First Financial Bancorp. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; unaudited. First Financial is a bank holding company serving primarily Ohio, Indiana, and Kentucky, with commercial, consumer, wealth-management, and mortgage businesses.
Financial performance and condition
| Metric | Q2 / June 30, 2014 | Comparable period / prior date |
|---|---|---|
| Net interest income | $54.3 million; net interest margin 3.70% | Q2 2013: $58.1 million; margin 4.02% |
| Net income | $16.0 million; diluted EPS $0.28 | Q2 2013: $15.8 million; diluted EPS $0.27 |
| Six-month net income | $31.1 million; diluted EPS $0.54 | Six months 2013: $29.7 million; diluted EPS $0.51 |
| Total assets | $6.55 billion | December 31, 2013: $6.42 billion |
| Loans, excluding covered loans | $3.66 billion | December 31, 2013: $3.51 billion |
| Total deposits | $4.88 billion | December 31, 2013: $4.84 billion |
| Borrowed funds | $874.0 million, including $814.3 million short-term borrowings | December 31, 2013: $809.5 million |
| Shareholders’ equity | $705.8 million | December 31, 2013: $682.2 million |
Q2 noninterest income was $16.3 million, up from $11.6 million a year earlier, primarily because FDIC loss-sharing income shifted from a $7.4 million loss to $1.1 million of income. Noninterest expense fell to $47.1 million from $53.3 million. Pretax income was $23.9 million and income tax expense was $8.0 million.
For the first six months, operating cash flow was $18.7 million, versus $79.7 million in 2013; investing activities used $97.7 million, versus providing $132.1 million; financing activities provided $84.6 million, versus using $231.6 million. Cash and due from banks ended the period at $123.2 million.
Material changes and credit quality
- Net interest income declined 6.5% in Q2 and 6.5% for the first half year over year. Management cited runoff of higher-yielding covered loans, lower yields on new and repricing loans, and the prolonged low-rate environment; growth and improved yields in investment securities partly offset the decline.
- Uncovered loans grew $157.0 million, or 4.5%, from year-end; covered loans fell $92.3 million, or 20.2%, to $365.6 million. Deposits increased 0.8% from year-end.
- Uncovered nonperforming assets declined to $58.4 million from $72.5 million at year-end. Nonperforming loans were $45.0 million; the allowance for uncovered loans was $42.0 million, or 1.15% of loans. First-half net charge-offs were $3.0 million.
- Covered-loan allowance fell to $12.4 million from $18.9 million. The company recorded a $0.4 million negative covered-loan provision in Q2, reflecting improved expected cash flows.
- Q2 diluted EPS was $0.28 versus $0.27, while net income increased slightly. For the first half, net income rose to $31.1 million from $29.7 million. Q2 return on average assets was 0.99% and return on average equity was 9.19%.
- Q2 2013 included $4.3 million in pension settlement charges; there were none in Q2 2014. This contributed to lower year-over-year expenses.
Outlook, risks, and notable items
- Management expected the 2014 effective tax rate to be approximately 32%–34%. The filing provides no specific earnings or revenue guidance.
- Management reported that most covered commercial-loan and covered-OREO loss protection would expire in Q3 2014; residential covered-asset protection generally continues through Q3 2019. Expiration reduces FDIC loss protection, although covered balances are reclassified rather than changed in accounting treatment.
- Three Columbus-area acquisitions—First Bexley, Insight Bank, and Guernsey—were expected to close in Q3 2014 following regulatory approvals. Their stated transaction values were approximately $44.5 million, $36.6 million, and $13.5 million, respectively, with the Guernsey deal also involving transfer of a property.
- Liquidity included $162.4 million on hand and $1.9 billion of unused, available overnight wholesale funding. Remaining FHLB borrowing capacity was $423.6 million. A new $15 million bank credit facility had no balance outstanding at quarter-end.
- The company was categorized as well-capitalized; consolidated ratios were 9.99% Tier 1 leverage, 14.34% Tier 1 risk-based capital, and 15.59% total risk-based capital. Management expected to exceed Basel III requirements.
- Management said interest-rate positioning became modestly more liability-sensitive. A parallel 100-basis-point increase was modeled to reduce first-year net interest income 1.66% and economic value of equity 2.32%; results depend on modeling assumptions.
- Litigation matters were described as ordinary-course matters; management said damages were not probable or could not be reasonably estimated. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether loan growth and the Columbus acquisitions can offset covered-loan runoff and pressure on net interest margin.
- Credit performance, allowance adequacy, and the effect of Q3 2014 expiration of FDIC protection on covered commercial assets.
- Acquisition closing dates, integration costs, customer retention, and realized benefits.
- Liquidity and funding costs, including reliance on short-term FHLB and wholesale funding.
- Actual results against the stated 32%–34% tax-rate expectation and the interest-rate sensitivity assumptions.