10-Q - THFF - Equibles

Table of Contents

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 September 30, 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 ☑ 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 ☑ 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	☑
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 ☑.

As of November 1, 2022, the registrant had outstanding 12,021,998 shares of common stock, without par value.

Table of Contents 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	7

Notes to Consolidated Financial Statements	8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	32

Item 3. Quantitative and Qualitative Disclosures about Market Risk	32

Item 4. Controls and Procedures	39

PART II. Other Information:

Item 1. Legal Proceedings	40

Item 1A. Risk Factors	40

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	40

Item 3. Defaults upon Senior Securities	40

Item 4. Mine Safety Disclosures	40

Item 5. Other Information	40

Item 6. Exhibits	41

Signatures	42

Table of Contents

Part I – Financial Information

Item 1.Financial Statements

FIRST FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS

(Dollar amounts in thousands, except per share data)


		September 30,			December 31,
	****	2022		****	2021
		(unaudited)
ASSETS
Cash and due from banks		$	328,222		$	682,807
Federal funds sold			8,223			308
Securities available-for-sale			1,331,985			1,364,734
Loans:
Commercial			1,717,265			1,674,066
Residential			676,400			664,509
Consumer			570,245			474,026
			2,963,910			2,812,601
(Less) plus:
Net deferred loan (fees)/costs			6,565			3,294
Allowance for credit losses			(39,495)			(48,305)
			2,930,980			2,767,590
Restricted stock			15,372			16,200
Accrued interest receivable			19,128			16,946
Premises and equipment, net			68,113			69,522
Bank-owned life insurance			116,034			116,997
Goodwill			86,985			86,135
Other intangible assets			7,024			8,024
Other real estate owned			214			108
Other assets			97,059			45,728
TOTAL ASSETS		$	5,009,339		$	5,175,099
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Non-interest-bearing		$	894,348		$	914,933
Interest-bearing:
Certificates of deposit exceeding the FDIC insurance limits			56,596			74,015
Other interest-bearing deposits			3,456,562			3,420,621
			4,407,506			4,409,569
Short-term borrowings			89,321			93,374
Other borrowings			9,593			15,937
Other liabilities			64,293			73,643
TOTAL LIABILITIES			4,570,713			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-12,021,998 in 2022 and 12,629,893 in 2021			2,011			2,009
Additional paid-in capital			142,596			141,979
Retained earnings			607,220			559,139
Accumulated other comprehensive income/(loss)			(167,375)			(2,426)
Less: Treasury shares at cost-4,092,994 in 2022 and 3,466,420 in 2021			(145,826)			(118,125)
TOTAL SHAREHOLDERS’ EQUITY			438,626			582,576
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	5,009,339		$	5,175,099

See accompanying notes.

Table of Contents FIRST FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Dollar amounts in thousands, except per share data)


		Three Months Ended					Nine Months Ended
		September 30,					September 30,
	****	2022		****	2021		2022		****	2021
		(unaudited)			(unaudited)		(unaudited)			(unaudited)
INTEREST INCOME:
Loans, including related fees		$	38,021		$	31,937	$	104,683		$	95,760
Securities:
Taxable			7,327			3,627		17,958			10,061
Tax-exempt			2,562			2,234		7,402			6,471
Other			336			347		1,059			1,080
TOTAL INTEREST INCOME			48,246			38,145		131,102			113,372
INTEREST EXPENSE:
Deposits			4,644			1,959		8,793			6,335
Short-term borrowings			418			99		676			291
Other borrowings			80			59		249			177
TOTAL INTEREST EXPENSE			5,142			2,117		9,718			6,803
NET INTEREST INCOME			43,104			36,028		121,384			106,569
Provision for credit losses			1,050			(1,500)		(4,750)			(3,244)
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES			42,054			37,528		126,134			109,813
NON-INTEREST INCOME:
Trust and financial services			1,015			1,156		3,687			3,774
Service charges and fees on deposit accounts			6,965			6,421		20,698			18,031
Other service charges and fees			160			135		488			957
Securities gains (losses), net			—			5		5			111
Interchange income			149			224		418			423
Loan servicing fees			457			344		1,184			1,485
Gain on sales of mortgage loans			440			1,426		1,705			4,268
Other			2,954			1,381		7,963			2,268
TOTAL NON-INTEREST INCOME			12,140			11,092		36,148			31,317
NON-INTEREST EXPENSE:
Salaries and employee benefits			15,943			15,770		48,953			47,478
Occupancy expense			2,525			2,151		7,419			6,302
Equipment expense			3,311			2,177		9,177			7,195
FDIC Expense			556			313		1,526			898
Other			9,169			8,048		26,447			22,221
TOTAL NON-INTEREST EXPENSE			31,504			28,459		93,522			84,094
INCOME BEFORE INCOME TAXES			22,690			20,161		68,760			57,036
Provision for income taxes			4,639			4,063		14,172			11,447
NET INCOME			18,051			16,098		54,588			45,589
OTHER COMPREHENSIVE INCOME (LOSS)
Change in unrealized gains/(losses) on securities, net of reclassifications and taxes			(41,060)			(2,985)		(165,893)			(12,281)
Change in funded status of post retirement benefits, net of taxes			315			471		944			1,415
COMPREHENSIVE INCOME (LOSS)		$	(22,694)		$	13,584	$	(110,361)		$	34,723
PER SHARE DATA
Basic and Diluted Earnings per Share		$	1.50		$	1.24	$	4.45		$	3.42
Weighted average number of shares outstanding (in thousands)			12,029			13,019		12,270			13,320

See accompanying notes.

Table of Contents FIRST FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

Three Months Ended

September 30, 2022, and 2021

(Dollar amounts in thousands, except per share data)

(Unaudited)


	****			****			****			****	Accumulated		****
											Other
		Common			Additional			Retained			Comprehensive			Treasury
		Stock			Capital			Earnings			Income/(Loss)			Stock		Total
Balance, July 1, 2021		$	2,008		$	141,240		$	543,595		$	1,412		$	(100,092)	$	588,163
Net income			—			—			16,098			—			—		16,098
Other comprehensive income (loss)			—			—			—			(2,514)			—		(2,514)
Omnibus Equity Incentive Plan			1			216			—			—			—		217
Treasury shares purchased (176,293 shares)			—			—			—			—			(7,029)		(7,029)
Balance, September 30, 2021		$	2,009		$	141,456		$	559,693		$	(1,102)		$	(107,121)	$	594,935

Balance, July 1, 2022		$	2,011		$	142,390		$	589,169		$	(126,630)		$	(145,409)	$	461,531
Net income			—			—			18,051			—			—		18,051
Other comprehensive income (loss)			—			—			—			(40,745)			—		(40,745)
Omnibus Equity Incentive Plan			—			206			—			—			—		206
Treasury shares purchased (9,125 shares)			—			—			—			—			(417)		(417)
Cash dividends, $0 per share			—			—			—			—			—		—
Balance, September 30, 2022		$	2,011		$	142,596		$	607,220		$	(167,375)		$	(145,826)	$	438,626

See accompanying notes.

