First Financial Corporation
2014 Annual Report to Our Stakeholders
180 years and still Going Strong
2014 Performance Highlights.
A 7.10% increase in net income to $33.8 million, the second
best year in the history of the Corporation;
A 7.59% increase in diluted earnings per share to $2.55 EPS;
Non-performing loans of 1.76% of total loans, down from
2.19% at year-end 2013, reflecting our strong asset quality;
A 5.25% increase in book value per share to $30.46 from
$28.94 at year-end 2013;
A 2.09% growth in shareholder equity to $394.2 million;
A 7.8% increase in total average balances in our demand
deposits;
A stock repurchase program which returned an additional
$13.6 million to shareholders; and
Increased dividends for the 26th consecutive year.
The mission of First Financial Corporation is to be
the FIRST choice for all your financial needs.
Shareholder Information
The common stock of First Financial Corporation is traded
on the NASDAQ Global Market under the symbol THFF.
2014 Financial Highlights (Dollar amounts in thousands, except per share data)
2nd most profitable year in company history.
Net Income $33,772
1 Assets
2014
2013
2012
2011
2010
3,002,485
3,018,718
2,895,408
2,954,061
2,451,095
3 Deposits
2014
2013
2012
2,457,197
2,458,791
2,276,134
2 Shareholders Equity
2014
2013
2012
2011
2010
394,214
386,195
372,122
346,961
321,717
4 Loans
2014
2013
2012
1,781,428
1,791,428
1,851,936
5 Book Value Per Share
6 Cash Dividends Per Share
2014
2013
2012
30.46
28.94
28.01
2014
2013
2012
0.98
0.96
0.95
25TH CONSECUTIVE YEAR of increased dividends to shareholders.
7 Earnings Per Share
8 Leverage Tier 1 Ratio
2014
2013
2012
2.55
2.37
2.48
2014
2013
2012
12.33
11.69
11.43
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www.first-online.com | 2014 Annual Report to Our Stakeholders | First Financial Corporation A Letter to Our Shareholders
In 1935, shortly after celebrating the 100th birthday of Terre Haute First National Bank (the predecessor of First Financial Bank)
an officer of the bank made the following observations:
“In 1834, when this Bank was organized, the population of the United States was approximately 13,000,000 and that of
Indiana, close to 400,000. The great West was yet unborn. It was not until after 1845 that agreements with Mexico and Great
Britain gave us the territory now represented by the following states: Texas, New Mexico, Arizona, California, Utah, Nevada,
Idaho, Oregon and Washington.
In 1834, there were less than 500 miles of railroad in use. It was the age of the stage-coach and Indian warfare. The
automobile, the airplane, the telegraph, the phonograph, radio and motion pictures, etc. were still undreamed of miracles of
the future.”
The author of this release was amazed at how much the world changed in the first 100 years of our company’s existence. I can’t
help but wonder what the author would think of the world today and specifically about the banking industry. How would he
or she conceptualize the electronic delivery of products and services through the internet and mobile channels? Would they
marvel at banking from home, anytime, day or night? Would scanning and depositing a check with a telephone you carry in
your pocket seem like magic? What would they think of the cost and complexity of regulation? No matter how taken back
they might be with changes in our industry, I am confident they would not be surprised by how First Financial Corporation has
withstood the test of time and how we have consistently delivered positive results to our shareholders year after year.
I am pleased to report 2014 was no exception to our history of success as we added yet another year of solid financial
performance, highlighted by:
• A 7.10% increase in net income to $33.8 million, the second best year in the history of the Corporation;
• A 7.59% increase in diluted earnings per share to $2.55 EPS;
• Non-performing loans of 1.76% of total loans, down from 2.19% at year-end 2013, reflecting our strong asset quality;
• A 5.25% increase in book value per share to $30.46 from $28.94 at year-end 2013;
• A 2.09% growth in shareholder equity to $394.2 million;
• A 7.8% increase in total average balances in our demand deposits;
• A stock repurchase program which returned an additional $13.6 million to shareholders; and
• Increased dividends for the 26th consecutive year.
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While financial results are important to us, we also value how we are viewed by our industry and peers. In 2014, First Financial
Corporation and our dedicated associates were honored with the following recognition:
• Forbes Magazine named First Financial Corporation as one of “America’s 50 Most Trustworthy Financial Companies”.
This recognition is particularly pleasing because we were selected from hundreds of financial service companies across
the nation.
• Bank Director Magazine ranked First Financial Bank 34th in its $1-$5 Billion Category 2014 Performance Scorecard.
This ranking is based on key metrics that measure profitability, capital strength and credit quality. According to Bank
Director Magazine, First Financial Bank is “well balanced across a full spectrum of these metrics”.
• Bauer Financial, Inc., the nation’s largest independent bank rating and research firm, awarded First Financial Bank its
5-Star rating, the highest available. This rating is a reflection of overall strength and soundness.
• Readers of the Terre Haute Tribune Star and the Danville Commercial-News voted First Financial Bank as the Best Bank
in their Readers’ Choice Awards. First Financial Bank has received this recognition from both newspapers every year since
inception of the Readers’ Choice polls.
• First Financial Bank continued as one of the Top 100 US Farm Lenders by dollar volume, according to 2014 figures from the
Federal Deposit Insurance Corporation.
More is required for success than mere luck or good fortune. Success comes from strategy implemented wisely, from dedicated,
committed associates and mostly from hard work. There are many I would like to thank for what we accomplished in 2014. First
and foremost, our associates for their uncompromised work ethic and commitment to implementing our strategy and serving
our customers the way they would want to be served. We are pleased to have such a great team that strives for success daily.
To our Board of Directors for their invaluable insight, advice and commitment to position First Financial Corporation for winning
performance in 2015 and beyond. To our customers and the communities we serve for honoring us with their business over the
past 180 years and finally, we are most thankful to you, our shareholders, for your confidence and investment in First Financial
Corporation.
Norman L. Lowery
CEO, President and Vice-Chairman
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www.first-online.com | 2014 Annual Report to Our Stakeholders | First Financial Corporation Bloomington
Champaign-Urbana
Charleston
Mattoon
Terre Haute
Hillsboro
Salem
Mount Vernon
Benton
West Frankfort
Princeton
Evansville
Always Close to Home
With 71 banking centers, over 130 FirstPlus ATMs,
telephone, Internet and mobile banking
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KENTUCKYOHIOPENNSYLVANIAWESTVIRGINIAVIRGINIAINDIANAILLINOISMISSOURIIOWAWISCONSINMICHIGAN Bloomington
Champaign-Urbana
Charleston
Mattoon
Terre Haute
Hillsboro
Salem
Mount Vernon
Benton
West Frankfort
Princeton
Evansville
Noteworthy Achievements
America’s 50 Most Trustworthy
In April 2014, First Financial Corporation was included on the
list of America’s 50 Most Trustworthy Financial Companies as
compiled by ratings provider and investment advisor
GMI Ratings and published by Forbes magazine. To
develop the list of trustworthy organizations, GMI
reviewed the accounting and governance behaviors
of more than 8,000 publicly traded companies in
North America.
Bank Performance Scorecard
Bank Director magazine’s 2014 Bank Performance
Scorecard ranked First Financial Corporation
number 34 out of 93 publicly traded U.S. bank
holding companies with $1 billion to $5 billion
in assets. The ranking is based on profitability,
capital strength and credit quality.
Bauer 5-Star
BauerFinancial Inc., the nation’s largest
independent bank rating and research firm,
regularly awards First Financial Bank its 5-Star rating,
the highest available. The rating is a reflection of
overall strength and soundness.
Top 100 Ag Lenders
First Financial Bank ranks as one of the Top 100 U.S. Farm
Lenders by dollar volume, according to 2014 figures from the
Federal Deposit Insurance Corporation.
Readers’ Choice Winner
Readers of the Terre Haute Tribune-Star and the Danville
Commercial-News voted First Financial as Best Bank in their
2014 Readers’ Choice Awards. The bank has received this
honor every year from both newspapers since the inception
of the Readers’ Choice polls.
www.first-online.com | 2014 Annual Report to Our Stakeholders | First Financial Corporation
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www.first-online.com | 2014 Annual Report to Our Stakeholders | First Financial CorporationKENTUCKYOHIOPENNSYLVANIAWESTVIRGINIAVIRGINIAINDIANAILLINOISMISSOURIIOWAWISCONSINMICHIGAN Giving of Time, Tale nt and Treasures
Community Investment
First Financial has a long tradition of advancing the quality of life in communities we serve
through targeted giving in support of organizations, events and activities that benefit people
of all ages and walks of life.
Enhancing the Arts
In October, First Financial Bank sponsored an appearance
by Japanese drumming and dance ensemble San Jose
Taiko, the opening show in Rose-Hulman Institute of
Technology’s 2014-2015 Performing Arts Series. Each year
First Financial underwrites a variety of cultural events in our
service area, from concerts to art exhibitions.
Supporting School Athletics
For over 30 years, First Financial Bank has supported athletic programs throughout the two-state area
by providing scoreboards to schools, colleges and youth organizations. In 2014, the bank donated the
scoreboard for the new Jeanne Knoerle Sports and Recreation Center at Saint Mary-of-the-Woods College.
Sponsoring Charitable Initiatives
Patty Stiegelbauer, Associate Director of Development
at Gibault, a facility offering treatment and education
for troubled youth, is pictured at the 2014 Gibault
Golf Scramble. First Financial Bank is the corporate
sponsor of the annual event, which raises funds to
support Gibault Children’s Services.
Supporting Charitable Organizations
During the Frederick R. Benson, Oscar Baur, Mary Smith Young and Sheldon Swope trust distribution
reception, First Financial Corporation announced the 2014 contribution to the United Way of the
Wabash Valley campaign. A total of $80, 815.12 in corporate and employee pledges and contributions
benefit United Way organizations in many of the counties serviced by First Financial banking centers.
Heather Reininga (second from left), Brenda Bonine (center) and Jean Beacon (second from right) of First
Financial Bank, made the presentation to Danielle Isbell and Troy Fears, United Way of the Wabash Valley.
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Giving of Time, Tale nt and Treasures
Community Involvement
First Financial and our talented associates contribute to the communities
we serve, participating in civic and charitable organizations, assisting with
youth sports programs and supporting other local initiatives.
Advocating for Diverse Needs
First Financial Corporation employees, family members and friends gathered before the kickoff of the Indiana Special
Olympics Summer Games. First volunteers assisted during the opening ceremonies at Hulman Center. More than 2,500
Special Olympic athletes from around the state competed in the games on the campuses of Indiana State University
and Rose-Hulman Institute of Technology.
Underwriting Youth Programs
Emily Wright (center), daughter of Ticia
and David Wright of First Financial Bank,
presents prizes to Izzy Cognata and Jayden
Moore, who won the target toss tournament
during the bank’s end-of-summer picnic for
First Fishing Club members. First Financial
has sponsored the popular club since 1998.
Promoting Educational Success
Phil Garrigus of First Financial Bank presented Elizabeth Conner
an award at the fifth grade Lost Creek Elementary School student
awards and recognition ceremony. For over 25 years, Lost Creek and
First Financial have teamed up to be Partners in Education.
Building Community Ties
Norman D. Lowery (left), chief operating officer of First Financial Bank, welcomes (front)
Mayor Clint Lamb of Sullivan, Mayor Pat Schofield of Palestine, Mayor Roy Terrell of Jasonville
(back), Mayor Jack Gilfoy of Clinton, Mayor Larry Rennels of Charleston, Mayor Duke Bennett
of Terre Haute and Town Council President Jerry Bowman of Sandborn during the bank-
sponsored Mayors’ Breakfast Symposium in May.
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www.first-online.com | 2014 Annual Report to Our Stakeholders | First Financial Corporation Board of Directors
STANDING: Thomas T. Dinkel, Ronald K. Rich, William R. Krieble, B. Guille Cox, Jr., Virginia L. Smith, Norman L. Lowery, Anton H. George, Gregory L. Gibson
SEATED: William J. Voges, W. Curtis Brighton
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
Directors
FIRST FINANCIAL CORPORATION
AND FIRST FINANCIAL BANK
W. Curtis Brighton
B. Guille Cox, Jr.
Thomas T. Dinkel
Anton H. George
Gregory L. Gibson
William R. Krieble
Norman L. Lowery
Ronald K. Rich
Donald E. Smith, Emeritus
Virginia L. Smith
William J. Voges
THE MORRIS PLAN COMPANY
OF TERRE HAUTE INC.
David L. Bailey
Jeffrey G. Belskus
Mark J. Fuson
Steven H. Holliday
Norman D. Lowery
James F. Nasser
Jeffrey B. Smith
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Community Directors
FIRST FINANCIAL BANK,
CLAY REGION
David L. Barr
James E. Brown
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
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
Charles A. Cooper
Steven H. Holliday
FIRST FINANCIAL BANK,
COMMUNITY REGION
FIRST FINANCIAL BANK,
SULLIVAN REGION
Robert F. Dukes
Steven H. Holliday
Henry T. Smith
Robert E. Springer
V. Bruce Walkup
Norman D. Lowery
Avery J. McKinney
V. Bruce Walkup
Jeffery L. Wilson
FIRST FINANCIAL BANK,
CRAWFORD REGION
Jerry L. Bailey
W.J. Chamblin
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014
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)
One First Financial Plaza
Terre Haute, Indiana
(Address of Registrant’s Principal Executive Offices)
35-1546989
(I.R.S. Employer Identification Number)
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 x
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 x
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 x 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 x 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 x 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 x
As of June 30, 2014 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 $392,711,526. (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 5, 2015—12,952,169 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement for the First Financial Corporation Annual Meeting of Shareholders to be held April
15, 2015 are incorporated by reference into Part III.
FIRST FINANCIAL CORPORATION
2014 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
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
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. 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
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FIRST FINANCIAL CORPORATION
2014 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, Indiana, 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 four
subsidiaries. At the close of business in 2014 the Corporation and its subsidiaries had 952 full-time equivalent employees.
The risk characteristics of each loan portfolio segment are as follows:
Commercial
Commercial loans are predominately loans to expand a business or finance asset purchases. The underlying risk in the
Commercial loan segment is primarily a function of the reliability and sustainability of the cash flows of the borrower and
secondarily on the underlying collateral securing the transaction. From time to time, the cash flows of borrowers may be less
than historical or as planned. In addition, the underlying collateral securing these loans may fluctuate in value. Most
commercial loans are secured by the assets financed or other business assets and most commercial loans are further supported
by a personal guarantee. However, in some instances, short term loans are made on an unsecured basis. Agriculture production
loans are typically secured by growing crops and generally secured by other assets such as farm equipment. Production loans
are subject to weather and market pricing risks. The Corporation has established underwriting standards and guidelines for all
commercial loan types.
The Corporation strives to maintain a geographically diverse commercial real estate portfolio. Commercial real estate loans are
primarily underwritten based upon the cash flows of the underlying real estate or from the cash flows of the business conducted
at the real estate. Generally, these types of loans will be fully guaranteed by the principal owners of the real estate and loan
amounts must be supported by adequate collateral value. Commercial real estate loans may be adversely affected by factors in
the local market, the regional economy, or industry specific factors. In addition, Commercial Construction loans are a specific
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type of commercial real estate loan which inherently carry more risk than loans for completed projects. Since these types of
loans are underwritten utilizing estimated costs, feasibility studies, and estimated absorption rates, the underlying value of the
project may change based upon the inaccuracy of these projections. Commercial construction loans are closely monitored,
subject to industry standards, and disbursements are controlled during the construction process.
Residential
Retail real estate mortgages that are secured by 1-4 family residences are generally owner occupied and include residential real
estate and residential real estate construction loans. The Corporation typically establishes a maximum loan-to-value ratio and
generally requires private mortgage insurance if the ratio is exceeded. The Corporation sells substantially all of its long-term
fixed mortgages to secondary market purchasers. Mortgages sold to secondary market purchasers are underwritten to specific
guidelines. The Corporation originates some mortgages that are maintained in the bank’s loan portfolio. Portfolio loans are
generally adjustable rate mortgages and are underwritten to conform to Qualified Mortgage standards. Several factors are
considered in underwriting all Mortgages including the value of the underlying real estate, debt-to-income ratio and credit
history of the borrower. Repayment is primarily dependent upon the personal income of the borrower and can be impacted by
changes in borrower’s circumstances such as changes in employment status and changes in real estate property values. Risk is
mitigated by the sale of substantially all long-term fixed rate mortgages, the underwriting of portfolio loans to Qualified
Mortgage standards and the fact that mortgages are generally smaller individual amounts spread over a large number of
borrowers.
Consumer
The consumer portfolio primarily consists of home equity loans and lines (typically secured by a subordinate lien on a 1-4
family residence), secured loans (typically secured by automobiles, boats, recreational vehicles, or motorcycles), cash/CD
secured, and unsecured loans. Pricing, loan terms, and loan to value guidelines vary by product line. The underlying value of
collateral dependent loans may vary based on a number of economic conditions, including fluctuations in home prices and
unemployment levels. Underwriting of consumer loans is based on the individual credit profile and analysis of the debt
repayment capacity for each borrower. Payments for consumer loans is typically set-up on equal monthly installments,
however, future repayment may be impacted by a change in economic conditions or a change in the personal income levels of
individual customers. Overall risks within the consumer portfolio are mitigated by the mix of various loan products, lending in
various markets and the overall make-up of the portfolio (small loan sizes and a large number of individual borrowers).
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; four in Clay County, Ind.; one in Daviess County, Ind.; one in Gibson County, Ind.; one in Greene County, Ind.; three
in Knox County, Ind.; five in Parke County, Ind.; one in Putnam County, Ind., four in Sullivan County, Ind.; one in Vanderburgh,
County.; four in Vermillion County, Ind.; five in Champaign County, Illinois; one in Clark County, Ill.; three in Coles County, Ill.;
two in Crawford County, Ill.; two in Franklin County, Ill.; one in Jasper County, Ill.; two in Jefferson County, Ill.; one in Lawrence
County, Ill.; two in Livingston County, Illinois; two in Marion County, Ill.; one in Montgomery County, Ill.; three 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 regional supplier of
insurance, surety and other financial products. Forrest Sherer has more than 58 professionals and over 91 years of 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.
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.
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.
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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
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act” or “Dodd-Frank”), which was
enacted in July 2010, significantly restructures the financial regulatory regime in the United States. Although the Dodd-Frank
Act’s provisions that have received the most public attention generally have been those applying to or more likely to affect
larger institutions such as bank holding companies with total consolidated assets of $50 billion or more, it contains numerous
other provisions that affect all bank holding companies and banks, including the Corporation, the Bank, and Morris Plan, some
of which are described in more detail below.
