Attached files
file | filename |
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EX-32.2 - FIRST FINANCIAL BANCORP /OH/ | v201296_ex32-2.htm |
EX-31.1 - FIRST FINANCIAL BANCORP /OH/ | v201296_ex31-1.htm |
EX-32.1 - FIRST FINANCIAL BANCORP /OH/ | v201296_ex32-1.htm |
EX-31.2 - FIRST FINANCIAL BANCORP /OH/ | v201296_ex31-2.htm |
FORM
10-Q
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington
D.C. 20549
x
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the quarterly period ended September 30,
2010
OR
¨
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the transition period from
to
Commission
file number 0-12379
FIRST FINANCIAL BANCORP.
|
(Exact
name of registrant as specified in its
charter)
|
Ohio
|
31-1042001
|
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
|
incorporation
or organization)
|
Identification
No.)
|
201 East Fourth Street, Suite
1900
|
||
Cincinnati, Ohio
|
45202
|
|
(Address of principal executive offices)
|
(Zip
Code)
|
Registrant's
telephone number, including area code (513)
979-5837
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 Date File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit
and post such files). Yes ¨ No
¨
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, or a
non-accelerated filer. See definition of “accelerated filer and large
accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer ¨
|
Accelerated
filer x
|
Non-accelerated
filer ¨
|
Smaller
reporting company ¨
|
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of Exchange
Act).
Yes¨
No x
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
Class
|
Outstanding at November 5, 2010
|
|
Common
stock, No par value
|
58,057,934
|
FIRST
FINANCIAL BANCORP.
INDEX
Page No.
|
||
(Dollars
in thousands, except per share data)
(Unaudited)
September
30,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
ASSETS
|
||||||||
Cash
and due from banks
|
$ | 144,101 | $ | 344,150 | ||||
Interest-bearing
deposits with other banks
|
280,457 | 262,017 | ||||||
Investment
securities trading
|
0 | 200 | ||||||
Investment
securities available-for-sale, at market value
|
||||||||
(cost $596,901
at September 30, 2010 and $454,953 at December 31, 2009)
|
616,175 | 471,002 | ||||||
Investment
securities held-to-maturity
|
||||||||
(market
value $18,755 at September 30, 2010 and $18,590 at December 31,
2009)
|
17,842 | 18,115 | ||||||
Other
investments
|
86,509 | 89,830 | ||||||
Loans
held for sale
|
19,075 | 6,413 | ||||||
Loans:
|
||||||||
Commercial
|
763,449 | 800,261 | ||||||
Real
estate-construction
|
178,914 | 253,223 | ||||||
Real
estate-commercial
|
1,095,543 | 1,079,628 | ||||||
Real
estate-residential
|
283,914 | 321,047 | ||||||
Installment
|
73,138 | 82,989 | ||||||
Home
equity
|
341,288 | 328,940 | ||||||
Credit
card
|
28,825 | 29,027 | ||||||
Lease
financing
|
138 | 14 | ||||||
Total
loans, excluding covered loans
|
2,765,209 | 2,895,129 | ||||||
Less
|
||||||||
Allowance
for loan and lease losses
|
57,249 | 59,311 | ||||||
Net
loans - uncovered
|
2,707,960 | 2,835,818 | ||||||
Covered
loans
|
1,609,584 | 1,934,740 | ||||||
Less
|
||||||||
Allowance
for loan and lease losses
|
11,583 | 0 | ||||||
Net
loans - covered
|
1,598,001 | 1,934,740 | ||||||
Net
loans
|
4,305,961 | 4,770,558 | ||||||
Premises
and equipment
|
116,959 | 107,351 | ||||||
Goodwill
|
51,820 | 51,820 | ||||||
Other
intangibles
|
6,049 | 7,461 | ||||||
FDIC
indemnification asset
|
237,709 | 287,407 | ||||||
Accrued
interest and other assets
|
271,843 | 241,269 | ||||||
TOTAL
ASSETS
|
$ | 6,154,500 | $ | 6,657,593 | ||||
LIABILITIES
|
||||||||
Deposits:
|
||||||||
Interest-bearing
|
$ | 999,922 | $ | 1,060,383 | ||||
Savings
|
1,407,332 | 1,231,081 | ||||||
Time
|
1,930,652 | 2,229,500 | ||||||
Total
interest-bearing deposits
|
4,337,906 | 4,520,964 | ||||||
Noninterest-bearing
|
713,357 | 829,676 | ||||||
Total
deposits
|
5,051,263 | 5,350,640 | ||||||
Federal
funds purchased and securities sold
|
||||||||
under
agreements to repurchase
|
58,747 | 37,430 | ||||||
Long-term
debt
|
129,224 | 404,716 | ||||||
Other
long-term debt
|
20,620 | 20,620 | ||||||
Accrued
interest and other liabilities
|
203,715 | 194,229 | ||||||
TOTAL
LIABILITIES
|
5,463,569 | 6,007,635 | ||||||
SHAREHOLDERS'
EQUITY
|
||||||||
Preferred
stock - $1,000 par value
|
||||||||
Authorized
- 80,000 shares
|
||||||||
Outstanding
- 0 shares in 2010 and 80,000 shares in 2009
|
0 | 79,195 | ||||||
Common
stock - no par value
|
||||||||
Authorized
- 160,000,000 shares
|
||||||||
Issued
- 68,730,731 shares in 2010 and 62,358,614 shares in 2009
|
579,309 | 490,532 | ||||||
Retained
earnings
|
301,777 | 276,119 | ||||||
Accumulated
other comprehensive loss
|
(9,106 | ) | (10,487 | ) | ||||
Treasury
stock, at cost, 10,672,797 shares in 2010 and 10,924,793 shares in
2009
|
(181,049 | ) | (185,401 | ) | ||||
TOTAL
SHAREHOLDERS' EQUITY
|
690,931 | 649,958 | ||||||
TOTAL
LIABILITIES AND SHAREHOLDERS' EQUITY
|
$ | 6,154,500 | $ | 6,657,593 |
See notes
to consolidated financial statements.
1
CONSOLIDATED
STATEMENTS OF INCOME
(Dollars
in thousands, except per share data)
(Unaudited)
Three months ended
|
Nine months ended
|
|||||||||||||||
September 30,
|
September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Interest
income
|
||||||||||||||||
Loans,
including fees
|
$ | 75,957 | $ | 46,811 | $ | 230,239 | $ | 114,446 | ||||||||
Investment
securities
|
||||||||||||||||
Taxable
|
5,386 | 6,241 | 16,226 | 22,954 | ||||||||||||
Tax-exempt
|
240 | 352 | 720 | 1,172 | ||||||||||||
Total
investment securities interest
|
5,626 | 6,593 | 16,946 | 24,126 | ||||||||||||
Other
earning assets
|
3,101 | 1,311 | 13,996 | 1,311 | ||||||||||||
Total
interest income
|
84,684 | 54,715 | 261,181 | 139,883 | ||||||||||||
Interest
expense
|
||||||||||||||||
Deposits
|
14,457 | 11,490 | 45,413 | 30,373 | ||||||||||||
Short-term
borrowings
|
25 | 261 | 61 | 1,295 | ||||||||||||
Long-term
borrowings
|
2,034 | 1,977 | 7,147 | 4,534 | ||||||||||||
Subordinated
debentures and capital securities
|
322 | 323 | 956 | 880 | ||||||||||||
Total
interest expense
|
16,838 | 14,051 | 53,577 | 37,082 | ||||||||||||
Net
interest income
|
67,846 | 40,664 | 207,604 | 102,801 | ||||||||||||
Provision
for loan and lease losses - uncovered
|
6,287 | 26,655 | 23,823 | 41,272 | ||||||||||||
Provision
for loan and lease losses - covered
|
20,725 | 0 | 49,147 | 0 | ||||||||||||
Net
interest income after provision for loan and lease losses
|
40,834 | 14,009 | 134,634 | 61,529 | ||||||||||||
Noninterest
income
|
||||||||||||||||
Service
charges on deposit accounts
|
5,632 | 5,408 | 17,098 | 13,776 | ||||||||||||
Trust
and wealth management fees
|
3,366 | 3,339 | 10,579 | 9,881 | ||||||||||||
Bankcard
income
|
2,193 | 1,379 | 6,263 | 4,092 | ||||||||||||
Net
gains from sales of loans
|
2,749 | 63 | 3,391 | 855 | ||||||||||||
Gains
on sales of investment securities
|
0 | 0 | 0 | 3,349 | ||||||||||||
Gain
on acquisition
|
0 | 342,494 | 0 | 342,494 | ||||||||||||
FDIC
loss sharing income
|
17,800 | 0 | 40,538 | 0 | ||||||||||||
Accelerated
discount on covered loans
|
9,448 | 0 | 22,954 | 0 | ||||||||||||
Income
(loss) on preferred securities
|
0 | 154 | (30 | ) | 277 | |||||||||||
Other
|
3,707 | 1,599 | 11,504 | 5,842 | ||||||||||||
Total
noninterest income
|
44,895 | 354,436 | 112,297 | 380,566 | ||||||||||||
Noninterest
expenses
|
||||||||||||||||
Salaries
and employee benefits
|
28,790 | 22,051 | 88,544 | 55,927 | ||||||||||||
Net
occupancy
|
4,663 | 3,442 | 18,125 | 8,912 | ||||||||||||
Furniture
and equipment
|
2,490 | 1,874 | 7,277 | 5,527 | ||||||||||||
Data
processing
|
1,191 | 973 | 3,559 | 2,585 | ||||||||||||
Marketing
|
1,230 | 871 | 3,904 | 2,211 | ||||||||||||
Communication
|
986 | 737 | 3,016 | 2,077 | ||||||||||||
Professional
services
|
2,117 | 1,220 | 6,306 | 3,427 | ||||||||||||
Debt
extinguishment
|
8,029 | 0 | 8,029 | 0 | ||||||||||||
State
intangible tax
|
724 | 628 | 3,481 | 1,944 | ||||||||||||
FDIC
expense
|
2,123 | 1,612 | 6,040 | 5,318 | ||||||||||||
Other
|
8,967 | 12,893 | 29,109 | 21,103 | ||||||||||||
Total
noninterest expenses
|
61,310 | 46,301 | 177,390 | 109,031 | ||||||||||||
Income
before income taxes
|
24,419 | 322,144 | 69,541 | 333,064 | ||||||||||||
Income
tax expense
|
8,840 | 121,787 | 24,590 | 125,522 | ||||||||||||
Net
income
|
15,579 | 200,357 | 44,951 | 207,542 | ||||||||||||
Dividends
on preferred stock
|
0 | 1,000 | 1,865 | 2,578 | ||||||||||||
Net
income available to common shareholders
|
$ | 15,579 | $ | 199,357 | $ | 43,086 | $ | 204,964 | ||||||||
Net
earnings per common share - basic:
|
$ | 0.27 | $ | 3.91 | $ | 0.76 | $ | 4.77 | ||||||||
Net
earnings per common share - diluted:
|
$ | 0.27 | $ | 3.87 | $ | 0.75 | $ | 4.71 | ||||||||
Cash
dividends declared per share
|
$ | 0.10 | $ | 0.10 | $ | 0.30 | $ | 0.30 | ||||||||
Average
basic shares outstanding
|
57,570,709 | 51,027,887 | 56,765,933 | 43,005,983 | ||||||||||||
Average
diluted shares outstanding
|
58,531,505 | 51,457,189 | 57,758,906 | 43,502,561 |
See notes
to consolidated financial statements.
2
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited,
dollars in thousands)
Nine months ended
|
||||||||
September 30,
|
||||||||
2010
|
2009
|
|||||||
Operating
activities
|
||||||||
Net
income
|
$ | 44,951 | $ | 207,542 | ||||
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||
Provision
for loan and lease losses
|
72,970 | 41,272 | ||||||
Provision
for depreciation and amortization
|
8,130 | 5,613 | ||||||
Stock-based
compensation expense
|
2,155 | 2,073 | ||||||
Pension
expense
|
1,508 | 833 | ||||||
Net
amortization of premiums/accretion of discounts on investment
securities
|
729 | 1,031 | ||||||
Gains
on sales of investment securities
|
0 | (3,349 | ) | |||||
Loss
(income) on trading securities
|
30 | (277 | ) | |||||
Gain
on acquisition
|
0 | (342,494 | ) | |||||
Originations
of loans held for sale
|
(93,113 | ) | (114,966 | ) | ||||
Net
gains from sales of loans held for sale
|
(1,333 | ) | (948 | ) | ||||
Proceeds
from sales of loans held for sale
|
81,785 | 113,558 | ||||||
Deferred
income taxes
|
17,607 | 140,099 | ||||||
Decrease
(increase) in interest receivable
|
7,745 | (11,029 | ) | |||||
Increase
in cash surrender value of life insurance
|
(3,491 | ) | (3,178 | ) | ||||
Decrease
(increase) in prepaid expenses
|
1,687 | (991 | ) | |||||
Decrease
in indemnification asset
|
49,698 | 0 | ||||||
(Decrease)
increase in accrued expenses
|
(32,005 | ) | 10,103 | |||||
Increase
(decrease) in interest payable
|
1,960 | (847 | ) | |||||
Contribution
to pension plan
|
0 | (30,800 | ) | |||||
Other
|
(13,963 | ) | (14,425 | ) | ||||
Net
cash provided by (used in) operating activities
|
147,050 | (1,180 | ) | |||||
Investing
activities
|
||||||||
Proceeds
from sales of securities available-for-sale
|
0 | 152,720 | ||||||
Proceeds
from calls, paydowns and maturities of securities
available-for-sale
|
112,055 | 135,566 | ||||||
Purchases
of securities available-for-sale
|
(254,734 | ) | (113,042 | ) | ||||
Proceeds
from calls, paydowns and maturities of securities
held-to-maturity
|
852 | 647 | ||||||
Purchases
of securities held-to-maturity
|
(577 | ) | 0 | |||||
Net
increase in interest-bearing deposits with other banks
|
(18,440 | ) | (728,853 | ) | ||||
Net
decrease (increase) in loans and leases, excluding covered
loans
|
86,106 | (180,908 | ) | |||||
Net
decrease in covered assets
|
279,900 | 10,384 | ||||||
Proceeds
from disposal of other real estate owned
|
3,769 | 5,046 | ||||||
Purchases
of premises and equipment
|
(16,961 | ) | (10,124 | ) | ||||
Net
cash acquired from acquisitions
|
0 | 285,562 | ||||||
Net
cash proceeds received in FDIC assisted acquisition
|
0 | 967,391 | ||||||
Net
cash provided by investing activities
|
191,970 | 524,389 | ||||||
Financing
activities
|
||||||||
Net
decrease in total deposits
|
(299,377 | ) | (51,325 | ) | ||||
Net
increase (decrease) in short-term borrowings
|
21,317 | (308,770 | ) | |||||
Payments
on long-term borrowings
|
(255,149 | ) | (101,463 | ) | ||||
Cash
dividends paid on common stock
|
(16,708 | ) | (13,880 | ) | ||||
Cash
dividends paid on preferred stock
|
(1,100 | ) | (2,578 | ) | ||||
Redemption
of preferred stock
|
(80,000 | ) | 0 | |||||
Issuance
of common stock, net of issuance costs
|
91,224 | 97,985 | ||||||
Proceeds
from exercise of stock options
|
206 | 0 | ||||||
Excess
tax benefit (liability) on share-based compensation
|
518 | (189 | ) | |||||
Net
cash used in financing activities
|
(539,069 | ) | (380,220 | ) | ||||
Cash
and cash equivalents:
|
||||||||
Net
(decrease) increase in cash and cash
equivalents
|
(200,049 | ) | 142,989 | |||||
Cash
and cash equivalents at beginning of period
|
344,150 | 100,935 | ||||||
Cash
and cash equivalents at end of period
|
$ | 144,101 | $ | 243,924 |
See notes
to consolidated financial statements.
3
FIRST
FINANCIAL BANCORP. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited,
dollars in thousands)
Nine months ended
|
||||||||
September 30,
|
||||||||
2010
|
2009
|
|||||||
Supplemental
Schedule for Investing Activities
|
||||||||
Acquisitions
|
||||||||
Assets
acquired - branch acquisition
|
$ | 0 | $ | 79,101 | ||||
Liabilities
assumed - branch acquisition
|
0 | 84,641 | ||||||
Goodwill
|
$ | 0 | $ | 5,540 | ||||
Assets
acquired - Peoples
|
$ | 0 | $ | 566,642 | ||||
Liabilities
assumed - Peoples
|
0 | 584,661 | ||||||
Goodwill
|
$ | 0 | $ | 18,019 | ||||
Assets
acquired - Irwin
|
$ | 0 | $ | 3,230,376 | ||||
Liabilities
assumed - Irwin
|
0 | 2,887,882 | ||||||
Bargain
purchase gain
|
$ | 0 | $ | 342,494 |
See notes
to consolidated financial statements.
4
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited,
dollars in thousands except per share data)
Preferred
|
Preferred
|
Common
|
Common
|
Accumulated
other
|
||||||||||||||||||||||||||||||||
Stock
|
Stock
|
Stock
|
Stock
|
Retained
|
comprehensive
|
Treasury
stock
|
||||||||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
earnings
|
income
(loss)
|
Shares
|
Amount
|
Total
|
||||||||||||||||||||||||||||
Balances
at January 1, 2009
|
80,000 | $ | 78,019 | 48,558,614 | $ | 394,169 | $ | 76,339 | $ | (11,905 | ) | (11,077,413 | ) | $ | (188,295 | ) | $ | 348,327 | ||||||||||||||||||
Net
income
|
207,542 | 207,542 | ||||||||||||||||||||||||||||||||||
Unrealized
holding gains (losses) on securities available-for-sale arising during the
period
|
4,939 | 4,939 | ||||||||||||||||||||||||||||||||||
Change
in retirement obligation
|
501 | 501 | ||||||||||||||||||||||||||||||||||
Unrealized
loss on derivatives-Prime Swap market value adj.
|
(356 | ) | (356 | ) | ||||||||||||||||||||||||||||||||
Unrealized
loss on derivatives-Trust Preferred Swap market value adj.
|
162 | 162 | ||||||||||||||||||||||||||||||||||
Total
comprehensive income
|
212,788 | |||||||||||||||||||||||||||||||||||
Issuance
of common stock
|
13,800,000 | 97,985 | 97,985 | |||||||||||||||||||||||||||||||||
Cash
dividends declared :
|
||||||||||||||||||||||||||||||||||||
Common
stock at $0.30 per share
|
(12,650 | ) | (12,650 | ) | ||||||||||||||||||||||||||||||||
Preferred
stock
|
(2,578 | ) | (2,578 | ) | ||||||||||||||||||||||||||||||||
Discount
on preferred stock
|
252 | (252 | ) | 0 | ||||||||||||||||||||||||||||||||
Excess
tax liability on share-based compensation
|
(189 | ) | (189 | ) | ||||||||||||||||||||||||||||||||
Restricted
stock awards, net of forfeitures
|
(3,184 | ) | 150,221 | 2,845 | (339 | ) | ||||||||||||||||||||||||||||||
Share-based
compensation expense
|
2,073 | 2,073 | ||||||||||||||||||||||||||||||||||
Balances
at September 30, 2009
|
80,000 | 78,271 | 62,358,614 | 490,854 | 268,401 | (6,659 | ) | (10,927,192 | ) | (185,450 | ) | 645,417 | ||||||||||||||||||||||||
Balances
at January 1, 2010
|
80,000 | 79,195 | 62,358,614 | 490,532 | 276,119 | (10,487 | ) | (10,924,793 | ) | (185,401 | ) | 649,958 | ||||||||||||||||||||||||
Net
income
|
44,951 | 44,951 | ||||||||||||||||||||||||||||||||||
Unrealized
holding gains on securities available-for-sale arising during the
period
|
1,894 | 1,894 | ||||||||||||||||||||||||||||||||||
Change
in retirement obligation
|
1,064 | 1,064 | ||||||||||||||||||||||||||||||||||
Unrealized
loss on derivatives-Prime Swap market value adj.
|
(295 | ) | (295 | ) | ||||||||||||||||||||||||||||||||
Unrealized
loss on derivatives-Trust Preferred Swap market value adj.
|
(1,470 | ) | (1,470 | ) | ||||||||||||||||||||||||||||||||
Foreign
Currency Exchange
|
188 | 188 | ||||||||||||||||||||||||||||||||||
Total
comprehensive income
|
46,332 | |||||||||||||||||||||||||||||||||||
Issuance
of common stock
|
6,372,117 | 91,224 | 91,224 | |||||||||||||||||||||||||||||||||
Preferred
stock redemption
|
(80,000 | ) | (79,235 | ) | (79,235 | ) | ||||||||||||||||||||||||||||||
Cash
dividends declared :
|
||||||||||||||||||||||||||||||||||||
Common
stock at $0.30 per share
|
(17,388 | ) | (17,388 | ) | ||||||||||||||||||||||||||||||||
Preferred
stock
|
(1,100 | ) | (1,100 | ) | ||||||||||||||||||||||||||||||||
Discount
on preferred stock
|
40 | (805 | ) | (765 | ) | |||||||||||||||||||||||||||||||
Excess
tax benefit on share-based compensation
|
518 | 518 | ||||||||||||||||||||||||||||||||||
Exercise
of stock options, net of shares purchased
|
(1,534 | ) | 81,615 | 1,384 | (150 | ) | ||||||||||||||||||||||||||||||
Restricted
stock awards, net of forfeitures
|
(3,586 | ) | 170,381 | 2,968 | (618 | ) | ||||||||||||||||||||||||||||||
Share-based
compensation expense
|
2,155 | 2,155 | ||||||||||||||||||||||||||||||||||
Balances
at September 30, 2010
|
0 | $ | 0 | 68,730,731 | $ | 579,309 | $ | 301,777 | $ | (9,106 | ) | (10,672,797 | ) | $ | (181,049 | ) | $ | 690,931 |
See Notes
to Consolidated Financial Statements.
5
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2010
(Unaudited)
The
consolidated financial statements for interim periods are unaudited; however, in
the opinion of the management of First Financial Bancorp. (First Financial), all
material adjustments (consisting of only normal recurring adjustments) necessary
for a fair presentation have been included.
NOTE
1: BASIS OF PRESENTATION
The
consolidated financial statements of First Financial, a bank holding company,
include the accounts of First Financial and its wholly-owned subsidiaries –
First Financial Bank, N.A. and First Financial Capital Advisors LLC, a
registered investment advisor. All intercompany transactions and accounts
have been eliminated in consolidation. Certain reclassifications of prior
periods’ amounts have been made to conform to current period’s presentation and
had no effect on previously reported net income amounts or financial
condition.
The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles (GAAP) requires management to make estimates, assumptions,
and judgments that affect the amounts reported in the financial statements and
accompanying notes. Actual realized amounts could differ materially from
those estimates. These interim financial statements have been prepared in
accordance with the instructions to Form 10-Q and Article 10 of
Regulation S-X and serve to update the First Financial Bancorp. Annual
Report on Form 10-K (Form 10-K) for the year ended December 31, 2009.
These financial statements may not include all information and notes necessary
to constitute a complete set of financial statements under GAAP applicable to
annual periods and accordingly should be read in conjunction with the financial
information contained in the Form 10-K. Management believes these
unaudited consolidated financial statements reflect all adjustments of a normal
recurring nature which are necessary for a fair presentation of the results for
the interim periods presented. The results of operations for the interim
periods are not necessarily indicative of the results that may be expected for
the full year or any other interim period. The Consolidated Balance Sheet
as of December 31, 2009, has been derived from the audited financial statements
in the company’s 2009 Form 10-K.
The
Financial Accounting Standards Board’s (FASB) Accounting Standards Codification
(ASC) became effective July 1, 2009. At that date, the ASC became the
FASB’s officially recognized source of authoritative GAAP applicable to all
public and non-public non-governmental entities, superseding existing FASB,
American Institute of Certified Public Accountants, Emerging Issues Tax Force,
and related literature. Rules and interpretive releases of the Securities
and Exchange Commission (SEC) under the authority of federal securities laws are
also sources of authoritative GAAP for SEC registrants. All other
accounting literature is considered non-authoritative. The change to ASC
affects the way companies refer to GAAP in financial statements and accounting
policies. Citing particular content in the ASC involves specifying the
unique numeric path to the content through the Topic, Subtopic, Section, and
Paragraph structure.
NOTE
2: RECENTLY ADOPTED AND ISSUED ACCOUNTING STANDARDS
Effective
January 1, 2010, First Financial adopted the amended guidance on the
consolidation of variable interest entities in ASC Topic 810,
Consolidations. This guidance affects all entities and enterprises
currently within its scope, as well as qualifying special purpose entities that
were previously outside of its scope, and is effective for fiscal years
beginning after November 15, 2009, with early adoption prohibited. The
adoption of this guidance did not have a material impact on First Financial’s
Consolidated Financial Statements.
Effective
January 1, 2010, First Financial adopted the amended guidance on derecognition
on transfers of financial assets in ASC Topic 860, Transfers and
Servicing. This guidance removes the concept of a qualifying
special-purpose entity and removes the exception from applying ASC Topic 810,
Consolidations, to qualifying special-purpose entities. This guidance
applies prospectively to transfers of financial assets occurring on or after the
effective date and was effective for fiscal years beginning after November 15,
2009, with early adoption prohibited. The adoption of this guidance did
not have a material impact on First Financial’s Consolidated Financial
Statements.
Effective
January 1, 2010, First Financial adopted the amended guidance on variable
interest entities in ASC Topic 810-10. This guidance replaces the
quantitative-based risks-and-rewards calculation for determining which reporting
entity, if any, has controlling financial interest in a variable interest entity
with an approach focused on identifying which reporting entity has (1) the power
to direct the activities of a variable interest entity that most significantly
affect the entity’s economic performance and (2) the obligation to absorb losses
of, or the right to receive benefits from, the entity. This guidance also
requires additional disclosures about a reporting entity’s involvement with
variable interest entities and about any significant changes in risk exposure as
a result of that involvement. The adoption of this guidance did not have a
material impact on First Financial’s Consolidated Financial
Statements.
6
Effective
January 1, 2010 First Financial adopted the amended guidance on fair value
disclosures in ASC Topic 820, Fair Value Measurements and Disclosures. This
amended guidance requires disclosures about transfers into and out of Levels 1
and 2 and separate disclosures about purchases, sales, issuances, and
settlements relating to Level 3 measurements. The guidance also clarifies
existing fair value disclosures about the level of disaggregation and about
inputs and valuation techniques used to measure fair value and amends guidance
on employers’ disclosures about postretirement benefit plan assets under ASC
Topic 715, Compensation – Post Retirement Benefits, to require that disclosures
be provided by classes of assets instead of by major categories of assets. This
guidance was effective for the first reporting period, including interim
periods, beginning after December 15, 2009, except for the requirement to
provide the Level 3 activity of purchases, sales, issuances, and settlements on
a gross basis, which will be effective for fiscal years beginning after December
15, 2010, and for interim periods within those fiscal years. For further detail
on First Financial’s fair value measurements and disclosures, see Note 14 - Fair
Value Disclosures.
In
March 2010, the FASB issued an update (ASU No. 2010-11, Scope
Exception Related to Embedded Credit Derivatives) impacting FASB ASC 815-15,
Derivatives and Hedging — Embedded Derivatives. The amendments clarify the scope
exception for embedded credit derivative features related to the transfer of
credit risk in the form of subordination of one financial instrument to another.
This update became effective for First Financial for the interim reporting
period beginning after June 15, 2010 and did not have a material impact on
First Financial’s consolidated financial statements or results of
operations.
In
April 2010, the FASB issued an update (ASU No. 2010-18, Effect of a
Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a
Single Asset) impacting FASB ASC 310-30, Receivables — Loans and Debt Securities
Acquired with Deteriorated Credit Quality. Under the amendments, modifications
of loans that are accounted for within a pool do not result in the removal of
those loans from the pool even if the modification of those loans would
otherwise be considered a troubled debt restructuring. An entity will continue
to be required to consider whether the pool of assets in which the loan is
included is impaired if expected cash flows for the pool change. This update
became effective for First Financial for the interim reporting period beginning
after June 15, 2010 and did not have a material impact on First Financial’s
consolidated financial statements or results of operations.
In
July 2010, the FASB issued Accounting Standards Update 2010-20, Disclosure
about the Credit Quality of Financing Receivables and the Allowance for Credit
losses. The new guidance will increase disclosures made about the credit quality
of loans and the allowance for credit losses. The disclosures will provide
additional information about the nature of credit risk inherent in First
Financial’s loans, how credit risk is analyzed and assessed, and the reasons for
the change in the allowance for loan losses. The requirements will be effective
for First Financial’s year ended December 31, 2010. First Financial is
still evaluating the potential impact to its consolidated financial statements
from the adoption of this guidance.
NOTE
3: BUSINESS COMBINATIONS
On July
31, 2009, First Financial Bank, N.A. (First Financial Bank), a wholly owned
subsidiary of First Financial Bancorp, entered into a purchase and assumption
agreement (Peoples Agreement) with the Federal Deposit Insurance Corporation
(FDIC), as receiver, pursuant to which First Financial acquired certain assets
and assumed substantially all of the deposits and certain liabilities of Peoples
Community Bank (Peoples).
Prior to
the acquisition, Peoples operated 19 banking centers in the Cincinnati, Ohio
metropolitan area. Excluding the effects of purchase accounting
adjustments, First Financial acquired $579.6 million in assets and assumed
approximately $520.8 million of the deposits of Peoples.
In
connection with the Peoples acquisition, First Financial Bank entered into a
loss sharing agreement with the FDIC that covers $449.7 million of assets, based
upon seller’s records, including single family residential mortgage loans,
commercial real estate and commercial and industrial loans, and other real
estate acquired through foreclosure (OREO), all of which are referred to
collectively as covered assets. First Financial acquired other Peoples
assets that are not covered by the loss sharing agreement with the FDIC
including investment securities purchased at fair market value and other
tangible assets. Pursuant to the terms of the loss sharing agreement, the
covered assets are subject to a stated loss threshold of $190.0 million whereby
the FDIC will reimburse First Financial for 80% of losses up to $190.0 million,
and 95% of losses in excess of this amount. First Financial will reimburse the
FDIC for its share of recoveries with respect to losses for which the FDIC paid
First Financial a reimbursement under the loss sharing agreement. The FDIC’s
obligation to reimburse First Financial for losses with respect to covered
assets began with the first dollar of loss incurred.
On
September 18, 2009, First Financial Bank, N.A, entered into separate purchase
and assumption agreements (Irwin Agreements) with the FDIC, as receiver,
pursuant to which First Financial acquired certain assets and assumed
substantially all of the deposits and certain liabilities of Irwin Union Bank
and Trust Company (Irwin Union Bank) and Irwin Union Bank, F.S.B. (Irwin FSB).
Irwin Union Bank and Irwin FSB are collectively referred to herein as
Irwin.
7
Prior to
the acquisition, Irwin operated 27 banking centers primarily located in Indiana,
with banking centers also located in Michigan, Nevada, Arizona, California,
Kentucky, Missouri, New Mexico and Utah. Excluding the effects of purchase
accounting adjustments, First Financial acquired $2.6 billion in assets and
assumed approximately $2.5 billion of the deposits of Irwin.
In
connection with the Irwin acquisitions, First Financial Bank entered into loss
sharing agreements with the FDIC that collectively cover approximately $2.2
billion of assets, based upon seller’s records, which include single family
residential mortgage loans, commercial real estate and commercial and industrial
loans (covered assets). First Financial acquired other Irwin assets that are not
covered by loss sharing agreements with the FDIC including investment securities
purchased at fair market value and other tangible assets. Pursuant to the terms
of the loss sharing agreements, the covered assets of Irwin Union Bank are
subject to a stated loss threshold of $526.0 million whereby the FDIC will
reimburse First Financial for 80% of losses up to $526.0 million, and 95% of
losses in excess of this amount. Also pursuant to the terms of the loss sharing
agreements, the covered assets of Irwin FSB are subject to a stated loss
threshold of $110.0 million whereby the FDIC will reimburse First Financial for
80% of losses up to $110.0 million, and 95% of losses in excess of this amount.
First Financial will reimburse the FDIC for its share of recoveries with respect
to losses for which the FDIC paid First Financial a reimbursement under the loss
sharing
agreements. The FDIC’s obligation to reimburse First Financial for losses with
respect to covered assets began with the first dollar of loss
incurred.
The
amounts covered by the loss sharing agreements are the pre-acquisition book
values of the underlying covered assets, the contractual balance of unfunded
commitments that were acquired, and certain future net direct costs. The loss
sharing agreements applicable to single family residential mortgage loans
provide for FDIC loss sharing and First Financial reimbursement to the FDIC, in
each case as described above, for ten years. The loss sharing agreements
applicable to all other covered assets provide for FDIC loss sharing for five
years and First Financial reimbursement of recoveries to the FDIC for eight
years, in each case as described above.
The loss
sharing agreements are subject to certain servicing procedures as specified in
agreements with the FDIC. The expected reimbursements under the loss sharing
agreements were recorded as indemnification assets at their estimated fair
values of $63.4 million and $224.6 million for the Peoples Agreement and the
Irwin Agreements, respectively, on the acquisition dates. The indemnification
assets reflect the present value of the expected net cash reimbursement related
to the loss sharing agreements described above.
The
estimated fair value of liabilities assumed exceeded the estimated fair value of
assets acquired in the Peoples acquisition, resulting in the recognition of
goodwill in the amount of approximately $18.0 million. In the Irwin acquisition,
the estimated fair value of assets acquired exceeded the estimated fair value of
liabilities assumed, resulting in a bargain purchase gain of $342.5 million and
the recognition of a $213.2 million after-tax gain.
