First Financial Corporation — 2015 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2015. First Financial is an Indiana-based financial holding company operating principally in west-central Indiana and east-central Illinois. Its businesses include banking, consumer finance, insurance and trust services.
Financial performance and condition
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Interest income | $108.7 million | $113.4 million | Down 4.1% |
| Net interest income | $104.5 million | $107.8 million | Down 3.1% |
| Non-interest income | $39.2 million | $40.8 million | Down 3.9% |
| Net income | $30.2 million | $33.8 million | Down 10.6% |
| Diluted earnings per share | $2.35 | $2.55 | Down 7.8% |
| Net interest margin | 4.04% | 4.08% | Down 4 basis points |
| Return on average assets | 1.01% | 1.12% | Down 11 basis points |
| Operating cash flow | $41.3 million | $57.8 million | Down $16.6 million |
- Income before taxes was $40.6 million, compared with $48.0 million. The effective tax rate fell to 25.6% from 29.6%, principally reflecting lower pretax income with a similar level of tax-exempt earnings.
- Non-interest expense rose to $98.4 million from $95.6 million. Salaries and employee benefits increased $4.2 million; management attributed the increase in employee benefits in part to a lower discount rate and updated mortality tables.
- At year-end, total assets were $2.980 billion, deposits $2.442 billion, net loans $1.744 billion, total borrowings $46.5 million and shareholders’ equity $410.3 million. Cash and due from banks was $88.7 million; federal funds sold were $9.8 million.
- Year-end assets fell 0.8% from 2014. Gross loans declined to $1.761 billion from $1.780 billion; deposits declined to $2.442 billion from $2.457 billion. Borrowings fell to $46.5 million from $60.9 million, while equity increased to $410.3 million from $394.2 million.
- Provision for loan losses was $4.7 million. Net charge-offs declined to $3.6 million from $5.6 million. Nonperforming loans fell to $25.5 million from $30.6 million; the allowance was $19.9 million, or 78% of nonperforming loans, versus 62% a year earlier.
- The Corporation’s reported regulatory capital ratios were 17.69% CET1, 17.69% Tier 1, 18.62% total capital and 12.92% leverage. The Bank was reported well capitalized, with ratios of 17.23%, 17.23%, 18.05% and 12.50%, respectively.
- Cash dividends were $0.98 per share, with a reported 41.5% payout ratio. The Corporation repurchased 257,989 shares for $8.7 million during 2015; no shares were repurchased in the fourth quarter.
Material changes and management commentary
- Net interest income declined as average interest-earning assets and their tax-equivalent yield fell. The yield was 4.19% versus 4.28%; the average cost of interest-bearing liabilities also fell, to 0.21% from 0.27%.
- Non-interest income declined by $1.6 million. Increased interchange and mortgage-sale income partly offset lower investment-service income and insurance-agency income.
- Management described interest-rate risk as the Corporation’s most significant market risk. Its model estimated that a 100-basis-point increase would raise net interest income 3.54% over 12 months, while a 100-basis-point decrease would reduce it 0.45%; management cautioned that simulations rely on assumptions and do not reflect responsive actions.
- Liquidity sources include securities, core deposits and borrowing capacity. The filing cited $4.7 million of securities maturities, $129.6 million of expected mortgage-backed security principal payments and $27.4 million of anticipated securities calls over the following 12 months. Unused loan commitments totaled $364.8 million; commercial letters of credit were $7.2 million.
- In February 2016, the Board approved marketing insurance subsidiary Forrest Sherer, Inc. for sale. The company had entered an exclusivity agreement with a potential buyer, subject to due diligence and a definitive agreement; no completed sale is reported.
- Management reported effective internal control over financial reporting, and the independent auditor gave unqualified opinions on the financial statements and internal control. The filing reports no material pending litigation beyond routine matters.
Outlook, risks and unusual items
The filing provides no numerical earnings or revenue guidance. Management expects regular cash dividends to continue, subject to earnings, capital requirements and regulatory restrictions. It also noted that securities cash flows would be available for reinvestment in 2016.
- Principal risks include the Corporation’s geographic concentration, local economic and credit deterioration, competition, interest-rate changes, regulatory requirements, cyber and operational threats, vendor dependence, and the possibility that loan-loss reserves or goodwill valuations may prove inadequate.
- The defined-benefit pension plan was underfunded by $30.3 million at year-end, compared with $35.6 million in 2014. Management expected 2016 contributions of $2.7 million to the pension plan and $1.1 million to the ESOP.
- The securities portfolio included $6.7 million of gross unrealized losses at year-end. Management attributed these mainly to interest-rate and market factors, said it did not intend to sell the affected securities, and did not expect to be required to sell before recovery.
- Three collateralized debt obligations had cumulative credit-related other-than-temporary impairment charges of approximately $14.0 million. Their year-end fair value exceeded carrying value, and the filing reports no new impairment charge in 2015.
- The company had $42.7 million of goodwill and other intangible assets; management reported no goodwill impairment in its 2015 annual test.
Important facts for investors to verify
- Whether the decline in earnings continues, particularly given weaker net interest income and higher employee-benefit costs.
- Whether loan quality and reserve adequacy remain sound, including trends in nonperforming loans, past-due loans and net charge-offs.
- How actual net interest income responds to rate changes compared with the filing’s simulation estimates and assumptions.
- Whether Forrest Sherer is ultimately sold, and the resulting proceeds, earnings impact and use of capital.
- Whether pension funding needs, dividend capacity and regulatory capital remain consistent with management’s expectations.
- Whether unrealized securities losses or other valuation assumptions result in future impairment or earnings effects.