Annual Statements Open main menu

FIRST FINANCIAL CORP /IN/ - Quarter Report: 2013 June (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

 

SECURITIES EXCHANGE ACT OF 1934

 

For The Quarterly Period Ended June 30, 2013

 

Commission File Number 0-16759

 

FIRST FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 

  INDIANA 35-1546989
  (State or other jurisdiction (I.R.S. Employer
  incorporation or organization) Identification No.)
     
  One First Financial Plaza, Terre Haute, IN 47807
  (Address of principal executive office) (Zip Code)
     
  (812)238-6000  
  (Registrant's telephone number, including area code)

 

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 period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x  No  ¨.

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 

Yes x   No  ¨.

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  ¨ Accelerated filer x
Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x.

 

As of August 5, 2013, the registrant had outstanding 13,307,498 shares of common stock, without par value.

 

 
 

 

FIRST FINANCIAL CORPORATION

 

FORM 10-Q

 

INDEX 

 

  Page No.
PART I.  Financial Information  
   
Item 1. Financial Statements:  
   
Consolidated Balance Sheets 3
   
Consolidated Statements of Income and Comprehensive Income (Loss) 4
   
Consolidated Statements of Shareholders’ Equity 5
   
Consolidated Statements of Cash Flows 7
   
Notes to Consolidated Financial Statements 8
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 30
   
Item 3.  Quantitative and Qualitative Disclosures about Market Risk 32
   
Item 4.  Controls and Procedures 34
   
PART II. Other Information:  
   
Item 1. Legal Proceedings 34
   
Item 1A. Risk Factors 34
   
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds 34
   
Item 3.  Defaults upon Senior Securities 34
   
Item 4.  Mine Safety Disclosures 34
   
Item 5.  Other Information 34
   
Item 6.  Exhibits 35
   
Signatures 36

 

2
 

 

Part I – Financial Information

Item 1. Financial Statements

FIRST FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS

(Dollar amounts in thousands, except per share data)

 

   June 30,   December 31, 
   2013   2012 
   (unaudited) 
ASSETS          
Cash and due from banks  $73,720   $87,230 
Federal funds sold   10,215    20,800 
Securities available-for-sale   837,047    691,000 
Loans:          
Commercial   1,046,681    1,088,144 
Residential   486,016    496,237 
Consumer   267,632    268,507 
    1,800,329    1,852,888 
Less:          
Unearned Income   (1,010)   (952)
Allowance for loan losses   (22,133)   (21,958)
    1,777,186    1,829,978 
Restricted Stock   21,050    21,292 
Accrued interest receivable   11,046    12,024 
Premises and equipment, net   46,468    47,308 
Bank-owned life insurance   78,267    77,295 
Goodwill   37,612    37,612 
Other intangible assets   3,308    3,893 
Other real estate owned   9,336    7,722 
FDIC Indemnification Asset   1,515    2,632 
Other assets   53,747    56,622 
TOTAL ASSETS  $2,960,517   $2,895,408 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY          
Deposits:          
Non-interest-bearing  $449,231   $465,954 
Interest-bearing:          
Certificates of deposit of $100 or more   211,529    213,610 
Other interest-bearing deposits   1,618,745    1,596,570 
    2,279,505    2,276,134 
Short-term borrowings   29,194    40,551 
Other borrowings   209,534    119,705 
Other liabilities   73,882    86,896 
TOTAL LIABILITIES   2,592,115    2,523,286 
           
Shareholders’ equity          
Common stock, $.125 stated value per share;          
Authorized shares-40,000,000          
Issued shares-14,516,113 in 2013 and 14,490,609 in 2012          
Outstanding shares-13,307,498 in 2013 and 13,287,348 in 2012   1,809    1,808 
Additional paid-in capital   70,354    69,989 
Retained earnings   346,092    338,342 
Accumulated other comprehensive income (loss)   (19,146)   (7,472)
Less: Treasury shares at cost-1,208,615 in 2013 and 1,203,261 in 2012   (30,707)   (30,545)
           
TOTAL SHAREHOLDERS’ EQUITY   368,402    372,122 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY  $2,960,517   $2,895,408 

See accompanying notes.

 

3
 

 

FIRST FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)

(Dollar amounts in thousands, except per share data)

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2013   2012   2013   2012 
   (unaudited)   (unaudited)   (unaudited)   (unaudited) 
INTEREST INCOME:                    
Loans, including related fees  $22,576   $25,226   $46,030   $50,424 
Securities:                    
Taxable   3,479    3,508    6,694    7,031 
Tax-exempt   1,761    1,810    3,531    3,615 
Other   489    590    992    1,213 
TOTAL INTEREST INCOME   28,305    31,134    57,247    62,283 
INTEREST EXPENSE:                    
Deposits   1,534    2,169    3,276    4,833 
Short-term borrowings   19    37    39    83 
Other borrowings   1,014    1,266    2,021    2,540 
TOTAL INTEREST EXPENSE   2,567    3,472    5,336    7,456 
NET INTEREST INCOME   25,738    27,662    51,911    54,827 
Provision for loan losses   2,960    1,789    5,981    4,745 
NET INTEREST INCOME AFTER PROVISION                    
FOR LOAN LOSSES   22,778    25,873    45,930    50,082 
NON-INTEREST INCOME:                    
Trust and financial services   1,403    1,439    2,929    2,919 
Service charges and fees on deposit accounts   2,394    2,402    4,648    4,606 
Other service charges and fees   2,726    2,276    5,226    4,731 
Securities gains/(losses), net   3    664    7    660 
Total impairment losses   -    (11)   -    (11)
Loss recognized in other comprehensive loss   -    -    -    - 
Net impairment loss recognized in earnings   -    (11)   -    (11)
Insurance commissions   1,941    1,799    3,904    3,690 
Gain on sales of mortgage loans   943    792    1,906    1,717 
Other   253    396    920    956 
TOTAL NON-INTEREST INCOME   9,663    9,757    19,540    19,268 
NON-INTEREST EXPENSE:                    
Salaries and employee benefits   13,713    13,891    27,309    28,310 
Occupancy expense   1,576    1,488    3,098    2,905 
Equipment expense   1,537    1,399    3,038    2,681 
FDIC Expense   502    527    1,059    955 
Other   6,055    5,797    11,078    11,671 
TOTAL NON-INTEREST EXPENSE   23,383    23,102    45,582    46,522 
INCOME BEFORE INCOME TAXES   9,058    12,528    19,888    22,828 
Provision for income taxes   2,612    3,823    5,749    6,680 
NET INCOME   6,446    8,705    14,139    16,148 
OTHER COMPREHENSIVE INCOME (LOSS)                    
Change in unrealized gains/losses on securities, net of reclassifications   (18,094)   570    (20,872)   640 
Tax effect   7,535    (228)   8,646    (256)
    (10,559)   342    (12,226)   384 
Change in funded status of post retirement benefits   563    670    920    1,287 
Tax effect   (225)   (268)   (368)   (515)
    338    402    552    772 
TOTAL OTHER COMPREHENSIVE INCOME (LOSS)   (10,221)   744    (11,674)   1,156 
COMPREHENSIVE INCOME (LOSS)  $(3,775)  $9,449   $2,465   $17,304 
PER SHARE DATA                    
Basic and Diluted Earnings per Share  $0.48   $0.66   $1.06   $1.22 
Dividends per Share  $0.48   $0.47   $0.48   $0.47 
Weighted average number of shares outstanding (in thousands)   13,307    13,238    13,304    13,230 

See accompanying notes.

 

4
 

 

FIRST FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

Three Months Ended

June 30, 2013, and 2012

(Dollar amounts in thousands, except per share data)

(Unaudited)

 

               Accumulated         
               Other         
   Common   Additional   Retained   Comprehensive   Treasury     
   Stock   Capital   Earnings   Income/(Loss)   Stock   Total 
Balance, April 1, 2012  $1,807   $69,448   $325,573   $(10,082)  $(31,809)  $354,937 
Net income   -    -    8,705    -    -    8,705 
                               
Other comprehensive income   -    -    -    744    -    744 
                               
Omnibus Equity Incentive Plan   -    123    -    -    -    123 
Cash Dividends, $.47 per share   -    -    (6,222)   -    -    (6,222)
                               
Balance, June 30, 2012  $1,807   $69,571   $328,056   $(9,338)  $(31,809)  $358,287 
                               
Balance, April 1, 2013  $1,809   $70,171   $346,035   $(8,925)  $(30,707)  $378,383 
Net income   -    -    6,446    -    -    6,446 
                               
Other comprehensive income (loss)   -    -    -    (10,221)   -    (10,221)
                               
Omnibus Equity Incentive Plan   -    183    -    -    -    183 
Cash Dividends, $.48 per share   -    -    (6,389)   -    -    (6,389)
                               
Balance, June 30, 2013  $1,809   $70,354   $346,092   $(19,146)  $(30,707)  $368,402 

See accompanying notes.

 

5
 

 

FIRST FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

Six Months Ended

June 30, 2013, and 2012

(Dollar amounts in thousands, except per share data)

(Unaudited)

 

               Accumulated         
               Other         
   Common   Additional   Retained   Comprehensive   Treasury     
   Stock   Capital   Earnings   Income/(Loss)   Stock   Total 
                         
Balance, January 1, 2012  $1,806   $69,328   $318,130   $(10,494)  $(31,809)  $346,961 
Net income   -    -    16,148    -    -    16,148 
                               
Other comprehensive income   -    -    -    1,156    -    1,156 
                               
Omnibus Equity Incentive Plan   1    243    -    -    -    244 
Cash Dividends, $.47 per share   -    -    (6,222)   -    -    (6,222)
                               
Balance, June 30, 2012  $1,807   $69,571   $328,056   $(9,338)  $(31,809)  $358,287 
                               
Balance, January 1, 2013  $1,808   $69,989   $338,342   $(7,472)  $(30,545)  $372,122 
Net income   -    -    14,139    -    -    14,139 
                               
Other comprehensive income (loss)   -    -    -    (11,674)   -    (11,674)
Treasury stock purchase (5,354 shares)                       (162)   (162)
Omnibus Equity Incentive Plan   1    365    -    -    -    366 
Cash Dividends, $.48 per share   -    -    (6,389)   -    -    (6,389)
                               
Balance, June 30, 2013  $1,809   $70,354   $346,092   $(19,146)  $(30,707)  $368,402 

See accompanying notes.

 

6
 

 

FIRST FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollar amounts in thousands, except per share data)

  

   Six Months Ended 
   June 30, 
   2013   2012 
   (Unaudited) 
CASH FLOWS FROM OPERATING ACTIVITIES:          
           
Net Income  $14,139   $16,148 
Adjustments to reconcile net income to net cash provided by operating activities:          
Net amortization (accretion) of premiums and discounts on investments   1,465    1,565 
Provision for loan losses   5,981    4,745 
Securities (gains) losses   (7)   (660)
Securities impairment loss   -    11 
(Gain) loss on sale of other real estate   51    1 
Restricted stock compensation   366    244 
Depreciation and amortization   2,705    2,395 
Other, net   329    3,829 
NET CASH FROM OPERATING ACTIVITIES   25,029    28,278 
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
           
Proceeds from sales of securities available-for-sale   5,023    6,513 
Redemption of restricted stock   250    1,172 
Purchases of restricted stock   (8)   (186)
Purchases of customer list   -    (114)
Redemption of bank owned life insurance   -    7,319 
Calls, maturities and principal reductions on securities available-for-sale   86,246    58,483 
Purchases of securities available-for-sale   (259,646)   (58,052)
Loans made to customers, net of repayment   44,345    8,288 
Proceeds from sales of other real estate owned   966    2,111 
Net change in federal funds sold   10,585    (15,747)
Additions to premises and equipment   (1,280)   (6,518)
NET CASH FROM INVESTING ACTIVITIES   (113,519)   3,269 
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
           
Net change in deposits   2,877    (22,024)
Net change in short-term borrowings   (11,357)   (52,931)
Proceeds from other borrowings   95,000    - 
Maturities of other borrowings   (5,000)   - 
Purchase of treasury stock   (162)   - 
Dividends paid   (6,378)   (6,203)
NET CASH FROM FINANCING ACTIVITIES   74,980    (81,158)
           
NET CHANGE IN CASH AND CASH EQUIVALENTS   (13,510)   (49,611)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD   87,230    134,280 
           
CASH AND CASH EQUIVALENTS, END OF PERIOD  $73,720   $84,669 

See accompanying notes.

