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 March 31, 2023
☐
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 May 1, 2023, the registrant had outstanding 12,065,888 shares of common stock, without par value.
INDEX
Page No.
PART I. Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets
3
Consolidated Statements of Income and Comprehensive Income (Loss)
4
Consolidated Statements of Shareholders’ Equity
5
Consolidated Statements of Cash Flows
6
Notes to Consolidated Financial Statements
7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
28
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 4. Controls and Procedures
34
PART II. Other Information:
Item 1. Legal Proceedings
35
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults upon Senior Securities
36
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
37
Signatures
38
2
Part I – Financial Information
Item 1.Financial Statements
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands, except per share data)
March 31,
December 31,
2023
2022
(unaudited)
ASSETS
Cash and due from banks
$
82,621
222,517
Federal funds sold
12,931
9,374
Securities available-for-sale
1,340,781
1,330,481
Loans:
Commercial
1,798,240
1,798,260
Residential
675,978
673,464
Consumer
598,299
588,539
3,072,517
3,060,263
(Less) plus:
Net deferred loan (fees)/costs
7,527
7,175
Allowance for credit losses
(39,620)
(39,779)
3,040,424
3,027,659
Restricted stock
15,384
15,378
Accrued interest receivable
20,402
21,288
Premises and equipment, net
68,158
66,147
Bank-owned life insurance
116,117
115,704
Goodwill
86,985
Other intangible assets
6,396
6,714
Other real estate owned
336
337
Other assets
76,286
86,697
TOTAL ASSETS
4,866,821
4,989,281
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Non-interest-bearing
830,233
857,920
Interest-bearing:
Certificates of deposit exceeding the FDIC insurance limits
58,476
50,608
Other interest-bearing deposits
3,276,689
3,460,343
4,165,398
4,368,871
Short-term borrowings
108,584
70,875
Other borrowings
34,585
9,589
Other liabilities
52,755
64,653
TOTAL LIABILITIES
4,361,322
4,513,988
Shareholders’ equity
Common stock, $0.125 stated value per share; Authorized shares-40,000,000 Issued shares-16,137,220 in 2023 and 16,114,992 in 2022 Outstanding shares-12,065,888 in 2023 and 12,051,964 in 2022
2,012
Additional paid-in capital
143,408
143,185
Retained earnings
630,809
614,829
Accumulated other comprehensive loss
(125,589)
(139,974)
Less: Treasury shares at cost-4,071,332 in 2023 and 4,063,028 in 2022
(145,141)
(144,759)
TOTAL SHAREHOLDERS’ EQUITY
505,499
475,293
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
See accompanying notes.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)
Three Months Ended
INTEREST INCOME:
Loans, including related fees
44,595
32,357
Securities:
Taxable
6,236
4,583
Tax-exempt
2,598
2,348
Other
1,271
365
TOTAL INTEREST INCOME
54,700
39,653
INTEREST EXPENSE:
Deposits
9,527
1,676
808
82
30
84
TOTAL INTEREST EXPENSE
10,365
1,842
NET INTEREST INCOME
44,335
37,811
Provision for credit losses
1,800
(6,550)
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES
42,535
44,361
NON-INTEREST INCOME:
Trust and financial services
1,317
1,372
Service charges and fees on deposit accounts
6,818
6,654
Other service charges and fees
204
106
Securities gains, net
—
Interchange income
47
118
Loan servicing fees
285
359
Gain on sales of mortgage loans
180
662
524
4,462
TOTAL NON-INTEREST INCOME
9,375
13,738
NON-INTEREST EXPENSE:
Salaries and employee benefits
17,158
17,342
Occupancy expense
2,599
2,522
Equipment expense
3,299
2,907
FDIC Expense
787
428
8,478
8,145
TOTAL NON-INTEREST EXPENSE
32,321
31,344
INCOME BEFORE INCOME TAXES
19,589
26,755
Provision for income taxes
3,609
5,831
NET INCOME
15,980
20,924
OTHER COMPREHENSIVE INCOME (LOSS)
Change in unrealized gains/(losses) on securities, net of reclassifications and taxes
14,238
(68,914)
Change in funded status of post retirement benefits, net of taxes
147
315
COMPREHENSIVE INCOME (LOSS)
30,365
(47,675)
PER SHARE DATA
Basic and Diluted Earnings per Share
1.33
1.67
Weighted average number of shares outstanding (in thousands)
12,058
12,538
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
March 31, 2023, and 2022
(Unaudited)
Accumulated
Common
Additional
Retained
Comprehensive
Treasury
Stock
Capital
Earnings
Income/(Loss)
Total
Balance, January 1, 2022
2,009
141,979
559,139
(2,426)
(118,125)
582,576
Net income
Other comprehensive income (loss)
(68,599)
Omnibus Equity Incentive Plan
1
206
207
Treasury shares purchased (213,263 shares)
(9,664)
Balance, March 31, 2022
2,010
142,185
580,063
(71,025)
(127,789)
525,444
Balance, January 1, 2023
14,385
223
Treasury shares purchased (8,304 shares)
(382)
Balance, March 31, 2023
CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization (accretion) of premiums and discounts on investments
