First Financial Bancorp. — 2013 Third-Quarter Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. Unaudited consolidated results. First Financial is a bank holding company serving principally Ohio, Indiana and Kentucky, with commercial, consumer, wealth-management and mortgage businesses.
Financial results and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net interest income | $55.8 million | $59.8 million | $172.5 million | $191.4 million |
| Noninterest income | $22.3 million | $30.8 million | $60.6 million | $96.3 million |
| Income before taxes | $22.6 million | $25.2 million | $65.0 million | $78.3 million |
| Net income | $14.9 million | $16.2 million | $44.6 million | $51.0 million |
| Diluted EPS | $0.26 | $0.28 | $0.77 | $0.87 |
| Net interest margin | 3.91% | 4.21% | 3.99% | 4.40% |
- Q3 return on average assets was 0.96% and return on average equity was 8.53%, versus 1.05% and 9.01%, respectively, a year earlier.
- At September 30, total assets were $6.25 billion, down from $6.50 billion at year-end 2012. Uncovered loans were $3.43 billion, up 7.9% since year-end; covered loans declined to $518.5 million from $748.1 million.
- Total deposits were $4.73 billion, down 4.6% from year-end. Borrowed funds were $684.8 million, including $518.2 million in short-term FHLB advances and $61.1 million in long-term debt. Shareholders’ equity was $692.0 million.
- Uncovered allowance for loan and lease losses was $45.5 million, or 1.33% of uncovered loans; covered-loan allowance was $23.3 million. Uncovered net charge-offs were $9.1 million year to date, compared with $18.6 million in 2012.
- For the first nine months, operating cash flow was $125.2 million, investing cash flow was positive $214.0 million, and financing cash flow was negative $296.0 million. Cash and due from banks rose $43.2 million to $177.7 million.
- Consolidated regulatory capital ratios were 10.29% Tier 1 leverage, 15.26% Tier 1 risk-based and 16.53% total risk-based. The company reported that it remained well-capitalized; tangible common equity was 9.60%.
Material changes versus comparable periods
- Q3 net income fell 8.2% year over year; nine-month net income fell 12.7%. Lower net interest income and noninterest income were partly offset by lower provisions and operating expenses.
- Net interest margin narrowed as higher-yielding covered loans ran off and new loan originations carried lower yields. Lower deposit costs helped, but short-term borrowings increased substantially year over year.
- Noninterest income declined 27.7% in Q3 and 37.1% year to date. Lower FDIC loss-sharing income and covered-loan discount accretion were key factors; year-to-date comparison also reflected a $5.0 million litigation settlement recorded in 2012 and lower securities-sale gains.
- Noninterest expense decreased 11.7% in Q3 and 7.9% year to date, mainly reflecting staffing reductions, branch consolidations and lower credit-related costs. The 2013 results included pension settlement charges of $1.4 million in Q3 and $5.7 million year to date.
- Uncovered loans grew, led by commercial and commercial real estate lending. Deposits and the investment portfolio contracted; the portfolio declined 14.6% from year-end. Rising rates drove an after-tax unrealized securities loss in accumulated other comprehensive income of $9.8 million, versus a $12.8 million gain at year-end 2012.
Outlook, commentary, risks and unusual items
- The filing gives no specific earnings or revenue guidance. Management reported annualized efficiency savings exceeding its initial $17.1 million target, estimated 85% of that target would be reflected in 2013 results, and identified additional initiatives expected to generate $5.0 million of savings in 2014.
- Management said covered loans are expected to continue declining through payoffs, sales, charge-offs and loss-share expiration unless new covered assets are acquired. Covered assets were approximately 9% of total assets.
- Liquidity sources included $188.1 million of cash and short-term investments, $353.3 million of remaining FHLB borrowing capacity and $1.8 billion of available overnight wholesale funding. Management stated liquidity was sufficient for expected needs.
- Management expected to exceed Basel III capital requirements based on preliminary assessment. Interest-rate models showed a near-term risk-neutral to modestly asset-sensitive position; an immediate +100-basis-point shock was estimated to reduce first-year net interest income by 0.94%, while a +200-basis-point shock was estimated to increase it by 1.22%. Model outcomes depend on assumptions and actual results may differ.
- Significant judgment areas include loan-loss allowances, covered-loan cash-flow estimates and the FDIC indemnification asset. A second-quarter 2013 valuation-methodology change contributed to a $5.7 million year-to-date reclassification from accretable to nonaccretable covered-loan discount and lower yields on certain pools.
- There were $1.4 billion of commitments to extend credit and $13.2 million of letters of credit. The company reported various pending legal matters but said amounts were not probable or reasonably estimable; the Irwin Mortgage bankruptcy settlement was reported as having no material adverse effect.
- Further pension lump-sum distributions could trigger additional settlement charges during the remainder of 2013. The board authorized a regular $0.15-per-share dividend payable January 2, 2014; management described a target to return 60%–80% of earnings through dividends and repurchases, subject to conditions.
Most important facts for investors to verify
- Whether loan growth and deposit trends can offset covered-loan runoff, lower yields and continued margin pressure.
- Credit performance and reserve adequacy, particularly covered-loan charge-offs, TDR growth and the sensitivity of covered-loan cash-flow estimates.
- Realization and timing of the announced cost savings, including the additional $5.0 million expected in 2014 and any further pension charges.
- Liquidity and capital capacity under deposit runoff, loan growth, market-rate changes and Basel III implementation.
- Exposure to securities valuation changes, FDIC reimbursement assumptions, legal matters and the $1.4 billion in unfunded credit commitments.