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Should You Be Concerned About First Financial Corporation’s (NASDAQ:THFF) Risks?

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Simply Wall St
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Post-GFC recovery has led to improving credit quality and a strong growth environment for the banking sector. As a small-cap bank with a market capitalisation of US$521m, First Financial Corporation’s (NASDAQ:THFF) profit and value are directly affected by economic growth. This is because borrowers’ demand for, and ability to repay, their loans depend on the stability of their salaries and interest rates. Risk associated with repayment is measured by bad debt which is written off as an expense, impacting First Financial’s bottom line. Today we will analyse First Financial’s level of bad debt and liabilities in order to understand the risk involved with investing in the bank.

Check out our latest analysis for First Financial

NasdaqGS:THFF Historical Debt, March 8th 2019
NasdaqGS:THFF Historical Debt, March 8th 2019

How Good Is First Financial At Forecasting Its Risks?

The ability for First Financial to accurately forecast and provision for its bad loans shows it has a strong understanding of the level of risk it is taking on. If the bank provisions for more than 100% of the bad debt it actually writes off, then could be considered to be relatively prudent and accurate in its bad debt provisioning. With a non-performing loan allowance to non-performing loan ratio of 123.27%, the bank has cautiously over-provisioned by 23.27%, which may suggest the bank is anticipating additional non-performing loans.

What Is An Appropriate Level Of Risk?

First Financial’s operations expose it to risky assets by lending to borrowers who may not be able to repay their loans. Loans that cannot be recuperated by the bank, also known as bad loans, should typically form less than 3% of its total loans. When these loans are not repaid, they are written off as expenses which come directly out of the bank’s profit. A ratio of 0.85% may indicate the bank faces relatively low chance of default and exhibits strong bad debt management – or it could indicate risks in the portfolio have not fully matured.

Is There Enough Safe Form Of Borrowing?

Handing Money Transparent
Handing Money Transparent

First Financial operates by lending out its various forms of borrowings. Customers’ deposits tend to carry the smallest risk given the relatively stable interest rate and amount available. As a rule, a bank is considered less risky if it holds a higher level of deposits. Since First Financial’s total deposit to total liabilities is very high at 95% which is well-above the prudent level of 50% for banks, First Financial may be too cautious with its level of deposits and has plenty of headroom to take on risker forms of liability.

Next Steps:

How will THFF’s recent acquisition impact the business going forward? Should you be concerned about the future of THFF and the sustainability of its financial health? The list below is my go-to checks for THFF. I use Simply Wall St’s platform to keep informed about any changes in the company and market sentiment, and also use their data as the basis for my articles.

  1. Future Outlook: What are well-informed industry analysts predicting for THFF’s future growth? Take a look at our free research report of analyst consensus for THFF’s outlook.

  2. Valuation: What is THFF worth today? Has the future growth potential already been factored into the price? The intrinsic value infographic in our free research report helps visualize whether THFF is currently mispriced by the market.

  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.