1,275
1,903
Securities gains
(5)
Depreciation and amortization
1,581
1,529
Restricted stock compensation
Gain on sale of mortgage loans
(180)
(662)
(Gain) Loss on sale of other real estate
Other, net
3,094
3,199
NET CASH FROM OPERATING ACTIVITIES
23,777
20,545
CASH FLOWS FROM INVESTING ACTIVITIES:
Calls, maturities and principal reductions on securities available-for-sale
29,900
50,504
Purchases of securities available-for-sale
(22,911)
(138,610)
Loans made to customers, net of repayment
(14,020)
11,188
Net change in federal funds sold
(3,557)
(428)
Redemption of restricted stock
1,605
Purchase of restricted stock
(6)
(952)
Proceeds from sales of other real estate owned
40
67
Additions to premises and equipment
(3,274)
(1,641)
NET CASH FROM INVESTING ACTIVITIES
(13,828)
(78,267)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits
(203,260)
(14,055)
Net change in short-term borrowings
37,709
3,298
Dividends paid
(8,912)
(7,952)
Purchase of treasury stock
Proceeds from other borrowings
25,000
Maturities of other borrowings
(22)
NET CASH FROM FINANCING ACTIVITIES
(149,845)
(28,395)
NET CHANGE IN CASH AND CASH EQUIVALENTS
(139,896)
(86,117)
CASH AND DUE FROM BANKS, BEGINNING OF PERIOD
688,027
CASH AND DUE FROM BANKS, END OF PERIOD
601,910
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying March 31, 2023 and 2022 consolidated financial statements are unaudited. The December 31, 2022 consolidated financial statements are as reported in the First Financial Corporation (the “Corporation”) 2022 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, 2022.
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 three months ended 2023 and 2022, 22,228 and 18,679 shares were awarded, respectively. These shares had a grant date value of $1.0 million and $847 thousand for 2023 and 2022, 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. New accounting standards
Accounting Pronouncements Adopted:
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 adopted ASU 2022-02 on January 1, 2023, and has applied the disclosure changes in this document. See Note 2. Allowance for Credit Losses for the additional disclosures.
Recent Accounting Pronouncements:
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.
3. Allowance for Credit Losses
The following table presents the activity of the allowance for credit losses by portfolio segment for the three months ended March 31.
Allowance for Credit Losses:
March 31, 2023
(Dollar amounts in thousands)
Unallocated
Beginning balance
12,949
14,568
12,104
158
39,779
(54)
500
1,254
100
Loans charged-off
(306)
(79)
(3,991)
(4,376)
Recoveries
201
70
2,146
2,417
Ending Balance
12,790
15,059
11,513
258
39,620
March 31, 2022
18,883
18,316
10,721
385
48,305
(1,040)
(5,144)
(300)
(66)
(883)
(466)
(1,905)
(3,254)
340
529
1,146
2,015
17,300
13,235
9,662
319
40,516
8
The tables below present the recorded investment in non-performing loans by class of loans.
Loans Past
Nonaccrual
Due Over
With No
90 Days Still
Allowance
Accruing
For Credit Loss
Commercial & Industrial
1,503
972
Farmland
584
456
Non Farm, Non Residential
1,803
1,791
Agriculture
184
155
All Other Commercial
297
24
First Liens
766
1,205
Home Equity
41
73
Junior Liens
80
220
Multifamily
1,459
1,264
All Other Residential
465
Motor Vehicle
2,993
All Other Consumer
407
TOTAL
1,184
10,920
4,638
December 31, 2022
114
2,137
254
461
2,064
2,052
186
26
666
1,380
133
197
256
1,468
478
2,549
416
1,157
11,554
2,461
9
The following tables present the amortized cost basis of collateral dependent loans by class of loans:
Collateral Type
Real Estate
3,983
2,224
4,818
12,289
4,613
3,289
5,123
895
13,920
156
10
The following tables presents the aging of the recorded investment in loans by past due category and class of loans.
90 Days
30-59 Days
60-89 Days
and Greater
Past Due
Current
983
4,249
660,729
664,978
60
470
530
1,060
131,569
132,629
149
103
252
396,054
396,306
107,065
108,568
173
504,908
505,378
3,187
574
961
4,722
348,644
353,366
213
107
400
61,512
61,912
191
211
625
56,088
56,713
145
946
373
1,464
179,813
181,277
369
24,369
24,738
8,113
1,595
730
10,438
558,332
568,770
232
277
31,578
31,855
17,534
4,113
4,182
25,829
3,060,661
3,086,490
1,698
726
2,953
674,569
677,522
112
127,498
127,610
274
308
387,108
387,416
1,231
136,451
137,682
333
14
347
478,095
478,442
4,528
1,203
1,054
6,785
341,131
347,916
305
144
276
725
63,615
64,340
69
327
609
56,367
56,976
317
83
180,305
180,705
1,115
350
1,465
24,058
25,523
15,151
1,930
985
18,066
539,651
557,717
341
56
15
412
32,967
33,379
24,387
5,629
3,397
33,413
3,041,815
3,075,228
Loan Modifications Made to Borrowers Experiencing Financial Difficulty:
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 2023 or 2022 resulted in the permanent reduction of the recorded investment in the loan.