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.
The Volcker Rule
The Dodd-Frank Act requires the federal financial regulatory agencies to adopt rules that prohibit banks and their affiliates from
engaging in proprietary trading and investing in and sponsoring certain unregistered investment companies (defined as hedge
funds and private equity funds). The statutory provision is commonly called the “Volcker Rule”. The Volcker Rule became effective
on July 21, 2012 and the final rules were effective April 1, 2014, but the Federal Reserve issued an order extending the period
during which institutions have to conform their activities and investments to the requirements of the Volcker Rule to July 21, 2015.
Although the Corporation is continuing to evaluate the impact of the Volcker Rule and the final rules adopted thereunder, the
Corporation does not currently anticipate that the Volcker Rule will have a material effect on the operations of the Bank, Morris
Plan, or their respective subsidiaries, as the Corporation does not engage in the businesses prohibited by the Volcker Rule. The
Corporation may incur costs to adopt additional policies and systems to ensure compliance with the Volcker Rule, but any such
costs are not expected to be material.
Consumer Financial Protection Bureau
The Consumer Financial Protection Bureau (the “CFPB”), created by the Dodd-Frank Act, 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 authority to set and enforce rules in the consumer
protection area over financial institutions that have assets of $10.0 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. Abusive acts or practices are defined as those that:
(1)
materially interfere with a consumer’s ability to understand a term or condition of a consumer financial product
or service, or
(2)
take unreasonable advantage of a consumer’s:
•
•
lack of financial savvy,
inability to protect himself in the selection or use of consumer financial products or services,
or
•
reasonable reliance on a covered entity to act in the consumer’s interests.
The CFPB has the authority to investigate possible violations of federal consumer financial law, hold hearings and commence
civil litigation. The CFPB can issue cease-and-desist orders against banks and other entities that violate consumer financial
5
laws. The CFPB may also institute a civil action against an entity in violation of federal consumer financial law in order to
impose a civil penalty or an injunction.
BASEL III
In July 2013, the federal banking agencies published the Basel III Capital Rules establishing a new comprehensive capital framework
for U.S. banking organizations. The rules implement the Basel Committee’s December 2010 framework known as “Basel III” for
strengthening international capital standards as well as certain provisions of the Dodd-Frank Act. The Basel III Capital Rules
substantially revise the risk-based capital requirements applicable to bank holding companies and depository institutions, including
the Corporation and its subsidiary financial institutions, compared to the current U.S. risk-based capital rules. The Basel III Capital
Rules define the components of capital and address other issues affecting the numerator in banking institutions’ regulatory capital
ratios. The Basel III Capital Rules also address risk weights and other issues affecting the denominator in banking institutions’
regulatory capital ratios. The Basel III Capital Rules also implement the requirements of Section 939A of the Dodd-Frank Act to
remove references to credit ratings from the federal banking agencies’ rules. The Basel III Capital Rules are effective on January
1, 2015 (subject to a phase-in period).
The Basel III Capital Rules, among other things:
•
•
•
•
introduce a new capital measure called “Common Equity Tier 1” (“CET1”);
specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting specified requirements;
define CET1 narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to CET1
and not to the other components of capital; and
expand the scope of the deductions/adjustments as compared to existing regulations.
When fully phased in on January 1, 2019, the Basel III Capital Rules will require the Corporation and its banking subsidiaries to
maintain:
•
•
•
•
a minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is
added to the 4.5% CET1 ratio as that buffer is phased in, effectively resulting in a minimum ratio of CET1 to risk-weighted
assets of at least 7% upon full implementation);
a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (which is
added to the 6.0% Tier 1 capital ratio as that buffer is phased in, effectively resulting in a minimum Tier 1 capital ratio
of 8.5% upon full implementation);
a minimum ratio of Total capital (that is, Tier 1 plus Tier 2) to risk-weighted assets of at least 8.0%, plus the capital
conservation buffer (which is added to the 8.0% total capital ratio as that buffer is phased in, effectively resulting in a
minimum total capital ratio of 10.5% upon full implementation), and
a minimum leverage ratio of 4%, calculated as the ratio of Tier 1 capital to average assets (as compared to a current
minimum leverage ratio of 3% for banking organizations that either have the highest supervisory rating or have
implemented the appropriate federal regulatory authority’s risk-adjusted measure for market risk).
The aforementioned capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions
with a ratio of CET1 to risk-weighted assets above the minimum but below the conservation buffer (or below the combined capital
conservation buffer and countercyclical capital buffer, when the latter is applied) will face constraints on dividends, equity
repurchases and compensation based on the amount of the shortfall.
Under the Basel III Capital Rules, the initial minimum capital ratios as of January 1, 2015 will be as follows:
•
•
•
4.5% CET1 to risk-weighted assets;
6.0% Tier 1 capital to risk-weighted assets;
8.0% Total capital to risk-weighted assets.
The Basel III Capital Rules provide for a number of deductions from and adjustments to CET1. These include, for example, the
requirement that mortgage servicing rights, deferred tax assets arising from temporary differences that could not be realized through
net operating loss carrybacks 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 the
former capital standards, the effects of accumulated other comprehensive income items included in capital were excluded for the
purposes of determining regulatory capital ratios. Under the Basel III Capital Rules, the effects of certain accumulated other
comprehensive items are not excluded; however, non-advanced approaches banking organizations, including the Corporation,
may make a one-time permanent election to continue to exclude these items. The Corporation, the Bank and Morris Plan all made
6
this election in order to avoid significant variations in the level of capital depending upon the impact of interest rate fluctuations
on the fair value of the Corporation’s available-for-sale securities portfolio. The Basel III Capital Rules also preclude certain
hybrid securities, such as trust preferred securities, as Tier 1 capital of bank holding companies, subject to phase-out. The
Corporation has no trust preferred securities.
Implementation of the deductions and other adjustments to CET1 will begin on January 1, 2015 and will be phased-in over a four-
year period (beginning at 40% on January 1, 2015 and an additional 20% per year thereafter). 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 Capital Rules prescribe a standardized approach for risk weightings that expand the risk-weighting categories from
the current four Basel I-derived categories (0%, 20%, 50% and 100%) to a much larger and more risk-sensitive number of categories,
depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain
equity exposures, and resulting in higher risk weights for a variety of asset categories. Specifics changes from former capital rules
impacting the Corporation’s determination of risk-weighted assets include, among other things:
•
•
•
•
Applying a 150% risk weight instead of a 100% risk weight for certain high volatility commercial real estate acquisition,
development and construction loans;
Assigning a 150% risk weight to exposures (other than residential mortgage exposures) that are 90 days past due;
Providing for a 20% credit conversion factor for the unused portion of a commitment with an original maturity of one
year or less that is not unconditionally cancellable (currently set at 0%); and
Providing for a risk weight, generally not less than 20% with certain exceptions, for securities lending transactions based
on the risk weight category of the underlying collateral securing the transaction.
Management believes that, as of December 31, 2014, the Corporation, the Bank, and Morris Plan would meet all capital adequacy
requirements under the Basel III Capital Rules on a fully phased-in basis as if such requirements were currently in effect.
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.
In general, the Act limits the business of bank holding companies to banking, managing or controlling banks and other
activities that the Federal Reserve has determined to be so closely related to banking as to be a proper incident thereto. In
addition, bank holding companies that qualify and elect to be financial holding companies such as the Corporation, may engage
in any activity, or acquire and retain the shares of a company engaged in any activity, that is either (i) financial in nature or
incidental to such financial activity (as determined by the Federal Reserve in consultation with the Secretary of the Treasury) or
(ii) complementary to a financial activity and does not pose a substantial risk to the safety and soundness of depository
institutions or the financial system generally (as solely determined by the Federal Reserve), without prior approval of the
Federal Reserve.
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 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
7
activities than is permitted for a bank holding company, including insurance underwriting and making merchant banking
investments in commercial and financial companies.
The Corporation is a financial holding company (“FHC”) within the meaning of the Gramm-Leach-Bliley Financial
Modernization Act of 1999 (“GLB Act”). The GLB Act restricts the business of FHC’s to financial and related activities, and
provides the following:
·
·
·
·
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
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. Prior to January 1, 2015 bank holding companies with assets in
excess of $500 million were subject to 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 was required to 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") was allowed to 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, 2014, are shown below:
Tier 1 Capital to Risk-Weighted Assets
Total Risk Based Capital to Risk-Weighted Asset
Tier 1 Leverage Ratio
16.99%
17.86%
12.33%
Effective January 1, 2015, the Corporation and its banking subsidiaries became subject to the Basel III Capital Rules discussed
above.
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.
8
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 this 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 $1.9 million and Morris Plan paid a total FDIC assessment of $30 thousand in 2014.
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.
9
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:
•
•
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. Prior to January 1, 2015, the Bank was subject to the OCC's risk-based capital ratio guidelines before they
were amended by the Basel lll Capital Rules described above. 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
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. 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.
10
Certain actual regulatory capital ratios under the OCC's risk-based capital guidelines for the Bank at December 31, 2014, are
shown below:
Tier 1 Capital to Risk-Weighted Assets
Total Risk-Based Capital to Risk-Weighted Assets
Tier 1 Leverage Ratio
16.36%
17.13%
11.83%
Morris Plan is also subject to the capital adequacy guidelines of the FDIC in its examination and regulation of Morris Plan.
Certain actual regulatory capital ratios of Morris Plan under the FDIC's risk-based capital guidelines for the Bank at December
31, 2014, are shown below:
Tier 1 Capital to Risk-Weighted Assets
Total Risk-Based Capital to Risk-Weighted Assets
Tier 1 Leverage Ratio
29.49%
30.78%
26.18%
Effective January 1, 2015, the Corporation and its banking subsidiaries became subject to the Basel lll Capital Rules discussed
above.
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.
Prompt Corrective Action. The Federal Deposit Insurance Act, as amended (“FDIA”), requires among other things, the federal
banking agencies to take “prompt corrective action” in respect of depository institutions that do not meet minimum capital
requirements. The FDIA includes the following five capital tiers: “well capitalized,” “adequately capitalized,” “undercapitalized,”
“significantly undercapitalized” and “critically undercapitalized.” A depository institution’s capital tier will depend upon how its
capital levels compare with various relevant capital measures and certain other factors, as established by regulation. The relevant
capital measures are the total risk-based capital ratio, the Tier 1 risk-based capital ratio, the common equity Tier 1 risk-based
capital ratio and the leverage ratio.
A bank will be (i) “well capitalized” if the institution has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based
capital ratio of 8.0% or greater, a common equity tier 1 risk-based capital ratio of 6.5% or greater and a leverage ratio of 5.0% or
greater, and is not subject to any order or written directive by any such regulatory authority to meet and maintain a specific capital
level for any capital measure; (ii) “adequately capitalized” if the institution has a total risk-based capital ratio of 8.0% or greater,
a Tier 1 risk-based capital ratio of 6.0% or greater, a common equity Tier 1 risk-based capital ratio of 4.5% or greater and a
leverage ratio of 4.0% or greater and is not “well capitalized”; (iii) “undercapitalized” if the institution has a total risk-based capital
ratio that is less than 8.0%, a Tier 1 risk-based capital ratio of less than 6.0%, a common equity Tier 1 risk-based capital ratio of
4.5%, or a leverage ratio of less than 4.0%; (iv) “significantly undercapitalized” if the institution has a total risk-based capital ratio
of less than 6.0%, a Tier 1 risk-based capital ratio of less than 4.0%, a common equity Tier 1 risk-based capital ratio of less than
3.0%, or a leverage ratio of less than 3.0%; and (v) “critically undercapitalized” if the institution’s tangible equity is equal to or
11
less than 2.0% of average quarterly tangible assets. An institution may be downgraded to, or deemed to be in, a capital category
that is lower than indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if it receives an
unsatisfactory examination rating with respect to certain matters. A bank’s capital category is determined solely for the purpose
of applying prompt corrective action regulations, and the capital category may not constitute an accurate representation of the
bank’s overall financial condition or prospects for other purposes.
The FDIA generally prohibits a depository institution from making any capital distributions (including payment of a dividend) or
paying any management fee to its parent holding company if the depository institution would thereafter be “undercapitalized.”
“Undercapitalized” institutions are subject to growth limitations and are required to submit a capital restoration plan. The agencies
may not accept such a plan without determining, among other things, that the plan is based on realistic assumptions and is likely
to succeed in restoring the depository institution’s capital. In addition, for a capital restoration plan to be acceptable, the depository
institution’s parent holding company must guarantee that the institution will comply with such capital restoration plan. The bank
holding company must also provide appropriate assurances of performance. The aggregate liability of the parent holding company
is limited to the lesser of (i) an amount equal to 5.0% of the depository institution’s total assets at the time it became undercapitalized
and (ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all capital
standards applicable with respect to such institution as of the time it fails to comply with the plan. If a depository institution fails
to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.”
“Significantly undercapitalized” depository institutions may be subject to a number of requirements and restrictions, including
orders to sell sufficient voting stock to become “adequately capitalized,” requirements to reduce total assets, and cessation of
receipt of deposits from correspondent banks. “Critically undercapitalized” institutions are subject to the appointment of a receiver
or conservator.
The appropriate federal banking agency may, under certain circumstances, reclassify a well-capitalized insured depository
institution as adequately capitalized. The FDIA provides that an institution may be reclassified if the appropriate federal banking
agency determines (after notice and opportunity for hearing) that the institution is in an unsafe or unsound condition or deems the
institution to be engaging in an unsafe or unsound practice.
The appropriate agency is also permitted to require an adequately capitalized or undercapitalized institution to comply with the
supervisory provisions as if the institution were in the next lower category (but not treat a significantly undercapitalized institution
as critically undercapitalized) based on supervisory information other than the capital levels of the institution.
The Corporation believes that, as of December 31, 2014, the Bank and Morris Plan were each “well capitalized” based on the
aforementioned ratios.
Incentive Compensation. The Dodd-Frank Act requires the federal bank regulatory agencies and the SEC to establish joint
regulations or guidelines prohibiting incentive-based payment arrangements at specified regulated entities, such as the Corporation
and the Bank, having at least $1 billion in total assets that encourage inappropriate risks by providing an executive officer, employee,
director or principal shareholder with excessive compensation, fees, or benefits or that could lead to material financial loss to the
entity. In addition, these regulators must establish regulations or guidelines requiring enhanced disclosure to regulators of incentive-
based compensation arrangements. The agencies proposed such regulations in April 2011, but the regulations have not been
finalized. If the regulations are adopted in the form initially proposed, they will impose limitations on the manner in which the
Corporation may structure compensation for its executives.
In June 2010, the Federal Reserve Board, OCC and FDIC issued a comprehensive final guidance on incentive compensation
policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and
soundness of such organizations by encouraging excessive risk-taking. The guidance, which covers all employees that have the
ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key
principles that a banking organization’s incentive compensation arrangements should (i) provide incentives that do not encourage
risk-taking beyond the organization’s ability to effectively identify and manage risks, (ii) be compatible with effective internal
controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by
the organization’s board of directors. These three principles are incorporated into the proposed joint compensation regulations
under the Dodd-Frank Act, discussed above.
The Federal Reserve Board will review, as part of the regular, risk-focused examination process, the incentive compensation
arrangements of banking organizations, such as the Corporation, that are not “large, complex banking organizations.” These reviews
will be tailored to each organization based on the scope and complexity of the organization’s activities and the prevalence of
12
incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination.
Deficiencies will be incorporated into the organization’s supervisory ratings, which can affect the organization’s ability to make
acquisitions and take other actions. Enforcement actions may be taken against a banking organization if its incentive compensation
arrangements, or related risk-management control or governance processes, pose a risk to the organization’s safety and soundness
and the organization is not taking prompt and effective measures to correct the deficiencies.
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.
The CFPB has issued a final rule 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 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.
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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:
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•
•
•
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.
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 has authority for amending existing consumer compliance
regulations and implementing new such regulations. In addition, the Bureau has 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
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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.
ITEM 1A.
RISK FACTORS
An investment in the Corporation’s common stock is subject to risks inherent to the Corporation’s business. The material risks
and uncertainties that management believes affect the Corporation are described below. Before making an investment decision,
you should carefully consider the risks and uncertainties described below together with all of the other information included or
incorporated by reference in this report. The risks and uncertainties described below are not the only ones facing the
Corporation. Additional risks and uncertainties that management is not aware of or focused on or that management currently
deems immaterial may also impair the Corporation’s business operations. This report is qualified in its entirety by these risk
factors.
If any of the following risks actually occur, the Corporation’s business, financial condition and results of operations could be
materially and adversely affected. If this were to happen, the market price of the Corporation’s common stock could decline
significantly, and you could lose all or part of your investment.
Risks Related to the Corporation’s Business
Difficult conditions in the capital markets and the economy generally may materially adversely affect the Corporation’s
business and results of operations
In recent years, the U.S. economy has faced a severe economic crisis including a major recession from which it is slowly recovering.
Business activity across a wide range of industries and regions in the U.S. remains reduced and local governments and many
businesses continue to experience financial difficulty. In addition, on-going federal budget negotiations, the implementation of
the Patient Protection and Affordable Care Act and the level of U.S. debt may have a destabilizing effect on financial markets.
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. Overall during recent years, 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.
New capital rules that were recently issued generally require insured depository institutions and their holding companies
to hold more capital. The impact of the new rules on our financial condition and operations is uncertain but could be
materially adverse.
The Federal Reserve, the FDIC and the OCC have adopted final rules for the Basel III capital framework which became
effective on January 1, 2015. These rules substantially amend the regulatory risk-based capital rules formerly applicable to the
Corporation and its banking subsidiaries. The rules phase in overtime beginning in 2015 and will become fully effective in
2019. The rules provide for minimum capital ratios of (i) common equity Tier 1 risk-weighted capital ratio of 4.5%, (ii) Tier 1
risk-based capital ratio (common Tier 1 capital plus Additional Tier 1 capital) of 6%, and (iii) total risk-based capital ratio of
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8% (the current requirement). Beginning in 2016, a capital conservation buffer will phase in over three years, ultimately
resulting in a requirement of 2.5% on top of the common Tier 1, Tier 1 and total capital requirements, resulting in a required
common equity Tier 1 risk-based ratio of 7%, a Tier 1 risk-based ratio of 8.5%, and a total risk-based capital ratio of 10.5%.
Failure to satisfy any of these three capital requirements will result in limits on paying dividends, engaging in share repurchases
and paying discretionary bonuses. These limitations will establish a maximum percentage of eligible retained income that could
be utilized for such actions.