First
Financial did not acquire the real estate, banking facilities, furniture and
equipment of Peoples as part of the purchase and assumption agreement but had
the option to purchase these assets at fair market value from the FDIC. This
purchase option expired 90 days after acquisition date, but was extended by the
FDIC. First Financial completed a review of the former Peoples locations and
notified the FDIC during the first quarter of 2010 of the company’s intent
to
purchase certain properties for a combined purchase price of $7.9 million.
First Financial completed the acquisition of these properties from the FDIC in
the third quarter of 2010, concluding its last material settlement with the FDIC
related to the acquisition of Peoples.
First
Financial has determined that the acquisitions of the net assets of Peoples and
Irwin constitute business combinations as defined by the FASB ASC Topic 805,
Business Combinations. Accordingly, the assets acquired and liabilities
assumed are presented at their fair values as required. Fair values were
determined based on the requirements of FASB ASC Topic 820, Fair Value
Measurements. In many cases the determination of these fair values
required management to make estimates about discount rates, future expected cash
flows, market conditions and other future events that are highly subjective in
nature and subject to change.
Early in
the fourth quarter of 2009, First Financial completed the technology conversion
and operational integration of Peoples. The conversion of Irwin’s
technology and operational systems was completed in the first quarter of
2010. During the first quarter of 2010, in conjunction with the planning
and product mapping of the Irwin technology integration, First Financial
determined that certain noninterest-bearing, interest-bearing and other savings
account products were ultimately classified in categories different than had
been previously reported. Based upon this updated product level
information, the previously reported deposit line items in the third and fourth
quarters of 2009 have been reclassified to reflect the classifications as shown
in the first quarter 2010 reporting. This reclassification did not change
the total amount of outstanding deposits in any reported period, only individual
line items.
Estimated
fair values were considered preliminary and, in accordance with FASB ASC Topic
805, were subject to change up to one year after the acquisition date. This
allowed for adjustments to the initial purchase entries if additional
information relative to closing date fair values became available. Material
adjustments to acquisition date estimated fair values were recorded in the
period in which the acquisition occurred and, as a result, previously reported
results are subject to change. Certain reclassifications of prior periods’
amounts were also made to conform to the current period’s presentation and had
no effect on previously reported net income amounts. The one year measurement
period expired at the end of the third quarter of 2010.
8
First
Financial made certain adjustments to the estimated fair values of the assets
and liabilities acquired in connection with the Irwin acquisitions during the
third quarter of 2010 based on new information. As a result of its valuation
procedures and assumptions regarding the timing of expected loss experience
related to loans acquired from Irwin, First Financial determined that the FDIC
indemnification asset related to these loans required an adjustment decreasing
the balance by $22.4 million. The FDIC indemnification asset represents the
expected payments from the FDIC over the course of the loss sharing agreements,
on a discounted basis. The fair value of loans acquired from Irwin was adjusted
to reflect the impact of reclassifications of the initial category assignments.
The fair value adjustment of other assets is primarily related to the
establishment of valuation allowances for certain assets and investments of
Irwin subsidiaries as well as other community reinvestment related assets. These
adjustments resulted in a $36.6 million pre-tax decline in the bargain purchase
gain on the Irwin acquisitions and are included in the tables
below.
The table
below summarizes all material adjustments to the fair values of assets acquired
in the Irwin transactions during the one year measurement period and the impact
on the bargain purchase gain recorded on the acquisitions.
Three months ended
|
||||
(Dollars in thousands)
|
September 30, 2009
|
|||
Pre-Tax Impact
|
||||
Bargain
purchase gain on acquisitions, as originally reported
|
$ | 383,330 | ||
Adjustments:
|
||||
Valuation
- indemnification asset related to Irwin
|
(23,784 | ) | ||
Valuation
- loans acquired from Irwin
|
(1,496 | ) | ||
Other
net asset valuations
|
(15,556 | ) | ||
Total
adjustments to gain on acquisitions
|
(40,836 | ) | ||
Bargain
purchase gain on acquisitions, as adjusted
|
$ | 342,494 |
First
Financial also made certain adjustments to the estimated fair values of the
assets and liabilities acquired in connection with the Peoples acquisition
during the third quarter of 2010 based on new information. As a result of
these adjustments, goodwill was decreased for the Peoples Community Bank
acquisition by $0.1 million.
Until
First Financial and the FDIC conduct a final settlement for the Irwin
transactions, the determination of which assets and liabilities are ultimately
acquired or assumed by First Financial cannot be completed. The estimated fair
values for the purchased impaired and nonimpaired loans were based upon the
FDIC’s estimated data for acquired loans. First Financial anticipates the final
settlement for the Irwin transactions will be completed in the fourth quarter of
2010. In addition, the tax treatment of FDIC assisted acquisitions is
complex and subject to interpretations that may result in future adjustments of
deferred taxes as of the acquisition dates.
9
Peoples
|
Irwin
|
|||||||||||||||||||||||
As
Recorded
|
Fair Value
|
As
Recorded
|
As
Recorded
|
Fair Value
|
As
Recorded
|
|||||||||||||||||||
(Dollars in thousands)
|
by FDIC
|
Adjustments
|
by FFB
|
by FDIC
|
Adjustments
|
by FFB
|
||||||||||||||||||
Assets
|
||||||||||||||||||||||||
Cash
and interest-bearing deposits
|
$ | 87,158 | $ | 0 | $ | 87,158 | $ | 158,786 | $ | 0 | $ | 158,786 | ||||||||||||
Investment
securities
|
37,681 | 0 | 37,681 | 70,700 | 0 | 70,700 | ||||||||||||||||||
Covered
loans
|
431,217 | (100,425 | ) | 330,792 | 2,237,158 | (483,026 | ) | 1,754,132 | ||||||||||||||||
Total
loans
|
431,217 | (100,425 | ) | 330,792 | 2,237,158 | (483,026 | ) | 1,754,132 | ||||||||||||||||
Goodwill
(Bargain Purchase)
|
0 | 18,019 | 18,019 | 0 | (342,494 | ) | (342,494 | ) | ||||||||||||||||
Core
deposit intangible
|
0 | 1,820 | 1,820 | 0 | 3,326 | 3,326 | ||||||||||||||||||
Covered
other real estate owned
|
18,457 | (7,728 | ) | 10,729 | 796 | 0 | 796 | |||||||||||||||||
FDIC
indemnification asset
|
0 | 63,420 | 63,420 | 0 | 224,620 | 224,620 | ||||||||||||||||||
Other
assets
|
5,115 | (4,697 | ) | 418 | 106,073 | (20,870 | ) | 85,203 | ||||||||||||||||
Total
assets acquired
|
$ | 579,628 | $ | (29,591 | ) | $ | 550,037 | $ | 2,573,513 | $ | (618,444 | ) | $ | 1,955,065 | ||||||||||
Liabilities
|
||||||||||||||||||||||||
Deposits
|
||||||||||||||||||||||||
Noninterest-bearing
deposit accounts
|
$ | 49,424 | $ | 0 | $ | 49,424 | $ | 300,859 | $ | 0 | $ | 300,859 | ||||||||||||
Interest-bearing
deposit accounts
|
0 | 0 | 0 | 741,525 | 0 | 741,525 | ||||||||||||||||||
Savings
deposits
|
168,220 | 0 | 168,220 | 79,987 | 0 | 79,987 | ||||||||||||||||||
Time
deposits
|
303,135 | 0 | 303,135 | 1,376,076 | 0 | 1,376,076 | ||||||||||||||||||
Total
deposits
|
520,779 | 0 | 520,779 | 2,498,447 | 0 | 2,498,447 | ||||||||||||||||||
Advances
from Federal Home Loan Banks
|
58,940 | 4,598 | 63,538 | 337,433 | 17,685 | 355,118 | ||||||||||||||||||
Accrued
expenses and other liabilities
|
344 | 0 | 344 | 32,638 | 1,679 | 34,317 | ||||||||||||||||||
Total
liabilities assumed
|
$ | 580,063 | $ | 4,598 | $ | 584,661 | $ | 2,868,518 | $ | 19,364 | $ | 2,887,882 | ||||||||||||
Due
from FDIC for net liabilities assumed
|
$ | 435 | $ | 34,189 | $ | 34,624 | $ | 295,005 | $ | 637,808 | $ | 932,813 |
The
following is a description of the methods used to determine the fair values of
significant assets and liabilities presented above.
Cash and due from banks and
interest-bearing deposits in banks and the Federal Reserve – The carrying
amount of these assets is a reasonable estimate of fair value based on the
short-term nature of these assets.
Investment Securities
– Investment securities were acquired from the FDIC at fair market value which
was their quoted market prices at the time of acquisition.
Covered loans – Fair
values for covered loans were based on a discounted cash flow methodology that
considered factors including the type of loan and related collateral,
classification status, fixed or variable interest rate, loan term and whether or
not the loan was amortizing, and current discount rates. The discount
rates used for loans were based on then current market rates for new
originations of comparable loans and include adjustments for liquidity
concerns. Fair values of covered loans include both a rate-based valuation
mark, representing the carrying value discount required to establish the
appropriate effective yield for covered loans, as well as a credit-based
valuation mark representing the valuation adjustment applied to covered loans
related to credit loss assumptions.
Core deposit
intangible – This intangible asset represents the value of the
relationships that Peoples and Irwin had with its deposit customers. The fair
value of this intangible asset was estimated based on a discounted cash flow
methodology that gave appropriate consideration to expected customer attrition
rates, cost of the deposit base, and the net maintenance cost attributable to
customer deposits.
Covered other real estate
owned – Covered OREO is presented at the estimated value that management
expects to receive when the property is sold, net of related costs of
disposal.
10
FDIC indemnification
asset – This loss sharing asset is measured separately from the related
covered assets as it is not contractually embedded in the covered assets and is
not transferable with the covered assets should First Financial choose to
dispose of them. Fair value was estimated using projected cash flows related to
the loss sharing agreements based on the expected reimbursements for losses and
the applicable loss sharing percentages. These cash flows were discounted
to reflect the uncertainty of the timing and receipt of the loss sharing
reimbursement from the FDIC.
Deposits – The fair
values used for the demand and savings deposits that comprise the transaction
accounts acquired, by definition equal the amount payable on demand at the
acquisition date. No fair value adjustment was applied for time deposits
as First Financial was provided with the option, upon acquisition, to reset
deposit rates to market rates currently offered.
Advances from Federal Home
Loan Banks – The fair values of Federal Home Loan Bank (FHLB) advances
were based on contractual pre-payment penalties that are determined by the
FHLB.
NOTE
4: GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
Changes
in the net carrying amount of goodwill are shown below. No changes to
goodwill were recorded for 2010.
(Dollars in thousands)
|
||||
Balance
at December 31, 2008
|
$ | 28,261 | ||
Goodwill
acquired:
|
||||
Peoples
Community Bank
|
18,019 | |||
Branch
Acquisition
|
5,540 | |||
Balance
at December 31, 2009
|
$ | 51,820 |
Assets
and liabilities of acquired entities are recorded at their estimated fair values
as of the acquisition date and are subject to refinement for up to one year as
information relative to the fair values of that data becomes available.
The change in the goodwill for 2009 was a result of purchase accounting
adjustments related to the FDIC assisted transaction in July of 2009 for Peoples
Community Bank and the August of 2009 purchase of three branches, and related
loans and deposits from Irwin Union Bank and Trust Company. As a result of
the refinement, goodwill was decreased for the Peoples Community Bank
acquisition by $0.1 million. First Financial expects all the goodwill
resulting from the acquisitions described above to be deductible for tax
purposes.
Goodwill
is not amortized, but is measured for impairment on an annual basis as of
October 1 of each year or whenever events or changes in circumstances indicate
that the fair value of a reporting unit may be below its carrying value.
First Financial performed its annual impairment test as of October 1, 2009, and
determined that no impairment was indicated.
Other intangible
assets
Other
intangible assets consist of mortgage servicing rights and core deposit
intangibles. Core deposit intangibles are amortized on an accelerated
basis over their estimated useful lives and have an estimated weighted average
life of 9.4 years.
11
Other
intangible assets consisted of the following:
September 30, 2010
|
||||||||||||
Gross
|
Net
|
|||||||||||
Carrying
|
Accumulated
|
Carrying
|
||||||||||
(Dollars in thousands)
|
Amount
|
Amortization
|
Amount
|
|||||||||
Core
deposit intangibles
|
$ | 5,691 | $ | (1,294 | ) | $ | 4,397 | |||||
Mortgage
servicing rights
|
2,065 | (413 | ) | 1,652 | ||||||||
Total
other intangible assets
|
$ | 7,756 | $ | (1,707 | ) | $ | 6,049 | |||||
December 31, 2009
|
||||||||||||
Gross
|
Net
|
|||||||||||
Carrying
|
Accumulated
|
Carrying
|
||||||||||
(Dollars in thousands)
|
Amount
|
Amortization
|
Amount
|
|||||||||
Core
deposit intangibles
|
$ | 5,691 | $ | (332 | ) | $ | 5,359 | |||||
Mortgage
servicing rights
|
2,072 | (96 | ) | 1,976 | ||||||||
Other
|
178 | (52 | ) | 126 | ||||||||
Total
other intangible assets
|
$ | 7,941 | $ | (480 | ) | $ | 7,461 |
Mortgage Servicing
Rights
Changes
in capitalized mortgage servicing rights are summarized as follows:
September 30,
|
||||||||
(Dollars in thousands)
|
2010
|
2009
|
||||||
Balance
at beginning of year
|
$ | 1,976 | $ | 398 | ||||
Rights
acquired
|
0 | 1,930 | ||||||
Amortization
|
(324 | ) | (53 | ) | ||||
Rights
sold
|
0 | 0 | ||||||
Balance
at end of period
|
$ | 1,652 | $ | 2,275 |
Due to
the 2009 acquisition of Irwin Union Bank, First Financial acquired $1.9 million
in servicing rights. No new servicing rights were
capitalized.
The
estimated fair value of capitalized mortgage servicing rights was $1.7 million
at September 30, 2010, and $2.0 million at December 31, 2009.
NOTE
5: COMMITMENTS AND CONTINGENCIES
In the
normal course of business, First Financial offers a variety of financial
instruments with off-balance-sheet risk to its clients to aid them in meeting
their requirements for liquidity and credit enhancement. These financial
instruments include standby letters of credit and outstanding
commitments to extend credit. U.S. generally accepted accounting
principles do not require these financial instruments to be recorded in the
Consolidated Balance Sheets, Consolidated Statements of Income, Consolidated
Statements of Changes in Shareholders’ Equity, and Consolidated Statements of
Cash Flows. Following is a discussion of these transactions.
First
Financial’s exposure to credit loss, in the event of nonperformance by the other
party to the financial instrument for standby letters of credit, and outstanding
commitments to extend credit, is represented by the contractual amounts of those
instruments. First Financial uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
Standby letters of credit –
These transactions are conditional commitments issued by First Financial to
guarantee the performance of a client to a third party. First Financial’s
portfolio of standby letters of credit consists primarily of performance
assurances made on behalf of clients who have a contractual commitment to
produce or deliver goods or services. The risk to First Financial arises
from its obligation to make payment in the event of the clients’ contractual
default to produce the contracted good or service to a third party. First
Financial has issued standby letters of credit aggregating $23.0 million and
$22.9 million at September 30, 2010, and December 31, 2009,
respectively.
12
Management
conducts regular reviews of these instruments on an individual client basis and
does not anticipate any material losses as a result of these letters of
credit.
Loan commitments – Commitments
to extend credit are agreements to lend to a client as long as there is no
violation of any condition established in the commitment. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. First Financial evaluates each
client’s creditworthiness on an individual basis. The amount of collateral
obtained, if deemed necessary by First Financial upon extension of credit, is
based on management’s credit evaluation of the counterparty. The
collateral held varies, but may include securities, real estate, inventory,
plant, or equipment. First Financial had commitments outstanding to extend
credit totaling $1.0 billion at September 30, 2010, and $1.1 billion at
December 31, 2009.
Contingencies/Litigation – We
and our subsidiaries are from time to time engaged in various matters of
litigation, other assertions of improper or fraudulent loan practices or lending
violations, and other matters, and we have a number of unresolved claims
pending. In addition, as part of the ordinary course of business, we and our
subsidiaries are parties to litigation involving claims to the ownership of
funds in particular accounts, the collection of delinquent accounts, challenges
to security interests in collateral, and foreclosure interests, that is
incidental to our regular business activities. While the ultimate liability with
respect to these other litigation matters and claims cannot be determined at
this time, we believe that damages, if any, and other amounts relating to
pending matters are not likely to be material to our consolidated financial
position or results of operations. Reserves are established for these various
matters of litigation, when appropriate under FASB ASC Topic 450, Contingencies,
based in part upon the advice of legal counsel.
NOTE
6: INVESTMENTS
The
following is a summary of held-to-maturity and available-for-sale investment
securities as of September 30, 2010.
Held-to-Maturity
|
Available-for-Sale
|
|||||||||||||||||||||||||||||||
Amortized
|
Unrealized
|
Unrealized
|
Market
|
Amortized
|
Unrealized
|
Unrealized
|
Market
|
|||||||||||||||||||||||||
(Dollars
in thousands)
|
Cost
|
Gains
|
Losses
|
Value
|
Cost
|
Gains
|
Losses
|
Value
|
||||||||||||||||||||||||
U.S.
Treasuries
|
$ | 14,335 | $ | 576 | $ | 0 | $ | 14,911 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||||||||
Securities
of U.S. government agencies and corporations
|
0 | 0 | 0 | 0 | 110,023 | 1,567 | 0 | 111,590 | ||||||||||||||||||||||||
Mortgage-backed
securities
|
125 | 4 | 0 | 129 | 462,111 | 17,141 | (65 | ) | 479,187 | |||||||||||||||||||||||
Obligations
of state and other political subdivisions
|
3,382 | 333 | 0 | 3,715 | 15,146 | 283 | (50 | ) | 15,379 | |||||||||||||||||||||||
Other
securities
|
0 | 0 | 0 | 0 | 9,621 | 398 | 0 | 10,019 | ||||||||||||||||||||||||
Total
|
$ | 17,842 | $ | 913 | $ | 0 | $ | 18,755 | $ | 596,901 | $ | 19,389 | $ | (115 | ) | $ | 616,175 |
The
following is a summary of held-to-maturity and available-for-sale investment
securities as of December 31, 2009.
Held-to-Maturity
|
Available-for-Sale
|
|||||||||||||||||||||||||||||||
Amortized
|
Unrealized
|
Unrealized
|
Market
|
Amortized
|
Unrealized
|
Unrealized
|
Market
|
|||||||||||||||||||||||||
(Dollars
in thousands)
|
Cost
|
Gains
|
Losses
|
Value
|
Cost
|
Gains
|
Losses
|
Value
|
||||||||||||||||||||||||
U.S.
Treasuries
|
$ | 13,857 | $ | 204 | $ | (31 | ) | $ | 14,030 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||||||||||||
Securities
of U.S. government agencies and corporations
|
0 | 0 | 0 | 0 | 20,036 | 585 | 0 | 20,621 | ||||||||||||||||||||||||
Mortgage-backed
securities
|
149 | 1 | 0 | 150 | 407,221 | 15,407 | (369 | ) | 422,259 | |||||||||||||||||||||||
Obligations
of state and other political subdivisions
|
4,109 | 301 | 0 | 4,410 | 17,949 | 303 | (130 | ) | 18,122 | |||||||||||||||||||||||
Other
securities
|
0 | 0 | 0 | 0 | 9,747 | 266 | (13 | ) | 10,000 | |||||||||||||||||||||||
Total
|
$ | 18,115 | $ | 506 | $ | (31 | ) | $ | 18,590 | $ | 454,953 | $ | 16,561 | $ | (512 | ) | $ | 471,002 |
13
The
following is a summary of investment securities by estimated maturity as of
September 30, 2010.
Held-to-Maturity
|
Available-for-Sale
|
|||||||||||||||
Amortized
Cost
|
Market
Value
|
Amortized
Cost
|
Market
Value
|
|||||||||||||
Due
in one year or less
|
$ | 3,323 | $ | 3,332 | $ | 22,955 | $ | 23,121 | ||||||||
Due
after one year through five years
|
13,352 | 14,070 | 503,464 | 519,858 | ||||||||||||
Due
after five years through ten years
|
289 | 335 | 48,611 | 50,440 | ||||||||||||
Due
after ten years
|
878 | 1,018 | 21,871 | 22,756 | ||||||||||||
Total
|
$ | 17,842 | $ | 18,755 | $ | 596,901 | $ | 616,175 |
The
following tables present the age of gross unrealized losses and associated fair
value by investment category.
September 30, 2010
|
||||||||||||||||||||||||
Less than 12 Months
|
12 Months or More
|
Total
|
||||||||||||||||||||||
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
|||||||||||||||||||
(Dollars
in thousands)
|
Value
|
Loss
|
Value
|
Loss
|
Value
|
Loss
|
||||||||||||||||||
Mortgage-backed
securities
|
$ | 882 | $ | 0 | $ | 1,372 | $ | 65 | $ | 2,254 | $ | 65 | ||||||||||||
Obligations
of state and other political subdivisions
|
0 | 0 | 2,235 | 50 | 2,235 | 50 | ||||||||||||||||||
Total
|
$ | 882 | $ | 0 | $ | 3,607 | $ | 115 | $ | 4,489 | $ | 115 |
December 31, 2009
|
||||||||||||||||||||||||
Less than 12 Months
|
12 Months or More
|
Total
|
||||||||||||||||||||||
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
|||||||||||||||||||
(Dollars
in thousands)
|
Value
|
Loss
|
Value
|
Loss
|
Value
|
Loss
|
||||||||||||||||||
U.S.
Treasuries
|
$ | 2,277 | $ | 31 | $ | 0 | $ | 0 | $ | 2,277 | $ | 31 | ||||||||||||
Mortgage-backed
securities
|
23,800 | 266 | 1,608 | 103 | 25,408 | 369 | ||||||||||||||||||
Obligations
of state and other political subdivisions
|
621 | 10 | 1,540 | 120 | 2,161 | 130 | ||||||||||||||||||
Other
securities
|
312 | 13 | 0 | 0 | 312 | 13 | ||||||||||||||||||
Total
|
$ | 27,010 | $ | 320 | $ | 3,148 | $ | 223 | $ | 30,158 | $ | 543 |
Unrealized
losses on debt securities are generally due to higher current market yields
relative to the yields of the debt securities at their amortized cost.
Unrealized losses due to credit risk associated with the underlying collateral
of the debt security, if any, are not material. All securities with
unrealized losses are reviewed quarterly to determine if any impairment is
considered other than temporary, requiring a write-down to fair market
value. First Financial considers the percentage loss on a security, duration of
the loss, average life or duration of the security, credit rating of the
security, as well as payment performance and the company’s intent and ability to
hold the security to maturity when determining whether any impairment is other
than temporary. At this time First Financial does not intend to sell and it is
not more likely than not that the Company will be required to sell, debt
security issues temporarily impaired prior to maturity or recovery of book
value. First Financial had no other than temporary impairment charges for the
three and nine months ended September 30, 2010.
14
First
Financial had trading securities with a fair value of $0 at September 30, 2010,
$0.2 million at December 31, 2009, and $0.3 million at September 30, 2009.
For further detail on the fair value of investment securities, see Note 14 –
Fair Value Disclosures.
NOTE
7: DERIVATIVES
The use
of derivative instruments allows First Financial to meet the needs of its
clients while managing the interest-rate risk associated with certain
transactions. First Financial’s board of directors has authorized the use
of certain derivative products, including interest rate caps, floors, and
swaps. First Financial does not use derivatives for speculative purposes
and currently does not have any derivatives that are not designated as
hedges.
The
following table summarizes the derivative financial instruments utilized by
First Financial by the nature of the underlying asset or liability:
September 30, 2010
|
December 31, 2009
|
September 30, 2009
|
||||||||||||||||||||||||||||||||||
Fair Value
|
Cash Flow
|
Fair Value
|
Cash Flow
|
Fair Value
|
Cash
Flow
|
|||||||||||||||||||||||||||||||
(Dollars in thousands)
|
Hedges
|
Hedges
|
Total
|
Hedges
|
Hedges
|
Total
|
Hedges
|
Hedges
|
Total
|
|||||||||||||||||||||||||||
Instruments
associated with:
|
||||||||||||||||||||||||||||||||||||
Loans
|
$ | 509,901 | $ | 0 | $ | 509,901 | $ | 456,077 | $ | 0 | $ | 456,077 | $ | 432,257 | $ | 0 | $ | 432,257 | ||||||||||||||||||
Other
long-term debt
|
0 | 20,000 | 20,000 | 0 | 20,000 | 20,000 | 0 | 20,000 | 20,000 | |||||||||||||||||||||||||||
Total
notional value
|
$ | 509,901 | $ | 20,000 | $ | 529,901 | $ | 456,077 | $ | 20,000 | $ | 476,077 | $ | 432,257 | $ | 20,000 | $ | 452,257 |
While
authorized to use a variety of derivative products, First Financial primarily
utilizes interest rate swaps as a means to offer borrowers products that meet
their needs and may from time to time utilize interest rate swaps to manage the
macro interest rate risk profile of the company. These agreements establish the basis on
which interest rate payments are exchanged with counterparties and are referred
to as the notional amount. As only interest rate payments are exchanged, cash
requirements and credit risk are significantly less than the notional amount and
the company’s credit risk exposure is limited to the market value of the
instrument.
First
Financial manages this market value credit risk through counterparty credit
policies. These policies require the company to maintain a total derivative
notional position of less than 35 percent of assets, total credit exposure of
less than 3 percent of capital, and no single counterparty credit risk exposure
greater than $20 million. The company is currently well below all single
counterparty and portfolio limits. At September 30, 2010, the company had a
total counterparty notional amount outstanding of approximately $285.7 million,
spread among six counterparties, with an outstanding liability from these
contracts of $14.1 million.
In
connection with its use of derivative instruments, First Financial from time to
time is required to post cash collateral with its counterparties to offset its
market position. Derivative collateral balances were $18.1 million, $11.2
million, and $8.7 million at September 30, 2010, December 31, 2009, and
September 30, 2009, respectively. First Financial classifies the derivative cash
collateral outstanding with its counterparties as an adjustment to the fair
value of the derivative contracts within accrued interest and other liabilities
in the Consolidated Balance Sheets.
The
following table summarizes the derivative financial instruments utilized by
First Financial and their balances:
September 30, 2010
|
December 31, 2009
|
September 30, 2009
|
||||||||||||||||||||||||||||||
Balance
|
Notional
|
Estimated Fair Value
|
Notional
|
Estimated Fair Value
|
Notional
|
Estimated Fair Value
|
||||||||||||||||||||||||||
(Dollars in thousands)
|
Sheet Location
|
Amount
|
Gain
|
Loss
|
Amount
|
Gain
|
Loss
|
Amount
|
Gain
|
Loss
|
||||||||||||||||||||||
Fair
Value Hedges
|
||||||||||||||||||||||||||||||||
Pay
fixed interest rate swaps with counterparty
|
Accrued
interest and other liabilities
|
$ | 21,543 | $ | 0 | $ | (2,927 | ) | $ | 22,559 | $ | 0 | $ | (1,928 | ) | $ | 22,795 | $ | 0 | $ | (2,331 | ) | ||||||||||
Matched
interest rate swaps with borrower
|
Accrued
interest and other assets
|
244,179 | 19,919 | 0 | 216,759 | 10,226 | (32 | ) | 204,731 | 12,353 | 0 | |||||||||||||||||||||
Matched
interest rate swaps with counterparty
|
Accrued
interest and other liabilities
|
244,179 | 0 | (20,734 | ) | 216,759 | 32 | (10,661 | ) | 204,731 | 0 | $ | (12,353 | ) | ||||||||||||||||||
Cash
Flow Hedge
|
||||||||||||||||||||||||||||||||
Trust
Preferred Swap
|
Accumulated
other comprehensive income (loss)
|
20,000 | 0 | (1,326 | ) | 20,000 | 998 | 0 | 20,000 | 253 | 0 | |||||||||||||||||||||
Total
|
$ | 529,901 | $ | 19,919 | $ | (24,987 | ) | $ | 476,077 | $ | 11,256 | $ | (12,621 | ) | $ | 452,257 | $ | 12,606 | $ | (14,684 | ) |
15
The
following table details the derivative financial instruments, the average
remaining maturities and the weighted-average interest rates being paid and
received by First Financial at September 30, 2010:
Average
|
||||||||||||||||||||
Notional
|
Maturity
|
Fair
|
Weighted-Average Rate
|
|||||||||||||||||
(Dollars in thousands)
|
Value
|
(years)
|
Value
|
Receive
|
Pay
|
|||||||||||||||
Asset
conversion swaps
|
||||||||||||||||||||
Pay
fixed interest rate swaps with counterparty
|
$ | 21,543 | 5.2 | $ | (2,927 | ) | 2.28 | % | 6.83 | % | ||||||||||
Receive
fixed, matched interest rate swaps with borrower
|
244,179 | 4.4 | 19,919 | 6.22 | % | 2.87 | % | |||||||||||||
Pay
fixed, matched interest rate swaps with counterparty
|
244,179 | 4.4 | (20,734 | ) | 2.87 | % | 6.22 | % | ||||||||||||
Total
asset conversion swaps
|
509,901 | 4.4 | (3,742 | ) | 4.45 | % | 4.64 | % | ||||||||||||
Liability
conversion swaps
|
||||||||||||||||||||
Trust
Preferred Swap
|
20,000 | 8.5 | (1,326 | ) | 3.63 | % | 6.20 | % | ||||||||||||
Total
liability conversion swaps
|
20,000 | 8.5 | (1,326 | ) | 3.63 | % | 6.20 | % | ||||||||||||
Total
swap portfolio
|
$ | 529,901 | 4.6 | $ | (5,068 | ) | 4.42 | % | 4.70 | % |
The
accounting for changes in the fair value of derivatives depends on the intended
use of the derivative and the resulting designation. Derivatives used to
hedge the exposure to changes in the fair value of an asset, liability, or firm
commitment attributable to a particular risk, such as interest rate risk, are
considered fair value hedges. Derivatives used to
hedge the exposure to variability in expected future cash flows, or other types
of forecasted transactions, are considered cash flow hedges.
Fair Value Hedges -
First Financial utilizes interest rate swaps as a means to offer commercial
borrowers products that meet their needs, but are also designed to achieve First
Financial’s desired interest rate risk profile at the time. The fair value
hedge swap agreements generally involve the net receipt by First Financial of
floating-rate amounts in exchange for net payments by First Financial, through
its loan clients, of fixed-rate amounts over the life of the agreements without
an exchange of the underlying principal or notional amount. This results
in First Financial’s loan customers receiving fixed rate funding, while
providing First Financial with a floating rate asset. The net interest
receivable or payable on the interest rate swaps is accrued and recognized as an
adjustment to the interest income or interest expense of the hedged item.
The fair value of the interest rate swaps is included within accrued interest
and other assets on the Consolidated Balance Sheets. The corresponding
fair-value adjustment is also included on the Consolidated Balance Sheets in the
carrying value of the hedged item. Derivative gains and losses not
considered effective in hedging the change in fair value of the hedged item are
recognized immediately in income. The following table details the location
and amounts recognized for fair value hedges:
Increase (decrease) to Interest Income
|
||||||||||||||
(Dollars in thousands)
|
Three Months Ended
|
|||||||||||||
Derivatives in fair value
|
Location of change in fair value
|
September 30,
|
December 31,
|
September 30,
|
||||||||||
hedging relationships
|
recognized in earnings on derivative
|
2010
|
2009
|
2009
|
||||||||||
Interest
Rate Contracts
|
||||||||||||||
Loans
|
Interest
Income - Loans
|
$ | (249 | ) | $ | (253 | ) | $ | (252 | ) | ||||
Total
|
$ | (249 | ) | $ | (253 | ) | $ | (252 | ) | |||||
Increase
(decrease) to Interest Income
|
||||||||||||||
Nine Months Ended
|
||||||||||||||
Derivatives in fair value
|
Location of change in fair value
|
September 30,
|
September 30,
|
|||||||||||
hedging relationships
|
recognized in earnings on derivative
|
2010
|
2009
|
|||||||||||
Interest
Rate Contracts
|
||||||||||||||
Loans
|
Interest
Income - Loans
|
$ | (759 | ) | $ | (755 | ) | |||||||
Total
|
$ | (759 | ) | $ | (755 | ) |
Cash Flow Hedges –
First Financial utilizes interest rate swaps designated as cash flow hedges to
manage the variability of cash flows, primarily net interest income,
attributable to changes in interest rates. The net interest receivable or
payable on an interest rate swap designated as a cash flow hedge is accrued and
recognized as an adjustment to interest income or interest expense. The
fair value of the interest rate swaps is included within accrued interest and
other assets on the Consolidated Balance Sheets. Changes in the fair value
of the interest rate swap are included
in accumulated comprehensive income (loss). Derivative gains and losses
not considered effective in hedging the cash flows related to the underlying
loans, if any, would be recognized immediately in income. All of First
Financial’s cash flow hedges are considered effective.
