First Financial Corporation (NASDAQ: THFF) — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. First Financial is a banking company reporting one segment. Financial statements are unaudited; amounts below are in U.S. dollars unless stated otherwise.
Financial performance and condition
| Metric | Q2 2023 | Prior comparable period |
|---|---|---|
| Net interest income | $42.2 million | $40.5 million in Q2 2022 |
| Net interest margin | 3.81% | 3.46% in Q2 2022 |
| Provision for credit losses | $1.8 million | $0.75 million in Q2 2022 |
| Net income | $16.0 million | $15.6 million in Q2 2022 |
| Basic and diluted EPS | $1.33 | $1.27 in Q2 2022 |
| Comprehensive income | $0.3 million | Comprehensive loss of $40.0 million in Q2 2022 |
For the six months ended June 30, net interest income was $86.5 million versus $78.3 million a year earlier, while net interest margin was 3.88% versus 3.31%. Net income was $32.0 million versus $36.5 million; EPS was $2.66 versus $2.95. Six-month comprehensive income was $30.7 million, compared with a comprehensive loss of $87.7 million in 2022.
- Revenue and expenses: Q2 non-interest income was $10.5 million versus $10.3 million; non-interest expense was $31.3 million versus $30.7 million. Six-month non-interest income declined to $19.8 million from $24.0 million, mainly because the prior-year period included a $4.0 million legal settlement that the company does not expect to recur. Six-month non-interest expense increased to $63.7 million from $62.0 million.
- Balance sheet at June 30: Total assets were $4.88 billion; net loans were $3.09 billion; available-for-sale securities were $1.30 billion; deposits were $4.06 billion; and shareholders’ equity was $496.9 million.
- Cash flow, first six months: Operating cash flow was $37.7 million, investing cash flow was negative $37.4 million, and financing cash flow was negative $140.8 million. Cash and due from banks declined $140.4 million to $82.1 million.
- Funding and liquidity: Deposits fell $305.7 million from year-end 2022. Short-term borrowings rose to $128.9 million from $70.9 million, and FHLB advances increased to $134.6 million from $9.6 million. Management said cash and available-for-sale securities represented approximately 28.3% of assets and described liquidity as adequate. Reported unused capacity included $119.6 million at the FHLB, $208.3 million at the Federal Reserve, and $125 million of correspondent-bank fed funds lines.
- Capital and shareholder returns: Corporation common equity Tier 1, total risk-based capital, and Tier 1 leverage ratios were 14.44%, 15.50%, and 11.53%, respectively; management said capital exceeded applicable minimums. The company paid $0.54 per share in Q2 dividends and repurchased 82,903 shares for $2.7 million during the quarter.
Material changes and credit quality
- Loans, net of deferred loan costs, increased $67 million from December 31, 2022; deposits decreased 7.0%. Management attributed deposit declines partly to seasonal public-fund reductions and a pricing decision affecting institutional deposits.
- The allowance for credit losses was $39.9 million at June 30, broadly comparable to $39.8 million at year-end. Six-month provision was $3.6 million, compared with a $5.8 million provision benefit in the first half of 2022. Net charge-offs were $3.5 million for the first half of 2023.
- Nonperforming loans were $13.3 million, up from $12.7 million at year-end and $9.4 million at June 30, 2022. The allowance equaled 300.1% of nonperforming loans, compared with 414.4% at year-end. The nonperforming asset ratio was 0.33% of assets; net charge-offs were 0.23% of average loans and leases, as reported.
- Available-for-sale securities had $173.8 million of gross unrealized losses at June 30, versus $172.1 million at year-end. Management attributed the losses to market interest rates rather than issuer credit quality, and stated it did not intend to sell the securities and was not likely to be required to sell them before recovery. Accumulated other comprehensive loss was $141.3 million.
Outlook, commentary, risks, and unusual items
- The filing provides no quantitative earnings or revenue guidance. Management said the effects of banking-sector stress, further interest-rate changes, and recession concerns on the remainder of 2023 were uncertain.
- Management cited higher loan yields as the main driver of improved first-half net interest margin. Over the first six months, the effective rate paid on average interest-bearing deposits increased 103 basis points; the rate on other borrowings increased 197 basis points.
- Interest-rate simulations show that a 100-basis-point rate increase would reduce net interest income by 2.11% over 12 months; a 100-basis-point decrease would reduce it by 1.34%. The filing cautions that these are model estimates assuming an immediate rate move and no management response.
- The company closed and consolidated seven of 72 branches on January 31, 2023, projecting approximately $1.5 million in annual operating-expense savings. The related owned properties had been impaired by $1.3 million in 2022.
- Key stated risks include liquidity and deposit outflows, economic and market conditions, interest rates, borrower credit deterioration, competition, regulation, and litigation. The filing specifically notes that rapid withdrawals by uninsured depositors could impair access to liquidity. No material pending legal proceedings were reported beyond routine litigation.
- Management said disclosure controls were effective as of June 30, 2023, with no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Deposit trends and funding costs, including the extent to which increased FHLB and short-term borrowing levels persist.
- Loan delinquencies, nonperforming loans, net charge-offs, and whether the allowance remains adequate as economic conditions and portfolio composition change.
- Net interest margin and the effects of deposit repricing and interest-rate movements; review the sensitivity model’s assumptions and limits.
- Liquidity availability and the market value of securities, including the possibility that liquidity needs could require securities sales before unrealized losses recover.
- Whether branch consolidations achieve the projected savings and whether expense growth offsets those benefits.
- Reconcile reported period comparisons with the absence of the prior-year $4.0 million legal settlement and the unusually large 2022 credit-provision benefit.