FIRST FINANCIAL CORP /IN/ MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-K)
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Management's Discussion and Analysis of Financial Condition and Results of Operations, as well as disclosures found elsewhere in this report are based uponFirst Financial Corporation's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States of America . The preparation of these financial statements requires the Corporation to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for credit losses, securities valuation and goodwill. Actual results could differ from those estimates.
Provision for credit losses. The allowance for credit losses represents management’s estimate of expected losses inherent in the existing loan portfolio. The allowance for credit losses is increased by the allowance for credit losses charged
32 -------------------------------------------------------------------------------- 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. We utilize 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. Our cohorts track loan balances and historical loss experience since 2008. Where past performance may not be representative of future losses, loss rates are adjusted for qualitative and economic forecast factors. Qualitative factors include items such as changes in lending policies or procedures, asset specific risks, the impact of COVID-19 on customer's operations, and economic uncertainty in forward-looking forecasts. Economic indicators utilized in forecasting include unemployment rate, gross domestic product, housing starts, and interest rates. 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. Should cash flow assumptions or market conditions change, a different amount may be recorded for the allowance for credit losses and the associated provision for credit losses. Securities valuation and potential impairment. Securities available-for-sale are carried at fair value, with unrealized holding gains and losses reported separately in accumulated other comprehensive income (loss), net of tax. The Corporation obtains market values from a third party on a monthly basis in order to adjust the securities to fair value. Equity securities that do not have readily determinable fair values are carried at cost. Additionally, all securities are required to be evaluated for impairment related to credit losses. 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. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income, net of applicable taxes. No allowance for credit losses for available-for-sale securities was needed atDecember 31, 2021 .Goodwill . The carrying value of goodwill requires management to use estimates and assumptions about the fair value of the reporting unit compared to its book value. An impairment analysis is prepared on an annual basis. Fair values of the reporting units are determined by an analysis which considers cash flows streams, profitability and estimated market values of the reporting unit. With the decrease in market value as a result of the pandemic, the Corporation engaged a third party to conduct an in-depth analysis of the Corporation as ofOctober 31, 2021 . The final results determined that there was no impairment of goodwill. From the effective date of the analysis toDecember 31, 2021 , the Corporation's market value increased. The majority of the Corporation's goodwill is recorded atFirst Financial Bank, N. A . Management believes the accounting estimates related to the allowance for credit losses, valuation of investment securities and the valuation of goodwill are "critical accounting estimates" because: (1) the estimates are highly susceptible to change from period to period because they require management to make assumptions concerning, among other factors, the changes in the types and volumes of the portfolios, valuation assumptions, and economic conditions, and (2) the impact of recognizing an impairment or credit loss could have a material effect on the Corporation's assets reported on the balance sheet as well as net income.
RESULTS OF OPERATIONS – SUMMARY FOR 2021
COMPARISON FROM 2021 TO 2020
Net income for 2021 was$53.0 million , or$4.02 per share versus$53.8 million , or$3.93 per share for 2020. The decrease in 2021 net income is due to increased expenses from the Hancock acquisition, as well as declining interest rates. Return on average assets atDecember 31, 2021 decreased 12.00% to 1.10% compared to 1.25% atDecember 31, 2020 . 33 --------------------------------------------------------------------------------
The main components of revenues and expenses affecting net profit are examined in the following analysis.
NET INTEREST INCOME The principal source of the Corporation's earnings is net interest income, which represents the difference between interest earned on loans and investments and the interest cost associated with deposits and other sources of funding. Net interest income decreased in 2021 to$143.4 million compared to$146.3 million in 2020. Total average interest earning assets increased to$4.61 billion in 2021 from$3.71 billion in 2020. The tax-equivalent yield on these assets decreased to 3.39% in 2021 from 4.43% in 2020. Total average interest-bearing liabilities increased to$3.43 billion in 2021 from$2.98 billion in 2020. The average cost of these interest-bearing liabilities decreased to 0.26% in 2021 from 0.47% in 2020.