16
Effective
March 30, 2009, First Financial executed a cash flow hedge utilizing an interest
rate swap to hedge against interest rate volatility on $20.0 million of floating
rate trust preferred securities based on the London Inter-Bank Offered Rate
(LIBOR). The interest rate swap involves the receipt by First Financial of
variable-rate interest amounts in exchange for fixed-rate interest payments by
First Financial for a period of 10 years. The net interest receivable or
payable on the trust preferred interest rate swap is accrued and recognized as
an adjustment to interest expense. The fair value of the trust preferred
interest rate swap is included in accrued interest and other assets or
liabilities on the Consolidated Balance Sheets. Changes in the fair value
of the trust preferred interest rate swap are included in accumulated other
comprehensive income (loss) on the Consolidated Balance Sheets. The
following table details the location and amounts recognized for cash flow
hedges.
Amount of gain or (loss)
|
Amount of gain or (loss)
|
||||||||||||||||
recognized in OCI on
|
reclassified from accumulated
|
||||||||||||||||
derivatives
|
|
OCI into earnings (effective
|
|||||||||||||||
(effective portion)
|
Location of gain or (loss)
|
portion)
|
|||||||||||||||
Three Months Ended
|
reclassified from
|
Three Months Ended
|
|||||||||||||||
Derivatives in cash flow
|
September 30,
|
September 30,
|
accumulated OCI into
|
September 30,
|
September 30,
|
||||||||||||
hedging relationships
|
2010
|
2009
|
earnings (effective portion)
|
2010
|
2009
|
||||||||||||
Interest
Rate Contracts
|
Interest
Expense
|
||||||||||||||||
Other
long-term debt
|
$ | (471 | ) | $ | (312 | ) |
Other
long-term debt
|
$ | (131 | ) | $ | (128 | ) | ||||
Total
|
$ | (471 | ) | $ | (312 | ) | $ | (131 | ) | $ | (128 | ) | |||||
Amount of gain or (loss)
|
Amount of gain or (loss)
|
||||||||||||||||
recognized in OCI on
|
reclassified from accumulated
|
||||||||||||||||
derivatives
|
OCI into earnings (effective
|
||||||||||||||||
(effective portion)
|
Location of gain or (loss)
|
portion)
|
|||||||||||||||
Nine Months Ended
|
reclassified from
|
Nine Months Ended
|
|||||||||||||||
Derivatives in cash flow
|
September 30,
|
September 30,
|
accumulated OCI into
|
September 30,
|
September 30,
|
||||||||||||
hedging relationships
|
2010
|
2009
|
earnings (effective portion)
|
2010
|
2009
|
||||||||||||
Interest
Rate Contracts
|
Interest
Expense
|
||||||||||||||||
Other
long-term debt
|
$ | (1,470 | ) | $ | 161 |
Other
long-term debt
|
$ | (417 | ) | $ | (223 | ) | |||||
Total
|
$ | (1,470 | ) | $ | 161 | $ | (417 | ) | $ | (223 | ) |
First
Financial expects approximately $0.3 million of the unrecognized losses on cash
flow hedges, net of taxes, at September 30, 2010 to be reclassified into
earnings within the next 12 months.
U.S.
lawmakers recently passed financial reform legislation, including new
regulations on the use of derivatives. While specific regulations are yet
to be enacted, First Financial continues to monitor these developments and
assess the potential impact on its use of derivatives.
NOTE
8: LONG-TERM DEBT
Long-term
debt on the Consolidated Balance Sheets consists of FHLB long-term advances and
repurchase agreements utilizing investment securities pledged as
collateral. These instruments are primarily utilized to reduce overnight
liquidity risk and to mitigate interest rate sensitivity on the balance
sheet. During the third quarter of 2008, First Financial executed $65.0
million in repurchase agreements with remaining maturities of between three and
five years and a weighted average rate of 3.50%. These instruments have
current call dates of less than one year. Securities pledged as collateral
in conjunction with the repurchase agreements are included within Investment
securities available-for-sale on the Consolidated Balance Sheets. First
Financial assumed additional FHLB long-term advances in the Peoples and Irwin
acquisitions of $63.5 million and $216.3 million, respectively. During the
third quarter of 2010, approximately $232 million of these advances were
prepaid. These advances had a weighted average maturity of 5.5 years, an
effective duration of 3.3 years, and a weighted average effective yield of 2.08%
after adjusting for the impact of purchase accounting adjustments. The
funding for the prepayments consisted entirely of interest-bearing deposits with
other banks that were previously earning 0.25%. As of September 30, 2010,
the remaining FHLB long-term advances assumed in the two transactions totaled
$1.7 million and had remaining maturities of less than 9 years and a weighted
average effective yield of 5.04%.
17
The
following is a summary of long-term debt:
September 30, 2010
|
||||||||
(Dollars in thousands)
|
Amount
|
Average Rate
|
||||||
Federal
Home Loan Bank
|
$ | 64,224 | 3.83 | % | ||||
National
Market Repurchase Agreement
|
65,000 | 3.50 | % | |||||
Total
long-term debt
|
$ | 129,224 | 3.66 | % |
NOTE
9: OTHER LONG-TERM DEBT
Other
long-term debt on the Consolidated Balance Sheets consists of junior
subordinated debentures owed to unconsolidated subsidiary trusts. Capital
securities were issued in the third quarter of 2003 by a statutory business
trust, First Financial (OH) Statutory Trust II (Trust II).
The
debentures issued in 2003 were eligible for early redemption by First Financial
in September of 2008. First Financial did not elect to redeem early, but under
the terms of the agreement may redeem the securities on any interest payment
date, with a final maturity in 2033.
First
Financial owns 100% of the common equity of the remaining trust, Trust II. The
trust was formed with the sole purpose of issuing the capital securities and
investing the proceeds from the sale of such capital securities in the
debentures. The debentures held by the trust are the sole asset of the trust.
Distributions on the capital securities are payable quarterly at a variable rate
of interest, which is equal to the interest rate being earned by the trust on
the debentures and are recorded as interest expense of First Financial. The
interest rate is subject to change every three months, indexed to the
three-month London Inter-Bank Offered Rate (LIBOR).
First
Financial has the option to defer interest for up to five years on the
debentures. However, the debt covenants prevent the payment of dividends on
First Financial’s common stock if the interest is deferred. The capital
securities are subject to mandatory redemption, in whole or in part, upon
repayment of the debentures. First Financial has entered into agreements which,
taken collectively, fully or unconditionally guarantee the capital securities
subject to the terms of the guarantees. The debenture currently qualifies as
Tier I capital under Federal Reserve Board guidelines, but is limited to 25% of
qualifying Tier I capital. The company has the capacity to issue approximately
$148.7 million in additional qualifying debentures under these
guidelines.
The
following is a summary of other long-term debt:
(Dollars in $000’s)
|
Amount
|
Contractual
Rate
|
Maturity
Date
|
||||||
First
Financial (OH) Statutory Trust II
|
$ | 20,000 | 3.63 | % |
09/30/2033
|
Effective
March 30, 2009, First Financial executed a cash flow hedge utilizing an interest
rate swap to hedge against interest rate volatility on $20.0 million of floating
rate trust preferred securities indexed to the London Inter-Bank Offered Rate
(LIBOR). The interest rate swap involves the receipt by First Financial of
variable-rate interest amounts in exchange for fixed-rate interest payments by
First Financial for a period of 10 years. This interest rate swap effectively
fixed the rate of interest on the floating rate trust preferred securities at
6.20% for the 10 year life of the swap. The net interest receivable or payable
on the trust preferred interest rate swap is accrued and recognized as an
adjustment to interest expense. The fair value of the trust preferred interest
rate swap is included in accrued interest and other assets or liabilities on the
Consolidated Balance Sheets. Changes in the fair value of the trust preferred
interest rate swap are included in accumulated other comprehensive income (loss)
on the Consolidated Balance Sheets. For further information on this cash
flow hedge, see Note 7.
NOTE
10: COVERED LOANS
First
Financial evaluates purchased loans for impairment in accordance with the
provisions of FASB ASC Topic 310-30, Loans and Debt Securities Acquired with
Deteriorated Credit Quality. The cash flows expected to be collected on
purchased loans are estimated based upon the expected remaining life of the
underlying loans, which includes the effects of estimated prepayments. Purchased
loans are considered impaired if there is evidence of credit deterioration since
origination and if it is probable that not all contractually required payments
will be collected. First Financial is accounting for the majority of purchased
loans under FASB ASC Topic 310-30 except loans with revolving privileges, which
are outside the scope of this guidance, and loans for which cash flows could not
be estimated, which are accounted for under the cost recovery method. Purchased
impaired loans were not classified as nonperforming assets at September 30, 2010
as the loans are considered to be performing under FASB ASC Topic 310-30.
Therefore, interest income, through accretion of the difference between the
carrying value of the loans and the expected cash flows is being recognized on
all purchased loans being accounted for under FASB ASC Topic
310-30.
18
All loans
acquired in the Peoples and Irwin acquisitions are covered by loss sharing
agreements with the FDIC, whereby the FDIC reimburses First Financial for the
majority of the losses incurred. Additionally, these loans were recorded at fair
value as of the acquisition date. Generally the determination of the fair
value of the loans resulted in a significant write-down in the value of the
loans, which was assigned to an accretable or nonaccretable balance, with the
accretable balance being recognized as interest income over the remaining term
of the loan.
The
following table reflects the carrying value of all purchased impaired and
nonimpaired loans as of September 30, 2010:
(Dollars in thousands)
|
FASB ASC
Topic 310-30
|
Loans
excluded from
FASB ASC
Topic 310-30 (1)
|
Total Purchased
Loans
|
|||||||||
Commercial
|
$ | 336,779 | $ | 49,814 | $ | 386,593 | ||||||
Real
estate - construction
|
59,804 | 0 | 59,804 | |||||||||
Real
estate - commercial
|
880,940 | 16,447 | 897,387 | |||||||||
Real
estate - residential
|
167,039 | 69,253 | 236,292 | |||||||||
Installment
|
20,201 | 1,662 | 21,863 | |||||||||
Other
covered loans
|
0 | 7,645 | 7,645 | |||||||||
Total
covered loans
|
$ | 1,464,763 | $ | 144,821 | $ | 1,609,584 |
(1)
Includes loans with revolving privileges which are scoped out of FASB ASC Topic
310-30 and certain loans which First Financial elected to treat under the cost
recovery method of accounting.
The
outstanding balance of all purchased impaired and nonimpaired loans accounted
for under FASB ASC Topic 310-30, including contractual principal, interest,
fees, and penalties, was $2.4 billion and $3.0 billion as of September 30, 2010
and December 31, 2009, respectively.
Changes
in the carrying amount of accretable yield for purchased impaired and
nonimpaired loans were as follows:
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
(Dollars in thousands)
|
September 30, 2010
|
September 30, 2010
|
||||||||||||||
Accretable
Yield
|
Carrying
Amount
of Loans
|
Accretable
Yield
|
Carrying
Amount
of Loans
|
|||||||||||||
Balance
at beginning of period (1)
|
$ | 514,810 | $ | 1,552,414 | $ | 623,669 | $ | 1,733,106 | ||||||||
Reclassification
from nonaccretable difference
|
81,067 | 0 | 81,067 | 0 | ||||||||||||
Accretion
|
(34,891 | ) | 34,891 | (104,096 | ) | 104,096 | ||||||||||
Payments
received, net (2)
|
(11,893 | ) | (122,542 | ) | (51,547 | ) | (372,439 | ) | ||||||||
Balance
at end of period
|
$ | 549,093 | $ | 1,464,763 | $ | 549,093 | $ | 1,464,763 |
(2) Includes
the impact of loan prepayments and charge-offs.
First
Financial reviewed its forecast of expected cash flows for loans accounted for
under FASB ASC Topic 310-30 during the third quarter of 2010. The Company
recognized an improvement in the cash flow expectations related to certain loan
pools of $36.7 million, which is reflected as a yield adjustment on a
prospective basis. Additionally, the Company identified impairment in
certain loan pools. First Financial recognized a provision expense related
to covered loans of $20.7 million and realized net charge-offs of $10.4 million,
resulting in an allowance for covered loan losses of $11.6 million as of
September 30, 2010. The related receivable due from the FDIC under loss
share agreements related to these loans of $17.8 million was recognized as FDIC
loss share income and a corresponding increase to the FDIC indemnification
asset.
19
NOTE
11: ALLOWANCE FOR LOAN AND LEASE LOSSES
Uncovered
Loans
Due to
the significant difference in the accounting for the covered loans and the loss
sharing agreements with the FDIC, management believes that asset quality
measures excluding the covered loans are generally more meaningful. Therefore,
management has included asset quality measures that exclude covered loans in the
tables below.
Changes
in the allowance for loan and lease losses for the previous five quarters are
presented in the table that follows:
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||||||||||||||
2010
|
2009
|
Sep. 30,
|
||||||||||||||||||||||||||
(Dollars
in thousands)
|
Sep.
30
|
June
30
|
Mar.
31
|
Dec.
31
|
Sep.
30
|
2010
|
2009
|
|||||||||||||||||||||
Balance
at beginning of period
|
$ | 57,811 | $ | 56,642 | $ | 59,311 | $ | 55,770 | $ | 38,649 | $ | 59,311 | $ | 35,873 | ||||||||||||||
Provision
for loan losses
|
6,287 | 6,158 | 11,378 | 14,812 | 26,655 | 23,823 | 41,272 | |||||||||||||||||||||
Loans
charged off
|
(8,124 | ) | (5,457 | ) | (14,485 | ) | (12,055 | ) | (10,063 | ) | (28,066 | ) | (22,894 | ) | ||||||||||||||
Recoveries
|
1,275 | 468 | 438 | 784 | 529 | 2,181 | 1,519 | |||||||||||||||||||||
Ending
allowance for loan and lease losses - uncovered
|
57,249 | 57,811 | 56,642 | 59,311 | 55,770 | 57,249 | 55,770 | |||||||||||||||||||||
Allowance
for loan and lease losses to total ending loans
|
2.07 | % | 2.07 | % | 2.01 | % | 2.05 | % | 1.94 | % | 2.07 | % | 1.94 | % |
The
allowance for uncovered loan and lease losses related to loans that are
identified as impaired, as defined by FASB ASC Topic 310-10-35-4,
Receivables-Subsequent Measurement: Loan Impairment, are based on discounted
cash flows using the loan’s initial effective interest rate or the fair value of
the collateral for certain collateral dependent loans. Interest income for
impaired loans is recorded on a cash basis during the period the loan is
considered impaired after recovery of principal is reasonably
assured.
First
Financial’s investment in uncovered impaired loans is as
follows:
As of and for the Quarter Ended
|
||||||||||||||||||||
2010
|
2009
|
|||||||||||||||||||
(Dollars in thousands)
|
Sep. 30
|
Jun. 30
|
Mar. 31
|
Dec. 31
|
Sep. 30
|
|||||||||||||||
Impaired
loans requiring a valuation
|
$ | 38,185 | $ | 44,218 | $ | 35,363 | $ | 27,666 | $ | 23,579 | ||||||||||
Impaired
loans not requiring a valuation
|
39,057 | 35,205 | 39,090 | 49,437 | 40,113 | |||||||||||||||
Total
impaired loans
|
$ | 77,242 | $ | 79,423 | $ | 74,453 | $ | 77,103 | $ | 63,692 | ||||||||||
Valuation
allowance
|
$ | 12,124 | $ | 12,004 | $ | 12,310 | $ | 11,662 | $ | 9,789 | ||||||||||
Average
impaired loans for the period
|
$ | 78,333 | $ | 76,938 | $ | 75,778 | $ | 70,398 | $ | 50,643 | ||||||||||
Interest
income included in revenue
|
$ | 263 | $ | 257 | $ | 204 | $ | 186 | $ | 117 |
Covered
Loans
In
accordance with accounting for business combinations, there was no allowance
brought forward on any of the acquired loans, as the credit losses evident in
the loans were included in the determination of the fair value of the loans at
the acquisition date. The majority of the loans acquired in the Peoples and
Irwin acquisitions were considered to be accruing loans as of the acquisition
date. In accordance with bank regulatory reporting standards, covered loans that
are contractually past due will continue to be reported as past due and still
accruing based on the number of days past due.
The
Company established an allowance for loan losses associated with covered loans
during the second quarter 2010 based on its valuation procedures performed
during the period. This allowance, totaling $1.3 million, was the net
effect of $19.0 million recognized as provision expense during the second
quarter less $17.7 million of net charge-offs related to these loans. The
related, estimated reimbursement due from the FDIC under loss sharing agreements
of $15.2 million was recorded as both FDIC loss sharing income and an increase
to the FDIC indemnification asset. The net amount of this activity
reflects the Company’s expected proportionate share of losses related to this
impairment.
20
During
the third quarter 2010, the Company updated its valuation procedures related to
loans covered under loss share agreements. As a result of impairment in
certain loan pools, it recognized a provision expense related to covered loans
of $20.7 million and realized net charge-offs of $10.4 million, resulting in an
allowance for covered loan losses of $11.6 million as of September 30,
2010. The related receivable due from the FDIC under loss share agreements
related to these loans of $17.8 million was recognized as FDIC loss share income
and a corresponding increase to the FDIC indemnification asset.
Under the
applicable accounting guidance, the allowance for loan losses related to covered
loans as a result of impairment to loan pools arising from on-going valuation
procedures is generally recognized in the current period as provision expense.
Improvement in the credit outlook, however, is not recognized immediately but
instead is reflected as an adjustment to the yield earned on the related loan
pools on a prospective basis. The timing inherent in this accounting treatment
may result in earnings volatility in future periods.
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
September 30,
|
September 30,
|
|||||||||||||||
(Dollars in thousands)
|
2010
|
2009
|
2010
|
2009
|
||||||||||||
Balance
at beginning of period
|
$ | 1,273 | $ | 0 | $ | 0 | $ | 0 | ||||||||
Provision
for impairment on covered loans
|
20,725 | 0 | 49,147 | 0 | ||||||||||||
Loans
charged off
|
(10,492 | ) | 0 | (37,641 | ) | 0 | ||||||||||
Recoveries
|
77 | 0 | 77 | 0 | ||||||||||||
Ending
allowance for loan and lease losses - covered
|
11,583 | 0 | 11,583 | 0 | ||||||||||||
Total
allowance for loan and lease losses
|
$ | 11,583 | $ | 0 | $ | 11,583 | $ | 0 |
NOTE
12: INCOME TAXES
First
Financial’s effective tax rate for the third quarter of 2010 was 36.2% compared
to 37.8% for the third quarter of 2009. The 2010 year-to-date effective
tax rate was 35.4% compared to 37.7% for 2009. The decrease in the
effective tax rate was primarily due to the 2009 gain associated with the Irwin
transaction as well as increased bank owned life insurance income and tax
credits related to investments in low income housing initiatives, partially
offset by a decrease in tax-exempt investment and loan interest.
At
September 30, 2010, and December 31, 2009, First Financial had no unrecognized
tax benefits recorded under FASB ASC Topic 740-10, Income Taxes. First Financial
does not expect the total amount of unrecognized tax benefits to significantly
increase within the next twelve months.
First
Financial recognizes interest and penalties on income tax assessments or income
tax refunds in the Consolidated Financial Statements as a component of
noninterest expense.
First
Financial and its subsidiaries are subject to U.S. federal income tax as well as
state and local income tax in several jurisdictions. Tax years prior to
2008 have been closed and are no longer subject to U.S. federal income tax or
state of Indiana income tax examinations.
First
Financial is no longer subject to state and local income tax examinations for
years prior to 2006. Tax years 2006 through 2008 remain open to state and
local examination in various jurisdictions. The years open to examination
by state and local government authorities vary by jurisdiction and First
Financial is not aware of any material outstanding tax examination
matters. There may be tax matters related to the acquisitions of Peoples
and Irwin at the federal, state, and local levels that could arise in the
future.
NOTE
13: EMPLOYEE BENEFIT PLANS
First
Financial sponsors a non-contributory defined benefit pension plan covering
substantially all employees. First Financial uses a December 31
measurement date for its defined benefit pension plan.
In April
of 2009, due to the unfunded pension obligation resulting from the significant
decline in equity market values, First Financial contributed $30.8 million to
its defined benefit pension plan. First Financial has not yet determined
if it will make contributions to the plan during 2010.
The
following table sets forth information concerning amounts recognized in First
Financial’s Consolidated Balance Sheets and Consolidated Statements of
Income.
21
Three months ended
|
Nine months ended
|
|||||||||||||||
September 30,
|
September 30,
|
|||||||||||||||
(Dollars in thousands)
|
2010
|
2009
|
2010
|
2009
|
||||||||||||
Service
cost
|
$ | 743 | $ | 590 | $ | 1,943 | $ | 1,770 | ||||||||
Interest
cost
|
633 | 675 | 2,033 | 2,025 | ||||||||||||
Expected
return on assets
|
(1,199 | ) | (918 | ) | (3,699 | ) | (2,753 | ) | ||||||||
Amortization
of prior service cost
|
(117 | ) | (105 | ) | (317 | ) | (315 | ) | ||||||||
Recognized
net actuarial loss
|
498 | 388 | 1,548 | 1,163 | ||||||||||||
Net
periodic benefit cost
|
$ | 558 | $ | 630 | $ | 1,508 | $ | 1,890 |
Amounts
recognized in accumulated other comprehensive income (loss):
Three months ended
|
Nine months ended
|
|||||||||||||||
September 30,
|
September 30,
|
|||||||||||||||
(Dollars in thousands)
|
2010
|
2009
|
2010
|
2009
|
||||||||||||
Net
actuarial loss
|
$ | 498 | $ | 388 | $ | 1,548 | $ | 1,163 | ||||||||
Net
prior service (credit) cost
|
(117 | ) | (105 | ) | (317 | ) | (315 | ) | ||||||||
Deferred
tax assets
|
(141 | ) | (141 | ) | (167 | ) | (347 | ) | ||||||||
Net
amount recognized
|
$ | 240 | $ | 142 | $ | 1,064 | $ | 501 |
NOTE
14: FAIR VALUE DISCLOSURES
Fair Value
Measurement
The fair
value framework as disclosed in the Fair Value Measurements and Disclosure Topic
of the FASB Accounting Standards Codification (Fair Value Topic) includes a
hierarchy which focuses on prioritizing the inputs used in valuation
techniques. The fair value hierarchy gives the highest priority to quoted
prices in active markets for identical assets or liabilities (Level 1), a lower
priority to observable inputs other than quoted prices in active markets for
identical assets and liabilities (Level 2), and the lowest priority to
unobservable inputs (Level 3). When determining the fair value
measurements for assets and liabilities, First Financial looks to active markets
to price identical assets or liabilities whenever possible and classifies such
items in Level 1. When identical assets and liabilities are not traded in
active markets, First Financial looks to market observable data for similar
assets and liabilities and classifies such items as Level 2. Certain
assets and liabilities are not actively traded in observable markets and First
Financial must use alternative techniques, based on unobservable inputs, to
determine the fair value and classifies such items as Level 3. The level within
the fair value hierarchy is based on the lowest level of input that is
significant in the fair value measurement.
The
following methods, assumptions, and valuation techniques were used by First
Financial to measure different financial assets and liabilities at fair value
and in estimating its fair value disclosures for financial
instruments.
Cash and short-term
investments –
The carrying amounts reported in the Consolidated Balance Sheets for cash
and short-term investments, such as federal funds sold, approximated the fair
value of those instruments.
Investment securities
– Investment securities classified as trading and available-for-sale are
recorded at fair value on a recurring basis. Fair value measurement is
based upon quoted market prices, when available (Level 1). If quoted
market prices are not available, fair values are measured utilizing independent
valuation techniques of identical or similar investment securities. Third
party vendors compile prices from various sources and may apply such techniques
as matrix pricing to determine the value of identical or similar investment
securities (Level 2). Matrix pricing is a mathematical technique widely
used in the banking industry to value investment securities without relying
exclusively on quoted prices for the specific investment securities but rather
relying on the investment securities’ relationship to other benchmark quoted
investment securities. Any investment securities not valued based upon the
methods above are considered Level 3.
22
First
Financial utilizes information provided by a third party investment securities
portfolio manager in analyzing the investment securities portfolio in accordance
with the fair value hierarchy of the Fair Value Topic. The portfolio
manager’s evaluation of investment security portfolio pricing is performed using
a combination of prices and data from third party vendors, along with internally
developed matrix pricing models and assistance from the provider’s internal
fixed income analysts and trading desk. The portfolio manager’s month-end
pricing process includes a series of quality assurance activities where prices
are compared to recent market conditions, previous evaluation prices, and
between the various pricing services. These processes produce a series of
quality assurance reports on which price exceptions are identified, reviewed,
and where appropriate, securities are repriced. In the event of a
materially different price, the portfolio manager will report the variance to
the third party vendor as a “price challenge”, and review the pricing
methodology in detail. The results of the quality assurance process are
incorporated into the selection of pricing providers by the portfolio
manager.
Loans held for sale –
Loans held for sale are carried at the lower of cost or market value.
These loans currently consist of one-to-four family residential real estate
loans originated for sale to qualified third parties. Fair value is based
on the contractual price to be received from these third parties, which is not
materially different than cost due to the short duration between origination and
sale (Level 2). As such, First Financial records any fair value
adjustments on a nonrecurring basis. Gains and losses on the sale of loans
are recorded as net gains from sales of loans within noninterest income in the
Consolidated Statements of Income.
Uncovered Loans – The
fair value of commercial, commercial real estate, residential real estate, and
consumer loans were estimated by discounting the future cash flows using the
current rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities or repricing
frequency. The carrying amount of accrued interest approximates its fair
value.
Loans are
designated as impaired when, in the judgment of management based on current
information and events, it is probable that all amounts due according to the
contractual terms of the loan agreement will not be collected. Impaired
loans are valued at the lower of cost or market for purposes of determining the
appropriate amount of impairment to be allocated to the allowance for loan and
lease losses. Market value is measured based on the value of the
collateral securing the loans. Collateral may be in the form of real
estate or business assets including equipment, inventory, and accounts
receivable. The vast majority of the collateral is real estate. The
value of real estate collateral is determined utilizing an income or market
valuation approach based on an appraisal conducted by an independent, licensed
appraiser outside of the company (Level 2). The value of business equipment is
based upon an outside appraisal if deemed significant, or the net book value on
the applicable borrower financial statements if not considered
significant. Likewise, values for inventory and accounts receivable
collateral are based on borrower financial statement balances or aging reports
(Level 3). Impaired loans allocated to the allowance for loan and lease
losses are measured at fair value on a nonrecurring basis. Any fair value
adjustments are recorded in the period incurred as provision for loan and lease
losses on the Consolidated Statements of Income.
Covered loans – Fair
values for covered loans were based on a discounted cash flow methodology that
considered factors including the type of loan and related collateral,
classification status, fixed or variable interest rate, loan term and whether or
not the loan was amortizing, and current discount rates. Covered loans were
grouped together according to similar characteristics and were treated in the
aggregate when applying various valuation techniques. The discount rates used
for covered loans are based on current market rates for new originations of
comparable loans and include adjustments for liquidity concerns.
There was
no allowance for loan and lease losses related to covered loans prior to June
30, 2010 as these loans were recorded at acquisition at their estimated fair
value. With the exception of covered loans accounted for outside the scope of
FASB ASC Topic 310-30, improvements in the estimated fair value of covered loans
are reflected through higher yields on these loans while declines in the
estimated fair value of covered loans are recorded as impairment charges in the
company’s operating results in the period in which the decline
occurs.
Under the
applicable accounting guidance, impairment is generally recognized in the
current period as provision expense while improvement in the credit outlook is
not recognized immediately but instead is reflected as a loan yield adjustment
on a prospective basis. The timing inherent in this accounting treatment
may result in earnings volatility in future periods.
Mortgage-servicing
rights – The fair value of mortgage-servicing rights was determined
through modeling the expected future cash flows. The modeling included
stratification by maturity and coupon rates on the underlying mortgage
loans. Certain assumptions were used in the valuation regarding prepayment
speeds, discount rates, servicing costs, delinquency, cash balances, and
foreclosure costs which were arrived at from third-party sources and internal
records.
FDIC indemnification
asset – These loss sharing assets are 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 Bank choose to dispose of them.
Fair value was estimated using projected cash flows related to the loss sharing
agreements based on the expected reimbursements for losses and the applicable
loss sharing percentages. These expected reimbursements do not include
reimbursable amounts related to future covered expenditures. These cash flows
were discounted to reflect the uncertainty of the timing and receipt of the loss
sharing reimbursement from the FDIC.
23
Deposit liabilities –
The fair value of demand deposits, savings accounts, and certain money-market
deposits was the amount payable on demand at the reporting date. The
carrying amounts for variable-rate certificates of deposit approximated their
fair values at the reporting date. The fair value of fixed-rate
certificates of deposit was estimated using a discounted cash flow calculation
which applies the interest rates currently offered for deposits of similar
remaining maturities. The carrying amount of accrued interest approximated
its fair value.
Borrowings – The
carry amounts of federal funds purchased and securities sold under agreements to
repurchase and other short-term borrowings approximated their fair values.
The fair value of long-term debt was estimated using a discounted cash flow
calculation which utilizes the interest rates currently offered for borrowings
of similar remaining maturities. Third-party valuations were used for
long-term debt with embedded options, such as call features.
Commitments to extend credit
and standby letters of credit – Pricing of these financial instruments is
based on the credit quality and relationship, fees, interest rates, probability
of funding and compensating balance and other covenants or requirements.
Loan commitments generally have fixed expiration dates, are variable rate and
contain termination and other clauses which provide for relief from funding in
the event that there is a significant deterioration in the credit quality of the
client. Many loan commitments are expected to expire without being drawn
upon. The rates and terms of the commitments to extend credit and the
standby letters of credit are competitive with those in First Financial’s market
area. The carrying amounts are reasonable estimates of the fair value of
these financial instruments. Carrying amounts, which are comprised of the
unamortized fee income and, where necessary, reserves for any expected credit
losses from these financial instruments, are immaterial.
Derivatives – First
Financial utilizes interest rate swaps as a means to offer commercial borrowers
products that meet their needs and also to achieve First Financial’s desired
interest rate risk profile at the time. The net interest receivable or
payable is accrued and recognized as an adjustment to the interest income or
interest expense of the hedged item. First Financial utilizes third-party
vendors for derivative valuation purposes. These vendors determine the
appropriate fair value based on a net present value calculation of the cash
flows related to the interest rate swaps using primarily observable market
inputs such as interest rate yield curves. The discounted net present
value calculated represents the cost to terminate the swap if First Financial
should choose to do so on the applicable measurement date (Level 2).
Additionally, First Financial utilizes a vendor developed, proprietary model to
value the credit risk component of both the derivative assets and
liabilities. The credit valuation adjustment is recorded as an adjustment
to the fair value of the derivative asset or liability on the applicable
measurement date (Level 3).
24
The
estimated fair values of First Financial’s financial instruments were as
follows:
September 30, 2010
|
December 31, 2009
|
|||||||||||||||
Carrying
|
Fair
|
Carrying
|
Fair
|
|||||||||||||
(Dollars in thousands)
|
value
|
value
|
value
|
value
|
||||||||||||
Financial
assets
|
||||||||||||||||
Cash
and short-term investments
|
$ | 424,558 | $ | 424,558 | $ | 606,167 | $ | 606,167 | ||||||||
Investment
securities trading
|
0 | 0 | 200 | 200 | ||||||||||||
Investment
securities held-to-maturity
|
17,842 | 18,755 | 18,115 | 18,590 | ||||||||||||
Investment
securities available-for-sale
|
616,175 | 616,175 | 471,002 | 471,002 | ||||||||||||
Other
investments
|
86,509 | 86,509 | 89,830 | 89,830 | ||||||||||||
Loans
held for sale
|
19,075 | 19,075 | 6,413 | 6,413 | ||||||||||||
Loans,
excluding covered loans
|
2,707,960 | 2,744,139 | 2,835,818 | 2,907,648 | ||||||||||||
Covered
loans
|
1,598,001 | 1,598,001 | 1,934,740 | 1,934,740 | ||||||||||||
Mortgage-servicing
rights
|
1,652 | 1,652 | 1,976 | 1,976 | ||||||||||||
FDIC
indemnification asset
|
237,709 | 237,709 | 287,407 | 287,407 | ||||||||||||
Accrued
interest receivable
|
14,902 | 14,902 | 22,647 | 22,647 | ||||||||||||
Derivative
financial instruments
|
0 | 0 | 998 | 998 | ||||||||||||
Financial
liabilities
|
||||||||||||||||
Deposits
|
||||||||||||||||
Noninterest-bearing
|
$ | 713,357 | $ | 713,357 | $ | 829,676 | $ | 829,676 | ||||||||
Interest-bearing
demand
|
999,922 | 999,922 | 1,060,383 | 1,060,383 | ||||||||||||
Savings
|
1,407,332 | 1,407,332 | 1,231,081 | 1,231,081 | ||||||||||||
Time
|
1,930,652 | 1,961,775 | 2,229,500 | 2,230,273 | ||||||||||||
Total
deposits
|
5,051,263 | 5,082,386 | 5,350,640 | 5,351,413 | ||||||||||||
Short-term
borrowings
|
58,747 | 58,747 | 37,430 | 37,430 | ||||||||||||
Long-term
debt
|
129,224 | 136,153 | 404,716 | 428,358 | ||||||||||||
Other
long-term debt
|
20,620 | 20,620 | 20,620 | 20,620 | ||||||||||||
Accrued
interest payable
|
6,719 | 6,719 | 4,759 | 4,759 | ||||||||||||
Derivative
financial instruments
|
5,068 | 5,068 | 2,363 | 2,363 |
The
following table summarizes the financial assets and liabilities measured at fair
value on a recurring basis at September 30, 2010:
(Dollars in thousands)
|
Fair Value Measurements Using
|
Netting
|
Assets/Liabilities
|
|||||||||||||||||
|
Level 1
|
Level 2
|
Level 3
|
Adjustments (1)
|
at Fair Value
|
|||||||||||||||
Assets | ||||||||||||||||||||
Derivatives
|
$ | 0 | $ | 20,734 | $ | (815 | ) | $ | (19,919 | ) | $ | 0 | ||||||||
Available-for-sale
investment securities
|
112 | 616,063 | 0 | 0 | 616,175 | |||||||||||||||
Total
|
$ | 112 | $ | 636,797 | $ | (815 | ) | $ | (19,919 | ) | $ | 616,175 | ||||||||
Liabilities
|
||||||||||||||||||||
Derivatives
|
$ | 0 | $ | 25,042 | $ | (55 | ) | $ | (19,919 | ) | $ | 5,068 |
|
(1)
|
Amounts
represent the impact of legally enforceable master netting arrangements
that allow First Financial to settle positive and negative positions and
also cash collateral held with the same
counterparties.
|
25
Certain
financial assets and liabilities are measured at fair value on a nonrecurring
basis. Adjustments to the fair market value of these assets usually result
from the application of lower-of-cost-or-market accounting or write-downs of
individual assets. The following table summarizes financial assets and
liabilities measured at fair value on a nonrecurring basis at September 30,
2010:
(Dollars in thousands)
|
Fair Value Measurements Using
|
Year-to-date
|
||||||||||||||
|
Level 1
|
Level 2
|
Level 3
|
Gains/(Losses)
|
||||||||||||
Assets | ||||||||||||||||
Loans
held for sale
|
$ | 0 | $ | 19,075 | $ | 0 | 0 | |||||||||
Impaired
loans
(1)
|
0 | 20,968 | 2,146 | 0 |
(1)
Amounts represent the fair value of collateral for impaired loans allocated to
the allowance for loan and lease losses. Fair values are determined using
actual market prices (Level 1), independent third party valuations, discounted
as appropriate (Level 2), and borrower records discounted as appropriate (Level
3).
