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Item 8. Financial Statements and Supplementary Data

2024-03-11 compared with 2023-03-08 · 117 added, 105 removed, 1490 unchanged (13% of the section changed)

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Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of First Financial Corporation (the "Company") as of December 31, 2022 and 2021, the related consolidated statements of income and, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2022, and the related notes (collectively referred to as the "financial statements").

We have audited the accompanying consolidated balance sheets of First Financial Corporation (the "Company") as of December 31, 2023 and 2022, the related consolidated statements of income and, comprehensive income/(loss), changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2023, and the related notes (collectively referred to as the "financial statements").

We also have audited the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework:

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Our responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

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Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

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Allowance for Credit Losses on Loans

As discussed in Notes 1, the allowance for credit losses (the “ACL”) is an accounting estimate of expected credit losses over the estimated life of financial assets carried at amortized cost and off-balance-sheet credit exposures in accordance with Accounting Standards Update (the “ASU”) 2016-13, Financial Instruments —Credit Losses (Topic 326):

As discussed in Notes 1 and 7, the allowance for credit losses (the “ACL”) is an accounting estimate of expected credit losses over the estimated life of financial assets carried at amortized cost and off-balance-sheet credit exposures in accordance with Accounting Standards Update (the “ASU”) 2016-13, Financial Instruments —Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments.

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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- 12,051,964 in 2022 and 12,629,893 in 2021

Authorized shares - 40,000,000 ;

Issued shares- 16,137,220 in 2023 and 16,114,992 in 2022;

Outstanding shares - 11,795,024 in 2023 and 12,051,964 in 2022

Additional paid-in capital

Retained earnings

Accumulated other comprehensive income/(loss)

Accumulated other comprehensive loss

Treasury shares at cost - 4,342,196 in 2023 and 4,063,028 in 2022

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See accompanying notes.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME/(LOSS)

Years Ended December 31,

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Other service charges and fees

Securities gains, net

Securities gains/(losses), net

Interchange income

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Provision for credit losses

Securities gains

Securities (gains)/losses

Depreciation and amortization

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Proceeds from other borrowings

Repayments on other borrowings

Maturities of other borrowings

( 1,981,000 )

NET CASH FROM FINANCING ACTIVITIES

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Organization:

The consolidated financial statements of First Financial Corporation and its subsidiaries (the Corporation) include the parent company and its wholly-owned subsidiaries, First Financial Bank, N.A., headquartered in Vigo County, Indiana, and FFB Risk Management Co., Inc., a captive insurance subsidiary headquartered in Las Vegas, Nevada.

The consolidated financial statements of First Financial Corporation and its subsidiaries (the Corporation) include the parent company and its wholly-owned subsidiary, First Financial Bank, N.A., headquartered in Vigo County, Indiana.

Inter-company transactions and balances have been eliminated.

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First Financial Bank also has wholly-owned subsidiaries JBMM, LLC and Fort Webb LP, LLC.

The Corporation, which is headquartered in Terre Haute, Indiana, offers a wide variety of financial services including commercial, mortgage and consumer lending, lease financing, trust account services and depositor services through its four subsidiaries.

The Corporation’s primary source of revenue is derived from loans to customers and investment activities.

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First Financial Bank is the largest bank in Vigo County.

It operates nine full-service banking branches within the county;

It operates seven full-service banking branches within the county;

one in Daviess County, Indiana.;

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one in Putnam County, Indiana;

three in Sullivan County, Indiana;

two in Sullivan County, Indiana;

one in Vanderburgh County, Indiana,;

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one in Clark County, Illinois;

two in Coles County, Illinois;

one in Coles County, Illinois;

two in Crawford County, Illinois;

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one in Richland County, Illinois;

six in Vermilion County, Illinois;

five in Vermilion County, Illinois;

one in Wayne County, Illinois;

one in Breckinridge County, Kentucky;

two in Calloway County, Kentucky;

one in Calloway County, Kentucky;

three in Christian County, Kentucky;

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one in Trigg County, Kentucky;

two in Warren County, Kentucky;

one in Warren County, Kentucky;

three in Cheatham County, Tennessee;

one in Houston County, Tennessee;

and three in Montgomery County, Tennessee.