Net interest margin decreased from 4.05% in 2020 to 3.20% in 2021. Yields on earning assets decreased by 104 basis points while rate on interest bearing liabilities decreased by 21 basis points .
CONSOLIDATED BALANCE SHEET – AVERAGE BALANCES AND INTEREST RATES
December 31,
2021 2020 2019
Average Yield/ Average Yield/ Average Yield/
(Dollar amounts in thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate
ASSETS
Interest-earning assets:
Loans (1) (2) $ 2,602,344 128,978 4.96 % $ 2,702,225 138,302 5.12 % $ 2,270,313 125,906 5.55 %
Taxable investment securities 890,563 13,110 1.47 % 689,203 13,625 1.98 % 621,756 15,191 2.44 %
Tax-exempt investments (2) 387,935 13,544 3.49 % 322,121 12,731 3.95 % 302,757 11,999 3.96 %
Cash and due from banks 726,412 888 0.12 % - - - % - - - %
Federal funds sold 4,487 42 0.94 % 1,245 71 5.70 % 3,029 143 4.72 %
Total interest-earning assets 4,611,741 156,562 3.39 % 3,714,794 164,729 4.43 % 3,197,855 153,239 4.79 %
Non-interest earning assets:
Cash and due from banks - 370,883 86,592
Premises and equipment, net 64,787 63,145 54,336
Other assets 183,589 187,415 121,411
Less allowance for loan losses (45,767) (23,318) (20,401)
TOTALS $ 4,814,350 $ 4,312,919 $ 3,439,793
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Transaction accounts $ 2,799,227 2,751 0.10 % $ 2,282,750 4,424 0.19 % $ 2,057,713 9,847 0.48 %
Time deposits 520,885 5,407 1.04 % 589,975 8,377 1.42 % 447,172 5,864 1.31 %
Short-term borrowings 99,805 387 0.39 % 90,613 568 0.63 % 60,924 1,105 1.81 %
Other borrowings 7,562 252 3.33 % 18,335 770 4.20 % 24,780 653 2.64 %
Total interest-bearing liabilities: 3,427,479 8,797 0.26 % 2,981,673 14,139 0.47 % 2,590,589 17,469 0.67 %
Non interest-bearing liabilities:
Demand deposits 717,764 660,011 292,445
Other 71,738 77,444 59,430
4,216,981 3,719,128 2,942,464
Shareholders' equity 597,369 593,791 497,329
TOTALS $ 4,814,350 $ 4,312,919 $ 3,439,793
Net interest earnings $ 147,765 $ 150,590 $ 135,770
Net yield on interest- earning assets 3.20 % 4.05 % 4.25 %
(1)For purposes of these computations, non-accruing loans are included in the
daily average loan amounts outstanding.
(2)Interest income includes the effect of tax equivalent adjustments using a
federal tax rate of 21%.
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The following table shows the components of net interest income attributable to volume and rate variations. The information in the table compares 2021 to 2020 and 2020 to 2019.
2021 Compared to 2020 Increase
2020 vs. 2019 Increase
(Decrease) Due to (Decrease) Due to
Volume/ Volume/
(Dollar amounts in thousands) Volume Rate Rate Total Volume Rate Rate Total
Interest earned on interest-earning assets:
Loans (1) (2) $ (5,112) $ (4,374) $ 162 $ (9,324) $ 23,953 $ (9,710) $ (1,847) $ 12,396
Taxable investment securities 3,981 (3,479) (1,017) (515) 1,648 (2,899) (315) (1,566)
Tax-exempt investment securities (2) 2,600 (1,484) (303) 813 767 (33) (2) 732
Cash and due from banks - - 888 888 - - - -
Federal funds sold 185 (59) (155) (29) (84) 30 (18) (72)
Total interest income $ 1,654 $ (9,396) $ (425) $ (8,167) $ 26,284 $ (12,612) $ (2,182) $ 11,490
Interest paid on interest-bearing liabilities:
Transaction accounts 1,001 (2,181) (493) (1,673) 1,077 (5,859) (641) (5,423)
Time deposits (981) (2,253) 264 (2,970) 1,873 485 155 2,513
Short-term borrowings 58 (217) (22) (181) 538 (723) (352) (537)
Other borrowings (452) (159) 93 (518) (170) 388 (101) 117
Total interest expense (374) (4,810) (158) (5,342) 3,318 (5,709) (939) (3,330)
Net interest income $ 2,028 $ (4,586) $ (267) $ (2,825) $ 22,966 $ (6,903) $ (1,243) $ 14,820
(1)For purposes of these computations, non-accruing loans are included in the
daily average loan amounts outstanding.