 

7
 

 

FIRST FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The accompanying June 30, 2013 and 2012 consolidated financial statements are unaudited. The December 31, 2012 consolidated financial statements are as reported in the First Financial Corporation (the “Corporation”) 2012 annual report. The information presented does not include all information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. The following notes should be read together with notes to the consolidated financial statements included in the 10-K filed with the Securities and Exchange Commission for the fiscal year ended December 31, 2012.

 

1. Significant Accounting Policies

 

The significant accounting policies followed by the Corporation and its subsidiaries for interim financial reporting are consistent with the accounting policies followed for annual financial reporting. All adjustments which are, in the opinion of management, necessary for a fair statement of the results for the periods reported have been included in the accompanying consolidated financial statements and are of a normal recurring nature. The Corporation reports financial information for only one segment, banking. Some items in the prior year financials were reclassified to conform to the current presentation.

 

The Omnibus Equity Incentive Plan is a long-term incentive plan that was designed to align the interests of participants with the interests of shareholders. Under the plan, awards may be made based on certain performance measures. The grants are made in restricted stock units that are subject to a vesting schedule. These shares vest over 3 years in increments of 33%, 33%, and 34% respectively. In 2013 and 2012, 30,219 and 39,643 shares were awarded, respectively. These shares had a grant date value of $0.9 million and $1.4 million for 2013 and 2012, vest over three years and their grant is not subject to future performance measures. Outstanding shares are increased at the award date for the total shares awarded.

 

2. Allowance for Loan Losses

 

The following table presents the activity of the allowance for loan losses by portfolio segment for the three months

ended June 30.

 

Allowance for Loan Losses:  June 30, 2013 
(Dollar amounts in thousands)  Commercial   Residential   Consumer   Unallocated   Total 
Beginning balance  $14,144   $5,400   $3,481   $2,247   $25,272 
Provision for loan losses*   1,660    303    611    126    2,700 
Loans charged -off   (1,435)   (4,127)   (811)   -    (6,373)
Recoveries   162    16    356    -    534 
Ending Balance  $14,531   $1,592   $3,637   $2,373   $22,133 

* Provision before increase of $260 thousand in 2013for decrease in FDIC indemnification asset

 

Allowance for Loan Losses:  June 30, 2012 
(Dollar amounts in thousands)  Commercial   Residential   Consumer   Unallocated   Total 
Beginning balance  $11,448   $2,092   $3,806   $967   $18,313 
Provision for loan losses*   1,880    582    670    67    3,199 
Loans charged -off   (344)   (572)   (1,073)   -    (1,989)
Recoveries   206    22    341    -    569 
Ending Balance  $13,190   $2,124   $3,744   $1,034   $20,092 

* Provision before decrease of $1.41 million in 2012 for increase in FDIC indemnification asset

 

The following table presents the activity of the allowance for loan losses by portfolio segment for the six months ended June 30.

 

Allowance for Loan Losses:  June 30, 2013 
(Dollar amounts in thousands)  Commercial   Residential   Consumer   Unallocated   Total 
Beginning balance  $10,987   $5,426   $3,879   $1,666   $21,958 
Provision for loan losses*   2,924    500    844    707    4,975 
Loans charged -off   (1,885)   (4,399)   (1,837)   -    (8,121)
Recoveries   2,505    65    751    -    3,321 
Ending Balance  $14,531   $1,592   $3,637   $2,373   $22,133 

* Provision before increase of $1.01 million in 2013 for decrease in FDIC indemnification asset

 

8
 

 

Allowance for Loan Losses:  June 30, 2012 
(Dollar amounts in thousands)  Commercial   Residential   Consumer   Unallocated   Total 
Beginning balance  $12,119   $2,728   $3,889   $506   $19,242 
Provision for loan losses*   2,877    1,265    989    528    5,659 
Loans charged -off   (2,202)   (1,908)   (1,856)   -    (5,966)
Recoveries   396    39    722    -    1,157 
Ending Balance  $13,190   $2,124   $3,744   $1,034   $20,092 

* Provision before decrease of $914 thousand in 2012 for increase in FDIC indemnification asset

 

The following table presents the allocation of the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method at June 30, 2013 and December 31, 2012.

 

Allowance for Loan Losses  June 30, 2013 
(Dollar amounts in thousands)  Commercial   Residential   Consumer   Unallocated   Total 
Individually evaluated for impairment  $6,057   $-   $-   $-   $6,057 
Collectively evaluated for impairment   7,763    1,278    3,637    2,373    15,051 
Acquired with deteriorated credit quality   711    314    -    -    1,025 
Ending Balance  $14,531   $1,592   $3,637   $2,373   $22,133 

 

Loans:  June 30, 2013 
(Dollar amounts in thousands)  Commercial   Residential   Consumer   Total 
Individually evaluated for impairment  $25,201   $264   $-   $25,465 
Collectively evaluated for impairment   1,014,924    484,192    268,941    1,768,057 
Acquired with deteriorated credit quality   11,513    3,170    1    14,684 
Ending Balance  $1,051,638   $487,626   $268,942   $1,808,206 

 

Allowance for Loan Losses:  December 31, 2012 
(Dollar amounts in thousands)  Commercial   Residential   Consumer   Unallocated   Total 
Individually evaluated for impairment   3,453    3,920    -    -    7,373 
Collectively evaluated for impairment   7,286    1,506    3,879    1,666    14,337 
Acquired with deteriorated credit quality   248    -    -    -    248 
Ending Balance  $10,987   $5,426   $3,879   $1,666   $21,958 

 

Loans  December 31, 2012 
(Dollar amounts in thousands)  Commercial   Residential   Consumer   Total 
Individually evaluated for impairment   23,721    6,973    -    30,694 
Collectively evaluated for impairment   1,056,861    487,486    269,882    1,814,229 
Acquired with deteriorated credit quality   13,582    3,421    6    17,009 
Ending Balance  $1,094,164   $497,880   $269,888   $1,861,932 

 

9
 

 

The following tables present loans individually evaluated for impairment by class of loans.

 

           June 30, 2013         
           Allowance             
   Unpaid       for Loan   Average   Interest   Cash Basis 
   Principal   Recorded   Losses   Recorded   Income   Interest 
(Dollar amounts in thousands)  Balance   Investment   Allocated   Investment   Recognized   Recognized 
With no related allowance recorded:                              
Commercial                              
Commercial & Industrial  $2,131   $1,929   $-   $776   $   -   $     - 
Farmland   -    -    -    -    -    - 
Non Farm, Non Residential   -    -    -    -    -    - 
Agriculture   -    -    -    -    -    - 
All Other Commercial   -    -    -    -    -    - 
Residential                              
First Liens   34    34    -    11    -    - 
Home Equity   -    -    -    -    -    - 
Junior Liens   -    -    -    -    -    - 
Multifamily   -    -    -    -    -    - 
All Other Residential   -    -    -    -    -    - 
Consumer                              
Motor Vehicle   -    -    -    -    -    - 
All Other Consumer   -    -    -    -    -    - 
With an allowance recorded:                              
Commercial                              
Commercial & Industrial   12,462    12,462    3,657    15,244    -    - 
Farmland   -    -    -    594    -    - 
Non Farm, Non Residential   8,439    8,373    1,507    8,134    -    - 
Agriculture   -    -    -    -    -    - 
All Other Commercial   4,189    4,189    993    3,241    -    - 
Residential                              
First Liens   39    39    -    849    -    - 
Home Equity   191    191    -    189    -    - 
Junior Liens   -    -    -    -    -    - 
Multifamily   -    -    -    -    -    - 
All Other Residential   -    -    -    3,693    -    - 
Consumer                              
Motor Vehicle   -    -    -    -    -    - 
All Other Consumer   -    -    -    -    -    - 
TOTAL  $27,485   $27,217   $6,157   $32,731   $-   $- 

 

10
 

  

          December 31, 2012         
           Allowance           Cash Basis 
   Unpaid       for Loan   Average   Interest   Interest 
   Principal   Recorded   Losses   Recorded   Income   Income 
(Dollar amounts in thousands)  Balance   Investment   Allocated   Investment   Recognized   Recognized 
With no related allowance recorded:                              
Commercial                              
Commercial & Industrial  $-   $-   $-   $1,013   $-   $- 
Farmland   -    -    -    -    -    - 
Non Farm, Non Residential   -    -    -    1,679    -    - 
Agriculture   -    -    -    -    -    - 
All Other Commercial   -    -    -    -    -    - 
Residential                              
First Liens   -    -    -    150    -    - 
Home Equity   -    -    -    -    -    - 
Junior Liens   -    -    -    -    -    - 
Multifamily   -    -    -    50    -    - 
All Other Residential   -    -    -    -    -    - 
Consumer                              
Motor Vehicle   -    -    -    -    -    - 
All Other Consumer   -    -    -    -    -    - 
With an allowance recorded:                              
Commercial                              
Commercial & Industrial   17,262    17,098    3,153    16,738    -    - 
Farmland   891    891    191    891    -    - 
Non Farm, Non Residential   7,438    7,386    293    5,000    179    - 
Agriculture   -    -    -    -    -    - 
All Other Commercial   1,209    1,209    52    1,362    -    - 
Residential                              
First Liens   1,254    1,254    126    1,230    -    - 
Home Equity   179    179    -    75    -    - 
Junior Liens   -    -    -    176    -    - 
Multifamily   5,540    5,540    3,794    2,216    -    - 
All Other Residential   -    -    -    -    -    - 
Consumer                              
Motor Vehicle   -    -    -    -    -    - 
All Other Consumer   -    -    -    -    -    - 
TOTAL  $33,773   $33,557   $7,609   $30,580   $179   $- 

 

11
 

  

   Three Months Ended   Six Months Ended 
   June 30, 2013   June 30, 2013 
   Average   Interest   Cash Basis   Average   Interest   Cash Basis 
   Recorded   Income   Interest Income   Recorded   Income   Interest Income 
(Dollar amounts in thousands)  Investment   Recognized   Recognized   Investment   Recognized   Recognized 
With no related allowance recorded:                              
Commercial                              
Commercial & Industrial  $1,164   $-   $-   $776   $-   $- 
Farmland   -    -    -    -    -    - 
Non Farm, Non Residential   -    -    -    -    -    - 
Agriculture   -    -    -    -    -    - 
All Other Commercial   -    -    -    -    -    - 
Residential                              
First Liens   17    -    -    11    -    - 
Home Equity   -    -    -    -    -    - 
Junior Liens   -    -    -    -    -    - 
Multifamily   -    -    -    -    -    - 
All Other Residential   -    -    -    -    -    - 
Consumer                              
Motor Vehicle   -    -    -    -    -    - 
All Other Consumer   -    -    -    -    -    - 
With an allowance recorded:                              
Commercial                              
Commercial & Industrial   14,317    -    -    15,244    -    - 
Farmland   446    -    -    594    -    - 
Non Farm, Non Residential   8,509    -    -    8,134    -    - 
Agriculture   -    -    -    -    -    - 
All Other Commercial   4,258    -    -    3,241    -    - 
Residential                              
First Liens   646    -    -    849    -    - 
Home Equity   194    -    -    189    -    - 
Junior Liens   -    -    -    -    -    - 
Multifamily   -    -    -    -    -    - 
All Other Residential   2,770    -    -    3,693    -    - 
Consumer                              
Motor Vehicle   -    -    -    -    -    - 
All Other Consumer   -    -    -    -    -    - 
TOTAL  $32,321   $-   $-   $32,731   $-   $- 