There are five loan production offices, one in Hamilton County, Indiana;

There are six loan production offices, one in Allen County, Indiana;

one in Hamilton County, Indiana;

one in Monroe County, Indiana;

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Regulatory Agencies:

First Financial Corporation is a multi-bank holding company and as such is regulated by various banking agencies.

First Financial Corporation is a bank holding company and as such is regulated by various banking agencies.

The holding company is regulated by the Seventh District of the Federal Reserve System.

The national bank subsidiary is regulated by the Office of the Comptroller of the Currency.

The state bank subsidiary is jointly regulated by the state banking organization and the Federal Deposit Insurance Corporation.

FFB Risk Management Company is regulated by the State of Nevada Division of Insurance.

SIGNIFICANT ACCOUNTING POLICIES

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Commercial real estate loans may be adversely affected by factors in the local market, the regional economy, or industry specific factors.

In addition, Commercial Construction loans are a specific type of commercial real estate loan

which inherently carry more risk than loans for completed projects.

In addition, Commercial Construction loans are a specific type of commercial real estate loan which inherently carry more risk than loans for completed projects.

Since these types of loans are underwritten utilizing estimated costs, feasibility studies, and estimated absorption rates, the underlying value of the project may change based upon the inaccuracy of these projections.

Commercial construction loans are closely monitored, subject to industry standards, and disbursements are controlled during the construction process.

Retail real estate mortgages that are secured by 1-4 family residences are generally owner occupied and include residential real estate and residential real estate construction loans.

Real estate mortgages that are secured by 1-4 family residences are generally owner occupied and include residential real estate and residential real estate construction loans.

The Corporation typically establishes a maximum loan-to-value ratio and generally requires private mortgage insurance if the ratio is exceeded.

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If a loan is individually evaluated, a portion of the allowance is allocated so that the loan is reported at the fair value of collateral, adjusted for selling costs, if repayment is expected solely from the collateral.

The pooled component covers pools of loans that share similar risk characteristics, and is based on historical loss experienced since 2008.

The pooled component covers pools of loans that share similar risk characteristics, and is based on historical

loss experienced since 2008.

This historical loss experience is supplemented with other current factors based on the risks present for each portfolio segment.

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The amortization of mortgage servicing rights is netted against loan servicing fee income.

Servicing fees totaled $ 1.4 million,

$ 1.3 million and $ 1.3 million for the years ended December 31, 2022, 2021 and 2020.

Servicing fees totaled $ 1.3 million, $ 1.4 million and $ 1.3 million for the years ended December 31, 2023, 2022 and 2021.

Late fees and ancillary fees related to loan servicing are not material.

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Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually.

The Corporation has selected November 30 as the date to perform the annual impairment test.

The Corporation has selected October 31 as the date to perform the annual impairment test.

The final results determined that there was no impairment of goodwill.

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The short-term portion of the plan is paid out within 75 days of year end and the long-term plan vests over a three year period and is paid out within 75 days of the end of each vesting period.

The compensation expense related to the plans in 2022, 2021 and 2020

was $ 2.0 million, $ 2.3 million and $ 2.2 million, respectively, and resulted in a liability of $ 1.6 million at December 31, 2022 and $ 1.8 million at December 31, 2021.

The compensation expense related to the plans in 2023, 2022 and 2021 was $ 2.9 million, $ 2.0 million and $ 2.3 million, respectively, and resulted in a liability of $ 1.8 million at December 31, 2023 and $ 1.6 million at December 31, 2022.

The Omnibus Equity Incentive Plan is a long term incentive plan that was designed to align the interests of participants with the interest of shareholders.

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Accounting Pronouncements Adopted:

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.

In December 2022, the FASB issued ASU 2022-06, “Reference Rate Reform (Topic 848):

Deferral of the Sunset Date of Topic 848”, which defers the sunset date of relief provisions within Topic 848 from December 31, 2022 to December 31, 2024.

The objective of the guidance in Topic 848 is to provide relief during the transition period.

The guidance is effective for all entities as of March 12, 2020 through December 31, 2024 The Corporation has discontinued originating LIBOR based loans and has a plan in place to transition all LIBOR indexed loans to term SOFR.

Recently Issued Not Yet Effective Accounting Pronouncements:

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).

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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.

The Corporation adopted ASU 2022-02 on January 1, 2023, and has applied the disclosure changes in this document.

