Possible
Additional Risks
The risks listed here are not the
only risks we face. Additional risks that are not presently known, or that we
presently deem to be immaterial, also could have a material adverse effect on
our financial condition, results of operations, business, and prospects.
(See also “Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations” for certain forward looking
statements.)
Recent
Market, Legislative, and Regulatory Events
Difficult market conditions
have adversely affected our industry.
Dramatic
declines in the housing market over the past years, with falling home prices and
increasing foreclosures, unemployment and under-employment, have negatively
impacted the credit performance of real estate related loans and resulted in
significant write-downs of asset values by financial institutions. These
write-downs, initially of mortgage-backed securities (MBS) but spreading to
other securities and loans have caused many financial institutions to seek
additional capital, to reduce or eliminate dividends, to merge with larger and
stronger institutions and, in some cases, to fail. Reflecting concern about the
stability of the financial markets generally and the strength of counterparties,
many lenders and institutional investors have reduced or ceased providing
funding to borrowers, including to other financial institutions. This market
turmoil and tightening of credit have led to an increased level of commercial
and consumer delinquencies, lack of consumer confidence, increased market
volatility and widespread reduction of business activity generally. The
resulting economic pressure on consumers and lack of confidence in the financial
markets has adversely affected our business, financial condition and results of
operations. Market developments may affect consumer confidence levels and may
cause adverse changes in payment patterns, causing increases in delinquencies
and default rates, which may impact our charge-offs and provision for credit and
fraud losses. A worsening of these conditions would likely exacerbate the
adverse effects of these difficult market conditions on us and others in the
financial institutions industry.
Current levels of market
volatility are unprecedented.
The
capital and credit markets have been experiencing volatility and disruption for
more than 12 months. Recently, volatility and disruption have reached
unprecedented levels. In some cases, the markets have produced downward pressure
on stock prices and credit availability for certain issuers without regard to
those issuers’ underlying financial strength. If current levels of market
disruption and volatility continue or worsen, there can be no assurance that we
will not experience an adverse effect, which may be material, on our ability to
access capital and on our business, financial condition and results of
operations. Numerous facts and circumstances are considered when
evaluating the carrying value of our goodwill. One of those considerations is
our market capitalization, evaluated over a reasonable period of time, in
relation to the aggregate estimated fair value of the reporting units. While
this comparison provides some relative market information regarding the
estimated fair value of the reporting units, it is not determinative and needs
to be evaluated in the context of the current economic and political
environment. However, significant and/or sustained declines in First Financial’s
market capitalization, especially in relation to First Financial’s book value,
could be an indication of potential impairment of goodwill.
The soundness of other
financial institutions could adversely affect us.
Our
ability to engage in routine funding transactions could be adversely affected by
the actions and commercial soundness of other financial institutions. Financial
services institutions are interrelated as a result of trading, clearing,
counterparty, or other relationships. As a result, defaults by, or even rumors
or questions about, one or more financial services institutions, or the
financial services industry generally, have led to market-wide liquidity
problems and could lead to losses or defaults by us or by other institutions.
Many of these transactions expose us to credit risk in the event of default of
our counterparty or client. In addition, our credit risk may be exacerbated when
the collateral held by us cannot be realized upon or is liquidated at prices not
sufficient to recover the full amount of the financial instrument exposure due
us. There is no assurance that any such losses would not materially and
adversely affect our results of operations.
There can be no assurance
that enacted legislation or any proposed federal programs will stabilize the
U.S. financial system and such legislation and programs may adversely affect
us.
There has
been much legislative and regulatory action in response to the financial crises
affecting the banking system and financial markets and threats to investment
banks and other financial institutions
.
There can be no
assurance, however, as to the actual impact that the legislation and its
implementing regulations or any other governmental program will have on the
financial markets. The failure of the actions by the legislators, the regulatory
bodies or the U.S. government to stabilize the financial markets and a
continuation or worsening of current financial market conditions could
materially and adversely affect our business, financial condition, results of
operations, and access to credit or the trading price of our common
shares.
Contemplated
and proposed legislation, state and federal programs, and increased government
control or influence may adversely affect us by increasing the uncertainty in
our lending operations and expose us to increased losses, including legislation
that would allow bankruptcy courts to permit modifications to mortgage loans on
a debtor’s primary residence, moratoriums on a mortgagor’s right to foreclose on
property, and requirements that fees be paid to register other real estate owned
property. Statutes and regulations may be altered that may potentially increase
our costs to service and underwrite mortgage loans. Additionally, federal
intervention and operation of formerly private institutions may adversely affect
our rights under contracts with such institutions and the way in which we
conduct business in certain markets.
Treasury “Stress Tests” and
Other Actions may Adversely Affect Bank Operations and Value of
Shares.
On
February 10, 2009, the Treasury outlined a plan to restore stability to the
financial system. This announcement included reference to a plan by the Treasury
to conduct “stress tests” of certain banks which received funds under the CPP
and similar Treasury programs. The methods and procedures to be used by the
Treasury in conducting its “stress tests,” how these methods and procedures will
be applied, and the significance or consequence of such tests presently are not
known. Any of these or their consequences could adversely affect the banking
industry in general, and the value of First Financial shares, among other
things.
The fiscal and monetary
policies of the federal government and its agencies could have a material
adverse effect on our earnings.
The Board
of Governors of the Federal Reserve System regulates the supply of money and
credit in the United States. Its policies determine in large part the cost of
funds for lending and investing and the return earned on those loans and
investments, both of which affect the net interest margin. The resultant changes
in interest rates can also materially decrease the value of certain financial
assets we hold, such as debt securities. Its policies can also adversely affect
borrowers, potentially increasing the risk that they may fail to repay their
loans. Changes in Federal Reserve Board policies are beyond our control and
difficult to predict; consequently, the impact of these changes on our
activities and results of operations is difficult to predict.
Risks
Relating to Our Business
Credit
Risks
When we loan money, commit
to loan money or enter into a letter of credit or other contract with a
counterparty, we incur credit risk, or the risk of losses if our borrowers do
not repay their loans or our counterparties fail to perform according to the
terms of their contracts
.
Large,
individual loans, letters of credit and contracts magnify such credit
risks. As lending is one of our primary business activities, the
credit quality of our portfolio can have a significant impact on our earnings.
