First Financial Bancorp. — Q3 2020 Form 10-Q
Business context and reporting period. First Financial is an Ohio-based bank holding company serving primarily Ohio, Indiana, Kentucky and Illinois, with additional nationwide commercial-finance and foreign-exchange operations. This unaudited filing covers the quarter and nine months ended September 30, 2020; comparisons are with 2019 unless otherwise stated. COVID-19 and the related economic disruption materially affected operations and results.
Financial performance and position
- Q3 earnings: Net income was $41.5 million, down 18.5%; diluted EPS was $0.42, versus $0.51. Nine-month net income was $107.5 million, down 28.0%, and diluted EPS was $1.10, versus $1.51.
- Net interest: Q3 net interest income was $112.2 million, down 7.7%. Fully tax-equivalent net interest margin was 3.36%, down 60 basis points. For nine months, net interest income was $338.0 million, down 7.5%, and fully tax-equivalent margin was 3.52%, down 51 basis points. Lower market rates and moderating acquired-loan accretion pressured asset yields; lower funding costs partly offset the decline.
- Other income and expenses: Q3 noninterest income increased 49.4% to $49.5 million, notably from loan-sale gains ($18.6 million) and foreign-exchange income ($10.5 million). Noninterest expense rose 12.8% to $97.5 million, including higher compensation and technology costs. Nine-month noninterest income was $127.6 million (+34.9%) and expense was $275.9 million (+10.6%).
- Credit costs and quality: Q3 loan-and-lease provision was $15.3 million; nine-month provision was $57.0 million. Net charge-offs were $5.4 million for Q3 and $7.6 million for nine months. The allowance for credit losses was $168.5 million, or 1.65% of loans, versus $57.7 million, or 0.63%, at year-end 2019. The increase reflects CECL adoption and expected pandemic-related losses. Nonperforming assets were $87.3 million, 0.55% of assets, versus $61.6 million, 0.42%, at year-end.
- Balance sheet and funding: Total assets were $15.9 billion, up from $14.5 billion at year-end. Loans and leases were $10.2 billion, up 10.9%, including $886.1 million of PPP loans net of unearned fees. Deposits rose to $11.6 billion from $10.2 billion. Borrowed funds totaled $1.59 billion; long-term debt was $1.34 billion, including $881.7 million of PPPLF advances secured by PPP loans. The company reported $245.9 million in cash and short-term investments, $4.4 billion in unused wholesale funding, and $1.8 billion in remaining FHLB borrowing capacity.
- Cash flow: For the first nine months, operating activities used $43.9 million, investing activities used $1.08 billion, and financing activities provided $1.13 billion. Financing included $1.36 billion of net deposit growth; investing outflows primarily reflected loan growth.
- Capital and shareholder returns: Consolidated Tier 1 capital ratio was 12.02%, total capital ratio 15.37%, and leverage ratio 9.55%. Management said the company met capital requirements and was well-capitalized. It declared a $0.23-per-share Q3 dividend; no shares were repurchased in Q3.
Material changes and notable items
- Effective January 1, 2020, CECL replaced the incurred-loss methodology. Adoption reduced retained earnings by $56.9 million, including a $61.5 million increase in the loan allowance and a $12.2 million increase in the unfunded-commitment allowance, partly offset by a $16.8 million reduction in deferred tax liabilities.
- COVID-19 relief included approximately 6,800 active PPP loans totaling $886.1 million. The company had modified $2.1 billion of commercial loans and $131.4 million of consumer loans; $1.5 billion had returned to normal payment schedules and $631.2 million received a second deferral. Hotels and franchise loans represented $438.2 million of second-round deferrals.
- Q3 loan-sale gains reflected record mortgage origination activity amid low rates. Foreign-exchange income benefited from Bannockburn Global Forex, acquired in August 2019, and record Q3 performance. These gains supported noninterest income despite lower deposit service charges, bankcard activity and client derivative fees.
- The filing provides no specific earnings or financial guidance. Management cautioned that prolonged pandemic disruption could adversely affect borrowers, asset valuations, funding and results. It also identified uncertainty in credit-loss estimates, particularly for franchise, hotel and investor CRE exposures. Interest-rate sensitivity modeling indicated projected NII increases under +100/+200 bp shocks and declines under a -100 bp shock; these are modeled sensitivities, not guidance.
- Management reported no material litigation reserves and no material change in previously disclosed risk factors. It said a September 2020 interim qualitative goodwill impairment test did not indicate impairment.
Key investor verification points
- Track whether second-round payment deferrals—especially hotel and franchise exposures—resume payment and whether pandemic-related credit deterioration requires further allowance increases.
- Assess the assumptions and sensitivity of the CECL allowance to economic forecasts, prepayments, defaults and qualitative adjustments; distinguish CECL adoption effects from subsequent provision expense.
- Monitor PPP loan forgiveness, fee recognition and the corresponding repayment of PPPLF advances, alongside deposit balances and wholesale funding needs.
- Evaluate whether unusually strong mortgage-sale and Bannockburn foreign-exchange income persists, and whether expense growth and lower net interest margins continue to weigh on earnings.
- Confirm capital, liquidity and dividend capacity as credit conditions, interest rates and loan growth evolve; the filing’s forward-looking statements are subject to substantial uncertainty.