First Financial Corporation (NASDAQ: THFF) — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. First Financial is a regional financial holding company providing banking and related services across Indiana, Illinois, Kentucky and Tennessee. It operated 78 branches and reported 883 full-time equivalent employees at year-end.
Financial performance and position
| Metric | 2021 | 2020 | Change / context |
|---|---|---|---|
| Total assets | $5.175 billion | $4.561 billion | Up 13.5% |
| Gross loans | $2.813 billion | $2.606 billion | Up about 7.9% |
| Deposits | $4.410 billion | $3.756 billion | Up $653.6 million |
| Net interest income | $143.4 million | $146.3 million | Down 2.0% |
| Net income | $53.0 million | $53.8 million | Down 1.6% |
| Diluted EPS | $4.02 | $3.93 | Up 2.3%; share repurchases reduced shares outstanding |
| Net interest margin | 3.20% | 4.05% | Down 85 basis points |
| Provision for credit losses | $2.5 million | $10.5 million | Down 77% |
| Operating cash flow | $55.1 million | $77.4 million | Cash from investing was negative $317.4 million; financing provided $287.6 million |
Interest income fell to $152.2 million from $160.5 million, while interest expense declined to $8.8 million from $14.1 million. The average yield on interest-earning assets fell 104 basis points, more than the 21-basis-point decline in the cost of interest-bearing liabilities. Non-interest income was $42.1 million, slightly below 2020; non-interest expense increased to $117.4 million, principally reflecting the Hancock acquisition. Return on average assets was 1.10%, versus 1.25%.
At year-end, shareholders’ equity was $582.6 million, down from $597.0 million. Cash and due from banks totaled $682.8 million, and available-for-sale securities totaled $1.365 billion. Total borrowings were $109.3 million, comprising $93.4 million of short-term borrowings and $15.9 million of other borrowings. Regulatory capital remained above minimums: the Corporation’s CET1 ratio was 14.37% and leverage ratio 9.83%; management reported subsidiary banks as well capitalized.
Material changes and notable items
- Hancock acquisition: Completed November 5, 2021, for $31.36 million in cash. The acquired company added $227.8 million of loans and $286.1 million of deposits at acquisition; $7.5 million of goodwill was recorded. Its results are included from the acquisition date.
- Credit quality: Nonperforming loans declined to $14.9 million from $21.9 million. Net charge-offs were $2.6 million, versus $3.5 million. The allowance for credit losses was $48.3 million, or 1.72% of loans, compared with $44.1 million, or 1.69%.
- PPP exposure: The company originated $275.1 million of Paycheck Protection Program loans; all but $27.2 million had been forgiven by the SBA. The filing notes potential recourse risk if the SBA identifies origination, funding or servicing deficiencies.
- Capital returns: The company repurchased 981,132 shares during 2021 for $42.5 million and paid dividends. Shareholders’ equity also reflected a $12.2 million decline in accumulated other comprehensive income, primarily reflecting securities-related changes.
- Securities portfolio: Available-for-sale securities increased $344.0 million. Gross unrealized losses were $10.2 million at year-end, compared with $0.4 million in 2020; management attributed the losses primarily to market interest-rate movements and reported no allowance for credit losses on these securities.
Outlook, risks and contingencies
The filing provides no formal earnings or revenue guidance. Management described interest-rate risk as its most significant market risk. Its model estimated that a 100-basis-point rate increase would raise net interest income 5.09% over 12 months, while a 100-basis-point decrease would reduce it 6.49%; these are modeled scenarios, not forecasts, and assume no management response.
Management highlighted elevated inflation, interest-rate changes, COVID-19 and new variants, labor availability, local economic conditions, and the company’s geographic concentration as risks. Commercial and commercial real estate loans represented approximately 59.5% of the loan portfolio. Other stated risks include cybersecurity and third-party service-provider dependence, liquidity, regulatory changes, and the transition from LIBOR. The company had $823.4 million in unused loan commitments and $7.0 million in commercial letters of credit; these commitments may not be fully drawn.
The annual goodwill impairment review found no impairment. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. The allowance for credit losses was identified as a critical audit matter because of the significant judgments involved. Management reported effective internal controls. The filing reports no material pending legal proceedings beyond routine litigation and no unresolved staff comments.
Key facts for investors to verify
- Reconcile the dividend-per-share disclosures: the selected financial data lists $1.06 for 2021, while the statement of changes in equity lists $1.16 and quarterly declared dividends total $1.16.
- Assess the sustainability of earnings given the substantial net interest margin decline and the added contribution and expenses from the Hancock acquisition.
- Review acquired-loan performance, the remaining PPP balance and any SBA review or forgiveness issues.
- Track allowance assumptions and credit trends, particularly in commercial and commercial real estate lending, and the effect of changing economic forecasts.
- Evaluate securities valuation and potential equity volatility from interest-rate changes; confirm liquidity and deposit trends alongside the large securities and cash balances.
- Review the full notes and subsequent filings for developments after December 31, 2021; this summary does not include later-period results.