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 west central Indiana and east central Illinois. 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.
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.
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 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.
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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 will impose more stringent capital, liquidity and leverage requirements and may impact the profitability of
business activities, require changes to certain business practices, or otherwise adversely affect the Corporation’s business.
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. 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.
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 Corporation is subject to extensive government regulation and supervision
The Corporation, primarily through the Bank and Morris Plan, 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. 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 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.
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. 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,
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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. 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) natural disasters. 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 is subject to environmental liability risk associated with lending activities
A significant portion of the Corporation’s loan portfolio is secured by real property. During the ordinary course of business, the
Corporation may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or
toxic substances could be found on these properties. If hazardous or toxic substances are found, the Corporation may be liable
for remediation costs, as well as for personal injury and property damage. Environmental laws may require the Corporation to
incur substantial expenses and may materially reduce the affected property’s value or limit the Corporation’s ability to use or
sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to
existing laws may increase the Corporation’s exposure to environmental liability. Environmental reviews of real property before
initiating foreclosure actions may not be sufficient to detect all potential environmental hazards. The remediation costs and any
other financial liabilities associated with an environmental hazard could have a material adverse effect on the Corporation’s
business, financial condition and results of operations.
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 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.
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The Corporation’s accounting estimates and risk management processes rely on analytical and forecasting models
The processes the Corporation uses to estimate its probable loan losses and to measure the fair value of financial instruments,
as well as the processes used to estimate the effects of changing interest rates and other market measures on the Corporation’s
financial condition and results of operations, depends upon the use of analytical and forecasting models. These models reflect
assumptions that may not be accurate, particularly in times of market stress or other unforeseen circumstances. Even if these
assumptions are adequate, the models may prove to be inadequate or inaccurate because of other flaws in their design or their
implementation. If the models the Corporation uses for interest rate risk and asset-liability management are inadequate, the
Corporation may incur increased or unexpected losses upon changes in market interest rates or other market measures. If the
models the Corporation uses for determining its probable loan losses are inadequate, the allowance for loan losses may not be
sufficient to support future charge-offs. If the models the Corporation uses to measure the fair value financial instruments are
inadequate, the fair value of such financial instruments may fluctuate unexpectedly or may not accurately reflect what the
Corporation could realize upon sale or settlement of such financial instruments. Any such failure in the Corporation’s analytical
or forecasting models could have a material adverse effect on the Corporation’s business, financial condition and results of
operations.
The Corporation continually encounters technological change
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 controls and procedures may fail or be circumvented
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 Corporation’s internal controls, disclosure controls and procedures, and corporate governance policies
and procedures are based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the
objectives of the system are met. Any failure or circumvention of the Corporation’s controls and procedures or failure to comply
with regulations related to controls and procedures could have a material adverse effect on the Corporation’s business, 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
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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 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 that may not be profitable
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.
Potential acquisitions may disrupt the Corporation’s business and dilute stockholder value
The Corporation generally seeks merger or acquisition partners that are culturally similar and have experienced management
and possess either significant market presence or have potential for improved profitability through financial management,
economies of scale or expanded services. Acquiring other banks, businesses, or branches involves various risks commonly
associated with acquisitions, including, among other things:
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•
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potential exposure to unknown or contingent liabilities of the target company;
exposure to potential asset quality issues of the target company;
potential disruption to the Corporation’s business;
potential diversion of the Corporation’s management’s time and attention;
the possible loss of key employees and customers of the target company;
difficulty in estimating the value of the target company; and
potential changes in banking or tax laws or regulations that may affect the target company.
Acquisitions typically involve the payment of a premium over book and market values, and, therefore, some dilution of the
Corporation’s tangible book value and net income per common share may occur in connection with any future transaction.
Furthermore, failure to realize the expected revenue increases, cost savings, increases in geographic or product presence, and/
or other projected benefits from an acquisition could have a material adverse effect on the Corporation’s business, financial
condition and results of operations.
New lines of business or new products and services may subject the Corporation to additional risks
From time to time, the Corporation may implement new lines of business or offer new products and services within existing
lines of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the
markets are not fully developed. In developing and marketing new lines of business and/or new products and services the
Corporation may invest significant time and resources. Initial timetables for the introduction and development of new lines of
business and/or new products or services may not be achieved and price and profitability targets may not prove feasible. External
factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the
successful implementation of a new line of business or a new product or service. Furthermore, any new line of business and/or
new product or service could have a significant impact on the effectiveness of the Corporation’s system of internal controls.
Failure to successfully manage these risks in the development and implementation of new lines of business or new products or
services could have a material adverse effect on the Corporation’s business, financial condition and results of operations.
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
20
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 is subject to claims and litigation pertaining to Intellectual Property
Banking and other financial services companies, such as the Corporation, rely on technology companies to provide information
technology products and services necessary to support the Corporations’ day-to-day operations. Technology companies
frequently enter into litigation based on allegations of patent infringement or other violations of intellectual property rights. In
addition, patent holding companies seek to monetize patents they have purchased or otherwise obtained. Competitors of the
Corporation’s vendors, or other individuals or companies, have from time to time claimed to hold intellectual property sold to
the Corporation by its vendors. Such claims may increase in the future as the financial services sector becomes more reliant on
information technology vendors. The plaintiffs in these actions frequently seek injunctions and substantial damages.
Regardless of the scope or validity of such patents or other intellectual property rights, or the merits of any claims by potential
or actual litigants, the Corporation may have to engage in protracted litigation. Such litigation is often expensive, time-consuming,
disruptive to the Corporation’s operations, and distracting to management. If the Corporation is found to infringe upon one or
more patents or other intellectual property rights, it may be required to pay substantial damages or royalties to a third-party. In
certain cases, the Corporation may consider entering into licensing agreements for disputed intellectual property, although no
assurance can be given that such licenses can be obtained on acceptable terms or that litigation will not occur. These licenses
may also significantly increase the Corporation’s operating expenses. If legal matters related to intellectual property claims
were resolved against the Corporation or settled, the Corporation could be required to make payments in amounts that could
have a material adverse effect on its business, financial condition and results of operations.
The value of the Corporation’s goodwill and other intangible assets may decline in the future
As of December 31, 2014, the Corporation had $43.4 million of goodwill and other intangible assets. A significant decline in
the Corporation’s expected future cash flows, a significant adverse change in the business climate, slower growth rates or a
significant and sustained decline in the price of the Corporation’s common stock may necessitate taking charges in the future
related to the impairment of the Corporation’s goodwill and other intangible assets. If the Corporation were to conclude that a
future write-down of goodwill and other intangible assets is necessary, the Corporation would record the appropriate charge,
which could have a material adverse effect on the Corporation’s business, financial condition and results of operations.
The Corporation’s operations rely on certain external vendors
The Corporation relies on certain external vendors to provide products and services necessary to maintain day-to-day operations
of the Corporation. Accordingly, the Corporation’s operations are exposed to risk that these vendors will not perform in accordance
with the contracted arrangements under service level agreements. The failure of an external vendor to perform in accordance
with the contracted arrangements under service level agreements, because of changes in the vendor’s organizational structure,
financial condition, support for existing products and services or strategic focus or for any other reason, could be disruptive to
the Corporation’s operations, which 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 may be adversely affected by the soundness of other financial institutions
Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. The Corporation
has exposure to many different industries and counterparties, and routinely executes transactions with counterparties in the
financial services industry, including commercial banks, brokers and dealers, investment banks, and other institutional clients.
Many of these transactions expose the Corporation to credit risk in the event of a default by a counterparty or client. In addition,
the Corporation’s credit risk may be exacerbated when the collateral held by the Corporation cannot be realized upon or is
liquidated at prices not sufficient to recover the full amount of the credit or derivative exposure due to the Corporation. Any
such losses could have a material adverse effect on the Corporation’s business, financial condition and results of operations.
21
The Corporation relies on dividends from its subsidiaries for most of its revenue
The Corporation is a separate and distinct legal entity from its subsidiaries. It receives substantially all of its revenue from
dividends from its subsidiaries. These dividends are the principal source of funds to pay dividends on the Corporation’s common
stock and interest and principal on the Corporation’s debt. Various federal and state laws and regulations limit the amount of
dividends that the Bank and Morris Plan may pay to the Corporation. Also, the Corporation’s right to participate in a distribution
of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors. In the event
the Bank is unable to pay dividends to the Corporation, the Corporation may not be able to service debt, pay obligations or pay
dividends on the Corporation’s common stock. The inability to receive dividends from the Bank could have a material adverse
effect on the Corporation’s business, financial condition and results of operations.
Risks Related to the Corporation’s Common Stock
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.
An investment in the Corporation’s common stock is not an insured deposit
The Corporation’s common stock is not a bank deposit and, therefore, is not insured against loss by the Federal Deposit Insurance
Corporation (FDIC), any other deposit insurance fund or by any other public or private entity. Investment in the Corporation’s
common stock is inherently risky for the reasons described in this “Risk Factors” section and elsewhere in this report and is
subject to the same market forces that affect the price of common stock in any company. As a result, if you acquire the
Corporation’s common stock, you could lose some or all of your investment.
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 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
leases are May 31, 2016, February 14, 2016, May 31, 2015, and December 31, 2019.
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 an office in Clay
City, Indiana. All four buildings are held in fee.
22
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, Dugger, Farmersburg and
Hymera, Indiana. All four 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 Sandborn and two in Vincennes, Indiana.
All three 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. Both buildings are held in fee.
Facilities of the Corporation’s banking centers in Franklin County include an office in Benton, Illinois and an office in
West Frankfort, Illinois. Both buildings are held in fee.
Facilities of the Corporation’s banking centers in Jefferson County include an office and a drive-up facility in Mt. Vernon,
Illinois. Both 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 two offices in Pontiac, Illinois. Both buildings are
held in fee.
Facilities of the Corporation’s banking centers in Marion County include an office and a drive-up facility in Salem, Illinois.
Both buildings are held in fee.
Facilities of the Corporation’s banking center in McLean County include two offices in Bloomington, Illinois, and an
office in Gridley, Illinois. These building are all held in fee.
Facilities of the Corporation’s banking center in Montgomery County include an office in Hillsboro, Illinois. This building
is 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 centers in Coles County include two offices in Charleston, Illinois and an office in
Matoon, Illinois. These buildings are 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.
23
Facilities of the Corporation’s banking center in Champaign County include two offices in Champaign, Illinois, an office in
Mahomet, 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 Mahomet is leased and the lease expires on June 30, 2019. 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
expires on November 30, 2017.
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, 2018 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
(a) 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.
(b) Not applicable.
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
(a) As of March 5, 2015 shareholders owned 12,952,169 shares of the Corporation's common stock. The stock is traded on the
NASDAQ Global Select Market under the symbol “THFF”. On March 5, 2015, approximately 4,911 shareholders of record 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 2014 and 2013.
24
Quarter ended
2014
2013
Trade Price
High
Low
Cash
Dividends
Declared
Trade Price
High
Low
Cash
Dividends
Declared
March 31 $
$
June 30
$
September 30
$
December 31
35.18
33.97
33.32
35.91
$
$
$
$
30.60
31.31
30.57
30.99
$
$
$
$
$
$
0.49
0.49
31.97
31.54
34.26
36.86
$
$
$
$
29.24
29.02
30.42
30.47
$
$
0.48
0.48
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 33.92%. During this same period, the return on The Russell 2000 Index was 105.95% and the SNL Index of
Banks $1 - $5 Billion had a return of 93.81%.
Total Return Performance
First Financial Corporation
Russell 2000
SNL Bank $1B-$5B
e
u
l
a
V
x
e
d
n
I
250
225
200
175
150
125
100
75
50
25
12/31/09
12/31/10
12/31/11
12/31/12
12/31/13
12/31/14
Index
12/31/2009
12/31/2010
12/31/2011
12/31/2012
12/31/2013
12/31/2014
First Financial Corporation
Russell 2000
SNL Bank $1B-$5B
100.00
100.00
100.00
118.69
126.86
113.35
115.79
121.56
103.38
108.75
141.43
127.47
133.58
196.34
185.36
133.92
205.95
193.81
Period Ending
(b) Not applicable.
(c) The Corporation periodically acquires shares of its common stock directly from shareholders in individually negotiated
transactions. On August 25, 2014 First Financial Corporation issued a press release announcing that it's Board of Directors has
authorized a stock repurchase program pursuant to which up to 5% of the Corporation's outstanding shares of common stock, or
667,700 shares may be repurchased. There were 459,241 purchases of common stock by the Corporation during the year ended
25
December 31, 2014. The Corporation contributed 36,368 shares of treasury stock to the ESOP in November of 2014. Following
is certain information regarding shares of common stock purchased by the Corporation during the fourth quarter of the fiscal
year covered by this report.
(a)
(b)
Total Number of
Average Price
Shares Purchased
56,800
—
—
56,800
Paid Per Share
31.90
—
—
31.90
(c)
(d)
Total Number of Shares Maximum Number
of Shares that May
Yet
Be Purchased
Purchased as Part of
Publicly Announced
Plans or Program
56,800
—
—
56,800
218,235
—
—
218,235
October 1-31, 2031
November 1-30, 2014
December 1,-31 2014
Total
ITEM 6.
SELECTED FINANCIAL DATA
(Dollar amounts in thousands, except per share amounts)
2014
2013
2012
2011
2010
FIVE YEAR COMPARISON OF SELECTED FINANCIAL DATA
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
$
3,002,485
$
3,018,718
$
2,895,408
$
2,954,061
$
2,451,095
897,053
1,781,428
2,457,197
60,901
394,214
113,358
5,526
107,832
5,072
40,785
95,584
33,772
2.55
0.98
914,560
1,791,428
2,458,791
117,880
386,195
116,221
8,961
107,260
7,860
40,455
94,554
31,534
2.37
0.96
691,000
1,851,936
2,276,134
160,256
372,122
122,305
13,393
108,912
8,773
39,547
93,056
32,812
2.48
0.95
666,287
1,893,679
2,274,499
246,449
346,961
560,846
1,640,146
1,903,043
159,899
321,717
116,341
123,582
17,147
99,194
5,755
33,340
75,187
37,195
2.83
0.94
26,966
96,616
9,200
29,797
77,202
28,044
2.14
0.92
1.12%
1.06%
1.13%
1.49%
1.11%
8.37
13.99
13.36
38.16
8.35
13.45
12.69
40.58
9.02
13.25
12.55
38.40
10.88
14.57
13.68
33.29
8.73
13.56
12.76
43.08
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
26
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 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 fair 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 2014
COMPARISON OF 2014 TO 2013
Net income for 2014 was $33.8 million, or $2.55 per share. This represents a 7.1% increase in net income and a 7.6% increase in
earnings per share, compared to 2013. Return on assets at December 31, 2014 increased 5.7% to 1.12% compared to 1.06% at
December 31, 2013.
The primary components of income and expense affecting net income are discussed in the following analysis.
NET INTEREST INCOME
The principal source of the Corporation's earnings is net interest income, which represents the difference between interest earned
on loans and investments and the interest cost associated with deposits and other sources of funding. Net interest income increased
27
in 2014 to $107.8 million compared to $107.3 million in 2013. Total average interest earning assets increased to $2.79 billion in
2014 from $2.73 billion in 2013. The tax-equivalent yield on these assets decreased to 4.28% in 2014 from 4.46% in 2013. Total
average interest-bearing liabilities decreased to $2.035 billion in 2014 from $2.045 billion in 2012. The average cost of these
interest-bearing liabilities decreased to 0.27% in 2014 from 0.44% in 2013.
The net interest margin decreased from 4.13% in 2013 to 4.08% in 2014. This decrease is primarily the result of the decreased
income provided by earning assets. Earning asset yields decreased 18 basis points while the rate on interest-bearing liabilities
decreased by 17 basis points.
CONSOLIDATED BALANCE SHEET - AVERAGE BALANCES AND INTEREST RATES
Average
Balance
2014
Interest
Yield/
Rate
Average
Balance
December 31,
2013
Interest
Yield/
Rate
Average
Balance
2012
Interest
Yield/
Rate
(Dollar amounts in thousands)
ASSETS
Interest-earning assets:
Loans (1) (2)
Taxable investment securities
Tax-exempt investments (2)
Federal funds sold
$1,795,235
737,566
249,040
11,583
89,011
17,015
13,506
34
4.96% $1,807,599
2.31%
5.42%
0.29%
641,383
242,484
42,460
92,207
16,157
13,523
32
5.10% $1,863,014
100,083
2.52%
5.58%
0.08%
498,509
243,070
67,240
13,541
14,651
44
5.37%
2.72%
6.03%
0.07%
4.80%
Total interest-earning assets
2,793,424
119,566
4.28% 2,733,926
121,919
4.46% 2,671,833
128,319
Non-interest earning assets:
Cash and due from banks
Premises and equipment, net
Other assets
Less allowance for loan losses
69,522
51,929
124,402
(19,209)
TOTALS
$3,020,068
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
75,945
48,625
140,227
(22,623)
$2,976,100
65,445
43,594
138,462
(20,134)
$2,899,200
Transaction accounts
$1,415,431
Time deposits
Short-term borrowings
Other borrowings
519,166
45,743
54,769
1,340
3,284
99
803
0.09% $1,321,848
0.63%
0.22%
1.47%
579,815
37,968
105,161
Total interest-bearing liabilities:
2,035,109
5,526
0.27% 2,044,792
1,374
4,512
78
2,997
8,961
0.10% $1,176,403
0.78%
0.21%
2.85%
653,089
50,451
136,281
1,736
6,784
140
4,733
0.44% 2,016,224
13,393
0.15%
1.04%
0.28%
3.47%
0.66%
Non interest-bearing liabilities:
Demand deposits
Other
Shareholders' equity
TOTALS
Net interest earnings
Net yield on interest- earning
assets
526,656
54,890
2,616,655
403,413
$3,020,068
479,659
73,963
2,598,414
377,686
$2,976,100
439,206
79,894
2,535,324
363,876
$2,899,200
$ 114,040
$ 112,958
$ 114,926
4.08%
4.13%
4.30%
(1)For purposes of these computations, non-accruing 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%.
The following table sets forth the components of net interest income due to changes in volume and rate. The table information
compares 2014 to 2013 and 2013 to 2012.
