First Financial Corporation — Q3 2017 Form 10-Q
Business context and period: The filing reports unaudited consolidated results for the quarter and nine months ended September 30, 2017. The Corporation reports one segment: banking.
Financial performance and condition
- Third-quarter results: Net income was $8.8 million, up from $8.2 million a year earlier; diluted EPS was $0.72 versus $0.67. Return on assets was 1.18% and return on equity was 7.98%.
- Nine-month results: Net income was $26.5 million versus $30.1 million, and EPS was $2.17 versus $2.43. The decrease primarily reflects the prior-year insurance-operation sale gain.
- Revenue and margins: Third-quarter net interest income rose to $27.1 million from $26.4 million; net interest margin was 4.14% versus 4.05%. Nine-month net interest income was $80.2 million versus $78.6 million, with margin of 4.08% versus 4.05%. Non-interest income was $8.5 million for the quarter and $27.7 million year to date.
- Expenses and credit provision: Third-quarter non-interest expense was $22.3 million versus $22.0 million. Nine-month expense declined to $66.9 million from $68.1 million. Loan-loss provision was $1.2 million for the quarter and $3.8 million for nine months, compared with $1.1 million and $2.4 million, respectively, in 2016.
- Balance sheet at September 30: Total assets were $2.982 billion; gross loans were $1.863 billion and net loans were $1.847 billion. Deposits were $2.453 billion, total liabilities $2.539 billion, and shareholders’ equity $443.6 million. Assets were broadly stable versus year-end 2016; net loans and equity increased.
- Cash flow and funding: Nine-month operating cash flow was $35.8 million, investing cash outflow $4.4 million, and financing cash outflow $45.5 million. Cash and due from banks ended at $61.0 million, down $14.0 million from year-end. Short-term borrowings fell to $23.5 million from $81.0 million; there were no FHLB advances at quarter-end.
- Capital: The Corporation’s September 30 ratios were 18.04% common equity Tier 1, 18.90% total risk-based capital, and 14.05% Tier 1 leverage. Management stated the Corporation exceeded applicable capital minimums.
Material changes and notable items
- Quarterly earnings improved year over year, while nine-month earnings declined because 2016 included a $13.0 million pre-tax gain from the insurance brokerage operation sale (reported as an after-tax gain of $5.84 million in management’s comparison).
- 2017 nine-month non-interest income included a $3.1 million cash recovery on a previously written-down collateralized debt obligation. The filing reports no additional other-than-temporary impairment charge in 2017.
- Gross loans grew about $27.5 million from December 31, 2016; commercial loans were broadly flat while residential and consumer lending increased. The allowance for loan losses rose to $19.8 million from $18.8 million.
- Net charge-offs were $1.1 million in Q3, down from $1.5 million in Q3 2016; nine-month net charge-offs were $2.8 million versus $3.2 million.
- Non-performing loans were $22.8 million, little changed from $22.7 million at year-end 2016, but below $26.3 million at September 30, 2016. The allowance equaled 86.9% of non-performing loans.
- Accumulated other comprehensive loss narrowed to $5.4 million from $14.2 million at year-end, mainly reflecting improvement in unrealized securities values.
Outlook, risks and contingencies
- No earnings or revenue guidance is provided. Management expects liquidity to be adequate, citing expected security maturities and principal payments, anticipated calls, deposits and loan repayments, and unused borrowing capacity at the FHLB and correspondent banks.
- Interest-rate simulations estimate that a 100-basis-point increase would raise net interest income 2.34% over 12 months and 6.24% over 24 months; a 100-basis-point decrease would reduce it 3.84% and 6.67%, respectively. Management cautions that the models assume an immediate parallel rate shift and no management response, and actual results may differ.
- Key stated risks include economic and financial-market conditions, interest rates, competition, regulation, litigation, borrower losses and accounting changes. Management identified the loan-loss allowance, goodwill valuation and investment-security valuation as critical accounting judgments.
- Management considers the allowance adequate. The filing notes $7.4 million of troubled debt restructurings at quarter-end and no material TDR-related charge-offs or additional provision expense during the reported periods.
- The company reported no material pending legal proceedings beyond routine litigation and no material change to the risk factors in its 2016 Form 10-K. Management said disclosure controls were effective and there was no material change in internal control over financial reporting during the quarter.
- Management expects the forthcoming CECL credit-loss standard to increase the allowance at adoption, but the amount is uncertain. The filing states no other material expected accounting-standard impact in the disclosures provided.
Important facts for investors to verify
- Whether loan growth, deposit mix and funding costs support continued net interest income and margin improvement.
- Trends in non-performing loans, consumer charge-offs, TDRs and allowance coverage, particularly as the allowance rose year to date.
- The sustainability of earnings excluding the 2016 insurance-sale gain and the 2017 securities recovery.
- Interest-rate sensitivity assumptions and the timing and availability of the liquidity sources management cites.
- The eventual CECL transition impact and valuation assumptions for Level 3 securities and other assets.