Executive Summary / Key Takeaways

• First Financial Corporation delivered a strong first quarter in 2025, with net income increasing significantly year-over-year, primarily driven by robust net interest income growth and margin expansion.
• The recent acquisition of SimplyBank has expanded the balance sheet and contributed to operational scale, though it also factored into higher non-interest expenses.
• Asset quality remains solid with a notable decrease in non-performing loans and a high allowance for credit losses coverage ratio, reflecting disciplined underwriting.
• The company maintains a strong liquidity position and robust capital ratios, providing stability amidst broader banking sector concerns and interest rate volatility.
• While lacking detailed technological differentiators compared to larger peers, THFF leverages its long history, regional network, and community focus as key competitive advantages, though future growth may be challenged by scale and digital gaps.

Setting the Scene: A Regional Anchor in a Dynamic Landscape

First Financial Corporation, operating primarily across the Midwest, stands as a long-established regional bank rooted in traditional banking services. Its business model centers on serving local communities through deposit-taking, commercial, residential, and consumer lending, complemented by trust and financial services. With a history stretching back to 1834, the company has built a foundation of regional loyalty and a reputation for disciplined underwriting, a philosophy credited with supporting its credit performance through prior financial crises.

In recent years, THFF has strategically responded to the evolving banking landscape. A significant move was the acquisition of SimplyBank, completed on July 1, 2024. This transaction, valued at approximately $73.4 million in cash consideration, was aimed at expanding the company's footprint and scale. While contributing to an increase in operating expenses, the integration of SimplyBank's operations has resulted in a larger balance sheet and, according to management, has been a factor in improving the net interest margin. External commentary suggests that recent deposit growth has been largely driven by such acquisitions rather than purely organic expansion, highlighting M&A as a key component of THFF's growth strategy.

Within the competitive Midwest banking sector, THFF operates alongside a mix of larger regional players and smaller community banks. Key publicly traded competitors include Old National Bancorp (ONB), Fifth Third Bancorp (FITB), Regions Financial Corporation (RF), and Huntington Bancshares Incorporated (HBAN). These rivals often possess greater scale and more extensive technological capabilities. For instance, competitors like FITB and HBAN are noted for leveraging digital tools and potentially faster processing speeds in lending compared to more traditional approaches.

THFF's competitive advantages are primarily rooted in its historical presence, established regional network of 78 branches, and the strong customer loyalty fostered by its community-focused approach. These factors can contribute to higher customer retention and potentially lower customer acquisition costs in its specific geographic niches. However, THFF faces disadvantages related to its smaller scale compared to peers like ONB and FITB, which can lead to higher operating costs per unit. Furthermore, specific details regarding THFF's core differentiated technology, significant R&D initiatives, or quantifiable technological benefits over alternatives are not readily available. While the industry is undergoing digital transformation, technological leadership does not appear to be a key competitive moat for THFF. Instead, its strategic positioning appears to lean more on traditional banking strengths and regional density, which could be a vulnerability against rivals investing heavily in digital innovation and efficiency.

Performance Amidst Shifting Rates

Against this backdrop, First Financial Corporation demonstrated a notable improvement in its financial performance in the first quarter of 2025. Net income rose significantly to $18.4 million for the three months ended March 31, 2025, compared to $10.9 million in the same period of 2024. This translated to basic earnings per share increasing from $0.93 to $1.55. Profitability metrics also saw a substantial uplift, with return on average assets climbing to 1.34% from 0.91% and return on average equity reaching 13.04% from 8.36% year-over-year.

The primary engine behind this improved performance was a strong increase in net interest income, which grew by $13.1 million to $52.0 million in Q1 2025 from $38.9 million in Q1 2024. This expansion drove the net interest margin to 4.11%, a notable increase from 3.53% in the prior year's quarter. The improvement in margin was primarily attributed to a 32 basis point increase in yields on net loans and leases. Simultaneously, the effective rate paid on average interest-bearing deposits decreased by 23 basis points, and interest paid on other borrowings decreased by 20 basis points, contributing favorably to the net interest margin expansion.

Non-interest income also saw growth, increasing to $10.5 million in Q1 2025 from $9.4 million in Q1 2024. However, non-interest expenses rose to $36.8 million from $33.4 million, reflecting an overall increase in operating expenses, partly attributed to the SimplyBank acquisition.