28
2014 Compared to 2013 Increase
(Decrease) Due to
2013 Compared to 2012 Increase
(Decrease) Due to
(Dollar amounts in thousands)
Volume
Rate
Interest earned on interest-earning assets:
Volume/
Rate
Total
Volume
Rate
Volume/
Rate
Total
Loans (1) (2)
$
(631) $
(2,584) $
18
$
(3,197) $
(2,977) $
(5,049) $
150
$
(7,876)
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
2,423
366
(23)
(1,361)
(372)
93
(204)
(10)
(67)
858
(16)
3
3,881
(35)
(17)
(983)
(1,096)
7
(282)
3
(2)
2,616
(1,128)
(12)
$
2,135
$
(4,224) $
(263) $
(2,352) $
852
$
(7,121) $
(131) $
(6,400)
97
(472)
16
(1,436)
(1,795)
(123)
(843)
4
(1,455)
(2,417)
(9)
88
1
697
777
(35)
(1,227)
21
(2,194)
(3,435)
215
(761)
(35)
(1,081)
(1,662)
(514)
(1,702)
(36)
(849)
(3,101)
(63)
191
9
194
331
(362)
(2,272)
(62)
(1,736)
(4,432)
$
3,930
$
(1,807) $
(1,040) $
1,083
$
2,514
$
(4,020) $
(462) $
(1,968)
(1)For purposes of these computations, non-accruing 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%.
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, 2014,
the provision for loan losses was $5.1 million net, a decrease of $2.8 million, or 35.4%, compared to 2013. The 2014 provision
includes $0.7 million related to a decrease in the FDIC indemnification asset. Pursuant to its accounting policy, the Corporation
reflects changes in the FDIC indemnification asset related to actual or expected losses in indemnified loans as offsets or additions
to the provision for loan losses.
Net charge-offs for 2014 were $5.6 million as compared to $8.4 million for 2013 and $8.3 million for 2012. Non-accrual loans
decreased to $15.0 million at December 31, 2014 from $19.8 million at December 31, 2013. Loans past due 90 days and still on
accrual decreased to $780 thousand compared to $2.1 million at December 31, 2013.
NON-INTEREST INCOME
Non-interest income of $40.8 million increased $330 thousand from the $40.5 million earned in 2013. Increases in electronic
banking fees and deposit fees helped to offset reduced income from the sale of mortgage loans.
NON-INTEREST EXPENSES
Non-interest expenses increased to $95.6 million for 2014 from $94.6 million for 2013. Salaries increased $1.6 million while
benefits decreased $758 thousand. Occupancy and equipment expenses were up $2.0 million while other expenses were down
$1.7 million.
INCOME TAXES
The Corporation's federal income tax provision was $14.2 million in 2014 compared to 13.8 million in 2013. The overall effective
tax rate in 2014 of 29.6% decreased as compared to a 2013 effective rate of 30.4%.
COMPARISON OF 2013 TO 2012
Net income for 2013 was $31.5 million or $2.37 per share compared to $32.8 million in 2012 or $2.48 per share. This decrease
in net income was driven by the increased non-interest expense from the addition of 5 branches combined with reduced net interest
margin of 20 basis points from 4.30% to 4.13%.
29
Net interest income decreased $1.7 million in 2013 compared to 2012 as total average interest-earning assets increased. The
provision for loan losses decreased $913 thousand from $8.8 million in 2012 to $7.9 million in 2013. Net non-interest income and
expense increased $590 thousand from 2012 to 2013. Non-interest expenses increased $1.5 million while non-interest income
increased $1.0 million. The increase in non-interest income resulted primarily from electronic banking fees and trust fees. The
increase in non-interest expense was primarily occupancy and equipment costs associated with the addition of five locations to
the banking network.
The provision for income taxes decreased $51 thousand from 2012 to 2013 and the effective tax rate increased 76 basis points, or
2.6% in 2013 from 2012.
COMPARISON AND DISCUSSION OF 2014 BALANCE SHEET TO 2013
The Corporation's total assets decreased 0.5% or $16.2 million at December 31, 2014, from a year earlier. Available-for-sale
securities decreased $17.5 million at December 31, 2014, from the previous year. Loans, net of deferred fees and costs, decreased
by $10.0 million to $1.78 billion. Deposits remained virtually the same with a decrease of $1.6 million while borrowings decreased
by $57.0 million. In August 2013, the Corporation acquired a number of branch facilities in central and southern Illinois and
assumed approximately $189 million in customer deposits. Total shareholders' equity increased $8.0 million to $394.2 million at
December 31, 2014. Net income was partially offset by higher dividends. There were also 36,368 shares from the treasury with
a value of $1.25 million that were contributed to the ESOP plan in 2014 compared to 35,531 shares with a value of $1.22 million
in 2013.
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 2014 the portfolio's balance decreased by 1.9%. The average life of the
portfolio decreased from 4.7 years in 2013 to 4.2 years in 2014. The portfolio structure will continue to provide cash flows to be
reinvested during 2014.
(Dollar amounts in thousands)
Balance
Rate
Balance
Rate
Balance
Rate
Balance
Rate
1 year and less
1 to 5 years
5 to 10 years
Over 10 Years
2014
Total
U.S. government sponsored
entity mortgage-backed
securities and agencies (1)
$
Collateralized mortgage
obligations (1)
States and political
subdivisions
Corporate obligations
18
24
7,700
—
3.70% $
13,092
5.28% $
29,790
5.25% $ 146,520
5.61% $ 189,420
4.99%
1,813
5.04%
3,919
4.89%
478,899
2.40%
484,655
4.22%
—%
38,891
—
3.58%
—%
90,909
—
3.53%
—%
70,175
15,303
3.60%
207,675
—%
15,303
TOTAL
$
7,742
4.22% $
53,796
4.04% $ 124,618
3.98% $ 710,897
3.13% $ 897,053
(1) Distribution of maturities is based on the estimated life of the asset.
(Dollar amounts in thousands)
Balance
Rate
Balance
Rate
Balance
Rate
Balance
Rate
1 year and less
1 to 5 years
5 to 10 years
Over 10 Years
2013
Total
U.S. government sponsored
entity mortgage-backed
securities and agencies (1)
Collateralized mortgage
obligations (1)
States and political
subdivisions
Corporate obligations
TOTAL
$
127
5.29% $
14,149
5.28% $
38,461
4.93% $ 151,051
5.58% $ 203,788
—
—%
3,475
4.48%
5,780
4.58%
497,486
2.49%
506,741
10,612
—
10,739
4.25%
—%
4.26%
33,389
—
51,013
3.84%
—%
83,995
—
3.59%
—%
66,991
9,044
3.71%
194,987
—%
9,044
4.28%
128,236
4.04%
724,572
3.22%
914,560
(1) Distribution of maturities is based on the estimated life of the asset.
30
LOAN PORTFOLIO
Loans outstanding by major category as of December 31 for each of the last five years and the maturities at year end 2014 are
set forth in the following analyses.
(Dollar amounts in thousands)
Loan Category
Commercial
Residential
Consumer
TOTAL
2014
2013
2012
2011
2010
$ 1,044,522
469,172
266,656
$ 1,780,350
$ 1,042,138
482,377
268,033
$ 1,792,548
$ 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
(Dollar amounts in thousands)
MATURITY DISTRIBUTION
Commercial, financial and agricultural
TOTAL
Residential
Consumer
TOTAL
Loans maturing after one year with:
Fixed interest rates
Variable interest rates
TOTAL
ALLOWANCE FOR LOAN LOSSES
Within
One Year
After One
But Within
Five Years
After Five
Years
Total
$
346,470
$
553,626
$
144,426
$ 1,044,522
469,172
266,656
$ 1,780,350
$
$
204,526
349,100
553,626
$
$
133,798
10,628
144,426
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,
Average amount of loans by year
Allowance for loan losses at beginning of
year
2014
$ 1,780,350
$ 1,795,235
2013
$ 1,792,548
$ 1,807,599
2012
$ 1,852,888
$ 1,863,014
2011
$ 1,894,641
$ 1,637,471
2010
$ 1,641,086
$ 1,636,254
$
20,068
$
21,958
$
19,241
$
22,336
$
19,437
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
3,522
1,143
4,785
9,450
934
798
2,104
3,836
5,614
4,385
4,830
4,942
3,615
13,387
3,149
472
1,401
5,022
8,365
6,475
$
18,839
$
20,068
$
4,176
2,598
3,640
10,414
644
100
1,387
2,131
8,283
11,000
21,958
5,336
2,811
2,969
11,116
938
95
1,108
2,141
8,975
5,880
$
19,241
$
7,099
872
4,503
12,474
2,319
258
1,934
4,511
7,963
10,862
22,336
0.31%
0.46%
0.44%
0.55%
0.49%
31
* In 2014 and 2013 the provision charged to expense was increased by $687 thousand and $1.4 million, respectively for the
decrease to the FDIC indemnification asset. In 2012, and 2011 the provision was reduced with a corresponding increase in the
FDIC indemnification asset by $2.2 million and $125 thousand, respectively. In 2010 the provision was increased with a
corresponding decrease in the FDIC indemnification asset by $1.7 million.
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 $1.8 billion of loans outstanding at December 31, 2014 are $7.3 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 loans acquired on December 30, 2011 in the Freestar acquisition. The acquired portfolio includes purchased
credit impaired loans with a contractual balance due of $6.1 million and a carrying value of $5.7 million.
The analysis of the allowance for loan losses includes the allocation of specific amounts of the allowance to individual impaired
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 allowance for loan losses as a percentage of total loans
declined to 1.05% at year end 2014 compared to 1.12% at year end 2013. The Corporation’s unallocated allowance position of
$2.2 million at December 31, 2014 has decreased from $2.4 million at December 31, 2013 and increased from $1.7 million at
December 31, 2012. The calculation of historical losses used in the allowance computation weights the most recent year's net
charge off activity more heavily, and the unallocated portion of the allowance reflects management's uncertainty about whether
the more modest levels of net charge offs in the recent years, particularly in the commercial segment of the portfolio, are sustainable
and representative of the risk in the loan portfolio. Non-performing loans of $30.6 million at December 31, 2014 decreased from
$39.2 million at December 31, 2013 due in large part to the resolution of certain larger commercial credits and net charge-offs
declined to $5.6 million in 2014 compared to $8.4 million in 2013. Management believes the allowance for loan losses balance
at year end 2014, including the unallocated portion, is reasonable based on their analysis of specific loans and the credit trends
reflected within the loan portfolio. 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
2014
10,915
1,374
4,370
2,180
18,839
$
$
$
$
NONPERFORMING LOANS
Years Ended December 31,
2012
2011
2013
12,450
1,585
3,650
2,383
20,068
$
$
10,987
5,426
3,879
1,666
21,958
$
$
12,119
2,728
3,889
505
19,241
$
$
2010
12,809
2,873
4,551
2,103
22,336
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.
Non-accrual restructured loans decreased in 2014 primarily due to the sale in 2014 of two large commercial credits and in 2013
of one large commercial credit. Additional information regarding restructured loans is available in the footnotes to the financial
statements.
32
(Dollar amounts in thousands)
Non-accrual loans
Accruing restructured loans
Non-accrual restructured loans
Accruing loans past due over 90 days
2014
2013
2012
2011
2010
$
$
15,034
4,616
10,142
780
30,572
$
$
19,779
4,199
13,102
2,073
39,153
$
$
36,794
3,831
17,454
3,362
61,441
$
$
38,102
3,356
13,981
2,047
57,486
$
$
38,517
13,044
4,050
3,185
58,796
The ratio of the allowance for loan losses as a percentage of nonperforming loans was 62% at December 31, 2014, compared to
51% in 2013. The ratio of nonperforming loans excluding covered loans was 62% at December 31, 2014 and 56% at December 31,
2013. There were no covered loans included in restructured loans in 2014 and 2013. In the footnotes to the financial statements
the amount reported for nonperforming loans is the recorded investment which includes accrued interest receivable. The following
loan categories comprise significant components of the nonperforming loans at December 31, 2014 and 2013:
(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
2014
2013
9,212
4,651
1,171
15,034
—
624
156
780
61% $
31%
8%
100% $
—% $
80%
20%
100% $
13,424
5,195
1,160
19,779
712
1,181
180
2,073
Covered Loans (also included above)
2014
2013
35
239
—
274
—
37
—
37
13% $
87%
—%
100% $
—% $
100%
—%
100% $
799
275
—
1,074
459
121
—
580
68%
26%
6%
100%
34%
57%
9%
100%
74%
26%
—%
100%
79%
21%
—%
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.
33
DEPOSITS
The information below presents the average amount of deposits and rates paid on those deposits for 2014, 2013 and 2012.
(Dollar amounts in thousands)
Amount
Rate
Amount
Rate
Amount
Rate
2014
2013
2012
Non-interest-bearing demand
deposits
Interest-bearing demand deposits
Savings deposits
Time deposits: $100,000 or more
Other time deposits
TOTAL
$
526,656
$
479,659
$
439,206
567,267
848,164
142,153
377,013
$ 2,461,253
0.11%
0.08%
0.73%
0.59%
541,235
780,613
169,567
410,248
$ 2,381,322
0.12%
0.09%
0.90%
0.73%
439,368
737,035
183,635
469,454
$ 2,268,698
0.19%
0.13%
1.12%
1.01%
The maturities of certificates of deposit of $100 thousand or more outstanding at December 31, 2014, 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
OTHER BORROWINGS
$ 42,526
19,356
32,977
57,083
$ 151,942
Advances from the Federal Home Loan Bank decreased to $12.9 million in 2014 compared to $58.3 million in 2013. The FHLB
advances acquired in the acquisition had a fair value of $16.6 million. 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, 2014.
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 2014 and 2013 was 38.2% and 40.6%, 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
34
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.
The table below shows the Corporation's estimated sensitivity profile as of December 31, 2014. 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 2.17% over the next 12 months and increase 5.80% over the following 12 months. Given a 100 basis point decrease in
rates, net interest income would decrease 0.58% over the next 12 months and decrease 1.98% 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
36 months
24 months
12 months
-1.05%
-0.58%
2.17%
1.46%
-3.62%
-1.98%
5.80%
8.18%
-5.65%
-3.14%
9.50%
15.40%
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 $7.7 million of investments that mature throughout the coming 12 months. The
Corporation also anticipates $127.6 million of principal payments from mortgage-backed securities. Given the current rate
environment, the Corporation anticipates $15.1 million in securities to be called within the next 12 months.
The Corporation also has additional sources of liquidity available through secured and unsecured borrowing capacity. These include
upstream corresondents, the Federal Home Loan Bank and the Federal Reserve Bank.
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, 2014, 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
One year
or less
$ 1,984,405
276,729
48,015
2,297
35
One year to
Three Years
$
— $
144,812
—
10,589
Three to
Five Years
Over Five
Years
Total
— $
50,465
—
— $ 1,984,405
472,792
786
48,015
—
12,886
—
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.
The Corporation has lease obligations on certain branch properties and equipment as described in Note 8 to the consolidated
financial statements.
Commitments: The following table details the amount and expected maturities of significant commitments as of December 31,
2014. 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
Committed
One year
or less
Over One
Year
$
354,592
7,684
$
174,601
5,978
$
179,991
1,706
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.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information contained under the caption “Management’s Discussion and Analysis of Financial Condition and Results of
Operations — Market Risk” on page 34 of this Form 10-K is incorporated herein by reference in response to this item.
36
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of First Financial Corporation (the "Corporation") has prepared and is responsible for the preparation and accuracy
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, 2014, 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 (COSO) in 2013. Based on this assessment,
management concluded that, as of December 31, 2014, 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 audited the Corporation's 2014 and 2013 consolidated
financial statements included in this Annual report and the Corporation's internal control over financial reporting as of December
31, 2014, and has issued a report dated March 6, 2015.
37
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, 2014 and 2013
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, 2014. We also have audited First Financial Corporation's internal control
over financial reporting as of December 31, 2014, based on criteria established in 2013 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, 2014 and 2013, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2014, 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, 2014, based on criteria established in 2013 in Internal Control —Integrated Framework
issued by the COSO.
Crowe Horwath LLP
Indianapolis, Indiana
March 6, 2015
38
December 31,
2014
2013
$
78,102
8,000
897,053
1,762,589
16,404
11,593
51,802
80,730
39,489
3,901
3,965
(74)
48,931
$ 3,002,485
$
71,033
4,276
914,560
1,771,360
21,057
11,554
51,449
79,035
39,489
4,935
5,291
1,055
43,624
$ 3,018,718
$
556,389
$
506,815
53,733
1,847,075
2,457,197
48,015
12,886
90,173
2,608,271
63,263
1,888,713
2,458,791
59,592
58,288
55,852
2,632,523
1,815
72,405
377,970
(14,529)
(43,447)
394,214
$ 3,002,485
1,811
71,074
357,083
(13,969)
(29,804)
386,195
$ 3,018,718
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 $18,839 in 2014 and $20,068 in 2013
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 that meet or exceed the FDIC insurance limit
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-14,538,132 in 2014 and 14,516,113 in 2013
Outstanding shares-12,942,175 in 2014 and 13,343,029 in 2013
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss)
Less: Treasury shares at cost-1,595,957 in 2014 and 1,173,084 in 2013
TOTAL SHAREHOLDERS’ EQUITY
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
See accompanying notes.
39
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 (loss), 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
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
EARNINGS PER SHARE:
BASIC AND DILUTED
Weighted average number of shares outstanding (in thousands)
See accompanying notes.
40
Years Ended December 31,
2013
2012
2014
$
87,530
$
91,242
$
99,196
17,015
7,084
1,729
113,358
4,624
99
803
5,526
107,832
5,072
102,760
5,860
10,772
11,697
(3)
—
—
—
7,646
1,849
2,964
40,785
55,936
7,218
7,269
1,931
23,230
95,584
47,961
14,189
33,772
16,157
7,046
1,776
116,221
5,886
78
2,997
8,961
107,260
7,860
99,400
6,035
10,162
11,081
423
—
—
—
7,750
3,052
1,952
40,455
55,097
6,102
6,348
2,052
24,955
94,554
45,301
13,767
31,534
13,913
(14,473)
33,212
2.55
13,226
$
$
(17,066)
10,569
25,037
2.37
13,310
$
$
$
$
13,542
7,246
2,321
122,305
8,520
140
4,733
13,393
108,912
8,773
100,139
5,804
9,742
9,710
886
(11)
—
(11)
7,422
4,590
1,404
39,547
56,211
5,746
5,489
1,949
23,661
93,056
46,630
13,818
32,812
691
2,331
35,834
2.48
13,240
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollar amounts in thousands, except per share data)
Balance, January 1, 2012
Common
Additional
Stock
Capital
Retained
Earnings
$
1,806
$
69,328
$
318,130
Accumulated
Other
Comprehensive
Income/(Loss)
$
(10,494) $
Treasury
Stock
Total
(31,809) $
346,961
Net income
Other comprehensive income (loss)
Omnibus Equity Incentive Plan, net
Contribution of 49,825 shares to ESOP
Cash Dividends, $.95 per share
Balance, December 31, 2012
Net income
Other comprehensive income (loss)
Omnibus Equity Incentive Plan, net
Contribution of 35,531 shares to ESOP
Cash Dividends, $.96 per share
Balance, December 31, 2013
Net income
Other comprehensive income (loss)
Omnibus Equity Incentive Plan, net
Treasury stock purchases (459,241 shares)
Contribution of 36,368 shares to ESOP
Cash Dividends, $.98 per share
Balance, December 31, 2014
See accompanying notes.
