First Financial Corporation — 2014 Form 10-K
Business context and reporting period. First Financial Corporation is a bank holding company operating primarily in west-central Indiana and east-central Illinois. Its businesses include commercial, mortgage and consumer banking, trust services, insurance and consumer finance. This annual filing covers the year ended December 31, 2014; fourth-quarter figures are identified separately below. Amounts are in U.S. dollars.
Financial results and condition
- Earnings: 2014 net income was $33.8 million, up 7.1% from $31.5 million in 2013. Diluted earnings per share were $2.55, versus $2.37. Return on average assets was 1.12%; return on average equity was 8.37%.
- Revenue and margin: Net interest income increased to $107.8 million from $107.3 million, while non-interest income rose to $40.8 million from $40.5 million. Net interest margin declined to 4.08% from 4.13%, as earning-asset yields fell 18 basis points, partly offset by a 17-basis-point decline in funding costs.
- Expenses and taxes: Non-interest expense increased to $95.6 million from $94.6 million. The provision for loan losses was $5.1 million, down from $7.9 million. Income tax expense was $14.2 million; the effective tax rate declined to 29.6% from 30.4%.
- Fourth quarter: Net income was $9.2 million, or $0.71 per share, compared with $8.9 million, or $0.67 per share, in the fourth quarter of 2013.
- Balance sheet: Total assets were $3.00 billion, down 0.5% year over year. Gross loans were $1.78 billion, down from $1.79 billion; deposits were $2.46 billion, essentially unchanged. Available-for-sale securities totaled $897.1 million, down from $914.6 million.
- Credit quality: Net charge-offs fell to $5.6 million from $8.4 million, and nonperforming loans declined to $30.6 million from $39.2 million. The allowance was $18.8 million, or 1.05% of loans, compared with $20.1 million, or 1.12%, a year earlier. Management said the allowance was adequate but noted that weaker economic conditions could increase losses.
- Debt and liquidity: Short-term borrowings were $48.0 million and other borrowings were $12.9 million, for total borrowings of $60.9 million, down from $117.9 million. Cash and due from banks was $78.1 million, with $8.0 million in federal funds sold. Operating cash flow was $57.8 million; investing activities provided $35.5 million and financing activities used $86.3 million. Cash increased $7.1 million.
- Capital and shareholder returns: Corporation capital ratios were 16.99% Tier 1 risk-based, 17.86% total risk-based and 12.33% leverage. Management said the Corporation and its banking subsidiaries would meet Basel III requirements on a fully phased-in basis. The 2014 dividend was $0.98 per share, and 459,241 shares were repurchased for $14.6 million during the year.
Material changes versus 2013
- Net income improved despite continued pressure on asset yields; lower funding costs and lower loan-loss provision supported results.
- Nonperforming loans and net charge-offs declined, while the allowance-to-loans ratio also decreased.
- Borrowings fell by $57.0 million, largely reflecting reduced Federal Home Loan Bank advances. Deposits remained nearly flat.
- Shareholders’ equity increased $8.0 million to $394.2 million, despite dividends and share repurchases.
- Comprehensive income was $33.2 million versus $25.0 million in 2013. Securities-related other comprehensive income improved, while retirement-plan remeasurement losses offset much of that benefit.
Outlook, risks and unusual items
- Outlook: The filing provides no specific earnings or revenue guidance. Management expected regular cash dividends to continue, subject to earnings, capital requirements and regulatory limits.
- Interest-rate exposure: Management described the Corporation as asset-sensitive. Its model estimated that a 100-basis-point rate increase would raise net interest income 2.17% over 12 months; a 100-basis-point decrease would reduce it 0.58%. These are model estimates based on assumptions, not forecasts.
- Concentration and credit risks: Operations and lending are concentrated in regional markets, exposing results to local economic conditions, borrower repayment and collateral values. Commercial real estate, construction, agriculture and consumer lending have distinct credit risks.
- Regulatory and operating risks: Basel III requirements began taking effect in 2015; management noted possible compliance costs and potential constraints on capital distributions. The filing also identifies competition, technology and cybersecurity, vendor dependence, fraud, and regulatory change as risks.
- Unusual items: The defined-benefit pension plan’s funded status deteriorated to a $35.6 million deficit from $14.2 million, with actuarial losses and lower discount rates contributing. New mortality tables increased plan obligations by approximately $8.5 million. The 2014 loan-loss provision included a $0.7 million charge related to a decrease in the FDIC indemnification asset.
- Investment valuation: Level 3 securities totaled $21.2 million, including $15.3 million of collateralized debt obligations. Gross unrealized securities losses were $8.2 million, down from $26.7 million in 2013; management recorded no other-than-temporary impairment loss in 2014.
- Contingencies and controls: The Corporation reported no material pending legal proceedings beyond routine litigation. Management and the independent auditor concluded internal control over financial reporting was effective as of year-end.
Most important facts for investors to verify
- Whether improved credit indicators persist and the $18.8 million allowance remains adequate as loan mix, local conditions and charge-offs change.
- Whether net interest margin stabilizes or weakens further, particularly under changing interest rates and competitive deposit pricing.
- The pension plan’s funding trajectory, actuarial assumptions, required contributions and impact on equity and earnings.
- The valuation, expected cash flows and credit performance of Level 3 securities and the remaining collateralized debt obligations.
- Capital and dividend capacity under Basel III, including the effects of phase-in requirements and repurchases.
- The filing reports a five-year shareholder total return of 33.92%, below the Russell 2000’s 105.95% and the SNL Bank $1–$5 billion index’s 93.81%; investors may wish to assess the causes and implications.