Table of Contents FIRST FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

Nine Months Ended

September 30, 2022, and 2021

(Dollar amounts in thousands, except per share data)

(Unaudited)


	****			****			****			****	Accumulated		****
											Other
		Common			Additional			Retained			Comprehensive			Treasury
		Stock			Capital			Earnings			Income/(Loss)			Stock		Total
Balance, January 1, 2021		$	2,007		$	140,820		$	521,103		$	9,764		$	(76,702)	$	596,992
Net income			—			—			45,589			—			—		45,589
Other comprehensive income (loss)			—			—			—			(10,866)			—		(10,866)
Omnibus Equity Incentive Plan			2			636			—			—			—		638
Treasury shares purchased (707,734 shares)			—			—			—			—			(30,419)		(30,419)
Cash dividends, $.53 per share			—			—			(6,999)			—			—		(6,999)
Balance, September 30, 2021		$	2,009		$	141,456		$	559,693		$	(1,102)		$	(107,121)	$	594,935

Balance, January 1, 2022		$	2,009		$	141,979		$	559,139		$	(2,426)		$	(118,125)	$	582,576
Net income			—			—			54,588			—			—		54,588
Other comprehensive income (loss)			—			—			—			(164,949)			—		(164,949)
Omnibus Equity Incentive Plan			2			617			—			—			—		619
Treasury shares purchased (626,574 shares)			—			—			—			—			(27,701)		(27,701)
Cash dividends, $.54 per share			—			—			(6,507)			—			—		(6,507)
Balance, September 30, 2022		$	2,011		$	142,596		$	607,220		$	(167,375)		$	(145,826)	$	438,626

Table of Contents FIRST FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollar amounts in thousands, except per share data)


		Nine Months Ended
		September 30,
	****	2022		****	2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income		$	54,588		$	45,589
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization (accretion) of premiums and discounts on investments			5,174			6,207
Provision for credit losses			(4,750)			(3,244)
Securities (gains) losses			(5)			(111)
Gain on sales of mortgage loans			(1,705)			(4,268)
(Gain) Loss on sale of other real estate			26			10
Restricted stock compensation			619			638
Depreciation and amortization			4,615			4,670
Other, net			(6,266)			(6,583)
NET CASH FROM OPERATING ACTIVITIES			52,296			42,908
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available-for-sale			—			9,369
Calls, maturities and principal reductions on securities available-for-sale			141,274			198,613
Purchases of securities available-for-sale			(329,564)			(479,007)
Proceeds from loans held for sale previously classified as portfolio loans			12,802			—
Loans made to customers, net of repayment			(168,558)			135,691
Redemption of restricted stock			1,871			—
Purchase of restricted stock			(1,043)			(25)
Purchase of bank owned life insurance			—			(10,000)
Proceeds from sales of other real estate owned			223			237
Net change in federal funds sold			(7,915)			(5,882)
Additions to premises and equipment			(2,206)			(4,547)
NET CASH FROM INVESTING ACTIVITIES			(353,116)			(155,551)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits			(1,150)			272,903
Net change in short-term borrowings			(4,053)			(15,010)
Maturities of other borrowings			(6,402)			—
Proceeds from other borrowings			—			—
Purchase of treasury stock			(27,701)			(30,419)
Dividends paid			(14,459)			(14,181)
NET CASH FROM FINANCING ACTIVITIES			(53,765)			213,293
NET CHANGE IN CASH AND CASH EQUIVALENTS			(354,585)			100,650
CASH AND DUE FROM BANKS, BEGINNING OF PERIOD			682,807			657,470
CASH AND DUE FROM BANKS, END OF PERIOD		$	328,222		$	758,120

See accompanying notes.

Table of Contents

FIRST FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The accompanying September 30, 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.

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 nine 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.

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 September 30.


Allowance for Credit Losses:	****			September 30, 2022
(Dollar amounts in thousands)		Commercial		Residential		Consumer		Unallocated		Total
Beginning balance		$	16,469	$	14,168	$	10,584	$	247	$	41,468
Provision for credit losses			(1,403)		297		2,199		(43)		1,050
Loans charged-off			(2,406)		(57)		(3,190)		—		(5,653)
Recoveries			634		55		1,941		—		2,630
Ending Balance		$	13,294	$	14,463	$	11,534	$	204	$	39,495


Allowance for Credit Losses:	****			****	September 30, 2021						****	****
(Dollar amounts in thousands)		Commercial			Residential		Consumer		Unallocated			Total
Beginning balance		$	15,693		$	17,837	$	10,988	$	214		$	44,732
Provision for credit losses			(531)			(1,387)		173		245			(1,500)
Loans charged-off			(313)			(61)		(1,240)		—			(1,614)
Recoveries			182			130		1,032		—			1,344
Ending Balance		$	15,031		$	16,519	$	10,953	$	459		$	42,962

The following table presents the activity of the allowance for credit losses by portfolio segment for the nine months ended September 30.


Allowance for Credit Losses:	****			September 30, 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			(3,835)		(3,952)		3,218		(181)		(4,750)
Loans charged -off			(3,659)		(579)		(7,080)		—		(11,318)
Recoveries			1,905		678		4,675		—		7,258

Table of Contents

Ending Balance		$	13,294		$	14,463		$	11,534		$	204		$	39,495


Allowance for Credit Losses:	****			****	September 30, 2021						****	****
(Dollar amounts in thousands)		Commercial			Residential		Consumer		Unallocated			Total
Beginning balance		$	16,901		$	19,142	$	11,009	$	—		$	47,052
Provision for credit losses			(2,067)			(2,577)		941		459			(3,244)
Loans charged -off			(612)			(492)		(3,999)		—			(5,103)
Recoveries			809			446		3,002		—			4,257
Ending Balance		$	15,031		$	16,519	$	10,953	$	459		$	42,962

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


	****	September 30, 2022
		Loans Past				Nonaccrual
		Due Over				With No
		90 Days Still				Allowance
(Dollar amounts in thousands)		Accruing		Nonaccrual		For Credit Loss
Commercial
Commercial & Industrial		$	242	$	1,647	$	322
Farmland			—		287		272
Non Farm, Non Residential			—		2,456		2,443
Agriculture			—		393		361
All Other Commercial			15		28		—
Residential
First Liens			480		1,599		—
Home Equity			—		140		—
Junior Liens			95		263		—
Multifamily			—		204		—
All Other Residential			—		108		—
Consumer
Motor Vehicle			402		1,492		—
All Other Consumer			1		530		—
TOTAL		$	1,235	$	9,147	$	3,398


	****	December 31, 2021
		Loans Past				Nonaccrual
		Due Over				With No
		90 Days Still				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

Table of Contents

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


	****	September 30, 2022
		Collateral Type
(Dollar amounts in thousands)		Real Estate		Other
Commercial
Commercial & Industrial		$	5,656	$	142
Farmland			3,561		—
Non Farm, Non Residential			5,555		—
Agriculture			—		361
All Other Commercial			—		—
Residential
First Liens			—		—
Home Equity			—		—
Junior Liens			—		—
Multifamily			—		—
All Other Residential			906		—
Consumer
Motor Vehicle			—		—
All Other Consumer			—		—
Total		$	15,678	$	503


	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

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


	****	September 30, 2022
						90 Days
		30-59 Days		60-89 Days		and Greater		Total		****		****
(Dollar amounts in thousands)		Past Due		Past Due		Past Due		Past Due		Current		Total
Commercial
Commercial & Industrial		$	2,437	$	217	$	1,267	$	3,921	$	677,656	$	681,577
Farmland			—		—		272		272		128,175		128,447
Non Farm, Non Residential			312		80		—		392		359,662		360,054
Agriculture			—		—		—		—		120,903		120,903
All Other Commercial			301		—		30		331		434,394		434,725
Residential
First Liens			935		1,056		1,038		3,029		329,304		332,333
Home Equity			616		40		102		758		63,834		64,592
Junior Liens			257		29		241		527		56,214		56,741
Multifamily			467		99		—		566		193,728		194,294
All Other Residential			—		38		—		38		30,169		30,207
Consumer
Motor Vehicle			10,129		2,088		853		13,070		525,363		538,433
All Other Consumer			273		56		3		332		33,713		34,045
TOTAL		$	15,727	$	3,703	$	3,806	$	23,236	$	2,953,115	$	2,976,351


