First Financial Corporation (THFF) — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. The company reports one segment: banking. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net interest income | $40.5 | $35.6 | $78.3 | $70.5 |
| Net interest margin | 3.46% | 3.23% | 3.31% | 3.25% |
| Provision for credit losses | $0.8 | $(2.2) | $(5.8) | $(1.7) |
| Non-interest income | $10.3 | $10.9 | $24.0 | $20.2 |
| Non-interest expense | $30.7 | $28.0 | $62.0 | $55.6 |
| Net income | $15.6 | $16.6 | $36.5 | $29.5 |
| Diluted EPS | $1.27 | $1.24 | $2.95 | $2.19 |
| Comprehensive income (loss) | $(40.0) | $18.9 | $(87.7) | $21.1 |
Q2 return on assets was 1.24% and return on equity 12.64%, versus 1.40% and 11.06%, respectively, a year earlier. Six-month figures were 1.43% and 13.80%, compared with 1.26% and 9.82%.
Financial position, cash flow and capital
- At June 30, total assets were $5.01 billion, loans net of deferred costs and allowance were $2.85 billion, deposits were $4.38 billion, and total liabilities were $4.55 billion.
- Compared with December 31, 2021, loans net of deferred costs increased about $72 million and deposits declined 0.6%. Cash and due from banks fell to $412 million from $683 million; federal funds sold were $11 million.
- Six-month operating cash flow was $32.6 million. Investing cash outflow was $226.7 million, including $238.5 million of securities purchases and $75.1 million net lending. Financing cash outflow was $76.6 million, including net deposit outflows, dividends and share repurchases.
- Short-term borrowings were $84.2 million and other borrowings $15.9 million. Shareholders’ equity declined to $461.5 million from $582.6 million; book value per share fell to $38.36 from $46.13.
- At June 30, the corporation’s common equity Tier 1, total risk-based, Tier 1 risk-based and Tier 1 leverage capital ratios were 13.51%, 14.65%, 13.51% and 9.97%, respectively. The company stated it exceeded applicable minimum capital requirements.
Changes, credit quality and notable items
- Q2 net income declined year over year despite higher net interest income; six-month net income increased. Higher rates contributed to improved net interest income and margin. The 2021 Hancock Bancorp acquisition also affects year-over-year comparisons, including expenses.
- Six-month non-interest income benefited from a $4.0 million legal settlement received in February 2022; management said it does not expect this income to recur. Q2 non-interest income was lower year over year, partly reflecting reduced mortgage-sale gains.
- The six-month negative provision for credit losses reflected annual model recalibration, lower historical loss rates and removal or reduction of certain qualitative reserve factors. Management considered the $41.5 million loan allowance adequate. Net charge-offs for the first half were $1.0 million, up $0.5 million year over year.
- Nonperforming loans were $13.5 million, down from $14.9 million at year-end 2021 and $20.0 million at June 30, 2021. The allowance equaled 307% of nonperforming loans. Loans 90 days or more past due totaled $2.45 million in the aging table.
- Available-for-sale securities had $146.8 million of gross unrealized losses at June 30, versus $10.2 million at year-end. Management attributed the losses primarily to higher market interest rates, said it did not intend to sell the securities, and did not expect to be required to sell before recovery. The related six-month after-tax securities loss in other comprehensive income was $124.8 million, a major contributor to lower equity.
- On July 12, 2022, the company sold seven classified commercial loans with $14.9 million principal balance. The filing reports a $2.1 million charge-off and a $361,000 net recovery after reserves and unamortized acquisition discount; the loans did not qualify as held for sale at June 30.
- The board authorized repurchases of up to approximately 10% of outstanding shares. The company repurchased 404,186 shares during Q2 and 617,449 shares in the first half. No material changes to previously disclosed risk factors or material pending legal proceedings were reported.
Outlook, risks and contingencies
Management expects adequate liquidity to meet customer needs, citing deposits, loan and securities repayments, and unused borrowing capacity at the Federal Home Loan Bank and correspondent banks. It estimated that a 100-basis-point rate increase would raise net interest income 3.98% over the next 12 months, while a 100-basis-point decrease would reduce it 4.95%; these models assume an immediate rate change and no management response. The filing provides no earnings or revenue guidance.
Management identifies interest-rate exposure as its most significant market risk. Other disclosed uncertainties include economic and market conditions, competition, borrower defaults and asset quality, regulatory changes, litigation, and COVID-19-related effects. Estimates for credit losses and securities valuation are judgmental and could change. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Investor verification points
- Assess the persistence of higher net interest income and margin as rates and deposit costs change.
- Separate recurring earnings from the nonrecurring $4.0 million settlement and evaluate expenses following the Hancock acquisition.
- Review the securities portfolio’s unrealized losses, interest-rate sensitivity, and any liquidity or capital effects if securities must be sold.
- Verify credit-reserve assumptions, charge-offs, classified commercial exposures, and the outcome of the July loan sale.
- Monitor deposit trends, cash levels, borrowing capacity, capital ratios, and the pace and cost of share repurchases.