FIRST FINANCIAL CORP annual report, FY2023

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First Financial Corporation (NASDAQ: THFF) — 2023 Form 10-K

Business context and reporting period. This filing covers the fiscal year ended December 31, 2023. First Financial is an Indiana-based financial holding company whose principal subsidiary, First Financial Bank, provides commercial, mortgage and consumer lending, deposit, trust and related services. Its 70 branches serve markets in Indiana, Illinois, Kentucky and Tennessee. The company reported 861 full-time-equivalent employees at year-end.

Financial results and position

Amounts below are in U.S. dollars; financial statement amounts are shown in millions unless stated otherwise.

  • Earnings: Net income was $60.7 million, down 14.7% from $71.1 million in 2022. Diluted earnings per share were $5.08 versus $5.82. Return on average assets declined to 1.26% from 1.41%; return on average equity was 12.47% versus 14.37%.
  • Revenue and margins: Net interest income rose 1.3% to $167.3 million. Interest income increased to $228.4 million from $183.3 million, while interest expense climbed to $61.1 million from $18.3 million. Net interest margin improved to 3.78% from 3.54%. Non-interest income fell to $42.7 million from $46.7 million; non-interest expense rose to $130.2 million from $126.0 million.
  • Credit costs and asset quality: Provision for credit losses was $7.3 million, compared with a $2.0 million reversal in 2022. Net charge-offs were $7.3 million, or 0.23% of average loans, versus $6.5 million and 0.23%. Nonperforming loans increased to $24.6 million from $9.6 million, largely because a commercial relationship was downgraded. The allowance for credit losses was $39.8 million, equal to 1.26% of loans, versus 1.30% in 2022. Management stated that the allowance was adequate.
  • Balance sheet: Total assets declined 2.8% to $4.85 billion. Gross loans increased 3.3% to $3.16 billion; deposits decreased 6.4% to $4.09 billion. Shareholders’ equity rose to $528.0 million from $475.3 million.
  • Funding and liquidity: Borrowings totaled $175.8 million at year-end, up from $80.5 million, including $108.6 million of FHLB advances versus $9.6 million a year earlier. Cash and due from banks was $76.8 million, compared with $222.5 million. Management cited available borrowing capacity of $197.7 million at the FHLB, $237.5 million at the Federal Reserve and $125 million in correspondent-bank fed funds lines, and expected adequate liquidity.
  • Cash flows: Operating activities provided $86.1 million; investing activities used $22.1 million; financing activities used $209.8 million. Cash and due from banks declined $145.8 million during the year.
  • Capital: At year-end, the Bank’s CET1 and Tier 1 risk-based capital ratios were each 13.84%, total risk-based capital was 14.89%, and leverage was 10.73%. The filing states that the Bank was well capitalized.

Material changes versus 2022

  • Higher loan and securities yields lifted interest income, but funding costs rose sharply as deposit and borrowing rates increased; net interest income grew only modestly.
  • Net income fell, reflecting higher credit-loss provision, lower non-interest income and higher operating expenses. The 2022 comparison included a $4.0 million legal settlement that did not recur.
  • Deposits fell by $278.8 million while loans grew by approximately $99.8 million. Uninsured deposits declined to an estimated $938.9 million, or 23% of deposits, from $1.27 billion, or 29%.
  • Nonperforming loans rose materially, primarily due to the downgraded commercial relationship. Gross unrealized losses on available-for-sale securities improved to $157.8 million from $172.1 million, but remained substantial; the company reported no credit-loss allowance for these securities and said it did not intend, and was not more likely than not required, to sell them before recovery.
  • The company closed and consolidated seven branches in January 2023, recording a $1.3 million impairment charge on property and estimating annual operating-expense savings of approximately $1.5 million.

Outlook, commentary, risks and unusual items

  • Acquisition: In November 2023, First Financial entered into a merger agreement to acquire SimplyBank, a Tennessee-chartered bank. Completion remained subject to approvals and other conditions. The filing identifies execution, integration, employee and customer retention, costs, regulatory approval and expansion into new markets as risks; the supplied filing text does not provide clear transaction consideration or detailed financial terms.
  • Interest-rate exposure: Management identifies interest-rate risk as its most significant market risk. Its model estimates that a 100-basis-point rate increase would reduce net interest income 1.28% over 12 months and increase it 1.33% over 24 months; a 100-basis-point decrease would increase it 0.74% over 12 months and reduce it 2.08% over 24 months. These scenarios assume an immediate parallel rate change and no management response.
  • Credit and geographic risks: Commercial and commercial real estate loans represented approximately 57.5% of the loan portfolio. The company is concentrated in regional markets and warns that local economic deterioration, borrower stress, collateral declines and further loan downgrades could increase losses.
  • Other risks: The filing highlights deposit confidence and liquidity, inflation and funding costs, competition, regulatory change, cybersecurity and third-party service providers, and acquisition-related execution risks. Management reported no material pending legal proceedings beyond routine litigation.
  • Shareholder returns: The company moved from semi-annual to quarterly cash dividends beginning with the dividend declared in the fourth quarter of 2023. It expects regular dividends to continue subject to earnings, capital needs and regulatory limits. No shares were repurchased in the fourth quarter; 319,664 shares were repurchased during 2023.
  • Controls and audit: Management and the independent auditor concluded that internal control over financial reporting was effective at December 31, 2023. The auditor issued an unqualified opinion and identified the allowance for credit losses as a critical audit matter.

Important facts for investors to verify

  • Current status, final terms, approval conditions, expected costs and integration plans for the SimplyBank merger.
  • Performance, collateral and expected loss exposure of the downgraded commercial relationship, and whether elevated nonperforming loans require further provisions.
  • Deposit trends, uninsured-deposit mix, funding costs and the company’s actual use and availability of contingent borrowing sources.
  • Potential liquidity or capital implications of securities’ unrealized losses, including sensitivity to interest rates and any need to sell securities.
  • Reconciliation of dividend disclosures: the filing reports $0.99 per share declared in 2023 in MD&A, while selected financial data lists $1.28 per share of cash dividends; confirm the distinction between declared and paid amounts.