First Financial Corporation — Q2 2021 Form 10-Q
Business and period: Indiana-based bank holding company reporting unaudited consolidated results for the three and six months ended June 30, 2021. The company reports one segment: banking. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net interest income | $35.6 | $35.9 | $70.5 | $72.2 |
| Net interest margin | 3.23% | 3.97% | 3.25% | 4.05% |
| Provision for credit losses | $(2.2) | $3.0 | $(1.7) | $5.7 |
| Non-interest income | $10.9 | $8.8 | $20.2 | $17.9 |
| Non-interest expense | $28.0 | $26.9 | $55.6 | $54.4 |
| Net income | $16.6 | $11.9 | $29.5 | $24.1 |
| Basic and diluted EPS | $1.24 | $0.87 | $2.19 | $1.76 |
Q2 return on assets was 1.40% and return on equity 11.06%, versus 1.10% and 8.06%, respectively, a year earlier. For the first half, the respective measures were 1.26% and 9.82%, versus 1.16% and 8.30%.
Financial position, cash flow and credit
- At June 30, 2021, total assets were $4,753.3, loans net of allowance were $2,526.2, and deposits were $3,988.8. Compared with December 31, 2020, assets rose $195.8, deposits rose $232.8, and net loans fell $37.0.
- Cash and due from banks was $677.9, federal funds sold $0.5, and available-for-sale securities $1,219.6. Total borrowings were $104.4, comprising $98.5 of short-term borrowings and $5.9 of other borrowings, down from $121.9 at year-end.
- First-half operating cash flow was $27.5, down from $39.7. Investing cash flow was $(185.0), principally reflecting $364.6 of securities purchases; financing cash flow was $177.8, including $233.0 of net deposit growth and $23.4 of treasury-stock purchases. Cash and due from banks increased $20.4 to $677.9.
- The allowance for credit losses was $44.7, down from $47.1 at year-end. Nonperforming loans were $20.0 versus $21.9 at year-end; allowance coverage of nonperforming loans was 223.5%, compared with 214.9%.
- Regulatory capital ratios remained well above stated minimums. At June 30, the Corporation reported 17.15% common equity Tier 1, 18.40% total risk-based capital, and 10.72% Tier 1 leverage.
Material changes and management commentary
- Net income rose year over year as lower credit-loss provision expense and stronger non-interest income more than offset reduced net interest income and higher operating expenses. Management attributed lower net interest income and margin to lower interest rates and elevated low-yielding cash balances.
- Non-interest income growth reflected higher service charges and fees, particularly debit-card income, along with increased loan-sale gains. Salaries and employee benefits also increased.
- The company recorded a negative provision for credit losses in Q2 and the first half. Management cited improved economic conditions and said COVID-related potential losses incorporated in 2020 had not been realized; it considered the allowance adequate. CECL was adopted effective January 1, 2020, with the first three quarters of 2020 using the incurred-loss method and CECL applied from Q4 2020.
- COVID-related payment relief: 1,454 loans totaling $285 million had been modified and were not classified as troubled debt restructurings; the filing says 1,147 loans totaling $222 million resumed scheduled payments and 247 remained under relief, including 22 commercial loans totaling $52 million receiving additional relief. It separately reports 14 loans totaling $2 million under the original plan.
- Management estimated that a 100-basis-point rate increase would raise net interest income 4.94% over 12 months, while a 100-basis-point decrease would lower it 5.70%. These are modeled scenarios assuming an immediate parallel rate move and no management response. Management anticipated adequate liquidity, citing deposit funding, expected security principal payments and available borrowing capacity.
- The filing provides no earnings or revenue guidance. Management cautioned that COVID-19, economic conditions, rates, asset quality, competition, regulation, litigation and accounting estimates could affect actual results. It reported no material change in risk factors from the 2020 Form 10-K and no material pending legal proceedings beyond routine litigation.
Other notable items
Available-for-sale securities increased to $1,219.6 from $1,020.7 at year-end. Gross unrealized losses rose to $5.4 from $0.4; management attributed them to market-rate movements rather than issuer credit concerns and said it did not intend, and was not likely required, to sell the affected securities before recovery. Accumulated other comprehensive income fell to $1.4 from $9.8, primarily reflecting the first-half change in securities values. The company repurchased 497,000 shares in Q2 at an average $44.31 per share, exhausting the then-authorized 5% repurchase program. Management stated disclosure controls were effective and that no material internal-control change occurred during the quarter.
Investor verification priorities
- Assess whether lower rates and high cash balances will continue to pressure net interest margin and earnings, and compare modeled rate sensitivity with actual balance-sheet repricing.
- Review credit quality, the adequacy and assumptions of the CECL allowance, and the continued performance of COVID-relief borrowers; reconcile the filing’s reported loan-modification counts and balances.
- Track deposit mix and funding costs, liquidity sources, securities cash flows, and the market-value sensitivity of the securities portfolio.
- Evaluate the sustainability of earnings growth given the unusually low/negative provision, higher non-interest income, and rising compensation expense.
- Confirm the effects of completed share repurchases, dividends and securities-related accumulated other comprehensive income on capital and book value per share.