First Financial Bancorp. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; balance-sheet comparisons are with December 31, 2014. First Financial is a Cincinnati-based regional bank holding company operating primarily in Ohio, Indiana and Kentucky.
Financial performance
- Second-quarter earnings: Net income was $18.9 million, up 18.8% from $16.0 million; diluted EPS was $0.31 versus $0.28. Return on average assets was 1.05% and return on average equity was 9.49%.
- Six-month earnings: Net income was $36.6 million versus $31.1 million; diluted EPS was $0.59 versus $0.54.
- Net interest income and margin: Q2 net interest income rose 8.0% to $58.7 million; six-month net interest income rose to $117.3 million from $109.1 million. Fully tax-equivalent net interest margin declined to 3.62% from 3.76% for Q2 and to 3.64% from 3.81% for the six-month period.
- Other income and expenses: Q2 noninterest income increased 31.1% to $21.4 million, supported by accelerated covered-loan discount recognition, loan-sale gains and a $1.1 million securities-sale gain. Noninterest expense rose 3.6% to $48.8 million. Six-month noninterest income was $39.0 million and expense was $96.9 million.
- Margins and cost outlook: Management attributed margin pressure to low rates, lower yields on new and variable-rate loans, growth in lower-yielding assets and runoff of higher-yield covered loans; deposit costs also increased.
Financial position, cash flow and asset quality
- Balance sheet: Total assets were $7.38 billion, up from $7.22 billion at year-end. Loans and leases totaled $4.85 billion, up 1.6%; deposits were $5.72 billion, up 1.1%. Shareholders’ equity was $802.4 million.
- Funding and debt: Borrowed funds were $757.1 million, including $710.0 million short-term borrowings and $47.1 million long-term debt. Short-term FHLB borrowing increased to $641.7 million from $558.2 million at year-end.
- Cash flow: For the first six months, operating activities provided $55.8 million, investing activities used $138.2 million and financing activities provided $88.6 million. Cash and due from banks ended at $116.3 million.
- Liquidity and capital: Management reported $157.3 million in cash and short-term liquidity, $453.5 million of remaining FHLB borrowing capacity and $1.8 billion of unused overnight wholesale funding. The company was categorized as well-capitalized; consolidated CET1 was 12.34%, tier 1 capital 12.35%, total capital 13.31% and leverage 9.77%.
- Credit quality: Nonperforming assets declined to $76.2 million from $87.1 million at year-end, and the allowance was $52.9 million, or 1.09% of loans. However, Q2 net charge-offs were $3.3 million versus net recoveries of $1.2 million a year earlier, and provision expense was $3.1 million versus a $0.4 million provision recapture. TDRs increased to $34.2 million from $28.2 million.
Changes, outlook, risks and unusual items
- Year-over-year asset and deposit growth reflected organic growth and the 2014 Columbus-area acquisitions. The company reported strong loan demand; construction real estate commitments were $155.8 million in the first half, of which $108.0 million remained unfunded at June 30.
- On July 23, 2015, First Financial Bank agreed to acquire Oak Street Holdings for $110.0 million in cash, with closing anticipated in Q3 2015. Oak Street reported $241.7 million of assets and $238.0 million of loans at June 30.
- The five-year FDIC loss-sharing period for most non-single-family assets expired October 1, 2014. Remaining covered loans were $125.8 million, with stated protection expiring October 1, 2019. Accelerated discount income was unusually high in Q2 at $4.1 million, partly reflecting prepayments and the coverage expiration.
- Management expected a 2015 effective tax rate of approximately 32%–34%. It described a target to return 60%–80% of earnings to shareholders through dividends and repurchases. The board authorized a $0.16-per-share dividend payable October 1, 2015.
- Interest-rate sensitivity estimates showed first-year net interest income down 0.87% for an immediate +100 basis-point shock and up 0.15% for +200 basis points; second-year estimates were +2.45% and +4.86%, respectively. Management said risk was within internal limits, but sensitivity depends on modeling assumptions.
- Key disclosed risks include persistent low rates and margin compression, credit losses and collateral values, commercial real estate exposure, liquidity and funding costs, FDIC coverage expiration, acquisition integration, regulatory capital requirements, technology and operational risks, and litigation. Management reported no material change in legal proceedings and no material change in internal financial-reporting controls.
Important facts for investors to verify
- Whether Oak Street closes on the anticipated timetable and how its acquisition affects capital, funding, earnings and integration costs.
- Whether loan growth can offset ongoing net interest margin pressure and higher deposit funding costs.
- Whether the increase in charge-offs, provision expense and TDR balances persists, particularly in commercial real estate.
- How much future earnings depend on covered-loan discount accretion as the portfolio runs off and FDIC protection expires.
- Whether reported liquidity and capital remain adequate as loan commitments fund, borrowings change and Basel III requirements phase in.