FIRST FINANCIAL CORP /IN/ - Quarter Report: 2022 March (Form 10-Q)

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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 March 31, 2022

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________

Commission File Number 0-16759

FIRST FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)


Indiana		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)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, par value $0.125 per share

THFF

The NASDAQ Stock Market LLC

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 þ 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 þ 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	þ
Non-accelerated filer (Do not check if a smaller reporting company)	¨	Smaller reporting company	☐
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ¨

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

Yes ☐ No þ.

As of May 2, 2022, the registrant had outstanding 12,421,849 shares of common stock, without par value.

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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			4

Consolidated Statements of Shareholders’ Equity			5

Consolidated Statements of Cash Flows			6

Notes to Consolidated Financial Statements			7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			31

Item 3. Quantitative and Qualitative Disclosures about Market Risk			34

Item 4. Controls and Procedures			37

PART II. Other Information:

Item 1. Legal Proceedings			38

Item 1A. Risk Factors			38

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			38

Item 3. Defaults upon Senior Securities			38

Item 4. Mine Safety Disclosures			38

Item 5. Other Information			38

Item 6. Exhibits			39

Signatures			40

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Part I – Financial Information

Item 1.Financial Statements

FIRST FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS

(Dollar amounts in thousands, except per share data)


	March 31, 2022		December 31, 2021
	(unaudited)
ASSETS
Cash and due from banks	$	598,175	$	682,807
Federal funds sold	736		308
Securities available-for-sale	1,359,483		1,364,734
Loans:
Commercial	1,701,507		1,674,066
Residential	635,264		664,509
Consumer	464,035		474,026
	2,800,806		2,812,601
(Less) plus:
Net deferred loan (fees)/costs	3,844		3,294
Allowance for credit losses	(40,516)		(48,305)
	2,764,134		2,767,590
Restricted stock	15,547		16,200
Accrued interest receivable	15,633		16,946
Premises and equipment, net	69,978		69,522
Bank-owned life insurance	117,354		116,997
Goodwill	86,135		86,135
Other intangible assets	7,680		8,024
Other real estate owned	236		108
Other assets	63,497		45,728
TOTAL ASSETS	$	5,098,588	$	5,175,099

LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Non-interest-bearing	$	893,375	$	914,933
Interest-bearing:
Certificates of deposit exceeding the FDIC insurance limits	62,899		74,015
Other interest-bearing deposits	3,438,916		3,420,621
	4,395,190		4,409,569
Short-term borrowings	96,672		93,374
Other borrowings	15,924		15,937
Other liabilities	65,358		73,643
TOTAL LIABILITIES	4,573,144		4,592,523

Shareholders’ equity
Common stock, $0.125 stated value per share;
Authorized shares-40,000,000
Issued shares-16,114,992 in 2022 and 16,096,313 in 2021
Outstanding shares-12,435,309 in 2022 and 12,629,893 in 2021	2,010		2,009
Additional paid-in capital	142,185		141,979
Retained earnings	580,063		559,139
Accumulated other comprehensive income/(loss)	(71,025)		(2,426)
Less: Treasury shares at cost-3,679,683 in 2022 and 3,466,420 in 2021	(127,789)		(118,125)
TOTAL SHAREHOLDERS’ EQUITY	525,444		582,576
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	5,098,588	$	5,175,099

See accompanying notes.

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FIRST FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Dollar amounts in thousands, except per share data)


	Three Months Ended March 31,
	2022		2021
	(unaudited)		(unaudited)
INTEREST INCOME:
Loans, including related fees	$	32,357	$	31,857
Securities:
Taxable	4,583		3,079
Tax-exempt	2,348		2,074
Other	365		346
TOTAL INTEREST INCOME	39,653		37,356
INTEREST EXPENSE:
Deposits	1,676		2,286
Short-term borrowings	82		98
Other borrowings	84		59
TOTAL INTEREST EXPENSE	1,842		2,443
NET INTEREST INCOME	37,811		34,913
Provision for credit losses	(6,550)		452
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES	44,361		34,461
NON-INTEREST INCOME:
Trust and financial services	1,372		1,305
Service charges and fees on deposit accounts	6,654		5,594
Other service charges and fees	106		416
Securities gains (losses), net	5		(152)
Interchange income	118		84

Loan servicing fees	359		353
Gain on sales of mortgage loans	662		1,393
Other	4,462		301
TOTAL NON-INTEREST INCOME	13,738		9,294
NON-INTEREST EXPENSE:
Salaries and employee benefits	17,342		15,677
Occupancy expense	2,522		2,149
Equipment expense	2,907		2,578
FDIC Expense	428		298
Other	8,145		6,937
TOTAL NON-INTEREST EXPENSE	31,344		27,639
INCOME BEFORE INCOME TAXES	26,755		16,116
Provision for income taxes	5,831		3,239
NET INCOME	20,924		12,877
OTHER COMPREHENSIVE INCOME (LOSS)
Change in unrealized gains/(losses) on securities, net of reclassifications and taxes	(68,914)		(11,068)
Change in funded status of post retirement benefits, net of taxes	315		472
COMPREHENSIVE INCOME	$	(47,675)	$	2,281
PER SHARE DATA
Basic and Diluted Earnings per Share	$	1.67	$	0.95
Weighted average number of shares outstanding (in thousands)	12,538		13,533

See accompanying notes.

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FIRST FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

Three Months Ended

March 31, 2022, and 2021

(Dollar amounts in thousands, except per share data)

(Unaudited)


	Common Stock		Additional Capital		Retained Earnings		Accumulated Other Comprehensive Income/(Loss)		Treasury Stock		Total
Balance, January 1, 2021	$	2,007	$	140,820	$	521,103	$	9,764	$	(76,702)	$	596,992
Net income	—		—		12,877		—		—		12,877
Other comprehensive income (loss)	—		—		—		(10,596)		—		(10,596)
Omnibus Equity Incentive Plan	1		204		—		—		—		205
Treasury shares purchased (34,441 shares)	—		—		—		—		(1,366)		(1,366)



Balance, March 31, 2021	$	2,008	$	141,024	$	533,980	$	(832)	$	(78,068)	$	598,112

Balance, January 1, 2022	$	2,009	$	141,979	$	559,139	$	(2,426)	$	(118,125)	$	582,576
Net income	—		—		20,924		—		—		20,924
Other comprehensive income (loss)	—		—		—		(68,599)		—		(68,599)
Omnibus Equity Incentive Plan	1		206		—		—		—		207
Treasury shares purchased (213,263 shares)	—		—		—		—		(9,664)		(9,664)


Balance, March 31, 2022	$	2,010	$	142,185	$	580,063	$	(71,025)	$	(127,789)	$	525,444

See accompanying notes.

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FIRST FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollar amounts in thousands, except per share data)


	Three Months Ended March 31,
	2022		2021
	(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$	20,924	$	12,877
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization (accretion) of premiums and discounts on investments	1,903		2,015
Provision for credit losses	(6,550)		452
Securities (gains) losses	(5)		152
Gain on sales of mortgage loans	(662)		(1,393)
(Gain) Loss on sale of other real estate	—		28

Restricted stock compensation	207		205
Depreciation and amortization	1,529		1,572
Other, net	3,199		(716)
NET CASH FROM OPERATING ACTIVITIES	20,545		15,192
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available-for-sale	—		4,913
Calls, maturities and principal reductions on securities available-for-sale	51,989		75,551
Purchases of securities available-for-sale	(138,610)		(172,833)
Loans made to customers, net of repayment	11,188		(35,178)
Redemption of restricted stock	1,605		—
Purchase of restricted stock	(952)		(13)


Proceeds from sales of other real estate owned	67		36
Net change in federal funds sold	(428)		(284)
Additions to premises and equipment	(1,641)		(1,660)
NET CASH FROM INVESTING ACTIVITIES	(76,782)		(129,468)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits	(14,055)		149,486
Net change in short-term borrowings	3,298		(17,286)
Maturities of other borrowings	(22)		—

Purchase of treasury stock	(9,664)		(1,366)
Dividends paid	(7,952)		(7,182)
NET CASH FROM FINANCING ACTIVITIES	(28,395)		123,652
NET CHANGE IN CASH AND CASH EQUIVALENTS	(84,632)		9,376
CASH AND DUE FROM BANKS, BEGINNING OF PERIOD	682,807		657,470
CASH AND DUE FROM BANKS, END OF PERIOD	$	598,175	$	666,846

See accompanying notes.

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FIRST FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The accompanying March 31, 2022 and 2021 consolidated financial statements are unaudited. The December 31, 2021 consolidated financial statements are as reported in the First Financial Corporation (the “Corporation”) 2021 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, 2021.

