First Financial Corporation (NASDAQ: THFF) — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. The company is a single-segment banking organization. Comparisons with 2019 are affected by the July 2019 HopFed Bancorp acquisition.
Financial performance
Amounts are in millions of dollars except per-share data and ratios.
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Interest income | $39.3 | $33.3 | $80.7 | $65.9 |
| Net interest income | $35.9 | $29.8 | $72.2 | $59.2 |
| Net interest margin | 3.97% | 4.33% | 4.05% | 4.32% |
| Provision for loan losses | $3.0 | $0.2 | $5.7 | $1.7 |
| Non-interest income | $8.8 | $9.7 | $17.9 | $17.4 |
| Non-interest expense | $26.9 | $23.5 | $54.4 | $47.2 |
| Net income | $11.9 | $12.6 | $24.1 | $22.3 |
| Diluted EPS | $0.87 | $1.02 | $1.76 | $1.81 |
| Return on assets / equity | 1.10% / 8.06% | 1.66% / 10.67% | 1.16% / 8.30% | 1.47% / 9.66% |
- Second-quarter net income declined despite higher net interest income; increased credit-loss provision and operating expenses weighed on results. First-half net income rose, while first-half EPS declined.
- Second-quarter net interest income rose $6.1 million year over year, but margin fell 36 basis points. The company reported $6.2 million of deferred PPP fees, including $171,000 accreted into Q2 interest income.
- Q2 non-interest income decreased $1.0 million; lower deposit service charges and a decline in “other” income were partly offset by stronger mortgage-sale gains. First-half non-interest income increased $0.5 million.
- Six-month operating cash flow was $39.7 million versus $27.8 million in 2019. Cash and due from banks was $386.5 million at quarter-end, up from $127.4 million at year-end; cash growth largely reflected a $295.2 million increase in deposits.
Financial position, credit and liquidity
- At June 30, total assets were $4.37 billion, net loans $2.75 billion, deposits $3.57 billion and shareholders’ equity $590.3 million. Gross loans were $2.78 billion, up from $2.65 billion at December 31, 2019.
- Short-term borrowings were $100.1 million and other borrowings $28.1 million, versus $80.1 million and $31.0 million, respectively, at year-end. The filing reports regulatory capital ratios above stated minimums: company CET1 15.44%, total risk-based capital 16.17% and Tier 1 leverage 11.64%.
- Nonperforming loans increased to $23.0 million from $15.3 million at year-end; allowance coverage of nonperforming loans declined to 101.4% from 130.0%. The allowance for loan losses was $23.3 million, compared with $19.9 million at year-end. First-half net charge-offs were $2.3 million.
- Management added $1.0 million to the Q2 provision specifically for its initial COVID-19 loss estimate and said it considered the allowance adequate. The company deferred CECL adoption under the CARES Act and continued using the incurred-loss model; its earlier estimated $15–$25 million CECL-related allowance increase was not recorded as a CECL adoption adjustment in this quarter.
- As of June 30, 1,341 COVID-related modified loans totaling $343 million were not classified as troubled debt restructurings; payment deferrals were generally up to three months. The company had processed approximately $170 million of approved PPP loans through quarter-end.
- Management anticipated adequate liquidity, citing deposits, loan and securities repayments, $7.2 million of investments maturing over the next 12 months, expected mortgage-backed security principal payments of $183.8 million and unused FHLB and correspondent-bank borrowing capacity.
Material developments, outlook and risks
- The HopFed acquisition closed July 27, 2019; acquired assets included $675 million of loans and $736 million of deposits. Accordingly, year-over-year balance-sheet and earnings comparisons include acquired operations for 2020 but not the comparable 2019 periods.
- The COVID-19 pandemic is the central uncertainty. The company warned of possible worsening borrower performance, delinquencies, defaults, charge-offs, collateral values and loan-loss estimates, as well as pressure on net interest margin from low rates, operational disruption and increased cybersecurity exposure.
- Management reported no goodwill impairment at June 30, 2020, while acknowledging expected higher pandemic-related losses. It provided no specific earnings or margin guidance.
- Interest-rate simulations estimated that a 100-basis-point increase would raise net interest income 4.59% over 12 months, while a 100-basis-point decrease would reduce it 3.83%. These are modeled estimates assuming immediate rate moves and no management response.
- No material changes to previously disclosed risk factors were reported apart from the added COVID-19 risk discussion. The filing disclosed no material pending legal proceedings; management concluded disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Key investor verification points
- Track whether pandemic-related deferrals convert into delinquencies, nonperforming loans, charge-offs or renewed modifications; review the $343 million modified-loan portfolio and concentrations by borrower and industry.
- Assess whether the $23.3 million allowance remains adequate as economic conditions and credit quality evolve, and verify the timing and eventual impact of CECL adoption.
- Reconcile earnings growth with lower quarterly EPS, reduced net interest margin, elevated provisions and expenses, and acquisition-related comparability effects.
- Monitor deposit growth and mix, borrowing levels, liquidity sources, PPP fee recognition and interest-rate sensitivity as rates and funding costs change.
- Review subsequent filings for updated pandemic assumptions, capital ratios, goodwill impairment assessments and any material changes to management’s outlook.