FIRST FINANCIAL CORP /IN/ 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING The management of First Financial Corporation (the "Corporation") has prepared and is responsible for the preparation and accuracy of the consolidated financial statements and related financial information included in the Annual Report. The management of the Corporation is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Corporation's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Corporation's internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Corporation; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Corporation are being made only in accordance with authorizations of management and directors of the Corporation; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Corporation's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the Corporation's system of internal control over financial reporting as of December 31, 2021, in relation to criteria for effective internal control over financial reporting as described in "Internal Control—Integrated Framework," issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 2013. Based on this assessment, management concluded that, as of December 31, 2021, its system of internal control over financial reporting is effective and meets the criteria of the "Internal Control—Integrated Framework." Crowe LLP (PCAOB ID: 173 ) , independent registered public accounting firm, has audited the Corporation's internal control over financial reporting as of December 31, 2021 and has issued a report dated March 9, 2022. 43 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Shareholders and the Board of Directors of First Financial Corporation Terre Haute, Indiana Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of First Financial Corporation (the "Company") as of December 31, 2021 and 2020, the related consolidated statements of income and comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively referred to as the "financial statements"). We also have audited the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework: (2013) issued by COSO. Change in Accounting Principle As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for credit losses effective January 1, 2020 due to the adoption of Financial Accounting Standards Board (FASB) Accounting Standards Codification No. 326, Financial Instruments – Credit Losses (ASC 326). The Company adopted the new credit loss standard using the modified retrospective method such that prior period amounts are not adjusted and continue to be reported in accordance with previously applicable generally accepted accounting principles. Basis for Opinions The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. 44 Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Allowance for Credit Losses on Loans As discussed in Notes 1, the allowance for credit losses (the “ACL”) is an accounting estimate of expected credit losses over the estimated life of financial assets carried at amortized cost and off-balance-sheet credit exposures in accordance with Accounting Standards Update (the “ASU”) 2016-13, Financial Instruments —Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU requires financial assets, including the Company's loan portfolio, measured at amortized cost, to be presented at the net amount expected to be collected. Estimates of expected credit losses for loans are based on relevant information about past events, current conditions, and reasonable and supportable forecasts related to macroeconomic conditions, resulting in recognition of lifetime expected credit losses upon loan origination. Provision for credit loss expense for the year ending December 31, 2021 was $2.4 million and the Allowance for Credit Losses at December 31, 2021 was $48.3 million. The Company utilizes the cohort or open pool methodology for determining the allowance for credit losses. The open pool methodology 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. The methodology then tracks the respective losses generated by that cohort of loans over their remaining lives. When past performance may not be representative of future losses, the historical loss experience is supplemented with other current factors based on the risks present for each portfolio segment. These current factors include changes in lending policies or procedures, asset specific risks, the impact of COVID-19 on customers’ operations, and economic uncertainty in forward-looking forecasts. Economic indicators that are used in determining the economic forecast factors include unemployment rate, gross domestic product, housing starts and interest rates. The allowance for credit losses on loans was identified by us as a critical audit matter because of the extent of auditor judgment applied and significant audit effort to evaluate the significant subjective and complex judgments made by management throughout the determination process. The principal considerations resulting in our determination included the following: • Significant auditor judgment and effort were used in evaluating the qualitative factors used in the calculation. • Significant auditor judgment in evaluating the selection and application of the reasonable and supportable forecast of economic variables. • Significant audit effort to test the relevance and reliability of the critical data used in the methodology. The primary procedures performed to address this critical audit matter included: • Testing the effectiveness of management’s internal controls over the Company’s significant model assumptions and judgments, loan segmentation, reasonable and supportable forecasts, qualitative factor adjustments, relevance and reliability of data used in the model, charge-off approval, information systems and model validation 45 • Testing the effectiveness of controls over the Company’s preparation and review of the allowance for credit loss calculation, including data used as the basis for adjustments related to the qualitative factors, the development and reasonableness of qualitative factors and mathematical accuracy and appropriateness of the overall calculation • Evaluating management’s judgments in the selection of the loss estimation model as well as the loan segmentation and historical loss periods used in the model • Evaluating management’s judgments in the selection and application of reasonable and supportable forecast of economic variables • Testing management’s process for developing the qualitative factors and assessing reasonableness, relevance and reliability of data used to develop factors, including evaluating their judgments and assumptions for reasonableness /s/ Crowe LLP Crowe LLP We have served as the Corporation's auditor since 1999. Indianapolis, Indiana March 9, 2022 46 CONSOLIDATED BALANCE SHEETS December 31, (Dollar amounts in thousands, except per share data) 2021 2020 ASSETS Cash and due from banks $ 682,807 $ 657,470 Federal funds sold 308 301 Securities available-for-sale 1,364,734 1,020,744 Loans, net of allowance for credit losses of $ 48,305 in 2021 and $ 44,076 in 2020 2,767,590 2,566,218 Restricted stock 16,200 14,812 Accrued interest receivable 16,946 16,957 Premises and equipment, net 69,522 62,063 Bank-owned life insurance 116,997 95,849 Goodwill 86,135 78,592 Other intangible assets 8,024 8,972 Other real estate owned 108 1,012 Other assets 45,728 37,530 TOTAL ASSETS $ 5,175,099 $ 4,560,520 LIABILITIES AND SHAREHOLDERS’ EQUITY Deposits: Non-interest-bearing $ 914,933 $ 732,694 Interest-bearing: Certificates of deposit that meet or exceed the FDIC insurance limit 74,015 107,764 Other interest-bearing deposits 3,420,621 2,915,487 4,409,569 3,755,945 Short-term borrowings 93,374 116,061 Other borrowings 15,937 5,859 Other liabilities 73,643 85,663 TOTAL LIABILITIES 4,592,523 3,963,528 Shareholders’ equity Common stock, $ .125 stated value per share; Authorized shares- 40,000,000 Issued shares- 16,096,313 in 2021 and 16,075,154 in 2020 Outstanding shares- 12,629,893 in 2021 and 13,558,511 in 2020 2,009 2,007 Additional paid-in capital 141,979 140,820 Retained earnings 559,139 521,103 Accumulated other comprehensive income (loss) ( 2,426 ) 9,764 Less: Treasury shares at cost- 3,466,420 in 2021 and 2,516,643 in 2020 ( 118,125 ) ( 76,702 ) TOTAL SHAREHOLDERS’ EQUITY 582,576 596,992 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 5,175,099 $ 4,560,520 See accompanying notes. 47 CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME Years Ended December 31, (Dollar amounts in thousands, except per share data) 2021 2020 2019 INTEREST AND DIVIDEND INCOME: Loans, including related fees $ 128,000 $ 137,241 $ 124,788 Securities: Taxable 13,998 13,625 15,191 Tax-exempt 8,762 7,952 7,674 Other 1,438 1,667 1,468 TOTAL INTEREST AND DIVIDEND INCOME 152,198 160,485 149,121 INTEREST EXPENSE: Deposits 8,158 12,801 15,711 Short-term borrowings 387 568 1,105 Other borrowings 252 770 653 TOTAL INTEREST EXPENSE 8,797 14,139 17,469 NET INTEREST INCOME 143,401 146,346 131,652 Provision for credit loss expense 2,466 10,528 4,700 NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 140,935 135,818 126,952 NON-INTEREST INCOME: Trust and financial services 5,255 5,423 5,036 Service charges and fees on deposit accounts 10,089 10,256 11,795 Other service charges and fees 18,212 15,644 14,012 Securities gain (loss), net 114 233 44 Insurance commissions 162 158 133 Gain on sale of mortgage loans 5,003 6,626 2,573 Other 3,249 4,136 4,859 TOTAL NON-INTEREST INCOME 42,084 42,476 38,452 NON-INTEREST EXPENSES: Salaries and employee benefits 64,474 61,931 54,827 Occupancy expense 8,774 8,202 7,600 Equipment expense 10,174 10,568 8,244 Federal Deposit Insurance 1,294 316 693 Other 32,690 31,741 33,041 TOTAL NON-INTEREST EXPENSE 117,406 112,758 104,405 INCOME BEFORE INCOME TAXES 65,613 65,536 60,999 Provision for income taxes 12,626 11,692 12,127 NET INCOME 52,987 53,844 48,872 OTHER COMPREHENSIVE INCOME Change in unrealized gains/(losses) on securities, net of reclassifications and taxes ( 18,488 ) 19,269 20,998 Change in funded status of post-retirement benefits, net of taxes 6,298 ( 2,004 ) ( 5,045 ) COMPREHENSIVE INCOME $ 40,797 $ 71,109 $ 64,825 EARNINGS PER SHARE: BASIC AND DILUTED $ 4.02 $ 3.93 $ 3.80 Weighted average number of shares outstanding (in thousands) 13,190 13,716 12,865 See accompanying notes. 48 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Common Additional Retained Accumulated Other Comprehensive Treasury (Dollar amounts in thousands, except per share data) Stock Capital Earnings Income/(Loss) Stock Total Balance, January 1, 2019 $ 1,824 $ 76,774 $ 456,716 $ ( 23,454 ) $ ( 69,159 ) $ 442,701 Net income — — 48,872 — — 48,872 Other comprehensive income (loss) — — — 15,953 — 15,953 Omnibus Equity Incentive Plan, net 3 798 — — — 801 Treasury stock purchases (7,866 shares) — — — — ( 315 ) ( 315 ) Contribution of 28,470 shares to ESOP — 422 — — 829 1,251 Acquisition of HopFed, Inc. (1,423,143 shares) 178 61,700 — — — 61,878 Cash Dividends, $ 1.04 per share — — ( 13,533 ) — — ( 13,533 ) Balance, December 31, 2019 2,005 139,694 492,055 ( 7,501 ) ( 68,645 ) 557,608 Cumulative change in accounting principle (Note 1) — — (10,483) — — (10,483) Balance, January 1, 2020 2,005 139,694 481,572 (7,501) (68,645) 547,125 Net income — — 53,844 — — 53,844 Other comprehensive income (loss) — — — 17,265 — 17,265 Omnibus Equity Incentive Plan, net 2 818 — — — 820 Treasury stock purchases (242,031 shares) — — — — ( 9,220 ) ( 9,220 ) Contribution of 39,029 shares to ESOP — 308 — — 1,163 1,471 Cash Dividends, $ 1.05 per share — — ( 14,313 ) — — ( 14,313 ) Balance, December 31, 2020 2,007 140,820 521,103 9,764 ( 76,702 ) 596,992 Net income — — 52,987 — — 52,987 Other comprehensive income (loss) — — — ( 12,190 ) — ( 12,190 ) Omnibus Equity Incentive Plan, net 2 805 — — — 807 Treasury stock purchases (981,132 shares) — — — — ( 42,471 ) ( 42,471 ) Contribution of 31,355 shares to ESOP — 354 — — 1,048 1,402 Cash Dividends, $ 1.16 per share — — ( 14,951 ) — — ( 14,951 ) Balance, December 31, 2021 $ 2,009 $ 141,979 $ 559,139 $ ( 2,426 ) $ ( 118,125 ) $ 582,576 See accompanying notes. 49 CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, (Dollar amounts in thousands, except per share data) 2021 2020 2019 CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 52,987 $ 53,844 $ 48,872 Adjustments to reconcile net income to net cash provided by operating activities: Net (accretion) amortization on securities 8,433 7,184 4,848 Provision for credit losses 2,466 10,528 4,700 Securities (gains) losses ( 114 ) ( 233 ) ( 44 ) Depreciation and amortization 6,154 6,092 4,826 Provision for deferred income taxes ( 1,568 ) ( 3,768 ) ( 2,841 ) Net change in accrued interest receivable 982 1,566 ( 903 ) Contribution of shares to ESOP 1,402 1,471 1,251 Stock compensation expense 807 820 801 Gain on sale of mortgage loans ( 5,003 ) ( 6,626 ) ( 2,573 ) Loss (gain) on sales of other real estate 18 ( 761 ) 44 Origination of loans held for sale ( 115,144 ) ( 165,524 ) ( 79,454 ) Proceeds from loans held for sale 123,079 170,834 79,454 Other, net ( 19,432 ) 1,998 ( 9,080 ) NET CASH FROM OPERATING ACTIVITIES 55,067 77,425 49,901 CASH FLOWS FROM INVESTING ACTIVITIES: Sales of securities available-for-sale 9,369 28,161 3,259 Calls, maturities and principal reductions on securities available-for-sale 262,209 260,631 181,763 Purchases of securities available-for-sale ( 589,802 ) ( 365,998 ) ( 129,466 ) Loans made to customers, net of payments 31,628 53,144 ( 47,169 ) Net change in federal funds sold 10,463 7,199 ( 7,500 ) Purchase of bank owned life insurance ( 10,000 ) — — Redemption of restricted stock — 600 3,588 Purchase of restricted stock ( 25 ) ( 18 ) ( 4,164 ) Cash received (disbursed) from acquisitions ( 28,312 ) — ( 32,830 ) Sale of other real estate 929 3,941 756 Additions to premises and equipment ( 3,835 ) ( 3,908 ) ( 1,103 ) NET CASH FROM INVESTING ACTIVITIES ( 317,376 ) ( 16,248 ) ( 32,866 ) CASH FLOWS FROM FINANCING ACTIVITIES: Net change in deposits 367,985 481,728 104,113 Net change in short-term borrowings ( 22,687 ) 35,942 ( 55,147 ) Dividends paid ( 14,181 ) ( 14,273 ) ( 12,648 ) Purchases of treasury stock ( 42,471 ) ( 9,220 ) ( 315 ) Proceeds from other borrowings — 16,700 217,000 Repayments on other borrowings ( 1,000 ) ( 42,010 ) ( 217,000 ) NET CASH FROM FINANCING ACTIVITIES 287,646 468,867 36,003 50 Continued NET CHANGE IN CASH AND CASH EQUIVALENTS 25,337 530,044 53,038 CASH AND DUE FROM BANKS, BEGINNING OF YEAR 657,470 127,426 74,388 CASH AND DUE FROM BANKS, END OF YEAR $ 682,807 $ 657,470 $ 127,426 SUPPLEMENTAL DISCLOSURES OF CASH FLOW AND NONCASH INFORMATION: Cash paid for the year for: Interest $ 9,144 $ 14,845 $ 16,339 Income Taxes $ 15,025 $ 7,549 $ 9,595 See accompanying notes. 