FIRST FINANCIAL CORPORATION 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. 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$39.8 million and$2.1 million , respectively atDecember 31, 2022 , compared to$48.3 million and$3.0 million , respectively atDecember 31, 2021 . The$8.5 million decrease in the ACL 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 33
Table of Contents
the reserve. Additionally, the qualitative factors for uncertainty were lowered due to the seasoning of the acquired loans, and as well as lower qualitative factors, due to the sale of non farm non residential commercial loans in the third quarter. Finally, the reserve was impacted by improved portfolio performance. The qualitative amount of the reserve decreased$3.3 million to$11.0 million . The quantitative amount is$28.6 million atDecember 31, 2022 , compared to$33.6 million atDecember 31, 2021 . There was a$900 thousand decrease in the allowance for unfunded commitments. See additional discussion of ACL in the Allowance for Credit Losses section below. Based on management's analysis of the current portfolio, management believes the allowance is adequate. Changes in the financial condition of individual borrowers, economic conditions, historical loss experience, or the condition of the various markets in which collateral may be sold may affect the required level of the allowance for credit losses and the associated provision for credit losses. As management monitors these changes, as well as those factors discussed above, adjustments may be recorded to the allowance for credit losses and the associated provision for credit losses in the future. 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, 2022 .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. 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 2022
COMPARISON OF 2022 TO 2021
Net income for 2022 was$71.1 million , or$5.82 per share versus$53.0 million , or$4.02 per share for 2021. The increase in 2022 net income is primarily due to increased interest rates and growth in earning assets. Return on average assets atDecember 31, 2022 increased 28.18% to 1.41% compared to 1.10% atDecember 31, 2021 .
The primary components of income and expense affecting net income are discussed 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 increased in 2022 to$165.0 million compared to$143.4 million in 2021. Total average interest earning assets increased to$4.80 billion in 2022 from$4.61 billion in 2021. The tax-equivalent yield on these assets increased to 3.92% in 2022 from 3.39% in 2021. Total average interest- 34
Table of Contents
bearing liabilities increased to$3.61 billion in 2022 from$3.43 billion in 2021. The average cost of these interest-bearing liabilities increased to 0.51% in 2022 from 0.26% in 2021.
The net interest margin increased from 3.20% in 2021 to 3.54% in 2022. Earning asset yields increased 53 basis points while the rate on interest-bearing liabilities increased by 25 basis points.
35
Table of Contents
CONSOLIDATED BALANCE SHEET - AVERAGE BALANCES AND INTEREST RATES
December 31,
2022 2021 2020
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) $ 2,884,053 147,398 5.11 % $ 2,602,344 128,978 4.96 % $ 2,702,225 138,302 5.12 %
Taxable investment
securities 981,453 21,014 2.14 % 890,563 13,110 1.47 % 689,203 13,625 1.98 %
Tax-exempt
investments (2) 451,228 14,216 3.15 % 387,935 13,544 3.49 % 322,121 12,731 3.95 %
Cash and due from
banks 479,854 5,224 1.09 % 726,412 888 0.12 % - - - %
Federal funds sold 3,893 106 2.72 % 4,487 42 0.94 % 1,245 71 5.70 %
Total
interest-earning
assets 4,800,481 187,958 3.92 % 4,611,741 156,562 3.39 % 3,714,794 164,729 4.43 %
Non-interest
earning assets:
Cash and due from
banks - - 370,883
Premises and
equipment, net 68,911 64,787 63,145
Other assets 216,592 183,589 187,415
Less allowance for
loan losses (41,997) (45,767) (23,318)
TOTALS $ 5,043,987 $ 4,814,350 $ 4,312,919
LIABILITIES AND
SHAREHOLDERS'
EQUITY
Interest-bearing
liabilities:
Transaction
accounts $ 3,034,430 13,483 0.44 % $ 2,799,227 2,751 0.10 % $ 2,282,750 4,424 0.19 %
Time deposits 483,038 3,260 0.67 % 520,885 5,407 1.04 % 589,975 8,377 1.42 %
Short-term
borrowings 83,959 1,243 1.48 % 99,805 387 0.39 % 90,613 568 0.63 %
Other borrowings 13,175 273 2.07 % 7,562 252 3.33 % 18,335 770 4.20 %
Total
interest-bearing
liabilities: 3,614,602 18,259 0.51 % 3,427,479 8,797 0.26 % 2,981,673 14,139 0.47 %
Non
interest-bearing
liabilities:
Demand deposits 891,042 717,764 660,011
Other 43,506 71,738 77,444
4,549,150 4,216,981 3,719,128
Shareholders'
equity 494,837 597,369 593,791
TOTALS $ 5,043,987 $ 4,814,350 $ 4,312,919
Net interest
earnings $ 169,699 $ 147,765 $ 150,590
Net yield on
interest- earning
assets 3.54 % 3.20 % 4.05 %
(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%.