 

12
 

 

   Three Months Ended   Six Months Ended 
   June 30, 2012   June 30, 2012 
   Average   Interest   Cash Basis   Average   Interest   Cash Basis 
   Recorded   Income   Interest Income   Recorded   Income   Interest Income 
(Dollar amounts in thousands)  Investment   Recognized   Recognized   Investment   Recognized   Recognized 
With no related allowance recorded:                              
Commercial                              
Commercial & Industrial  $1,284   $-   $-   $856   $-   $- 
Farmland   -    -    -    -    -    - 
Non Farm, Non Residential   1,975    -    -    2,798    -    - 
Agriculture   -    -    -    -    -    - 
All Other Commercial   -    -    -    -    -    - 
Residential                              
First Liens   -    -    -    250    -    - 
Home Equity   -    -    -    -    -    - 
Junior Liens   -    -    -    -    -    - 
Multifamily   -    -    -    83    -    - 
All Other Residential   -    -    -    -    -    - 
Consumer                              
Motor Vehicle   -    -    -    -    -    - 
All Other Consumer   -    -    -    -    -    - 
With an allowance recorded:                              
Commercial                              
Commercial & Industrial   16,669    -    -    17,068    -    - 
Farmland   891    -    -    891    -    - 
Non Farm, Non Residential   2,609    -    -    3,345    -    - 
Agriculture   -    -    -    -    -    - 
All Other Commercial   1,384    -    -    1,428    -    - 
Residential                              
First Liens   1,213    -    -    1,213    -    - 
Home Equity   -    -    -    -    -    - 
Junior Liens   -    -    -    293    -    - 
Multifamily   -    -    -    -    -    - 
All Other Residential   -    -    -    -    -    - 
Consumer                              
Motor Vehicle   -    -    -    -    -    - 
All Other Consumer   -    -    -    -    -    - 
TOTAL  $26,025   $-   $-   $28,225   $-   $- 

 

13
 

 

The table below presents the recorded investment in non-performing loans.

 

       June 30, 2013 
   Loans Past         
   Due Over   Troubled     
   90 Day Still   Debt     
(Dollar amounts in thousands)  Accruing   Restructurings   Nonaccrual 
Commercial               
Commercial & Industrial  $245   $10,288   $6,877 
Farmland   61    -    61 
Non Farm, Non Residential   -    4,717    8,003 
Agriculture   -    -    81 
All Other Commercial   -    -    4,601 
Residential               
First Liens   514    4,228    5,357 
Home Equity   62    -    191 
Junior Liens   113    -    557 
Multifamily   -    -    149 
All Other Residential   -    -    141 
Consumer               
Motor Vehicle   89    676    170 
All Other Consumer   -    17    1,366 
TOTAL  $1,084   $19,926   $27,554 

 

       December 31, 2012 
   Loans Past         
   Due Over   Troubled     
   90 Day Still   Debt     
(Dollar amounts in thousands)  Accruing   Restructurings   Nonaccrual 
Commercial               
Commercial & Industrial  $724   $11,573   $9,360 
Farmland   231    -    907 
Non Farm, Non Residential   491    4,836    6,718 
Agriculture   69    -    104 
All Other Commercial   -    -    4,811 
Residential               
First Liens   1,237    4,126    6,852 
Home Equity   24    -    196 
Junior Liens   538    -    405 
Multifamily   101    -    5,598 
All Other Residential   -    -    150 
Consumer               
Motor Vehicle   133    685    174 
All Other Consumer   3    16    1,519 
TOTAL  $3,551   $21,236   $36,794 

 

Loans covered by loss share agreements with the FDIC included in loans past due over 90 days still on accrual are $24 thousand at June 30, 2013 and $630 thousand at December 31, 2012. Covered loans included in non-accrual loans are $2.7 million at June 30, 2013 and $4.3 million at December 31, 2012. Covered loans of $1.7 million at June 30, 2013 and $2.9 million at December 31, 2012 are deemed impaired and have allowance for loan loss allocated to them of $100 thousand and $236 thousand, respectively for June 30, 2013 and December 31, 2012. Non-performing loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

 

14
 

 

The following table presents the aging of the recorded investment in loans by past due category and class of loans.

 

           June 30, 2013             
           Greater             
   30-59 Days   60-89 Days   than 90 days   Total         
(Dollar amounts in thousands)  Past Due   Past Due   Past Due   Past Due   Current   Total 
Commercial                              
Commercial & Industrial  $1,428   $820   $7,255   $9,503   $467,641   $477,144 
Farmland   189    -    65    254    84,843    85,097 
Non Farm, Non Residential   1,558    48    3,866    5,472    265,855    271,327 
Agriculture   395    -    2    397    121,016    121,413 
All Other Commercial   204    195    363    762    95,895    96,657 
Residential                              
First Liens   1,732    1,573    2,480    5,785    335,621    341,406 
Home Equity   113    31    62    206    42,627    42,833 
Junior Liens   199    173    505    877    33,722    34,599 
Multifamily   357    -    48    405    58,626    59,031 
All Other Residential   -    -    -    -    9,757    9,757 
Consumer                              
Motor Vehicle   2,868    482    98    3,448    243,599    247,047 
All Other Consumer   99    25    -    124    21,771    21,895 
TOTAL  $9,142   $3,347   $14,744   $27,233   $1,780,973   $1,808,206 

 

           December 31, 2012         
           Greater             
   30-59 Days   60-89 Days   than 90 days   Total         
(Dollar amounts in thousands)  Past Due   Past Due   Past Due   Past Due   Current   Total 
Commercial                              
Commercial & Industrial  $1,315   $861   $3,616   $5,792   $487,160   $492,952 
Farmland   534    -    1,122    1,656    87,270    88,926 
Non Farm, Non Residential   5,618    1,004    2,449    9,071    290,023    299,094 
Agriculture   137    -    78    215    130,404    130,619 
All Other Commercial   568    202    350    1,120    81,453    82,573 
Residential                              
First Liens   8,359    1,659    4,599    14,617    336,230    350,847 
Home Equity   143    15    24    182    43,317    43,499 
Junior Liens   555    98    586    1,239    36,535    37,774 
Multifamily   52    -    5,641    5,693    49,019    54,712 
All Other Residential   214    -    -    214    10,834    11,048 
Consumer                              
Motor Vehicle   4,164    600    182    4,946    241,303    246,249 
All Other Consumer   225    93    3    321    23,318    23,639 
TOTAL  $21,884   $4,532   $18,650   $45,066   $1,816,866   $1,861,932 

 

Troubled Debt Restructurings:

 

The Corporation has allocated $3.7 million and $1.6 million of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of June 30, 2013 and December 31, 2012. The Corporation has not committed to lend additional amounts as of June 30, 2013 and December 31, 2012 to customers with outstanding loans that are classified as troubled debt restructurings. Modification of the terms of such loans typically include one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk. No modification in 2013 or 2012 resulted in permanent reduction of the recorded investment in the loan. There were $90 thousand in modifications that were troubled debt restructurings in the quarter ended June 30, 2013 and $655 thousand for the three months ended June 30, 2012, resulting in no impact to the allowance for loan losses. There were no loans that defaulted during the six months ended June 30, 2013 or 2012 that had been restructured within the past 12 months.

 

15
 

 

Credit Quality Indicators:

 

The Corporation categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Corporation analyzes loans individually by classifying the loans as to credit risk. This analysis includes non-homogeneous loans, such as commercial loans, with an outstanding balance greater than $50 thousand. Any consumer loans outstanding to a borrower who had commercial loans analyzed will be similarly risk rated. This analysis is performed on a quarterly basis. The Corporation uses the following definitions for risk ratings:

 

Special Mention: Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

 

Substandard: Loans classified as substandard are inadequately protected by the current net worth and debt service capacity of the borrower or of any pledged collateral. These loans have a well-defined weakness or weaknesses which have clearly jeopardized repayment of principal and interest as originally intended. They are characterized by the distinct possibility that the institution will sustain some future loss if the deficiencies are not corrected.

 

Doubtful: Loans classified as doubtful have all the weaknesses inherent in those graded substandard, with the added characteristic that the severity of the weaknesses makes collection or liquidation in full highly questionable or improbable based upon currently existing facts, conditions, and values.

 

Furthermore, non-homogeneous loans which were not individually analyzed, but are 90+ days past due or on non-accrual are classified as substandard. Loans included in homogeneous pools, such as residential or consumer may be classified as substandard due to 90+ days delinquency, non-accrual status, bankruptcy, or loan restructuring.

 

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. Loans listed as not rated are either less than $100 thousand or are included in groups of homogeneous loans. As of June 30, 2013 and December 31, 2012, and based on the most recent analysis performed, the risk category of loans by class of loans are as follows:

 

           June 30, 2013             
       Special                 
(Dollar amounts in thousands)  Pass   Mention   Substandard   Doubtful   Not Rated   Total 
Commercial                              
Commercial & Industrial  $414,347   $23,878   $28,895   $6,103   $2,791   $476,014 
Farmland   80,045    3,097    685    -    35    83,862 
Non Farm, Non Residential   236,649    9,962    21,931    870    1,195    270,607 
Agriculture   114,878    4,703    97    -    436    120,114 
All Other Commercial   80,642    3,453    11,124    49    816    96,084 
Residential                              
First Liens   110,195    10,336    8,760    1,354    209,524    340,169 
Home Equity   13,229    602    1,477    115    27,334    42,757 
Junior Liens   9,246    191    476    243    24,317    34,473 
Multifamily   54,073    3,121    1,581    101    19    58,895 
All Other Residential   1,956    -    33    -    7,733    9,722 
Consumer                              
Motor Vehicle   11,644    315    383    10    233,521    245,873 
All Other Consumer   3,754    62    64    19    17,860    21,759 
TOTAL  $1,130,658   $59,720   $75,506   $8,864   $525,581   $1,800,329 

 

16
 

 

           December 31, 2012         
       Special                 
(Dollar amounts in thousands)  Pass   Mention   Substandard   Doubtful   Not Rated   Total 
Commercial                              
Commercial & Industrial  $414,680   $31,368   $31,442   $7,138   $7,025   $491,653 
Farmland   81,977    2,718    1,616    -    805    87,116 
Non Farm, Non Residential   249,614    25,764    22,038    831    42    298,289 
Agriculture   119,789    8,921    134    -    62    128,906 
All Other Commercial   69,952    132    11,239    54    803    82,180 
Residential                              
First Liens   113,360    8,986    11,516    689    215,034    349,585 
Home Equity   13,035    469    1,631    23    28,267    43,425 
Junior Liens   10,419    50    515    70    26,575    37,629 
Multifamily   42,719    3,328    8,481    59    -    54,587 
All Other Residential   2,840    -    35    -    8,136    11,011 
Consumer   -                          
Motor Vehicle   11,695    262    311    25    232,727    245,020 
All Other Consumer   4,614    73    104    21    18,675    23,487 
TOTAL  $1,134,694   $82,071   $89,062   $8,910   $538,151   $1,852,888 

 

3. Securities

 

The amortized cost and fair value of the Corporation’s investments are shown below. All securities are classified as available-for-sale.

