First Financial Bancorp. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. The company is an Ohio bank holding company operating primarily in Ohio, Indiana and Kentucky. Figures below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless otherwise noted.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net interest income | $63.2 million | $58.4 million | $180.4 million | $167.5 million |
| Net interest margin | 3.61% | 3.66% | 3.59% | 3.73% |
| Noninterest income | $20.4 million | $16.5 million | $59.4 million | $47.0 million |
| Noninterest expense | $53.0 million | $51.4 million | $149.8 million | $146.4 million |
| Provision for loan and lease losses | $2.6 million | $0.9 million | $7.8 million | $(0.5) million |
| Net income | $18.7 million | $15.3 million | $55.2 million | $46.4 million |
| Diluted EPS | $0.30 | $0.26 | $0.89 | $0.79 |
Q3 return on average assets was 0.97% and return on average equity was 9.12%, versus 0.88% and 8.16% a year earlier. Nine-month figures were 1.00% and 9.23%, respectively, versus 0.94% and 8.75%.
Net interest income increased mainly from higher earning-asset and loan balances, including acquired Oak Street loans, while margin declined as yields on new loans were lower and the high-yielding covered-loan portfolio continued to run off. Higher noninterest income included increased accelerated loan-discount accretion, loan-sale gains and swap fees. Acquisition-related professional fees and other expenses contributed to expense growth.
Financial position, cash flow and credit
- Assets and loans: Total assets were $7.88 billion at September 30, up from $7.22 billion at December 31, 2014. Loans and leases were $5.22 billion, up 9.2% from year-end; commercial loan growth reflected both Oak Street and organic growth.
- Deposits and borrowings: Deposits were $6.08 billion, up 7.5% from year-end. Borrowed funds totaled $883.0 million, versus $709.6 million. The company issued $120 million of 5.125% subordinated notes, due in 2025, during Q3; they qualify as Tier 2 capital.
- Liquidity: Cash and due from banks was $112.3 million; cash plus interest-bearing deposits with other banks totaled $136.5 million. Management reported $1.7 billion of unused and available overnight wholesale funding and $440 million of remaining FHLB borrowing capacity. A $15 million bank credit facility was undrawn.
- Cash flow, nine months: Operating activities provided $57.8 million; investing activities used $625.5 million, including $305.6 million net cash paid in business combinations; financing activities provided $570.0 million. Cash and due from banks increased $2.2 million to $112.3 million.
- Credit quality: The allowance for loan and lease losses was $53.3 million, or 1.02% of period-end loans, versus $52.9 million, or 1.11%, at year-end. Q3 net charge-offs were $2.2 million, or 0.17% of average loans on an annualized basis. Nonperforming assets declined to $71.1 million from $87.1 million at year-end; nonperforming loans were 1.07% of loans.
- Capital: Consolidated common equity Tier 1, Tier 1, total capital and leverage ratios were 10.51%, 10.52%, 13.37% and 8.58%. The company reported that it was well-capitalized and exceeded minimum total capital requirements by $326.1 million. Tangible common equity ratio was 7.84%, down from 9.02% at year-end, principally reflecting acquisition goodwill.
Material changes and unusual items
- First Financial completed its acquisition of Oak Street in Q3. Consideration was $307.8 million, including $110.0 million cash and repayment of $197.8 million of Oak Street debt. The transaction added $238.0 million of loans and $66.3 million of preliminary goodwill; $2.6 million of related expenses were recorded in Q3. Purchase accounting remained subject to refinement.
- The company issued $120 million of subordinated notes and repurchased 148,935 shares during the first nine months for $2.8 million.
- The five-year FDIC loss-sharing period for most non-single-family assets expired October 1, 2014. Remaining covered loans were $117.6 million at September 30, 2015, with remaining protection generally expiring October 1, 2019. Accelerated discount income rose substantially year over year; Q3 included $3.8 million versus $0.8 million a year earlier.
- Q3 included a $0.9 million fee for prepayment of FHLB debt and $0.7 million of litigation-related reserve adjustments for resolved matters. Litigation reserves were $1.3 million at quarter-end; management said pending matters were not probable or reasonably estimable as a material liability.
Outlook, risks and contingencies
- Management expected the 2015 effective tax rate to be approximately 32%–34%. No specific earnings or revenue guidance was provided.
- The company stated a general target of returning 60%–80% of earnings to shareholders through dividends and repurchases, subject to capital and regulatory requirements. A $0.16 per-share dividend was authorized for payment January 4, 2016.
- Management reported compliance with internal interest-rate risk limits. Modeling showed that an immediate +100 basis-point rate shock would reduce Year 1 net interest income by 0.19%, while a +200 bp shock would increase it by 1.04%; results depend on assumptions, including deposit repricing behavior.
- Key risks include credit quality and loan-loss estimates, interest rates and margin pressure, liquidity and funding access, FDIC loss-sharing expiration, integration of acquisitions, regulatory and capital changes, cybersecurity/operational issues, and litigation. Oak Street’s internal control over financial reporting was excluded from the period-end controls evaluation due to acquisition timing; integration work was planned. Management otherwise concluded disclosure controls were effective.
Important facts for investors to verify
- Oak Street integration, acquired-loan performance, final purchase accounting and the sustainability of projected growth and revenue diversification.
- Whether loan growth and deposit generation can offset continued margin compression and rising funding costs.
- Trends in charge-offs, nonperforming loans, TDRs, allowance adequacy and the remaining FDIC-covered portfolio.
- Capital and liquidity after the acquisition, including the decline in tangible common equity and reliance on wholesale funding capacity.
- The repeatability of accelerated discount income, swap fees and other noninterest income, and the effects of acquisition and debt-prepayment costs.