	****	December 31, 2021
						90 Days
		30-59 Days		60-89 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

Table of Contents During the three and nine months ended September 30, 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
July 1,	$	672	$	3,474	$	—	$	4,146
Added/(Disposed)		—		—		—		—
Charged Off		—		—		—		—
Payments		(19)		(180)		—		(199)
September 30,	$	653	$	3,294	$	—	$	3,947


	2022
(Dollar amounts in thousands)	Commercial		Residential		Consumer		Total
January 1,	$	407	$	3,686	$	706	$	4,799
Added/(Disposed)		305		128		(611)		(178)
Charged Off		—		—		—		—
Payments		(59)		(520)		(95)		(674)
September 30,	$	653	$	3,294	$	—	$	3,947


	2021
(Dollar amounts in thousands)	Commercial		Residential		Consumer		Total
July 1,		—		3,904		556		4,460
Added		—		—		172		172
Charged Off		—		—		—		—
Payments		—		(91)		(52)		(143)
September 30,		—		3,813		676		4,489


	2021
(Dollar amounts in thousands)	Commercial		Residential		Consumer		Total
January 1,		—		3,589		617		4,206
Added		—		491		294		785
Charged Off		—		(27)		(75)		(102)
Payments		—		(240)		(160)		(400)
September 30,		—		3,813		676		4,489

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 September 30, 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 September 30, 2022 and 2021. The Corporation has not committed to lend additional amounts as of September 30, 2022 and 2021 to customers with outstanding loans that are classified as troubled debt restructurings. None of the charge-offs during the three and nine months ended September 30, 2022 and 2021 were of restructurings that had occurred in the previous 12 months. 12

Table of Contents The CARES Act included a provision that permitted 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 have been (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 were not troubled debt restructurings under ASC Subtopic 310-40. This included short-term (e.g., up to six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that were insignificant. Borrowers considered current were those that were less than 30 days past due on their contractual payments at the time a modification program was implemented. From the inception of the CARES Act through December 31, 2021, 1,242 loans totaling $172 million were modified, related to COVID-19, that were not considered troubled debt restructurings. 1,076 loans totaling $168 million have resumed normal scheduled payments. 113 remaining loans are still under a debt relief plan, which include no commercial loans that have been provided additional payment relief since the initial 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 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. 13

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


		September 30, 2022
		Term Loans at Amortized Cost Basis by Origination Year												Revolving
		2022		2021		2020		2019		2018		Prior		Loans		Total
Commercial
Commercial and Industrial	Pass	$	118,289	$	143,777	$	57,461	$	63,594	$	28,655	$	110,184	$	106,028	$	627,988
	Special Mention		1,635		2,954		413		611		3,516		4,065		288	$	13,482
	Substandard		718		752		2,621		1,228		2,096		6,573		11,148	$	25,136
	Doubtful		—		—		—		—		—		—		—	$	—
	Not Rated		9,694		1,588		913		560		211		112		—	$	13,078
	Subtotal	$	130,336	$	149,071	$	61,408	$	65,993	$	34,478	$	120,934	$	117,464	$	679,684

Farmland	Pass	$	13,583	$	23,014	$	9,382	$	10,191	$	10,752	$	50,206	$	267	$	117,395
	Special Mention		—		—		1,164		882		—		3,796		—	$	5,842
	Substandard		—		—		461		272		55		2,332		—	$	3,120
	Doubtful		—		—		—		—		—		—		—	$	—
	Not Rated		—		—		—		—		—		20		—	$	20
	Subtotal	$	13,583	$	23,014	$	11,007	$	11,345	$	10,807	$	56,354	$	267	$	126,377

Non Farm, Non Residential	Pass	$	70,604	$	76,794	$	35,195	$	19,915	$	31,852	$	114,737	$	1,757	$	350,854
	Special Mention		—		—		—		931		—		370		—	$	1,301
	Substandard		—		—		—		521		—		6,436		—	$	6,957
	Doubtful		—		—		—		—		—		—		—	$	—
	Not Rated		—		—		—		—		—		286		—	$	286
	Subtotal	$	70,604	$	76,794	$	35,195	$	21,367	$	31,852	$	121,829	$	1,757	$	359,398

Agriculture	Pass	$	7,934	$	9,730	$	8,381	$	8,855	$	1,987	$	19,173	$	56,124	$	112,184
	Special Mention		89		—		10		5		—		712		3,450	$	4,266
	Substandard		—		—		—		430		1,370		384		—	$	2,184
	Doubtful		—		—		—		—		—		—		—	$	—
	Not Rated		75		42		86		67		30		—		—	$	300
	Subtotal	$	8,098	$	9,772	$	8,477	$	9,357	$	3,387	$	20,269	$	59,574	$	118,934

Other Commercial	Pass	$	117,094	$	74,954	$	89,027	$	20,029	$	29,456	$	87,301	$	3,240	$	421,101
	Special Mention		24		—		—		11		—		11,070		—	$	11,105
	Substandard		—		15		—		—		—		22		10	$	47
	Doubtful		—		—		—		—		—		—		—	$	—
	Not Rated		17		84		—		—		31		487		—	$	619
	Subtotal	$	117,135	$	75,053	$	89,027	$	20,040	$	29,487	$	98,880	$	3,250	$	432,872

Residential
Multifamily >5 Residential	Pass	$	58,035	$	33,076	$	46,842	$	12,212	$	5,087	$	34,770	$	932	$	190,954
	Special Mention		—		—		—		—		—		90		—	$	90
	Substandard		—		—		—		—		—		1,301		—	$	1,301
	Doubtful		—		—		—		—		—		—		—	$	—
	Not Rated		—		1,129		—		—		—		267		—	$	1,396
	Subtotal	$	58,035	$	34,205	$	46,842	$	12,212	$	5,087	$	36,428	$	932	$	193,741

Total	Pass	$	385,539	$	361,345	$	246,288	$	134,796	$	107,789	$	416,371	$	168,348	$	1,820,476
	Special Mention		1,748		2,954		1,587		2,440		3,516		20,103		3,738	$	36,086
	Substandard		718		767		3,082		2,451		3,521		17,048		11,158	$	38,745
	Doubtful		—		—		—		—		—		—		—	$	—
	Not Rated		9,786		2,843		999		627		272		1,172		—	$	15,699
Total commercial loans		$	397,791	$	367,909	$	251,956	$	140,314	$	115,098	$	454,694	$	183,244	$	1,911,006

Table of Contents


		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		—		—		—		—		—		—		—	$	—
	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		—		—		—		—		—		—		—	$	—
	Not Rated		—		—		—		—		—		—		—	$	—
	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		—		—		—		—		—		—		—	$	—
	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		—		—		—		—		—		—		—	$	—
	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		—		—		—		—		—		—		—	$	—
	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		—		—		—		—		—		—		—	$	—
	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		—		—		—		—		—		—		—	$	—
	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

Table of Contents 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:


		September 30, 2022
		Term Loans at Amortized Cost Basis by Origination Year												Revolving
		2022		2021		2020		2019		2018		Prior		Loans		Total
Residential
First Liens	Performing	$	53,596	$	68,418	$	42,892	$	17,521	$	20,943	$	122,753	$	3,201	$	329,324
	Non-performing		—		—		—		33		64		2,068		—	$	2,165
	Subtotal	$	53,596	$	68,418	$	42,892	$	17,554	$	21,007	$	124,821	$	3,201	$	331,489

Home Equity	Performing	$	1,823	$	—	$	8	$	115	$	90	$	1,074	$	61,175	$	64,285
	Non-performing		—		—		79		—		15		45		—	$	139
	Subtotal	$	1,823	$	—	$	87	$	115	$	105	$	1,119	$	61,175	$	64,424

Junior Liens	Performing	$	16,412	$	11,274	$	7,963	$	6,220	$	5,877	$	6,783	$	1,737	$	56,266
	Non-performing		—		—		26		65		74		192		—	$	357
	Subtotal	$	16,412	$	11,274	$	7,989	$	6,285	$	5,951	$	6,975	$	1,737	$	56,623