We estimate and establish reserves for credit risks and credit losses inherent
in our total loan portfolio. This process, which is critical to our financial
results and condition, requires difficult, subjective and complex judgments,
including forecasts of economic conditions and how these economic predictions
might impair the ability of our borrowers to repay their loans. As is the case
with any such assessments, there is always the chance that we will fail to
identify the proper factors or that we will fail to accurately estimate the
impacts of factors that we identify. In addition, large loans,
letters of credit and contracts with individual counterparties in our portfolio
magnify the credit risk that we face, as the impact of large borrowers and
counterparties not repaying their loans or performing according to the terms of
their contracts has a disproportionately significant impact on our credit losses
and reserves.
Weakness in the economy and
in the real estate market, including specific weakness within our geographic
footprint, has adversely affected us and may continue to adversely affect
us.
If the
strength of the U.S. economy in general and the strength of the local economies
in which we conduct operations decline, or continue to decline, this could
result in, among other things, a deterioration of credit quality or a reduced
demand for credit, including a resultant effect on our loan portfolio and
allowance for loan and lease losses. These factors could result in higher
delinquencies and greater charge-offs in future periods, which would materially
adversely affect our financial condition and results of operations.
Weakness in the real estate
market, including the secondary residential mortgage loan markets, could
adversely affect us.
Significant
ongoing disruptions in the secondary market for residential mortgage loans have
limited the market for and liquidity of many mortgage loans. The effects of
ongoing mortgage market challenges, combined with the ongoing correction in
residential real estate market prices and reduced levels of home sales, could
result in further price reductions in single family home values, adversely
affecting the value of collateral securing mortgage loans that we hold, mortgage
loan originations and profits on sales of mortgage loans. These trends could
continue and such conditions could result in higher losses, write downs and
impairment charges in our mortgage and other lines of business. Continued
declines in real estate values, home sale volumes, financial stress on borrowers
as a result of job losses, interest rate resets on adjustable rate mortgage
loans or other factors could have further adverse effects on borrowers that
could result in higher delinquencies and greater charge-offs in future periods,
which adversely affect our financial condition or results of operations.
Additionally, decreases in real estate values might adversely affect the
creditworthiness of state and local governments, and this might result in
decreased profitability or credit losses from loans made to such governments. A
decline in home values or overall economic weakness could also have an adverse
impact upon the value of real estate or other assets which we own upon
foreclosing a loan and our ability to realize value on such
assets.
Real estate volatility and
future changes in our disposition strategies could result in net proceeds that
differ significantly from our OREO fair value appraisals.
Our other
real estate owned (“OREO”) portfolio consists of properties that we obtained
through foreclosure or through an in-substance foreclosure in satisfaction of
loans. Properties in our OREO portfolio are recorded at the lower of the
recorded investment in the loans for which the properties previously served as
collateral or the “fair value”, which represents the estimated sales price of
the properties on the date acquired less estimated selling costs. Generally, in
determining “fair value” an orderly disposition of the property is assumed,
except where a different disposition strategy is expected. Significant judgment
is required in estimating the fair value of OREO property, and the period of
time within which such estimates can be considered current is significantly
shortened during periods of market volatility, as is currently being experienced
and as experienced during 2008 and 2009.
In
response to market conditions and other economic factors, we may utilize
alternative sale strategies other than orderly disposition as part of our OREO
disposition strategy, such as immediate liquidation sales. In this event, as a
result of the significant judgments required in estimating fair value and the
variables involved in different methods of disposition, the net proceeds
realized from such sales transactions could differ significantly from
appraisals, comparable sales, and other estimates used to determine the fair
value of our OREO properties.
The information that we use
in managing our credit risk may be inaccurate or incomplete, which may result in
an increased risk of default and otherwise have an adverse effect on our
business, results of operations and financial condition.
In
deciding whether to extend credit or enter into other transactions with clients
and counterparties, we may rely on information furnished by or on behalf of
clients and counterparties, including financial statements and other financial
information. We also may rely on representations of clients and counterparties
as to the accuracy and completeness of that information and, with respect to
financial statements, on reports of independent auditors. Although we regularly
review our credit exposure to specific clients and counterparties and to
specific industries that we believe may present credit concerns, default risk
may arise from events or circumstances that are difficult to detect, such as
fraud. Moreover, such circumstances, including fraud, may become more likely to
occur and/or be detected in periods of general economic uncertainty, such as at
the present time. We may also fail to receive full information with respect to
the risks of a counterparty. In addition, in cases where we have
extended credit against collateral, we may find that we are undersecured, for
example, as a result of sudden declines in market values that reduce the value
of collateral or due to fraud with respect to such collateral. If such events or
circumstances were to occur, it could result in a potential loss of revenue and
have an adverse effect on our business, results of operations and financial
condition.
Recently declining values of
real estate, increases in unemployment, and the related effects on local
economies may increase our credit losses, which would negatively affect our
financial results.
We offer
a variety of secured loans, including commercial lines of credit, commercial
term loans, real estate, construction, home equity, consumer and other loans.
Many of our loans are secured by real estate (both residential and commercial)
in our market area. A major change in the real estate market, such as
deterioration in the value of this collateral, or in the local or national
economy, could adversely affect our customer’s ability to pay these loans, which
in turn could adversely impact us. Additionally, increases in unemployment also
may adversely affect the ability of certain clients to pay loans and the
financial results of commercial clients in localities with higher unemployment,
which may result in loan defaults and foreclosures and which may impair the
value of our collateral. Risk of loan defaults and foreclosures are unavoidable
in the banking industry, and we try to limit our exposure to this risk by
monitoring our extensions of credit carefully. We cannot fully eliminate credit
risk, and as a result credit losses may increase in the future.
Deteriorating credit
quality, particularly in real estate loans, has adversely impacted us and may
continue to adversely impact us.
Late in
2008 we began to experience a downturn in the overall credit performance of our
loan portfolio, as well as acceleration in the deterioration of general economic
conditions. This deterioration, including a significant increase in national and
regional unemployment levels and decreased sources of liquidity are the primary
drivers of the increased stress being placed on most borrowers and is negatively
impacting their ability to repay. These conditions resulted in an increase in
our loan loss reserves.
We expect
credit quality to remain challenging and could continue to deteriorate for much
of 2010, notably in commercial real estate. Continued deterioration in the
quality of our credit portfolio could significantly increase nonperforming
loans, require additional increases in loan loss reserves, elevate charge-off
levels and have a material adverse effect on our capital, financial condition,
and results of operations. Furthermore, given the size of our loan portfolio, it
is possible that a deterioration in the credit quality of one or two of our
largest credits could have a material adverse effect on our capital, financial
condition, and results of operations. Because we have substantially fewer
nonperforming assets than many of our peers, the credit quality of our loan
portfolio in recent quarters has and may continue to deteriorate at a faster
rate than many of our peers.