(2)Interest income includes the effect of tax equivalent adjustments using a
federal tax rate of 21%.
PROVISION FOR CREDIT LOSSES
The provision for credit losses charged to expense is based upon current
expected loss and the results of a detailed analysis estimating an appropriate
and adequate allowance for credit losses. The analysis is governed by Accounting
Standards Codification (ASC 326), implemented in 2020, which uses an economic
forecast that includes the impact of the COVID-19 pandemic. For the year ended
December 31, 2021 , the provision for credit losses was $2.5 million , a decrease
of $8.1 million , or 77%, compared to 2020. In 2020, along with the adoption of
CECL, $4 million was added to allowance to accommodate anticipated losses from
the pandemic. In 2021 when those losses became unrealized, the additional
pandemic allowances were removed, as well as CECL performance requiring lower
allowance for credit losses. Continued loan growth in future periods, an
increase in charge-offs, or a decline in our current level of recoveries could
result in an increase in provision expense. Additionally, with the adoption of
ASC 326 in 2020, provision expense may become more volatile due to changes in
CECL model assumptions of credit quality, economic conditions, and loan
composition, which drive allowance for credit losses.
Net charge-offs for 2021 were $2.6 million as compared to $3.5 million for 2020
and $5.2 million for 2019. Non-accrual loans, excluding TDR's, decreased to $9.6
million at December 31, 2021 from $15.4 million at December 31, 2020 . Loans past
due 90 days and still on accrual decreased to $515 thousand compared to $2.3
million at December 31, 2020 .
NON-INTEREST INCOME
Non-interest income from
NON-INTEREST EXPENSES Non-interest expenses increased to$117.4 million in 2021 from$112.8 million in 2020. The increase was mainly due to increased expenses from the acquisition ofHancock Bancorp, Inc. INCOME TAXES The Corporation's federal income tax provision was$12.6 million in 2021 compared to$11.7 million in 2020. The overall effective tax rate in 2021 of 19.2% increased as compared to a 2020 effective rate of 17.8%. The increase is primarily due to increase of general business tax credits benefits earned in 2020. 35 --------------------------------------------------------------------------------
COMPARISON FROM 2020 TO 2019
Net income for 2020 was
Net interest income increased
The provision for income taxes decreased$492 thousand from 2019 to 2020 and the effective tax rate decreased to 17.8% in 2020 from 20.0% in 2019. The decrease is primarily due to increase of general business tax credits benefits earned in 2020.
COMPARISON AND DISCUSSION OF THE 2021 TO 2020 REPORT
The Corporation's total assets increased 13.5% or$614.6 million atDecember 31, 2021 , from a year earlier. Available-for-sale securities increased$344.0 million atDecember 31, 2021 , from the previous year. Loans, net increased by$204.3 million to$2.77 billion . Deposits increased$653.6 million while borrowings decreased by$12.6 million . Total shareholders' equity decreased$14.4 million to$582.6 million atDecember 31, 2021 . In 2021 dividends paid by the Corporation totaled$1.06 per share. There were also 31,355 shares from the treasury with a value of$1.40 million that were contributed to the ESOP plan in 2021 compared to 39,029 shares with a value of$1.47 million in 2020.
Here is an analysis of the components of the Company’s balance sheet.
SECURITIES
The Corporation's investment strategy seeks to maximize income from the
investment portfolio while using it as a risk management tool and ensuring
safety of principal and capital. During 2021 the portfolio's balance increased
by 33.7%. The average life of the portfolio increased from 3.8 years in 2020 to
5.0 years in 2021. The portfolio structure will continue to provide cash flows
to be reinvested during 2022.