51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES: BUSINESS Organization: The consolidated financial statements of First Financial Corporation and its subsidiaries (the Corporation) include the parent company and its wholly-owned subsidiaries, First Financial Bank, N.A. headquartered in Vigo County, Indiana, The Morris Plan Company of Terre Haute (Morris Plan), First Chanticleer Corporation, a property rental entity headquartered in Terre Haute, Indiana, JBMM, LLC, Heritage USA Title LLC, and Fort Webb LP, LLC, and FFB Risk Management Co., Inc., a captive insurance subsidiary headquartered in Las Vegas, Nevada. Inter-company transactions and balances have been eliminated. First Chanticleer Corporation was dissolved in December 2020. First Financial Bank also has two investment subsidiaries, Portfolio Management Specialists A (Specialists A) and Portfolio Management Specialists B (Specialists B), which were established to hold and manage certain assets as part of a strategy to better manage various income streams and provide opportunities for capital creation as needed. Specialists A and Specialists B subsequently entered into a limited partnership agreement, Global Portfolio Limited Partners. Portfolio Management Specialists B also owns First Financial Real Estate, LLC. At December 31, 2021, $ 910.1 million of securities and loans were owned by these subsidiaries. Specialists A, Specialists B, Global Portfolio Limited Partners and First Financial Real Estate LLC are included in the consolidated financial statements. The Corporation, which is headquartered in Terre Haute, Indiana, offers a wide variety of financial services including commercial, mortgage and consumer lending, lease financing, trust account services and depositor services through its four subsidiaries. The Corporation's primary source of revenue is derived from loans to customers and investment activities. The Corporation operates 78 branches in west-central Indiana, east-central Illinois, western Kentucky, and central Tennessee. First Financial Bank is the largest bank in Vigo County. It operates nine full-service banking branches within the county; one in Daviess County, Indiana.; three in Clay County, Indiana; one in Greene County, Indiana; one in Knox County, Indiana; two in Parke County, Indiana; one in Putnam County, Indiana; three in Sullivan County, Indiana; one in Vanderburgh County, Indiana,; three in Vermillion County, Indiana; four in Champaign County, Illinois; one in Clark County, Illinois; two in Coles County, Illinois; two in Crawford County, Illinois; one in Franklin County, Illinois; one in Jasper County, Illinois; two in Jefferson County, Illinois; one in Lawrence County, Illinois; two in Livingston County, Illinois; two in Marion County, Illinois; two in McLean County, Illinois; one in Richland County, Illinois; six in Vermilion County, Illinois; one in Wayne County, Illinois; one in Breckinridge County, Kentucky; two in Calloway County, Kentucky; three in Christian County, Kentucky; two in Fulton County, Kentucky; two in Hancock County, Kentucky; two in Hopkins County, Kentucky; two in Marshall County, Kentucky; one in Todd County, Kentucky; one in Trigg County, Kentucky; two in Warren County, Kentucky; three in Cheatham County, Tennessee; one in Houston County, Tennessee; and three in Montgomery County, Tennessee. There are four loan production offices, one in Hamilton County, Indiana; one in Vanderburgh County, Indiana; one in Rutherford County, Tennessee; and one in Williamson County, Tennessee. The bank also has a main office in downtown Terre Haute and an operations center/office building in southern Terre Haute. Regulatory Agencies: First Financial Corporation is a multi-bank holding company and as such is regulated by various banking agencies. The holding company is regulated by the Seventh District of the Federal Reserve System. The national bank subsidiary is regulated by the Office of the Comptroller of the Currency. The state bank subsidiary is jointly regulated by the state banking organization and the Federal Deposit Insurance Corporation. FFB Risk Management Company is regulated by the State of Nevada Division of Insurance. SIGNIFICANT ACCOUNTING POLICIES Use of Estimates: To prepare financial statements in conformity with U.S. generally accepted accounting principles, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and disclosures provided, and actual results could differ. Cash Flows : Cash and cash equivalents include cash and demand deposits with other financial institutions. Cash flows are reported for customer loan and deposit transactions and short-term borrowings. Non-cash transactions include loans transferred to other real estate of $ 43 thousand, $ 567 thousand and $ 458 thousand for the years ended December 31, 2021, 2020 and 2019 respectively. 52 Securities : The Corporation classifies all securities as "available for sale." Securities are classified as available for sale when they might be sold before maturity. Securities available for sale are carried at fair value with unrealized holdings gains and losses, net of taxes, reported in other comprehensive income within shareholders' equity. Interest income includes amortization of purchase premium or discount. Premiums and discounts are amortized on the level yield method without anticipating prepayments. Mortgage-backed securities are amortized over the expected life. Realized gains and losses on sales are based on the amortized cost of the security sold. Management evaluates securities for impairment related to credit losses at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. Loans: Loans that management has the intent and ability to hold for the foreseeable future until maturity or pay-off are reported at the principal balance outstanding, net of unearned interest, purchase premiums and discounts, deferred loan fees and costs, and allowance for credit losses. Loans held for sale are reported at the lower of cost or fair value, on an aggregate basis. Interest income is accrued on the unpaid principal balance and includes amortization of net deferred loan fees and costs over the loan term without anticipating prepayments. The recorded investment in loans includes accrued interest receivable and net deferred loan fees and costs. Interest income is not reported when full loan repayment is in doubt, typically when the loan is collateral dependent or payments are significantly past due. Past-due status is based on the contractual terms of the loan. All interest accrued but not received for loans placed on non-accrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. In all cases, loans are placed on non-accrual or charged-off if collection of principal or interest is considered doubtful. The above policies are consistent for all segments of loans. Purchased Credit Deteriorated (PCD) Loans: The Corporation purchases individual loans and groups of loans, some of which have experienced more than insignificant credit deterioration since origination. PCD loans are recorded at the amount paid . An allowance for credit losses is determined using the same methodology as other loans held for investment. The initial allowance for credit losses determined on a collective basis is allocated to individual loans. The sum of the loan's purchase price and initial allowance for credit losses becomes its amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is accreted or amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit losses are recorded through provision for credit losses. Concentration of Credit Risk: Most of the Corporation's business activity is with customers located within west-central Indiana, east-central Illinois, western Kentucky, and middle and western Tennessee. Therefore, the Corporation's exposure to credit risk is significantly affected by changes in the economy of this area. A major economic downturn in this area would have a negative effect on the Corporation's loan portfolio. The risk characteristics of each loan portfolio segment are as follows: Commercial Commercial loans are predominately loans to expand a business or finance asset purchases. The underlying risk in the Commercial loan segment is primarily a function of the reliability and sustainability of the cash flows of the borrower and secondarily on the underlying collateral securing the transaction. From time to time, the cash flows of borrowers may be less than historical or as planned. In addition, the underlying collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets financed or other business assets and most commercial loans are further supported by a personal guarantee. However, in some instances, short term loans are made on an unsecured basis. Agriculture production loans are typically secured by growing crops and generally secured by other assets such as farm equipment. Production loans are subject to weather and market pricing risks. The Corporation has established underwriting standards and guidelines for all commercial loan types. The Corporation strives to maintain a geographically diverse commercial real estate portfolio. Commercial real estate loans are primarily underwritten based upon the cash flows of the underlying real estate or from the cash flows of the business conducted at the real estate. Generally, these types of loans will be fully guaranteed by the principal owners of the real estate and loan amounts must be supported by adequate collateral value. Commercial real estate loans may be adversely affected by factors in the local market, the regional economy, or industry specific factors. In addition, Commercial Construction loans are a specific type of commercial real estate loan which inherently carry more risk than loans for completed projects. Since these types of loans are underwritten utilizing estimated costs, feasibility studies, and estimated absorption rates, the underlying value of the project may change based upon the inaccuracy of these projections. Commercial construction loans are closely monitored, subject to industry standards, and disbursements are controlled during the construction process. 53 Residential Retail real estate mortgages that are secured by 1-4 family residences are generally owner occupied and include residential real estate and residential real estate construction loans. The Corporation typically establishes a maximum loan-to-value ratio and generally requires private mortgage insurance if the ratio is exceeded. The Corporation sells substantially all of its long-term fixed mortgages to secondary market purchasers. Mortgages sold to secondary market purchasers are underwritten to specific guidelines. The Corporation originates some mortgages that are maintained in the bank’s loan portfolio. Portfolio loans are generally adjustable rate mortgages and are underwritten to conform to Qualified Mortgage standards. Several factors are considered in underwriting all Mortgages including the value of the underlying real estate, debt-to-income ratio and credit history of the borrower. Repayment is primarily dependent upon the personal income of the borrower and can be impacted by changes in borrower’s circumstances such as changes in employment status and changes in real estate property values. Risk is mitigated by the sale of substantially all long-term fixed rate mortgages, the underwriting of portfolio loans to Qualified Mortgage standards and the fact that mortgages are generally smaller individual amounts spread over a large number of borrowers. Consumer The consumer portfolio primarily consists of home equity loans and lines (typically secured by a subordinate lien on a 1-4 family residence), secured loans (typically secured by automobiles, boats, recreational vehicles, or motorcycles), cash/CD secured, and unsecured loans. Pricing, loan terms, and loan to value guidelines vary by product line. The underlying value of collateral dependent loans may vary based on a number of economic conditions, including fluctuations in home prices and unemployment levels. Underwriting of consumer loans is based on the individual credit profile and analysis of the debt repayment capacity for each borrower. Payments for consumer loans is typically set-up on equal monthly installments, however, future repayment may be impacted by a change in economic conditions or a change in the personal income levels of individual customers. Overall risks within the consumer portfolio are mitigated by the mix of various loan products, lending in various markets and the overall make-up of the portfolio (small loan sizes and a large number of individual borrowers). Allowance for Credit Losses: Credit quality of loans is continuously monitored by management and is reflected within the allowance for credit losses for loans. The allowance for credit losses is an estimate of expected losses inherent within the Company’s loan portfolio. Credit quality is assessed and monitored by evaluating various attributes and the results of those evaluations are utilized in underwriting new loans and in our process for estimating expected credit losses. The allowance for credit losses is adjusted by a credit loss expense, which is reported in earnings, and reduced by the charge-off of loan amounts, net of recoveries. We have made a policy election to report accrued interest receivable as a separate line item on the balance sheet. The Corporation adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13), on December 31, 2020 with an effective date of January 1, 2020. As of the adoption date, the Corporation increased the allowance for credit losses for loan, by $20 million, since the ASU covers credit losses over the expected life of a loan as well as considering future changes in macroeconomic conditions. As of January 1, 2020, the Corporation recorded a cumulative effect adjustment of $10.5 million to decrease retained earnings. The allowance for credit loss estimation process involves procedures to appropriately consider the unique characteristics of the loan portfolio segments. These segments are further disaggregated into loan classes based on the level at which credit risk is monitored. When computing the level of expected credit losses, credit loss assumptions are estimated using a model that categorizes loan pools based on loss history, delinquency status, and other credit trends and risk characteristics, including current conditions and reasonable and supportable forecasts about the future. Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. In future periods evaluations of the overall loan portfolio, in light of the factors and forecasts then prevailing, may result in significant changes in the allowance and credit loss expense in those future periods. 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 at a particular point in time to form a cohort. Then it tracks the respective losses generated by that cohort of loans over their remaining life. When past performance may not be representative of future losses, loss rates are adjusted for qualitative and economic forecast factors. The allowance level is influenced by loan volumes, loan quality rating migration or delinquency status, changes in historical loss experience, and other conditions influencing loss expectations, such as reasonable and supportable forecasts of economic conditions. The methodology for estimating the amount of expected credit losses reported in the allowance for credit losses consists of specific and pooled components. The specific component relates to loans that are individually evaluated. A loan is individually evaluated when the loan no longer shares similar risk characteristics with other loans in its respective loan pool. If 54 a loan is individually evaluated, a portion of the allowance is allocated so that the loan is reported at the fair value of collateral, adjusted for selling costs, if repayment is expected solely from the collateral. The pooled component covers pools of loans that share similar risk characteristics, and is based on historical loss experienced since 2008. This historical loss experience is supplemented with other current factors based on the risks present for each portfolio segment. These current factors include items such as changes in lending policies or procedures, asset specific risks, the impact of COVID-19 on customers’ operations, and economic uncertainty in forward-looking forecasts. Economic indicators utilized in forecasting include unemployment rate, gross domestic product, housing starts, and interest rates. We maintain an allowance for credit losses on unfunded lending commitments to provide for the risk of loss inherent in these arrangements. Unfunded commitments include funds available for disbursement on commercial and agriculture operating lines, commercial real estate and residential construction loans, and home equity lines of credit. The allowance is computed using a methodology similar to that used to determine the allowance for credit losses for loans, modified to take into account the probability of a drawdown on the commitment. The allowance for credit losses on unfunded commitments was $3.0 million at December 31, 2021, and $3.4 million at December 31, 2020. Foreclosed Assets: Assets acquired through or instead of loan foreclosures are initially recorded at fair value less estimated selling costs when acquired, establishing a new cost basis. Physical possession of residential real estate property collateralizing a consumer mortgage loan occurs when legal title is obtained upon completion of foreclosure or when the borrower conveys all interest in the property to satisfy the loan through completion of a deed in lieu of foreclosure or similar legal agreement. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. If fair value declines, a valuation allowance is recorded through expense. Costs after acquisition are expensed. Premises and Equipment: Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed over the useful lives of the assets, which range from 3 to 5 years for furniture and equipment and 33 to 39 years for buildings and leasehold improvements. Restricted Stock: Restricted stock includes Federal Home Loan Bank (FHLB) of Indianapolis and Federal Reserve stock. This restricted stock is carried at cost and periodically evaluated for impairment. Because this stock is viewed as a long-term investment, impairment is based on ultimate recovery of par value. Both cash and stock dividends are reported as income. Servicing Rights: Servicing rights are recognized separately when they are acquired through sales of loans. When mortgage loans are sold, servicing rights are initially recorded at fair value with the income statement effect recorded in gains on sales of loans. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on third-party valuations that incorporate assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, ancillary income, prepayment speeds and default rates and losses. All classes of servicing assets are subsequently measured using the amortization method, which requires servicing rights to be amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to carrying amount. Impairment is determined by stratifying rights into groupings based on predominant risk characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance for an individual grouping, to the extent that fair value is less than the carrying amount. If the Corporation later determines that all or a portion of the impairment no longer exists for a particular grouping, a reduction of the allowance may be recorded as an increase to income. Changes in valuation allowances are reported with Other Service Charges and Fees on the income statement. The fair values of servicing rights are subject to significant fluctuations as a result of changes in estimated and actual prepayment speeds and default rates and losses. Servicing fee income, which is included in Other Service Charges and Fees on the income statement, is for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income when earned. The amortization of mortgage servicing rights is netted against loan servicing fee income. Servicing fees totaled $ 1.3 million, $ 1.3 million and $ 1.3 million for the years ended December 31, 2021, 2020 and 2019. Late fees and ancillary fees related to loan servicing are not material. Stock based compensation: Compensation cost is recognized for restricted stock awards and units issued to employees based on the fair value of these awards at the date of grant. Market price of the Corporation’s common stock at the date of grant is used for restricted stock awards. Compensation expense is recognized over the requisite service period. 55 Transfers of Financial Assets: Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Corporation, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Corporation does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. Bank-Owned Life Insurance: The Corporation has purchased life insurance policies on certain key executives. Bank-owned life insurance is recorded at its cash surrender value, or the amount that can be realized. Income on the investments in life insurance is included in other interest income. Goodwill and Other Intangible Assets: Goodwill resulting from business combinations prior to January 1, 2009 represents the excess of the purchase price over the fair value of the net assets of businesses acquired. Goodwill resulting from business combinations after January 1, 2009 represents the future economic benefits arising from other assets acquired that are not individually identified and separately recognized. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually. The Corporation has selected December 31 as the date to perform the annual impairment test. 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. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on our balance sheet. Other intangible assets consist of core deposit assets arising from the whole bank and branch acquisitions. They are initially measured at fair value and then are amortized on an accelerated basis over their estimated useful lives, which are 10 and 12 years, respectively. Long-Term Assets: Premises and equipment and other long-term assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value. Benefit Plans: Pension expense is the net of service and interest cost, return on plan assets and amortization of gains and losses not immediately recognized. The amount contributed is determined by a formula as decided by the Board of Directors. Deferred compensation and supplemental retirement plan expense allocates the benefits over years of service. Employee Stock Ownership Plan: Shares of treasury stock are issued to the ESOP and compensation expense is recognized based upon the total market price of shares when contributed. Deferred Compensation Plan: Prior to 2011, a deferred compensation plan covered all directors. Under the plan, the Corporation pays each director, or their beneficiary, the amount of fees deferred plus interest over 10 years, beginning when the director achieves age 65. A liability is accrued for the obligation under these plans. The expense incurred for the deferred compensation for each of the last three years was $ 117 thousand, $ 111 thousand and $ 109 thousand, resulting in a deferred compensation liability of $ 1.3 million at December 31, 2021 and $1.5 million at December 31, 2020. There are no deferred compensation plans now in effect for directors. Incentive Plans: A long-term incentive plan established in 2000 provides for the payment of incentive rewards as a 15 -year annuity to all directors and certain key officers. That plan was in place through December 31, 2009, and compensation expense is recognized over the service period. Payments under the plan generally did not begin until the earlier of January 1, 2015, or the January 1 immediately following the year in which the participant reaches age 65. There was no compensation expense related to this plan for 2021, 2020 and 2019. There is a liability of $ 6.0 million and $ 6.8 million as of year-end 2021 and 2020. In 2011 the Corporation adopted the 2011 Short-term Incentive Plan and the 2011 Omnibus Equity Incentive Plan designed to reward key officers based on certain performance measures. The short-term portion of the plan is paid out within 75 days of year end and the long-term plan vests over a three year period and is paid out within 75 days of the end of each vesting period. The compensation expense related to the plans in 2021, 2020 and 2019 was $ 2.3 million, $ 2.2 million and $ 1.9 million, respectively, and resulted in a liability of $ 1.8 million at December 31, 2021 and $ 1.4 million at December 31, 2020. The Omnibus Equity Incentive Plan is a long term incentive plan that was designed to align the interests of participants with the interest of shareholders. Under the plan, awards may be made based on certain performance measures. The grants are made in restricted stock units that are subject to a vesting schedule. 56 Income Taxes: Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. A tax position is recognized as a benefit only if it is "more likely than not" that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50 % likely of being realized on examination. For tax positions not meeting the "more likely than not" test, no tax benefit is recorded. The Corporation recognizes interest and/or penalties related to income tax matters in income tax expense. Loan Commitments and Related Financial Instruments: Financial instruments include credit instruments, such as commitments to make loans and standby letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded. Earnings Per Share: Earnings per common share is net income divided by the weighted average number of common shares outstanding during the period. The Corporation does not have any potentially dilutive securities as the restricted stock awards are included in outstanding shares.. Earnings and dividends per share are restated for stock splits and dividends through the date of issue of the financial statements. Comprehensive Income: Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale and changes in the funded status of the retirement plans, net of taxes, which are also recognized as separate components of equity. Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount of range of loss can be reasonably estimated. Management does not believe there are currently such matters that will have a material effect on the financial statements. Dividend Restriction: Banking regulations require maintaining certain capital levels and may limit the dividends paid by the bank to the holding company or by the holding company to shareholders. Fair Value of Financial Instruments: Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or market conditions could significantly affect the estimates. Operating Segment: While the Corporation's chief decision-makers monitor the revenue streams of the various products and services, the operating results of significant segments are similar and operations are managed and financial performance is evaluated on a corporate-wide basis. Accordingly, all of the Corporation's financial service operations are considered by management to be aggregated in one reportable operating segment, which is banking. Accounting Pronouncements Adopted: In December 2019, the FASB issued ASU 2019-12 “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” These amendments remove specific exceptions to the general principles in Topic 740 in GAAP. It eliminates the need for an organization to analyze whether the following apply in a given period: exception to the incremental approach for intraperiod tax allocation; exceptions to accounting for basis differences where there are ownership changes in foreign investments; and exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses. It also improves financial statement preparers’ application of income tax-related guidance and simplifies GAAP for: franchise taxes that are partially based on income; transactions with a government that result in a step up in the tax basis of goodwill; separate financial statements of legal entities that are not subject to tax; and enacts changes in tax laws in interim periods. The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted. The Corporation adopted ASU 2019-12 on January 1, 2021. ASU 2019-12 did not have a material impact on the Corporation's financial statements. Recently Issued Not Yet Effective Accounting Pronouncements : 57 In March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. In January 2021, the FASB issued ASU 2021-01 which clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. The Corporation is evaluating the impacts of this ASU and has not yet determined whether LIBOR transition and this ASU will have material effects on the Corporation's business operations and consolidated financial statements. 2. FAIR VALUES OF FINANCIAL INSTRUMENTS: Accounting guidance establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value: Level 1: Quoted prices (unadjusted) of identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. Level 2: Significant other observable inputs other than Level 1 prices such as such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. Level 3: Significant unobservable inputs that reflect a reporting entity's own assumptions about the assumptions that market participants would use in pricing an asset or liability. The fair value of securities available-for-sale is determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities' relationship to other benchmark quoted securities (Level 2 inputs). For those securities that cannot be priced using quoted market prices or observable inputs, a Level 3 valuation is determined. These securities are primarily trust preferred securities, which are priced using Level 3 due to current market illiquidity, and state and municipal securities. The fair value of the trust preferred securities is obtained from a third party provider without adjustment. Management obtains values from other pricing sources to validate the Standard & Poors pricing that they currently utilizes. The fair value of state and municipal obligations are derived by comparing the securities to current market rates plus an appropriate credit spread to determine an estimated value. Illiquidity spreads are then considered. Credit reviews are performed on each of the issuers. The significant unobservable inputs used in the fair value measurement of the Corporation’s state and municipal obligations are credit spreads related to specific issuers. Significantly higher credit spread assumptions would result in significantly lower fair value measurement. Conversely, significantly lower credit spreads would result in a significantly higher fair value measurement. 58 The fair value of derivatives is based on valuation models using observable market data as of the measurement date (Level 2 inputs). December 31, 2021 Fair Value Measurement Using (Dollar amounts in thousands) Level 1 Level 2 Level 3 Carrying Value U.S. Government entity mortgage-backed securities $ — $ 120,123 $ — $ 120,123 Mortgage-backed securities, residential — 626,428 — 626,428 Mortgage-backed securities, commercial — 15,671 — 15,671 Collateralized mortgage obligations — 175,005 — 175,005 State and municipal obligations — 378,203 1,895 380,098 Municipal taxable — 38,626 — 38,626 U.S. Treasury — 204 — 204 Collateralized debt obligations — — 3,359 3,359 Other securities — 3,477 1,743 5,220 TOTAL $ — $ 1,357,737 $ 6,997 $ 1,364,734 Derivative Assets $ 1,030 Derivative Liabilities ( 1,030 ) December 31, 2020 Fair Value Measurement Using (Dollar amounts in thousands) Level 1 Level 2 Level 3 Carrying Value U.S. Government entity mortgage-backed securities $ — $ 97,814 $ — $ 97,814 Mortgage-backed securities, residential — 355,121 — 355,121 Mortgage-backed securities, commercial — 18,490 — 18,490 Collateralized mortgage obligations — 214,160 — 214,160 State and municipal obligations — 304,236 1,895 306,131 Municipal taxable — 23,139 — 23,139 U.S. Treasury — 2,753 — 2,753 Collateralized debt obligations — — 3,136 3,136 TOTAL $ — $ 1,015,713 $ 5,031 $ 1,020,744 Derivative Assets $ 2,465 Derivative Liabilities ( 2,465 ) There were no transfers between Level 1 and Level 2 during 2021 and 2020. The table below presents a reconciliation and income statement classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the twelve months ended December 31, 2021 and 2020. Fair Value Measurements Using Significant Unobservable Inputs (Level 3) December 31, 2021 State and municipal obligations Collateralized debt obligations Other securities Total Beginning balance, January 1 $ 1,895 $ 3,136 $ — $ 5,031 Total realized/unrealized gains or losses Included in earnings — — — — Included in other comprehensive income — 223 — 223 Purchases — — 1,743 1,743 Settlements — — — — Ending balance, December 31 $ 1,895 $ 3,359 $ 1,743 $ 6,997 59 Fair Value Measurements Using Significant Unobservable Inputs (Level 3) December 31, 2020 State and municipal obligations Collateralized debt obligations Total Beginning balance, January 1 $ 2,565 $ 3,619 $ 6,184 Total realized/unrealized gains or losses Included in earnings — — — Included in other comprehensive income — ( 483 ) ( 483 ) Transfers — — — Settlements ( 670 ) — ( 670 ) Ending balance, December 31 $ 1,895 $ 3,136 $ 5,031 There were no unrealized gains and losses recorded in earnings for the years ended December 31, 2021, 2020 or 2019. Other real estate owned is valued at Level 3. Other real estate owned at December 31, 2021 with a value of $ 108 thousand was reduced by zero for fair value adjustment. At December 31, 2021 other real estate owned was comprised of $ 68 thousand from commercial loans and $ 40 thousand from residential loans. Other real estate owned at December 31, 2020 with a value of $ 1.0 million was reduced zero for fair value adjustment. At December 31, 2020 other real estate owned was comprised of $ 846 thousand from commercial loans and $ 167 thousand from residential loans. Fair value is measured based on the value of the collateral securing those loans, and is determined using several methods. Generally the fair value of real estate is determined based on appraisals by qualified licensed appraisers. Appraisals for real estate generally use three methods to derive value: cost, sales or market comparison and income approach. The cost method bases value on the cost to replace current property. The market comparison evaluates the sales price of similar properties in the same market area. The income approach considers net operating income generated by the property and the investor’s required return. The final fair value is based on a reconciliation of these three approaches. If an appraisal is not available, the fair value may be determined by using a cash flow analysis, a broker’s opinion of value, the net present value of future cash flows, or an observable market price from an active market. Fair value of other real estate is based upon the current appraised values of the properties as determined by qualified licensed appraisers and the Company’s judgment of other relevant market conditions. Appraisals are obtained annually and reductions in value are recorded as a valuation through a charge to expense. The primary unobservable input used by management in estimating fair value are additional discounts to the appraised value to consider market conditions and the age of the appraisal, which are based on management’s past experience in resolving these types of properties. These discounts range from 0 % to 50 %. Values for non-real estate collateral, such as business equipment, are based on appraisals performed by qualified licensed appraisers or the customers financial statements. Values for non real estate collateral use much higher discounts than real estate collateral. Other real estate and collateral dependent loans carried at fair value are primarily comprised of smaller balance properties. The following tables present quantitative information about recurring and non-recurring Level 3 fair value measurements at December 31, 2021 and 2020. 