2017 ANNUAL REPORT
BUILDING RELATIONSHIPS STRENGTHENING COMMUNITIES
First Financial Corporation
Our Mission
Our mission is to be the FIRST CHOICE for all your financial needs.
Our Profile
First Financial Corporation (NASDAQ:THFF) is a financial services holding company
headquartered in Terre Haute, Indiana. Our subsidiary, First Financial Bank N.A.,
founded in 1834, is the fifth oldest national bank in the United States. First Financial
Bank operates 65 banking centers in Indiana and Illinois offering complete banking
services, including depository accounts, loans, brokerage services, and trust and asset
management to retail and business customers. Our subsidiary, The Morris Plan Com-
pany of Terre Haute, Inc., is a state industrial chartered financial institution. The Morris
Plan operates one office in Terre Haute, Indiana, offering deposit accounts and loans
to retail customers. At December 31, 2017, First Financial Corporation had assets in
excess of $3 billion.
Our People
Our associates — some 900 strong — make our results possible. Their efforts, both on the
job and in cities and towns they call home, drive First Financial Corporation’s success. This
annual report highlights some of their accomplishments over the past year as they worked
to build lasting customer relationships and strengthen the fabric of the communities in
our service area. We are grateful to all of our associates for their commitment to doing
whatever it takes to deliver an exceptional customer experience to the individuals, families
and businesses we serve.
ON THE COVER
A number of our associates are featured in these pages. On the cover are (clockwise from
upper left): Veronica Stone, Assistant Manager, Customer Contact Center, Terre Haute,
Indiana; Chris Hudgens, Senior Commercial Lending Executive, Bloomington, Illinois; Jim
Nichols, Residential Lending Manager, Terre Haute, Indiana; Tina Smith, Assistant Banking
Center Manager, Marshall, Illinois; and Dan Laughner, Commercial Loan Officer, Danville,
Illinois.
HOW WE EXCELLED
PAID DIVIDENDS
$2.50 In 2017, we returned $30,540,369 in common stock
dividends to shareholders, including a special dividend
paid in December. This marks our 29th consecutive year
of increased dividends.
dividends per common share
3.68%
LOAN GROWTH
An improving economy fueled increased demand for
loans in our service area. Steady focus on building and
expanding customer relationships positioned us well
to benefit from this trend. Our loan portfolio in 2017
grew 3.68% over 2016.
4.11
59.12%
0.22%
13.31%
NET INTEREST MARGIN
In 2017, our net interest margin increased to 4.11, largely
the result of loan growth. Total loans for the year reached
$1.90B, the highest in the Corporation’s history.
EFFICIENCY RATIO
Our efficiency ratio was 59.12% in 2017, reflecting
our operational efficiency and our dedication to cost
control.
NET CHARGE-OFFS
Our strong asset quality is evident in our net charge-off
ratio of 0.22%, which hit a five-year low in 2017 even as
commercial and consumer lending grew robustly.
TIER 1 CAPITAL
Our Tier 1 Capital Ratio of 13.31% for 2017 comfortably
exceeds the regulatory minimum. Through prudent
management of capital, we are well prepared to weather
economic cycles.
2017 ANNUAL REPORT | 1
LETTER TO OUR SHAREHOLDERS
Dear Fellow Shareholders,
As I write this letter, my thoughts immediately turn
to Don Smith, our retired President, CEO and Board
Chairman, who passed away on April 23, 2017. Don’s
career with the First family spanned 45 years during
which First Financial grew from one small bank in Vigo
County, Indiana to a $3 billion, multi-bank financial
services company with 65 branches in west central
Indiana and east central Illinois. Don dedicated his
life to serving others and made certain a servant’s
attitude was woven into the fabric of First Financial.
We are all better persons because we knew Don and
had the opportunity to work with him. Don’s leadership
and wise counsel are greatly missed. Please see our
remembrance of Don on page 5 of this Annual Report.
RESULTS
I am pleased to report 2017 was another year of solid
earnings and consistent operational performance. It
was also the 29th consecutive year we have increased
dividends to our shareholders and one in which we
paid a special dividend of $1.50 per share, bringing
total dividends in 2017 to $2.50 per share. Overall, we
returned $30,540,369.00 in common stock dividends
to you, our shareholders.
Accountants often speak of the “noise” in the numbers.
While I am not an accountant, I believe when they
make that statement, they are actually saying additional
explanation is necessary to fully understand what is
reported. That certainly is the case when comparing
our strong 2017 performance to 2016. Two significant
non-reoccurring items must be considered. The first
occurred in 2016 when our reported net income and
earnings per share included a one-time net gain of
approximately $5.8 million, which was realized on the
sale of our insurance subsidiary. The second occurred
in 2017 when our reported results were negatively
impacted by a one-time charge due to the Tax Cuts
and Jobs Act (“TCJA”), which required us to revalue our
deferred tax assets resulting in a non-cash charge of
$6.3 million during the fourth quarter.
The significance of these two items and the impact of
each are shown in the following tables, which illustrate
our 2016 and 2017 net income and earnings per share
after eliminating the effect of these one-time items on
our reported results:
Net Income
(in millions)
Net income, as reported
2016: Eliminate gain on
sale of insurance subsidiary
2017: Eliminate TCJA change
Adjusted Net Income
(Non-GAAP)
2016
$38.4
(5.8)
$32.6
2017
$29.1
6.3
$35.4
% Growth
2017 vs. 2016
-24.2%
+8.6%
Fully Diluted Earnings Per Share
(EPS)
% Growth
2017 vs. 2016
EPS, as reported
2016: Eliminate gain on
sale of insurance subsidiary
2017: Eliminate TCJA change
Adjusted EPS
(Non-GAAP)
2016
$3.12
(0.47)
$2.65
2017
$2.38
0.52
$2.90
-23.7%
+9.4%
2 | FIRST FINANCIAL CORPORATION
“
Our consistent performance
is only possible through the
hard work and dedication of
our experienced management
team and exceptional
associates…
”
NORMAN L. LOWERY, PRESIDENT and CEO
We are also pleased to report the following as of
December 31, 2017:
• Net interest income increased by 2.75%;
• Our net interest margin grew to 4.11%, up from
• Total loans outstanding increased $67.6 million, or
4.04% in 2016;
3.68%, to $1.90 billion;
• Total deposits outstanding increased $30.1 million,
or 1.24%, to $2.46 billion;
• Return on average assets was 0.98% as reported
and 1.17% after eliminating the effect of the $6.3
million TCJA charge;
• Return on average shareholders’ equity was 6.69%
as reported and 8.27% after eliminating the effect
of the $6.3 million TCJA charge;
• Credit quality remained strong as the ratio of net
charge-offs to average loans outstanding fell to
0.22%;
• Non-performing loans decreased 4.4% to $21.7
million; the ratio of non-performing loans to total
loans and leases was 1.14%; and,
• Our tier one capital ratio was 13.31%, comfortably
exceeding the regulatory minimum.
Continued on page 4
2017 ANNUAL REPORT | 3
LETTER TO OUR SHAREHOLDERS (continued)
RECOGNITION
Our consistent performance is only possible through
the hard work and dedication of our experienced
management team and exceptional associates who
are committed to delivering outstanding customer
experiences, providing quality products and services,
and creating value for our shareholders. It is because
of them we received the following recognition:
• The nation’s largest independent bank rating and
research firm, BauerFinancial, Inc., awarded First
Financial Bank and The Morris Plan Company of
Terre Haute, Inc. its highest available rating —
5 Stars;
• For the eighth consecutive year, First Financial
Bank was named “Best Bank” and “Best Mortgage
Company” in the Terre Haute Tribune-Star annual
Readers’ Choice Awards;
• First Financial Bank was named the “Best Investment
Firm” and was recognized as having the “Best Bank
Teller,” Ashley Akons, and “Best Financial Advisor,”
Scott Minton, as determined in the 2017 Terre Haute
Tribune-Star Readers’ Choice Awards;
• First Financial Bank was nominated and was one
of three finalists in the categories “Best Customer
Service” and “Best Place to Work” in the 2017 Terre
Haute Tribune-Star Readers’ Choice Awards;
• Bank Director Magazine named First Financial Bank
among the Top 100 publically traded US banks in
the $1 – $5 billion asset category on their annual
Performance Scorecard which recognizes financial
performance based on capital strength, profitability
and asset quality; and,
• According to the Federal Deposit Insurance
Corporation, First Financial Bank is one of the “Top
100 Farm Lenders” in the United States by dollar
volume, reflecting the Bank’s strong support of
agriculture.
There are many I must thank for what we accomplished
in 2017. First, I would like to thank our talented, experi-
enced management team and capable associates for
developing and successfully implementing our strate-
gies. We are fortunate to have such a great team that
works tirelessly to create value for our shareholders.
I would also like to thank our Board of Directors for their
guidance and continued support and extend a special
thanks to our customers and the communities we serve
for continuing to honor us with their business.
Finally, I want to thank you, our shareholders, for your
confidence and investment in First Financial Corpora-
tion. I hope each of you can join us at the 2018 Annual
Meeting of Shareholders on Wednesday, April 18 at
11:00 a.m. (EST) in our Corporate Headquarters Board
Room, One First Financial Plaza, Terre Haute, Indiana.
Norman L. Lowery
CEO, President and Vice Chairman
4 | FIRST FINANCIAL CORPORATION
A REMEMBRANCE
DONALD E. SMITH ~ 1926–2017
The directors, officers and associates of First Financial Corpora-
tion were saddened at the loss of Donald E. Smith, who passed
away on April 23, 2017.
Don’s career with First Financial Corporation and First Financial
Bank spanned 45 years. He joined Terre Haute First National
Bank in 1969 as Executive Vice President and was elected
President of the bank in 1973. When First Financial Corpora-
tion was established as the first multi-bank holding company
in the state of Indiana in 1983, Don became President and CEO
and was later named Chairman of the Board of Directors. He
served on the Board of First Financial Bank from 1973 until
2013 and First Financial Corporation from 1983 to 2013. He
was name Director Emeritus on his retirement in 2014.
Don's life epitomized his passionate belief in service to others
and he was widely recognized for his guidance and good
counsel to many educational, civic and charitable organiza-
tions. He was a former Trustee of Rose-Hulman Institute of
Technology, Indiana State University and Saint-Mary-of-the-
Woods College. He was a past President of the Terre Haute
Chamber of Commerce and the Terre Haute Economic
Development Corporation. He served on numerous boards,
including the Wabash Valley Community Foundation, TREES
Inc., the Terre Haute Boys and Girls Club, Swope Art Museum,
the Wabash Valley Fair Association, the Indiana 4-H Foundation
and the Indiana Department of Natural Resources Foundation.
In 1977, he was named a Sagamore of the Wabash, the highest
civilian award that can be given by the Governor of Indiana, for
distinguished service to the state. He was awarded an honorary
Doctor of Humane Letters degree from Indiana State University
in 2003 and Saint Mary-of-the-Woods College in 2008.
Don will also be remembered throughout the United States
as a leader in auto racing. Since 1941, when he attended his
first Indianapolis 500, Don’s interest in motorsports never
wavered. For many years he promoted races at the Terre
Haute Action Track at the Vigo County Fairgrounds. He held
the title of director of competition at the Action Track from
1951 to 1980 and is widely credited for putting Terre Haute
on the professional racing map in America. In 1971 he was
named Director of Competition in the auto racing division
for the Indiana State Fair Board, serving until 1979. He also
served on the board of directors of the Indy Racing League,
the Indianapolis Motor Speedway Foundation and the United
States Auto Club (USAC). He was a member of the National
Sprint Car Hall of Fame and a lifetime member of CARA
Charities, an auxiliary of Championship Auto Racing.
Although Don had many interests, the bank was his passion.
He devoted his career to building First Financial into a strong,
stable company that enjoys wide respect in the banking
world. He was an insightful businessman and brilliant mar-
keter with a gift for understanding how to attract and keep
loyal customers. It was Don who coined the term “First
Family,” because he wanted all employees, regardless of
position, to know their contributions were meaningful to
the bank’s success.
Through every goal he pursued in his life, there was a
common thread — Don Smith put his whole heart into
everything he did. “You give more than you expect to
receive,” he said. It was the golden rule he lived by. It is the
legacy he passes on to his family, friends and colleagues.
2017 ANNUAL REPORT | 5
2017 HIGHLIGHTS
SUPPORT
Holiday Joy Drive, which collected 2,306 new toys and
$16,813 in cash donations.
These events allowed our associates to address specific
needs of their communities. By encouraging and build-
ing a passion for service throughout the Corporation,
we help to create better places for all of us to live and
work.
At First Financial, we believe we all share a responsibility
to make life better for our neighbors. With that in mind,
two years ago, we developed and launched a unique
service initiative designed to forge new bonds and to
benefit the communities we serve. To that end, we
organize and promote four special events annually
that make an impact either by raising charitable funds
or providing a public service.
Showing
Associates in each of our banking centers are involved
in selecting, planning and making each of our quarterly
events a success.
Following are the highlights of our 2017 initiatives:
• Our Pet Food and Supplies Drive raised $16,878
in cash and received 2,463 pet items to help humane
organizations that care for homeless and neglected
animals.
• Our Backpack Drive for Kids collected 3,553 items
of food and school supplies, along with $15,513 in
monetary donations to support nonprofit groups that
help kids in need.
In a series of Saturday Shred Days, we invited the
•
public to bring unwanted personal papers to participat-
ing banking centers for free shredding. Corporate-wide,
27,908 pounds of documents were shredded, helping
prevent identity theft that can occur when personal
documents are discarded in the trash.
• Hundreds of people shared the joy of providing
Christmas gifts for children in need by giving to our
6 | FIRST FINANCIAL CORPORATION
FREE SATURDAY SHRED DAYS
During the summer, First Financial Bank held shred days at
20 banking centers throughout our service area. In addition
to documents for shredding and recycling, we also accepted
worn-out American flags for respectful disposal by the VFW.
(right) At The Meadows in Terre Haute, Jesse Clark of Data
Management Shredding and Jeff Redman, Meadows Banking
Center Manager, prepare to send a crate of documents to the
shredder. (below, right) Teller John Harris accepts a flag at the
Meadows event. Corporate-wide, several hundred flags were
collected during the shred days.
BACKPACK DRIVE FOR KIDS
(above) In Vanderburgh County, Indiana, Glen Roberts from
the Tri-State Food Bank accepted proceeds from our spring
Backpack Drive from teller Heather Davis (left) and Jessica
Marvel (center), Manager of the First Financial Evansville
banking center. As with all of our charitable fundraisers,
donations to the Backpack Drive stayed in the county where
they were made.
PET FOOD AND SUPPLIES DRIVE
(on page 6) In conjunction with our Pet Food and Supplies
Drive, we held a photo contest open to the public. Entries
were sorted by county and judged by our banking center
associates. Winners were each awarded a $100 prize and the
opportunity to designate an animal welfare organization of
their choice to receive a $100 donation from the bank on
their behalf. The photo on the left was the first-place winner
in Vigo County, Indiana, earning a $100 donation for the
Terre Haute Humane Society.
HOLIDAY JOY DRIVE
(above) The Toys for Kids program was the recipient of the toys
and funds collected during the Holiday Joy Drive at our Newton
banking center in Jasper County. Connie Elliott (right) of the
University of Illinois Extension accepted Joy Drive donations from
Kris Newton, Manager of the Newton, Illinois banking center.
2017 ANNUAL REPORT | 7
2017 HIGHLIGHTS
RELATIONSHIPS
Our approach to customer service begins with a princi-
ple all of us embrace: treat everyone as you want to be
treated. It’s not only the foundation of building customer
relationships that last, but also one of the key values that
guide every customer interaction, whether on the
phone, in person or online
Building
Our values are straightforward. When people come to
us with their financial needs, we believe in listening
carefully, communicating honestly and demonstrating
integrity in our words and actions.
We believe in providing products, services, tools and
advice that will help customers achieve financial success.
Most importantly, we believe in delivering what we
promise and doing what’s right, not just for customers,
but for our fellow associates and shareholders as well.
At our Customer Contact Center, where First Financial
team members field hundreds of calls each day, there’s
a statement prominently displayed on the wall that says,
“Consider It Done.” In other words, we’re committed to
doing whatever it takes to satisfy our customers’ needs
with personal service that consistently sets us apart.
Although banking has changed substantially since our
earliest ancestor opened its doors in 1834, the values
that have guided us for decades continue to be essential
to building successful relationships, one customer at a
time.
8 | FIRST FINANCIAL CORPORATION
IMPROVING CUSTOMER SUPPORT
In 2017, we consolidated phone support for retail banking,
consumer online banking and consumer debit card into the
First Financial Customer Contact Center, allowing expansion
of our service hours. Veronica Stone, Assistant Manager of our
Customer Experience Team, helped to lead the transition.
BRICK AND MORTAR MATTERS
Despite the growth in other forms of banking, our branch network is
vital to our sales and customer service process. Our recently renovated
Brazil 59 banking center in Brazil, Indiana epitomizes our brick-and-mortar
strategy, delivering comprehensive financial services in secure, attractive
surroundings. Investing in our delivery channels is another way we ensure
customers have a choice in how, when and where to do their banking.
TAKING TECHNOLOGY TO THE CUSTOMER
One of the ways technology builds banking relationships is by making it
easier to illustrate the benefits of new products wherever it’s convenient
for the customer. Every First Financial banking center is equipped with
iPads to assist customers in the branch or at their place of business. Here,
Terri McGuire, Manager of our Main Office banking center, demonstrates
our new Business Online Banking platform.
PROVIDING A BETTER CHECKING OPTION
In January, we introduced First Provider Checking,
which includes a bundle of money-savings benefits
for a modest monthly fee. We believe accounts
such as this are valued by our customers largely
because they offer attractive, affordable benefits.
Above, Tina Smith, Assistant Manager of our
Marshall, Illinois banking center, explains the
benefits of the First Provider account to a new
customer.
2017 ANNUAL REPORT | 9
COLLABORATING TO EARN NEW CUSTOMERS
Welbrook Senior Living, a leading developer of retirement communities, chose to work with First Financial Bank
when it decided to construct a new senior living facility in Illinois. Carrie Bentley (left), owner/operator of Welbrook
at Bloomington, recently hosted a tour of the new facility for First Financial associates Chris Hudgens, Commercial
Lender; Nick Lurkins, Manager of the Bloomington Brickyard Banking Center; Pam Kaburcek, Manager of the
Bloomington Towanda Banking Center; and Lyneer Straub, Commercial Lender. Earning Welbrook’s business was
and continues to be the result of teamwork. At First Financial, every associate is motivated to give their best to
colleagues and customers.