Looking at the balance sheet as of March 31, 2025, total assets stood at $5.55 billion, a slight decrease from $5.56 billion at December 31, 2024. Gross loans increased modestly by $17 million to $3.85 billion. Deposits, however, decreased by $80 million to $4.64 billion. To manage funding needs, other borrowings saw a significant increase of $96.8 million, reaching $124.9 million. Shareholders' equity grew by $22.9 million, or 4.17%, from year-end 2024, pushing book value per share up by $4.10 to $48.26. This increase in equity occurred despite accumulated other comprehensive loss increasing by $11.1 million, primarily due to the impact of market interest rates on the valuation of the securities portfolio.

Asset quality metrics remained solid. The provision for credit losses saw a slight increase to $2.0 million in Q1 2025 from $1.8 million in Q1 2024, and net charge-offs also increased to $1.8 million from $1.5 million. However, non-performing loans decreased significantly to $10.2 million at March 31, 2025, down from $13.3 million at December 31, 2024, and a more substantial decrease from $24.3 million at March 31, 2024. This reduction in non-performing assets, coupled with a stable allowance, resulted in a strong allowance for credit losses coverage ratio of 460.6% of non-performing loans, up from 351.4% at the end of 2024. Management believes the current allowance is adequate, based on their analysis of the portfolio and economic conditions.

Liquidity is described as strong, supported by cash and available-for-sale securities representing approximately 22.9% of assets. The company also has access to significant contingent liquidity sources, including substantial borrowing capacity with the Federal Home Loan Bank, the Federal Reserve Bank, and correspondent banks. Management assesses the current liquidity position as adequate to meet expected obligations. Capital ratios remain robust and well above regulatory requirements for being considered well-capitalized, providing a cushion against potential economic headwinds.

Outlook and Risks

While specific forward-looking guidance figures from management were not readily available, external analyst estimates suggest a positive outlook for 2025 earnings, with Zacks Consensus Estimates ranging from $5.56 to $6.02 per share.

The company acknowledges that interest rate risk is its most significant market risk. Simulation modeling indicates sensitivity to rate changes, with a 100 basis point increase potentially decreasing net interest income by 1.41% over the next 12 months, while a 100 basis point decrease could increase it by 4.92% over the same period. These simulations are based on assumptions and actual results may differ, but they highlight the potential impact of rate volatility. The company may use derivatives to manage this risk but does not foresee them becoming a major strategic component.

Credit risk remains a key focus, managed through disciplined underwriting and regular evaluation of the loan portfolio. While non-performing loans have decreased, changes in economic conditions or borrower financial health could necessitate future adjustments to the allowance for credit losses. The company also holds a significant portfolio of investment securities with unrealized losses totaling $154.6 million at March 31, 2025. Management attributes these losses to changes in market interest rates rather than credit deterioration and does not intend to sell these securities before anticipated recovery, mitigating the immediate impact on earnings.

Broader market conditions, including potential recessionary concerns and events in the banking sector, are recognized risks. The company states it has proactively positioned its balance sheet to mitigate these risks, emphasizing its strong liquidity and capital levels as defenses. No material changes in overall risk factors from the 2024 annual report were noted.

Conclusion

First Financial Corporation's first quarter of 2025 demonstrated solid financial execution, marked by strong earnings growth, expanding net interest margin, and improving asset quality metrics. The SimplyBank acquisition appears to be contributing to a larger operational base, supporting revenue growth. The company's core strengths lie in its deep regional roots, established brand loyalty, and conservative lending practices, which have historically provided stability.

However, the competitive landscape, particularly the increasing technological capabilities and scale of larger peers, presents ongoing challenges. While THFF's traditional model and regional density offer resilience in its core markets, the lack of detailed information on specific technological differentiators suggests this may not be a primary driver of future growth or a significant competitive moat against more digitally advanced rivals. Investors should weigh the company's recent strong performance and stable financial health against the potential long-term pressures from competitive dynamics and the need for continued strategic adaptation in a rapidly evolving banking environment. Key factors to monitor include the trajectory of net interest margin in response to future rate changes, the ability to generate organic loan and deposit growth beyond acquisitions, and the company's strategic response to technological shifts in the industry.