2021 Fair Value Valuation Technique(s) Unobservable Input(s) Range State and municipal obligations $ 1,895 Discounted cash flow Discount rate 3.41 %- 4.44 % Collateralized debt obligations $ 3,359 Discounted cash flow Discount rate 1.83 % Other securities $ 1,743 Discounted cash flow Discount rate 0.65 %- 1.40 % Collateral dependent loans $ 12,839 Discounted cash flows Discount rate for age of appraisal and market conditions 0.00 %- 50.00 % 60 2020 Fair Value Valuation Technique(s) Unobservable Input(s) Range State and municipal obligations $ 1,895 Discounted cash flow Discount rate 3.41 %- 4.44 % Collateralized debt obligations $ 3,136 Discounted cash flow Discount rate 1.93 % Collateral dependent loans $ 6,581 Sales comparison/income approach Discount rate for age of appraisal and market conditions 0.00 %- 50.00 % The carrying amounts and estimated fair values of financial instruments are shown below. Carrying amount is the estimated fair value for cash and due from banks, federal funds sold, accrued interest receivable and payable, demand deposits, short-term and certain other borrowings, and variable-rate loans or deposits that reprice frequently and fully. Security fair values are determined as previously described. It is not practicable to determine the fair value of restricted stock due to restrictions placed on their transferability. For fixed-rate loans or deposits, variable rate loans or deposits with infrequent repricing or repricing limits, and for longer-term borrowings, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. Loan fair value estimates represent an exit price for 2021 and 2020. Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values. Fair value of debt is based on current rates for similar financing. The fair value of off-balance sheet items is not considered material. 61 The carrying amount and estimated fair value of assets and liabilities are presented in the tables below and were determined based on the above assumptions: December 31, 2021 Carrying Fair Value (Dollar amounts in thousands) Value Level 1 Level 2 Level 3 Total Cash and due from banks $ 682,807 $ 24,901 $ 657,906 $ — $ 682,807 Securities available-for-sale 1,364,734 — 1,357,737 6,997 1,364,734 Restricted stock 16,200 n/a n/a n/a n/a Loans, net 2,767,590 — — 2,682,257 2,682,257 Accrued interest receivable 16,946 — 4,709 12,237 16,946 Deposits ( 4,409,569 ) — ( 4,418,117 ) — ( 4,418,117 ) Short-term borrowings ( 93,374 ) — ( 93,374 ) — ( 93,374 ) Other borrowings ( 15,937 ) — ( 16,483 ) — ( 16,483 ) Accrued interest payable ( 687 ) — ( 687 ) — ( 687 ) December 31, 2020 Carrying Fair Value (Dollar amounts in thousands) Value Level 1 Level 2 Level 3 Total Cash and due from banks $ 657,470 $ 25,645 $ 631,825 $ — $ 657,470 Securities available-for-sale 1,020,744 — 1,015,713 5,031 1,020,744 Restricted stock 14,812 n/a n/a n/a n/a Loans, net 2,563,242 — — 2,560,683 2,560,683 Accrued interest receivable 16,957 — 3,521 13,436 16,957 Deposits ( 3,755,945 ) — ( 3,763,358 ) — ( 3,763,358 ) Short-term borrowings ( 116,061 ) — ( 116,061 ) — ( 116,061 ) Other borrowings ( 5,859 ) — ( 6,297 ) — ( 6,297 ) Accrued interest payable ( 1,033 ) — ( 1,033 ) — ( 1,033 ) 3. RESTRICTIONS ON CASH AND DUE FROM BANKS: Certain affiliate banks are required to maintain average reserve balances with the Federal Reserve Bank. The amount of those reserve balances was zero at December 31, 2021 and 2020. 62 4. SECURITIES: The fair value of securities available-for-sale and related gross unrealized gains and losses recognized in accumulated other comprehensive income were as follows: December 31, 2021 Amortized Unrealized (Dollar amounts in thousands) Cost Gains Losses Fair Value U.S. Government entity mortgage-backed securities $ 118,176 $ 2,688 $ ( 741 ) $ 120,123 Mortgage-backed securities, residential 628,920 4,387 ( 6,879 ) 626,428 Mortgage-backed securities, commercial 15,480 191 — 15,671 Collateralized mortgage obligations 175,501 1,272 ( 1,768 ) 175,005 State and municipal obligations 362,843 17,833 ( 578 ) 380,098 Municipal taxable 38,445 396 ( 215 ) 38,626 U.S. Treasury 205 — ( 1 ) 204 Collateralized debt obligations — 3,359 — 3,359 Other securities 5,220 — — 5,220 TOTAL $ 1,344,790 $ 30,126 $ ( 10,182 ) $ 1,364,734 December 31, 2020 Amortized Unrealized (Dollar amounts in thousands) Cost Gains Losses Fair Value U.S. Government entity mortgage-backed securities $ 92,710 $ 5,105 $ ( 1 ) $ 97,814 Mortgage-backed securities, residential 346,606 8,794 ( 279 ) 355,121 Mortgage-backed securities, commercial 17,931 559 — 18,490 Collateralized mortgage obligations 209,556 4,761 ( 157 ) 214,160 State and municipal obligations 285,837 20,294 — 306,131 Municipal taxable 22,440 702 ( 3 ) 23,139 U.S. Treasury 2,750 3 — 2,753 Collateralized debt obligations — 3,136 — 3,136 TOTAL $ 977,830 $ 43,354 $ ( 440 ) $ 1,020,744 As of December 31, 2021, the Corporation does not have any securities from any issuer, other than the U.S. Government, with an aggregate book or fair value that exceeds ten percent of shareholders' equity. Securities with a carrying value of approximately $ 814.7 million and $ 744.5 million at December 31, 2021 and 2020, respectively, were pledged as collateral for short-term borrowings and for other purposes. Below is a summary of the gross gains and losses realized by the Corporation on investment sales and calls during the years ended December 31, 2021, 2020 and 2019, respectively. (Dollar amounts in thousands) 2021 2020 2019 Proceeds $ 12,886 $ 36,696 $ 11,210 Gross gains 274 290 55 Gross losses ( 160 ) ( 57 ) ( 11 ) Gains of $ 274 thousand and losses of $ 160 thousand in 2021 and gains of $ 290 thousand and losses of $ 57 thousand in 2020 and gains of $ 55 thousand and losses of $ 11 thousand in 2019 resulted from redemption premiums on called and sold securities. 63 Contractual maturities of debt securities at year-end 2021 were as follows. Securities not due at a single maturity or with no maturity date, primarily mortgage-backed and collateralized mortgage obligations, are shown separately. Available-for-Sale Amortized Fair (Dollar amounts in thousands) Cost Value Due in one year or less $ 16,769 $ 16,956 Due after one but within five years 47,479 48,391 Due after five but within ten years 83,680 87,192 Due after ten years 376,961 395,091 524,889 547,630 Mortgage-backed securities and collateralized mortgage obligations 819,901 817,104 TOTAL $ 1,344,790 $ 1,364,734 The following tables show the securities' gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in continuous unrealized loss position, at December 31, 2021 and 2020. December 31, 2021 Less Than 12 Months More Than 12 Months Total Unrealized Unrealized Unrealized (Dollar amounts in thousands) Fair Value Losses Fair Value Losses Fair Value Losses U.S. Government entity mortgage-backed securities $ 48,939 $ ( 739 ) 146 ( 2 ) $ 49,085 $ ( 741 ) Mortgage-backed securities, residential 436,726 ( 5,281 ) 60,807 ( 1,598 ) 497,533 ( 6,879 ) Collateralized mortgage obligations 73,530 ( 1,327 ) 12,505 ( 441 ) 86,035 ( 1,768 ) State and municipal obligations 54,040 ( 578 ) — — 54,040 ( 578 ) Municipal taxable 15,048 ( 195 ) 729 ( 20 ) 15,777 ( 215 ) U.S. Treasury 204 ( 1 ) — — 204 ( 1 ) Total temporarily impaired securities $ 628,487 $ ( 8,121 ) $ 74,187 $ ( 2,061 ) $ 702,674 $ ( 10,182 ) December 31, 2020 Less Than 12 Months More Than 12 Months Total Unrealized Unrealized Unrealized (Dollar amounts in thousands) Fair Value Losses Fair Value Losses Fair Value Losses U.S. Government entity mortgage-backed securities $ — $ — $ 944 $ ( 1 ) $ 944 $ ( 1 ) Mortgage-backed securities, residential 76,962 ( 279 ) — — 76,962 ( 279 ) Collateralized mortgage obligations 12,282 ( 108 ) 3,767 ( 49 ) 16,049 ( 157 ) Municipal taxable 747 ( 3 ) — — 747 ( 3 ) U.S. Treasury 250 — — — 250 — Total temporarily impaired securities $ 90,241 $ ( 390 ) $ 4,711 $ ( 50 ) $ 94,952 $ ( 440 ) The Corporation held 221 investment securities with an amortized cost greater than fair value as of December 31, 2021. The unrealized losses on collateralized mortgage obligations, all mortgage-backed securities and state and municipal obligations represent negative adjustments to fair value relative to the rate of interest paid on the securities and not losses related to the creditworthiness of the issuer. Gross unrealized losses on investment securities were $ 10.2 million as of December 31, 2021 and $ 440 thousand as of December 31, 2020. Management does not intend to sell and it is not more likely than not that management would be required to sell the securities prior to their anticipated recovery. Management believes the value will recover as the securities approach maturity or market rates change. Management evaluates securities for impairment related to credit losses at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. The investment securities portfolio is evaluated for impairment related to credit losses by segregating the portfolio into two general segments. 64 In evaluating for impairment, management considers the reason for the decline, the extent of the decline, the duration of the decline and whether the Corporation intends to sell a security or is more likely than not to be required to sell a security before recovery of its amortized cost. 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. In prior years, a significant portion of the total unrealized losses relates to collateralized debt obligations that were separately evaluated under FASB ASC 325-40, Beneficial Interests in Securitized Financial Assets. Based upon qualitative considerations, such as a downgrade in credit rating or further defaults of underlying issuers during the year, and an analysis of expected cash flows, we determined that three CDOs included in collateralized debt obligations were other-than-temporarily impaired. One of the CDO's was called in first quarter 2017. A second was called in second quarter 2018. The remaining CDO has a contractual balance of $ 3.7 million at December 31, 2021 which has been reduced to $ 3.4 million by $ 750 thousand of interest payments received, $ 3.0 million of cumulative credit loss charges recorded through earnings to date and increased by $ 3.4 million recorded in other comprehensive income. These securities are collateralized by trust preferred securities issued primarily by bank holding companies, but certain pools do include a limited number of insurance companies. Collateralized debt obligations include one additional investment in a CDO consisting of pooled trust preferred securities in which the issuers are primarily banks. This CDO was paid in full in 2015. In the first quarter of 2017 a CDO with no remaining book value was called with the bank receiving $ 3.1 million, which is included in other non-interest income on the consolidated statements of income and comprehensive income. In the second quarter of 2018 one of the obligations was called, resulting in the elimination of the credit loss associated with that obligation. A recovery of previously recorded credit loss of $4.2 million was received and recognized in non-interest income for the period. In addition the Corporation received $2.4 million of interest income associated with the call. The table below presents a rollforward of the credit losses recognized in earnings for the years presented: (Dollar amounts in thousands) 2021 2020 2019 Beginning balance, January 1, $ 2,974 $ 2,974 $ 2,974 Reductions for securities called during the period — — — Ending balance, December 31, $ 2,974 $ 2,974 $ 2,974 5. LOANS: Loans are summarized as follows: December 31, (Dollar amounts in thousands) 2021 2020 Commercial $ 1,674,066 $ 1,521,711 Residential 664,509 604,652 Consumer 474,026 479,750 Total gross loans 2,812,601 2,606,113 Deferred costs, net 3,294 4,181 Allowance for credit losses ( 48,305 ) ( 44,076 ) TOTAL $ 2,767,590 $ 2,566,218 The Corporation periodically sells residential mortgage loans it originates based on the overall loan demand of the Corporation and the outstanding balances in the residential mortgage portfolio. At December 31, 2021 and 2020, loans held for sale were $ 4.2 million and $ 7.1 million, respectively, and are included in the totals above. In the normal course of business, the Corporation’s subsidiary banks make loans to directors and executive officers and to their associates. In 2021, the aggregate dollar amount of these loans to directors and executive officers who held office amounted to 65 $ 57.5 million at the beginning of the year. During 2021, advances of $ 57.5 million, repayments of $ 64.1 million, and additions for new directors of $0.0 million were made with respect to related party loans for an aggregate dollar amount outstanding of $ 50.9 million at December 31, 2021. Loans serviced for others, which are not reported as assets, total $ 542.8 million and $ 490.4 million at year-end 2021 and 2020. Custodial escrow balances maintained in connection with serviced loans were $ 3.0 million and $ 3.0 million at year-end 2021 and 2020. Activity for capitalized mortgage servicing rights (included in other assets) was as follows: December 31, (Dollar amounts in thousands) 2021 2020 2019 Servicing rights: Beginning of year $ 1,601 $ 1,435 $ 1,431 Additions 1,094 956 579 Amortized to expense ( 736 ) ( 790 ) ( 575 ) End of year $ 1,959 $ 1,601 $ 1,435 Third party valuations are conducted periodically for mortgage servicing rights. Based on these valuations, fair values were approximately $ 2.7 million and $ 2.4 million at year end 2021 and 2020. There was no valuation allowance in 2021 or 2020. Fair value for 2021 was determined using a discount rate of 12.5 %, prepayment speeds ranging from 185 % to 453 %, depending on the stratification of the specific right. Fair value at year end 2020 was determined using a discount rate of 12.5 %, prepayment speeds ranging from 239 % to 403 %, depending on the stratification of the specific right. Mortgage servicing rights are amortized over 8 years, the expected life of the sold loans. 