First Financial Bancorp. — Q1 2011 Form 10-Q
Business context and reporting period
First Financial Bancorp. is a Cincinnati-based bank holding company operating primarily in Ohio, Indiana, and Kentucky, with banking and wealth-management businesses. The unaudited quarter ended March 31, 2011; balance-sheet comparisons are to December 31, 2010, and earnings comparisons are to Q1 2010 unless noted. The company exited four Michigan banking centers and one Louisville center during the quarter, shifting resources toward core markets.
Financial performance and position
Amounts below are in millions except per-share data and ratios.
| Metric | Q1 2011 / Mar. 31, 2011 | Comparable / prior period |
|---|---|---|
| Interest income | $80.1 | $90.6 in Q1 2010 |
| Net interest income | $67.3 | $72.0 in Q1 2010; $67.9 in Q4 2010 |
| Net interest margin | 4.73% | 4.89% in Q1 2010; 4.65% in Q4 2010 |
| Noninterest income | $43.7 | $26.9 in Q1 2010 |
| Noninterest expense | $57.8 | $60.3 in Q1 2010; $56.3 in Q4 2010 |
| Net income | $17.2 | $11.6 in Q1 2010; $14.3 in Q4 2010 |
| Diluted EPS | $0.29 | $0.17 in Q1 2010; $0.24 in Q4 2010 |
| Return on average assets / equity | 1.11% / 10.04% | 0.71% / 6.92% in Q1 2010 |
| Operating cash flow | $79.9 | $64.4 in Q1 2010 |
| Cash and due from banks | $96.7 | $106.0 at Dec. 31, 2010 |
| Cash and short-term investments | $484.6 | $282.9 at Dec. 31, 2010 |
| Total assets / shareholders’ equity | $6,314.5 / $708.0 | $6,250.2 / $697.4 at Dec. 31, 2010 |
| Total deposits / borrowed funds | $5,217.3 / $211.6 | $5,146.2 / $209.3 at Dec. 31, 2010 |
Net cash decreased $9.3 million: operating activities provided $79.9 million, investing activities used $156.7 million, and financing activities provided $67.6 million. Net loans were $4.032 billion, down from $4.224 billion at year-end, reflecting declining covered and uncovered balances. Long-term debt was $103.0 million; other long-term debt was $20.6 million.
Consolidated regulatory capital ratios were 11.08% leverage, 20.49% Tier 1 risk-based, and 21.77% total risk-based. The company reported that it exceeded “well-capitalized” requirements. Tangible common equity was 10.40%.
Material changes versus prior periods
- Net income rose about 48% year over year, while diluted EPS increased from $0.17 to $0.29. Higher noninterest income and lower expenses more than offset declining net interest income.
- Noninterest income included $23.4 million of FDIC loss-sharing income, compared with $7.6 million in Q1 2010. Accelerated discount on covered loans contributed another $5.8 million.
- Total loan-loss provision increased to $26.7 million from $11.4 million a year earlier, largely because covered-loan provision rose to $26.0 million from $9.5 million. The corresponding FDIC reimbursement partly offset covered credit costs.
- Net interest income declined $4.7 million year over year, primarily from lower average covered-loan balances and reduced yield on the FDIC indemnification asset. Lower funding costs provided a partial offset.
- Uncovered net charge-offs declined to $4.2 million, or 0.61% of average loans on an annualized basis, from $14.0 million, or 2.00%, in Q1 2010. The prior-year figure included $8.8 million related to alleged fraudulent activity noted in earlier periods.
- Uncovered nonperforming loans were $80.6 million and nonperforming assets $95.5 million, versus $79.9 million and $97.8 million, respectively, at year-end. Classified assets declined $16.4 million to $185.7 million.
- Investment securities grew to $1.1 billion from $1.0 billion at year-end, following purchases funded by liquidity and deposit inflows. Average time deposits continued to decline as savings balances increased.
Outlook, management commentary, and risks
- No quantified earnings or financial guidance is provided. Management said loan demand remained challenging and expected covered loans to continue declining through repayments, sales, and charge-offs absent additional acquisitions. Management expects to complete the dissolution of its wealth-management subsidiary, Capital Advisors, in 2011.
- Management reported improving classified-asset and delinquency trends but cautioned that economic conditions and real-estate collateral values remained challenging; a renewed economic downturn could worsen credit quality. Covered-loan cash-flow estimates are subjective and can create earnings volatility.
- Q1 covered-loan provision was $26.0 million, with $11.0 million of net charge-offs and a $31.6 million covered-loan allowance at quarter-end. FDIC loss-sharing income was $23.4 million. The FDIC arrangements reimburse 80% of specified losses up to contractual thresholds and 95% above them, subject to agreement terms and servicing requirements.
- A $3.1 million write-down of vacant commercial land contributed to OREO expense; the property represented 22.8% of uncovered OREO after the write-down. Lease-abandonment costs in exited markets also contributed to higher linked-quarter occupancy expense.
- Interest-rate models showed estimated net interest income changes of +3.88% for an immediate 100-basis-point increase and −1.75% for a 100-basis-point decrease; a 200-basis-point decline was estimated to reduce net interest income 9.28%. Results depend on assumptions and actual outcomes may differ.
- Liquidity included $484.6 million of cash and short-term investments and approximately $1.9 billion of unused overnight wholesale funding. The company reported $257.5 million of remaining FHLB borrowing capacity.
- Off-balance-sheet commitments to extend credit were $1.1 billion; letters of credit totaled $14.9 million. Management did not anticipate material losses from letters of credit. Litigation claims were described as not likely to be material, but the ultimate liability was not determinable. Indemnification discussions with the FDIC regarding certain pre-acquisition Irwin matters remained ongoing, with no assurance the FDIC would agree to the company’s positions.
- On April 28, 2011, the company filed a shelf registration permitting potential future securities offerings, subject to board approval. This filing does not state that an offering was planned.
Most important facts for investors to verify
- Whether the elevated covered-loan provision and related FDIC reimbursements, indemnification-asset estimates, and future cash-flow revisions continue or materially affect earnings.
- Trends in uncovered nonperforming loans, classified assets, charge-offs, and collateral values, particularly in construction and commercial real estate portfolios.
- Whether declining covered and uncovered loan balances and muted loan demand pressure net interest income and margin despite deposit-cost reductions and securities growth.
- The collectability and timing of FDIC loss-sharing reimbursements, compliance with agreement requirements, and resolution of disputed Irwin-related indemnification claims.
- Whether liquidity, deposit mix, regulatory capital, and the company’s stated metropolitan-market strategy remain consistent with reported plans and risk measures.