Allowance for Credit Losses for the additional disclosures.

Recently Issued Not Yet Effective Accounting Pronouncements:

In June 2022, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No.

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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.

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.

In March 2023, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No.

2023-02 “ Investments Equity Method and Joint Ventures (Topic 323):

Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method.” These amendments allow reporting entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of the program giving rise to the related income tax credits.

This guidance is effective for public business entities for fiscal years including interim periods within those fiscal years, beginning after December 15, 2023.

Early adoption is permitted in any interim period.

The Corporation is evaluating ASU 2023-02 and its effect on its consolidated financial statements and related disclosures.

In November 2023, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2023-07 “Segment Reporting (Topic 280):

Improvements to Reportable Segment Disclosures.” These amendments require, among other things, that a public entity that has a single reportable segment provide all the disclosures required by the amendments in this ASU and all existing segment disclosures in Topic 208.

The ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024.

Early adoption is permitted.

A public entity should apply the amendments retrospectively to all periods presented in the financial statements.

The Corporation is assessing ASU 2023-07 and its effect on its consolidated financial statements and related disclosures.

In December 2023, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No.

2023-09 “Income Taxes (Topic 740):

Improvements to Income Tax Disclosures.” Among other things, these amendments require that public business entities on an annual basis (1) disclose specific categories in the rate reconciliation and (2) provide additional information for reconciling items that meet a quantitative threshold (if the effect of those reconciling items is equal to or greater than five percent of the amount computed by multiplying pretax income (loss) by the applicable statutory income tax rate.) The amendments also require that all entities disclose on an annual basis the following information about income taxes paid:

(1) the amount of income taxes paid (net of refunds received) disaggregated by federal, state, and foreign taxes and (2) the amount of income taxes paid (net of refunds received) disaggregated by individual jurisdictions in which income taxes paid (net of refunds received) is equal to or greater than five percent of total income taxes paid (net of refunds received.) This guidance is effective for public business entities for annual periods beginning after December 15, 2024.

Early adoption is permitted for annual financial statements that have not yet been issued or made available for issuance.

The amendments should be applied on a prospective basis although retrospective application is permitted.

The Corporation is assessing ASU 2023-09 and i ts effect on its consolidated financial statements and related disclosures .

FAIR VALUES OF FINANCIAL INSTRUMENTS:

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The table below presents a reconciliation and income statement classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the twelve months ended December 31, 2023 and 2022.

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

December 31, 2023

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debt obligations

Other securities

Beginning balance, January 1

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debt obligations

Other securities

Beginning balance, January 1

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At December 31, 2023 other real estate owned was comprised of $ 26 thousand from commercial loans and $ 81 thousand from residential loans.

Other real estate owned at December 31, 2021 with a value of $ 108 thousand was reduced by zero for fair value adjustment.

Other real estate owned at December 31, 2022 with a value of $ 337 thousand was reduced by $ 25 thousand for fair value adjustment.

At December 31, 2022 other real estate owned was comprised of $ 39 thousand from commercial loans and $ 298 thousand from residential loans.

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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 %.

These discounts range from 0 % to 100 % with an average discount of 36 %.

Values for non-real estate collateral, such as business equipment, are based on appraisals performed by qualified licensed appraisers or the customers financial statements.

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The fair value of off-balance sheet items is not considered material.

The carrying amount and estimated fair value of assets and liabilities are presented in the tables below and were determined based on the above assumptions:

The carrying amount and estimated fair value of financial assets and liabilities are presented in the tables below and were determined based on the above assumptions:

December 31, 2023

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Mortgage Backed Securities - Residential

Mortgage Backed Securities - Commercial

Collateralized mortgage obligations

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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.

In evaluating for impairment, management considers the reason for the decline, the extent 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.

If the present value of cash flows expected to be collected is less than the amortized cost basis for the security, 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.

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At December 31, 2023 and 2022, loans held for sale were $ 2.5 million and $ 1.7 million, respectively, and are included in the totals above.

In the normal course of business, the Corporation’s subsidiary banks make loans to directors and executive officers and to their associates.

In the normal course of business, the Corporation’s subsidiary bank makes loans to directors and executive officers and to their associates.