—
—
2
—
—
—
—
486
175
—
1,808
69,989
—
—
3
—
—
—
—
770
315
—
1,811
71,074
—
—
4
—
—
—
—
—
1,068
—
263
—
32,812
—
—
—
(12,600)
338,342
31,534
—
—
—
(12,793)
357,083
33,772
—
—
—
—
(12,885)
32,812
3,022
488
1,439
(12,600)
372,122
31,534
(6,497)
611
1,218
(12,793)
386,195
33,772
(560)
1,072
—
3,022
—
—
—
—
—
—
1,264
—
(7,472)
(30,545)
—
(6,497)
—
—
—
—
—
(162)
903
—
(13,969)
(29,804)
—
—
—
—
(560)
—
—
—
—
(14,633)
(14,633)
990
—
1,253
(12,885)
$
1,815
$
72,405
$
377,970
$
(14,529) $
(43,447) $
394,214
41
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:
Years Ended December 31,
2014
2013
2012
$
33,772
$
31,534
$
32,812
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
Origination of loans held for sale
Proceeds from loans held for sale
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 (disbursed) from acquisitions
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 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
42
3,405
5,072
—
3
5,977
2,873
(39)
1,253
1,072
(1,849)
(357)
(66,300)
68,438
4,524
57,844
2,712
7,860
—
(423)
5,482
(39)
470
1,218
773
(3,052)
182
(112,483)
121,092
7,371
62,697
356
5,110
136,141
(99,954)
325
(3,724)
—
—
4,670
(17)
—
—
3,034
(5,296)
35,535
(2,151)
(11,577)
(12,949)
(14,633)
572,000
(617,000)
(86,310)
7,069
71,033
158,317
(417,997)
41,643
16,524
—
—
250
(15)
—
177,610
4,714
(2,522)
(16,366)
(7,544)
19,041
(12,766)
(162)
135,000
(196,097)
(62,528)
(16,197)
87,230
3,492
8,773
11
(886)
5,105
(143)
923
1,439
488
(4,590)
69
(167,303)
167,227
7,160
54,577
25,812
142,475
(194,475)
29,619
(9,075)
(1,551)
9,180
1,185
(186)
(114)
—
4,285
(10,945)
(3,790)
149
(59,471)
(12,425)
—
—
(26,090)
(97,837)
(47,050)
134,280
CASH AND CASH EQUIVALENTS, END OF YEAR
$
78,102
$
71,033
$
87,230
SUPPLEMENTAL DISCLOSURES OF CASH FLOW AND NONCASH
INFORMATION:
Cash paid for the year for:
Interest
Income Taxes
See accompanying notes.
$
$
5,527
9,354
$
$
9,375
13,822
$
$
13,837
12,638
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS
Organization: The consolidated financial statements of First Financial Corporation and its subsidiaries (the Corporation) include
the 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, 2014, $690.1 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 71 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.; four in Clay County,
Indiana; one in Gibson County, Indiana.; one in Greene County, Indiana; three in Knox County, Indiana; five in Parke County,
Indiana; one in Putnam County, Indiana; four in Sullivan County, Indiana; one in Vanderburgh County, Indiana,; four in Vermillion
County, Indiana; five in Champaign County, Illinois; one in Clark County, Illinois; three in Coles County, Illinois; two in Crawford
County, Illinois; two in Franklin County, Illinois; one in Jasper County, Illinois; two in Jefferson County, Illinois; one in Lawrence
County, Illinois; two in Livingston County, Illinois; two in Marion County, Illinois; three in McLean County, Illinois; one in
Montgomery County, Illinois; two in Richland County, Illinois; seven 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. FFB Risk Management Company is regulated by the State of Nevada
Division of Insurance.
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.
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 $1.4 million, $2.5 million and $7.1 million for the years ended December 31, 2014, 2013 and 2012 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
44
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. 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 non-accrual 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 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.
The risk characteristics of each loan portfolio segment are as follows:
Commercial
Commercial loans are predominately loans to expand a business or finance asset purchases. The underlying risk in the
Commercial loan segment is primarily a function of the reliability and sustainability of the cash flows of the borrower and
secondarily on the underlying collateral securing the transaction. From time to time, the cash flows of borrowers may be less
than historical or as planned. In addition, the underlying collateral securing these loans may fluctuate in value. Most
commercial loans are secured by the assets financed or other business assets and most commercial loans are further supported
by a personal guarantee. However, in some instances, short term loans are made on an unsecured basis. Agriculture production
loans are typically secured by growing crops and generally secured by other assets such as farm equipment. Production loans
are subject to weather and market pricing risks. The Corporation has established underwriting standards and guidelines for all
commercial loan types.
The Corporation strives to maintain a geographically diverse commercial real estate portfolio. Commercial real estate loans are
primarily underwritten based upon the cash flows of the underlying real estate or from the cash flows of the business conducted
at the real estate. Generally, these types of loans will be fully guaranteed by the principal owners of the real estate and loan
amounts must be supported by adequate collateral value. Commercial real estate loans may be adversely affected by factors in
the local market, the regional economy, or industry specific factors. In addition, Commercial Construction loans are a specific
type of commercial real estate loan which inherently carry more risk than loans for completed projects. Since these types of
loans are underwritten utilizing estimated costs, feasibility studies, and estimated absorption rates, the underlying value of the
project may change based upon the inaccuracy of these projections. Commercial construction loans are closely monitored,
subject to industry standards, and disbursements are controlled during the construction process.
Residential
Retail real estate mortgages that are secured by 1-4 family residences are generally owner occupied and include residential real
estate and residential real estate construction loans. The Corporation typically establishes a maximum loan-to-value ratio and
generally requires private mortgage insurance if the ratio is exceeded. The Corporation sells substantially all of its long-term
45
fixed mortgages to secondary market purchasers. Mortgages sold to secondary market purchasers are underwritten to specific
guidelines. The Corporation originates some mortgages that are maintained in the bank’s loan portfolio. Portfolio loans are
generally adjustable rate mortgages and are underwritten to conform to Qualified Mortgage standards. Several factors are
considered in underwriting all Mortgages including the value of the underlying real estate, debt-to-income ratio and credit
history of the borrower. Repayment is primarily dependent upon the personal income of the borrower and can be impacted by
changes in borrower’s circumstances such as changes in employment status and changes in real estate property values. Risk is
mitigated by the sale of substantially all long-term fixed rate mortgages, the underwriting of portfolio loans to Qualified
Mortgage standards and the fact that mortgages are generally smaller individual amounts spread over a large number of
borrowers.
Consumer
The consumer portfolio primarily consists of home equity loans and lines (typically secured by a subordinate lien on a 1-4
family residence), secured loans (typically secured by automobiles, boats, recreational vehicles, or motorcycles), cash/CD
secured, and unsecured loans. Pricing, loan terms, and loan to value guidelines vary by product line. The underlying value of
collateral dependent loans may vary based on a number of economic conditions, including fluctuations in home prices and
unemployment levels. Underwriting of consumer loans is based on the individual credit profile and analysis of the debt
repayment capacity for each borrower. Payments for consumer loans is typically set-up on equal monthly installments,
however, future repayment may be impacted by a change in economic conditions or a change in the personal income levels of
individual customers. Overall risks within the consumer portfolio are mitigated by the mix of various loan products, lending in
various markets and the overall make-up of the portfolio (small loan sizes and a large number of individual borrowers).
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. The general component covers
non-classified loans as well as non-impaired 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 as well as non-impaired 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 for automobiles and other consumer purchases. Commercial loans are generally well secured, which mitigates
the risk of loss and has contributed to the low historical loss rate. However, concentrations in commercial real estate, along with
the potential impact of rising interest rates to commercial real estate, raises the risk of loss on commercial loans. For these reasons,
commercial loans have the highest adjustment to the historical loss rate. Continued weakness in local economic conditions along
with declining auto values resulted in consumer loans having the next highest level of adjustment to the historical loss rate. The
residential loan portfolio segment had the lowest level of adjustment to the historical loss rate.
46
Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated
future cash flows using the loan's effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent
loan, the loan is reported, net, at the fair value of the collateral. For troubled debt restructurings that subsequently default, the
Corporation determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.
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 or decrease in the FDIC indemnification asset is recorded as an (increase) or offset to the
provision for loan losses. During 2014, 2013 and 2012, the provision for loan losses was (increased)/ offset by ($687 thousand),
($1.4 million )and $2.2 million related to the changes 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 value less
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 5 years for furniture and equipment and 33 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
$1.4 million, $1.4 million and $1.3 million for the years ended December 31, 2014, 2013 and 2012. 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.
47
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 December 31 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 10 and 12 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 $138 thousand, $149 thousand and $142 thousand, resulting in a deferred compensation liability of $2.4 million
at December 31, 2014 and $2.6 million at December 31, 2013.
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 did 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 2014, 2013 and 2012. There is a liability of $14.0 million and $14.5 million as of year-end 2014 and 2013. In 2011 the
Corporation adopted the 2011 Short-term Incentive Plan and the 2011 Omnibus Equity Incentive Plan 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 is paid out within 75 days of the end of each vesting period. The compensation
expense related to the plans in 2014, 2013 and 2012 was $654 thousand, $856 thousand and $1.3 million, respectively, and resulted
in a liability of $782 thousand at December 31, 2014 and $1.2 million at December 31, 2013.
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.
48
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: ASU 2014-04 “Receivables (Topic 310) - Troubled Debt Restructurings by
Creditors” (“ASU 2014-04”) amends Topic 310 “Receivables” to clarify the terms defining when an in substance repossession or
foreclosure occurs, which determines when the receivable should be derecognized and the real estate property is recognized. ASU
2013-04 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2014. It is
not expected to have a significant impact on our financial statements.
In May 2014, the FASB and the International Accounting Standards Board (the "IASB") jointly issued a comprehensive new
revenue recognition standard that will supersede nearly all existing revenue recognition guidance under GAAP and International
Financial Reporting Standards ("IFRS"). Previous revenue recognition guidance in GAAP comprised broad revenue recognition
concepts together with numerous revenue requirements for particular industries or transactions, which sometimes resulted in
different accounting for economically similar transactions. In contrast, IFRS provided limited revenue recognition guidance and,
consequently, could be difficult to apply to complex transactions. Accordingly, the FASB and the IASB initiated a joint project to
clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and IFRS that would:
(1) Remove inconsistencies and weaknesses in revenue requirements; (2) Provide a more robust framework for addressing revenue
issues; (3) Improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets;
(4) Provide more useful information to users of financial statements through improved disclosure requirements; and (5) Simplify
the preparation of financial statements by reducing the number of requirements to which an entity must refer. To meet those
objectives, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers." The standard’s core principle is that
a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the
consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies generally
will be required to use more judgment and make more estimates than under current guidance. These may include identifying
performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and
49
allocating the transaction price to each separate performance obligation. The standard is effective for public entities for interim
and annual periods beginning after December 15, 2016; early adoption is not permitted. For financial reporting purposes, the
standard allows for either full retrospective adoption, meaning the standard is applied to all of the periods presented, or modified
retrospective adoption, meaning the standard is applied only to the most current period presented in the financial statements with
the cumulative effect of initially applying the standard recognized at the date of initial application. The Corporation is currently
evaluating the provisions of ASU No. 2014-09 and will be closely monitoring developments and additional guidance to determine
the potential impact the new standard will have on the Corporation's Consolidated Financial Statements.
In August 2014, the FASB issued ASU 2014-14, Classification of Certain Government-Guaranteed Mortgage Loans upon
Foreclosure. This ASU requires that a mortgage loan be derecognized and that a separate other receivable be recognized if certain
conditions are met in the case of government guarantees. The amendments are effective for annual periods, and interim periods
within those years, beginning after December 15, 2014. The adoption of this ASU is not expected to have a significant impact on
the Corporation's financial statements.
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 state and
municipal securities. The fair value of the trust preferred securities is obtained from a third party provider without adjustment.
Management obtains values from other pricing sources to validate the Standard & Poors pricing that they currently utilize. 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.
50
The fair value of derivatives is based on valuation models using observable market data as of the measurement date (Level 2
inputs).
December 31, 2014
Fair Value Measurement Using
Level 1
Level 2
Level 3
(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
TOTAL
Derivative Assets
Derivative Liabilities
(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
TOTAL
Derivative Assets
Derivative Liabilities
$
$
$
$
Carrying Value
1,467
187,936
17
484,655
207,675
15,303
897,053
— $
—
—
—
5,900
15,303
21,203
$
Carrying Value
1,633
197,764
4,391
506,741
194,987
9,044
914,560
— $
—
—
—
4,525
9,044
13,569
$
— $
—
—
—
—
—
— $
$
$
$
1,467
187,936
17
484,655
201,775
—
875,850
1,062
(1,062)
— $
—
—
—
—
—
— $
$
$
$
1,633
197,764
4,391
506,741
190,462
—
900,991
1,195
(1,195)
December 31, 2013
Fair Value Measurement Using
Level 1
Level 2
Level 3
There were no transfers between Level 1 and Level 2 during 2014 and 2013.
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, 2014 and
2013.
Fair Value Measurements Using Significant
Unobservable Inputs (Level 3)
December 31, 2014
State and
municipal
obligations
4,525
—
—
4,000
(2,625)
5,900
$
Collateralized
debt obligations
9,044
$
Total
13,569
—
7,100
4,000
(3,466)
21,203
$
$
—
7,100
—
(841)
15,303
Beginning balance, January 1
Total realized/unrealized gains or losses
Included in earnings
Included in other comprehensive income
Purchases
Settlements
Ending balance, December 31
$
$
51
Fair Value Measurements Using SignificantUnobservable
Inputs (Level 3)
December 31, 2013
Collateralized
debt
obligations
State and
municipal
obligations
Total
Beginning balance, January 1
Total realized/unrealized gains or losses
Included in earnings
Included in other comprehensive income
Transfers
Settlements
Ending balance, December 31
$
$
9,911
$
6,122
$
16,033
—
—
(1,186)
(4,200)
4,525
$
904
3,155
—
(1,137)
9,044
$
904
3,155
(1,186)
(5,337)
13,569
There were no unrealized gains and losses recorded in earnings for the years ended December 31, 2014 or 2013.
Certain local municipal securities with a fair value of $4.0 million as of December 31, 2014 were purchased and added to Level
3 because we were unable to obtain observable market data from our provider for these investments. Certain local municipal
securities with a fair value of $1.2 million as of December 31, 2013 were transferred from Level 3 to Level 2 because we were
able to obtain observable market data from our provider for these investments that was not available the previous year.
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 $11.5 million, after a valuation allowance of $1.9 million at December 31, 2014 and at a fair
value of $13.8 million, net of a valuation allowance of $3.1 million at December 31, 2013. The impact to the provision for loan
losses for the twelve months ended December 31, 2014 and December 31, 2013 was a $1.2 million decrease and a $0.9 million
decrease, respectively. Other real estate owned is valued at Level 3. Other real estate owned at December 31, 2014 with a value
of $4.0 million was reduced $1.1 million for fair value adjustment. At December 31, 2014 other real estate owned was comprised
of $3.0 million from commercial loans and $1.0 million from residential loans. Other real estate owned at December 31, 2013
with a value of $5.3 million was reduced $1.1 million for fair value adjustment. At December 31, 2013 other real estate owned
was comprised of $3.9 million from commercial loans and $1.4 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
0% to 50%. Values for non-real estate collateral, such as business equipment, are based on appraisals performed by qualified
licensed appraisers or the customers financial statements. Values for non real estate collateral use much higher discounts than real
estate collateral. Other real estate and impaired loans carried at fair value are primarily comprised of smaller balance properties.
52
The following tables present quantitative information about recurring and non-recurring Level 3 fair value measurements at
December 31, 2014 and 2013.
2014
Fair Value
Valuation Technique(s)
Unobservable Input(s)
Range
State and municipal
obligations
Other real estate
Impaired Loans
$
$
$
5,900 Discounted cash flow
Discount rate
3,965 Sales comparison/income
approach
11,477 Sales comparison/income
approach
Probability of default
Discount rate for age of
appraisal and market
conditions
Discount rate for age of
appraisal and market
conditions
3.05%-5.50%
—%
5.00%-20.00%
0.00%-50.00%
2013
Fair Value
Valuation Technique(s)
Unobservable Input(s)
Range
State and municipal
obligations
Other real estate
Impaired Loans
$
$
$
4,525 Discounted cash flow
Discount rate
5,291 Sales comparison/income
approach
13,765 Sales comparison/income
approach
Probability of default
Discount rate for age of
appraisal and market
conditions
Discount rate for age of
appraisal and market
conditions
3.05%-5.50%
—%
5.00%-20.00%
0.00%-50.00%
The following tables present impaired collateral dependent loans measured at fair value on a non-recurring basis by class of loans
as of December 31, 2014 and 2013.