NOTE
15: ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Shareholders’
equity is affected by transactions and valuations of asset and liability
positions that require adjustments to accumulated other comprehensive income
(loss). The related tax effects allocated to other comprehensive income
and accumulated other comprehensive income (loss) are as
follows:
September 30, 2010
|
||||||||||||||||
Transactions
|
Balances
|
|||||||||||||||
(Dollars
in thousands)
|
Pre-tax
|
Tax-effect
|
Net
of tax
|
Net
of tax
|
||||||||||||
Unrealized
gain on securities available-for-sale
|
$ | 3,225 | $ | (1,331 | ) | $ | 1,894 | $ | 12,118 | |||||||
Unrealized
loss on derivatives
|
(2,787 | ) | 1,022 | (1,765 | ) | (834 | ) | |||||||||
Unfunded
pension obligation
|
1,231 | (167 | ) | 1,064 | (20,697 | ) | ||||||||||
Foreign
currency translation
|
188 | 0 | 188 | 307 | ||||||||||||
Total
|
$ | 1,857 | $ | (476 | ) | $ | 1,381 | $ | (9,106 | ) | ||||||
September 30, 2009
|
||||||||||||||||
Transactions
|
Balances
|
|||||||||||||||
(Dollars in thousands)
|
Pre-tax
|
Tax-effect
|
Net of tax
|
Net of tax
|
||||||||||||
Unrealized
gain on securities available-for-sale
|
$ | 7,728 | $ | (2,789 | ) | $ | 4,939 | $ | 11,878 | |||||||
Unrealized
gain on derivatives
|
(307 | ) | 113 | (194 | ) | 575 | ||||||||||
Unfunded
pension obligation
|
848 | (347 | ) | 501 | (19,112 | ) | ||||||||||
Total
|
$ | 8,269 | $ | (3,023 | ) | $ | 5,246 | $ | (6,659 | ) |
26
NOTE
16: EARNINGS PER COMMON SHARE
The
following table sets forth the computation of basic and diluted earnings per
share:
Three months ended
|
Nine months ended
|
|||||||||||||||
September 30,
|
September 30,
|
|||||||||||||||
(Dollars
in thousands, except per share data)
|
2010
|
2009
|
2010
|
2009
|
||||||||||||
Numerator
for basic and diluted earnings per share -
|
||||||||||||||||
income
available to common shareholders:
|
||||||||||||||||
Net
income
|
$ | 15,579 | $ | 200,357 | $ | 44,951 | $ | 207,542 | ||||||||
Dividends
on preferred stock
|
0 | 1,000 | 1,865 | 2,578 | ||||||||||||
Income
available to common shareholders
|
$ | 15,579 | $ | 199,357 | $ | 43,086 | $ | 204,964 | ||||||||
Denominator
for basic earnings per
|
||||||||||||||||
share
- weighted average shares
|
57,570,709 | 51,027,887 | 56,765,934 | 43,005,983 | ||||||||||||
Effect
of dilutive securities —
|
||||||||||||||||
Employee
stock awards
|
873,959 | 429,302 | 887,477 | 496,578 | ||||||||||||
Warrants
|
86,837 | 0 | 105,495 | 0 | ||||||||||||
Denominator
for diluted earnings per share
|
||||||||||||||||
-
adjusted weighted average shares
|
58,531,505 | 51,457,189 | 57,758,906 | 43,502,561 | ||||||||||||
Earnings
per share available to common shareholders
|
||||||||||||||||
Basic
|
$ | 0.27 | $ | 3.91 | $ | 0.76 | $ | 4.77 | ||||||||
Diluted
|
$ | 0.27 | $ | 3.87 | $ | 0.75 | $ | 4.71 |
Stock
options and warrants, where the exercise price was greater than the average
market price of the common shares, were not included in the computation of net
income per diluted share as they would have been antidilutive. These
out-of-the-money options were 692,312 and 3,272,093 at September 30, 2010 and
2009, respectively. The warrants to purchase 465,117 shares of common
stock were also outstanding as of September 30, 2010. At September 30,
2009, the warrant to purchase 930,233 shares of common stock was also
outstanding, but was out-of-the-money. The reduction in the warrant share
position was a result of the common stock offering that occurred in June of
2009, in accordance with rules established by the U.S. Treasury.
27
CONDITION
AND RESULTS OF OPERATIONS (MD&A)
FIRST
FINANCIAL BANCORP. AND SUBSIDIARIES
(Unaudited)
SUMMARY
MARKET
STRATEGY
First
Financial serves a combination of metropolitan and non-metropolitan markets in
Ohio, Indiana, Kentucky, and Michigan through 113 full-service banking centers
across 75 communities. Market selection is based upon a number of factors, but
markets are primarily chosen for their potential for growth, and long-term
profitability. First Financial’s goal is to develop a competitive advantage
utilizing a local market focus; building long-term relationships with clients
and helping them reach greater levels of success in their financial life. During
the third quarter of 2009, First Financial assumed the banking operations of
Peoples Community Bank (Peoples), Irwin Union Bank and Trust Company (Irwin
Union Bank) and Irwin Union Bank, F.S.B. (Irwin FSB) (Irwin Union Bank and Irwin
FSB, collectively, Irwin) through Federal Deposit Insurance Corporation (FDIC)
assisted transactions. First Financial acquired a specialty, franchise lending
subsidiary as part of the Irwin acquisition. The franchise finance business
provides equipment and leasehold improvement financing for franchisees, in the
quick service and casual dining restaurant sector, throughout the United States.
First Financial intends to continue to concentrate future growth plans and
capital investments in its metropolitan markets, however, the acquired franchise
finance subsidiary is a national business. Smaller markets have historically
provided stable, low-cost funding sources to First Financial and they remain an
important part of its funding base. First Financial believes its historical
strength in these markets should enable it to retain or improve its market
share.
BUSINESS
COMBINATIONS
All
references to acquired balances reflect their fair values unless stated
otherwise.
During
the third quarter of 2009, through FDIC-assisted transactions, First Financial
acquired the banking operations of Peoples and Irwin. The company also acquired
3 Indiana banking centers, including related deposits and loans, from Irwin in a
separate and unrelated transaction. The acquisitions of the Peoples and Irwin
franchises significantly expanded the First Financial footprint, opened new
markets and strengthened the company through the generation of additional
capital. Through these three transactions, the company added, at the time of
acquisition, a total of 49 banking centers, including 39 banking centers within
the company’s primary markets. Since the acquisitions, 13 banking centers
in non-strategic locations, primarily the western United States, have been
closed.
In
connection with the Peoples and Irwin FDIC-assisted transactions, First
Financial entered into loss sharing agreements with the FDIC. Under the terms of
these agreements the FDIC will reimburse First Financial for a percentage of
losses with respect to certain loans (covered loans) and other real estate owned
(OREO) (collectively, covered assets) beginning with the first dollar of loss.
These agreements provide for loss protection on single-family, residential loans
for a period of ten years and First Financial is required to share any
recoveries of previously charged-off amounts for the same time period, on the
same pro-rata basis with the FDIC. All other loans are provided loss protection
for a period of five years and recoveries of previously charged-off loans must
be shared with the FDIC for a period of eight years, again on the same pro-rata
basis. Covered loans now represent approximately 37% of First Financial’s
loans.
First
Financial must follow specific servicing and resolution procedures, as outlined
in the loss share agreements, in order to receive reimbursement from the FDIC
for losses on covered assets. The company has established separate and dedicated
teams of legal, finance, credit and technology staff to execute and monitor all
activity related to each agreement, including the required periodic reporting to
the FDIC. First Financial intends to service all covered assets with the same
resolution practices and diligence as it does for the assets that are not
subject to a loss share agreement.
An
overview of the transactions and their respective loss share agreements are
discussed below.
Peoples
Community Bank
Including
cash received from the FDIC, First Financial acquired $566.6 million in assets,
including $341.5 million in loans and other real estate, and assumed $584.7
million in liabilities, including $520.8 million in deposits. All assets and
liabilities were recorded at their estimated fair market value resulting in
recorded goodwill of $18.0 million as the estimated fair value of liabilities
assumed exceeded the estimated fair value of assets acquired.
28
Covered loans
totaling $421.0 million in unpaid principal balances are subject to a stated
loss threshold of $190.0 million whereby the FDIC will reimburse First Financial
for 80% of covered asset losses up to $190.0 million, and 95% of losses beyond
$190.0
million. The FDIC’s obligation to reimburse First Financial for losses with
respect to covered assets begins with the first dollar of loss
incurred.
First
Financial obtained a purchase option from the FDIC for each of Peoples bank
properties and their associated contents. First Financial completed a review of
the former Peoples locations and notified the FDIC of the company’s intent to
purchase certain properties for a combined purchase price of $7.9 million
during the first quarter of 2010. First Financial completed the
acquisition of these properties from the FDIC in the third quarter of 2010,
concluding its last material settlement with the FDIC related to the acquisition
of Peoples.
Early in
the fourth quarter of 2009, First Financial completed the technology conversion
and operational integration of Peoples. In conjunction with these efforts, two
former Peoples banking centers were consolidated into First Financial locations
and one First Financial banking center was consolidated into a former Peoples
location.
Irwin
Including
cash received from the FDIC, First Financial acquired $3.2 billion in assets,
including $1.8 billion in loans, and assumed $2.9 billion in liabilities,
including $2.5 billion in deposits, with all assets and liabilities recorded at
their estimated fair market value.
The loans
were acquired under a modified transaction structure with the FDIC whereby
certain nonperforming loans, foreclosed real estate, acquisition, development
and construction loans, and residential and commercial land loans were excluded
from the acquired portfolio. Until First Financial and the FDIC conduct a
final settlement, the determination of which assets and liabilities are
ultimately acquired or assumed by First Financial cannot be
completed. First Financial anticipates the final settlement for the Irwin
transactions will be completed in the fourth quarter of 2010.
Covered
loans acquired from Irwin Union Bank totaling $1.9 billion in unpaid principal
balances are subject to a stated loss threshold of $526.0 million whereby the
FDIC will reimburse First Financial for 80% of covered asset losses up to $526.0
million, and 95% of losses beyond $526.0 million. The FDIC’s obligation to
reimburse First Financial for losses with respect to covered assets begins with
the first dollar of loss incurred.
Covered
loans acquired from Irwin FSB totaling $368.1 million in unpaid principal
balances are subject to a stated loss threshold of $110.0 million whereby the
FDIC will reimburse First Financial for 80% of covered asset losses up to $110.0
million, and 95% of losses beyond $110.0 million. The FDIC’s obligation to
reimburse First Financial for losses with respect to covered assets begins with
the first dollar of loss incurred.
As the
estimated fair value of assets acquired exceeded the estimated fair value of
liabilities assumed, First Financial recorded a pre-tax bargain purchase gain of
$342.5 million, as required by Financial Accounting Standards Board (FASB)
Accounting Standards Codification (ASC) Topic 805, Business
Combinations.
Conversion
of Irwin’s technology and operational systems was completed in the first quarter
of 2010.
Strategic
Decisions
Management
concluded that the markets previously operated by Irwin in the western United
States did not align with the long-term strategic plans for the company. Each of
these markets pursued an exit strategy whereby the market presidents worked with
an institution of their choosing to refer existing client relationships. If a
suitable financial institution was not identified, an exit date was selected for
each market and the office closed in compliance with the applicable regulatory
requirements. Exit strategies coincided with the conversion and operational
integration process. In the fourth quarter of 2009, the company elected to close
the St. Louis, Missouri location and sold $42.9 million in western market loans,
at their unpaid principal balances.
Additionally,
in the first quarter of 2010, First Financial closed 7 of the remaining 9
western market offices and sold an additional $24.5 million in western market
loans at their unpaid principal balances. The two remaining western
offices were closed in the third quarter of 2010.
First
Financial also acquired, as part of the Irwin transaction, a franchise finance
business. This national business is a specialty lender in the quick service and
casual dining segments of the restaurant industry. It is led by a seasoned
management team with strong underwriting, credit management and loss mitigation
experience. There were outstanding principal balances of approximately
$587.3 million in franchise finance loans at September 30, 2010, all of which
are covered under a loss share agreement with the FDIC except for $79.7 million
of loans originated subsequent to the acquisition.
29
This
business offers First Financial the ability to diversify its earning assets and
will be supported as part of the company’s ongoing strategy. The overall
portfolio size will be managed to a risk-appropriate level so as not to create
an industry concentration.
OVERVIEW
OF OPERATIONS
Third
quarter 2010 net income and net income available to common shareholders, was
$15.6 million, and earnings per diluted common share were $0.27. This
compares with second quarter 2010 net income and net income available to common
shareholders of $17.8 million, and earnings per diluted common share of $0.30
and third quarter 2009 net income of $200.4 million, net income available to
common shareholders of $199.4 million and earnings per diluted common share of
$3.87. Impacting net income during the third quarter 2010 was a prepayment
penalty of $8.0 million on a pre-tax basis, or $0.09 per fully diluted share
after taxes, related to the early redemption of $232 million of Federal Home
Loan Bank (FHLB) advances. Included in the third quarter 2009 amounts was
a pre-tax bargain purchase gain of $342.5 million recognized in connection with
the Company’s FDIC-assisted transactions.
For the
nine month period ended September 30, 2010, net income was $45.0 million, net
income available to common shareholders was $43.1 million and earnings per
diluted common share were $0.75 as compared to net income of $207.5 million, net
income available to common shareholders of $205.0 million and earnings per
diluted common share of $4.71 for the nine month period ended September 30,
2009.
Each
acquisition in the third quarter of 2009 was considered a business combination
and accounted for under FASB ASC Topic 805, Business Combinations, ASC Topic
820, Fair Value Measurements and Disclosures, ASC Topic 310-30, Loans and Debt
Securities Acquired with Deteriorated Credit Quality, and ASC Topic 310-20,
Receivables-Nonrefundable Fees and Costs. All acquired assets and
liabilities, including identifiable intangible assets, were recorded at their
estimated fair values as of the date of acquisition.
Certain
reclassifications of prior periods’ amounts have been made to conform to current
period’s presentation and had no effect on previously reported net income
amounts or financial condition. For a more detailed discussion of the
transactions please see Note 3, Business Combinations.
Return on
average assets for the third quarter of 2010 was 0.96% compared to 17.64% for
the comparable period in 2009 and 1.08% for the linked-quarter (third quarter of
2010 compared to the second quarter of 2010). Return on average shareholders’
equity for the third quarter of 2010 was 9.03% compared to 166.45% for the
comparable period in 2009 and 10.62% for the linked-quarter.
Return on
average assets for the first nine months of 2010 was 0.92% compared to 6.89% for
the comparable period in 2009. Return on average shareholder’s equity was
8.86% for the first nine months of 2010 compared to 68.81% for the same period
in 2009.
A
discussion of the first nine months and third quarter of 2010 results of
operations follows.
NET
INTEREST INCOME
Net
interest income, First Financial’s principal source of income, is the excess of
interest received from earning assets over interest paid on interest-bearing
liabilities. For analytical purposes, net interest income is also
presented in the table that follows, adjusted to a tax equivalent basis assuming
a 35% marginal tax rate for interest earned on tax-exempt assets such as
municipal loans and investments. This is to recognize the income tax
savings that facilitates a comparison between taxable and tax-exempt
assets. Management believes that it is a standard practice in the banking
industry to present net interest margin and net interest income on a fully tax
equivalent basis. Therefore, management believes these measures provide
useful information for both management and investors by allowing them to make
peer comparisons.
30
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
September 30,
|
September 30,
|
|||||||||||||||
(Dollars in thousands)
|
2010
|
2009
|
2010
|
2009
|
||||||||||||
Net
interest income
|
$ | 67,846 | $ | 40,664 | $ | 207,604 | $ | 102,801 | ||||||||
Tax
equivalent adjustment
|
222 | 300 | 646 | 970 | ||||||||||||
Net
interest income - tax equivalent
|
$ | 68,068 | $ | 40,964 | $ | 208,250 | $ | 103,771 | ||||||||
Average
earning assets
|
$ | 5,867,311 | $ | 4,134,955 | $ | 5,946,078 | $ | 3,702,855 | ||||||||
Net
interest margin *
|
4.59 | % | 3.90 | % | 4.67 | % | 3.71 | % | ||||||||
Net
interest margin (fully tax equivalent) *
|
4.60 | % | 3.93 | % | 4.68 | % | 3.75 | % |
*
Margins are calculated using net interest income annualized divided by
average earning assets.
Net
interest income for the third quarter of 2010 was $67.8 million, an increase of
$27.2 million from the third quarter of 2009 net interest income of $40.7
million and a slight increase of $0.1 million from the second quarter of 2010
net interest income of $67.7 million. Net interest income on a fully
tax-equivalent basis for the third quarter 2010 was $68.1 million as compared to
$68.0 million for the second quarter 2010 and $41.0 million as compared to the
year-over-year period. Despite a lower level of average interest earning
assets relative to the linked quarter, net interest income in the third quarter
of 2010 remained essentially the same due to an increase in interest income
related to loans and a decrease in interest expense as a result of lower time
and brokered deposit balances and the prepayment of FHLB advances. In
addition to higher levels of average interest-earning assets and
interest-bearing liabilities resulting from the 2009 acquisitions, the
year-over-year increase of $27.1 million was also impacted by the significant
increase in the net interest margin.
For the
nine month period ended September 30, 2010, net interest income was $207.6
million, an increase of $104.8 million over the comparable period in 2009. Net
interest income on a fully tax-equivalent basis was $208.3 million as compared
to $103.8 million for the comparable period in 2009. Similar to the quarterly
year-over-year items noted above, the increase was driven by the larger balance
sheet items as well as a higher net interest margin.
Included
in net interest income for all quarters of 2010 were the results of operations
classified by the Company as acquired-non-strategic, including loans and
deposits from offices locates in the western United States. These amounts
totaled $10.6 million and $31.6 million for the quarter and nine month
periods ended September 30, 2010, respectively.
Net
interest margin was 4.59% for the third quarter 2010 as compared to 4.53% for
the second quarter 2010 and 3.90% for the third quarter 2009. The net
interest margin continued to be negatively impacted by the combination of normal
amortization and paydowns in both the legacy and acquired loan portfolios and
reduced loan demand in the Company’s strategic markets. However, during
the third quarter, First Financial used a portion of its liquidity to purchase
$154 million of FNMA / FHMLC mortgage backed securities and prepay $232 million
of FHLB advances, which helped to offset the net effect of muted loan
activity. Net interest margin was also positively impacted by the expected
runoff of retail and brokered certificates of deposit and the lower earning
asset base during the quarter.
Net
interest margin was also positively impacted by certain activity related to the
acquired loan portfolio. As these loans are recorded at fair value, the
Company is required to periodically update its forecast of expected cash flows
from these loans. The Company recognized an improvement in the cash flow
expectations related to certain loan pools, which is reflected as a yield
adjustment on a prospective basis. During the third quarter 2010, this
improvement positively impacted net interest margin by 6 basis
points.
As part
of its on-going valuation procedures, the Company experienced an improvement in
the cash flow expectations related to certain loan pools of $36.7 million during
the third quarter 2010. As a result, the average yield earned on covered
loans increased from 9.10% during the second quarter 2010 to 9.75% during the
third quarter 2010. On a prospective basis and until its next periodic
valuation, the Company expects the yield on covered loans to be
10.08%.
This
projected improvement in cash flow expectations on loans is partially offset by
a related $20.7 million decline in cash flow expectations on the FDIC
indemnification asset. The net result of improvement and impairment
activity related to covered loans affected the average yield earned on the
indemnification asset, decreasing from 6.50% during the
second quarter 2010 to 3.91% during the third quarter 2010. On a
prospective basis and until its next periodic valuation, the Company expects the
yield on the indemnification asset to be 2.61%.
31
The
increase of 69 basis points over the comparable year-over-year period was
primarily attributable to the higher yield on covered loans, improved pricing in
new loan originations, lower funding costs of deposits as a result of repricing
acquired CDs and disciplined pricing strategies, and an overall increase in
earning assets.
Net
interest margin for the nine month period ended September 30, 2010 was 4.67% as
compared to 3.71% for the nine month period ended September 30,
2009.
The
Consolidated Average Balance Sheets and Net Interest Income Analysis that
follows are presented on a GAAP basis.
QUARTERLY
CONSOLIDATED AVERAGE BALANCE SHEETS AND NET INTEREST INCOME
ANALYSIS
September 30, 2010
|
June 30, 2010
|
September 30, 2009
|
||||||||||||||||||||||||||||||||||
Average
|
Average
|
Average
|
Average
|
Average
|
Average
|
|||||||||||||||||||||||||||||||
(Dollars in thousands)
|
Balance
|
Interest
|
Rate
|
Balance
|
Interest
|
Rate
|
Balance
|
Interest
|
Rate
|
|||||||||||||||||||||||||||
Earning
assets
|
||||||||||||||||||||||||||||||||||||
Investments:
|
||||||||||||||||||||||||||||||||||||
Interest-bearing
deposits with other banks
|
$ | 483,097 | $ | 396 | 0.33 | % | $ | 554,333 | $ | 459 | 0.33 | % | $ | 136,210 | $ | - | 0.25 | % | ||||||||||||||||||
Investment
securities
|
691,700 | 5,626 | 3.23 | % | 597,991 | 5,689 | 3.82 | % | 575,697 | 6,593 | 4.54 | % | ||||||||||||||||||||||||
Gross
loans including covered loans and
|
||||||||||||||||||||||||||||||||||||
indemnification asset (1)
|
4,692,514 | 78,662 | 6.65 | % | 4,848,436 | 79,790 | 6.60 | % | 3,423,048 | 48,122 | 5.58 | % | ||||||||||||||||||||||||
Total
earning assets
|
5,867,311 | 84,684 | 5.73 | % | 6,000,760 | 85,938 | 5.74 | % | 4,134,955 | 54,715 | 5.25 | % | ||||||||||||||||||||||||
Nonearning
assets
|
||||||||||||||||||||||||||||||||||||
Cash
and due from banks
|
185,322 | 273,162 | 107,216 | |||||||||||||||||||||||||||||||||
Allowance
for loan and lease losses
|
(61,753 | ) | (60,444 | ) | (42,034 | ) | ||||||||||||||||||||||||||||||
Premises
and equipment
|
115,518 | 115,587 | 91,252 | |||||||||||||||||||||||||||||||||
Other
assets
|
302,081 | 291,956 | 214,351 | |||||||||||||||||||||||||||||||||
Total
assets
|
$ | 6,408,479 | $ | 6,621,021 | $ | 4,505,740 | ||||||||||||||||||||||||||||||
Interest-bearing
liabilities
|
||||||||||||||||||||||||||||||||||||
Deposits:
|
||||||||||||||||||||||||||||||||||||
Interest-bearing
|
$ | 1,029,350 | 1,063 | 0.41 | % | $ | 1,139,001 | 1,265 | 0.45 | % | $ | 735,258 | 448 | 0.24 | % | |||||||||||||||||||||
Savings
|
1,412,441 | 2,115 | 0.59 | % | 1,341,194 | 2,058 | 0.62 | % | 838,381 | 2,300 | 1.09 | % | ||||||||||||||||||||||||
Time
|
2,007,138 | 11,279 | 2.23 | % | 2,090,776 | 11,985 | 2.30 | % | 1,480,587 | 8,742 | 2.34 | % | ||||||||||||||||||||||||
Short-term
borrowings
|
50,580 | 25 | 0.20 | % | 37,353 | 17 | 0.18 | % | 150,878 | 261 | 0.69 | % | ||||||||||||||||||||||||
Long-term
borrowings
|
301,790 | 2,356 | 3.10 | % | 410,592 | 2,875 | 2.81 | % | 226,528 | 2,300 | 4.03 | % | ||||||||||||||||||||||||
Total
interest-bearing liabilities
|
4,801,299 | 16,838 | 1.39 | % | 5,018,916 | 18,200 | 1.45 | % | 3,431,632 | 14,051 | 1.62 | % | ||||||||||||||||||||||||
Noninterest-bearing
liabilities and shareholders' equity
|
||||||||||||||||||||||||||||||||||||
Noninterest-bearing
demand
|
721,501 | 740,011 | 554,471 | |||||||||||||||||||||||||||||||||
Other
liabilities
|
201,567 | 191,043 | 42,087 | |||||||||||||||||||||||||||||||||
Shareholders'
equity
|
684,112 | 671,051 | 477,550 | |||||||||||||||||||||||||||||||||
Total
liabilities and
|
||||||||||||||||||||||||||||||||||||
shareholders'
equity
|
$ | 6,408,479 | $ | 6,621,021 | $ | 4,505,740 | ||||||||||||||||||||||||||||||
Net
interest income
|
$ | 67,846 | $ | 67,738 | $ | 40,664 | ||||||||||||||||||||||||||||||
Net
interest spread
|
4.34 | % | 4.29 | % | 3.63 | % | ||||||||||||||||||||||||||||||
Contribution
of noninterest-bearing sources of funds
|
0.25 | % | 0.24 | % | 0.27 | % | ||||||||||||||||||||||||||||||
Net interest margin (2)
|
4.59 | % | 4.53 | % | 3.90 | % |
(1)
Nonaccrual loans and loans held for sale are included in average balances for
each applicable loan category.
(2)
Because noninterest-bearing funding sources, demand deposits, other liabilities,
and shareholders' equity also support earning assets, the net interest margin
exceeds the interest spread.
32
RATE/VOLUME
ANALYSIS
The
impact of changes in the volume of interest-earning assets and interest-bearing
liabilities and interest rates on net interest income is illustrated in the
following tables.
Changes for the Three Months Ended September 30
|
||||||||||||||||||||||||
Linked Qtr. Income Variance
|
Comparable Qtr. Income Variance
|
|||||||||||||||||||||||
(Dollars in thousands)
|
Rate
|
Volume
|
Total
|
Rate
|
Volume
|
Total
|
||||||||||||||||||
Earning
assets
|
||||||||||||||||||||||||
Investment
securities
|
$ | (878 | ) | $ | 815 | $ | (63 | ) | $ | (1,911 | ) | $ | 944 | $ | (967 | ) | ||||||||
Other
earning assets
|
(10 | ) | (53 | ) | (63 | ) | 112 | 284 | 396 | |||||||||||||||
Gross loans
(1)
|
602 | (1,730 | ) | (1,128 | ) | 9,260 | 21,280 | 30,540 | ||||||||||||||||
Total
earning assets
|
(286 | ) | (968 | ) | (1,254 | ) | 7,461 | 22,508 | 29,969 | |||||||||||||||
Interest-bearing
liabilities
|
||||||||||||||||||||||||
Total
interest-bearing deposits
|
$ | (616 | ) | $ | (235 | ) | $ | (851 | ) | $ | (1,565 | ) | $ | 4,532 | $ | 2,967 | ||||||||
Borrowed
funds
|
||||||||||||||||||||||||
Short-term
borrowings
|
1 | 7 | 8 | (186 | ) | (50 | ) | (236 | ) | |||||||||||||||
Federal
Home Loan Bank long-term debt
|
234 | (756 | ) | (522 | ) | (487 | ) | 544 | 57 | |||||||||||||||
Other
long-term debt
|
(1 | ) | 4 | 3 | (1 | ) | 0 | (1 | ) | |||||||||||||||
Total
borrowed funds
|
234 | (745 | ) | (511 | ) | (674 | ) | 494 | (180 | ) | ||||||||||||||
Total
interest-bearing liabilities
|
(382 | ) | (980 | ) | (1,362 | ) | (2,239 | ) | 5,026 | 2,787 | ||||||||||||||
Net interest income
(2)
|
$ | 96 | $ | 12 | $ | 108 | $ | 9,700 | $ | 17,482 | $ | 27,182 |
(1) Loans
held for sale, nonaccrual loans, covered loans, and indemnification asset are
included in gross loans.
(2) Not
tax equivalent.
Changes for the
|
||||||||||||
Nine Months Ended September 30
|
||||||||||||
Year-to-Date Income Variance
|
||||||||||||
Rate
|
Volume
|
Total
|
||||||||||
Earning
assets
|
||||||||||||
Investment
securities
|
$ | (5,226 | ) | $ | (1,954 | ) | $ | (7,180 | ) | |||
Federal
funds sold
|
128 | 1,068 | 1,196 | |||||||||
Gross
loans
(1)
|
32,717 | 94,565 | 127,282 | |||||||||
Total
earning assets
|
27,619 | 93,679 | 121,298 | |||||||||
Interest-bearing
liabilities
|
||||||||||||
Total
interest-bearing deposits
|
$ | (3,968 | ) | $ | 19,008 | $ | 15,040 | |||||
Borrowed
funds
|
||||||||||||
Short-term
borrowings
|
(844 | ) | (390 | ) | (1,234 | ) | ||||||
Federal
Home Loan Bank long-term debt
|
(1,279 | ) | 3,892 | 2,613 | ||||||||
Other
long-term debt
|
76 | 0 | 76 | |||||||||
Total
borrowed funds
|
(2,047 | ) | 3,502 | 1,455 | ||||||||
Total
interest-bearing liabilities
|
(6,015 | ) | 22,510 | 16,495 | ||||||||
Net
interest income
(2)
|
$ | 33,634 | $ | 71,169 | $ | 104,803 |
(1) Loans
held for sale, nonaccrual loans, covered loans, and indemnification asset are
included in gross loans.
(2) Not
tax equivalent.
33
NONINTEREST
INCOME
Third
quarter 2010 noninterest income was $44.9 million, compared to $40.5 million in
the second quarter of 2010 and $354.4 million in the third quarter of
2009. Excluding the gain on the acquisition recorded in the third quarter
of 2009, noninterest income for that period was $11.9 million.
During
the third and second quarters of 2010, covered loan activity positively impacted
noninterest income by $9.4 million and $7.4 million, respectively due to loan
prepayments and dispositions. When covered loan balances paydown early,
through either a loan sale or prepayments by the borrower, and credit experience
is better than originally estimated, the remaining carrying value of the
valuation mark associated with the respective loan is recognized as noninterest
income, net of a corresponding valuation adjustment on the FDIC indemnification
asset. When losses are incurred on covered loans, the Company recognizes
those credit losses as provision expense. Reimbursements due from the FDIC
under loss share agreements related to these credit losses are recorded as
noninterest income and were $17.8 million and $15.2 million for the third and
second quarters of 2010, respectively. The impact on earnings of this
offsetting activity is the net effect of the gross up of credit losses and FDIC
reimbursement, representing the Company’s proportionate share of the credit
losses realized on covered loans.
During
the third quarter of 2010, the Company sold approximately $23.2 million of loans
originated by its franchise finance business, recognizing a $2.0 million
gain. Sales of franchise loans will be a recurring strategy in order to
manage risk in the business line but the frequency has yet to be
determined. Additionally, consistent with the Company’s previous exit of a
similar business line, the property and casualty insurance business acquired as
part of the Irwin acquisition was sold during the quarter, resulting in the
recognition of a $1.3 million gain. Excluding the nonrecurring items
previously discussed which totaled $28.6 million, estimated noninterest income
was $16.4 million for the third quarter of 2010. For the second quarter of
2010, excluding the $22.6 million previously discussed as well as $3.4 million
in nonrecurring FDIC settlement and other income, estimated noninterest income
was $14.5 million.
Excluding
the bargain purchase gain recognized during the third quarter 2009, noninterest
income earned in the third quarter 2009 was $11.9 million. The remaining
increase in the comparable year-over-year quarter was driven primarily by higher
service charges on deposit accounts resulting from an increase in
transaction-based deposits, increased bankcard income, higher trust and wealth
management fees and higher brokerage and insurance income, primarily as a result
of the 2009 acquisitions, as well as the gain the sale of franchise
loans.
