and any other relevant market information, including announcements of interest payment deferrals or defaults of underlying trust
preferred securities. Assumptions used in the model include expected future default rates and prepayments. We assume no recoveries
on defaults and treat all interest payment deferrals as defaults. In addition we use the model to “stress” each CDO, or make
assumptions more severe than expected activity, to determine the degree to which assumptions could deteriorate before the CDO
could no longer fully support repayment of the Corporation’s note class.
Collateralized debt obligations include one additional investment in a CDO consisting of pooled trust preferred securities in which
the issuers are primarily banks. This CDO, with an amortized cost of $830 thousand and a fair value of $731 thousand, is currently
rated BAA3 and is the senior tranche, is not in the scope of FASB ASC 325 as it was rated high investment grade at purchase, and is
not considered to be other-than-temporarily impaired based on its credit quality. Its fair value is negatively impacted by the factors
described above.
Management has consistently used Standard & Poors pricing to value these investments. There are a number of other pricing sources
available to determine fair value for these investments. These sources utilize a variety of methods to determine fair value. The result
is a wide range of estimates of fair value for these securities. The Standard & Poors pricing ranges from 3.58 to 88.07 while Moody’s
Investor Service pricing ranges from 3.25 to 94.15, with others falling somewhere in between. We recognize that the Standard &
Poors pricing utilized is likely a conservative estimate, but have been consistent in using this source and its estimate of fair value.
In 2012 the Corporation recognized $11 thousand of OTTI on stock held in a financial institution. In 2011 there was $110 thousand
of OTTI recognized on the same financial institution equity security that is still held at December 31, 2012.
The table below presents a rollforward of the credit losses recognized in earnings for the year ended December 31, 2012:
(Dollar amounts in thousands)
Beginning balance, January 1,
Amounts related to credit loss for which other-than-
temporary impairment was not previously recognized
Amounts realized for securities sold during the period
Reductions for increase in cash flows expected to be collected
that are recognized over the remaining life of the security
Increases to the amount related to the credit loss for which other-
than-temporary impairment was previously recognized
2012
2011
$
15,180
$
15,070
2010
11,359
$
11
(208)
-
-
110
-
-
-
(549)
-
-
4,260
Ending balance, December 31,
$
14,983
$
15,180
$
15,070
5. LOANS:
Loans are summarized as follows:
(Dollar amounts in thousands)
Commercial
Residential
Consumer
Total gross loans
Less: unearned income
Allowance for loan losses
TOTAL
December 31,
$
$
2012
1,088,144
496,237
268,507
1,852,888
(952)
(21,958)
1,829,978
2011
1,099,324
505,600
289,717
1,894,641
(962)
(19,241)
1,874,438
$
$
Loans in the above summary include loans totaling $27.8 million and $35.0 million at December 31, 2012 and 2011 that are
subject to the FDIC loss share arrangement (“covered loans”) discussed in footnote 6.
47
The Corporation periodically sells residential mortgage loans it originates based on the overall loan demand of the Corporation and the
outstanding balances in the residential mortgage portfolio. At December 31, 2012 and 2011, loans held for sale included $8.8 million and $4.1
million, respectively, and are included in the totals above.
In the normal course of business, the Corporation’s subsidiary banks make loans to directors and executive officers and to their
associates. In 2012, the aggregate dollar amount of these loans to directors and executive officers who held office amounted to $58.5
million at the beginning of the year. During 2012, advances of $27.2 million, repayments of $11.6 million and decreases of $12.6
million resulting from changes in personnel were made with respect to related party loans for an aggregate dollar amount outstanding of
$61.5 million at December 31, 2012.
Loans serviced for others, which are not reported as assets, total $543.6 million and $450.1 million at year-end 2012 and 2011. Custodial
escrow balances maintained in connection with serviced loans were $2.64 million and $1.89 million at year-end 2012 and 2011.
Activity for capitalized mortgage servicing rights (included in other assets) was as follows:
2012
(Dollar amounts in thousands)
Servicing rights:
Beginning of year
Additions*
Amortized to expense
End of year
* In 2011 $520 thousand is from the acquisition of Freestar Bank
2,429
868
(1,072)
2,225
$
$
December 31,
2011
2010
$
$
2,080
1,035
(686)
2,429
2,034
810
(764)
2,080
$
$
Third party valuations are conducted periodically for mortgage servicing rights. Based on these valuations, fair values were approximately
$3.2 million and $3.3 million at year end 2012 and 2011. There was no valuation allowance in 2012 or 2011.
Fair value for 2012 was determined using a discount rate of 9%, prepayment speeds ranging from 262% to 550%, depending on the
stratification of the specific right. Fair value at year end 2011 was determined using a discount rate of 9%, prepayment speeds ranging
from 139% to 700%, depending on the stratification of the specific right. Mortgage servicing rights are amortized over 8 years, the
expected life of the sold loans.
6. ACQUISITIONS AND FDIC INDEMNIFICATION ASSET:
On December 30, 2011, the Bank completed a purchase and assumption agreement with PNB Holding Co (PNB), an Illinois corporation, to
purchase all of the issued and outstanding stock of Freestar Bank, National Association, and assume certain liabilities of PNB (the
“Transaction”). Immediately following the acquisition of the stock of Freestar Bank, First Financial merged Freestar Bank
with and into its wholly-owned subsidiary, First Financial Bank, National Association.
The acquisition provided a strategic entry into the Champaign-Urbana, Bloomington-Normal and Pontiac, Illinois markets.
Each of these markets are characterized by higher growth rates.
First Financial paid PNB cash in the amount of $47 million and assumed certain liabilities of PNB in the aggregate amount of
approximately $8.2 million. The acquisition consisted of assets and liabilities with a fair value of approximately $414.0 million,
including $245.3 million of loans, $95.5 million of investment securities, $62.0 million of cash and cash equivalents and $361.2
million of deposits. A customer related core deposit intangible asset of $2.1 million was also recorded. Based upon the acquisition date
fair values of the net assets acquired, goodwill of $29.8 million was recorded, all of which is expected to be tax deductable. Loans
acquired include purchase credit impaired loans with a fair value of $48.1 million which have a contractual amount due of $55.6
million. The purchase premium paid, holding company debt assumed and amount paid in excess of the loans fair value are the primary
components of goodwill. $715 thousand was added to goodwill in the second quarter as a result of the determination the terms of a
land lease required rents in excess of current market rents. A liability was recorded which will result in rent expense being recorded at
market rates. As required by acquisition accounting rules, this adjustment is reflected retrospectively, at December 31, 2011. During
the second quarter of 2012, management also completed their analysis of acquired loans and the determination of which loans were
purchased credit impaired (PCI). As a result of that analysis, PCI loans were determined to have a fair value of $22.0 million and a
contractual amount due of $29.0 million. The finalization of the loan analysis did not result in a change in loan fair value or goodwill..
Pro Forma Results
The following schedule includes pro forma results for the periods ended December 31, 2011 and 2010 as if the Freestar
acquisition has occurred as of the beginning of the periods presented after giving effect to certain adjustments. The un-audited
pro forma information is provided for illustrative purposes only and is not indicative of the results of operations or financial
condition that would have been achieved if the Freestar acquisition would have take place at the beginning of the periods
presented and should not be taken as indicative of the Corporation’s future consolidated results of operations or financial
condition.
(Dollar amounts in thousands, except per share data)
Net interest income
Non-interest income
Total revenue
Net Income
Earnings per share
12/31/2011
12/31/2010
$
116,534
39,412
155,946
$
116,295
34,684
150,979
$
42,075
3.20
$
34,481
2.63
48
No provision expense was included in either period for Freestar. In accordance with accounting for business combinations, there was no
allowance brought forward on any of the acquired loans, as the credit losses evident in the loans were included in the determination of the fair
value of the loans at acquisition date. A tax rate of 27.91% was used to adjust tax provision expense for the income statement impact in both
periods. On July 2, 2009, the Bank entered into a purchase and assumption agreement with the Federal Deposit Insurance Corporation
(“FDIC”) to assume all of the deposits (excluding brokered deposits) and certain assets of The First National Bank of Danville, a full-
service commercial bank headquartered in Danville, Illinois, that had failed and been placed in receivership with the FDIC. The
acquisition consisted of assets worth a fair value of approximately $151.8 million, including $77.5 million of loans, $24.2 million of
investment securities, $31.0 million of cash and cash equivalents and $146.3 million of liabilities, including $145.7 million of
deposits. A customer related core deposit intangible asset of $4.6 million was also recorded. In addition to the excess of liabilities
over assets, the Bank received approximately$14.6 million in cash from the FDIC. Based upon the acquisition date fair values of the
net assets acquired, no goodwill was recorded. The transaction resulted in a gain of $5.1 million, which is included in non-interest
income in the December 31, 2009 Consolidated Statement of Operations. Under the loss-sharing agreement (“LSA”), the Bank will
share in the losses on assets covered under the agreement (referred to as covered assets). On losses up to $29 million, the FDIC
has agreed to reimburse the Bank for 80 percent of the losses. On losses exceeding $29 million, the FDIC has agreed to reimburse
the Bank for 95 percent of the losses. The loss-sharing agreement is subject to following servicing procedures as specified in the
agreement with the FDIC. Loans acquired that are subject to the loss-sharing agreement with the FDIC are referred to as covered
loans for disclosure purposes. Since the acquisition date the Bank has been reimbursed $18.0 million for losses and carrying expenses
and currently carries a balance of $2.6 million in the indemnification asset. Included in the current balance is the estimate of $1.5
million for 80% of the loans subject to the loss-sharing agreement identified in the allowance for loan loss evaluation as future
potential losses at December 31, 2012.
FASB ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, applies to a loan with evidence of
deterioration of credit quality since origination, acquired by completion of a transfer for which it is probable, at acquisition,
that the investor will be unable to collect all contractually required payments receivable. FASB ASC 310-30 prohibits carrying
over or creating an allowance for loan losses upon initial recognition. The carrying amount of covered assets at December 31,
2012 and 2011, consisted of loans accounted for in accordance with FASB ASC 310-30, loans not subject to FASB ASC
310-30 and other assets as shown in the following table:
(Dollar amounts in thousands)
Loans
Foreclosed Assets
Total Covered Assets
(Dollar amounts in thousands)
Loans
Foreclosed Assets
Total Covered Assets
ASC 310-30
Loans
$
4,279
-
$ 4,279
ASC 310-30
Loans
$
6,875
-
$ 6,875
The rollforward of the FDIC Indemnification asset is as follows:
Non ASC
310-30
Loans
$
$
23,475
-
23,475
Non ASC
310-30
Loans
$
$
28,173
-
28,173
Other
$
-
720
720
$
Other
-
$
1,665
1,665
$
2012
Total
$
$
27,754
720
28,474
2011
Total
$
$
35,048
1,665
36,713
(Dollar amounts in thousands)
Beginning balance
Accretion
Net changes in losses and expenses added
Reimbursements from the FDIC
TOTAL
December 31,
2012
2011
$
$
2,384
-
2,422
(2,174)
2,632
3,977
38
(192)
(1,439)
2,384
$
$
On the acquisition date, the preliminary estimate of the contractually required payments receivable for all FASB ASC310-30
loans acquired in the acquisition were $31.6 million, the cash flows expected to be collected were $18.4 million including
interest, and the estimated fair value of the loans was $16.7 million. These amounts were determined based upon the
estimated remaining life of the underlying loans, which include the effects of estimated prepayments. At December 31, 2012, a
majority of these loans were valued based on the liquidation value of the underlying collateral, because the expected cash flows
are primarily based on the liquidation of underlying collateral and the timing and amount of the cash flows could not be
reasonably estimated. There was a $236 thousand and $1.0 million allowance for credit losses related to these loans at
December 31, 2012 and 2011, respectively. On the acquisition date, the preliminary estimate of the contractually required
payments receivable for all non FASB ASC310-30 loans acquired in the acquisition was $58.4 million and the estimated fair
value of the loans was $60.7 million. The impact to the Corporation from the amortization and accretion of premiums and
discounts was immaterial.