MAKING INROADS IN EVANSVILLE
The First Financial Business Center, a commercial
loan production office, completed its first full year
of operation in 2017. Established in Evansville,
Indiana to allow us take part in the exciting growth
of the tri-state area, the Business Center serves the
diverse credit needs of businesses, organizations,
local governments and institutions. The team
there includes veteran lenders Darren Spainhoward,
Jeff Johnson and Stacy Gager, who take pride in
offering unparalleled service that puts customers
first at every step in the lending process.
CREATING BETTER
HOUSING FOR STUDENTS
Element Building, a commercial
and residential construction firm
based in Champaign, chose First
Financial Bank when it decided
to renovate two apartment
complexes on the edge of the
University of Illinois campus.
Travis Miller (left), First Financial
Commercial Lender, enjoyed an
opportunity to tour the complex
with George Gramm, Asset Man-
ager and Marketing Manager of
Element Building.
TRUST & ASSET MANAGEMENT
First Financial is fortunate to have an experienced Trust & Asset Management team providing advice and assistance in personal
and corporate trusts, estate planning and administration, investment management, retirement planning, business succession
planning, farm management, and employee- and employer-sponsored retirement plans. Our team of professionals includes
(left to right) Carol Myers, Tom Rhees, Jo Ellen McBeth, Brenda “B.J.” Voll, Tammy Evinger, John Ayre, Katherine Virostko, Krista
Grange, Benjamin Dye, Brandi Hanson, Jennifer Hanley, Andrew Decker and Bev Christopher.
2017 ANNUAL REPORT | 11
2017 HIGHLIGHTS
COMMUNITIES
First Financial was founded on the belief that banks exist to help
people succeed. We devote time and resources to benefit our cus-
tomers and the communities they call home. From financial support
to volunteer service, we are actively engaged with projects, activities
and organizations that make a positive impact where we do business.
Strengthening
In addition to hundreds of leadership and volunteer hours given
by our associates, First Financial Corporation, First Financial Bank
and the Morris Plan Company of Terre Haute provide monetary
contributions, sponsorships and in-kind gifts to a variety of civic
and charitable organizations and initiatives.
Our commitment to putting community needs first starts at the top,
with directors and executives who are active on a wide range of
community boards and advisory committees. The spirit of service
to others is also embraced by our associates, who are generous in
support of their local schools, churches, youth programs, the arts,
service clubs, economic development groups and more.
The following pages showcase some of the many ways we served
communities throughout our footprint in 2017.
RED SKELTON MUSEUM IN VINCENNES, INDIANA
Jill Kerins (right), Manager of First Financial’s Vincennes Sixth Street banking
center, and Craig Kirk, Senior Commercial Lending Executive, present a
$1,000 check to Anne Pratt of the Red Skelton Museum of American Comedy
in support of A Tribute to Bob Hope and the Radio Stars of the 1940s, a stage
show bringing to life the radio programs of World War II.
12 | FIRST FINANCIAL CORPORATION
MAIN STREET REVITALIZATION IN SULLIVAN, INDIANA
The bank took the lead as a $5,000 private sector partner to enable the city of Sullivan to secure a $500,000 Main Street Revitaliza-
tion Program grant from the Indiana Office of Community and Rural Affairs for streetscape improvements to its business district.
In November, Sullivan Mayor Clint D. Lamb (third from right) accepted the donation in front of the First Financial Sullivan banking
center. With him are (left to right) John Ellington, Sullivan City Council Member; Brian Pound, Sullivan Building Commissioner;
Alan Badger, First Financial Ag Loan Officer; Sean Mickey, First Financial Mortgage Loan Officer; Dave Wright, Sullivan Banking
Center Manager; Mike Lueking, First Financial Commercial Loan Officer; Greg Gibson, Director of First Financial Corporation and
First Financial Bank; Norman D. Lowery, Chief Operating Officer of First Financial Corporation and First Financial Bank; Norman L.
Lowery, President and CEO of First Financial Corporation and First Financial Bank; and Doug Followell, Sullivan City Attorney.
DAY OF GIVING IN
BLOOMINGTON, ILLINOIS
In October, the First Financial Brickyard
banking center in Bloomington served
as a donation site for the annual
Operation Honor Guard Day of Giving.
Founded in Danville, Illinois, the non-
profit organization provides charitable
assistance to outfit Honor Guard units,
made up of VFW and American Legion volunteers who
perform military rites at funerals for service members and
veterans. Don Judd (right), age 82, a 50-year member of
VFW Post 6190 in Farmer City, Illinois, was among the many
veterans who turned out on the Day of Giving to collect
donations. Judd is a founder of Post 6190’s Honor Guard and
is still active with them. He and his fellow veterans helped to
raise more than $164,000 for Operation Honor Guard in Cen-
tral Illinois. Banking Center Manager Nick Lurkins, Assistant
Manager Taylor Hish (in the First Duck costume) and the Brick-
yard staff shared in the fundraising efforts.
First Financial associates gave 14,212 hours of volunteer service
to more than 250 community organizations of their choice in 2017.
2017 ANNUAL REPORT | 13
BALLOONS OVER VERMILION FESTIVAL IN DANVILLE, ILLINOIS
In July, First Financial Bank was a major sponsor of the Balloons Over Vermilion festival at the Vermilion Regional Airport. More
than 20,000 visitors attended the two-day festival, which brought both tourism dollars and family-centered entertainment to
the Danville area. First Financial presented the Balloon Glow, a one-of-a kind event where tethered hot air balloons create a
massive synchronized light display that illuminates the night sky.
FIRST FINANCIAL
WABASH VALLEY CLASSIC
First Financial Bank is proud to sponsor the
Wabash Valley Classic basketball tourna-
ment, a highly anticipated annual event
that brings together 16 high school teams
from Indiana and Illinois for four days of
competition. Above, Tournament Director
Ticia Wright of First Financial Bank presents
the 2017 championship trophy to the team
from Edgewood High School of Ellettsville,
Indiana following their victory in the final
game in December. The Classic is largest
and best-attended holiday high school bas-
ketball tournament in the state of Indiana,
with all proceeds going to participating
schools to support their athletic programs.
THANKING A VALUED CUSTOMER
Dan Laughner (far right), First Financial
Commercial Loan officer based in Danville,
Illinois, stands by as Bob and Pat Hubner
prepare to lift off in a hot air balloon. The
bank treated the couple to the flight just
prior to opening day of the Balloons Over
Vermilion festival.
2017 ANNUAL REPORT | 15
JEANS DAYS DONATION IN URBANA, ILLINOIS
Wearing denim is making a difference for
nonprofit organizations in the First Financial
service area, where banking center associates
are taking part in Jeans Days. Each month, staff
members have the option of supporting a local
charity by donating $5 each to wear jeans to
work. Because the staff decides where the
funds they collect will go, they take special
pride in the program. Some banking centers
pool their funds over a period of time to make
a larger donation; others present checks
monthly. In July, Ginger McKee (right) of the
Cunningham Children’s Home in Urbana, Illi-
nois happily accepted a $100 Jeans Days dona-
tion from Sam Pogue (left), Manager of our
West Region, and Joyce Remesch, Manager of
the Philo Road banking center in Urbana.
AUTUMN FEST IN
MARSHALL, ILLINOIS
Troy Hendricks, First Financial Agri-
cultrual Lending Officer and lifelong
farmer, took part in the Marshall
Autumn Fest parade in September,
driving his John Deere 4020 tractor
with his wife Darla riding alongside.
The three-day festival attracts hun-
dreds of visitors and is a signature
event for the Clark County area.
CATHOLIC CHARITIES FOODBANK
CONSTRUCTION PROJECT
John Etling (third from right) and
Jennifer Buell (second from right) of
Catholic Charities Terre Haute receive
a donation of $10,000 as part of First
Financial’s pledge to help develop a
new building to house the Catholic
Charities Foodbank. B. Guille Cox Jr.
(right), Chairman of the Board of First
Financial Corporation and First Finan-
cial Bank; Norman L. Lowery (left),
President and CEO of First Financial
Bank; and Krista Grange, Director of
Trust & Asset Management at the
bank, presented the check. The Food-
bank supplies food pantries, soup
kitchens and other agencies that feed
the hungry in seven counties in West
Central Indiana.
16 | FIRST FINANCIAL CORPORATION
HONORS AND ACCOLADES
TOP 100 PUBLICLY TRADED U.S. BANKS
Bank Director magazine named First Financial Bank among
the top 100 publically traded U.S. banks in the $1- to $5-billion
asset category on their 2017 Bank Performance Scorecard.
The scorecard recognizes financial performance based on
capital strength, profitability and asset quality.
5 STARS FROM BAUERFINANCIAL, INC.
First Financial Bank and The Morris Plan Company of Terre
Haute received the highest available rating — 5 Stars —
from BauerFinancial Inc., the nation’s largest independent
bank rating and research firm. The rating is based on overall
strength and soundness.
TOP 100 FARM LENDERS
According to the Federal Deposit Insurance Corporation,
First Financial Bank is one of the “Top 100 Farm Lenders”
in the United States by dollar volume, reflecting the bank’s
strong support for agriculture.
READERS’ CHOICE AWARDS
In 2017, for the eighth consecutive year, First Financial Bank was
named “Best Bank” and “Best Mortgage Company” in the Terre
Haute Tribune-Star Readers’ Choice Awards. The bank was also
named the “Best Investment Firm” and was recognized as having
the “Best Bank Teller,” Ashley Akons, and “Best Financial Advisor,”
Scott Minton.
2017 ANNUAL REPORT | 17
COMMUNITIES WE SERVE
LOCATIONS
INDIANA
Vigo County (Terre Haute)
Terre Haute Main Office*
One First Financial Plaza
Sixth & Wabash
812-238-6000
Honey Creek Mall*
U.S. 41 South
812-238-6000
Industrial Park*
1749 East Industrial Drive
812-238-6000
Maple Avenue*
4065 Maple Avenue
812-238-6000
Meadows*
350 South 25th Street
812-238-6000
Plaza North*
Ft. Harrison & Lafayette
812-238-6000
Southland*
3005 South Seventh Street
812-238-6000
Springhill*
4500 U.S. 41 South
812-238-6000
Sycamore Terrace*
2425 South State Road 46
812-238-6000
The Morris Plan Company
of Terre Haute
817 Wabash Avenue
812-238-6063
Vigo County
Seelyville*
9520 East U.S. 40
812-238-6000
West Terre Haute*
309 National Avenue
812-238-6000
Clay County
Brazil*
7995 North State Road 59
812-443-4481
Brazil Eastside*
2180 East National Avenue
812-448-8110
Clay City*
502-504 Main Street
812-939-2145
Daviess County
Washington*
300 East Main Street
812-257-8860
Gibson County
Princeton*
1501 West Broadway
812-385-0235
Greene County
Worthington*
9 North Commercial Street
812-875-3021
Knox County
Vincennes Sixth Street*
2707 North Sixth Street
812-882-4800
Vincennes Main Street*
619 Main Street
812-886-9690
Parke County
Rockville*
1311 North Lincoln Road
765-569-3171
Rockville Downtown Drive-Up*
120 East Ohio Street
765-569-3442
Marshall
10 South Main Street
765-597-2261
Montezuma*
232 East Crawford Street
765-245-2706
Putnam County
Greencastle*
101 South Warren Drive
765-653-4444
Sullivan County
Sullivan*
15 South Main Street
812-268-3331
Dugger*
879 South Third Street
812-648-2251
Farmersburg*
819 West Main Street
812-696-2106
Hymera*
102 South Main Street
812-383-4933
Vanderburgh County
Evansville*
12600 U.S. 41 North
812-868-8850
First Financial
Business Center
727 N. Cross Pointe Blvd.
Suite D, Evansville
812-477-1423
Vermillion County
Newport*
100 West Market Street
765-492-3321
Cayuga*
101 South Division Street
765-492-3391
Clinton*
221 South Main Street
765-832-3504
Crown Hill*
1775 East State Road 163
765-832-5546
ILLINOIS
Champaign County
Champaign Neil Street*
1205 South Neil Street
217-352-6700
Champaign South Prospect*
1611 South Prospect Avenue
217-351-6620
Mahomet*
Eastwood Center IGA
217-586-5322
Urbana Philo Road*
2510 South Philo Road
217-344-1300
Clark County
Marshall*
215 North Michigan
217-826-6311
Coles County
Charleston*
820 West Lincoln Avenue
217-345-4824
Charleston East*
605 Lincoln Avenue
217-345-2101
Mattoon*
101 Broadway Avenue East
217-258-8940
Crawford County
Robinson*
108 West Main Street
618-544-8666
Robinson Motor Bank*
(Drive-Through Only)
602 West Walnut Street
618-544-3355
Franklin County
Benton*
400 Public Square
618-439-4341
West Frankfort*
212 West Oak Street
618-932-3131
Jasper County
Newton*
601 West Jourdan Street
618-783-2022
Jefferson County
Mount Vernon*
900 Main Street
618-242-4000
Mount Vernon Drive-Up*
3303 Broadway
618-242-1779
Lawrence County
Lawrenceville*
1601 State Street
618-943-3323
Livingston County
Pontiac Main*
223 North Mill Street
815-842-8133
Pontiac West*
1023 West Reynolds
815-842-8164
Marion County
Salem*
401 West Main Street
618-548-2265
Salem Drive-Up*
1365 West Main Street
618-548-5293
McLean County
Bloomington Brickyard*
#1 Brickyard Drive
309-661-9993
Bloomington Towanda*
Towanda Plaza
1218 Towanda Avenue
309-834-6216
Gridley*
325 Center Street
309-747-2100
Richland County
Olney*
240 East Chestnut Street
618-395-8676
Olney Route 130*
1110 South West Street
618-395-2112
Vermilion County
Danville Towne Centre
One Towne Centre
217-442-0362
Danville North Vermilion*
2750 North Vermilion Street
217-431-8750
Danville North Gilbert*
901 North Gilbert Street
217-431-3486
Danville South Gilbert*
(Drive-Through Only)
421 South Gilbert Street
217-477-4512
Ridge Farm*
11 South State Street
217-247-2126
Westville*
101 East Main Street
217-267-2147
Wayne County
Fairfield*
303 West Delaware
618-842-2145
*FirstPlus 24-hour
ATM available at
these locations
2017 ANNUAL REPORT | 19
BOARD OF DIRECTORS
STANDING: Thomas T. Dinkel; Ronald K. Rich; William R. Krieble; B. Guille Cox, Jr., Chairman; Virginia L. Smith; Anton H. George;
Gregory L. Gibson SEATED: William J. Voges; Norman L. Lowery, Vice Chairman; W. Curtis Brighton
DIRECTORS
FIRST FINANCIAL CORPORATION
and FIRST FINANCIAL BANK
W. Curtis Brighton
B. Guille Cox, Jr., Chairman
Thomas T. Dinkel
Anton H. George
Gregory L. Gibson
William R. Krieble
Norman L. Lowery, Vice Chairman
Ronald K. Rich
Virginia L. Smith
William J. Voges
DIRECTORS
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
20 | FIRST FINANCIAL CORPORATION
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, 2017
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. x
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 ¨
Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities
Act. ¨
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, 2017 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 $515,437,610. (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 1, 2018—12,255,045 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement for the First Financial Corporation Annual Meeting of Shareholders to be held April
18, 2018 are incorporated by reference into Part III.
FIRST FINANCIAL CORPORATION
2017 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 21
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
PAGE
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37
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89
89
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93
2
FIRST FINANCIAL CORPORATION
2017 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 2017 the Corporation and its subsidiaries had 847 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 type of
commercial real estate loan which inherently carry more risk than loans for completed projects. Since these types of loans are
3
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; three in Clay County, Ind.; one in Daviess County, Ind.; one in Gibson County, Ind.; one in Greene County, Ind.; three
in Knox County, Ind.; four in Parke County, Ind.; one in Putnam County, Ind., four in Sullivan County, Ind.; one in Vanderburgh,
County.; four in Vermillion County, Ind.; four 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.; six 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. First Chanticleer Corporation has one building located in Terre
Haute, Indiana. 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.
4
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 restructured 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”. 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 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 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.
5
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 became effective on January 1, 2015 (subject to a phase-in period) and, among other things, introduced
a new capital measure known as “Common Equity Tier 1” (“CET1”), which generally consists of common equity Tier 1 capital
instruments and related surplus, retained earnings, and common equity Tier 1 minority interests, minus certain adjustments and
deductions.
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
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 began 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 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.
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.
6
The 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. The implementation of the capital conservation buffer began on January 1,
2016 at the 0.625% level and will 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).
Under the Basel III Capital Rules, the minimum capital ratios as of January 1, 2017 are as follows:
•
•
•
5.75% CET1 to risk-weighted assets;
7.25% Tier 1 capital to risk-weighted assets; and
9.25% Total capital to risk-weighted assets.
Certain regulatory capital ratios for the Corporation as of December 31, 2017, are shown below:
•
•
•
•
17.01% CET1 to risk-weighted assets;
17.01% Tier 1 capital to risk-weighted assets;
17.88% Total capital to risk-weighted assets; and
13.31% leverage ratio.
Certain regulatory capital ratios for the Bank as of December 31, 2017, are shown below:
•
•
•
•
16.56% CET1 to risk-weighted assets;
16.56% Tier 1 capital to risk-weighted assets;
17.30% Total capital to risk-weighted assets; and
12.81% leverage ratio.
Certain regulatory capital ratios for Morris Plan as of December 31, 2017, are shown below:
•
•
•
•
32.63% CET1 to risk-weighted assets;
32.63% Tier 1 capital to risk-weighted assets;
33.93% Total capital to risk-weighted assets; and
28.66% leverage ratio.
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
7
determines to be so closely related to banking or managing or controlling banks as to be incidental to these operations. The Bank
Holding Company Act does not place territorial restrictions on the activities of such nonbanking-related activities.
Bank holding companies which meet certain management, capital, and Community Reinvestment Act of 1977 (“CRA”) standards
may elect to become a financial holding company, which would allow them to engage in a substantially broader range of nonbanking
activities than is permitted for a bank holding company, including insurance underwriting and making merchant banking
investments in commercial and financial companies.
The Corporation 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.
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.
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.
8
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 Deposit Insurance Fund (“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.
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 $895 thousand and Morris Plan paid a total FDIC assessment of $20 thousand in 2017.