The results of the internal
stress test may not accurately predict the impact on our company if the
condition of the economy were to continue to deteriorate.
During
2009 we conducted a number of internal stress tests. These stress tests were
based on the tests that were administered to the nation’s 19 largest banks by
the Treasury in connection with its Supervisory Capital Assessment Program.
Under the stress tests, we applied the Treasury’s assumptions to estimate our
credit losses, resources available to absorb those losses and any necessary
additions to capital that would be required under the “more adverse” stress test
scenario.
While we
believe we have appropriately applied the Treasury’s assumptions in performing
our internal stress tests, we can not assure you that the results of this test
are comparable to the results of stress tests performed and publicly released by
the Treasury or that the results of our stress test would be the same if it had
been performed by the Treasury. Moreover, the results of the stress tests may
not accurately reflect the impact on our company if the economy does not improve
or continues to deteriorate. Any continued deterioration of the economy could
result in credit losses significantly higher, with a corresponding impact on our
resources and capital requirements, than those predicted by our internal stress
tests.
Our allowance for loan
losses may prove to be insufficient to absorb losses in our loan
portfolio.
Like all
financial institutions, we maintain an allowance for loan losses to provide for
loans in our portfolio that may not be repaid in their entirety. We believe that
our allowance for loan losses is maintained at a level adequate to absorb
probable losses inherent in our loan portfolio as of the corresponding balance
sheet date. However, our allowance for loan losses may not be sufficient to
cover actual loan losses, and future provisions for loan losses could materially
and adversely affect our operating results. We have seen a significant increase
in the level of potential problem loans and other loans with higher than normal
risk. We expect to receive more frequent requests from borrowers to modify
loans. The related accounting measurements related to impairment and the loan
loss allowance require significant estimates which are subject to uncertainty
and changes relating to new information and changing circumstances. Our
estimates of the risk of loss and amount of loss on any loan are complicated by
the significant uncertainties surrounding our borrowers’ abilities to
successfully execute their business models through changing economic
environments, competitive challenges and other factors. Because of the degree of
uncertainty and susceptibility of these factors to change, our actual losses may
vary from our current estimates.
State and
federal regulators, as an integral part of their examination process,
periodically review our allowance for loan losses and may require us to increase
our allowance for loan losses by recognizing additional provisions for loan
losses charged to expense, or to decrease our allowance for loan losses by
recognizing loan charge-offs, net of recoveries. Any such additional provisions
for loan losses or charge-offs, as required by these regulatory agencies, could
have a material adverse effect on our financial condition and results of
operations.
We expect
fluctuations in our loan loss provisions due to the uncertain economic
conditions.
Operating
Risks
The introduction,
implementation, withdrawal, success and timing of business initiatives and
strategies, including, but not limited to, the opening of new banking centers,
may be less successful or may be different than anticipated, which could
adversely affect our business.
First
Financial makes certain projections and develops plans and strategies for its
banking and financial products. If we do not accurately determine demand for our
banking and financial products, it could result in us incurring significant
expenses without the anticipated increases in revenue, which could result in a
material adverse effect on its business.
Changes in market interest
rates or capital markets could adversely affect our revenue and expense, the
value of assets and obligations, and the availability and cost of capital or
liquidity.
Given our
business mix, and the fact that most of the assets and liabilities are financial
in nature, we tend to be sensitive to market interest rate movements and the
performance of the financial markets. In addition to the impact of the general
economy, changes in interest rates or in valuations in the debt or equity
markets could directly impact us in one or more of the following
ways:
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The
yield on earning assets and rates paid on interest bearing liabilities may
change in disproportionate ways;
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The
value of certain balance sheet and off-balance sheet financial instruments
or the value of equity investments that we hold could
decline;
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The
value of assets for which we provide processing services could decline;
or
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To
the extent we access capital markets to raise funds to support our
business; such changes could affect the cost of such funds or the ability
to raise such funds.
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We may be required to
repurchase mortgage loans or indemnify mortgage loan purchasers as a result of
breaches of representations and warranties, borrower fraud, or certain borrower
defaults, which could harm our liquidity, results of operations, and financial
condition.
When we
sell mortgage loans, whether as whole loans or pursuant to a securitization, we
are required to make customary representations and warranties to the purchaser
about the mortgage loans and the manner in which they were originated. Our whole
loan sale agreements require us to repurchase or substitute mortgage loans in
the event we breach any of these representations or warranties. In addition, we
may be required to repurchase mortgage loans as a result of borrower fraud.
Likewise, we are required to repurchase or substitute mortgage loans if we
breach a representation or warranty in connection with our securitizations.
While we have taken steps to enhance our underwriting policies and procedures,
there can be no assurance that these steps will be effective or reduce risk
associated with loans sold in the past. If the level of repurchase and indemnity
activity becomes material, our liquidity, results of operations and financial
condition will be adversely affected.
Clients could pursue
alternatives to bank deposits, causing us to lose a relatively inexpensive
source of funding.
Checking
and savings account balances and other forms of client deposits could decrease
if clients perceive alternative investments as providing superior expected
returns. When clients move money out of bank deposits in favor of alternative
investments, we can lose a relatively inexpensive source of funds, increasing
our funding costs.
Consumers may decide not to
use banks to complete their financial transactions, which could affect net
income.
Technology
and other changes now allow parties to complete financial transactions without
banks. For example, consumers can pay bills and transfer funds directly without
banks. This process could result in the loss of fee income, as well as the loss
of client deposits and the income generated from those deposits.
Our asset management
business subjects us to a variety of risks.
At March
31, 2010, we had $2.3 billion in assets under management. A sharp
decline in the stock market can negatively impact the amount of assets under
management and thus subject our earnings to a broader variety of risks and
uncertainties.
Negative public opinion
could damage our reputation and adversely impact business and
revenues.
As a
financial institution, our earnings and capital are subject to risks associated
with negative public opinion. Negative public opinion could result from our
actual or alleged conduct in any number of activities, including lending
practices, the failure of any product or service sold by us to meet our clients’
expectations or applicable regulatory requirements, corporate governance and
acquisitions, or from actions taken by government regulators and community
organizations in response to those activities. Negative public opinion can
adversely affect our ability to keep and attract and/or retain clients and can
expose us to litigation and regulatory action. Actual or alleged conduct by one
of our businesses can result in negative public opinion about our other
businesses. Negative public opinion could also affect our ability to borrow
funds in the unsecured wholesale debt markets.
