First Financial Corporation — Q3 2014 Form 10-Q
Business and period: First Financial Corporation is a banking company reporting one banking segment. This unaudited filing covers the quarter and nine months ended September 30, 2014; balance-sheet comparisons are with December 31, 2013 unless noted.
Financial performance and condition
- Q3 earnings: Net income was $8.3 million, down from $8.5 million a year earlier; diluted EPS was $0.62 versus $0.64. Return on assets was 1.10% and return on equity 8.27%.
- Nine-month earnings: Net income was $24.6 million versus $22.6 million; diluted EPS was $1.85 versus $1.70. Return on assets was 1.08% and return on equity 8.17%.
- Revenue and margin: Q3 interest income was $28.4 million and non-interest income $10.5 million. Net interest income was $27.1 million, down $0.7 million year over year; net interest margin declined to 4.15% from 4.30%. For nine months, net interest income increased to $80.9 million from $79.7 million, while margin eased to 4.11% from 4.16%.
- Expenses and credit costs: Q3 non-interest expense was $24.7 million, slightly lower year over year. Q3 loan-loss provision rose to $1.5 million from $0.5 million; nine-month provision declined to $3.1 million from $6.5 million. Q3 net charge-offs were $2.3 million versus $0.4 million.
- Loans and credit quality: Loans, net of unearned discount, were approximately $1.81 billion, broadly unchanged from year-end. Non-performing loans fell to $34.2 million from $39.2 million at year-end. The allowance was $17.5 million, or 51.2% of non-performing loans, versus 51.3% at year-end.
- Balance sheet and liquidity: Total assets were $3.06 billion and shareholders’ equity $403.9 million. Deposits were $2.45 billion, broadly stable; short-term borrowings were $59.0 million and other borrowings, primarily FHLB advances, were $88.0 million. Cash and due from banks totaled $97.0 million, with $15.0 million in federal funds sold and $900.1 million in available-for-sale securities.
- Cash flow: Nine-month operating cash flow was $38.6 million; investing activities used $9.0 million and financing activities used $3.6 million. Cash and cash equivalents increased $26.0 million to $97.0 million.
- Capital: First Financial Bank was categorized as well capitalized. At September 30, its total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios were 16.51%, 15.81%, and 11.63%, respectively. Management expected the company to remain well capitalized under new 2015 requirements.
Material changes and notable items
- Nine-month net income improved despite lower net interest margin, supported by lower loan-loss provision and higher non-interest income. In Q3, lower net interest income and higher provision coincided with slightly lower net income.
- Shareholders’ equity rose 7.7% year over year, and book value per share was $31.16, up 10.5% from September 2013. The company repurchased 392,665 shares for approximately $12.5 million during Q3. A new authorization permits repurchases of up to 5% of outstanding shares; 279,360 shares remained available at quarter-end.
- Unrealized losses on securities declined to $12.7 million from $26.7 million at year-end. Management attributed most losses to market-rate factors and said it did not intend, and was not more likely than not required, to sell affected securities before recovery. Three collateralized debt obligations had previously recorded cumulative other-than-temporary impairment charges of $14.0 million; no new impairment was identified in 2014.
- The FDIC loss-sharing agreement for non-single-family loans expired at the end of Q3. The remaining FDIC indemnification asset was $0.4 million; the filing included no estimate of future potential losses in that balance.
Outlook, risks and contingencies
- No specific earnings or revenue guidance is provided. Management said liquidity was expected to be adequate, citing deposits, loan and securities repayments, and unused borrowing capacity.
- Interest-rate simulations estimated that a 100-basis-point increase would raise net interest income 1.75% over 12 months and 5.25% over 24 months; a 100-basis-point decrease would reduce it 0.75% and 2.34%, respectively. Management cautioned that these are model estimates assuming immediate parallel rate changes and no management response.
- Key stated risks include economic and financial-market conditions, interest rates, competition, regulation, litigation, borrower losses, and accounting changes. The filing reported no material change in risk factors, no material pending legal proceedings beyond routine litigation, and effective disclosure controls.
- Management identified the allowance for loan losses, goodwill valuation, and securities valuation as critical accounting judgments. Level 3 security valuations involve illiquid markets and significant estimation uncertainty.
Important facts for investors to verify
- Whether the increase in nine-month earnings is sustainable as net interest margin declines and Q3 charge-offs rise.
- Credit trends behind the lower non-performing-loan balance, including charge-offs, restructurings, and the adequacy of the $17.5 million allowance.
- Potential effects of the expired FDIC loss-sharing agreement and the remaining acquired covered-loan exposures.
- Interest-rate, valuation, and liquidity risks in the securities portfolio, particularly Level 3 holdings and securities with long-standing unrealized losses.
- The scale and funding impact of the share-repurchase authorization, alongside capital needs and upcoming regulatory requirements.