In addition to the FDIC insurance premiums, the Bank and the Morris Plan are required to make quarterly payments on bonds
issued by the Financing Corporation (“FICO”), an agency of the Federal government established to recapitalize a predecessor
deposit insurance fund. These assessments will continue until the FICO bonds are repaid.
Transactions with Affiliates and Insiders. Pursuant to Sections 23A and 23B of the Federal Reserve Act and Regulation W, the
Bank and Morris Plan are subject to limitations on the amount of loans or extensions of credit to, or investments in, or certain
other transactions with, affiliates (including the Corporation) and insiders and on the amount of advances to third parties
collateralized by the securities or obligations of affiliates. Furthermore, within the foregoing limitations as to amount, each covered
transaction must meet specified collateral requirements. Compliance is also required with certain provisions designed to avoid
the taking of low quality assets. The Bank and Morris Plan are also prohibited from engaging in certain transactions with certain
affiliates and insiders unless the transactions are on terms substantially the same, or at least as favorable to such institution or its
subsidiaries, as those prevailing at the time for comparable transactions with nonaffiliated companies.
Extensions of credit by the Bank or Morris Plan to their executive officers, directors, certain principal shareholders, and their
related interests must:
•
•
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
9
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.
Interest Rate and Market Risk. 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 4.5%, a common equity Tier 1 risk-based capital ratio of less than
10
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
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, 2017, 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.
The Federal Reserve Board, OCC and FDIC have 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
11
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.
12
Interest and other charges collected or contracted by the Bank or Morris Plan are subject to state usury laws and federal laws
concerning interest rates. The loan operations are also subject to federal and state laws applicable to credit transactions, such as
the:
•
•
•
•
•
Truth-In-Lending Act and state consumer protection laws governing disclosures of credit terms and prohibiting
certain practices with regard to consumer borrowers;
Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public
and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing
needs of the community it serves;
Equal Credit Opportunity Act and other fair lending laws, prohibiting discrimination on the basis of race, creed or
other prohibited factors in extending credit;
Fair Credit Reporting Act of 1978 and Fair and Accurate Credit Transactions Act of 2003, governing the use and
provision of information to credit reporting agencies;
Fair Debt Collection Practices Act, governing the manner in which consumer debts may be collected by collection
agencies; and rules and regulations of the various federal agencies charged with the responsibility of implementing
such federal laws.
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
13
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
Economic conditions in the capital markets and the economy generally may materially adversely affect the Corporation’s
business and results of operations
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. The U.S. economy experienced growth during 2017, with increasing exports, jobs, and
manufacturing production. Real GDP has increased, and unemployment is in line with a full-employment economy. However, if
tighter financial conditions emerge, along with additional rate hikes by the Federal Reserve, there can be no assurance that the
economy will not enter into another recession, whether in the near term or long term. An economic downturn or sustained, high
unemployment levels, and stock market volatility may negatively impact our operating results and have a negative effect on the
ability of our borrowers to make timely repayments of their loans (thereby, increasing the risk of loan defaults and losses), the
value of collateral securing those loans, and demand for loans and other products and services that the Corporation offers.
The Basel III capital rules may require us to retain higher capital levels, impacting our ability to pay dividends, repurchase
our stock, or pay discretionary bonuses.
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 amended the regulatory risk-based capital rules formerly applicable to the Corporation
and its banking subsidiaries. The rules phase in over time 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 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.
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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:
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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 loan associations, credit unions, finance companies, brokerage firms, insurance
companies, factoring companies, financial technology 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:
•
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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’s success depends on our ability to respond to the threats and opportunities of financial technology
innovation and adapt to changes in the regulatory landscape.
Financial technology (“FinTech”), a broad category referring to technological innovation in the design and delivery of financial
services and products, has the potential to disrupt the financial industry and change the way financial institutions, including the
Corporation and the Bank, do business. Investment in new technology to stay competitive may result in significant costs and
increased risks of cyber security attacks. Our success depends on our ability to adapt to the pace of the rapidly changing
technological environment, which is crucial to retention and acquisition of customers. In December 2016 the former Comptroller
of the Currency Thomas Curry announced an initiative for the Office of the Comptroller of the Currency ("OCC") to consider
applications from FinTech companies to become special purpose national banks. The proposed federal charter would largely
allow FinTech companies to operate nationwide under a single set of national standards, without needing to seek state-by-state
licenses or joining with brick-and-mortar banks, and may therefore allow FinTech companies to more easily compete with us for
financial products and services in the communities we serve. The OCC’s initiative has been met with criticism, including opposition
from state regulators. Since announcing its initiative, the OCC has solicited public comment and continues to evaluate the benefits
and risks of the initiative. On November 27, 2017, Joseph M. Otting was sworn in as Comptroller of the Currency. Public comments
15
from Comptroller Otting have indicated that he supports continued evaluation of the FinTech-charter initiative. At this point,
however, it is unclear when and if the OCC will consider (and/or approve) applications from FinTech companies to become
special purpose national banks and, in such event, what form such charters will take. In the event the OCC adopts such initiative,
our business may be adversely affected due to increased competition.
Moreover, on January 30, 2018, the United States House of Representatives Committee on Financial Services - Financial
Institutions and Consumer Credit Subcommittee held a hearing to examine the current FinTech marketplace, focusing on the
current regulatory landscape and the need to amend or modernize the regulatory landscape or the necessity to amend existing
financial laws or develop new legislative proposals that would allow financial services entities to use FinTech to deliver new
products and services to consumers. We cannot predict whether changes will be made to the current regulatory landscape or what
impact any such changes, if any, will have on us. However, the costs of complying with any additional or amended legislation
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.
Current legislation 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 performance of and government intervention in
the financial services sector arising out of or related to the 2007-2008 financial crisis. 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.
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Tax reform could adversely affect our business.
On December 22, 2017, H.R. 1- An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution
on the Budget for Fiscal Year 2018, commonly known as the Tax Cuts and Jobs Act (the “Tax Act”), was signed into law. The
Tax Act makes substantial changes to the Internal Revenue Code, the full effect of which cannot be currently anticipated. For
example, the Tax Act reduces the corporate income tax rate from 35% to 21% for tax years beginning after December 31, 2017,
limits the deduction for interest expense, modifies expensing of capital investment, and makes several other changes to business-
related exclusions, deductions, and credits, which may have a positive or negative affect on our business. Notwithstanding the
reduction in the corporate income tax rate, the overall impact of the Tax Act is uncertain and could adversely affect our business
and financial condition. Further, many of the provisions of the Tax Act will require guidance through the issuance of regulations
and other tax guidance (such as revenue rulings, revenue procedures, notices, and announcements) by the Internal Revenue
Service in order to assess their effect. There may be a substantial delay before such regulations are promulgated or guidance is
issued, increasing the uncertainty as to the ultimate effect of the Tax Act on us. Moreover, at this point, it is unclear how States
will respond to the Tax Act and if state-level tax reform will be enacted by any States and, if so, what form such state-level tax
reform will take and when such state-level tax reform will be enacted.
The Corporation is still in the process of analyzing the Tax Act and its possible effects on the Corporation. Additionally, the
implementation by us of new practices and processes designed to comply with, and benefit from, the Tax Act and its rules and
regulations could require us to make substantial changes to our business practices, allocate additional resources, and increase our
costs, which could negatively affect our business, results of operations, and financial condition. The intended and unintended
consequences of Tax Act on our business and our holders of common stock at this time are uncertain and could be adverse.
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, 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
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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.
For several years prior to December 2015, the Federal Open Market Committee (“FOMC”) kept the target federal funds rate
between 0% and 0.25%. In December 2015, the FOMC increased the target federal funds rate by 25 basis points, representing
the first increase in nearly a decade. In December 2016, the FOMC increased the target federal funds rate by another 25 basis
points. The FOMC increased the target federal funds rate by 25 basis points in each of March, June, and December 2017. Based
on comments made by the FOMC, we expect gradual increases during 2018, but the overall low interest rate environment is
expected to continue in 2018. The extended low interest rate environment has compressed our net interest spread and reduced
our spread-based revenues, which has had, and continues to have, an adverse impact on our revenue and results of operations.
Uncertainty about the future of the London Inter-Bank Offered Rate (“LIBOR”), and its accepted alternatives, may
adversely affect our business.
The Corporation and its subsidiaries hold certain financial instruments which have an interest rate indexed to LIBOR. On July
27, 2017, the Chief Executive of the United Kingdom Financial Conduct Authority, which regulates LIBOR, announced that it
intends to stop persuading or compelling banks to submit rates for the calculation of LIBOR to the administrator of LIBOR after
2021. The announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after
2021. It is impossible to predict whether and to what extent banks will continue to provide LIBOR submissions to the administrator
of LIBOR or whether any additional reforms to LIBOR may be enacted in the United Kingdom or elsewhere. At this time, no
consensus exists as to what rate or rates may become accepted alternatives to LIBOR and it is impossible to predict the effect of
any such alternatives on the value of LIBOR-based financial instruments given LIBOR’s role in determining market interest rates
globally.
In June 2017, the Alternative Reference Rate Committee (“ARRC”), a committee of private-market derivative participants and
their regulators convened by the Federal Reserve to identity alternative reference interest rates, announced a Secured Overnight
Funding Rate (“SOFR”), a broad Treasuries overnight repurchase agreement (repo) financing rate, as its preferred alternative to
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U.S. dollar LIBOR. In December 2017, the Federal Reserve announced final plans for the production of SOFR. It is presently
anticipated that SOFR will be published by the Federal Reserve Bank of New York, in cooperation with the Office of Financial
Research, beginning in the second quarter of 2018. Plans for alternative reference rates for other currencies have also been
announced.
Uncertainty as to the nature of alternative reference rates and as to potential changes or other reforms to LIBOR may adversely
affect LIBOR rates and interest rates indexed to LIBOR, as well as other interest rates. At this time, it is not possible to predict
how markets will respond to these alternative reference rates, and the effect of any changes or reforms to LIBOR or discontinuation
of LIBOR on new or existing financial instruments to which we have exposure. If LIBOR ceases to exist, or if the methods of
calculating LIBOR change from current methods for any reason, interest rates on financial instruments whose value is tied to
LIBOR may be adversely affected. The manner and impact of this transition and related developments, as well as the effect of
these developments on our funding costs, investment and trading securities portfolios, and business, is uncertain and may be
materially adverse to our profitability.
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’s earnings could be adversely impacted by incidences of fraud and compliance failure
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.
Risks associated with cyber-security could negatively affect our earnings
The financial services industry has experienced an increase in both the number and severity of reported cyber attacks aimed at
gaining unauthorized access to bank systems as a way to misappropriate assets and sensitive information, corrupt and destroy
data, or cause operational disruptions. We have established policies and procedures to prevent or limit the impact of security
breaches, but such events may still occur or may not be adequately addressed if they do occur. Although we rely on security
safeguards to secure our data, these safeguards may not fully protect our systems from compromises or breaches.
We also rely on the integrity and security of a variety of third party processors, payment, clearing and settlement systems, as well
as the various participants involved in these systems, many of which have no direct relationship with us. Failure by these participants
or their systems to protect our customers' transaction data may put us at risk for possible losses due to fraud or operational
disruption.
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Our customers are also the target of cyber attacks and identity theft. Large scale identity theft could result in customers' accounts
being compromised and fraudulent activities being performed in their name. We have implemented certain safeguards against
these types of activities but they may not fully protect us from fraudulent financial losses.
The occurrence of a breach of security involving our customers' information, regardless of its origin, could damage our reputation
and result in a loss of customers and business and subject us to additional regulatory scrutiny, and could expose us to litigation
and possible financial liability. Any of these events could have a material adverse effect on our financial condition and results of
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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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 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.
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The Corporation may become 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, 2017, the Corporation had $36.0 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.
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.
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The Corporation may not be able to pay dividends in the future in accordance with past practice
Risks Related to the Corporation’s Common Stock
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:
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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, 2018, February 14, 2021, May 31, 2019, 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 two offices in Brazil, Indiana and an office in Clay
City, Indiana. All three buildings are held in fee.
Facilities of the Corporation’s banking centers in Vermillion County include two offices in Clinton, Indiana and offices in
Cayuga and Newport, Indiana. All four buildings are held in fee.
Facilities of the Corporation’s banking centers in Sullivan County include offices in Sullivan, 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.
22
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 two offices in Vincennes, Indiana. Both 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 and Montezuma, Indiana. All four 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. A banking center in Bloomington is leased and the lease expires on June 30, 2021. The other
buildings are 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
Mattoon, 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.
Facilities of the Corporation’s banking center in Champaign County include two offices in Champaign, Illinois, an office in
Mahomet, Illinois, and an office 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, 2019. The banking center in Mahomet is leased and the lease expires on June 4, 2019. The banking center in
Urbana is held in fee.
Facilities of the Corporation’s banking center in Vermilion County include four 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 five buildings are held in fee.
23
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 April 30, 2020.
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.
The facility of the Corporation’s subsidiary, First Chanticleer Corporation, includes an office building in Terre Haute,
Indiana. The building is held in fee by First Chanticleer Corporation.
Facilities of the Corporation’s subsidiary, FFB Risk 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 or of which any
of their property is the subject, 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 1, 2018 shareholders owned 12,255,045 shares of the Corporation's common stock. The stock is traded on the
NASDAQ Global Select Market under the symbol “THFF”. On March 1, 2018, approximately 4,945 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 2017 and 2016.
Quarter ended
2017
2016
Trade Price
High
Low
Cash
Dividends
Declared
Trade Price
High
Low
Cash
Dividends
Declared
March 31 $
$
June 30
$
September 30
$
December 31
51.18
49.29
47.02
49.80
$
$
$
$
43.92
44.02
40.38
44.60
$
$
$
$
$
$
0.50
2.01
34.54
37.62
41.32
52.90
$
$
$
$
31.30
31.98
36.07
39.40
$
$
0.50
0.50
24
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 74.72%. During this same period, the return on The Russell 2000 Index was 93.58% and the SNL Index of Banks
$1 - $5 Billion had a return of 161.04%.
Total Return Performance
First Financial Corporation
Russell 2000
SNL Bank $1B-$5B
e
u
l
a
V
x
e
d
n
I
325
300
275
250
225
200
175
150
125
100
75
50
25
12/31/12
12/31/13
12/31/14
12/31/15
12/31/16
12/31/17
Index
12/31/2012
12/31/2013
12/31/2014
12/31/2015
12/31/2016
12/31/2017
First Financial Corporation
Russell 2000
SNL Bank $1B-$5B
100.00
100.00
100.00
122.82
138.82
145.41
123.14
145.62
152.04
120.83
139.19
170.20
193.18
168.85
244.85
174.72
193.58
261.04
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 257,989 purchases of common stock by the Corporation during the year ended
December 31, 2015. On February 3, 2016 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 637,500 shares may be repurchased. There were 9,524 and 565,618 purchases of common stock by the
Corporation during the years ended December 31, 2017 and December 31, 2016. The Corporation contributed 22,714 shares of
treasury stock to the ESOP in November of 2017. There were no shares of common stock purchased by the Corporation during
the fourth quarter of the fiscal year covered by this report.
25
ITEM 6.
SELECTED FINANCIAL DATA
(Dollar amounts in thousands, except per share amounts)
2017
2016
2015
2014
2013
FIVE YEAR COMPARISON OF SELECTED FINANCIAL DATA
BALANCE SHEET DATA
Total assets
Securities
Loans
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
$
3,000,668
$
2,988,527
$
2,979,585
$
3,002,485
$
3,018,718
814,931
1,906,761
2,458,653
57,686
413,569
114,195
6,338
107,857
5,295
35,938
88,747
29,131
2.38
2.51
853,725
1,839,180
2,428,526
81,121
414,395
109,380
4,407
104,973
3,300
46,931
90,308
38,413
3.12
1.00
891,082
1,763,808
2,442,369
46,508
410,316
108,676
4,169
104,507
4,700
39,179
98,398
30,196
2.35
0.98
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
0.98%
1.30%
1.01%
1.12%
1.06%
6.69
15.24
14.58
105.32
9.26
14.67
14.01
31.81
7.46
14.26
13.60
41.51
8.37
13.99
13.36
38.16
8.35
13.45
12.69
40.58
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Management's Discussion and Analysis of Financial Condition and Results of Operations, as well as disclosures found
elsewhere in this report are based upon First Financial Corporation's consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial
statements requires the Corporation to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues,
and expenses. Material estimates that are particularly susceptible to significant change in the near term relate to the determination
of the allowance for loan losses, securities valuation and goodwill. Actual results could differ from those estimates.
Allowance for loan losses. The allowance for loan losses represents management's estimate of probable incurred losses in the
existing loan portfolio. The allowance for loan losses is increased by the provision for loan losses charged to expense and reduced
by loans charged off, net of recoveries. The allowance for loan losses is determined based on management's assessment of several
factors: reviews and evaluations of specific loans, changes in the nature and volume of the loan portfolio, current economic and
nonperforming loans. Loans are considered impaired if, based on current information and 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.
26
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 2017
COMPARISON OF 2017 TO 2016
Net income for 2017 was $29.1 million, or $2.38 per share versus $38.4 million, or $3.12 per share for 2016, which included an
after-tax gain on the sale of the Corporation's insurance subsidiary of $5.8 million. The 2017 results were negatively impacted by
the revaluation of the Corporation's deferred tax assets as a result of the passage of the Tax Cuts and Jobs Act resulting in a non-
cash tax expense of $6.3 million. Return on average assets at December 31, 2017 decreased 24.6% to 0.98% compared to 1.3%
at December 31, 2016.
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
in 2017 to $107.9 million compared to $105.0 million in 2016. Total average interest earning assets increased to $2.78 billion in
2017 from $2.75 billion in 2016. The tax-equivalent yield on these assets increased to 4.34% in 2017 from 4.21% in 2016. Total
average interest-bearing liabilities increased to $2.05 billion in 2017 from $1.92 billion in 2016. The average cost of these interest-
bearing liabilities increased to 0.31% in 2017 from 0.23% in 2016.
The net interest margin increased from 4.04% in 2016 to 4.11% in 2017. Earning asset yields increased 13 basis points while the
rate on interest-bearing liabilities increased by 8 basis points.