49
7. ALLOWANCE FOR LOAN LOSSES:
The following table presents the activity of the allowance for loan losses by portfolio segment for the years ended December 31, 2012
and 2011.
Allowance for Loan Losses:
December 31, 2012
(Dollar amounts in thousands)
Commercial
Residential
Consumer
Unallocated
T otal
Beginning balance
$
12,119
$
2,728
$
3,889
$
505
$
19,241
Provision for loan losses*
Loans charged -off
Recoveries
Ending Balance
2,400
(4,176)
644
5,196
(2,598)
100
2,243
(3,640)
1,387
1,161
-
-
11,000
(10,414)
2,131
$
10,987
$
5,426
$
3,879
$
1,666
$
21,958
* Provision before decrease of $2.2 million in 2012 for increase in FDIC indemnification asset
Allowance for Loan Losses:
December 31, 2011
(Dollar amounts in thousands)
Commercial
Residential
Consumer
Unallocated
T otal
Beginning balance
$
12,809
$
2,873
$
4,551
$
2,103
$
22,336
Provision for loan losses*
Loans charged -off
Recoveries
3,708
(5,336)
938
2,571
(2,811)
95
1,199
(2,969)
1,108
(1,598)
-
-
Ending Balance
505
* Provision before decrease of $125 thousand in 2011 for increase in FDIC indemnification asset
$
12,119
2,728
3,889
$
$
$
5,880
(11,116)
2,141
$
19,241
Changes in the allowance for loan losses for 2010 are summarized as follows:
(Dollar amounts in thousands)
December 31,
2010
Balance at beginning of year
Provision for loan losses *
Recoveries of loans previously charged off
Loans charged off
19,437
10,862
4,511
(12,474)
22,336
* In 2010 the provision charged to expense was reduced by $1.7 million for
the increase to the FDIC Indemnification asset.
BALANCE AT END OF YEAR
$
$
The following tables present the allocation of the allowance for loan losses and the recorded investment in loans by portfolio
segment and based on impairment method at December 31, 2012 and 2011:
Allowance for Loan Losses:
(Dollar amounts in thousands)
Individually evaluated for impairment
Collectively evaluated for impairment
Acquired with deteriorated credit quality
BALANCE AT END OF YEAR
Loans
(Dollar amounts in thousands)
Individually evaluated for impairment
Collectively evaluated for impairment
Acquired with deteriorated credit quality
BALANCE AT END OF YEAR
December 31, 2012
Commercial Residential Consumer Unallocated
$
$
3,453
7,286
248
10,987
3,920
1,506
-
5,426
$
-
3,879
-
3,879
$
$
-
1,666
-
1,666
$
$
$
Total
$
7,373
14,337
248
21,958
$
Total
$
30,694
1,814,229
17,009
1,861,932
$
$
Commercial Residential Consumer
$
$
-
269,882
6
269,888
23,721
1,056,861
13,582
1,094,164
6,973
487,486
3,421
497,880
$
$
$
50
Allowance for Loan Losses:
(Dollar amounts in thousands)
Individually evaluated for impairment
Collectively evaluated for impairment
Acquired with deteriorated credit quality
BALANCE AT END OF YEAR
Loans
(Dollar amounts in thousands)
Individually evaluated for impairment
Collectively evaluated for impairment
Acquired with deteriorated credit quality
BALANCE AT END OF YEAR
December 31, 2011
Commercial Residential Consumer Unallocated
$
$
3,071
8,264
784
12,119
190
2,183
355
2,728
-
$
3,889
-
3,889
$
-
$
505
-
505
$
$
$
Total
$
3,261
14,841
1,139
19,241
$
$
Commercial Residential Consumer
$
-
$
291,190
11
291,201
25,393
1,036,963
43,389
1,105,745
2,213
492,139
12,986
507,338
$
$
$
Total
$
27,606
1,820,292
56,386
1,904,284
$
The following table presents loans individually evaluated for impairment by class of loan.
December 31, 2012
With no related allowance recorded:
Commercial
Commercial & Industrial
Farmland
Non Farm, Non Residential
Agriculture
All Other Commercial
Residential
First Liens
Home Equity
Junior Liens
Multifamily
All Other Residential
Consumer
Motor Vehicle
All Other Consumer
With an allowance recorded:
Commercial
Commercial & Industrial
Farmland
Non Farm, Non Residential
Agriculture
All Other Commercial
Residential
First Liens
Home Equity
Junior Liens
Multifamily
All Other Residential
Consumer
Motor Vehicle
All Other Consumer
TOTAL
Unpaid
Principal
Balance
Allowance
for Loan Average
Recorded
Recorded
Losses
Investment Allocated Investment Recognized Recognized
Cash Basis
Interest
Income
Interest
Income
-
$
-
-
-
-
-
$
-
-
-
-
-
$
-
-
-
-
$
1,013
-
1,679
-
-
-
$
-
-
-
-
-
$
-
-
-
-
-
-
-
-
-
-
-
17,262
891
7,438
-
1,209
1,254
179
-
5,540
-
-
-
-
-
-
-
-
17,098
891
7,386
-
1,209
1,254
179
-
5,540
-
-
-
-
-
-
-
-
3,153
191
293
-
52
126
-
-
3,794
-
150
-
-
50
-
-
-
16,738
891
5,000
-
1,362
1,230
75
176
2,216
-
-
-
-
-
-
-
-
-
-
179
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
33,773
$
-
-
33,557
$
-
-
7,609
$
-
-
30,580
$
-
-
179
$
-
-
$
-
For 2012, the unpaid principal balance has not been reduced for partial charge-offs.
51
December 31, 2011
With no related allowance recorded:
Commercial
Commercial & Industrial
Farmland
Non Farm, Non Residential
Agriculture
All Other Commercial
Residential
First Liens
Home Equity
Junior Liens
Multifamily
All Other Residential
Consumer
Motor Vehicle
All Other Consumer
With an allowance recorded:
Commercial
Commercial & Industrial
Farmland
Non Farm, Non Residential
Agriculture
All Other Commercial
Residential
First Liens
Home Equity
Junior Liens
Multifamily
All Other Residential
Consumer
Motor Vehicle
All Other Consumer
TOTAL
Unpaid
Principal
Balance
Allowance
for Loan Average
Losses
Recorded
Recorded
Investment Allocated Investment Recognized Recognized
Cash Basis
Interest
Income
Interest
Income
$
-
-
4,444
-
-
$
-
-
4,444
-
-
$
-
-
-
-
-
$
1,929
-
3,262
-
-
$
165
-
-
-
-
$
-
-
-
-
-
750
-
-
250
-
-
-
17,890
891
4,816
-
1,517
1,213
-
879
-
-
750
-
-
250
-
-
-
17,866
891
4,816
-
1,517
1,213
-
879
-
-
-
-
-
-
-
-
-
2,664
49
957
-
66
190
-
347
-
-
150
-
-
50
-
-
-
16,746
360
8,717
-
1,671
2,014
-
937
510
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
32,650
$
-
-
32,626
$
-
-
4,273
$
-
-
36,346
$
-
-
165
$
-
-
$
-
For 2011, the unpaid principal balance has been reduced for partial charge-offs.
(Dollar amounts in thousands)
Average of impaired loans during the year
Interest income recognized during impairment
Cash-basis interest income recognized
2010
$
27,772
660
57
52
The following table presents the recorded investment in nonperforming loans by class of loans.
(Dollar amounts in thousands)
Commercial
Commercial & Industrial
Farmland
Non Farm, Non Residential
Agriculture
All Other Commercial
Residential
First Liens
Home Equity
Junior Liens
Multifamily
All Other Residential
Consumer
Motor Vehicle
All Other Consumer
TOTAL
Loans Past
Due Over
90 Day Still
December 31, 2012
Loans Past
Due Over
90 Day Still
December 31, 2011
Accruing Restructured Nonaccrual Accruing Restructured Nonaccrual
$
724
231
491
69
-
$
11,573
-
4,836
-
-
$
9,360
907
6,718
104
4,811
$
317
74
237
-
-
$
12,590
-
-
-
-
$
9,673
979
12,542
225
3,171
1,237
24
538
101
-
4,126
-
-
-
-
6,852
196
405
5,598
150
1,150
8
154
-
136
3,856
-
898
-
-
7,398
-
1,240
668
171
133
3
3,551
$
685
16
21,236
$
174
1,519
36,794
$
77
4
2,157
$
-
-
17,344
$
294
1,741
38,102
$
Covered loans included in loans past due over 90 days still on accrual are $630 thousand at December 31, 2012 and $413
thousand at December 31, 2011. Covered loans included in non-accrual loans are $4.3 million at December 31, 2012 and $5.6
million at December 31, 2011. Covered loans of $2.9 million are deemed impaired at December 31, 2012 and have allowance
for loan loss allocated to them of $236 thousand. On December 31, 2011 there were $5.0 million of covered loans deemed
impaired that had an allowance for loan loss allocated to them of $1.0 million. Non-performing loans include both smaller bal-
ance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.
During the years ending December 31, 2012 and 2011, the terms of certain loans were modified as troubled debt restructurings
(TDRs). In 2012, new TDRs included two commercial loans totaling $5.1 million, four residential loans totaling $13 thousand
and one hundred and fifty five consumer loans totaling $864 thousand. In 2012, the dollar amount of loans modified in trouble
debt restructurings that defaulted within 12 months of their modification were charged off included one commercial loan for
$879 thousand, one residential loan for $31 thousand and four installment loans totaling $14 thousand. In 2011, new TDRs
included four commercial loans totaling $631 thousand and four residential loans totaling $212 thousand. In 2011, the dollar
amount of loans modified in trouble debt restructurings that defaulted within 12 months of their modification and were charged
off was insignificant to the allowance for loan losses. There was no impact to the provision for loan losses as a result of these
transactions.