Other Residential	Performing	$	9,348	$	13,341	$	4,450	$	1,322	$	503	$	1,051	$	—	$	30,015
	Non-performing		—		—		—		50		38		20		—	$	108
	Subtotal	$	9,348	$	13,341	$	4,450	$	1,372	$	541	$	1,071	$	—	$	30,123

Consumer
Motor Vehicle	Performing	$	251,757	$	132,338	$	100,690	$	34,889	$	11,308	$	3,552	$	6	$	534,540
	Non-performing		306		694		426		247		60		39		—	$	1,772
	Subtotal	$	252,063	$	133,032	$	101,116	$	35,136	$	11,368	$	3,591	$	6	$	536,312

Other Consumer	Performing	$	11,785	$	9,216	$	4,804	$	1,502	$	506	$	884	$	4,702	$	33,399
	Non-performing		28		269		132		69		19		15		2	$	534
	Subtotal	$	11,813	$	9,485	$	4,936	$	1,571	$	525	$	899	$	4,704	$	33,933

Total	Performing	$	344,721	$	234,587	$	160,807	$	61,569	$	39,227	$	136,097	$	70,821	$	1,047,829
	Non-performing		334		963		663		464		270		2,379		2	$	5,075
Total other loans		$	345,055	$	235,550	$	161,470	$	62,033	$	39,497	$	138,476	$	70,823	$	1,052,904

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	$	—	$	31,217
	Non-performing		—		—		55		43		—		27		—	$	125
	Subtotal	$	20,218	$	6,665	$	1,752	$	705	$	883	$	1,119	$	—	$	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

3. Securities

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


	****	September 30, 2022
		Amortized			Unrealized			Unrealized
(Dollar amounts in thousands)		Cost		****	Gains		****	Losses		****	Fair Value
U.S. Government agencies		$	117,925		$	26		$	(11,670)		$	106,281
Mortgage Backed Securities - residential			725,085			22			(106,138)			618,969
Mortgage Backed Securities - commercial			11,763			—			(454)			11,309
Collateralized mortgage obligations			230,237			—			(23,877)			206,360
State and municipal obligations			399,040			100			(50,325)			348,815
Municipal taxable			39,326			40			(6,760)			32,606
U.S. Treasury			2,084			—			(28)			2,056
Collateralized debt obligations			—			3,111			—			3,111
Other securities			2,478			—			—			2,478
TOTAL		$	1,527,938		$	3,299		$	(199,252)		$	1,331,985

Table of Contents


	****	December 31, 2021
		Amortized			Unrealized			Unrealized
(Dollar amounts in thousands)		Cost		****	Gains		****	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 September 30, 2022 were as follows.


	****	Available-for-Sale
		Amortized			Fair
(Dollar amounts in thousands)	****	Cost		****	Value
Due in one year or less		$	14,709		$	14,645
Due after one but within five years			45,896			44,462
Due after five but within ten years			88,156			81,746
Due after ten years			412,092			354,494
			560,853			495,347
Mortgage-backed securities and collateralized mortgage obligations			967,085			836,638
TOTAL		$	1,527,938		$	1,331,985

There were zero and $5 thousand in gross gains and zero in losses from investment sales/calls realized by the Corporation for the three and nine months ended September 30, 2022. For the three and nine months ended September 30, 2021 there were $5 thousand and $268 thousand in gross gains and zero and $157 thousand in losses on sales/calls of investment securities.

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 September 30, 2022 and December 31, 2021.


	****	September 30, 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		$	83,013		$	(6,952)		$	22,164		$	(4,718)		$	105,177		$	(11,670)
Mortgage Backed Securities - Residential			364,927			(48,470)			252,690			(57,668)			617,617			(106,138)
Mortgage Backed Securities - Commercial			11,309			(454)			—			—			11,309			(454)
Collateralized mortgage obligations			153,183			(14,893)			43,137			(8,984)			196,320			(23,877)
State and municipal obligations			280,127			(35,118)			38,129			(15,207)			318,256			(50,325)
Municipal taxable			25,851			(5,218)			5,715			(1,542)			31,566			(6,760)
U.S. Treasury			2,056			(28)			—			—			2,056			(28)
Total temporarily impaired securities		$	920,466		$	(111,133)		$	361,835		$	(88,119)		$	1,282,301		$	(199,252)

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	****	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 $199.3 million as of September 30, 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. The portfolio contains primarily government agency, agency backed mortgage backed securities (“MBS”), and collateralized mortgage obligations (“CMO”), which are issued by government sponsored enterprises and are backed by the full faith and credit of the United States government. Secondarily, the Corporation invests in municipal securities issued by state and local governments. Of these, the majority are either insured or contain state enhancements. On the remaining, credit is monitored by the investment committee. 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.

The table below presents a rollforward of the credit losses recognized in earnings for the three and nine month periods ended September 30, 2022 and 2021:


		Three Months Ended September 30,					Nine Months Ended September 30,
(Dollar amounts in thousands)	****	2022		****	2021		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. 19

Table of Contents 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).


		September 30, 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		$	—		$	106,281		$	—		$	106,281
Mortgage Backed Securities-residential			—			618,969			—			618,969
Mortgage Backed Securities-commercial			—			11,309			—			11,309
Collateralized mortgage obligations			—			206,360			—			206,360
State and municipal			—			347,270			1,545			348,815
Municipal taxable			—			32,606			—			32,606
U.S. Treasury			—			2,056			—			2,056
Collateralized debt obligations			—			—			3,111			3,111
Other securities			—			—			2,478			2,478
TOTAL		$	—		$	1,324,851		$	7,134		$	1,331,985
Derivative Assets						3,555
Derivative Liabilities						(3,555)


	****	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)

Table of Contents

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

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 and nine months ended September 30, 2022 and the year ended December 31, 2021.


	****	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
		Three Months Ended
		September 30, 2022
	****	State and		****			****			****
		municipal			Collateralized
(Dollar amounts in thousands)	****	obligations		****	debt obligations		****	Other securities		****	Total
Beginning balance, July 1		$	1,545		$	3,087		$	1,494		$	6,126
Total realized/unrealized gains or losses
Included in earnings			—			—			—			—
Included in other comprehensive income			—			24			—			24
Transfers			—			—			984			984
Settlements			—			—			—			—
Ending balance, September 30		$	1,545		$	3,111		$	2,478		$	7,134


		Nine Months Ended
		September 30, 2022
	****	State and		****			****			****
		municipal			Collateralized
(Dollar amounts in thousands)	****	obligations		****	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			—			(248)			—			(248)
Transfers			—			—			984			984
Settlements			(350)			—			(249)			(599)
Ending balance, September 30		$	1,545		$	3,111		$	2,478		$	7,134


	****	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
		Year Ended
		December 31, 2021
		State and
		municipal			Collateralized
(Dollar amounts in thousands)	****	obligations		****	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 September 30, 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		$	3,111		Discounted cash flow		Discount rate		2.67	%
Other securities		$	2,478		Discounted cash flow		Discount rate		0.04%-3.35	%
Collateral dependent loans		$	5,172		Discounted cash flow		Discount rate for age of appraisal and market conditions		0.00%-50.00	%

Table of Contents 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 September 30, 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.


