First Financial Corp (THFF): A High-Yield Dividend Growth Stock Thriving in a Rising Rate Environment

In the current economic climate, where central banks remain resolute in their inflation-fighting mandates, investors are increasingly scrutinizing stocks that can deliver both income and capital appreciation. Among these, First Financial Corp (NASDAQ: THFF) stands out as a compelling candidate. This regional bank has demonstrated a unique ability to balance aggressive dividend growth with prudent financial management, all while navigating the challenges—and opportunities—of a rising interest rate environment.

Sustainable Payout Growth: A Track Record of Consistency

First Financial's dividend yield of 3.57% as of July 2025 is not just above the Financial Services sector average of 2.89% but also reflects a 24% premium over its own five-year average. This growth is underpinned by a disciplined approach to capital allocation. Since 2020, the company has increased its annualized dividend per share (DPS) by 47%, with the most recent hike from $0.45 to $0.51 in 2024-2025. Such consistency is rare in an industry where many peers have cut or frozen dividends during economic downturns.

The key to this sustainability lies in THFF's payout ratio of 42.9%, which is moderate compared to peers like Horizon Bancorp (61.5%) and Lakeland Financial (55.8%). This ratio ensures that the company retains enough earnings to reinvest in growth while rewarding shareholders. Notably, the dividend cover—earnings relative to dividend payments—is currently 2.0, meaning First Financial's earnings can support its payout twice over. This buffer provides a margin of safety against economic headwinds.

Low Payout Ratio: A Shield Against Volatility

While a high yield is attractive, it must be paired with a sustainable payout structure. First Financial's 42.9% payout ratio is a testament to its balanced approach. This metric is particularly appealing in a rising rate environment, where banks often face pressure to allocate capital toward higher-yielding assets. By maintaining a lower payout ratio than many peers, THFF retains flexibility to navigate shifting conditions without compromising its dividend.

For example, Old National Bancorp, with a payout ratio of 32.2%, has opted for even greater conservatism, but this comes at the cost of lower yield (2.3% in 2023). THFF strikes a middle ground, offering a yield that is both attractive and secure. The company's ability to grow dividends without overextending its balance sheet is further evidenced by its dividend cover, which has averaged 1.8 over the past three years.

Earnings Momentum in a Rising Rate Environment

First Financial's Q2 2025 earnings report underscore its ability to thrive in a tightening monetary environment. Net income surged 63% year-over-year to $18.6 million, driven by a 34% increase in net interest income to $52.7 million. This growth was fueled by a 21.62% rise in total loans to $3.9 billion, partly due to the acquisition of SimplyBank in July 2024. The net interest margin (NIM) expanded to 4.15%, up from 3.57% in 2024, reflecting the company's ability to leverage higher rates while maintaining deposit growth.

Importantly, asset quality has remained robust. Nonperforming loans declined to $9.8 million (0.25% of total loans) from $15.9 million (0.50%) a year earlier, while the efficiency ratio improved to 59.37% from 64.56%. These metrics suggest that management, led by CEO Norman D. Lowery, is executing a dual strategy: expanding the loan book profitably while maintaining conservative risk management.

Strategic Positioning for the Future

First Financial's performance in 2025 highlights its strategic advantages. By expanding its NIM and growing its loan portfolio, the company is capitalizing on the Federal Reserve's rate hikes without sacrificing credit quality. Its recent acquisition of SimplyBank not only added $467 million in loans but also enhanced its deposit base, providing a foundation for future growth.

Moreover, the company's dividend policy is aligned with its earnings trajectory. With a 9.23% average dividend growth rate over the past three years and a forward yield of 3.8%, THFF offers a rare combination of income and growth potential. The recent stability in quarterly dividends—$0.51 per share in both Q1 and Q2 2025—further reinforces confidence in management's commitment to shareholder returns.

Investment Implications

For income-focused investors, First Financial Corp presents a rare opportunity. Its 3.57% yield is not a “buy and forget” proposition but rather a carefully calibrated payout supported by earnings growth and a conservative payout ratio. The company's ability to expand its NIM and grow its loan book in a rising rate environment ensures that this yield is not only sustainable but likely to increase over time.

In a market where many high-yield stocks are burdened by unsustainably high payout ratios or weak earnings, THFF's fundamentals are a breath of fresh air. With a forward dividend yield of 3.8% and a dividend cover of 2.0, the stock is well-positioned to continue its trajectory of dividend growth. For those seeking a high-yield dividend growth stock that can withstand macroeconomic volatility, First Financial Corp is a compelling addition to any portfolio.