Modification of the terms of such loans typically include one or a combination of the following: a reduction of the stated
interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new
debt with similar risk; or a permanent reduction of the recorded investment in the loan. No modification in 2012 or 2011
resulted in the permanent reduction of the recorded investment in the loan. Modifications involving a reduction of the stated
interest rate of the loan were for periods ranging from twelve months to five years. Modifications involving an extension of
the maturity date were for periods ranging from twelve months to 10 years.
The Corporation has allocated $1.6 million of specific reserves to customers whose loan terms have been modified in troubled
debt restructurings at both December 31, 2012 and 2011. The Corporation has not committed to lend additional amounts as of
December 31, 2012 and 2011 to customers with outstanding loans that are classified as troubled debt restructurings.
53
The following table presents the aging of the recorded investment in loans by past due category and class of loans.
December 31, 2012
(Dollar amounts in thousands)
Commercial
Commercial & Industrial
Farmland
Non Farm, Non Residential
Agriculture
All Other Commercial
Residential
First Liens
Home Equity
Junior Liens
Multifamily
All Other Residential
Consumer
Motor Vehicle
All Other Consumer
TOTAL
December 31, 2011
(Dollar amounts in thousands)
Commercial
Commercial & Industrial
Farmland
Non Farm, Non Residential
Agriculture
All Other Commercial
Residential
First Liens
Home Equity
Junior Liens
Multifamily
All Other Residential
Consumer
Motor Vehicle
All Other Consumer
TOTAL
Credit Quality Indicators:
30-59 Days 60-89 Days than 90 days
Past Due
Past Due
Past Due
Total
Past Due
Current
Total
Greater
$
1,315
534
5,618
137
568
$
861
-
1,004
-
202
$
3,616
1,122
2,449
78
350
$
5,792
1,656
9,071
215
1,120
$
487,160
87,270
290,023
130,404
81,453
$
492,952
88,926
299,094
130,619
82,573
8,359
143
555
52
214
1,659
15
98
-
-
4,599
24
586
5,641
-
14,617
182
1,239
5,693
214
336,230
43,317
36,535
49,019
10,834
350,847
43,499
37,774
54,712
11,048
4,164
225
21,884
$
600
93
4,532
$
182
3
18,650
$
Greater
4,946
321
45,066
$
241,303
23,318
1,816,866
$
246,249
23,639
1,861,932
$
30-59 Days 60-89 Days than 90 days
Past Due
Past Due
Past Due
Total
Past Due
Current
Total
$
2,717
5
2,945
88
120
$
740
57
420
-
-
$
4,452
1,034
7,754
97
1,588
$
7,909
1,096
11,119
185
1,708
$
472,370
98,159
310,724
114,162
88,313
$
480,279
99,255
321,843
114,347
90,021
11,435
175
1,333
-
128
2,016
62
183
100
-
5,316
8
190
668
136
18,767
245
1,706
768
264
340,269
44,939
39,903
46,216
14,261
359,036
45,184
41,609
46,984
14,525
3,450
174
22,570
$
563
48
4,189
$
77
5
21,325
$
4,090
227
48,084
$
260,102
26,782
1,856,200
$
264,192
27,009
1,904,284
$
The Corporation categorizes loans into risk categories based on relevant information about the ability of borrowers to service
their debt such as: current financial information, historical payment experience, credit documentation, public information, and
current economic trends, among other factors. The Corporation analyzes loans individually by classifying the loans as to credit
risk. This analysis includes non-homogeneous loans, such as commercial loans, with an outstanding balance greater than $50
thousand. Any consumer loans outstanding to a borrower who had commercial loans analyzed will be similarly risk rated.
This analysis is performed on a quarterly basis. The Corporation uses the following definitions for risk ratings:
Special Mention: Loans classified as special mention have a potential weakness that deserves management’s close attention.
If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the
institution’s credit position at some future date.
Substandard: Loans classified as substandard are inadequately protected by the current net worth and debt service capacity of
the borrower or of any pledged collateral. These loans have a well-defined weakness or weaknesses which have clearly
54
jeopardized repayment of principal and interest as originally intended. They are characterized by the distinct possibility that
the institution will sustain some future loss if the deficiencies are not corrected.
Doubtful: Loans classified as doubtful have all the weaknesses inherent in those graded substandard, with the added
characteristic that the severity of the weaknesses makes collection or liquidation in full highly questionable or improbable
based upon currently existing facts, conditions, and values.
Furthermore, non-homogeneous loans which were not individually analyzed, but are 90+ days past due or on non-accrual are
classified as substandard. Loans included in homogeneous pools, such as residential or consumer, may be classified as
substandard due to 90+ days delinquency, non-accrual status, bankruptcy, or loan restructuring.
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be
pass rated loans. Loans listed as not rated are either less than $50 thousand or are included in groups of homogeneous loans.
As of December 31, 2012 and 2011, and based on the most recent analysis performed, the risk category of loans by class of
loans is as follows:
December 31, 2012
(Dollar amounts in thousands)
Commercial
Commercial & Industrial
Farmland
Non Farm, Non Residential
Agriculture
All Other Commercial
Residential
First Liens
Home Equity
Junior Liens
Multifamily
All Other Residential
Consumer
Motor Vehicle
All Other Consumer
TOTAL
December 31, 2011
(Dollar amounts in thousands)
Commercial
Commercial & Industrial
Farmland
Non Farm, Non Residential
Agriculture
All Other Commercial
Residential
First Liens
Home Equity
Junior Liens
Multifamily
All Other Residential
Consumer
Motor Vehicle
All Other Consumer
TOTAL
Pass
Special
Mention Substandard Doubtful
Not Rated
Total
$
414,680
81,977
249,614
119,789
69,952
$
31,368
2,718
25,764
8,921
132
$
31,442
1,616
22,038
134
11,239
$
7,138
-
831
-
54
$
7,025
805
42
62
803
$
491,653
87,116
298,289
128,906
82,180
113,360
13,035
10,419
42,719
2,840
8,986
469
50
3,328
-
11,516
1,631
515
8,481
35
689
23
70
59
-
215,034
28,267
26,575
-
8,136
349,585
43,425
37,629
54,587
11,011
11,695
4,614
1,134,694
$
262
73
82,071
$
311
104
89,062
$
25
21
8,910
$
232,727
18,675
538,151
$
245,020
23,487
1,852,888
$
Pass
Special
Mention Substandard Doubtful
Not Rated
Total
$
386,734
89,213
254,761
109,869
77,330
$
25,343
4,250
28,684
2,100
6,097
$
53,026
3,015
32,704
623
5,099
$
7,128
69
4,271
79
67
$
6,717
619
393
122
1,011
$
478,948
97,166
320,813
112,793
89,604
113,234
13,613
11,887
35,837
4,658
5,175
520
714
3,911
445
19,895
671
783
6,224
53
1,318
19
968
606
-
218,118
30,278
27,105
258
9,310
357,740
45,101
41,457
46,836
14,466
12,988
6,120
1,116,244
$
330
57
77,626
$
501
141
122,735
$
59
12
14,596
$
249,018
20,491
563,440
$
262,896
26,821
1,894,641
$
55
8. PREMISES AND EQUIPMENT:
Premises and equipment are summarized as follows:
(Dollar amounts in thousands)
Land
Building and leasehold improvements
Furniture and equipment
Less accumulated depreciation
TOTAL
December 31,
2012
2011
$
$
10,391
49,418
41,096
100,905
(53,597)
47,308
9,415
45,665
36,913
91,993
(51,888)
40,105
$
$
Aggregate depreciation expense was $3.74 million, $2.84 million and $3.27 million for 2012, 2011 and 2010, respectively.
The Company leases certain branch properties and equipment under operating leases. Rent expense was $1.1 million, $882
thousand, and $907 thousand for 2012, 2011, and 2010. Rent commitments, before considering renewal options that generally
are present, were as follows:
2013
2014
2015
2016
2017
Thereafter
$
715
599
490
313
251
186
2,554
$
9. GOODWILL AND INTANGIBLE ASSETS:
The Corporation completed its annual impairment testing of goodwill during the second quarter of 2012 and 2011.
Management does not believe any amount of goodwill is impaired.
Intangible assets subject to amortization at December 31, 2012 and 2011 are as follows:
(Dollar amounts in thousands)
Customer list intangible
Core deposit intangible
2012
2011
Gross
Amount
Accumulated
Amortization
Gross
Amount
Accumulated
Amortization
$
4,169
8,600
$
3,512
5,364
$
4,055
8,600
$
3,409
4,104
$
12,769
$
8,876
$
12,655
$
7,513
In April 2012 Forrest Sherer, Inc. paid $142 thousand to acquire an insurance agency. The only identifiable asset
purchased was a customer list intangible of $114.
In late December 2011 First Financial Bank paid $47.0 million to acquire Freestar Bank. The intangible assets purchased
were the core deposit intangible of $2.1 million and goodwill of $30.5million.
Aggregate amortization expense was $1.36 million, $1.06 million and $1.38 million for 2012, 2011 and 2010,
respectively.
Estimated amortization expense for the next five years is as follows:
$
In thousands
1,110
810
596
455
326
2013
2014
2015
2016
2017
56
10. DEPOSITS:
Scheduled maturities of time deposits for the next five years are as follows:
2013
2014
2015
2016
2017
$
345,615
130,758
69,770
29,513
32,351
11. SHORT-TERM BORROWINGS:
A summary of the carrying value of the Corporation's short-term borrowings at December 31, 2012 and 2011 is presented below:
(Dollar amounts in thousands)
Federal funds purchased
Repurchase-agreements
(Dollar amounts in thousands)
Average amount outstanding
Maximum amount outstanding at a month end
Average interest rate during year
Interest rate at year-end
2012
$
2,750
37,801
$
40,551
2012
$
50,499
64,969
0.28%
0.21%
2011
$
43,167
56,855
$
100,022
2011
$
43,015
100,022
0.44%
0.10%
Federal funds purchased are generally due in one day and bear interest at market rates. Substantially all repurchase agreement
liabilities represent amounts advanced by various customers. Securities are pledged to cover these liabilities, which are not covered by
federal deposit insurance. The Corporation maintains possession of and control over these securities.
12. OTHER BORROWINGS:
Other borrowings at December 31, 2012 and 2011 are summarized as follows:
(Dollar amounts in thousands)
FHLB advances
Junior subordinated debentures (variable rate) Maturing December 2037
TOTAL
The aggregate minimum annual retirements of other borrowings are as follows:
2012
119,705
-
119,705
$
$
2011
140,231
6,196
146,427
$
$
2013
2014
2015
2016
2017
Thereafter
$
61,320
45,297
2,297
10,222
569
-
119,705
$
The Corporation's subsidiary banks are members of the Federal Home Loan Bank (FHLB) and accordingly are permitted to obtain advances.
