Business context and reporting period
First Financial Bancorp. is an Ohio-based bank holding company serving primarily Ohio, Indiana and Kentucky, with nationwide commercial-finance lending. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2017; balance-sheet comparisons are with December 31, 2016. Amounts below are in millions unless noted.
Financial performance and condition
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net interest income | $70.5 | $68.8 | $207.9 | $202.5 |
| Noninterest income | $22.9 | $16.9 | $57.8 | $52.7 |
| Noninterest expense | $54.4 | $51.1 | $157.0 | $151.2 |
| Provision for loan losses | $3.0 | $1.7 | $3.8 | $7.4 |
| Net income | $24.8 | $22.9 | $72.0 | $65.2 |
| Diluted EPS | $0.40 | $0.37 | $1.16 | $1.05 |
| Fully tax-equivalent net interest margin | 3.57% | 3.66% | 3.61% | 3.67% |
- Q3 return on average assets was 1.13% and return on average equity was 10.85%; nine-month figures were 1.12% and 10.82%, respectively.
- At September 30, assets were $8,761.7, loans and leases $5,977.0, deposits $6,726.1, total borrowed funds $983.3, long-term debt $119.6, and shareholders’ equity $915.0. Since year-end 2016, assets rose $323.7, loans rose $219.6, deposits rose $200.3, and equity rose $49.7.
- Allowance for loan and lease losses was $54.5, or 0.91% of loans, versus $58.0, or 1.01%, at year-end. Q3 net charge-offs were $3.3, an annualized 0.22% of average loans, compared with $0.8 and 0.05% a year earlier. Nonperforming assets were $52.9, or 0.60% of assets, down from $54.3 at year-end.
- Nine-month operating cash flow was $93.0; investing cash outflow was $322.4 and financing cash inflow was $225.6. Cash and due from banks declined $3.8 to $117.8.
- Regulatory capital ratios at September 30 included 10.53% common equity Tier 1, 10.53% Tier 1, 12.98% total capital and 8.74% leverage. Management reported the company was well-capitalized and exceeded minimum total regulatory capital requirements by $264.8.
Material changes versus comparable periods
- Net income increased 8.6% in Q3 and 10.3% for the first nine months. Higher earning-asset balances and yields lifted interest income, but funding costs rose faster; fully tax-equivalent margin declined 9 basis points in Q3 and 6 basis points year to date.
- Q3 noninterest income increased $6.0, primarily from a $5.8 gain related to early redemption of certain off-balance-sheet securitizations. The transaction also brought $28.3 of seasoned performing home-equity loans onto the balance sheet.
- Expense growth reflected higher salaries and benefits, data-processing and professional-service costs. Management cited $3.8 of Q3 severance costs, system investments and merger-related expenses. Nine-month expenses rose 3.8%.
- Loans grew 3.8% from year-end, led by commercial and industrial, commercial real estate and home-equity lending. Deposits rose 3.1%, led by savings growth; time deposits declined as higher-cost brokered CDs ran off.
- Nonperforming loans increased $1.8 from year-end, partly due to three commercial relationships downgraded to nonaccrual. Classified assets nevertheless declined 24.6% to $94.3, and TDR balances fell 18.7% to $28.8.
Guidance, outlook, risks and unusual items
- No general earnings or revenue forecast is provided. Management expected a 2017 full-year effective tax rate of approximately 31.5%–32.5%, excluding a possible historic-tax-credit certification outcome. If approved in Q4, the filing estimated an after-tax asset write-down of $7.1 and tax credits of $8.2, for a net $1.1 after-tax benefit and an approximately 7% reduction in the full-year effective tax rate.
- Management converted approximately $1.5 billion of indexed deposits to managed-rate products and reduced rates on those products by a weighted average 35 basis points late in Q3; it expected the full financial impact in Q4 2017.
- The proposed stock-for-stock MainSource Financial merger, announced in July 2017, was valued at approximately $1.0 billion. MainSource shareholders would receive 1.3875 First Financial shares per share; the transaction was expected to close in Q1 2018, subject to shareholder, regulatory and other conditions. First Financial shareholders were expected to own approximately 65% of the combined company.
- Interest-rate sensitivity modeling showed estimated net interest income changes of -6.06% and -8.28% for year one and year two under an immediate 100-basis-point decline, and +2.65% and +3.77% under a 100-basis-point increase. The filing says the company was within policy limits; results depend on modeling assumptions, including deposit repricing behavior.
- Liquidity included $152.6 of cash and short-term investments and $2.6 billion of unused overnight wholesale funding capacity. FHLB short-term borrowings were $818.2; remaining FHLB borrowing capacity was $576.1. The company also had a $15.0 undrawn bank facility maturing May 2018.
- Management disclosed ordinary-course litigation and unresolved claims but said losses were not probable or reasonably estimable; no litigation reserves were recorded. Other key risks include credit quality, funding costs and interest rates, merger execution and integration, regulation, technology and cyber risk, and economic conditions.
Important facts for investors to verify
- Review the MainSource merger proxy/prospectus, approvals, expected timing, consideration and integration costs and risks.
- Track deposit pricing after the managed-rate changes, funding mix, borrowing levels and whether margin pressure moderates.
- Monitor commercial credit migration, charge-offs, nonaccrual loans, classified assets and allowance coverage, particularly following the three commercial downgrades.
- Confirm whether the historic tax-credit certification is approved and how the estimated tax benefit and asset write-down are recognized.
- Assess the sustainability of earnings growth apart from the $5.8 securitization-redemption income and the effects of severance, merger and technology costs.