First Financial Bancorp. — Q1 2018 Form 10-Q
Period: Three months ended March 31, 2018; unaudited. First Financial is a regional financial holding company serving Ohio, Indiana and Kentucky, with additional nationwide commercial-finance operations.
Financial performance
| Metric | Q1 2018 | Q1 2017 / prior date |
|---|---|---|
| Net interest income | $75.8 million | $68.9 million |
| Net interest margin | 3.80%; 3.84% tax-equivalent | 3.63%; 3.70% tax-equivalent |
| Noninterest income | $16.9 million | $17.4 million |
| Noninterest expense | $52.3 million | $51.0 million |
| Provision for loan and lease losses | $2.3 million | $0.4 million |
| Net income | $30.5 million | $24.4 million |
| Diluted EPS | $0.49 | $0.39 |
| Return on average assets / equity | 1.40% / 13.31% | 1.18% / 11.36% |
| Operating cash flow | $52.3 million | $31.8 million |
Net income increased 25% year over year. The effective tax rate fell to 20.1% from 30.0%, principally reflecting the federal corporate tax rate reduction. The company reported an expected full-year 2018 effective tax rate of approximately 19.5%.
Balance sheet, funding and credit quality
- At March 31, total assets were $8.90 billion, total loans and leases $6.10 billion, and deposits $7.01 billion. Loans increased $88.8 million from year-end; deposits increased $115.5 million.
- Total shareholders’ equity was $940.0 million. Regulatory capital ratios were 10.77% common equity Tier 1 and 13.17% total capital on a consolidated basis; management said the company met capital requirements and was well-capitalized.
- Total borrowed funds were $828.0 million, down from $934.2 million at year-end. Long-term debt rose to $169.7 million from $119.7 million, including a new $50 million FHLB advance. Remaining FHLB borrowing capacity was $724.5 million.
- Liquidity on hand was $126.8 million, with $2.3 billion of unused, available overnight wholesale funding. A $15 million bank credit facility was undrawn and matures May 29, 2018.
- Allowance for loan and lease losses was $54.4 million, or 0.89% of loans. Net charge-offs were $1.9 million, 0.13% of average loans on an annualized basis.
- Nonperforming assets were $46.3 million, up from $44.4 million at year-end, primarily due to one commercial relationship moving to nonaccrual. Nonperforming loans were $45.2 million; TDRs totaled $21.0 million, down from $23.9 million.
Material changes, outlook and notable items
- Net interest income rose 10.0%, supported by loan growth and higher earning-asset yields; higher interest expense, including higher deposit costs, partly offset the increase. Tax-equivalent margin improved 14 basis points year over year.
- Noninterest income declined 2.5%, including lower loan-sale gains and limited-partnership income; client derivative fees and deposit service charges increased. Noninterest expenses rose 2.4%, with merger-related professional fees and FDIC-agreement termination costs among the drivers.
- On April 1, 2018, the company completed its acquisition of MainSource Financial Group for approximately $1.0 billion in stock consideration. MainSource reported $4.6 billion in assets, $3.0 billion in gross loans and $3.4 billion in deposits at March 31. Final fair values were not yet available; First Financial anticipated recording goodwill and core deposit intangibles. Integration and realization of expected merger benefits are risks.
- The FDIC loss-sharing agreements were terminated following a settlement payment in Q1. The related indemnification asset was zero at March 31, versus $1.9 million at year-end; future recoveries, gains, losses and expenses on formerly covered assets will be fully recognized by First Financial.
- Investment-securities fair-value changes produced a $9.8 million after-tax other comprehensive loss in Q1; accumulated other comprehensive loss was $34.7 million at quarter-end. Management reported no intent or expected requirement to sell temporarily impaired debt securities before recovery or maturity.
- Management’s interest-rate model indicated asset sensitivity: a parallel +100 basis-point shock was estimated to increase first-year net interest income 2.88%, while −100 basis points was estimated to reduce it 5.89%. Results depend on assumptions, including deposit repricing behavior.
- Potential risks include credit deterioration, interest-rate and liquidity changes, regulatory developments, merger integration, litigation and operational or technology risks. The company reported no litigation reserves and said pending matters were not considered probable or reasonably estimable as of March 31.
Important facts for investors to verify
- Whether the MainSource acquisition delivers anticipated benefits and how purchase accounting, integration costs and subsequent results develop.
- Trends in nonaccrual loans and commercial real-estate exposure, especially the relationship that drove the quarterly increase in nonperforming assets.
- Whether loan and deposit growth can sustain margins as funding costs rise, and how actual rate sensitivity compares with modeled estimates.
- The adequacy of the allowance and the impact of adopting the expected-credit-loss standard, which the company was still evaluating.
- Cash, borrowing capacity, capital ratios and dividend capacity after the acquisition and its related funding and integration needs.