First Financial Bancorp. — Q3 2012 Form 10-Q
Business context and reporting period. Unaudited results cover the three and nine months ended September 30, 2012; balance-sheet comparisons are with December 31, 2011. The Cincinnati-based bank holding company operates primarily in Ohio, Indiana and Kentucky, with commercial banking, retail banking and wealth management businesses. It reported 122 banking centers and 141 ATMs.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net interest income | $59.8 million | $65.2 million | $191.4 million | $198.4 million |
| Noninterest income | $30.8 million | $28.1 million | $96.3 million | $112.9 million |
| Net income | $16.2 million | $15.6 million | $51.0 million | $48.8 million |
| Diluted earnings per share | $0.28 | $0.27 | $0.87 | $0.83 |
| Net interest margin | 4.21% | 4.55% | 4.40% | 4.63% |
| Noninterest expense | $55.3 million | $53.1 million | $168.5 million | $163.4 million |
Return on average assets was 1.05% for Q3 and 1.08% year to date; return on average shareholders’ equity was 9.01% and 9.56%, respectively. Q3 provision for loan and lease losses was $10.2 million, including $3.6 million for uncovered and $6.6 million for covered loans. The effective tax rate was 35.4% for Q3 and 34.8% year to date.
At September 30, total assets were $6.24 billion, shareholders’ equity $716.0 million, and total loans $3.89 billion, including $825.5 million in covered loans. Total deposits were $4.94 billion. Borrowed funds were $446.7 million, including $283.0 million of short-term FHLB advances; long-term debt was $75.5 million. Uncovered and covered loan-loss allowances were $49.2 million and $48.9 million, respectively.
For the first nine months, operating cash flow was $117.7 million, investing cash flow $363.9 million and financing cash flow negative $477.1 million. Cash and due from banks ended at $154.2 million, up $4.5 million from year-end. The company reported $175.7 million in cash and short-term investments and $2.3 billion of unused, available overnight wholesale funding. Consolidated regulatory capital ratios were 10.54% Tier 1 leverage, 16.93% Tier 1 risk-based and 18.21% total risk-based; the company said it remained well-capitalized.
Material changes versus comparable periods
- Net income increased 4.0% in Q3 and 4.6% year to date, despite lower net interest income and weaker year-to-date noninterest income.
- Net interest margin fell 34 basis points year over year in Q3 and 23 basis points year to date. Management attributed pressure to low rates, runoff and paydowns of higher-yielding covered loans, mortgage-security prepayments and premium amortization, and lower yields on new loans. Lower deposit funding costs partly offset these effects.
- Q3 noninterest income increased, including a $2.6 million securities-sale gain. Year-to-date noninterest income declined, primarily because FDIC loss-sharing income fell $23.9 million and accelerated covered-loan discount declined $4.5 million; a $5.0 million litigation settlement and other fee growth partly offset the decline.
- Deposits declined $698.2 million, or 12.4%, from year-end, reflecting deposit rationalization, repricing of acquired Flagstar deposits and attrition associated with branch consolidations. Borrowed funds increased $270.7 million, primarily through FHLB short-term advances.
- Uncovered loans grew $97.6 million, or 3.3%, while covered loans declined $227.7 million, or 21.6%. Uncovered nonperforming loans were $74.0 million versus $76.4 million at year-end; classified assets declined to $133.4 million from $162.4 million.
- Uncovered net charge-offs were $18.6 million year to date versus $16.7 million in 2011; covered-loan provision was $25.6 million versus $57.2 million. Nonperforming assets were $87.9 million, broadly similar to $87.7 million at year-end.
Outlook, risks and unusual items
- No formal earnings guidance is stated. Management expects approximately $17.1 million in annualized cost savings from an efficiency plan, including estimated net operating expenses of $3.0 million associated with 2012 branch consolidations. Savings were expected to begin in Q4 2012, but implementation costs were expected to preclude net savings for 2012; realization depends on execution and external conditions.
- The board approved an October 2012 repurchase plan authorizing up to 5 million shares, with an approximate target of 1 million shares annually beginning in Q4 2012, subject to market conditions and board review. Management expected combined regular and variable dividends to represent a 100% payout of quarterly earnings through the dividend paid in Q4 2013; the board evaluates dividends quarterly.
- Interest-rate sensitivity modeling indicated a modestly asset-sensitive position. Estimated NII changes under immediate rate shocks were -0.52% in year one and +3.45% in year two for a 100-basis-point increase; a 200-basis-point increase showed +0.60% and +6.31%, respectively. A 100-basis-point decrease showed -6.88% and -8.89%. These are model estimates, dependent on assumptions and excluding securities purchased after September 30 from the EVE analysis.
- Investment securities were reclassified in Q1, with $915.5 million book value moved from available-for-sale to held-to-maturity to reduce potential equity volatility from market-value changes. The company stated it intended and was able to hold the securities to maturity. Q3 repositioning included an $84.3 million agency MBS sale and a $2.6 million pretax gain; additional securities purchases occurred after quarter-end.
- Key exposures include credit deterioration, interest-rate and prepayment risk, deposit runoff and access to reasonably priced liquidity, FDIC loss-sharing compliance and reimbursement estimates, regulatory changes, operational/security risks and litigation. Outstanding commitments to extend credit were $1.2 billion; letters of credit totaled $14.7 million. Management said pending litigation was not likely to be material, while noting claims may remain unresolved. A claim against an acquired entity was dismissed without prejudice, so it may be refiled.
Important facts for investors to verify
- Whether loan growth, credit migration and charge-offs support the lower uncovered allowance, and how covered-loan cash-flow estimates and FDIC indemnification assumptions evolve.
- Whether deposit attrition stabilizes and how replacement funding costs affect net interest margin and liquidity.
- Whether the planned cost savings are achieved, net of implementation costs, without harming customer service or revenue.
- How the securities portfolio’s yields, prepayments, duration and held-to-maturity classification affect future income, liquidity and reported equity.
- Whether dividends and the newly approved repurchases remain sustainable alongside capital needs, regulatory requirements and business conditions.
- The filing’s financial statements report diluted EPS of $0.87 for the nine months; verify figures against the statements, as the MD&A also contains an inconsistent narrative presentation of Q3 EPS.