27
CONSOLIDATED BALANCE SHEET - AVERAGE BALANCES AND INTEREST RATES
Average
Balance
2017
Interest
Yield/
Rate
Average
Balance
December 31,
2016
Interest
Yield/
Rate
Average
Balance
2015
Interest
Yield/
Rate
(Dollar amounts in thousands)
ASSETS
Interest-earning assets:
Loans (1) (2)
Taxable investment securities
Tax-exempt investments (2)
Federal funds sold
$1,855,092
632,672
279,301
12,663
92,750
14,325
13,337
101
5.00% $1,792,609
2.26%
4.78%
0.80%
672,641
267,849
15,066
87,636
14,506
13,358
63
4.89% $1,761,888
2.16%
4.99%
0.42%
705,118
259,191
18,272
85,529
15,814
13,518
52
4.85%
2.24%
5.22%
0.28%
4.19%
Total interest-earning assets
2,779,728
120,513
4.34% 2,748,165
115,563
4.21% 2,744,469
114,913
Non-interest earning assets:
Cash and due from banks
Premises and equipment, net
Other assets
Less allowance for loan losses
61,650
48,368
114,329
(19,528)
TOTALS
$2,984,547
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
62,694
49,721
122,450
(19,650)
$2,963,380
73,066
50,877
128,177
(19,658)
$2,976,931
Transaction accounts
$1,647,622
Time deposits
Short-term borrowings
Other borrowings
356,281
39,802
7,205
3,795
2,216
245
82
0.23% $1,482,046
0.62%
0.62%
1.14%
393,180
38,081
8,475
1,986
2,173
134
114
0.13% $1,463,662
0.55%
0.35%
1.35%
437,961
32,644
14,463
1,429
2,505
70
165
Total interest-bearing liabilities:
2,050,910
6,338
0.31% 1,921,782
4,407
0.23% 1,948,730
4,169
0.10%
0.57%
0.21%
1.14%
0.21%
Non interest-bearing liabilities:
Demand deposits
Other
Shareholders' equity
TOTALS
Net interest earnings
Net yield on interest- earning
assets
438,234
60,137
2,549,281
435,266
$2,984,547
550,977
75,589
2,548,348
415,032
$2,963,380
544,708
78,648
2,572,086
404,845
$2,976,931
$ 114,175
$ 111,156
$ 110,744
4.11%
4.04%
4.04%
(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%.
28
The following table sets forth the components of net interest income due to changes in volume and rate. The table information
compares 2017 to 2016 and 2016 to 2015.
(Dollar amounts in thousands)
Volume
Rate
Interest earned on interest-earning assets:
Volume/
Rate
Total
Volume
Rate
Volume/
Rate
Total
2017 Compared to 2016 Increase
(Decrease) Due to
2016 Compared to 2015 Increase
(Decrease) Due to
Loans (1) (2)
$
3,055
$
1,991
$
69
$
5,115
$
1,492
$
605
$
Taxable investment securities
Tax-exempt investment securities (2)
Federal funds sold
Total interest income
Interest paid on interest-bearing liabilities:
(862)
571
(10)
724
(568)
57
(43)
(24)
(9)
(181)
(21)
38
(728)
452
(9)
(608)
(592)
24
$
2,754
$
2,204
$
(7) $
4,951
$
1,207
$
(571) $
Transaction accounts
Time deposits
Short-term borrowings
Other borrowings
Total interest expense
Net interest income
222
(204)
6
(17)
7
1,428
273
100
(18)
1,783
159
(26)
5
3
141
1,809
43
111
(32)
1,931
18
(256)
12
(68)
(294)
532
(85)
45
30
522
$
2,747
$
421
$
(148) $
3,020
$
1,501
$
(1,093) $
4
$
11
28
(20)
(4)
15
7
9
7
(12)
11
$
2,108
(1,308)
(160)
11
651
$
557
(332)
64
(50)
239
412
(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, 2017,
the provision for loan losses was $5.3 million, an increase of $2.0 million, or 60.5%, compared to 2016.
Impaired loans increased to $10.1 million at December 31, 2017 from $8.6 million at December 31, 2016. The allowance
allocation for these impaired loans increased to $625 thousand from $331 thousand during this period, contributing to the
increase in provision in 2017 compared to 2016. Net charge-offs for 2017 were $4.2 million as compared to $4.5 million for
2016 and $3.6 million for 2015. Non-accrual loans, excluding TDR's, decreased to $13.2 million at December 31, 2017 from
$13.5 million at December 31, 2016. Loans past due 90 days and still on accrual increased to $1.4 million compared to $0.6
million at December 31, 2016.
NON-INTEREST INCOME
Non-interest income of $35.9 million decreased $11.0 million from the $46.9 million earned in 2016. Non -interest income decreased
due to the gain on sale of certain assets and liabilities of the insurance brokerage of $12.8 million in 2016, which was offset by
$3.1 million received in 2017 for a collateralized debt obligation with no remaining book value.
NON-INTEREST EXPENSES
Non-interest expenses decreased to $88.7 million in 2017 from $90.3 million in 2016. Fringe benefits decreased $1.7 million as
pension costs were reduced.
INCOME TAXES
The Corporation's federal income tax provision was $20.6 million in 2017 compared to $19.9 million in 2016. The overall effective
tax rate in 2017 of 41.5% increased as compared to a 2016 effective rate of 34.1%, primarily due to the deferred tax adjustment
related to the Tax Cuts and Jobs Act.
29
COMPARISON OF 2016 TO 2015
Net income for 2016 was $38.4 million or $3.12 per share compared to $30.2 million in 2015 or $2.35 per share. This increase in
net income was driven by the gain on sale of certain assets and liabilities of the insurance brokerage of $12.8 million, as well as
lower non-interest expense due to reduced salaries and benefits expenses as a result of the sale.
Net interest income increased $466 thousand in 2016 compared to 2015. The provision for loan losses decreased $1.4 million
from $4.7 million in 2015 to $3.3 million in 2016. Non-interest expenses decreased $8.1 million while non-interest income
increased $7.7 million. The increase in non-interest income and the decrease in non-interest expense resulted primarily from the
sale of the insurance brokerage.
The provision for income taxes increased $9.5 million from 2015 to 2016 and the effective tax rate increased 851 basis points, or
33.2% in 2016 from 2015. The tax increase is principally due to the sale of certain assets and liabilities of the brokerage operation.
The sale eliminated goodwill of $5.1 million which was not deductible for tax purposes which had the effect of increasing the tax
gain on the sale compared to the book gain, resulting in additional tax expense.
COMPARISON AND DISCUSSION OF 2017 BALANCE SHEET TO 2016
The Corporation's total assets increased 0.4% or $12.1 million at December 31, 2017, from a year earlier. Available-for-sale
securities decreased $38.8 million at December 31, 2017, from the previous year. Loans, net increased by $67.6 million to $1.91
billion. Deposits increased $30.1 million while borrowings decreased by $23.4 million. Total shareholders' equity decreased $0.8
million to $413.6 million at December 31, 2017. In 2017 dividends paid by the Corporation totaled $2.50, which included a $1.50
per share special dividend paid to shareholders on December 1, 2017, which totaled $18,335,625. There were also 22,714 shares
from the treasury with a value of $1.06 million that were contributed to the ESOP plan in 2017 compared to 30,975 shares with
a value of $1.36 million in 2016.
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 2017 the portfolio's balance decreased by 4.5%. The average life of the
portfolio decreased from 4.9 years in 2016 to 4.8 years in 2017. The portfolio structure will continue to provide cash flows to be
reinvested during 2018.
(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
2017
Total
U.S. government sponsored
entity mortgage-backed
securities and agencies (1)
$
Collateralized mortgage
obligations (1)
States and political
subdivisions
Corporate obligations
439
130
4,701
—
4.78% $
4,277
4.89% $
55,887
5.72% $ 168,432
4.52% $ 229,035
4.22%
440
6.32%
5,175
3.57%
333,924
2.47%
339,669
3.93%
—%
31,338
—
3.38%
—%
85,726
—
3.51%
109,857
3.12%
231,622
—%
14,605
—%
14,605
TOTAL
$
5,270
4.01% $
36,055
3.60% $ 146,788
4.35% $ 626,818
3.08% $ 814,931
(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
2016
Total
U.S. government sponsored
entity mortgage-backed
securities and agencies (1)
$
Collateralized mortgage
obligations (1)
States and political
subdivisions
Corporate obligations
TOTAL
73
—
3,527
—
3,600
4.62% $
10,583
4.82% $
71,322
5.69% $ 192,280
4.59% $ 274,258
—%
1,525
5.34%
6,504
3.54%
340,147
2.44%
348,176
3.66%
—%
3.68%
51,043
—
63,151
3.54%
—%
90,010
—
3.49%
—%
74,343
12,368
3.09%
218,923
—%
12,368
3.80%
167,836
4.43%
619,138
3.14%
853,725
(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 2017 are
set forth in the following analyses.
(Dollar amounts in thousands)
Loan Category
Commercial
Residential
Consumer
TOTAL
2017
2016
2015
2014
2013
$ 1,139,490
436,143
327,976
$ 1,903,609
$ 1,106,182
423,911
305,881
$ 1,835,974
$ 1,043,980
444,447
272,896
$ 1,761,323
$ 1,044,522
469,172
266,656
$ 1,780,350
$ 1,042,138
482,377
268,033
$ 1,792,548
(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
$
459,602
$
531,255
$
148,633
$ 1,139,490
436,143
327,976
$ 1,903,609
$
$
155,995
375,260
531,255
$
$
139,568
9,065
148,633
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
2017
$ 1,903,609
$ 1,855,092
2016
$ 1,835,974
$ 1,792,609
2015
$ 1,761,323
$ 1,761,888
2014
$ 1,780,350
$ 1,795,235
2013
$ 1,792,548
$ 1,807,599
$
18,773
$
19,946
$
18,839
$
20,068
$
21,958
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
1,572
761
6,429
8,762
1,377
842
2,384
4,603
4,159
5,295
2,659
1,011
5,279
8,949
1,663
676
2,137
4,476
4,473
3,300
2,852
866
4,810
8,528
2,429
452
2,054
4,935
3,593
4,700
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
$
19,909
$
18,773
$
19,946
$
18,839
$
20,068
0.22%
0.25%
0.20%
0.31%
0.46%
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.
The allowance is maintained at an amount management believes sufficient to absorb probable incurred losses in the loan portfolio.
Monitoring loan quality and maintaining an adequate allowance is an ongoing process overseen by senior management and the
loan review function. On at least a quarterly basis, a formal analysis of the adequacy of the allowance is prepared and reviewed
by management and the Board of Directors. This analysis serves as a point in time assessment of the level of the allowance and
serves as a basis for provisions for loan losses. The loan quality monitoring process includes assigning loan grades and the use of
a watch list to identify loans of concern.
Included in the $1.9 billion of loans outstanding at December 31, 2017 are $4.3 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 $1.5 million and a carrying value of $1.6 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
increased to 1.04% at year end 2017 compared to 1.02% at year end 2016. The Corporation’s unallocated allowance position of
$1.5 million at December 31, 2017 decreased from $1.7 million at December 31, 2016 and December 31, 2015. The calculation
of historical losses used in the allowance computation averages the net charge off activity and qualitative factors that supplement
historical losses and consider internal and external factors that influence management's expectations of loss in the portfolio 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 $21.7 million at December 31, 2017 decreased from $22.7 million at December 31,
2016 due in large part to the resolution of certain commercial credits in 2017. Management believes the allowance for loan losses
balance at year end 2017, 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
2017
10,281
1,455
6,709
1,464
19,909
$
$
$
$
NONPERFORMING LOANS
Years Ended December 31,
2015
2014
2016
9,731
1,553
5,767
1,722
18,773
$
$
11,482
1,834
4,945
1,685
19,946
$
$
10,915
1,374
4,370
2,180
18,839
$
$
2013
12,450
1,585
3,650
2,383
20,068
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.
Restructured loans declined in 2017 and 2016 due to the reduced number and balance of loans added combined with the continued
receipt of payments in accordance with the restructuring terms as well as in 2015 there was one large commercial credit paid off.
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
2017
2016
2015
2014
2013
$
$
13,245
3,280
3,754
1,403
21,682
$
$
13,492
3,729
4,836
610
22,667
$
$
14,634
4,851
5,009
964
25,458
$
$
15,034
4,616
10,142
780
30,572
$
$
19,779
4,199
13,102
2,073
39,153
The ratio of the allowance for loan losses as a percentage of nonperforming loans was 92% at December 31, 2017, compared to
83% in 2016. There were no covered loans included in restructured loans in 2017 and 2016. 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, 2017 and 2016:
(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
2017
2016
7,935
4,445
865
13,245
57
1,088
258
1,403
60% $
34%
6%
100% $
4% $
78%
18%
100% $
6,534
6,077
881
13,492
44
287
279
610
Covered Loans (also included above)
2017
2016
2
60
—
62
—
88
—
88
3% $
97%
—%
100% $
—% $
100%
—%
100% $
3
109
—
112
—
80
—
80
48%
45%
7%
100%
7%
47%
46%
100%
3%
97%
—%
100%
—%
100%
—%
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 2017, 2016 and 2015.
(Dollar amounts in thousands)
Amount
Rate
Amount
Rate
Amount
Rate
2017
2016
2015
Non-interest-bearing demand
deposits
Interest-bearing demand deposits
Savings deposits
Time deposits: $100,000 or more
Other time deposits
TOTAL
$
438,234
$
550,977
$
544,708
719,728
927,894
100,432
255,849
$ 2,442,137
0.30%
0.19%
0.69%
0.59%
592,832
889,214
108,739
284,441
$ 2,426,203
0.18%
0.11%
0.58%
0.54%
591,412
872,250
117,066
320,895
$ 2,446,331
0.12%
0.08%
0.59%
0.57%
The maturities of certificates of deposit of more than $100 thousand outstanding at December 31, 2017, 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
$ 12,771
13,652
22,581
49,802
$ 98,806
Advances from the Federal Home Loan Bank decreased to zero in 2017 compared to $132 thousand in 2016. The Asset/Liability
Committee reviews these 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 subsidiary
banking institutions capital exceeds the requirements to be considered well capitalized at December 31, 2017.
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 2017 and 2016 was 105.3% and 31.8%, respectively. The Corporation expects to continue its policy of paying
regular cash dividends, subject to future earnings and regulatory restrictions and capital requirements.
INTEREST RATE SENSITIVITY AND LIQUIDITY
First Financial Corporation has established risk measures, limits and policy guidelines for managing interest rate risk and liquidity.
Responsibility for management of these functions resides with the Asset/Liability Committee. The primary goal of the Asset/
Liability Committee is to maximize net interest income within the interest rate risk limits approved by the Board of Directors.
Interest Rate Risk: Management considers interest rate risk to be the Corporation's most significant market risk. Interest rate risk
is the exposure to changes in net interest income as a result of changes in interest rates. Consistency in the Corporation's net interest
income is largely dependent on the effective management of this risk. The Asset/Liability position is measured using sophisticated
risk management tools, including earnings simulation and market value of equity sensitivity analysis. These tools allow management
to quantify and monitor both short-and long-term exposure to interest rate risk. Simulation modeling measures the effects of
34
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, 2017. 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 2.36% over the next 12 months and increase 6.03% over the following 12 months. Given a 100 basis point decrease in
rates, net interest income would decrease 2.78% over the next 12 months and decrease 4.2% 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
-3.39%
-2.78%
2.36%
1.48%
-6.19%
-4.20%
6.03%
8.38%
-8.61%
-5.64%
9.53%
15.22%
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 $5.3 million of investments that mature throughout the coming 12 months. The
Corporation also anticipates $98.3 million of principal payments from mortgage-backed securities. Given the current rate
environment, the Corporation anticipates $25.3 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 correspondents, 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, 2017, 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
$ 2,121,722
181,508
57,686
—
One year to
Three Years
$
— $
109,904
—
—
Three to
Five Years
Over Five
Years
Total
— $
45,467
—
—
— $ 2,121,722
336,931
52
57,686
—
—
—
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.
35
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,
2017. 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
$
387,701
5,012
$
193,683
4,525
$
194,018
487
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 in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the
preceding pages 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, 2017, 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, 2017, 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 internal control over financial
reporting as of December 31, 2017 and has issued a report dated March 7, 2018.
37
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and the Board of Directors of First Financial Corporation
Terre Haute, Indiana
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of First Financial Corporation (the "Corporation") as of
December 31, 2017 and 2016, the related consolidated statements of income and comprehensive income, changes in
shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2017, and the related
notes (collectively referred to as the "financial statements"). We also have audited the Corporation’s internal control over
financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework: (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the
Corporation as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the
three-year period ended December 31, 2017 in conformity with accounting principles generally accepted in the United States of
America. Also in our opinion, the Corporation maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework: (2013) issued by
COSO.
Basis for Opinions
The 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 the Corporation’s financial statements and an opinion on the Corporation’s internal control over financial reporting based on
our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States)
("PCAOB") and are required to be independent with respect to the Corporation in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to
error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the
financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also
included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the
overall presentation of the financial statements. 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.
Definition and Limitations of Internal Control Over Financial Reporting
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.
38
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.
We have served as the Corporation's auditor since 1999.
Indianapolis, Indiana
March 7, 2018
Crowe Horwath LLP
39
December 31,
2017
2016
$
74,107
—
814,931
1,886,852
10,379
12,913
48,272
85,016
34,355
1,630
1,880
30,333
$ 3,000,668
$
75,012
6,952
853,725
1,820,407
10,359
12,311
49,240
83,737
34,355
2,109
2,531
37,789
$ 2,988,527
$
425,001
$
564,092
43,178
1,990,474
2,458,653
57,686
—
70,760
2,587,099
43,759
1,820,675
2,428,526
80,989
132
64,485
2,574,132
1,822
75,624
420,275
(14,704)
(69,448)
413,569
$ 3,000,668
1,820
74,525
421,826
(14,164)
(69,612)
414,395
$ 2,988,527
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 $19,909 in 2017 and $18,773 in 2016
Restricted Stock
Accrued interest receivable
Premises and equipment, net
Bank-owned life insurance
Goodwill
Other intangible assets
Other real estate owned
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-14,595,320 in 2017 and 14,578,758 in 2016
Outstanding shares-12,246,464 in 2017 and 12,216,712 in 2016
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss)
Less: Treasury shares at cost-2,348,856 in 2017 and 2,362,046 in 2016
TOTAL SHAREHOLDERS’ EQUITY
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
See accompanying notes.
40
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
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
Insurance commissions
Gain on sale of certain assets and liabilities of insurance brokerage operation
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.
