First Financial Corporation — Q2 2013 Form 10-Q
Business context and reporting period. Regional banking company reporting unaudited consolidated results for the three and six months ended June 30, 2013. Amounts are in U.S. dollars; financial statement amounts below are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net interest income | $25.7 | $27.7 | $51.9 | $54.8 |
| Provision for loan losses | $3.0 | $1.8 | $6.0 | $4.7 |
| Non-interest income | $9.7 | $9.8 | $19.5 | $19.3 |
| Non-interest expense | $23.4 | $23.1 | $45.6 | $46.5 |
| Net income | $6.4 | $8.7 | $14.1 | $16.1 |
| Basic and diluted EPS | $0.48 | $0.66 | $1.06 | $1.22 |
- Q2 net interest margin was 4.09%, down from 4.42% a year earlier. Management attributed the decline to interest income on earning assets falling faster than funding costs.
- Q2 return on assets and return on equity were 0.88% and 6.78%, respectively, versus 1.20% and 9.43% in Q2 2012.
- At June 30, total assets were $2.96 billion, net loans $1.78 billion, deposits $2.28 billion, total liabilities $2.59 billion, and shareholders’ equity $368.4 million. Loans were down from $1.83 billion at December 31, 2012; deposits were broadly stable.
- Cash and cash equivalents were $73.7 million at June 30, down $13.5 million from year-end. For the first half, operating cash flow was $25.0 million, investing cash flow was negative $113.5 million, and financing cash flow was positive $75.0 million. Securities purchases drove much of the investing outflow.
- Short-term borrowings were $29.2 million, down from $40.6 million at year-end; FHLB advances were $209.5 million, up from $119.7 million. The filing gives no consolidated debt-to-equity measure.
- The allowance for loan losses was $22.1 million, approximately 1.23% of reported loans. Q2 net charge-offs were $5.8 million; first-half net charge-offs were $4.8 million, or 0.53% of average loans and leases.
Material changes and notable items
- Compared with Q2 2012, Q2 net income fell 26%, EPS declined from $0.66 to $0.48, and net interest income decreased $1.9 million. First-half net income fell to $14.1 million from $16.1 million.
- Q2 loan-loss provision rose to $3.0 million from $1.8 million. Management said most Q2 loans charged off had been reserved for in prior quarters. The allowance increased only modestly from year-end, while non-performing loans declined overall.
- Non-performing loans were reported as $46.7 million in the detailed table at June 30, down from $59.8 million at December 31, 2012; the allowance equaled 47.3% of non-performing loans, versus 36.7%. Elsewhere, the narrative describes the June figure as $47.6 million, an inconsistency to verify.
- Available-for-sale securities increased to $837.0 million from $691.0 million at year-end. Gross unrealized losses rose to $20.4 million from $8.2 million, principally reflecting interest-rate and market conditions, according to management. The portfolio includes collateralized debt obligations (CDOs) with significant valuation uncertainty.
- Other comprehensive loss was $10.2 million for Q2 and $11.7 million for the first half, largely reflecting securities valuation changes. The accumulated other comprehensive loss reached $19.1 million at June 30, compared with $7.5 million at year-end.
- In July, the company received a $1.3 million payment on a CDO carried at $0.2 million at quarter-end; management expected some portion could be recognized as a recovery of prior impairment in Q3.
Outlook, risks and contingencies
- No earnings or revenue guidance was provided. Management said it expected liquidity to be adequate, citing expected security maturities and principal payments and available FHLB and correspondent-bank borrowing capacity.
- A 100-basis-point rate increase was modeled to raise net interest income 2.37% over 12 months; a 100-basis-point decrease was modeled to reduce it 0.95%. These are scenario estimates that assume an immediate parallel rate move and no management response.
- The company agreed to acquire certain assets and assume deposits of seven Bank of America branches and two drive-up facilities in central and southern Illinois. The transaction was expected to close in Q3 2013, subject to completion; regulatory approval had been received. The bank agreed to assume approximately $250 million of deposits, acquire approximately $2.3 million of loans and pay a 2.75% deposit premium.
- The subsidiary banks were categorized as well capitalized. First Financial Bank’s total risk-based, Tier I risk-based, and Tier I leverage ratios were 16.04%, 15.13%, and 11.34%, respectively, above the stated well-capitalized thresholds.
- Management identified loan-loss allowance estimates, goodwill valuation, and securities valuation as critical accounting judgments. It cited economic and financial-market conditions, interest rates, competition, regulation, litigation, and borrower losses among risks that could affect results. No material changes to previously disclosed risk factors or material pending legal proceedings were reported.
Investor verification priorities
- Reconcile the inconsistent June 30 non-performing-loan amount in the MD&A narrative and detailed table.
- Review the composition, valuation assumptions, and potential credit exposure of the CDO portfolio and the increase in unrealized securities losses.
- Assess loan charge-offs, impaired and restructured credits, allowance adequacy, and the FDIC indemnification asset’s effect on provision expense.
- Verify the timing, deposit retention, integration costs, and expected economics of the planned Illinois branch acquisition.
- Track the effects of interest-rate changes on net interest margin, securities values, liquidity, and funding needs.