During the three months ended March 31, 2023, the Corporation had no modified loans made to borrowers experiencing financial difficulty. There were no modified loans that had a payment default during the three months ended March 31, 2023 and were modified in the twelve months prior to that default to borrowers experiencing financial difficulty.A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms.
11
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.
12
The following tables present the commercial loan portfolio by risk category:
Term Loans at Amortized Cost Basis by Origination Year
Revolving
2021
2020
2019
Prior
Loans
Commercial and Industrial
Pass
20,794
143,766
123,586
46,757
51,857
114,938
108,126
609,824
Special Mention
43
9,423
3,264
3,676
948
17,397
Substandard
3,297
676
1,167
931
8,456
7,823
22,606
Doubtful
Not Rated
8,745
1,668
1,284
718
368
175
12,958
Subtotal
32,879
145,690
134,969
51,906
53,199
127,245
116,897
662,785
Current period gross charge-offs
39
-
62
12,394
16,577
21,962
8,885
9,067
54,997
283
124,165
882
2,495
3,377
504
608
2,133
3,245
17
9,389
10,557
59,642
130,804
15,142
112,290
73,946
32,431
18,736
130,690
2,893
386,128
96
1,025
904
2,301
505
5,647
6,152
692
91
783
112,386
74,971
33,123
20,145
136,704
395,364
2,397
13,026
8,962
7,319
8,134
18,202
43,559
101,599
86
705
1,446
2,248
224
1,406
549
2,179
63
45
222
13,174
8,999
7,390
8,406
20,328
45,554
106,248
Other Commercial
7,514
153,260
96,815
95,111
18,223
108,023
10,792
489,738
22
846
11,815
12,683
21
27
496
591
153,297
96,916
19,069
120,340
503,039
244
Multifamily >5 Residential
696
55,592
34,781
42,724
6,672
29,669
170
170,304
7,278
7,646
1,118
260
1,378
35,899
43,092
38,482
180,603
58,937
494,511
360,052
233,227
112,689
456,519
165,823
1,881,758
10,448
3,640
2,678
26,245
2,394
45,652
697
1,671
2,268
18,923
8,372
35,484
1,745
2,519
1,473
413
15,949
71,022
496,716
373,716
240,011
118,048
502,741
176,589
1,978,843
13
2018
163,479
128,012
56,830
54,208
26,514
99,522
92,110
620,675
2,071
9,738
3,434
2,572
2,061
1,848
453
22,177
423
723
1,861
954
3,169
6,264
9,103
22,497
7,041
1,408
822
469
85
9,974
173,014
139,881
62,947
58,203
31,893
107,719
101,666
675,323
16,261
22,530
9,244
9,438
10,352
48,847
117,012
1,164
2,930
4,976
1,969
3,370
10,864
10,928
10,689
53,763
125,375
102,629
75,011
33,214
19,596
31,438
111,586
2,975
376,449
99
1,035
921
279
2,334
513
6,281
6,794
269
965
102,728
76,046
33,910
21,030
118,415
386,542
13,085
9,028
8,015
8,422
1,987
26,729
62,397
129,663
89
709
3,330
1,201
762
2,243
71
68
61
25
264
13,245
8,093
8,710
3,213
27,494
65,678
135,500
143,941
91,615
90,845
19,259
29,143
82,535
5,602
462,940
23
11,911
11,944
29
16
480
607
143,980
91,720
19,269
29,172
94,932
475,520
50,424
33,415
46,740
6,734
4,969
27,353
169,731
533
372
6,795
7,700
1,280
1,124
263
1,387
35,072
47,112
35,691
180,098
489,819
359,611
244,888
117,657
104,403
396,572
163,520
1,876,470
2,282
11,306
4,980
4,388
24,472
2,972
52,461
746
2,317
2,299
4,707
15,856
9,865
36,213
7,128
2,653
1,586
203
1,114
13,214
499,652
374,316
253,771
124,874
111,374
438,014
176,357
1,978,358
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 and loans past due 90 days or more and still accruing interest 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:
Performing
9,258
74,715
69,431
44,378
16,703
133,024
2,835
350,344
Non-performing
418
115
1,521
2,081
74,742
69,849
16,818
134,545
352,425
79
590
169
810
59,975
61,614
20
53
113
863
60,015
61,727
2,874
19,375
9,764
7,038
5,452
10,747
1,020
56,270
72
64
157
301
9,772
7,110
5,516
10,904
56,571
Other Residential
747
12,414
8,261
488
753
1,523
24,186
50
466
1,169
1,573
24,652
64,910
287,205
104,775
75,616
23,788
7,578
563,878
1,008
90
2,684
288,213
105,484
76,241
24,040
7,668
566,562
1,876
1,247
561
3,903
Other Consumer
2,974
11,645
6,582
3,492
1,140
1,070
4,425
31,328
234
94
32
18
409
11,674
6,816
3,586
1,172
1,088
4,427
31,737
88
80,825
405,944
198,813
131,020
48,005
154,752
68,261
1,087,620
1,064
1,369
811
879
1,889
42
6,054
Total other loans
407,008
200,182
131,831
48,884
156,641
68,303
1,093,674
71,607
70,197
45,080
16,968
20,258
117,488
344,843
141
1,782
2,129
71,713
17,109
20,358
119,270
346,972
1,995
943
55
820
59,875
63,811
78
176
860
60,051
64,119
19,074
10,485
7,507
5,830
5,366
6,195
1,928
56,385
77
139
451
10,489
7,584
5,920
5,505
6,336
56,836
11,542
9,923
501
915
498
1,582
24,961
425
1,340
1,600
25,439
306,565
118,362
88,144
29,004
8,652
2,230
552,963
813
739
437
237
66
2,339
307,378
119,101
88,581
29,241
8,718
2,277
555,302
13,426
7,914
4,109
1,302
429
819
4,819
32,818
247
419
13,444
8,161
4,198
1,341
441
831
4,821
33,237
424,209
217,824
145,349
54,134
35,258
129,134
69,873
1,075,781
937
990
681
932
366
2,040
178
6,124
425,146
218,814
146,030
55,066
35,624
131,174
70,051
1,081,905
4. Securities
The amortized cost and fair value of the Corporation’s investments are shown below. All securities are classified as available-for-sale.