In 2023, the aggregate dollar amount of these loans to directors and executive officers who held office amounted to $ 46.1 million at the beginning of the year.

During 2022, advances of $ 46.2 million, repayments of $ 45.7 million, and reductions for the removal of The Morris Plan directors of $ 5.3 million were made with respect to related party loans for an aggregate dollar amount outstanding of $ 46.1 million at December 31, 2022.

During 2023, advances of $ 46.7 million, and repayments of $ 48.1 million were made with respect to related party loans for an aggregate dollar amount outstanding of $ 44.7 million at December 31, 2023.

Loans serviced for others, which are not reported as assets, total $ 462.6 million and $ 518.1 million at year-end 2023 and 2022.

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Beginning balance

PCD ACL on acquired loans

Provision for credit losses

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Beginning balance

Impact of adopting ASC 326

PCD ACL on acquired loans

Provision for credit losses

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All Other Consumer

During the years ending December 31, 2022, 2021, and 2020 the terms of certain loans were modified as troubled debt restructurings (TDRs).

The following tables present the activity for TDR’s.

(Dollar amounts in thousands)

Loan Modifications Made to Borrowers Experiencing Financial Difficulty:

Modification of the terms of such loans typically include one or a combination of the following:

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or a permanent reduction of the recorded investment in the loan.

No modification in 2022, 2021 or 2020 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 .

During the years ended December 31, 2022, 2021 and 2020 the Corporation modified 8 , 39 , and 42 loans respectively as troubled debt restructurings.

All of the loans modified were smaller balance residential and consumer loans.

There were no loans that were charged off within 12 months of the modification for 2022, 2021 or 2020.

The Corporation had no allocation of specific reserves to customers whose loan terms have been modified in troubled debt restructurings at December 31, 2022, 2021, and 2020.

The Corporation has not committed to lend additional amounts as of December 31, 2022 and 2021 to customers with outstanding loans that are classified as troubled debt restructurings.

The CARES Act includes a provision that permits a financial institution to elect to suspend temporarily troubled debt restructuring accounting under ASC Subtopic 310-40 in certain circumstances (“section 4013”).

To be eligible under section 4013, a loan modification must be (1) related to COVID-19;

(2) executed on a loan that was not more than 30 days past due as of December 31, 2019;

and (3) executed between March 1, 2020, and the earlier of (A) 60 days after the date of termination of the National Emergency or (B) December 31, 2020.

In response to this section of the CARES Act, the federal banking agencies issued a revised interagency statement on April 7, 2020 that, in consultation with the Financial Accounting Standards Board, confirmed that for loans not subject to section 4013, short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not troubled debt restructurings under ASC Subtopic 310-40.

This includes short-term (e.g., up to six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant.

Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented.

As of December 31, 2022 no loans remained under the program.

As of December 31, 2021, 1,225 loans totaling $ 253 million were modified, related to COVID-19, that were not considered troubled debt restructurings.

As of December 31, 2021, 961 loans totaling $ 210 million had resumed normal scheduled payments.

204 remaining loans were still under a debt relief plan, which include 9 commercial loans totaling $ 36 million that had been provided additional payment relief since the initial payment relief plan.

1 loan totaling $ 17 thousand was under the original payment relief plan.

The following table presents the amortized cost of loans and leases at December 31, 2023 that were both experiencing financial difficulty and modified during the twelve months ended December 31, 2023, by class and by type of modification.

The percentage of the amortized cost of loans and leases that were modified to borrowers in financial distress as compared to the amortized cost of each class of financial receivable is also presented below.

Extension and

Interest Rate

(Dollar amounts in thousands)

Motor Vehicle

The Company closely monitors the performance of loans and leases that have been modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts.

All loans and leases that have been modified during the twelve months ended December 31, 2023 are in a current status of repayment.

The following table presents the financial effect of loan and lease modifications presented above to borrowers experiencing financial difficulty for the twelve months ended Decemer 31, 2023.

Interest Rate

(Dollar amounts in thousands)

Motor Vehicle

There were no modified loans that had a payment default during the twelve months ended December 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.

Upon the Corporation’s determination that a modified loan has subsequently been deemed uncollectible, the loan is written off.

Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the allowance for credit losses is adjusted by the same amount.

The following table presents the amortized cost basis of collateral dependent loans by class of loans:

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Special Mention