First Financial Bancorp. — Q1 2017 Form 10-Q
Business and period: Bank holding company serving primarily Ohio, Indiana and Kentucky, with national commercial-finance lending platforms. Results cover the three months ended March 31, 2017; balance-sheet comparisons are to December 31, 2016. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q1 2017 / March 31, 2017 | Comparable / prior period |
|---|---|---|
| Net income | $24.4 million | $19.8 million in Q1 2016 |
| Diluted EPS | $0.39 | $0.32 in Q1 2016 |
| Net interest income | $68.9 million; fully tax-equivalent NIM 3.70% | $66.6 million; fully tax-equivalent NIM 3.68% in Q1 2016 |
| Noninterest income / expense | $17.4 million / $51.0 million | $15.5 million / $50.7 million in Q1 2016 |
| Return on average assets / equity | 1.18% / 11.36% | 0.98% / 9.70% in Q1 2016 |
| Total assets | $8.53 billion | $8.44 billion at December 31, 2016 |
| Total loans and leases | $5.75 billion | $5.76 billion at December 31, 2016 |
| Total deposits | $6.53 billion | $6.53 billion at December 31, 2016 |
| Total borrowed funds | $978.8 million | $927.5 million at December 31, 2016 |
| Shareholders’ equity | $880.1 million | $865.2 million at December 31, 2016 |
- Operating cash flow was $31.8 million, investing cash flow was negative $81.3 million, and financing cash flow was positive $45.8 million. Cash and due from banks declined $3.7 million to $117.9 million; interest-bearing deposits at other banks were $39.1 million.
- Liquidity included $157.0 million of cash and short-term investments and $2.0 billion of unused, available overnight wholesale funding. The company reported $806.7 million of short-term FHLB borrowings and $119.6 million of long-term debt, primarily subordinated notes carrying a 5.125% fixed rate and maturing in 2025.
- Consolidated regulatory capital ratios were 10.59% common equity Tier 1, 10.59% Tier 1 risk-based, 13.19% total risk-based and 8.69% leverage. The company said it exceeded well-capitalized thresholds.
Material changes and operating trends
- Net income increased about 23% year over year. Net interest income rose 3.6%, supported by higher average earning assets, loan growth and improved asset yields; higher deposit and borrowing costs partly offset these benefits. Fully tax-equivalent net interest margin edged up to 3.70% from 3.68%.
- Noninterest income increased $1.9 million, including higher other income, trust fees and gains on securities sales. Noninterest expense rose only $0.3 million: higher salaries and data-processing costs were mostly offset by lower other, marketing and occupancy costs.
- Period-end loans were nearly flat from year-end. Construction real estate loans rose $46.9 million, while commercial real estate, residential real estate and lease-financing balances declined. Management attributed the overall modest decline to slower first-quarter activity and elevated commercial and real-estate payoffs.
- Nonperforming assets increased 26.1% to $68.4 million from $54.3 million at year-end, mainly after two relationships were downgraded to nonaccrual. Management said both were well secured. Nonperforming loans were $63.1 million; the allowance for loan and lease losses was $56.3 million, or 0.98% of loans, versus 1.01% at year-end.
- Net charge-offs were $2.0 million, or 0.14% of average loans on an annualized basis, versus $1.3 million, or 0.10%, in Q1 2016. The provision for loan losses was $0.4 million, down from $1.7 million.
- Deposits were essentially unchanged from year-end, with savings up $142.6 million and time deposits down $119.3 million, partly reflecting runoff of higher-cost brokered CDs. Investment securities increased to about $2.0 billion, or 23.5% of assets.
Outlook, commentary and risks
- Management expected a 2017 effective tax rate of approximately 31.5%–32.5%. No broader earnings or revenue guidance is provided in the filing.
- The reported Q1 effective tax rate was 30.0%, versus 33.3% a year earlier; adoption of share-based compensation guidance produced a $1.1 million tax benefit. This was a notable contributor to the year-over-year reduction in tax expense relative to pretax income.
- Interest-rate modeling showed estimated net interest income sensitivity of negative 5.59% for year one under a 100-basis-point decline, positive 1.64% under a 100-basis-point rise and positive 3.44% under a 200-basis-point rise. Management said the company was within internal limits and maintained a bias toward asset sensitivity; outcomes depend on modeling assumptions, including deposit repricing.
- Key stated risks include credit quality, interest rates, liquidity and funding costs, regulatory and accounting changes, operational and technology risks, execution of business plans, and litigation or FDIC loss-sharing matters. Litigation claims were pending, but the company said losses were not probable or reasonably estimable and had no litigation reserves at quarter-end.
- The company reported adopting ASU 2016-09 in Q1 2017. It was evaluating the future expected-credit-loss standard (ASU 2016-13), effective for periods beginning after December 15, 2019, and did not anticipate a material income-statement impact from the revenue-recognition standard, though additional disclosures would be required.
Important facts for investors to verify
- Whether the increase in nonperforming loans and assets persists, particularly the two newly downgraded relationships, and how collateral supports management’s assessment.
- Whether deposit pricing and wholesale funding costs continue to pressure margins as interest rates change; verify assumptions behind the reported rate-sensitivity estimates.
- Whether the $56.3 million allowance remains adequate given higher nonperforming loans and net charge-offs, including the impact of the forthcoming expected-credit-loss standard.
- How loan growth, payoffs and shifts among construction, commercial real estate and other loan categories develop in subsequent quarters.
- Whether the expected 2017 tax-rate range is achieved and how much of Q1’s earnings improvement reflects the $1.1 million share-based compensation tax benefit.
- Confirm the status of the $15 million credit facility, which matured May 29, 2017, and monitor available liquidity, capital ratios and dividend capacity.