66 6. ACQUISITIONS: On November 5, 2021, the Corporation completed its acquisition of Hancock Bancorp, Inc. and its banking subsidiary, Hancock Bank and Trust Company. Therefore, the results of Hancock Bancorp have been included in the results of operations beginning on November 5, 2021. Pursuant to the terms of the merger agreement, each issued and outstanding share of Hancock Bancorp, Inc. common stock, issued and outstanding, was converted into the right to receive $18.38 per share in cash. The aggregate value of the transaction was $31.36 million. Acquisition-related costs of $1.2 million are included in the Corporation's income statement for the year ended December 31, 2021. Goodwill of $7.5 million arising from the acquisition consisted largely of synergies and the cost savings resulting from the combining of the operations of the companies. The goodwill is not deductible for income tax purposes as the transaction was accounted for as a tax-free exchange. The following table summarizes the consideration paid and the amounts of the assets acquired and liabilities assumed recognized at the acquisition date. (Dollar amounts in thousands) 2021 Consideration Cash consideration $ 31,358 Fair value of total consideration transferred $ 31,358 Assets acquired Cash $ 3,046 Investment securities available-for-sale 57,054 Federal funds sold 10,470 Bank owned life insurance 9,753 Federal Home Loan Bank stock 1,362 Loans 227,827 Premises and equipment 8,180 Core deposit intangibles 652 Other assets 4,567 Total assets acquired 322,911 Liabilities assumed Deposits 286,098 FHLB advances 11,042 Other liabilities 1,956 Total liabilities assumed 299,096 Net identifiable assets 23,815 Goodwill $ 7,543 The fair value of net assets acquired includes fair value adjustments to certain receivables that were not considered impaired as of the acquisition date. The fair value adjustments were determined using discounted contractual cash flows. However, the Corporation believes that all contractual cash flows related to these financial instruments will be collected. As such, these receivables were not considered impaired at the acquisition date and were not subject to guidance relating to purchase credit impaired loans, which have shown evidence of credit deterioration since origination. The following table presents supplemental pro forma information as if the acquisition had occurred at the beginning of 2020. The unaudited pro forma information includes adjustments for interest income on loans and securities acquired, interest expense 67 on deposits acquired, and the related income tax effects. The pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the transactions been effected on the assumed dates. Year ended December 31, (Dollar amounts in thousands, except per share data) 2021 2020 Net interest income $ 150,806 $ 156,051 Net income $ 53,714 $ 55,958 Basic and diluted earnings per share $ 4.07 $ 4.08 The fair value of purchased financial assets with credit deterioration was $12.9 million on the date of acquisition. The gross contractual amounts receivable relating to the purchased financial assets with credit deterioration was $18.3 million. The Corporation estimates, on the date of acquisition, that $4.4 million of the contractual cash flows specific to the purchased financial assets with credit deterioration will not be collected. 68 7. ALLOWANCE FOR CREDIT LOSSES: The following table presents the activity of the allowance for credit losses by portfolio segment for the years ended December 31, 2021, 2020 and 2019. Allowance for Credit Losses: December 31, 2021 (Dollar amounts in thousands) Commercial Residential Consumer Unallocated Total Beginning balance $ 13,925 $ 19,142 $ 11,009 $ — $ 44,076 PCD ACL on acquired loans 4,410 — — 4,410 Provision for credit losses 1,637 ( 630 ) 1,074 385 2,466 Loans charged off ( 2,158 ) ( 812 ) ( 5,246 ) — ( 8,216 ) Recoveries 1,069 616 3,884 — 5,569 Ending Balance $ 18,883 $ 18,316 $ 10,721 $ 385 $ 48,305 Allowance for Credit Losses: December 31, 2020 (Dollar amounts in thousands) Commercial Residential Consumer Unallocated Total Beginning balance $ 8,945 $ 1,302 $ 8,304 $ 1,392 $ 19,943 Impact of adopting ASC 326 6,843 9,515 2,118 17,084 Provision for credit losses ( 1,622 ) 8,612 3,538 — 10,528 Loans charged off ( 1,097 ) ( 944 ) ( 6,355 ) — ( 8,396 ) Recoveries 856 657 3,404 — 4,917 Ending Balance $ 13,925 $ 19,142 $ 11,009 $ — $ 44,076 Allowance for Credit Losses: December 31, 2019 (Dollar amounts in thousands) Commercial Residential Consumer Unallocated Total Beginning balance $ 9,848 $ 1,313 $ 7,481 $ 1,794 $ 20,436 Provision for credit losses 621 ( 321 ) 4,802 ( 402 ) 4,700 Loans charged off ( 2,616 ) ( 1,050 ) ( 7,007 ) — ( 10,673 ) Recoveries 1,092 1,360 3,028 — 5,480 Ending Balance $ 8,945 $ 1,302 $ 8,304 $ 1,392 $ 19,943 69 The following tables present the recorded investment in nonperforming loans by class of loans. December 31, 2021 Loans Past Non-accrual Due Over 90 Day Still With No Allowance (Dollar amounts in thousands) Accruing Non-accrual For Credit Loss Commercial Commercial & Industrial $ 14 $ 1,950 $ 1,662 Farmland — 15 — Non Farm, Non Residential — 2,911 2,898 Agriculture — 111 — All Other Commercial — 4 — Residential First Liens 346 2,339 33 Home Equity — 84 — Junior Liens 89 294 — Multifamily — 225 — All Other Residential — 107 — Consumer Motor Vehicle 94 864 — All Other Consumer — 686 — TOTAL $ 543 $ 9,590 $ 4,593 December 31, 2020 Loans Past Non-accrual Due Over 90 Day Still With No Allowance (Dollar amounts in thousands) Accruing Non-accrual For Credit Loss Commercial Commercial & Industrial $ — $ 4,838 $ 1,080 Farmland — 195 — Non Farm, Non Residential — 3,729 3,267 Agriculture — 409 — All Other Commercial — 533 24 Residential First Liens 1,746 2,604 86 Home Equity 88 30 — Junior Liens 252 206 — Multifamily — 1,380 — All Other Residential — 135 — Consumer Motor Vehicle 372 754 — All Other Consumer — 554 — TOTAL $ 2,458 $ 15,367 $ 4,457 70 During the years ending December 31, 2021, 2020, and 2019 the terms of certain loans were modified as troubled debt restructurings (TDRs). The following tables present the activity for TDR's. 2021 (Dollar amounts in thousands) Commercial Residential Consumer Total January 1, $ — $ 3,589 $ 617 $ 4,206 Added 407 491 402 1,300 Charged Off — ( 29 ) ( 82 ) ( 111 ) Payments — ( 365 ) ( 231 ) ( 596 ) December 31, $ 407 $ 3,686 $ 706 $ 4,799 2020 (Dollar amounts in thousands) Commercial Residential Consumer Total January 1, $ 11 $ 3,485 $ 698 $ 4,194 Added — 692 304 996 Charged Off — ( 6 ) ( 158 ) ( 164 ) Payments ( 11 ) ( 582 ) ( 227 ) ( 820 ) December 31, $ — $ 3,589 $ 617 $ 4,206 2019 (Dollar amounts in thousands) Commercial Residential Consumer Total January 1, $ 145 $ 4,043 $ 618 $ 4,806 Added — 195 375 570 Charged Off — ( 24 ) ( 81 ) ( 105 ) Payments ( 134 ) ( 729 ) ( 214 ) ( 1,077 ) December 31, $ 11 $ 3,485 $ 698 $ 4,194 Modification of the terms of such loans typically include one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan. No modification in 2021, 2020 or 2019 resulted in the permanent reduction of the recorded investment in the loan. Modifications involving a reduction of the stated interest rate of the loan were for periods ranging from twelve months to five years . Modifications involving an extension of the maturity date were for periods ranging from twelve months to ten years . During the years ended December 31, 2021, 2020 and 2019 the Corporation modified 39, 42, and 45 loans respectively as troubled debt restructurings. All of the loans modified were smaller balance residential and consumer loans. There were no loans that were charged off within 12 months of the modification for 2021, 2020, or 2019. The Corporation had no allocation of specific reserves to customers whose loan terms have been modified in troubled debt restructurings at December 31, 2021, 2020, and 2019. The Corporation has not committed to lend additional amounts as of December 31, 2021 and 2020 to customers with outstanding loans that are classified as troubled debt restructurings. The CARES Act includes a provision that permits a financial institution to elect to suspend temporarily troubled debt restructuring accounting under ASC Subtopic 310-40 in certain circumstances (“section 4013”). To be eligible under section 4013, a loan modification must be (1) related to COVID-19; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (A) 60 days after the date of termination of the National Emergency or (B) December 31, 2020. In response to this section of the CARES Act, the federal banking agencies issued a revised interagency statement on April 7, 2020 that, in consultation with the Financial Accounting Standards Board, confirmed that for loans not subject to section 4013, short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not troubled debt restructurings under ASC Subtopic 310-40. This includes short-term (e.g., up to six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. As of December 31, 2021, 1,225 loans totaling $253 million were modified, related to COVID-19, that were not considered troubled debt restructurings. As of December 31, 2020, 961 loans totaling $210 million have resumed normal scheduled payments. 204 remaining loans are still under a debt 71 relief plan, which include 9 commercial loans totaling $36 million that have been provided additional payment relief since the initial payment relief plan. 1 loan totaling $17 thousand is under the original payment relief plan. The following table presents the amortized cost basis of collateral dependent loans by class of loans: December 31, 2021 Collateral Type (Dollar amounts in thousands) Real Estate Other Commercial Commercial & Industrial $ 17,734 $ 720 Farmland 3,669 — Non Farm, Non Residential 6,135 — Agriculture — — All Other Commercial — — Residential First Liens 33 — Home Equity — — Junior Liens — — Multifamily 935 — All Other Residential — — Consumer Motor Vehicle — — All Other Consumer — — Total $ 28,506 $ 720 December 31, 2020 Collateral Type (Dollar amounts in thousands) Real Estate Other Commercial Commercial & Industrial $ 3,293 $ 2,221 Farmland 2,771 Non Farm, Non Residential 6,838 Agriculture — 599 All Other Commercial 528 24 Residential First Liens 86 — Home Equity — — Junior Liens — — Multifamily 1,380 — All Other Residential — — Consumer Motor Vehicle — — All Other Consumer — — Total $ 14,896 $ 2,844 72 The following tables present the aging of the recorded investment in loans by past due category and class of loans. Greater December 31, 2021 30-59 Days 60-89 Days than 90 days Total (Dollar amounts in thousands) Past Due Past Due Past Due Past Due Current Total Commercial Commercial & Industrial $ 1,132 $ 388 $ 1,614 $ 3,134 $ 693,949 $ 697,083 Farmland 57 — — 57 141,189 141,246 Non Farm, Non Residential 62 — — 62 361,174 361,236 Agriculture 90 42 89 221 141,682 141,903 All Other Commercial 390 — — 390 340,076 340,466 Residential First Liens 4,686 680 949 6,315 336,064 342,379 Home Equity 131 24 58 213 62,085 62,298 Junior Liens 179 120 283 582 50,048 50,630 Multifamily 342 146 — 488 178,849 179,337 All Other Residential 284 291 — 575 30,843 31,418 Consumer Motor Vehicle 7,633 1,105 486 9,224 433,095 442,319 All Other Consumer 192 37 — 229 33,425 33,654 TOTAL $ 15,178 $ 2,833 $ 3,479 $ 21,490 $ 2,802,479 $ 2,823,969 Greater December 31, 2020 30-59 Days 60-89 Days than 90 days Total (Dollar amounts in thousands) Past Due Past Due Past Due Past Due Current Total Commercial Commercial & Industrial $ 685 $ 746 $ 3,364 $ 4,795 $ 603,777 $ 608,572 Farmland 22 — 91 113 118,528 118,641 Non Farm, Non Residential 155 — 271 426 350,681 351,107 Agriculture 28 30 275 333 146,147 146,480 All Other Commercial — — 24 24 305,612 305,636 Residential First Liens 5,506 1,866 2,365 9,737 314,730 324,467 Home Equity 260 29 104 393 60,362 60,755 Junior Liens 421 68 341 830 53,346 54,176 Multifamily — — — — 151,042 151,042 All Other Residential — 50 — 50 15,918 15,968 Consumer Motor Vehicle 6,975 1,294 560 8,829 441,283 450,112 All Other Consumer 164 19 13 196 31,401 31,597 TOTAL $ 14,216 $ 4,102 $ 7,408 $ 25,726 $ 2,592,827 $ 2,618,553 Credit Quality Indicators: The Corporation categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Corporation analyzes loans individually by classifying the loans as to credit risk. This analysis includes non-homogeneous loans, such as commercial loans, with an outstanding balance greater than $ 100 thousand. Any consumer loans outstanding to a borrower who had commercial loans analyzed will be similarly risk rated. This analysis is performed on a quarterly basis. The Corporation uses the following definitions for risk ratings: 73 Special Mention: Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date. Substandard: Loans classified as substandard are inadequately protected by the current net worth and debt service capacity of the borrower or of any pledged collateral. These loans have a well-defined weakness or weaknesses which have clearly jeopardized repayment of principal and interest as originally intended. They are characterized by the distinct possibility that the institution will sustain some future loss if the deficiencies are not corrected. Doubtful: Loans classified as doubtful have all the weaknesses inherent in those graded substandard, with the added characteristic that the severity of the weaknesses makes collection or liquidation in full highly questionable or improbable based upon currently existing facts, conditions, and values. Furthermore, non-homogeneous loans which were not individually analyzed, but are 90+ days past due or on non-accrual are classified as substandard. Loans included in homogeneous pools, such as residential or consumer, may be classified as substandard due to 90+ days delinquency, non-accrual status, bankruptcy, or loan restructuring. Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. Loans listed as not rated are either less than $ 100 thousand or are included in groups of homogeneous loans. 74 The following tables present the recorded investment of the commercial loan portfolio by risk category: December 31, 2021 Term Loans at Amortized Cost Basis by Origination Year Revolving 2021 2020 2019 2018 2017 Prior Loans Total Commercial Commercial and Industrial Pass $ 163,588 $ 71,271 $ 80,668 $ 40,441 $ 37,739 $ 113,887 $ 111,594 $ 619,188 Special Mention 7,561 393 1,841 5,375 263 4,523 7,482 27,438 Substandard 4,521 896 348 5,148 2,325 7,934 2,648 23,820 Doubtful — — — — — — — — Not Rated 21,134 1,610 959 466 189 140 — 24,498 Subtotal $ 196,804 $ 74,170 $ 83,816 $ 51,430 $ 40,516 $ 126,484 $ 121,724 $ 694,944 Farmland Pass $ 25,673 $ 12,060 $ 13,111 $ 13,246 $ 11,049 $ 49,158 $ 1,418 $ 125,715 Special Mention — 1,191 914 — 342 3,247 — 5,694 Substandard 3,455 444 — 326 558 2,876 — 7,659 Doubtful — — — — — — — — Not Rated — — — — — — — — Subtotal $ 29,128 $ 13,695 $ 14,025 $ 13,572 $ 11,949 $ 55,281 $ 1,418 $ 139,068 Non Farm, Non Residential Pass $ 81,203 $ 37,971 $ 24,716 $ 32,775 $ 54,732 $ 97,241 $ 10,548 $ 339,186 Special Mention — — 1,103 182 1,948 1,996 — 5,229 Substandard — — 910 — 1,440 13,391 — 15,741 Doubtful — — — — — — — — Not Rated — — — — — 402 — 402 Subtotal $ 81,203 $ 37,971 $ 26,729 $ 32,957 $ 58,120 $ 113,030 $ 10,548 $ 360,558 Agriculture Pass $ 14,426 $ 10,386 $ 10,135 $ 2,585 $ 4,932 $ 15,755 $ 68,937 $ 127,156 Special Mention — — 1,000 — 537 271 5,257 7,065 Substandard — 20 216 — 46 485 4,828 5,595 Doubtful — — — — — — — — Not Rated 110 120 131 55 1 — — 417 Subtotal $ 14,536 $ 10,526 $ 11,482 $ 2,640 $ 5,516 $ 16,511 $ 79,022 $ 140,233 Other Commercial Pass $ 77,821 $ 69,117 $ 33,231 $ 36,495 $ 53,479 $ 58,819 $ 3,488 $ 332,450 Special Mention — — — — — 6,106 — 6,106 Substandard 72 — 25 475 — 9 — 581 Doubtful — — — — — — — — Not Rated 89 — — 37 — — — 126 Subtotal $ 77,982 $ 69,117 $ 33,256 $ 37,007 $ 53,479 $ 64,934 $ 3,488 $ 339,263 Residential Multifamily >5 Residential Pass $ 37,244 $ 63,312 $ 16,037 $ 7,471 $ 5,370 $ 35,284 $ 1,434 $ 166,152 Special Mention — — — — — 10,282 — 10,282 Substandard — — — — — 958 — 958 Doubtful — — — — — — — — Not Rated 1,149 — — — 44 384 — 1,577 Subtotal $ 38,393 $ 63,312 $ 16,037 $ 7,471 $ 5,414 $ 46,908 $ 1,434 $ 178,969 Total Pass $ 399,955 $ 264,117 $ 177,898 $ 133,013 $ 167,301 $ 370,144 $ 197,419 $ 1,709,847 Special Mention 7,561 1,584 4,858 5,557 3,090 26,425 12,739 61,814 Substandard 8,048 1,360 1,499 5,949 4,369 25,653 7,476 54,354 Doubtful — — — — — — — — Not Rated 22,482 1,730 1,090 558 234 926 — 27,020 Total commercial loans $ 438,046 $ 268,791 $ 185,345 $ 145,077 $ 174,994 $ 423,148 $ 217,634 $ 1,853,035 75 December 31, 2020 Term Loans at Amortized Cost Basis by Origination Year Revolving 2020 2019 2018 2017 2016 Prior Loans Total Commercial Commercial and Industrial Pass $ 159,494 $ 77,253 $ 64,298 $ 41,806 $ 20,564 $ 103,598 $ 91,615 $ 558,628 Special Mention 4,848 1,331 4,427 216 1,278 4,566 3,695 20,361 Substandard 3,780 323 4,187 1,148 3,543 2,565 3,124 18,670 Doubtful — — — — — — — — Not Rated 2,618 1,772 1,446 580 105 2,255 — 8,776 Subtotal $ 170,740 $ 80,679 $ 74,358 $ 43,750 $ 25,490 $ 112,984 $ 98,434 $ 