The advances from the FHLB, aggregating $119.7 million, including $118.6 million at December 31, 2012 contractually due and a
purchase premium of $1.1 million, and $140.2 million, including $138.6 million at December 31, 2011 contractually due and a
purchase premium of $1.6 million, accrue interest, payable monthly, at annual rates, primarily fixed, varying from 2.9% to 6.6% in 2012
and 2.9% to 6.6% in 2011. The advances are due at various dates through August 2017. FHLB advances are, generally, due in full at
maturity. They are secured by eligible securities totaling $20.9 million at December 31, 2012, and $8.3 million at December 31, 2011, and
a blanket pledge on real estate loan collateral. Based on this collateral and the Corporation's holdings of FHLB stock, the Corporation is
eligible to borrow up to $196.7 million at year end 2012. Certain advances may be prepaid, without penalty, prior to maturity. The FHLB
can adjust the interest rate from fixed to variable on certain advances, but those advances may then be prepaid, without penalty.
In 2011 First Financial Corporation acquired PNB Statutory Trust I in conjunction with its purchase and assumption of the
assets and liabilities of Freestar Bank NA and assumption of certain liabilities of PNB Holding Company. First Financial
guarantees payments of distributions on the trust preferred securities issued by PNB Statutory Trust I. PNB Statutory Trust I
57
issued $6.0 million in preferred securities in December 2007. The fair value of these securities at acquisition was $6.2 million
based upon the intended redemption by the Corporation on December 31, 2012. The preferred securities carried a variable rate
of interest priced at the three-month LIBOR plus 230 basis points, payable quarterly and maturing on December 31, 2037.
Proceeds from the securities were used to purchase junior subordinated debentures with the same financial terms as the
securities issued by PNB Statutory Trust I. The Corporation redeemed the junior subordinated debentures and thereby cause
redemption of the trust preferred securities in whole on December 31, 2012.
13. INCOME TAXES:
Income tax expense is summarized as follows:
(Dollar amounts in thousands)
Federal:
Currently payable
Deferred
State:
Currently payable
Deferred
TOTAL
2012
2011
2010
$
12,074
(455)
11,619
$
11,872
311
12,183
$
15,582
(4,850)
10,732
1,887
312
2,199
13,818
$
1,901
313
2,214
14,397
$
2,325
(1,090)
1,235
11,967
$
The reconciliation of income tax expense with the amount computed by applying the statutory federal income tax rate of
35% to income before income taxes is summarized as follows:
(Dollar amounts in thousands)
Federal income taxes computed at the statutory rate
Add (deduct) tax effect of:
Tax exempt income
ESOP dividend deduction
State tax, net of federal benefit
Affordable housing credits
Other, net
TOTAL
2012
$16,320
2011
$18,057
2010
$14,004
(3,864)
(258)
1,444
(148)
324
$13,818
(3,875)
(1,085)
1,439
(86)
(53)
$14,397
(3,400)
-
803
-
560
$11,967
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at
December 31, 2012 and 2011, are as follows:
(Dollar amounts in thousands)
Deferred tax assets:
Other than temporary impairment
Net unrealized losses on retirement plans
Loan losses provision
Deferred compensation
Compensated absences
Post-retirement benefits
Deferred loss on acquisition
Other
GROSS DEFERRED ASSETS
Deferred tax liabilities:
Net unrealized gains on securities available-for-sale
Depreciation
Mortgage servicing rights
Pensions
Intangibles
Other
GROSS DEFERRED LIABILITIES
NET DEFERRED TAX ASSETS (LIABILITIES)
58
2012
2011
$
5,951
13,612
8,606
7,729
888
2,040
136
2,104
41,066
$
6,068
15,166
7,803
8,087
759
2,016
187
1,771
41,857
(8,954)
(2,715)
(700)
(2,518)
(541)
(1,381)
(16,809)
24,257
$
(8,493)
(1,830)
(763)
(3,587)
-
(1,055)
(15,728)
26,129
$
Unrecognized Tax Benefits — A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
(Dollar amounts in thousands)
Balance at January 1
Additions based on tax positions related to the current year
Additions based on tax positions related to prior years
Reductions due to the statute of limitations
Balance at December 31
2012
$
2011
$
2010
$
862
86
-
(171)
777
901
137
-
(176)
862
660
113
181
(53)
901
$
$
$
Of this total, $777 represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective
income tax rate in future periods. The Corporation does not expect the total amount of unrecognized tax benefits to
significantly increase or decrease in the next 12 months.
The total amount of interest and penalties recorded in the income statement for the years ended December 31, 2012, 2011 and
2010 was an expense decrease of $2 and $18 and an increase of $43, respectively. The amount accrued for interest and
penalties at December 31, 2012, 2011 and 2010 was $96, $98 and $116, respectively.
The Corporation and its subsidiaries are subject to U.S. federal income tax as well as income tax of the states of Indiana and
Illinois. The Corporation is no longer subject to examination by taxing authorities for years before 2009.
14. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK:
The Corporation is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments include conditional commitments and commercial letters of credit.
The financial instruments involve to varying degrees, elements of credit and interest rate risk in excess of amounts recognized in
the financial statements. The Corporation's maximum exposure to credit loss in the event of nonperformance by the other party
to the financial instrument for commitments to make loans is limited generally by the contractual amount of those instruments.
The Corporation follows the same credit policy to make such commitments as is followed for those loans recorded in the
consolidated financial statements.
Commitment and contingent liabilities are summarized as follows at December 31:
(Dollar amounts in thousands)
Home Equity
Commercial Operating Lines
Other Commitments
TOTAL
2012
2011
$
59,370
243,005
59,635
362,010
$
$
58,057
247,337
54,195
359,589
$
Commercial letters of credit
$
7,717
$
5,346
The majority of commercial operating lines and home equity lines are variable rate, while the majority of other commitments to fund
loans are fixed rate. Since many commitments to make loans expire without being used, these amounts do not necessarily
represent future cash commitments. Collateral obtained upon exercise of the commitment is determined using management's credit
evaluation of the borrower, and may include accounts receivable, inventory, property, land and other items. The approximate
duration of these commitments is generally one year or less.
Derivatives: The Corporation enters into derivative instruments for the benefit of its customers. At the inception of a derivative
contract, the Corporation designates the derivative as an instrument with no hedging designation ("standalone derivative").
Changes in the fair value of derivatives are reported currently in earnings as non-interest income. Net cash settlements on
derivatives that do not qualify for hedge accounting are reported in non-interest income.
First Financial Bank offers clients the ability on certain transactions to enter into interest rate swaps. Typically, these are pay fixed,
receive floating swaps used in conjunction with commercial loans. These derivative contracts do not qualify for hedge accounting.
The Bank hedges the exposure to these contracts by entering into offsetting contracts with substantially matching terms. The notional
amount of these interest rate swaps was $18.6 and $27.2 million at December 31, 2012 and 2011. The fair value of these contracts
combined was zero, as gains offset losses. The gross gain and loss associated with these interest rate swaps was $2.1 million and $2.4
million at December 31, 2012 and 2011.
59
1 5 . R E T IR E ME N T P L A N S:
Employees of the Corporation are covered by a retirement program that consists of a defined benefit plan and an employee stock
ownership plan (ESOP). Plan assets consist primarily of the Corporation's stock and obligations of U.S. Government agencies.
Benefits under the defined benefit plan are actuarially determined based on an employee's service and compensation, as defined,
and funded as necessary. This plan was frozen for the majority of employees as of December 31, 2012.Those employees will be
eligible to participate in a 401K plan that the Corporation can contribute a discretionary match of the pay contributed by the
employee. In addition the ESOP plan will continue in place for all employees.
Assets in the ESOP are considered in calculating the funding to the defined benefit plan required to provide such benefits. Any
shortfall of benefits under the ESOP are to be provided by the defined benefit plan. The ESOP may provide benefits beyond
those determined under the defined benefit plan. Contributions to the ESOP are determined by the Corporation's Board of
Directors. The Corporation made contributions to the defined benefit plan of $3.64 million, $7.11 million and $1.30 million
in 2012, 2011 and 2010. The Corporation contributed $1.44 million, $1.56 million and $1.35 million to the ESOP in 2012,
2011 and 2010.
The Corporation uses a measurement date of December 31, 2012.
Net periodic benefit cost and other amounts recognized in other comprehensive income included the following components:
(Dollar amounts in thousands)
Service cost - benefits earned
Interest cost on projected benefit obligation
Expected return on plan assets
Net amortization and deferral
Net periodic pension cost
Net loss (gain) during the period
Curtailment gain
Amortization of prior service cost
Amortization of unrecognized gain (loss)
Total recognized in other comprehensive income (loss)
2012
2011
2010
$
4,872
3,667
(3,258)
2,434
7,715
$
3,542
3,688
(4,003)
1,152
4,379
$
3,093
3,313
(3,400)
964
3,970
3,842
(5,700)
(166)
(2,270)
(4,294)
17,868
-
(166)
(986)
16,716
4,466
-
18
(982)
3,502
Total recognized net periodic pension cost and other comprehensive income
$
3,421
$
21,095
$
7,472
The estimated net loss and prior service costs (credits) for the defined benefit pension plan that will be amortized from accumulated
other comprehensive income into net periodic benefit cost over the next fiscal year are $2.1 million and $(16) thousand.
The information below sets forth the change in projected benefit obligation, reconciliation of plan assets, and the funded status of the
Corporation's retirement program. Actuarial present value of benefits is based on service to date and present pay levels.
(Dollar amounts in thousands)
Change in benefit obligation:
Benefit obligation at January 1
Service cost
Interest cost
Actuarial (gain) loss
Benefits paid
Benefit obligation at December 31
Reconciliation of fair value of plan assets:
Fair value of plan assets at January 1
Actual return on plan assets
Employer contributions
Benefits paid
Fair value of plan assets at December 31
2012
2011
$
84,908
4,872
3,667
(4,747)
(1,893)
86,807
$
67,006
3,542
3,688
12,689
(2,017)
84,908
53,935
371
5,078
(1,893)
57,491
48,464
(1,176)
8,664
(2,017)
53,935
Funded status at December 31 (plan assets less benefit obligation)
$
(29,316)
$
(30,973)
60
Amounts recognized in accumulated other comprehensive income at December 31, 2012 and 2011 consist of:
(Dollar amounts in thousands)
Net loss (gain)
Prior service cost (credit)
2012
2011
$
$
3,842
166
4,008
17,867
166
18,033
$
$
The accumulated benefit obligation for the defined benefit pension plan was $79,869 and $73,560 at year-end
2012 and 2011.
Principal assumptions used:
Discount rate
Rate of increase in compensation levels
Expected long-term rate of return on plan assets
2012
2011
4.05%
3.50
6.00
4.40%
3.50
6.00
The expected long-term rate of return was estimated using market benchmarks for equities and bonds applied to the plan's target asset
allocation. Management estimated the rate by which plan assets would perform based on historical experience as adjusted for changes
in asset allocations and expectations for future return on equities as compared to past periods.
Plan Assets — The Corporation's pension plan weighted-average asset allocation for the years 2012 and 2011 by asset category are as
follows:
Pension Plan
Target Allocation
2012
61-63%
33-36%
1-6%
ASSET CATEGORY
Equity securities
Debt securities
Other
TOTAL
ESOP
Target Allocation
2012
99-100%
0-0
0-1
Pension
Pecentage of Plan
Assets at December 31,
ESOP
Pecentage of Plan
Assets at December 31,
2012
2011
2012
2011
55%
33%
12%
100%
49%
36%
15%
100%
98%
0%
2%
100%
99%
0%
1%
100%
Fair Value of Plan Assets — Fair value is the exchange price that would be received for an asset in the principal or most advantageous
market for the asset in an orderly transaction between market participants on the measurement date. It also establishes a fair value
hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when
measuring fair value.
