First Financial Corporation — Q1 2013 Form 10-Q
Business context and period. The Indiana-based company reports one segment, banking. This unaudited quarterly report covers the three months ended March 31, 2013; income and cash-flow comparisons are against Q1 2012, while balance-sheet comparisons are generally against December 31, 2012. Dollar amounts below are in millions unless stated otherwise.
Key financial metrics
| Metric | Q1 2013 / March 31, 2013 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $26.17 | $27.17 in Q1 2012 |
| Net interest margin | 4.09% | 4.26% in Q1 2012 |
| Non-interest income | $9.88 | $9.51 in Q1 2012 |
| Non-interest expense | $22.20 | $23.42 in Q1 2012 |
| Provision for loan losses | $3.02 | $2.96 in Q1 2012 |
| Net income / diluted EPS | $7.69 / $0.58 | $7.44 / $0.56 in Q1 2012 |
| Comprehensive income | $6.24 | $7.86 in Q1 2012 |
| Operating cash flow | $15.96 | $22.73 in Q1 2012 |
| Total assets | $2,964.95 | $2,895.41 at December 31, 2012 |
| Loans, net of unearned income and allowance | $1,796.26 | $1,829.98 at December 31, 2012 |
| Deposits | $2,349.78 | $2,276.13 at December 31, 2012 |
| Borrowings | $154.56 | $160.26 at December 31, 2012 |
| Shareholders’ equity | $378.38 | $372.12 at December 31, 2012 |
| Allowance for loan losses | $25.27; 1.39% of gross loans | $21.96; 1.19% at December 31, 2012 |
| Cash and due from banks | $78.40; federal funds sold $54.38 | $87.23 and $20.80, respectively |
Material changes versus comparable periods
- Net income rose 3.4% and EPS increased from $0.56 to $0.58 year over year. Return on assets was 1.05% versus 1.02%; return on equity was 8.21% versus 8.46%.
- Net interest income declined $0.99 million and margin fell 17 basis points, as yields on earning assets decreased more than funding costs.
- Non-interest income increased $0.37 million, while non-interest expense declined $1.22 million. Management attributed much of the expense reduction to $0.82 million lower personnel expense and efficiencies following the Freestar Bank acquisition.
- Net charge-offs decreased $4.4 million year over year, and the quarter recorded net recoveries of $1.04 million. The allowance nevertheless increased from year-end, principally because of higher reserves on individually evaluated loans.
- Non-performing loans were $58.71 million, compared with $59.83 million at December 31, 2012. Nonaccrual loans rose to $38.13 million from $36.79 million, while accruing loans over 90 days past due declined to $1.26 million from $3.36 million.
- Operating cash flow decreased to $15.96 million from $22.73 million. Investing cash use increased, largely reflecting $131.18 million of securities purchases; financing provided $61.26 million, including a $73.40 million net increase in deposits.
Outlook, commentary, risks and unusual items
- Outlook and liquidity: No earnings or revenue guidance is provided. Management stated it expects adequate liquidity, citing scheduled investment maturities, anticipated mortgage-backed security principal payments and available borrowing capacity. It estimated $16.4 million of investments maturing, $116.5 million of mortgage-backed principal payments and $8.6 million of securities calls over the next 12 months.
- Branch acquisition: In March 2013, First Financial Bank agreed to acquire certain assets and assume liabilities of seven Bank of America branches and two drive-up facilities in central and southern Illinois. The agreement covers approximately $250 million of deposits and $2.3 million of loans; closing was expected in Q3 2013, subject to regulatory approval expected by June 30, 2013.
- Credit and securities risks: Management considered the loan-loss allowance adequate, but noted estimates depend on borrower conditions and other assumptions. Gross unrealized securities losses were $8.73 million, including $7.55 million on collateralized debt obligations (CDOs). Three CDOs had previously recognized cumulative credit impairment of $14.98 million; no additional impairment was identified in Q1. Management attributed most unrealized losses to market illiquidity and did not expect or intend to sell the securities before recovery.
- Market sensitivity: The filing’s rate-shock model estimates that a 100-basis-point rate increase would raise net interest income 3.07% over 12 months, while a 100-basis-point decrease would reduce it 1.97%. The model assumes an immediate parallel rate shift and no management response; actual outcomes may differ.
- Capital and contingencies: The subsidiary banks were categorized as well capitalized. First Financial Bank reported total risk-based capital of 16.21%, Tier 1 risk-based capital of 15.15% and Tier 1 leverage capital of 11.44%, above the stated well-capitalized thresholds. The company reported no material pending legal proceedings and no material changes to previously disclosed risk factors.
- Other items: The FDIC indemnification asset fell to $1.77 million from $2.63 million at year-end. Q1 other comprehensive income was negative $1.45 million, primarily reflecting a decline in unrealized securities gains. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Reconcile the increase in the allowance for loan losses with loan-level credit deterioration, non-performing loans and the reported net recoveries.
- Review the CDO cash-flow assumptions, valuations and sensitivity to defaults, deferrals, market illiquidity and alternative pricing sources.
- Monitor completion, regulatory approval and integration of the Bank of America branch transaction, including the assumed deposits and acquired assets.
- Compare actual net interest margin and deposit costs with management’s rate-sensitivity estimates as interest rates and balance-sheet mix change.
- Confirm liquidity, capital and FDIC-indemnification trends in subsequent filings; the reported financial statements are unaudited and interim.