41
Years Ended December 31,
2016
2015
2017
$
91,100
$
86,128
$
84,022
14,325
7,391
1,379
114,195
6,011
245
82
6,338
107,857
5,295
102,562
5,001
11,895
12,499
59
74
—
1,688
4,722
35,938
51,322
6,897
7,186
915
22,427
88,747
49,753
20,622
29,131
14,506
7,269
1,477
109,380
4,159
134
114
4,407
104,973
3,300
101,673
5,208
10,530
12,307
34
2,346
12,822
1,842
1,842
46,931
52,730
6,865
7,300
1,300
22,113
90,308
58,296
19,883
38,413
15,815
7,194
1,645
108,676
3,934
70
165
4,169
104,507
4,700
99,807
5,586
10,145
11,798
17
6,945
—
1,998
2,690
39,179
60,109
6,978
6,991
1,769
22,551
98,398
40,588
10,392
30,196
3,335
(3,875)
28,591
2.38
12,225
$
$
(10,130)
5,367
33,650
3.12
12,317
$
$
(1,225)
6,353
35,324
2.35
12,836
$
$
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollar amounts in thousands, except per share data)
Balance, January 1, 2015
Common
Additional
Stock
Capital
Retained
Earnings
$
1,815
$
72,405
$
377,970
Accumulated
Other
Comprehensive
Income/(Loss)
$
(14,529) $
Treasury
Stock
Total
(43,447) $
394,214
Net income
Other comprehensive income (loss)
Omnibus Equity Incentive Plan, net
Treasury stock purchases (257,989 shares)
Contribution of 36,149 shares to ESOP
Cash Dividends, $.98 per share
Balance, December 31, 2015
Net income
Other comprehensive income (loss)
Omnibus Equity Incentive Plan, net
Treasury stock purchases (575,224 shares)
Contribution of 30,975 shares to ESOP
Cash Dividends, $1.00 per share
Balance, December 31, 2016
Net income
Other comprehensive income (loss)
Omnibus Equity Incentive Plan, net
Treasury stock purchases (9,524 shares)
Contribution of 22,714 shares to ESOP
Cash Dividends, $2.51 per share
Balance, December 31, 2017
See accompanying notes.
—
—
2
—
—
—
—
713
278
—
1,817
73,396
—
—
3
—
—
—
—
—
681
—
448
—
1,820
74,525
—
—
2
—
—
—
—
—
704
—
395
—
30,196
—
—
—
(12,533)
395,633
38,413
—
—
—
—
(12,220)
421,826
29,131
—
—
—
—
(30,682)
—
5,128
—
—
—
—
—
—
(8,698)
1,016
—
(9,401)
(51,129)
—
(4,763)
—
—
—
—
—
—
—
913
—
(14,164)
(69,612)
—
(540)
—
—
—
—
—
—
—
(503)
667
—
30,196
5,128
715
(8,698)
1,294
(12,533)
410,316
38,413
(4,763)
684
1,361
(12,220)
414,395
29,131
(540)
706
(503)
1,062
(30,682)
(19,396)
(19,396)
$
1,822
$
75,624
$
420,275
$
(14,704) $
(69,448) $
413,569
42
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,
2017
2016
2015
$
29,131
$
38,413
$
30,196
Net (accretion) amortization on securities
Provision for loan losses
Securities (gains) losses
Depreciation and amortization
Provision for deferred income taxes
Net change in accrued interest receivable
Contribution of shares to ESOP
Gain on sale of certain assets and liabilities of insurance brokerage operation
Stock compensation expense
Gain on sale of mortgage loans
Loss (gain) 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
Redemption of restricted stock
Purchase of restricted stock
Purchase of customer list
Proceeds from sale of certain assets and liabilities of insurance brokerage
operation
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
Continued
43
3,786
5,295
(59)
4,426
(4,241)
(602)
1,062
—
706
(1,688)
108
(62,712)
66,265
8,658
50,135
9,743
141,819
(111,138)
(72,463)
6,952
—
(20)
—
—
1,419
(2,979)
(26,667)
30,121
(23,303)
(30,556)
(503)
170,000
(170,132)
(24,373)
3,695
3,300
(34)
4,968
(1,512)
(578)
1,361
(12,822)
684
(1,842)
93
(68,945)
71,010
3,401
41,192
—
168,506
(150,893)
(80,434)
2,863
500
(21)
—
16,895
1,583
(3,049)
(44,050)
(13,906)
47,158
(12,359)
(19,396)
54,350
(66,672)
(10,825)
2,940
4,700
(17)
5,490
(924)
(140)
1,294
—
684
(1,998)
116
(72,303)
75,542
(4,325)
41,255
3,735
150,315
(149,181)
12,901
(1,815)
5,587
(21)
(103)
—
1,638
(3,393)
19,663
(14,899)
(14,184)
(12,632)
(8,698)
36,900
(36,812)
(50,325)
NET CHANGE IN CASH AND CASH EQUIVALENTS
CASH AND DUE FROM BANKS, BEGINNING OF YEAR
(905)
75,012
(13,683)
88,695
10,593
78,102
CASH AND DUE FROM BANKS, END OF YEAR
$
74,107
$
75,012
$
88,695
SUPPLEMENTAL DISCLOSURES OF CASH FLOW AND NONCASH
INFORMATION:
Cash paid for the year for:
Interest
Income Taxes
See accompanying notes.
$
$
6,337
11,158
$
$
4,432
18,739
$
$
4,237
12,869
44
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), First Chanticleer Corporation, a property rental entity 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, 2017, $743.3 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 and investment activities.
The Corporation operates 66 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.; three in Clay County,
Indiana; one in Gibson County, Indiana.; one in Greene County, Indiana; two in Knox County, Indiana; four in Parke County,
Indiana; one in Putnam County, Indiana; four in Sullivan County, Indiana; one in Vanderburgh County, Indiana,; four in Vermillion
County, Indiana; four 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; two in
Richland County, Illinois; six in Vermilion County, Illinois; and one in Wayne County, Illinois. It also has a main office in downtown
Terre Haute and an operations center/office building in southern Terre Haute.
Regulatory Agencies: First Financial Corporation is a multi-bank holding company and as such is regulated by various banking
agencies. The holding company is regulated by the Seventh District of the Federal Reserve System. The national bank subsidiary
is regulated by the Office of the Comptroller of the Currency. The state bank subsidiary is jointly regulated by the state banking
organization and the Federal Deposit Insurance Corporation. 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 $0.9 million, $0.7 million and $1.3 million for the years ended December 31, 2017, 2016 and 2015 respectively.
Securities: The Corporation classifies all securities as "available for sale." Securities are classified as available for sale when they
might be sold before maturity. Securities available for sale are carried at fair value with unrealized holdings gains and losses, net
of taxes, reported in other comprehensive income within shareholders' equity.
Interest income includes amortization of purchase premium or discount. Premiums and discounts are amortized on the level yield
method without anticipating prepayments. Mortgage-backed securities are amortized over the expected life. Realized gains and
losses on sales are based on the amortized cost of the security sold. Management evaluates securities for other-than temporary
impairment (OTTI) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an
evaluation.
45
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 fair value, 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 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
46
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. 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.
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.
47
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. There were not any changes to the provision for loan losses related to the FDIC indemnification asset
in 2017, 2016, and 2015. At December 31, 2017, 2016, and 2015, the balance of the indemnification asset was not material and
is included in other assets.
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. Physical possession of residential real estate property collateralizing a consumer
mortgage loan occurs when legal title is obtained upon completion of foreclosure or when the borrower conveys all interest in
the property to satisfy the loan through completion of a deed in lieu of foreclosure or similar legal agreement. 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 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 Charges and 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 Charges and Fees on the income statement, is for fees earned for servicing
loans.
The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income
when earned. The amortization of mortgage servicing rights is netted against loan servicing fee income. Servicing fees totaled
$1.3 million, $1.3 million and $1.3 million for the years ended December 31, 2017, 2016 and 2015. 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.
48
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 assets arising from the whole bank 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: Prior to 2011, a deferred compensation plan covered 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 $95 thousand, $114 thousand and $142 thousand, resulting in a deferred compensation liability of $2.0
million at December 31, 2017 and $2.1 million at December 31, 2016. There are no deferred compensation plans now in effect
for directors.
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 2017, 2016 and 2015. There is a liability of $11.4 million and $12.3 million as of year-end 2017 and 2016. 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 2017, 2016 and 2015 was $1.6 million, $1.5 million and $1.4 million, respectively, and resulted in
a liability of $836 thousand at December 31, 2017 and $823 thousand at December 31, 2016.
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.
49
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 as the restricted stock awards are
included in outstanding shares.. 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, net of taxes, 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.
Accounting Pronouncements Adopted:
ASU No. 2016-09, "Improvements to Employee Share-Based Payment Accounting” includes provisions intended to simplify
various aspects related to how share-based payments are accounted for and presented in the financial statements. Some of the
key provisions of this new ASU include: (1) companies will no longer record excess tax benefits and certain tax deficiencies in
additional paid-in capital (“APIC”). Instead, they will record all excess tax benefits and tax deficiencies as income tax expense
or benefit in the income statement, and APIC pools will be eliminated. The guidance also eliminates the requirement that
excess tax benefits be realized before companies can recognize them. In addition, the guidance requires companies to present
excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity; (2) increase the
amount an employer can withhold to cover income taxes on awards and still qualify for the exception to liability classification
for shares used to satisfy the employer’s statutory income tax withholding obligation. The new guidance will also require an
employer to classify the cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding
obligation as a financing activity on its statement of cash flows (current guidance did not specify how these cash flows should
be classified); and (3) permit companies to make an accounting policy election for the impact of forfeitures on the recognition
of expense for share-based payment awards. Forfeitures can be estimated, as required today, or recognized when they occur.
The Corporation adopted ASU 2016-09 in the first quarter of 2017. The adoption of ASU No. 2016-09 did not have a material
impact on the consolidated financial statements.
In March 2017, the FASB issued ASU No. 2017-08, “Premium Amortization on Purchased Callable Debt Securities.” This
ASU shortens the amortization period for the premium on certain purchased callable debt securities to the earliest call date.
Today, entities generally amortize the premium over the contractual life of the security. The new guidance does not change the
50
accounting for purchased callable debt securities held at a discount; the discount continues to be amortized to maturity. ASU
No. 2017-08 is effective for interim and annual reporting periods beginning after December 15, 2018; early adoption is
permitted. The guidance calls for a modified retrospective transition approach under which a cumulative-effect adjustment will
be made to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Corporation
elected to early adopt ASU 2017-08 in the fourth quarter of 2017. The adoption of this guidance did not have a material impact
on the Corporation’s financial statements.
Recently Issued Not Yet Effective Accounting Pronouncements:
In May 2014, the FASB issued an update (ASU No. 2014-09, Revenue from Contracts with Customers) creating FASB Topic 606,
Revenue from Contracts with Customers. The guidance in this update affects any entity that either enters into contracts with
customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are
within the scope of other standards (for example, insurance contracts or lease contracts). The core principle of the guidance is that
an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an
entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in
the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract
and (v) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2015-4 “Revenue from Contracts with
Customers - Deferral of the Effective Date” deferred the effective date of ASU 2014-09 by one year and as a result, the new
standard will be effective the first quarter of 2018. The Corporation’s revenue is comprised of net interest income on financial
assets and financial liabilities, which is explicitly excluded from the scope of ASU 2014-09, and non-interest income. Based on
the Corporation’s analysis of the effect of the new standard on its recurring revenue streams, the Corporation did not expect and
did not experience an impact on the Corporation’s financial statements upon adoption in the first quarter of 2018. No adjustments
to opening retained earnings was recorded on January 1, 2018.
In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities,
amending ASU Subtopic 825-10. The amendments in this update make targeted improvements to generally accepted accounting
principles (GAAP) as follows: 1) Require equity investments to be measured at fair value with changes in fair value recognized
in net income.; 2) Simplify the impairment assessment of equity investments without readily determinable fair values by requiring
a qualitative assessment to identify impairment.; 3) Eliminate the requirement to disclose the fair value of financial instruments
measured at amortized cost for entities that are not public business entities.; 4) Eliminate the requirement for public business
entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for
financial instruments measured at amortized cost on the balance sheet.; 5) Require public business entities to use the exit price
notion when measuring the fair value of financial instruments for disclosure purposes.; 6) Require an entity to present separately
in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-
specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for
financial instruments.; 7) Require separate presentation of financial assets and financial liabilities by measurement category and
form of financial asset on the balance sheet or the accompanying notes to the financial statements.; and 8) Clarify that an entity
should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination
with the entity’s other deferred tax assets. The amendments in this update are effective for fiscal years beginning after December
15, 2017. ASU 2016-1 became effective on January 1, 2018 and did not have a significant impact on the Corporation’s financial
statements. However, the fair value disclosures for our loan portfolio will consider the exit price.
In February 2016, the FASB issued ASU No. 2016-02, "Leases." Under the new guidance, lessees will be required to recognize
the following for all leases (with the exception of short-term leases): 1) a lease liability, which is the present value of a lessee's
obligation to make lease payments, and 2) a right-of-use asset, which is an asset that represents the lessee's right to use, or control
the use of, a specified asset for the lease term. Lessor accounting under the new guidance remains largely unchanged as it is
substantially equivalent to existing guidance for sales-type leases, direct financing leases, and operating leases. Leveraged leases
have been eliminated, although lessors can continue to account for existing leveraged leases using the current accounting guidance.
Other limited changes were made to align lessor accounting with the lessee accounting model and the new revenue recognition
standard. All entities will classify leases to determine how to recognize lease-related revenue and expense. Quantitative and
qualitative disclosures will be required by lessees and lessors to meet the objective of enabling users of financial statements to
assess the amount, timing, and uncertainty of cash flows arising from leases. The intention is to require enough information to
supplement the amounts recorded in the financial statements so that users can understand more about the nature of an entity’s
leasing activities. ASU No. 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018; early
adoption is permitted. All entities are required to use a modified retrospective approach for leases that exist or are entered into
after the beginning of the earliest comparative period in the financial statements. They have the option to use certain relief; full
retrospective application is prohibited. The Corporation continues to evaluate the provision of the new lease standard but, due to
the small number of lease agreements presently in effect for the Corporation, does not expect the new guidance will have a
significant impact on the Corporation’s financial statements.
51
In June 2016 ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments (ASU 2016-13), was issued and requires entities to use a current expected credit loss ("CECL") model which is a
new impairment model based on expected losses rather than incurred losses. Under this model an entity would recognize an
impairment allowance equal to its current estimate of all contractual cash flows that the entity does not expect to collect from
financial assets measured at amortized cost. The entity's estimate would consider relevant information about past events,
current conditions, and reasonable and supportable forecasts, which will result in recognition of lifetime expected credit losses
upon loan origination. ASU 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019,
with early adoption permitted for annual reporting periods beginning after December 15, 2018. Management has initiated an
implementation committee to assist in assessing data and system needs for the new standard. Management anticipates the
effect will be an increase to the allowance for loan losses upon adoption, however, the overall increase is uncertain at this time.
In August of 2016 ASU 2016-15 "Statement of Cash Flows (Topic 230)" ("ASU 2016-15") was issued and is intended to reduce
the diversity in practice around how certain transactions are classified within the statement of cash flows. ASU 2016-15 is
effective for public companies for annual periods beginning after December 15, 2017, including interim periods within those
fiscal years. Early adoption is permitted with retrospective application. ASU 2016-15 became effective on January 1, 2018 and
did not have a significant impact on the Corporation’s accounting and disclosures.
In January 2017, the FASB issued ASU No. 2017-04, “Simplifying the Test for Goodwill Impairment.” The guidance removes
Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment will now
be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.
All other goodwill impairment guidance will remain largely unchanged. ASU No. 2017-04 is effective for interim and annual
reporting periods beginning after December 15, 2019, applied prospectively. Early adoption is permitted for any impairment
tests performed after January 1, 2017. The Corporation is assessing ASU 2017-04 but does not expect a significant impact on
its accounting and disclosures.
In March 2017, the FASB issued ASU No. 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net
Periodic Postretirement Benefit Cost.” Under the new guidance, employers will present the service cost component of the net
periodic benefit cost in the same income statement line item (e.g., Salaries and Benefits) as other employee compensation costs
arising from services rendered during the period. In addition, only the service cost component will be eligible for capitalization
in assets. Employers will present the other components separately (e.g., Other Noninterest Expense) from the line item that
includes the service cost. ASU No. 2017-07 is effective for interim and annual reporting periods beginning after December 15,
2017. Early adoption is permitted, however, the Corporation has decided not to early adopt. Employers will apply the guidance
on the presentation of the components of net periodic benefit cost in the income statement retrospectively. The guidance
limiting the capitalization of net periodic benefit cost in assets to the service cost component will be applied prospectively. ASU
2017-07 became effective on January 1, 2018 and did not have a significant impact on the Corporation’s accounting and
disclosures.
In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification”. ASU
2017-09 was issued to provide clarity and reduce both 1) diversity in practice and 2) cost and complexity when applying the
guidance in Topic 718, Compensation - Stock Compensation, to a change to the terms or conditions of a share-based payment
award. Diversity in practice has arisen in part because some entities apply modification accounting under Topic 718 for
modifications to terms and conditions that they consider substantive, but do not when they conclude that particular
modifications are not substantive. Others apply modification accounting for any change to an award, except for changes that
they consider purely administrative in nature. Still others apply modification accounting when a change to an award changes
the fair value, the vesting, or the classification of the award. In practice, it appears that the evaluation of a change in fair value,
vesting, or classification may be used to evaluate whether a change is substantive. ASU 2017-09 include guidance on
determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification
accounting under Topic 718. ASU 2017-09 is effective for the annual period, and interim periods within the annual periods,
beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period for: (a) public
business entities for reporting periods for which financial statements have not yet been issued, and (b) all other entities for
reporting periods for which financial statements have not yet been made available for issuance. ASU 2017-09 should be applied
prospectively to an award modified on or after the adoption date. ASU 2017-07 became effective on January 1, 2018 and did
not have a significant impact on the Corporation’s consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220):
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” ASU 2018-02 was issued to address
the income tax accounting treatment of the stranded tax effects within other comprehensive income due to the prohibition of
backward tracing due to an income tax rate change that was initially recorded in other comprehensive income. This issue came
about from the enactment of the Tax Cuts and Jobs Act on December 22, 2017 that changed the Company’s income tax rate
from 35% to 21%. The ASU changed current accounting whereby an entity may elect to reclassify the stranded tax effect from
accumulated other comprehensive income to retained earnings. The ASU is effective for periods beginning after December 15,
52
2018 although early adoption is permitted. The Corporation will adopt the standard in the first quarter of 2018 and adoption
will not have a material impact on the consolidated 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 utilizes. The
fair value of state and municipal obligations are derived by comparing the securities to current market rates plus an appropriate
credit spread to determine an estimated value. Illiquidity spreads are then considered. Credit reviews are performed on each of
the issuers. The significant unobservable inputs used in the fair value measurement of the Corporation’s state and municipal
obligations are credit spreads related to specific issuers. Significantly higher credit spread assumptions would result in significantly
lower fair value measurement. Conversely, significantly lower credit spreads would result in a significantly higher fair value
measurement.