 

       (000's)     
       June 30, 2013     
   Amortized
Cost
   Unrealized
Gains
   Unrealized
Losses
   Fair Value 
U.S. Government agencies  $1,719   $36   $-   $1,755 
Mortgage Backed Securities - Residential   220,988    8,589    (1,887)   227,690 
Mortgage Backed Securities - Commercial   4,905    1    (268)   4,638 
Collateralized Mortgage Obligations   410,427    1,728    (9,158)   402,997 
State and Municipal Obligations   185,821    7,257    (1,757)   191,321 
Collateralized Debt Obligations   11,356    4,124    (7,304)   8,176 
Equity Securities   320    150    -    470 
TOTAL  $835,536   $21,885   ($20,374)  $837,047 

 

       (000's)     
       December 31, 2012     
   Amortized   Unrealized     
(Dollar amounts in thousands)  Cost   Gains    Losses    Fair Value 
U.S. Government agencies  $1,807   $79   $-   $1,886 
Mortgage Backed Securities-residential   231,316    13,373    (13)   244,676 
Mortgage Backed Securities-commercial   5,146    1    (16)   5,131 
Collateralized mortgage obligations   230,739    2,827    (246)   233,320 
State and municipal   187,044    12,518    (77)   199,485 
Collateralized debt obligations   12,243    1,761    (7,882)   6,122 
Equities   320    60    -    380 
TOTAL  $668,615   $30,619   $(8,234)  $691,000 

 

17
 

 

Contractual maturities of debt securities at June 30, 2013 were as follows. Securities not due at a single maturity or with no maturity date, primarily mortgage-backed and equity securities are shown separately.

 

   Available-for-Sale 
   Amortized   Fair 
(Dollar amounts in thousands)  Cost   Value 
Due in one year or less  $14,192   $14,321 
Due after one but within five years   30,512    31,986 
Due after five but within ten years   88,599    91,523 
Due after ten years   476,020    466,419 
    609,323    604,249 
Mortgage-backed securities and equities   226,213    232,798 
TOTAL  $835,536   $837,047 

 

There were $7 thousand in gains from investment sales realized by the Corporation for the six months ended June 30, 2013. For the three months ended June 30, 2013 the gains were $3 thousand. There were $664 thousand in gains and $4 thousand in losses from investment sales, and $11 thousand in losses from OTTI realized by the Corporation for the six months ended June 30, 2012. The $11 thousand of OTTI was realized in the second quarter of 2012.

 

The following tables show the securities’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in continuous unrealized loss position, at June 30, 2013 and December 31, 2012.

 

           June 30, 2013         
   Less Than 12 Months   More Than 12 Months       Total 
       Unrealized       Unrealized       Unrealized 
(Dollar amounts in thousands)  Fair Value   Losses   Fair Value   Losses   Fair Value   Losses 
Mortgage Backed Securities - Residential  $62,792   $(1,887)  $-   $-   $62,792   $(1,887)
Mortgage Backed Securities - Commercial   4,599    (268)   -    -    4,599    (268)
Collateralized mortgage obligations   31,480    (9,158)   -    -    31,480    (9,158)
State and municipal obligations   35,591    (1,654)   985    (103)   36,576    (1,757)
Collateralized Debt Obligations   -    -    3,874    (7,304)   3,874    (7,304)
Total temporarily impaired securities  $134,462   $(12,967)  $4,859   $(7,407)  $139,321   $(20,374)

 

           December 31, 2012         
   Less Than 12 Months   More Than 12 Months       Total 
       Unrealized       Unrealized       Unrealized 
(Dollar amounts in thousands)  Fair Value   Losses   Fair Value   Losses   Fair Value   Losses 
Mortgage Backed Securities - Residential  $7,245   $(13)  $-   $-   $7,245   $(13)
Mortgage Backed Securities - Commercial   5,086    (16)   -    -    5,086    (16)
Collateralized mortgage obligations   46,121    (246)   -    -    46,121    (246)
State and municipal obligations   8,611    (77)   -    -    8,611    (77)
Collateralized Debt Obligations   -    -    4,032    (7,882)   4,032    (7,882)
Total temporarily impaired securities  $67,063   $(352)  $4,032   $(7,882)  $71,095   $(8,234)

 

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. The investment securities portfolio is evaluated for OTTI by segregating the portfolio into two general segments and applying the appropriate OTTI model. Investment securities are generally evaluated for OTTI under FASB ASC 320, Investments - Debt and Equity Securities. However, certain purchased beneficial interests, including non-agency mortgage-backed securities, asset-backed securities, and collateralized debt obligations, that had credit ratings at the time of purchase of below AA are evaluated using the model outlined in FASB ASC 325-40, Beneficial Interests in Securitized Financial Assets.

 

In determining OTTI under the FASB ASC 320 model, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the security or more likely than not will be required to sell the security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

 

18
 

 

The second segment of the portfolio uses the OTTI guidance provided by FASB ASC 325 that is specific to purchased beneficial interests that, on the purchase date, were rated below AA. Under the FASB ASC 325 model, the Company compares the present value of the remaining cash flows as estimated at the preceding evaluation date to the current expected remaining cash flows. An OTTI is deemed to have occurred if there has been an adverse change in the remaining expected future cash flows.

 

When OTTI occurs under either model, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss. If an entity intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss, the OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.

 

Gross unrealized losses on investment securities were $20.4 million as of June 30, 2013 and $8.2 million as of December 31, 2012. A majority of these losses represent negative adjustments to market value relative to the interest rate environment and not losses related to the creditworthiness of the issuer. Based upon our review of the issuers, we do not believe these investments to be other than temporarily impaired. Management does not intend to sell these securities and it is not more likely than not that we will be required to sell them before their anticipated recovery.

 

A significant portion of the total unrealized loss in investment securities relates to collateralized debt obligations that were separately evaluated under FASB ASC 325-40, Beneficial Interests in Securitized Financial Assets. Based upon qualitative considerations, such as a down grade in credit rating or further defaults of underlying issuers during the quarter, and an analysis of expected cash flows, we have determined that three of the CDO’s included in collateralized debt obligations were other-than-temporarily impaired, though no impairment was identified during the first or second quarter of 2013. Those three CDO’s have a contractual balance of $26.9 million at June 30, 2013 which has been reduced to $7.6 million by $1.2 million of interest payments received, $14.9 million of cumulative OTTI charges recorded through earnings to date, and $3.2 million recorded in other comprehensive income ($2.0 million after tax effect). The severity of the OTTI recorded varies by security, based on the analysis described below, and ranges at June 30, 2013 from 28% to 92%. The losses recorded in other comprehensive income represents temporary impairment due to factors other than credit loss, mainly current market illiquidity. The issuers in these securities are primarily banks, but some of the pools do include a limited number of insurance companies. The market for these securities has become very illiquid, there are very few new issuances of trust preferred securities and the credit spreads implied by current prices have increased dramatically and remain very high, resulting in significant non-credit related impairment. The Company uses the OTTI evaluation model to compare the present value of expected cash flows to the previous estimate to ensure there are no adverse changes in cash flows during the quarter. The OTTI model considers the structure and term of the CDO and the financial condition of the underlying issuers. Specifically, the model details interest rates, principal balances of note classes and underlying issuers, the timing and amount of interest and principal payments of the underlying issuers, and the allocation of the payments to the note classes. Cash flows are projected using a forward rate LIBOR curve, as these CDOs are variable rate instruments. An average rate is then computed using this same forward rate curve to determine an appropriate discount rate (3 month LIBOR plus margin ranging from 160 to 180 basis points). The current estimate of expected cash flows is based on the most recent trustee reports and any other relevant market information including announcements of interest payment deferrals or defaults of underlying trust preferred securities. Assumptions used in the model include expected future default rates and prepayments. In addition we use the model to “stress” each CDO, or make assumptions more severe than expected activity, to determine the degree to which assumptions could deteriorate before the CDO could no longer fully support repayment of the Company’s note class.

 

In July 2013, the Corporation received a $1.3 million payment on a CDO with a book value at June 30, 2013 of $.2 million. This CDO had the highest severity of recorded impairment and a payment of this magnitude (and timing) was not contemplated in the OTTI evaluation at June 30, 2013. This payment will be included in future evaluations of this CDO and management expects that some portion of this payment will be recorded as a recovery of previously recorded OTTI in the third quarter of 2013.

 

Collateralized debt obligations include an investment in a CDO consisting of pooled trust preferred securities in which the issuers are primarily banks. This CDO with an amortized cost of $646 thousand and a fair value of $583 thousand is rated BAA3 and is the senior tranche, is not in the scope of FASB ASC 325, as it was rated high investment grade at purchase, and is not considered to be other-than-temporarily impaired based on its credit quality. Its fair value is negatively impacted by the factors described above.

 

Management has consistently used Standard & Poors pricing to value these investments. There are a number of other pricing sources available to determine fair value for these investments. These sources utilize a variety of methods to determine fair value. The result is a wide range of estimates of fair value for these securities. The Standard & Poors pricing ranges from 4.4 to 90.3 while Moody Investor Service pricing ranges from .32 to 90.5, with others falling somewhere in between. We recognize that the Standard & Poors pricing utilized is an estimate, but have been consistent in using this source and its estimate of fair value.

 

Equity securities relate to investments in bank stocks held at the holding company. In the second quarter of 2012 the Corporation recognized other-than-temporary impairment on an equity security in the amount of $11 thousand. Bank stock values have been negatively impacted by the current economic environment and market pessimism.

 

19
 

 

The table below presents a rollforward of the credit losses recognized in earnings for the three and six month periods ended June 30, 2013 and 2012:

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
(Dollar amounts in thousands)  2013   2012   2013   2012 
Beginning balance  $14,983   $15,180   $14,983   $15,180 
Increases to the amount related to the credit                    
loss for which other-than-temporary was previously recognized   -    11    -    11 
Amounts realized for securities sold during the period   -    (208)   -    (208)
Ending balance  $14,983   $14,983   $14,983   $14,983 

 

4. Fair Value

 

FASB ASC No. 820-10 establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

 

Level 1: Quoted prices (unadjusted) of identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level I prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

 

 The fair value of most securities available for sale is determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).

 

   For those securities that cannot be priced using quoted market prices or observable inputs a Level 3 valuation is determined. These securities are primarily trust preferred securities, which are priced using Level 3 due to current market illiquidity and certain investments in state and municipal securities. The fair value of the trust preferred securities is obtained from a third party provider without adjustment. As described previously, management obtains values from other pricing sources to validate the Standard & Poors pricing that they currently utilize. The fair value of state and municipal obligations are derived by comparing the securities to current market rates plus an appropriate credit spread to determine an estimated value. Illiquidity spreads are then considered. Credit reviews are performed on each of the issuers. The significant unobservable inputs used in the fair value measurement of the Corporation’s state and municipal obligations are credit spreads related to specific issuers. Significantly higher credit spread assumptions would result in significantly lower fair value measurement. Conversely, significantly lower credit spreads would result in a significantly higher fair value measurements.

 

The fair value of derivatives is based on valuation models using observable market data as of the measurement date (Level 2 inputs).

 

   June 30, 2013 
   Fair Value Measurements Using Significant 
   Unobservable Inputs (Level 3) 
(Dollar amounts in thousands)  Level 1   Level 2   Level 3   Total 
U.S. Government agencies  $-   $1,755   $-   $1,755 
Mortgage Backed Securities-residential   -    227,690    -    227,690 
Mortgage Backed Securities-commercial   -    4,638    -    4,638 
Collateralized mortgage obligations   -    402,997    -    402,997 
State and municipal   -    184,819    6,502    191,321 
Collateralized debt obligations   -    -    8,176    8,176 
Equities   470    -    -    470 
TOTAL  $470   $821,899   $14,678   $837,047 
Derivative Assets        1,401           
Derivative Liabilities        (1,401)          

 

20
 

   

   December 31, 2012 
   Fair Value Measurements Using Significant 
   Unobservable Inputs (Level 3) 
(Dollar amounts in thousands)  Level 1   Level 2   Level 3   Total 
U.S. Government agencies  $-   $1,886   $-   $1,886 
Mortgage Backed Securities-residential   -    244,676    -    244,676 
Mortgage Backed Securities-commercial   -    5,131    -    5,131 
Collateralized mortgage obligations   -    233,320    -    233,320 
State and municipal   -    189,574    9,911    199,485 
Collateralized debt obligations   -    -    6,122    6,122 
Equities   380    -    -    380 
TOTAL  $380   $674,587   $16,033   $691,000 
Derivative Assets        2,053           
Derivative Liabilities        (2,053)          

 

There were no transfers between Level 1 and Level 2 during 2013 and 2012.