	****	September 30, 2022
		Carrying			Fair Value
(Dollar amounts in thousands)	****	Value		****	Level 1		****	Level 2		****	Level 3		****	Total
Cash and due from banks		$	328,222		$	29,207		$	299,015		$	—		$	328,222
Federal funds sold			8,223			—			8,223			—			8,223
Securities available-for-sale			1,331,985			—			1,324,851			7,134			1,331,985
Restricted stock			15,372			n/a			n/a			n/a			n/a
Loans, net			2,930,980			—			—			2,591,866			2,591,866
Accrued interest receivable			19,128			—			6,785			12,343			19,128
Deposits			(4,407,506)			—			(4,389,442)			—			(4,389,442)
Short-term borrowings			(89,321)			—			(89,321)			—			(89,321)
Other borrowings			(9,593)			—			(8,827)			—			(8,827)
Accrued interest payable			(479)			—			(479)			—			(479)

Table of Contents


	****	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)	September 30, 2022		****	December 31, 2021
Federal Funds Purchased	$	3,350		$	3,275
Repurchase Agreements		85,971			90,099
	$	89,321		$	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:


	September 30, 2022
Repurchase Agreements	Remaining Contractual Maturity of the Agreements
	Overnight									Greater
	and		****	Up to 30		****	30 - 90		****	than 90		****
(Dollar amounts in thousands)	continuous		****	days		****	days		****	days		****	Total
Mortgage Backed Securities - Residential and Collateralized<br>Mortgage Obligations	$	81,431		$	—		$	—		$	4,540		$	85,971


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

6. Components of Net Periodic Benefit Cost

Table of Contents


		Three Months Ended September 30,										Nine Months Ended September 30,
							Post-Retirement										Post-Retirement
		Pension Benefits					Health Benefits					Pension Benefits					Health Benefits
(Dollar amounts in thousands)	****	2022		****	2021		2022		****	2021		2022		****	2021		2022		****	2021
Service cost		$	297		$	339	$	8		$	10	$	892		$	1,016	$	25		$	32
Interest cost			707			658		28			26		2,120			1,974		83			77
Expected return on plan assets			(1,227)			(1,178)		—			—		(3,682)			(3,535)		—			—
Net amortization of prior service cost			—			—		—			—		—			—		—			—
Net amortization of net (gain) loss			315			518		—			—		944			1,554		—			—
Net Periodic Benefit Cost		$	92		$	337	$	36		$	36	$	274		$	1,009	$	108		$	109

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 $95 thousand have been made to the Pension Plan thus far in 2022. Contributions of $171 thousand have been made through the first nine 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 nine months of 2022 and 2021 there has been $1.7 million and $2.3 million 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.

In March 2022, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2022-02, “Financial Instruments – Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures” (ASU 2022-02). ASU 2022-02 eliminates the accounting guidance for troubled debt restructurings (TDRs) in ASC 310-40, “Receivables - Troubled Debt Restructurings by Creditors” for entities that have adopted the current expected credit loss (CECL) model introduced by ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (ASU 2016-13). ASU 2022-02 also requires that public business entities disclose current-period gross charge-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, “Financial Instruments—Credit Losses—Measured at Amortized Cost”. ASU 2022-02 is effective for the Corporation for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, with early adoption permitted. The Corporation is evaluating the effect that ASU 2022-02 will have on its consolidated financial statements and related disclosures.

In June 2022, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2022-03 “Fair Value Measurements (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions.” These amendments clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. ASU 2022-03 is effective for the Corporation for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years, with early adoption is permitted. The Corporation is evaluating the effect that ASU 2022-03 will have on its consolidated financial statements and related disclosures. 24

Table of Contents 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 and nine months ended September 30, 2022 and 2021. Items outside the scope of ASC 606 are noted as such.


	Three Months Ended September 30,					Nine Months Ended September 30,
(Dollar amounts in thousands)	2022		****	2021		2022		****	2021
Non-interest income
Service charges on deposits and debit card fee income	$	6,965		$	6,421	$	20,698		$	18,031
Asset management fees		1,015			1,156		3,687			3,774
Interchange income		149			224		418			423
Net gains on sales of loans ^(a)^		440			1,426		1,705			4,268
Loan servicing fees^(a)^		457			344		1,184			1,485
Net gains/(losses) on sales of securities ^(a)^		—			5		5			111
Other service charges and fees ^(a)^		160			135		488			957
Other ^(b)^		2,954			1,381		7,963	(c)		2,268
Total non-interest income	$	12,140		$	11,092	$	36,148		$	31,317

(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 September 30, 2022 and September 30, 2021, totaling zero and $(11) thousand, respectively, and for the nine months ended for the same periods, totaling $85 thousand and $5 thousand, which is within the scope of ASC 606; the remaining balance is outside the scope of ASC 606.

(c)Legal settlement totaling $4 million received in first quarter 2022.

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. 25

Table of Contents 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 $8.4 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.


				Measurement
		As Initially		Period
(Dollar amounts in thousands)	****	Reported		Adjustments		As Adjusted
Consideration
Cash consideration		$	31,358	$	—	$	31,358

Fair value of total consideration transferred		$	31,358	$	—	$	31,358

Assets acquired
Cash		$	3,046	$	—	$	3,046
Investment securities available-for-sale			57,054		—		57,054
Federal funds sold			10,470		—		10,470
Bank owned life insurance			9,753		—		9,753
Federal Home Loan Bank stock			1,362		—		1,362
Loans			227,827		—		227,827
Premises and equipment			8,180		—		8,180
Core deposit intangibles			652		—		652
Other assets			4,567		(850)		3,717
Total assets acquired			322,911		(850)		322,061

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

Net identifiable assets			23,815		(850)		22,965
Goodwill		$	7,543	$	850	$	8,393

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.

A goodwill adjustment was recorded in the second quarter 2022 of $850 thousand. The deferred tax assets were adjusted for the acquisition based on the final short-period income tax return that was filed for Hancock Bancorp, Inc. in the second quarter 2022. 26

Table of Contents 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 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 and nine months ended September 30, 2022 and 2021.


		Unrealized
		gains and
		(Losses) on available-			2022
		for-sale			Retirement
(Dollar amounts in thousands)	****	Securities		****	plans		****	Total
Beginning balance, July 1,		$	(109,159)		$	(17,471)		$	(126,630)
Change in other comprehensive income (loss) before reclassification			(41,060)			—			(41,060)
Amounts reclassified from accumulated other comprehensive income			—			315			315
Net current period other comprehensive income (loss)			(41,060)			315			(40,745)
Ending balance, September 30,		$	(150,219)		$	(17,156)		$	(167,375)


		Unrealized
		gains and
		(Losses) on available-			2022
		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			(165,889)			—			(165,889)
Amounts reclassified from accumulated other comprehensive income			(4)			944			940
Net current period other comprehensive income (loss)			(165,893)			944			(164,949)
Ending balance, September 30,		$	(150,219)		$	(17,156)		$	(167,375)


		Unrealized
		gains and
		(Losses) on available-			2021
		for-sale			Retirement			****
(Dollar amounts in thousands)	****	Securities		****	plans		****	Total
Beginning balance, July 1,		$	24,866		$	(23,454)		$	1,412
Change in other comprehensive income (loss) before reclassification			(2,981)			—			(2,981)
Amounts reclassified from accumulated other comprehensive income			(4)			471			467
Net current period other comprehensive income (loss)			(2,985)			471			(2,514)
Ending balance, September 30,		$	21,881		$	(22,983)		$	(1,102)

Table of Contents


		Unrealized
		gains and
		(Losses) on available-			2021
		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			(12,198)			—			(12,198)
Amounts reclassified from accumulated other comprehensive income			(83)			1,415			1,332
Net current period other comprehensive income (loss)			(12,281)			1,415			(10,866)
Ending balance, September 30,		$	21,881		$	(22,983)		$	(1,102)


		Balance at			Current Period			Balance at
(Dollar amounts in thousands)	****	7/1/2022		****	Change		****	9/30/2022
Unrealized gains (losses) on securities available-for-sale without other than temporary impairment		$	(111,474)		$	(41,078)		$	(152,552)
Unrealized gains (losses) on securities available-for-sale with other than temporary impairment			2,315			18			2,333
Total unrealized loss on securities available-for-sale		$	(109,159)		$	(41,060)		$	(150,219)
Unrealized gain (loss) on retirement plans			(17,471)			315			(17,156)
TOTAL		$	(126,630)		$	(40,745)		$	(167,375)