1 year and less 1 to 5 years 5 to 10 years Over 10 Years 2021
(Dollar amounts in thousands) Balance Rate Balance Rate Balance Rate Balance Rate Total
U.S. government sponsored entity mortgage-backed
securities and agencies and U.S. Treasury (1) $ 12,784 2.37 % $ 28,466 1.84 % $ 42,881 3.96 % $ 678,295 2.15 % $ 762,426
Collateralized mortgage obligations (1) 3,449 2.17 % 688 3.79 % 7,516 2.15 % 163,352 2.32 %
175,005
States and political subdivisions 5,358 3.27 % 34,438 2.97 % 75,506 2.68 % 303,422 2.57 % 418,724 Other securities 3,477 1.40 % 1,245 0.01 % 498 0.01 % - - % 5,220 Collateralized debt obligations - - % - - % - - % 3,359 - % 3,359 TOTAL$ 25,068 2.40 %$ 64,837 2.42 %$ 126,401 3.07 %$ 1,148,428 2.28 %$ 1,364,734 (1) Distribution of maturities is based on the estimated life of the asset. 1 year and less 1 to 5 years 5 to 10 years Over 10 Years 2020 (Dollar amounts in thousands) Balance Rate Balance Rate Balance Rate Balance Rate TotalU.S. government sponsored entity mortgage-backed securities and agencies (1)$ 8,892 2.21 %$ 36,343 1.87 %$ 40,007 5.02 %$ 388,936 2.44 %$ 474,178 Collateralized mortgage obligations (1) - - % 3,728 5.19 % 5,400 1.67 % 205,032 2.42 % 214,160 States and political subdivisions 4,414 3.17 % 35,651 3.15 % 57,755 3.06 % 231,450 2.87 % 329,270 Collateralized debt obligations - - % - - % - - % 3,136 - % 3,136 TOTAL 13,306 2.53 % 75,722 2.64 % 103,162 3.74 % 828,554 2.55 % 1,020,744
(1) The breakdown of maturities is based on the estimated useful life of the asset.
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LOAN PORTFOLIO
Loans outstanding by major category as ofDecember 31 for each of the last five years and the maturities at year end 2021 are set forth in the following analyses. (Dollar amounts in thousands) 2021 2020 2019 2018 2017 Loan Category Commercial$ 1,674,066 $ 1,521,711 $ 1,584,447 $ 1,166,352 $ 1,139,490 Residential 664,509 604,652 682,077 443,670 436,143 Consumer 474,026 479,750 386,006 341,041 327,976 TOTAL$ 2,812,601 $ 2,606,113 $ 2,652,530 $ 1,951,063 $ 1,903,609 After One Within But Within After Five (Dollar amounts in thousands) One Year Five Years Years Total MATURITY DISTRIBUTION Commercial, financial and agricultural$ 535,632 $ 748,859 $ 389,575 $ 1,674,066 TOTAL Residential 664,509 Consumer 474,026 TOTAL$ 2,812,601 Loans maturing after one year with: Fixed interest rates$ 437,115 $ 346,566 Variable interest rates 311,744 43,009 TOTAL$ 748,859 $ 389,575 37
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PROVISION FOR CREDIT LOSSES
The activity in the Corporation's allowance for credit losses is shown in the following analysis: (Dollar amounts in thousands) 2021 2020 2019 2018 2017 Amount of loans outstanding at December 31,$ 2,812,601 $ 2,606,113
Average amount of loans per year
$ 2,270,313 $ 1,855,092 $ 1,792,609 Allowance for credit losses at beginning of year$ 44,076 $ 19,943 $ 20,436 $ 19,909 $ 18,773 Loans charged off: Commercial 2,158 1,097 2,616 1,122 1,572 Residential 812 944 1,050 841 761 Consumer 5,246 6,355 7,007 6,868 6,429 Total loans charged off 8,216 8,396 10,673 8,831 8,762 Recoveries of loans previously charged off: Commercial 1,069 856 1,092 606 1,377 Residential 616 657 1,360 639 842 Consumer 3,884 3,404 3,028 2,345 2,384 Total recoveries 5,569 4,917 5,480 3,590 4,603 Net loans charged off 2,647 3,479 5,193 5,241 4,159 Provision charged to expense * 2,466 10,528 4,700 5,768 5,295 CECL adoption - 17,084 - - - PCD ACL on acquired loans 4,410 - - - - Balance at end of year$ 48,305 $ 44,076 $ 19,943 $ 20,436 $ 19,909 Ratio of net charge-offs during period to average loans outstanding 0.10 % 0.13 % 0.23 % 0.22 % 0.25 % The allowance is maintained at an amount management believes sufficient to absorb expected losses in the loan portfolio. Monitoring loan quality and