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.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law. It contained substantial tax and spending provisions intended to address the impact of the COVID-19 pandemic. The goal of the CARES Act was to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. The CARES Act also included a range of other provisions designed to support the U.S. economy and mitigate the impact of COVID-19 on financial institutions and their customers, including through the authorization of various programs and measures that the U.S. Department of the Treasury, the Small Business Administration, the Federal Reserve Board, and other federal banking agencies implemented. Further, in response to the COVID-19 outbreak, the Federal Reserve Board implemented or announced a number of facilities to provide emergency liquidity to various segments of the U.S. economy and financial market.

Recent declines in COVID-19 cases have resulted in most businesses reopening to capacity and a declining unemployment rate. Some supply chain issues persist contributing to inflation. COVID-19 continues to impact the Corporation's customers and still may result in adverse conditions on the Corporation's loans and investments.

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. For the three months ended 2022 and 2021, 18,679 and 21,159 shares were awarded, respectively. These shares had a grant date value of $847 thousand and $885 thousand for 2022 and 2021, 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.

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2.Allowance for Credit Losses

The following table presents the activity of the allowance for credit losses by portfolio segment for the three months ended March 31.


Allowance for Credit Losses:	March 31, 2022
(Dollar amounts in thousands)	Commercial		Residential		Consumer		Unallocated		Total
Beginning balance	$	18,883	$	18,316	$	10,721	$	385	$	48,305
Provision for credit losses	(1,040)		(5,144)		(300)		(66)		(6,550)
Loans charged-off	(883)		(466)		(1,905)		—		(3,254)
Recoveries	340		529		1,146		—		2,015
Ending Balance	$	17,300	$	13,235	$	9,662	$	319	$	40,516


Allowance for Credit Losses:	March 31, 2021
(Dollar amounts in thousands)	Commercial		Residential		Consumer		Unallocated		Total
Beginning balance	$	13,925	$	19,142	$	11,009	$	—	$	44,076
Provision for credit losses	(478)		(262)		1,028		164		452
Loans charged-off	(186)		(188)		(1,964)		—		(2,338)
Recoveries	478		147		985		—		1,610
Ending Balance	$	13,739	$	18,839	$	11,058	$	164	$	43,800

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The tables below present the recorded investment in non-performing loans by class of loans.


	March 31, 2022
	Loans Past Due Over 90 Days Still				Nonaccrual With No Allowance
(Dollar amounts in thousands)	Accruing		Nonaccrual		For Credit Loss
Commercial
Commercial & Industrial	$	4	$	689	$	352
Farmland	—		15		—
Non Farm, Non Residential	—		2,717		2,703
Agriculture	—		84		—
All Other Commercial	—		4		—
Residential
First Liens	279		2,036		18
Home Equity	—		66		—
Junior Liens	89		244		—
Multifamily	—		211		—
All Other Residential	—		101		—
Consumer
Motor Vehicle	362		863		—
All Other Consumer	13		682		—
TOTAL	$	747	$	7,712	$	3,073


	December 31, 2021
	Loans Past Due Over 90 Days Still				Nonaccrual With No Allowance
(Dollar amounts in thousands)	Accruing		Nonaccrual		For Credit Loss
Commercial
Commercial & Industrial	$	14	$	1,950	$	1,662
Farmland	—		15		—
Non Farm, Non Residential	—		2,911		2,898
Agriculture	—		111		—
All Other Commercial	—		4		—
Residential
First Liens	346		2,339		33
Home Equity	—		84		—
Junior Liens	89		294		—
Multifamily	—		225		—
All Other Residential	—		107		—
Consumer
Motor Vehicle	94		864		—
All Other Consumer	—		686		—
TOTAL	$	543	$	9,590	$	4,593

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The following tables present the amortized cost basis of collateral dependent loans by class of loans:


		March 31, 2022
		Collateral Type
(Dollar amounts in thousands)		Real Estate		Other
Commercial
	Commercial & Industrial	$	6,008	$	546
	Farmland	3,650
	Non Farm, Non Residential	13,796
	Agriculture	—		—
	All Other Commercial	—		—
Residential
	First Liens	18		—
	Home Equity	—		—
	Junior Liens	—		—
	Multifamily	920		—
	All Other Residential	—		—
Consumer
	Motor Vehicle	—		—
	All Other Consumer	—		—
Total		$	24,392	$	546


		December 31, 2021
		Collateral Type
(Dollar amounts in thousands)		Real Estate		Other
Commercial
	Commercial & Industrial	$	17,734	$	720
	Farmland	3,669
	Non Farm, Non Residential	6,135
	Agriculture	—		—
	All Other Commercial	—		—
Residential
	First Liens	33		—
	Home Equity	—		—
	Junior Liens	—		—
	Multifamily	935		—
	All Other Residential	—		—
Consumer
	Motor Vehicle	—		—
	All Other Consumer	—		—
Total		$	28,506	$	720

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


	March 31, 2022
	30-59 Days		60-89 Days		90 Days and Greater		Total
(Dollar amounts in thousands)	Past Due		Past Due		Past Due		Past Due		Current		Total
Commercial
Commercial & Industrial	$	1,086	$	382	$	227	$	1,695	$	705,981	$	707,676
Farmland	94		205		—		299		134,430		134,729
Non Farm, Non Residential	48		—		—		48		386,785		386,833
Agriculture	—		—		49		49		114,251		114,300
All Other Commercial	162		—		—		162		364,273		364,435
Residential
First Liens	3,628		446		747		4,821		329,788		334,609
Home Equity	233		57		38		328		60,287		60,615
Junior Liens	301		110		200		611		51,008		51,619
Multifamily	386		—		—		386		161,473		161,859
All Other Residential	93		—		—		93		27,978		28,071
Consumer
Motor Vehicle	5,935		883		686		7,504		426,290		433,794
All Other Consumer	178		50		17		245		31,875		32,120
TOTAL	$	12,144	$	2,133	$	1,964	$	16,241	$	2,794,419	$	2,810,660


	December 31, 2021
	30-59 Days		60-89 Days		90 Days and Greater		Total
(Dollar amounts in thousands)	Past Due		Past Due		Past Due		Past Due		Current		Total
Commercial
Commercial & Industrial	$	1,132	$	388	$	1,614	$	3,134	$	693,949	$	697,083
Farmland	57		—		—		57		141,189		141,246
Non Farm, Non Residential	62		—		—		62		361,174		361,236
Agriculture	90		42		89		221		141,682		141,903
All Other Commercial	390		—		—		390		340,076		340,466
Residential
First Liens	4,686		680		949		6,315		336,064		342,379
Home Equity	131		24		58		213		62,085		62,298
Junior Liens	179		120		283		582		50,048		50,630
Multifamily	342		146		—		488		178,849		179,337
All Other Residential	284		291		—		575		30,843		31,418
Consumer
Motor Vehicle	7,633		1,105		486		9,224		433,095		442,319
All Other Consumer	192		37		—		229		33,425		33,654
TOTAL	$	15,178	$	2,833	$	3,479	$	21,490	$	2,802,479	$	2,823,969

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During the three months ended March 31, 2022 and 2021, the terms of certain loans were modified as troubled debt restructurings (TDRs). The following tables present the activity for TDRs.


			2022
(Dollar amounts in thousands)	Commercial		Residential		Consumer		Total
January 1,	$	407	$	3,686	$	706	$	4,799
Added	—		27		68		95
Charged Off	—		—		—		—
Payments	—		(268)		(84)		(352)
March 31,	$	407	$	3,445	$	690	$	4,542


		2021
(Dollar amounts in thousands)	Commercial	Residential	Consumer	Total
January 1,	—	3,589	617	4,206
Added	—	378	48	426
Charged Off	—	—	(43)	(43)
Payments	—	(79)	(46)	(125)
March 31,	—	3,888	576	4,464

Modification of the terms of such loans typically include one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan. No modification in 2022 or 2021 resulted in the permanent reduction of the recorded investment in the loan. Modifications involving a reduction of the stated interest rate of the loan were for periods ranging from twelve months to five years. Modifications involving an extension of the maturity date were for periods ranging from twelve months to ten years. Troubled debt restructurings during the three months ended March 31, 2022 and 2021 did not result in any material charge-offs or additional provision expense.

The Corporation has no allocations of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of March 31, 2022 and 2021. The Corporation has not committed to lend additional amounts as of March 31, 2022 and 2021 to customers with outstanding loans that are classified as troubled debt restructurings. None of the charge-offs during the three months ended March 31, 2022 and 2021 were of restructurings that had occurred in the previous 12 months.

The CARES Act includes a provision that permits a financial institution to elect to suspend temporarily troubled debt restructuring accounting under ASC Subtopic 310-40 in certain circumstances (“section 4013”). To be eligible under section 4013, a loan modification must be (1) related to COVID-19; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (A) 60 days after the date of termination of the National Emergency or (B) December 31, 2020. In response to this section of the CARES Act, the federal banking agencies issued a revised interagency statement on April 7, 2020 that, in consultation with the Financial Accounting Standards Board, confirmed that for loans not subject to section 4013, short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not troubled debt restructurings under ASC Subtopic 310-40. This includes short-term (e.g., up to six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. From the inception of the CARES Act through March 31, 2022, 1,105 loans totaling $225 million were modified, related to COVID-19, that were not considered troubled debt restructurings. 863 loans totaling $183 million have resumed normal scheduled payments. 184 remaining loans are still under a debt relief plan, which include 9 commercial loans totaling $35 million that have been provided additional payment relief since the initial payment relief plan. 1 loan totaling $16 thousand is under the original payment relief plan.