 

The table below presents a reconciliation and income statement classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and six months ended June 30, 2013 and the year ended December 31, 2012.

 

   Fair Value Measurements Using SignificantUnobservable Inputs (Level 3) 
   Three months ended June 30, 2013 
   State and   Collateralized     
   municipal   debt     
   obligations   obligations   Total 
Beginning balance, April 1  $6,502   $5,972   $12,474 
Total realized/unrealized gains or losses               
Included in earnings   -    -    - 
Included in other comprehensive income   -    2,408    2,408 
Transfers & Purchases   -    -    - 
Settlements   -    (204)   (204)
Ending balance, June 30  $6,502   $8,176   $14,678 

 

   Fair Value Measurements Using SignificantUnobservable Inputs (Level 3) 
   Six months ended June 30, 2013 
   State and   Collateralized     
   municipal   debt     
   obligations   obligations   Total 
Beginning balance, January 1  $9,911   $6,122   $16,033 
Total realized/unrealized gains or losses               
Included in earnings   -         - 
Included in other comprehensive income   -    2,803    2,803 
Transfers & Purchases   -    -    - 
Settlements   (3,409)   (749)   (4,158)
Ending balance, June 31  $6,502   $8,176   $14,678 

 

21
 

 

   Fair Value Measurements Using SignificantUnobservable Inputs (Level 3) 
   December 31, 2012 
       State and   Collateralized     
       municipal   debt     
   Equities   obligations   obligations   Total 
Beginning balance, January 1  $1,711   $9,525   $4,771   $16,007 
Total realized/unrealized gains or losses                    
Included in earnings   (446)   -    (96)   (542)
Included in other comprehensive income   -    -    1,556    1,556 
Transfers & Purchases   -    1,186    -    1,186 
Settlements   (1,265)   (800)   (109)   (2,174)
Ending balance, December 31  $-   $9,911   $6,122   $16,033 

  

The following table presents quantitative information about recurring and non-recurring Level 3 fair value measurements at June 30, 2013.

 

   Fair Value   Valuation Technique(s)  Unobservable Input(s)  Range  
State and municipal obligations  $6,502   Discounted cash flow  Discount rate
Probability of default
  3.05%-5.50%
0%
 
Other real estate    $9,336   Sales comparison/income approach  Discount rate for age of appraisal and market conditions  5.00%-20.00%  
Impaired Loans   21,060   Sales comparison/income approach  Discount rate for age of appraisal and market conditions  0.00%-50.00%  

 

All impaired loans disclosed in footnote 2 are valued at Level 3 and are carried at a fair value of $21.1 million, net of a valuation allowance of $6.2 million at June 30, 2013. At December 31, 2012 impaired loans valued at Level 3 were carried at a fair value of $26.0 million, net of a valuation allowance of $7.6 million. The impact to the provision for loan losses was $(0.6) and $2.4 million for the three and six months ended June 30, 2013, and was $4.2 million for the year ended December 31, 2012. Other real estate owned is valued at Level 3. Other real estate owned at June 30, 2013, with a value of $9.3 million was reduced $232 thousand for fair value adjustment. Other real estate owned at December 31, 2012, with a value of $7.7 million was reduced $234 thousand for fair value adjustment.

 

Fair value is measured based on the value of the collateral securing those loans, and is determined using several methods. Generally the fair value of real estate is determined based on appraisals by qualified licensed appraisers. Appraisals for real estate generally use three methods to derive value: cost, sales or market comparison and income approach. The cost method bases value on the cost to replace current property. The market comparison evaluates the sales price of similar properties in the same market area. The income approach considers net operating income generated by the property and the investor’s required return. The final fair value is based on a reconciliation of these three approaches. If an appraisal is not available, the fair value may be determined by using a cash flow analysis, a broker’s opinion of value, the net present value of future cash flows, or an observable market price from an active market. Fair value of other real estate is based upon the current appraised values of the properties as determined by qualified licensed appraisers and the Company’s judgment of other relevant market conditions. Appraisals are obtained annually and reductions in value are recorded as a valuation through a charge to expense. The primary unobservable input used by management in estimating fair value are additional discounts to the appraised value to consider selling costs and the age of the appraisal, which are based on management’s past experience in resolving these types of properties. These discounts range from 5% to20% for costs to sell and marketability. Other real estate and impaired loans carried at fair value are primarily comprised of smaller balance properties. One impaired loan has an estimated fair value of $3.9 million. The collateral securing this loan is a hotel and was appraised based on income and sales comparison approaches. Given the current distressed market, it was difficult for the appraiser to identify recent and relevant comparable sales, therefore the value was based predominantly on the income method which applied a 9.5% capitalization rate to projected net operating income.

 

22
 

 

The following tables presents loans identified as impaired by class of loans as of June 30, 2013 and December 31, 2012, which are all considered Level 3.

 

   June 30, 2013 
(Dollar amounts in thousands) 

Carrying

Value

   Allowance
for Loan
Losses
Allocated
   Fair Value 
Commercial               
Commercial & Industrial  $14,391   $3,657   $10,734 
Farmland   -    -    - 
Non Farm, Non Residential   8,373    1,507    6,866 
Agriculture   -    -    - 
All Other Commercial   4,189    993    3,196 
Residential               
First Liens   73    -    73 
Home Equity   191    -    191 
Junior Liens   -    -    - 
Multifamily   -    -    - 
All Other Residential   -    -    - 
Consumer               
Motor Vehicle   -    -    - 
All Other Consumer   -    -    - 
TOTAL  $27,217   $6,157   $21,060 

 

   December 31, 2012 
(Dollar amounts in thousands) 

Carrying

Value

   Allowance
for Loan
Losses
Allocated
   Fair Value 
Commercial               
Commercial & Industrial  $17,098   $3,153   $13,945 
Farmland   891    191    700 
Non Farm, Non Residential   7,386    293    7,093 
Agriculture   -    -      
All Other Commercial   1,209    52    1,157 
Residential               
First Liens   1,254    126    1,128 
Home Equity   179    -    179 
Junior Liens   -    -    - 
Multifamily   5,540    3,794    1,746 
All Other Residential   -         - 
Consumer               
Motor Vehicle   -         - 
All Other Consumer   -         - 
TOTAL  $33,557   $7,609   $25,948 

 

The carrying amounts and estimated fair value of financial instruments at June 30, 2013 and December 31, 2012, are shown below. Carrying amount is the estimated fair value for cash and due from banks, federal funds sold, short-term borrowings, accrued interest receivable and payable, demand deposits, short-term debt and variable-rate loans or deposits that reprice frequently and fully. Security fair values were described previously. For fixed-rate, non-impaired loans or deposits, variable rate loans or deposits with infrequent repricing or repricing limits, and for longer-term borrowings, fair value is based on discounted cash flows using current market rates applied to the estimated life and considering credit risk. The valuation of impaired loans was described previously. Loan fair value estimates do not necessarily represent an exit price. Fair values of loans held for sale are based on market bids on the loans or similar loans. It was not practicable to determine the fair value of Federal Home Loan Bank stock due to restrictions placed on its transferability. For the FDIC indemnification asset the carrying value is the estimated fair value as it represents amounts to be received from the FDIC in the near term. Fair value of debt is based on current rates for similar financing. The fair value of off-balance sheet items is not considered material.

 

23
 

 

   June 30, 2013     
   Carrying   Fair Value 
(Dollar amounts in thousands)  Value   Level 1   Level 2   Level 3   Total 
                     
Cash and due from banks  $73,720   $17,946   $55,774   $-   $73,720 
Federal funds sold   10,215    -    10,215    -    10,215 
Securities available—for—sale   837,047    470    821,898    14,679    837,047 
Restricted stock   21,050    n/a    n/a    n/a    n/a 
Loans, net   1,777,186    -         1,832,518    1,832,518 
FDIC Indemnification Asset   1,515    -    1,515    -    1,515 
Accrued interest receivable   11,046    -    3,171    7,875    11,046 
Deposits   (2,279,505)   -    (2,282,242)   -    (2,282,242)
Short—term borrowings   (29,194)   -    (29,194)   -    (29,194)
Federal Home Loan Bank advances   (209,534)   -    (211,786)   -    (211,786)
Accrued interest payable   (924)   -    (924)   -    (924)

 

   December 31, 2012       
   Carrying   Fair Value 
(Dollar amounts in thousands)  Value   Level 1   Level 2   Level 3   Total 
Cash and due from banks  $87,230   $21,333   $65,897   $-   $87,230 
Federal funds sold   20,800    -    20,800    -    20,800 
Securities available—for—sale   691,000    380    674,587    16,033    691,000 
Restricted stock   21,292    n/a    n/a    n/a    n/a 
Loans, net   1,829,978    -    -    1,916,256    1,916,256 
FDIC Indemnification Asset   2,632    -    2,632    -    2,632 
Accrued interest receivable   12,024    -    2,980    9,044    12,024 
Deposits   (2,276,134)   -    (2,280,910)   -    (2,280,910)
Short—term borrowings   (40,551)   -    (40,551)   -    (40,551)
Federal Home Loan Bank advances   (119,705)   -    (124,933)   -    (124,933)
Accrued interest payable   (1,163)   -    (1,163)   -    (1,163)

 

5. Short-Term Borrowings

 

Period–end short-term borrowings were comprised of the following:

 

   (000 's) 
   June 30,   December 31, 
   2013   2012 
Federal Funds Purchased  $1,400   $2,750 
Repurchase Agreements   27,794    37,801 
  $29,194   $40,551 

 

6. Other Borrowings

 

Other borrowings at period-end are summarized as follows:

 

   (000 's) 
   June 30,   December 31, 
   2013   2012 
FHLB Advances  $209,534   $119,705 
   $209,534   $119,705 

 

24
 

 

7. Components of Net Periodic Benefit Cost

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   (000's)   (000's) 
       Post-Retirement       Post-Retirement 
   Pension Benefits   Health Benefits   Pension Benefits   Health Benefits 
   2013   2012   2013   2012   2013   2012   2013   2012 
Service cost  $559   $1,218   $17   $15   $1,119   $2,436   $34   $30 
Interest cost   846    917    43    43    1,692    1,833    87    86 
Expected return on plan assets   (827)   (815)   -    -    (1,655)   (1,629)   -    - 
Amortization of transition obligation   -    -    15    15    -    -    30    30 
Net amortization of prior service cost   (4)   41    -    -    (8)   83    -    - 
Net amortization of net (gain) loss   523    567    -    -    1,046    1,135    -    - 
Net Periodic Benefit Cost  $1,097   $1,928   $75   $73   $2,194   $3,858   $151   $146 

 

Employer Contributions

 

First Financial Corporation previously disclosed in its financial statements for the year ended December 31, 2012 that it expected to contribute $2.1 million and $550 thousand respectively to its Pension Plan and ESOP and $234 thousand to the Post Retirement Health Benefits Plan in 2013. Contributions of $620 thousand have been made to the Pension Plan. Contributions of $103 thousand have been made through the first six months of 2013 for the Post Retirement Health Benefits plan. No contributions have been made in 2013 for the ESOP. The Pension plan was frozen for most employees at the end of 2012 and for those employees there will be discretionary contributions to the ESOP plan and a 401K plan in place of the former Pension benefit. In the first six months of 2013 there has been $700 thousand of expense accrued for potential contributions to these alternative retirement benefit options.

 

8. New accounting standards

 

In February 2013, the Financial Accounting Standards Board (FASB) issued updated guidance related to disclosure of reclassification amounts out of other comprehensive income. The standard requires that companies present either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source and the income statement line items affected by the reclassification. The new requirements will take effect for public companies in fiscal years, and interim periods within those years, beginning after December 15, 2012. The Company has adopted this standard and the effect of adopting this standard increased our disclosure surrounding reclassification items out of accumulated other comprehensive income.

