First Financial Corporation — Q3 2019 Form 10-Q
Business context and period. First Financial Corporation is a bank holding company reporting one banking segment. This unaudited report covers the three and nine months ended September 30, 2019. Results include HopFed Bancorp from its July 27, 2019 acquisition, so reported comparisons with 2018 are not on a fully comparable basis.
Financial performance and condition
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net interest income | $34.0m | $28.8m | $93.2m | $87.0m |
| Net interest margin | 4.04% | 4.29% | 4.21% | 4.31% |
| Non-interest income | $9.7m | $8.9m | $27.1m | $30.0m |
| Non-interest expense | $27.4m | $22.3m | $74.6m | $68.2m |
| Provision for loan losses | $1.5m | $1.5m | $3.2m | $4.3m |
| Net income | $12.3m | $11.3m | $34.5m | $35.5m |
| Diluted EPS | $0.93 | $0.92 | $2.74 | $2.90 |
- Q3 return on assets and return on equity were 1.33% and 9.97%, respectively; nine-month figures were 1.42% and 9.74%.
- At September 30, total assets were $3.99bn, loans net of allowance were $2.65bn, securities available-for-sale were $939.9m, and deposits were $3.22bn. Total shareholders’ equity was $556.6m.
- Cash and due from banks were $80.2m. Nine-month operating cash flow was $39.1m; investing cash use was $27.9m and financing cash use was $5.5m. Cash increased $5.8m from year-end 2018.
- Period-end short-term borrowings were $90.9m, including $79.7m of repurchase agreements. Other borrowings were $55.9m. Total liabilities were $3.43bn.
- Regulatory capital ratios remained above stated minimums. At September 30, the Corporation’s common equity Tier 1, total risk-based capital, and Tier 1 leverage ratios were 15.09%, 15.72%, and 13.07%; First Financial Bank’s corresponding ratios were 14.76%, 15.27%, and 12.77%.
Material changes and notable items
- HopFed acquisition: completed July 27 for reported total consideration of $129.2m, including $67.3m cash and $61.9m stock. The company recorded $41.1m of goodwill and $10.4m of core deposit intangibles. Acquired assets totaled $927.3m, including $657.2m of loans; assumed liabilities totaled $839.2m, including $735.5m of deposits. Acquisition-related costs were $2.9m for the nine months.
- Total assets rose from $3.01bn at December 31, 2018 to $3.99bn at September 30, 2019; reported loan growth and deposit growth comparisons also reflect HopFed. Book value per share was $40.59, up 16.3% from September 2018.
- Q3 net interest income increased, but net interest margin declined. Interest expense rose as deposit and borrowing costs increased. Nine-month net income and EPS declined year over year; management cited a $2.4m prior-year recovery of nonaccrual-loan fees in Q2 2018 as a comparison factor.
- Nine-month non-interest income declined partly because 2018 included a $4.2m recovery of previously recorded securities impairment. Non-interest expense increased, with acquisition costs included in 2019.
- Allowance for loan losses was $19.8m, versus $20.4m at year-end 2018. Nine-month net charge-offs were $3.8m. Nonperforming loans were $14.4m, down from $16.6m at year-end 2018; allowance coverage of nonperforming loans was 137.5%.
- Available-for-sale securities had $1.3m of gross unrealized losses, versus $15.2m at year-end 2018. Management attributed most losses to market interest-rate changes, reported no additional OTTI, and said it did not intend to sell and was not more likely than not required to sell affected securities before recovery.
Outlook, risks and contingencies
- No specific earnings or revenue guidance is provided. Management anticipated adequate liquidity, citing expected security maturities and principal repayments and unused borrowing capacity at the Federal Home Loan Bank and correspondent banks.
- Interest-rate simulations estimated that a 100-basis-point increase would raise net interest income 2.63% over 12 months, while a 100-basis-point decrease would reduce it 3.81%. Management cautioned that these are model estimates with assumptions and do not reflect management actions.
- Management expected adoption of the CECL credit-loss standard, effective for the company in 2020, to increase the allowance; the amount was uncertain. It was preparing models and planned parallel calculations in Q4 2019.
- Credit quality warrants monitoring: Q3 net charge-offs were $2.0m versus $1.2m a year earlier, and the HopFed-acquired loan portfolio initially carried no allowance; an allowance would be recorded if further deterioration occurs. Management considered the existing allowance adequate.
- Disclosed risks include economic and financial-market conditions, interest rates, competition, execution of business plans, regulation, litigation, borrower losses, and accounting changes. The filing reported no material change in risk factors, no material pending legal proceedings beyond routine litigation, and effective disclosure controls.
Key facts for investors to verify
- How much of reported asset, loan, deposit, and earnings growth is attributable to HopFed versus organic performance, and what integration costs or synergies remain?
- Whether net interest margin and funding costs stabilize, particularly as deposits and borrowings expand.
- Trends in charge-offs, nonperforming loans, criticized loans, and the adequacy of reserves, including the acquired portfolio’s credit performance.
- The eventual CECL adoption impact on the allowance, earnings, and capital.
- Liquidity and capital trends following the acquisition, and the company’s sensitivity to interest-rate changes.