The Corporation used the following methods and significant assumptions to estimate the fair value of each type of financial
instrument:
Equity, Debt, Investment Funds and Other Securities — The fair values for investment securities are determined by quoted market
prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of
similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values
are calculated using discounted cash flows or other market indicators (Level 3).
The fair value of the plan assets at December 31, 2012 and 2011, by asset category, is as follows:
Fair Value Measurments at
December 31, 2012 Using:
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
S ignificant
Other
Obsevable
Inputs
(Level 2)
S ignificant
Obsevable
Inputs
(Level 3)
Total
$
$
43,393
10,597
3,501
57,491
43,393
-
3,501
46,894
$
-
10,597
-
10,597
$
-
$
-
-
$
-
$
$
(Dollar amounts in thousands)
Plan assets
Equity securities
Debt securities
Investment Funds
Total plan assets
61
Fair Value Measurments at
December 31, 2011 Using:
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
S ignificant
Other
Obsevable
Inputs
(Level 2)
S ignificant
Obsevable
Inputs
(Level 3)
Total
$
$
40,475
8,566
4,894
53,935
40,475
-
4,894
45,369
$
-
8,566
-
8,566
$
-
$
-
-
$
-
$
$
(Dollar amounts in thousands)
Plan assets
Equity securities
Debt securities
Investment Funds
Total plan assets
The investment objective for the retirement program is to maximize total return without exposure to undue risk. Asset allocation
favors equities, with a target allocation of approximately 88%. This target includes the Corporation's ESOP, which is 100%
invested in corporate stock. Other investment allocations include fixed income securities and cash.
The plan is prohibited from investing in the following: private placement equity and debt transactions; letter stock and
uncovered options; short-sale margin transactions and other specialized investment activity; and fixed income or interest rate futures.
All other investments not prohibited by the plan are permitted.
Equity securities include First Financial Corporation common stock in the amount of $27.2 million (49 percent of total plan assets)
and $28.3 million (53 percent of total plan assets) at December 31, 2012 and 2011, respectively. Other equity securities are
predominantly stocks in large cap U.S. companies.
Contributions — The Corporation expects to contribute $2.1 million to its pension plan and $550 thousand to its ESOP in 2013.
Estimated Future Payments — The following benefit payments, which reflect expected future service, are expected:
PENSION BENEFITS
(Dollar amounts in thousands)
2013
$ 2,009
2,312
2014
2,564
2015
2,872
2016
5,068
2017
18,374
2018-2022
Supplemental Executive Retirement Plan — The Corporation has established a Supplemental Executive Retirement Plan
(SERP) for certain executive officers. The provisions of the SERP allow the Plan's participants who are also participants in the
Corporation's defined benefit pension plan to receive supplemental retirement benefits to help recompense for benefits lost due to
the imposition of IRS limitations on benefits under the Corporation's tax qualified defined benefit pension plan. Expenses
related to the plan were $163 thousand in 2012 and $200 thousand in 2011. The plan is unfunded and has a measurement date of
December 31. The amounts recognized in other comprehensive income in the current year are as follows:
(Dollar amounts in thousands)
Net loss (gain) during the period
Amortization of prior service cost
Amortization of unrecognized gain (loss)
Total recognized in other comprehensive income (loss)
2012
$
2011
$
2010
$
442
-
(79)
363
486
(74)
39
451
(90)
(74)
66
(98)
$
$
$
The Corporation has $2.5 million and $2.0 million recognized in the balance sheet as a liability at December 31, 2012 and 2011.
Amounts in accumulated other comprehensive income consist of $718 thousand net loss at December 31, 2012 and $355
thousand net loss at December 31, 2011. The estimated loss for the SERP that will be amortized from accumulated other
comprehensive income into net periodic benefit cost over the next fiscal year is $68 thousand.
62
Estimated Future Payments — The following benefit payments, which reflect expected future service, are expected:
(Dollar amounts on thousands)
2013
-
$
-
2014
2015
253
2016
250
2017
248
2018-2022
1,191
The Corporation also provides medical benefits to certain employees subsequent to their retirement. The Corporation uses a
measurement date of December 31. Accrued post-retirement benefits as of December 31, 2012 and 2011 are as follows:
(Dollar amounts in thousands)
Change in benefit obligation:
Benefit obligation at January 1
Service cost
Interest cost
Plan participants' contributions
Actuarial (gain) loss
Benefits paid
Benefit obligation at December 31
December 31,
2012
2011
$
$
4,057
60
173
62
311
(268)
4,395
4,500
61
194
62
(472)
(288)
4,057
$
$
Funded status at December 31
$
4,395
$
4,057
Amounts recognized in accumulated other comprehensive income consist of a net loss of $402 thousand and $59 thousand in transition
obligation at December 31, 2012 and $91thousand net loss and $120 thousand in transition obligation at December 31, 2011. The
post-retirement benefits paid in 2012 and 2011 of $268 thousand and $288 thousand, respectively, were fully funded by company and
participant contributions.
The estimated transition obligation for the post-retirement benefit plan that will be amortized from accumulated other comprehensive
income into net periodic benefit cost over the next fiscal year is $59 thousand.
Weighted average assumptions at December 31:
Discount rate
Initial weighted health care cost trend rate
Ultimate health care cost trend rate
Year that the rate is assumed to stabilize and remain unchanged
Post-retirement health benefit expense included the following components:
December 31,
2012
2011
4.05%
7.50
5.00
2015
4.40%
7.50
5.00
2015
(Dollar amounts in thousands)
Service cost $ 60
173
Interest cost
60
Amortization of transition obligation
-
Recognized actuarial loss
$ 293
Net periodic benefit cost
2012
Years Ended December 31,
2011
$ 59
194
60
-
$ 313
2010
$ 64
218
60
12
$ 354
Net loss (gain) during the period
Amortization of prior service cost
Amortization of unrecognized gain (loss)
Total recognized in other comprehensive income (loss)
Total recognized net periodic benefit cost and other comprehensive income
$
311
(60)
-
$
251
$
544
$
(469)
(60)
-
$
(529)
$
(216)
$
-
(60)
(153)
(213)
141
$
$
63
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-
point change in the assumed health care cost trend rates would have the following effects:
(Dollar amounts in thousands)
Effect on total of service and interest cost components
Effect on post-retirement benefit obligation
1% Point
Increase
$ 71
3
1% Point
Decrease
$ (63)
(3)
Contributions — The Corporation expects to contribute $234 thousand to its other post-retirement benefit plan in 2013.
Estimated Future Payments — The following benefit payments, which reflect expected future service, are expected:
(Dollar amounts in thousands)
$
2013
2014
2015
2016
2017
2018-2022
234
242
255
268
270
1,348
16. STOCK BASED COMPENSATION:
On February 5, 2011, the Corporation's Board of Directors adopted and approved the First Financial Corporation 2011
Omnibus Equity Incentive Plan (the "2011 Stock Incentive Plan") effective upon the approval of the Plan by the Company's
shareholders, which occurred on April 20, 2011 at the Corporation’s annual meeting of shareholders. The 2011 Stock Incentive
Plan provides for the grant of non qualified stock options, incentive stock options, stock appreciation rights, restricted stock,
restricted stock units and incentive awards. An aggregate of 700,000 shares of common stock are reserved for issuance under
the 2011 Stock Incentive Plan. Shares issuable under the 2011 Stock Incentive Plan may be authorized and unissued shares of
common stock or treasury shares.
During the first quarter of 2012, the Compensation Committee of the Board of Directors of the Company granted restricted
stock awards to certain executive officers pursuant to the Corporation's annual performance-based stock incentive bonus plan.
Compensation expense is recognized over the vesting period of the awards based on the fair value of the stock at the grant date.
The value of the awards was determined by dividing the award amount by the closing price of a share of Company common
stock on the grant date, April 8, 2011 ($36.88). The restricted stock awards vest as follows — 33% on the first anniversary,
33% on the second anniversary and the remaining 34% on the third anniversary of the earned date. The Corporation has the
right retain shares to satisfy any withholding tax obligation. A total of 39,643 shares of restricted common stock of the
Company were granted under the 2011 Stock Incentive Plan. A total of 660,357 remain to be granted under this plan.
Restricted Stock
Restricted stock awards require certain service-based or performance requirements and have a vesting period of 3 years.
Compensation expense is recognized over the vesting period of the award based on the fair value of the stock at the date of
issue.
(shares in thousands)
Nonvested balance at January 1, 2012
Granted during the year
Vested during the year
Forfeited during the year
Novested balance at December 31, 2012
Number
Outstanding
-
39,643
13,212
-
26,431
Weighted Average
Grant Date
Fair Value
$
-
36.88
30.24
-
36.88
As of December 31, 2012, there was $975 thousand of total unrecognized compensation cost related to nonvested shares
granted under the Plan. The cost is expected to be recognized over a weighted-average period of 2 years. The total fair
value of the shares vested during the years ended December 31, 2012 was $340 thousand.
64
17. OTHER COMPREHENSIVE INCOME (LOSS):
Other comprehensive income (loss) components and related taxes were as follows:
(Dollar amounts in thousands)
Unrealized holding gains and (losses) on securities available-for-sale
Change in unrealized gains (losses) on securities available-for-sale
for which a portion of OTTI has been recognized in earnings
Reclassification adjustments for (gains) and losses later
2012
December 31,
2011
2010
$
(2,590)
$
11,441
$
(6,291)
$
2,867
$
3,216
$
4,101
recognized in income
875
104
2,939
Net unrealized gains and (losses)
Tax effect
Other comprehensive income (loss)
Unrecognized gains and (losses) on benefit plans
Amortization of prior service cost included in net periodic pension cost
Amortization of unrecognized gains (losses) included in net
periodic pension cost
Benefit plans, net
Tax Effect
Other comprehensive income (loss)
1,152
(461)
691
$
14,761
(5,904)
8,857
$
749
(300)
449
$
$
1,309
226
$
(17,885)
300
$
(4,376)
116
2,349
3,884
(1,553)
2,331
$
947
(16,638)
6,656
(9,982)
$
1,069
(3,191)
1,277
(1,914)
$
The following is a summary of the accumulated other comprehensive income balances, net of tax:
(Dollar amounts in thousands)
Unrealized gains (losses) on securities available-for-sale
Unrealized loss on retirement plans
TOTAL
18. REGULATORY MATTERS:
Balance
at
12/31/2011
12,740
$
(23,234)
(10,494)
$
Current
Period
Change
$
691
2,331
3,022
$
Balance
at
12/31/2012
13,431
$
(20,903)
(7,472)
$
The Corporation and its bank affiliates are subject to various regulatory capital requirements administered by the federal
banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory—and possibly additional
discretionary—actions by regulators that, if undertaken, could have a direct material effect on the Corporation's financial
statements.