Amortized
Unrealized
Cost
Gains
Losses
Fair Value
U.S. Government agencies
110,289
(10,185)
100,149
Mortgage Backed Securities - residential
700,397
185
(82,328)
618,254
Mortgage Backed Securities - commercial
8,033
(376)
7,657
Collateralized mortgage obligations
226,009
138
(22,945)
203,202
State and municipal obligations
403,085
1,362
(32,552)
371,895
Municipal taxable
39,882
52
(5,855)
34,079
U.S. Treasury
2,652
(21)
2,631
Collateralized debt obligations
2,914
1,490,347
4,696
(154,262)
110,226
(11,777)
98,473
Mortgage Backed Securities-residential
711,131
(91,016)
620,248
Mortgage Backed Securities-commercial
10,103
(426)
9,677
228,344
(24,919)
203,485
396,522
745
(37,114)
360,153
39,321
(6,847)
32,515
2,979
(35)
2,944
2,986
1,498,626
3,989
(172,134)
Contractual maturities of debt securities at March 31, 2023 were as follows.
Available-for-Sale
Fair
Value
Due in one year or less
8,441
Due after one but within five years
43,678
42,314
Due after five but within ten years
92,137
87,646
Due after ten years
411,652
373,302
555,908
511,668
Mortgage-backed securities and collateralized mortgage obligations
934,439
829,113
There were zero in gross gains and zero in losses from investment sales/calls realized by the Corporation for the three months ended March 31, 2023. For the three months ended March 31, 2022 there were $5 thousand in gross gains and zero 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 March 31, 2023 and December 31, 2022.
Less Than 12 Months
More Than 12 Months
26,041
(1,069)
70,008
(9,116)
96,049
Mortgage Backed Securities - Residential
109,292
(3,725)
497,613
(78,603)
606,905
Mortgage Backed Securities - Commercial
3,914
(229)
3,743
(147)
45,547
(1,898)
140,526
(21,047)
186,073
91,667
(1,808)
157,646
(30,744)
249,313
873
30,839
(5,833)
31,712
2,264
Total temporarily impaired securities
279,598
(8,772)
900,375
(145,490)
1,179,973
58,462
(4,034)
38,959
(7,743)
97,421
234,488
(19,757)
379,520
(71,259)
614,008
135,135
(11,331)
63,792
(13,588)
198,927
233,439
(24,291)
41,510
(12,823)
274,949
18,637
(3,706)
12,837
(3,141)
31,474
692,782
(63,580)
536,618
(108,554)
1,229,400
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 $154.3 million as of March 31, 2023 and $172.1 million as of December 31, 2022. 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 month periods ended March 31, 2023 and 2022:
Three Months Ended March 31,
Reductions for securities called during the period
Ending balance
5. Fair Value
FASB ASC No. 820-10 establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) of identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level I prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The fair value of most securities available for sale is determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).
For those securities that cannot be priced using quoted market prices or observable inputs a Level 3 valuation is determined. These securities are primarily trust preferred securities, which are priced using Level 3 due to current market illiquidity and certain investments in state and municipal securities. The fair value of the trust preferred securities is obtained from a third party provider without adjustment. As described previously, management obtains values from other pricing sources to validate the Standard & Poors pricing that they currently utilize. The fair value of state and municipal obligations are derived by comparing the securities to current market rates plus an appropriate credit spread to determine an estimated value. Illiquidity spreads are then considered. Credit reviews are performed on each of the issuers. The significant unobservable inputs used in the fair value measurement of the Corporation’s state and municipal obligations are credit spreads related to specific issuers. Significantly higher credit spread assumptions would result in significantly lower fair value measurement. Conversely, significantly lower credit spreads would result in a significantly higher fair value measurements.
The fair value of derivatives is based on valuation models using observable market data as of the measurement date (Level 2 inputs).
Fair Value Measurements Using
Significant Unobservable Inputs (Level 3)
Level 1
Level 2
Level 3
State and municipal
370,715
1,180
1,336,687
4,094
Derivative Assets
1,902
Derivative Liabilities
(1,902)
358,608
1,545
1,325,950
4,531
2,838
(2,838)
There were no transfers between Level 1 and Level 2 during 2023 and 2022.
19
The tables below presents a reconciliation and income statement classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2023 and the year ended December 31, 2022.