		Balance at			Current Period			Balance at
(Dollar amounts in thousands)	****	1/1/2022		****	Change		****	9/30/2022
Unrealized gains (losses) on securities available-for-sale without other than temporary impairment		$	13,155		$	(165,707)		$	(152,552)
Unrealized gains (losses) on securities available-for-sale with other than temporary impairment			2,519			(186)			2,333
Total unrealized gain (loss) on securities available-for-sale		$	15,674		$	(165,893)		$	(150,219)
Unrealized loss on retirement plans			(18,100)			944			(17,156)
TOTAL		$	(2,426)		$	(164,949)		$	(167,375)


		Balance at			Current Period			Balance at
(Dollar amounts in thousands)	****	7/1/2021		****	Change		****	9/30/2021
Unrealized gains (losses) on securities available-for-sale without other than temporary impairment		$	22,417		$	(2,969)		$	19,448
Unrealized gains (losses) on securities available-for-sale with other than temporary impairment			2,449			(16)			2,433
Total unrealized gain (loss) on securities available-for-sale		$	24,866		$	(2,985)		$	21,881
Unrealized loss on retirement plans			(23,454)			471			(22,983)
TOTAL		$	1,412		$	(2,514)		$	(1,102)


		Balance at			Current Period			Balance at
(Dollar amounts in thousands)	****	1/1/2021		****	Change		****	9/30/2021
Unrealized gains (losses) on securities available-for-sale without other than temporary impairment		$	31,810		$	(12,362)		$	19,448
Unrealized gains (losses) on securities available-for-sale with other than temporary impairment			2,352			81			2,433
Total unrealized income (loss) on securities available-for-sale		$	34,162		$	(12,281)		$	21,881
Unrealized gain (loss) on retirement plans			(24,398)			1,415			(22,983)
TOTAL		$	9,764		$	(10,866)		$	(1,102)

Table of Contents


	****	Three Months Ended September 30, 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			—		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		$	(315)		Net of tax

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


	****	Nine Months Ended September 30, 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		$	5		Net securities gains (losses)
on available-for-sale			(1)		Income tax expense
securities		$	4		Net of tax

Amortization of		$	(1,260)	(a)	Salary and benefits
retirement plan items			316		Income tax expense
		$	(944)		Net of tax
Total reclassifications for the period		$	(940)		Net of tax
(a)	Included in the computation of net periodic benefit cost. (see Footnote 6 for additional details).
---	---

Table of Contents


		Three Months Ended September 30, 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		$	5		Net securities gains (losses)
on available-for-sale			(1)		Income tax expense
securities		$	4		Net of tax

Amortization of		$	(518)	(a)	Salary and benefits
retirement plan items			47		Income tax expense
		$	(471)		Net of tax
Total reclassifications for the period		$	(467)		Net of tax
(a)	Included in the computation of net periodic benefit cost. (see Footnote 6 for additional details).
---	---


		Nine Months Ended September 30, 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		$	111		Net securities gains (losses)
on available-for-sale			(28)		Income tax expense
securities		$	83		Net of tax

Amortization of		$	(1,554)	(a)	Salary and benefits
retirement plan items			139		Income tax expense
		$	(1,415)		Net of tax
Total reclassifications for the period		$	(1,332)		Net of tax
(a)	Included in the computation of net periodic benefit cost. (see Footnote 6 for additional details).
---	---

Table of Contents 11. Leases

The Corporation leases certain branches under operating leases. At September 30, 2022, the Corporation had lease liabilities totaling $6,095,000 and right-of-use assets totaling $6,056,000 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 September 30, 2022, the weighted average remaining lease term for operating leases was 9.7 years and the weighted average discount rate used in the measurement of operating lease liabilities was 2.19%.

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:


		Nine Months Ended
(Dollar amounts in thousands)	****	September 30, 2022
Operating lease cost		$	775
Short-term lease cost			148
Variable lease cost			11
Total lease cost		$	934

Other information:
Cash paid for amounts included in the measurement of operating lease liabilities			742
Right-of-use assets obtained in exchange for new operating lease liabilities			59

Future minimum payments for operating leases with initial or remaining terms of one year or more as of September 30, 2022 were as follows:


(Dollar amounts in thousands)	****	September 30, 2022
Twelve Months Ended September 30,
2023		$	949
2024			853
2025			818
2026			727
2027			685
Thereafter			2,790
Total Future Minimum Lease Payments			6,822
Amounts Representing Interest			(727)
Present Value of Net Future Minimum Lease Payments		$	6,095

Table of Contents

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. Since December 31, 2021, the critical accounting policy for determining the allowance for credit losses has been enhanced with the discussion below from December 31, 2021.

Allowance for credit losses. The allowance for credit losses (ACL) represents management’s estimate of expected losses inherent within the existing loan portfolio. The allowance for credit losses is increased by the provision for credit losses charged to expense and reduced by loans charged off, net of recoveries. The allowance for credit losses is determined based on management’s assessment of several factors: reviews and evaluations of specific loans, changes in the nature and volume of the loan portfolio, current economic conditions, nonperforming loans, determination of acquired loans as purchase credit deteriorated, and reasonable and supportable forecasts. Loans are individually evaluated when they do not share risk characteristics with other loans in the respective pool. Loans evaluated individually are excluded from the collective evaluation. Management elected the collateral dependent practical expedient upon adoption of ASC 326. Expected credit losses on individually evaluated loans are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate. 32

Table of Contents Management utilizes a cohort methodology to determine the allowance for credit losses. This method identifies and captures the balance of a pool of loans with similar risk characteristics, as of a particular point in time to form a cohort, then tracks the respective losses generated by that cohort of loans over their remaining life. The cohorts track loan balances and historical loss experience since 2008, and management extends the look back period each quarter to capture all available data points in the historical loss rate calculation. The quantitative component of the ACL involves assumptions that require a significant level of estimation; these include historical losses as a predictor of future performance, appropriateness of selected delay periods, and the reasonableness of the portfolio segmentation.

A historical data set is expected to provide the best indication of future credit performance. Delay periods represent the amount of time it takes a cohort of loans to become seasoned, or incur sufficient attrition through pay downs, renewals, or charge-offs. Portfolio segmentation relates to the pooling of loans with similar risk characteristics, such as industry types, collateral, and consumer purpose. On an annual basis, in the first quarter, management performs a recalibration of the delay periods and portfolio segmentation to determine whether they are reasonable and appropriate based on the information available at that time.

Management considers qualitative adjustments to expected credit loss estimates for information not already captured in the loss estimation process. Where past performance may not be representative of future losses, loss rates are adjusted for qualitative and economic forecast factors. Management uses the peak three consecutive quarter net charge off rate to capture maximum potential volatility over the reasonable and supportable forecast period. Historical losses utilized in setting the qualitative factor ranges are anchored to 2008 and may be supplemented by peer information when needed. The qualitative factor ranges are recalibrated annually to capture recent behavior that is indicative of the credit profile of the current portfolio.

Qualitative factors include items, such as changes in lending policies or procedures, asset specific risks, and economic uncertainty in forward-looking forecasts. Economic indicators utilized in forecasting include unemployment rate, gross domestic product, housing starts, and interest rates. Management uses a two-year reasonable and supportable period across all loan segments to forecast economic conditions. Management believes the two-year time horizon aligns with available industry guidance and various forecasting sources. Economic forecast adjustments are overlaid onto historical loss rates. As such, reversion from forecast rates to historical loss rates is immediate.