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

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greater than $100 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.

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The following tables present the commercial loan portfolio by risk category:


			March 31, 2022
			Term Loans at Amortized Cost Basis by Origination Year						Revolving
			2022	2021	2020	2019	2018	Prior	Loans	Total
Commercial
	Commercial and Industrial	Pass	$54,640	$142,201	$67,137	$76,940	$34,752	$127,934	$146,245	$649,849
		Special Mention	3,098	4,603	356	1,750	2,192	4,576	722	$17,297
		Substandard	—	390	453	536	3,187	6,455	13,372	$24,393
		Doubtful	—	—	—	—	—	5	—	$5
		Not Rated	9,715	2,002	1,288	815	362	246	—	$14,428
		Subtotal	$67,453	$149,196	$69,234	$80,041	$40,493	$139,216	$160,339	$705,972

	Farmland	Pass	$3,965	$24,146	$11,567	$11,594	$11,783	$56,064	$1,253	$120,372
		Special Mention	—	3,346	1,191	914	—	3,496	—	$8,947
		Substandard	—	—	—	—	426	3,346	—	$3,772
		Doubtful	—	—	—	—	—	—	—	$0
		Not Rated	—	—	—	—	—	58	—	$58
		Subtotal	$3,965	$27,492	$12,758	$12,508	$12,209	$62,964	$1,253	$133,149

	Non Farm, Non Residential	Pass	$29,516	$86,348	$32,771	$22,486	$32,792	$144,708	$10,382	$359,003
		Special Mention	—	—	—	1,089	180	3,876	—	$5,145
		Substandard	—	1,766	—	537	2,434	16,835	—	$21,572
		Doubtful	—	—	—	—	—	—	—	$0
		Not Rated	—	—	—	—	—	425	—	$425
		Subtotal	$29,516	$88,114	$32,771	$24,112	$35,406	$165,844	$10,382	$386,145

	Agriculture	Pass	$1,280	$11,482	$9,663	$9,697	$2,357	$20,269	$47,047	$101,795
		Special Mention	—	—	—	1,000	—	803	6,495	$8,298
		Substandard	89	—	10	137	—	449	1,593	$2,278
		Doubtful	—	—	—	—	—	—	—	$0
		Not Rated	38	105	93	101	35	—	—	$372
		Subtotal	$1,407	$11,587	$9,766	$10,935	$2,392	$21,521	$55,135	$112,743

	Other Commercial	Pass	$12,561	$93,145	$75,132	$21,401	$36,150	$114,794	$3,028	$356,211
		Special Mention	—	—	—	—	—	5,978	—	$5,978
		Substandard	—	68	—	20	468	9	—	$565
		Doubtful	—	—	—	—	—	—	—	$0
		Not Rated	—	87	—	—	35	622	—	$744
		Subtotal	$12,561	$93,300	$75,132	$21,421	$36,653	$121,403	$3,028	$363,498

Residential
	Multifamily >5 Residential	Pass	$7,261	$39,771	$46,791	$12,371	$6,698	$37,737	$2,046	$152,675
		Special Mention	—	—	—	—	—	6,478	—	$6,478
		Substandard	—	—	—	—	—	933	—	$933
		Doubtful	—	—	—	—	—	—	—	$0
		Not Rated	—	1,143	—	—	—	272	—	$1,415
		Subtotal	$7,261	$40,914	$46,791	$12,371	$6,698	$45,420	$2,046	$161,501

Total		Pass	$109,223	$397,093	$243,061	$154,489	$124,532	$501,506	$210,001	$1,739,905
		Special Mention	3,098	7,949	1,547	4,753	2,372	25,207	7,217	$52,143
		Substandard	89	2,224	463	1,230	6,515	28,027	14,965	$53,513
		Doubtful	—	—	—	—	—	5	—	$5
		Not Rated	9,753	3,337	1,381	916	432	1,623	—	$17,442
Total commercial loans			$122,163	$410,603	$246,452	$161,388	$133,851	$556,368	$232,183	$1,863,008

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			December 31, 2021
			Term Loans at Amortized Cost Basis by Origination Year						Revolving
			2021	2020	2019	2018	2017	Prior	Loans	Total
Commercial
	Commercial and Industrial	Pass	$163,588	$71,271	$80,668	$40,441	$37,739	$113,887	$111,594	$619,188
		Special Mention	7,561	393	1,841	5,375	263	4,523	7,482	$27,438
		Substandard	4,521	896	348	5,148	2,325	7,934	2,648	$23,820
		Doubtful	—	—	—	—	—	—	—	$0
		Not Rated	21,134	1,610	959	466	189	140	—	$24,498
		Subtotal	$196,804	$74,170	$83,816	$51,430	$40,516	$126,484	$121,724	$694,944

	Farmland	Pass	$25,673	$12,060	$13,111	$13,246	$11,049	$49,158	$1,418	$125,715
		Special Mention	—	1,191	914	—	342	3,247	—	$5,694
		Substandard	3,455	444	—	326	558	2,876	—	$7,659
		Doubtful	—	—	—	—	—	—	—	$0
		Not Rated	—	—	—	—	—	—	—	$0
		Subtotal	$29,128	$13,695	$14,025	$13,572	$11,949	$55,281	$1,418	$139,068

	Non Farm, Non Residential	Pass	$81,203	$37,971	$24,716	$32,775	$54,732	$97,241	$10,548	$339,186
		Special Mention	—	—	1,103	182	1,948	1,996	—	$5,229
		Substandard	—	—	910	—	1,440	13,391	—	$15,741
		Doubtful	—	—	—	—	—	—	—	$0
		Not Rated	—	—	—	—	—	402	—	$402
		Subtotal	$81,203	$37,971	$26,729	$32,957	$58,120	$113,030	$10,548	$360,558

	Agriculture	Pass	$14,426	$10,386	$10,135	$2,585	$4,932	$15,755	$68,937	$127,156
		Special Mention	—	—	1,000	—	537	271	5,257	$7,065
		Substandard	—	20	216	—	46	485	4,828	$5,595
		Doubtful	—	—	—	—	—	—	—	$0
		Not Rated	110	120	131	55	1	—	—	$417
		Subtotal	$14,536	$10,526	$11,482	$2,640	$5,516	$16,511	$79,022	$140,233

	Other Commercial	Pass	$77,821	$69,117	$33,231	$36,495	$53,479	$58,819	$3,488	$332,450
		Special Mention	—	—	—	—	—	6,106	—	$6,106
		Substandard	72	—	25	475	—	9	—	$581
		Doubtful	—	—	—	—	—	—	—	$0
		Not Rated	89	—	—	37	—	—	—	$126
		Subtotal	$77,982	$69,117	$33,256	$37,007	$53,479	$64,934	$3,488	$339,263

Residential
	Multifamily >5 Residential	Pass	$37,244	$63,312	$16,037	$7,471	$5,370	$35,284	$1,434	$166,152
		Special Mention	—	—	—	—	—	10,282	—	$10,282
		Substandard	—	—	—	—	—	958	—	$958
		Doubtful	—	—	—	—	—	—	—	$0
		Not Rated	1,149	—	—	—	44	384	—	$1,577
		Subtotal	$38,393	$63,312	$16,037	$7,471	$5,414	$46,908	$1,434	$178,969

Total		Pass	$399,955	$264,117	$177,898	$133,013	$167,301	$370,144	$197,419	$1,709,847
		Special Mention	7,561	1,584	4,858	5,557	3,090	26,425	12,739	$61,814
		Substandard	8,048	1,360	1,499	5,949	4,369	25,653	7,476	$54,354
		Doubtful	—	—	—	—	—	—	—	$0
		Not Rated	22,482	1,730	1,090	558	234	926	—	$27,020
Total commercial loans			$438,046	$268,791	$185,345	$145,077	$174,994	$423,148	$217,634	$1,853,035

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The Corporation evaluates the credit quality of its other loan portfolios, which includes residential real estate, consumer and lease financing loans, based primarily on the aging status of the loan and payment activity. Accordingly, loans on non-accrual status, loans past due 90 days or more and still accruing interest, and loans modified under troubled debt restructurings are considered to be nonperforming for purposes of credit quality evaluation. The following table presents the balance of our other loan portfolio based on the credit risk profile of loans that are performing and loans that are nonperforming:


			March 31, 2022
			Term Loans at Amortized Cost Basis by Origination Year						Revolving
			2022	2021	2020	2019	2018	Prior	Loans	Total
Residential
	First Liens	Performing	$14,671	$82,001	$46,694	$20,505	$22,331	$142,807	$2,432	$331,441
		Non-performing	—	—	—	34	67	2,218	—	$2,319
		Subtotal	$14,671	$82,001	$46,694	$20,539	$22,398	$145,025	$2,432	$333,760

	Home Equity	Performing	$1,191	$481	$65	$128	$711	$1,311	$56,549	$60,436
		Non-performing	—	—	24	—	—	42	—	$66
		Subtotal	$1,191	$481	$89	$128	$711	$1,353	$56,549	$60,502

	Junior Liens	Performing	$4,469	$12,836	$9,292	$7,590	$7,049	$8,828	$1,115	$51,179
		Non-performing	—	—	—	25	119	186	—	$330
		Subtotal	$4,469	$12,836	$9,292	$7,615	$7,168	$9,014	$1,115	$51,509

	Other Residential	Performing	$553	$17,731	$5,533	$1,474	$640	$1,942	$0	$27,873
		Non-performing	—	—	—	54	41	24	—	$119
		Subtotal	$553	$17,731	$5,533	$1,528	$681	$1,966	$0	$27,992

Consumer
	Motor Vehicle	Performing	$48,190	$170,684	$134,583	$50,638	$18,668	$8,085	$—	$430,848
		Non-performing	—	259	613	176	91	53	—	$1,192
		Subtotal	$48,190	$170,943	$135,196	$50,814	$18,759	$8,138	$—	$432,040

	Other Consumer	Performing	$2,941	$12,991	$6,934	$2,448	$794	$1,161	$4,023	$31,292
		Non-performing	21	323	220	85	29	20	5	$703
		Subtotal	$2,962	$13,314	$7,154	$2,533	$823	$1,181	$4,028	$31,995

Total		Performing	$72,015	$296,724	$203,101	$82,783	$50,193	$164,134	$64,119	$933,069
		Non-performing	21	582	857	374	347	2,543	5	$4,729
Total other loans			$72,036	$297,306	$203,958	$83,157	$50,540	$166,677	$64,124	$937,798

Table of Contents


			December 31, 2021
			Term Loans at Amortized Cost Basis by Origination Year						Revolving
			2021	2020	2019	2018	2017	Prior	Loans	Total
Residential
	First Liens	Performing	$86,224	$49,633	$22,262	$24,377	$26,437	$126,828	$3,061	$338,822
		Non-performing	—	—	35	69	160	2,421	—	$2,685
		Subtotal	$86,224	$49,633	$22,297	$24,446	$26,597	$129,249	$3,061	$341,507

	Home Equity	Performing	$757	$9	$152	$719	$62	$1,332	$59,059	$62,090
		Non-performing	—	25	—	—	3	57	—	$85
		Subtotal	$757	$34	$152	$719	$65	$1,389	$59,059	$62,175

	Junior Liens	Performing	$13,255	$10,189	$8,124	$7,888	$4,158	$5,554	$968	$50,136
		Non-performing	—	6	64	97	119	94	—	$380
		Subtotal	$13,255	$10,195	$8,188	$7,985	$4,277	$5,648	$968	$50,516

	Other Residential	Performing	$20,218	$6,665	$1,697	$662	$883	$1,092	$0	$31,217
		Non-performing	—	—	55	43	—	27	—	$125
		Subtotal	$20,218	$6,665	$1,752	$705	$883	$1,119	$0	$31,342

Consumer
	Motor Vehicle	Performing	$188,675	$155,156	$60,676	$23,367	$9,307	$2,384	$—	$439,565
		Non-performing	199	373	191	109	43	23	—	$938
		Subtotal	$188,874	$155,529	$60,867	$23,476	$9,350	$2,407	$—	$440,503

	Other Consumer	Performing	$14,924	$8,225	$3,119	$948	$304	$1,121	$4,194	$32,835
		Non-performing	342	181	107	35	18	3	2	$688
		Subtotal	$15,266	$8,406	$3,226	$983	$322	$1,124	$4,196	$33,523

Total		Performing	$324,053	$229,877	$96,030	$57,961	$41,151	$138,311	$67,282	$954,665
		Non-performing	541	585	452	353	343	2,625	2	$4,901
Total other loans			$324,594	$230,462	$96,482	$58,314	$41,494	$140,936	$67,284	$959,566

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3.Securities

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


	March 31, 2022
(Dollar amounts in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
U.S. Government agencies	$	116,581	$	343	$	(4,522)	$	112,402
Mortgage Backed Securities - residential	668,331		398		(45,062)		623,667
Mortgage Backed Securities - commercial	11,490		8		(54)		11,444
Collateralized mortgage obligations	211,507		24		(9,555)		201,976
State and municipal obligations	377,351		5,208		(17,604)		364,955
Municipal taxable	38,440		34		(2,777)		35,697
U.S. Treasury	2,083		—		(7)		2,076
Collateralized debt obligations	—		3,531		—		3,531
Other securities	3,735		—		—		3,735
TOTAL	$	1,429,518	$	9,546	$	(79,581)	$	1,359,483


	December 31, 2021
(Dollar amounts in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
U.S. Government agencies	$	118,176	$	2,688	$	(741)	$	120,123
Mortgage Backed Securities-residential	628,920		4,387		(6,879)		626,428
Mortgage Backed Securities-commercial	15,480		191		—		15,671
Collateralized mortgage obligations	175,501		1,272		(1,768)		175,005
State and municipal obligations	362,843		17,833		(578)		380,098
Municipal taxable	38,445		396		(215)		38,626
U.S. Treasury	205		—		(1)		204
Collateralized debt obligations	—		3,359		—		3,359
Other securities	5,220		—		—		5,220
TOTAL	$	1,344,790	$	30,126	$	(10,182)	$	1,364,734

Contractual maturities of debt securities at March 31, 2022 were as follows.


	Available-for-Sale
	Amortized		Fair
(Dollar amounts in thousands)	Cost		Value
Due in one year or less	$	17,169	$	17,253
Due after one but within five years	47,121		46,898
Due after five but within ten years	82,626		81,719
Due after ten years	391,274		376,526
	538,190		522,396
Mortgage-backed securities and collateralized mortgage obligations	891,328		837,087
TOTAL	$	1,429,518	$	1,359,483

There were $5 thousand in gross gains and zero in losses from investment sales/calls realized by the Corporation for the three months ended March 31, 2022. For the three months ended March 31, 2021 there were $5 thousand in gross gains and $157 thousand in losses on sales/calls of investment securities.

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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 March 31, 2022 and December 31, 2021.


	March 31, 2022
	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
U.S. Government agencies	$	80,851	$	(4,056)	$	4,387	$	(466)	$	85,238	$	(4,522)
Mortgage Backed Securities - Residential	420,840		(27,386)		174,550		(17,676)		595,390		(45,062)
Mortgage Backed Securities - Commercial	5,206		(54)		—		—		5,206		(54)
Collateralized mortgage obligations	158,532		(7,536)		21,506		(2,019)		180,038		(9,555)
State and municipal obligations	167,005		(16,557)		5,557		(1,047)		172,562		(17,604)
Municipal taxable	31,454		(2,439)		2,710		(338)		34,164		(2,777)
U.S. Treasury	2,076		(7)		—		—		2,076		(7)

Total temporarily impaired securities	$	865,964	$	(58,035)	$	208,710	$	(21,546)	$	1,074,674	$	(79,581)


	December 31, 2021
	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
U.S. Government agencies	$	48,939	$	(739)	$	146	$	(2)	$	49,085	$	(741)
Mortgage Backed Securities - Residential	436,726		(5,281)		60,807		(1,598)		497,533		(6,879)

Collateralized mortgage obligations	73,530		(1,327)		12,505		(441)		86,035		(1,768)
State and municipal obligations	54,040		(578)		—		—		54,040		(578)
Municipal taxable	15,048		(195)		729		(20)		15,777		(215)
U.S. Treasury	204		(1)		—		—		204		(1)
Total temporarily impaired securities	$	628,487	$	(8,121)	$	74,187	$	(2,061)	$	702,674	$	(10,182)

Management evaluates securities for impairment related to credit losses 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 impairment related to credit losses by segregating the portfolio into two general segments.

In evaluating for impairment, management considers the reason for the decline, the extent of the decline, the duration of the decline and whether the Corporation intends to sell a security or is more likely than not to be required to sell a security before recovery of its amortized cost. If an entity intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, the security's amortized cost is written down to fair value through income. 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, a credit loss exists and an allowance for credit losses is recorded, limited to the amount that the fair value of the security is less than its amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income, net of applicable taxes.

Gross unrealized losses on investment securities were $79.6 million as of March 31, 2022 and $10.2 million as of December 31, 2021. Management believes these losses represent negative adjustments to market value relative to the interest rate environment reflecting the increase in market rates 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.