36
Table of Contents
The following table sets forth the components of net interest income due to changes in volume and rate. The table information compares 2022 to 2021 and 2021 to 2020.
2022 Compared to 2021 Increase 2021 Compared to 2020 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) $ 13,962 $ 4,023 $ 436 $ 18,421 $ (5,112) $ (4,374) $ 162 $ (9,324)
Taxable investment
securities 1,338 5,958 608 7,904 3,981 (3,479) (1,017) (515)
Tax-exempt
investment
securities (2) 2,210 (1,322) (216) 672 2,600 (1,484) (303) 813
Cash and due from
banks (301) 7,020 (2,383) 4,336 - - 888 888
Federal funds sold (6) 80 (11) 63 185 (59) (155) (29)
Total interest
income $ 17,203 $ 15,759 $ (1,566) $ 31,396 $ 1,654 $ (9,396) $ (425) $ (8,167)
Interest paid on
interest-bearing
liabilities:
Transaction accounts 231 9,687 814 10,732 1,001 (2,181) (493) (1,673)
Time deposits (393) (1,892) 137 (2,148) (981) (2,253) 264 (2,970)
Short-term
borrowings (61) 1,091 (173) 857 58 (217) (22) (181)
Other borrowings 187 (95) (71) 21 (452) (159) 93 (518)
Total interest
expense (36) 8,791 707 9,462 (374) (4,810) (158) (5,342)
Net interest income $ 17,239 $ 6,968 $ (2,273) $ 21,934 $ 2,028 $ (4,586) $ (267) $ (2,825) (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 endedDecember 31, 2022 , the negative provision for credit losses was$2.0 million , a decrease of$4.5 million , or 182%, compared to 2021. The negative provision for the year was the result of several factors. The first was the annual model recalibration. Each year, in the first quarter, management reviews each model variable to determine if adjustments are necessary to improve the model's predictability. In the first quarter 2022 the delay periods were shortened to pick up more recent losses. Also, the qualitative factor maximum scorecard ranges for certain cohorts were reduced, which reduced the reserve. Secondly, management removed two qualitative factors that were deemed no longer applicable. The first was related to acquisition uncertainty, which management believes 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. Net charge-offs for 2022 were$6.5 million as compared to$2.6 million for 2021 and$3.5 million for 2020. Non-accrual loans, excluding TDR's, decreased to$8.5 million atDecember 31, 2022 from$9.6 million atDecember 31, 2021 . Loans past due 90 days and still on accrual increased to$1.1 million compared to$515 thousand atDecember 31, 2021 . OnJuly 12, 2022 , the Corporation sold seven classified non-farm nonresidential commercial loans, which were acquired in the two acquisitions in 2019 and 2021, with a total principal balance of$14.9 million . The net recovery on the sale of$361 thousand includes the charge-off of the seven loans of$2,145 thousand , netted by the$2,072 thousand reserve on those loans, previously charged off in the period, and the$434 thousand unamortized discount 37 Table of Contents
remaining from the acquisitions. As the related charge offs were previously reserved for and related to acquired loans, the increase in net charge offs for the year does not have a significant impact on the future expected losses.