The fair value of derivatives is based on valuation models using observable market data as of the measurement date (Level 2
inputs).
December 31, 2017
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
Carrying Value
13,695
215,338
1
339,670
231,622
14,605
814,931
— $
—
—
—
3,680
14,605
18,285
$
$
$
— $
—
—
—
—
—
— $
$
$
$
13,695
215,338
1
339,670
227,942
—
796,646
298
(298)
53
(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
December 31, 2016
Fair Value Measurement Using
Level 1
Level 2
Level 3
$
$
— $
—
—
—
—
—
— $
$
$
$
13,249
261,005
4
348,176
214,713
—
837,147
653
(653)
Carrying Value
13,249
261,005
4
348,176
218,923
12,368
853,725
— $
—
—
—
4,210
12,368
16,578
$
There were no transfers between Level 1 and Level 2 during 2017 and 2016.
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, 2017 and
2016.
Fair Value Measurements Using Significant
Unobservable Inputs (Level 3)
December 31, 2017
Beginning balance, January 1
Total realized/unrealized gains or losses
Included in earnings
Included in other comprehensive income
Purchases
Settlements
Ending balance, December 31
Beginning balance, January 1
Total realized/unrealized gains or losses
Included in earnings
Included in other comprehensive income
Transfers
Settlements
Ending balance, December 31
$
$
$
$
State and
municipal
obligations
4,210
—
—
—
(530)
3,680
$
Collateralized
debt obligations
12,368
$
Total
16,578
—
2,773
—
(1,066)
18,285
$
$
—
2,773
—
(536)
14,605
Fair Value Measurements Using Significant
Unobservable Inputs (Level 3)
December 31, 2016
State and
municipal
obligations
4,725
—
—
—
(515)
4,210
Collateralized
debt obligations
14,875
$
—
(2,066)
—
(441)
12,368
$
Total
19,600
—
(2,066)
—
(956)
16,578
$
$
There were no unrealized gains and losses recorded in earnings for the years ended December 31, 2017, 2016 or 2015.
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 $3.9 million, after a valuation allowance of $0.6 million at December 31, 2017 and at a fair
value of $1.4 million, net of a valuation allowance of $0.3 million at December 31, 2016. The impact to the provision for loan
losses for the twelve months ended December 31, 2017 and December 31, 2016 was a $294 thousand increase and a $523 thousand
decrease, respectively. Other real estate owned is valued at Level 3. Other real estate owned at December 31, 2017 with a value
of $1.9 million was reduced $951 thousand for fair value adjustment. At December 31, 2017 other real estate owned was comprised
54
of $1.7 million from commercial loans and $212 thousand from residential loans. Other real estate owned at December 31, 2016
with a value of $2.5 million was reduced $930 thousand for fair value adjustment. At December 31, 2016 other real estate owned
was comprised of $2.0 million from commercial loans and $483 thousand 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.
The following tables present quantitative information about recurring and non-recurring Level 3 fair value measurements at
December 31, 2017 and 2016.
2017
Fair Value
Valuation Technique(s)
Unobservable Input(s)
Range
State and municipal
obligations
Other real estate
Impaired Loans
$
$
$
3,680 Discounted cash flow
Discount rate
1,880 Sales comparison/income
approach
3,882 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
2.30%-5.45%
—%
5.00%-20.00%
0.00%-50.00%
2016
Fair Value
Valuation Technique(s)
Unobservable Input(s)
Range
State and municipal
obligations
Other real estate
Impaired Loans
$
$
$
4,210 Discounted cash flow
Discount rate
2,531 Sales comparison/income
approach
1,387 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%
55
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, 2017 and 2016.
(Dollar amounts in thousands)
Commercial
Commercial & Industrial
Farmland
Non Farm, Non Residential
Agriculture
All Other Commercial
Residential
First Liens
Home Equity
Junior Liens
Multifamily
All Other Residential
Consumer
Motor Vehicle
All Other Consumer
TOTAL
(Dollar amounts in thousands)
Commercial
Commercial & Industrial
Farmland
Non Farm, Non Residential
Agriculture
All Other Commercial
Residential
First Liens
Home Equity
Junior Liens
Multifamily
All Other Residential
Consumer
Motor Vehicle
All Other Consumer
TOTAL
December 31, 2017
Allowance
for Loan
Losses
Allocated
Fair Value
Carrying Value
$
$
$
493
3,035
—
537
—
442
—
—
—
—
—
—
4,507
$
146
268
—
205
—
6
—
—
—
—
—
—
625
December 31, 2016
Allowance
for Loan
Losses
Allocated
Carrying Value
$
537
—
657
—
—
524
—
—
—
—
36
—
206
—
—
89
—
—
—
—
$
$
$
347
2,767
—
332
—
436
—
—
—
—
—
—
3,882
Fair Value
501
—
451
—
—
435
—
—
—
—
—
—
1,718
$
—
—
331
$
—
—
1,387
$
$
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 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
56
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, 2017
(Dollar amounts in thousands)
Cash and due from banks
Securities available-for-sale
Restricted stock
Loans, net
Accrued interest receivable
Deposits
Short-term borrowings
Federal Home Loan Bank advances
Accrued interest payable
(Dollar amounts in thousands)
Cash and due from banks
Federal funds sold
Securities available-for-sale
Restricted stock
Loans, net
Accrued interest receivable
Deposits
Short-term borrowings
Federal Home Loan Bank advances
Accrued interest payable
$
Carrying
Value
$
74,107
814,931
10,379
1,886,852
12,913
(2,458,653)
(57,686)
—
(372)
Fair Value
Level 1
Level 2
Level 3
Total
$
53,425
18,285
796,646
n/a
n/a
— 1,878,166
9,317
$
20,682
—
n/a
—
3,596
—
— (2,456,900)
(57,686)
—
—
—
(372)
—
— $
74,107
814,931
n/a
1,878,166
12,913
— (2,456,900)
(57,686)
—
—
—
(372)
—
December 31, 2016
$
Carrying
Value
$
75,012
6,952
853,725
10,359
1,820,407
12,311
(2,428,526)
(80,989)
(132)
(363)
Fair Value
Level 1
Level 2
Level 3
Total
$
— $
53,965
—
6,952
16,578
837,147
n/a
n/a
— 1,854,046
8,971
$
21,047
—
—
n/a
—
3,340
—
— (2,414,555)
(80,989)
—
(137)
—
(363)
—
75,012
6,952
853,725
n/a
1,854,046
12,311
— (2,414,555)
(80,989)
—
(137)
—
(363)
—
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 $12.5 million and $12.0 million at December 31, 2017 and 2016, respectively.
57
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
$
$
13,989
215,079
1
346,005
227,651
8,644
811,369
Amortized
Cost
$
$
13,594
261,878
4
353,499
217,365
9,181
855,521
$
$
$
$
December 31, 2017
Unrealized
Gains
Losses
24
2,071
—
370
4,671
5,961
13,097
$
$
(318) $
(1,812)
—
(6,705)
(700)
—
(9,535) $
Fair Value
13,695
215,338
1
339,670
231,622
14,605
814,931
December 31, 2016
Unrealized
Gains
Losses
32
3,200
—
1,021
3,954
4,411
12,618
$
$
(377) $
(4,073)
—
(6,344)
(2,396)
(1,224)
(14,414) $
Fair Value
13,249
261,005
4
348,176
218,923
12,368
853,725
As of December 31, 2017, 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 $423.9 million and $391.1 million at December 31, 2017 and 2016, 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 and calls during the years ended
December 31, 2017, 2016 and 2015, respectively.
(Dollar amounts in thousands)
Proceeds
Gross gains
Gross losses
2017
2016
2015
$
$
15,348
185
(126)
$
8,160
39
(5)
3,735
23
(6)
Gains of $185 thousand and losses of $126 thousand in 2017 and gains of $39 thousand and losses of $5 thousand in 2016 and
gains of $23 thousand and losses of $6 thousand in 2015 resulted from redemption premiums on called and sold securities.
58
Contractual maturities of debt securities at year-end 2017 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
$
$
4,683
30,765
83,483
131,353
250,284
561,085
811,369
$
$
4,701
31,338
85,726
138,157
259,922
555,009
814,931
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, 2017 and 2016.
(Dollar amounts in thousands)
U.S. Government entity mortgage-
backed securities
Mortgage-backed securities, residential
Collateralized mortgage obligations
State and municipal obligations
Total temporarily impaired securities
Less Than 12 Months
Fair Value
Unrealized
Losses
December 31, 2017
More Than 12 Months
Unrealized
Losses
Fair Value
Total
Fair Value
Unrealized
Losses
$
9,321
$
79,918
150,182
27,347
$ 266,768
$
(86)
(425)
(1,418)
(183)
3,538
53,815
146,750
(232) $
12,859
$
(1,387)
(5,287)
(517)
133,733
296,932
18,660
(2,112) $ 222,763
$
46,007
(7,423) $ 489,531
$
(318)
(1,812)
(6,705)
(700)
(9,535)
(Dollar amounts in thousands)
U.S. Government entity mortgage-
backed securities
Mortgage-backed securities, residential
Collateralized mortgage obligations
State and municipal obligations
Collateralized debt obligations
Total temporarily impaired securities
Less Than 12 Months
Fair Value
Unrealized
Losses
December 31, 2016
More Than 12 Months
Unrealized
Losses
Fair Value
Total
Fair Value
Unrealized
Losses
$
12,224
$
(377) $
202,248
169,717
72,852
7,561
$ 464,602
$
(4,072)
(3,086)
(2,396)
(1,224)
(11,155) $
— $
152
79,999
—
—
80,151
$
— $
(1)
(3,258)
—
12,224
$
202,400
249,716
72,852
—
7,561
(3,259) $ 544,753
$
(377)
(4,073)
(6,344)
(2,396)
(1,224)
(14,414)
The Corporation held 239 investment securities with an amortized cost greater than fair value as of December 31, 2017. The
unrealized losses on collateralized mortgage obligations, all 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 $9.5 million as of December 31, 2017 and
$14.4 million as of December 31, 2016. 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.
59
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. One of
the CDO's was called in first quarter 2017. The remaining two CDO’s have a contractual balance of $18.4 million at December 31,
2017 which has been reduced to $14.6 million by $2.6 million of interest payments received, $7.2 million of cumulative OTTI
charges recorded through earnings to date and increased by $6.0 million recorded in other comprehensive income. The severity
of the OTTI recorded varies by security, based on the analysis described below, and ranges, at December 31, 2017 from 28% to
80%. 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 could deteriorate before the CDO could no longer
fully support repayment of the Corporation’s note class. In the current year management determined there was no OTTI. There
was no OTTI recorded in 2016 or 2015.
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 was paid in full in 2015. In the first quarter of 2017 a CDO with no remaining book
value was called with the bank receiving $3.1 million, which is included in other non-interest income on the consolidated statements
of income and comprehensive income.
60
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 67.64 to 79.33
while Moody’s Investor Service pricing ranges from 19.53 to 49.45, with others falling somewhere in between. We recognize that
the Standard & Poors pricing utilized is an 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
Reductions for securities called 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,
2017
2016
2015
$
13,974
$
13,995
$
14,050
—
(6,842)
—
—
—
(21)
(55)
—
7,132
$
—
13,974
$
—
13,995
$
5. LOANS:
Loans are summarized as follows:
(Dollar amounts in thousands)
Commercial
Residential
Consumer
Total gross loans
Deferred costs, net
Allowance for loan losses
TOTAL
December 31,
2017
$ 1,139,490
436,143
327,976
1,903,609
3,152
(19,909)
$ 1,886,852
2016
$ 1,106,182
423,911
305,881
1,835,974
3,206
(18,773)
$ 1,820,407
Loans in the above summary include loans totaling $4.3 million and $5.1 million at December 31, 2017 and 2016 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, 2017 and 2016, loans held for sale included
$4.1 million and $6.1 million, respectively, and are included in the totals above.
In the normal course of business, the Corporation’s subsidiary banks make loans to directors and executive officers and to their
associates. In 2017, the aggregate dollar amount of these loans to directors and executive officers who held office amounted to
$59.1 million at the beginning of the year. During 2017, advances of $26.9 million, repayments of $43.3 million were made with
respect to related party loans for an aggregate dollar amount outstanding of $42.7 million at December 31, 2017.
Loans serviced for others, which are not reported as assets, total $484.4 million and $496.2 million at year-end 2017 and 2016.
Custodial escrow balances maintained in connection with serviced loans were $2.8 million and $2.7 million at year-end 2017 and
2016.
61
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,
2016
2017
2015
$
$
1,549
477
(592)
1,434
$
$
1,746
480
(677)
1,549
$
$
1,863
531
(648)
1,746
Third party valuations are conducted periodically for mortgage servicing rights. Based on these valuations, fair values were
approximately $2.3 million and $2.6 million at year end 2017 and 2016. There was no valuation allowance in 2017 or 2016.
Fair value for 2017 was determined using a discount rate of 13%, prepayment speeds ranging from 112% to 250%, depending on
the stratification of the specific right. Fair value at year end 2016 was determined using a discount rate of 12%, prepayment speeds
ranging from 108% to 316%, 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, DIVESTITURES AND FDIC INDEMNIFICATION ASSET:
The Bank is party to a loss sharing agreement with the Federal Deposit Insurance Corporation (“FDIC”) as a result of a 2009
acquisition. 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 $24.3 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 identified in the allowance for loan loss evaluation as future potential losses at December 31, 2017. Loans covered by
the loss share agreement excluding AS 310-30 loans at December 31, 2017 and 2016 totaled $4.3 million and $5.1 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 carrying amount of loans accounted for in accordance with
FASB ASC 310-30 at December 31, 2017 and 2016, 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
Commercial
Consumer
3,451
—
(1,555)
1,896
$
$
$
1,430
—
(1,430)
— $
Commercial
Consumer
4,122
—
(671)
3,451
$
$
1,480
—
(50)
1,430
$
$
2017
Total
4,881
—
(2,985)
1,896
2016
Total
5,602
—
(721)
4,881
$
$
$
$
62
During the quarter ended March 31, 2016 the Corporation sold a significant portion of the assets and liabilities of the insurance
operation for a gain of $12.8 million. Settlement of the transaction has been completed and the original gain was reduced by $199
thousand during the third quarter of 2016. The total assets, total revenues and net income of the insurance operation for 2015 were
$13.0 million, $7.6 million and $168 thousand, respectively. For 2014 they were $15.8 million, $8.3 million and $544 thousand,
respectively. The Corporation has chosen to focus its resources on the core banking activities. The sale of the insurance operations
eliminated the goodwill of $5.1 million from the original acquisition.
7. ALLOWANCE FOR LOAN LOSSES:
The following table presents the activity of the allowance for loan losses by portfolio segment for the years ended
December 31, 2017, 2016 and 2015.
December 31, 2017
Consumer
Residential
1,553
$
(179)
(761)
842
1,455
$
$
$
5,767
4,987
(6,429)
2,384
6,709
Unallocated
1,722
$
(258)
—
—
1,464
$
December 31, 2016
Consumer
Residential
1,834
$
54
(1,011)
676
1,553
$
$
$
4,945
3,964
(5,279)
2,137
5,767
Unallocated
1,685
$
37
—
—
1,722
$
December 31, 2015
Consumer
Residential
1,374
$
874
(866)
452
1,834
$
$
$
4,370
3,331
(4,810)
2,054
4,945
Unallocated
2,180
$
(495)
—
—
1,685
$
Total
18,773
5,295
(8,762)
4,603
19,909
Total
19,946
3,300
(8,949)
4,476
18,773
Total
18,839
4,700
(8,528)
4,935
19,946
$
$
$
$
$
$
Allowance for Loan Losses:
(Dollar amounts in thousands)
Beginning balance
Provision for loan losses
Loans charged -off
Recoveries
Ending Balance
Allowance for Loan Losses:
(Dollar amounts in thousands)
Beginning balance
Provision for loan losses
Loans charged -off
Recoveries
Ending Balance
Allowance for Loan Losses:
(Dollar amounts in thousands)
Beginning balance
Provision for loan losses
Loans charged -off
Recoveries
Ending Balance
Commercial
9,731
$
745
(1,572)
1,377
10,281
$
Commercial
11,482
$
(755)
(2,659)
1,663
9,731
$
Commercial
10,915
$
990
(2,852)
2,429
11,482
$
63
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, 2017 and 2016:
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, 2017
Commercial
Residential
Consumer
Unallocated
Total
$
$
619
$
6
$
— $
— $
9,662
—
1,449
—
6,709
—
1,464
—
625
19,284
—
10,281
$
1,455
$
6,709
$
1,464
$
19,909
(Dollar amounts in thousands)
Commercial
Residential
Consumer
Individually evaluated for impairment
$
9,619
$
463
$
—
Collectively evaluated for impairment
1,134,701
436,944
329,435
Acquired with deteriorated credit quality
BALANCE AT END OF YEAR
1,860
$ 1,146,180
—
—
$
437,407
$
329,435
Total
$
10,082
1,901,080
1,860
$ 1,913,022
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, 2016
Commercial
Residential
Consumer
Unallocated
Total
$
$
242
$
89
$
— $
— $
9,489
—
1,464
—
5,767
—
1,722
—
331
18,442
—
9,731
$
1,553
$
5,767
$
1,722
$
18,773
(Dollar amounts in thousands)
Commercial
Residential
Consumer
Individually evaluated for impairment
$
8,051
$
549
$
—
Collectively evaluated for impairment
Acquired with deteriorated credit quality
BALANCE AT END OF YEAR
1,101,269
3,415
$ 1,112,735
423,099
1,431
307,226
—
$
425,079
$
307,226
Total
8,600
$
1,831,594
4,846
$ 1,845,040
64
The following tables present loans individually evaluated for impairment by class of loan.