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The table below presents a rollforward of the credit losses recognized in earnings for the three month periods ended March 31, 2022 and 2021:


	Three Months Ended March 31,
(Dollar amounts in thousands)	2022		2021
Beginning balance	$	2,974	$	2,974



Reductions for securities called during the period	—		—
Ending balance	$	2,974	$	2,974

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).

Table of Contents


	March 31, 2022
	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
(Dollar amounts in thousands)	Level 1		Level 2		Level 3		Total
U.S. Government agencies	$	—	$	112,402	$	—	$	112,402
Mortgage Backed Securities-residential	—		623,667		—		623,667
Mortgage Backed Securities-commercial	—		11,444		—		11,444
Collateralized mortgage obligations	—		201,976		—		201,976
State and municipal	—		363,410		1,545		364,955
Municipal taxable	—		35,697		—		35,697
U.S. Treasury	—		2,076		—		2,076
Collateralized debt obligations	—		—		3,531		3,531
Other securities	—		1,992		1,743		3,735
TOTAL	$	—	$	1,352,664	$	6,819	$	1,359,483
Derivative Assets			884
Derivative Liabilities			(884)


	December 31, 2021
	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
(Dollar amounts in thousands)	Level 1		Level 2		Level 3		Total
U.S. Government agencies	$	—	$	120,123	$	—	$	120,123
Mortgage Backed Securities-residential	—		626,428		—		626,428
Mortgage Backed Securities-commercial	—		15,671		—		15,671
Collateralized mortgage obligations	—		175,005		—		175,005
State and municipal	—		378,203		1,895		380,098
Municipal taxable	—		38,626		—		38,626
U.S. Treasury	—		204		—		204
Collateralized debt obligations	—		—		3,359		3,359
Other securities	—		3,477		1,743		5,220
TOTAL	$	—	$	1,357,737	$	6,997	$	1,364,734
Derivative Assets			1,030
Derivative Liabilities			(1,030)

There were no transfers between Level 1 and Level 2 during 2022 and 2021.

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The tables 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 months ended March 31, 2022 and the year ended December 31, 2021.


	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Three Months Ended March 31, 2022
(Dollar amounts in thousands)	State and municipal obligations		Collateralized debt obligations		Other securities		Total
Beginning balance, January 1	$	1,895	$	3,359	$	1,743	$	6,997
Total realized/unrealized gains or losses
Included in earnings	—		—		—		—
Included in other comprehensive income	—		172		—		172
Transfers	—		—		—		—
Settlements	(350)		—		—		(350)
Ending balance, March 31	$	1,545	$	3,531	$	1,743	$	6,819


	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Year Ended December 31, 2021
(Dollar amounts in thousands)	State and municipal obligations		Collateralized debt obligations		Other securities		Total
Beginning balance, January 1	$	1,895	$	3,136	$	—	$	5,031
Total realized/unrealized gains or losses
Included in earnings	—		—		—		—
Included in other comprehensive income	—		223		—		223
Purchases	—		—		1,743		1,743
Settlements	—		—		—		—
Ending balance, December 31	$	1,895	$	3,359	$	1,743	$	6,997

The following table presents quantitative information about recurring and non-recurring Level 3 fair value measurements at March 31, 2022.


(Dollar amounts in thousands)	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range
State and municipal obligations	$	1,545	Discounted cash flow	Discount rate	3.73%-4.44%
Collateralized debt obligations	$	3,531	Discounted cash flow	Discount rate	1.83%
Other securities	$	1,743	Discounted cash flow	Discount rate	0.65%-1.40%
Collateral dependent loans	$	10,964	Discounted cash flow	Discount rate for age of appraisal and market conditions	0.00%-50.00%

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The following table presents quantitative information about recurring and non-recurring Level 3 fair value measurements at December 31, 2021.

(Dollar amounts in thousands)

Fair Value

Valuation Technique(s)

Unobservable Input(s)

Range

State and municipal obligations

1,895

Discounted cash flow

Discount rate

3.41%-4.44%

Collateralized debt obligations

3,359

Discounted cash flow

Discount rate

1.83%

Other securities

1,743

Discounted cash flow

Discount rate

0.65%-1.40%

Collateral dependent loans

12,839

Discounted cash flow

Discount rate for age of appraisal and market conditions

0.00%-50.00%

Fair value is measured based on the value of the collateral securing those loans, and is determined using several methods. Generally the fair value of real estate is determined based on appraisals by qualified licensed appraisers. Appraisals for real estate generally use three methods to derive value: cost, sales or market comparison and income approach. The cost method bases value on the cost to replace current property. The market comparison evaluates the sales price of similar properties in the same market area. The income approach considers net operating income generated by the property and the investor’s required return. The final fair value is based on a reconciliation of these three approaches. If an appraisal is not available, the fair value may be determined by using a cash flow analysis, a broker’s opinion of value, the net present value of future cash flows, or an observable market price from an active market. Fair value of other real estate is based upon the current appraised values of the properties as determined by qualified licensed appraisers and the Company’s judgment of other relevant market conditions. Appraisals are obtained annually and reductions in value are recorded as a valuation through a charge to expense. The primary unobservable input used by management in estimating fair value are additional discounts to the appraised value to consider market conditions and the age of the appraisal, which are based on management’s past experience in resolving these types of properties. These discounts range from 0% to 50%. Values for non-real estate collateral, such as business equipment, are based on appraisals performed by qualified licensed appraisers or the customers financial statements. Values for non real estate collateral use much higher discounts than real estate collateral. Other real estate and individually evaluated loans carried at fair value are primarily comprised of smaller balance properties.

The carrying amounts and estimated fair value of financial instruments at March 31, 2022 and December 31, 2021, 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, collectively evaluated 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 individually evaluated loans was described previously. Loan fair value estimates 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. Fair value of debt is based on current rates for similar financing. The fair value of off-balance sheet items is not considered material.


	March 31, 2022
	Carrying		Fair Value
(Dollar amounts in thousands)	Value		Level 1		Level 2		Level 3		Total
Cash and due from banks	$	598,175	$	25,661	$	572,514	$	—	$	598,175
Federal funds sold	736		—		736		—		736
Securities available-for-sale	1,359,483		—		1,352,664		6,819		1,359,483
Restricted stock	15,547		n/a		n/a		n/a		n/a
Loans, net	2,764,134		—		—		2,641,346		2,641,346
Accrued interest receivable	15,633		—		6,019		9,614		15,633
Deposits	(4,395,190)		—		(4,403,416)		—		(4,403,416)
Short-term borrowings	(96,672)		—		(96,672)		—		(96,672)
Other borrowings	(15,924)		—		(15,920)		—		(15,920)
Accrued interest payable	(605)		—		(605)		—		(605)

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	December 31, 2021
	Carrying		Fair Value
(Dollar amounts in thousands)	Value		Level 1		Level 2		Level 3		Total
Cash and due from banks	$	682,807	$	24,901	$	657,906	$	—	$	682,807
Federal funds sold	308		—		308		—		308
Securities available-for-sale	1,364,734		—		1,357,737		6,997		1,364,734
Restricted stock	16,200		n/a		n/a		n/a		n/a
Loans, net	2,767,590		—		—		2,682,257		2,682,257
Accrued interest receivable	16,946		—		4,709		12,237		16,946
Deposits	(4,409,569)		—		(4,418,117)		—		(4,418,117)
Short-term borrowings	(93,374)		—		(93,374)		—		(93,374)
Other borrowings	(15,937)		—		(16,483)		—		(16,483)
Accrued interest payable	(687)		—		(687)		—		(687)

5.Short-Term Borrowings

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



(Dollar amounts in thousands)	March 31, 2022		December 31, 2021
Federal Funds Purchased	$	4,800	$	3,275
Repurchase Agreements	91,872		90,099
	$	96,672	$	93,374

The Corporation enters into sales of securities under agreements to repurchase. The amounts received under these agreements represent short-term borrowings and are reflected as a liability in the consolidated balance sheets. The securities underlying these agreements are included in investment securities in the consolidated balance sheets. The Corporation has no control over the market value of the securities, which fluctuates due to market conditions. However, the Corporation is obligated to promptly transfer additional securities if the market value of the securities falls below the repurchase agreement price. The Corporation manages this risk by maintaining an unpledged securities portfolio that it believes is sufficient to cover a decline in the market value of the securities sold under agreements to repurchase.

