COMMITMENTS AND CONTINGENCIES

9 Months Ended

Sep. 30, 2021

Commitments and Contingencies Disclosure [Abstract]

First Financial offers a variety of financial instruments including loan commitments and letters of credit to assist clients in meeting their requirement for liquidity and credit enhancement. GAAP does not require these financial instruments to be recorded in the Consolidated Financial Statements.

First Financial utilizes the same credit policies in issuing commitments and conditional obligations as it does for credit instruments recorded on the Consolidated Balance Sheets. First Financial’s exposure to credit loss in the event of non-performance by the counterparty was represented by the contractual amounts of those instruments. Effective January 1, 2020, First Financial adopted ASC 326, at which time First Financial estimated expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life consistent with the Company's ACL methodology for loans and leases. Adjustments to the reserve for unfunded commitments are recorded in Provision for credit losses - unfunded commitments in the Consolidated Statements of Income. First Financial had $11.6 million and $12.5 million of reserves for unfunded commitments recorded in Accrued interest and other liabilities on the Consolidated Balance Sheets at September 30, 2021 and December 31, 2020, respectively.

Loan commitments. Loan commitments are agreements to extend credit to a client, absent any violation of conditions established in the commitment agreement. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments will expire without being fully drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary by First Financial upon extension of credit, is based on management’s credit evaluation of the client. The collateral held varies, but may include securities, real estate, inventory, plant or equipment. First Financial had commitments outstanding to extend credit totaling $3.7 billion at September 30, 2021 and $3.4 billion at December 31, 2020. As of September 30, 2021, loan commitments with a fixed interest rate totaled $158.8 million while commitments with variable interest rates totaled $3.6 billion. At December 31, 2020, loan commitments with a fixed interest rate totaled $123.6 million while commitments with variable interest rates totaled $3.3 billion. First Financial's fixed rate loan commitments have interest rates ranging from 0.00% to 21.00% for both September 30, 2021 and December 31, 2020 and have maturities ranging from less than one year to 30.0 years for September 30, 2021 and less than one year to 30.8 years for December 31, 2020.

The following table presents by type First Financial's active loan balances and related obligations to extend credit:


	September 30, 2021				December 31, 2020
(dollars in thousands)	Unfunded commitment		Loan balance		Unfunded commitment		Loan balance
Commercial & industrial	$	1,418,937	$	2,602,848	$	1,270,765	$	3,007,509
Lease financing	18,229		67,855		0		72,987
Construction real estate	386,329		477,004		374,008		636,096
Commercial real estate-investor	129,332		3,399,664		139,754		3,244,540
Commercial real estate-owner	34,674		1,038,710		51,637		1,063,318
Residential real estate	53,055		922,492		28,895		1,003,086
Home equity	813,862		709,050		762,406		743,099
Installment	14,603		96,077		18,229		81,850
Credit card	221,310		47,231		207,365		48,485
Total	$	3,090,331	$	9,360,931	$	2,853,059	$	9,900,970

Letters of credit. Letters of credit are conditional commitments issued by First Financial to guarantee the performance of a client to a third party. First Financial’s letters of credit consist of performance assurances made on behalf of clients who have a contractual commitment to produce or deliver goods or services. The risk to First Financial arises from its obligation to make

payment in the event of the client's contractual default to produce the contracted good or service to a third party. First Financial issued letters of credit aggregating $36.2 million and $36.1 million at September 30, 2021 and December 31, 2020, respectively. Management conducts regular reviews of these instruments on an individual client basis.

Affordable housing projects and other tax credit investments. First Financial is a limited partner in several tax-advantaged limited partnerships whose purpose is to invest in approved qualified affordable housing, renewable energy, or other renovation or community revitalization projects. These investments are included in Accrued interest and other assets in the Consolidated Balance Sheets, with any unfunded commitments included in Accrued interest and other liabilities in the Consolidated Balance Sheets. As of September 30, 2021, First Financial expects to recover its remaining investments through the use of the tax credits that are generated by the investments.

The following table summarizes First Financial's investments in affordable housing projects and other tax credit investments.


(Dollars in thousands)		September 30, 2021				December 31, 2020
Investment	Accounting Method	Investment		Unfunded commitment		Investment		Unfunded commitment
LIHTC	Proportional amortization	$	111,288	$	61,492	$	90,401	$	47,531
HTC	Equity	3,414		56		3,607		364
NMTC	Equity	4,074		0		1,165		0
Renewable energy	Equity	8,913		7,940		5,244		7,661
Total		$	127,689	$	69,488	$	100,417	$	55,556

The following tables summarize First Financial's amortization expense and tax benefit recognized in affordable housing projects and other tax credit investments.


	Three months ended
	September 30, 2021				September 30, 2020
(Dollars in thousands)	Amortization expense (1)		Tax expense (benefit) recognized (2)		Amortization expense (1)		Tax expense (benefit) recognized (2)
LIHTC	$	2,120	$	(2,097)	$	1,972	$	(1,812)
HTC	64		(80)		62		(82)
NMTC	53		(53)		44		(44)
Renewable energy	5,192		(5,200)		0		0
Total	$	7,429	$	(7,430)	$	2,078	$	(1,938)

	Nine months ended
	September 30, 2021				September 30, 2020
(Dollars in thousands)	Amortization expense (1)		Tax expense (benefit) recognized (2)		Amortization expense (1)		Tax expense (benefit) recognized (2)
LIHTC	$	6,580	$	(6,434)	$	6,076	$	(5,643)
HTC	283		(239)		202		(245)
NMTC	158		(158)		131		(131)
Renewable energy	6,232		(6,248)		0		0
Total	$	13,253	$	(13,079)	$	6,409	$	(6,019)

(1) The amortization expense for the LIHTC investments is included in income tax expense. The amortization expense for the HTC, NMTC, and Renewable energy tax credits is included in other noninterest expense.
(2) All of the tax benefits recognized are included in Income tax expense. The tax benefit recognized for the HTC, NMTC, and Renewable energy investments primarily reflects the tax credits generated from the investments and excludes the net tax expense (benefit) and deferred tax liability of the investments’ income (loss).

Contingencies/Litigation. First Financial and its subsidiaries are engaged in various matters of litigation and have a number of unresolved claims pending.

Like many banks, First Financial has been the subject of lawsuits relating to overdraft fees. This type of litigation is time consuming and expensive in large part due to the amount of data to be sorted and disclosed, in some cases going back multiple years. No legal settlement expenses were accrued in the three months ended September 30, 2021. During the second quarter of 2021, First Financial determined that it was in its best interest to settle a lawsuit in the state of Indiana and have signed a settlement agreement that is being presented to the court for approval. As such, First Financial accrued legal settlement expenses of $3.8 million in Other noninterest expenses in the Consolidated Statements of Income during the second quarter of 2021 and settled the lawsuit for the same amount in the third quarter of 2021. No legal settlement expenses were accrued or paid in the three or nine month periods ended September 30, 2020.

Additionally, as part of the ordinary course of business, First Financial and its subsidiaries are parties to other litigation, including claims to the ownership of funds in particular accounts, the collection of delinquent accounts, challenges to security interests in collateral, foreclosure interests that are incidental to our regular business activities and other matters. While the ultimate liability with respect to these litigation matters and claims cannot be determined at this time, First Financial believes that damages, if any, and other amounts relating to pending matters are not probable or cannot be reasonably estimated as of September 30, 2021. Reserves are established for these various matters of litigation when appropriate under FASB ASC Topic 450, Contingencies, based in part upon the advice of legal counsel. First Financial had no reserves related to litigation matters as of September 30, 2021 or December 31, 2020.