 

In October 2012, the Financial Accounting Standards Board (“FASB”) issued guidance on the subsequent accounting for an indemnification asset recognized at the acquisition date as a result of a government assisted acquisition of a financial institution. When an entity recognizes such an indemnification asset and subsequently a change in the cash flows expected to be collected on the indemnification asset occurs as a result of a change in the cash flows expected to be collected on the indemnified asset, the guidance requires the entity to recognize the change in the measurement of the indemnification asset on the same basis as the indemnified assets. Any amortization of changes in value of the indemnification asset should be limited to the lesser of the term of the indemnification agreement and the remaining life of the indemnified assets. The amendments are effective for fiscal years beginning on or after December 15, 2012 and early adoption is permitted. The amendments are to be applied prospectively to any new indemnification assets acquired after the date of adoption and to indemnification assets existing as of the date of adoption arising from a government-assisted acquisition of a financial institution. The effect of adopting this standard did not have a material effect on the Corporation’s operating results or financial condition.

 

In July 2012, the FASB amended existing guidance relating to testing indefinite-lived intangible assets for impairment. The amendment permits an assessment of qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, it is concluded that it is not more likely than not that the indefinite-lived intangible asset is impaired, then no further action is required. However, after the same assessment, if it is concluded that it is more likely than not that the indefinite-lived intangible asset is impaired, then a quantitative impairment test should be performed whereby the fair value of the indefinite-lived intangible asset is compared to the carrying amount. The amendments in this guidance are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The effect of adopting this standard did not have a material effect on the Corporation’s operating results or financial condition.

 

25
 

 

9. Acquisitions and FDIC Indemnification Asset

 

On July 2, 2009, the Bank entered into a purchase and assumption agreement with the Federal Deposit Insurance Corporation (“FDIC”) to assume all of the deposits (excluding brokered deposits) and certain assets of The First National Bank of Danville, a full-service commercial bank headquartered in Danville, Illinois, that had failed and been placed in receivership with the FDIC. The acquisition consisted of assets worth a fair value of approximately $151.8 million, including $77.5 million of loans, $24.2 million of investment securities, $31.0 million of cash and cash equivalents and $146.3 million of liabilities, including $145.7 million of deposits. A customer related core deposit intangible asset of $4.6 million was also recorded. In addition to the excess of liabilities over assets, the Bank received approximately$14.6 million in cash from the FDIC. Based upon the acquisition date fair values of the net assets acquired, no goodwill was recorded. The transaction resulted in a gain of $5.1 million, which is included in non-interest income in the December 31, 2009 Consolidated Statement of Operations Under the loss-sharing agreement (“LSA”), the Bank will share in the losses on assets covered under the agreement (referred to as covered assets). On losses up to $29 million, the FDIC has agreed to reimburse the Bank for 80 percent of the losses. On losses exceeding $29 million, the FDIC has agreed to reimburse the Bank for 95 percent of the losses. The loss-sharing agreement is subject to following servicing procedures as specified in the agreement with the FDIC. The loss sharing provisions of the agreements for commercial and single family residential mortgage loans are in effect for five and ten years, respectively, from the acquisition date and the loss recovery provisions for such loans are in effect for eight years and ten years, respectively, from the acquisition date. Loans acquired that are subject to the loss-sharing agreement with the FDIC are referred to as covered loans for disclosure purposes. Since the acquisition date the Bank has been reimbursed $18.1 million for losses and carrying expenses and currently carries a balance of $1.5 million. Included in the current balance is the estimate of $469 thousand for 80% of the loans subject to the loss-sharing agreement identified in the allowance for loan loss evaluation as probable incurred losses.

 

FASB ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, applies to a loan with evidence of deterioration of credit quality since origination, acquired by completion of a transfer for which it is probable, at acquisition, that the investor will be unable to collect all contractually required payments receivable. FASB ASC 310-30 prohibits carrying over or creating an allowance for loan losses upon initial recognition. The carrying amount of covered assets at June 30, 2013 and December 31, 2012, consisted of loans accounted for in accordance with FASB ASC 310-30, loans not subject to FASB ASC 310-30 and other assets as shown in the following table:

 

       June 30, 2013         
   ASC 310-30   Non ASC 310-30         
(Dollar amounts in thousands)  Loans   Loans   Other   Total 
Loans  $3,071   $20,464   $-   $23,535 
Foreclosed Assets   -    -    630    630 
Total Covered Assets  $3,071   $20,464   $630   $24,165 

 

       December 31, 2012     
   ASC 310-30   Non ASC 310-30         
   Loans   Loans   Other   Total 
Loans  $4,279   $23,475   $-   $27,754 
Foreclosed Assets   -    -    720    720 
Total Covered Assets  $4,279   $23,475   $720   $28,474 

 

The rollforward of the FDIC Indemnification asset is as follows:

 

       Six Months     
   Quarter Ended   Ended   Year Ended 
   June 30,   June 30,   December 31, 
(Dollar amounts in thousands)  2013   2013   2012 
Beginning balance  $1,770   $2,632   $2,384 
Accretion   -         - 
Net changes in losses and expenses   (128)   (830)   2,422 
Reimbursements from the FDIC   (127)   (287)   (2,174)
TOTAL  $1,515   $1,515   $2,632 

 

On the acquisition date, the preliminary estimate of the contractually required payments receivable for all FASB ASC310-30 loans acquired in the acquisition were $31.6 million, the cash flows expected to be collected were $18.4 million including interest, and the estimated fair value of the loans was $16.7 million. These amounts were determined based upon the estimated remaining life of the underlying loans, which include the effects of estimated prepayments. At June 30, 2013, a majority of these loans were valued based on the liquidation value of the underlying collateral, because the expected cash flows are primarily based on the liquidation of underlying collateral and the timing and amount of the cash flows could not be reasonably estimated. There was a $559 thousand allowance for credit losses related to these loans at June 30, 2013. On the acquisition date, the preliminary estimate of the contractually required payments receivable for all non FASB ASC310-30 loans acquired in the acquisition was $58.4 million and the estimated fair value of the loans was $60.7 million. The impact to the Corporation from the amortization and accretion of premiums and discounts was immaterial.

 

On March 18, 2013, First Financial Bank, a subsidiary of First Financial Corporation entered into a Purchase and Assumption Agreement with Bank of America, National Association. Under the terms of the Agreement, First Financial Bank will purchase certain assets and assume certain liabilities of 7 branch offices and 2 drive-up facilities of Bank of America in central and southern Illinois. Pursuant to the terms of the Agreement, First Financial Bank has agreed to assume approximately $250 million in deposit liabilities and to acquire approximately $2.3 million of loans, as well as real property, furniture, and other fixed operating assets associated with the branches. First Financial Bank will pay a 2.75% deposit premium. The agreement is expected to close in the third quarter of 2013. Regulatory approval has been received.

 

26
 

 

10. Accumulated Other Comprehensive Income

 

The following table summarizes the changes, net of tax within each classification of accumulated other comprehensive income for the three and six months ended June 30, 2013 and 2012.

 

   Unrealized         
   gains and   2013 
   Losses on         
   available-         
   for-sale   Retirement     
(Dollar amounts in thousands)  Securities   plans   Total 
Beginning balance, April 1  $11,764   $(20,689)  $(8,925)
Change in other comprehensive income before reclassification   (10,557)   -    (10,557)
Amounts reclassified from accumulated other comprehensive income   (2)   338    336 
Net Current period other comprehensive other income   (10,559)   338    (10,221)
Ending balance, June 30  $1,205   $(20,351)  $(19,146)

 

   Unrealized         
   gains and   2013 
   Losses on         
   available-         
   for-sale   Retirement     
(Dollar amounts in thousands)  Securities   plans   Total 
Beginning balance, January 1  $13,431   $(20,903)  $(7,472)
Change in other comprehensive income before reclassification   (12,222)   -    (12,222)
Amounts reclassified from accumulated other comprehensive income   (4)   552    548 
Net Current period other comprehensive other income   (12,226)   552    (11,674)
Ending balance, June 30  $1,205   $(20,351)  $(19,146)

 

   Unrealized         
   gains and   2012 
   Losses on         
   available-         
   for-sale   Retirement     
(Dollar amounts in thousands)  Securities   plans   Total 
Beginning balance, April 1  $12,782   $(22,864)  $(10,082)
Change in other comprehensive income before reclassification   734         734 
Amounts reclassified from accumulated other comprehensive income   (392)   402    10 
Net Current period other comprehensive other income   342    402    744 
Ending balance, June 30  $13,124   $(22,462)  $(9,338)

 

   Unrealized         
   gains and   2012 
   Losses on         
   available-         
   for-sale   Retirement     
(Dollar amounts in thousands)  Securities   plans   Total 
Beginning balance, January 1  $12,740   $(23,234)  $(10,494)
Change in other comprehensive income before reclassification   773    -    773 
Amounts reclassified from accumulated other comprehensive income   (389)   772    383 
Net Current period other comprehensive other income   384    772    1,156 
Ending balance, June 30  $13,124   $(22,462)  $(9,338)

 

27
 

 

   Balance   Current   Balance 
   at   Period   at 
(Dollar amounts in thousands)  4/1/2013   Change   6/30/2013 
Unrealized gains (losses) on securities available-for-sale            
without other than temporary impairment  $15,161   $(12,138)  $3,023 
Unrealized gains (losses) on securities available-for-sale               
with other than temporary impairment   (3,397)   1,579    (1,818)
Total unrealized loss on securities available-for-sale  $11,764   $(10,559)  $1,205 
Unrealized loss on retirement plans   (20,689)   338    (20,351)
TOTAL  $(8,925)  $(10,221)  $(19,146)

 

   Balance   Current   Balance 
   at   Period   at 
(Dollar amounts in thousands)  1/1/2013   Change   6/30/2013 
Unrealized gains (losses) on securities available-for-sale            
without other than temporary impairment  $17,044   $(14,021)  $3,023 
Unrealized gains (losses) on securities available-for-sale               
with other than temporary impairment   (3,613)   1,795    (1,818)
Total unrealized loss on securities available-for-sale  $13,431   $(12,226)  $1,205 
Unrealized loss on retirement plans   (20,903)   552    (20,351)
TOTAL  $(7,472)  $(11,674)  $(19,146)

 

   Balance   Current   Balance 
   at   Period   at 
(Dollar amounts in thousands)  4/1/2012   Change   6/30/2012 
Unrealized gains (losses) on securities available-for-sale               
without other than temporary impairment  $18,175   $11   $18,514 
Unrealized gains (losses) on securities available-for-sale               
with other than temporary impairment   (5,393)   3    (5,390)
Total unrealized loss on securities available-for-sale  $12,782   $14   $13,124 
Unrealized loss on retirement plans   (22,864)   402    (22,462)
TOTAL  $(10,082)  $744   $(9,338)

 

   Balance   Current   Balance 
   at   Period   at 
(Dollar amounts in thousands)  1/1/2012   Change   6/30/2012 
Unrealized gains (losses) on securities available-for-sale               
without other than temporary impairment  $18,136   $251   $18,387 
Unrealized gains (losses) on securities available-for-sale               
with other than temporary impairment   (5,396)   133    (5,263)
Total unrealized loss on securities available-for-sale  $12,740   $384   $13,124 
Unrealized loss on retirement plans   (23,234)   772    (22,462)
TOTAL  $(10,494)  $1,156   $(9,338)

 

28
 

 

   Three Months ended June 30, 2013    
Details about accumulated  Amount reclassified from   Affected line item in
other comprehensive  accumulated other   the statement where
income components  comprehensive income   net income is presented
   (in thousands)    
Unrealized gains and losses  $3   Net securities gains (losses)
on available-for-sale   (1)  Income tax expense
securities  $2   Net of tax
         
Amortization of  $(563)(a)   
retirement plan items   225   Income tax expense
   $(338)  Net of tax
         
Total reclassifications for the period  $(336)  Net of tax

 

(a) Included in the computation of net periodic benefit cost. (see Footnote 7 for additional details).

