First Financial Corporation (THFF) — Q1 2022 Form 10-Q
Business context and period: Banking company reporting for the three months ended March 31, 2022, compared with Q1 2021; balance-sheet comparisons are primarily with December 31, 2021. Results include Hancock Bancorp, acquired November 5, 2021, so year-over-year comparisons reflect a larger business. All dollar figures below are in millions unless stated otherwise.
Financial performance and condition
- Earnings: Net income was $20.9 million, up from $12.9 million; diluted and basic EPS was $1.67 versus $0.95. Return on assets was 1.63% and return on equity was 14.81%, compared with 1.12% and 8.58%, respectively.
- Interest income and margin: Net interest income rose to $37.8 million from $34.9 million. Net interest margin declined to 3.16% from 3.27%. Interest income was $39.7 million and interest expense was $1.8 million.
- Other income and expenses: Non-interest income increased to $13.7 million from $9.3 million, principally due to a $4.0 million legal settlement. Non-interest expense rose to $31.3 million from $27.6 million, partly reflecting the Hancock acquisition.
- Credit costs: The company recorded a $6.55 million provision benefit, versus $0.45 million of provision expense in Q1 2021. Management attributed the release to annual model recalibration, removal of two qualitative factors, and lower loss rates. Net charge-offs were $1.2 million versus $0.7 million. The allowance for credit losses was $40.5 million, and nonperforming loans were $13.0 million, down from $14.9 million at year-end; allowance coverage of nonperforming loans was 312.6%.
- Balance sheet: Total assets were $5.10 billion, down from $5.18 billion at year-end. Net loans were $2.76 billion versus $2.77 billion at year-end; management separately reported loans up $158 million year over year. Deposits were $4.40 billion, slightly below year-end but up 12.5% year over year. Cash and due from banks totaled $598.2 million; available-for-sale securities were $1.36 billion.
- Debt and capital: Short-term borrowings were $96.7 million and other borrowings were $15.9 million. Shareholders’ equity fell to $525.4 million from $582.6 million, largely reflecting securities-related accumulated other comprehensive loss. Corporation capital ratios included 14.46% common equity Tier 1, 15.63% total risk-based capital, and 9.94% Tier 1 leverage; the company stated it exceeded applicable minimums.
- Cash flow: Operating activities provided $20.5 million; investing activities used $76.8 million; financing activities used $28.4 million. Cash and due from banks declined $84.6 million during the quarter to $598.2 million.
Material changes and unusual items
- Comprehensive loss was $47.7 million, compared with comprehensive income of $2.3 million in Q1 2021. The primary factor was a $68.9 million after-tax decline in securities-related accumulated other comprehensive income.
- Gross unrealized losses on available-for-sale securities increased to $79.6 million from $10.2 million at year-end. Management attributed the losses to higher market interest rates rather than issuer credit deterioration, and said it did not intend, and was not more likely than not required, to sell the securities before recovery.
- The company repurchased 204,952 shares during the quarter for an average $45.31 per share under its authorized repurchase program. The equity statement reports 213,263 treasury shares purchased during the quarter; the filing’s share-count disclosures should be reconciled.
- The merger of The Morris Plan Company into First Financial Bank became effective February 21, 2022; management said it produced efficiencies recognized in Q1.
Outlook, risks and contingencies
- No specific earnings or revenue guidance is provided. Management anticipated adequate liquidity, citing expected security maturities, principal repayments and calls, together with unused borrowing capacity at the Federal Home Loan Bank and correspondent banks.
- Interest-rate sensitivity modeling estimated that a parallel 100-basis-point increase would raise net interest income 5.53% over 12 months, while a 100-basis-point decrease would reduce it 7.81%. These are model estimates assuming immediate rate changes and no management response; actual results may differ.
- Management noted that COVID-19 continued to affect customers and could adversely affect loans and investments; supply-chain issues were contributing to inflation. Other stated risks include economic and market conditions, interest rates, competition, regulation, litigation, and credit quality. The filing reported no material changes to the risk factors in the 2021 Form 10-K and no material pending legal proceedings beyond routine litigation.
- From the start of COVID-19 relief through March 31, 2022, 1,105 loans totaling $225 million had received modifications not treated as troubled debt restructurings. The filing reports 184 remaining loans under a debt-relief plan, including nine commercial loans totaling $35 million that had received additional relief.
Important facts for investors to verify
- Whether the $4.0 million legal settlement and $6.55 million provision benefit are nonrecurring, and how earnings perform without them.
- How rapidly rising rates affect the securities portfolio, accumulated other comprehensive loss, capital, and net interest margin; confirm management’s assumptions about holding securities through recovery.
- Credit trends, allowance adequacy, and repayment performance of remaining COVID-relief loans, particularly the commercial loans receiving additional relief.
- The reconciliation of treasury-share purchase counts across the equity statement, cash-flow statement, and repurchase-program disclosure.
- Ongoing effects of the Hancock acquisition and Morris Plan merger on expenses, loan growth, deposits, and operating efficiencies.