First Financial Corporation — Q1 2015 Form 10-Q
Business context and reporting period. First Financial Corporation is a one-segment banking company. This unaudited filing covers the three months ended March 31, 2015; balance-sheet comparisons are with December 31, 2014 unless otherwise noted.
Financial performance and condition
- Income: Net income was $7.76 million, down slightly from $7.83 million in Q1 2014. Diluted EPS was $0.60 versus $0.59, with lower average shares outstanding. Return on assets was 1.04% and return on equity was 7.73%.
- Revenue and margin: Net interest income declined 4.2% to $26.0 million from $27.1 million. Net interest margin was 4.01%, down from 4.10%. Non-interest income was essentially unchanged at $10.1 million. Total interest and non-interest income was $37.1 million versus $38.9 million in Q1 2014.
- Expenses and credit costs: Non-interest expense rose to $24.0 million from $23.7 million; salaries and benefits increased $962,000, partly reflecting higher pension expense. Provision for loan losses fell to $1.45 million from $1.96 million. Net charge-offs were approximately $938,000, compared with $1.39 million a year earlier.
- Cash flow: Operating activities provided $13.4 million and investing activities provided $16.7 million; financing activities used $19.7 million. Cash and cash equivalents increased $10.4 million to $88.5 million.
- Balance sheet and funding: Total assets were $3.00 billion, down $6.6 million from year-end. Gross loans were $1.76 billion, down from $1.78 billion; deposits were $2.46 billion, up slightly. Short-term borrowings were $28.5 million and FHLB advances were $12.8 million. Shareholders’ equity was $409.0 million, up from $394.2 million at year-end.
- Credit quality: Non-performing loans totaled $30.5 million, nearly unchanged from $30.6 million at year-end. The allowance for loan losses was $19.4 million, or 63.4% of non-performing loans, versus 61.6% at year-end. Loans more than 90 days past due totaled $14.3 million, down from $20.4 million.
- Capital: At March 31, the Corporation’s common equity Tier 1, total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios were 17.66%, 18.57%, 17.66%, and 12.74%, respectively. The Bank’s corresponding ratios were 16.83%, 17.65%, 16.83%, and 12.07%.
Material changes versus comparable periods
- Net interest income and net interest margin declined year over year, reflecting lower income on earning assets; lower funding costs only partly offset the decline.
- Net income was broadly flat, while EPS increased by one cent. Non-interest income was stable, but non-interest expense increased.
- Compared with year-end 2014, loans declined and deposits were broadly stable. Equity increased, including from quarterly earnings and $7.2 million of other comprehensive income.
- The allowance increased $512,000 from year-end; management attributed the lower year-over-year provision partly to reduced impaired-loan volume and specific reserves.
Outlook, commentary, risks, and notable items
- No specific earnings or revenue guidance was provided. Management said it currently expects adequate liquidity, citing deposits, loan and securities repayments, $4.2 million of investments maturing, anticipated mortgage-backed-security principal payments of $136.1 million, expected calls of $19.0 million, and unused borrowing capacity.
- Management identified interest-rate risk as its most significant market risk. Its model estimated that a 100-basis-point increase would raise net interest income 2.68% over 12 months, while a 100-basis-point decrease would lower it 1.88%; the estimates assume immediate rate changes and no management response.
- Management considered the allowance adequate. The filing cautions that estimates depend on borrower conditions, economic performance, interest rates, and other factors. Forward-looking risks also include competition, regulation, litigation, and financial-market conditions.
- Unrealized securities losses fell to $3.7 million from $8.2 million at year-end. Management attributed most losses to interest-rate-related market-value changes, not issuer credit concerns, and said it did not intend, nor expect to be required, to sell the securities before recovery. Certain collateralized debt obligations use Level 3 valuations; management disclosed a wide range of third-party price estimates.
- Pension expense increased, in part because of lower discount rates and use of the RP-2014 mortality table. The company repurchased 9,689 shares during the quarter for approximately $345,000.
- The filing reported no material change in risk factors and no material pending legal proceedings beyond routine business litigation. Management concluded disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Investor verification points
- Track whether net interest margin and net interest income stabilize or continue to decline.
- Review loan growth, deposit mix, non-performing loans, delinquencies, charge-offs, and allowance adequacy in subsequent filings.
- Assess the assumptions behind liquidity projections and interest-rate sensitivity, including actual deposit and borrower behavior.
- Monitor pension costs and the valuation of Level 3 securities and impaired loans, including changes in valuation inputs.
- Confirm future regulatory capital ratios and the pace of share repurchases against the company’s capital and funding needs.