First Financial Bancorp. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; balance-sheet comparisons are against December 31, 2013 unless otherwise noted. First Financial is a bank holding company operating primarily in Ohio, Indiana and Kentucky. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
- Earnings: Net income was $15.1 million, up from $13.8 million in Q1 2013. Diluted EPS was $0.26 versus $0.24. Pretax income was $22.2 million versus $20.2 million.
- Net interest: Net interest income fell 6.6% to $54.8 million from $58.7 million; net interest margin narrowed to 3.82% from 4.04% (fully tax-equivalent margin: 3.87% versus 4.07%). Management attributed the decline chiefly to runoff of higher-yielding covered loans, lower loan yields and the low-rate environment.
- Other income and expenses: Noninterest income declined to $14.2 million from $26.7 million, mainly because FDIC loss-sharing income shifted from $8.9 million of income to $0.5 million of expense, alongside lower securities-sale gains and covered-loan discount accretion. Noninterest expense decreased 9.9% to $47.8 million from $53.1 million, reflecting staffing and branch reductions, among other factors. The quarter included a $0.5 million legal settlement expense.
- Credit costs and asset quality: Uncovered-loan provision was $1.2 million versus $3.0 million; net charge-offs were $2.0 million, or 0.23% annualized, versus $2.5 million, or 0.32%. The uncovered allowance was $43.0 million, 1.19% of loans, compared with $43.8 million, or 1.25%, at year-end. Covered loans had a $2.2 million provision recapture, versus $9.0 million of provision expense a year earlier. Uncovered nonperforming assets fell to $61.5 million from $72.5 million.
- Loans and deposits: Uncovered loans, excluding loans held for sale, increased $108.6 million during the quarter to approximately $3.6 billion; covered loans declined $48.5 million to $409.4 million. Deposits decreased $17.1 million to $4.82 billion.
- Cash flow and liquidity: Operating cash flow was $13.1 million versus $21.9 million in Q1 2013; investing cash flow was a $28.9 million outflow versus a $96.5 million inflow; financing cash flow was a $59.7 million inflow versus a $146.6 million outflow. Cash and due from banks rose $43.9 million to $161.5 million. Management reported $1.8 billion of unused available overnight wholesale funding and $320.2 million of remaining FHLB borrowing capacity.
- Debt and capital: Borrowed funds totaled $895.3 million, up from $809.5 million at year-end, including $835.1 million of short-term borrowings and $60.2 million of long-term debt. Consolidated regulatory ratios were 9.94% leverage, 14.42% Tier 1 risk-based and 15.67% total capital; the company reported that it remained well-capitalized. Shareholders’ equity was $691.3 million; total assets were $6.50 billion.
- Margins and returns: Return on average assets was 0.96% versus 0.88% in Q1 2013. The filing reports return on average equity of 8.95% versus 7.91% for the comparable period.
Material changes, outlook and risks
- Uncovered loan growth and declining problem assets were positive developments, while net interest margin and net interest income weakened. The covered-loan portfolio continued to run off.
- The majority of loss protection on covered commercial loans and covered OREO is scheduled to expire in Q3 2014; other covered assets have protection through Q3 2019. The company notes that expiry will reclassify affected balances from covered to uncovered loans.
- First Financial expected a 2014 effective tax rate of approximately 32%–34%. The filing provides no specific earnings or revenue guidance and cautions that interim results are not necessarily indicative of full-year results.
- Pending acquisitions of First Bexley and Insight were subject to regulatory and shareholder approval and expected to close in Q2 2014. On April 29, 2014, the company also agreed to acquire Guernsey Bancorp, subject to regulatory approval, with closing expected in the second half of 2014. The transactions target entry into the Columbus market.
- The board authorized a $0.15-per-share dividend payable July 1, 2014. The company repurchased 40,255 shares in Q1, then suspended further repurchases in January in connection with regulatory applications for pending acquisitions.
- Investment securities sales included $92.5 million of proceeds, primarily from CLOs; management cited uncertainty about Volcker Rule application. The Federal Reserve subsequently extended the compliance deadline to July 21, 2017.
- Key disclosed risks include interest-rate changes and low rates, credit quality and collateral values, liquidity access, FDIC loss-sharing expiry and compliance, regulatory and capital changes, acquisition execution and integration, litigation, and operational or cybersecurity disruptions. Management said disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether loan growth, deposit trends and pricing can offset continued runoff of higher-yielding covered loans and pressure on net interest margin.
- The assumptions supporting the allowance for loan losses, covered-loan cash-flow estimates and FDIC indemnification asset, particularly as commercial loss protection expires in Q3 2014.
- Acquisition approval, closing, financing, integration costs and expected contribution from Bexley, Insight and Guernsey.
- Current liquidity and funding capacity, including short-term FHLB borrowings, available wholesale funding and deposit stability.
- Capital ratios and shareholder distributions after acquisitions and under Basel III transition requirements.