First Financial Corporation (NASDAQ: THFF) — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. The company operates in one reportable segment: banking. Unless otherwise noted, amounts below are in millions of dollars. Comparisons with 2019 are affected by the July 27, 2019 acquisition of HopFed; HopFed results are included only from the acquisition date.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net interest income | $36.5 | $34.0 | $108.8 | $93.2 |
| Provision for loan losses | $4.4 | $1.5 | $10.1 | $3.2 |
| Non-interest income | $11.7 | $9.7 | $29.6 | $27.1 |
| Non-interest expense | $27.1 | $27.4 | $81.6 | $74.6 |
| Net income | $14.0 | $12.3 | $38.1 | $34.5 |
| Diluted EPS | $1.02 | $0.93 | $2.78 | $2.74 |
| Net interest margin | 3.99% | 4.00% | 4.03% | 4.21% |
Quarterly net income rose 14% year over year; nine-month net income rose 10%. Higher net interest income and non-interest income were partly offset by increased credit-loss provisions and, year to date, higher operating expenses. Mortgage-loan sale gains were $2.9 million in Q3 and $4.8 million year to date, compared with $0.9 million and $1.8 million, respectively, in 2019. PPP loan-fee accretion contributed $733,000 to Q3 interest income; $6.2 million of PPP fees had been deferred.
Q3 return on assets and return on equity were 1.28% and 9.29%, versus 1.33% and 9.97% a year earlier. Nine-month figures were 1.20% and 8.62%, versus 1.42% and 9.74%.
Financial position, cash flow and credit
- Balance sheet at September 30: Total assets were $4.390 billion, versus $4.023 billion at December 31, 2019. Gross loans were $2.752 billion and net loans $2.727 billion; deposits were $3.604 billion. Shareholders’ equity was $607.1 million, up from $557.6 million at year-end.
- Liquidity and borrowings: Cash and due from banks increased to $388.4 million from $127.4 million at year-end. Short-term borrowings were $95.2 million and other borrowings $10.8 million, compared with $80.1 million and $31.0 million, respectively. Management said available borrowing capacity and expected security repayments supported adequate liquidity.
- Nine-month cash flows: Operating activities provided $52.8 million; investing activities used $100.5 million; financing activities provided $308.8 million. Net cash and cash equivalents increased $261.0 million. Deposit growth was $329.9 million.
- Credit quality: The allowance for loan losses rose to $27.0 million from $19.9 million at year-end. Q3 provision was $4.4 million; nine-month provision was $10.1 million. Nine-month net charge-offs were $3.1 million, down from $3.9 million in 2019.
- Non-performing loans increased to $23.7 million from $15.3 million at year-end; allowance coverage of non-performing loans declined to 113.9% from 130.0%. Past-due and nonaccrual measures also showed deterioration in some categories.
- Capital: At September 30, the Corporation reported common equity tier 1 of 15.70%, total risk-based capital of 16.54%, and tier 1 leverage of 11.81%. The filing states the company exceeded applicable minimum capital requirements.
Material changes, outlook and risks
- COVID-19 uncertainty remains a major risk to borrowers, asset quality, earnings and valuations. Management increased the allowance during 2020 to reflect estimated pandemic-related losses and said it considered the allowance adequate; actual losses may differ from estimates.
- As of September 30, 1,431 COVID-related loans totaling $328 million had been modified without being classified as troubled debt restructurings. Of these, 1,139 loans totaling $208 million had resumed normal payments; 292 loans totaling $120 million remained under relief plans, including 42 commercial loans totaling $80 million receiving additional relief.
- The company processed approximately $170 million of approved PPP loans through September 30. Management identified possible credit, interest-rate, operational and cybersecurity effects from the pandemic and related relief programs.
- The company elected under the CARES Act to delay CECL implementation and continued to use the incurred-loss model. Before that election, management had estimated a potential initial allowance increase of $15 million to $25 million; the filing does not provide a finalized CECL adoption impact.
- Management reported no goodwill impairment as of September 30, despite conducting an interim review in response to the pandemic. It also noted that future effects depend on uncertain pandemic and economic developments. The filing gives no specific earnings or revenue guidance.
- Interest-rate simulation estimated that a 100-basis-point rate increase would raise net interest income 4.77% over 12 months, while a 100-basis-point decrease would reduce it 4.23%. These are model estimates assuming an immediate parallel shift and no management response.
- Management cited deposits, loan repayments, security maturities and mortgage-backed security principal payments as liquidity sources. It expected $214.1 million of mortgage-backed security principal payments and $26.1 million of security calls over the next 12 months.
- The HopFed acquisition affects period comparability. The acquisition added substantial assets, loans and deposits, and 2020 comparisons include a full quarter of combined operations versus only part of Q3 2019.
Important facts for investors to verify
- How pandemic-related borrower relief performs as remaining modified loans return to scheduled payments, and whether non-performing loans, charge-offs or provisions rise further.
- Whether the allowance remains adequate and the eventual CECL adoption effect, including the implications of the previously estimated $15–$25 million increase.
- How sustainable earnings are given lower year-to-date net interest margin, PPP fee accretion and elevated mortgage-sale gains.
- Whether deposit growth and available contingent funding continue to support liquidity, and how interest-rate movements affect funding costs and asset yields.
- Whether post-acquisition comparisons, expenses and credit trends provide a reliable view of underlying performance.