First Financial Corporation — Q1 2019 Form 10-Q
Business context and period: Indiana-based bank holding company reporting consolidated results for the three months ended March 31, 2019. Financial statements are unaudited; amounts below are U.S. dollars. Unless stated otherwise, figures are in millions.
Financial results and condition
| Metric | Q1 2019 | Comparable period / prior date |
|---|---|---|
| Net interest income | $29.4 | $27.5 in Q1 2018; up 7.1% |
| Net interest margin | 4.31% | 4.06% in Q1 2018 |
| Non-interest income | $7.6 | $8.1 in Q1 2018 |
| Non-interest expense | $23.7 | $23.2 in Q1 2018 |
| Provision for loan losses | $1.5 | $1.5 in Q1 2018 |
| Net income | $9.7 | $9.0 in Q1 2018; up 8.1% |
| Basic and diluted EPS | $0.79 | $0.73 in Q1 2018 |
| Comprehensive income | $20.2 | $1.5 in Q1 2018, reflecting a significant swing in securities-related other comprehensive income |
| Operating cash flow | $14.5 | $9.0 in Q1 2018 |
Return on assets was 1.29% versus 1.20% in Q1 2018; return on equity was 8.59% versus 8.64%. The effective income tax rate increased year over year; the filing does not provide a clear rate in the MD&A.
At March 31, 2019, total assets were $3.026 billion, up from $3.009 billion at December 31, 2018. Gross loans were $1.981 billion, compared with $1.951 billion at year-end; net loans were $1.963 billion. Deposits were $2.420 billion, down from $2.437 billion. Shareholders’ equity was $462.8 million, up from $442.7 million. Book value per share was $37.66, up 11.2% from $33.86 at March 31, 2018.
Cash and due from banks ended the quarter at $54.6 million, down $19.8 million during the quarter; federal funds sold were $2.0 million. Investing activities used $22.5 million, principally reflecting $31.2 million of net loan growth. Financing activities used $11.8 million. Short-term borrowings were $56.6 million, down from $69.7 million, while the company had $25.0 million of FHLB advances at quarter-end versus none at year-end.
Asset quality improved on several reported measures: non-performing loans were $16.1 million versus $16.6 million at year-end and $20.7 million a year earlier. The allowance for loan losses was $21.0 million, or 130.3% of non-performing loans. Net charge-offs were $946,000, compared with $1.1 million in Q1 2018. The company reported regulatory capital ratios above applicable minimums; the bank’s common equity tier 1, total risk-based, tier 1 risk-based, and tier 1 leverage ratios were 17.94%, 18.67%, 17.94%, and 14.15%, respectively.
Material changes and notable items
- Net interest income and margin rose year over year, while non-interest income declined and non-interest expense increased.
- Loans grew during the quarter; deposits declined modestly from year-end and were down 1.5% year over year, according to management.
- Unrealized securities losses fell to $6.5 million from $15.2 million at December 31, 2018. The resulting improvement in other comprehensive income was a major driver of the increase in comprehensive income and equity.
- Adoption of the new lease standard on January 1, 2019 added lease liabilities and right-of-use assets of about $7 million. At March 31, lease liabilities were $6.4 million and right-of-use assets were $6.4 million. Management did not expect a material change in future lease expense.
- Management disclosed a remaining collateralized debt obligation with previously recorded impairment and no additional impairment in Q1. It noted a wide valuation-source range, including Standard & Poor’s pricing of 82.35 versus Moody’s pricing of 20.75, and said it continued to use Standard & Poor’s pricing.
Outlook, risks, and contingencies
The filing provides no earnings or revenue guidance. Management said it expected adequate liquidity, citing expected principal payments of $103.4 million from mortgage-backed securities, $4.4 million of investments maturing, anticipated calls of $30.3 million in securities, and unused borrowing capacity at the FHLB and correspondent banks.
Interest-rate modeling estimated that a 100-basis-point increase would raise net interest income 2.25% over the next 12 months, while a 100-basis-point decrease would reduce it 3.23%. Management cautioned that the estimates assume an immediate parallel rate change and no management response, and actual results may differ.
Management considered the loan-loss allowance adequate, but noted that adoption of the expected-credit-loss standard (CECL) was expected to increase the allowance; the amount was uncertain. Other stated risks include economic and market conditions, interest rates, competition, regulation, litigation, borrower losses, and execution of business plans. The company reported no material change to the risk factors in its 2018 Form 10-K, no material pending legal proceedings beyond routine litigation, and effective disclosure controls.
Most important facts for investors to verify
- Whether loan growth, deposit trends, and the higher net interest margin persist, and how deposit funding costs affect earnings.
- Credit quality by loan category, including non-performing loans, charge-offs, risk-rated loans, and the adequacy of the allowance as CECL implementation approaches.
- The assumptions behind the securities valuations, particularly the Level 3 collateralized debt obligation pricing and the effect of market-rate movements on accumulated other comprehensive income.
- Liquidity and funding needs, including the company’s reliance on deposit funding, short-term borrowings, and FHLB advances.
- Whether modeled interest-rate sensitivity and management’s liquidity expectations remain valid under changing market conditions.