First Financial Bancorp. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. First Financial is a bank holding company operating primarily in Ohio, Indiana, Kentucky and Illinois. Financial amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net interest income | $113.4 | $112.2 | $341.3 | $338.0 |
| Net interest margin, fully tax-equivalent | 3.32% | 3.36% | 3.34% | 3.52% |
| Noninterest income | $42.5 | $49.5 | $125.8 | $127.6 |
| Noninterest expense | $99.1 | $97.5 | $291.2 | $275.9 |
| Net income | $60.0 | $41.5 | $158.2 | $107.5 |
| Diluted earnings per share | $0.63 | $0.42 | $1.64 | $1.10 |
Q3 return on average assets was 1.49% and return on average equity was 10.53%, versus 1.04% and 7.40%, respectively, a year earlier. The nine-month figures were 1.32% and 9.34%, compared with 0.93% and 6.50%.
For the first nine months, operating cash flow was $284.0 million, investing cash outflow was $135.6 million and financing cash outflow was $169.7 million. Cash and due from banks ended at $209.7 million, down from $231.1 million at December 31, 2020.
Balance sheet, credit and liquidity
- Total assets were $16.0 billion, broadly unchanged from year-end 2020. Total loans and leases fell 5.5% to $9.36 billion, principally as PPP loans ran off; commercial real estate lending rose 3.0% to $4.44 billion.
- Deposits increased 3.6% to $12.68 billion. Savings and noninterest-bearing demand balances grew, while time deposits declined. Total borrowed funds decreased to $502.1 million from $942.8 million, including repayment of $435.0 million in PPPLF advances.
- The allowance for credit losses on loans and leases was $148.9 million, or 1.59% of loans, down from $175.7 million and 1.77% at year-end. The company recorded an $8.2 million loan-loss provision recapture in Q3 and a $9.5 million recapture for the nine-month period.
- Nonperforming assets declined to $77.8 million, or 0.49% of assets, from $89.1 million at year-end. Classified assets increased to $165.5 million from $142.0 million, with the filing citing COVID-related downgrades, particularly in hospitality. TDRs rose to $31.8 million, primarily due to one commercial real estate relationship.
- Regulatory capital ratios remained above stated minimums: consolidated Tier 1 capital ratio was 11.92%, total capital ratio 14.97%, and leverage ratio 9.05%. The company reported $4.6 billion of available overnight wholesale funding capacity and $1.5 billion of remaining FHLB borrowing capacity.
- Shareholders’ equity was $2.24 billion versus $2.28 billion at year-end. The company repurchased 4.63 million shares during the first nine months and declared a quarterly dividend of $0.23 per share.
Changes, outlook and notable items
- Net income rose year over year as lower funding costs and credit-loss provision recaptures more than offset weaker loan-sale gains and a lower net interest margin. Q3 noninterest income fell 14.1%, mainly because mortgage gains and foreign exchange income declined; Q3 expenses rose 1.6%.
- Management attributed lower interest expense to reduced deposit rates, deposit growth and repayment of borrowings. The fully tax-equivalent margin declined year over year as earning-asset yields fell and acquired-loan accretion moderated.
- Management provided no specific earnings or revenue guidance. It described continued focus on current markets, digital investment, liquidity and balance-sheet management. Its interest-rate model estimated that an immediate +100 basis-point parallel rate shift would raise first-year NII 8.52%; a +200 basis-point shift would raise it 16.41%. These are modeled sensitivities, not guidance.
- COVID-19 remained a material uncertainty. At September 30, $101.2 million of loans—20 commercial loans concentrated in hotel and franchise lending—were on active payment modifications. The filing warns that prolonged disruption could affect borrowers, asset values, funding and results.
- Unrealized after-tax gains on debt securities in AOCI fell to $37.9 million from $73.6 million at year-end, which management attributed to higher interest rates. The investment portfolio grew to $4.3 billion and its effective duration increased to 3.8 years from 3.2 years.
- A $3.8 million legal settlement expense was accrued in Q2 and paid in Q3 for an Indiana overdraft-fee lawsuit. No litigation reserves were recorded at quarter-end; other pending claims were not considered probable or reasonably estimable by management.
- Other notable expense items included write-downs of tax-credit investments and higher data-processing and digital-technology costs. The lower effective tax rate reflected tax-credit investments.
Investor verification priorities
- Reconcile PPP balances: the notes report $175.7 million net of $7.8 million unearned fees, while MD&A reports $167.9 million with the same fee amount.
- Monitor commercial real estate and hospitality credit quality, classified assets, TDRs, and the status of the $101.2 million in modified loans.
- Assess whether credit-loss recaptures remain appropriate as economic forecasts evolve, and track charge-offs and allowance coverage.
- Review sensitivity to interest rates, including deposit repricing assumptions, securities duration, and potential AOCI volatility.
- Track deposit composition, contingent borrowing capacity, capital ratios, share repurchases and the effects of tax-credit investments and legal matters on reported earnings.