FIRST FINANCIAL CORP quarterly report, Q3 FY2018

Business Context and Reporting Period

First Financial Corporation is a bank holding company reporting one banking segment. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2018; balance-sheet comparisons are to December 31, 2017 unless noted.

Key Financial Metrics

• Q3 return on assets was 1.53% and return on equity 10.58%; nine-month figures were 1.59% and 11.23%, respectively.
• At September 30, total assets were $2.981 billion, net loans $1.921 billion, deposits $2.407 billion, total liabilities $2.553 billion, and shareholders’ equity $427.8 million.
• Gross loans were $1.939 billion, up from $1.904 billion at year-end. The allowance for loan losses was $20.3 million, versus $19.9 million; allowance coverage of non-performing loans was 125.3%.
• Nine-month operating cash flow was $41.5 million. Investing activities used $37.1 million and financing activities used $28.5 million; cash and due from banks ended at $50.0 million.
• Short-term borrowings were $58.7 million and FHLB advances were $35.0 million; there were no FHLB advances at year-end 2017. Regulatory capital ratios at the Corporation and lead bank exceeded the stated well-capitalized thresholds.

Material Changes Versus Comparable Period

• Q3 net income rose 29% year over year; nine-month net income rose 34%. Higher net interest income and a lower income-tax provision contributed to the increase.
• Net interest income increased $1.7 million in Q3 and $6.8 million year to date. Management cited a $2.4 million second-quarter recovery of interest on a nonaccrual loan as a contributor to 2018 interest income.
• Year-to-date non-interest income included a $4.2 million recovery of a previously written-down security, compared with a $3.1 million recovery in 2017. These unusual recoveries affect period-to-period comparability.
• Non-performing loans fell to $16.2 million from $21.7 million at year-end 2017. Net charge-offs for the first nine months increased to $3.9 million from $2.8 million in 2017.
• Available-for-sale securities fell to $785.7 million from $814.9 million. Gross unrealized losses increased to $23.4 million from $9.5 million, primarily attributed by management to higher market interest rates rather than issuer credit deterioration. Accumulated other comprehensive loss was $32.3 million.
• Deposits declined to $2.407 billion from $2.459 billion at year-end, while shareholders’ equity increased to $427.8 million from $413.6 million. Management’s discussion attributes year-over-year book-value pressure to the December 2017 special dividend and tax-related deferred-tax-asset revaluation.

Outlook, Risks, and Unusual Items

• No specific earnings or revenue guidance is provided. Management said it currently expects adequate liquidity, citing deposit funding, loan and securities repayments, and unused FHLB and correspondent-bank borrowing capacity.
• Interest-rate sensitivity modeling estimated that a 100-basis-point rate increase would raise net interest income 1.88% over 12 months, while a 100-basis-point decrease would reduce it 2.96%. Management cautions that the model assumes an immediate parallel rate shift and no management response, and actual results may differ.
• Management considered the loan-loss allowance adequate, based on its portfolio analysis. Credit risks include borrower repayment weakness, delinquencies, charge-offs, and changes in economic conditions.
• The company reported no material change in risk factors from its 2017 Form 10-K and no material pending legal proceedings beyond routine litigation. Forward-looking risks include economic and market conditions, interest rates, competition, regulation, litigation, and accounting changes.
• Management expects adoption of the current expected credit loss standard to increase the loan-loss allowance, but said the amount remains uncertain. It did not expect the new lease standard to have a significant financial-statement impact.
• Fair-value estimates include Level 3 assets and judgment-sensitive inputs. Management disclosed a wide range among outside pricing sources for certain collateralized debt obligations and continued to use its established Standard & Poor’s pricing source.

Important Facts for Investors to Verify

• Separate recurring operating performance from the $4.2 million security recovery and the $2.4 million nonaccrual-interest recovery, including their effects on reported income.
• Track loan delinquencies, non-performing loans, net charge-offs, and the adequacy of the allowance as credit conditions evolve.
• Monitor deposit trends, the addition of FHLB advances, borrowing capacity, and liquidity under changing market conditions.
• Assess the impact of rising rates on securities valuations, accumulated other comprehensive loss, and net interest income; review key Level 3 valuation assumptions.
• Follow implementation estimates and eventual allowance effects for the expected-credit-loss standard.