We rely on other companies
to provide key components of our business infrastructure.
Third
parties provide key components of our business infrastructure such as banking
services, processing, and Internet connections and network access. Any
disruption in such services provided by these third parties or any failure of
these third parties to handle current or higher volumes of use could adversely
affect our ability to deliver products and services to clients and otherwise to
conduct business. Technological or financial difficulties of a third party
service provider could adversely affect our business to the extent those
difficulties result in the interruption or discontinuation of services provided
by that party. We may not be insured against all types of losses as a result of
third party failures and our insurance coverage may be inadequate to cover all
losses resulting from system failures or other disruptions. Failures in our
business infrastructure could interrupt the operations or increase the costs of
doing business.
We rely on our systems,
employees, and certain counterparties, and certain failures could materially
adversely affect our operations.
We are
exposed to many types of operational risk, including the risk of fraud by
employees and outsiders, clerical and record-keeping errors, and
computer/telecommunications systems malfunctions. Our businesses are dependent
on our ability to process a large number of increasingly complex transactions.
If any of our financial, accounting, or other data processing systems fail or
have other significant shortcomings, we could be materially adversely affected.
We are similarly dependent on our employees. We could be materially adversely
affected if one of our employees causes a significant operational break-down or
failure, either as a result of human error or where an individual purposefully
sabotages or fraudulently manipulates our operations or systems. Third parties
with which we do business could also be sources of operational risk to us,
including relating to break-downs or failures of such parties’ own systems or
employees. Any of these occurrences could result in our diminished ability to
operate one or more of our businesses, potential liability to clients,
reputational damage and regulatory intervention, which could materially
adversely affect us. We may also be subject to disruptions of our operating
systems arising from events that are wholly or partially beyond our control,
which may include, for example, computer viruses or electrical or
telecommunications outages or natural disasters, or events arising from local or
regional politics, including terrorist acts. Such disruptions may give rise to
losses in service to clients and loss or liability to us. In addition there is
the risk that our controls and procedures as well as business continuity and
data security systems prove to be inadequate. Any such failure could affect our
operations and could materially adversely affect our results of operations by
requiring us to expend significant resources to correct the defect, as well as
by exposing us to litigation or losses not covered by insurance.
We depend on the accuracy
and completeness of information about clients and
counterparties.
In
deciding whether to extend credit or enter into other transactions with clients
and counterparties, we may rely on information furnished by or on behalf of
clients and counterparties, including financial statements and other financial
information. We also may rely on representations of clients and counterparties
as to the accuracy and completeness of that information and, with respect to
financial statements, on reports of independent auditors.
Industry
Risks
Regulation by federal and
state agencies could adversely affect the business, revenue, and profit
margins.
We are
heavily regulated by federal and state agencies. This regulation is to protect
depositors, the federal deposit insurance fund and the banking system as a
whole. Congress and state legislatures and federal and state regulatory agencies
continually review banking laws, regulations, and policies for possible changes.
Changes to statutes, regulations, or regulatory policies, including
interpretation or implementation of statutes, regulations, or policies, could
affect us adversely, including limiting the types of financial services and
products we may offer and/or increasing the ability of non-banks to offer
competing financial services and products. Also, if we do not comply with laws,
regulations, or policies, we could receive regulatory sanctions and damage to
our reputation.
Competition in the financial
services industry is intense and could result in losing business or reducing
margins.
We
operate in a highly competitive industry that could become even more competitive
as a result of legislative, regulatory and technological changes, and continued
consolidation. We face aggressive competition from other domestic and foreign
lending institutions and from numerous other providers of financial services.
The ability of non-banking financial institutions to provide services previously
limited to commercial banks has intensified competition. Because non-banking
financial institutions are not subject to the same regulatory restrictions as
banks and bank holding companies, they can often operate with greater
flexibility and lower cost structures. Securities firms and insurance companies
that elect to become financial holding companies may acquire banks and other
financial institutions. This may significantly change the competitive
environment in which we conduct business. Some of our competitors have greater
financial resources and/or face fewer regulatory constraints. As a result of
these various sources of competition, we could lose business to competitors or
be forced to price products and services on less advantageous terms to retain or
attract clients, either of which would adversely affect our
profitability.
Future legislation could
harm our competitive position.
Federal,
state, and local legislatures increasingly have been considering proposals to
substantially change the financial institution regulatory system and to expand
or contract the powers of banking institutions and bank holding companies.
Various legislative bodies have also recently been considering altering the
existing framework governing creditors’ rights, including legislation that would
result in or allow loan modifications of various sorts. Such legislation may
change banking statutes and the operating environment in substantial and
unpredictable ways. If enacted, such legislation could increase or decrease the
cost of doing business, limit or expand permissible activities, or affect the
competitive balance among banks, savings associations, credit unions, and other
financial institutions. We cannot predict whether new legislation will be
enacted and, if enacted, the effect that it, or any regulations, would have on
our activities, financial condition, or results of operations.
Maintaining or increasing
market share depends on market acceptance and regulatory approval of new
products and services.
Our
success depends, in part, on the ability to adapt products and services to
evolving industry standards. There is increasing pressure to provide products
and services at lower prices. This can reduce net interest income and
noninterest income from fee-based products and services. In addition, the
widespread adoption of new technologies could require us to make substantial
capital expenditures to modify or adapt existing products and services or
develop new products and services. We may not be successful in introducing new
products and services in response to industry trends or development in
technology or those new products may not achieve market acceptance. As a result,
we could lose business, be forced to price products and services on less
advantageous terms to retain or attract clients, or be subject to cost
increases.
Company
Risks
We may not pay dividends on
your common shares.
Holders
of our common shares are only entitled to receive such dividends as our Board of
Directors may declare out of funds legally available for such payments. Although
we have historically declared cash dividends on our common shares, we are not
required to do so and may reduce or eliminate our common shares dividend in the
future. This could adversely affect the market price of our common
shares. Also, our ability to increase our dividend or to make other
distributions was restricted due to our participation in the CPP, which limited
(without the consent of the Treasury) our ability to increase our dividend or to
repurchase our common shares for so long as any preferred securities issued
under such program remain outstanding. Our ability to increase our
dividend or to make other distributions is not impacted by the warrant held by
Treasury.
There may be future sales or
other dilution of our equity, which may adversely affect the market price of our
common shares.