NON-INTEREST INCOME
Non-interest income of$46.7 million increased$4.6 million from the$42.1 million earned in 2021. The change in non-interest income from 2021 to 2022 was primarily driven by a$4.0 million legal settlement received in February, 2022, and a$2.5 million bank owned life insurance mortality payment. The Corporation does not expect these items to reoccur.
NON-INTEREST EXPENSES
Non-interest expenses increased to$126.0 million in 2022 from$117.4 million in 2021. The year-over-year changes are, in part, impacted by the acquisition ofHancock Bancorp in the fourth quarter of 2021.
INCOME TAXES
The Corporation's federal income tax provision was
COMPARISON OF 2021 TO 2020
Net income for 2021 was
2021 net income is due to increased expenses from the Hancock acquisition, as well as declining interest rates.
Net interest income decreased
The provision for income taxes increased$934 thousand from 2020 to 2021 and the effective tax rate increased to 19.2% in 2021 from 17.8% in 2020. The increase is primarily due to increase of general business tax credits benefits earned in 2020.
COMPARISON AND DISCUSSION OF 2022 BALANCE SHEET TO 2021
The Corporation's total assets decreased 3.6% or$185.8 million atDecember 31, 2022 , from a year earlier. Available-for-sale securities decreased$29.0 million atDecember 31, 2022 , from the previous year. Loans, net increased by$260.1 million to$3.03 billion . Deposits decreased$40.7 million while borrowings decreased by$28.8 million . Total shareholders' equity decreased$107.3 million to$475.3 million atDecember 31, 2022 . Accumulated other comprehensive income decreased$137.6 million primarily due to the market value of the securities portfolio, which reflected the large decrease in securities pricing. In 2022 dividends paid by the Corporation totaled$1.17 per share. There were also 29,966 shares from the treasury with a value of$1.45 million that were contributed to the ESOP plan in 2022 compared to 31,355 shares with a value of$1.40 million in 2021.
Following is an analysis of the components of the Corporation'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 2022 the portfolio's balance decreased by 2.1%. The average life of the portfolio
38
Table of Contents
increased from 5.0 years in 2021 to 6.9 years in 2022. The portfolio structure will continue to provide cash flows to be reinvested during 2023.
1 year and less 1 to 5 years 5 to 10 years Over 10 Years 2022
(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) $ 5,066 1.91 % $ 22,871 2.05 % $ 37,360 3.91 % $ 666,045 2.44 % $ 731,342
Collateralized mortgage
obligations (1) 11 1.66 % 6,473 2.18 % 7,727 2.70 % 189,274 2.47 % 203,485 States and political subdivisions
5,018 3.58 % 31,550 2.80 % 76,442 2.70 % 279,658 2.62 % 392,668
Collateralized debt
obligations - - % - - % - - % 2,986 - % 2,986
TOTAL $ 10,095 2.74 % $ 60,894 2.45 % $ 121,529 3.07 % $ 1,137,963 2.48 % $ 1,330,481 (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 2021
(Dollar amounts in
thousands) Balance Rate Balance Rate Balance Rate Balance Rate Total
U.S. government
sponsored entity
mortgage-backed
securities and agencies
(1) $ 12,784 2.37 % $ 28,466 1.84 % $
42,881 3.96 %
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
Collateralized debt
obligations - - % - - % - - % 3,359 - % 3,359
TOTAL 21,591 2.56 % 63,592 2.47 % 125,903 3.08 % 1,148,428 2.28 % 1,359,514
(1) Distribution of maturities is based on the estimated life of the asset.