As
discussed above, the Company sold $23.2 million of loans originated by its
franchise finance unit, a portion of which consisted of loans covered under loss
share agreements. With regard to the covered loan portion, the Company
recognized $0.4 million of revenue related to the accelerated discount, which is
included in the $9.4 million of accelerated discount resulted from loan
prepayments previously discussed.
For the
nine month period ended September 30, 2010, noninterest income totaled $112.3
million as compared to $380.6 million for the similar year-over-year
period. Excluding the items mentioned previously as well as gains on sales
of investments and the gain on sale of the property and casualty portion of the
insurance business which occurred during the first quarter 2009, noninterest
income was $43.7 million for the nine month period ended September 30, 2010 as
compared to $33.9 million for the nine months ended September 30,
2009.
NONINTEREST
EXPENSE
Third
quarter 2010 noninterest expense was $61.3 million, compared with $46.3 million
in the third quarter of 2009, and $55.8 million in the second quarter of
2010. Acquisition-related costs for the third quarter of 2010 consisted of
$1.2 million in professional services fees and $0.3 million in
integration-related and other costs. Transition related items such as
salaries, employee benefits and other items related to people, processes, and
facilities that are diminishing over time were $1.4 million for the same
period. Additionally, there was $0.9 million for FDIC indemnification
support, $8.0 million for the FHLB prepayment penalty, and $0.5 million in other
items not expected to recur. These expenses totaled $12.3 million for the
second quarter of 2010.
After
adjusting for these items, estimated noninterest expense increased slightly,
totaling $49.0 million for the third quarter 2010. Compared to the
year-over-year quarter, excluding the acquisition-related and other
non-recurring expenses incurred during the third quarter 2009, estimated
noninterest expense increased $13.6 million, primarily driven by higher salaries
and employment benefits, occupancy costs, equipment expenses and marketing costs
resulting from the 2009 acquisitions.
Likewise,
acquisition-related costs for the second quarter of 2010 consisted of $0.7
million in integration-related and other costs and $1.4 million in professional
services fees. Transition related items such as salaries and employee
benefits were $1.9 million and occupancy expense and other was $3.1 million for
the same period. Additionally, there was $0.9 million for FDIC
indemnification support, $1.0 million in retention plan expense, $0.3 million in
professional fees related to the auction of the common stock warrant held by the
U.S. Treasury, and other items not expected to recur of $1.1 million.
These expenses totaled $8.1 for the second quarter of 2010.
34
For the
nine month period ended September 30, 2010, noninterest expense totaled $177.4
million compared to $109.0 million for the comparable year-over-year
period. Excluding the items mentioned previously, first quarter 2010
acquisition related expenses and other expenses not expect to recur totaling
$12.7 million, the FDIC special assessment and acquisition related expenses
incurred during the second quarter 2009 and severance costs related to the first
quarter 2009 sale of the property & casualty portion of the insurance
business, noninterest expense was $144.3 million for the nine month period ended
September 30, 2010 as compared to $106.6 million for the nine months ended
September 30, 2009, reflecting the strategic growth of the company.
While the
technology and operational integration of Irwin and Peoples is complete, it is
expected that there will be additional integration and wind-down-related costs
incurred throughout 2010 and much of 2011.
INCOME
TAXES
Income
tax expense was $8.8 million and $121.8 million for the third quarters of 2010
and 2009, respectively. The effective tax rates for the third quarters of
2010 and 2009 were 36.2% and 37.8%, respectively. Income tax expense was
$24.6 million and $125.5 million for the nine months ended September 30, 2010
and 2009, respectively, with a tax benefit related to securities transactions of
$11 thousand for the nine months ended September 30, 2010 and a tax expense of
$1.2 million for the same period in 2009. The effective tax rates for the
nine months ended September 30, 2010, and 2009, were 35.4% and 37.7%,
respectively.
The
decrease in the effective tax rate was primarily due to the 2009 gain associated
with the Irwin transaction as well as increased bank owned life insurance income
and tax credits related to investments in low income housing initiatives
partially offset by a decrease in tax-exempt investment and loan
interest.
LOANS
(excluding covered loans)
Loans,
excluding covered loans, totaled $2.8 billion at the end of the third quarter, a
decrease of $28.9 million, or 1.0%, from the balance of $2.8 billion as of June
30, 2010 and a decrease of $106.7 million, or 3.7%, from the amount of $2.9
billion as of September 30, 2009. As compared to the linked quarter, the
composition of the loan portfolio remained essentially the same with the slight
overall decrease occurring in the construction, commercial real estate, and
residential real estate portfolios offset by modest increases in the commercial
and home equity portfolio. Overall, loan demand continued to remain slow
in the Company’s strategic operating markets.
Third
quarter 2010 average loans excluding covered loans and loans held for sale,
decreased $93.2 million or 3.2% from the third quarter of 2009. Third
quarter average commercial, commercial real estate, and construction loans
decreased $61.5 million or 2.9% from the third quarter of 2009.
Year-to-date average loans, excluding loans covered and held for sale, increased
$33.5 million or 1.2% from the same period on 2009. Year-to-date average
commercial, commercial real estate, and construction loans increased $65.2
million or 3.2% from the same period in 2009.
During
the third quarter 2010, the Company sold approximately $23.2 million of loans
originated by its franchise finance business at a premium, recognizing a gain of
$2.0 million. The loans sold consisted of both loans covered by FDIC loss
sharing agreements and credits originated subsequent to the Irwin
acquisition. The sale was conducted to lessen credit and geographic
concentration risk within the franchise portfolio. As a liquid secondary
market exists for these types of credits, the Company may consider additional
franchise loan sales in the future as a way to mitigate the aforementioned
risks.
INVESTMENTS
Investment
securities totaled $720.5 million as of September 30, 2010 as compared to $579.1
million as of December 31, 2009 and $629.3 million as of September 30,
2009. The total investment portfolio represented 11.7% of total assets at
September 30, 2010, 8.7% at December 31, 2009, and 8.7% at September 30,
2009. Securities available-for-sale at September 30, 2010, totaled $616.2
million, compared with $523.4 million at September 30, 2009, and $471.0 million
at December 31, 2009. The net increase relative to December 31, 2009 was
due to the purchase of $100 million of FNMA agency securities during the second
quarter and $154 million of FNMA/FHLMC mortgage-backed securities in the third
quarter. While loan demand remains muted, the Company continues to
selectively redeploy a portion of its cash position to purchase investments as
market conditions permit. Future purchases will be made utilizing the same
discipline and portfolio management philosophy applied in the past, including
avoidance of material credit risk and geographic concentration risk within
mortgage-backed securities, while also balancing the Company’s overall
asset/liability management objectives. The aforementioned purchase of
FNMA/FHLMC agency securities represents the Company’s commitment to this
discipline and philosophy.
The
company has recorded, as a component of equity in accumulated other
comprehensive income, an unrealized after-tax gain on the investment portfolio
of approximately $12.1 million at September 30, 2010, compared with an
unrealized after-tax gain of $11.9 million at September 30, 2009, and an
unrealized after-tax gain of $10.2 million at December 31,
2009.
35
DEPOSITS
AND FUNDING
Total
deposits as of September 30, 2010 were $5.1 billion, a decline of $299.4
million, or 5.6%, from $5.4 billion as of December 31, 2009. A significant
portion of this decrease related to declines in time deposits of $298.8 million,
noninterest-bearing deposits of $116.3 million, and interest-bearing checking
accounts of $60.5 million, offset by increases in savings accounts of $176.3
million. The acquisition of low cost core deposits and customer
relationships is central to the Company’s long term operating strategy despite
the current strong liquidity position. Overall, strategic deposit
retention from the acquisitions continues to exceed management’s
expectations.
On a
linked quarter basis, strategic transaction and savings accounts declined $36.9
million during the third quarter. Retail and business transactional
accounts continued to experience solid growth during the quarter, increasing
$60.4 million. However, this growth was offset by a decrease of $97.2
million in public funds transaction deposits, reflecting the company’s
determination to maintain disciplined pricing and transaction structure.
While we are always sensitive to the client relationship aspect of our
decisions, we will not pursue business that erodes our internal profitability
targets. Similar to the prior quarter, acquired-non-strategic balances
continued to decline, the majority of which consisted of time and brokered
deposits. During the third quarter 2010, the Company closed its remaining
two western market offices acquired as part of the Irwin transaction,
contributing to the decline in acquired-non-strategic transaction and savings
accounts. As of September 30, 2010, brokered deposits had declined to less
than 4% of total deposits.
Borrowed
funds as of September 30, 2010 totaled $208.6 million, as compared to $443.7
million as of June 30, 2010. This decrease was primarily due to the third
quarter of 2010 prepayment of long-term FHLB advances acquired in the Peoples
and Irwin transactions. Borrowed funds declined $323.1 million, or 60.8%,
from $531.7 million as of September 30, 2009, which was also due to the
prepayment previously mentioned. Other than the FHLB long-term debt
acquired in the Peoples and Irwin transactions First Financial has not increased
long-term borrowings since the third quarter of 2008.
RISK
MANAGEMENT
First
Financial manages risks through processes that regularly assess the overall
level of risk and identifies specific risks and the steps being taken to
mitigate them. First Financial continues to enhance its risk management
capabilities and has, over time, enhanced risk awareness as part of the culture
of the company. First Financial employ’s a structured Enterprise Risk
Management (ERM) approach as part of this progression. ERM allows First
Financial to align a variety of risk management activities within the company
into a cohesive, enterprise-wide approach, focus on process-level risk
management activities and strategic objectives within the risk management
culture, deliberately consider risk responses and effectiveness of mitigation
compared to established standards for risk appetite and tolerance, recognize and
respond to the significant organizational changes that have increased the size
and complexity of the organization, and consolidate information obtained through
a common process into concise business performance and risk information for
management and the board of directors.
First
Financial uses a robust regulatory risk framework as one of the foundational
components of its ERM framework. This not only allows for a common
categorization among business units, but allows for a consistent and complete
risk framework that can be summarized and assessed enterprise-wide. In
addition, the framework is consistent with that used by the company’s
regulators, allowing for additional feedback on First Financials ability to
assess and measure risk across the organization and for management and the board
of directors to identify and understand differences in assessed risk profiles
using this same foundation. The goal of this framework is to implement
effective risk management techniques and strategies, minimize losses, and
strengthen the company’s overall performance.
CREDIT
RISK
Credit
risk represents the risk of loss due to failure of a customer or counterparty to
meet its financial obligations in accordance with contractual terms. First
Financial manages credit risk through underwriting, periodically reviewing and
approving its credit exposures using Board approved credit policies and
guidelines.
Allowance
for loan and lease losses (Excluding covered assets)
Due to
the significant difference in the accounting for the covered loans and the loss
sharing agreements with the FDIC, management believes that asset quality
measures excluding the covered loans are generally more meaningful.
Therefore, management has included asset quality measures that exclude covered
loans in the table in this section.
36
Management
maintains the allowance at a level that is considered sufficient to absorb
inherent risks in the loan portfolio. Management’s evaluation in
establishing the adequacy of the allowance includes evaluation of the loan and
lease portfolios, historical loan and lease loss experience, known and inherent
risks in the portfolio, adverse situations that may affect the borrower’s
ability to repay (including the timing of future payments), the estimated value
of any underlying collateral, composition of the loan portfolio, economic
conditions, and other pertinent factors, such as periodic internal and external
evaluations of delinquent, nonaccrual, and classified loans. The
evaluation is inherently subjective as it requires utilizing material estimates,
including the amounts and timing of future cash flows expected to be received on
impaired loans. The evaluation of these factors is the responsibility of
the Allowance for Loan and Lease Losses Committee, which is comprised of senior
officers from the risk management, credit administration, finance, and lending
areas.
As of the
end of the third quarter 2010, the allowance for uncovered loan and lease losses
decreased slightly to $57.2 million from $57.8 million as of June 30, 2010 and
was $55.8 million as of September 30, 2009. As a percentage of period-end
loans, the allowance for loan and lease losses remained unchanged at 2.07% as of
September 30, 2010 as compared to June 30, 2010 and 1.94% as of September 30,
2009. The allowance for loan and lease losses as of September 30, 2010
reflects management’s estimate of credit risk inherent in the Company’s
portfolio at that time.
Third
quarter 2010 net charge-offs were $6.8 million, or 0.97% of average loans and
leases, compared with $5.0 million, or 0.71%, for the linked quarter and $9.5
million, or 1.31%, for the comparable year-over-year quarter. The increase
compared to the linked quarter was driven by higher charge-offs in the
construction, commercial real estate and, to a lesser degree, residential
portfolios, offset by lower net charge-offs in the commercial
portfolio.
For the
nine months ended September 30, 2010, net charge-offs were $25.9 million, or
1.23% of average loans and leases. These amounts were impacted by the
alleged fraudulent activity noted during the first quarter 2010 which totaled
$8.8 million, representing 42 basis points of average loans and leases for the
period. Excluding the alleged fraudulent activity, net charge-offs were
$17.1 million, or 0.81%, as compared to $21.4 million, or 1.03%, for the nine
month period ended September 30, 2009.
Third
quarter 2010 provision expense related to uncovered loans and leases was $6.3
million as compared to $6.2 million during the linked quarter and $26.7 million
during the comparable year-over-year quarter. As a percentage of net
charge-offs, third quarter 2010 provision expense equaled 91.8% compared to
123.4% during the second quarter 2010 and 279.6% during the third quarter
2009. Year-to-date 2010 provision expense related to uncovered loans and
leases was $23.8 million as compared to $41.3 million during the comparable
period in 2009. As a percentage of net charge-offs, year-to-date 2010
provision expense equaled 92.0% compared to 193.1% during the first nine months
of 2009.
37
The table
that follows indicates the activity in the allowance for loan losses, excluding
covered loans, for the quarterly periods presented.
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||||||||||||||
2010
|
2009
|
September 30,
|
||||||||||||||||||||||||||
(Dollars in thousands)
|
Sep. 30
|
June 30
|
Mar. 31
|
Dec. 31
|
Sep. 30
|
2010
|
2009
|
|||||||||||||||||||||
Balance
at beginning of period
|
$ | 57,811 | $ | 56,642 | $ | 59,311 | $ | 55,770 | $ | 38,649 | $ | 59,311 | $ | 35,873 | ||||||||||||||
Provision
for loan losses
|
6,287 | 6,158 | 11,378 | 14,812 | 26,655 | 23,823 | 41,272 | |||||||||||||||||||||
Gross
charge-offs
|
||||||||||||||||||||||||||||
Commercial
|
762 | 1,156 | 6,275 | 1,143 | 2,924 | 8,193 | 10,152 | |||||||||||||||||||||
Real
estate-construction
|
3,607 | 2,386 | 2,126 | 6,788 | 4,552 | 8,119 | 5,892 | |||||||||||||||||||||
Real
estate-commercial
|
2,013 | 359 | 3,932 | 1,854 | 927 | 6,304 | 2,660 | |||||||||||||||||||||
Real
estate-residential
|
717 | 246 | 534 | 262 | 471 | 1,497 | 1,053 | |||||||||||||||||||||
Installment
|
205 | 304 | 414 | 449 | 315 | 923 | 1,019 | |||||||||||||||||||||
Home
equity
|
389 | 580 | 684 | 1,105 | 382 | 1,653 | 932 | |||||||||||||||||||||
All
other
|
431 | 426 | 520 | 454 | 492 | 1,377 | 1,186 | |||||||||||||||||||||
Total
gross charge-offs
|
8,124 | 5,457 | 14,485 | 12,055 | 10,063 | 28,066 | 22,894 | |||||||||||||||||||||
Recoveries
|
||||||||||||||||||||||||||||
Commercial
|
334 | 120 | 109 | 148 | 91 | 563 | 484 | |||||||||||||||||||||
Real
estate-construction
|
0 | 24 | 0 | 0 | 0 | 24 | 0 | |||||||||||||||||||||
Real
estate-commercial
|
728 | 99 | 12 | 360 | 167 | 839 | 197 | |||||||||||||||||||||
Real
estate-residential
|
11 | 4 | 3 | 3 | 2 | 18 | 24 | |||||||||||||||||||||
Installment
|
116 | 127 | 160 | 195 | 205 | 403 | 662 | |||||||||||||||||||||
Home
equity
|
21 | 10 | 87 | 6 | 9 | 118 | 10 | |||||||||||||||||||||
All
other
|
65 | 84 | 67 | 72 | 55 | 216 | 142 | |||||||||||||||||||||
Total
recoveries
|
1,275 | 468 | 438 | 784 | 529 | 2,181 | 1,519 | |||||||||||||||||||||
Total
net charge-offs
|
6,849 | 4,989 | 14,047 | 11,271 | 9,534 | 25,885 | 21,375 | |||||||||||||||||||||
Ending
allowance for loan and lease losses - uncovered
|
$ | 57,249 | $ | 57,811 | $ | 56,642 | $ | 59,311 | $ | 55,770 | $ | 57,249 | $ | 55,770 | ||||||||||||||
NET
CHARGE-OFFS TO AVERAGE LOANS AND LEASES (ANNUALIZED)
|
||||||||||||||||||||||||||||
Commercial
|
0.23 | % | 0.56 | % | 3.18 | % | 0.47 | % | 1.31 | % | 1.35 | % | 1.54 | % | ||||||||||||||
Real
estate-construction
|
7.64 | % | 4.68 | % | 3.72 | % | 10.48 | % | 6.90 | % | 5.23 | % | 3.10 | % | ||||||||||||||
Real
estate-commercial
|
0.45 | % | 0.09 | % | 1.47 | % | 0.57 | % | 0.30 | % | 0.66 | % | 0.36 | % | ||||||||||||||
Real
estate-residential
|
0.95 | % | 0.32 | % | 0.70 | % | 0.31 | % | 0.56 | % | 0.65 | % | 0.39 | % | ||||||||||||||
Installment
|
0.49 | % | 0.92 | % | 1.30 | % | 1.15 | % | 0.50 | % | 0.91 | % | 0.53 | % | ||||||||||||||
Home
equity
|
0.43 | % | 0.69 | % | 0.73 | % | 1.31 | % | 0.47 | % | 0.61 | % | 0.41 | % | ||||||||||||||
All
other
|
5.05 | % | 4.89 | % | 6.46 | % | 5.40 | % | 6.35 | % | 5.46 | % | 5.19 | % | ||||||||||||||
Total
net charge-offs
|
0.97 | % | 0.71 | % | 2.00 | % | 1.53 | % | 1.31 | % | 1.23 | % | 1.03 | % |
While the
Company is seeing isolated areas of improvement, overall weakness in both the
commercial and consumer sectors continues to exist in its strategic markets and,
as a result, recovery will be slow. Given the continued challenging
environment, it will be critical to remain proactive in identifying and managing
individual credit situations.
Allowance
for loan and lease losses on covered loans
All loans
acquired in the Peoples and Irwin acquisitions are covered by loss sharing
agreements with the FDIC, whereby the FDIC reimburses First Financial for the
majority of the losses incurred. Additionally, these loans were recorded at fair
value as of the acquisition date. Generally the determination of the fair
value of the loans resulted in a significant write-down in the value of the
loans, which was assigned to an accretable or nonaccretable balance, with the
accretable balance being recognized as interest income over the remaining term
of the loan. In accordance with accounting for business combinations, there was
no allowance brought forward on any of the acquired loans, as the credit losses
evident in the loans were included in the determination of the fair value of the
loans at the acquisition date and are represented by the nonaccretable
balance. The majority of the nonaccretable balance is expected to be
received from the FDIC through the loss sharing agreements and is recorded as a
separate asset from the covered loans and reflected on the Consolidated Balance
Sheets. As a result, the majority of loans acquired in the Peoples and Irwin
acquisitions were considered to be accruing loans as of the acquisition date. In
accordance with regulatory reporting standards, covered loans that are
contractually past due will continue to be reported as past due and still
accruing based on the number of days past due. First Financial had $20.1
million of covered nonaccrual loans, $222.5 million of covered loans 90 days
past due and still accruing, and $20.6 million of covered OREO at September 30,
2010.
38
There was
no allowance for loan and lease losses related to covered loans prior to June
30, 2010 as these loans were recorded at acquisition at their estimated fair
value. With the exception of covered loans accounted for outside the scope of
FASB ASC Topic 310-30, improvements in the estimated fair value of covered loans
are reflected through higher yields on these loans while declines in the
estimated fair value of covered loans are recorded as impairment charges in the
company’s operating results in the period in which the decline
occurs.
Under the
applicable accounting guidance, the allowance for loan
losses related to covered loans as a result of impairment identified in on-going
valuation procedures is generally recognized in the current period as provision
expense. Improvement in the credit outlook, however, is not recognized
immediately but instead is reflected as an adjustment to the yield earned on the
related loan pools on a prospective basis. The timing inherent in this
accounting treatment may result in earnings volatility in future
periods.
The
Company established an allowance for loan losses associated with covered loans
during the second quarter 2010 based on its estimated valuation procedures
performed during the period. This allowance, totaling $1.3 million, was
the net effect of $19.0 million recognized as provision expense during the
second quarter less $17.7 million of net charge-offs related to these
loans. The related estimated reimbursement due from the FDIC under loss
sharing agreements of $15.2 million was recorded as both FDIC loss sharing
income and an increase to the FDIC indemnification asset. The net amount
of this activity reflects the Company’s expected proportionate share of losses
related to this impairment.
During
the third quarter 2010, the Company updated its estimated valuation procedures
related to loans covered under loss share agreements. As a result of
impairment identified in certain loan pools, it recognized a provision expense
related to covered loans of $20.7 million and realized net charge-offs of $10.4
million, resulting in an allowance for covered loan losses of $11.6 million as
of September 30, 2010. The related receivable due from the FDIC under loss
share agreements related to these loans of $17.8 million was recognized as FDIC
loss share income and a corresponding increase to the FDIC indemnification
asset.
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
September 30,
|
September 30,
|
|||||||||||||||
(Dollars in thousands)
|
2010
|
2009
|
2010
|
2009
|
||||||||||||
Balance
at beginning of period
|
$ | 1,273 | $ | 0 | $ | 0 | $ | 0 | ||||||||
Provision
for impairment on covered loans
|
20,725 | 0 | 49,147 | 0 | ||||||||||||
Loans
charged off
|
(10,492 | ) | 0 | (37,641 | ) | 0 | ||||||||||
Recoveries
|
77 | 0 | 77 | 0 | ||||||||||||
Ending
allowance for loan and lease losses - covered
|
11,583 | 0 | 11,583 | 0 | ||||||||||||
Total
allowance for loan and lease losses
|
$ | 11,583 | $ | 0 | $ | 11,583 | $ | 0 |
Nonperforming/Underperforming
Assets (Excluding covered assets)
Nonperforming
loans totaled $79.5 million and nonperforming assets totaled $97.8 million as of
September 30, 2010 compared with $79.4 million and $96.2 million, respectively,
for the linked quarter and $63.6 million and $67.9 million, respectively, for
the comparable year-over-year quarter.
While
total nonaccrual loans remained essentially unchanged, the individual components
changed as commercial nonaccrual loans increased $4.4 million and home equity
nonaccrual loans increased $0.6 million, offset by a decrease in construction
nonaccrual loans of $5.4 million driven by the higher level of net charge-offs
related to this loan category.
The third
quarter 2010 allowance for loan and lease losses as a percent of nonaccrual
loans was 86.5% compared with 86.7% in the second quarter of 2010, and 92.2% in
the third quarter of 2009, and the allowance for loan and lease losses as a
percent of nonperforming loans was 72.0% at September 30, 2010, compared with
72.8% in the second quarter of 2010, and 87.7% in the third quarter of
2009.
39
Total
classified assets increased $10.7 million during the third quarter to $212.6
million. Classified assets are defined by the Company as nonperforming
assets plus performing loans internally rated substandard or worse. This
increase was driven primarily by one relationship related to a multi-family,
mixed use project totaling $9.3 million in the aggregate. All credits included
in classified assets are monitored closely and have workout strategies in place
should their status continue to deteriorate.
While the
Company is seeing isolated areas of improvement, overall weakness in both the
commercial and consumer sectors continues to exist in its strategic markets and,
as a result, recovery will be slow. Given the continued challenging
environment, it will be critical to remain proactive in identifying and managing
individual credit situations.
Restructured
Loans
Restructured
loans increased $0.6 million during the third quarter 2010 from the linked
quarter and $7.2 million from December 31, 2009. The increase from year
end was due primarily to one commercial relationship totaling $5.0 million that
was previously classified as nonaccrual in which the Company worked with the
borrower to modify certain terms including the addition of an interest-only
feature for a specified period of time and re-amortization. Restructured
loans remain on nonaccrual status until the borrower demonstrates the ability to
comply with the modified terms.
Delinquent
Loans
Loans
30-to-89 days past due totaled $45.1 million, or 1.63% of period end loans, as
of September 30, 2010. This compares to $21.8 million, or 0.78%, as of
June 30, 2010 and $20.8 million, or 0.72%, as of September 30, 2009. The
increase was driven primarily by the multi-family project discussed above, two
residential developments totaling $8.1 million in the aggregate and a commercial
real estate credit of $3.4 million.
Other
Real Estate Owned
At
September 30, 2010, OREO was $18.3 million, compared with $4.1 million at
December 31, 2009, and $4.3 million at September 30, 2009. One
relationship with multiple commercial land loans, totaling $13.6 million in the
aggregate, all of which was previously classified as nonperforming, was
transferred to OREO during the first quarter of 2010.
The table
that follows shows the categories that are included in nonperforming and
underperforming assets, excluding covered assets, as of September 30, 2010, and
the four previous quarters, as well as related credit quality
ratios.
Quarter Ended
|
||||||||||||||||||||
2010
|
2009
|
|||||||||||||||||||
(Dollars in thousands)
|
Sep. 30
|
June 30
|
Mar. 31
|
Dec. 31
|
Sep. 30
|
|||||||||||||||
Nonaccrual
loans
|
||||||||||||||||||||
Commercial
|
$ | 17,320 | $ | 12,874 | $ | 21,572 | $ | 13,756 | $ | 13,244 | ||||||||||
Real
estate - construction
|
13,454 | 18,890 | 17,710 | 35,604 | 26,575 | |||||||||||||||
Real
estate - commercial
|
27,945 | 28,272 | 21,196 | 15,320 | 12,407 | |||||||||||||||
Real
estate - residential
|
4,801 | 4,571 | 4,116 | 3,993 | 5,253 | |||||||||||||||
Installment
|
279 | 267 | 365 | 660 | 493 | |||||||||||||||
Home
equity
|
2,358 | 1,797 | 1,910 | 2,324 | 2,534 | |||||||||||||||
Total
nonaccrual loans
|
66,157 | 66,671 | 66,869 | 71,657 | 60,506 | |||||||||||||||
Restructured
loans
|
13,365 | 12,752 | 7,584 | 6,125 | 3,102 | |||||||||||||||
Total
nonperforming loans
|
79,522 | 79,423 | 74,453 | 77,782 | 63,608 | |||||||||||||||
Other
real estate owned (OREO)
|
18,305 | 16,818 | 18,087 | 4,145 | 4,301 | |||||||||||||||
Total
nonperforming assets
|
97,827 | 96,241 | 92,540 | 81,927 | 67,909 | |||||||||||||||
Accruing
loans past due 90 days or more
|
233 | 276 | 286 | 417 | 308 | |||||||||||||||
Total
underperforming assets
|
$ | 98,060 | $ | 96,517 | $ | 92,826 | $ | 82,344 | $ | 68,217 | ||||||||||
Allowance
for loan and lease losses to
|
||||||||||||||||||||
Nonaccrual
loans
|
86.54 | % | 86.71 | % | 84.71 | % | 82.77 | % | 92.17 | % | ||||||||||
Nonperforming
loans
|
71.99 | % | 72.79 | % | 76.08 | % | 76.25 | % | 87.68 | % | ||||||||||
Total
ending loans
|
2.07 | % | 2.07 | % | 2.01 | % | 2.05 | % | 1.94 | % | ||||||||||
Nonperforming
loans to total loans
|
2.88 | % | 2.84 | % | 2.65 | % | 2.69 | % | 2.21 | % | ||||||||||
Nonperforming
assets to
|
||||||||||||||||||||
Ending
loans, plus OREO
|
3.51 | % | 3.42 | % | 3.27 | % | 2.83 | % | 2.36 | % | ||||||||||
Total
assets, including covered assets
|
1.59 | % | 1.46 | % | 1.41 | % | 1.23 | % | 0.94 | % |
40
MARKET
RISK
Market
risk is the risk of loss arising from adverse changes in the fair value of
financial instruments due to changes in interest rates, foreign exchange rates,
and equity prices. The primary source of market risk for First Financial is
interest-rate risk. Interest-rate risk is the risk to earnings and market value
arising from changes in market interest rates and arises in the normal course of
business to the extent that there is a divergence between the amount of First
Financial’s interest-earning assets and the amount of interest-bearing
liabilities that are prepaid/withdrawn, re-price, or mature in specified
periods. First Financial seeks to achieve consistent growth in net interest
income and capital while managing volatility arising from shifts in market
interest rates. First Financial’s board of directors establishes policy limits
with respect to interest rate risk. First Financial’s Asset and Liability
Committee (ALCO) oversees market risk management, monitoring risk measures,
limits, and policy guidelines for managing the amount of interest-rate risk and
its effect on net interest income and capital.
Interest
rate risk management is an active process that encompasses monitoring loan and
deposit flows complemented by investment and funding activities. Effective
interest rate risk management begins with understanding the dynamic
characteristics of assets and liabilities and determining the appropriate
interest rate risk position given business activities, management objectives,
market expectations and ALCO policy limits and guidelines.
Liquidity
Liquidity
management is the process by which First Financial manages the continuing flow
of funds necessary to meet its financial commitments on a timely basis and at a
reasonable cost. These funding commitments include withdrawals by
depositors, credit commitments to borrowers, shareholder dividends, expenses of
its operations, and capital expenditures. Liquidity is monitored and
closely managed by ALCO, a group of senior officers from the lending, deposit
gathering, finance, risk management, and treasury areas. It is ALCO’s
responsibility to ensure First Financial has the necessary level of funds
available for normal operations as well as maintain a contingency funding policy
to ensure that liquidity stress events are quickly identified, and management
plans are in place to respond. This is accomplished through the use of
policies which establish limits and require measurements to monitor liquidity
trends, including management reporting that identifies the amounts and costs of
all available funding sources. First Financial has expanded its various
funding sources, including overnight borrowing lines, and has a diversified base
of liquidity sources. These sources are periodically tested for funding
availability and there have been no restrictions in availability.
Liquidity
is derived primarily from deposit growth, principal and interest payments on
loans and investment securities, maturing loans and investment securities,
access to wholesale funding sources, and collateralized borrowings. First
Financial’s most stable source of liability-funded liquidity for both the long
and short-term needs is deposit growth and retention of the core deposit
base. The deposit base is diversified among individuals, partnerships,
corporations, public entities, and geographic markets. This
diversification helps First Financial minimize dependence on large
concentrations of funding sources.
Capital
expenditures, such as banking center expansions and technology investments, were
$17.0 million and $10.1 million for the first nine months of 2010 and 2009,
respectively. Management believes that First Financial has sufficient
liquidity to fund its future capital expenditure commitments.
As of
September 30, 2010, First Financial had pledged certain eligible residential and
farm real estate loans, home equity lines of credit, as well as certain
government and agency securities, totaling $1.2 billion as collateral for
borrowings to the FHLB. For ease of borrowing execution, First Financial
utilizes a blanket collateral agreement with the FHLB.
From time
to time, First Financial utilizes its short-term line of credit and longer-term
advances from the FHLB as funding sources. At both September 30, 2010 and
December 31, 2009, the company had no short-term borrowings from the FHLB.
At September 30, 2010, and December 31, 2009, total long-term borrowings from
the FHLB were $64.2 million and $339.7 million, respectively.
The total remaining borrowing capacity from the FHLB at September 30, 2010, was
$259.7 million.
The
principal source of asset-funded liquidity is marketable investment securities,
particularly those of shorter maturities. The market value of investment
securities classified as available-for-sale totaled $616.2 million at September
30, 2010. Securities classified as held-to-maturity that are maturing in
one year or less are also a source of liquidity and totaled $3.3 million at
September 30, 2010. In addition, other types of assets such as cash and
due from banks, federal funds sold and securities purchased under agreements to
resell, as well as loans maturing within one year, are sources of
liquidity.
At
September 30, 2010, in addition to liquidity on hand of $424.6 million, First
Financial had unused and available short-term wholesale funding of approximately
$2.2 billion to fund any significant deposit runoff that may occur.
41
Certain
restrictions exist regarding the ability of First Financial’s subsidiaries to
transfer funds to First Financial in the form of cash dividends, loans, or
advances. The approval of the subsidiaries’ respective primary federal
regulators is required for First Financial’s subsidiaries to pay dividends in
excess of regulatory limitations. In June 2010, banking regulators issued
interagency guidelines on their evaluation of bargain purchase gains created in
business combinations. The guidance lists several situations in which the
bargain purchase gain is to be excluded from capital during the one year period
under which U.S. generally accepted accounting principles allow for adjustments
to be made to the original asset and liability valuations (“conditional
period”). Capital will be excluded for the calculations of legal lending limits,
bank-to-parent dividend availability and any other business combination
application. The conditional period for First Financial’s acquisitions
expired at the end of the third quarter of 2010. Dividends paid to First
Financial from its subsidiaries totaled $0.5 million for the first nine
months of 2010. As of September 30, 2010, First Financial’s subsidiaries
had retained earnings of $369.8 million of which $240.7 million was
available for distribution to First Financial at the end of the third quarter of
2010. Management is not aware of any other events or regulatory
requirements that, if implemented, are likely to have a material effect on First
Financial’s liquidity.