Generally,
we are not restricted from issuing additional common shares, including any
securities that are convertible into or exchangeable for, or that represent the
right to receive, common shares. We are currently authorized to issue up to 160
million common shares, of which 57,850,210 shares are outstanding. Our board of
directors has authority, without action or vote of the shareholders, to issue
all or part of the authorized but unissued shares. These authorized but unissued
shares could be issued on terms or in circumstances that could dilute the
interests of other shareholders.
Furthermore,
in connection with our participation in the CPP, the U.S. Treasury received a
warrant as discussed under “-The U.S. Department of the Treasury Troubled Asset
Relief Program”, and we have agreed to provide the U.S. Treasury with certain
anti-dilutive adjustments as well as registration rights. The issuance of
additional common shares as a result of exercise of the warrant or otherwise or
the issuance of securities convertible or exercisable into common shares would
dilute the ownership interest of our existing common
shareholders. The market price of our common shares could decline as
a result of this offering as well as other sales of a large block of common
shares or similar securities in the market after this offering, or the
perception that such sales could occur.
Our liquidity is dependent
upon our ability to receive dividends from our subsidiaries, which accounts for
most of our revenue and could affect our ability to pay dividends, and we may be
unable to enhance liquidity from other sources.
We are a
separate and distinct legal entity from our subsidiaries, including First
Financial Bank. We receive substantially all of our revenue from dividends from
our subsidiaries. These dividends are the principal source of funds to pay
dividends on our common stock and interest and principal on our debt. Various
federal and/or state laws and regulations limit the amount of dividends that our
bank and certain of our non-bank subsidiaries may pay us. Additionally, if our
subsidiaries’ earnings are not sufficient to make dividend payments to us while
maintaining adequate capital levels, we may not be able to make dividend
payments to our common shareholders.
To
enhance liquidity, we may depend upon borrowings under credit facilities or
other indebtedness. As a result of recent turbulence in the capital and credit
markets, many lenders and institutional investors have reduced or ceased to
provide funding to borrowers and, as a result, we may not be able to further
increase liquidity through additional borrowings.
Limitations
on our ability to receive dividends from our subsidiaries or an inability to
increase liquidity through additional borrowings, or inability to maintain,
renew or replace existing credit facilities, could have a material adverse
effect on our liquidity and on our ability to pay dividends on our common and
preferred shares and interest and principal on our debt.
Significant legal actions
could subject us to substantial uninsured liabilities.
We are
from time to time subject to claims related to our operations. These claims and
legal actions, including supervisory actions by our regulators, could involve
large monetary claims and significant defense costs. Substantial legal liability
or significant regulatory action against us could have material adverse
financial effects or cause significant reputational harm to us, which in turn
could seriously harm our business prospects. We may be exposed to substantial
uninsured liabilities, which could adversely affect our results of operations
and financial condition.
If our regulators deem it
appropriate, they can take regulatory actions that could impact our ability to
compete for new business, constrain our ability to fund our liquidity needs, and
increase the cost of our services.
First
Financial and its subsidiaries are subject to the supervision and regulation of
various State and Federal regulators, including the Office of the Comptroller of
the Currency, the Federal Reserve, the FDIC, SEC, FINRA, and various state
regulatory agencies. As such, First Financial is subject to a wide variety of
laws and regulations. As part of their supervisory process, which includes
periodic examinations and continuous monitoring, the regulators have the
authority to impose restrictions or conditions on our activities and the manner
in which we manage the organization. These actions could impact the organization
in a variety of ways, including subjecting us to monetary fines, restricting our
ability to pay dividends, precluding mergers or acquisitions, limiting our
ability to offer certain products or services, or imposing additional capital,
operating, or oversight requirements.
Disruptions in our ability
to access capital markets may negatively affect our capital resources and
liquidity.
In
managing our consolidated balance sheet, we depend on wholesale capital markets
to provide us with sufficient capital resources and liquidity to meet our
commitments and business needs, and to accommodate the transaction and cash
management needs of our clients. Other sources of funding available to us, and
upon which we rely as regular components of our liquidity risk management
strategy, include inter-bank borrowings, repurchase agreements, and borrowings
from the Federal Home Loan Bank system. Any occurrence that may limit our access
to these sources, such as a decline in the confidence of debt purchasers, or our
depositors or counterparties participating in the capital markets, may adversely
affect our capital costs and our ability to raise capital and, in turn, our
liquidity.
Management’s ability to
retain key officers and employees may change.
Our
future operating results depend substantially upon the continued service of its
executive officers and key personnel. Our future operating results also depend
in significant part upon its ability to attract and retain qualified management,
financial, technical, marketing, sales and support personnel. Competition for
qualified personnel is intense, and we cannot ensure success in attracting or
retaining qualified personnel. There may be only a limited number of persons
with the requisite skills to serve in these positions, and it may be
increasingly difficult for us to hire personnel over time.
Our
ability to retain key officers and employees may be further impacted by
legislation and regulation affecting the financial services industry. For
example, Section 7001 of the ARRA which amended Section 111 of the
EESA in its entirety, as well as the interim regulations issued by the U.S.
Treasury, significantly expanded the executive compensation restrictions. Such
restrictions applied to us as a participant in the CPP and generally continued
to apply for as long as any Senior Preferred shares were outstanding. These ARRA
restrictions shall not apply to us during such time when the federal government
only holds warrants to purchase common shares. Such restrictions and standards
may further impact management's ability to compete with financial institutions
that are not subject to the same limitations as First Financial under
Section 7001 of the ARRA.
Our
business, financial condition, or results of operations could be materially
adversely affected by the loss of any of its key employees, or our inability to
attract and retain skilled employees.
Potential acquisitions may
disrupt our business and dilute shareholder value and we may not be able to
successfully consummate or integrate such acquisitions.
Acquiring
other banks, businesses, or branches involves various risks commonly associated
with acquisitions, including, among other things:
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potential
exposure to unknown or contingent liabilities of the target
company;
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exposure
to potential asset quality issues of the target
company;
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difficulty
and expense of integrating the operations and personnel of the target
company;
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potential
disruption to our business;
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potential
diversion of our management’s time and
attention;
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the
possible loss of key employees and customers of the target
company;
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difficulty
in estimating the value (including goodwill) of the target
company;
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difficulty
in receiving appropriate regulatory approval for any proposed
transaction;
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difficulty
in estimating the fair value of acquired assets, liabilities and
derivatives of the target
company; and
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potential
changes in accounting, banking, or tax laws or regulations that may affect
the target company.