Collateral pledged to repurchase agreements by remaining maturity are as follows:


	March 31, 2022
Repurchase Agreements	Remaining Contractual Maturity of the Agreements
(Dollar amounts in thousands)	Overnight and continuous		Up to 30 days		30 - 90 days		Greater than 90 days		Total
Mortgage Backed Securities - Residential and Collateralized Mortgage Obligations	$	86,007	$	—	$	415	$	5,450	$	91,872


	December 31, 2021
Repurchase Agreements	Remaining Contractual Maturity of the Agreements
(Dollar amounts in thousands)	Overnight and continuous		Up to 30 days		30 - 90 days		Greater than 90 days		Total
Mortgage Backed Securities - Residential and Collateralized Mortgage Obligations	$	83,576	$	—	$	5,816	$	707	$	90,099

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6.Components of Net Periodic Benefit Cost


	Three Months Ended March 31,
(Dollar amounts in thousands)	Pension Benefits				Post-Retirement Health Benefits
	2022		2021		2022		2021
Service cost	$	297	$	339	$	8	$	11
Interest cost	706		658		28		26
Expected return on plan assets	(1,227)		(1,178)		—		—

Net amortization of prior service cost	—		—		—		—
Net amortization of net (gain) loss	315		518		—		—
Net Periodic Benefit Cost	$	91	$	337	$	36	$	37

Employer Contributions

First Financial Corporation previously disclosed in its financial statements for the year ended December 31, 2021 that it expected to contribute $250 thousand and $703 thousand respectively to its Pension Plan and ESOP and $248 thousand to the Post Retirement Health Benefits Plan in 2022. Contributions of $32 thousand have been made to the Pension Plan thus far in 2022. Contributions of $57 thousand have been made through the first three months of 2022 for the Post Retirement Health Benefits plan. No contributions have been made in 2022 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 three months of 2022 and 2021 there has been $849 thousand and $552 thousand of expense accrued for potential contributions to these alternative retirement benefit options.

7.New accounting standards

Recent Accounting Pronouncements:

In March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. In January 2021, the FASB issued ASU 2021-01 which clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. The Corporation has discontinued originating LIBOR based loans and has a plan in place to transition all LIBOR indexed loans to term SOFR.

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8.Revenue from Contracts with Customers

All of the Corporation's revenue from contracts with customers in the scope of ASC 606 is recognized within Non-Interest Income. The following table presents the Corporation's sources of Non-Interest Income for the three months ended March 31, 2022 and 2021. Items outside the scope of ASC 606 are noted as such.


		Three Months Ended March 31,
(Dollar amounts in thousands)		2022			2021
Non-interest income
	Service charges on deposits and debit card fee income	$	6,654		$	5,594
	Asset management fees	1,372			1,305
	Interchange income	118			84
	Net gains on sales of loans (a)	662			1,393
	Loan servicing fees (a)	359			353
	Net gains/(losses) on sales of securities (a)	5			(152)
	Other service charges and fees (a)	106			416
	Other (b)	4,462		(c)	301
	Total non-interest income	$	13,738		$	9,294

(a) Not within the scope of ASC 606.

(b) The Other category includes gains/(losses) on the sale of OREO for the three months ended March 31, 2022 and March 31, 2021, totaling $68 thousand and zero , respectively, which is within the scope of ASC 606; the remaining balance is outside the scope of ASC 606.

Service charges on deposits: The Corporation earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Corporation fulfills the customer's request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Corporation satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer's account balance.

Asset management fees: The Corporation earns asset management fees from its contracts with trust customers to manage assets for investment, and/or to transact on their accounts. These fees are primarily earned over time as the Corporation provides the contracted monthly or quarterly services and are generally assessed based on a tiered scale of the market value of assets under management at month-end. Fees that are transaction based, including trade execution services, are recognized at the point in time that the transaction is executed, i.e. the trade date. Other related services provided and the fees the Corporation earns, which are based on a fixed fee schedule, are recognized when the services are rendered.

Interchange income: The Corporation earns interchange fees from debit and credit cardholder transactions conducted through the payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder.

Gains/Losses on sales of OREO: The Corporation records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the Corporation finances the sale of OREO to the buyer, the Corporation assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on the sale, the Corporation adjusts the transaction price and related gain (loss) on sale if a significant financing component is present.

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9.Acquisitions

On November 5, 2021, the Corporation completed its acquisition of Hancock Bancorp, Inc. and its banking subsidiary, Hancock Bank and Trust Company. Therefore, the results of Hancock Bancorp have been included in the results of operations beginning on November 5, 2021. Pursuant to the terms of the merger agreement, each issued and outstanding share of Hancock Bancorp, Inc. common stock, issued and outstanding, was converted into the right to receive $18.38 per share in cash. The aggregate value of the transaction was $31.36 million. Acquisition-related costs of $1.2 million are included in the Corporation's income statement for the year ended December 31, 2021.

Goodwill of $7.5 million arising from the acquisition consisted largely of synergies and the cost savings resulting from the combining of the operations of the companies. The goodwill is not deductible for income tax purposes as the transaction was accounted for as a tax-free exchange. The following table summarizes the consideration paid and the amounts of the assets acquired and liabilities assumed recognized at the acquisition date.


(Dollar amounts in thousands)	2021
Consideration
Cash consideration	$	31,358

Fair value of total consideration transferred	$	31,358

Assets acquired
Cash	$	3,046
Investment securities available-for-sale	57,054
Federal funds sold	10,470
Bank owned life insurance	9,753
Federal Home Loan Bank stock	1,362
Loans	227,827
Premises and equipment	8,180
Core deposit intangibles	652
Other assets	4,567
Total assets acquired	322,911

Liabilities assumed
Deposits	286,098
FHLB advances	11,042
Other liabilities	1,956
Total liabilities assumed	299,096

Net identifiable assets	23,815

Goodwill	$	7,543

The fair value of net assets acquired includes fair value adjustments to certain receivables that were not considered impaired as of the acquisition date. The fair value adjustments were determined using discounted contractual cash flows. However, the Corporation believes that all contractual cash flows related to these financial instruments will be collected. As such, these receivables were not considered impaired at the acquisition date and were not subject to guidance relating to purchase credit impaired loans, which have shown evidence of credit deterioration since origination.

The following table presents supplemental pro forma information as if the acquisition had occurred at the beginning of 2020. The unaudited pro forma information includes adjustments for interest income on loans and securities acquired, interest

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expense on deposits acquired, and the related income tax effects. The pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the transactions been effected on the assumed dates.


	Year ended December 31,
(Dollar amounts in thousands, except per share data)	2021		2020

Net interest income	$	150,806	$	156,051
Net income	$	53,714	$	55,958
Basic and diluted earnings per share	$	4.07	$	4.08

The fair value of purchased financial assets with credit deterioration was $12.9 million on the date of acquisition. The gross contractual amounts receivable relating to the purchased financial assets with credit deterioration was $18.3 million. The Corporation estimates, on the date of acquisition, that $4.4 million of the contractual cash flows specific to the purchased financial assets with credit deterioration will not be collected.

10.Accumulated Other Comprehensive Income

The following tables summarize the changes, net of tax, within each classification of accumulated other comprehensive income/(loss) for the three months ended March 31, 2022 and 2021.


	Unrealized
	gains and		2022
	(Losses) on available- for-sale		Retirement
(Dollar amounts in thousands)	Securities		plans		Total
Beginning balance, January 1,	$	15,674	$	(18,100)	$	(2,426)
Change in other comprehensive income (loss) before reclassification	(68,910)		—		(68,910)
Amounts reclassified from accumulated other comprehensive income	(4)		315		311

Net current period other comprehensive income (loss)	(68,914)		315		(68,599)
Ending balance, March 31,	$	(53,240)	$	(17,785)	$	(71,025)


	Unrealized
	gains and		2021
	(Losses) on available- for-sale		Retirement
(Dollar amounts in thousands)	Securities		plans		Total
Beginning balance, January 1,	$	34,162	$	(24,398)	$	9,764
Change in other comprehensive income (loss) before reclassification	(11,182)		—		(11,182)
Amounts reclassified from accumulated other comprehensive income	114		472		586
Net current period other comprehensive income (loss)	(11,068)		472		(10,596)

Ending balance, March 31,	$	23,094	$	(23,926)	$	(832)

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	Balance at		Current Period		Balance at
(Dollar amounts in thousands)	1/1/2022		Change		3/31/2022
Unrealized gains (losses) on securities available-for-sale
without other than temporary impairment	$	13,155	$	(69,043)	$	(55,888)
Unrealized gains (losses) on securities available-for-sale
with other than temporary impairment	2,519		129		2,648
Total unrealized loss on securities available-for-sale	$	15,674	$	(68,914)	$	(53,240)
Unrealized gain (loss) on retirement plans	(18,100)		315		(17,785)
TOTAL	$	(2,426)	$	(68,599)	$	(71,025)


	Balance at		Current Period		Balance at
(Dollar amounts in thousands)	1/1/2021		Change		3/31/2021
Unrealized gains (losses) on securities available-for-sale
without other than temporary impairment	$	31,810	$	(11,212)	$	20,598
Unrealized gains (losses) on securities available-for-sale
with other than temporary impairment	2,352		144		2,496
Total unrealized gain (loss) on securities available-for-sale	$	34,162	$	(11,068)	$	23,094
Unrealized loss on retirement plans	(24,398)		472		(23,926)
TOTAL	$	9,764	$	(10,596)	$	(832)

Three Months Ended March 31, 2022

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

Net securities gains (losses)

on available-for-sale

(1)

Income tax expense

securities

Net of tax

Amortization of

(420)

(a) Salary and benefits

retirement plan items

105

Income tax expense

(315)

Net of tax

Total reclassifications for the period

(311)

Net of tax

(a) Included in the computation of net periodic benefit cost. (see Footnote 6 for additional details).

