First Financial Corporation (NASDAQ: THFF) — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; audited financial statements compare 2013 with 2012 and 2011. The company is an Indiana-based financial holding company operating primarily in west-central Indiana and east-central Illinois, with banking, consumer finance, insurance, and captive-insurance businesses.
Financial performance and position
- Earnings: Net income was $31.5 million, or $2.37 per diluted share, down 3.9% and 4.4%, respectively, from 2012. Fourth-quarter net income was $8.9 million ($0.67 per share), compared with $8.6 million ($0.65) in fourth-quarter 2012.
- Revenue and margins: Net interest income was $107.3 million, down from $108.9 million. Non-interest income rose to $40.5 million from $39.5 million. The filing does not present a single total-revenue measure. Net interest margin declined to 4.13% from 4.30%; earning-asset yield fell 34 basis points while the cost of interest-bearing liabilities fell 22 basis points. Return on average assets was 1.06% versus 1.13%; return on average equity was 8.35% versus 9.02%.
- Credit costs and asset quality: Net provision for loan losses was $7.9 million, down from $8.8 million; 2013 included a $1.4 million charge related to a lower FDIC indemnification asset. Net charge-offs were $8.4 million versus $8.3 million. Non-accrual loans declined to $19.8 million from $36.8 million; loans past due over 90 days and still accruing declined to $2.1 million from $3.4 million. The allowance was $20.1 million, or 1.12% of loans, compared with $22.0 million, or 1.19%.
- Balance sheet and liquidity: Total assets were $3.02 billion, up 4.3%; deposits were $2.46 billion, up $182.7 million; gross loans were $1.79 billion, down about $60 million; securities were $914.6 million, up $223.6 million. Cash and due from banks was $71.0 million, with $4.3 million in federal funds sold. Cash flows were $62.7 million from operating activities, negative $16.4 million from investing, and negative $62.5 million from financing; cash and cash equivalents fell $16.2 million to $71.0 million.
- Debt and capital: Borrowings totaled $117.9 million, down from $160.3 million. Shareholders’ equity was $386.2 million. Corporation capital ratios were 16.22% Tier 1 risk-based, 17.13% total risk-based, and 11.69% Tier 1 leverage; management reported the Bank and Morris Plan were well capitalized. The dividend was $0.96 per share, with a 40.6% payout ratio.
Material changes and notable items
- In August 2013, the Bank acquired seven branches and two drive-up facilities in central and southern Illinois from Bank of America and assumed approximately $189.3 million in deposits. The transaction brought in $177.7 million in cash and added $1.9 million in goodwill. Management attributed some expense growth to five additional banking locations; the acquisition disclosure identifies seven branches.
- Interest income fell $6.1 million, chiefly reflecting lower loan balances and yields; reduced funding costs partly offset the decline. Non-interest expenses increased to $94.6 million from $93.1 million. The company cited higher occupancy and equipment costs, while lower pension expense following the pension freeze for most employees helped reduce benefit costs.
- Available-for-sale securities had $26.7 million of gross unrealized losses at year-end versus $8.2 million a year earlier. Management said it did not intend, and was not more likely than not required, to sell the securities before recovery. Three collateralized debt obligations were identified as other-than-temporarily impaired; cumulative credit impairment charges were $14.1 million.
- The defined-benefit pension plan was frozen for most employees as of December 31, 2013. Its year-end funded status was a $14.2 million shortfall, improved from $29.3 million in 2012.
Outlook, risks, and contingencies
- Management anticipated moderate growth opportunities in 2014, gradual improvement in local labor markets and retail sales, and no dramatic improvement in labor conditions. This is a forward-looking expectation, not a quantified earnings or revenue forecast.
- The company describes itself as asset-sensitive. Its model estimated that a 100-basis-point rate increase would lift net interest income 2.29% over 12 months, while a 100-basis-point decrease would reduce it 0.82%. Management cautions that model assumptions are uncertain and actual outcomes may differ.
- Key risks include concentration in local Indiana and Illinois economies; borrower credit quality and collateral values; interest-rate and securities valuation exposure; competition; regulatory change, including Basel III and mortgage rules; operational, cyber, vendor and fraud risks; and the possibility of higher funding costs or insufficient loan-loss reserves.
- Commitments included $375.5 million of unused loan commitments and $7.6 million of commercial letters of credit; these do not necessarily represent future cash requirements. The company reported no material pending legal proceedings other than routine litigation. No material loss contingencies were identified by management.
Important facts for investors to verify
- Whether lower loan balances and yields continue to pressure net interest income and margin, and whether deposit costs remain low.
- Whether the improvement in non-accrual loans is sustained, and whether the $20.1 million allowance adequately reflects portfolio risks, including commercial and real-estate exposures.
- Performance and integration of the acquired Illinois branches, including deposit retention, loan growth, and related operating costs.
- Potential effects of securities valuation changes, especially the CDO holdings and unrealized losses, on earnings and capital.
- Capital, dividend, and liquidity capacity under regulatory requirements and changing interest-rate conditions; management’s 2014 outlook is qualitative rather than numerical.