First Financial Bancorp. — Q1 2012 Form 10-Q
Business context and reporting period. This unaudited filing covers the three months ended March 31, 2012, with balance-sheet comparisons to December 31, 2011. Cincinnati-based First Financial Bancorp. is a bank holding company operating in Ohio, Indiana and Kentucky, with commercial banking, retail banking and wealth-management businesses. It also provides franchise lending nationwide. Covered loans from prior FDIC-assisted acquisitions represented about 25% of loans at quarter-end.
Key financial results and condition
| Metric | Q1 2012 | Comparable period / change |
|---|---|---|
| Net interest income | $66.7 million | $67.3 million in Q1 2011 |
| Net interest margin | 4.51% | 4.73% in Q1 2011 |
| Provision for loan and lease losses | $16.2 million total | $26.7 million in Q1 2011 |
| Noninterest income | $31.9 million | $43.7 million in Q1 2011 |
| Noninterest expense | $55.8 million | $57.8 million in Q1 2011 |
| Income before taxes | $26.6 million | $26.5 million in Q1 2011 |
| Net income / diluted EPS | $17.0 million / $0.29 | $17.2 million / $0.29 in Q1 2011 |
| Operating cash flow | $66.8 million | $79.9 million in Q1 2011 |
The company declared dividends of $0.31 per share, compared with $0.12 in Q1 2011. Return on average assets was 1.05% versus 1.11%; return on average shareholders’ equity was 9.67% versus 10.04%.
- Balance sheet at March 31: total assets were $6.42 billion, down from $6.67 billion at year-end; total deposits were $5.40 billion, down 4.3%; shareholders’ equity was $714.7 million. Total loans, excluding covered loans, were $2.96 billion, broadly stable from year-end, while covered loans declined 6.3% to $986.6 million.
- Funding and liquidity: borrowed funds totaled $154.4 million, down from $176.0 million at year-end. The company reported $150.1 million of liquidity on hand and $2.6 billion of unused, available overnight wholesale funding. It also reported $333.4 million of remaining FHLB borrowing capacity.
- Debt: long-term debt was $75.7 million, including $65.0 million in repurchase agreements and $10.7 million in FHLB advances.
- Cash flows: investing activities provided $188.2 million, versus using $156.7 million in Q1 2011; financing activities used $278.7 million, versus providing $67.6 million. Cash and due from banks ended at $125.9 million, down $23.7 million during the quarter.
- Regulatory capital: consolidated leverage, Tier 1 risk-based and total risk-based capital ratios were 9.94%, 17.18% and 18.45%, respectively. The company and bank were reported as well-capitalized; consolidated capital exceeded the minimum requirement by $388.0 million.
Material changes and management commentary
- Net income was nearly unchanged year over year, but lower net interest income and sharply lower noninterest income offset reduced provision expense and lower operating costs. Noninterest income fell primarily because FDIC loss-sharing income declined to $12.8 million from $23.4 million and accelerated covered-loan discount declined to $3.6 million from $5.8 million.
- Net interest margin declined to 4.51%. Management attributed pressure to covered and originated loan paydowns and amortization, reinvestment in lower-yielding securities, and lower yields on new loan originations. Lower deposit costs from deposit-rationalization efforts partly offset the impact.
- The investment portfolio was $1.7 billion, or 26.9% of assets, versus $1.5 billion at year-end. During the quarter, the company reclassified securities with a March 31 book value of approximately $915.5 million, primarily agency mortgage-backed securities, from available-for-sale to held-to-maturity. Management said the transfer was intended to reduce potential volatility in accumulated other comprehensive income and shareholders’ equity; it stated it had the intent and ability to hold them to maturity.
- Asset-quality indicators were mixed. Nonperforming loans rose to $82.6 million from $76.4 million at year-end; nonperforming assets rose to $97.7 million from $87.7 million. Total classified assets declined to $154.7 million from $162.4 million, continuing a seven-quarter decline. Uncovered net charge-offs were $6.4 million, or 0.87% of average loans, versus $4.2 million, or 0.61%, a year earlier.
- Uncovered allowance coverage declined: the allowance was $49.4 million, or 1.67% of uncovered loans, versus $52.6 million, or 1.77%, at year-end. Covered-loan provision was $13.0 million and related net charge-offs were $9.6 million; the covered-loan allowance ended at $46.2 million. FDIC loss-sharing income partly offsets eligible losses, subject to agreement terms and servicing requirements.
- Management cited muted loan demand and continued competition. It announced consolidation of nine Ohio and Indiana banking centers and exit from one Indiana market, effective June 29, 2012. No quantitative earnings or revenue guidance was provided; management cautioned that interim results are not necessarily indicative of full-year results.
Risks, contingencies and unusual items
- Key risks include credit deterioration, loan demand, interest-rate and market changes, liquidity access and funding costs, regulatory changes, execution of the business plan, acquisition integration and deposit attrition, compliance with FDIC loss-sharing agreements, and litigation. Interest-rate simulations estimated that an immediate 100-basis-point rise would increase year-one net interest income by 0.32%; a 200-basis-point rise by 3.36%. A 100-basis-point decline was estimated to reduce year-one net interest income by 7.49%. These are model estimates dependent on assumptions, not forecasts.
- Off-balance-sheet commitments to extend credit were $1.3 billion; letters of credit totaled $19.2 million. Actual funding needs may be lower because some commitments expire unused.
- The company reported various litigation and claims, but stated that pending matters were not likely to be material to consolidated financial position or results. In one disclosed case, plaintiffs dismissed claims without prejudice against an acquired former Irwin-related entity; claims against other defendants remained, and refiling remains possible.
- Management identified significant estimation sensitivity in loan-loss allowances, covered-loan cash-flow estimates, the FDIC indemnification asset, goodwill, pensions and income taxes. It reported no material goodwill impairment indicators at quarter-end.
Important facts for investors to verify
- Whether the decline in net interest margin continues as covered loans run off and loan proceeds are reinvested, and whether deposit-cost reductions can offset the pressure.
- Trends in nonperforming loans, TDRs, OREO, classified assets, charge-offs and allowance coverage, especially in commercial real estate and construction exposures.
- The assumptions and recoverability underlying covered-loan cash flows and the $156.4 million FDIC indemnification asset, including the timing and collectability of reimbursements.
- Deposit runoff and funding mix following repricing and planned branch consolidations, alongside the availability and cost of reported wholesale liquidity.
- The effect of the securities transfer to held-to-maturity on future liquidity flexibility and reported equity, and the company’s ability to hold the securities as stated.
- Execution and customer-retention effects of the announced branch actions, and developments in disclosed litigation and regulatory matters.