606,435 Farmland Pass $ 10,010 $ 12,775 $ 12,149 $ 10,089 $ 15,863 $ 40,338 $ 1,386 $ 102,610 Special Mention 988 947 — 230 1,900 2,656 — 6,721 Substandard 1,718 2,303 — 716 1,628 826 — 7,191 Doubtful — — — — — — — — Not Rated — — — — — — — — Subtotal $ 12,716 $ 16,025 $ 12,149 $ 11,035 $ 19,391 $ 43,820 $ 1,386 $ 116,522 Non Farm, Non Residential Pass $ 39,914 $ 33,261 $ 38,111 $ 63,371 $ 49,511 $ 83,052 $ 4,092 $ 311,312 Special Mention — 998 — 305 9,982 6,811 — 18,096 Substandard — 1,188 — 4,310 7,484 7,028 — 20,010 Doubtful — — — — — — — — Not Rated — — — — — 682 — 682 Subtotal $ 39,914 $ 35,447 $ 38,111 $ 67,986 $ 66,977 $ 97,573 $ 4,092 $ 350,100 Agriculture Pass $ 13,336 $ 8,330 $ 3,485 $ 5,329 $ 3,732 $ 16,792 $ 67,052 $ 118,056 Special Mention — 1,483 1,203 664 5 428 7,611 11,394 Substandard — 3,834 18 223 2,435 1,988 5,926 14,424 Doubtful — — — — — — — — Not Rated 159 216 110 6 13 — — 504 Subtotal $ 13,495 $ 13,863 $ 4,816 $ 6,222 $ 6,185 $ 19,208 $ 80,589 $ 144,378 Other Commercial Pass $ 44,673 $ 57,200 $ 41,470 $ 61,442 $ 40,196 $ 50,325 $ 5,162 $ 300,468 Special Mention — — — 7 — 2,786 — 2,793 Substandard — — — 24 528 24 — 576 Doubtful — — — — — — — — Not Rated — 3 52 39 345 — — 439 Subtotal $ 44,673 $ 57,203 $ 41,522 $ 61,512 $ 41,069 $ 53,135 $ 5,162 $ 304,276 Residential Multifamily >5 Residential Pass $ 44,599 $ 9,892 $ 36,563 $ 19,749 $ 4,676 $ 21,704 $ 1,293 $ 138,476 Special Mention — — — — 102 10,662 — 10,764 Substandard — — 1,380 — — — — 1,380 Doubtful — — — — — — — — Not Rated — — — — — — — — Subtotal $ 44,599 $ 9,892 $ 37,943 $ 19,749 $ 4,778 $ 32,366 $ 1,293 $ 150,620 Total Pass $ 312,026 $ 198,711 $ 196,076 $ 201,786 $ 134,542 $ 315,809 $ 170,600 $ 1,529,550 Special Mention 5,836 4,759 5,630 1,422 13,267 27,909 11,306 70,129 Substandard 5,498 7,648 5,585 6,421 15,618 12,431 9,050 62,251 Doubtful — — — — — — — — Not Rated 2,777 1,991 1,608 625 463 2,937 — 10,401 Total commercial loans $ 326,137 $ 213,109 $ 208,899 $ 210,254 $ 163,890 $ 359,086 $ 190,956 $ 1,672,331 76 The Corporation evaluates the credit quality of its other loan portfolios, which includes residential real estate, consumer and lease financing loans, based primarily on the aging status of the loan and payment activity. Accordingly, loans on non-accrual status, loans past due 90 days or more and still accruing interest, and loans modified under troubled debt restructurings are considered to be nonperforming for purposes of credit quality evaluation. The following table presents the recorded investment of our other loan portfolio based on the credit risk profile of loans that are performing and loans that are nonperforming: December 31, 2021 Term Loans at Amortized Cost Basis by Origination Year Revolving 2021 2020 2019 2018 2017 Prior Loans Total Residential First Liens Performing $ 86,224 $ 49,633 $ 22,262 $ 24,377 $ 26,437 $ 126,828 $ 3,061 $ 338,822 Non-performing — — 35 69 160 2,421 — 2,685 Subtotal $ 86,224 $ 49,633 $ 22,297 $ 24,446 $ 26,597 $ 129,249 $ 3,061 $ 341,507 Home Equity Performing $ 757 $ 9 $ 152 $ 719 $ 62 $ 1,332 $ 59,059 $ 62,090 Non-performing — 25 — — 3 57 — 85 Subtotal $ 757 $ 34 $ 152 $ 719 $ 65 $ 1,389 $ 59,059 $ 62,175 Junior Liens Performing $ 13,255 $ 10,189 $ 8,124 $ 7,888 $ 4,158 $ 5,554 $ 968 $ 50,136 Non-performing — 6 64 97 119 94 — 380 Subtotal $ 13,255 $ 10,195 $ 8,188 $ 7,985 $ 4,277 $ 5,648 $ 968 $ 50,516 Other Residential Performing $ 20,218 $ 6,665 $ 1,697 $ 662 $ 883 $ 1,092 $ — $ 31,217 Non-performing — — 55 43 — 27 — 125 Subtotal $ 20,218 $ 6,665 $ 1,752 $ 705 $ 883 $ 1,119 $ — $ 31,342 Consumer Motor Vehicle Performing $ 188,675 $ 155,156 $ 60,676 $ 23,367 $ 9,307 $ 2,384 $ — $ 439,565 Non-performing 199 373 191 109 43 23 — 938 Subtotal $ 188,874 $ 155,529 $ 60,867 $ 23,476 $ 9,350 $ 2,407 $ — $ 440,503 Other Consumer Performing $ 14,924 $ 8,225 $ 3,119 $ 948 $ 304 $ 1,121 $ 4,194 $ 32,835 Non-performing 342 181 107 35 18 3 2 688 Subtotal $ 15,266 $ 8,406 $ 3,226 $ 983 $ 322 $ 1,124 $ 4,196 $ 33,523 Total Performing $ 324,053 $ 229,877 $ 96,030 $ 57,961 $ 41,151 $ 138,311 $ 67,282 $ 954,665 Non-performing 541 585 452 353 343 2,625 2 4,901 Total other loans $ 324,594 $ 230,462 $ 96,482 $ 58,314 $ 41,494 $ 140,936 $ 67,284 $ 959,566 77 December 31, 2020 Term Loans at Amortized Cost Basis by Origination Year Revolving 2020 2019 2018 2017 2016 Prior Loans Total Residential First Liens Performing $ 47,875 $ 33,737 $ 31,634 $ 36,426 $ 30,419 $ 135,456 $ 3,235 $ 318,782 Non-performing — 40 95 343 107 4,062 — 4,647 Subtotal $ 47,875 $ 33,777 $ 31,729 $ 36,769 $ 30,526 $ 139,518 $ 3,235 $ 323,429 Home Equity Performing $ 854 $ 135 $ 644 $ 20 $ — $ 1,525 $ 57,334 $ 60,512 Non-performing — — 1 — — 91 24 116 Subtotal $ 854 $ 135 $ 645 $ 20 $ — $ 1,616 $ 57,358 $ 60,628 Junior Liens Performing $ 13,125 $ 12,742 $ 11,139 $ 6,214 $ 3,948 $ 5,099 $ 1,333 $ 53,600 Non-performing — 129 48 198 9 66 — 450 Subtotal $ 13,125 $ 12,871 $ 11,187 $ 6,412 $ 3,957 $ 5,165 $ 1,333 $ 54,050 Other Residential Performing $ 9,773 $ 2,775 $ 1,372 $ 292 $ 178 $ 733 $ 651 $ 15,774 Non-performing — 62 50 — — 39 — 151 Subtotal $ 9,773 $ 2,837 $ 1,422 $ 292 $ 178 $ 772 $ 651 $ 15,925 Consumer Motor Vehicle Performing $ 245,839 $ 113,293 $ 51,649 $ 24,786 $ 10,026 $ 1,600 $ — $ 447,193 Non-performing 318 355 257 127 36 11 — 1,104 Subtotal $ 246,157 $ 113,648 $ 51,906 $ 24,913 $ 10,062 $ 1,611 $ — $ 448,297 Other Consumer Performing $ 15,298 $ 7,328 $ 2,622 $ 724 $ 854 $ 703 $ 3,352 $ 30,881 Non-performing 231 200 92 22 — 8 19 572 Subtotal $ 15,529 $ 7,528 $ 2,714 $ 746 $ 854 $ 711 $ 3,371 $ 31,453 Total Performing $ 332,764 $ 170,010 $ 99,060 $ 68,462 $ 45,425 $ 145,116 $ 65,905 $ 926,742 Non-performing 549 786 543 690 152 4,277 43 7,040 Total other loans $ 333,313 $ 170,796 $ 99,603 $ 69,152 $ 45,577 $ 149,393 $ 65,948 $ 933,782 78 8. PREMISES AND EQUIPMENT: Premises and equipment are summarized as follows: December 31, (Dollar amounts in thousands) 2021 2020 Land $ 18,612 $ 17,574 Building and leasehold improvements 73,739 66,658 Furniture and equipment 44,839 42,167 137,190 126,399 Less accumulated depreciation ( 67,668 ) ( 64,336 ) TOTAL $ 69,522 $ 62,063 Aggregate depreciation expense was $ 4.6 million, $ 4.4 million and $ 3.9 million for 2021, 2020 and 2019, respectively. The Company leases certain branch properties and equipment under operating leases. Rent expense was $ 1.4 million, $ 1.1 million, and $ 1.1 million for 2021, 2020, and 2019. Rent commitments, before considering renewal options that generally are present, were as follows: 2022 $ 922 2023 799 2024 530 2025 425 2026 260 Thereafter 838 $ 3,774 See Note 19 for additional discussion on leases. 79 9. GOODWILL AND INTANGIBLE ASSETS: The Corporation completed its annual impairment testing of goodwill during the fourth quarter of 2021 and 2020. Management does not believe any amount of goodwill is impaired. Goodwill was as follows at year-end: 2021 2020 2019 Beginning of year $ 78,592 $ 78,592 $ 34,355 Acquired goodwill 7,543 — 44,237 Impairment — — — End of year $ 86,135 $ 78,592 $ 78,592 Intangible assets subject to amortization at December 31, 2021 and 2020 are as follows: 2021 2020 Gross Accumulated Gross Accumulated (Dollar amounts in thousands) Amount Amortization Amount Amortization Core deposit intangible $ 21,205 $ 13,849 $ 21,205 $ 12,233 Acquired cored deposit intangible 652 (16) — — $ 21,857 $ 13,833 $ 21,205 $ 12,233 Aggregate amortization expense was $ 1.6 million, $ 1.7 million and $ 923 thousand for 2021, 2020 and 2019, respectively. Estimated amortization expense for the next five years is as follows: In thousands 2022 $ 1,311 2023 1,128 2024 888 2025 786 2026 679 10. DEPOSITS: Scheduled maturities of time deposits for the next five years are as follows: (dollar amounts in thousands) 2022 $ 326,173 2023 136,691 2024 55,180 2025 17,710 2026 13,971 11. SHORT-TERM BORROWINGS: A summary of the carrying value of the Corporation's short-term borrowings at December 31, 2021 and 2020 is presented below: (Dollar amounts in thousands) 2021 2020 Federal funds purchased $ 3,275 $ 6,500 Repurchase-agreements 90,099 109,561 $ 93,374 $ 116,061 80 (Dollar amounts in thousands) 2021 2020 Average amount outstanding $ 99,810 $ 90,561 Maximum amount outstanding at a month end 117,337 116,061 Average interest rate during year 0.40 % 0.63 % Interest rate at year-end 0.08 % 0.11 % Federal funds purchased are generally due in one day and bear interest at market rates. The Corporation enters into sales of securities under agreements to repurchase. The amounts received under these agreements represent short-term borrowings and are reflected as a liability in the consolidated balance sheets. The securities underlying these agreements are included in investment securities in the consolidated balance sheets. The Corporation has no control over the market value of the securities, which fluctuates due to market conditions. However, the Corporation is obligated to promptly transfer additional securities if the market value of the securities falls below the repurchase agreement price. The Corporation manages this risk by maintaining an unpledged securities portfolio that it believes is sufficient to cover a decline in the market value of the securities sold under agreements to repurchase. Securities are pledged to cover these liabilities, which are not covered by federal deposit insurance. The Corporation maintains possession of and control over these securities. Collateral pledged to repurchase agreements by remaining maturity are as follows: December 31, 2021 Repurchase Agreements and Repurchase to Maturity Transactions Remaining Contractual Maturity of the Agreements (Dollar amounts in thousands) Overnight and continuous Up to 30 days 30 - 90 days Greater than 90 days Total Mortgage Backed Securities - Residential and Collateralized Mortgage Obligations $ 83,576 $ — $ 5,816 $ 707 $ 90,099 December 31, 2020 Repurchase Agreements and Repurchase to Maturity Transactions Remaining Contractual Maturity of the Agreements (Dollar amounts in thousands) Overnight and continuous Up to 30 days 30 - 90 days Greater than 90 days Total Mortgage Backed Securities - Residential and Collateralized Mortgage Obligations $ 86,335 $ 1,086 $ 21,342 $ 798 $ 109,561 12. OTHER BORROWINGS: Other borrowings at December 31, 2020 and 2019 are summarized as follows: (Dollar amounts in thousands) 2021 2020 FHLB advances $ 15,937 $ 5,859 Junior subordinated debentures — — TOTAL $ 15,937 $ 5,859 81 The aggregate minimum annual retirements of other borrowings are as follows: 2022 $ — 2023 6,933 2024 2,658 2025 5,929 2026 417 Thereafter — $ 15,937 At December 31, 2021 and 2020, other borrowings are summarized as follows: The Corporation's subsidiary banks are members of the Federal Home Loan Bank (FHLB) and accordingly are permitted to obtain advances. There are $15.9 million of advances from the FHLB at December 31, 2021, and $5.9 million of advances at December 31, 2020, which accrue interest, payable monthly, at annual rates, primarily fixed, varying from 0.68 % to 3.32 % in 2021 and 0.25 % to 0.39 % during the year in 2020. FHLB advances are, generally, due in full at maturity. They are secured by eligible securities totaling $ 58.5 million at December 31, 2021, and $ 97.1 million at December 31, 2020, and a blanket pledge on real estate loan collateral. Based on this collateral and the Corporation's holdings of FHLB stock, the Corporation is eligible to borrow up to $ 232.2 million at year end 2021. Certain advances may be prepaid, without penalty, prior to maturity. The FHLB can adjust the interest rate from fixed to variable on certain advances, but those advances may then be prepaid, without penalty. 13. REVENUE FROM CONTRACTS WITH CUSTOMERS: All of the Corporation's revenue from contracts with customers in the scope of ASC 606 is recognized within Non-Interest Income. The following table presents the Corporation's sources of Non-Interest Income for the years ended December 31, 2021 and 2020. Items outside the scope of ASC 606 are noted as such. Years Ended December 31, (Dollar amounts in thousands) 2021 2020 Non-interest income Service charges on deposits and debit card fee income $ 24,700 $ 21,809 Asset management fees 5,255 4,838 Interchange income 438 344 Net gains on sales of loans (a) 5,003 6,626 Loan servicing fees (a) 1,849 1,715 Net gains on sales of securities (a) 114 233 Other service charges and fees (a) 1,163 1,888 Other (b) 3,562 5,023 Total non-interest income $ 42,084 $ 42,476 (a) Not within the scope of ASC 606. (b) The Other category includes gains/(losses) on the sale of OREO for the years ended December 31, 2021 and December 31, 2020, totaling $5 thousand and $942 thousand, respectively, which is within the scope of ASC 606; the remaining balance is outside the scope of ASC 606. Service charges on deposits : The Corporation earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Corporation fulfills the customer's request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Corporation satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer's account balance. Asset management fees : The Corporation earns asset management fees from its contracts with trust customers to manage assets for investment, and/or to transact on their accounts. These fees are primarily earned over time as the Corporation provides the contracted monthly or quarterly services and are generally assessed based on a tiered scale of the market value of 82 assets under management at month-end. Fees that are transaction based, including trade execution services, are recognized at the point in time that the transaction is executed, i.e. the trade date. Other related services provided and the fees the Corporation earns, which are based on a fixed fee schedule, are recognized when the services are rendered. Interchange income : The Corporation earns interchange fees from debit and credit cardholder transactions conducted through the payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. Gains/Losses on sales of OREO : The Corporation records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the Corporation finances the sale of OREO to the buyer, the Corporation assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on the sale, the Corporation adjusts the transaction price and related gain (loss) on sale if a significant financing component is present. 14. INCOME TAXES: Income tax expense is summarized as follows: (Dollar amounts in thousands) 2021 2020 2019 Federal: Currently payable $ 7,978 $ 7,886 $ 7,118 Deferred 1,488 1,188 2,435 9,466 9,074 9,553 State: Currently payable 3,080 2,422 2,168 Deferred 80 196 406 3,160 2,618 2,574 TOTAL $ 12,626 $ 11,692 $ 12,127 The reconciliation of income tax expense with the amount computed by applying the statutory federal income tax rate of 21 % to income before income taxes is summarized as follows: (Dollar amounts in thousands) 2021 2020 2019 Federal income taxes computed at the statutory rate $ 13,779 $ 13,763 $ 12,810 Add (deduct) tax effect of: Tax exempt income ( 2,745 ) ( 2,643 ) ( 2,551 ) ESOP dividend deduction ( 101 ) ( 98 ) ( 115 ) State tax, net of federal benefit 2,496 2,068 2,034 General business tax credits ( 716 ) ( 1,648 ) ( 148 ) Other, net ( 87 ) 250 97 TOTAL $ 12,626 $ 11,692 $ 12,127 83 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 2021 and 2020, are as follows: (Dollar amounts in thousands) 2021 2020 Deferred tax assets: Other than temporary impairment $ 764 $ 753 Net unrealized losses on retirement plans 6,033 8,132 Loan loss provisions 12,476 12,150 Unfunded commitments 764 — Deferred compensation 2,367 2,496 Compensated absences 739 623 Post-retirement benefits 1,284 1,286 Lease liability 1,597 1,450 Purchase accounting 1,333 1,060 Deferred loss on acquisition — — Other 2,770 2,186 GROSS DEFERRED ASSETS 30,127 30,136 Deferred tax liabilities: Net unrealized gains on securities available-for-sale ( 4,269 ) ( 8,752 ) Depreciation ( 1,611 ) ( 2,155 ) Mortgage servicing rights ( 515 ) ( 390 ) Pensions ( 1,647 ) ( 843 ) Right-of-use asset ( 1,591 ) ( 1,446 ) Intangibles ( 5,717 ) ( 5,458 ) FHLB stock dividends ( 32 ) ( 111 ) Other ( 4,113 ) ( 3,963 ) GROSS DEFERRED LIABILITIES ( 19,495 ) ( 23,118 ) NET DEFERRED TAX ASSETS $ 10,632 $ 7,018 Unrecognized Tax Benefits — A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: (Dollar amounts in thousands) 2021 2020 2019 Balance at January 1 $ 867 $ 825 $ 922 Additions based on tax positions related to the current year 9 114 298 Additions based on tax positions related to prior years — — — Reductions due to the statute of limitations ( 68 ) ( 72 ) ( 395 ) Balance at December 31 $ 808 $ 867 $ 825 Of this total, $ 808 thousand represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in future periods. The Corporation does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next 12 months. The total amount of interest and penalties recorded in the income statement for the years ended December 31, 2021, 2020 and 2019 was an expense increase of $ 21 thousand, an increase of $ 11 thousand, and an decrease of $ 9 thousand, respectively. The amount accrued for interest and penalties at December 31, 2021, 2020 and 2019 was $ 85 thousand, $ 64 thousand and $ 53 thousand, respectively. The Corporation and its subsidiaries are subject to U.S. federal income tax as well as income tax of the states of Indiana and Illinois. The Corporation is no longer subject to examination by taxing authorities for years before 2018. 