First Financial Corporation — Q1 2017 Form 10-Q
Business context and reporting period. The Indiana-based company reports one segment, banking. This unaudited filing covers the three months ended March 31, 2017; balance-sheet comparisons are with December 31, 2016, and income and cash-flow comparisons are with Q1 2016. Amounts below are in millions unless stated otherwise.
Financial highlights
- Earnings: Net income was $9.37 million versus $13.68 million, and diluted EPS was $0.77 versus $1.08. Return on assets was 1.26% and return on equity 8.78%.
- Interest and noninterest income: Interest income was $27.85 million versus $27.20 million; net interest income was $26.51 million versus $26.16 million. Net interest margin was 4.05%, compared with 4.06%. Noninterest income was $11.05 million versus $22.37 million.
- Expenses and taxes: Provision for loan losses rose to $1.60 million from $0.84 million. Noninterest expense decreased to $22.58 million from $23.35 million. Income tax expense was $4.01 million versus $10.67 million.
- Cash flow: Net cash from operating activities was $10.43 million, investing activities provided $7.37 million, and financing activities used $42.30 million. Cash and due from banks declined $24.49 million during the quarter to $50.52 million; federal funds sold were $5.00 million at quarter-end.
- Balance sheet and funding: Total assets were $2.96 billion, down from $2.99 billion. Net loans were $1.82 billion, deposits $2.44 billion, and shareholders’ equity $426.8 million. Short-term borrowings were $35.8 million, down from $81.0 million; FHLB advances were $0.1 million.
- Credit quality: The allowance for loan losses was $19.40 million, or 1.06% of loans, versus $18.77 million at year-end. Net charge-offs were $0.97 million versus $0.86 million. Nonperforming loans fell to $19.72 million from $22.67 million; allowance coverage of nonperforming loans was 98.4%, up from 82.8%.
- Capital: At March 31, the Corporation reported common equity Tier 1 and Tier 1 risk-based capital ratios of 17.78%, total risk-based capital of 18.64%, and Tier 1 leverage of 13.63%. The filing says the Corporation exceeded applicable minimums.
Material changes versus the prior comparable period
- Net income declined by $4.31 million, primarily because Q1 2016 included an after-tax gain of $5.84 million from the insurance operation sale. That sale generated a $13.02 million pretax gain in Q1 2016; there was no comparable sale gain in Q1 2017.
- Q1 2017 noninterest income included a $3.1 million cash recovery on a previously written-off collateralized debt obligation. Excluding the prior-year insurance-sale gain, reported noninterest income was higher year over year.
- Net interest income rose modestly, while the provision for loan losses increased by $0.76 million. Noninterest expense decreased by $0.77 million.
- At quarter-end, deposits were $9.5 million above year-end, while short-term borrowings were $45.2 million lower. Within deposits, noninterest-bearing balances decreased and other interest-bearing deposits increased substantially.
Outlook, risks, contingencies, and unusual items
- No specific earnings or revenue guidance is provided. Management expects liquidity to be adequate, citing deposits, loan and securities repayments, expected mortgage-backed security principal payments, and unused borrowing capacity.
- Management identifies interest-rate risk as its most significant market risk. Its model estimates that a 100-basis-point increase would raise net interest income 1.66% over the next 12 months, while a 100-basis-point decrease would lower it 2.98%. These are modeled estimates with assumptions, not forecasts.
- Management considers the loan-loss allowance adequate, based on its portfolio analysis. The filing describes expected CECL adoption as likely to increase the allowance, but says the amount is uncertain.
- Unrealized securities losses were $9.1 million, down from $14.4 million at year-end. Management attributes most losses to interest-rate movements, says it does not intend to sell the securities, and does not consider them other-than-temporarily impaired. Some fair values rely on estimates and unobservable inputs.
- The filing reports no material change in risk factors, no material pending legal proceedings beyond routine litigation, and effective disclosure controls. Forward-looking results remain subject to economic, market, interest-rate, competitive, regulatory, litigation, and credit risks.
Important facts for investors to verify
- How sustainable are earnings after accounting for the prior-year insurance-sale gain and the Q1 2017 CDO cash recovery?
- What drove the higher loan-loss provision and net charge-offs, and whether the allowance remains adequate as credit conditions evolve.
- Whether the modeled sensitivity to interest-rate changes and the deposit mix imply material future pressure on net interest income or funding costs.
- The assumptions supporting securities valuations and management’s assessment that unrealized losses are temporary, particularly for securities using Level 3 inputs.
- The eventual size and implementation impact of the expected CECL-related allowance increase.