First Financial Corporation — 2019 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2019; fourth-quarter figures are also reported. First Financial is an Indiana-based financial holding company operating 82 branches across Indiana, Illinois, Kentucky and Tennessee. Its principal activities include commercial, mortgage and consumer lending, deposits, trust services and insurance.
A major change was the July 27, 2019 acquisition of HopFed Bancorp and Heritage Bank. The acquired business is included in results from that date and substantially contributed to the year-over-year expansion in assets, loans, deposits and earnings. Acquisition consideration was $129.2 million, including $61.9 million in First Financial shares; acquisition-related costs were $3.3 million.
Financial performance and condition
| Metric | 2019 | 2018 |
|---|---|---|
| Interest and dividend income | $149.1 million | $126.2 million |
| Net interest income | $131.7 million | $116.6 million |
| Provision for loan losses | $4.7 million | $5.8 million |
| Non-interest income | $38.5 million | $38.2 million |
| Non-interest expense | $104.4 million | $91.3 million |
| Net income | $48.9 million | $46.6 million |
| Diluted EPS | $3.80 | $3.80 |
| Net interest margin | 4.25% | 4.32% |
| Return on average assets | 1.42% | 1.57% |
| Return on average equity | 9.83% | 10.98% |
Fourth-quarter 2019 net income was $14.4 million, or $1.06 per share, versus $11.1 million, or $0.90 per share, in fourth-quarter 2018. Annual net income increased 4.9%, while EPS was unchanged as the average share count rose, partly reflecting acquisition-related stock issuance.
Net interest income grew with higher average earning assets, up to $3.20 billion from $2.79 billion, and higher loan yields. However, funding costs rose faster than earning-asset yields: the average cost of interest-bearing liabilities increased to 0.67% from 0.47%, contributing to the 7-basis-point decline in net interest margin. Non-interest expenses increased largely because of HopFed.
| Year-end balance-sheet metric | 2019 | 2018 |
|---|---|---|
| Total assets | $4.02 billion | $3.01 billion |
| Gross loans | $2.65 billion | $1.95 billion |
| Deposits | $3.28 billion | $2.44 billion |
| Borrowings | $111.1 million | $69.7 million |
| Shareholders’ equity | $557.6 million | $442.7 million |
Operating cash flow was $49.9 million; investing cash flow was negative $32.9 million and financing cash flow was positive $36.0 million. Cash and due from banks increased $53.0 million to $127.4 million; the balance sheet also reported $7.5 million of federal funds sold. Liquidity sources include securities cash flows and secured and unsecured borrowing capacity. Management estimated $14.0 million of securities maturities, $119.3 million of mortgage-backed securities principal payments and $31.3 million of expected security calls over the next 12 months.
Credit quality: the allowance for loan losses was $19.9 million, or 0.75% of loans, compared with 1.05% a year earlier. Management attributed the lower ratio primarily to acquired loans being recorded at fair value. Nonperforming loans were $15.3 million, down from $16.6 million; allowance coverage of nonperforming loans was 130%. Net charge-offs were $5.2 million, about 0.23% of average loans.
Regulatory capital remained well above minimums. At year-end, the Corporation’s CET1 ratio was 15.51%, total capital ratio 16.16% and leverage ratio 12.04%; the Bank’s corresponding ratios were 15.40%, 15.91% and 11.93%. These ratios were lower than 2018 levels, in part reflecting the larger post-acquisition balance sheet. Year-end borrowings included $80.1 million of short-term borrowings and $31.0 million of other borrowings, including $20.8 million of FHLB advances and $10.2 million of junior subordinated debentures.
Material changes, outlook and risks
- Acquisition and growth: Total assets rose 33.7%; loans and deposits increased substantially following the HopFed acquisition. Management cautions that integration may entail higher-than-expected costs, customer or employee losses, and failure to realize projected benefits.
- Credit exposure: Approximately 60% of the loan portfolio consisted of commercial and commercial real estate loans, which management identifies as carrying higher inherent risk. Regional concentration makes results sensitive to local economic conditions.
- CECL transition: The new expected-credit-loss standard became effective for the Corporation on January 1, 2020. Management estimated an initial allowance increase of $15 million to $25 million, subject to refinement and validation.
- Interest-rate sensitivity: The company identified interest-rate risk as its most significant market risk. Its model estimated that a 100-basis-point rate increase would raise net interest income 2.21% over 12 months, while a 100-basis-point decrease would reduce it 3.46%. These are model estimates that assume an immediate parallel rate shift and no management response.
- Other risks: The filing identifies LIBOR transition, competition, cybersecurity and vendor risks, liquidity, regulatory and capital requirements, and potential goodwill impairment. The 2019 FOMC rate cuts and economic uncertainty were noted as relevant conditions.
- Outlook and distributions: The filing provides no specific earnings or revenue guidance. Management expected regular cash dividends to continue, subject to earnings, capital needs and regulatory restrictions; 2019 dividends were reported as $1.03 per share in selected data. The company reported strong capital and available liquidity facilities.
- Unusual and nonrecurring comparisons: 2018 results included a recovery of a previously impaired security, contributing $2.4 million to pre-tax interest income and $4.5 million to pre-tax other income. The 2017 comparison was affected by a $6.3 million noncash tax expense from federal tax reform. There were no material pending legal proceedings reported, other than routine litigation.
The independent auditor gave an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded that internal controls were effective as of December 31, 2019.
Most important facts for investors to verify
- How much of reported growth and earnings reflects HopFed, and whether integration delivers anticipated cost savings and performance.
- The final CECL day-one allowance adjustment and its effects on retained earnings, capital ratios and future credit-loss expense.
- Commercial and commercial real estate loan concentrations, acquired-loan performance, nonperforming assets and allowance adequacy after adoption of CECL.
- Deposit pricing and funding costs, which rose faster than asset yields and narrowed net interest margin.
- Liquidity and capital after acquisition, including borrowing needs, regulatory restrictions and capacity to sustain dividends.
- Interest-rate and LIBOR transition exposure, including how actual outcomes compare with the filing’s model assumptions.