The ACL and allowance for unfunded commitments were $39.5 million and $2.1 million, respectively at September 30, 2022, compared to $48.3 million and $3.0 million, respectively at December 31, 2021. The $8.8 million decrease in the ACL was the result of several factors. The first was the annual model recalibration. Additionally, the qualitative factors were lower from the seasoning of the acquired loans, as well as lower qualitative factors, due to the sale of non farm non residential commercial loans in the third quarter. Finally, the reserve was impacted by improved portfolio performance. The qualitative amount of the reserve decreased $3.9 million to $10.4 million. The quantitative amount is $28.9 million at September 30, 2022, compared to $33.6 million at December 31, 2021. There was a $900 thousand decrease in the allowance for unfunded commitments. See additional discussion of ACL in the Allowance for Credit Losses section below.

Based on management’s analysis of the current portfolio, management believes the allowance is adequate.Changes in the financial condition of individual borrowers, economic conditions, historical loss experience, or the condition of the various markets in which collateral may be sold may affect the required level of the allowance for credit losses and the associated provision for credit losses. As management monitors these changes, as well as those factors discussed above, adjustments may be recorded to the allowance for credit losses and the associated provision for credit losses in the future. 33

Table of Contents

Summary of Operating Results

Net income for the three months ended September 30, 2022 was $18.1 million, compared to $16.1 million for the same period in 2021. Basic earnings per share increased to $1.50 for the third quarter of 2022 compared to $1.24 for the same period in 2021. Return on Assets and Return on Equity were 1.43% and 15.00% respectively, for the three months ended September 30, 2022 compared to 1.34% and 10.75% for the three months ended September 30, 2021. Net income for the nine months ended September 30, 2022 was $54.6 million, compared to $45.6 million for the same period in 2021. Basic earnings per share increased to $4.45 for the first nine months of 2022 compared to $3.42 for the same period in 2021. Return on Assets and Return on Equity were 1.43% and 14.14% respectively, for the nine months ended September 30, 2022, compared to 1.28% and 10.10% for the nine months ended September 30, 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.

On October 31, 2022, First Financial Corporation issued a press release announcing plans to optimize its banking center network as part of a plan to improve operating efficiencies and accommodate changing customer preferences. Subject to regulatory requirements, over the next two quarters the Corporation will close and consolidated seven of its seventy-two branches. These consolidations are projected to save the Corporation approximately $1.5 million per year in operating expenses, commencing in the first quarter of 2023.

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 $7.1 million in the three months ended September 30, 2022 to $43.1 million from $36.0 million in the same period in 2021. The net interest margin for the three months ended September 30, 2022 is 3.71% compared to 3.22% for the same period in 2021, a 15.37% increase. Net interest income increased $14.8 million in the nine months ended September 30, 2022 to $121.4 million from $106.6 million in the same period in 2021. The net interest margin for the nine months ended September 30, 2022 is 3.44% compared to 3.24% for the same period in 2021. Interest rates increased significantly from 2021 to 2022, due to federal rate adjustments.

Non-Interest Income

Non-interest income for the three months ended September 30, 2022 was $12.1 million compared to $11.1 million for the same period of 2021. Non-interest income for the nine months ended September 30, 2022 was $36.1 million compared to $31.3 million for the same period in 2021. The change in non-interest income from 2021 to 2022 was primarily driven by a $4.0 million legal settlement received in February, 2022. The Corporation does not expect this income to reoccur. In addition gains from the sale of mortgage loans declined $1.0 million for the three months ended September 30, 2022 compared to September 30, 2021, and $2.6 million for the nine months ended September 30, 2022 compared to September 30, 2021.

Non-Interest Expenses

The Corporation’s non-interest expense for the quarter ended September 30, 2022 was $31.5 million compared to $28.5 million for the same period in 2021. The Corporation’s non-interest expense for the nine months ended September 30, 2022 increased $9.4 million to $93.5 million compared to the same period in 2021. The year-over-year changes are, in part, impacted by the acquisition of Hancock Bancorp in the fourth quarter of 2021. 34

Table of Contents Allowance for Credit Losses

The Corporation’s provision for credit losses increased to $1.1 million for the third quarter of 2022 as compared to $(1.5) million for the same period in 2021. Net charge-offs for the third quarter of 2022 were $3.0 million compared to $270 thousand for the same period of 2021. In 2021 the potential losses from the original CECL calculation were not realized, and the economy had shown improvements which allowed for the decrease in provision. The provision for loan losses decreased $1.5 million to $(4.8) million for the nine months ended September 30, 2022 compared to $(3.2) million for the same period in 2021. Net charge offs for the first nine months of 2022 increased $3.2 million to $4.1 million compared to the same period in 2021. The negative provision for the year was the result of several factors. The first was the annual model recalibration. Each year, in the first quarter, management reviews each model variable to determine if adjustments are necessary to improve the model’s predictability. In the first quarter 2022 the delay periods were shortened to pick up more recent losses. Also, the qualitative factor maximum scorecard ranges for certain cohorts were reduced, which reduced the reserve. Secondly, management removed two qualitative factors that were deemed no longer applicable. The first was related to an acquisition, which management believed to have seasoned adequately that it was no longer warranted. The second was related to the CECL model and the related uncertainty. The uncertainty surrounded the newness of the model and potential regulatory scrutiny. Following two exam cycles, management elected to remove the factor. Also, during the quarter, historical loss rates continued to decline, which lowers the required reserve. The historical loss rate declined in most segments. 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.

On July 12, 2022, the Corporation sold seven classified non farm non residential commercial loans, which were acquired in the two acquisitions in 2019 and 2021, with a total principal balance of $14.9 million. The net recovery on the sale of $361 thousand includes the charge-off of the seven loans of $2,145 thousand, netted by the $2,072 thousand reserve on those loans, previously charged off in the period, and the $434 thousand unamortized discount remaining from the acquisitions. As the related charge offs were previously reserved for and related to acquired loans, the increase in net charge offs for the quarter does not have a significant impact on the future expected losses.

Income Tax Expense

The Corporation’s effective income tax rate for the first nine months of 2022 was 20.61% compared to 20.07% for the same period in 2021.

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 $14.3 million at September 30, 2022 compared to $14.9 million at December 31, 2021. Nonperforming loans decreased 26.8% compared to $19.5 million as of September 30, 2021. A summary of non-performing loans at September 30, 2022 and December 31, 2021 follows:


		(000's)
	****	September 30, 2022		****	December 31, 2021
Non-accrual loans		$	9,147		$	9,590
Accruing restructured loans			3,465			3,897
Nonaccrual restructured loans			482			902
Accruing loans past due over 90 days			1,185			515
		$	14,279		$	14,904

Ratio of the allowance for credit losses as a percentage of non-performing loans			276.6	%		324.1	%

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


		(000's)
	****	September 30, 2022		December 31, 2021
Non-accrual loans
Commercial loans		$	4,811	$	4,991
Residential loans			2,314		3,049
Consumer loans			2,022		1,550
		$	9,147	$	9,590
Past due 90 days or more
Commercial loans		$	238	$	14
Residential loans			551		410
Consumer loans			396		91
		$	1,185	$	515

The CARES Act included a provision that permitted 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 have been (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 were not troubled debt restructurings under ASC Subtopic 310-40. This included short-term (e.g., up to six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that were insignificant. Borrowers considered current were those that were less than 30 days past due on their contractual payments at the time a modification program was implemented. From the inception of the CARES Act through December 31, 2021, 1,242 loans totaling $172 million were modified, related to COVID-19, that were not considered troubled debt restructurings. 1,189 loans totaling $195 million have resumed normal scheduled payments. 113 remaining loans are still under a debt relief plan, which include no commercial loans that have been provided additional payment relief since the initial payment relief plan.