First
Financial Bancorp makes quarterly interest payments on its junior subordinated
debenture owed to its unconsolidated subsidiary trust. Interest expense
related to this other long-term debt totaled $0.3 million for each of the three
months ended September 30, 2010, and 2009. Interest expense was $1.0
million for the nine months ended September 30, 2010, and $0.9 million for the
comparable period in 2009. Through the execution of an interest-rate swap
the company has fixed its interest rate on the debentures for the next 10 years
at 6.20%.
During
2009, First Financial made quarterly dividend payments to the U.S. Treasury on
the 80,000 perpetual preferred securities, which carried a 5.0% dividend rate
for the first five years and a 9.0% rate thereafter. On February 24, 2010, First
Financial Bancorp redeemed all of the $80.0 million of senior preferred shares
issued to the U.S. Treasury in December 2008 under its Capital Purchase Program
(CPP). First Financial included in its computation of earnings per diluted
common share the impact of a non-cash, deemed dividend of $0.8 million,
representing the unaccreted preferred stock discount remaining on the
transaction date. This one-time deemed dividend was in addition to the first
quarter 2010 preferred cash dividends paid through the redemption date, totaling
$1.1 million.
First
Financial had no share repurchase activity under publicly announced plans in
2009 or 2010. First Financial does not plan to repurchase any of its
shares during 2010.
OPERATIONAL
RISK
As with
all companies, First Financial is subject to operational risk in all the
products and services offered and in every business line. Operational risk is
the risk of loss due to human behavior, inadequate or failed internal systems
and controls, and external influences such as market conditions, fraudulent
activities, disasters, and security risks. First Financial continuously strives
to strengthen the company’s system of internal controls, operating processes and
employee awareness to assess the impact on earnings and capital and to improve
the oversight of our operational risk.
COMPLIANCE
RISK
Compliance
risk represents the risk of regulatory sanctions, reputational impact or
financial loss resulting from the company’s failure to comply with regulations
and standards of good banking practice. Activities which may expose First
Financial to compliance risk include, but are not limited to, those dealing with
the prevention of money laundering, privacy and data protection, community
reinvestment initiatives, fair lending challenges resulting from the company’s
expansion of its banking center network and employment and tax
matters.
STRATEGIC
AND/OR REPUTATION RISK
Strategic
and/or reputation risk represents the risk of loss due to impairment of
reputation, failure to fully develop and execute business plans, failure to
assess current and new opportunities in business, markets and products, and any
other event not identified in the defined risk types mentioned previously.
Mitigation of the various risk elements that represent strategic and/or
reputation risk is achieved through initiatives to help First Financial better
understand and report on the various risks.
CAPITAL
First
Financial and its subsidiary, First Financial Bank, are subject to regulatory
capital requirements administered by federal banking agencies. Capital
adequacy guidelines and, additionally for banks, prompt corrective action
regulations involve quantitative measures of assets, liabilities, and certain
off-balance sheet items calculated under regulatory accounting practices.
Capital amounts and classifications are also subject to qualitative judgments by
regulators. Failure to meet minimum capital requirements can initiate
regulatory action.
42
On June
8, 2009, First Financial completed a public offering of 13.8 million shares of
its common stock adding approximately $98.0 million of additional common equity,
after offering related costs. As a result of the capital raise, the company's
capital ratios strengthened and continued to significantly exceed the amounts
necessary to be classified as well capitalized.
On
February 2, 2010, First Financial completed a public offering of 6.4 million
shares of its common stock adding approximately $91.2 million of additional
common equity, after offering related costs. This public offering
completed the issuance of common shares available to be offered pursuant to a
prospectus supplement and base prospectus filed as part of an existing shelf
registration statement, filed with the Securities and Exchange Commission (SEC)
on Form S-3.
Consolidated
regulatory capital ratios at September 30, 2010, included the leverage ratio of
10.50%, Tier 1 ratio of 18.64%, and total capital ratio of 19.91%. All
regulatory capital ratios exceeded the amounts necessary to be classified as
“well capitalized,” and total regulatory capital exceeded the “minimum”
requirement by approximately $428.3 million, on a consolidated basis.
First Financial’s tangible common equity ratio increased to 10.38% for the third
quarter 2010 as compared to 9.55% for the linked quarter and 7.07% for the
comparable year-over-year quarter.
Quantitative
measures established by regulation to ensure capital adequacy require First
Financial to maintain minimum amounts and ratios (as defined by the regulations
and set forth in the following table) of Total and Tier 1 capital to
risk-weighted assets and to average assets, respectively. Management
believes, as of September 30, 2010, that First Financial met all capital
adequacy requirements to which it was subject. At September 30, 2010, and
December 31, 2009, regulatory notifications categorized First Financial as
well-capitalized under the regulatory framework for prompt corrective
action. To be categorized as well-capitalized, First Financial must
maintain minimum Total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios
as set forth in the table. There have been no conditions or events since
those notifications that management believes has changed the institution’s
category.
First
Financial’s Tier I capital is comprised of total shareholders’ equity plus
junior subordinated debentures, less unrealized gains and losses and any amounts
resulting from the application of FASB ASC Topic 715, Compensation-Retirement
Benefits, that is recorded within accumulated other comprehensive income (loss),
intangible assets, and any valuation related to mortgage servicing rights.
Total risk-based capital consists of Tier I capital plus qualifying allowance
for loan and lease losses and gross unrealized gains on equity
securities.
For
purposes of calculating the leverage ratio, average assets represents quarterly
average assets less assets not qualifying for Total risk-based capital including
intangibles and non-qualifying mortgage servicing rights and allowance for loan
and lease losses.
The
Peoples and Irwin FDIC-assisted transactions, which were each accounted for as a
business combination, resulted in the recognition of an FDIC Indemnification
Asset, which represents the fair value of estimated future payments by the FDIC
to First Financial for losses on covered assets. The FDIC Indemnification
Asset, as well as covered assets, are risk-weighted at 20% for regulatory
capital requirement purposes.
U.S. Department of the
Treasury Troubled Asset Relief Program
The U.S.
Department of the Treasury (“Treasury”), working with the Federal Reserve Board,
established late in 2008 the Troubled Asset Relief Program (TARP) Capital
Purchase Program (CPP), which was intended to stabilize the financial services
industry. One of the components of the CPP included a $250 billion
voluntary capital purchase program for certain qualified and healthy banking
institutions. Pursuant to the CPP, Treasury purchased from First Financial
80,000 shares of $1,000 par value senior perpetual preferred securities at a
price of $80.0 million equal to approximately 3.0% of the company’s then
risk-weighted assets. Such preferred shares paid a dividend of 5% for the
first five years and was to increase to 9% thereafter. In addition,
subject to certain limited exceptions, as a participant in the CPP, the company
was prohibited from (a) increasing its dividend to common shareholders and
(b) conducting share repurchases without prior approval of the Treasury.
First Financial also was subject to certain limitations on executive
compensation as well as other conditions. On January 21, 2009, First
Financial filed a registration statement on Form S-3 with the SEC to register
these securities as required by the security purchase agreement with the
Treasury. On February 19, 2009, the registration statement was deemed
effective by the SEC.
During
February 2010, First Financial successfully completed a follow-on equity
offering and, after deducting underwriting and other offering costs, received
net proceeds of $91.2 million. On February 24, 2010, First Financial used
most of the net proceeds to redeem all of the $80 million in senior preferred
shares issued to the U.S. Treasury in December 2008 under CPP. Subsequent
to the equity offering and redemption of the preferred shares, the Company
experienced an increase in its already strong regulatory and GAAP capitalization
levels.
In
connection with the company’s participation in
the CPP, Treasury also received a warrant for the purchase of common stock in
the amount of 930,233 shares at a strike price of $12.90 per share and expires
on December 23, 2018. As a result of the common equity raised during the
second quarter of 2009, the number of common shares eligible for purchase under
the warrant agreement was reduced by 50% to 465,117 shares. In June 2010,
the U.S. Treasury conducted an auction of the warrants in which the warrants
were sold in a public offering at a price of $6.70 per warrant. This
transaction represents the final step in the redemption process and the U.S.
Treasury no longer owns any securities issued by First
Financial.
43
The
following table illustrates the actual and required capital amounts and ratios
as of September 30, 2010, and the year ended December 31, 2009.
To Be Well
|
||||||||||||||||||||||||
Capitalized Under
|
||||||||||||||||||||||||
For Capital
|
Prompt Corrective
|
|||||||||||||||||||||||
Actual
|
Adequacy Purposes
|
Action Provisions
|
||||||||||||||||||||||
(Dollars in thousands)
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
||||||||||||||||||
SEPTEMBER
30, 2010
|
||||||||||||||||||||||||
Total
capital to risk-weighted assets
|
||||||||||||||||||||||||
Consolidated
|
715,938 | 19.91 | % | 287,624 | 8.00 | % | N/A | N/A | ||||||||||||||||
First
Financial Bank
|
643,891 | 17.96 | % | 286,771 | 8.00 | % | 358,463 | 10.00 | % | |||||||||||||||
Tier
1 capital to risk-weighted assets
|
||||||||||||||||||||||||
Consolidated
|
670,121 | 18.64 | % | 143,812 | 4.00 | % | N/A | N/A | ||||||||||||||||
First
Financial Bank
|
590,809 | 16.48 | % | 143,385 | 4.00 | % | 215,078 | 6.00 | % | |||||||||||||||
Tier
1 capital to average assets
|
||||||||||||||||||||||||
Consolidated
|
670,121 | 10.50 | % | 254,343 | 4.00 | % | N/A | N/A | ||||||||||||||||
First
Financial Bank
|
590,809 | 9.28 | % | 253,916 | 4.00 | % | 317,395 | 5.00 | % |
To Be Well
|
||||||||||||||||||||||||
Capitalized Under
|
||||||||||||||||||||||||
For Capital
|
Prompt Corrective
|
|||||||||||||||||||||||
Actual
|
Adequacy Purposes
|
Action Provisions
|
||||||||||||||||||||||
(Dollars in thousands)
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
||||||||||||||||||
DECEMBER
31, 2009
|
||||||||||||||||||||||||
Total
capital to risk-weighted assets
|
||||||||||||||||||||||||
Consolidated
|
678,024 | 17.37 | % | 312,285 | 8.00 | % | N/A | N/A | ||||||||||||||||
First
Financial Bank
|
596,898 | 15.33 | % | 311,566 | 8.00 | % | 389,458 | 10.00 | % | |||||||||||||||
Tier
1 capital to risk-weighted assets
|
||||||||||||||||||||||||
Consolidated
|
628,982 | 16.11 | % | 156,143 | 4.00 | % | N/A | N/A | ||||||||||||||||
First
Financial Bank
|
540,544 | 13.88 | % | 155,783 | 4.00 | % | 233,675 | 6.00 | % | |||||||||||||||
Tier
1 capital to average assets
|
||||||||||||||||||||||||
Consolidated
|
628,982 | 9.24 | % | 271,557 | 4.00 | % | N/A | N/A | ||||||||||||||||
First
Financial Bank
|
540,544 | 7.90 | % | 272,760 | 4.00 | % | 340,950 | 5.00 | % |
CRITICAL
ACCOUNTING POLICIES
First
Financial’s Consolidated Financial Statements are prepared based on the
application of accounting policies. These policies require the reliance on
estimates and assumptions. Changes in underlying factors, assumptions, or
estimates in any of these areas could have a material impact on First
Financial’s future financial condition and results of operations. In
management’s opinion, some of these areas have a more significant impact than
others on First Financial’s financial reporting. For First Financial, these
areas currently include accounting for the allowance for loan and lease losses
for uncovered and covered loans, FDIC indemnification asset, goodwill, pension
and income taxes.
44
Allowance for Loan and Lease Losses –
Uncovered Loans. First Financial maintains the allowance for loan
and lease losses at a level sufficient to absorb potential losses inherent in
the uncovered loan portfolio given the conditions at the time. Management
determines the adequacy of the allowance based on periodic evaluations of the
loan portfolio and other factors. These evaluations are inherently
subjective as they require material estimates, all of which may be susceptible
to significant change, including, among others:
•
|
Probability of
default,
|
•
|
Loss given
default,
|
•
|
Exposure at date of
default,
|
•
|
Amounts and timing of expected
future cash flows on impaired
loans,
|
•
|
Value of
collateral,
|
•
|
Historical loss exposure,
and
|
•
|
The effects of changes in
economic conditions that may not be reflected in historical
results.
|
To the
extent actual outcomes differ from management's estimates, additional provision
for credit losses may be required that would impact First Financial's operating
results.
Allowance for Loan and Lease Losses –
Covered Loans. First Financial maintains an allowance for loan and
lease losses on covered loans. For loans accounted for under FASB ASC Topic
310-30, expected cash flows are re-estimated periodically with any decline in
expected cash flows recorded as provision expense on a discounted basis during
the period. These cash flow evaluations are inherently subjective as they
require material estimates, all of which may be susceptible to significant
change. The related, estimated reimbursement on covered loan losses due from the
FDIC under loss sharing agreements is recorded as both FDIC loss sharing income
and an increase to the FDIC indemnification asset.
Covered Loans. Loans acquired
in FDIC-assisted transactions are covered under loss sharing agreements. Covered
loans were recorded at fair value at acquisition. Fair values for covered loans
were based on a discounted cash flow methodology that considered various factors
including the type of loan and related collateral, classification status, fixed
or variable interest rate, term of loan and whether or not the loan was
amortizing, and a discount rate reflecting the Company’s assessment of risk
inherent in the cash flow estimates. Covered loans were grouped together
according to similar characteristics and were treated in the aggregate when
applying various valuation techniques.
FDIC Indemnification Asset.
FDIC indemnification assets result from the loss share agreements in the
assisted transactions and are measured separately from the related covered
assets as they are not contractually embedded in the assets and are not
transferable with the assets should First Financial choose to dispose of them.
Fair value is estimated using projected cash flows related to the loss sharing
agreements based on the expected reimbursements for losses and the applicable
loss sharing percentages. These expected reimbursements do not include
reimbursable amounts related to future covered expenditures. These cash flows
are discounted to reflect the uncertainty of the timing and receipt of the loss
sharing reimbursement from the FDIC.
Goodwill. Goodwill
arising from business acquisitions represents the value attributable to
unidentifiable intangible elements in the business acquired. FASB ASC Topic 350,
Intangibles-Goodwill and Other, requires goodwill to be tested for impairment on
an annual basis and more frequently in certain circumstances. At least annually,
First Financial reviews goodwill for impairment using both income and asset
based approaches. The income-based approach utilizes a multiple of earnings
method in which First Financial's annualized earnings are compared to equity to
provide an implied book-value-to-earnings multiple. First Financial then
compares the implied multiple to current marketplace earnings multiples for
which banks are being traded. An implied multiple less than current marketplace
earnings multiples is an indication of possible goodwill impairment. The
asset-based approach uses the discounted cash flows of First Financial's assets
and liabilities, inclusive of goodwill, to determine an implied fair value. This
input is used to calculate the fair value of the company, including goodwill,
and is compared to the company's book value. An implied fair value that exceeds
the company's book value is an indication that goodwill is not impaired. If
First Financial's book value exceeds the implied fair value, an impairment loss
equal to the excess amount would be recognized. Based on First Financial's
analysis at year-end 2009, there have been no impairment charges
required.
Pension. First Financial
sponsors a non-contributory defined-benefit pension plan covering substantially
all employees. Accounting for the pension plan involves material estimates
regarding future plan obligations and investment returns on plan assets.
Significant assumptions used in the pension plan include the discount rate,
expected return on plan assets, and the rate of compensation increase. First
Financial determines the discount rate assumption using published Corporate Bond
Indices, projected cash flows of the pension plan, and comparisons to external
industry surveys for reasonableness. The expected long-term return on plan
assets is based on the composition of plan assets and a consensus of estimates
of expected future returns from similarly managed portfolios while the rate of
compensation increase
is compared to historical increases for plan participants. Changes in these
assumptions can have a material impact on the amount of First Financial's future
pension obligations, on the funded status of the plan and can impact First
Financial's operating results.
45
Income Taxes. First
Financial evaluates and assesses the relative risks and appropriate tax
treatment of transactions after considering statutes, regulations, judicial
precedent and other information and maintains tax accruals consistent with its
evaluation of these relative risks. Changes to the estimate of accrued taxes
occur periodically due to changes in tax rates, interpretations of tax laws, the
status of examinations being conducted by taxing authorities and changes to
statutory, judicial and regulatory guidance that impact the relative risks of
tax positions. These changes, when they occur, can affect deferred taxes and
accrued taxes as well as the current period's income tax expense and can be
material to First Financial's operating results.
ACCOUNTING
AND REGULATORY MATTERS
Note 2 to
the Consolidated Financial Statements discusses new accounting standards adopted
by First Financial during 2010 and the expected impact of accounting standards
recently issued but not yet required to be adopted. To the extent the
adoption of new accounting standards materially affects financial condition,
results of operations, or liquidity, the impacts are discussed in the applicable
section(s) of Management’s Discussion and Analysis and the Notes to the
Consolidated Financial Statements.
FORWARD-LOOKING
INFORMATION
Certain
statements contained in this report that are not statements of historical fact
constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act (the Act). In addition, certain
statements in future filings by First Financial with the SEC, in press releases,
and in oral and written statements made by or with the approval of First
Financial which are not statements of historical fact constitute forward-looking
statements within the meaning of the Act.
Examples
of forward-looking statements include, but are not limited to, projections of
revenues, income or loss, earnings or loss per share, the payment or non-payment
of dividends, capital structure and other financial items, statements of plans
and objectives of First Financial or its management or board of directors, and
statements of future economic performances and statements of assumptions
underlying such statements. Words such as “believes,” “anticipates,”
“intends,” and other similar expressions are intended to identify
forward-looking statements but are not the exclusive means of identifying such
statements.
Management’s
analysis contains forward-looking statements that are provided to assist in the
understanding of anticipated future financial performance. However, such
performance involves risk and uncertainties that may cause actual results to
differ materially. Factors that could cause actual results to differ from those
discussed in the forward-looking statements include, but are not limited
to:
|
·
|
management’s
ability to effectively execute its business
plan;
|
|
·
|
the
risk that the strength of the United States economy in general and the
strength of the local economies in which we conduct operations may
continue to deteriorate resulting in, among other things, a further
deterioration in credit quality or a reduced demand for credit, including
the resultant effect on our loan portfolio, allowance for loan and lease
losses and overall financial
performance;
|
|
·
|
the
ability of financial institutions to access sources of liquidity at a
reasonable cost;
|
|
·
|
the
impact of recent upheaval in the financial markets and the effectiveness
of domestic and international governmental actions taken in response, such
as the U.S. Treasury’s TARP and the FDIC’s Temporary Liquidity Guarantee
Program, and the effect of such governmental actions on us, our
competitors and counterparties, financial markets generally and
availability of credit specifically, and the U.S. and international
economies, including potentially higher FDIC premiums arising from
increased payments from FDIC insurance funds as a result of depository
institution failures;
|
|
·
|
the
effects of and changes in policies and laws of regulatory agencies
(notably the recently enacted Dodd-Frank Wall Street Reform and Consumer
Protection Act);
|
|
·
|
inflation
and possible changes in interest
rates;
|
|
·
|
our
ability to keep up with technological
changes;
|
|
·
|
mergers
and acquisitions, including costs or difficulties related to the
integration of acquired companies, the wind-down of non-strategic
operations and the duration of those wind-down
activities;
|
|
·
|
the
risk that exploring merger and acquisition opportunities may detract from
management’s time and ability to successfully manage our
company;
|
|
·
|
expected
cost savings in connection with the consolidation of recent acquisitions
may not be fully realized or realized within the expected time frames, and
deposit attrition, customer loss and revenue loss following completed
acquisitions may be greater than
expected;
|
|
·
|
our
ability to increase market share and control
expenses;
|
46
|
·
|
the
effect of changes in accounting policies and practices, as may be adopted
by the regulatory agencies as well as the Financial Accounting Standards
Board and the SEC; adverse changes in the securities and debt
markets;
|
|
·
|
our
success in recruiting and retaining the necessary personnel to support
business growth and expansion and maintain sufficient expertise to support
increasingly complex products and
services;
|
|
·
|
monetary
and fiscal policies of the Board of Governors of the Federal Reserve
System (Federal Reserve) and the U.S. government and other governmental
initiatives affecting the financial services
industry;
|
|
·
|
our
ability to manage loan delinquency and charge-off rates and changes in
estimation of the adequacy of the allowance for loan losses;
and
|
|
·
|
the
costs and effects of litigation and of unexpected or adverse outcomes in
such litigation.
|
In
addition, please refer to “Item 1A. Risk Factors” and our Annual Report on Form
10-K for the year ended December 31, 2009, as well as our other filings with the
SEC, for a more detailed discussion of these risks and uncertainties and other
factors. Such forward-looking statements are meaningful only on the date
when such statements are made, and First Financial undertakes no obligation to
update any forward-looking statement to reflect events or circumstances after
the date on which such a statement is made to reflect the occurrence of
unanticipated events.
47
Market
risk is the risk of loss arising from adverse changes in the fair value of
financial instruments due to changes in interest rates, foreign exchange rates,
and equity prices. The primary source of market risk for First Financial
is interest rate risk. Interest rate risk arises in the normal course of
business to the extent that there is a divergence between the amount of First
Financial’s interest-earning assets and the amount of interest-bearing
liabilities that are prepaid/withdrawn, re-price, or mature in specified
periods. First Financial seeks to achieve consistent growth in net
interest income and capital while managing volatility arising from shifts in
market interest rates. The Asset and Liability Committee (ALCO) oversees
market risk management, establishing risk measures, limits, and policy
guidelines for managing the amount of interest-rate risk and its effect on net
interest income and capital.
Interest-rate
risk for First Financial’s Consolidated Balance Sheets consists of repricing,
option, and basis risks. Repricing risk results from differences in the
maturity, or repricing, of interest-bearing assets and liabilities. Option
risk in financial instruments arises from embedded options such as loan
prepayments, early withdrawal of Certificates of Deposits, and calls on
investments and debt instruments that are primarily driven by third party or
client behavior. Basis risk refers to the potential for changes in the
underlying relationship between market rates or indices, which subsequently
result in a narrowing of the net interest margin. Basis risk is also
present in managed rate liabilities, such as interest-bearing checking accounts
and savings accounts, where historical pricing relationships to market rates may
change due to the level or directional change in market interest rates, or
competitive pressures.
The
interest rate risk position is measured and monitored using income simulation
models and economic value of equity sensitivity analysis that capture both
short-term and long-term interest rate risk exposure. Income simulation
involves forecasting net interest income under a variety of interest rate
scenarios including instantaneous shocks.
Presented
below is the estimated impact on First Financial’s net interest income as of
September 30, 2010, assuming immediate, parallel shifts in interest
rates:
-200 basis points
|
-100 basis points
|
+100 basis points
|
+200 basis points
|
|||||||||||||
September
30, 2010
|
(9.14 | )% | (2.75 | )% | 4.89 | % | 6.93 | % |
Modeling
the sensitivity of net interest income and the economic value of equity to
changes in market interest rates is highly dependent on numerous assumptions
incorporated into the modeling process. These assumptions are periodically
reviewed in the context of balance sheet changes, product offerings, external
economic factors and anticipated client behavior. Due to the current low
interest rate environment, funding rates on deposit and wholesale funding
instruments were not reduced below 0.0% in the down 200 and down 100 basis
points scenarios. The analysis provides a framework as to what our overall
sensitivity is as of our most recent reported position. Management
strategies may impact future reporting periods, as our actual results may differ
from simulated results due to the timing, magnitude, and frequency of interest
rate changes, the difference between actual experience, and the characteristics
assumed, as well as changes in market conditions. Market based prepayment
speeds are factored into the analysis for loan and securities portfolios.
Rate sensitivity for transactional deposit accounts is modeled based on both
historical experience and external industry studies.
First
Financial uses economic value of equity sensitivity analysis to understand the
impact of changes in interest rates on long-term cash flows, income, and
capital. Economic value of equity is based on discounting the cash flows
for all balance sheet instruments under different interest-rate scenarios.
Deposit premiums are based on external industry studies and utilizing historical
experience. Presented below is the change in First Financial’s economic
value of equity position as of September 30, 2010, assuming immediate, parallel
shifts in interest rates and excluding the impact of the Irwin acquisition as
noted above:
-200 basis points
|
-100 basis points
|
+100 basis points
|
+200 basis points
|
|||||||||||||
September
30, 2010
|
(18.00 | )% | (8.21 | )% | 5.43 | % | 7.25 | % |
First
Financial, utilizing interest rates primarily based upon external industry
studies, models additional scenarios covering the next twelve months.
Based on these scenarios, First Financial has a relatively neutral rate risk
position of a positive 1.59% when compared to a base-case scenario with interest
rates held constant. Given its outlook for future interest rates, First
Financial is managing its balance sheet with a bias toward asset
sensitivity.
See also
“Item 2-Management’s Discussion and Analysis of Financial Condition and Results
of Operations—Net Interest Income.”
48
Disclosure Controls and
Procedures
Management
is responsible for establishing and maintaining effective disclosure controls
and procedures, as defined under Rule 13a-15 of the Securities Exchange Act
of 1934, that are designed to cause the material information required to be
disclosed by First Financial in the reports it files or submits under the
Securities Exchange Act of 1934 to be recorded, processed, summarized, and
reported to the extent applicable within the time periods required by the
Securities and Exchange Commission’s rules and forms. In designing and
evaluating the disclosure controls and procedures, management recognized that a
control system, no matter how well designed and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within a company have been
detected.
As of the
end of the period covered by this report, First Financial performed an
evaluation under the supervision and with the participation of management,
including the Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of its disclosure controls and
procedures pursuant to Rule 13a-15 of the Securities Exchange Act of
1934. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the disclosure controls and procedures were
effective at the reasonable assurance level.
Changes in Internal Control over
Financial Reporting
No
changes were made to the Corporation’s internal control over financial reporting
(as defined in Rule 13a-15 under the Securities Exchange Act of 1934)
during the last fiscal quarter that materially affected, or are reasonably
likely to materially affect, the Corporation’s internal control over financial
reporting.
49
We
make the following disclosure in connection with the acquisition of certain
assets and assumption of certain liabilities of Irwin Union Bank and Trust
Company (Irwin Union Bank) by First Financial Bank from the FDIC as receiver for
Irwin Union Bank. The acquisition was completed pursuant to a Purchase and
Assumption Agreement by and among the FDIC, the FDIC as receiver, and First
Financial Bank dated September 18, 2009, as amended (the “Purchase
Agreement”). Some of these claims involve Irwin Union Bank prior to it
being placed in receivership and are thus the responsibility of the FDIC as
receiver pursuant to the Purchase Agreement. Furthermore, with respect to
the claims set forth below, First Financial Bank has or expects to submit
requests for indemnification to the FDIC as receiver pursuant to Section 12 of
the Purchase Agreement. Pursuant to the Purchase Agreement, the FDIC as
receiver has agreed to indemnify and hold harmless First Financial Bank for
certain claims against Irwin Union Bank and the former subsidiaries of Irwin
Union Bank for actions taken on or prior to September 18, 2009. First
Financial believes the matters discussed below qualify for
indemnification. Furthermore, discussions are ongoing with the FDIC
regarding indemnification with respect to certain actions taken by Irwin and its
subsidiaries in connection with the purchase of certain assets and assumption of
certain liabilities of Irwin by First Financial Bank from the FDIC as
receiver.
Litigation in Connection with Loans
Purchased by Former Irwin Subsidiaries from Freedom Mortgage Corporation
On
January 22, 2008, Irwin Union Bank and Irwin Home Equity Corporation (IHE),
filed suit against Freedom Mortgage Corporation (Freedom) in the United States
District Court for the Northern District of California, Oakland Division, Irwin Union Bank, et al. v.
Freedom Mortgage
Corp. (the “First California Action”), for breach of contract and
negligence arising out of Freedom’s refusal to repurchase certain mortgage loans
that Irwin Union Bank and IHE had purchased from Freedom. Irwin Union Bank and
IHE are seeking damages in excess of $8 million from Freedom.
In
response, in March 2008, Freedom moved to compel arbitration of the claims
asserted in the First California Action and filed suit against Irwin Mortgage
Corporation (Irwin Mortgage) and its former indirect parent, Irwin Financial
Corporation (IFC), (now in Chapter 7 bankruptcy), in the United States District
Court for the District of Delaware, Freedom Mortgage Corporation v.
Irwin Financial Corporation et al., (the “Delaware Action”). Freedom
alleged that the repurchase demands in the First California Action represent
various breaches of an Asset Purchase Agreement dated as of August 7, 2007,
which was entered into by IFC, Irwin Mortgage and Freedom in connection with the
sale to Freedom of the majority of Irwin Mortgage’s loan origination assets. In
the Delaware Action, Freedom sought damages in excess of $8 million and to
compel IFC to order its (now former) subsidiaries in the First California Action
to dismiss their claims.
In April
2008, the California district court stayed the First California Action pending
completion of arbitration. The arbitration remains pending. The California
district judge previously stated on the record that she would not hear Freedom’s
claims in the Delaware Action until the arbitration is completed.
On March
23, 2009, the Delaware district court granted Irwin’s motion to transfer the
Delaware Action to the Northern District of California, and ordered that the
Delaware case be closed. The Delaware Action was transferred on March 30,
2009 and officially filed in the United States District Court for the Northern
District of California, San Francisco Division, on March 31, 2009, Freedom Mortgage Corporation v.
Irwin Financial Corporation and Irwin Mortgage Corporation (the “Second
California Action”).
As a
result of the FDIC receivership of Irwin Union Bank, the bankruptcy of IFC, and
the perceived desire of the parties to consider settlement options, several
stipulations were entered into postponing various case management dates
originally ordered by the court. No reserves have been established for
this litigation.
First
Financial Bank continues to evaluate this matter, has engaged in discussions
with Freedom and FDIC counsel, and expects to make a claim for indemnification
with respect to the subsidiaries.
50
EverBank v. Irwin Mortgage
Corporation and Irwin Union Bank and Trust Company-Demand for
Arbitration
On March
25, 2009, Irwin Mortgage and Irwin Union Bank received an arbitration demand
(Demand) from EverBank for administration by the American Arbitration
Association (AAA), claiming damages for alleged breach of an ”Agreement for
Purchase and Sale of Servicing” (the “EverBank Agreement”) under which Irwin
Mortgage is alleged to have sold the servicing of certain mortgage loans to
EverBank. The Demand also alleges that Irwin Union Bank is the guarantor of
Irwin Mortgage’s obligations under the EverBank Agreement, and that the EverBank
Agreement was amended November 1, 2006 to include additional loans. According to
the Demand, EverBank alleges that Irwin Mortgage and Irwin Union Bank breached
certain warranties and covenants under the EverBank Agreement by failing to
repurchase certain loans and failing to indemnify EverBank after EverBank had
demanded repurchase. The Demand sets forth several claims based on legal
theories of breach of warranty, breach of the covenant of good faith and fair
dealing, promissory estoppel, specific performance and unjust enrichment, and
requests damages, penalties, interest, attorneys’ fees, costs, and other
appropriate relief to be granted by the arbitration panel. The Demand also
states that, as a result of Irwin Mortgage’s alleged failure to repurchase
loans, EverBank has allegedly incurred and continues to incur damages that it
claims could exceed $10,000,000. In April 2009, Irwin Mortgage and Irwin
Union Bank filed an answer and counter-claims to the Demand. Discussions
to resolve this matter led to the issuance of a stay of the arbitration on
February 16, 2010. A reserve has been established that is deemed
appropriate for resolution of all open repurchase issues with
EverBank.
On
October 23, 2009, First Financial requested indemnification from the FDIC for
this matter under the Agreement and continues to explore possible resolution of
the litigation.
Additional
Repurchase Demands
Irwin
Mortgage has recorded a liability for losses from the potential repurchases by
Irwin Mortgage of loans it sold that allegedly contained origination errors.
Such alleged errors included inaccurate appraisals, errors in
underwriting, and ineligibility for inclusion in loan programs of
government-sponsored entities. In determining liability levels for
repurchases, we estimate the number of loans that may contain origination
errors, the year in which the loss is expected to occur, and the expected
severity of the loss upon occurrence applied to an average loan amount.
Inaccurate assumptions in setting this liability could result in changes in
future liabilities. A reserve has been established that is deemed
appropriate for resolution of verified repurchase issues.
In
addition, in August 2009, Irwin Mortgage received a request to repurchase
approximately 1,700 mobile home loans with an unpaid principal balance of
approximately $154 million. The request alleged that title was not
perfected with respect to these loans in accordance with contractual terms.
However, Irwin Mortgage believes the requesting party has failed to
provide sufficient evidence to support its claim. Irwin Mortgage disputed
the claim in September 2009. Additional unsubstantiated claims have been
received subsequent to the August 2009 requests of approximately $15
million. Based on the information available at the time of this filing,
there is insufficient evidence to warrant the recording of a reserve for these
claims.
