First Financial Corporation — Q3 2016 Form 10-Q
Business context and period: Indiana-based bank holding company reporting one segment, banking. This unaudited quarterly report covers the three and nine months ended September 30, 2016; balance-sheet comparisons are with December 31, 2015 unless otherwise noted. Dollar amounts below are in millions unless stated.
Financial performance and condition
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Interest income | $27.45 | $27.60 | $81.80 | $81.66 |
| Net interest income | $26.35 | $26.58 | $78.57 | $78.50 |
| Net interest margin | 4.05% | 4.12% | 4.05% | 4.04% |
| Provision for loan losses | $1.09 | $1.05 | $2.36 | $3.65 |
| Non-interest income | $7.92 | $9.95 | $38.50 | $29.79 |
| Non-interest expense | $22.01 | $24.15 | $68.11 | $73.46 |
| Net income | $8.16 | $8.40 | $30.07 | $23.08 |
| Basic and diluted EPS | $0.67 | $0.65 | $2.43 | $1.79 |
- Quarterly net income declined modestly year over year, while EPS increased as weighted-average shares fell. Nine-month net income and EPS rose substantially, primarily reflecting the insurance-operation sale gain.
- At September 30, assets were $3,019.3, loans net of allowance and deferred costs were $1,802.5, deposits were $2,479.2, and shareholders’ equity was $422.4. Since year-end 2015, gross loans increased to $1,818.3 from $1,761.3; deposits rose to $2,479.2 from $2,442.4.
- Allowance for loan losses was $19.1, approximately 1.05% of gross loans. Non-performing loans were $26.3, versus $25.5 at year-end and $27.6 at September 2015; allowance coverage of non-performing loans was 72.6%, versus 78.3% at year-end.
- Nine-month operating cash flow was $27.4 versus $33.6 in 2015; investing cash flow was negative $49.0 versus positive $35.6; financing cash flow was positive $0.3 versus negative $84.1. Cash and due from banks ended at $67.4. Federal funds sold, reported separately, were $44.5.
- Short-term borrowings were $31.4 and FHLB advances $10.1. Regulatory capital ratios remained strong: the bank’s common equity Tier 1 ratio was 16.77%, total risk-based capital 17.52%, and Tier 1 leverage 12.72%.
Material changes and unusual items
- The Corporation sold a significant portion of its insurance operation in Q1 2016, recording a $12.8 gain; the gain was reduced by $0.2 in Q3 settlement adjustments. The sale eliminated $5.1 of related goodwill and reduced insurance commissions and employee headcount. The filing says the company is focusing resources on core banking.
- Quarterly non-interest income fell mainly because insurance commissions declined by $1.7 following the sale. Nine-month non-interest income increased mainly because of the sale gain. The Q1 sale-related tax effect raised the effective tax rate because the eliminated goodwill was not tax deductible.
- Non-interest expense declined year over year, with lower salaries and benefits (including reduced pension and health costs) as key factors. Nine-month provision expense fell year over year, but net charge-offs increased to $3.2 from $2.7; Q3 net charge-offs were $1.5 versus $1.0.
- The company repurchased 575,224 shares during the first nine months for $19.4 and paid dividends of $12.4. Its announced buyback authorization allowed repurchases of up to approximately 637,500 shares; 71,882 remained available at quarter-end.
- Available-for-sale securities had $2.7 of gross unrealized losses, down from $6.7 at year-end. Management attributed most losses to market-rate movements, reported no additional 2016 OTTI, and said it did not intend to sell and was not likely to be required to sell the securities before recovery. CDO valuations involve a wide range of third-party estimates.
Outlook, risks and contingencies
- No earnings or revenue guidance was provided. Management said it expects adequate liquidity, citing deposits, loan and securities repayments, $5.9 of securities maturities, anticipated mortgage-backed principal payments of $134.3, expected calls of $30.7, and unused FHLB and correspondent-bank borrowing capacity.
- Interest-rate simulation estimated that a 100-basis-point rise would increase net interest income 3.87% over 12 months and 8.23% over 24 months; a 100-basis-point decline would reduce it 0.59% and 2.09%, respectively. These estimates assume an immediate parallel rate change and no management action; actual outcomes may differ.
- Management considered the allowance adequate based on its portfolio analysis. Key risks include borrower credit deterioration, economic and financial-market changes, interest-rate movements, competition, regulation, litigation, and accounting changes. The filing reported no material change to previously disclosed risk factors and no material pending legal proceedings beyond routine business litigation.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. Newly issued accounting standards, including CECL, were under evaluation; the company had not determined CECL’s financial-statement impact.
Investor verification priorities
- Assess earnings excluding the $12.8 insurance-sale gain and related tax effects; compare sustainable banking earnings, costs, and EPS.
- Track non-performing loans, delinquencies, net charge-offs, and allowance coverage, particularly given higher non-performing loans versus year-end and increased year-to-date charge-offs.
- Review net interest margin and funding costs under changing rates, and test the assumptions behind management’s sensitivity and liquidity estimates.
- Examine valuation and credit risks in securities measured with significant unobservable inputs, especially collateralized debt obligations, and confirm the reported unrealized losses and impairment judgments.
- Verify the status of the remaining share-repurchase authorization, capital ratios, and the eventual impact and implementation plan for CECL.