First Financial Corporation (THFF) — Q3 2023 Form 10-Q
Business context and reporting period
Unaudited consolidated results for the three and nine months ended September 30, 2023; comparison periods are the corresponding 2022 periods. First Financial reports one segment: banking. Dollar figures below are in millions unless stated otherwise.
Financial and operating highlights
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Interest income | $58.7 | $48.2 | $169.7 | $131.1 |
| Net interest income | $41.2 | $43.1 | $127.7 | $121.4 |
| Net interest margin | 3.74% | 3.71% | 3.83% | 3.44% |
| Provision for credit losses | $1.2 | $1.1 | $4.8 | $(4.8) |
| Non-interest income | $11.6 | $12.1 | $31.5 | $36.1 |
| Non-interest expense | $32.3 | $31.5 | $95.9 | $93.5 |
| Net income | $16.3 | $18.1 | $48.3 | $54.6 |
| Diluted EPS | $1.37 | $1.50 | $4.02 | $4.45 |
Q3 return on average assets was 1.35% and return on average equity was 13.19%, versus 1.43% and 15.00% in Q3 2022. Nine-month returns were 1.33% and 12.98%, versus 1.43% and 14.14%.
- Balance sheet at September 30: assets $4.785 billion, down 4.1% from year-end 2022; loans net of deferred costs $3.079 billion, up about $50 million; deposits $4.041 billion, down 7.5%.
- Funding and liquidity: cash and due from banks were $74.7 million. Short-term borrowings were $132.7 million and other borrowings, principally FHLB advances, were $84.6 million, up from $9.6 million at year-end. Management stated cash and available-for-sale securities represented 27.2% of assets and considered liquidity adequate. Available borrowing capacity disclosed: $217.8 million at FHLB, $179.6 million at the Federal Reserve, and $125 million in correspondent-bank fed funds lines.
- Cash flows, nine months: operating cash flow $66.2 million; investing cash flow $3.3 million; financing cash outflow $217.4 million. The financing outflow included a $327.3 million net deposit decline, partly offset by borrowing activity. Cash and due from banks fell $147.8 million to $74.7 million.
- Credit: allowance for credit losses was $39.0 million, versus $39.8 million at year-end; allowance for unfunded commitments was $2.0 million. Nonperforming loans were $12.6 million, approximately unchanged from year-end and up 21.8% from September 2022. Nonperforming assets were 0.33% of assets; the allowance was 310.2% of nonperforming loans. Nine-month net charge-offs were $5.5 million, and management reported net charge-offs of 0.24% of average loans and leases.
- Capital and equity: Corporation common equity Tier 1 and total risk-based capital ratios were 14.61% and 15.64%; its bank’s ratios were 13.63% and 14.67%. Shareholders’ equity was $470.2 million; book value per share was $40.00.
Material changes versus comparable periods
- Q3 net interest income declined $2.0 million year over year despite higher interest income, as interest expense rose to $17.6 million from $5.1 million. Deposit interest expense increased to $13.6 million from $4.6 million.
- Nine-month net interest income increased $6.3 million, reflecting higher loan yields; management also noted higher deposit and borrowing costs. The effective rate paid on average interest-bearing deposits rose 109 basis points and interest paid on other borrowings rose 253 basis points year over year.
- Net income declined $1.8 million in Q3 and $6.3 million year to date. Nine-month non-interest income fell $4.7 million, primarily because the 2022 period included a $4.0 million legal settlement that management does not expect to recur.
- Provision for credit losses was $4.8 million for the first nine months of 2023, compared with a $4.8 million provision release in 2022. The filing attributes the prior-year release in part to model recalibration and declining historical loss rates.
- Available-for-sale securities were $1.225 billion, down from $1.330 billion at year-end. Gross unrealized losses increased to $218.7 million from $172.1 million; management attributed them primarily to higher market interest rates, not issuer credit deterioration, and said it did not intend, nor expect to be required, to sell before recovery.
- Deposits declined as public funds balances typically fell seasonally and institutional deposits decreased following a pricing decision. The balance sheet also reflects $75 million more other borrowings than at year-end.
Outlook, commentary, risks and unusual items
- No specific earnings or revenue guidance was provided. Management said the effects of banking-sector stress, further interest-rate changes and recession concerns on the rest of 2023 were uncertain.
- Management described liquidity, capital and asset quality as strong and said liquidity was adequate for expected customer obligations. Interest-rate sensitivity modeling estimated that a 100-basis-point rate increase would reduce net interest income 1.31% over the next 12 months, followed by a 1.49% increase over the subsequent 12 months; the filing cautions that the model assumes an immediate rate change and no management response.
- Seven of 72 branches were closed and consolidated on January 31, 2023. Management projected approximately $1.5 million in annual operating expense savings; the related buildings and land had been impaired by $1.3 million in 2022.
- Key risks include liquidity and deposit withdrawals, interest-rate and market changes, economic and borrower conditions, competition, regulation, and litigation. The filing specifically warns that deposit outflows can accelerate if uninsured depositors lose confidence. No material pending legal proceedings were reported beyond routine litigation.
- During Q3, the company repurchased 228,457 shares at an average $36.95 per share; 518,860 shares remained under the repurchase authorization. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Deposit trends, funding costs, uninsured-deposit exposure and the company’s ability to maintain liquidity as deposits and borrowings reprice.
- Interest-rate sensitivity and the assumptions behind the modeled impact on net interest income, including asset and deposit repricing behavior.
- Credit quality trends, especially consumer charge-offs, nonperforming loans, criticized commercial loans, and the adequacy of the allowance under changing economic forecasts.
- Available-for-sale securities losses, potential liquidity implications, and whether management’s expectation not to sell remains valid.
- Whether branch consolidation delivers the projected recurring savings and whether expense growth moderates.