maintaining an adequate allowance is an ongoing process overseen by senior management and the loan review function. On at least a quarterly basis, a formal analysis of the adequacy of the allowance is prepared and reviewed by management and the Board of Directors. This analysis serves as a point in time assessment of the level of the allowance and serves as a basis for provisions for credit losses. The loan quality monitoring process includes assigning loan grades and the use of a watch list to identify loans of concern. The analysis of the allowance for credit losses includes the allocation of specific amounts of the allowance to individually evaluated loans, generally based on an analysis of the collateral securing those loans. Portions of the allowance are also allocated to loan portfolios, based upon a variety of factors including historical loss experience, trends in the type and volume of the loan portfolios, trends in delinquent and non-performing loans, and economic trends affecting our market, including current conditions and reasonable and supportable forecasts about the future. These components are added together and compared to the balance of our allowance at the evaluation date. The allowance for credit losses as a percentage of total loans increased to 1.72% at year end 2021 compared to 1.69% at year end 2020. The increase is primarily due to the adoption of CECL. A portion of the increase was due to the requirement to include an allowance for credit losses on purchased loans that previously only required an allocation if there was a deterioration since acquisition date. The calculation of historical losses used in the allowance computation averages the net charge off activity and qualitative factors that supplement historical losses and consider internal and external factors, including reasonable and supportable forecasts, that influence management's expectations of loss in the portfolio. Non-performing loans of$14.9 million atDecember 31, 2021 decreased from$21.9 million atDecember 31, 2020 . Management believes the allowance for credit losses balance at year end 2021 is reasonable based on their analysis of specific loans and the credit trends reflected within the loan portfolio. 38 -------------------------------------------------------------------------------- The table below presents the allocation of the allowance to the loan portfolios at year-end. Years Ended December 31, (Dollar amounts in thousands) 2021 2020 2019 2018 2017 Commercial$ 18,883 $ 13,925 $ 8,945 $ 9,848 $ 10,281 Residential 18,316 19,142 1,302 1,313 1,455 Consumer 10,721 11,009 8,304 7,481 6,709 Unallocated 385 - 1,392 1,794 1,464 TOTAL ALLOWANCE FOR CREDIT LOSSES$ 48,305 $ 44,076 $ 19,943 $ 20,436 $ 19,909 NONPERFORMING LOANS Management monitors the components and status of nonperforming loans as a part of the evaluation procedures used in determining the adequacy of the allowance for loan losses. It is the Corporation's policy to discontinue the accrual of interest on loans where, in management's opinion, serious doubt exists as to collectability. The amounts shown below represent non-accrual loans, loans which have been restructured to provide for a reduction or deferral of interest or principal because of deterioration in the financial condition of the borrower and those loans which are past due more than 90 days where the Corporation continues to accrue interest. Restructured loans increased in 2021 and in 2020 due to the increased number and balance of loans added combined with the continued receipt of payments in accordance with the restructuring terms. Additional information regarding restructured loans is available in the footnotes to the financial statements. (Dollar amounts in thousands) 2021 2020 2019 2018 2017 Non-accrual loans$ 9,590 $ 15,367 $ 9,535 $ 10,974 $ 13,245 Accruing restructured loans 3,897 3,052 3,318 3,702 3,280 Non-accrual restructured loans 902 1,154 876 1,104 3,754 Accruing loans past due over 90 days 515 2,324 1,610 798 1,403$ 14,904 $ 21,897 $ 15,339 $ 16,578 $ 21,682 The ratio of the allowance for loan losses as a percentage of nonperforming loans was 324.11% atDecember 31, 2021 , compared to 226.83% in 2020. In the footnotes to the financial statements the amount reported for nonperforming loans is the recorded investment which includes accrued interest receivable. The following loan categories comprise significant components of the nonperforming loans atDecember 31, 2021 and 2020: (Dollar amounts in thousands) 2021 2020 Non-accrual loans: Commercial loans$ 4,991 52 %$ 9,704 63 % Residential loans 3,049 32 % 4,355 28 % Consumer loans 1,550 16 % 1,308 9 %$ 9,590 100 %$ 15,367 100 % Past due 90 days or more: Commercial loans$ 14 3 % $ - - % Residential loans 410 79 % 1,962 84 % Consumer loans 91 18 % 362 16 %$ 515 100 %$ 2,324 100 %
Management considers the current allowance to be appropriate and adequate to cover expected losses inherent in the loan portfolio given the current economic environment. However, future economic changes cannot be predicted. Deteriorating economic conditions could lead to an increase in the risk characteristics of the loan portfolio and an increase in the potential for credit losses.
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DEPOSITS
The information below presents the average amount of deposits and the rates paid on these deposits for 2021, 2020 and 2019.
2021 2020
2019
(Dollar amounts in thousands) Amount Rate Amount Rate Amount
Rate
Non-interest-bearing demand deposits$ 717,764 $ 660,011 $ 292,445 Interest-bearing demand deposits 1,309,682 0.15 % 1,061,745 0.27 % 979,195 0.60 % Savings deposits 1,489,545 0.05 % 1,221,005 0.12 % 1,078,518 0.37 % Time deposits:$100,000 or more 214,976 1.36 % 260,314 1.88 % 139,416 1.82 % Other time deposits 305,909 0.81 % 329,661 1.05 % 307,756 1.08 % TOTAL$ 4,037,876 $ 3,532,736 $ 2,797,330 The maturities of certificates of deposit of more than$100 thousand outstanding atDecember 31, 2021 , are summarized as follows: (Dollar amounts in thousands) 3 months or less$ 40,254 Over 3 through 6 months 28,258 Over 6 through 12 months 67,474 Over 12 months 109,835 TOTAL$ 245,821 OTHER BORROWINGS Advances from theFederal Home Loan Bank decreased to$15.9 million in 2021 compared to$5.9 million in 2020. The Asset/Liability Committee reviews these funding sources and considers the related strategies on a monthly basis. See Interest Rate Sensitivity and Liquidity below for more information.
CAPITAL RESOURCES
Bank regulatory agencies have established capital adequacy standards which are
used extensively in their monitoring and control of the industry. These
standards relate capital to level of risk by assigning different weightings to
assets and certain off-balance-sheet activity. As shown in the footnote to the
consolidated financial statements ("Regulatory Matters"), the Corporation's
subsidiary banking institutions capital exceeds the requirements to be
considered well capitalized at December 31, 2021 .
First Financial Corporation's objective continues to be to maintain adequate
capital to merit the confidence of its customers and shareholders. To warrant
this confidence, the Corporation's management maintains a capital position which
they believe is sufficient to absorb unforeseen financial shocks without
unnecessarily restricting dividends to its shareholders. The Corporation's
dividend payout ratio for 2021 and 2020 was 28.2% and 26.6%, respectively. The
Corporation expects to continue its policy of paying regular cash dividends,
subject to future earnings and regulatory restrictions and capital requirements.
