First Financial Bancorp. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Unaudited consolidated results; dollar amounts below are in millions unless stated otherwise. The company is a Cincinnati-based bank holding company operating primarily in Ohio, Indiana and Kentucky.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net interest income | $64.8 | $65.9 | $131.5 | $133.2 |
| Net interest margin | 4.49% | 4.61% | 4.50% | 4.67% |
| Noninterest income | $33.5 | $41.1 | $65.5 | $84.8 |
| Noninterest expense | $57.5 | $52.5 | $113.2 | $110.3 |
| Net income | $17.8 | $16.0 | $34.8 | $33.2 |
| Diluted EPS | $0.30 | $0.27 | $0.59 | $0.57 |
- Q2 return on average assets was 1.13% and return on average equity was 9.98%; respective year-earlier figures were 1.03% and 9.05%.
- Q2 net interest income declined $1.0 million year over year: lower loan income, especially from covered-loan paydowns, was partly offset by lower funding costs and higher securities income. Six-month margin fell 17 basis points year over year.
- Net income improved despite lower noninterest income, principally because covered-loan loss provision expense and FDIC loss-sharing income were both substantially lower than in 2011. Q2 income also included a $5.0 million litigation-related settlement recorded in other noninterest income.
- Cash from operating activities was $112.5 million for the first six months, versus $127.0 million a year earlier. Investing activities provided $289.2 million and financing activities used $424.9 million; cash and due from banks declined $23.3 million to $126.4 million.
Financial position, credit and liquidity
- Total assets were $6.28 billion at June 30, down from $6.67 billion at year-end 2011. Total loans, including covered loans, were $3.92 billion, compared with $4.02 billion at year-end. Uncovered loans increased 1.5% to $3.01 billion; covered loans declined 14.2% to $903.9 million.
- Total deposits fell $541.1 million, or 9.6%, to $5.10 billion, mainly due to time-deposit runoff and deposit rationalization. Borrowed funds increased to $325.0 million from $176.0 million, including $176.0 million of short-term FHLB advances.
- Uncovered allowance for loan and lease losses was $51.0 million, 1.69% of uncovered loans, versus $52.6 million and 1.77% at year-end. Six-month uncovered net charge-offs increased to $13.2 million from $10.0 million; the annualized ratio rose to 0.90% from 0.72%.
- Uncovered nonperforming loans were $83.2 million, or 2.76% of loans, versus $76.4 million at year-end; nonperforming assets were $98.9 million versus $87.7 million. Classified assets improved to $145.6 million from $162.4 million. Uncovered OREO increased to $15.7 million, while covered OREO declined to $25.4 million.
- Covered-loan allowance rose to $48.3 million from $42.8 million. Q2 covered-loan provision was $6.0 million, compared with $23.9 million in Q2 2011. FDIC loss-sharing income was $8.3 million for Q2 and $21.1 million for the first half, down from $21.6 million and $45.1 million, respectively, a year earlier.
- Management reported $135.6 million of liquidity on hand and $2.5 billion of unused, available overnight wholesale funding. Remaining FHLB borrowing capacity was $83.6 million. It stated that liquidity was sufficient for operating needs and planned capital expenditures.
- Consolidated regulatory capital ratios were 10.21% Tier 1 leverage, 17.14% Tier 1 risk-based and 18.42% total risk-based; the company reported that it remained well-capitalized. Tangible common equity ratio was 9.91%, up from 9.23% at year-end.
Material changes, outlook and risks
- The company reclassified securities with a book value of $915.5 million from available-for-sale to held-to-maturity during Q1, citing reduced exposure of equity to potential market-value declines in a rising-rate environment. It reported intent and ability to hold the securities to maturity.
- Management said loan demand remained challenging amid competition and economic uncertainty. It expects the covered-loan portfolio to decline through payoffs, sales, charge-offs and expiration or termination of FDIC loss-sharing coverage. No specific earnings or revenue guidance was provided.
- The company consolidated nine banking centers and exited one Indiana market effective June 29, 2012; it also announced two further consolidations and four additional Indiana closures planned for August. Q2 expenses included $1.1 million of employee-benefit and other exit costs; management cited acquisition-related staffing and other costs as factors in higher expenses.
- Key risks identified include deterioration in the economy and credit quality, low interest rates and changes in rates, funding access and deposit attrition, FDIC loss-sharing compliance, regulatory changes, technology and operational/security failures, and litigation. Interest-rate modeling showed estimated Year 1 net interest income sensitivity of -8.42% under a 100-basis-point decline and +0.42% under a 100-basis-point increase; results depend on assumptions and are not forecasts.
- Commitments to extend credit totaled $1.2 billion; letters of credit totaled $16.8 million. The company said pending litigation was not likely to be material, while noting that outcomes could not be determined. In one disclosed matter, claims against an acquired entity were dismissed without prejudice, so plaintiffs may refile.
Important facts for investors to verify
- Whether deposit runoff and reliance on short-term FHLB funding continued after June 30, and whether stated wholesale liquidity remained available on acceptable terms.
- Subsequent trends in uncovered delinquencies, nonperforming loans, charge-offs, OREO and allowance coverage, particularly commercial real estate and construction exposures.
- How covered-loan runoff, loss-sharing claims, FDIC reimbursements and indemnification-asset estimates affect future income and credit costs.
- Whether branch closures and integration actions deliver expected savings without material customer, deposit or revenue losses.
- The effects of the held-to-maturity reclassification on liquidity flexibility, interest-rate exposure and reported equity, alongside the assumptions used in interest-rate sensitivity estimates.