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We
regularly evaluate merger and acquisition opportunities and conduct due
diligence activities related to possible transactions with other financial
institutions and financial services companies. As a result, merger or
acquisition discussions and, in some cases, negotiations may take place and
future mergers or acquisitions involving cash, debt or equity securities may
occur at any time. Acquisitions could involve the payment of a premium over book
and market values, and, therefore, some dilution of our tangible book value and
net income per common share may occur in connection with any future
transaction.
Any
merger or acquisition opportunity that we decide to pursue will ultimately be
subject to regulatory approval and other closing conditions. We may expend
substantial time and resources pursuing potential acquisitions which may not be
consummated because regulatory approval is not received or other closing
conditions are not satisfied. In addition, our existing credit facility and the
terms of other indebtedness that we may subsequently incur may restrict our
ability to consummate certain acquisitions. Furthermore, any difficulty
integrating businesses acquired as a result of a merger or acquisition and the
failure to realize the expected revenue increases, cost savings, increases in
geographic or product presence, and/or other projected benefits from an
acquisition could have an adverse impact on our liquidity, results of
operations, and financial condition and any such integration could divert
management’s time and attention from managing our company in an effective manner
and could be significantly more expensive than we anticipate.
Our accounting policies and
processes are critical to how we report our financial condition and results of
operations. They require management to make estimates about matters that are
uncertain.
Accounting
policies and processes are fundamental to how we record and report the financial
condition and results of operations. Management must exercise judgment in
selecting and applying many of these accounting policies and processes so they
comply with Generally Accepted Accounting Principles in the United States (U.S.
GAAP).
Management
has identified certain accounting policies as being critical because they
require management’s judgment to ascertain the valuations of assets,
liabilities, commitments, and contingencies. A variety of factors could affect
the ultimate value that is obtained either when earning income, recognizing an
expense, recovering an asset, valuing an asset or liability, or reducing a
liability. We have established detailed policies and control procedures that are
intended to ensure these critical accounting estimates and judgments are well
controlled and applied consistently. In addition, the policies and procedures
are intended to ensure that the process for changing methodologies occurs in an
appropriate manner. Because of the uncertainty surrounding our judgments and the
estimates pertaining to these matters, we cannot guarantee that we will not be
required to adjust accounting policies or restate prior period financial
statements. See the “Critical Accounting Policies” in the MD&A and Note 1,
“Accounting Policies,” to the Consolidated Financial Statements, in our annual
report on Form 10-K for the year ended December 31, 2009 for more
information.
Changes in our accounting
policies or in accounting standards could materially affect how we report our
financial results and condition.
From time
to time, the Financial Accounting Standards Board (“FASB”) and SEC change the
financial accounting and reporting standards that govern the preparation of our
financial statements. These changes can be hard to predict and can materially
impact how we record and report our financial condition and results of
operations. In some cases, we could be required to apply a new or revised
standard retroactively, resulting in us restating prior period financial
statements.
Our results of operations
depend upon the results of operations of our subsidiaries.
We are a
holding company that conducts substantially all of our operations through our
bank and other subsidiaries. As a result, our ability to make dividend payments
on our common shares will depend primarily upon the receipt of dividends and
other distributions from our subsidiaries. There are various regulatory
restrictions on the ability of our bank subsidiary to pay dividends or make
other payments to us. As of the close of business on March 31, 2010, our bank
subsidiary had an additional $226.7 million available to pay dividends to us
without prior regulatory approval.
Our disclosure controls and
procedures may not prevent or detect all errors or acts of
fraud.
Our
disclosure controls and procedures are designed to reasonably assure that
information required to be disclosed by us in reports we file or submit under
the Exchange Act is accurately accumulated and communicated to management, and
recorded, processed, summarized, and reported within the time periods specified
in the SEC’s rules and forms. We believe that any disclosure controls and
procedures or internal controls and procedures, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met.
These
inherent limitations include the realities that judgments in decision-making can
be faulty, that alternative reasoned judgments can be drawn, or that breakdowns
can occur because of a simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or more
people or by an unauthorized override of the controls. Accordingly, because of
the inherent limitations in our control system, misstatements due to error or
fraud may occur and not be detected.
Our financial instruments
carried at fair value expose us to certain market risks.
We
maintain an available for sale investment securities portfolio which includes
assets with various types of instruments and maturities. We also
maintain certain assets that are classified and accounted for as trading assets.
The changes in fair value of the available for sale securities are recognized in
shareholders equity as a component of other comprehensive income. The changes in
fair value of financial instruments classified as trading assets are carried at
fair value and recognized in earnings. The financial instruments carried at fair
value are exposed to market risks related to changes in interest rates and
market liquidity. We manage the market risks associated with these instruments
through broad asset/liability management strategies. Changes in the market
values of these financial instruments could have a material adverse impact on
our financial condition or results of operations. We may classify additional
financial assets or financial liabilities at fair value in the
future.
Our revenues derived from
our investment securities may be volatile and subject to a variety of
risks.
We
generally maintain investment securities and trading positions in the fixed
income markets. Unrealized gains and losses associated with our investment
portfolio and mark to market gains and losses associated with our trading
portfolio are affected by many factors, including our credit position, interest
rate volatility, volatility in capital markets, and other economic factors. Our
return on such investments could experience volatility and such volatility may
materially adversely affect our financial condition and results of operations.
Additionally, accounting regulations may require us to record a charge prior to
the actual realization of a loss when market valuations of such securities are
impaired and such impairment is considered to be other than
temporary.
We are subject to ongoing
tax examinations in various jurisdictions. The Internal Revenue Service and
other taxing jurisdictions may propose various adjustments to our previously
filed tax returns. It is possible that the ultimate resolution of such proposed
adjustments, if unfavorable, may be material to the results of operations in the
period it occurs.
In the
ordinary course of business, we operate in various taxing jurisdictions and are
subject to income and nonincome taxes. The effective tax rate is based in part
on our interpretation of the relevant current tax laws. We believe the aggregate
liabilities related to taxes are appropriately reflected in the consolidated
financial statements. We review the appropriate tax treatment of all
transactions taking into consideration statutory, judicial, and regulatory
guidance in the context of our tax positions. In addition, we rely on various
tax opinions, recent tax audits, and historical experience.
From time
to time, we engage in business transactions that may have an effect on our tax
liabilities. Where appropriate, we have obtained opinions of outside experts and
have assessed the relative merits and risks of the appropriate tax treatment of
business transactions taking into account statutory, judicial, and regulatory
guidance in the context of the tax position. However, changes to our estimates
of accrued taxes can occur due to changes in tax rates, implementation of new
business strategies, resolution of issues with taxing authorities regarding
previously taken tax positions prior to acquisition and newly enacted statutory,
judicial, and regulatory guidance. Such changes could affect the amount of our
accrued taxes and could be material to our financial position and/or results of
operations.
