First Financial Corporation (NASDAQ: THFF) — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; balance-sheet comparisons are to December 31, 2022 unless stated otherwise. Amounts below are in U.S. dollars.
Business context and financial performance
The company is a single-segment banking organization. Q1 results reflected higher net interest income but lower net income, including the absence of a prior-year legal settlement and a shift from a credit-loss reserve release to a provision.
- Net interest income: $44.3 million, up from $37.8 million in Q1 2022. Net interest margin was 3.96%, versus 3.16%.
- Net income and EPS: $16.0 million and $1.33 per diluted share, compared with $20.9 million and $1.67. Return on assets was 1.32% (1.63%); return on equity was 13.10% (14.81%).
- Non-interest income: $9.4 million, down from $13.7 million. Q1 2022 included a $4.0 million legal settlement that management does not expect to recur.
- Non-interest expense: $32.3 million, up from $31.3 million. Income before taxes was $19.6 million, versus $26.8 million.
- Credit costs: The provision for credit losses was $1.8 million, versus a $6.6 million provision benefit in Q1 2022. Net charge-offs were approximately $2.0 million, compared with $1.2 million.
Financial condition, cash flow and liquidity
- Assets and loans: Total assets were $4.87 billion, down from $4.99 billion. Net loans were $3.04 billion, up from $3.03 billion.
- Deposits and borrowings: Deposits fell 4.66% to $4.17 billion. Short-term borrowings were $108.6 million and other borrowings, principally FHLB advances, were $34.6 million; combined borrowings increased from $80.5 million at year-end.
- Cash flows: Operating activities provided $23.8 million; investing activities used $13.8 million; financing activities used $149.8 million, including a $203.3 million net decrease in deposits. Cash and due from banks ended at $82.6 million, down from $222.5 million at year-end.
- Liquidity: Management said liquidity was adequate and reported cash and available-for-sale securities at approximately 29.5% of assets. Additional stated borrowing capacity included $93.8 million at the FHLB, $118.5 million at the Federal Reserve and $125 million in correspondent-bank fed funds lines.
- Capital and equity: Shareholders’ equity increased to $505.5 million from $475.3 million. Corporation ratios included 14.27% common equity Tier 1, 15.32% total risk-based capital and 11.30% Tier 1 leverage; the filing states capital exceeded applicable well-capitalized standards.
Material changes and asset quality
- Seven of 72 branches were closed or consolidated on January 31, 2023. The company recorded a $1.3 million impairment on the affected properties in 2022 and projects annual operating-cost savings of approximately $1.5 million.
- Nonperforming loans were $12.1 million, down from $12.7 million at year-end; nonperforming assets were 0.31% of total assets. The allowance for credit losses was $39.6 million, or 328.1% of nonperforming loans. Management considers the allowance adequate.
- Available-for-sale securities had a fair value of $1.34 billion and gross unrealized losses of $154.3 million, down from $172.1 million at year-end. Management attributed the losses primarily to higher interest rates, stated it did not intend to sell the securities, and said a forced sale before recovery was not considered likely. Accumulated other comprehensive loss improved to $125.6 million from $140.0 million.
Outlook, commentary and risks
- The filing provides no formal earnings or revenue guidance. Management said the continuing effects of banking-sector stress, interest-rate increases and recession concerns on the remainder of 2023 were uncertain.
- Management described liquidity, capital and asset quality as strong, while noting that deposit withdrawals and loss of depositor confidence could quickly impair access to funding. The filing specifically updates liquidity risk discussion in light of March 2023 bank failures.
- Interest-rate sensitivity modeling estimated that a 100-basis-point increase would raise net interest income 1.22% over 12 months, while a 100-basis-point decrease would reduce it 2.57%. The filing cautions that the scenarios assume an immediate rate move and no management response.
- Key stated risks include liquidity and deposit outflows, interest-rate and market changes, economic conditions, borrower losses, competition, regulation and litigation. No material pending legal proceedings were reported beyond routine business litigation.
Important facts for investors to verify
- Whether deposit trends and funding costs stabilized after the $203.3 million Q1 deposit outflow, and how reliance on borrowings changes.
- Whether net interest margin and earnings remain resilient as deposit pricing and interest rates evolve.
- Whether credit quality, charge-offs and the allowance remain consistent with management’s adequacy assessment.
- Whether unrealized securities losses, liquidity access and any potential need to sell securities change materially.
- Whether the branch consolidations deliver the projected $1.5 million annual savings.