First Financial Bancorp. — Q1 2023 Form 10-Q
Business context and period. Ohio-based financial holding company serving Ohio, Indiana, Kentucky and Illinois, with commercial lending and finance businesses extending nationally. This unaudited report covers the three months ended March 31, 2023; balance-sheet comparisons are with December 31, 2022. Dollar amounts below are in millions unless noted.
Key financial results and position
- Earnings: Net income was $70.4 million and diluted EPS was $0.74, compared with $41.3 million and $0.44 in Q1 2022. Versus Q4 2022, net income rose from $69.1 million and diluted EPS from $0.73.
- Net interest: Net interest income was $159.3 million, up 49.8% year over year and 0.9% sequentially. Net interest margin was 4.51% (4.55% fully tax-equivalent), versus 3.11% (3.16% FTE) a year earlier and 4.43% (4.47% FTE) in Q4 2022.
- Other income and expenses: Noninterest income was $55.5 million, up 34.5% year over year, notably from leasing and foreign-exchange income. Noninterest expense was $116.7 million, up 13.5% year over year. Income before taxes was $87.7 million; tax expense was $17.3 million, a 19.7% effective rate.
- Balance sheet: Assets were $16.9 billion; loans and leases were $10.4 billion, up $134.4 million from year-end; deposits were $12.7 billion, down $26.5 million. Shareholders’ equity was $2.12 billion.
- Credit: Loan and lease allowance was $141.6 million, or 1.36% of period-end loans, versus $133.0 million and 1.29% at year-end. Including unfunded commitments, total allowance was $161.8 million. Nonaccrual loans rose to $34.6 million from $28.6 million; nonperforming assets were $34.8 million, while classified assets increased to $159.0 million from $128.1 million.
- Cash flow and funding: Operating cash flow was $172.2 million, investing cash flow was negative $57.5 million, and financing cash flow was negative $122.4 million. Borrowed funds totaled $1.56 billion, including $1.09 billion of short-term FHLB borrowings and $342.6 million of long-term debt. Cash and interest-bearing deposits with other banks totaled $505.3 million.
- Capital: Consolidated CET1, Tier 1, total capital and leverage ratios were 11.00%, 11.34%, 13.66% and 9.03%, respectively. Management reported the company was well-capitalized and met applicable capital requirements.
Material changes and management commentary
- Year-over-year earnings and margin growth reflected higher rates, loan growth and increased leasing and foreign-exchange income. Management said the asset-sensitive balance sheet repriced faster than funding costs, supporting margin expansion.
- Funding costs rose: interest expense increased to $49.3 million from $7.5 million a year earlier and to $49.3 million from $32.0 million sequentially. Time deposits increased $635.7 million from year-end, partly offset by declines in noninterest-bearing, demand and savings deposits.
- Uninsured deposits were $4.9 billion, or 38.6% of deposits; management’s adjusted measure, excluding public funds and intercompany accounts, was $2.9 billion, or 22.8%. The company reported some deposit attrition after first-quarter bank failures, but said it was not a major driver of business deposit declines.
- AFS securities had an after-tax unrealized loss in AOCI of $295.4 million, improving from $325.9 million at year-end; HTM securities had $7.3 million of net unrealized losses. Management said it did not intend, and was not more likely than not required, to sell debt securities before recovery or maturity, and recorded no AFS credit-loss reserve.
- Nonaccrual loans rose primarily after two relationship downgrades; classified assets increased following three relationship downgrades. The allowance increase reflected loan growth, slower prepayments and changes in economic forecasts. The company also cited franchise, hotel and investor CRE exposures as areas considered for potential credit stress.
- Interest-rate simulations showed estimated NII changes of +4.27% under an immediate +100-basis-point shock and +7.70% under +200 bps, versus −6.30% under −100 bps. Management cautioned that deposit-cost increases could moderate asset sensitivity; outcomes depend on modeling assumptions.
Outlook, contingencies and unusual items
- The filing provides no specific earnings or revenue guidance. Management described ongoing monitoring of loan demand, deposits, balance-sheet composition, capital sensitivity and interest rates.
- Liquidity sources included $3.6 billion of unused overnight wholesale funding capacity, $488.2 million of remaining FHLB borrowing capacity, and $1.6 billion of unpledged AFS securities. The company also reported expected $704.4 million of investment-portfolio cash flows over the next 12 months.
- First Financial acquired Brady Ware Capital’s assets on January 3, 2023, for approximately $4.3 million, including $3.4 million cash and a contingent earn-out; $4.2 million of goodwill was recorded.
- The company adopted ASU 2022-02 in 2023, changing disclosures and treatment of borrower financial-difficulty modifications; adoption did not materially affect results. No such modified loans subsequently defaulted during the quarter.
- Litigation includes overdraft-fee matters and other ordinary-course claims. No litigation reserves were recorded at quarter-end; management said pending damages were not probable or could not be reasonably estimated. The company reported no material change in previously disclosed risk factors.
Most important facts for investors to verify
- Whether deposit retention and funding costs continue to pressure margins, particularly given growth in time deposits and reliance on wholesale funding.
- Whether rising nonaccrual and classified assets lead to higher charge-offs, provisions or further allowance needs, especially in CRE and other identified risk exposures.
- The extent to which the large unrealized securities loss, liquidity sources and potential deposit outflows affect flexibility under stressed conditions.
- Whether reported earnings growth and the interest-rate sensitivity estimates persist as rates, deposit betas and balance-sheet mix change.
- Integration, contingent earn-out payments and realized benefits from the Brady Ware acquisition; also monitor the status and potential costs of litigation and tax positions.