First Financial Corporation (NASDAQ: THFF) — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. The filing reports full-year results, not standalone fourth-quarter results. First Financial is a regional financial holding company operating primarily in Indiana, Illinois, Kentucky and Tennessee, with banking as its principal business.
Financial performance and condition
Dollar amounts are in millions unless otherwise stated.
| Metric | 2022 | 2021 | Change / context |
|---|---|---|---|
| Net income | $71.1 | $53.0 | Up 34%; management attributed growth mainly to higher interest rates and growth in earning assets. |
| Diluted earnings per share | $5.82 | $4.02 | Up from prior year. |
| Net interest income | $165.0 | $143.4 | Up 15%. |
| Net interest margin | 3.54% | 3.20% | Improved as asset yields rose faster than funding costs. |
| Non-interest income | $46.7 | $42.1 | Includes unusual $4.0 million legal settlement and $2.5 million bank-owned life insurance mortality payment; the company does not expect either to recur. |
| Non-interest expense | $126.0 | $117.4 | Higher year over year; partly reflects the Hancock Bancorp acquisition. |
| Provision for credit losses | $(2.0) | $2.5 | Negative provision (release) in 2022, reflecting model recalibration, lower historical loss rates and improved portfolio performance. |
| Total assets | $4,989.3 | $5,175.1 | Down 3.6%. |
| Loans, gross | $3,060.3 | $2,812.6 | Up about 8.8%. |
| Deposits | $4,368.9 | $4,409.6 | Down about 0.9%. |
| Borrowings | $80.5 | $109.3 | Down about 26%. |
| Shareholders’ equity | $475.3 | $582.6 | Down $107.3 million, mainly reflecting the securities-related decline in accumulated other comprehensive income. |
| Operating cash flow | $78.8 | $55.1 | Investing cash flow was $(433.7) million and financing cash flow $(110.6) million; cash and due from banks fell $465.5 million to $222.5 million. |
- Credit quality: Allowance for credit losses was $39.8 million, or 1.30% of gross loans, versus $48.3 million, or 1.72%, in 2021. Net charge-offs rose to $6.5 million from $2.6 million (0.23% versus 0.10% of average loans). Non-accrual loans were $11.6 million; the filing’s broader nonperforming-loan table totals $16.5 million, including restructured and 90-day-past-due accruing loans.
- Investment securities: Available-for-sale securities were $1,330.5 million. Their net unrealized position shifted from a $19.9 million gain in 2021 to a $168.2 million loss in 2022, attributed primarily to interest-rate-driven market declines rather than credit deterioration. Management reported no intent or expected requirement to sell before recovery and no credit-loss allowance was needed.
- Capital and liquidity: At year-end, the Corporation reported CET1 and Tier 1 risk-based capital ratios of 13.58%, total capital of 14.61% and leverage of 10.78%; First Financial Bank reported 12.09%, 12.09%, 13.14% and 9.50%, respectively. The Bank was categorized as well capitalized. The company cited securities cash flows and secured and unsecured borrowing capacity as liquidity sources; FHLB borrowing capacity was $246.4 million.
Material changes and notable items
- Higher rates and earning-asset growth lifted net interest income, while the average cost of interest-bearing liabilities rose to 0.51% from 0.26%.
- Loans grew while deposits and total assets declined. Shareholders’ equity fell substantially as accumulated other comprehensive loss worsened, primarily due to the market value of the securities portfolio.
- Commercial and commercial real estate loans represented approximately 58.8% of the loan portfolio, exposing results to business and property-market conditions.
- The company repurchased 626,574 shares during 2022. No shares were repurchased in the fourth quarter; the remaining authorization was 830,220 shares at year-end.
- In January 2023, the company closed and consolidated seven branches. It recorded a $1.3 million impairment related to affected owned properties and projected annual operating-cost savings of about $1.5 million beginning in the first quarter of 2023.
- All $275.1 million of Paycheck Protection Program loans had been forgiven by the SBA; the company nevertheless noted potential exposure if the SBA identifies origination, funding or servicing deficiencies.
Outlook, risks and contingencies
- No formal earnings or revenue guidance is provided. Management said it expects to continue regular cash dividends, subject to earnings, capital needs and regulatory restrictions. The filing reports $1.17 per share of cash dividends in selected financial data, while the equity statement reports $1.28 per share declared; investors should verify the distinction and amounts.
- Interest-rate sensitivity modeling estimated that a 100-basis-point increase would raise net interest income 1.94% over 12 months, while a 100-basis-point decrease would reduce it 3.30%. Management cautioned that these are model estimates assuming immediate rate changes and no management action.
- Key risks include inflation and recession, changing interest rates and deposit costs, credit deterioration, concentrated regional markets, commercial real estate exposure, liquidity, cybersecurity and third-party service providers, competition, regulation, and the LIBOR-to-SOFR transition.
- Unused loan commitments were $820.0 million and commercial letters of credit $7.8 million; these do not necessarily result in future funding. The filing reports no material pending legal proceedings other than routine litigation and no unresolved SEC staff comments.
- Management and the auditor concluded internal control over financial reporting was effective at year-end. The auditor identified the allowance for credit losses as a critical audit matter due to significant estimation and judgment.
Important facts for investors to verify
- Whether the sharp decline in securities values and equity could affect capital, liquidity or strategic flexibility if securities need to be sold.
- How loan growth, increased net charge-offs and the lower allowance ratio develop, especially in commercial and commercial real estate portfolios.
- Deposit trends, deposit pricing and funding costs as market rates change.
- Whether the $1.5 million projected branch-consolidation savings are achieved and what additional implementation costs arise.
- The recurring earnings contribution after excluding the $4.0 million legal settlement and $2.5 million mortality payment.
- The dividend-per-share figures: selected financial data lists $1.17, while the equity statement lists $1.28 declared for 2022.