First Financial Bancorp. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet figures are as of March 31, 2020. Unaudited. Dollar amounts below are in millions unless stated otherwise.
Business context
First Financial Bancorp. is a Cincinnati-based financial holding company operating primarily in Ohio, Indiana, Kentucky and Illinois. Its businesses include commercial and retail banking, mortgage banking, wealth management, investment commercial real estate and commercial finance. It reported $15.1 billion in total assets and operated 145 full-service banking centers. The 2019 Bannockburn Global Forex acquisition contributed to foreign-exchange income in the quarter.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 or prior date |
|---|---|---|
| Net interest income | $114.3 | $121.5 |
| Net interest margin | 3.71%; 3.77% tax-equivalent | 4.05%; 4.10% tax-equivalent |
| Provision for credit losses: loans and leases | $23.9 | $14.1 |
| Provision for credit losses: unfunded commitments | $1.6 | Insignificant |
| Noninterest income | $35.4 | $26.8 |
| Noninterest expense | $89.7 | $78.5 |
| Net income | $28.6 | $45.8 |
| Diluted earnings per share | $0.29 | $0.47 |
| Return on average assets / equity | 0.79% / 5.21% | 1.33% / 8.88% |
- Net interest income fell 6.0% year over year: lower asset yields, following rate cuts, outweighed lower funding costs. Tax-equivalent net interest margin declined 33 basis points.
- Noninterest income rose 31.9%, led by $10.0 million of foreign-exchange income, higher client derivative fees and loan-sale gains. Bankcard income declined 51.7%, partly reflecting the Durbin interchange fee cap; other income was also affected by mortgage servicing rights valuation.
- Noninterest expense increased 14.2%, including higher salaries, technology costs and intangible amortization, as well as a $1.0 million COVID-19 relief donation.
- Loans and leases were $9.31 billion, up 1.2% from year-end 2019. Deposits were $10.64 billion, up 4.2%. Total assets rose to $15.06 billion from $14.51 billion.
- Cash flows were $(126.2) million from operating activities, $(190.2) million from investing activities and $377.7 million from financing activities. Cash and due from banks ended at $261.9 million, up $61.2 million; the filing attributes much of the operating cash-flow movement to changes in other assets and liabilities.
- Borrowed funds totaled $1.72 billion, including $1.40 billion of short-term borrowings and $325.6 million of long-term debt. Long-term debt declined from $414.4 million at year-end. The company reported $778.9 million of remaining FHLB borrowing capacity and $2.8 billion of unused wholesale funding.
- Consolidated regulatory capital ratios were 11.27% Tier 1, 13.54% total capital and 9.18% leverage. Management said the company remained well-capitalized. Shareholders’ equity was $2.18 billion, down from $2.25 billion at year-end.
Material changes, outlook and risks
- COVID-19 and credit: Management said the pandemic significantly affected first-quarter operations and results, while its ultimate financial impact remained uncertain. The company increased credit-loss provisions and considered more adverse economic forecasts and exposure to franchise, hotel and investor commercial real estate lending.
- CECL adoption: The company adopted the expected-credit-loss standard on January 1, 2020. Adoption increased the loan allowance by $61.5 million and the unfunded-commitment allowance by $12.2 million, reduced deferred tax liabilities by $16.8 million and reduced retained earnings by $56.9 million. The loan allowance ended at $143.9 million, or 1.55% of loans, versus $57.7 million, or 0.63%, at year-end; management attributed the increase to both adoption and pandemic-related expectations.
- Asset quality and borrower relief: Nonperforming assets were $72.2 million, or 0.48% of assets, versus $61.6 million at year-end; classified assets increased to $124.5 million from $89.3 million. Through April 30, the company had modified 1,055 commercial loans totaling $1.6 billion and 979 consumer loans totaling $129.5 million under COVID-19 relief programs; these modifications were not reported as TDRs under the stated CARES Act criteria. It had also secured SBA funding for 6,085 PPP loans totaling $917.4 million by that date.
- Interest-rate exposure: The company’s disclosed model estimated first-year net interest income would decline 6.63% under a 100-basis-point rate decrease and increase 4.70% under a 100-basis-point increase. Management described the balance sheet as asset-sensitive and within policy limits.
- Liquidity, capital and shareholder returns: In April 2020, the company issued $150 million of subordinated notes, initially bearing 5.25% interest and maturing in 2030. It declared a $0.23-per-share dividend payable in June and repurchased 880,000 shares in Q1 at an average $18.96 per share.
- Other items: The company performed an interim goodwill impairment test in response to the pandemic and recorded no impairment. It reported no litigation reserves and said pending claims were not probable or reasonably estimable as of quarter-end. No specific earnings or full-year financial guidance is provided in the filing text.
Important facts for investors to verify
- How subsequent economic conditions, loan deferrals and borrower performance affect credit losses, the allowance and future provisions—especially in retail commercial real estate, franchise and hospitality exposures.
- Whether CECL assumptions and qualitative adjustments remain appropriate as forecasts change, and how the five-year regulatory capital transition affects reported capital.
- Whether margin pressure from low interest rates is offset by deposit-cost reductions, loan growth and fee income; verify the durability of foreign-exchange and derivative revenues.
- How liquidity and capital evolve after the April $150 million subordinated-note issuance, continued lending commitments, dividends and share repurchases.
- Whether goodwill, mortgage servicing rights, investment securities and mortgage-loan repurchase exposure require future valuation adjustments as pandemic-related conditions develop.