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
State and
municipal
Collateralized
obligations
debt obligations
Beginning balance, January 1
Total realized/unrealized gains or losses
Included in earnings
Included in other comprehensive income
(72)
Transfers
Settlements
(365)
Ending balance, March 31
Year Ended
1,895
3,359
5,254
(373)
Purchases
(350)
Ending balance, December 31
The following table presents quantitative information about recurring and non-recurring Level 3 fair value measurements at March 31, 2023.
Valuation Technique(s)
Unobservable Input(s)
Range
Discounted cash flow
Discount rate
4.04%-4.44
%
5.34
Collateral dependent loans
3,325
Discount rate for age of appraisal and market conditions
0.00%-50.00
The following table presents quantitative information about recurring and non-recurring Level 3 fair value measurements at December 31, 2022.
3.73%-4.44
4,477
Fair value is measured based on the value of the collateral securing those loans, and is determined using several methods. Generally the fair value of real estate is determined based on appraisals by qualified licensed appraisers. Appraisals for real estate generally use three methods to derive value: cost, sales or market comparison and income approach. The cost method bases value on the cost to replace current property. The market comparison evaluates the sales price of similar properties in the same market area. The income approach considers net operating income generated by the property and the investor’s required return. The final fair value is based on a reconciliation of these three approaches. If an appraisal is not available, the fair value may be determined by using a cash flow analysis, a broker’s opinion of value, the net present value of future cash flows, or an observable market price from an active market. Fair value
of other real estate is based upon the current appraised values of the properties as determined by qualified licensed appraisers and the Company’s judgment of other relevant market conditions. Appraisals are obtained annually and reductions in value are recorded as a valuation through a charge to expense. The primary unobservable input used by management in estimating fair value are additional discounts to the appraised value to consider market conditions and the age of the appraisal, which are based on management’s past experience in resolving these types of properties. These discounts range from 0% to 50%. Values for non-real estate collateral, such as business equipment, are based on appraisals performed by qualified licensed appraisers or the customers financial statements. Values for non real estate collateral use much higher discounts than real estate collateral. Other real estate and individually evaluated loans carried at fair value are primarily comprised of smaller balance properties.
The carrying amounts and estimated fair value of financial instruments at March 31, 2023 and December 31, 2022, 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.
Carrying
25,004
57,617
n/a
Loans, net
2,893,586
6,716
13,686
(4,165,398)
(4,148,628)
(108,584)
(34,585)
(34,357)
Accrued interest payable
(710)
29,400
193,117
2,930,680
5,529
15,759
(4,368,871)
(4,369,402)
(70,875)
(9,589)
(8,788)
(483)
6. Borrowings
Short-term borrowings:
Period–end short-term borrowings were comprised of the following:
Federal Funds Purchased
22,800
3,000
Repurchase Agreements
85,784
67,875
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:
Remaining Contractual Maturity of the Agreements
Overnight
Greater
and
Up to 30
30 - 90
than 90
continuous
days
Mortgage Backed Securities - Residential and CollateralizedMortgage Obligations
79,732
215
5,837
63,335
4,175
Other borrowings:
Other borrowings at March 31, 2023 and December 31, 2022 are summarized as follows:
FHLB advances
The aggregate minimum annual retirements of other borrowings are as follows:
Twelve Months Ended March 31,
2024
26,005
2025
3,638
2026
4,942
2027
2028
Thereafter
At March 31, 2023 and December 31, 2022, other borrowings are summarized as follows: The Corporation’s subsidiary bank is a member of the Federal Home Loan Bank (FHLB) and accordingly are permitted to obtain advances. There are $35.6 million of advances from the FHLB at March 31, 2023, and $9.6 million of advances at December 31, 2022. FHLB advances are, generally due in full at maturity. They are secured by eligible securities and a blanket pledge on real estate loan collateral.
7. Components of Net Periodic Benefit Cost
Post-Retirement
Pension Benefits
Health Benefits
Service cost
Interest cost
956
706
Expected return on plan assets
(970)
(1,227)
Net amortization of prior service cost
Net amortization of net (gain) loss
188
(13)
Net Periodic Benefit Cost
331
Employer Contributions
First Financial Corporation previously disclosed in its financial statements for the year ended December 31, 2022 that it expected to contribute zero and $642 thousand respectively to its Pension Plan and ESOP and $245 thousand to the Post Retirement Health Benefits Plan in 2023. No contributions have been made to the Pension Plan thus far in 2023. Contributions of $54 thousand have been made through the first three months of 2023 for the Post Retirement Health Benefits plan. No contributions have been made in 2023 for the ESOP. The Pension plan was frozen for most employees at the end of 2012 and for those employees there will be discretionary contributions to the ESOP plan and a 401K plan in place of the former Pension benefit. In the first three months of 2023 and 2022 there has been $608 thousand and $849 thousand of expense accrued for potential contributions to these alternative retirement benefit options.
8. Revenue from Contracts with Customers
All of the Corporation’s revenue from contracts with customers in the scope of ASC 606 is recognized within Non-Interest Income. The following table presents the Corporation’s sources of Non-Interest Income for the three months ended March 31, 2023 and 2022. Items outside the scope of ASC 606 are noted as such.
