First Financial Bancorp. — Q3 2011 Form 10-Q
Business context and period: Ohio-based bank holding company reporting for the quarter and nine months ended September 30, 2011. It operated banking centers in Ohio, Indiana and Kentucky, with commercial banking, retail banking, wealth management and nationwide franchise lending activities. Results are unaudited.
Financial performance and condition
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net income | $15.6 million | $15.6 million | $48.8 million | $45.0 million |
| Net income available to common shareholders | $15.6 million | $15.6 million | $48.8 million | $43.1 million |
| Diluted EPS | $0.27 | $0.27 | $0.83 | $0.75 |
| Net interest income | $65.2 million | $67.8 million | $198.4 million | $207.6 million |
| Net interest margin | 4.55% | 4.59% | 4.63% | 4.67% |
| Noninterest income | $28.1 million | $44.9 million | $112.9 million | $112.3 million |
| Noninterest expense | $53.1 million | $61.3 million | $163.4 million | $177.4 million |
Balance sheet at September 30: Total assets were $6.34 billion, up from $6.25 billion at December 31, 2010. Deposits were $5.30 billion, up 3.0%; total loans were $4.09 billion, comprising $2.94 billion of loans excluding covered loans and $1.15 billion of covered loans. Shareholders’ equity was $727.1 million.
Cash flow and liquidity: Nine-month operating cash flow was $155.6 million versus $147.1 million in 2010; investing cash flow provided $92.2 million versus $192.0 million; financing activities used $245.5 million versus $539.1 million. Cash and due from banks was $108.3 million at quarter end, and cash plus interest-bearing deposits with other banks totaled $477.4 million. Management reported approximately $2.5 billion of available overnight wholesale funding and $367.2 million of remaining FHLB borrowing capacity.
Debt and capital: Borrowed funds totaled $172.3 million, down from $209.3 million at year-end 2010; long-term debt was $76.9 million. Consolidated regulatory capital ratios were 10.87% leverage, 18.81% Tier 1 risk-based and 20.08% total risk-based; the company reported that it exceeded well-capitalized thresholds. Tangible common equity ratio was 10.38%.
Material changes and drivers
- Quarterly net income was essentially unchanged, while nine-month earnings available to common shareholders rose year over year. Lower interest income—principally from smaller covered-loan balances and lower yield on the FDIC indemnification asset—reduced net interest income. Lower funding costs partly offset that effect; NIM edged down.
- Q3 noninterest income fell $16.8 million year over year, mainly because FDIC loss-sharing income, accelerated covered-loan discount and loan-sale gains were lower. Nine-month noninterest income was nearly flat.
- Noninterest expense declined year over year, including the absence of an $8.0 million FHLB prepayment penalty recorded in Q3 2010, lower FDIC assessments and lower staffing costs. Acquisition, covered-OREO and litigation-related costs partly offset savings.
- Uncovered loans increased 4.3% from year-end, mainly from the Liberty branch purchase. Covered loans declined 22.3%, reflecting expected runoff. The allowance on uncovered loans was $54.5 million (1.86% of uncovered loans), versus $57.2 million (2.03%) at year-end. Covered-loan allowance rose to $48.1 million from $16.5 million.
- Uncovered nonperforming assets were $88.4 million, down from $97.8 million at year-end; nonperforming loans were $76.4 million. Nine-month uncovered net charge-offs fell to $16.7 million from $25.9 million, though Q3 net charge-offs were $6.8 million, or 0.96% annualized.
Outlook, risks and unusual items
- Management gave no specific earnings or revenue guidance. It said it intended to focus growth and investment on core metropolitan markets and remain proactive in managing credit exposures; it also noted continuing weakness in commercial and consumer sectors in its markets.
- Liberty acquisition: completed September 23, 2011, adding 16 Ohio banking centers, $126.5 million of performing loans and $341.9 million of deposits; First Financial paid a $22.4 million net deposit premium and recorded $17.1 million of goodwill. Purchase accounting values remained preliminary.
- Flagstar transaction: agreement to acquire 22 Indiana branches and assume about $530 million of deposits, expected to close in Q4 2011 subject to customary closing conditions.
- FDIC loss-sharing arrangements cover most losses on specified assets from the 2009 Peoples and Irwin acquisitions. Nine-month 2011 covered-loan provision was $57.2 million and FDIC loss-sharing income was $53.5 million. Management cautioned that covered-loan cash-flow estimates are subjective and can cause earnings volatility.
- Other principal risks include credit quality and loan demand, interest-rate changes, liquidity and funding access, FDIC agreement compliance, acquisition integration and deposit attrition, regulatory changes, and litigation. The filing states pending litigation is not expected to be material to consolidated financial position or results, while separately noting litigation-related expenses associated with First Franchise.
- Interest-rate sensitivity modeling estimated net interest income changes of -10.73% and -4.85% for immediate declines of 200 and 100 basis points, and +1.49% and +5.87% for increases of 100 and 200 basis points. These are model estimates, not guidance.
Important facts for investors to verify
- Whether Liberty purchase accounting adjustments, integration costs and deposit retention affect subsequent results, and whether the Flagstar acquisition closes on expected terms and timing.
- Trends in covered-loan cash-flow estimates, covered provisions and FDIC reimbursements, including the remaining value and collectability of the indemnification asset.
- Credit quality, charge-offs, nonperforming assets, OREO and allowance adequacy, distinguishing covered from uncovered portfolios.
- Deposit mix and pricing, loan growth, net interest margin and the company’s actual interest-rate exposure relative to the disclosed models.
- Dividend level and sustainability: Q3 declared dividends were $0.27 per share, while management described a current annual base dividend of $0.48 per share.