Net unrealized gain/loss on available for sale securities decreased
LOAN PORTFOLIO
Loans outstanding by major category as of
(Dollar amounts in thousands) 2022 2021 2020 2019 2018 Loan Category Commercial$ 1,798,260 $ 1,674,066 $ 1,521,711 $ 1,584,447 $ 1,166,352 Residential 673,464 664,509 604,652 682,077 443,670 Consumer 588,539 474,026 479,750 386,006 341,041 TOTAL$ 3,060,263 $ 2,812,601 $ 2,606,113 $ 2,652,530 $ 1,951,063 39 Table of Contents After One Within But Within After Five
(Dollar amounts in thousands) One Year Five Years Years Total MATURITY DISTRIBUTION Commercial, financial and agricultural$ 642,069 $ 769,205 $
386,986$ 1,798,260 TOTAL Residential 673,464 Consumer 588,539 TOTAL$ 3,060,263 Loans maturing after one year with: Fixed interest rates$ 387,285 $ 344,771 Variable interest rates 381,920 42,215 TOTAL$ 769,205 $ 386,986 ALLOWANCE FOR CREDIT LOSSES
The activity in the Corporation's allowance for credit losses is shown in the following analysis:
(Dollar amounts in thousands) 2022 2021 2020 2019 2018 Amount of loans outstanding at December 31,$ 3,060,263 $ 2,812,601 $ 2,606,113 $ 2,652,530 $ 1,951,063 Average amount of loans by year$ 2,884,053 $ 2,602,344 $ 2,702,225 $ 2,270,313 $ 1,855,092 Allowance for credit losses at beginning of year$ 48,305 $ 44,076 $ 19,943 $ 20,436 $ 19,909 Loans charged off: Commercial 3,917 2,158 1,097 2,616 1,122 Residential 657 812 944 1,050 841 Consumer 11,132 5,246 6,355 7,007 6,868
Total loans charged off 15,706 8,216 8,396 10,673 8,831 Recoveries of loans previously charged off: Commercial 2,062 1,069 856 1,092 606 Residential 759 616 657 1,360 639 Consumer 6,384 3,884 3,404 3,028 2,345 Total recoveries 9,205 5,569 4,917 5,480 3,590 Net loans charged off 6,501 2,647 3,479 5,193 5,241
Provision charged to expense (2,025) 2,466 10,528 4,700 5,768 CECL adoption - - 17,084 - - PCD ACL on acquired loans - 4,410 - - - Balance at end of year$ 39,779 $ 48,305 $ 44,076 $ 19,943 $ 20,436 Ratio of net charge-offs during period to average loans outstanding 0.23 % 0.10 % 0.13
% 0.23 % 0.22 %
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 decreased to 1.30% at year-end
2022 compared to 1.72%
40
Table of Contents
at year-end 2021. The decrease 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 acquisition uncertainty, which management believes 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. The declines in historical loss rates were offset by increased qualitative factors due to the concerns of continuing inflation and overall economic conditions during the year, exclusive of the recalibration items noted above. 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. Non-performing loans of$13.4 million atDecember 31, 2022 decreased from$14.9 million atDecember 31, 2021 . The table below presents the allocation of the allowance to the loan portfolios at year-end. Years Ended December 31, (Dollar amounts in thousands) 2022 2021 2020 2019 2018 Commercial$ 12,949 $ 18,883 $ 13,925 $ 8,945 $ 9,848 Residential 14,568 18,316 19,142 1,302 1,313 Consumer 12,104 10,721 11,009 8,304 7,481 Unallocated 158 385 -
1,392 1,794
TOTAL ALLOWANCE FOR CREDIT LOSSES
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 decreased in 2022 and increased
in 2021 due to the decreased 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.
2022 2021 2020 2019 2018
Non-accrual loans $ 11,554 $ 9,590 $ 15,367 $ 9,535 $ 10,974
Accruing restructured loans 3,390 3,897 3,052 3,318 3,702 Nonaccrual restructured loans
413 902 1,154 876 1,104
Accruing loans past due over 90 days 1,119 515 2,324 1,610 798
Ratio of the allowance for credit losses as a percentage of non-performing loans 296.8 % 324.1 % 226.8 % 130.0 % 123.0 %
The ratio of the allowance for loan losses as a percentage of nonperforming
loans was 296.79% at
41
Table of Contents
which includes accrued interest receivable. The following loan categories comprise significant components of the nonperforming loans atDecember 31, 2022 and 2021: 2022 2021 Non-accrual loans Commercial loans$ 4,874 42 %$ 4,991 52 % Residential loans 3,715 32 % 3,049 32 % Consumer loans 2,965 26 % 1,550 16 %$ 11,554 100 %$ 9,590 100 % Past due 90 days or more Commercial loans$ 112 10 %$ 14 3 % Residential loans 1,007 90 % 410 79 % Consumer loans - - % 91 18 %$ 1,119 100 %$ 515 100 %
Management considers the present allowance to be appropriate and adequate to cover expected losses inherent in the loan portfolio based on the current economic environment. However, future economic changes cannot be predicted. Deteriorating economic conditions could result in an increase in the risk characteristics of the loan portfolio and an increase in the potential for credit losses.