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Three Months Ended March 31, 2021

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

(152)

Net securities gains (losses)

on available-for-sale

Income tax expense

securities

(114)

Net of tax

Amortization of

(518)

(a) Salary and benefits

retirement plan items

Income tax expense

(472)

Net of tax

Total reclassifications for the period

(586)

Net of tax

(a) Included in the computation of net periodic benefit cost. (see Footnote 6 for additional details).

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11.Leases

The Corporation leases certain branches under operating leases. At March 31, 2022, the Corporation had lease liabilities totaling $6,517,000 and right-of-use assets totaling $6,489,000 related to these leases. At December 31, 2021, the Corporation had lease liabilities totaling $6,218,000 and right-of-use assets totaling $6,197,000 related to these leases. Lease liabilities and right-of-use assets are reflected in other liabilities and other assets, respectively. At March 31, 2022, the weighted average remaining lease term for operating leases was 10.0 years and the weighted average discount rate used in the measurement of operating lease liabilities was 2.20%.

The calculated amount of the lease liabilities and right-of-use assets are impacted by the length of the lease term and the discount rate used to present value the minimum lease payments. The Corporation's lease agreements often include one or more options to renew at the Corporation's discretion. If at lease inception, the Corporation considers the exercising of a renewal option to be reasonably certain, the Corporation will include the extended term in the calculation of the lease liability and right-of-use asset. Regarding the discount rate, the new standard requires the use of the rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, the Corporation utilizes its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term.

The following table represents lease costs and other lease information. As the Corporation elected, not to separate lease and non-lease components and instead to account for them as a single lease component, the variable lease cost primarily represents variable payments such as common area maintenance and utilities.

Lease costs were as follows:


(Dollar amounts in thousands)	Three Months Ended March 31, 2022
Operating lease cost	$	274
Short-term lease cost	57
Variable lease cost	4
Total lease cost	$	335

Other information:
Cash paid for amounts included in the measurement of operating lease liabilities	515
Right-of-use assets obtained in exchange for new operating lease liabilities	9,811

Future minimum payments for operating leases with initial or remaining terms of one year or more as of March 31, 2022 were as follows:


(Dollar amounts in thousands)		March 31, 2022
Twelve Months Ended March 31,
	2023	$	974
	2024	896
	2025	837
	2026	770
	2027	698
Thereafter		3,133
Total Future Minimum Lease Payments		7,308
Amounts Representing Interest		(796)
Present Value of Net Future Minimum Lease Payments		$	6,512

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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 2021 in the 10-K filed for the fiscal year ended December 31, 2021.

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. Risks related to COVID-19 include the disruption of local, regional, national and global economic activity caused by infectious disease outbreaks, including the recent outbreak of coronavirus, or COVID-19, and the significant impact that such outbreak has had and may have on our growth, operations, earnings and asset quality; changes in asset quality, including increases in default rates on loans and higher levels of nonperforming loans and loan charge-offs generally, and specifically resulting from the economic dislocation caused by the COVID-19 pandemic; inaccuracy of the assumptions and estimates that the management of our Corporation makes in establishing reserves for probable credit losses and other estimates generally, and specifically as a result of the effect of the COVID-19 pandemic; and an increase in the rate of personal or commercial customers' bankruptcies generally, and specifically as a result of the COVID-19 pandemic. 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, 2021, 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 credit losses and the valuation of goodwill and valuing investment securities. See further discussion of these critical accounting policies in the 2021 Form 10-K.

Summary of Operating Results

Net income for the three months ended March 31, 2022 was $20.9 million, compared to $12.9 million for the same period in 2021. Basic earnings per share increased to $1.67 for the first quarter of 2022 compared to $0.95 for the same period in 2021. Return on Assets and Return on Equity were 1.63% and 14.81% respectively, for the three months ended March 31, 2022 compared to 1.12% and 8.58% for the three months ended March 31, 2021.

In March 2020, the outbreak of the Coronavirus Disease 2019 (COVID-19) was recognized as a pandemic by the World Health Organization. The spread of COVID-19 caused economic and social disruption resulting in unprecedented uncertainty. Recent declines in COVID-19 cases have resulted in most businesses reopening to capacity and a declining unemployment rate. Some supply chain issues persist contributing to inflation. COVID-19 continues to impact the Corporation's customers and still may result in adverse conditions on the Corporation's loans and investments.

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beginning on November 5, 2021. Pursuant to the terms of the merger agreement, each issued and outstanding share of Hancock Bancorp, Inc. common stock, issued and outstanding, was converted into the right to receive $18.38 per share in cash. The aggregate value of the transaction was $31.36 million. Acquisition-related costs of $1.2 million are included in the Corporation's income statement for the year ended December 31, 2021.

On September 27, 2021, First Financial Corporation issued a press release announcing that its Board of Directors approved the merger of subsidiary, The Morris Plan Company of Terre Haute, into subsidiary, First Financial Bank N.A. The merger was effective on February 21, 2022. The merger resulted in increased efficiencies, which were recognized in the first quarter of 2022.

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 increased $2.9 million in the three months ended March 31, 2022 to $37.8 million from $34.9 million in the same period in 2021. The net interest margin for the three months ended March 31, 2022 is 3.16% compared to 3.27% for the same period in 2021, a 3.42% decrease.

Non-Interest Income

Non-interest income for the three months ended March 31, 2022 was $13.7 million compared to $9.3 million for the same period of 2021. The change in non-interest income from 2021 to 2022 was primarily driven by a $4.0 million legal settlement received in the first quarter.

Non-Interest Expenses

The Corporation’s non-interest expense for the quarter ended March 31, 2022 was $31.3 million compared to $27.6 million for the same period in 2021. The year-over-year change is, in part, impacted by the acquisition of Hancock Bancorp in the fourth quarter of 2021.

Allowance for Credit Losses

The Corporation’s provision for credit losses decreased to $(6.6) million for the first quarter of 2022 as compared to $452 thousand for the same period in 2021. Net charge offs for the first quarter of 2022 were $1.2 million compared to $728 thousand for the same period of 2021. The negative provision for the quarter was the result of several factors. The first was the annual model recalibration in which delay periods are updated as well as the qualitative factor scorecard ranges. Secondly, management removed two qualitative factors that are no longer applicable. Lastly, loss rates continue to decline, lowering the required reserve. Based on management’s analysis of the current portfolio, an evaluation that includes consideration of changes in CECL model assumptions of credit quality, economic conditions, and loan composition, management believes the allowance is adequate.

Income Tax Expense

The Corporation’s effective income tax rate for the first three months of 2022 was 21.79% compared to 20.10% for the same period in 2021.

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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 $13.0 million at March 31, 2022 compared to $14.9 million at December 31, 2021. Nonperforming loans decreased 38.3% compared to $21.0 million as of March 31, 2021. A summary of non-performing loans at March 31, 2022 and December 31, 2021 follows:


	(000's)
	March 31, 2022			December 31, 2021
Non-accrual loans	$	7,712		$	9,590
Accruing restructured loans	3,723			3,897
Nonaccrual restructured loans	819			902
Accruing loans past due over 90 days	707			515
	$	12,961		$	14,904
Ratio of the allowance for credit losses
as a percentage of non-performing loans	312.6		%	324.1		%

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


	(000's)
	March 31, 2022		December 31, 2021
Non-accrual loans
Commercial loans	$	3,509	$	4,991
Residential loans	2,658		3,049
Consumer loans	1,545		1,550
	$	7,712	$	9,590
Past due 90 days or more
Commercial loans	$	4	$	14
Residential loans	347		410
Consumer loans	356		91
	$	707	$	515

The CARES Act includes a provision that permits a financial institution to elect to suspend temporarily troubled debt restructuring accounting under ASC Subtopic 310-40 in certain circumstances (“section 4013”). To be eligible under section 4013, a loan modification must be (1) related to COVID-19; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (A) 60 days after the date of termination of the National Emergency or (B) December 31, 2020. The date was subsequently extended to December 31, 2021. In response to this section of the CARES Act, the federal banking agencies issued a revised interagency statement on April 7, 2020 that, in consultation with the Financial Accounting Standards Board, confirmed that for loans not subject to section 4013, short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not troubled debt restructurings under ASC Subtopic 310-40. This includes short-term (e.g., up to six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. From the inception of the CARES Act through March 31, 2022, 1,105 loans totaling $225 million were modified, related to COVID-19, that were not considered troubled debt restructurings. 863 loans totaling $183 million have resumed normal scheduled payments. 184 remaining loans are still under a debt relief plan, which include 9 commercial loans totaling $35 million that have been provided additional payment relief since the initial payment relief plan. 1 loan totaling $16 thousand is under the original payment relief plan. On these modifications, we have granted payment deferrals, generally for up to three months.