We and
our subsidiaries are from time to time engaged in various matters of litigation,
including the matters described above, other assertions of improper or
fraudulent loan practices or lending violations, and other matters, and we have
a number of unresolved claims pending. In addition, as part of the ordinary
course of business, we and our subsidiaries are parties to litigation involving
claims to the ownership of funds in particular accounts, the collection of
delinquent accounts, challenges to security interests in collateral, and
foreclosure interests, that is incidental to our regular business activities.
While the ultimate liability with respect to these other litigation matters and
claims cannot be determined at this time, we believe that damages, if any, and
other amounts relating to pending matters are not likely to be material to our
consolidated financial position or results of operations, except as described
above. Reserves are established for these various matters of litigation, when
appropriate under FASB ASC Topic 450, Contingencies, based in part upon the
advice of legal counsel.
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Possible
Additional Risks
The risks listed here are not the
only risks we face. Additional risks that are not presently known, or that we
presently deem to be immaterial, also could have a material adverse effect on
our financial condition, results of operations, business, and prospects.
(See also “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations” for certain forward looking statements.)
Recent
Market, Legislative, and Regulatory Events
Difficult market conditions
have adversely affected our industry.
Dramatic
declines in the housing market over the past years, with falling home prices and
increasing foreclosures, unemployment and under-employment, have negatively
impacted the credit performance of real estate related loans and resulted in
significant write-downs of asset values by financial institutions. These
write-downs, initially of mortgage-backed securities (MBS) but spreading to
other securities and loans have caused many financial institutions to seek
additional capital, to reduce or eliminate dividends, to merge with larger and
stronger institutions and, in some cases, to fail. Reflecting concern about the
stability of the financial markets generally and the strength of counterparties,
many lenders and institutional investors have reduced or ceased providing
funding to borrowers, including to other financial institutions. This market
turmoil and tightening of credit have led to an increased level of commercial
and consumer delinquencies, lack of consumer confidence, increased market
volatility and widespread reduction of business activity generally. The
resulting economic pressure on consumers and lack of confidence in the financial
markets has adversely affected our business, financial condition and results of
operations. Market developments may affect consumer confidence levels and may
cause adverse changes in payment patterns, causing increases in delinquencies
and default rates, which may impact our charge-offs and provision for credit and
fraud losses. A worsening of these conditions would likely exacerbate the
adverse effects of these difficult market conditions on us and others in the
financial institutions industry.
Current levels of market
volatility are unprecedented.
The
capital and credit markets have been experiencing volatility and disruption for
more than 12 months. Recently, volatility and disruption have reached
unprecedented levels. In some cases, the markets have produced downward pressure
on stock prices and credit availability for certain issuers without regard to
those issuers’ underlying financial strength. If current levels of market
disruption and volatility continue or worsen, there can be no assurance that we
will not experience an adverse effect, which may be material, on our ability to
access capital and on our business, financial condition and results of
operations. Numerous facts and circumstances are considered when
evaluating the carrying value of our goodwill. One of those considerations is
our market capitalization, evaluated over a reasonable period of time, in
relation to the aggregate estimated fair value of the reporting units. While
this comparison provides some relative market information regarding the
estimated fair value of the reporting units, it is not determinative and needs
to be evaluated in the context of the current economic and political
environment. However, significant and/or sustained declines in First Financial’s
market capitalization, especially in relation to First Financial’s book value,
could be an indication of potential impairment of goodwill.
The soundness of other
financial institutions could adversely affect us.
Our
ability to engage in routine funding transactions could be adversely affected by
the actions and commercial soundness of other financial institutions. Financial
services institutions are interrelated as a result of trading, clearing,
counterparty, or other relationships. As a result, defaults by, or even rumors
or questions about, one or more financial services institutions, or the
financial services industry generally, have led to market-wide liquidity
problems and could lead to losses or defaults by us or by other institutions.
Many of these transactions expose us to credit risk in the event of default of
our counterparty or client. In addition, our credit risk may be exacerbated when
the collateral held by us cannot be realized upon or is liquidated at prices not
sufficient to recover the full amount of the financial instrument exposure due
us. There is no assurance that any such losses would not materially and
adversely affect our results of operations.
There can be no assurance
that enacted legislation or any proposed federal programs will stabilize the
U.S. financial system and such legislation and programs may adversely affect
us.
There has
been much legislative and regulatory action in response to the financial crises
affecting the banking system and financial markets and threats to investment
banks and other financial institutions. There can be no
assurance, however, as to the actual impact that the legislation and its
implementing regulations or any other governmental program will have on the
financial markets. The failure of the actions by the legislators, the regulatory
bodies or the U.S. government to stabilize the financial markets and a
continuation or worsening of current financial market conditions could
materially and adversely affect our business, financial condition, results of
operations, and access to credit or the trading price of our common
shares.
Contemplated
and proposed legislation, state and federal programs, and increased government
control or influence may adversely affect us by increasing the uncertainty in
our lending operations and expose us to increased losses, including legislation
that would allow bankruptcy courts to permit modifications to mortgage loans on
a debtor’s primary residence, moratoriums on a mortgagor’s right to foreclose on
property, and requirements that fees be paid to register other real estate owned
property. Statutes and regulations may be altered that may potentially increase
our costs to service and underwrite mortgage loans. Additionally, federal
intervention and operation of formerly private institutions may adversely affect
our rights under contracts with such institutions and the way in which we
conduct business in certain markets.
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Financial reforms and
related regulations may affect our business activities, financial position and
profitability.
On
July 21, 2010, President Obama signed into law the Financial Reform Act.
The Financial Reform Act will institute far-reaching reforms, including the
creation of an independent Bureau of Consumer Financial Protection inside the
Federal Reserve Board and new federal government power to wind down large,
failing financial institutions.
The
changes resulting from the Financial Reform Act, as well as the regulations
promulgated by federal agencies, may impact the profitability of our business
activities, require changes to certain of its business practices, impose upon us
more stringent capital, liquidity and leverage ratio requirements or otherwise
adversely affect our business. These changes may also require us to invest
significant management attention and resources to evaluate and make necessary
changes.
Further Treasury “Stress
Tests” and Other Actions may Adversely Affect Bank Operations and Value of
Shares.
On
February 10, 2009, the Treasury outlined a plan to restore stability to the
financial system. This announcement included reference to a plan by the Treasury
to conduct “stress tests” of certain banks which received funds under the CPP
and similar Treasury programs. The methods and procedures to be used by the
Treasury in conducting its “stress tests,” how these methods and procedures will
be applied, and the significance or consequence of such tests presently are not
known. Any of these or their consequences could adversely affect the banking
industry in general, and the value of First Financial shares, among other
things.
The fiscal and monetary
policies of the federal government and its agencies could have a material
adverse effect on our earnings.
The Board
of Governors of the Federal Reserve System regulates the supply of money and
credit in the United States. Its policies determine in large part the cost of
funds for lending and investing and the return earned on those loans and
investments, both of which affect the net interest margin. The resultant changes
in interest rates can also materially decrease the value of certain financial
assets we hold, such as debt securities. Its policies can also adversely affect
borrowers, potentially increasing the risk that they may fail to repay their
loans. Changes in Federal Reserve Board policies are beyond our control and
difficult to predict; consequently, the impact of these changes on our
activities and results of operations is difficult to predict.
Risks
Relating to Our Business
Credit
Risks
When we loan money, commit
to loan money or enter into a letter of credit or other contract with a
counterparty, we incur credit risk, or the risk of losses if our borrowers do
not repay their loans or our counterparties fail to perform according to the
terms of their contracts.
Large,
individual loans, letters of credit and contracts magnify such credit
risks. As lending is one of our primary business activities, the credit
quality of our portfolio can have a significant impact on our earnings. We
estimate and establish reserves for credit risks and credit losses inherent in
our total loan portfolio. This process, which is critical to our financial
results and condition, requires difficult, subjective and complex judgments,
including forecasts of economic conditions and how these economic predictions
might impair the ability of our borrowers to repay their loans. As is the case
with any such assessments, there is always the chance that we will fail to
identify the proper factors or that we will fail to accurately estimate the
impacts of factors that we identify. In addition, large loans, letters of
credit and contracts with individual counterparties in our portfolio magnify the
credit risk that we face, as the impact of large borrowers and counterparties
not repaying their loans or performing according to the terms of their contracts
has a disproportionately significant impact on our credit losses and
reserves.
Weakness in the economy and
in the real estate market, including specific weakness within our geographic
footprint, has adversely affected us and may continue to adversely affect
us.
If the
strength of the U.S. economy in general and the strength of the local economies
in which we conduct operations decline, or continue to decline, this could
result in, among other things, a deterioration of credit quality or a reduced
demand for credit, including a resultant effect on our loan portfolio and
allowance for loan and lease losses. These factors could result in higher
delinquencies and greater charge-offs in future periods, which would materially
adversely affect our financial condition and results of operations.
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Weakness in the real estate
market, including the secondary residential mortgage loan markets, could
adversely affect us.
Significant
ongoing disruptions in the secondary market for residential mortgage loans have
limited the market for and liquidity of many mortgage loans. The effects of
ongoing mortgage market challenges, combined with the ongoing correction in
residential real estate market prices and reduced levels of home sales, could
result in further price reductions in single family home values, adversely
affecting the value of collateral securing mortgage loans that we hold, mortgage
loan originations and profits on sales of mortgage loans. These trends could
continue and such conditions could result in higher losses, write downs and
impairment charges in our mortgage and other lines of business. Continued
declines in real estate values, home sale volumes, financial stress on borrowers
as a result of job losses, interest rate resets on adjustable rate mortgage
loans or other factors could have further adverse effects on borrowers that
could result in higher delinquencies and greater charge-offs in future periods,
which adversely affect our financial condition or results of operations.
Additionally, decreases in real estate values might adversely affect the
creditworthiness of state and local governments, and this might result in
decreased profitability or credit losses from loans made to such governments. A
decline in home values or overall economic weakness could also have an adverse
impact upon the value of real estate or other assets which we own upon
foreclosing a loan and our ability to realize value on such assets.
Real estate volatility and
future changes in our disposition strategies could result in net proceeds that
differ significantly from our OREO fair value appraisals.
Our other
real estate owned (“OREO”) portfolio consists of properties that we obtained
through foreclosure or through an in-substance foreclosure in satisfaction of
loans. Properties in our OREO portfolio are recorded at the lower of the
recorded investment in the loans for which the properties previously served as
collateral or the “fair value”, which represents the estimated sales price of
the properties on the date acquired less estimated selling costs. Generally, in
determining “fair value” an orderly disposition of the property is assumed,
except where a different disposition strategy is expected. Significant judgment
is required in estimating the fair value of OREO property, and the period of
time within which such estimates can be considered current is significantly
shortened during periods of market volatility, as is currently being experienced
and as experienced during 2008 and 2009.
In
response to market conditions and other economic factors, we may utilize
alternative sale strategies other than orderly disposition as part of our OREO
disposition strategy, such as immediate liquidation sales. In this event, as a
result of the significant judgments required in estimating fair value and the
variables involved in different methods of disposition, the net proceeds
realized from such sales transactions could differ significantly from
appraisals, comparable sales, and other estimates used to determine the fair
value of our OREO properties.
The information that we use
in managing our credit risk may be inaccurate or incomplete, which may result in
an increased risk of default and otherwise have an adverse effect on our
business, results of operations and financial condition.
In
deciding whether to extend credit or enter into other transactions with clients
and counterparties, we may rely on information furnished by or on behalf of
clients and counterparties, including financial statements and other financial
information. We also may rely on representations of clients and counterparties
as to the accuracy and completeness of that information and, with respect to
financial statements, on reports of independent auditors. Although we regularly
review our credit exposure to specific clients and counterparties and to
specific industries that we believe may present credit concerns, default risk
may arise from events or circumstances that are difficult to detect, such as
fraud. Moreover, such circumstances, including fraud, may become more likely to
occur and/or be detected in periods of general economic uncertainty, such as at
the present time. We may also fail to receive full information with respect to
the risks of a counterparty. In addition, in cases where we have extended
credit against collateral, we may find that we are undersecured, for example, as
a result of sudden declines in market values that reduce the value of collateral
or due to fraud with respect to such collateral. If such events or circumstances
were to occur, it could result in a potential loss of revenue and have an
adverse effect on our business, results of operations and financial
condition.
Recently declining values of
real estate, increases in unemployment, and the related effects on local
economies may increase our credit losses, which would negatively affect our
financial results.
We offer
a variety of secured loans, including commercial lines of credit, commercial
term loans, real estate, construction, home equity, consumer and other loans.
Many of our loans are secured by real estate (both residential and commercial)
in our market area. A major change in the real estate market, such as
deterioration in the value of this collateral, or in the local or national
economy, could adversely affect our customer’s ability to pay these loans, which
in turn could adversely impact us. Additionally, increases in unemployment also
may adversely affect the ability of certain clients to pay loans and the
financial results of commercial clients in localities with higher unemployment,
which may result in loan defaults and foreclosures and which may impair the
value of our collateral. Risk of loan defaults and foreclosures are unavoidable
in the banking industry, and we try to limit our exposure to this risk by
monitoring our extensions of credit carefully. We cannot fully eliminate credit
risk, and as a result credit losses may increase in the future.
Deteriorating credit
quality, particularly in real estate loans, has adversely impacted us and may
continue to adversely impact us.
Late in
2008 we began to experience a downturn in the overall credit performance of our
loan portfolio, as well as acceleration in the deterioration of general economic
conditions. This deterioration, including a significant increase in national and
regional unemployment levels and decreased sources of liquidity are the primary
drivers of the increased stress being placed on most borrowers and is negatively
impacting their ability to repay. These conditions resulted in an increase in
our loan loss reserves.
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We expect
credit quality to remain challenging and could continue to deteriorate for much
of 2010 and into 2011, notably in commercial real estate. Continued
deterioration in the quality of our credit portfolio could significantly
increase nonperforming loans, require additional increases in loan loss
reserves, elevate charge-off levels and have a material adverse effect on our
capital, financial condition, and results of operations. Furthermore, given the
size of our loan portfolio, it is possible that a deterioration in the credit
quality of one or two of our largest credits could have a material adverse
effect on our capital, financial condition, and results of operations. Because
we have substantially fewer nonperforming assets than many of our peers, the
credit quality of our loan portfolio in recent quarters has and may continue to
deteriorate at a faster rate than many of our peers.
The results of the internal
stress test may not accurately predict the impact on our company if the
condition of the economy were to continue to deteriorate.
During
2009 we conducted a number of internal stress tests. These stress tests were
based on the tests that were administered to the nation’s 19 largest banks by
the Treasury in connection with its Supervisory Capital Assessment Program.
Under the stress tests, we applied the Treasury’s assumptions to estimate our
credit losses, resources available to absorb those losses and any necessary
additions to capital that would be required under the “more adverse” stress test
scenario.
While we
believe we have appropriately applied the Treasury’s assumptions in performing
our internal stress tests, we can not assure you that the results of this test
are comparable to the results of stress tests performed and publicly released by
the Treasury or that the results of our stress test would be the same if it had
been performed by the Treasury. Moreover, the results of the stress tests may
not accurately reflect the impact on our company if the economy does not improve
or continues to deteriorate. Any continued deterioration of the economy could
result in credit losses significantly higher, with a corresponding impact on our
resources and capital requirements, than those predicted by our internal stress
tests.
Our allowance for loan
losses may prove to be insufficient to absorb losses in our loan
portfolio.
Like all
financial institutions, we maintain an allowance for loan losses to provide for
loans in our portfolio that may not be repaid in their entirety. We believe that
our allowance for loan losses is maintained at a level adequate to absorb
probable losses inherent in our loan portfolio as of the corresponding balance
sheet date. However, our allowance for loan losses may not be sufficient to
cover actual loan losses, and future provisions for loan losses could materially
and adversely affect our operating results. We have seen a significant increase
in the level of potential problem loans and other loans with higher than normal
risk. We expect to receive more frequent requests from borrowers to modify
loans. The related accounting measurements related to impairment and the loan
loss allowance require significant estimates which are subject to uncertainty
and changes relating to new information and changing circumstances. Our
estimates of the risk of loss and amount of loss on any loan are complicated by
the significant uncertainties surrounding our borrowers’ abilities to
successfully execute their business models through changing economic
environments, competitive challenges and other factors. Because of the degree of
uncertainty and susceptibility of these factors to change, our actual losses may
vary from our current estimates.
State and
federal regulators, as an integral part of their examination process,
periodically review our allowance for loan losses and may require us to increase
our allowance for loan losses by recognizing additional provisions for loan
losses charged to expense, or to decrease our allowance for loan losses by
recognizing loan charge-offs, net of recoveries. Any such additional provisions
for loan losses or charge-offs, as required by these regulatory agencies, could
have a material adverse effect on our financial condition and results of
operations.
We expect
fluctuations in our loan loss provisions due to the uncertain economic
conditions.
Operating
Risks
The introduction,
implementation, withdrawal, success and timing of business initiatives and
strategies, including, but not limited to, the opening of new banking centers or
entering into new product lines, may be less successful or may be different than
anticipated, which could adversely affect our business.
First
Financial makes certain projections and develops plans and strategies for its
banking and financial products. If we do not accurately determine demand for our
banking and financial products, it could result in us incurring significant
expenses without the anticipated increases in revenue, which could result in a
material adverse effect on its business.
Changes in market interest
rates or capital markets could adversely affect our revenue and expense, the
value of assets and obligations, and the availability and cost of capital or
liquidity.
Given our
business mix, and the fact that most of the assets and liabilities are financial
in nature, we tend to be sensitive to market interest rate movements and the
performance of the financial markets. In addition to the impact of the general
economy, changes in interest rates or in valuations in the debt or equity
markets could directly impact us in one or more of the following
ways:
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The
yield on earning assets and rates paid on interest bearing liabilities may
change in disproportionate ways;
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The
value of certain balance sheet and off-balance sheet financial instruments
or the value of equity investments that we hold could
decline;
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The
value of assets for which we provide processing services could decline;
or
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To
the extent we access capital markets to raise funds to support our
business; such changes could affect the cost of such funds or the ability
to raise such funds.
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We may be required to
repurchase mortgage loans or indemnify mortgage loan purchasers as a result of
breaches of representations and warranties, borrower fraud, or certain borrower
defaults, which could harm our liquidity, results of operations, and financial
condition.
When we
sell mortgage loans, whether as whole loans or pursuant to a securitization, we
are required to make customary representations and warranties to the purchaser
about the mortgage loans and the manner in which they were originated. Our whole
loan sale agreements require us to repurchase or substitute mortgage loans in
the event we breach any of these representations or warranties. In addition, we
may be required to repurchase mortgage loans as a result of borrower fraud.
Likewise, we are required to repurchase or substitute mortgage loans if we
breach a representation or warranty in connection with our securitizations.
While we have taken steps to enhance our underwriting policies and procedures,
there can be no assurance that these steps will be effective or reduce risk
associated with loans sold in the past. If the level of repurchase and indemnity
activity becomes material, our liquidity, results of operations and financial
condition will be adversely affected.
Clients could pursue
alternatives to bank deposits, causing us to lose a relatively inexpensive
source of funding.
Checking
and savings account balances and other forms of client deposits could decrease
if clients perceive alternative investments as providing superior expected
returns. When clients move money out of bank deposits in favor of alternative
investments, we can lose a relatively inexpensive source of funds, increasing
our funding costs.
Consumers may decide not to
use banks to complete their financial transactions, which could affect net
income.
Technology
and other changes now allow parties to complete financial transactions without
banks. For example, consumers can pay bills and transfer funds directly without
banks. This process could result in the loss of fee income, as well as the loss
of client deposits and the income generated from those deposits.
Our asset management
business subjects us to a variety of risks.
At
September 30, 2010, we had $2.2 billion in assets under management. A
sharp decline in the stock market can negatively impact the amount of assets
under management and thus subject our earnings to a broader variety of risks and
uncertainties.
Negative public opinion
could damage our reputation and adversely impact business and
revenues.
As a
financial institution, our earnings and capital are subject to risks associated
with negative public opinion. Negative public opinion could result from our
actual or alleged conduct in any number of activities, including lending
practices, the failure of any product or service sold by us to meet our clients’
expectations or applicable regulatory requirements, corporate governance and
acquisitions, or from actions taken by government regulators and community
organizations in response to those activities. Negative public opinion can
adversely affect our ability to keep and attract and/or retain clients and can
expose us to litigation and regulatory action. Actual or alleged conduct by one
of our businesses can result in negative public opinion about our other
businesses. Negative public opinion could also affect our ability to borrow
funds in the unsecured wholesale debt markets.
We rely on other companies
to provide key components of our business infrastructure.
Third
parties provide key components of our business infrastructure such as banking
services, processing, and Internet connections and network access. Any
disruption in such services provided by these third parties or any failure of
these third parties to handle current or higher volumes of use could adversely
affect our ability to deliver products and services to clients and otherwise to
conduct business. Technological or financial difficulties of a third party
service provider could adversely affect our business to the extent those
difficulties result in the interruption or discontinuation of services provided
by that party. We may not be insured against all types of losses as a result of
third party failures and our insurance coverage may be inadequate to cover all
losses resulting from system failures or other disruptions. Failures in our
business infrastructure could interrupt the operations or increase the costs of
doing business.
We rely on our systems,
employees, and certain counterparties, and certain failures could materially
adversely affect our operations.
We are
exposed to many types of operational risk, including the risk of fraud by
employees and outsiders, clerical and record-keeping errors, and
computer/telecommunications systems malfunctions. Our businesses are dependent
on our ability to process a large number of increasingly complex transactions.
If any of our financial, accounting, or other data processing systems fail or
have other significant shortcomings, we could be materially adversely affected.
We are similarly dependent on our employees. We could be materially adversely
affected if one of our employees causes a significant operational break-down or
failure, either as a result of human error or where an individual purposefully
sabotages or fraudulently manipulates our operations or systems. Third parties
with which we do business could also be sources of operational risk to us,
including relating to break-downs or failures of such parties’ own systems or
employees. Any of these occurrences could result in our diminished ability to
operate one or more of our businesses, potential liability to clients,
reputational damage and regulatory intervention, which could materially
adversely affect us. We may also be subject to disruptions of our operating
systems arising from events that are wholly or partially beyond our control,
which may include, for example, computer viruses or electrical or
telecommunications outages or natural disasters, or events arising from local or
regional politics, including terrorist acts. Such disruptions may give rise to
losses in service to clients and loss or liability to us. In addition there is
the risk that our controls and procedures as well as business continuity and
data security systems prove to be inadequate. Any such failure could affect our
operations and could materially adversely affect our results of operations by
requiring us to expend significant resources to correct the defect, as well as
by exposing us to litigation or losses not covered by
insurance.
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We depend on the accuracy
and completeness of information about clients and
counterparties.
In
deciding whether to extend credit or enter into other transactions with clients
and counterparties, we may rely on information furnished by or on behalf of
clients and counterparties, including financial statements and other financial
information. We also may rely on representations of clients and counterparties
as to the accuracy and completeness of that information and, with respect to
financial statements, on reports of independent auditors.
Industry
Risks
Regulation by federal and
state agencies could adversely affect the business, revenue, and profit
margins.
We are
heavily regulated by federal and state agencies. This regulation is to protect
depositors, the federal deposit insurance fund and the banking system as a
whole. Congress and state legislatures and federal and state regulatory agencies
continually review banking laws, regulations, and policies for possible changes.
Changes to statutes, regulations, or regulatory policies, including
interpretation or implementation of statutes, regulations, or policies, could
affect us adversely, including limiting the types of financial services and
products we may offer and/or increasing the ability of non-banks to offer
competing financial services and products. Also, if we do not comply with laws,
regulations, or policies, we could receive regulatory sanctions and damage to
our reputation.
Competition in the financial
services industry is intense and could result in losing business or reducing
margins.
We
operate in a highly competitive industry that could become even more competitive
as a result of legislative, regulatory and technological changes, and continued
consolidation. We face aggressive competition from other domestic and foreign
lending institutions and from numerous other providers of financial services.
The ability of non-banking financial institutions to provide services previously
limited to commercial banks has intensified competition. Because non-banking
financial institutions are not subject to the same regulatory restrictions as
banks and bank holding companies, they can often operate with greater
flexibility and lower cost structures. Securities firms and insurance companies
that elect to become financial holding companies may acquire banks and other
financial institutions. This may significantly change the competitive
environment in which we conduct business. Some of our competitors have greater
financial resources and/or face fewer regulatory constraints. As a result of
these various sources of competition, we could lose business to competitors or
be forced to price products and services on less advantageous terms to retain or
attract clients, either of which would adversely affect our
profitability.
Future legislation could
harm our competitive position.
Federal,
state, and local legislatures increasingly have been considering proposals to
substantially change the financial institution regulatory system and to expand
or contract the powers of banking institutions and bank holding companies.
Various legislative bodies have also recently been considering altering the
existing framework governing creditors’ rights, including legislation that would
result in or allow loan modifications of various sorts. Such legislation may
change banking statutes and the operating environment in substantial and
unpredictable ways. If enacted, such legislation could increase or decrease the
cost of doing business, limit or expand permissible activities, or affect the
competitive balance among banks, savings associations, credit unions, and other
financial institutions. We cannot predict whether new legislation will be
enacted and, if enacted, the effect that it, or any regulations, would have on
our activities, financial condition, or results of operations.
Maintaining or increasing
market share depends on market acceptance and regulatory approval of new
products and services.
Our
success depends, in part, on the ability to adapt products and services to
evolving industry standards. There is increasing pressure to provide products
and services at lower prices. This can reduce net interest income and
noninterest income from fee-based products and services. In addition, the
widespread adoption of new technologies could require us to make substantial
capital expenditures to modify or adapt existing products and services or
develop new products and services. We may not be successful in introducing new
products and services in response to industry trends or development in
technology or those new products may not achieve market acceptance. As a result,
we could lose business, be forced to price products and services on less
advantageous terms to retain or attract clients, or be subject to cost
increases.
Company
Risks
We may not pay dividends on
your common shares.
Holders
of our common shares are only entitled to receive such dividends as our Board of
Directors may declare out of funds legally available for such payments. Although
we have historically declared cash dividends on our common shares, we are not
required to do so and may reduce or eliminate our common shares dividend in the
future. This could adversely affect the market price of our common shares.
Also, our ability to increase our dividend or to make other distributions was
restricted due to our participation in the CPP, which limited (without the
consent of the Treasury) our ability
to increase our dividend or to repurchase our common shares for so long as any
preferred securities issued under such program remain outstanding.
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There may be future sales or
other dilution of our equity, which may adversely affect the market price of our
common shares.
Generally,
we are not restricted from issuing additional common shares, including any
securities that are convertible into or exchangeable for, or that represent the
right to receive, common shares. We are currently authorized to issue up to 160
million common shares, of which 58,057,934 shares are outstanding. Our board of
directors has authority, without action or vote of the shareholders, to issue
all or part of the authorized but unissued shares. These authorized but unissued
shares could be issued on terms or in circumstances that could dilute the
interests of other shareholders.
Furthermore,
in connection with our participation in the CPP, the U.S. Treasury received a
warrant as discussed under “-The U.S. Department of the Treasury Troubled Asset
Relief Program”, and we have agreed to provide the U.S. Treasury with certain
anti-dilutive adjustments. The purchasers of our warrants in the second
quarter of 2010 have these same rights. Any issuance of additional common
shares as a result of exercise of the warrant or otherwise or the issuance of
securities convertible or exercisable into common shares would dilute the
ownership interest of our existing common shareholders.
Our liquidity is dependent
upon our ability to receive dividends from our subsidiaries, which accounts for
most of our revenue and could affect our ability to pay dividends, and we may be
unable to enhance liquidity from other sources.
We are a
separate and distinct legal entity from our subsidiaries, notably First
Financial Bank. We receive substantially all of our revenue from dividends from
our subsidiaries. These dividends are the principal source of funds to pay
dividends on our common stock and interest and principal on our debt. Various
federal and/or state laws and regulations limit the amount of dividends that our
bank and certain of our non-bank subsidiaries may pay us. Additionally, if our
subsidiaries’ earnings are not sufficient to make dividend payments to us while
maintaining adequate capital levels, we may not be able to make dividend
payments to our common shareholders.
To
enhance liquidity, we may depend upon borrowings under credit facilities or
other indebtedness. As a result of recent turbulence in the capital and credit
markets, many lenders and institutional investors have reduced or ceased to
provide funding to borrowers and, as a result, we may not be able to further
increase liquidity through additional borrowings.
Limitations
on our ability to receive dividends from our subsidiaries or an inability to
increase liquidity through additional borrowings, or inability to maintain,
renew or replace existing credit facilities, could have a material adverse
effect on our liquidity and on our ability to pay dividends on our common and
preferred shares and interest and principal on our debt.
Significant legal actions
could subject us to substantial uninsured liabilities.
We are
from time to time subject to claims related to our operations. These claims and
legal actions, including supervisory actions by our regulators, could involve
large monetary claims and significant defense costs. Substantial legal liability
or significant regulatory action against us could have material adverse
financial effects or cause significant reputational harm to us, which in turn
could seriously harm our business prospects. We may be exposed to substantial
uninsured liabilities, which could adversely affect our results of operations
and financial condition.
If our regulators deem it
appropriate, they can take regulatory actions that could impact our ability to
compete for new business, constrain our ability to fund our liquidity needs, and
increase the cost of our services.
First
Financial and its subsidiaries are subject to the supervision and regulation of
various State and Federal regulators, including the Office of the Comptroller of
the Currency, the Federal Reserve, the FDIC, SEC, FINRA, and various state
regulatory agencies. As such, First Financial is subject to a wide variety of
laws and regulations. As part of their supervisory process, which includes
periodic examinations and continuous monitoring, the regulators have the
authority to impose restrictions or conditions on our activities and the manner
in which we manage the organization. These actions could impact the organization
in a variety of ways, including subjecting us to monetary fines, restricting our
ability to pay dividends, precluding mergers or acquisitions, limiting our
ability to offer certain products or services, or imposing additional capital,
operating, or oversight requirements.
Disruptions in our ability
to access capital markets may negatively affect our capital resources and
liquidity.
In
managing our consolidated balance sheet, we depend on wholesale capital markets
to provide us with sufficient capital resources and liquidity to meet our
commitments and business needs, and to accommodate the transaction and cash
management needs of our clients. Other sources of funding available to us, and
upon which we rely as regular components of our liquidity risk management
strategy, include inter-bank borrowings, repurchase agreements, and borrowings
from the Federal Home Loan Bank system. Any occurrence that may limit our access
to these sources, such as a decline in the confidence of debt purchasers, or our
depositors or counterparties participating in the capital markets, may adversely
affect our capital costs and our ability to raise capital and, in turn, our
liquidity.
58
Management’s ability to
retain key officers and employees may change.
Our
future operating results depend substantially upon the continued service of its
executive officers and key personnel. Our future operating results also depend
in significant part upon its ability to attract and retain qualified management,
financial, technical, marketing, sales, and support personnel. Competition for
qualified personnel is intense, and we cannot ensure success in attracting or
retaining qualified personnel. There may be only a limited number of persons
with the requisite skills to serve in these positions, and it may be
increasingly difficult for us to hire personnel over time.
Our
ability to retain key officers and employees may be further impacted by
legislation and regulation affecting the financial services industry. For
example, recent legislation and bank regulatory action has or will place
additional restrictions on executive compensation at, and the pay practices of,
financial institutions. Such restrictions and standards may further impact
management's ability to compete for talent with other industries that are not
subject to the same limitations as financial institutions.
Our
business, financial condition, or results of operations could be materially
adversely affected by the loss of any of its key employees, or our inability to
attract and retain skilled employees.
Potential acquisitions may
disrupt our business and dilute shareholder value and we may not be able to
successfully consummate or integrate such acquisitions.
Acquiring
other banks, businesses, or branches involves various risks commonly associated
with acquisitions, including, among other things:
|
·
|
potential
exposure to unknown or contingent liabilities of the target
company;
|
|
·
|
exposure
to potential asset quality issues of the target
company;
|
|
·
|
difficulty
and expense of integrating the operations and personnel of the target
company;
|
|
·
|
difficulty
or added costs in the wind-down of non-strategic
operations;
|
|
·
|
potential
disruption to our business;
|
|
·
|
potential
diversion of our management’s time and
attention;
|
|
·
|
the
possible loss of key employees and customers of the target
company;
|
|
·
|
difficulty
in estimating the value (including goodwill) of the target
company;
|
|
·
|
difficulty
in receiving appropriate regulatory approval for any proposed
transaction;
|
|
·
|
difficulty
in estimating the fair value of acquired assets, liabilities and
derivatives of the target company;
and
|
|
·
|
potential
changes in accounting, banking, or tax laws or regulations that may affect
the target company.
|
We
regularly evaluate merger and acquisition opportunities and conduct due
diligence activities related to possible transactions with other financial
institutions and financial services companies. As a result, merger or
acquisition discussions and, in some cases, negotiations may take place and
future mergers or acquisitions involving cash, debt or equity securities may
occur at any time. Acquisitions could involve the payment of a premium over book
and market values, and, therefore, some dilution of our tangible book value and
net income per common share may occur in connection with any future
transaction.
Any
merger or acquisition opportunity that we decide to pursue will ultimately be
subject to regulatory approval and other closing conditions. We may expend
substantial time and resources pursuing potential acquisitions which may not be
consummated because regulatory approval is not received or other closing
conditions are not satisfied. In addition, our existing credit facility and the
terms of other indebtedness that we may subsequently incur may restrict our
ability to consummate certain acquisitions. Furthermore, any difficulty
integrating businesses acquired as a result of a merger or acquisition and the
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 an adverse impact on our liquidity, results of
operations, and financial condition and any such integration could divert
management’s time and attention from managing our company in an effective manner
and could be significantly more expensive than we anticipate.
