First Financial Corporation — Q2 2015 Form 10-Q
Business context and reporting period
First Financial Corporation is a one-segment banking company. This unaudited quarterly report covers the three and six months ended June 30, 2015; balance-sheet comparisons are with December 31, 2014. Dollar amounts below are in millions unless stated otherwise.
Financial performance and condition
- Second-quarter earnings: Net income was $6.9 million, down from $8.5 million a year earlier; diluted EPS was $0.54 versus $0.63. Return on assets was 0.93% and return on equity was 6.8%.
- First-half earnings: Net income was $14.7 million versus $16.3 million; diluted EPS was $1.14 versus $1.22.
- Interest income and margin: Q2 net interest income was $25.9 million, down from $26.6 million, and net interest margin was 3.99% versus 4.08%. First-half net interest income was $51.9 million versus $53.7 million; reported net interest margins were 4.08% and 4.09%, respectively.
- Other income and expenses: Q2 non-interest income rose to $9.8 million from $9.6 million. Non-interest expense increased to $25.3 million from $24.0 million, including salaries and benefits of $15.1 million versus $13.9 million. The efficiency ratio increased to 67.91% from 63.76%.
- Credit costs: Q2 provision for loan losses was $1.15 million, compared with a $0.36 million provision reversal a year earlier. First-half provision was $2.6 million versus $1.6 million. The allowance was $19.9 million, or 61.7% of non-performing loans.
- Cash flow: First-half operating cash flow was $20.3 million, investing cash outflow was $3.2 million, and financing cash outflow was $34.6 million. Cash and cash equivalents fell $17.5 million to $60.6 million.
- Balance sheet and funding: Total assets were $2.974 billion, down from $3.002 billion at year-end. Net loans were $1.764 billion; deposits were $2.399 billion, down from $2.457 billion. Short-term borrowings were $84.8 million and FHLB advances were $10.7 million, compared with $48.0 million and $12.9 million, respectively, at year-end. Shareholders’ equity was $399.1 million.
- Capital: At June 30, the bank reported a 16.58% common equity tier 1 ratio, 17.41% total risk-based capital ratio, 16.58% tier 1 risk-based ratio, and 12.02% tier 1 leverage ratio. Each exceeded the disclosed well-capitalized threshold.
Material changes versus comparable periods
- Lower net interest income and a higher loan-loss provision contributed to lower earnings. In Q2 2014, the company recorded a provision reversal.
- Higher compensation expense, attributed in part to merit increases and increased pension expense, further reduced Q2 profitability. Management cited lower discount rates and use of the RP-2014 mortality table in pension calculations.
- Non-performing loans were $32.2 million, up from $30.6 million at December 31, 2014, but down from $34.0 million at June 30, 2014. Past-due loans overall were lower than at year-end.
- Available-for-sale securities had $8.9 million of gross unrealized losses, compared with $8.2 million at year-end. Q2 comprehensive income was $0.2 million, substantially below net income, primarily reflecting an after-tax securities-related other comprehensive loss.
- The company repurchased 127,742 shares during the first half for $4.4 million; 118,053 of those shares were purchased in Q2. The announced repurchase authorization had approximately 208,546 shares remaining at June 30.
Outlook, risks, and other notable items
- No specific earnings or financial guidance was provided. Management said it expected adequate liquidity, citing deposit funding, loan and securities repayments, and unused borrowing capacity. It anticipated $3.9 million of investment maturities, $117.1 million of mortgage-backed securities principal payments, and $21.9 million of securities calls over the next 12 months.
- Management identified interest-rate risk as its most significant market risk. Its model estimated that a 100-basis-point rate increase would raise net interest income 2.32% over 12 months and 5.70% over 24 months; a 100-basis-point decrease would reduce it 0.71% and 2.00%, respectively. The estimates assume immediate rate changes and no management response.
- Management considered the loan-loss allowance adequate based on its portfolio analysis, while noting loan growth and non-performing loan trends. Key uncertainties include borrower credit quality, economic and market conditions, interest rates, competition, regulation, litigation, and accounting changes.
- Management stated that most securities’ unrealized losses reflected interest-rate movements rather than issuer credit deterioration and did not consider the portfolio other-than-temporarily impaired. Some collateralized debt obligations use Level 3 valuations; management noted that external pricing sources produce a wide range of estimates.
- The FDIC loss-sharing agreement relates to a 2009 acquisition. Covered loans totaled $6.5 million at June 30, and the indemnification asset was described as immaterial. The agreement’s remaining non-single-family recovery sharing continues through 2017.
- The filing reported no material pending legal proceedings beyond routine litigation and no material changes to previously disclosed risk factors. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether net interest income and margin stabilize, and whether operating expenses—especially compensation and pension costs—moderate.
- Whether non-performing loans, charge-offs, and the allowance remain consistent with management’s credit-loss assumptions.
- How deposit trends and higher short-term borrowings affect liquidity and funding costs.
- Whether securities valuations and unrealized losses change materially as interest rates and market pricing evolve, particularly for Level 3 holdings.
- Whether reported capital ratios, repurchase activity, and pension funding remain consistent with the company’s stated financial position.