First Financial Corporation — Q1 2014 Form 10-Q
Business context and period: The Corporation is a banking company reporting one segment. This unaudited filing covers the three months ended March 31, 2014; balance-sheet comparisons are with December 31, 2013 unless otherwise noted. Dollar amounts below are in millions unless stated otherwise.
Financial performance and condition
- Earnings: Net income was $7.831 million, up from $7.693 million in Q1 2013; diluted EPS was $0.59 versus $0.58. Return on assets was 1.03% and return on equity 7.9%, compared with 1.05% and 8.21%, respectively, a year earlier.
- Interest income and margin: Net interest income increased to $27.142 million from $26.173 million. Net interest margin was 4.10%, up 0.01 percentage point. Total interest income was $28.824 million, slightly below $28.942 million, while interest expense fell to $1.682 million from $2.769 million.
- Other revenue and expenses: Non-interest income rose to $10.111 million from $9.877 million. Non-interest expense increased to $23.705 million from $22.199 million; management attributed much of the increase to staffing, occupancy and equipment costs associated with the 2013 branch expansion. Income before taxes was $11.588 million; income tax expense was $3.757 million.
- Credit costs: The income statement provision for loan losses was $1.960 million, down from $3.021 million. Management said FDIC indemnification asset changes added $0.235 million to provision in Q1 2014, versus $0.746 million in Q1 2013. Net charge-offs were $1.7 million, compared with net recoveries of $1.0 million in Q1 2013. The allowance was $20.408 million, versus $20.068 million at year-end.
- Credit quality: Non-performing loans declined to $35.276 million from $39.153 million at year-end; the allowance equaled 57.9% of non-performing loans, versus 51.3%. Troubled debt restructurings were $14.325 million, down from $17.301 million. Total loans were $1.785 billion before unearned income and allowance.
- Balance sheet and liquidity: Total assets were $3.033 billion, compared with $3.019 billion at year-end. Deposits totaled $2.507 billion, up from $2.459 billion. Cash and due from banks was $83.988 million; federal funds sold were $9.791 million. Short-term borrowings fell to $35.710 million from $59.592 million, and other borrowings to $38.214 million from $58.288 million. Shareholders’ equity was $399.329 million, up from $386.195 million.
- Cash flow: Operating activities provided $13.699 million, versus $15.962 million in Q1 2013. Investing activities provided $1.830 million, compared with $86.049 million used a year earlier; financing activities used $2.574 million. Cash and cash equivalents increased $12.955 million to $83.988 million.
- Capital: First Financial Bank reported total risk-based capital of 16.70%, Tier 1 risk-based capital of 15.87%, and Tier 1 leverage capital of 11.57% at March 31. The filing states subsidiary banks were categorized as well capitalized.
Material changes and notable items
- Lower funding costs supported higher net interest income despite slightly lower total interest income.
- Mortgage-loan sale gains fell by $0.587 million year over year, partly offset by higher deposit service charges and other service fees.
- Loans were lower than the comparable prior-year period ($1.78 billion versus $1.82 billion, as described by management); deposits remained approximately $2.5 billion. Book value per share was $29.90, versus $28.43 a year earlier.
- Unrealized securities losses were $19.5 million at March 31, down from $26.7 million at year-end. Management said most reflected interest-rate movements rather than issuer credit concerns and did not consider the securities other-than-temporarily impaired. Three collateralized debt obligations had cumulative impairment charges recorded through earnings of $14.1 million; valuations for certain securities rely on illiquid markets and Level 3 inputs.
- The Corporation continued to hold an FDIC indemnification asset of $0.754 million. The related loss-sharing agreement covers certain acquired assets, with reimbursement percentages subject to the agreement’s terms.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. Management said it anticipates adequate liquidity, citing deposits, loan and securities repayments, and unused borrowing capacity at the Federal Home Loan Bank and correspondent banks.
- Management identifies interest-rate risk as its most significant market risk. In its modeled parallel-rate scenarios, a 100-basis-point increase would raise net interest income 2.21% over 12 months, while a 100-basis-point decrease would reduce it 7.20%. The filing cautions that models depend on assumptions and do not reflect management actions.
- Forward-looking results are subject to economic and market conditions, interest rates, competition, regulation, litigation, borrower losses and other risks. Management considers the loan-loss allowance adequate, but estimates depend on borrower conditions, loss history and other judgments.
- No material pending legal proceedings or material changes to previously disclosed risk factors were reported. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether lower funding costs can continue to support net interest income and margin as asset yields and interest rates change.
- Trends in charge-offs, non-performing loans, restructurings and allowance adequacy, including the effect of FDIC loss-sharing asset adjustments.
- Expense growth and the ongoing financial contribution of the 2013 branch expansion.
- Credit and valuation risks in the securities portfolio, particularly Level 3 collateralized debt obligations and other illiquid holdings.
- Liquidity and capital trends, and the assumptions underlying the filing’s interest-rate sensitivity estimates.