Non-interest income
Service charges on deposits and debit card fee income
Asset management fees
Net gains on sales of loans (a)
Loan servicing fees (a)
Net gains/(losses) on sales of securities (a)
Other service charges and fees (a)
Other (b)
(c)
Total non-interest income
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.
9. Accumulated Other Comprehensive Income
The following tables summarize the changes, net of tax, within each classification of accumulated other comprehensive income/(loss) for the three months ended March 31, 2023 and 2022.
gains and
(Losses) on available-
for-sale
Retirement
Securities
plans
Beginning balance, January 1,
(128,896)
(11,078)
Change in other comprehensive income (loss) before reclassification
Amounts reclassified from accumulated other comprehensive income
Net current period other comprehensive income (loss)
Ending balance, March 31,
(114,658)
(10,931)
15,674
(18,100)
(68,910)
(4)
311
(53,240)
(17,785)
Balance at
Current Period
1/1/2023
Change
3/31/2023
Unrealized gains (losses) on securities available-for-sale without other than temporary impairment
(131,135)
14,291
(116,844)
Unrealized gains (losses) on securities available-for-sale with other than temporary impairment
2,239
(53)
2,186
Total unrealized gain (loss) on securities available-for-sale
Unrealized gain (loss) on retirement plans
1/1/2022
3/31/2022
13,155
(69,043)
(55,888)
129
2,648
Total unrealized income (loss) on securities available-for-sale
Three Months Ended March 31, 2023
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
(196)
(a)
Salary and benefits
retirement plan items
49
Total reclassifications for the period
Three Months Ended March 31, 2022
(1)
(420)
105
(315)
(311)
10. Leases
The Corporation leases certain branches under operating leases. At March 31, 2023, the Corporation had lease liabilities totaling $5,672,000 and right-of-use assets totaling $5,623,000 related to these leases. At December 31, 2022, the Corporation had lease liabilities totaling $5,885,000 and right-of-use assets totaling $5,840,000 related to these leases. Lease liabilities and right-of-use assets are reflected in other liabilities and other assets, respectively. At March 31, 2023, the weighted average remaining lease term for operating leases was 9.4 years and the weighted average discount rate used in the measurement of operating lease liabilities was 2.18%.
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:
Operating lease cost
265
Short-term lease cost
Variable lease cost
Total lease cost
324
Other information:
Cash paid for amounts included in the measurement of operating lease liabilities
Right-of-use assets obtained in exchange for new operating lease liabilities
Future minimum payments for operating leases with initial or remaining terms of one year or more as of March 31, 2023 were as follows:
896
837
770
698
688
2,445
Total Future Minimum Lease Payments
6,334
Amounts Representing Interest
Present Value of Net Future Minimum Lease Payments
5,672
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 2022 in the 10-K filed for the fiscal year ended December 31, 2022.
This Quarterly Report on Form 10-Q contains forward-looking statements. Forward-looking statements provide current expectations or forecasts of future events and are not guarantees of future performance, nor should they be relied upon as representing management’s views as of any subsequent date. The forward-looking statements are based on management’s expectations and are subject to a number of risks and uncertainties. Although management believes that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from those expressed or implied in such statements. Risks and uncertainties that could cause actual results to differ materially include, without limitation, the Corporation’s ability to effectively execute its business plans; changes in general economic and financial market conditions; changes in interest rates; changes in the competitive environment; continuing consolidation in the financial services industry; new litigation or changes in existing litigation; losses, customer bankruptcy, claims and assessments; changes in banking regulations or other regulatory or legislative requirements affecting the Corporation’s business; and changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board or other regulatory agencies. Additional information concerning factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements is available in the Corporation’s Form 10-K for the year ended December 31, 2022, 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 2022 Form 10-K.
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.
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 $39.6 million and $2.1 million, respectively at March 31, 2023, compared to $39.8 million and $2.1 million, respectively at December 31, 2022. The qualitative amount of the reserve decreased $92 thousand to $10.9 million. The quantitative amount is $28.4 million at March 31, 2023, compared to $28.6 million at December 31, 2022. There was no change 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.
Summary of Operating Results
Net income for the three months ended March 31, 2023 was $16.0 million, compared to $20.9 million for the same period in 2022. Basic earnings per share decreased to $1.33 for the first quarter of 2023 compared to $1.67 for the same period in 2022. Return on Assets and Return on Equity were 1.32% and 13.10% respectively, for the three months ended March 31, 2023 compared to 1.63% and 14.81% for the three months ended March 31, 2022.
In light of recent events in the banking sector, including recent bank failures, continuing interest rate hikes and recessionary concerns, the Corporation has proactively positioned the balance sheet to mitigate the risks affecting the Corporation and the overall banking industry in order to serve its clients and communities.
The Corporation will continue its safe and sound banking practices, but the continuing impact of the crisis and further extent on the Corporation’s operations and financial results for the remainder of 2023 is uncertain and cannot be predicted.
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, the Corporation closed and consolidated seven of its seventy-two branches on January 31, 2023. The buildings and land on the owned branches recorded impairment on December 31, 2022 for $1.3 million. These consolidations are projected to save the Corporation approximately $1.5 million per year in operating expenses.
