First Financial Corporation — Q3 2015 Form 10-Q
Business and period: Indiana-based bank holding company reporting one banking segment. The quarter and nine months ended September 30, 2015; financial statements are unaudited. Dollar figures below are in millions unless otherwise noted.
Financial performance and condition
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net interest income | $26.6 | $27.1 | $78.5 | $80.9 |
| Net interest margin | 4.12% | 4.15% | 4.04% | 4.11% |
| Non-interest income | $10.0 | $10.5 | $29.8 | $29.9 |
| Non-interest expense | $24.2 | $24.7 | $73.5 | $72.2 |
| Provision for loan losses | $1.1 | $1.5 | $3.7 | $3.1 |
| Net income | $8.4 | $8.3 | $23.1 | $24.6 |
| Diluted EPS | $0.65 | $0.62 | $1.79 | $1.85 |
| Return on assets / equity | 1.14% / 8.36% | 1.10% / 8.27% | 1.03% / 7.61% | 1.08% / 8.17% |
- Margins and operating trends: Q3 net interest income fell $0.6 million year over year as earning-asset income declined more than funding costs. Nine-month net interest income declined $2.8 million. The quarterly efficiency ratio was 63.42%, versus 63.00%.
- Expense and revenue detail: Quarterly salaries and benefits rose $0.9 million, partly due to higher pension expense; management cited merit increases, lower discount rates and use of the RP-2014 mortality table. Quarterly insurance commissions fell $0.4 million. Nine-month non-interest expense increased $1.2 million.
- Balance sheet at September 30: Total assets were $2,942.8 million; loans, net of allowance and deferred costs, were $1,746.7 million; deposits were $2,418.6 million; shareholders’ equity was $408.6 million. Gross loans were $1,764.3 million, down from $1,780.4 million at year-end 2014. Deposits were down $38.6 million from year-end, while management described them as broadly stable versus September 2014.
- Credit quality: Allowance for loan losses was $19.9 million, up from $18.8 million at year-end; allowance equaled 72.3% of nonperforming loans, versus 61.6% at year-end. Nonperforming loans declined to $27.6 million from $30.6 million at year-end and $34.2 million at September 2014. Nine-month net charge-offs were $2.6 million ($6.6 million charge-offs less $4.0 million recoveries). Management attributed the higher allowance to increased substandard loans and considered it adequate.
- Cash flow and funding: Nine-month operating cash flow was $33.6 million versus $38.6 million; investing cash flow was $35.6 million versus negative $9.0 million; financing cash flow was negative $84.1 million versus negative $3.6 million. Cash and due from banks declined $14.8 million to $63.3 million. Short-term borrowings were $23.3 million and FHLB advances $13.3 million, compared with $48.0 million and $12.9 million, respectively, at year-end.
- Capital and shareholder returns: September regulatory ratios included a 17.73% common equity tier 1 ratio and a 12.92% Tier 1 leverage ratio at the Corporation; the bank’s total risk-based capital ratio was 17.91%. The company paid $0.49 per share in dividends during the first nine months and repurchased 130,247 shares during Q3 at an average $33.22 per share.
Outlook, risks and notable items
- The filing provides no specific earnings or operating guidance. Management stated it expected adequate liquidity, citing deposits, loan and securities repayments, $123.9 million of anticipated mortgage-backed-security principal payments, $21.1 million of expected security calls, and unused borrowing capacity.
- Interest-rate sensitivity modeling estimated that a 100-basis-point rate increase would raise net interest income 2.48% over 12 months and 5.83% over 24 months; a 100-basis-point decrease would reduce it 0.40% and 1.64%, respectively. These are model estimates assuming immediate parallel rate shifts and no management response; actual results may differ.
- Available-for-sale securities had $4.3 million of gross unrealized losses, down from $8.2 million at year-end. Management said most reflected interest-rate movements, did not consider them other-than-temporary impairments, and did not intend or expect to be required to sell before recovery. The filing notes a wide range of third-party valuations for collateralized debt obligations, highlighting valuation uncertainty.
- Other risks cited include credit losses and borrower bankruptcies, economic and market conditions, interest rates, competition, regulation, litigation and accounting changes. Management reported no material change in previously disclosed risk factors, no material pending litigation beyond routine matters, and effective disclosure controls.
- The 2009 FDIC loss-sharing agreement covers $6.5 million of loans at September 30; the indemnification asset was immaterial. Recoveries on non-single-family covered loans remain subject to sharing through 2017.
Key facts for investors to verify
- Whether the decline in net interest income and net interest margin continues, and how rate changes affect realized results versus the sensitivity model.
- Credit trends behind the increase in substandard loans and allowance, including nonperforming loans, charge-offs, recoveries and reserve adequacy.
- The drivers of higher pension and employee-benefit costs and their effect on future expenses.
- Liquidity and deposit trends, including realized securities cash flows and access to unused borrowing capacity.
- Valuation assumptions and market-price dispersion for Level 3 securities, especially collateralized debt obligations.
- The scale and pace of share repurchases relative to the authorization and capital needs; the filing reports 130,247 shares purchased in the quarter and 104,507 purchased under the announced program.