Further, the Corporation's primary source of funds to pay dividends to shareholders is dividends from its subsidiary banks and
compliance with these capital requirements can affect the ability of the Corporation and its banking affiliates to pay dividends. At
December 31, 2012, approximately $50.4 million of undistributed earnings of the subsidiary banks, included in consolidated
retained earnings, were available for distribution to the Corporation without regulatory approval. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Corporation and Banks must meet specific capital
guidelines that involve quantitative measures of the Corporation's assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Corporation's and Banks' capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Corporation and Banks to maintain minimum
amounts and ratios of Total and Tier I Capital to risk-weighted assets, and of Tier I Capital to average assets. Management believes,
as of December 31, 2012 and 2011, that the Corporation meets all capital adequacy requirements to which it is subject.
As of December 31, 2012, the most recent notification from the respective regulatory agencies categorized the subsidiary banks
as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the banks
must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have changed the banks' category.
65
The following table presents the actual and required capital amounts and related ratios for the Corporation and First Financial Bank,
N.A., at year-end 2012 and 2011.
(Dollar amounts in thousands)
Total risk-based capital
Corporation – 2012
Corporation – 2011
First Financial Bank – 2012
First Financial Bank – 2011
Tier I risk-based capital
Corporation – 2012
Corporation – 2011
First Financial Bank – 2012
First Financial Bank – 2011
Tier I leverage capital
Corporation – 2012
Corporation – 2011
First Financial Bank – 2012
First Financial Bank – 2011
Actual
Amount
Ratio
For Capital
Adequacy Purposes
Amount
Ratio
To Be Well Capitalized
Under Promt Corrective
Action Provisions
Ratio
Amount
$359,824
$334,414
333,284
315,676
$337,866
$315,173
314,303
299,578
$337,866
$315,173
314,303
299,578
16.37% $175,793
15.08% $177,420
170,127
15.67%
171,669
14.71%
15.38%
14.21%
14.78%
13.96%
$87,897
$88,710
85,064
85,835
11.43% $118,195
$98,999
12.73%
114,462
10.98%
95,791
12.51%
8.00%
8.00%
8.00%
8.00%
4.00%
4.00%
4.00%
4.00%
4.00%
4.00%
4.00%
4.00%
N/A
N/A
212,659
214,586
N/A
N/A
10.00%
10.00%
N/A
N/A
127,595
128,752
N/A
N/A
143,077
119,739
N/A
N/A
6.00%
6.00%
N/A
N/A
5.00%
5.00%
19. PARENT COMPANY CONDENSED FINANCIAL STATEMENTS:
The parent company’s condensed balance sheets as of December 31, 2012 and 2011, and the related condensed statements of income and
cash flows for each of the three years in the period ended December 31, 2012, are as follows:
December 31,
2012
2011
$
$
8,981
370,013
4,856
1,123
384,973
8,548
348,826
5,004
3,017
365,395
$
$
$
-
6,378
6,473
12,851
$
6,196
6,203
6,035
18,434
372,122
384,973
$
346,961
365,395
$
(Dollar amounts in thousands)
ASSETS
Cash deposits in affiliated banks
Investments in subsidiaries
Land and headquarters building, net
Other
Total Assets
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Borrowings
Dividends payable
Other liabilities
TOTAL LIABILITIES
Shareholders' Equity
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
66
CONDENSED STATEMENTS OF INCOME
(Dollar amounts in thousands)
Dividends from subsidiaries
Other income
Interest on borrowings
Other operating expenses
Income before income taxes and equity
in undistributed earnings of subsidiaries
Income tax benefit
Income before equity in undistributed
earnings of subsidiaries
Equity in undistributed earnings of subsidiaries
Net income
CONDENSED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization
Equity in undistributed earnings
Contribution of shares to ESOP
Securities impairment loss recognized in earnings
Securities (gains) losses
Restricted stock compensation
Increase (decrease) in other liabilities
(Increase) decrease in other assets
NET CASH FROM OPERATING ACTIVITIES
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of securities available-for-sale
Investment in First Financial Bank Risk Management
Purchase of investment securities
Purchase of furniture and fixtures
NET CASH FROM INVESTING ACTIVITIES
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on borrowings
Purchase of treasury stock
Dividends paid
NET CASH FROM FINANCING ACTIVITES
NET (DECREASE) INCREASE IN CASH
CASH, BEGINNING OF YEAR
CASH, END OF YEAR
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Years Ended December 31,
2011
2012
2010
$
16,347
1,149
(225)
(3,383)
$
11,400
643
-
(3,616)
$
16,400
1,279
(70)
(4,314)
13,888
1,267
8,427
2,311
13,295
1,248
15,155
17,657
32,812
$
10,738
26,457
37,195
$
14,543
13,501
28,044
$
Years Ended December 31,
2011
2010
2012
$
32,812
$
37,195
$
28,044
172
(17,657)
1,439
11
(435)
488
610
188
17,628
1,700
(250)
-
(24)
1,426
177
(26,457)
1,558
110
(2)
-
(1,114)
24
11,491
25
-
(6)
19
262
(13,501)
1,347
549
(1,048)
-
655
(832)
15,476
4,999
(12)
(13)
4,974
(6,196)
-
(12,425)
(18,621)
433
8,548
8,981
$
-
-
(12,231)
(12,231)
(721)
9,269
8,548
$
(7,636)
(610)
(11,940)
(20,186)
264
9,005
9,269
$
Interest
Income taxes
$ 225
$ 12,638
$ -
$ 16,565
$ 87
$ 15,713
67
20. SELECTED QUARTERLY DATA (UNAUDITED):
2012
Interest
Income
(Dollar amounts in thousands)
Interest
Expense
Net Interest
Income
March 31
June 30
September 30
December 31
$
$
$
$
31,149
31,134
30,428
29,594
$
$
$
$
3,984
3,472
3,022
2,915
$
$
$
$
27,165
27,662
27,406
26,679
Provision
For Loan
Losses
$
$
$
$
2,956
1,789
2,559
1,469
Net Income
$
7,443
$
8,705
$
8,091
$
8,573
Net Income
Per Share
$
0.56
$
0.66
$
0.61
$
0.65
Interest
Income
(Dollar amounts in thousands)
Interest
Expense
Net Interest
Income
March 31
June 30
September 30
December 31
$
$
$
$
29,291
29,495
29,150
28,405
$
$
$
$
4,536
4,336
4,246
4,029
$
$
$
$
24,755
25,159
24,904
24,376
Provision
For Loan
Losses
$
$
$
$
1,182
1,352
1,360
1,861
Net Income
$
8,803
$
8,417
$
9,814
$
10,161
Net Income
Per Share
$
0.67
$
0.64
$
0.75
$
0.77
2011
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, we carried out an evaluation (the “Evaluation”), under the supervision
and with the participation of our Chief Executive Officer (“CEO”), who serves as our principal executive officer, and
Chief Financial Officer (“CFO”), who serves as our principal financial officer, of the effectiveness of our disclosure
controls and procedures (“Disclosure Controls”). Based on the Evaluation, our CEO and CFO concluded that our
Disclosure Controls are effective and designed to ensure that the information required to be included in our periodic SEC
reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Changes in Internal Controls Over Financial Reporting
There was no change in the Corporation’s internal control over financial reporting that occurred during the Corporation’s
fourth fiscal quarter of 2012 that has materially affected, or is reasonably likely to materially affect, the Corporation’s
internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting and Attestation Report of the Registered
Public Accounting Firm
“Management’s Report on Internal Control over Financial Reporting” and “Report of Independent Registered Public
Accounting Firm” are included in Item 8 hereof and incorporated by reference.
ITEM 9B. OTHER INFORMATION
for the year 2013 on November 20, 2012. These amounts are set forth on Exhibit 10.3 to this Form 10-K.
The Corporation established the compensation to be paid to Directors
The Corporation established the compensation to be paid to Named Executive Officers for the year 2013 on November 20,
2012. These amounts are set forth on Exhibit 10.4 to this Form 10-K.
Effective December 1, 2012, the Corporation and the Bank (collectively, the “Employers”), entered into a new
employment agreement (the “Agreement”) with Norman L. Lowery, Chief Executive Officer of the Corporation and
President and Chief Executive Officer of the Bank. The Agreement supersedes the employment agreement dated
December 1, 2011 between the Employers and Mr. Lowery.
Under the terms of the Agreement, the Employers have agreed to employ Mr. Lowery for an initial term of thirty-six (36)
months in his current position as Chief Executive Officer of the Corporation and President and Chief Executive Officer of
the Bank.
Under the Agreement, Mr. Lowery is entitled to an annual base salary of $620,297, which may be increased from time to
time as determined by the boards of directors of the Employers, and is entitled to participate in other bonus and fringe
benefit plans available to other executive officers or employees of the Employers generally.
68
If the Employers terminate Mr. Lowery’s employment for “just cause,” death or “disability” (as such terms are defined in
the Agreement), then Mr. Lowery is entitled to receive the base salary, bonuses, vested rights, and other benefits due him
through the date of his termination. Any benefits payable under insurance, health, retirement, bonus, incentive,
performance or other plans as a result of his participation in such plans through such date of termination will be paid when
and as due under those plans.
If the Employers terminate Mr. Lowery’s employment without just cause or if he terminates his employment for “good
reason,” and such termination does not occur within 12 months after a “change in control” (as such terms are defined in
the Agreement), then Mr. Lowery is entitled to receive an amount equal to the sum of his base salary and bonuses through
the end of the then-current term of the Agreement. He would also receive cash reimbursements in an amount equal to his
cost of obtaining all benefits which he would have been eligible to participate in or receive through the term of the
Agreement.
If Mr. Lowery’s employment is terminated for other than just cause or is constructively discharged and this occurs within
12 months following a change in control, then Mr. Lowery is entitled to receive an amount equal to the greater of the
compensation and benefits described in the previous paragraph if the termination did not occur within 12 months
following a change in control; or, the product of 2.99 times the sum of (i) his base salary in effect as of the date of the
change in control; (ii) an amount equal to the bonuses received by or payable to him in or for the calendar year prior to the
year in which the change in control occurs; and (iii) cash reimbursements in an amount equal to his cost of obtaining for a
period of three years, beginning on the date of termination, all benefits which he was eligible to participate in or receive.
Mr. Lowery would also be entitled to the payment provided for in this paragraph if a change in control occurs that was not
approved by a majority of the board of directors of the Corporation.
If Mr. Lowery qualifies as a “key employee” (as defined in the Agreement) at the time of his separation from service, then
the Corporation may not make certain payments earlier than six months following the date of his separation from service
(or, if earlier, the date of his death). In this event, payments to which Mr. Lowery would otherwise be entitled during the
first six months following the date of his separation from service will be accumulated and paid to Mr. Lowery on the first
day of the seventh month following his separation from service. Mr. Lowery is currently considered a “key employee” for
this purpose.
