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 upon
First Financial Corporation's consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
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

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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 at December 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 of
October 31, 2021. The final results determined that there was no impairment of
goodwill. From the effective date of the analysis to December 31, 2021, the
Corporation's market value increased. The majority of the Corporation's goodwill
is recorded at First 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 at December 31, 2021 decreased 12.00% to 1.10% compared
to 1.25% at December 31, 2020.

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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 $42.1 million decreases $392,000 from $42.5 million earned in 2020. Non-interest income decreased due to lower gains on sales of mortgages.


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 of
Hancock 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.

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COMPARISON FROM 2020 TO 2019

Net income for 2020 was $53.8 million Where $3.93 per share compared to $48.9 million in 2019 or $3.80 per share. The increase in net profit in 2020 is mainly due to an increase in net interest income related to the impact of the acquisition on the full year. The 2019 net result includes the results of the acquisition of
HopFed, Inc.

Net interest income increased $14.6 million in 2020 compared to 2019. Provision for credit losses increased $5.8 million from $4.7 million in 2019 at
$10.5 million in 2020. Non-interest expense increased $8.4 million and non-interest income increased $4.0 million. The increase in non-interest expenses is largely explained by the acquisition of HopFed, Inc.


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 at December 31,
2021, from a year earlier. Available-for-sale securities increased $344.0
million at December 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 at December 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                Total
U.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 of December 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



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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   

$2,652,530 $1,951,063 $1,903,609
Average amount of loans per year $2,602,344 $2,702,225

          $ 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 at December 31, 2021 decreased
from $21.9 million at December 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.
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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% at December 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 at December 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
at December 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 the Federal 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
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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 of
December 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, Federal mortgage bank and the Federal Reserve Bank.

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 of December 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 of December 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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