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 $6.5 million in the three months ended March 31, 2023 to $44.3 million from $37.8 million in the same period in 2022. The net interest margin for the three months ended March 31, 2023 is 3.96% compared to 3.16% for the same period in 2022, a 25.32% increase. Interest rates increased significantly throughout 2022 and in the first quarter of 2023, due to federal rate adjustments.
Non-Interest Income
Non-interest income for the three months ended March 31, 2023 was $9.4 million compared to $13.7 million for the same period of 2022. The change in non-interest income from 2022 to 2023 was primarily driven by a $4.0 million legal settlement received in February, 2022. The Corporation does not expect this income to reoccur.
Non-Interest Expenses
The Corporation’s non-interest expense for the quarter ended March 31, 2023 was $32.3 million compared to $31.3 million for the same period in 2022.
Allowance for Credit Losses
The Corporation’s provision for credit losses increased to $1.8 million for the first quarter of 2023 as compared to negative provision of $6.6 million for the same period in 2022. Net charge-offs for the first quarter of 2023 were $2.0 million compared to $1.2 million for the same period of 2022. The negative provision for first quarter 2022 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. In the first quarter 2023, no significant changes were made.
Income Tax Expense
The Corporation’s effective income tax rate for the first three months of 2023 was 18.42% compared to 21.79% for the same period in 2022. Pretax income for the first quarter 2022 was significantly higher than pretax income for first quarter 2023. Since our permanent differences remained similar, income was the driving factor for the decrease in effective tax rate.
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, and (2) loans past due ninety days or more as to principal or interest. Non-performing loans decreased to $12.1 million at March 31, 2023 compared to $12.7 million at December 31, 2022. Nonperforming loans decreased 43.4% compared to $8.4 million as of March 31, 2022. A summary of non-performing loans at March 31, 2023 and December 31, 2022 follows:
(000's)
Non-accrual loans
Accruing loans past due over 90 days
1,119
12,077
12,673
Ratio of the allowance for credit losses as a percentage of non-performing loans
328.1
414.4
The following loan categories comprise significant components of the nonperforming non-restructured loans:
Commercial loans
4,098
4,874
Residential loans
3,422
3,715
Consumer loans
3,400
2,965
Past due 90 days or more
293
1,007
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.
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The table below shows the Corporation’s estimated sensitivity profile as of March 31, 2023. The change in interest rates assumes a parallel shift in interest rates of 100, 200, and 300 basis points. Given a 100 basis point increase in rates, net interest income would increase 1.22% over the next 12 months and increase 3.86% over the following 12 months. Given a 100 basis point decrease in rates, net interest income would decrease 2.57% over the next 12 months and decrease 6.00% 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 300
(7.10)
(18.15)
(26.53)
Down 200
(5.09)
(12.30)
(17.94)
Down 100
(2.57)
(6.00)
(8.81)
Up 100
1.22
3.86
6.66
Up 200
(0.50)
4.78
10.37
Up 300
(0.37)
7.55
16.00
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 $8.5 million of investments that mature throughout the next 12 months. The Corporation also anticipates $113.7 million of principal payments from mortgage-backed and other securities. Given the current rate environment, the Corporation anticipates $11.2 million in securities to be called within the next 12 months. The Corporation also has $93.8 million of unused borrowing capacity available with the Federal Home Loan Bank of Indianapolis, $118.5 million available with the Federal Reserve Bank, and $125 million of available fed funds lines with correspondent banks. With these sources of funds, the Corporation currently anticipates adequate liquidity to meet the expected obligations of its customers.
Financial Condition
Comparing the first three months of 2023 to year-ended December 31, 2022, loans net of deferred loan costs, have increased $13 million to $3.1 billion. Deposits decreased 4.66% to $4.2 billion at March 31, 2023 compared to December 31, 2022. The decline was in part driven by a decline in interest bearing public funds checking, which historically declines in the first quarter each year, and a decline in institutional deposits as a result of a pricing decision. Shareholders’ equity increased 6.36% or $30.2 million. This financial performance increased book value per share 6.21% to $41.89 at March 31, 2023 from $39.44 at December 31, 2022. Book value per share is calculated by dividing the total shareholders’ equity by the number of shares outstanding. Accumulated other comprehensive income increased $14.4 million primarily due to the market value of the securities portfolio, which reflected the increase in securities pricing.
Capital Adequacy
The Federal Reserve, OCC and Federal Deposit Insurance Corporation (collectively, joint agencies) establish regulatory capital guidelines for U.S. banking organizations. Regulatory capital guidelines require that capital be measured in relation to the credit and market risks of both on- and off-balance sheet items using various risk weights. On January 1, 2015, the Basel 3 rules became effective and include transition provisions through January 1, 2019. Under Basel 3, Total capital consists of two tiers of capital, Tier 1 and Tier 2. Tier 1 capital is further composed of Common equity tier 1 capital and additional tier 1 capital.
Common equity tier 1 capital primarily includes qualifying common shareholders’ equity, retained earnings and certain minority interests. Goodwill, disallowed intangible assets and certain disallowed deferred tax assets are excluded from Common equity tier 1 capital.
Additional tier 1 capital primarily includes qualifying non-cumulative preferred stock, trust preferred securities (Trust Securities) subject to phase-out and certain minority interests. Certain deferred tax assets are also excluded.