84 15. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK: The Corporation is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include conditional commitments and commercial letters of credit. The financial instruments involve to varying degrees, elements of credit and interest rate risk in excess of amounts recognized in the financial statements. The Corporation's maximum exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to make loans is limited generally by the contractual amount of those instruments. The Corporation follows the same credit policy to make such commitments as is followed for those loans recorded in the consolidated financial statements. Commitment and contingent liabilities are summarized as follows at December 31: (Dollar amounts in thousands) 2021 2020 Home Equity $ 92,346 $ 88,672 Commercial Operating Lines 610,965 508,602 Other Commitments 120,111 119,108 TOTAL $ 823,422 $ 716,382 Commercial letters of credit $ 7,042 $ 3,601 The majority of commercial operating lines and home equity lines are variable rate, while the majority of other commitments to fund loans are fixed rate. Fixed rate commitments had a range of interest rates from 3.25 % to 6.00 % in 2021. In 2020 this range of rates was from 3.25 % to 6.00 %. Since many commitments to make loans expire without being used, these amounts do not necessarily represent future cash commitments. Collateral obtained upon exercise of the commitment is determined using management's credit evaluation of the borrower, and may include accounts receivable, inventory, property, land and other items. The approximate duration of these commitments is generally one year or less. Derivatives: The Corporation enters into derivative instruments for the benefit of its customers. At the inception of a derivative contract, the Corporation designates the derivative as an instrument with no hedging designation ("standalone derivative"). Changes in the fair value of derivatives are reported currently in earnings as non-interest income. Net cash settlements on derivatives that do not qualify for hedge accounting are reported in non-interest income. First Financial Bank offers clients the ability on certain transactions to enter into interest rate swaps. Typically, these are pay fixed, receive floating swaps used in conjunction with commercial loans. These derivative contracts do not qualify for hedge accounting. The Bank hedges the exposure to these contracts by entering into offsetting contracts with substantially matching terms. The notional amount of these interest rate swaps was $ 32.9 million and $ 29.1 million at December 31, 2021 and 2020. The fair value of these contracts combined was zero, as gains offset losses. The gross losses associated with these interest rate swaps was $ 1.0 million and $ 2.5 million at December 31, 2021 and 2020. 16. RETIREMENT PLANS: Employees of the Corporation are covered by a retirement program that consists of a defined benefit plan and an employee stock ownership plan (ESOP). Plan assets consist primarily of the Corporation's stock and obligations of U.S. Government agencies. Benefits under the defined benefit plan are actuarially determined based on an employee's service and compensation, as defined, and funded as necessary. This plan was frozen for the majority of employees as of December 31, 2012.Those employees will be eligible to participate in a 401K plan that the Corporation can contribute a discretionary match of the pay contributed by the employee. In addition the ESOP plan will continue in place for all employees. Assets in the ESOP are considered in calculating the funding to the defined benefit plan required to provide such benefits. Any shortfall of benefits under the ESOP are to be provided by the defined benefit plan. The ESOP may provide benefits beyond those determined under the defined benefit plan. Contributions to the ESOP are determined by the Corporation's Board of Directors. The Corporation made contributions to the defined benefit plan of $ 2.05 million, $ 4.44 million and $ 1.77 million in 2021, 2020 and 2019. The Corporation contributed $ 1.40 million, $ 1.47 million and $ 1.25 million to the ESOP in 2021, 2020 and 2019. There were contributions of $ 1.1 million, $ 1.2 million and $ 926 thousand to the ESOP for employees no longer participating in the defined benefit plan in 2021, 2020 and 2019 respectively. The Corporation uses a measurement date of December 31. 85 Net periodic benefit cost and other amounts recognized in other comprehensive income included the following components: (Dollar amounts in thousands) 2021 2020 2019 Service cost - benefits earned $ 1,355 $ 1,300 $ 1,218 Interest cost on projected benefit obligation 2,632 3,116 3,465 Expected return on plan assets ( 4,713 ) ( 4,198 ) ( 3,585 ) Net amortization and deferral 2,072 1,968 1,558 Net periodic pension cost 1,346 2,186 2,656 Net loss (gain) during the period ( 5,883 ) 3,188 6,362 Amortization of prior service cost ( 1 ) ( 1 ) ( 1 ) Amortization of unrecognized gain (loss) ( 2,072 ) ( 1,967 ) ( 1,558 ) Total recognized in other comprehensive (income) loss ( 7,956 ) 1,220 4,803 Total recognized net periodic pension cost and other comprehensive income $ ( 6,610 ) $ 3,406 $ 7,459 The information below sets forth the change in projected benefit obligation, reconciliation of plan assets, and the funded status of the Corporation's retirement program. Actuarial present value of benefits is based on service to date and present pay levels. (Dollar amounts in thousands) 2021 2020 Change in benefit obligation: Benefit obligation at January 1 $ 109,922 $ 102,791 Service cost 1,355 1,300 Interest cost 2,632 3,116 Actuarial (gain) loss ( 2,943 ) 6,845 Benefits paid ( 4,470 ) ( 4,130 ) Benefit obligation at December 31 106,496 109,922 Reconciliation of fair value of plan assets: Fair value of plan assets at January 1 82,437 73,962 Actual return on plan assets 7,654 7,856 Employer contributions 2,358 4,749 Benefits paid ( 4,470 ) ( 4,130 ) Fair value of plan assets at December 31 87,979 82,437 Funded status at December 31 (plan assets less benefit obligation) $ ( 18,517 ) $ ( 27,485 ) Amounts recognized in accumulated other comprehensive income at December 31, 2021 and 2020 consist of: (Dollar amounts in thousands) 2021 2020 Net loss (gain) $ 21,051 $ 29,006 Prior service cost (credit) — 1 $ 21,051 $ 29,007 The accumulated benefit obligation for the defined benefit pension plan was $ 102.4 million and $ 105.2 million at year-end 2021 and 2020. Principal assumptions used to determine pension benefit obligation at year end: 2021 2020 Discount rate 2.83 % 2.52 % Rate of increase in compensation levels 3.00 3.00 86 Principal assumptions used to determine net periodic pension cost: 2021 2020 Discount rate 2.52 % 3.22 % Rate of increase in compensation levels 3.00 3.00 Expected long-term rate of return on plan assets 6.00 6.00 The expected long-term rate of return was estimated using market benchmarks for equities and bonds applied to the plan's target asset allocation. Management estimated the rate by which plan assets would perform based on historical experience as adjusted for changes in asset allocations and expectations for future return on equities as compared to past periods. Plan Assets — The Corporation's pension plan weighted-average asset allocation for the years 2021 and 2020 by asset category are as follows: Pension Plan Target Allocation ESOP Target Allocation Pension Percentage of Plan Assets at December 31, ESOP Percentage of Plan Assets at December 31, ASSET CATEGORY 2021 2021 2021 2020 2021 2020 Equity securities 25 - 75 % 95 - 99 % 63 % 63 % 98 % 99 % Debt securities 0- 50 % 0-0% 32 % 31 % — % — % Other 0- 20 % 0- 5 % 5 % 6 % 2 % 1 % TOTAL 100 % 100 % 100 % 100 % Fair Value of Plan Assets — Fair value is the exchange price that would be received for an asset in the principal or most advantageous market for the asset in an orderly transaction between market participants on the measurement date. It also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The Corporation used the following methods and significant assumptions to estimate the fair value of each type of financial instrument: Equity, Debt, Investment Funds and Other Securities — The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). The fair value of the plan assets at December 31, 2021 and 2020, by asset category, is as follows: Fair Value Measurements at December 31, 2021 Using: Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Observable Inputs (Dollar amounts in thousands) Total (Level 1) (Level 2) (Level 3) Plan assets Equity securities $ 62,382 $ 62,382 $ — $ — Debt securities 10,102 — 10,102 — Investment Funds 15,495 15,495 — — Total plan assets $ 87,979 $ 77,877 $ 10,102 $ — 87 Fair Value Measurements at December 31, 2020 Using: Quoted Prices in Active Markets for Identical Assets Significant Other Observable Inputs Significant Observable Inputs (Dollar amounts in thousands) Total (Level 1) (Level 2) (Level 3) Plan assets Equity securities $ 55,235 $ 55,235 $ — $ — Debt securities 12,673 — 12,673 — Investment Funds 14,529 14,529 — — Total plan assets $ 82,437 $ 69,764 $ 12,673 $ — The investment objective for the retirement program is to maximize total return without exposure to undue risk. Asset allocation favors equities. This target includes the Corporation's ESOP, which is fully invested in corporate stock. Other investment allocations include fixed income securities and cash. The plan is prohibited from investing in the following: private placement equity and debt transactions; letter stock and uncovered options; short-sale margin transactions and other specialized investment activity; and fixed income or interest rate futures. All other investments not prohibited by the plan are permitted. Equity securities in the defined benefit plan include First Financial Corporation common stock in the amount of $ 18.1 million ( 21 percent of total plan assets) and $ 16.5 million ( 20 percent of total plan assets) at December 31, 2021 and 2020, respectively. In addition the ESOP for non plan participants holds an estimated $ 7.2 million and $ 5.5 million of First Financial Corporation stock at December 31, 2021 and December 31, 2020 respectively. Other equity securities are predominantly stocks in large cap U.S. companies. Contributions — The Corporation expects to contribute $ 250 thousand to its pension plan and $ 703 thousand to its ESOP in 2022. Estimated Future Payments — The following benefit payments, which reflect expected future service, are expected: PENSION BENEFITS (Dollar amounts in thousands) 2022 $ 5,889 2023 6,107 2024 6,293 2025 6,430 2026 6,663 2027-2031 34,497 Supplemental Executive Retirement Plan — The Corporation has established a Supplemental Executive Retirement Plan (SERP) for certain executive officers. The provisions of the SERP allow the Plan's participants who are also participants in the Corporation's defined benefit pension plan to receive supplemental retirement benefits to help recompense for benefits lost due to the imposition of IRS limitations on benefits under the Corporation's tax qualified defined benefit pension plan. Expenses related to the plan were $ 748 thousand in 2021 and $ 539 thousand in 2020 and $ 339 thousand in 2019.The plan is unfunded and has a measurement date of December 31. The amounts recognized in other comprehensive income in the current year are as follows: (Dollar amounts in thousands) 2021 2020 2019 Net loss (gain) during the period $ 54 $ 1,459 $ 1,357 Amortization of prior service cost — — — Amortization of unrecognized (gain) loss ( 441 ) ( 246 ) ( 75 ) Total recognized in other comprehensive (income) loss $ ( 387 ) $ 1,213 $ 1,282 88 The Corporation has $ 8.8 million and $ 8.4 million recognized in the balance sheet as a liability at December 31, 2021 and 2020. Amounts in accumulated other comprehensive income consist of $ 3.2 million net loss at December 31, 2021 and $ 3.6 million net loss at December 31, 2020. Estimated Future Payments — The following benefit payments, which reflect expected future service, are expected: (Dollar amounts on thousands) 2022 $ — 2023 203 2024 399 2025 390 2026 380 2027-2031 3,104 Post-retirement medical benefits — The Corporation also provides medical benefits to certain employees subsequent to their retirement. The Corporation uses a measurement date of December 31. Accrued post-retirement benefits as of December 31, 2021 and 2020 are as follows: December 31, (Dollar amounts in thousands) 2021 2020 Change in benefit obligation: Benefit obligation at January 1 $ 4,147 $ 3,975 Service cost 43 38 Interest cost 103 125 Plan participants' contributions 34 75 Actuarial (gain) loss ( 53 ) 238 Benefits paid ( 259 ) ( 304 ) Benefit obligation at December 31 $ 4,015 $ 4,147 Funded status at December 31 $ 4,015 $ 4,147 Amounts recognized in accumulated other comprehensive income consist of a net loss of $ 212 thousand at December 31, 2021 and $ 266 thousand net loss at December 31, 2020. The post-retirement benefits paid in 2021 and 2020 of $ 259 thousand and $ 305 thousand, respectively, were fully funded by company and participant contributions. There is no estimated transition obligation for the post-retirement benefit plan that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year. Weighted average assumptions at December 31: December 31, 2021 2020 Discount rate 2.83 % 2.52 % Initial weighted health care cost trend rate 5.00 % 5.00 % Ultimate health care cost trend rate 5.00 5.00 Year that the rate is assumed to stabilize and remain unchanged 2022 2021 89 Post-retirement health benefit expense included the following components: Years Ended December 31, (Dollar amounts in thousands) 2021 2020 2019 Service cost $ 43 $ 38 $ 34 Interest cost 103 125 146 Amortization of net actuarial loss (gain) — — ( 16 ) Net periodic benefit cost 146 163 164 Net loss (gain) during the period ( 53 ) 238 626 Amortization of prior service cost — — 16 Total recognized in other comprehensive income (loss) ( 53 ) 238 642 Total recognized net periodic benefit cost and other comprehensive income $ 93 $ 401 $ 806 Contributions — The Corporation expects to contribute $ 248 thousand to its other post-retirement benefit plan in 2022. Estimated Future Payments — The following benefit payments, which reflect expected future service, are expected: (Dollar amounts in thousands) 2022 $ 248 2023 253 2024 258 2025 253 2026 250 2027-2031 1,242 17. STOCK BASED COMPENSATION: On February 5, 2011, the Corporation's Board of Directors adopted and approved the First Financial Corporation 2011 Omnibus Equity Incentive Plan (the "2011 Stock Incentive Plan") effective upon the approval of the Plan by the Corporation's shareholders, which occurred on April 20, 2011 at the Corporation’s annual meeting of shareholders. The 2011 Stock Incentive Plan provides for the grant of non qualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units and incentive awards. An aggregate of 700,000 shares of common stock were reserved for issuance under the 2011 Stock Incentive Plan. A total of 205,760 shares of restricted common stock of the Corporation were granted under the 2011 Stock Incentive Plan. On April 21, 2021 at the Corporation's annual meeting of shareholders, the shareholders approved the First Financial Corporation Amended and Restated 2011 Omnibus Equity Incentive Plan ("2011 Amended Plan"). An aggregate of 400,000 shares of common stock are reserved for issuance under the 2011 Amended Plan. Shares issuable under the 2011 Amended Plan may be authorized and unissued shares of common stock or treasury shares. During the first quarter of 2021 and 2020, the Compensation Committee of the Board of Directors of the Company granted restricted stock awards to certain executive officers pursuant to the Corporation's annual performance-based stock incentive bonus plan. Compensation expense is recognized over the vesting period of the awards based on the fair value of the stock at the grant date. The value of the awards was determined by dividing the award amount by the median price of a share of Company common stock on the grant dates. The restricted stock awards vest as follows — 33 % on the first anniversary, 33 % on the second anniversary and the remaining 34 % on the third anniversary of the earned date. The Corporation has the right to retain shares to satisfy any withholding tax obligation. A total of 21,159 shares of restricted common stock of the Corporation were granted under the 2011 Amended Plan. A total of 378,841 remain to be granted under this plan. Restricted Stock Restricted stock awards require certain service-based or performance requirements and have a vesting period of 3 years. Compensation expense is recognized over the vesting period of the award based on the fair value of the stock at the date of issue. Compensation related to the plan was $ 807 thousand, $ 820 thousand, and $ 799 thousand in 2021, 2020 and 2019, respectively. 