(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, 2014
Allowance
for Loan
Losses
Allocated
Fair Value
Carrying Value
$
$
$
5,874
—
6,654
—
827
$
1,056
—
753
—
102
33
—
—
—
—
—
—
—
—
—
4,818
—
5,901
—
725
33
—
—
—
—
—
—
13,388
$
—
—
1,911
$
—
—
11,477
53
(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, 2013
Allowance
for Loan
Losses
Allocated
Fair Value
Carrying Value
$
$
$
8,620
—
7,204
—
1,062
$
1,612
—
1,500
—
46
37
—
—
—
—
—
—
—
—
—
7,008
—
5,704
—
1,016
37
—
—
—
—
—
—
16,923
$
—
—
3,158
$
—
—
13,765
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 or paid to 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. The methods utilized to estimate the fair value of loans do not necessarily represent
an exit price. 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:
December 31, 2014
(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
$
Carrying
Value
$
78,102
8,000
897,053
16,404
1,762,589
(74)
11,593
(2,457,197)
(48,015)
(12,886)
(456)
54
Fair Value
Level 1
Level 2
Level 3
Total
$
$
— $
55,505
22,597
—
8,000
—
21,203
875,850
—
n/a
n/a
n/a
— 1,810,885
—
—
(74)
—
—
8,410
3,183
— (2,459,703)
(48,015)
—
(13,605)
—
(456)
—
78,102
8,000
897,053
n/a
1,810,885
(74)
11,593
— (2,459,703)
(48,015)
—
(13,605)
—
(456)
—
December 31, 2013
(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
$
Carrying
Value
$
71,033
4,276
914,560
21,057
1,771,360
1,055
11,554
(2,458,791)
(59,592)
(58,288)
(750)
Fair Value
Level 1
Level 2
Level 3
Total
$
48,578
— $
4,276
—
900,991
13,569
n/a
n/a
— 1,816,726
—
8,275
$
22,455
—
—
n/a
—
1,055
—
3,279
—
— (2,463,330)
(59,592)
—
(60,258)
—
(750)
—
71,033
4,276
914,560
n/a
1,816,726
1,055
11,554
— (2,463,330)
(59,592)
—
(60,258)
—
(750)
—
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 $10.5 million and $11.5 million at December 31, 2014 and 2013, 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:
(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
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
TOTAL
Amortized
Cost
$
$
1,411
180,673
17
489,765
198,875
10,205
880,946
Amortized
Cost
$
$
1,623
191,995
4,642
521,148
190,521
10,968
920,897
$
$
$
$
December 31, 2014
Unrealized
Gains
Losses
56
7,593
—
2,513
9,019
5,115
24,296
$
$
— $
(330)
—
(7,623)
(219)
(17)
(8,189) $
Fair Value
1,467
187,936
17
484,655
207,675
15,303
897,053
December 31, 2013
Unrealized
Gains
Losses
10
7,761
1
1,492
6,388
4,695
20,347
$
$
— $
(1,992)
(252)
(15,899)
(1,922)
(6,619)
(26,684) $
Fair Value
1,633
197,764
4,391
506,741
194,987
9,044
914,560
As of December 31, 2014, 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 $412.5 million and $361.9 million at December 31, 2014 and 2013, 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, 2014, 2013 and 2012, respectively.
55
(Dollar amounts in thousands)
Proceeds
Gross gains
Gross losses
2014
2013
2012
$
$
356
—
(1)
$
5,110
423
—
25,812
891
(5)
Additional gains of $2 thousand and losses of $4 thousand in 2014 and gains of $5 thousand and losses of $5 thousand in 2013
and gains of $2 thousand in 2012 resulted from redemption premiums on called securities.
Contractual maturities of debt securities at year-end 2014 were as follows. Securities not due at a single maturity or with no
maturity date, primarily mortgage-backed and collateralized mortgage obligations, 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 collateralized mortgage obligations
TOTAL
Available-for-Sale
Fair
Value
Amortized
Cost
$
$
7,607
37,409
86,911
78,564
210,491
670,455
880,946
$
$
7,700
38,891
90,908
86,946
224,445
672,608
897,053
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, 2014 and 2013.
December 31, 2014
(Dollar amounts in thousands)
Mortgage-backed securities, residential
Collateralized mortgage obligations
State and municipal obligations
Collateralized debt obligations
50,832
6,500
—
Total temporarily impaired securities
$
57,332
$
Less Than 12 Months
Unrealized
Losses
More Than 12 Months
Unrealized
Losses
Fair Value
$
— $
Fair Value
23,849
— $
Fair Value
23,849
(330) $
Total
264,940
10,547
(128)
(35)
—
(7,495)
(184)
(17)
200
(163) $ 299,536
200
(8,026) $ 356,868
315,772
17,047
$
$
Unrealized
Losses
$
$
(330)
(7,623)
(219)
(17)
(8,189)
(Dollar amounts in thousands)
Mortgage-backed securities, residential
Fair Value
52,524
$
Mortgage-backed securities, commercial
Collateralized mortgage obligations
State and municipal obligations
Collateralized debt obligations
Total temporarily impaired securities
—
406,291
43,899
—
$ 502,714
Less Than 12 Months
Total
December 31, 2013
More Than 12 Months
Unrealized
Losses
Fair Value
6,022
$
Unrealized
Losses
$
$
(1,645) $
—
(13,979)
(1,746)
—
(17,370) $
4,357
29,588
2,305
3,686
45,958
$
Fair Value
58,546
4,357
(347) $
(252)
(1,920)
(176)
(6,619)
3,686
(9,314) $ 548,672
435,879
46,204
Unrealized
Losses
$
$
(1,992)
(252)
(15,899)
(1,922)
(6,619)
(26,684)
The Corporation held 108 investment securities with an amortized cost greater than fair value as of December 31, 2014. The
unrealized losses on collateralized mortgage obligations, mortgage-backed securities and state and municipal obligations represent
negative adjustments to fair value relative to the rate of interest paid on the securities and not losses related to the creditworthiness
of the issuer. Gross unrealized losses on investment securities were $8.2 million as of December 31, 2014 and $26.7 million as of
56
December 31, 2013. 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 fair value 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.
In prior years, 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 $25.8 million at December 31, 2014 which has been reduced to $15.1 million by $1.8
million of interest payments received, $14.0 million of cumulative OTTI charges recorded through earnings to date and increased
by $5.1 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, 2014 from 28% to 93%. 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 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
57
could deteriorate before the CDO could no longer fully support repayment of the Corporation’s note class. In the current year the
fair value of these securities exceeds their carrying value so managment determined there was no OTTI.
In the third quarter of 2013, the Corporation received a $1.3 million payment on a CDO that had a book value of $0.2 million.
The payment in excess of book value is recognized as interest income. This CDO had the highest severity of recorded impairment
and while a payment by the issuer was expected, such payment was not projected until maturity in the OTTI evaluation at June
30, 2013. The future payments, if any, on this CDO cannot be predicted with enough accuracy that such future payments will be
recorded as interest income when received.
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 $218 thousand and a fair value of $200 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 45.44 to 92.06
while Moody’s Investor Service pricing ranges from 7.22 to 96.04, 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.
The table below presents a rollforward of the credit losses recognized in earnings for the years presented:
(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
Ending balance, December 31,
2014
2013
2012
$
14,079
$
14,983
$
15,180
11
(208)
(29)
(904)
—
—
14,050
$
—
14,079
$
—
14,983
$
5. LOANS:
Loans are summarized as follows:
(Dollar amounts in thousands)
Commercial
Residential
Consumer
Total gross loans
Less (plus): deferred (fees) costs
Allowance for loan losses
TOTAL
December 31,
2014
$ 1,044,522
469,172
266,656
1,780,350
1,078
(18,839)
$ 1,762,589
2013
$ 1,042,138
482,377
268,033
1,792,548
(1,120)
(20,068)
$ 1,771,360
Loans in the above summary include loans totaling $7.3 million and $18.5 million at December 31, 2014 and 2013 that are
subject to the FDIC loss share arrangement (“covered loans”) discussed in footnote 6.
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, 2014 and 2013, loans held for sale included
$3.0 million and $3.3 million, respectively, and are included in the totals above.
58
In the normal course of business, the Corporation’s subsidiary banks make loans to directors and executive officers and to their
associates. In 2014, the aggregate dollar amount of these loans to directors and executive officers who held office amounted to
$55.6 million at the beginning of the year. During 2014, advances of $13.7 million, repayments of $28.5 million and decreases of
$0.2 million resulting from changes in personnel were made with respect to related party loans for an aggregate dollar amount
outstanding of $40.6 million at December 31, 2014.
Loans serviced for others, which are not reported as assets, total $521.7 million and $539.0 million at year-end 2014 and 2013.
Custodial escrow balances maintained in connection with serviced loans were $2.59 million and $2.61 million at year-end 2014
and 2013.
Activity for capitalized mortgage servicing rights (included in other assets) was as follows:
(Dollar amounts in thousands)
Servicing rights:
Beginning of year
Additions
Amortized to expense
End of year
December 31,
2013
2012
2014
$
$
2,065
414
(616)
1,863
$
$
2,225
588
(748)
2,065
$
$
2,429
868
(1,072)
2,225
Third party valuations are conducted periodically for mortgage servicing rights. Based on these valuations, fair values were
approximately $2.9 million and $3.0 million at year end 2014 and 2013. There was no valuation allowance in 2014 or 2013.
Fair value for 2014 was determined using a discount rate of 10%, prepayment speeds ranging from 112% to 403%, depending on
the stratification of the specific right. Fair value at year end 2013 was determined using a discount rate of 10%, prepayment speeds
ranging from 110% to 550%, 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 August 16, 2013, the Bank completed a Purchase and Assumption Agreement with Bank of America, National Association.
Under the terms of the Agreement, First Financial Bank purchased certain assets and assumed certain liabilities of 7 branch
offices and 2 drive-up facilities of Bank of America in central and southern Illinois. The acquisition was beneficial in increasing
the presence of the bank in the Illinois market. First Financial received cash in the amount of $177.7 million. The acquisition
consisted of loans with a fair value of $1.9 million, fixed assets with a value of $5.9 million, a customer related core deposit
intangible asset of $2.2 million, deposits with a value of $189.3 million and other liabilities of $0.3 million. Based upon the
acquisition date fair values of the net assets acquired, goodwill of $1.9 million was recorded, all of which is expected to be tax
deductible.
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. This 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.
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.
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 agreed to reimburse the Bank for 80% of the losses. On losses exceeding
$29 million, the FDIC agreed to reimburse the Bank for 95% 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
$24.2 million for losses and carrying expenses. In 2014 the non-single family (NSF) loss period ended eliminating future loss
reimbursements only to the extent of recoveries received. There is no estimate for the loans subject to the loss-sharing agreement
59
identified in the allowance for loan loss evaluation as future potential losses at December 31, 2014. Loans covered by the loss
share agreement excluding AS 310-30 loans at December 31, 2014 and 2013 totaled $7.3 million and $18.5 million, respectively.
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 Freestar and Danville acquisitions resulted in loans accounted
for following this standard. The carrying amount of loans accounted for in accordance with FASB ASC 310-30 at December 31,
2014 and 2013, are shown in the following tables:
(Dollar amounts in thousands)
Beginning balance
Discount accretion
Disposals
ASC 310-30 Loans
(Dollar amounts in thousands)
Beginning balance
Discount accretion
Disposals
ASC 310-30 Loans
The rollforward of the FDIC Indemnification asset is as follows:
(Dollar amounts in thousands)
Beginning balance
Accretion
Net changes in losses and expenses added
Reimbursements from the FDIC
TOTAL
7. ALLOWANCE FOR LOAN LOSSES:
Commercial
Consumer
7,676
—
(2,873)
4,803
$
$
2,409
—
(838)
1,571
Commercial
Consumer
13,654
(24)
(5,954)
7,676
$
$
3,464
(12)
(1,043)
2,409
$
$
$
$
2014
Total
10,085
—
(3,711)
6,374
2013
Total
17,118
(36)
(6,997)
10,085
$
$
$
$
December 31,
2014
2013
$
$
$
1,055
—
(79)
(1,050)
(74) $
2,632
—
(1,225)
(352)
1,055
The following table presents the activity of the allowance for loan losses by portfolio segment for the years ended
December 31, 2014, 2013 and 2012.
Allowance for Loan Losses:
(Dollar amounts in thousands)
Beginning balance
Provision for loan losses*
Loans charged -off
Recoveries
Ending Balance
Commercial
12,450
$
1,053
(3,522)
934
10,915
$
December 31, 2014
Consumer
Residential
1,585
$
134
(1,143)
798
1,374
$
$
$
3,650
3,401
(4,785)
2,104
4,370
Unallocated
2,383
$
(203)
—
—
2,180
$
Total
20,068
4,385
(9,450)
3,836
18,839
$
$
* Provision before increase of $687 thousand in 2014 for decrease in FDIC indemnification asset
60
Allowance for Loan Losses:
(Dollar amounts in thousands)
Beginning balance
Provision for loan losses*
Loans charged -off
Recoveries
Ending Balance
Commercial
10,987
$
3,144
(4,830)
3,149
12,450
$
December 31, 2013
Consumer
Residential
5,426
$
629
(4,942)
472
1,585
$
$
$
3,879
1,985
(3,615)
1,401
3,650
Unallocated
1,666
$
717
—
—
2,383
$
* Provision before increase of $1.4 million in 2013 for increase in FDIC indemnification asset
Allowance for Loan Losses:
(Dollar amounts in thousands)
Beginning balance
Provision for loan losses*
Loans charged -off
Recoveries
Ending Balance
Commercial
12,119
$
2,400
(4,176)
644
10,987
$
December 31, 2012
Consumer
Residential
2,728
$
5,196
(2,598)
100
5,426
$
$
$
3,889
2,243
(3,640)
1,387
3,879
Unallocated
505
$
1,161
—
—
1,666
$
Total
21,958
6,475
(13,387)
5,022
20,068
Total
19,241
11,000
(10,414)
2,131
21,958
$
$
$
$
* Provision before decrease of $2.2 million in 2012 for increase in FDIC indemnification asset
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, 2014 and 2013:
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
December 31, 2014
Commercial
Residential
Consumer
Unallocated
Total
$
$
1,911
$
— $
— $
— $
8,733
271
1,365
9
4,370
—
2,180
—
1,911
16,648
280
10,915
$
1,374
$
4,370
$
2,180
$
18,839
(Dollar amounts in thousands)
Commercial
Residential
Consumer
Individually evaluated for impairment
$
14,573
$
33
$
—
Collectively evaluated for impairment
Acquired with deteriorated credit quality
BALANCE AT END OF YEAR
1,030,949
4,887
$ 1,050,409
468,872
1,631
267,880
—
$
470,536
$
267,880
Total
$
14,606
1,767,701
6,518
$ 1,788,825
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
December 31, 2013
Commercial
Residential
Consumer
Unallocated
Total
$
$
3,158
$
— $
— $
— $
8,421
871
1,408
177
3,650
—
2,383
—
12,450
$
1,585
$
3,650
$
2,383
$
3,158
15,862
1,048
20,068
(Dollar amounts in thousands)
Commercial
Residential
Consumer
Individually evaluated for impairment
$
18,825
$
37
$
—
Collectively evaluated for impairment
Acquired with deteriorated credit quality
BALANCE AT END OF YEAR
1,020,771
8,001
$ 1,047,597
481,439
2,397
269,352
—
$
483,873
$
269,352
Total
$
18,862
1,771,562
10,398
$ 1,800,822
61
The following table presents loans individually evaluated for impairment by class of loan.
December 31, 2014
Unpaid
Principal
Balance
Recorded
Investment
Allowance
for Loan
Losses
Allocated
Cash Basis
Average
Interest
Interest
Recorded
Income
Investment Recognized Recognized
Income
With no related allowance recorded:
Commercial
Commercial & Industrial
$
1,200
$
926
$
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
—
—
—
292
—
—
—
—
—
—
—
7,388
—
6,654
—
827
33
—
—
—
—
—
—
—
—
—
292
—
—
—
—
—
—
—
5,874
—
6,654
—
827
33
—
—
—
—
—
—
— $
—
—
—
—
—
—
—
—
—
—
—
1,056
—
753
—
102
—
—
—
—
—
—
—
2,589
$
—
58
—
58
5
—
—
—
—
—
—
6,177
—
6,698
—
1,112
35
—
—
—
—
—
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
16,394
$
14,606
$
1,911
$
16,732
$
62
December 31, 2013
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
Recorded
Investment
Allowance
for Loan
Losses
Allocated
Interest
Average
Income
Recorded
Investment Recognized Recognized
Cash Basis
Interest
Income
$
$
2,120
—
271
—
—
$
1,918
—
105
—
—
— $
—
—
—
—
$
1,555
—
26
—
—
— $
—
—
—
—
—
—
—
—
—
—
—
10,134
—
7,664
—
1,062
37
—
—
—
—
—
—
—
—
—
—
—
8,620
—
7,204
—
1,062
37
—
—
—
—
—
—
—
—
—
—
—
1,612
—
1,500
—
46
—
—
—
—
—
7
—
—
—
—
—
—
13,029
356
7,921
—
2,979
524
113
2,216
—
—
—
—
—
—
—
—
217
113
—
—
—
—
—
—
—
—
—
21,288
$
—
—
18,946
$
$
—
—
3,158
$
—
—
28,726
$
—
—
330
$
—
—
—
—
—
—
—
—
—
—
—
—
217
113
—
—
—
—
—
—
—
—
—
—
330
63
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
Interest
Average
Income
Recorded
Investment Recognized Recognized
Cash Basis
Interest
Income
$
$
1,013
—
1,679
—
—
— $
—
—
—
—
150
—
—
50
—
—
—
16,738
891
5,000
—
1,362
1,230
75
176
2,216
—
—
—
—
—
—
—
—
—
—
179
—
—
—
—
—
—
—
—
—
30,580
$
$
—
—
179
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
64
The following table presents the recorded investment in nonperforming loans by class of loans.
Loans Past
Due Over
90 Day Still
Accruing
December 31, 2014
Troubled Debt
Restructured
Accrual
Non-accrual
Non-accrual
$
— $
—
—
—
—
603
88
12
—
5
162
3
7
—
10
—
—
4,357
—
—
—
—
257
1
$
4,961
$
—
3,987
—
—
842
—
—
—
—
83
269
3,720
79
3,388
767
1,258
3,861
404
275
—
111
210
961
$
873
$
4,632
$
10,142
$
15,034
Loans Past
Due Over
90 Day Still
Accruing
December 31, 2013
Troubled Debt
Restructured
Accrual
Non-accrual
Non-accrual
(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
$
240
$
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
—
489
—
—
— $
—
11
—
—
6,578
$
—
5,676
—
—
1,100
3,752
40
147
—
1
187
3
—
—
—
—
370
17
531
—
—
61
—
256
—
6,861
99
4,918
134
1,412
4,047
195
390
433
130
186
974
$
2,207
$
4,150
$
13,102
$
19,779
65
The commercial and industrial loans and non farm, non residential loans included in restructured loans above are also on non-
accrual.
Covered loans included in loans past due over 90 days still on accrual are $37 thousand at December 31, 2014 and $580 thousand
at December 31, 2013. Covered loans included in non-accrual loans are $274 thousand at December 31, 2014 and $1.1 million at
December 31, 2013. No covered loans are deemed impaired at December 31, 2014. On December 31, 2013 there were $84 thousand
of covered loans deemed impaired that had no allowance for loan loss allocated to them. Non-performing loans include both
smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.