In the
event the Internal Revenue Service, State of Ohio, or other state tax officials
propose adjustments to our previously filed tax returns (or those of our
subsidiaries), it is possible that the ultimate resolution of the proposed
adjustments, if unfavorable, may be material to the results of operations in the
period it occurs.
Risks
Related to the Acquisition of the Business and Assets of Peoples Community Bank,
Irwin Union Bank and Trust Company and Irwin Union Bank, FSB.
Changes in national and
local economic conditions could lead to higher loan charge-offs in connection
with the acquisitions all of which may not be supported by the loss sharing
agreements with the FDIC.
In
connection with the acquisitions, we acquired a significant portfolio of loans.
Although we marked down the loan portfolios we have acquired, there is no
assurance that the non-impaired loans we acquired will not become impaired or
that the impaired loans will not suffer further deterioration in value resulting
in additional charge-offs to this loan portfolio. The fluctuations in national,
regional and local economic conditions, including those related to local
residential, commercial real estate and construction markets, which may increase
the level of charge-offs that we make to our loan portfolio, and, consequently,
reduce our net income, may also increase the level of charge-offs on the loan
portfolios that we have acquired in the acquisitions and correspondingly reduce
our net income. These fluctuations are not predictable, cannot be controlled and
may have a material adverse impact on our operations and financial condition
even if other favorable events occur. See “Business Risks – Credit Risks“ in our
Annual Report on Form 10-K for the year ended December 31, 2009 for more
information on the factors affecting the levels of these
charge-offs.
Although
we have entered into loss sharing agreements with the FDIC, which provide that a
significant portion of losses related to specified loan portfolios that we have
acquired in connection with the acquisitions will be indemnified by the FDIC, we
are not protected from all losses resulting from charge-offs with respect to
those specified loan portfolios. Additionally, the loss sharing agreements have
limited terms; therefore, any charge-off of related losses that we experience
after the term of the loss sharing agreements will not be reimbursed by the FDIC
and will negatively impact our net income.
We may fail to realize any
benefits and incur unanticipated losses related to the assets of Peoples
Community Bank, Irwin Union Bank and Trust Company and Irwin Union Bank,
FSB that First Financial Bank acquired and the liabilities of Peoples
Community Bank, Irwin Union Bank and Trust Company and Irwin Union Bank,
FSB that were assumed.
The
success of these acquisitions will depend, in part, on First Financial’s ability
to successfully combine the acquired businesses and assets with First
Financial’s business and First Financial’s ability to successfully manage the
significant loan portfolio that was acquired. As with any acquisition involving
a financial institution, particularly with respect to the acquisition nearly
doubling the size of First Financial and the large increase in the number of
bank branches, there may be business and service changes and disruptions that
result in the loss of customers or cause customers to close their accounts and
move their business to competing financial institutions. It is possible that the
integration process could result in the loss of key employees, the disruption of
ongoing business, or inconsistencies in standards, controls, procedures and
policies that adversely affect First Financial’s ability to maintain
relationships with clients, customers, depositors and employees or to achieve
the anticipated benefits of the acquisition. Successful integration may also be
hampered by differences between the organizations. Although First Financial had
significant operations in the principal regional markets in which the acquired
entities operated, the loss of key employees of these entities could adversely
affect First Financial’s ability to successfully conduct business in certain
local markets in which the entities operated, which could have an adverse effect
on First Financial’s financial results. Integration efforts will also divert
attention and resources from First Financial’s management. Additionally, general
market and economic conditions or governmental actions affecting the financial
industry generally may inhibit the ability to successfully integrate the
institutions. If First Financial experiences difficulties with, or delays in,
the integration process, the anticipated benefits of the acquisitions may not be
realized fully, or at all, or may take longer to realize than expected.
Furthermore, any cost savings that are realized may be offset by losses in
revenues or other charges to earnings.
Finally,
First Financial will need to ensure that the banking operations of the acquired
entities maintain effective disclosure controls as well as internal controls and
procedures for financial reporting, and such compliance efforts may be costly
and may divert the attention of management.
First Financial’s Exchange
Act reports contain limited financial information on which to evaluate the
acquisition of Irwin Union Bank and Trust Company and Irwin Union Bank,
FSB.
The
acquisition of the banking operations and certain assets of Irwin Union Bank and
Irwin FSB are significant acquisitions for First Financial; however, First
Financial’s Exchange Act reports contain limited financial information on which
to evaluate these acquisitions. First Financial’s Exchange Act
reports may not contain all of the financial and other information about Irwin
Union Bank and Trust Company and Irwin Union, FSB and the assets that were
acquired and liabilities assumed that investors may consider important,
including information related to the loan portfolio acquired and the impact of
the acquisition on First Financial.
First Financial will be
expanding operations into new geographic areas.
Portions
of the market areas represented by Irwin Union Bank and Irwin FSB, including
those in Arizona, California, Nevada and Utah, are areas in which
First Financial historically conducted no banking activities. Although First
Financial has indicated it plans to divest itself of banking centers in areas
outside its strategic footprint, in the interim, First Financial must
effectively integrate these new markets to retain and expand the business
currently conducted by these branches while maintaining appropriate risk
controls. The ability to compete effectively in the new markets will be
dependent on First Financial’s ability to understand the local market and
competitive dynamics and identify and retain certain employees from Irwin who
know their markets better than First Financial does.
Furthermore,
the operations of the acquired franchise lending business will increase the
concentration risk of First Financial’s lending in this area and First Financial
will rely on the expertise of those individuals currently at the acquired
franchise group.
Prior to the acquisition,
Irwin Union Bank and Trust Company and a number of its subsidiaries, notably
Irwin Home Equity and Irwin Mortgage Corporation were the subject of a number of
legal actions regarding their mortgage and/or home equity lines of business and
these matters may require significant resources and management
attention.
