First Financial Bancorp. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. First Financial is an Ohio-based bank holding company operating primarily in Ohio, Indiana, Kentucky and Illinois. It reported consolidated assets of $16.6 billion and operated 134 banking centers. Results include Summit Funding Group, acquired December 31, 2021.
Financial performance and position
| Metric | Q3 2022 / Sep. 30, 2022 | Comparison |
|---|---|---|
| Net income | $55.7 million; diluted EPS $0.59 | Q3 2021: $60.0 million; $0.63 per diluted share. Q2 2022: $51.5 million; $0.55 per diluted share. |
| Net interest income | $137.9 million; net interest margin 3.93% (3.98% fully tax-equivalent) | NII rose 17.8% and FTE margin increased 53 basis points from Q2 2022. |
| Noninterest income and expense | $42.5 million income; $125.1 million expense | Quarterly expense included a $17.2 million write-off of tax-credit investments. |
| Nine-month results | Net income $148.5 million; diluted EPS $1.57 | 2021: $158.2 million; $1.64. NII was $361.2 million versus $341.3 million. |
| Loans and deposits | Loans and leases $9.80 billion; deposits $12.34 billion | Since year-end 2021, loans increased 5.5%; deposits declined 4.1%. |
| Borrowed funds | $1.52 billion total; $1.16 billion short-term | Total borrowed funds were $706.0 million at year-end 2021, reflecting greater use of short-term FHLB advances as deposits declined and funding shifted away from brokered CDs. |
| Credit quality | Nonaccrual loans $36.3 million; nonperforming assets $47.4 million | Nonaccrual loans were $48.4 million at year-end 2021. Loan ACL was $124.1 million, or 1.27% of loans. |
| Capital and equity | Consolidated CET1 10.82%; Tier 1 11.17%; total capital 13.73%; leverage 8.88% | Management said the company met capital requirements and was well-capitalized. Shareholders’ equity was $1.99 billion, down from $2.26 billion. |
Cash flow: For the first nine months, operating activities provided $174.2 million, investing activities used $411.3 million, and financing activities provided $212.6 million. Cash and due from banks ended at $195.6 million; cash plus interest-bearing bank deposits totaled $534.5 million.
Material changes and management commentary
- Rising rates lifted loan yields and NII; management described the balance sheet as asset-sensitive. Q3 average loan yield increased 89 basis points from Q2. Management’s modeled NII sensitivity was +5.29% for a +100-basis-point shock and +9.56% for +200 basis points in year one.
- Loan growth was led by commercial and industrial lending. Commercial real estate balances declined 5.9% from year-end 2021. Total deposits fell, while short-term borrowings rose substantially.
- Available-for-sale securities had $428.6 million of gross unrealized losses at September 30, 2022, versus $31.1 million at year-end 2021. The after-tax unrealized debt-security loss in AOCI was $333.9 million. Management attributed the mark-to-market decline to higher interest rates and said it did not intend, and was not more likely than not required, to sell securities before recovery or maturity.
- Q3 noninterest income declined 14.6% from Q2, reflecting lower foreign-exchange income, limited-partnership income, mortgage loan-sale gains and deposit service charges. Nine-month noninterest income increased 6.2% year over year, including $20.5 million of leasing income associated with Summit.
- Q3 included an $8.6 million income-tax benefit and a negative 18.3% effective tax rate, attributed primarily to tax credits. For nine months, the effective tax rate was 8.5%, compared with 15.1% in 2021.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. Management said it would continue monitoring loan demand, deposits, balance-sheet composition, capital sensitivity and interest rates.
- Risks discussed include credit deterioration, interest-rate and liquidity exposure, deposit changes and funding costs, economic conditions, cyber and operational risks, regulation, litigation, and Summit integration and realization of acquisition benefits.
- Available liquidity included $534.5 million of cash and interest-bearing deposits, $4.3 billion of unused overnight wholesale funding capacity, and $469.3 million of remaining FHLB borrowing capacity. A $40 million bank credit facility matured in December 2022 and had no balance outstanding at quarter-end.
- Off-balance-sheet commitments to extend credit totaled $4.4 billion, predominantly variable-rate; letters of credit totaled $34.6 million. Unfunded tax-credit investment commitments were $100.7 million.
- The company reported no litigation reserves at September 30, 2022. It paid $3.3 million of legal settlement expenses during the first nine months of 2022 related to previously agreed overdraft-fee settlements; other pending claims were not considered probable or reasonably estimable.
Important facts for investors to verify
- Whether deposit trends and reliance on short-term wholesale funding affect funding costs, liquidity and margins.
- Whether loan growth, classified assets and credit conditions change the allowance and future charge-offs; classified assets were $115.0 million, up from $104.8 million at year-end 2021.
- How much of the tax-credit investment write-off is nonrecurring, and whether tax-credit benefits and the unusually low effective tax rate persist.
- Potential effects of interest-rate-driven securities losses on tangible equity and capital, and the assumptions behind management’s rate-sensitivity models.
- Summit’s ongoing contribution, integration progress and final purchase-accounting adjustments; acquisition measurements remained preliminary through the measurement period ending December 2022.