December 31, 2017
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
$
Farmland
Non Farm, Non Residential
Agriculture
All Other Commercial
$
802
930
2,461
123
1,238
802
930
2,461
123
1,238
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
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
— $
—
—
—
—
—
—
—
—
—
—
—
146
268
—
205
—
6
—
—
—
—
—
—
971
$
1,265
2,781
239
1,308
23
—
—
—
—
—
—
514
669
131
279
—
483
—
—
—
—
—
—
21
—
—
—
—
—
—
21
—
—
—
—
—
—
493
3,035
493
3,035
—
738
—
442
—
—
—
—
—
—
—
537
—
442
—
—
—
—
—
—
$
10,283
$
10,082
$
625
$
8,663
$
65
December 31, 2016
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
Recorded
Income
Investment Recognized Recognized
Cash Basis
Interest
Income
$
$
1,181
826
3,368
622
1,367
$
1,181
826
2,996
487
1,367
— $
—
—
—
—
$
981
770
3,096
351
1,477
— $
—
—
—
—
25
—
—
—
—
—
—
537
—
657
—
—
524
—
—
—
—
25
—
—
—
—
—
—
537
—
657
—
—
524
—
—
—
—
—
—
—
—
—
—
—
36
—
206
—
—
89
—
—
—
—
27
—
—
—
—
—
—
819
—
1,016
114
45
647
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
9,107
$
—
—
8,600
$
$
—
—
331
$
—
—
9,343
$
—
—
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
66
December 31, 2015
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
$
$
1,796
—
2,080
—
1,175
— $
—
—
—
—
18
—
—
—
—
—
—
3,463
—
3,682
—
483
460
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
13,157
$
$
—
—
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
67
The following tables present the recorded investment in nonperforming loans by class of loans.
(Dollar amounts in thousands)
Commercial
Commercial & Industrial
Farmland
Non Farm, Non Residential
Agriculture
All Other Commercial
Residential
First Liens
Home Equity
Junior Liens
Multifamily
All Other Residential
Consumer
Motor Vehicle
All Other Consumer
TOTAL
Loans Past
Due Over
90 Day Still
Accruing
$
December 31, 2017
Troubled Debt
Restructured
Accrual
Non-accrual
Non-accrual
$
41
19
—
—
—
2
—
56
—
—
1,011
3,105
8
137
—
—
268
—
—
—
—
—
9
177
$
212
$
—
2,440
—
—
575
—
—
—
—
—
527
1,679
4,141
172
707
1,236
3,972
249
134
—
90
242
623
$
1,484
$
3,349
$
3,754
$
13,245
(Dollar amounts in thousands)
Commercial
Commercial & Industrial
$
Farmland
Non Farm, Non Residential
Agriculture
All Other Commercial
Residential
First Liens
Home Equity
Junior Liens
Multifamily
All Other Residential
Consumer
Motor Vehicle
All Other Consumer
TOTAL
Loans Past
Due Over
90 Day Still
Accruing
December 31, 2016
Troubled Debt
Restructured
Accrual
Non-accrual
Non-accrual
$
45
—
—
—
—
276
—
55
—
—
293
—
3
—
60
—
—
3,525
—
—
—
—
60
150
$
383
$
—
2,941
—
—
995
—
—
—
—
—
517
2,405
978
1,027
744
1,380
5,496
285
202
—
94
140
741
$
669
$
3,798
$
4,836
$
13,492
68
Covered loans included in loans past due over 90 days still on accrual are $88 thousand at December 31, 2017 and $80 thousand
at December 31, 2016. Covered loans included in non-accrual loans are $62 thousand at December 31, 2017 and $112 thousand
at December 31, 2016. No covered loans are deemed impaired at December 31, 2017 and 2016. 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, 2017, 2016, and 2015 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
3,386
$
4,447
$
732
$
January 1,
Added
Charged Off
Payments
December 31,
$
$
—
—
(677)
2,709
(Dollar amounts in thousands)
Commercial
January 1,
Added
Charged Off
Payments
December 31,
$
$
3,584
—
—
(198)
3,386
227
(289)
(774)
3,611
Residential
5,593
123
(321)
(948)
4,447
$
$
$
$
$
$
386
(141)
(263)
714
Consumer
683
369
(70)
(250)
732
$
$
$
(Dollar amounts in thousands)
Commercial
Residential
Consumer
January 1,
Added
Charged Off
Payments
December 31,
$
$
8,955
$
5,189
$
614
$
—
—
(5,371)
3,584
$
748
(65)
(279)
5,593
$
342
(52)
(221)
683
$
2017
Total
8,565
613
(430)
(1,714)
7,034
2016
Total
9,860
492
(391)
(1,396)
8,565
2015
Total
14,758
1,090
(117)
(5,871)
9,860
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 2017, 2016 or 2015 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, 2017, 2016 and 2015 the Corporation modified 43, 42, and 57 loans respectively as
troubled debt restructurings. All of the loans modified were smaller balance residential and consumer loans. There were no
loans that were charged off within 12 months of the modification for 2017, 2016, or 2015.
The Corporation had no allocation of specific reserves to customers whose loan terms have been modified in troubled debt
restructurings at both December 31, 2017 and 2016 and $25 thousand of specific reserves at December 31, 2015. The Corporation
has not committed to lend additional amounts as of December 31, 2017 and 2016 to customers with outstanding loans that are
classified as troubled debt restructurings.
69
The following tables present the aging of the recorded investment in loans by past due category and class of loans.
December 31, 2017
30-59 Days
60-89 Days
than 90 days
Total
(Dollar amounts in thousands)
Past Due
Past Due
Past Due
Past Due
Current
Total
Greater
Commercial
Commercial & Industrial
$
Farmland
Non Farm, Non Residential
Agriculture
All Other Commercial
$
372
341
141
141
—
80
—
—
—
—
$
640
$
1,092
$
474,709
$
475,801
3,671
4,012
—
561
—
141
702
—
104,457
200,804
152,388
207,875
108,469
200,945
153,090
207,875
Residential
First Liens
Home Equity
Junior Liens
Multifamily
All Other Residential
Consumer
Motor Vehicle
All Other Consumer
TOTAL
December 31, 2016
(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:
5,467
1,317
1,434
8,218
247,029
255,247
310
274
—
300
4,770
107
46
106
—
—
697
22
8
194
—
12
294
—
364
574
—
312
5,761
129
$
12,223
$
2,268
$
6,814
$
21,305
35,752
41,688
90,141
13,329
36,116
42,262
90,141
13,641
298,211
303,972
25,334
$ 1,891,717
25,463
$ 1,913,022
30-59 Days
Past Due
60-89 Days
Past Due
Greater
than 90 days
Past Due
Total
Past Due
Current
Total
$
$
370
235
153
246
15
3,862
186
271
—
42
4,048
143
9,571
$
$
$
114
22
—
—
—
954
64
—
—
12
732
22
1,920
$
1,199
46
215
467
—
1,516
27
224
—
—
313
3
4,010
$
$
1,683
303
368
713
15
6,332
277
495
—
54
$
474,406
110,897
195,120
151,059
178,171
264,446
35,782
36,912
67,799
12,982
476,089
111,200
195,488
151,772
178,186
270,778
36,059
37,407
67,799
13,036
5,093
168
15,501
277,604
24,361
$ 1,829,539
282,697
24,529
$ 1,845,040
$
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.
70
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.
Beginning in July 2016, the Company's loan rating process no longer includes all loans in a loan relationship. Therefore, certain
first lien mortgage loans and consumer loans that were previously rated in a loan relationship have been included in the not rated
category as of December 31, 2016. As of December 31, 2017 and 2016, 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
December 31, 2017
(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
430,015
88,338
179,181
111,724
194,170
45,320
319
1,882
89,936
—
$
$
19,889
10,782
7,689
17,482
2,723
750
—
76
—
—
$
18,611
7,466
13,632
21,388
7,459
3,980
64
342
—
67
—
—
$ 1,140,885
$
—
—
59,391
$
731
44
73,784
$
71
38
—
—
—
—
5
—
100
—
—
—
—
143
$
$
5,947
10
—
342
2,604
204,329
35,653
39,755
36
13,529
474,500
106,596
200,502
150,936
206,956
254,384
36,036
42,155
89,972
13,596
301,900
25,301
629,406
302,631
25,345
$ 1,903,609
$
Special
Mention
Substandard
Doubtful
Not Rated
Total
December 31, 2016
(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
427,262
95,115
172,739
121,983
163,492
43,674
363
1,826
66,133
—
$
16,286
8,300
5,745
13,885
596
1,541
—
85
1,430
—
$
25,177
5,238
16,601
12,301
10,058
4,466
86
401
15
—
—
—
$ 1,092,587
$
—
—
47,868
$
331
25
74,699
$
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
449
—
—
—
76
18
—
26
—
—
—
—
569
$
$
$
$
$
5,730
532
—
1,366
3,251
220,249
35,554
34,977
65
13,002
474,904
109,185
195,085
149,535
177,473
269,948
36,003
37,315
67,643
13,002
281,134
24,391
620,251
281,465
24,416
$ 1,835,974
December 31,
2017
2016
12,118
55,854
46,399
114,371
(66,099)
48,272
$
$
12,265
55,711
44,608
112,584
(63,344)
49,240
Aggregate depreciation expense was $3.95 million, $4.34 million and $4.66 million for 2017, 2016 and 2015, respectively.
The Company leases certain branch properties and equipment under operating leases. Rent expense was $1.0 million, $0.9 million,
and $0.9 million for 2017, 2016, and 2015. Rent commitments, before considering renewal options that generally are present,
were as follows:
2018
2019
2020
2021
2022
Thereafter
$
$
920
546
382
198
158
1,019
3,223
72
9. GOODWILL AND INTANGIBLE ASSETS:
The Corporation completed its annual impairment testing of goodwill during the fourth quarter of 2017 and 2016. Management
does not believe any amount of goodwill is impaired.
Intangible assets subject to amortization at December 31, 2017 and 2016 are as follows:
(Dollar amounts in thousands)
Core deposit intangible
2017
2016
Gross
Amount
$
$
10,836
10,836
Accumulated
Amortization
9,206
$
9,206
$
$
$
Gross
Amount
10,836
10,836
Accumulated
Amortization
8,727
$
8,727
$
Aggregate amortization expense was $479 thousand, $627 thousand and $826 thousand for 2017, 2016 and 2015, respectively.
Estimated amortization expense for the next five years is as follows:
2018
2019
2020
2021
2022
In thousands
434
$
350
252
232
224
In 2016, the sale of certain assets and liabilities of the insurance brokerage operations resulted in the reduction of customer list
intangible by $.4 million and the reduction of goodwill by $5.1 million.
10. DEPOSITS:
Scheduled maturities of time deposits for the next five years are as follows:
2018
2019
2020
2021
2022
$
(dollar amounts in thousands)
181,508
68,985
40,919
20,227
25,240
11. SHORT-TERM BORROWINGS:
A summary of the carrying value of the Corporation's short-term borrowings at December 31, 2017 and 2016 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
73
$
$
$
2017
2016
$
$
$
30,165
27,521
57,686
2017
39,704
85,714
0.62%
0.96%
49,982
31,007
80,989
2016
37,949
80,989
0.35%
0.64%
Federal funds purchased are generally due in one day and bear interest at market rates. The Corporation enters into sales of securities
under agreements to repurchase. The amounts received under these agreements represent short-term borrowings and are reflected
as a liability in the consolidated balance sheets. The securities underlying these agreements are included in investment securities
in the consolidated balance sheets. The Corporation has no control over the market value of the securities, which fluctuates due
to market conditions. However, the Corporation is obligated to promptly transfer additional securities if the market value of the
securities falls below the repurchase agreement price. The Corporation manages this risk by maintaining an unpledged securities
portfolio that it believes is sufficient to cover a decline in the market value of the securities sold under agreements to repurchase.
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.
Collateral pledged to repurchase agreements by remaining maturity are as follows:
Repurchase Agreements and Repurchase to Maturity
Transactions
(Dollar amounts in thousands)
Mortgage Backed Securities - Residential and Collateralized
Mortgage Obligations
Repurchase Agreements and Repurchase to Maturity
Transactions
(Dollar amounts in thousands)
Mortgage Backed Securities - Residential and Collateralized
Mortgage Obligations
12. OTHER BORROWINGS:
December 31, 2017
Remaining Contractual Maturity of the Agreements
Overnight
and
continuous
Up to 30
days
30 - 90
days
Greater
than 90
days
Total
$
11,929
$
6,282
$
8,552
$
758
$ 27,521
December 31, 2016
Remaining Contractual Maturity of the Agreements
Overnight
and
continuous
Up to 30
days
30 - 90
days
Greater
than 90
days
Total
$
11,238
$
9,495
$
9,516
$
758
$ 31,007
Other borrowings at December 31, 2017 and 2016 are summarized as follows:
(Dollar amounts in thousands)
FHLB advances
2017
2016
$
— $
132
The aggregate minimum annual retirements of other borrowings are as follows:
2018
2019
2020
2021
2022
Thereafter
$
$
—
—
—
—
—
—
—
The Corporation's subsidiary banks are members of the Federal Home Loan Bank (FHLB) and accordingly are permitted to obtain
advances. There are no advances from the FHLB at December 31, 2017, and $132 thousand at December 31, 2016, which accrue
interest, payable monthly, at annual rates, primarily fixed, varying from 0.8% to 6.6% in 2017 and 0.5% to 6.6% in 2016. FHLB
advances are, generally, due in full at maturity. They are secured by eligible securities totaling $120.1 million at December 31,
2017, and $57.1 million at December 31, 2016, 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 $223.4 million at year end 2017. 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.
74
13. INCOME TAXES:
Income tax expense is summarized as follows:
(Dollar amounts in thousands)
Federal:
Currently payable
Deferred
Expense due to enactment of federal tax reform
State:
Currently payable
Deferred
TOTAL
2017
2016
2015
$
$
8,303
3,756
6,282
18,341
1,818
463
2,281
20,622
$
$
15,514
1,326
—
16,840
2,857
186
3,043
19,883
$
$
9,890
(774)
—
9,116
1,426
(150)
1,276
10,392
The reconciliation of income tax expense with the amount computed by applying the statutory federal income tax rate of 35%
to income before income taxes is summarized as follows:
(Dollar amounts in thousands)
Federal income taxes computed at the statutory rate
Add (deduct) tax effect of:
Tax exempt income
Non-deductible insurance brokerage goodwill
ESOP dividend deduction
State tax, net of federal benefit
Affordable housing credits
Expense due to enactment of federal tax reform
Other, net
TOTAL
2017
2016
2015
$
17,414
$
20,403
$
14,206
(4,102)
—
(102)
1,483
(148)
6,282
(205)
20,622
$
(3,992)
1,797
(47)
1,978
(148)
—
(108)
19,883
$
(4,047)
—
(164)
829
(148)
—
(284)
10,392
$
On December 22, 2017, the Tax Cuts and Jobs Act was signed into law. The primary change for the Corporation was to lower the
corporate income tax rate from 35% to 21%. The Corporation's deferred tax assets and liabilities were re-measured based on the
income tax rates at which they are expected to reverse in the future, which is generally 21%. The amount recorded related to the
re-measurement of the Corporation's deferred tax balance was $6.3 million, an increase to income tax expense for the year ended
December 31, 2017.
75
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31,
2017 and 2016, 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
2017
2016
1,829
6,609
—
5,195
3,661
563
1,359
663
2,123
22,002
(804)
(1,989)
(308)
(201)
(2,446)
(2,408)
(8,156)
13,846
$
$
5,397
8,576
719
7,318
5,881
832
2,043
1,111
3,119
34,996
—
(2,778)
(486)
(65)
(3,015)
(3,180)
(9,524)
25,472
$
$
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
2017
2016
2015
$
$
698
257
—
(130)
825
$
$
513
288
—
(103)
698
$
$
589
68
—
(144)
513
Of this total, $825 thousand 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, 2017, 2016 and
2015 was an expense increase of $4 thousand, an increase of $4 thousand, and a decrease of $17 thousand, respectively. The
amount accrued for interest and penalties at December 31, 2017, 2016 and 2015 was $40 thousand, $31 thousand and $27 thousand,
respectively.
The Corporation and its subsidiaries are subject to U.S. federal income tax as well as income tax of the states of Indiana and
Illinois. The Corporation is no longer subject to examination by taxing authorities for years before 2014.
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
76
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
2017
2016
$
57,060
$
55,362
246,855
83,786
387,701
5,012
$
$
268,577
66,408
390,347
5,673
$
$
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 4.00% to 7.25% in 2017. In 2016 this range
of rates was from 3.25% to 7.00%. 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 $20.1 million and $21.3 million at December 31, 2017 and 2016. 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
$0.2 million and $0.6 million at December 31, 2017 and 2016.
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, 2012.Those employees will be
eligible to participate in a 401K plan that the Corporation can contribute a discretionary match of the pay contributed by the
employee. In addition the ESOP plan will continue in place for all employees.
Assets in the ESOP are considered in calculating the funding to the defined benefit plan required to provide such benefits. Any
shortfall of benefits under the ESOP are to be provided by the defined benefit plan. The ESOP may provide benefits beyond those
determined under the defined benefit plan. Contributions to the ESOP are determined by the Corporation's Board of Directors.
The Corporation made contributions to the defined benefit plan of $2.55 million, $2.70 million and $1.84 million in 2017, 2016
and 2015. The Corporation contributed $1.06 million, $1.36 million and $1.29 million to the ESOP in 2017, 2016 and 2015. There
were contributions of $676 thousand, $872 thousand and $746 thousand to the ESOP for employees no longer participating in
the defined benefit plan in 2017, 2016 and 2015 respectively.
The Corporation uses a measurement date of December 31.
77
Net periodic benefit cost and other amounts recognized in other comprehensive income included the following components:
(Dollar amounts in thousands)
Service cost - benefits earned
Interest cost on projected benefit obligation
Expected return on plan assets
Net amortization and deferral
Net periodic pension cost
Net loss (gain) during the period
Amortization of prior service cost
Amortization of unrecognized gain (loss)
Total recognized in other comprehensive (income) loss
2017
2016
2015
$
1,432
$
1,882
$
2,153
3,621
(3,940)
1,205
2,318
5,366
(1)
(1,204)
4,161
3,729
(3,429)
1,936
4,118
(6,150)
(1)
(1,935)
(8,086)
(3,968) $
3,516
(3,452)
2,065
4,282
(1,894)
(1)
(2,064)
(3,959)
323
Total recognized net periodic pension cost and other comprehensive income
$
6,479
$
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 $1.7 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
Benefits paid
Benefit obligation at December 31
Reconciliation of fair value of plan assets:
Fair value of plan assets at January 1
Actual return on plan assets
Employer contributions
Benefits paid
Fair value of plan assets at December 31
2017
2016
$
93,233
$
90,855
1,432
3,621
5,305
(5,495)
98,096
70,132
3,879
2,933
(5,495)
71,449
(26,647) $
1,882
3,729
2,839
(6,072)
93,233
60,602
12,418
3,184
(6,072)
70,132
(23,101)
Funded status at December 31 (plan assets less benefit obligation)
$
Amounts recognized in accumulated other comprehensive income at December 31, 2017 and 2016 consist of:
(Dollar amounts in thousands)
Net loss (gain)
Prior service cost (credit)
2017
2016
$
$
25,621
3
25,624
$
$
21,459
4
21,463
The accumulated benefit obligation for the defined benefit pension plan was $93.3 million and $88.5 million at year-end
2017 and 2016.
