First Financial Corporation — Q2 2019 Form 10-Q
Business context and period. First Financial Corporation is a bank holding company reporting one banking segment. This unaudited report covers the quarter and six months ended June 30, 2019; balance-sheet comparisons are with December 31, 2018. Amounts below are in millions unless noted.
Financial performance and condition
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net interest income | $29.8 | $30.7 | $59.2 | $58.2 |
| Net interest margin | 4.33% | 4.58% | 4.32% | 4.32% |
| Provision for loan losses | $0.2 | $1.4 | $1.7 | $2.8 |
| Non-interest income | $9.7 | $13.0 | $17.4 | $21.1 |
| Non-interest expense | $23.5 | $22.7 | $47.2 | $45.9 |
| Net income | $12.6 | $15.3 | $22.3 | $24.2 |
| Diluted EPS | $1.02 | $1.25 | $1.81 | $1.98 |
| Comprehensive income | $21.2 | $10.9 | $41.4 | $10.0 |
- At June 30, 2019, total assets were $3.064 billion; loans, net of allowance, were $1.990 billion; deposits were $2.463 billion; and shareholders’ equity was $477.8 million.
- Loans before allowance and deferred costs totaled $2.007 billion, up from $1.951 billion at year-end 2018. Deposits rose from $2.437 billion; short-term borrowings declined from $69.7 million to $60.5 million.
- Allowance for loan losses was $20.3 million, or 133.1% of nonperforming loans. Nonperforming loans totaled $15.2 million, down from $16.6 million at year-end 2018.
- Six-month operating cash flow was $27.8 million; investing cash outflow was $45.5 million and financing cash inflow was $4.2 million. Cash and due from banks ended at $60.9 million.
- Regulatory capital remained strong: at June 30, the Corporation’s total risk-based capital ratio was 19.60% and Tier 1 leverage ratio 14.97%; the bank’s respective ratios were 18.76% and 14.24%.
Material changes and management commentary
- Q2 net income fell 17.6% year over year; six-month net income fell 8.1%. Q2 net interest income declined despite higher loan interest income, as deposit and borrowing interest expense increased and the prior-year period included a $2.4 million recovery of fees on nonaccrual loans.
- Non-interest income fell $3.2 million in Q2 and $3.7 million for the first half. The 2018 comparison included a $4.2 million recovery of previously recorded securities impairment. Non-interest expense increased $0.8 million in Q2 and $1.3 million for the first half.
- Management stated the allowance was adequate based on its review of portfolio conditions and probable incurred losses. Net charge-offs for the first half were $1.9 million, down $0.8 million from 2018.
- Available-for-sale securities had $2.0 million of gross unrealized losses at June 30, versus $15.2 million at year-end 2018. Management attributed most losses to interest-rate-related market adjustments, did not expect to sell the securities, and did not consider them other-than-temporarily impaired.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided. Management estimated adequate liquidity, citing $6.4 million of investment maturities, expected principal payments of $119.2 million from mortgage-backed securities, anticipated calls of $29.4 million, and unused borrowing capacity.
- Interest-rate simulations estimated that a 100-basis-point increase would raise net interest income 2.45% over 12 months, while a 100-basis-point decrease would lower it 3.86%. Management cautioned that models depend on assumptions and do not reflect management actions.
- Management anticipated an increase in the allowance upon adoption of the CECL credit-loss standard, effective for the Corporation in 2020, but said the amount was uncertain. Adoption of the new lease standard in January 2019 recognized $7 million each of lease liabilities and right-of-use assets.
- After quarter-end, on July 29, 2019, the Corporation completed its merger with HopFed Bancorp. The announced consideration targeted an aggregate 50% stock/50% cash exchange; the filing estimated transaction value at approximately $133.9 million. HopFed reported June 30 assets of $934.2 million, loans of $669.5 million, and deposits of $735.5 million.
- The filing cites risks including economic and market conditions, interest rates, competition, regulatory or accounting changes, litigation, and execution of business plans. It reports no material change in previously disclosed risk factors and no material pending legal proceedings beyond routine litigation.
Important facts for investors to verify
- Whether the completed HopFed merger’s final integration, consideration mix, and financial contribution align with expectations.
- Drivers of deposit funding costs and net interest margin, including sensitivity to changing interest rates.
- Credit quality trends, charge-offs, criticized loans, and the adequacy of the allowance ahead of CECL adoption.
- Whether lower securities unrealized losses persist and how management’s valuation assumptions for less-liquid securities affect reported equity.
- Liquidity and capital levels after the merger and any related funding or purchase-accounting effects.