 

   Six Months ended June 30, 2013    
Details about accumulated  Amount reclassified from   Affected line item in
other comprehensive  accumulated other   the statement where
income components  comprehensive income   net income is presented
   (in thousands)    
Unrealized gains and losses  $7   Net securities gains (losses)
on available-for-sale   (3)  Income tax expense
securities  $4   Net of tax
         
Amortization of  $(920)(a)   
retirement plan items   368   Income tax expense
   $(552)  Net of tax
         
Total reclassifications for the period  $(548)  Net of tax

 

(a) Included in the computation of net periodic benefit cost. (see Footnote 7 for additional details).

 

   Three Months ended June 30, 2012    
Details about accumulated  Amount reclassified from   Affected line item in
other comprehensive  accumulated other   the statement where
income components  comprehensive income   net income is presented
   (in thousands)    
Unrealized gains and losses  $653   Net securities gains (losses)
on available-for-sale   (261)  Income tax expense
securities  $392   Net of tax
         
Amortization of  $(670)(a)   
retirement plan items   268   Income tax expense
   $(402)  Net of tax
Total reclassifications for the period  $(10)  Net of tax

 

(a) Included in the computation of net periodic benefit cost. (see Footnote 7 for additional details).

 

29
 

 

   Six Months ended June 30, 2012    
Details about accumulated  Amount reclassified from   Affected line item in
other comprehensive  accumulated other   the statement where
income components  comprehensive income   net income is presented
   (in thousands)    
Unrealized gains and losses  $649   Net securities gains (losses)
on available-for-sale   (260)  Income tax expense
securities  $389   Net of tax
         
Amortization of  $(1,286)(a)   
retirement plan items   514   Income tax expense
   $(772)  Net of tax
Total reclassifications for the period  $(383)  Net of tax

 

(a) Included in the computation of net periodic benefit cost. (see Footnote 7 for additional details).

 

ITEMS 2. and 3. Management's Discussion and Analysis of Financial Condition and Results of Operations

and Quantitative and Qualitative Disclosures About Market Risk

 

The purpose of this discussion is to point out key factors in the Corporation’s recent performance compared with earlier periods. The discussion should be read in conjunction with the financial statements beginning on page three of this report. All figures are for the consolidated entities. It is presumed the readers of these financial statements and of the following narrative have previously read the Corporation’s financial statements for 2012 in the 10-K filed for the fiscal year ended December 31, 2012.

 

This Quarterly Report on Form 10-Q contains forward-looking statements. Forward-looking statements provide current expectations or forecasts of future events and are not guarantees of future performance, nor should they be relied upon as representing management’s views as of any subsequent date. The forward-looking statements are based on management’s expectations and are subject to a number of risks and uncertainties. Although management believes that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from those expressed or implied in such statements. Risks and uncertainties that could cause actual results to differ materially include, without limitation, the Corporation’s ability to effectively execute its business plans; changes in general economic and financial market conditions; changes in interest rates; changes in the competitive environment; continuing consolidation in the financial services industry; new litigation or changes in existing litigation; losses, customer bankruptcy, claims and assessments; changes in banking regulations or other regulatory or legislative requirements affecting the Corporation’s business; and changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board or other regulatory agencies. Additional information concerning factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements is available in the Corporation’s Form 10-K for the year ended December 31, 2012, and subsequent filings with the United States Securities and Exchange Commission (SEC). Copies of these filings are available at no cost on the SEC’s Web site at www.sec.gov or on the Corporation’s Web site at www.first-online.com. Management may elect to update forward-looking statements at some future point; however, it specifically disclaims any obligation to do so.

 

Critical Accounting Policies

 

Certain of the Corporation’s accounting policies are important to the portrayal of the Corporation’s financial condition and results of operations, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances which could affect these judgments include, without limitation, changes in interest rates, in the performance of the economy or in the financial condition of borrowers. Management believes that its critical accounting policies include determining the allowance for loan losses and the valuation of goodwill and valuing investment securities. See further discussion of these critical accounting policies in the 2012 Form 10-K.

 

Summary of Operating Results

 

Net income for the three and six months ended June 30, 2013 was $6.4 and $14.1 million respectively compared to $8.7 and $16.1 million for the same period of 2012. Basic earnings per share decreased to $0.48 for the second quarter of 2013 compared to $0.66 for same period of 2012. Year to date earnings per share at June 30, 2013 is $1.06 compared to $1.22 for the same period of 2012. Return on Assets and Return on Equity were 0.88% and 6.78% respectively, for the three months ended June 30, 2013 compared to 1.20%and 9.43% for the three months ended June 30, 2012. Return on Assets and Equity were 0.96% and 7.49% respectively, for the six months ended June 30, 2013 compared to 1.11%and 8.96% for the six months ended June 30, 2012.

 

30
 

  

The primary components of income and expense affecting net income are discussed in the following analysis.

 

Net Interest Income

 

The Corporation's primary source of earnings is net interest income, which is the difference between the interest earned on loans and other investments and the interest paid for deposits and other sources of funds. Net interest income decreased $1.9 million in the three months ended June 30, 2013 to $25.7 million from $27.7 million in the same period in 2012. The net interest margin for the three months ended June 30, 2013 is 4.09% compared to 4.42% for the same period of 2012, a 7.5% decrease, driven by a greater decline in income realized on earning assets than the decline in the costs of funding. Net interest income for the six months ended June 30, 2013 decreased 5.3% or $2.9 million to $51.9 million from the $54.8 million for the six months ended June 30, 2012.

 

Non-Interest Income

 

Non-interest income for the three months ended June 30, 2013 was $9.7 million, a decrease of $0.1 million from the $9.8 million for the same period of 2012. Non-interest income for the six months ended June 30, 2013 was $0.3 million higher than the same period of 2012. Security gains decrease in 2013 offset increases in other areas of non-interest income.

 

Non-Interest Expenses

 

The Corporation’s non-interest expense for the quarter ended June 30, 2013 increased by $0.3 million to $23.4 million compared to the same period in 2012. Salaries and fringe benefits decreased $178 thousand. For the six months ended June 30, 2013 non-interest expense of $45.6 million decreased $0.9 million over the same period of 2012. Salaries and benefits were reduced $1.0 million. Other expenses in 2012, which include many costs from the acquisition of Freestar bank were reduced $489 thousand in the first six months of 2013 compared to the same periods of 2012.

 

Allowance for Loan Losses

 

The Corporation’s provision for loan losses increased $1.2 million to $6.0 million for the first half of 2013 compared to $4.8 million for the same period of 2012 and was $3.0 million for the second quarter of 2013 compared to $1.8 million in 2012. Net charge offs for the second quarter of 2013 were $5.8 million compared to $1.4 million for the same period of 2012. Net charge offs for the six months ended June 30, 2013 were the same at $4.8 million compared to the same period of 2012. For the six months ended June 30, 2013 and 2012, net charge-offs to average loans and leases were 0.53% and 0.51%, respectively. The majority of the loans charged off in the second quarter were reserved for in prior quarters. Provision expense is also impacted by changes in the FDIC indemnification asset. For the quarter ended June 30, 2013, these changes increases the provision by $260 thousand compared to a decrease of $1.4 million in 2012. For the six months ended June 30, 2013, these changes increased the provision by $1.0 million compared to a decrease of $914 thousand in 2012. During 2013, the volume of impaired loans and specific allocations for these loans increased as compared to the same period of 2012. The allowance for loan losses has increased to $22.1 million at June 30, 2013 compared to $22.0 million at December 31, 2012. Based on management’s analysis of the current portfolio, an evaluation that includes consideration of historical loss experience, non-performing loans trends, and probable incurred losses on identified problem loans, management believes the allowance is adequate.

 

Non-performing Loans

 

Non-performing loans consist of (1) non-accrual loans on which the ultimate collectability of the full amount of interest is uncertain, (2) loans which have been renegotiated to provide for a reduction or deferral of interest or principal because of a deterioration in the financial position of the borrower, and (3) loans past due ninety days or more as to principal or interest. Non-performing loans decreased to $47.6 million at June 30, 2013 compared to $59.8 million at December 31, 2012. A summary of non-performing loans at June 30, 2013 and December 31, 2012 follows:

 

   (000's) 
   June 30,   December 31, 
   2013   2012 
Non-accrual loans  $27,554   $36,794 
Restructured loans   18,212    19,671 
Accruing loans past due over 90 days   980    3,362 
   $46,746   $59,827 
Ratio of the allowance for loan losses          
as a percentage of non-performing loans   47.3%   36.7%

 

31
 

 

The following loan categories comprise significant components of the nonperforming loans:

 

   (000's) 
   June 30,   December 31, 
   2013   2012 
Non-accrual loans          
Commercial loans  $19,623   $21,900 
Residential loans   6,395    13,201 
Consumer loans   1,536    1,693 
   $27,554   $36,794 
           
Past due 90 days or more          
Commercial loans  $298   $1,481 
Residential loans   597    1,750 
Consumer loans   85    131 
   $980   $3,362 

 

The following table is information on the non-accrual loans at June 30, 2013 and December 31, 2012 that were from the acquisition of assets from The First National Bank of Danville and are included in non-accrual loans above.

 

   (000's) 
   June 30,   December 31, 
   2013   2012 
Non-accrual loans          
Commercial loans  $2,395   $4,114 
1-4 family residential   280    217 
Installment loans   -    - 
   $2,675   $4,331 
           
Past due 90 days or more:          
Commercial loans  $0   $539 
Residential loans   24    91 
Consumer loans   -    - 
   $24   $630 

 

Interest Rate Sensitivity and Liquidity

 

First Financial Corporation has established risk measures, limits and policy guidelines for managing interest rate risk and liquidity. Responsibility for management of these functions resides with the Asset Liability Committee. The primary goal of the Asset Liability Committee is to maximize net interest income within the interest rate risk limits approved by the Board of Directors.

 

Interest Rate Risk

 

Management considers interest rate risk to be the Corporation’s most significant market risk. Interest rate risk is the exposure to changes in net interest income as a result of changes in interest rates. Consistency in the Corporation’s net interest income is largely dependent on the effective management of this risk.

 

The Asset Liability position is measured using sophisticated risk management tools, including earning simulation and market value of equity sensitivity analysis. These tools allow management to quantify and monitor both short-term and long-term exposure to interest rate risk. Simulation modeling measures the effects of changes in interest rates, changes in the shape of the yield curve and the effects of embedded options on net interest income. This measure projects earnings in the various environments over the next three years. It is important to note that measures of interest rate risk have limitations and are dependent on various assumptions. These assumptions are inherently uncertain and, as a result, the model cannot precisely predict the impact of interest rate fluctuations on net interest income. Actual results will differ from simulated results due to timing, frequency and amount of interest rate changes as well as overall market conditions. The Committee has performed a thorough analysis of these assumptions and believes them to be valid and theoretically sound. These assumptions are continuously monitored for behavioral changes.

 

The Corporation from time to time utilizes derivatives to manage interest rate risk. Management continuously evaluates the merits of such interest rate risk products but does not anticipate the use of such products to become a major part of the Corporation’s risk management strategy.

 

32
 

 

The table below shows the Corporation’s estimated sensitivity profile as of June 30, 2013. The change in interest rates assumes a parallel shift in interest rates of 100 and 200 basis points. Given a 100 basis point increase in rates, net interest income would increase 2.37% over the next 12 months and increase 5.46% over the following 12 months. Given a 100 basis point decrease in rates, net interest income would decrease 0.95% over the next 12 months and decrease 2.68% over the following 12 months. These estimates assume all rate changes occur overnight and management takes no action as a result of this change.

 

Basis Point  Percentage Change in Net Interest Income 
Interest Rate Change  12 months   24 months   36 months 
Down 200   -1.67%   -4.69%   -6.74%
Down 100   -0.95    -2.68    -3.94 
Up 100   2.37    5.46    9.27 
Up 200   2.49    8.59    16.41 

 

Typical rate shock analysis does not reflect management’s ability to react and thereby reduce the effect of rate changes, and represents a worst-case scenario.