Principal assumptions used to determine pension benefit obligation at year end:
Discount rate
Rate of increase in compensation levels
2017
2016
3.60%
3.00
4.14%
3.00
78
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
2017
2016
4.14%
3.00
6.00
4.34%
3.00
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 2017 and 2016 by asset category
are as follows:
ASSET CATEGORY
Equity securities
Debt securities
Other
TOTAL
Pension Plan
Target
Allocation
2017
ESOP
Target
Allocation
2017
Pension
Percentage of Plan
Assets at December 31,
ESOP
Percentage of Plan
Assets at December 31,
2017
2016
2017
2016
25-75%
0-50%
0-20%
95-99%
0-0%
0-5%
72%
25%
3%
100%
68%
29%
3%
100%
98%
—%
2%
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).
The fair value of the plan assets at December 31, 2017 and 2016, by asset category, is as follows:
(Dollar amounts in thousands)
Plan assets
Equity securities
Debt securities
Investment Funds
Total plan assets
Fair Value Measurements at
December 31, 2017 Using:
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Observable
Inputs
(Level 3)
Total
$
$
48,152
10,717
12,580
71,449
$
$
48,152
—
12,580
60,732
$
$
— $
10,717
—
10,717
$
—
—
—
—
79
(Dollar amounts in thousands)
Plan assets
Equity securities
Debt securities
Investment Funds
Total plan assets
Fair Value Measurements at
December 31, 2016 Using:
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Observable
Inputs
(Level 3)
Total
$
$
51,170
11,566
7,396
70,132
$
$
51,170
—
7,396
58,566
$
$
— $
11,566
—
11,566
$
—
—
—
—
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 $21.4 million (30
percent of total plan assets) and $26.7 million (38 percent of total plan assets) at December 31, 2017 and 2016, respectively. In
addition the ESOP for non plan participants holds an estimated $3.8 million and $4.1 million of First Financial Corporation stock
at December 31, 2017 and December 31, 2016 respectively. Other equity securities are predominantly stocks in large cap U.S.
companies.
Contributions — The Corporation expects to contribute $2.3 million to its pension plan and $813 thousand to its ESOP in 2018.
Estimated Future Payments — The following benefit payments, which reflect expected future service, are expected:
PENSION BENEFITS
(Dollar amounts in thousands)
2018
2019
2020
2021
2022
2023-2027
$
5,837
6,067
6,166
6,341
6,474
35,078
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
$321 thousand in 2017 and $418 thousand in 2016 and $437 thousand in 2015.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
2017
2016
2015
$
$
527
—
—
527
$
$
(511) $
—
(57)
(568) $
(255)
—
(88)
(343)
80
The Corporation has $4.4 million and $3.6 million recognized in the balance sheet as a liability at December 31, 2017 and 2016.
Amounts in accumulated other comprehensive income consist of $859 thousand net loss at December 31, 2017 and $332 thousand
net loss at December 31, 2016. 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 $51 thousand.
Estimated Future Payments — The following benefit payments, which reflect expected future service, are expected:
(Dollar amounts on thousands)
2018
2019
2020
2021
2022
2023-2027
$
—
180
352
343
334
1,593
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, 2017
and 2016 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,
2017
2016
$
$
$
4,276
53
172
75
83
(298)
4,361
4,361
$
$
$
4,383
55
186
69
(144)
(273)
4,276
4,276
Amounts recognized in accumulated other comprehensive income consist of a net loss of $257 thousand at December 31, 2017
and $174 thousand net loss at December 31, 2016. The post-retirement benefits paid in 2017 and 2016 of $298 thousand and $273
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.
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
December 31,
2017
2016
3.60%
5.00%
5.00
2018
4.14%
5.00%
5.00
2017
81
Post-retirement health benefit expense included the following components:
(Dollar amounts in thousands)
Service cost
Interest cost
Net periodic benefit cost
Net loss (gain) during the period
Total recognized in other comprehensive income (loss)
Years Ended December 31,
2017
2016
2015
$
53
$
55
$
172
225
83
83
186
241
(144)
(144)
97
$
63
173
236
(200)
(200)
36
Total recognized net periodic benefit cost and other comprehensive income
$
308
$
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
$
$
1
25
1
23
Contributions — The Corporation expects to contribute $264 thousand to its other post-retirement benefit plan in 2017.
Estimated Future Payments — The following benefit payments, which reflect expected future service, are expected:
(Dollar amounts in thousands)
2018
2019
2020
2021
2022
2023-2027
$
264
266
274
265
279
1,408
16. STOCK BASED COMPENSATION:
On February 5, 2011, the Corporation's Board of Directors adopted and approved the First Financial Corporation 2011 Omnibus
Equity Incentive Plan (the "2011 Stock Incentive Plan") effective upon the approval of the Plan by the Company's shareholders,
which occurred on April 20, 2011 at the Corporation’s annual meeting of shareholders. The 2011 Stock Incentive Plan provides
for the grant of non qualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock
units and incentive awards. An aggregate of 700,000 shares of common stock are reserved for issuance under the 2011 Stock
Incentive Plan. Shares issuable under the 2011 Stock Incentive Plan may be authorized and unissued shares of common stock or
treasury shares.
During the first quarter of 2017 and 2016, 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 median 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 to retain shares to satisfy any
withholding tax obligation. A total of 149,069 shares of restricted common stock of the Company were granted under the 2011
Stock Incentive Plan. A total of 550,931 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
82
issue. Compensation related to the plan was $706 thousand, $684 thousand, and $684 thousand in 2017, 2016 and 2015,
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,
2017
Weighted
Average
Grant Date
Fair Value
32.83
46.70
37.03
—
41.14
Number
Outstanding
20,524
16,562
(19,067)
—
18,019
2016
Weighted
Average
Grant Date
Fair Value
33.26
32.35
32.76
—
32.83
Number
Outstanding
20,466
20,943
(20,885)
—
20,524
As of December 31, 2017 and 2016, there was $741 thousand and $674 thousand, 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, 2017 and 2016 was
$0.9 million and $1.1 million, 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, 2017 and 2016.
(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)
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
2017
Retirement
plans
Total
$
$
$
$
(1,077) $
3,371
(36)
3,335
2,258
$
Unrealized
gains and
Losses on
available-
for-sale
Securities
(14,164)
(1,238)
698
(540)
(14,704)
(13,087) $
(4,609)
734
(3,875)
(16,962) $
2016
Retirement
plans
Total
$
9,053
(10,109)
(21)
(10,130)
(1,077) $
(18,454) $
4,151
1,216
5,367
(13,087) $
(9,401)
(5,958)
1,195
(4,763)
(14,164)
83
(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
Balance
at
1/1/2017
Current
Period
Change
Balance
at
12/31/2017
$
(3,018) $
1,647
$
(1,371)
1,941
(1,077) $
(13,087)
(14,164) $
1,688
3,335
(3,875)
$
(540) $
3,629
2,258
(16,962)
(14,704)
Balance
at
1/1/2016
Current
Period
Change
Balance
at
12/31/2016
5,855
$
(8,873) $
(3,018)
3,198
$
9,053
(18,454)
(9,401) $
(1,257)
(10,130) $
5,367
(4,763) $
1,941
(1,077)
(13,087)
(14,164)
$
$
$
$
$
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, 2017
Amount reclassified from
accumulated other
comprehensive income
(in thousands)
Affected line item in
the statement where
net income is presented
59
(23)
36
Net securities gains (losses)
Income tax expense
Net of tax
(a)
(1,204)
470
(734)
(698)
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).
84
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, 2016
Amount reclassified from
accumulated other
comprehensive income
(in thousands)
Affected line item in
the statement where
net income is presented
34
(13)
21
Net securities gains (losses)
Income tax expense
Net of tax
(a)
(1,992)
776
(1,216)
(1,195)
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, 2015
Amount reclassified from
accumulated other
comprehensive income
(in thousands)
Affected line item in
the statement where
net income is presented
17
(6)
11
Net securities gains (losses)
Income tax expense
Net of tax
(a)
(8,066)
3,146
(4,920)
(4,909)
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, 2017, approximately $42.1 million of undistributed earnings of the subsidiary banks, included in consolidated
retained earnings, were available for distribution to the Corporation without regulatory approval. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Corporation and Banks must meet specific capital guidelines that
involve quantitative measures of the Corporation's assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Corporation's and Banks' capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Corporation and Banks to maintain minimum
amounts and ratios of Total, Common equity tier I capital and Tier I Capital to risk-weighted assets, and of Tier I Capital to average
assets.
85
The final rules implementing Basel Committee on Banking Supervision's capital guidelines for U.S. banks (Basel lll rules) became
effective for the Corporation on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-
year schedule, and fully phased in by January 1, 2019. Under the Basel lll rules, the Corporation must hold a capital conservation
buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer is being phased in from 0.0% for
2015 to 2.50% by 2019. The capital conservation buffer for 2017 and 2016 is 1.25% and 0.625%, respectively. The net unrealized
gain or loss on available for sale securities is not included in computing regulatory capital.
Management believes, as of December 31, 2017 and 2016, that the Corporation meets all capital adequacy requirements to which
it is subject.
As of December 31, 2017, 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, Common equity tier I capital, 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 2017 and 2016.
(Dollar amounts in thousands)
Total risk-based capital
Corporation – 2017
Corporation – 2016
First Financial Bank – 2017
First Financial Bank – 2016
Common equity tier I capital
Corporation – 2017
Corporation – 2016
First Financial Bank – 2017
First Financial Bank – 2016
Tier I risk-based capital
Corporation – 2017
Corporation – 2016
First Financial Bank – 2017
First Financial Bank – 2016
Tier I leverage capital
Corporation – 2017
Corporation – 2016
First Financial Bank – 2017
First Financial Bank – 2016
Actual
Amount
Ratio
For Capital
Adequacy Purposes
Ratio
Amount
To Be Well Capitalized
Under Prompt Corrective
Action Provisions
Amount
Ratio
$ 412,525
$ 411,713
386,593
384,522
$ 392,615
$ 392,939
370,061
368,797
$ 392,615
$ 392,939
370,061
368,797
$ 392,615
$ 392,939
370,061
368,797
17.88% $ 213,446
18.26% $ 194,435
206,745
17.30%
188,003
17.64%
17.01% $ 132,682
17.43% $ 115,534
128,517
16.56%
111,712
16.92%
17.01% $ 167,295
17.43% $ 149,348
162,044
16.56%
144,408
16.92%
13.31% $ 117,956
13.39% $ 117,376
115,553
12.81%
115,047
12.82%
9.250%
8.625%
9.250%
8.625%
5.750%
5.125%
5.750%
5.125%
7.250%
6.625%
7.250%
6.625%
4.00%
4.00%
4.00%
4.00%
N/A
N/A
223,508
217,974
N/A
N/A
145,280
141,683
N/A
N/A
178,807
174,379
N/A
N/A
144,441
143,809
N/A
N/A
10.00%
10.00%
N/A
N/A
6.50%
6.50%
N/A
N/A
8.00%
8.00%
N/A
N/A
5.00%
5.00%
86
19. PARENT COMPANY CONDENSED FINANCIAL STATEMENTS:
The parent company’s condensed balance sheets as of December 31, 2017 and 2016, 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, 2017, 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
December 31,
2017
2016
$
$
$
$
3,198
414,839
5,193
—
423,230
6,234
3,427
9,661
413,569
423,230
$
$
$
$
2,765
416,024
5,388
—
424,177
6,104
3,678
9,782
414,395
424,177
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Dollar amounts in thousands)
Dividends from subsidiaries
Other income
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
Years Ended December 31,
2017
2016
2015
$
30,814
$
31,781
$
19,397
720
(2,647)
28,887
889
29,776
(645)
29,131
28,591
$
$
722
(2,581)
29,922
821
30,743
7,670
38,413
33,650
$
$
795
(2,314)
17,878
815
18,693
11,503
30,196
35,324
$
$
87
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:
Years Ended December 31,
2017
2016
2015
$
29,131
$
38,413
$
30,196
Depreciation and amortization
Equity in undistributed earnings
Contribution of shares to ESOP
Restricted stock compensation
Increase (decrease) in other liabilities
(Increase) decrease in other assets
NET CASH FROM OPERATING ACTIVITIES
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture and fixtures
NET CASH FROM INVESTING ACTIVITIES
CASH FLOWS FROM FINANCING ACTIVITIES:
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
20. SELECTED QUARTERLY DATA (UNAUDITED):
195
645
1,062
706
(247)
—
200
(7,670)
1,361
684
(262)
12
31,492
32,738
—
—
—
—
(503)
(30,556)
(31,059)
433
2,765
(19,396)
(12,359)
(31,755)
983
1,782
203
(11,503)
1,294
684
(1,524)
188
19,538
(65)
(65)
(8,698)
(12,632)
(21,330)
(1,857)
3,639
3,198
$
2,765
$
1,782
— $
$
11,158
— $
$
18,739
—
12,869
$
$
$
2017
(Dollar amounts in thousands)
Interest
Income
Interest
Expense
Net Interest
Income
March 31 $
$
June 30
$
September 30
$
December 31
27,846
28,128
28,805
29,416
(Dollar amounts in thousands)
Interest
Income
March 31 $
$
June 30
$
September 30
$
December 31
27,201
27,150
27,450
27,579
$
$
$
$
$
$
$
$
1,339
1,568
1,697
1,734
Interest
Expense
1,044
1,091
1,099
1,173
$
$
$
$
$
$
$
$
Provision
For Loan
Losses
Net Income
(a)
Net Income
Per Share
1,596
1,040
1,185
1,474
$
$
$
$
9,369
8,352
8,794
2,616
$
$
$
$
0.77
0.68
0.72
0.21
26,507
26,560
27,108
27,682
$
$
$
$
2016
Net
Interest
Income
Provision
For Loan
Losses
26,157
26,059
26,351
26,406
$
$
$
$
835
435
1,091
939
Net Income
(b)
13,675
8,232
8,162
8,344
$
$
$
$
Net Income
Per Share
$
$
$
$
1.08
0.68
0.67
0.69
(a) The fourth quarter of 2017 was reduced due to the additional expense of $6.3 million for the enactment of federal tax
reform.
88
(b) The first quarter of 2016 included the gain on sale of certain assets and liabilities of the insurance brokerage operations that
resulted in an after-tax gain of $5.75 million.
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 2017 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 2017 fiscal year, which Proxy Statement
will contain such information. The information required by Item 10 is incorporated herein by reference to such Proxy
Statement.
ITEM 11. EXECUTIVE COMPENSATION
In accordance with the provisions of General Instruction G to Form 10-K, the information required for disclosure under Item 11
is not set forth herein because the Corporation intends to file with the Securities and Exchange Commission a definitive Proxy
Statement pursuant to Regulation 14A not later than 120 days following the end of its 2017 fiscal year, which Proxy Statement
will contain such information. The information required by Item 11 is incorporated herein by reference to such Proxy
Statement.
89
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 2017 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, 2017 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
(1)
(2)
(3)
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)
—
—
—
—
—
—
550,931
—
550,931
Available for future issuance under equity compensation plans (excluding securities reflected in the first column).
Includes the First Financial Corporation 2011 Omnibus Equity Incentive Plan.
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 2017 fiscal year, which Proxy Statement
will contain such information. The information required by Item 13 is incorporated herein by reference to such Proxy
Statement.
90
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 2017 fiscal year, which Proxy Statement
will contain such information. The information required by Item 14 is incorporated herein by reference to such Proxy
Statement.
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
PART IV
(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, 2017 and 2016
Consolidated Statements of Income and Comprehensive Income—Years ended December 31, 2017, 2016, and 2015
Consolidated Statements of Changes in Shareholders’ Equity—Years ended December 31, 2017, 2016, and 2015
Consolidated Statements of Cash Flows—Years ended December 31, 2017, 2016, and 2015
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*
10.5*
10.6*
10.7*
10.9*
10.10*
10.11*
10.12*
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, effective July 1, 2017, incorporated by reference to
Exhibit 10.01 of the Corporation’s Form 8-K filed March 29, 2017.
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.
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 for the quarter ended March 31, 2011 filed May 9, 2011.
Form of Restricted Stock Award Agreement, incorporated by reference to exhibit 10.12 to the
Corporations 10-Q for the quarter ended March 31, 2012 filed May 10, 2012.
continued
91
Exhibit
Number
10.13*
10.14*
10.15*
10.16*
21
31.1
31.2
32.1
32.2
101.
Description
Employment Agreement for Norman D. Lowery, dated December 27, 2016, incorporated by reference to
Exhibit 10.1 of the Corporation’s Form 8-K filed January 24, 2017.
Employment Agreement for Rodger A. McHargue, dated December 27, 2016, incorporated by reference to
Exhibit 10.2 of the Corporation’s Form 8-K filed January 24, 2017.
Employment Agreement for Steven H. Holliday, dated December 27, 2016, incorporated by reference to
Exhibit 10.3 of the Corporation’s Form 8-K filed January 24, 2017.
Employment Agreement for Karen L. Stinson-Milienu, dated December 27, 2016, incorporated by
reference to Exhibit 10.4 of the Corporation’s Form 8-K filed January 24, 2017.
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, 2017, 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).
92
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
Date: March 7, 2018
First Financial Corporation
/s/ Rodger A. McHargue
Rodger A. McHargue, Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
93
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 7, 2018
March 7, 2018
March 7, 2018
March 7, 2018
March 7, 2018
March 7, 2018
March 7, 2018
March 7, 2018
March 7, 2018
March 7, 2018
March 7, 2018
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
94
Exhibit
Number
21
Subsidiaries
EXHIBIT INDEX
Description
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, 2017, 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.
95
One First Financial Plaza
Terre Haute, Indiana 47807
812-238-6000 | 800-511-0045
www.first-online.com
First Financial Corporation