DEPOSITS
The information below presents the average amount of deposits and rates paid on those deposits for 2022, 2021 and 2020.
2022 2021 2020
(Dollar amounts in
thousands) Amount Rate Amount Rate Amount RateNon-interest-bearing demand deposits$ 891,042 $ 717,764 $ 660,011 Interest-bearing demand deposits 1,511,232 0.65 % 1,309,682 0.15 % 1,061,745 0.27 % Savings deposits 1,523,198 0.24 % 1,489,545 0.05 % 1,221,005 0.12 % Time deposits:$100,000 or more 172,916 1.15 % 214,976 1.36 % 260,314 1.88 % Other time deposits 310,122 0.41 % 305,909 0.81 % 329,661 1.05 % TOTAL$ 4,408,510 $ 4,037,876 $ 3,532,736
The maturities of certificates of deposit of more than
(Dollar amounts in thousands) 3 months or less$ 28,290 Over 3 through 6 months 30,310 Over 6 through 12 months 56,504 Over 12 months 48,446 TOTAL$ 163,550 OTHER BORROWINGS
Advances from theFederal Home Loan Bank decreased to$9.6 million in 2022 compared to$15.9 million in 2021. 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, 2022 .
42
Table of Contents
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 2022 and 2021 was 21.7% and 28.2%, 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 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, 2022 . The change in interest rates assumes a parallel shift in interest rates of 100 and 200 basis points. Given a 100 basis point increase in rates, net interest income would increase 1.94% over the next 12 months and increase 4.64% over the following 12 months. Given a 100 basis point decrease in rates, net interest income would decrease 3.30% over the next 12 months and decrease 6.74% over the following 12 months. These estimates assume all rate changes occur overnight and management takes no action as a result of this
change. Basis Point Percentage Change in Net Interest Income Interest Rate Change 12 months 24 months 36 months Down 200 (6.75) % (13.97) % (19.42) % Down 100 (3.30) (6.74) (9.45) Up 100 1.94 4.64 7.30 Up 200 1.15 6.56 11.91
Typical rate shock analysis does not reflect management's ability to react and thereby reduce the effects of rate changes, and represents a 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$10.1 million of investments that mature throughout the coming 12 months. The Corporation also anticipates$114.0 million of principal payments from mortgage-backed 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 additional sources of liquidity available through
secured and unsecured borrowing capacity. These include upstream correspondents,
the
43
Table of Contents
CONTRACTUAL OBLIGATIONS, COMMITMENTS, CONTINGENT LIABILITIES AND OFF-BALANCE SHEET ARRANGEMENTS
The Corporation has various financial obligations, including contractual obligations and commitments that may require future cash payments.
The Corporation has obligations on deposits as described in Note 10 to the consolidated financial statements.
The Corporation has obligations on borrowings as described in Notes 11 and 12 to the consolidated financial statements.
The Corporation has obligations under its pension, supplemental executive retirement plan and post-retirement medical benefits plan as described in Note 16 to the consolidated financial statements.
The Corporation 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, 2022 . Further discussion of these commitments is included in Note 15 to the consolidated financial statements. Total Amount One year Over One
(Dollar amounts in thousands) Committed or less Year
Commitments to extend credit:
Unused loan commitments
-
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.
© Edgar Online, source
