First Financial Corporation — Q2 2011 Form 10-Q
Business context and reporting period. First Financial Corporation is a one-segment banking company. This unaudited report covers the quarter and six months ended June 30, 2011; income and cash-flow comparisons are to the corresponding 2010 periods, while balance-sheet comparisons are primarily to December 31, 2010. Dollar amounts below are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net interest income | $25.2 | $24.1 | $49.9 | $47.4 |
| Net interest margin | 4.55% | 4.34% | Not stated | Not stated |
| Provision for loan losses | $1.35 | $2.19 | $2.53 | $4.62 |
| Non-interest income | $7.9 | $7.9 | $16.2 | $12.9 |
| Non-interest expense | $19.4 | $18.7 | $38.4 | $37.0 |
| Net income | $8.4 | $7.7 | $17.2 | $13.4 |
| Basic and diluted EPS | $0.64 | $0.59 | $1.31 | $1.02 |
| Dividends per share | $0.47 | $0.46 | $0.47 | $0.46 |
- Balance sheet at June 30: Assets were $2,502 million, up from $2,451 million at year-end 2010. Net loans were $1,623 million; deposits were $1,893 million; shareholders’ equity was $343 million. Loans and deposits were described as virtually unchanged compared with Q2 2010.
- Credit quality: The allowance for loan losses was $21.6 million, or 1.31% of gross loans, versus $22.3 million and 1.36% at year-end. Net charge-offs for the first half were lower year over year. Nonperforming loans were $62.8 million, up from $58.8 million at year-end; nonaccrual loans rose to $43.4 million from $38.5 million. The allowance covered 34% of nonperforming loans, down from 38%.
- Cash flows, first half: Operating activities provided $22.3 million, compared with $29.7 million in 2010; investing activities used $38.4 million versus $35.7 million; financing activities provided $17.6 million versus using $18.1 million. Cash and cash equivalents ended at $60.0 million.
- Borrowings and liquidity: Short-term borrowings were $67.5 million, up from $34.1 million at year-end; other borrowings, all FHLB advances, were $125.8 million. Management cited deposits, loan and securities repayments, and unused borrowing capacity as sources of liquidity.
- Capital: First Financial Bank’s June 30 total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios were 17.90%, 16.91%, and 13.02%, respectively—above stated “well capitalized” thresholds. Management reported no change in the bank’s well-capitalized category.
Material changes versus comparable periods
- Q2 net income increased about 9% year over year; first-half net income increased about 29%. Management attributed improvement principally to higher net interest income and lower loan-loss provision.
- Net interest income rose 4.5% in Q2 and 5.4% for the first half. Management said lower funding costs more than offset reduced income on earning assets.
- First-half non-interest income increased $3.3 million, primarily because the prior-year period included $3.2 million of securities impairment. Q2 non-interest income was essentially flat; lower deposit-fee income offset stronger electronic banking fees.
- Non-interest expense rose $0.7 million in Q2 and $1.4 million in the first half, largely reflecting higher salaries and employee benefits.
- Shareholders’ equity was $342.7 million at June 30 versus $319.2 million at June 30, 2010; management reported book value per share of $26.07 versus $24.33.
Outlook, risks, contingencies and unusual items
- No earnings or revenue guidance is provided. Management said it expects adequate liquidity to meet customer obligations and believes the loan-loss allowance is adequate based on its analysis; these are management assessments, not guarantees.
- Interest-rate modeling estimated that a 100-basis-point increase would raise net interest income 1.74% over the next 12 months, while a 100-basis-point decrease would lower it 1.12%. The filing cautions that model assumptions are uncertain and exclude management actions.
- Available-for-sale securities had $7.7 million of gross unrealized losses at June 30, including $7.5 million on collateralized debt obligations (CDOs). Management said it did not intend, and was not more likely than not required, to sell the securities before recovery. Four CDOs had cumulative impairment charges of $15.1 million recognized in earnings; valuation is exposed to illiquid markets and significant estimation uncertainty. Certain securities and bank equity holdings use Level 3 inputs.
- The company recorded $97,000 of securities impairment in the first half of 2011. Separately, the FDIC indemnification asset related to the 2009 Danville bank acquisition was $4.8 million; the loss-sharing agreement and covered-asset estimates remain relevant to credit-loss and reimbursement assumptions.
- Management identified economic and financial-market conditions, interest rates, competition, regulation, litigation, borrower losses, and accounting changes as risks to forward-looking results. It reported no material change in the risk factors disclosed in the 2010 Form 10-K, no material pending legal proceedings beyond routine litigation, and effective disclosure controls with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Track the rise in nonaccrual and total nonperforming loans against charge-offs, recoveries, and the allowance, particularly commercial credit exposures.
- Review the assumptions, cash-flow estimates, and market pricing supporting the CDO portfolio and other Level 3 fair values.
- Assess whether lower funding costs and the reported net interest margin can be sustained as rates and deposit costs change.
- Monitor short-term borrowing growth, deposit trends, and the availability of stated contingent borrowing capacity.
- Reconcile the filing’s restructured-loan disclosures: the MD&A reports $16.434 million, while the note table reports $16.901 million. The filing text does not explain the difference.