First Financial Bancorp. — Q1 2013 Form 10-Q
Business context and reporting period. The unaudited consolidated report covers the three months ended March 31, 2013, with balance-sheet comparisons to December 31, 2012 and income and cash-flow comparisons to Q1 2012. First Financial is a bank holding company headquartered in Cincinnati, serving primarily Ohio, Indiana and Kentucky; it also provides franchise lending nationally. Its bank operated 113 banking centers and 142 ATMs. Amounts below are in U.S. dollars; financial statement figures are generally in millions unless stated otherwise.
Financial performance and condition
| Metric | Q1 2013 / March 31, 2013 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $58.7 million | $66.7 million in Q1 2012; down 12.0% |
| Net interest margin | 4.04%; fully tax-equivalent 4.07% | 4.51%; fully tax-equivalent 4.52% in Q1 2012 |
| Provision for loan and lease losses | $12.1 million total: $3.0 million uncovered and $9.0 million covered | $16.2 million total in Q1 2012 |
| Net income / diluted EPS | $13.8 million / $0.24 | $17.0 million / $0.29 in Q1 2012 |
| Return on average assets / equity | 0.88% / 7.91% | 1.05% / 9.67% in Q1 2012 |
| Total assets | $6.35 billion | $6.50 billion at December 31, 2012 |
| Total loans, including covered loans | $3.94 billion gross | $3.93 billion at December 31, 2012 |
| Total deposits | $4.82 billion | $4.96 billion at December 31, 2012 |
| Borrowed funds | $707.6 million | $699.8 million at December 31, 2012 |
| Shareholders’ equity | $701.6 million | $710.4 million at December 31, 2012 |
Revenue and expenses. Total interest income fell 15.4% year over year to $63.5 million, while interest expense declined 42.4% to $4.8 million. Noninterest income declined 16.4% to $26.7 million, chiefly due to lower FDIC loss-sharing income and accelerated discount on covered loans; $1.5 million of investment-security sale gains partly offset the declines. Noninterest expense fell 4.8% to $53.1 million. Income before taxes was $20.2 million, versus $26.6 million in Q1 2012. The effective tax rate was 31.5%, compared with 36.2%.
Cash flow. Operating activities provided $21.9 million, investing activities provided $96.5 million, and financing activities used $146.6 million. Cash and due from banks declined by $28.3 million during the quarter to $106.2 million. The filing reports these cash-flow amounts but does not provide a company-defined free-cash-flow measure.
Margins and balance-sheet trends. Management attributed lower net interest income and margin primarily to runoff and paydowns in higher-yielding covered loans, low market rates, and lower yields on reinvested securities. Average uncovered loans grew 7.6% year over year, but newer loan originations were at lower yields than loans being repaid. The investment portfolio was $1.7 billion, down $130.7 million, or 7.0%, from year-end; the company sold $70.4 million of agency mortgage-backed securities and related securities to improve liquidity and reduce prepayment and premium risks.
Credit quality. Uncovered loans increased $69.8 million from year-end to $3.25 billion. Uncovered net charge-offs were $2.5 million, or 0.32% of average loans on an annualized basis, versus $6.4 million, or 0.87%, in Q1 2012. The uncovered allowance was $48.3 million, 1.49% of period-end uncovered loans. Uncovered nonperforming loans were $77.2 million and nonperforming assets were $89.2 million, compared with $75.9 million and $88.4 million, respectively, at year-end. Troubled debt restructurings rose to $35.1 million from $25.0 million. Covered loans fell to $687.8 million; covered provision expense was $9.0 million and covered net charge-offs were $8.7 million. The covered-loan allowance was $45.5 million. Covered assets are subject to FDIC loss-sharing agreements.
Liquidity and capital. The company reported $107.4 million of cash and short-term investments and $2.3 billion of unused and available overnight wholesale funding, equal to 36.7% of assets. Remaining FHLB borrowing capacity was $354.0 million; $502.2 million of short-term FHLB borrowings were outstanding. Management stated liquidity was sufficient for expected capital expenditure commitments. At March 31, consolidated regulatory ratios were 10.00% leverage, 15.87% Tier 1 risk-based capital and 17.15% total risk-based capital; the company and bank were categorized as well-capitalized. Tangible common equity was 9.60%.
Material changes and management commentary
- Ten banking centers in Ohio and Indiana were consolidated during Q1 2013, with resources redirected toward Cincinnati, Dayton and Indianapolis markets.
- A company-wide efficiency initiative identified approximately $17.1 million in annualized savings. Q1 included $2.9 million of related pre-tax costs and management reported $2.6 million of net savings for the quarter. Savings depend on successful implementation and are not assured.
- The company repurchased 249,000 shares at an average $15.39 per share. At quarter-end, 4,290,500 shares remained available under the 5-million-share authorization. The declared quarterly dividend was $0.28 per share, versus $0.31 in Q1 2012.
- Management described a near-term interest-rate risk position as broadly risk-neutral and long-term exposure as modestly asset-sensitive, while noting the position had become modestly more liability-sensitive. Under the disclosed immediate rate-shock model, a 100-basis-point increase reduced estimated year-one net interest income by 1.44%; a 200-basis-point increase had a 0.01% negative estimated year-one effect. Model outcomes depend on assumptions and are not forecasts.
Outlook, risks and contingencies
The filing gives no specific earnings or revenue guidance. Management expected the covered-loan portfolio to continue declining through repayments, sales, charge-offs and expiration or termination of FDIC coverage, absent new covered-asset acquisitions. It expected no pension cash contribution in 2013, but noted possible future pension settlement charges if employee reductions or turnover reach certain levels. Management stated that its subsidiaries had $24.3 million of retained earnings available for distribution without prior regulatory approval.
Key risks identified include persistent low interest rates and their effect on margins, economic weakness and borrower credit quality, funding access and deposit retention, regulatory and FDIC loss-sharing requirements, collateral and securities valuations, operational or cybersecurity disruptions, technology execution, and the realization of planned cost savings. The company had $1.3 billion of commitments to extend credit and $14.9 million of letters of credit. Management said pending litigation damages were not considered probable or reasonably estimable as of March 31, 2013; reserves are established when appropriate.
Important facts for investors to verify
- Whether loan growth and new originations can offset runoff in covered loans and pressure from lower loan and securities yields.
- Trends in deposits, short-term borrowing reliance, available wholesale funding and the company’s liquidity under stressed conditions.
- Changes in nonperforming loans, TDRs, delinquencies, charge-offs, covered-loan cash-flow estimates and the adequacy of both loan-loss allowances.
- Whether the reported $17.1 million annualized efficiency savings are achieved, and whether further consolidation, implementation costs or pension settlement charges arise.
- FDIC reimbursement timing and collectability, the remaining duration and terms of loss-sharing agreements, and any material developments in litigation or credit commitments.
- Interest-rate sensitivity assumptions and actual effects of rate changes on net interest income, securities values and capital.