First Financial Corporation (NASDAQ: THFF) — Q3 2022 Form 10-Q
Business context and reporting period
Bank holding company reporting unaudited results for the three and nine months ended September 30, 2022. Comparisons are with the corresponding 2021 periods unless otherwise noted; balance-sheet comparisons are with December 31, 2021. Hancock Bancorp, acquired in November 2021, is included in 2022 results but not in the comparable 2021 periods.
Financial performance and condition
| Metric | Q3 2022 / September 30, 2022 | Comparison |
|---|---|---|
| Net income | $18.1 million; diluted EPS $1.50 | Q3 2021: $16.1 million; EPS $1.24 |
| Nine-month net income | $54.6 million; diluted EPS $4.45 | Nine months 2021: $45.6 million; EPS $3.42 |
| Net interest income | Q3: $43.1 million; nine months: $121.4 million | Q3 2021: $36.0 million; nine months 2021: $106.6 million |
| Net interest margin | Q3: 3.71%; nine months: 3.44% | Q3 2021: 3.22%; nine months 2021: 3.24% |
| Non-interest income / expense | Q3: $12.1 million / $31.5 million; nine months: $36.1 million / $93.5 million | Q3 2021: $11.1 million / $28.5 million; nine months 2021: $31.3 million / $84.1 million |
| Return on assets / equity | Q3: 1.43% / 15.00%; nine months: 1.43% / 14.14% | Q3 2021: 1.34% / 10.75%; nine months 2021: 1.28% / 10.10% |
| Total assets | $5.009 billion | December 31, 2021: $5.175 billion |
| Loans, net | $2.931 billion | December 31, 2021: $2.768 billion |
| Deposits | $4.408 billion | December 31, 2021: $4.410 billion |
| Shareholders’ equity | $438.6 million; book value per share $36.49 | December 31, 2021: $582.6 million; $46.13 per share |
For the first nine months, operating cash flow was $52.3 million, investing cash outflow was $353.1 million, and financing cash outflow was $53.8 million. Cash and due from banks declined $354.6 million to $328.2 million; federal funds sold were $8.2 million. Deposit balances were broadly stable versus year-end. Period-end borrowings totaled $98.9 million: $89.3 million short-term and $9.6 million other borrowings.
Material changes and notable items
- Higher interest rates contributed to increased net interest income and margin. Interest income rose, while interest expense also increased, particularly deposit expense.
- Nine-month non-interest income included a $4.0 million legal settlement received in February 2022; management said it does not expect this income to recur. Mortgage-loan sale gains fell year over year.
- Nine-month provision for credit losses was a benefit of $4.8 million. Management attributed the reserve reduction to model recalibration, lower qualitative factors, improving historical loss experience, and portfolio performance. The allowance for credit losses was $39.5 million, down from $48.3 million at year-end; allowance for unfunded commitments was $2.1 million.
- Q3 net charge-offs were $3.0 million; nine-month net charge-offs were $4.1 million. Nonperforming loans were $14.3 million, down from $14.9 million at year-end and $19.5 million a year earlier. The allowance was 276.6% of nonperforming loans.
- Unrealized losses on available-for-sale securities were $199.3 million before tax at September 30, versus $10.2 million at year-end. Accumulated other comprehensive loss reached $167.4 million, driving much of the decline in equity and book value. Management attributed the securities marks primarily to higher market interest rates, said it did not intend to sell the securities, and did not consider the losses credit-related.
- The company repurchased 626,574 shares for $27.7 million in the first nine months; Q3 purchases were 9,125 shares at an average $45.71. Nine-month dividends paid were $14.5 million.
Outlook, risks and contingencies
No earnings or revenue guidance is provided. Management said it expects adequate liquidity, citing deposits, loan and securities repayments, and unused borrowing capacity at the Federal Home Loan Bank and correspondent banks. Interest-rate sensitivity modeling estimated that a 100-basis-point increase would raise net interest income 2.48% over 12 months, while a 100-basis-point decrease would lower it 3.71%; the filing cautions these scenarios assume an immediate parallel rate move and no management response.
On October 31, 2022, after quarter-end, the company announced plans to consolidate seven of 72 branches over the next two quarters, subject to regulatory requirements. It projected annual expense savings of approximately $1.5 million beginning in Q1 2023. Regulatory capital ratios remained above stated minimums: at September 30, the Corporation’s common equity tier 1 and total risk-based capital ratios were 13.69% and 14.75%; the bank’s were 12.00% and 13.07%.
Key risks identified include interest-rate and market changes, economic and competitive conditions, credit quality and loan losses, regulatory or accounting changes, litigation, and COVID-19-related economic disruption. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No material pending legal proceedings or material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether deposit pricing and funding costs continue to rise, and how that affects margin and earnings as rates change.
- The scale and duration of unrealized securities losses, associated AOCI and book-value effects, and whether liquidity needs could require securities sales.
- Credit trends, including consumer charge-offs, nonperforming loans, and whether the reduced allowance remains adequate as economic conditions evolve.
- Whether the announced branch consolidations proceed as planned and achieve the projected savings.
- The sustainability of earnings growth excluding the nonrecurring $4.0 million settlement and considering the Hancock acquisition’s effect on comparisons.