If, as a result of a change in control, Mr. Lowery becomes entitled to any payments which are determined to be payments
subject to Internal Revenue Code Section 280G, then his benefit will be equal to the greater of (i) his benefit under the
Agreement reduced to the maximum amount payable such that when it is aggregated with payments and benefits under all
other plans and arrangements it will not result in an “excess parachute payment” under Internal Revenue Code Section
280G, or (ii) his benefit under the Agreement after taking into account the amount of the excise tax imposed under Internal
Revenue Code Section 280G due to the benefit payment.
The Agreement also includes standard confidentiality and non-solicit provisions and a non-compete provision pursuant to
which Mr. Lowery is prohibited, during his employment and for a period of one year following his termination, from
directly or indirectly competing against the Employers within a 30-mile radius of Terre Haute, Indiana.
The foregoing description is a summary only and is qualified in its entirety by the full text of the Agreement, which is filed
as Exhibit 10.01 to the Corporations Form 8-K filed March 12, 2013.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
In accordance with the provisions of General Instruction G to Form 10-K, the information required for disclosure under
Item 10 is not set forth herein because the Corporation intends to file with the Securities and Exchange Commission a
definitive Proxy Statement pursuant to Regulation 14A not later than 120 days following the end of its 2012 fiscal year,
which Proxy Statement will contain such information. The information required by Item 10 is incorporated herein by
reference to such Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
In accordance with the provisions of General Instruction G to Form 10-K, the information required for disclosure under
Item 11 is not set forth herein because the Corporation intends to file with the Securities and Exchange Commission a
definitive Proxy Statement pursuant to Regulation 14A not later than 120 days following the end of its 2012 fiscal year,
which Proxy Statement will contain such information. The information required by Item 11 is incorporated herein by
reference to such Proxy Statement.
69
ITEM 12.
RELATED SHAREHOLDER MATTERS
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
In accordance with the provisions of General Instruction G to Form 10-K, the information required for disclosure under
Item 12 is not set forth herein because the Corporation intends to file with the Securities and Exchange Commission a
definitive Proxy Statement pursuant to Regulation 14A not later than 120 days following the end of its 2012 fiscal year,
which Proxy Statement will contain such information. The information required by Item 12 is incorporated herein by
reference to such Proxy Statement.
Equity Compensation Plan Information
The following table provides certain information as of December 31, 2012 with respect to the Corporation’s equity
compensation plans under which equity securities of the Company are authorized for issuance.
Plan Category
Number of Securities to be
issued upon exercise of
outstanding options, warrants
and rights
Weighted average exercise price
of outstanding options, warrants
and rights
Equity compensation
plans approved by
security holders (2)
Equity compensation
plans not approved by
security holders (3)
Total
0
0
0
0
0
0
Number of securities
remaining (1)
660,357
0
660,357
(1) Available for future issuance under equity compensation plans (excluding securities reflected in the first
column).
(2) Includes the First Financial Corporation 2011 Omnibus Equity Incentive Plan.
(3) The Corporation has no equity compensation plan that has not been authorized by its stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
In accordance with the provisions of General Instruction G to Form 10-K, the information required for disclosure under
Item 13 is not set forth herein because the Corporation intends to file with the Securities and Exchange Commission a
definitive Proxy Statement pursuant to Regulation 14A not later than 120 days following the end of its 2012 fiscal year,
which Proxy Statement will contain such information. The information required by Item 13 is incorporated herein by
reference to such Proxy Statement.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
In accordance with the provisions of General Instruction G to Form 10-K, the information required for disclosure under
Item 14 is not set forth herein because the Corporation intends to file with the Securities and Exchange Commission a
definitive Proxy Statement pursuant to Regulation 14A not later than 120 days following the end of its 2012 fiscal year,
which Proxy Statement will contain such information. The information required by Item 14 is incorporated herein by
reference to such Proxy Statement.
70
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) (1) The following consolidated financial statements of the Registrant and its subsidiaries are filed as part of this
document under “Item 8. Financial Statements and Supplementary Data.”
Consolidated Balance Sheets—-December 31, 2012 and 2011
Consolidated Statements of Income and Comprehensive Income—Years ended December 31, 2012, 2011, and
2010
Consolidated Statements of Changes in Shareholders’ Equity—Years ended December 31, 2012, 2011, and
2010
Consolidated Statements of Cash Flows—Years ended December 31, 2012, 2011, and 2010
Notes to Consolidated Financial Statements
(a)
(2)
inapplicable, or the required information has been disclosed elsewhere.
Schedules to the Consolidated Financial Statements required by Article 9 of Regulation S-X are not required,
(a)
(3)
Listing of Exhibits:
Exhibit Number
3.1
3.2
Description
Amended and Restated Articles of Incorporation of First Financial Corporation, incorporated by
reference to Exhibit 3(i) of the Corporation’s Form 10-Q filed for the quarter ended September 30,
2002.
Code of By-Laws of First Financial Corporation, incorporated by reference to Exhibit 3(ii) of the
Corporation’s Form 8-K filed August 24, 2012.
10.1* Employment Agreement for Norman L. Lowery, dated and effective December 1, 2012 incorporated by
10.2*
10.3*
10.4*
10.5*
10.6*
10.7*
10.9*
10.10*
10.11
21
31.1
31.2
32.1
32.2
101.
reference to Exhibit 10.1 of the Corporation’s Form 8-K filed March 12, 2013.
2001 Long-Term Incentive Plan of First Financial Corporation, incorporated by reference to Exhibit
10.3 of the Corporation’s Form 10-Q filed for the quarter ended September 30, 2002.
2012 Schedule of Director Compensation
2012 Schedule of Named Executive Officer Compensation
2005 Long-Term Incentive Plan of First Financial Corporation, incorporated by reference to Exhibit
10.7 of the Corporation’s Form 8-K filed September 4, 2007.
2005 Executives Deferred Compensation Plan, incorporated by reference to Exhibit 10.5 of the
Corporation’s Form 8-K filed September 4, 2007.
2005 Executives Supplemental Retirement Plan, incorporated by reference to Exhibit 10.6 of the
Corporation’s Form 8-K filed September 4, 2007.
First Financial Corporation 2010 Long-Term Incentive Compensation Plan, incorporated by reference
to Exhibit 10.9 to the Corporation’s Form 10-K filed March 15, 2011.
First Financial Corporation 2011 Short Term Incentive Compensation Plan, incorporated by reference
to Exhibit 10.10 to the Corporation’s Form 10-K filed March 15, 2011.
First Financial Corporation 2011 Omnibus Equity Incentive Plan, incorporated by reference to exhibit
10.11 to the Corporation’s Form 10-Q filed May 9, 2011.
Subsidiaries
Certification pursuant to Rule 13a-14(a) for Annual Report of Form 10-K by Principal Executive
Officer
Certification pursuant to Rule 13a-14(a) for Annual Report of Form 10-K by Principal Financial Officer
Certification pursuant to 18 U.S.C. Section 1350 of Principal Executive Officer
Certification pursuant to 18 U.S.C. Section 1350 of Principal Financial Officer
The following material from First Financial Corporation’s Form 10-K Report for the annual period
ended December 31, 2012, formatted in XBRL pursuant to Rule 405 of Regulation S-T: (i) the
Consolidated Balance Sheets, (ii) the Consolidated Statements of Income and Comprehensive Income,
(iii) the Consolidated Statements of Cash Flows, (iv) the Consolidated Statements of Shareholders’
Equity, and (v) the Notes to Consolidated Financial Statements**
* Indicates management contract or compensatory plan or arrangement required to be filed as an exhibit to this report.
**Furnished, not filed, for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities
Exchange Act of 1934.
(b) Exhibits-Filed Exhibits to (a) (3) listed above are attached to this report.
(c) Financial Statements Schedules-No schedules are required to be submitted. See response to ITEM 15(a) (2).
71
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
First Financial Corporation
/s/ Rodger A. McHargue
Rodger A. McHargue, Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
Date: March 15, 2013
72
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
NAME
_/s/ Donald E. Smith
Donald E. Smith, President and Director
/s/ Rodger A. McHargue
Rodger A. McHargue, Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
/s/ W. Curtis Brighton
W. Curtis Brighton, Director
/s/ B. Guille Cox, Jr.
B. Guille Cox, Jr., Director
/s/ Thomas T. Dinkel
Thomas T. Dinkel, Director
/s/ Anton H. George
Anton H. George, Director
/s/ Gregory L. Gibson
Gregory L. Gibson, Director
/s/ Norman L. Lowery
Norman L. Lowery, Vice Chairman, CEO & Director
(Principal Executive Officer)
/s/ Ronald K. Rich
Ronald K. Rich, Director
/s/ Virginia L. Smith
Virginia L. Smith, Director
/s/ William J. Voges
William J. Voges, Director
/s/ William R. Krieble
William R. Krieble, Director
DATE
March 15, 2013
March 15, 2013
March 15, 2013
March 15, 2013
March 15, 2013
March 15, 2013
March 15, 2013
March 15, 2013
March 15, 2013
March 15, 2013
March 15, 2013
March 15, 2013
73
EXHIBIT INDEX
Exhibit
Number Description
10.3
2011 Schedule of Director Compensation
10.4
2011 Schedule of Named Executive Officers Compensation
21
Subsidiaries
31.1
Certification Pursuant to Rule 13a-14(a) for Annual Report of Form 10-K by Principal Executive Officer
31.2
Certification Pursuant to Rule 13a-14(a) for Annual Report of Form 10-K by Principal Financial Officer
32.1
Certification Pursuant to Rule 18 U.S.C. Section 1350 of Principal Executive Officer
32.2
Certification Pursuant to Rule 18 U.S.C. Section 1350 of Principal Financial Officer
101.
The following material from First Financial Corporation’s Form 10-K Report for the annual period ended December
31, 2012, formatted in XBRL pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets, (ii) the
Consolidated Statements of Income and Comprehensive Income, (iii) the Consolidated Statements of Cash Flows, (iv)
the Consolidated Statements of Shareholders’ Equity, and (v) the Notes to Consolidated Financial Statements.*
*Furnished, not filed, for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities
Exchange Act of 1934.
74
EXHIBIT 10.3 - Schedule of Director Compensation
Compensation of Directors. Each director of the Corporation is also a director of First Financial Bank (“FFB”), the lead
subsidiary bank of the Corporation, and receives directors’ fees from each organization. For 2013 a director of the Corporation
and FFB will receive a fee of $750 for each board meeting attended.
Non-employee directors also receive a fee for meetings attended of the Audit Committee of $1,000, the Compensation
Committee of $1,000, the Governance/Nominating Committee of $500, and the Loan Discount Committee of $300. Each
director also will receive from a quarterly director’s fee of $11,250. No non-employee director served as a director of any other
subsidiary of the Corporation.
Directors of the Corporation and FFB who are not yet 70 years of age may participate in a deferred director’s fee program at
each institution. Under this program, a director may defer $6,000 of his or her director’s fees each year over a five-year period.