During the years ending December 31, 2014 and 2013, the terms of certain loans were modified as troubled debt restructurings
(TDRs). The following tables present the activity for TDR's.
(Dollar amounts in thousands)
Commercial
Residential
Consumer
January 1,
Added
Charged Off
Payments
December 31,
$
$
12,327
$
4,330
$
644
$
441
(1,069)
(2,744)
8,955
$
1,523
(93)
(571)
5,189
$
347
(109)
(268)
614
$
(Dollar amounts in thousands)
Commercial
Residential
Consumer
January 1,
Added
Charged Off
Payments
December 31,
$
$
16,474
$
4,107
$
704
$
1,561
—
(5,708)
12,327
$
841
(32)
(586)
4,330
$
270
(50)
(280)
644
$
2014
Total
17,301
2,311
(1,271)
(3,583)
14,758
2013
Total
21,285
2,672
(82)
(6,574)
17,301
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 2014 or 2013
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 ten years.
During the years ended December 31, 2014 and 2013 the Corporation modified 69 and 32 loans respectively. In 2014 there
were 40 of the 69 loans modified that were smaller balance consumer loans and in 2013 there were 30 of the 32 loans modified
that were consumer in nature. There were 2 loans that were charged off within 12 months of the modification for the 2013 that
were insignificant to the allowance for loans losses and had no impact on the provision for loan losses. There were no loans that
were charged off within 12 months of the modification for the 2014.
The Corporation has allocated $0.7 million and $2.6 million of specific reserves to customers whose loan terms have been modified
in troubled debt restructurings at both December 31, 2014 and 2013, respectively. The Corporation has not committed to lend
additional amounts as of December 31, 2014 and 2013 to customers with outstanding loans that are classified as troubled debt
restructurings.
66
The following table presents the aging of the recorded investment in loans by past due category and class of loans.
December 31, 2014
30-59 Days
60-89 Days
than 90 days
Total
(Dollar amounts in thousands)
Past Due
Past Due
Past Due
Past Due
Current
Total
Commercial
Commercial & Industrial
$
574
$
416
$
3,046
$
4,036
$
451,549
$
455,585
Greater
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, 2013
(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:
—
1,528
246
255
6,011
141
270
—
112
3,026
114
—
68
18
—
963
33
83
—
—
557
7
—
202
502
—
—
1,798
766
255
95,452
232,440
149,099
115,014
95,452
234,238
149,865
115,269
1,522
8,496
308,068
316,564
310
217
—
5
180
3
484
570
—
117
3,763
124
40,043
31,487
72,310
8,961
40,527
32,057
72,310
9,078
242,406
246,169
21,587
$ 1,768,416
21,711
$ 1,788,825
$
12,277
$
2,145
$
5,987
$
20,409
30-59 Days
Past Due
60-89 Days
Past Due
Greater
than 90 days
Past Due
Total
Past Due
Current
Total
$
$
1,076
—
362
31
50
5,594
307
392
103
88
3,579
123
11,705
$
$
266
—
—
32
217
1,513
7
170
19
—
612
22
2,858
$
$
$
7,900
—
2,042
—
188
1,701
40
471
400
1
$
$
9,242
—
2,404
63
455
8,808
354
1,033
522
89
459,076
92,602
239,183
136,388
108,184
324,141
41,350
32,269
66,138
9,169
468,318
92,602
241,587
136,451
108,639
332,949
41,704
33,302
66,660
9,258
227
7
12,977
$
4,418
152
27,540
243,146
21,636
$ 1,773,282
247,564
21,788
$ 1,800,822
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 $100 thousand.
67
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 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 $100 thousand or are included in groups of homogeneous loans. As
of December 31, 2014 and 2013, and based on the most recent analysis performed, the risk category of loans by class of loans is
as follows:
Special
Mention
Substandard
Doubtful
Not Rated
Total
2,900
—
36
177
33
1,035
6
63
—
—
—
21
4,271
$
$
4,717
13
—
67
1,275
196,008
26,116
23,053
3
7,228
454,160
93,839
233,760
148,102
114,661
315,559
40,463
31,962
72,133
9,055
233,302
18,175
509,957
245,063
21,593
$ 1,780,350
$
December 31, 2014
(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
393,449
85,772
186,346
138,713
101,942
104,854
12,592
8,112
69,080
1,799
$
29,081
7,618
21,765
7,399
4,356
5,929
375
173
1,801
—
$
24,013
436
25,613
1,746
7,055
7,733
1,374
561
1,249
28
11,135
3,169
$ 1,116,963
$
402
141
79,040
$
224
87
70,119
$
68
Special
Mention
Substandard
Doubtful
Not Rated
Total
December 31, 2013
(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
406,650
86,633
207,115
128,137
93,515
114,074
12,883
8,858
63,073
3,643
$
18,968
3,631
13,408
6,482
2,297
3,834
274
60
1,908
—
$
30,986
347
19,719
105
10,038
8,498
1,071
550
1,482
31
4,069
—
809
—
44
995
113
67
48
—
11,447
3,507
$ 1,139,535
$
219
46
51,127
$
510
79
73,416
$
9
22
6,176
$
$
$
$
$
6,426
445
—
71
2,243
204,416
27,295
23,654
—
5,550
467,099
91,056
241,051
134,795
108,137
331,817
41,636
33,189
66,511
9,224
234,210
17,984
522,294
246,395
21,638
$ 1,792,548
December 31,
2014
2013
11,353
55,074
45,602
112,029
(60,227)
51,802
$
$
11,423
54,353
42,546
108,322
(56,873)
51,449
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
Aggregate depreciation expense was $4.98 million, $4.29 million and $3.74 million for 2014, 2013 and 2012, respectively.
The Company leases certain branch properties and equipment under operating leases. Rent expense was $0.9 million, $1.0 million,
and $1.1 million for 2014, 2013, and 2012. Rent commitments, before considering renewal options that generally are present,
were as follows:
2015
2016
2017
2018
2019
Thereafter
$
$
901
720
391
304
204
1,188
3,708
9. GOODWILL AND INTANGIBLE ASSETS:
The Corporation completed its annual impairment testing of goodwill during the fourth quarter of 2014 and 2013. Management
does not believe any amount of goodwill is impaired.
In July of 2013 First Financial Bank acquired branch locations from Bank of America. The intangible assets purchased included
core deposit intangible of $2.2 million. Goodwill of $1.9 million was recorded with the purchase.
69
Intangible assets subject to amortization at December 31, 2014 and 2013 are as follows:
(Dollar amounts in thousands)
Customer list intangible
Core deposit intangible
2014
2013
Gross
Amount
$
$
4,669
10,836
15,505
Accumulated
Amortization
4,227
$
7,377
11,604
$
$
$
Gross
Amount
4,669
10,836
15,505
Accumulated
Amortization
4,120
$
6,450
10,570
$
Aggregate amortization expense was $1.03 million, $1.20 million and $1.36 million for 2014, 2013 and 2012, respectively.
Estimated amortization expense for the next five years is as follows:
2015
2016
2017
2018
2019
10. DEPOSITS:
Scheduled maturities of time deposits for the next five years are as follows:
2015
2016
2017
2018
2019
In thousands
820
$
679
550
505
421
$
(dollar amounts in thousands)
276,729
81,933
62,879
33,960
16,505
11. SHORT-TERM BORROWINGS:
A summary of the carrying value of the Corporation's short-term borrowings at December 31, 2014 and 2013 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
$
$
$
2014
2013
$
$
$
21,192
26,823
48,015
2014
45,697
96,452
0.22%
0.20%
30,679
28,913
59,592
2013
37,990
83,452
0.20%
0.12%
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.
70
12. OTHER BORROWINGS:
Other borrowings at December 31, 2014 and 2013 are summarized as follows:
(Dollar amounts in thousands)
FHLB advances
2014
2013
$
12,886
$
58,288
The aggregate minimum annual retirements of other borrowings are as follows:
2015
2016
2017
2018
2019
Thereafter
$
$
2,297
10,223
366
—
—
—
12,886
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 $12.9 million, including $12.4 million at December 31, 2014 contractually
due and a purchase premium of $519 thousand, and $58.3 million, including $57.5 million at December 31, 2013 contractually
due and a purchase premium of $816 thousand, accrue interest, payable monthly, at annual rates, primarily fixed, varying from
3.1% to 6.6% in 2014 and 3.1% to 6.6% in 2013. 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 $83.6 million at December 31, 2014, and
$15.9 million at December 31, 2013, 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 $210.6 million at year end 2014. 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.
13. INCOME TAXES:
Income tax expense is summarized as follows:
(Dollar amounts in thousands)
Federal:
Currently payable
Deferred
State:
Currently payable
Deferred
TOTAL
2014
2013
2012
$
$
9,388
2,120
11,508
1,928
753
2,681
14,189
$
$
10,177
740
10,917
3,629
(779)
2,850
13,767
$
$
12,074
(455)
11,619
1,887
312
2,199
13,818
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:
71
(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
2014
2013
2012
$
16,786
$
15,856
$
16,320
(4,016)
(284)
1,743
(148)
108
14,189
$
(3,760)
(105)
1,852
(148)
72
13,767
$
(3,864)
(258)
1,444
(148)
324
13,818
$
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31,
2014 and 2013, are as follows:
(Dollar amounts in thousands)
Deferred tax assets:
Other than temporary impairment
Net unrealized losses on retirement plans
Net unrealized losses on securities available for sale
Loan loss provisions
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)
2014
2013
$
$
5,417
16,068
—
7,232
6,637
894
2,014
1,377
2,185
41,824
(5,831)
(2,423)
(561)
(2,182)
(1,652)
(2,173)
(14,822)
27,002
$
$
5,820
6,815
2,701
7,845
7,118
857
2,045
929
2,771
36,901
—
(2,528)
(752)
(1,818)
(1,086)
(1,563)
(7,747)
29,154
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
2014
2013
2012
$
$
676
72
—
(159)
589
$
$
777
65
—
(166)
676
$
$
862
86
—
(171)
777
Of this total, $589 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, 2014, 2013 and
2012 was an expense decrease of $21, $31 and $2, respectively. The amount accrued for interest and penalties at December 31,
2014, 2013 and 2012 was $44, $65 and $96, respectively.
72
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 2011.
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
Commercial letters of credit
2014
2013
$
54,388
$
58,447
249,354
50,850
354,592
7,684
$
$
265,910
51,113
375,470
7,642
$
$
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. Fixed rate commitments had a range of interest rates from 3.25% to 5.25% in 2014. In 2013 this range
of rates was from 3.25% to 6.50%. 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 $13.1 and $14.1 million at December 31, 2014 and 2013. 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 $1.1
million and $1.2 million at December 31, 2014 and 2013.
15. RETIREMENT PLANS:
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, 2013.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 $3.24 million, $2.11 million and $3.64 million in 2014, 2013
and 2012. The Corporation contributed $1.25 million, $1.22 million and $1.44 million to the ESOP in 2014, 2013 and 2012. There
73
were contributions of $716 thousand and $629 thousand to the ESOP for employees no longer participating in the defined benefit
plan in 2014 and 2013 respectively.
The Corporation uses a measurement date of December 31.
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
Loss due to settlement
Expected return on plan assets
Net amortization and deferral
Net periodic pension cost
Net loss (gain) during the period
Adjustment to loss due to settlement
Settlement
Curtailment gain
Amortization of prior service cost
Amortization of unrecognized gain (loss)
Total recognized in other comprehensive (income) loss
2014
2013
2012
$
2,040
$
2,238
$
3,756
2,676
(3,794)
750
5,428
23,111
(2,676)
(7,148)
—
9
(759)
12,537
3,383
—
(3,309)
2,075
4,387
(14,697)
—
—
—
16
(2,091)
(16,772)
(12,385) $
4,872
3,667
—
(3,258)
2,434
7,715
3,842
—
—
(5,700)
(166)
(2,270)
(4,294)
3,421
Total recognized net periodic pension cost and other comprehensive income
$
17,965
$
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 $1 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
Settlement
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
Settlement
Benefits paid
Fair value of plan assets at December 31
Funded status at December 31 (plan assets less benefit obligation)
$
74
2014
2013
$
81,469
$
86,807
2,040
3,756
22,274
(7,148)
(4,256)
98,135
67,233
2,957
3,779
(7,148)
(4,256)
62,565
(35,570) $
2,238
3,383
(7,098)
—
(3,861)
81,469
57,491
10,909
2,694
—
(3,861)
67,233
(14,236)
Amounts recognized in accumulated other comprehensive income at December 31, 2014 and 2013 consist of:
(Dollar amounts in thousands)
Net loss (gain)
Prior service cost (credit)
2014
$
$
23,111
9
23,120
$
$
2013
(14,697)
16
(14,681)
The accumulated benefit obligation for the defined benefit pension plan was $91.5 million and $75.7 million at year-end
2014 and 2013.
Principal assumptions used to determine pension benefit obligation at year end:
Discount rate
Rate of increase in compensation levels
Principal assumptions used to determine net periodic pension cost:
Discount rate
Rate of increase in compensation levels
Expected long-term rate of return on plan assets
2014
2013
3.95%
3.00
4.95%
3.50
2014
2013
4.95%
3.50
6.00
4.05%
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 2014 and 2013 by asset category
are as follows:
ASSET CATEGORY
Equity securities
Debt securities
Other
TOTAL
Pension Plan
Target
Allocation
2014
ESOP
Target
Allocation
2014
Pension
Pecentage of Plan
Assets at December 31,
ESOP
Pecentage of Plan
Assets at December 31,
2014
2013
2014
2013
40-65%
35-60%
0-10%
95-99%
0-0%
0-5%
59%
38%
3%
100%
64%
34%
2%
100%
99%
—%
1%
100%
99%
—%
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).
75
The fair value of the plan assets at December 31, 2014 and 2013, by asset category, is as follows:
(Dollar amounts in thousands)
Plan assets
Equity securities
Debt securities
Investment Funds
Total plan assets
(Dollar amounts in thousands)
Plan assets
Equity securities
Debt securities
Investment Funds
Total plan assets
Fair Value Measurments at
December 31, 2014 Using:
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Observable
Inputs
(Level 3)
Total
44,732
15,245
2,588
62,565
$
$
44,732
—
2,588
47,320
$
$
— $
15,245
—
15,245
$
—
—
—
—
Fair Value Measurments at
December 31, 2013 Using:
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Observable
Inputs
(Level 3)
Total
53,112
12,015
2,106
67,233
$
$
53,112
—
2,106
55,218
$
$
— $
12,015
—
12,015
$
—
—
—
—
$
$
$
$
The investment objective for the retirement program is to maximize total return without exposure to undue risk. Asset allocation
favors equities. This target includes the Corporation's ESOP, which is fully 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 in the defined benefit plan include First Financial Corporation common stock in the amount of $22.5 million (36
percent of total plan assets) and $31.4 million (47 percent of total plan assets) at December 31, 2014 and 2013, respectively. In
addition the ESOP for non plan participants holds an estimated $1.4 million and $671 thousand of First Financial Corporation
stock at December 31, 2014 and December 31, 2013 respectively. Other equity securities are predominantly stocks in large cap
U.S. companies.
Contributions — The Corporation expects to contribute $1.8 million to its pension plan and $1.1 million to its ESOP in 2015.
Estimated Future Payments — The following benefit payments, which reflect expected future service, are expected:
2015
2016
2017
2018
2019
2020-2024
PENSION BENEFITS
(Dollar amounts in thousands)
76
$
4,730
4,891
5,022
5,143
5,403
29,658
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
$268 thousand in 2014 and $341 thousand in 2013. 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
2014
2013
2012
$
$
932
—
(7)
925
$
$
(333) $
—
(68)
(401) $
442
—
(79)
363
The Corporation has $3.6 million and $2.4 million recognized in the balance sheet as a liability at December 31, 2014 and 2013.
Amounts in accumulated other comprehensive income consist of $1.2 million net loss at December 31, 2014 and $316 thousand
net loss at December 31, 2013. 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 $88 thousand.
Estimated Future Payments — The following benefit payments, which reflect expected future service, are expected:
(Dollar amounts on thousands)
2015
2016
2017
2018
2019
2020-2024
$
—
293
289
284
280
1,316
Post-retirement medical benefits —
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, 2014 and 2013 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
Funded status at December 31
December 31,
2014
2013
$
$
$
4,088
53
175
39
456
(252)
4,559
4,559
$
$
$
4,395
68
173
37
(338)
(247)
4,088
4,088
Amounts recognized in accumulated other comprehensive income consist of a net loss of $521 thousand at December 31, 2014
and $63 thousand net loss at December 31, 2013. The post-retirement benefits paid in 2014 and 2013 of $252 thousand and $247
thousand, respectively, were fully funded by company and participant contributions.
There is no 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.
77
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:
(Dollar amounts in thousands)
Service cost
Interest cost
Amortization of transition obligation
Recognized actuarial loss
Net periodic benefit cost
Net loss (gain) during the period
Amortization of prior service cost
December 31,
2014
2013
3.95%
7.50
5.00
2015
4.95%
7.50
5.00
2016
Years Ended December 31,
2014
2013
2012
$
53
$
68
$
175
—
—
228
456
—
456
684
$
173
60
—
301
(338)
(59)
(397)
(96) $
60
173
60
—
293
311
(60)
251
544
Total recognized in other comprehensive income (loss)
Total recognized net periodic benefit cost and other comprehensive income
$
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
1% Point
Decrease
$
$
2
39
1
35
Contributions — The Corporation expects to contribute $247 thousand to its other post-retirement benefit plan in 2015.
Estimated Future Payments — The following benefit payments, which reflect expected future service, are expected:
(Dollar amounts in thousands)
2015
2016
2017
2018
2019
2020-2024
$
247
262
266
266
267
1,378
The Corporation's post retirement benefit plans described above were all impacted by the introduction of new mortality tables
that were introduced in 2014. Each plan experienced an increase in benefit obligation during 2014 of which approximately $8.5
million is attributable to the adoption of these new tables.
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
78
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 2014 and 2013, 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 dates. 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 91,881 shares of restricted common stock of the Company were granted under the 2011
Stock Incentive Plan. A total of 608,119 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. Compensation related to the plan was $1.02 million, $733 thousand and $487 thousand in 2014, 2013 and 2012,
respectively.