Tier 2 capital primarily consists of qualifying subordinated debt, a limited portion of the allowance for loan and lease losses, Trust Securities subject to phase-out and reserves for unfunded lending commitments. The Corporation’s Total capital is the sum of Tier 1 capital plus Tier 2 capital.
To meet adequately capitalized regulatory requirements, an institution must maintain a Tier 1 capital ratio of 8.50 percent and a Total capital ratio of 10.50 percent. A “well-capitalized” institution must generally maintain capital ratios 200 bps higher than the minimum guidelines. The risk-based capital rules have been further supplemented by a Tier 1 leverage ratio, defined as Tier 1 capital divided by quarterly average total assets, after certain adjustments. BHCs must have a minimum Tier 1 leverage ratio of at least 4.0 percent. National banks must maintain a Tier 1 leverage ratio of at least 5.0 percent to be classified as “well capitalized.” Failure to meet the capital requirements established by the joint agencies can lead to certain mandatory and discretionary actions by regulators that could have a material adverse effect on the Corporation’s financial position. Below are the capital ratios for the Corporation and lead bank.
The fully phased in capital conservation buffer set the minimum ratios for common equity Tier 1 capital at 7%, the Tier 1 capital at 8.5% and the total capital at 10.5%. Currently the Corporation exceeds all of these minimums.
To Be Well Capitalized
Common equity tier 1 capital
Corporation
14.27
13.58
N/A
First Financial Bank
12.74
12.09
Total risk-based capital
15.32
14.61
13.81
13.14
Tier I risk-based capital
Tier I leverage capital
11.30
10.78
10.00
9.50
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ITEM 4.Controls and Procedures
First Financial Corporation’s management is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. As of March 31, 2023, an evaluation was performed under the supervision and with the participation of management, including the principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Corporation's disclosure controls and procedures. Based on that evaluation, management, including the principal executive officer and principal financial officer, concluded that the Corporation’s disclosure controls and procedures as of March 31, 2023 were effective in ensuring material information required to be disclosed in this Quarterly Report on Form 10-Q was recorded, processed, summarized, and reported on a timely basis. Additionally, there was no change in the Corporation's internal control over financial reporting that occurred during the quarter ended March 31, 2023 that has materially affected, or is reasonably likely to materially affect, the Corporation's internal control over financial reporting.
PART II – Other Information
ITEM 1.Legal Proceedings.
There are no material pending legal proceedings, other than routine litigation incidental to the business of the Corporation or its subsidiaries, to which the Corporation or any of the subsidiaries is a party to or of which any of their respective property is subject. Further, there is no material legal proceeding in which any director, officer, principal shareholder, or affiliate of the Corporation or any of its subsidiaries, or any associate of such director, officer, principal shareholder or affiliate is a party, or has a material interest, adverse to the Corporation or any of its subsidiaries.
ITEM 1A. Risk Factors.
Except as set forth below, where an already discussed risk factor has been updated for the current period, there have been no material changes in the risk factors from those disclosed in the Corporation’s 2022 Form 10-K filed for December 31, 2022.
A lack of liquidity could affect our operations and jeopardize our financial condition.
The Corporation requires liquidity to meet our deposit and other obligations as they come due. The Corporation’s access to funding sources in amounts adequate to finance its activities or on terms that are acceptable to it could be impaired by factors that affect it specifically or the financial services industry or the general economy. Factors that could reduce its access to liquidity sources include a downturn in the markets in which our loans are concentrated or adverse regulatory actions against the Corporation. The Corporation’s access to deposits may also be affected by the liquidity needs of depositors. The Corporation may not be able to replace maturing deposits and advances as necessary in the future, especially if a large number of depositors sought to withdraw their deposits, regardless of the reason. A failure to maintain adequate liquidity could have a material adverse effect on the Corporation’s business, financial condition, and result of operations. The bank failures in March 2023 exemplify the potential serious results of the unexpected inability of insured depository institutions to obtain needed liquidity to satisfy deposit withdrawal requests, including how quickly such requests can accelerate once uninsured depositors lose confidence in an institutions ability to satisfy its obligations to depositors.
ITEM 2.Unregistered Sales of Equity Securities and Use of Proceeds.
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.
Total Number Of Shares
(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 *
January 1-31, 2023
February 1-28, 2023
March 1-31, 2023
830,220
ITEM 3.Defaults upon Senior Securities.
Not applicable.
ITEM 4.Mine Safety Disclosures
ITEM 5.Other Information.
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 March 31, 2023 by Principal Executive Officer, dated May 4, 2023.
31.2
Sarbanes-Oxley Act 302 Certification for Quarterly Report on Form 10-Q for the quarter ended March 31, 2023 by Principal Financial Officer, dated May 4, 2023.
32.1
Certification, dated May 4, 2023, of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2005 on Form 10-Q for the quarter ended March 31, 2023.
101.1
Financial statements from the Quarterly Report on Form 10-Q of the Corporation for the quarter ended March 31, 2023, 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.
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.
(Registrant)
Date: May 4, 2023
By /s/ Norman L. Lowery
Norman L. Lowery, Chairman, President and CEO
(Principal Executive Officer)
By /s/ Rodger A. McHargue
Rodger A. McHargue, Treasurer and CFO
(Principal Financial Officer)