90 2021 2020 Number Weighted Average Grant Date Number Weighted Average Grant Date (shares in thousands) Outstanding Fair Value Outstanding Fair Value Nonvested balance at January 1, 19,724 42.51 18,931 43.44 Granted during the year 20,016 41.81 19,688 42.50 Vested during the year ( 19,105 ) 42.27 ( 18,895 ) 43.43 Forfeited during the year ( 1,089 ) 42.51 — — Nonvested balance at December 31, 19,546 42.03 19,724 42.51 As of December 31, 2021 and 2020, there was $ 821 thousand and $ 838 thousand, respectively of total unrecognized compensation cost related to non-vested shares granted under the Plan. The cost is expected to be recognized over a weighted-average period of 1.5 years. The total fair value of the shares vested during the years ended December 31, 2021 and 2020 was $ 865 thousand and $ 734 thousand, respectively. 18. OTHER COMPREHENSIVE INCOME (LOSS): The following table summarizes the changes, net of tax within each classification of accumulated other comprehensive income for the years ended December 31, 2021 and 2020. Unrealized gains and 2021 Losses on available- for-sale Retirement (Dollar amounts in thousands) Securities plans Total Beginning balance, January 1 $ 34,162 $ ( 24,398 ) $ 9,764 Change in other comprehensive income before reclassification ( 18,403 ) 4,744 ( 13,659 ) Amounts reclassified from accumulated other comprehensive income ( 85 ) 1,554 1,469 Net current period other comprehensive income (loss) ( 18,488 ) 6,298 ( 12,190 ) Ending balance, December 31 $ 15,674 $ ( 18,100 ) $ ( 2,426 ) Unrealized gains and 2020 Losses on available- for-sale Retirement (Dollar amounts in thousands) Securities plans Total Beginning balance, January 1 $ 14,893 $ ( 22,394 ) $ ( 7,501 ) Change in other comprehensive income before reclassification 19,444 ( 3,479 ) 15,965 Amounts reclassified from accumulated other comprehensive income ( 175 ) 1,475 1,300 Net current period other comprehensive income (loss) 19,269 ( 2,004 ) 17,265 Ending balance, December 31 $ 34,162 $ ( 24,398 ) $ 9,764 91 Balance at Current Period Balance at (Dollar amounts in thousands) 1/1/2021 Change 12/31/2021 Unrealized gains (losses) on securities available-for-sale without other than temporary impairment $ 31,810 $ ( 18,655 ) $ 13,155 Unrealized gains (losses) on securities available-for-sale with other than temporary impairment 2,352 167 2,519 Total unrealized gain (loss) on securities available-for-sale $ 34,162 $ ( 18,488 ) $ 15,674 Unrealized loss on retirement plans ( 24,398 ) 6,298 ( 18,100 ) TOTAL $ 9,764 $ ( 12,190 ) $ ( 2,426 ) Balance at Current Period Balance at (Dollar amounts in thousands) 1/1/2020 Change 12/31/2020 Unrealized gains (losses) on securities available-for-sale without other than temporary impairment $ 12,178 $ 19,632 $ 31,810 Unrealized gains (losses) on securities available-for-sale with other than temporary impairment 2,715 ( 363 ) 2,352 Total unrealized gain (loss) on securities available-for-sale $ 14,893 $ 19,269 $ 34,162 Unrealized loss on retirement plans ( 22,394 ) ( 2,004 ) ( 24,398 ) TOTAL $ ( 7,501 ) $ 17,265 $ 9,764 Balance at December 31, 2021 Details about accumulated Amount reclassified from Affected line item in other comprehensive accumulated other the statement where income components comprehensive income net income is presented (in thousands) Unrealized gains and losses $ 114 Net securities gains (losses) on available-for-sale ( 29 ) Income tax expense securities $ 85 Net of tax Amortization of $ ( 2,072 ) (a) retirement plan items 518 Income tax expense $ ( 1,554 ) Net of tax Total reclassifications for the period $ ( 1,469 ) Net of tax (a) Included in the computation of net periodic benefit cost which is included in salaries and benefits. (see Footnote 16 for additional details). Balance at December 31, 2020 Details about accumulated Amount reclassified from Affected line item in other comprehensive accumulated other the statement where income components comprehensive income net income is presented (in thousands) Unrealized gains and losses $ 233 Net securities gains (losses) on available-for-sale ( 58 ) Income tax expense securities $ 175 Net of tax Amortization of $ ( 1,967 ) (a) retirement plan items 492 Income tax expense $ ( 1,475 ) Net of tax Total reclassifications for the period $ ( 1,300 ) Net of tax 92 (a) Included in the computation of net periodic benefit cost which is included in salaries and benefits. (see Footnote 16 for additional details). Balance at December 31, 2019 Details about accumulated Amount reclassified from Affected line item in other comprehensive accumulated other the statement where income components comprehensive income net income is presented (in thousands) Unrealized gains and losses $ 44 Net securities gains (losses) on available-for-sale ( 11 ) Income tax expense securities $ 33 Net of tax Amortization of $ ( 1,558 ) (a) retirement plan items 390 Income tax expense $ ( 1,168 ) Net of tax Total reclassifications for the period $ ( 1,135 ) Net of tax (a) Included in the computation of net periodic benefit cost which is included in salaries and benefits. (see Footnote 16 for additional details). 19. LEASES: The Corporation leases certain branches under operating leases. At December 31, 2021, the Corporation had lease liabilities totaling $6,218,000 and right-of-use assets totaling $6,197,000 related to these leases. Lease liabilities and right-of-use assets are reflected in other liabilities and other assets, respectively. For the year ended December 31, 2021, the weighted average remaining lease term for operating leases was 10.1 years and the weighted average discount rate used in the measurement of operating lease liabilities was 2.26%. The calculated amount of the lease liabilities and right-of-use assets are impacted by the length of the lease term and the discount rate used to present value the minimum lease payments. The Corporation's lease agreements often include one or more options to renew at the Corporation's discretion. If at lease inception, the Corporation considers the exercising of a renewal option to be reasonably certain, the Corporation will include the extended term in the calculation of the lease liability and right-of-use asset. Regarding the discount rate, the new standard requires the use of the rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, the Corporation utilizes its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term. For operating leases existing prior to January 1, 2019, the rate for the remaining lease term as of January 1, 2019 was used. The following table represents lease costs and other lease information. As the Corporation elected, not to separate lease and non-lease components and instead to account for them as a single lease component, the variable lease cost primarily represents variable payments such as common area maintenance and utilities. Lease costs were as follows: (Dollar amounts in thousands) Year Ended December 31, 2021 Operating lease cost $ 1,235 Short-term lease cost 196 Variable lease cost 10 Total lease cost $ 1,441 Other information: Cash paid for amounts included in the measurement of operating lease liabilities 1,200 Right-of-use assets obtained in exchange for new operating lease liabilities 9,293 93 Future minimum payments for operating leases with initial or remaining terms of one year or more as of December 31, 2021 were as follows: (Dollar amounts in thousands) December 31, 2021 Twelve Months Ended December 31, 2022 $ 916 2023 858 2024 793 2025 751 2026 671 Thereafter 3,021 Total future minimum lease payments 7,010 Amounts representing interest (792) Present value of net future minimum lease payments $ 6,218 20. REGULATORY MATTERS: The Corporation and its bank affiliates are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory—and possibly additional discretionary—actions by regulators that, if undertaken, could have a direct material effect on the Corporation's financial statements. Further, the Corporation's primary source of funds to pay dividends to shareholders is dividends from its subsidiary banks and compliance with these capital requirements can affect the ability of the Corporation and its banking affiliates to pay dividends. At December 31, 2021, approximately $ 8.4 million of undistributed earnings of the subsidiary banks, included in consolidated retained earnings, were available for distribution to the Corporation with regulatory approval. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and Banks must meet specific capital guidelines that involve quantitative measures of the Corporation's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Corporation's and Banks' capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Corporation and Banks to maintain minimum amounts and ratios of Total, Common equity tier I capital and Tier I Capital to risk-weighted assets, and of Tier I Capital to average assets. Under the Basel lll rules, the Corporation must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital. Management believes, as of December 31, 2021 and 2020, that the Corporation meets all capital adequacy requirements to which it is subject. As of December 31, 2021, the most recent notification from the respective regulatory agencies categorized the subsidiary banks as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the banks must maintain minimum total risk-based, Common equity tier I capital, Tier I risk-based and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the banks' category. 94 The following table presents the actual and required capital amounts and related ratios for the Corporation and First Financial Bank, N.A., at year-end 2021 and 2020. To Be Well Capitalized For Capital Under Prompt Corrective Actual Adequacy Purposes Action Provisions (Dollar amounts in thousands) Amount Ratio Amount Ratio Amount Ratio Total risk-based capital Corporation – 2021 $ 533,599 15.63 % $ 358,575 10.500 % N/A N/A Corporation – 2020 $ 538,440 17.40 % $ 324,849 10.500 % N/A N/A First Financial Bank – 2021 487,416 14.78 % 346,248 10.500 % 329,760 10.00 % First Financial Bank – 2020 507,869 17.03 % 313,075 10.500 % 298,166 10.00 % Common equity tier I capital Corporation – 2021 $ 490,842 14.37 % $ 239,050 7.000 % N/A N/A Corporation – 2020 $ 499,664 16.15 % $ 216,566 7.000 % N/A N/A First Financial Bank – 2021 446,189 13.53 % 230,832 7.000 % 214,344 6.50 % First Financial Bank – 2020 470,551 15.78 % 208,716 7.000 % 193,808 6.50 % Tier I risk-based capital Corporation – 2021 $ 490,842 14.37 % $ 290,275 8.500 % N/A N/A Corporation – 2020 $ 499,664 16.15 % $ 262,973 8.500 % N/A N/A First Financial Bank – 2021 446,189 13.53 % 280,296 8.500 % 263,808 8.00 % First Financial Bank – 2020 470,551 15.78 % 253,441 8.500 % 238,533 8.00 % Tier I leverage capital Corporation – 2021 $ 490,842 9.83 % $ 199,702 4.00 % N/A N/A Corporation – 2020 $ 499,664 11.24 % $ 177,781 4.00 % N/A N/A First Financial Bank – 2021 446,189 9.18 % 194,405 4.00 % 243,006 5.00 % First Financial Bank – 2020 470,551 10.90 % 172,728 4.00 % 215,910 5.00 % In December 2018, the OCC, the Board of Governors of the Federal Reserve System, and the FDIC approved a final rule to address changes to credit loss accounting under GAAP, including banking organizations’ implementation of CECL. The final rule provides banking organizations the option to phase in over a three-year period the day-one adverse effects on regulatory capital that may result from the adoption of the new accounting standard. In March 2020, the OCC, the Board of Governors of the Federal Reserve System, and the FDIC published an interim final rule to delay the estimated impact on regulatory capital stemming from the implementation of CECL. The interim final rule maintains the three-year transition option in the previous rule and provides banks the option to delay for two years an estimate of CECL’s effect on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period (five-year transition option). The Corporation is not adopting the capital transition relief. 95 21. PARENT COMPANY CONDENSED FINANCIAL STATEMENTS: The parent company’s condensed balance sheets as of December 31, 2021 and 2020, and the related condensed statements of income and comprehensive income and cash flows for each of the three years in the period ended December 31, 2021, are as follows: CONDENSED BALANCE SHEETS December 31, (Dollar amounts in thousands) 2021 2020 ASSETS Cash deposits in affiliated banks $ 13,844 $ 2,480 Investments in subsidiaries 571,986 597,888 Land and headquarters building, net 4,423 4,614 Other 7,518 6,000 Total Assets $ 597,771 $ 610,982 LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Dividends payable 7,952 7,182 Other liabilities 7,243 6,808 TOTAL LIABILITIES 15,195 13,990 Shareholders' Equity 582,576 596,992 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 597,771 $ 610,982 CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME Years Ended December 31, (Dollar amounts in thousands) 2021 2020 2019 Dividends from subsidiaries $ 99,231 $ 31,069 $ 81,281 Other income 746 1,054 720 Interest on borrowings — (374) (142) Other operating expenses ( 2,611 ) ( 3,430 ) ( 4,327 ) Income before income taxes and equity in undistributed earnings of subsidiaries 97,366 28,319 77,532 Income tax benefit 681 801 908 Income before equity in undistributed earnings of subsidiaries 98,047 29,120 78,440 Equity in undistributed earnings of subsidiaries ( 45,060 ) 24,724 ( 29,568 ) Net income $ 52,987 $ 53,844 $ 48,872 Comprehensive income $ 40,797 $ 71,109 $ 64,825 96 CONDENSED STATEMENTS OF CASH FLOWS Years Ended December 31, (Dollar amounts in thousands) 2021 2020 2019 CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 52,987 $ 53,844 $ 48,872 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 191 328 193 Equity in undistributed earnings 45,060 ( 24,724 ) ( 29,568 ) Contribution of shares to ESOP 1,402 1,471 1,251 Restricted stock compensation 807 820 801 Increase (decrease) in other liabilities 435 6,127 ( 2,150 ) (Increase) decrease in other assets ( 1,518 ) ( 5,977 ) 1,187 NET CASH FROM OPERATING ACTIVITIES 99,364 31,889 20,586 CASH FLOWS FROM INVESTING ACTIVITIES: Cash received (disbursed) from acquisitions ( 31,348 ) — ( 6,571 ) NET CASH FROM INVESTING ACTIVITIES ( 31,348 ) — ( 6,571 ) CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on borrowings — (10,310) — Purchase of treasury stock ( 42,471 ) ( 9,220 ) ( 315 ) Dividends paid ( 14,181 ) ( 14,273 ) ( 12,648 ) NET CASH FROM FINANCING ACTIVITES ( 56,652 ) ( 33,803 ) ( 12,963 ) NET (DECREASE) INCREASE IN CASH 11,364 ( 1,914 ) 1,052 CASH, BEGINNING OF YEAR 2,480 4,394 3,342 CASH, END OF YEAR $ 13,844 $ 2,480 $ 4,394 Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ — $ 375 $ — Income taxes $ 15,025 $ 7,549 $ 9,595 97 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None