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

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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.

The table below shows the Corporation’s estimated sensitivity profile as of March 31, 2022. 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 5.53% over the next 12 months and increase 9.00% over the following 12 months. Given a 100 basis point decrease in rates, net interest income would decrease 7.81% over the next 12 months and decrease 15.26% 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 100	-7.81	-15.26	-19.66
Up 100	5.53	9.00	11.98
Up 200	7.36	13.83	19.82

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 $27.7 million of investments that mature throughout the next 12 months. The Corporation also anticipates $131.2 million of principal payments from mortgage-backed and other securities. Given the current rate environment, the Corporation anticipates $21.3 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 sources of funds, the Corporation currently anticipates adequate liquidity to meet the expected obligations of its customers.

Financial Condition

Comparing the first three months of 2022 to the same period in 2021, loans, net of deferred loan costs, have increased $158 million to $2.8 billion. Deposits increased 12.5% to $4.4 billion at March 31, 2022 compared to March 31, 2021. Shareholders' equity decreased 12.15% or $72.7 million. This financial performance decreased book value per share 4.41% to $42.25 at March 31, 2022 from $44.20 at March 31, 2021. Book value per share is calculated by dividing the total shareholders' equity by the number of shares outstanding. Accumulated other comprehensive income decreased $68.6 million primarily due to the market value of the securities portfolio, which reflected the large decrease in securities pricing.

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As a Small Business Administration lender, we were well positioned to assist business customers in accessing funds available through the Paycheck Protection Program (“PPP”) implemented in April 2020. Through March 31, 2022, we processed approximately $275 million of approved PPP loans. The carrying value of these loans is $18 million as of March 31, 2022.

Capital Adequacy

The Federal Reserve, OCC and Federal Deposit Insurance Corporation (collectively, joint agencies) establish regulatory capital guidelines for U.S. banking organizations. Regulatory capital guidelines require that capital be measured in relation to the credit and market risks of both on- and off-balance sheet items using various risk weights. On January 1, 2015, the Basel 3 rules became effective and include transition provisions through January 1, 2019. Under Basel 3, Total capital consists of two tiers of capital, Tier 1 and Tier 2. Tier 1 capital is further composed of Common equity tier 1 capital and additional tier 1 capital.

Common equity tier 1 capital primarily includes qualifying common shareholders’ equity, retained earnings and certain minority interests. Goodwill, disallowed intangible assets and certain disallowed deferred tax assets are excluded from Common equity tier 1 capital.

Additional tier 1 capital primarily includes qualifying non-cumulative preferred stock, trust preferred securities (Trust Securities) subject to phase-out and certain minority interests. Certain deferred tax assets are also excluded.

Tier 2 capital primarily consists of qualifying subordinated debt, a limited portion of the allowance for loan and lease losses, Trust Securities subject to phase-out and reserves for unfunded lending commitments. The Corporation’s Total capital is the sum of Tier 1 capital plus Tier 2 capital.

To meet adequately capitalized regulatory requirements, an institution must maintain a Tier 1 capital ratio of 8.50 percent and a Total capital ratio of 10.50 percent. A “well-capitalized” institution must generally maintain capital ratios 200 bps higher than the minimum guidelines. The risk-based capital rules have been further supplemented by a Tier 1 leverage ratio, defined as Tier 1 capital divided by quarterly average total assets, after certain adjustments. BHCs must have a minimum Tier 1 leverage ratio of at least 4.0 percent. National banks must maintain a Tier 1 leverage ratio of at least 5.0 percent to be classified as “well capitalized.” Failure to meet the capital requirements established by the joint agencies can lead to certain mandatory and discretionary actions by regulators that could have a material adverse effect on the Corporation’s financial position. Below are the capital ratios for the Corporation and lead bank.

The fully phased in capital conservation buffer set the minimum ratios for common equity Tier 1 capital at 7%, the Tier 1 capital at 8.5% and the total capital at 10.5%. Currently the Corporation exceeds all of these minimums.


	March 31, 2022		December 31, 2021		To Be Well Capitalized
Common equity tier 1 capital
Corporation	14.46	%	14.37	%	N/A
First Financial Bank	13.72	%	13.53	%	6.50	%
Total risk-based capital
Corporation	15.63	%	15.63	%	N/A
First Financial Bank	14.89	%	14.78	%	10.00	%
Tier I risk-based capital
Corporation	14.46	%	14.37	%	N/A
First Financial Bank	13.72	%	13.53	%	8.00	%
Tier I leverage capital
Corporation	9.94	%	9.83	%	N/A
First Financial Bank	9.40	%	9.18	%	5.00	%

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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 March 31, 2022, 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 March 31, 2022 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 March 31, 2022 that has materially affected, or is reasonably likely to materially affect, the Corporation's internal control over financial reporting.

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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 1A.Risk Factors.

There have been no material changes in the risk factors from those disclosed in the Corporation’s 2021 Form 10-K filed for December 31, 2021.

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

(a) None.

(b) Not applicable.

The Corporation periodically acquires shares of its common stock directly from shareholders in individually negotiated transactions. On July 21, 2021 First Financial Corporation issued a press release announcing that its Board of Directors has authorized a stock repurchase program pursuant to which up to 5% of the Corporations outstanding shares of common stock, or approximately 652,411 shares may be repurchased.

Following is certain information regarding shares of common stock purchased by the Corporation during the quarter covered by this report.


			(c)
			Total Number Of Shares
			Purchased As Part Of	(c) Maximum
	(a) Total Number Of	(b) Average Price	Publicly Announced Plans	Number of Shares That May Yet
	Shares Purchased	Paid Per Share	Or Programs *	Be Purchased *
Januaryy 1-31, 2022	—	—	—	—
February 1-28, 2022	169,335	45.17	169,335	35,617
March 1-31, 2022	35,617	46.00	35,617	—
Total	204,952	45.31	204,952	—

ITEM 3.Defaults upon Senior Securities.

Not applicable.

ITEM 4.Mine Safety Disclosures

Not applicable.

ITEM 5.Other Information.

Not applicable.

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ITEM 6.Exhibits.


Exhibit No.:			Description of Exhibit:
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			Amended and Restated Code of By-Laws of First Financial Corporation, incorporated by reference to Exhibit 3.2 of the Corporation’s Form 8-K filed on February 22, 2021.
3.3			Articles of Amendment to the Amended and Restated Articles of Incorporation of First Financial Corporation, incorporated by reference to Exhibit 3.1 of the Corporation’s Form 8-K filed on April 27, 2021.
10.1*			Employment Agreement for Norman L. Lowery, dated and effective July 1, 2021, incorporated by reference to Exhibit 10.01 of the Corporation’s Form 8-K filed on July 1, 2021.
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.
10.5*			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 Amended and Restated 2011 Omnibus Equity Incentive Plan incorporated by reference to Exhibit 10.1 of the Corporation’s Form 8-K for the annual meeting filed on April 27, 2021.
10.12*			Form of Restricted Stock Award Agreement under the First Financial Corporation 2011 Omnibus Equity Incentive Plan incorporated by reference to Exhibit 10.12 of the Corporation's Form 10-Q for the quarter ended March 31, 2012 filed on May 10, 2012.
10.13*			Employment Agreement for Norman D. Lowery, effective July 1, 2021, incorporated by reference to Exhibit 10.1 of the Corporation’s Form 8-K filed July 1, 2021.
10.14*			Employment Agreement for Rodger A. McHargue, effective July 1, 2021, incorporated by reference to Exhibit 10.2 of the Corporation’s Form 8-K filed July 1, 2021.
10.15*			Employment Agreement for Steven H. Holliday, effective July 1, 2021, incorporated by reference to Exhibit 10.3 of the Corporation’s Form 8-K filed July 1, 2021.
31.1			Sarbanes-Oxley Act 302 Certification for Quarterly Report on Form 10-Q for the quarter ended March 31, 2022 by Principal Executive Officer, dated May 4, 2022.
31.2			Sarbanes-Oxley Act 302 Certification for Quarterly Report on Form 10-Q for the quarter ended March 31, 2022 by Principal Financial Officer, dated May 4, 2022.
32.1			Certification, dated May 4, 2022, 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 March 31, 2022.
101.1			Financial statements from the Quarterly Report on Form 10-Q of the Corporation for the quarter ended March 31, 2022, 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.

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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:	May 4, 2022	By /s/ Norman L. Lowery
		Norman L. Lowery, Chairman, President and CEO
		(Principal Executive Officer)

Date:	May 4, 2022	By /s/ Rodger A. McHargue
		Rodger A. McHargue, Treasurer and CFO
		(Principal Financial Officer)