First Financial Bancorp. — Q2 2022 Form 10-Q
Business context and period. First Financial Bancorp. is an Ohio-based financial holding company serving Ohio, Indiana, Kentucky and Illinois, with additional national lending and equipment-finance businesses. This unaudited report covers the quarter and six months ended June 30, 2022. Comparisons below are to Q2 2021 or the first six months of 2021 unless otherwise noted; management also discusses Q2 versus Q1 2022.
Financial performance and condition
- Revenue and earnings: Q2 net interest income was $117.2 million, up 2.8% year over year and 10.2% from Q1. Noninterest income was $49.8 million, up from $43.0 million in Q2 2021; the increase included $7.2 million of leasing income from Summit, acquired at year-end 2021. Net income was $51.5 million, versus $50.9 million in Q2 2021 and $41.3 million in Q1 2022. Diluted EPS was $0.55, versus $0.52 and $0.44, respectively. For the first half, net income was $92.8 million and diluted EPS $0.98, versus $98.2 million and $1.01 in 2021.
- Margins and expenses: Fully tax-equivalent net interest margin was 3.47% in Q2, up 30 basis points from Q1; the first-half margin was 3.32%, down 3 basis points year over year. Management attributed the linked-quarter improvement to loan yields repricing faster than funding costs as rates rose. Q2 noninterest expense was $103.2 million, up 3.6% year over year; first-half expense increased 7.2% to $206.0 million, including Summit-related costs, compensation and technology spending.
- Loans and credit: Loans and leases totaled $9.42 billion at June 30, up 1.4% from year-end. Growth in C&I, residential real estate and leasing was partly offset by lower commercial real estate and PPP balances. The loan-loss allowance was $117.9 million, or 1.25% of loans, down from $132.0 million, or 1.42%, at year-end. Q2 net charge-offs were $2.0 million, 0.08% of average loans on an annualized basis. Nonaccrual loans fell to $38.9 million from $48.4 million at year-end, while classified assets rose to $119.8 million from $104.8 million, including downgrades in hotel and healthcare.
- Cash flow: First-half operating cash flow was $265.8 million; investing activities used $93.2 million and financing activities used $90.0 million. Cash and due from banks ended the period at $302.5 million, compared with $220.0 million at year-end.
- Deposits, debt and liquidity: Deposits were $12.28 billion, down 4.6% from year-end. Borrowed funds rose to $1.25 billion from $706.0 million, primarily as short-term FHLB advances replaced brokered CDs. The company reported $487.5 million of cash and interest-bearing deposits and $4.5 billion of unused, available overnight wholesale funding. Remaining FHLB borrowing capacity was $561.4 million.
- Equity and capital: Shareholders’ equity was $2.07 billion, down from $2.26 billion at year-end. The decline largely reflected a $243.5 million after-tax first-half loss in other comprehensive income on debt securities; accumulated other comprehensive loss was $243.3 million at June 30. The consolidated Common Equity Tier 1, Tier 1, total capital and leverage ratios were 10.91%, 11.28%, 13.94% and 8.76%, respectively. Management reported the company remained well-capitalized.
Material changes, outlook and risks
- Rising interest rates supported Q2 net interest income and margin, but reduced the fair value of the available-for-sale securities portfolio. Management reported an asset-sensitive position: modeled NII increased 6.63% under an immediate +100-basis-point shock and 12.19% under +200 basis points for Year 1; the -100-basis-point scenario showed a 10.93% decline. These estimates depend on modeling assumptions, including deposit repricing.
- Management cited loan growth, the improving credit outlook and more favorable economic forecasts as factors behind loan-loss provision recaptures. However, it considered alternative adverse forecasts and identified franchise, hotel and investor CRE lending as areas potentially exposed to future credit stress.
- Summit’s acquisition expanded equipment leasing. Acquisition accounting remained preliminary through the measurement period ending December 2022; purchase consideration was approximately $127.1 million, and reported acquisition goodwill was approximately $62.2 million.
- First-half mortgage loan-sale gains declined as rising rates slowed mortgage demand. Foreign-exchange income and limited-partnership-related income supported noninterest revenue; a decline in the value of Class B Visa shares generated an unrealized loss.
- The company had $4.2 billion of commitments to extend credit and $35.1 million of letters of credit outstanding. Litigation includes overdraft-fee cases; $3.3 million of prior-period legal settlement expenses were paid in the first half of 2022, and no litigation reserves were recorded at June 30. Other pending matters were described as not probable or not reasonably estimable.
- All $16.5 million of COVID-related modified loans disclosed at year-end had returned to regular payment schedules by June 30; remaining PPP loans were $8.5 million, net of unearned fees. The filing provides no specific earnings or revenue guidance.
- The board authorized a $0.23-per-share dividend payable in September 2022. No shares were repurchased under the 2022 plan during the first half.
Important facts for investors to verify
- Whether deposit outflows continue and how funding substitution affects deposit costs, borrowing levels and net interest margin.
- Whether securities-related accumulated other comprehensive losses, capital ratios and tangible book value respond to further rate changes or securities sales.
- Whether credit quality remains favorable, particularly in hotel, healthcare, franchise and investor commercial real estate exposures, and whether the allowance remains adequate.
- Summit’s contribution to leasing revenue and earnings, integration progress, and any final purchase-accounting adjustments.
- Potential cash needs from loan commitments, tax-credit investment commitments, litigation and other contingencies.