 

Liquidity Risk

 

Liquidity represents an institution’s ability to provide funds to satisfy demands from depositors, borrowers, and other creditors by either converting assets into cash or accessing new or existing sources of incremental funds. Generally the Corporation relies on deposits, loan repayments and repayments of investment securities as its primary sources of funds. The Corporation has $15.1 million of investments that mature throughout the next 12 months. The Corporation also anticipates $103.3 million of principal payments from mortgage-backed securities. Given the current rate environment, the Corporation anticipates $7.8 million in securities to be called within the next 12 months. The Corporation also has unused borrowing capacity available with the Federal Home Loan Bank of Indianapolis and several correspondent banks. With these many sources of funds, the Corporation currently anticipates adequate liquidity to meet the expected obligations of its customers.

 

Financial Condition

 

Comparing the first six months of 2013 to the same period in 2012, loans, net of unearned discount, have decreased to $1.80 billion from $1.88 billion. Deposits remained stable at $2.3 billion at June 30, 2013, substantially the same as at June 30, 2012. Shareholders' equity increased 2.8% or $10.1 million. This financial performance increased book value per share 2.3% to $27.68 at June 30, 2013 from $27.07 at June 30, 2012. Book value per share is calculated by dividing the total shareholders' equity by the number of shares outstanding.

 

Capital Adequacy

 

As of June 30, 2013, the most recent notification from the respective regulatory agencies categorized the subsidiary banks as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the banks must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the bank's category. Below are the capital ratios for the Corporation and lead bank.

 

   June 30, 2013   December 31, 2012   To Be Well Capitalized 
             
Total risk-based capital               
Corporation   16.92%   16.37%   N/A 
First Financial Bank   16.04%   15.67%   10.00%
                
Tier I risk-based capital               
Corporation   15.90%   15.38%   N/A 
First Financial Bank   15.13%   14.78%   6.00%
                
Tier I leverage capital               
Corporation   11.96%   11.43%   N/A 
First Financial Bank   11.34%   10.98%   5.00%

 

33
 

 

ITEM 4. Controls and Procedures

 

First Financial Corporation’s management is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. As of June 30, 2013, an evaluation was performed under the supervision and with the participation of management, including the principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Corporation's disclosure controls and procedures. Based on that evaluation, management, including the principal executive officer and principal financial officer, concluded that the Corporation’s disclosure controls and procedures as of June 30, 2013 were effective in ensuring material information required to be disclosed in this Quarterly Report on Form 10-Q was recorded, processed, summarized, and reported on a timely basis. Additionally, there was no change in the Corporation's internal control over financial reporting that occurred during the quarter ended June 30, 2013 that has materially affected, or is reasonably likely to materially affect, the Corporation's internal control over financial reporting.

 

PART II – Other Information

 

ITEM 1. Legal Proceedings.

 

There are no material pending legal proceedings, other than routine litigation incidental to the business of the Corporation or its subsidiaries, to which the Corporation or any of the subsidiaries is a party to or of which any of their respective property is subject. Further, there is no material legal proceeding in which any director, officer, principal shareholder, or affiliate of the Corporation or any of its subsidiaries, or any associate of such director, officer, principal shareholder or affiliate is a party, or has a material interest, adverse to the Corporation or any of its subsidiaries.

 

ITEM 1 A. Risk Factors.

 

There have been no material changes in the risk factors from those disclosed in the Corporation’s 2012 financial statements in the Form 10-K filed for December 31, 2012.

 

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

(a) None.

 

(b) Not applicable.

 

(c) Purchases of Equity Securities

 

The Corporation periodically acquires shares of its common stock directly from shareholders in individually negotiated transactions. The Corporation has not adopted a formal policy or adopted a formal program for repurchases of shares of its common stock. There were no shares purchased by the Corporation during the quarter covered by this report.

 

ITEM 3. Defaults upon Senior Securities.

 

Not applicable.

 

ITEM 4. Mine Safety Disclosures

 

Not applicable.

 

ITEM 5. Other Information.

 

Not applicable.

 

34
 

 

ITEM 6. Exhibits.

 

Exhibit No.:   Description of Exhibit:
     
2.1   Purchase and Assumption Agreement dated March 18, 2013 between First Financial Bank, National Association and Bank of America, National Association, incorporated by reference to Exhibit 2.1 of the Corporation’s Form 8-K filed on March 20, 2013.
     
3.1   Amended and Restated Articles of Incorporation of First Financial Corporation, incorporated by reference to Exhibit 3(i) of the Corporation’s Form 10-Q filed for the quarter ended September 30, 2002.
     
3.2   Code of By-Laws of First Financial Corporation, incorporated by reference to Exhibit 3(ii) of the Corporation’s Form 8-K filed on August 24, 2012.
     
10.1*   Employment Agreement for Norman L. Lowery, dated and effective December 1, 2012, incorporated by reference to Exhibit 10.01 of the Corporation’s Form 8-K filed on March 12, 2013.
     
10.2*   2001 Long-Term Incentive Plan of First Financial Corporation, incorporated by reference to Exhibit 10.3 of the Corporation’s Form 10-Q filed for the quarter ended September 30, 2002.
     
10.3*   2013 Schedule of Director Compensation, incorporated by reference to Exhibit 10.3 of the Corporation’s Form 10-K filed for the fiscal year ended December 31, 2012.
     
10.4*   2013 Schedule of Named Executive Officer Compensation, incorporated by reference to Exhibit 10.4 of the Corporation’s Form 10-K filed for the fiscal year ended December 31, 2012.
     
10.5*   2005 Long-Term Incentive Plan of First Financial Corporation, incorporated by reference to Exhibit 10.7 of the Corporation’s Form 8-K filed on September 4, 2007.
     
10.6*   2005 Executives Deferred Compensation Plan, incorporated by reference to Exhibit 10.5 of the Corporation’s Form 8-K filed on September 4, 2007.
     
10.7*   2005 Executives Supplemental Retirement Plan, incorporated by reference to Exhibit 10.6 of the Corporation’s Form 8-K filed on September 4, 2007.
     
10.9*   First Financial Corporation 2010 Long-Term Incentive Compensation Plan incorporated by reference to Exhibit 10. 9 of the Corporation’s Form 10-K filed March 15, 2011.
     
10.10*   First Financial Corporation 2011 Short-Term Incentive Compensation Plan incorporated by reference to Exhibit 10.10 of the Corporation’s Form 10-K filed March 15, 2011.
     
10.11*   First Financial Corporation 2011 Omnibus Equity Incentive Plan incorporated by reference to Exhibit 10.11 of the Corporation’s Form 10-Q for the quarter ended March 31, 2011 filed on May 9, 2011.
     
10.12*   Form of Restricted Stock Award Agreement under the First Financial Corporation 2011 Omnibus Equity Incentive Plan
     
31.1   Sarbanes-Oxley Act 302 Certification for Quarterly Report on Form 10-Q for the quarter ended June 30, 2013 by Principal Executive Officer, dated August 7, 2013
     
31.2   Sarbanes-Oxley Act 302 Certification for Quarterly Report on Form 10-Q for the quarter ended June 30, 2013 by Principal Financial Officer, dated August 7, 2013.
     
32.1   Certification, dated August 7, 2013, of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2005 on Form 10-Q for the quarter ended June 30, 2013.
     
101.1   Financial statements from the Quarterly Report on Form 10-Q of the Corporation for the quarter ended June 30, 2013, formatted in XBRL pursuant to Rule 405 : (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income and Comprehensive Income, (iii) Consolidated Statements of Cash Flows, (iv) Consolidated Statements of Shareholders’ Equity, and (v) Notes to Consolidated Financial Statements, as blocks of text and in detail**.

 

*Management contract or compensatory plan or arrangement.

 

**Furnished, not filed, for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

 

35
 

 

SIGNATURES

 

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 thereunto duly authorized.

 

  FIRST FINANCIAL CORPORATION
  (Registrant)
   
Date: August 7, 2013 By     /s/ Norman L. Lowery
  Norman L. Lowery, Vice Chairman, President and CEO
  (Principal Executive Officer)
   
Date: August 7, 2013 By     /s/ Rodger A. McHargue
  Rodger A. McHargue, Treasurer and CFO
  (Principal Financial Officer)

 

36
 

 

ITEM 6. Exhibits.

 

Exhibit No.:   Description of Exhibit:
     
2.1   Purchase and Assumption Agreement dated March 18, 2013 between First Financial Bank, National Association and Bank of America, National Association, incorporated by reference to Exhibit 2.1 of the Corporation’s Form 8-K filed on March 20, 2013.
     
3.1   Amended and Restated Articles of Incorporation of First Financial Corporation, incorporated by reference to Exhibit 3(i) of the Corporation’s Form 10-Q filed for the quarter ended September 30, 2002.
     
3.2   Code of By-Laws of First Financial Corporation, incorporated by reference to Exhibit 3(ii) of the Corporation’s Form 8-K filed on August 24, 2012.
     
10.1*   Employment Agreement for Norman L. Lowery, dated and effective December 1, 2012, incorporated by reference to Exhibit 10.01 of the Corporation’s Form 8-K filed on March 12, 2013.
     
10.2*   2001 Long-Term Incentive Plan of First Financial Corporation, incorporated by reference to Exhibit 10.3 of the Corporation’s Form 10-Q filed for the quarter ended September 30, 2002.
     
10.3*   2013 Schedule of Director Compensation, incorporated by reference to Exhibit 10.3 of the Corporation’s Form 10-K filed for the fiscal year ended December 31, 2012.
     
10.4*   2013 Schedule of Named Executive Officer Compensation, incorporated by reference to Exhibit 10.4 of the Corporation’s Form 10-K filed for the fiscal year ended December 31, 2012.
     
10.5*   2005 Long-Term Incentive Plan of First Financial Corporation, incorporated by reference to Exhibit 10.7 of the Corporation’s Form 8-K filed on September 4, 2007.
     
10.6*   2005 Executives Deferred Compensation Plan, incorporated by reference to Exhibit 10.5 of the Corporation’s Form 8-K filed on September 4, 2007.
     
10.7*   2005 Executives Supplemental Retirement Plan, incorporated by reference to Exhibit 10.6 of the Corporation’s Form 8-K filed on September 4, 2007.
     
10.9*   First Financial Corporation 2010 Long-Term Incentive Compensation Plan incorporated by reference to Exhibit 10. 9 of the Corporation’s Form 10-K filed March 15, 2011.
     
10.10*   First Financial Corporation 2011 Short-Term Incentive Compensation Plan incorporated by reference to Exhibit 10.10 of the Corporation’s Form 10-K filed March 15, 2011.
     
10.11*   First Financial Corporation 2011 Omnibus Equity Incentive Plan incorporated by reference to Exhibit 10.11 of the Corporation’s Form 10-Q for the quarter ended March 31, 2011 filed on May 9, 2011.
     
10.12*   Form of Restricted Stock Award Agreement under the First Financial Corporation 2011 Omnibus Equity Incentive Plan
     
31.1   Sarbanes-Oxley Act 302 Certification for Quarterly Report on Form 10-Q for the quarter ended June 30, 2013 by Principal Executive Officer, dated August 7, 2013
     
31.2   Sarbanes-Oxley Act 302 Certification for Quarterly Report on Form 10-Q for the quarter ended June 30, 2013 by Principal Financial Officer, dated August 7, 2013.
     
32.1   Certification, dated August 7, 2013, of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2005 on Form 10-Q for the quarter ended June 30, 2013.
     
101.1   Financial statements from the Quarterly Report on Form 10-Q of the Corporation for the quarter ended June 30, 2013, formatted in XBRL pursuant to Rule 405 : (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income and Comprehensive Income, (iii) Consolidated Statements of Cash Flows, (iv) Consolidated Statements of Shareholders’ Equity, and (v) Notes to Consolidated Financial Statements, as blocks of text and in detail**.

 

*Management contract or compensatory plan or arrangement.

 

**Furnished, not filed, for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

 

37