Interest Rate Sensitivity and Liquidity

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

Interest Rate Risk

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

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

The Corporation from time to time utilizes derivatives to manage interest rate risk. Management continuously evaluates the merits of such interest rate risk products but does not anticipate the use of such products to become a major part of the Corporation’s risk management strategy. 36

Table of Contents The table below shows the Corporation’s estimated sensitivity profile as of September 30, 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 2.48% over the next 12 months and increase 5.21% over the following 12 months. Given a 100 basis point decrease in rates, net interest income would decrease 3.71% over the next 12 months and decrease 7.45% over the following 12 months. These estimates assume all rate changes occur overnight and management takes no action as a result of this change.


Basis Point	****	Percentage Change in Net Interest Income
Interest Rate Change	****	12 months	****	24 months	****	36 months	****
Down 200		(7.64)	%	(15.41)	%	(20.96)	%
Down 100		(3.71)		(7.45)		(10.24)
Up 100		2.48		5.21		7.86
Up 200		2.00		7.44		12.84

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 $18.4 million of investments that mature throughout the next 12 months. The Corporation also anticipates $117.8 million of principal payments from mortgage-backed and other securities. Given the current rate environment, the Corporation anticipates $6.7 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 nine months of 2022 to year-ended December 31, 2021, loans net of deferred loan costs, have increased $155 million to $3.0 billion. Deposits decreased 0.05% to $4.4 billion at September 30, 2022 compared to December 31, 2021. Shareholders’ equity decreased 24.71% or $144.0 million. This financial performance decreased book value per share 20.90% to $36.49 at September 30, 2022 from $46.13 at December 31, 2021. Comparing the first nine months of 2022 to the same period in 2021, loans, net of deferred loan costs, have increased $491 million to $3.0 billion. Deposits increased 9.4% to $4.4 billion at September 30, 2022 compared to September 30, 2021. Shareholders’ equity decreased 26.27% or $156.3 million. This financial performance decreased book value per share 21.06% to $36.49 at September 30, 2022 from $46.22 at September 30, 2021. Book value per share is calculated by dividing the total shareholders’ equity by the number of shares outstanding. Accumulated other comprehensive income decreased $164.9 million primarily due to the market value of the securities portfolio, which reflected the large decrease in securities pricing.

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 September 30, 2022, we processed approximately $272 million of approved PPP loans. The carrying value of these loans is $880 thousand as of September 30, 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. 37

Table of Contents 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.


	****	September 30, 2022	****	****	December 31, 2021	****	****	To Be Well Capitalized
Common equity tier 1 capital
Corporation		13.69	%		14.37	%		N/A
First Financial Bank		12.00	%		13.53	%		—	%
Total risk-based capital
Corporation		14.75	%		15.63	%		N/A
First Financial Bank		13.07	%		14.78	%		—	%
Tier I risk-based capital
Corporation		13.69	%		14.37	%		N/A
First Financial Bank		12.00	%		13.53	%		—	%
Tier I leverage capital
Corporation		10.33	%		9.83	%		N/A
First Financial Bank		8.99	%		9.18	%		—	%

Table of Contents

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 September 30, 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 September 30, 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 September 30, 2022 that has materially affected, or is reasonably likely to materially affect, the Corporation's internal control over financial reporting.

Table of Contents

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.
---	---
(c)	Purchases of Equity Securities
---	---

The Corporation periodically acquires shares of its common stock directly from shareholders in individually negotiated transactions. On April 21, 2022 First Financial Corporation issued a press release announcing that its Board of Directors has authorized a stock repurchase program pursuant to which up to 10% of the Corporations outstanding shares of common stock, or approximately 1,243,531 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		(c)
		(a)		(b)	Purchased As Part Of		Maximum
		Total Number Of		Average Price	Publicly Announced Plans		Number of Shares That May Yet
	****	Shares Purchased	****	Paid Per Share	Or Programs *	****	Be Purchased *
July 1-31, 2022		—		—	—		—
August 1-31, 2022		—		—	—		—
September 1-30, 2022		9,125		45.71	9,125		830,220
Total		9,125		45.71	9,125		830,220

ITEM 3.

Defaults upon Senior Securities. Not applicable.

ITEM 4.

Mine Safety Disclosures Not applicable.

ITEM 5.

Other Information. Not applicable.

Table of Contents

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, 2022, incorporated by reference to Exhibit 10.01 of the Corporation’s Form 8-K filed on July 29, 2022.
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, 2022, incorporated by reference to Exhibit 10.1 of the Corporation’s Form 8-K filed July 29, 2022.
10.14*		Employment Agreement for Rodger A. McHargue, effective July 1, 2022, incorporated by reference to Exhibit 10.2 of the Corporation’s Form 8-K filed July 29, 2022.
10.15*		Employment Agreement for Steven H. Holliday, effective July 1, 2022, incorporated by reference to Exhibit 10.3 of the Corporation’s Form 8-K filed July 29, 2022.
10.16*		Employment Agreement for Mark A. Franklin, effective July 1, 2022, incorporated by reference to Exhibit 10.4 of the Corporation’s Form 8-K filed July 29, 2022.
31.1		Sarbanes-Oxley Act 302 Certification for Quarterly Report on Form 10-Q for the quarter ended September 30, 2022 by Principal Executive Officer, dated November 3, 2022.
31.2		Sarbanes-Oxley Act 302 Certification for Quarterly Report on Form 10-Q for the quarter ended September 30, 2022 by Principal Financial Officer, dated November 3, 2022.
32.1		Certification, dated November 3, 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 September 30, 2022.
101.1		Financial statements from the Quarterly Report on Form 10-Q of the Corporation for the quarter ended September 30, 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.

Table of Contents 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: November 2, 2022	By /s/ Norman L. Lowery
	Norman L. Lowery, Chairman, President and CEO
	(Principal Executive Officer)

Date: November 2, 2022	By /s/ Rodger A. McHargue
	Rodger A. McHargue, Treasurer and CFO
	(Principal Financial Officer)

Exhibit 31.1

Sarbanes-Oxley Act of 2002, Section 302

Certification of Principal Executive Officer

I, Norman L. Lowery, certify that:

1	I have reviewed this quarterly report on Form 10-Q of First Financial Corporation;
2	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
---	---
3	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
---	---
4	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and l5d-15(f)) for the registrant and have:
---	---
a.	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
---	---
b.	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purpose in accordance with generally accepted accounting principles;
---	---
c.	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
---	---
d.	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
---	---
5	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
---	---
a.	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
---	---
b.	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.
---	---

Date: November 2, 2022


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

Exhibit 31.2

Sarbanes-Oxley Act of 2002, Section 302

Certification of Principal Executive Officer

I, Rodger A. McHargue, certify that:

1	I have reviewed this quarterly report on Form 10-Q of First Financial Corporation;
2	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
---	---
3	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
---	---
4	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and l5d-15(f)) for the registrant and have:
---	---
a.	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
---	---
b.	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purpose in accordance with generally accepted accounting principles;
---	---
c.	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
---	---
d.	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
---	---
5	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
---	---
a.	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
---	---
b.	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.
---	---

Date: November 2, 2022


	By /s/ Rodger A. McHargue
	Rodger A. McHargue
	Treasurer and CFO
	(Principal Financial Officer)

Exhibit 32.1

Sarbanes-Oxley Act of 2002, Section 906

Certification of Principal Executive and Principal Financial Officers

In connection with the Quarterly Report on Form 10-Q of First Financial Corporation (the “Company”) for the Quarterly period ended September 30, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Norman L. Lowery , as the Chief Executive Officer of the Company, and Rodger A. McHargue, as the Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his knowledge:

1.This Report fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934, and

2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


November 2, 2022	By /s/ Norman L. Lowery
	Norman L. Lowery, Chairman, President & CEO
	(Principal Executive Officer)

November 2, 2022	By /s/ Rodger A. McHargue
	Rodger A. McHargue, Treasurer & CFO
	(Principal Financial Officer)