(shares in thousands)
Nonvested balance at January 1,
Granted during the year
Vested during the year
Forfeited during the year
Nonvested balance at December 31,
2014
Weighted
Average
Grant Date
Fair Value
33.49
32.17
33.52
—
31.63
Number
Outstanding
30,496
22,019
(30,431)
—
22,084
2013
Weighted
Average
Grant Date
Fair Value
36.88
30.55
34.21
36.88
33.49
Number
Outstanding
26,431
30,219
(21,439)
(4,715)
30,496
As of December 31, 2014 and 2013, there was $698 thousand and $1.2 million, respectively of total unrecognized
compensation cost related to non-vested shares granted under the Plan. The cost is expected to be recognized over a weighted-
average period of 1.5 years. The total fair value of the shares vested during the years ended December 31, 2014 and 2013 was
$1.1 million and $784 thousand, respectively.
17. OTHER COMPREHENSIVE INCOME (LOSS):
The following table summarizes the changes, net of tax within each classification of accumulated other comprehensive income
for the years ended December 31, 2014 and 2013.
(Dollar amounts in thousands)
Beginning balance, January 1
Change in other comprehensive income before reclassification
Amounts reclassified from accumulated other comprehensive
income
Net current period other comprehensive income (loss)
Ending balance, December 31
Unrealized
gains and
Losses on
available-
for-sale
Securities
2014
Retirement
plans
Total
$
$
(3,635) $
13,911
2
13,913
10,278
$
(10,334) $
(14,934)
461
(14,473)
(24,807) $
(13,969)
(1,023)
463
(560)
(14,529)
79
(Dollar amounts in thousands)
Beginning balance, January 1
Change in other comprehensive income before reclassification
Amounts reclassified from accumulated other comprehensive
income
Net current period other comprehensive income (loss)
Ending balance, December 31
(Dollar amounts in thousands)
Unrealized gains (losses) on securities available-for-sale
without other than temporary impairment
Unrealized gains (losses) on securities available-for-sale
with other than temporary impairment
Total unrealized gain (loss) on securities available-for-sale
Unrealized loss on retirement plans
TOTAL
(Dollar amounts in thousands)
Unrealized gains (losses) on securities available-for-sale
without other than temporary impairment
Unrealized gains (losses) on securities available-for-sale
with other than temporary impairment
Total unrealized gain (loss) on securities available-for-sale
Unrealized loss on retirement plans
TOTAL
Unrealized
gains and
Losses on
available-
for-sale
Securities
2013
Retirement
plans
Total
$
$
$
13,431
(16,812)
(254)
(17,066)
(3,635) $
(20,903) $
—
10,569
10,569
(10,334) $
(7,472)
(16,812)
10,315
(6,497)
(13,969)
Balance
at
1/1/2014
Current
Period
Change
Balance
at
12/31/2014
$
(2,499) $
9,663
$
7,164
(1,136)
(3,635) $
(10,334)
(13,969) $
4,250
$
13,913
(14,473)
(560) $
3,114
10,278
(24,807)
(14,529)
$
$
Balance
at
1/1/2013
Current
Period
Change
Balance
at
12/31/2013
$
17,044
$
(19,543) $
(2,499)
$
(3,613)
13,431
(20,903)
(7,472) $
2,477
(17,066) $
10,569
(6,497) $
(1,136)
(3,635)
(10,334)
(13,969)
$
$
Details about accumulated
other comprehensive
income components
Unrealized gains and losses
on available-for-sale
securities
Amortization of
retirement plan items
Total reclassifications for the period
$
$
$
$
$
Balance as of December 31, 2014
Amount reclassified from
accumulated other
comprehensive income
(in thousands)
(3)
1
(2)
(756)
295
(461)
(463)
(a)
Affected line item in
the statement where
net income is presented
Net securities gains (losses)
Income tax expense
Net of tax
Income tax expense
Net of tax
Net of tax
(a) Included in the computation of net periodic benefit cost which is included in salaries and benefits. (see Footnote 15 for
additional details).
80
Details about accumulated
other comprehensive
income components
Unrealized gains and losses
on available-for-sale
securities
Amortization of
retirement plan items
Total reclassifications for the period
$
$
$
$
$
Balance as of December 31, 2013
Amount reclassified from
accumulated other
comprehensive income
(in thousands)
Affected line item in
the statement where
net income is presented
423
(169)
254
Net securities gains (losses)
Income tax expense
Net of tax
(a)
(17,615)
7,046
(10,569)
(10,315)
Income tax expense
Net of tax
Net of tax
(a) Included in the computation of net periodic benefit cost which is included in salaries and benefits. (see Footnote 15 for
additional details).
Details about accumulated
other comprehensive
income components
Unrealized gains and losses
on available-for-sale
securities
Amortization of
retirement plan items
Total reclassifications for the period
$
$
$
$
$
Balance at December 31, 2012
Amount reclassified from
accumulated other
comprehensive income
(in thousands)
886
(354)
532
(3,885)
1,554
(2,331)
(1,799)
(a)
Affected line item in
the statement where
net income is presented
Net securities gains (losses)
Income tax expense
Net of tax
Income tax expense
Net of tax
Net of tax
(a) Included in the computation of net periodic benefit cost which is included in salaries and benefits. (see Footnote 15 for
additional details).
18. REGULATORY MATTERS:
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, 2014, approximately $51.0 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.
81
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, 2014 and 2013, that the Corporation meets all capital adequacy requirements to which it is subject.
As of December 31, 2014, 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.
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 2014 and 2013.
(Dollar amounts in thousands)
Total risk-based capital
Corporation – 2014
Corporation – 2013
First Financial Bank – 2014
First Financial Bank – 2013
Tier I risk-based capital
Corporation – 2014
Corporation – 2013
First Financial Bank – 2014
First Financial Bank – 2013
Tier I leverage capital
Corporation – 2014
Corporation – 2013
First Financial Bank – 2014
First Financial Bank – 2013
Actual
Amount
Ratio
For Capital
Adequacy Purposes
Ratio
Amount
To Be Well Capitalized
Under Prompt Corrective
Action Provisions
Amount
Ratio
$ 386,622
$ 375,601
358,631
349,968
$ 367,783
$ 355,533
342,452
332,644
$ 367,783
$ 355,533
342,452
332,644
17.86% $ 173,211
17.13% $ 175,372
167,472
17.13%
169,745
16.49%
16.99% $
16.22% $
16.36%
15.68%
86,605
87,686
83,736
84,872
12.33% $ 119,356
11.69% $ 121,622
115,770
11.83%
116,711
11.40%
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
209,340
212,181
N/A
N/A
125,604
127,309
N/A
N/A
144,712
145,889
N/A
N/A
10.00%
10.00%
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, 2014 and 2013, and the related condensed statements of
income and comprehensive income and cash flows for each of the three years in the period ended December 31, 2014, are as
follows:
(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
Dividends payable
Other liabilities
TOTAL LIABILITIES
Shareholders' Equity
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
82
December 31,
2014
2013
$
$
$
$
3,639
396,486
5,791
103
406,019
6,341
5,464
11,805
394,214
406,019
$
$
$
$
4,654
388,937
4,688
258
398,537
6,405
5,937
12,342
386,195
398,537
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE 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
Comprehensive 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 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:
Interest
Income taxes
83
Years Ended December 31,
2014
2013
2012
$
26,530
$
7,130
$
16,347
724
—
(2,747)
24,507
1,156
25,663
8,109
33,772
33,212
$
$
1,144
—
(3,113)
5,161
988
6,149
25,385
31,534
25,037
$
$
1,149
(225)
(3,383)
13,888
1,267
15,155
17,657
32,812
35,834
$
$
Years Ended December 31,
2014
2013
2012
$
33,772
$
31,534
$
32,812
196
(8,109)
1,253
—
—
1,072
(473)
155
173
(25,385)
1,218
172
(17,657)
1,439
—
(420)
611
(512)
485
11
(435)
488
610
188
27,866
7,704
17,628
—
—
(1,299)
(1,299)
—
(14,633)
(12,949)
(27,582)
(1,015)
4,654
740
—
(5)
735
—
—
(12,766)
(12,766)
(4,327)
8,981
3,639
$
4,654
$
1,700
(250)
(24)
1,426
(6,196)
—
(12,425)
(18,621)
433
8,548
8,981
— $
$
9,354
— $
$
13,822
225
12,638
$
$
$
20. SELECTED QUARTERLY DATA (UNAUDITED):
(Dollar amounts in thousands)
Interest
Income
Interest
Expense
Net Interest
Income
2014
March 31 $
$
June 30
$
September 30
$
December 31
28,824
28,115
28,376
28,043
(Dollar amounts in thousands)
Interest
Income
March 31 $
$
June 30
$
September 30
$
December 31
28,942
28,305
29,719
29,255
$
$
$
$
$
$
$
$
1,682
1,509
1,231
1,104
Interest
Expense
2,769
2,567
1,921
1,704
$
$
$
$
$
$
$
$
Provision
For Loan
Losses
Net Income
7,831
1,960
$
8,488
(356) $
8,272
$
1,506
9,181
$
1,962
Net Income
Per Share
$
$
$
$
0.59
0.63
0.62
0.71
27,142
26,606
27,145
26,939
$
$
$
$
2013
Net
Interest
Income
Provision
For Loan
Losses
26,173
25,738
27,798
27,551
$
$
$
$
3,021
2,960
495
1,384
Net Income
7,693
$
6,446
$
8,472
$
8,923
$
Net Income
Per Share
$
$
$
$
0.58
0.48
0.64
0.67
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 2014 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 Not applicable.
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 2014 fiscal year, which Proxy Statement
84
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 2014 fiscal year, which Proxy Statement
will contain such information. The information required by Item 11 is incorporated herein by reference to such Proxy
Statement.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED SHAREHOLDER MATTERS
In accordance with the provisions of General Instruction G to Form 10-K, certain information required for disclosure under
Item 12 (relating to Item 403 of Regulation S-K) 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 2014 fiscal year, which Proxy Statement will contain such information. Such information required by
Item 12 is incorporated herein by reference to such Proxy Statement.
Following is the information required by Item 12 relating to Item 201 (d) of Regulation S-K.
Equity Compensation Plan Information
The following table provides certain information as of December 31, 2014 with respect to the Corporation’s equity
compensation plans under which equity securities of the Company are authorized for issuance.
Plan Category
Equity compensation plans
approved by security holders (2)
Equity compensation plans not
approved by security holders (3)
Total
Number of Securities to be
issued upon exercise of
outstanding options, warrants
and rights
Weighted average exercise price
of outstanding options, warrants
and rights
Number of securities
remaining (1)
—
—
—
—
—
—
608,119
—
608,119
(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 2014 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 2014 fiscal year, which Proxy Statement
will contain such information. The information required by Item 14 is incorporated herein by reference to such Proxy
Statement.
PART IV
85
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, 2014 and 2013
Consolidated Statements of Income and Comprehensive Income—Years ended December 31, 2014, 2013, and 2012
Consolidated Statements of Changes in Shareholders’ Equity—Years ended December 31, 2014, 2013, and 2012
Consolidated Statements of Cash Flows—Years ended December 31, 2014, 2013, and 2012
Notes to Consolidated Financial Statements
(a) (2) Schedules to the Consolidated Financial Statements required by Article 9 of Regulation S-X are not required,
inapplicable, or the required information has been disclosed elsewhere.
(a) (3) Listing of Exhibits:
Exhibit
Number
3.1
3.2
10.1*
10.2*
10.3*
10.4*
10.5*
10.6*
10.7*
10.9*
10.10*
10.11*
10.12*
21
31.1
31.2
32.1
32.2
101.
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.
Employment Agreement for Norman L. Lowery, dated February 4, 2014 effective January 1, 2014
incorporated by reference to Exhibit 10.1 of the Corporation’s Form 8-K filed February 10, 2014.
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.
2015 Schedule of Director Compensation
2015 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.
Form of Restricted Stock Award Agreement, incorporated by reference to exhibit 10.12 to the
Corporations 10-Q filed May 10, 2012.
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, 2014, 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 Changes in 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).
86
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 5, 2015
87
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.
DATE
March 5, 2015
March 5, 2015
March 5, 2015
March 5, 2015
March 5, 2015
March 5, 2015
March 5, 2015
March 5, 2015
March 5, 2015
March 5, 2015
March 5, 2015
NAME
/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, President, 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
88
Exhibit
Number
EXHIBIT INDEX
Description
10.3
2015 Schedule of Director Compensation
10.4
2015 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, 2014, 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 Changes in 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.
89
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 2015 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 $500. 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 November 17, 2014, the Compensation Committee of First Financial Corporation (the “Corporation”) set the 2015 annual base salaries of
the named executive officers. These amounts are set forth in the table below.
Name and Principal Position
2015 Base Salary
Norman L. Lowery
Vice Chairman, CEO and President of the
Corporation; President and CEO of First
Financial Bank, NA
Steven H. Holliday
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
Karen L. Milienu
Director of the Branch Banking; Vice President
of First Financial Bank, NA
$642,300
$210,000
$210,000
$206,000
$156,000
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.
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 5, 2015
By /s/ Norman L. Lowery
Norman L. Lowery,
Vice Chairman, President and CEO
(Principal Executive Officer)
Exhibit 31.2 — Certification pursuant to Rule 13a-14(a) for Annual Report of Form 10-K
by Principal Executive 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 5, 2015
By /s/ Rodger A. McHargue
Rodger A. McHargue,
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
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, 2014 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) the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(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 5, 2015
/s/ Norman L. Lowery
Norman L. Lowery
Vice Chairman, President and CEO
(Principal Executive Officer)
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, 2014 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) the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(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 5, 2015
/s/ Rodger A. McHargue
Rodger A. McHargue
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
First Financial Locations
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 Dr.
812-238-6000
Maple Avenue*
4065 Maple Ave.
812-238-6000
Meadows*
350 South 25th St.
812-238-6000
Morris Plan Company
of Terre Haute
817 Wabash Ave.
812-238-6063
Plaza North*
Ft. Harrison & Lafayette
812-238-6000
Seelyville*
9520 East U.S. 40
812-238-6000
Southland*
3005 South Seventh St.
812-238-6000
Springhill*
4500 U.S. 41 South
812-238-6000
Sycamore Terrace*
2425 South State Rd. 46
812-238-6000
West Terre Haute*
309 National Ave.
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 Ave.
812-448-8110
Clay City*
502-504 Main St.
812-939-2145
DAVIESS COUNTY
Washington*
300 East Main St.
812-257-8860
GIBSON COUNTY
Princeton*
1501 West Broadway
812-385-0235
GREENE COUNTY
Worthington*
9 North Commercial St.
812-875-3021
KNOX COUNTY
Sandborn
102 North Anderson St.
812-694-8463
Vincennes*
2707 North Sixth St.
812-882-4800
Vincennes*
619 Main St.
812-886-9690
PARKE COUNTY
Rockville*
1311 North Lincoln Rd.
765-569-3171
Rockville Downtown Drive-Up*
120 East Ohio St.
765-569-3442
Marshall
10 South Main St.
765-597-2261
Montezuma*
232 East Crawford St.
765-245-2706
Rosedale
62 East Central St.
765-548-2266
PUTNAM COUNTY
Greencastle*
101 South Warren Dr.
765-653-4444
SULLIVAN COUNTY
Sullivan*
15 South Main St.
812-268-3331
Dugger*
879 South 3rd St.
812-648-2251
Farmersburg*
819 West Main St.
812-696-2106
Hymera*
102 South Main St.
812-383-4933
VANDERBURGH
COUNTY
Evansville*
12600 Highway 41 North
812-868-8850
VERMILLION COUNTY
Newport*
100 West Market St.
765-492-3321
Cayuga
101 S. Division St.
765-492-3391
Clinton*
221 South Main St.
765-832-3504
Clinton Crown Hill*
1775 East State Rd. 163
765-832-5546
Illinois
CHAMPAIGN COUNTY
Mahomet*
Eastwood Center IGA
217-586-5322
Champaign*
1205 South Neil St.
217-352-6700
Champaign*
1611 South Prospect Ave.
217-351-6620
Urbana*
2510 South Philo Rd.
217-344-1300
Urbana*
410 North Broadway
217-351-2701
CLARK COUNTY
Marshall*
215 North Michigan
217-826-6311
COLES COUNTY
Charleston*
820 West Lincoln Ave.
217-345-4824
Charleston East*
605 Lincoln Ave.
217-345-2101
Mattoon*
101 Broadway Ave. East
217-258-8940
CRAWFORD COUNTY
Robinson*
108 West Main St.
618-544-8666
Robinson Motor Bank*
602 West Walnut St.
618-544-3355
FRANKLIN COUNTY
West Frankfort*
212 West Oak St.
618-932-3131
Benton*
400 Public Square
618-439-4341
JASPER COUNTY
Newton*
601 West Jourdan St.
618-783-2022
JEFFERSON COUNTY
Mount Vernon*
900 Main St.
618-242-4000
Mount Vernon Drive-Up*
3303 Broadway
618-242-1779
LAWRENCE COUNTY
Lawrenceville*
1601 State St.
618-943-3323
LIVINGSTON COUNTY
Pontiac*
223 North Mill St.
815-842-8131
Pontiac*
Route 116 & Route 66
815-842-8164
MARION COUNTY
Salem*
401 West Main St.
618-548-2265
Salem Drive-Up*
1365 West Main St.
618-548-5293
MCLEAN COUNTY
Bloomington*
#1 Brickyard Dr. Ste. 301
309-661-9993
Bloomington*
Towanda Plaza
1218 Towanda Ave.
888-876-2638
Gridley
325 Center St.
309-747-2100
MONTGOMERY
COUNTY
Hillsboro*
420 South Main St.
217-532-3926
RICHLAND COUNTY
Olney*
240 East Chestnut St.
618-395-8676
Olney*
1110 South West St.
618-395-2112
VERMILION COUNTY
Danville
One Towne Center
217-442-0362
Danville Motor Bank*
101 West Main St.
217-443-3519
Danville*
2750 North Vermilion St.
217-431-8750
Danville*
901 North Gilbert St.
217-431-3486
Danville*
421 South Gilbert St.
217-477-4510
Ridge Farm*
11 South State St.
217-247-2126
Westville*
101 East Main St.
217-267-2147
WAYNE COUNTY
Fairfield*
303 West Delaware
618-842-2145
INSURANCE
Forrest Sherer
Insurance of
Terre Haute
24 North Ohio St.
812-232-0441
1219 Ohio St.
812-232-0441
Forrest Sherer
Insurance of
Evansville
7525 East Virginia St.
812-232-0441
* FirstPlus ATM available
www.first-online.com | 2014 Annual Report to Our Stakeholders | First Financial Corporation
One First Financial Plaza
Terre Haute, IN 47807
812.238.6000 | 800.511.0045
www.first-online.com