Our accounting policies and
processes are critical to how we report our financial condition and results of
operations. They require management to make estimates about matters that are
uncertain.
Accounting
policies and processes are fundamental to how we record and report the financial
condition and results of operations. Management must exercise judgment in
selecting and applying many of these accounting policies and processes so they
comply with Generally Accepted Accounting Principles in the United States (U.S.
GAAP).
Management
has identified certain accounting policies as being critical because they
require management’s judgment to ascertain the valuations of assets,
liabilities, commitments, and contingencies. A variety of factors could affect
the ultimate value that is obtained either when earning income, recognizing an
expense, recovering an asset, valuing an asset or liability, or reducing a
liability. We have established detailed policies and control procedures that are
intended to ensure these critical accounting estimates and judgments are well
controlled and applied consistently. In addition, the policies and procedures
are intended to ensure that the process for changing methodologies occurs in an
appropriate manner. Because of the uncertainty surrounding our judgments and the
estimates pertaining to these matters, we cannot guarantee that we will not be
required to adjust accounting policies or restate prior period financial
statements.
59
See the
“Critical Accounting Policies” in the MD&A and Note 1, “Accounting
Policies,” to the Consolidated Financial Statements, in our annual report on
Form 10-K for the year ended December 31, 2009 for more
information.
Changes in our accounting
policies or in accounting standards could materially affect how we report our
financial results and condition.
From time
to time, the Financial Accounting Standards Board (“FASB”) and SEC change the
financial accounting and reporting standards that govern the preparation of our
financial statements. These changes can be hard to predict and can materially
impact how we record and report our financial condition and results of
operations. In some cases, we could be required to apply a new or revised
standard retroactively, resulting in us restating prior period financial
statements.
Our results of operations
depend upon the results of operations of our subsidiaries.
We are a
holding company that conducts substantially all of our operations through our
bank and other subsidiaries. As a result, our ability to make dividend payments
on our common shares will depend primarily upon the receipt of dividends and
other distributions from our subsidiaries. There are various regulatory
restrictions on the ability of our bank subsidiary to pay dividends or make
other payments to us. As of the close of business on September 30, 2010, our
bank subsidiary had an additional $240.7 million available to pay dividends to
us without prior regulatory approval.
Our disclosure controls and
procedures may not prevent or detect all errors or acts of
fraud.
Our
disclosure controls and procedures are designed to reasonably assure that
information required to be disclosed by us in reports we file or submit under
the Exchange Act is accurately accumulated and communicated to management, and
recorded, processed, summarized, and reported within the time periods specified
in the SEC’s rules and forms. We believe that any disclosure controls and
procedures or internal controls and procedures, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met.
These
inherent limitations include the realities that judgments in decision-making can
be faulty, that alternative reasoned judgments can be drawn, or that breakdowns
can occur because of a simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or more
people or by an unauthorized override of the controls. Accordingly, because of
the inherent limitations in our control system, misstatements due to error or
fraud may occur and not be detected.
Our financial instruments
carried at fair value expose us to certain market risks.
We
maintain an available for sale investment securities portfolio which includes
assets with various types of instruments and maturities. At times, we also
maintain certain assets that are classified and accounted for as trading assets.
The changes in fair value of the available for sale securities are recognized in
shareholders equity as a component of other comprehensive income. The changes in
fair value of financial instruments classified as trading assets are carried at
fair value and recognized in earnings. The financial instruments carried at fair
value are exposed to market risks related to changes in interest rates and
market liquidity. We manage the market risks associated with these instruments
through broad asset/liability management strategies. Changes in the market
values of these financial instruments could have a material adverse impact on
our financial condition or results of operations. We may classify additional
financial assets or financial liabilities at fair value in the
future.
Our revenues derived from
our investment securities may be volatile and subject to a variety of
risks.
We
generally maintain investment securities and trading positions in the fixed
income markets. Unrealized gains and losses associated with our investment
portfolio and mark to market gains and losses associated with our trading
portfolio are affected by many factors, including our credit position, interest
rate volatility, volatility in capital markets, and other economic factors. Our
return on such investments could experience volatility and such volatility may
materially adversely affect our financial condition and results of operations.
Additionally, accounting regulations may require us to record a charge prior to
the actual realization of a loss when market valuations of such securities are
impaired and such impairment is considered to be other than
temporary.
We are subject to ongoing
tax examinations in various jurisdictions. The Internal Revenue Service and
other taxing jurisdictions may propose various adjustments to our previously
filed tax returns. It is possible that the ultimate resolution of such proposed
adjustments, if unfavorable, may be material to the results of operations in the
period it occurs.
In the
ordinary course of business, we operate in various taxing jurisdictions and are
subject to income and non-income taxes. The effective tax rate is based in part
on our interpretation of the relevant current tax laws. We believe the aggregate
liabilities related to taxes are appropriately reflected in the consolidated
financial statements. We review the appropriate tax treatment of all
transactions taking into consideration statutory, judicial, and regulatory
guidance in the context of our tax positions. In addition, we rely on various
tax opinions, recent tax audits, and historical experience.
From time
to time, we engage in business transactions that may have an effect on our tax
liabilities. Where appropriate, we have obtained opinions of outside experts and
have assessed the relative merits and risks of the appropriate tax treatment of
business transactions taking into account statutory, judicial, and regulatory
guidance in the context of the tax position. However, changes to our estimates
of accrued taxes can occur due to changes in tax rates, implementation of new
business strategies, resolution of issues with taxing authorities regarding
previously taken tax positions prior to acquisition and newly enacted statutory,
judicial, and regulatory guidance. Such changes could affect the amount of our
accrued taxes and could be material to our financial position and/or results of
operations.
60
In the
event the Internal Revenue Service, State of Ohio, or other state tax officials
propose adjustments to our previously filed tax returns (or those of our
subsidiaries), it is possible that the ultimate resolution of the proposed
adjustments, if unfavorable, may be material to the results of operations in the
period it occurs.
Risks
Related to the Acquisition of the Business and Assets of Peoples Community Bank,
Irwin Union Bank and Trust Company and Irwin Union Bank, FSB.
Changes in national and
local economic conditions could lead to higher loan charge-offs in connection
with the acquisitions all of which may not be supported by the loss sharing
agreements with the FDIC.
In
connection with the acquisitions, we acquired a significant portfolio of loans.
Although we marked down the loan portfolios we have acquired, there is no
assurance that the non-impaired loans we acquired will not become impaired or
that the impaired loans will not suffer further deterioration in value resulting
in additional charge-offs to this loan portfolio. The fluctuations in national,
regional and local economic conditions, including those related to local
residential, commercial real estate and construction markets, which may increase
the level of charge-offs that we make to our loan portfolio, and, consequently,
reduce our net income, may also increase the level of charge-offs on the loan
portfolios that we have acquired in the acquisitions and correspondingly reduce
our net income. These fluctuations are not predictable, cannot be controlled and
may have a material adverse impact on our operations and financial condition
even if other favorable events occur. See “Business Risks – Credit Risks“ in our
Annual Report on Form 10-K for the year ended December 31, 2009 for more
information on the factors affecting the levels of these
charge-offs.
Although
we have entered into loss sharing agreements with the FDIC, which provide that a
significant portion of losses related to specified loan portfolios that we have
acquired in connection with the acquisitions will be indemnified by the FDIC, we
are not protected from all losses resulting from charge-offs with respect to
those specified loan portfolios. Additionally, the loss sharing agreements have
limited terms; therefore, any charge-off of related losses that we experience
after the term of the loss sharing agreements will not be reimbursed by the FDIC
and will negatively impact our net income.
We may fail to realize any
benefits and incur unanticipated losses related to the assets of Peoples
Community Bank, Irwin Union Bank and Trust Company and Irwin Union Bank,
FSB that First Financial Bank acquired and the liabilities of Peoples
Community Bank, Irwin Union Bank and Trust Company and Irwin Union Bank,
FSB that were assumed.
The
success of these acquisitions will depend, in part, on First Financial’s ability
to successfully combine the acquired businesses and assets with First
Financial’s business and First Financial’s ability to successfully manage the
significant loan portfolio that was acquired. As with any acquisition involving
a financial institution, particularly with respect to the acquisition nearly
doubling the size of First Financial and the large increase in the number of
bank branches, there may be business and service changes and disruptions that
result in the loss of customers or cause customers to close their accounts and
move their business to competing financial institutions. It is possible that the
integration process could result in the loss of key employees, the disruption of
ongoing business, or inconsistencies in standards, controls, procedures and
policies that adversely affect First Financial’s ability to maintain
relationships with clients, customers, depositors and employees or to achieve
the anticipated benefits of the acquisition. Successful integration may also be
hampered by differences between the organizations. Although First Financial had
significant operations in the principal regional markets in which the acquired
entities operated, the loss of key employees of these entities could adversely
affect First Financial’s ability to successfully conduct business in certain
local markets in which the entities operated, which could have an adverse effect
on First Financial’s financial results. Integration efforts will also divert
attention and resources from First Financial’s management. Additionally, general
market and economic conditions or governmental actions affecting the financial
industry generally may inhibit our ability to successfully integrate the
institutions or wind-down/exit non-strategic businesses. If First
Financial experiences difficulties with, or delays in, the integration or
wind-down processes, the anticipated benefits of the acquisitions may not be
realized fully, or at all, or may take longer to realize than expected.
Furthermore, any cost savings that are realized may be offset by losses in
revenues or other charges to earnings.
Finally,
First Financial will need to ensure that the banking operations of the acquired
entities maintain effective disclosure controls as well as internal controls and
procedures for financial reporting, and such compliance efforts may be costly
and may divert the attention of management.
First Financial’s Exchange
Act reports contain limited financial information on which to evaluate the
acquisition of Irwin Union Bank and Trust Company and Irwin Union Bank,
FSB.
The
acquisition of the banking operations and certain assets of Irwin Union Bank and
Irwin FSB are significant acquisitions for First Financial; however, First
Financial’s Exchange Act reports contain limited financial information on which
to evaluate these acquisitions. First Financial’s Exchange Act reports may
not contain all of the financial and other information about Irwin Union Bank
and Trust Company and Irwin Union, FSB and the assets that were acquired and
liabilities assumed that investors may consider important, including information
related to the loan portfolio acquired and the impact of the acquisition on
First Financial.
61
First Financial will be
expanding operations into new geographic areas.
Portions
of the market areas represented by Irwin Union Bank and Irwin FSB, including
those in Arizona, California, Nevada and Utah, are areas in which First
Financial historically conducted no banking activities. Although First Financial
has indicated it plans to divest itself of banking centers in areas outside its
strategic footprint (and has exited all markets in the west with respect to
branch operations as of September 30, 2010), in the interim, First Financial
must effectively integrate these new markets to retain and expand the business
currently conducted by these branches while maintaining appropriate risk
controls. The ability to compete effectively in the new markets will be
dependent on First Financial’s ability to understand the local market and
competitive dynamics and identify and retain certain employees from Irwin who
know their markets better than First Financial does.
Furthermore,
the operations of the acquired franchise lending business will increase the
concentration risk of First Financial’s lending and expand our geography
footprint in this area and First Financial will rely on the expertise of those
individuals currently at the acquired franchise group.
Prior to the acquisition,
Irwin Union Bank and Trust Company and a number of its subsidiaries, notably
Irwin Home Equity and Irwin Mortgage Corporation were the subject of a number of
legal actions regarding their mortgage and/or home equity lines of business and
these matters may require significant resources and management
attention.
In
connection with the acquisition of certain assets and assumption of certain
liabilities of Irwin Union Bank by First Financial Bank from the FDIC as
receiver for Irwin Union Bank, First Financial assumed, subject to the terms of
a Purchase and Assumption Agreement by and among the FDIC, the FDIC as receiver,
and First Financial Bank dated September 18, 2009, as amended (the “Purchase
Agreement”), certain legal claims against the subsidiaries of Irwin Union
Bank. Some of these claims involve Irwin Union Bank prior to it being
placed in receivership and are thus the responsibility of the FDIC as receiver
pursuant to the Agreement. Furthermore, with respect to the claims
involving the subsidiaries, First Financial Bank has or expects to submit
requests for indemnification to the FDIC as receiver pursuant to Section 12 of
the Purchase Agreement. Pursuant to the Purchase Agreement, the FDIC as
receiver has agreed to indemnify and hold harmless First Financial Bank for
certain claims against Irwin and its former subsidiaries for actions taken on or
prior to September 18, 2009. There can be no assurances the FDIC will
agree with our positions regarding indemnification.
Although
the assets and liabilities that the FDIC as receiver determines are subject to
First Financial’s indemnification claims will be covered by the FDIC as receiver
and thus excluded from the acquisition of Irwin Union Bank, during the process
of integrating Irwin Union Bank and its subsidiaries with First Financial Bank,
First Financial may discover other inconsistencies in standards, controls,
procedures and policies that adversely affect First Financial’s ability to
achieve the anticipated benefits of the acquisition of Irwin Union Bank and
could distract management from implementing its strategic plan.
Furthermore, unless the FDIC as receiver assumes the defense of such claims,
First Financial will have to expend considerable time and effort to defend the
actions, subject to such indemnification.
We have
identified a number of claims against which we believe we should be indemnified
pursuant to the Purchase Agreement, and we have submitted and expect to continue
to submit requests for indemnification to the FDIC as receiver. The process of
seeking indemnification from the FDIC as receiver with respect to such
litigation could be time-consuming and subject to dispute. Further, until the
FDIC as receiver has approved and reimbursed us for the claims for which we
should be indemnified, we could be exposed to liabilities arising from the
defense of such claims. Discussions are ongoing with the FDIC regarding
indemnification with respect to certain actions taken by Irwin and/or its
subsidiaries prior to September 18, 2009.
The acquisitions have
increased First Financial’s commercial real estate loan portfolio, which have a
greater credit risk than traditional residential mortgage
loans.
With the
acquisition of the Irwin entities loan portfolios, the commercial loan and
construction loan portfolios have become a larger portion of First Financial
Bank’s total loan portfolio than it was prior to the acquisitions. This type of
lending is generally considered to have more complex credit risks than
traditional single-family residential lending, because the principal is
concentrated in a limited number of loans with repayment dependent on the
successful operation of the related real estate or construction project.
Consequently, these loans are more sensitive to the current adverse conditions
in the real estate market and the general economy. These loans are generally
less predictable and more difficult to evaluate and monitor and collateral may
be more difficult to dispose of in a market decline.
First Financial Bank’s
acquisitions of Peoples and Irwin from the FDIC have caused us to modify our
disclosure controls and procedures, which may not result in the material
information that we are required to disclose in our Exchange Act reports being
recorded, processed, summarized, and reported adequately.
Our
management is responsible for establishing and maintaining effective disclosure
controls and procedures that are designed to cause the material information that
we are required to disclose in reports that we file or submit under the Exchange
Act to be recorded, processed, summarized, and reported to the extent applicable
within the time periods required by the SEC’s rules and forms. The internal
control over financial reporting of Peoples’ and Irwin’s banking operations were
excluded from the evaluation of effectiveness of our disclosure controls and
procedures as of the period ended December 31, 2009, because of the timing of
the acquisitions. As a result of the Peoples and Irwin acquisitions, however, we
will be implementing changes to processes, information technology systems and
other components of internal control over financial reporting as part of our
integration activities. Notwithstanding any changes to our disclosure controls
and procedures resulting from our evaluation of the same after the Peoples and
Irwin acquisitions, our control systems, no matter how well designed and
operated, may not result in the material information that we are required to
disclose in our Exchange Act reports being recorded, processed, summarized, and
reported adequately. Because of the inherent limitations in all control systems,
no evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within our company have been
detected.
62
Certain fair value estimates
and other measures associated with the assets of Peoples and Irwin acquired from
the FDIC remain uncertain, and subject to change, based on future determinations
made by the FDIC, which could adversely affect our financial condition and
results of operations.
We have
determined that the acquisitions of the net assets of Peoples and Irwin
constitute business combinations as defined under GAAP. Accordingly, the assets
acquired and liabilities assumed have been presented by us in our financial
statements at their fair values as required. In many cases, the determination of
these fair values requires management to make estimates about discount rates,
future expected cash flows, market conditions and other future events that are
highly subjective in nature and subject to change. Under GAAP, these fair value
estimates were considered preliminary, and remained subject to change for up to
one year after the closing dates of the acquisitions as additional information
relative to closing date fair values became available. The one year
measurement period expired at the end of the third quarter 2010. We and
the FDIC are engaged in on-going discussions that may impact which assets and
liabilities were acquired or assumed by First Financial and/or the associated
purchase prices. Based upon these discussions, there could be further
adjustments to those assets acquired or assumed. Should future material
adjustments be considered necessary, those adjustments would be reflected in
that current period. In addition, the tax treatment of FDIC assisted
acquisitions is complex and subject to interpretations that may result in future
adjustments of deferred taxes as of the acquisition dates. Any future changes to
such measures or determinations could adversely affect our financial condition
and results of operations.
First Financial Bank’s
failure to fully comply with the loss-sharing provisions relating to its
acquisitions of Peoples and Irwin from the FDIC could jeopardize the loss-share
coverage afforded to certain individual or pools of assets, rendering First
Financial Bank financially responsible for the full amount of any losses related
to such assets.
In
connection with First Financial Bank’s acquisitions of Peoples and Irwin from
the FDIC, First Financial Bank entered into loss-sharing agreements with the
FDIC whereby the FDIC has agreed to cover 80% of the losses on certain single
family residential mortgage loans and certain commercial loans (together,
“covered assets”), and 95% of the losses on such covered assets in excess of
thresholds stated in the loss-sharing agreements. First Financial Bank’s
management of and application of the terms and conditions of the loss-sharing
provisions of the Purchase and Assumption Agreements related to the covered
assets is monitored by the FDIC through periodic reports that First Financial
Bank must submit to the FDIC and on-site compliance visitations by the FDIC. If
First Financial Bank fails to fully comply with its obligations under the
loss-sharing provisions of the Purchase and Assumption Agreements relating to
First Financial Bank’s acquisitions of Peoples and Irwin from the FDIC, First
Financial Bank could lose the benefit of the loss-share coverage as it applies
to certain individual or pools of covered assets. Without such loss-share
coverage, First Financial Bank would be solely financially responsible for the
losses sustained by such individual or pools of assets.
63
Unregistered
Sales of Equity Securities and Use of
Proceeds
|
|
(c)
|
The
following table shows the total number of shares repurchased in the third
quarter of 2010.
|
Issuer
Purchases of Equity Securities
(a)
|
(b)
|
(c)
|
(d)
|
|||||||||||||
Total Number
|
||||||||||||||||
of Shares
|
Maximum Number
|
|||||||||||||||
Total Number
|
Average
|
Purchased as
|
of Shares that may
|
|||||||||||||
of Shares
|
Price Paid
|
Part of Publicly
|
yet be purchased
|
|||||||||||||
Period
|
Purchased (1)
|
Per Share
|
Announced Plans (2)
|
Under the Plans
|
||||||||||||
July
1 through
|
||||||||||||||||
July
31, 2010
|
1,845 | $ | 15.00 | 0 | 4,969,105 | |||||||||||
August
1 through
|
||||||||||||||||
August
31, 2010
|
0 | 0.00 | 0 | 4,969,105 | ||||||||||||
September
1 through
|
||||||||||||||||
September
30, 2010
|
375 | 16.02 | 0 | 4,969,105 | ||||||||||||
Total
|
2,220 | $ | 15.17 | 0 | 4,969,105 |
|
(1)
|
The
number of shares purchased in column (a) and the average price paid per
share in column (b) include the purchase of shares other than through
publicly announced plans. The shares purchased other than through
publicly announced plans were purchased pursuant to First Financial’s
Thrift Plan, Director Fee Stock Plan, 1999 Stock Option Plan for
Non-Employee Directors and 1999 Stock Incentive Plan for Officers and
Employees, 2009 Employee Stock Plan, and 2009 Non-Employee Director Stock
Plan. (The last four plans are referred to hereafter as the Stock
Plans.) The following tables show the number of shares
purchased pursuant to those plans and the average price paid per
share. The purchases for the Thrift Plan and the Director Fee Stock
Plan were made in open-market transactions. Under the Stock Plans,
shares were purchased from plan participants at the then current market
value in satisfaction of stock option exercise
prices.
|
64
(a)
|
(b)
|
|||||||
Total
Number
|
Average
|
|||||||
of Shares
|
Price Paid
|
|||||||
Purchased
|
Per Share
|
|||||||
Period
|
||||||||
First
Financial Bancorp Thrift Plan
|
||||||||
July
1 through
|
||||||||
July
31, 2010
|
0 | $ | 0.00 | |||||
August
1 through
|
||||||||
August
31, 2010
|
0 | 0.00 | ||||||
September
1 through
|
||||||||
September
30, 2010
|
0 | 0.00 | ||||||
Total
|
0 | $ | 0.00 | |||||
Director
Fee Stock Plan
|
||||||||
July
1 through
|
||||||||
July
31, 2010
|
1,845 | $ | 15.00 | |||||
August
1 through
|
||||||||
August
31, 2010
|
0 | 0.00 | ||||||
September
1 through
|
||||||||
September
30, 2010
|
0 | 0.00 | ||||||
Total
|
1,845 | $ | 15.00 | |||||
Stock
Plans
|
||||||||
July
1 through
|
||||||||
July
31, 2010
|
0 | $ | 0.00 | |||||
August
1 through
|
||||||||
August
31, 2010
|
0 | 0.00 | ||||||
September
1 through
|
||||||||
September
30, 2010
|
375 | 16.02 | ||||||
Total
|
375 | $ | 16.02 |
|
(2)
|
First
Financial has one remaining previously announced stock repurchase plan
under which it is currently authorized to purchase shares of its common
stock. The plan has no expiration date. The table that follows
provides additional information regarding this
plan.
|
Total Shares
|
|||||||||
Announcement
|
Total Shares
Approved for
|
Repurchased
Under
|
Expiration
|
||||||
Date
|
Repurchase
|
the Plan
|
Date
|
||||||
1/25/2000
|
7,507,500 | 2,538,395 |
None
|
65
Exhibits
|
(a)
|
Exhibits:
|
3.1
|
Amended
and Restated Articles of Incorporation (filed as Exhibit 3.1 to the
Registrant’s Annual Report on Form 10-K for the year ended December 31,
2007, and incorporated herein by reference).
|
3.2
|
Certificate
of Amendment by the Board of Directors to the Amended and Restated
Articles of Incorporation (filed as Exhibit 3.1 to the Registrant’s
Current Report on Form 8-K filed on December 24, 2008, and incorporated
herein by reference).
|
3.3
|
Certificate
of Amendment by Shareholders to the Amended and Restated Articles of
Incorporation (filed as Exhibit 4.2 to the Form S-3 filed on January 21,
2009, and incorporated herein by reference, Registration No.
333-156841).
|
3.4
|
Amended
and Restated Regulations, as amended as of May 1, 2007 (filed as Exhibit
3.2 to the Form 10-Q for the quarter ended June 30, 2007 and incorporated
herein by reference.
|
4.1
|
Letter
Agreement, dated as of December 23, 2008, between the Registrant and the
United States Department of the Treasury, which includes the Securities
Purchase Agreement – Standard Terms (filed as Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K filed on December 30, 2008, and
incorporated herein by reference).
|
4.2
|
Warrant
to Purchase up to 930,233 shares of Common Stock dated as of December 23,
2008 (filed as Exhibit 4.1 to the Form 8-K filed on December 30, 2008 and
incorporated herein by reference).
|
4.3
|
Form
of Series A Preferred Stock Certificate dated as of December 23, 2008
(filed as Exhibit 4.2 to the Form 8-K filed on December 30, 2008 and
incorporated herein by reference).
|
4.4
|
No
instruments defining the rights of holders of long-term debt of First
Financial are filed herewith. Pursuant to (b)(4)(iii) of Item 601 of
Regulation S-K, First Financial agrees to furnish a copy of any such
agreements to the Securities and Exchange Commission upon
request.
|
10.1
|
Agreement
between Charles D. Lefferson and First Financial Bancorp. dated August 4,
2000 (filed as Exhibit 10.5 to the Form 10-K for the year ended December
31, 2002 and incorporated herein by reference). * +
|
10.2
|
Amendment
to Employment Agreement between Charles D. Lefferson and First Financial
Bancorp. dated May 23, 2003 (filed as Exhibit 10.5 to the Form 10-Q for
the quarter ended June 30, 2003 and incorporated herein by
reference).* +
|
10.3
|
First
Financial Bancorp. Dividend Reinvestment and Share Purchase Plan, dated
April 24, 1997 (incorporated herein by reference to a Registration
Statement on Form S-3, Registration No. 333-25745).
|
10.4
|
First
Financial Bancorp. 1999 Stock Incentive Plan for Officers and Employees,
dated April 27, 1999 (incorporated herein by reference to a Registration
Statement on Form S-3, Registration No. 333-86781).*
|
10.5
|
First
Financial Bancorp. 1999 Non-Employee Director Stock Plan, as dated April
27, 1999 and amended and restated as of April 26, 2006 (filed as Exhibit
10.11 to the Form 10-Q for the quarter ended March 31, 2006 and
incorporated herein by reference).*
|
10.6
|
First
Financial Bancorp. Director Fee Stock Plan amended and restated effective
April 20, 2004 (filed as Exhibit 10.12 to the Form10-Q for the quarter
ended June 30, 2004 and incorporated herein by
reference).*
|
66
10.7
|
Form
of Executive Supplemental Retirement Plan (filed as Exhibit 10.7 to the
Form10-Q for the quarter ended March 31, 2010 and incorporated herein by
reference).*
|
10.8
|
Form
of Endorsement Method Split Dollar Agreement for Certain Executives (filed
as Exhibit 10.8 to the Form10-Q for the quarter ended March 31, 2010 and
incorporated herein by reference).*
|
10.9
|
First
Financial Bancorp. Amended and Restated Deferred Compensation Plan (filed
as Exhibit 10.9 to the Form10-Q for the quarter ended March 31, 2010 and
incorporated herein by reference).*
|
10.10
|
Form
of Stock Option Agreement for Incentive Stock Options (2005 – 2008) (filed
as Exhibit 10.1 to the Form 8-K filed on April 22, 2005 and incorporated
herein by reference).*
|
10.11
|
Form
of Stock Option Agreement for Non-Qualified Stock Options (2005-2008)
(filed as Exhibit 10.2 to the Form 8-K filed on April 22, 2005 and
incorporated herein by reference).*
|
10.12
|
Amended
and Restated Employment and Non-Competition Agreement between Claude E.
Davis and First Financial Bancorp. dated August 22, 2006, and incorporated
herein by reference to Exhibit 10.1 to First Financial Bancorp’s Form 8-K
filed on August 28, 2006.* ++
|
10.13
|
First
Financial Bancorp. Amended and Restated Severance Pay Plan as approved
April 28, 2008 (filed as Exhibit 10.19 to the Form 10-Q filed on May 9,
2008 and incorporated herein by reference).*
|
10.14
|
Terms
of First Financial Bancorp. Short-Term Incentive Plan (2007) (incorporated
herein by reference to the Form 8-K filed on May 4,
2007).*
|
10.15
|
First
Financial Bancorp. Amended and Restated Key Management Severance Plan as
approved February 26, 2008 (filed as Exhibit 10.21 to the Form 10-Q filed
on May 9, 2008 and incorporated herein by reference).*
|
10.16
|
Form
of Agreement for Restricted Stock Award (2008) (filed as Exhibit 10.22 to
the Form 10-Q filed on May 9, 2008 and incorporated herein by
reference).*
|
10.17
|
Long-Term
Incentive Plan Grant Design (2008) (filed as Exhibit 10.23 to the Form
10-Q filed on May 9, 2008 and incorporated herein by
reference).*
|
10.18
|
Short-Term
Incentive Plan Design (2008) (filed as Exhibit 10.24 to the Form 10-Q
filed on May 9, 2008 and incorporated herein by
reference).*
|
10.19
|
Letter
Agreement, dated December 23, 2008, including Securities Purchase
Agreement – Standard Terms incorporated by reference herein, between First
Financial and the United States Department of the Treasury (filed as
Exhibit 10.1 to the Form 8-K filed on December 30, 2008 and incorporated
herein by reference).
|
10.20
|
Form
of Waiver, executed by each of Messrs. Claude E. Davis, C. Douglas
Lefferson, J. Franklin Hall, Samuel J. Munafo and Gregory A. Gehlmann
dated as of December 23, 2008 (filed as Exhibit 10.2 to the Form 8-K filed
on December 30, 2008 and incorporated herein by
reference).*
|
10.21
|
Form
of Letter Agreement, executed by each of Messrs. Claude E. Davis, C.
Douglas Lefferson, J. Franklin Hall, Samuel J. Munafo and Gregory A.
Gehlmann dated as of December 23, 2008 (filed as Exhibit 10.3 to the Form
8-K filed on December 30, 2008 and incorporated herein by
reference).*
|
10.22
|
Form
of Amendment No. 1 to Agreement for Restricted Stock Awards for 2005
Awards (filed as Exhibit 10.24 to the Form 10-K filed on March 11, 2009
and incorporated herein by reference).*
|
10.23
|
Form
of Amendment No. 1 to Agreement for Restricted Stock Awards for 2006
Awards (filed as Exhibit 10.25 to the Form 10-K filed on March 11, 2009
and incorporated herein by reference).*
|
10.24
|
Form
of Amendment No. 1 to Agreement for Restricted Stock Awards for 2007
Awards (filed as Exhibit 10.26 to the Form 10-K filed on March 11, 2009
and incorporated herein by
reference).*
|
67
10.25
|
Terms
of First Financial Bancorp. Short-Term Incentive Plan (2009) (incorporated
herein by reference to the Form 8-K filed on April 16,
2009).*
|
10.26
|
First
Financial Bancorp. 2009 Employee Stock Plan (filed as Appendix A to the
DEF 14 Definitive Proxy Statement filed on April 23, 2009 and incorporated
herein by reference).*
|
10.27
|
First
Financial Bancorp. 2009 Non-Employee Director Stock Plan (filed as
Appendix B to the DEF 14 Definitive Proxy Statement filed on April 23,
2009 and incorporated herein by reference).*
|
10.28
|
Form
of Agreement for Restricted Stock Awards for 2009 Awards under the First
Financial Bancorp. 1999 Stock Incentive Plan for Officers and Employees
(filed as Exhibit 10.30 for the Form 10-Q filed on November 16, 2009 and
incorporated herein by reference).*
|
10.29
|
Form
of Agreement for Restricted Stock Awards for Awards under the First
Financial Bancorp. 2009 Employee Stock Plan (filed as Exhibit 10.31
for the Form 10-Q filed on November 16, 2009 and incorporated herein by
reference).*
|
10.30
|
Executive
Supplemental Savings Agreement between Claude E. Davis and First Financial
Bancorp. Dated August 25, 2008 (filed as Exhibit 10.31 to the Form10-Q for
the quarter ended March 31, 2010 and incorporated herein by
reference).*
|
10.31
|
Form
of Amended and Restated Agreement for Restricted Stock Award (2009) for
NEOs/Top Five Compensated Employees (filed as Exhibit 10.32 to the
Form10-Q for the quarter ended March 31, 2010 and incorporated herein by
reference).*
|
10.32
|
Form
of Agreement for Restricted Stock Awards under the First Financial
Bancorp. 2009 Employee Plan (3-year vesting/accrual of dividends) (filed
as Exhibit 10.33 to the Form10-Q for the quarter ended June 30, 2010 and
incorporated herein by reference).*
|
10.33
|
Form
of Agreement for Restricted Stock Awards under the First Financial
Bancorp. 2009 Non-Employee Directors Stock Plan (filed as Exhibit 10.34 to
the Form10-Q for the quarter ended June 30, 2010 and incorporated herein
by reference).*
|
10.34
|
First
Financial Bancorp. Short-Term Incentive Plan (2010) (filed as Exhibit 10.1
to the Form 8-K filed on October 29, 2010 and incorporated herein by
reference).*
|
14
|
First
Financial Bancorp. Code of Business Conduct and Ethics as amended April
27, 2010 (filed as Exhibit 14 to the Form 10-Q for the quarter ended March
31, 2010 and incorporated herein by reference).
|
31.1
|
Certification
by Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 filed herewith.
|
31.2
|
Certification
by Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 filed herewith.
|
32.1
|
Certification
of Periodic Financial Report by Chief Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 furnished
herewith.
|
32.2
|
Certification
of Periodic Financial Report by Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 furnished
herewith.
|
*
Compensatory plans or arrangements.
+ Similar agreements
between the Company and NEOs J. Franklin Hall and Samuel J. Munafo exist, the
material differences which are disclosed in the Company’s definitive proxy
statement filed with the SEC on Schedule 14A on April 19, 2009.
++ A
similar agreement between the Company and NEO Gregory A. Gehlmann exists, the
material differences which are disclosed in the Company’s definitive proxy
statement filed with the SEC on Schedule 14A on April 19, 2009.
68
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
FIRST FINANCIAL BANCORP.
|
||||
(Registrant)
|
||||
/s/ J. Franklin Hall
|
/s/ Anthony M. Stollings
|
|||
J.
Franklin Hall
|
Anthony
M. Stollings
|
|||
Executive
Vice President and
|
Senior
Vice President, Chief Accounting
|
|||
Chief
Financial Officer
|
Officer,
and Controller
|
|||
Date
|
11/9/10
|
Date
|
11/9/10
|
69