When the director reaches the age of 65 or age 70, the director may elect to receive payments over a ten-year period. The
amount of the deferred fees is used to purchase an insurance product which funds these payments. Each year from the initial
date of deferral until payments begin at age 65 or 70, the Corporation accrues a non-cash expense which will equal in the
aggregate the amount of the payments to be made to the director over the ten-year period. The Corporation expects that the
cash surrender value of the insurance policy will offset the amount of expenses accrued. If a director fails for any reason other
than death to serve as a director during the entire five-year period, or the director fails to attend at least 60 regular or special
meetings, the amount to be received at age 65 or 70, as applicable, will be pro-rated appropriately.
Directors also may receive compensation previously accrued under the Corporation’s 2005 Long-Term Incentive Plan, no other
benefits may be accrued under this plan. Under this plan, directors received 90, 100 or 110 percent of the director’s “award
amount” if the Corporation and FFB attained certain goals established by the Corporation’s Compensation Committee. See
Exhibit 10.3 to this Form 10-K for a description of this plan.
EXHIBIT 10.4 - Schedule of Named Executive Officers Compensation
On December 21, 2012, the Compensation Committee of First Financial Corporation (the “Corporation”) set the 2012 annual
base salaries of the named executive officers. These amounts are set forth in the table below.
Name and Principal Position
2013 Base Salary
Donald E. Smith
President and Chairman of the
Corporation; Chairman of First Financial
Bank, NA
Norman L. Lowery
Vice Chairman, CEO and Vice President
of the Corporation; President and CEO of
First Financial Bank, NA
Thomas S. Clary
Senior Vice President and CCO of First
Financial Bank, NA
Norman D. Lowery
Vice President and COO of First Financial
Bank, NA
Rodger A. McHargue
CFO of the Corporation; Vice President
and CFO of First Financial Bank, NA
$200,000
$620,296
$187,490
$191,014
$190,391
75
Exhibit 21 - Subsidiaries of the Registrant
First Financial Bank N.A. is a wholly-owned subsidiary of the Registrant. It is a national banking association. The bank
conducts its business under the name of First Financial Bank N.A.
The Morris Plan Company is a wholly-owned subsidiary of the Registrant. It is an Indiana corporation. The company
conducts its business under the name of The Morris Plan Company of Terre Haute, Inc.
Forrest Sherer, Inc. is a wholly-owned subsidiary of the Registrant. It is an Indiana corporation. It is a full-line insurance
agency and conducts its business under the name Forrest Sherer, Inc.
FFB Risk Management Co., Inc is a wholly-owned subsidiary of the Registrant. It is an insurance captive and
conducts its business under the name of FFB Risk Management Co,, Inc.
76
Exhibit 31.1 -- Certification pursuant to Rule 13a-14(a) for Annual Report of Form 10-K
by Principal Executive Officer
I, Norman L. Lowery, certify that:
1
I have reviewed this annual report on Form 10-K of First Financial Corporation;
2 Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3 Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4 The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and l5d--15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purpose in accordance with
generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5 The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or
persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant's internal control over financial reporting.
Date: March 15, 2013
By /s/ Norman L. Lowery
Norman L. Lowery,
Vice Chairman and CEO
(Principal Executive Officer)
77
Exhibit 31.2 -- Certification pursuant to Rule 13a-14(a) for Annual Report of Form 10-K
by Principal Financial Officer
I, Rodger A. McHargue, certify that:
1
I have reviewed this annual report on Form 10-K of First Financial Corporation;
2 Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3 Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4 The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and l5d--15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purpose in accordance with
generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5 The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or
persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant's internal control over financial reporting.
Date: March 15, 2013
By /s/ Rodger a. McHargue
Rodger A. McHargue, Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
78
Exhibit 32.1 -- Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002
In connection with the Annual Report of First Financial Corporation (the “Corporation”) on Form 10-K for the year ended
December 31, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Norman L.
Lowery, Vice Chairman and CEO of the Corporation, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002, that:
(1)
1934; and
the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of
(2)
the information contained in the Report fairly presents, in all material respects, the financial condition and results
of operations of the Corporation.
This certification is furnished solely pursuant to 18 U.S.C. section 1350 and is not being filed for any other purpose.
Date: March 15, 2013
/s/ Norman L. Lowery
Norman L. Lowery
Vice Chairman and CEO
(Principal Executive Officer)
79
Exhibit 32.2 -- Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002
In connection with the Annual Report of First Financial Corporation (the “Corporation”) on Form 10-K for the year ended
December 31, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Rodger A.
McHargue, Chief Financial Officer of the Corporation, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002, that:
(1)
(2)
the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
the information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Corporation.
This certification is furnished solely pursuant to 18 U.S.C. section 1350 and is not being filed for any other purpose.
Date: March 15, 2013
/s/ Rodger A. McHargue
Rodger A. McHargue
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
80
new service
locations
PUTNAM
PUTNAM
Greencastle
Greencastle
T
N
E
M
T
S
E
V
N
I
D
N
A
T
N
E
M
E
V
O
R
P
M
I
,
N
O
I
S
N
A
P
X
E
F
O
R
A
E
Y
A
LIVINGSTON
LIVINGSTON
Pontiac West
Pontiac
Pontiac Main
Madison Street
Gridley
Gridley
Brickyard Drive-
Bloomington
Bloomington
Towanda Plaza-
Bloomington
VERMILLION
VERMILION
MCLEAN
MCLEAN
Mahomet
Mahomet
Champaign
Champaign
Urbana
Urbana
CHAMPAIGN
CHAMPAIGN
COLES
COLES
Charleston
Charleston
Danville
Danville
Westville
Westville
Ridge Farm
Ridge Farm
Newport
VERMILLION
Cayuga
Cayuga
Marshall
Marshall
Newport
Montezuma
Montezuma
Rockville
Rockville
Clinton
Clinton
PARKE
PARKE
Rosedale
Rosedale
VIGO
VIGO
Seelyville
Seelyville
Terre Haute
Terre Haute
West Terre Haute
West Terre Haute
Brazil Dwntn
Brazil
Brazil
Brazil Eastside
CLAY
Poland
CLAY
Honey Creek Mall
Marshall
Marshall
CLARK
CLARK
Farmersburg
Farmersburg
Hymera
Hymera
Sullivan
Sullivan
Oblong
Oblong
Robinson
Dugger
Dugger
SULLIVAN
SULLIVAN
Carlisle
Clay City
Clay City
Worthington
Worthington
GREENE
GREENE
Newton
Newton
Robinson
Robinson
Motor Bank
JASPER CRAWFORD
JAPSER CRAWFORD
Lawrenceville
Lawrenceville
LAWRENCE
LAWRENCE
Olney
Olney
RICHLAND
RICHLAND
Sandborn
Sandborn
Vincennes
Vincennes
KNOX
KNOX
DAVIESS
DAVIESS
Washington
Washington
new personal
banking customers
WAYNE
F
F
WAYNE
Princeton
Princeton
GIBSON
GIBSON
VANDERBURGH
VANDERBURG
Evansville
Evansville
First Financial Banking Centers
INDIANA
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
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
Seelyville*
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
Sycamore Terrace*
2425 South State Road 46
812-238-6000
West Terre Haute*
309 National Avenue
812-238-6000
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
DAVIESS COUNTY
Washington*
300 East Main Street
812-257-8860
GIBSON COUNTY
Princeton*
1501 West Broadway
812-385-0235
GREENE COUNTY
Worthington*
9 North Commercial Street
812-875-3021
KNOX COUNTY
Sandborn
102 North Anderson Street
812-694-8462
Vincennes*
2707 North Sixth Street
812-882-4800
Vincennes*
619 Main Street Vincennes
812-886-9690
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
PUTNAM COUNTY
Greencastle*
101 South Warren Drive
765-653-4444
SULLIVAN COUNTY
Sullivan*
15 South Main Street
812-268-3331
Dugger*
879 South 3rd Street
812-648-2251
Farmersburg*
819 West Main Street
812-696-2106
Hymera*
102 South Main Street
812-383-4933
CRAWFORD COUNTY
Robinson*
108 West Main Street
618-544-8666
VERMILION COUNTY
Danville
One Towne Center
217-442-0362
Robinson Motor Bank*
602 West Walnut Street
618-544-3355
Danville Motor Bank*
101 West Main Street
217-443-3519
VANDERBURGH COUNTY
Evansville*
12600 Highway 41 North
812-868-8850
Oblong*
301 East Main Street
618-592-4252
VERMILLION COUNTY
Newport*
100 West Market Street
765-492-3321
JASPER COUNTY
Newton*
601 West Jourdan Street
618-783-2022
Cayuga
101 S. Division Street
765-492-3391
Clinton*
221 South Main Street
765-832-3504
Clinton Crown Hill*
1775 East State Road 163
765-832-5546
ILLINOIS
CHAMPAIGN COUNTY
Broadway*
410 North Broadway
217-351-2701
Mahomet IGA*
Eastwood Center IGA
217-586-5322
Neil Street*
1205 South Neil Street
217-352-6700
Philo Road*
2510 South Philo Road
217-344-1300
South Prospect*
1611 South Prospect Avenue
217-351-6620
CLARK COUNTY
Marshall*
215 North Michigan
217-826-6311
LAWRENCE COUNTY
Lawrenceville*
1601 State Street
618-943-3323
LIVINGSTON COUNTY
Madison Street*
521 West Madison Street
815-844-3171
Pontiac Main*
223 North Mill Street
815-844-3171
Pontiac West*
Route 116 & Route 66
815-844-3171
MCLEAN COUNTY
Brickyard Drive -
Bloomington*
#1 Brickyard Drive Suite 301
309-661-9993
Gridley
325 Center Street
309-747-2100
Towanda Plaza -
Bloomington*
1218 Towanda Avenue
888-876-2638
RICHLAND COUNTY
Olney*
240 East Chestnut Street
618-395-8676
Olney*
1110 South West Street
618-395-2112
Danville*
2750 North Vermilion Street
217-431-8750
Danville*
901 North Gilbert Street
217-431-3486
Danville*
421 South Gilbert Street
217-477-4510
Ridge Farm*
11 South State Street
217-247-2126
Westville*
101 East Main Street
217-267-2147
WAYNE COUNTY
Fairfield*
303 West Delaware
618-842-2145
Morris Plan Banking Center
817 Wabash Avenue
812-238-6063
INSURANCE
Forrest Sherer Insurance
of Terre Haute
24 North Ohio Street
812-232-0441
1219 Ohio Street
812-232-0441
Forrest Sherer Insurance
of Evansville
7525 East Virginia Street
812-232-0441
*First Plus 24-hour ATM available
at these locations
16 new service locations
COLES COUNTY
Charleston*
820 West Lincoln Avenue
217-345-4824
new or upgraded ATMs
expansion1254,00016
First Financial Corporation
2012 ANNUAL REPORT
TO THE STAKEHOLDERS
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The mission of First Financial Corporation
is to be the FIRST choice for all your financial needs.
One First Financial Plaza
Terre Haute, IN 47807
812/238/6000
800/511/0045
www.first-online.com
20122012