In
connection with the acquisition of certain assets and assumption of certain
liabilities of Irwin Union Bank by First Financial Bank from the FDIC as
receiver for Irwin Union Bank, First Financial assumed, subject to the terms of
a Purchase and Assumption Agreement by and among the FDIC, the FDIC as receiver,
and First Financial Bank dated September 18, 2009, as amended (the “Purchase
Agreement”), certain legal claims against the subsidiaries of Irwin Union
Bank. Some of these claims involve Irwin Union Bank prior to it being
placed in receivership and are thus the responsibility of the FDIC as receiver
pursuant to the Agreement. Furthermore, with respect to the claims
involving the subsidiaries, First Financial Bank has or expects to submit
requests for indemnification to the FDIC as receiver pursuant to Section 12 of
the Purchase Agreement. Pursuant to the Purchase Agreement, the FDIC
as receiver has agreed to indemnify and hold harmless First Financial Bank for
certain claims against Irwin and its former subsidiaries for actions taken on or
prior to September 18, 2009. There can be no assurances the FDIC will
agree with our positions regarding indemnification.
Although
the assets and liabilities that the FDIC as receiver determines are subject to
First Financial’s indemnification claims will be covered by the FDIC as receiver
and thus excluded from the acquisition of Irwin Union Bank, during the process
of integrating Irwin Union Bank and its subsidiaries with First Financial Bank,
First Financial may discover other inconsistencies in standards, controls,
procedures and policies that adversely affect First Financial’s ability to
achieve the anticipated benefits of the acquisition of Irwin Union Bank and
could distract management from implementing its strategic
plan. Furthermore, unless the FDIC as receiver assumes the defense of
such claims, First Financial will have to expend considerable time and effort to
defend the actions, subject to such indemnification.
We have
identified a number of claims against which we believe we should be indemnified
pursuant to the Purchase Agreement, and we have submitted and expect to continue
to submit requests for indemnification to the FDIC as receiver. The process of
seeking indemnification from the FDIC as receiver with respect to such
litigation could be time-consuming and subject to dispute. Further, until the
FDIC as receiver has approved and reimbursed us for the claims for which we
should be indemnified, we could be exposed to liabilities arising from the
defense of such claims. Discussions are ongoing with the FDIC
regarding indemnification with respect to certain actions taken by Irwin and/or
its subsidiaries prior to September 18, 2009.
The acquisitions have
increased First Financial’s commercial real estate loan portfolio, which have a
greater credit risk than residential mortgage loans.
With the
acquisition of the Irwin entities loan portfolios, the commercial loan and
construction loan portfolios have become a larger portion of First Financial
Bank’s total loan portfolio than it was prior to the acquisitions. This type of
lending is generally considered to have more complex credit risks than
traditional single-family residential lending, because the principal is
concentrated in a limited number of loans with repayment dependent on the
successful operation of the related real estate or construction project.
Consequently, these loans are more sensitive to the current adverse conditions
in the real estate market and the general economy. These loans are generally
less predictable and more difficult to evaluate and monitor and collateral may
be more difficult to dispose of in a market decline.
First Financial Bank’s
acquisitions of Peoples and Irwin from the FDIC have caused us to modify our
disclosure controls and procedures, which may not result in the material
information that we are required to disclose in our Exchange Act reports being
recorded, processed, summarized, and reported adequately.
Our
management is responsible for establishing and maintaining effective disclosure
controls and procedures that are designed to cause the material information that
we are required to disclose in reports that we file or submit under the Exchange
Act to be recorded, processed, summarized, and reported to the extent applicable
within the time periods required by the SEC’s rules and forms. The internal
control over financial reporting of Peoples’ and Irwin’s banking operations were
excluded from the evaluation of effectiveness of our disclosure controls and
procedures as of the period ended December 31, 2009, because of the timing of
the acquisitions. As a result of the Peoples and Irwin acquisitions, however, we
will be implementing changes to processes, information technology systems and
other components of internal control over financial reporting as part of our
integration activities. Notwithstanding any changes to our disclosure controls
and procedures resulting from our evaluation of the same after the Peoples and
Irwin acquisitions, our control systems, no matter how well designed and
operated, may not result in the material information that we are required to
disclose in our Exchange Act reports being recorded, processed, summarized, and
reported adequately. Because of the inherent limitations in all control systems,
no evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within our company have been
detected.
Certain fair value estimates
and other measures associated with the assets of Peoples and Irwin acquired from
the FDIC remain uncertain, and subject to change, based on future determinations
made by the FDIC, which could adversely affect our financial condition and
results of operations.
We have
determined that the acquisitions of the net assets of Peoples and Irwin
constitute business combinations as defined under GAAP. Accordingly, the assets
acquired and liabilities assumed have been presented by us in our financial
statements at their fair values as required. In many cases, the determination of
these fair values requires management to make estimates about discount rates,
future expected cash flows, market conditions and other future events that are
highly subjective in nature and subject to change. Under GAAP, these fair value
estimates are considered preliminary, and remain subject to change for up to one
year after the closing dates of the acquisitions as additional information
relative to closing date fair values becomes available. We and the FDIC are
engaged in on-going discussions that may impact which assets and liabilities
were acquired or assumed by First Financial and/or the associated purchase
prices. Based upon these discussions, there could be further adjustments to
those assets acquired or assumed. In addition, the tax treatment of FDIC
assisted acquisitions is complex and subject to interpretations that may result
in future adjustments of deferred taxes as of the acquisition dates. Any future
changes to such measures or determinations could adversely affect our financial
condition and results of operations.
First Financial Bank’s
failure to fully comply with the loss-sharing provisions relating to its
acquisitions of Peoples and Irwin from the FDIC could jeopardize the loss-share
coverage afforded to certain individual or pools of assets, rendering First
Financial Bank financially responsible for the full amount of any losses related
to such assets.
In
connection with First Financial Bank’s acquisitions of Peoples and Irwin from
the FDIC, First Financial Bank entered into loss-sharing agreements with the
FDIC whereby the FDIC has agreed to cover 80% of the losses on certain single
family residential mortgage loans and certain commercial loans (together,
“covered assets”), and 95% of the losses on such covered assets in excess of
thresholds stated in the loss-sharing agreements. First Financial Bank’s
management of and application of the terms and conditions of the loss-sharing
provisions of the Purchase and Assumption Agreements related to the covered
assets is monitored by the FDIC through periodic reports that First Financial
Bank must submit to the FDIC and on-site compliance visitations by the FDIC. If
First Financial Bank fails to fully comply with its obligations under the
loss-sharing provisions of the Purchase and Assumption Agreements relating to
First Financial Bank’s acquisitions of Peoples and Irwin from the FDIC, First
Financial Bank could lose the benefit of the loss-share coverage as it applies
to certain individual or pools of covered assets. Without such loss-share
coverage, First Financial Bank would be solely financially responsible for the
losses sustained by such individual or pools of assets.
