First Financial Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. First Financial is a bank holding company reporting one segment, banking. Dollar amounts below are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q1 2016 / March 31, 2016 | Comparable period / prior year-end |
|---|---|---|
| Interest income | $27.2 | $27.1 in Q1 2015 |
| Net interest income | $26.2 | $26.0 in Q1 2015 |
| Net interest margin | 4.06% | 4.01% in Q1 2015 |
| Provision for loan losses | $0.8 | $1.5 in Q1 2015 |
| Non-interest income | $22.4 | $10.1 in Q1 2015; includes $13.0 gain on insurance-operation sale |
| Non-interest expense | $23.3 | $24.0 in Q1 2015 |
| Income before taxes | $24.3 | $10.6 in Q1 2015 |
| Net income | $13.7 | $7.8 in Q1 2015 |
| Basic and diluted EPS | $1.08 | $0.60 in Q1 2015 |
| Operating cash flow | $13.1 | $13.4 in Q1 2015 |
| Total assets | $2,939.2 | $2,979.6 at December 31, 2015 |
| Loans, net of allowance and including deferred costs | $1,743.7 | $1,743.9 at December 31, 2015 |
| Deposits | $2,400.7 | $2,442.4 at December 31, 2015 |
| Total liabilities | $2,527.3 | $2,569.3 at December 31, 2015 |
| Shareholders’ equity | $411.9 | $410.3 at December 31, 2015 |
Material changes and notable items
- Net income rose by $5.9 million year over year, with management attributing $5.84 million after tax to the insurance-operation sale. The sale generated a $13.0 million pretax gain and $17.1 million of cash proceeds. The company said it sold a significant portion of the operation to focus resources on core banking.
- The effective tax rate increased substantially because acquired goodwill associated with the insurance operation was not tax-deductible, increasing taxable gain relative to book gain.
- Net interest income increased modestly, with margin rising to 4.06%. Management cited greater growth in earning-asset income than in funding costs.
- Non-interest expense declined $0.6 million, primarily from lower salaries and benefits, including reduced pension and health-insurance costs. The provision for loan losses fell $0.6 million year over year; net charge-offs were $0.9 million versus $0.9 million in Q1 2015.
- Nonperforming loans declined to $23.6 million from $25.5 million at year-end and $30.5 million at March 31, 2015. Allowance for loan losses was $19.9 million, equal to 84.4% of nonperforming loans, versus 78.3% at year-end. Management considered the allowance adequate.
- Cash and due from banks fell $22.6 million during the quarter. Cash flows included $32.0 million from investing activities and $67.6 million used in financing, including $16.6 million of treasury-stock purchases, $6.2 million of dividends, and a $41.7 million net decline in deposits.
- Quarter-end available-for-sale securities were $884.2 million. Gross unrealized losses were $3.0 million, down from $6.7 million at year-end; management attributed most losses to interest-rate movements and said it did not expect to sell the securities before recovery.
Outlook, liquidity, capital and risks
- No earnings or revenue guidance was provided. Management said it expected adequate liquidity, citing deposit funding, loan and securities repayments, $5.9 million of securities maturing, anticipated principal payments of $138.8 million on mortgage-backed securities, expected calls of $27.4 million, and unused FHLB and correspondent-bank borrowing capacity.
- Management identified interest-rate risk as its most significant market risk. Its model estimated that a 100-basis-point rate increase would raise net interest income 4.21% over 12 months and 7.76% over 24 months; a 100-basis-point decrease would reduce it 0.49% and 1.46%, respectively. These are model estimates assuming immediate parallel rate changes and no management response; actual results may differ.
- Capital ratios remained above stated well-capitalized thresholds. At March 31, the bank reported common-equity Tier 1 of 16.75%, total risk-based capital of 17.58%, Tier 1 risk-based capital of 16.75%, and Tier 1 leverage of 12.23%.
- The board authorized repurchases of up to approximately 637,500 shares. The filing reports 495,606 shares purchased during the quarter for $16.6 million, at an average $33.48 per share. The repurchase table’s reported remaining authorization does not clearly reconcile with the quarterly purchase total; verify the figures.
- Key disclosed risks include economic and financial-market changes, interest-rate and competitive pressures, regulatory changes, litigation, borrower losses and bankruptcy, and accounting-policy changes. Management reported no material risk-factor changes from the 2015 Form 10-K, no material pending legal proceedings, and effective disclosure controls.
Important facts for investors to verify
- How much of earnings growth is sustainable after excluding the after-tax insurance-sale gain, and what ongoing earnings contribution was lost through the divestiture?
- Whether the reported repurchase activity and remaining authorization reconcile, and the effects of buybacks on shares outstanding and capital.
- Loan-quality trends, including nonperforming loans, criticized classifications, charge-offs, and allowance adequacy.
- Deposit outflows, available borrowing capacity, and sensitivity of funding costs and net interest income to rate changes.
- The timing and financial-statement impact of the new accounting standards described in the filing; management had not yet determined the impact of certain standards.