First Financial Corporation (THFF) — Q3 2021 Form 10-Q
Business context and reporting period
Banking company First Financial Corporation reported unaudited results for the quarter and nine months ended September 30, 2021. Balance-sheet comparisons below are with December 31, 2020 unless otherwise noted. Dollar amounts are in millions except per-share data.
Financial performance and condition
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total interest income | $38.1 | $39.5 | $113.4 | $120.2 |
| Net interest income | $36.0 | $36.5 | $106.6 | $108.8 |
| Net interest margin | 3.22% | 3.99% | 3.24% | 4.03% |
| Non-interest income | $11.1 | $11.7 | $31.3 | $29.6 |
| Non-interest expense | $28.5 | $27.1 | $84.1 | $81.6 |
| Net income | $16.1 | $14.0 | $45.6 | $38.1 |
| Diluted EPS | $1.24 | $1.02 | $3.42 | $2.78 |
- Q3 pre-tax income was $20.2 million versus $16.7 million; year-to-date pre-tax income was $57.0 million versus $46.7 million. Nine-month effective tax rate was 20.07% versus 18.47%.
- Net interest margin compressed year over year, which management attributed to lower interest rates and higher balances of low-yielding cash. Net interest income declined, while lower credit-loss provisions supported higher earnings.
- At September 30, assets were $4.80 billion, loans net of allowance were $2.44 billion, and available-for-sale securities were $1.27 billion. Deposits were $4.03 billion, up from $3.76 billion at year-end; short-term and other borrowings totaled $107.0 million, down from $121.9 million.
- Shareholders’ equity was $594.9 million, versus $597.0 million at year-end. Book value per share was $46.22, up 4.41% from September 2020. The company repurchased 707,734 shares for $30.4 million during the first nine months.
- For the first nine months, operating cash flow was $42.9 million, investing cash flow was negative $155.6 million, and financing cash flow was $213.3 million. Cash and due from banks ended at $758.1 million.
- Allowance for credit losses was $43.0 million, down from $47.1 million at year-end. Non-performing loans were $19.5 million, versus $21.9 million at year-end; allowance coverage of non-performing loans was 220.4%.
- At September 30, the Corporation’s common equity Tier 1, total risk-based capital, and Tier 1 leverage ratios were 16.63%, 17.88%, and 10.77%, respectively. First Financial Bank’s respective ratios were 15.25%, 16.49%, and 9.74%.
Material changes, outlook, and risks
- Credit-loss provision was a release of $1.5 million in Q3 2021, compared with a $4.4 million provision in Q3 2020; the nine-month provision was a release of $3.2 million versus a $10.1 million provision. Management cited improved economic conditions and losses not materializing as previously anticipated. Net charge-offs were $0.3 million for Q3 and $0.8 million year to date.
- Non-interest income declined in Q3 but increased year to date; management cited stronger debit-card fee income. Non-interest expense increased in both periods.
- COVID-19 relief modifications: 1,332 loans totaling $268 million had been modified through September 30, 2021 and were not treated as troubled debt restructurings. Of these, 1,053 loans totaling $224 million had resumed normal payments; 217 remained under a relief plan, including 12 commercial loans totaling $36 million receiving additional relief.
- Management said it believed the allowance was adequate. It cautioned that COVID-19 effects remain uncertain and could affect borrowers, asset quality, valuations, earnings, liquidity, and capital. Other cited risks include interest rates, economic and market conditions, competition, regulation, litigation, and execution of business plans. No material changes to the risk factors in the 2020 Form 10-K were reported.
- Interest-rate sensitivity modeling estimated that a 100-basis-point rise would increase net interest income 5.66% over 12 months and 9.52% over 24 months; a 100-basis-point decline would reduce it 6.21% and 9.82%, respectively. Management noted these are scenario estimates assuming immediate rate changes and no management response.
- Management anticipated adequate liquidity, citing expected security maturities and principal payments, anticipated calls, and unused borrowing capacity. It gave no general earnings guidance in the provided filing text.
- On August 10, 2021, the company agreed to acquire Hancock Bancorp for $18.38 cash per share, with an announced aggregate transaction value of $31.35 million; completion remained subject to conditions. It also planned to merge Morris Plan Company of Terre Haute into First Financial Bank, subject to regulatory approval, effective December 31, 2021.
- The company planned to close and consolidate nine of 80 branches over two quarters, subject to regulatory requirements, and projected approximately $2.3 million in annual expense savings beginning in Q1 2022. Management also said the Morris Plan merger was expected to improve efficiencies beginning Q1 2022.
- Gross unrealized losses on available-for-sale securities rose to $7.1 million from $0.4 million at year-end. Management attributed these primarily to market-rate changes, not issuer credit deterioration, and said it did not intend or expect to be required to sell before recovery.
Important facts for investors to verify
- Progress, approvals, final consideration, integration costs, and expected benefits for the Hancock Bancorp acquisition and Morris Plan merger.
- Timing and realized savings from the nine planned branch consolidations, including any associated closure or restructuring costs.
- Whether remaining COVID-19 relief borrowers resume scheduled payments, and subsequent trends in delinquencies, non-performing loans, charge-offs, and allowance coverage.
- Whether net interest margin stabilizes as rates and cash balances change, and how actual results compare with the filing’s interest-rate sensitivity scenarios.
- Whether securities unrealized losses recover or result in credit impairments or sales, and how repurchases affect capital and per-share measures.