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 earnings simulation and market value of equity sensitivity analysis. These tools 40 -------------------------------------------------------------------------------- allow management to quantify and monitor both short-and long-term exposure to interest rate risk. Simulation modeling measures the effects of changes in interest rates, changes in the shape of the yield curve and the effects of embedded options on net interest income. This measure projects earnings in the various environments over the next three years. It is important to note that measures of interest rate risk have limitations and are dependent on various assumptions. These assumptions are inherently uncertain and, as a result, the model cannot precisely predict the impact of interest rate fluctuations on net interest income. Actual results will differ from simulated results due to timing, frequency and amount of interest rate changes as well as overall market conditions. The Committee has performed a thorough analysis of these assumptions and believes them to be valid and theoretically sound. These assumptions are continuously monitored for behavioral changes. The Corporation from time to time utilizes derivatives to manage interest rate risk. Management continuously evaluates the merits of such interest rate risk products but does not anticipate the use of such products to become a major part of the Corporation's risk management strategy. The table below shows the Corporation's estimated sensitivity profile as ofDecember 31, 2021 . The change in interest rates assumes a parallel shift in interest rates of 100 and 200 basis points. Given a 100 basis point increase in rates, net interest income would increase 5.09% over the next 12 months and increase 8.96% over the following 12 months. Given a 100 basis point decrease in rates, net interest income would decrease 6.49% over the next 12 months and decrease 10.91% over the following 12 months. These estimates assume all rate changes occur overnight and management takes no action as a result of this change. Basis Point Percentage Change in Net Interest Income Interest Rate Change 12 months 24 months 36 months Down 100 -6.49 % -10.91 % -13.51 % Up 100 5.09 % 8.96 % 11.92 % Up 200 6.61 % 13.62 % 19.54 %
The typical analysis of rate shocks does not reflect management’s ability to react and therefore reduce the effects of rate changes, and represents the worst-case scenario.
Liquidity Risk Liquidity is measured by the bank's ability to raise funds to meet the obligations of its customers, including deposit withdrawals and credit needs. This is accomplished primarily by maintaining sufficient liquid assets in the form of investment securities and core deposits. The Corporation has$25.1 million of investments that mature throughout the coming 12 months. The Corporation also anticipates$164.5 million of principal payments from mortgage-backed securities. Given the current rate environment, the Corporation anticipates$30.0 million in securities to be called within the next 12 months.
The Company also has additional sources of liquidity through its secured and unsecured borrowing capacity. These include upstream correspondents,
CONTRACTUAL OBLIGATIONS, COMMITMENTS, CONTINGENT LIABILITIES AND OFF-BALANCE SHEET ARRANGEMENTS
The Company has various financial obligations, including contractual obligations and commitments that may require future cash payments.
Contractual Obligations: The following table presents, as ofDecember 31, 2021 , significant fixed and determinable contractual obligations to third parties by payment date. Further discussion of the nature of each obligation is included in the referenced note to the consolidated financial statements. Payments Due in Note One year One year to Three to Over Five (Dollar amounts in thousands) Reference or less Three Years Five Years Years Total Deposits without a stated maturity$ 3,859,753 $ - $ - $ -$ 3,859,753 Consumer certificates of deposit 326,173 191,871 31,681 91 549,816 Short-term borrowings 11 93,374 - - - 93,374 Other borrowings 12 - 15,937 - - 15,937
The Company has obligations under its pension plan, supplemental executive retirement plan and post-retirement medical benefit plan, as described in note 16 to the consolidated financial statements.
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The Company has lease obligations on certain branch properties and equipment, as described in Note 8 to the consolidated financial statements.
Commitments: The following table details the amount and expected maturities of significant commitments as ofDecember 31, 2021 . Further discussion of these commitments is included in Note 15 to the consolidated financial statements. Total Amount One year Over
A
(Dollar amounts in thousands) Committed or less Year Commitments to extend credit: Unused loan commitments$ 823,422 $ 698,588 $
124,834
Commercial letters of credit 7,042 7,042
–
Commitments to extend credit, including loan commitments, standby and commercial letters of credit do not necessarily represent future cash requirements, in that these commitments often expire without being drawn upon.
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