First Financial Bancorp. — Q1 2021 Form 10-Q
Business context and reporting period. First Financial Bancorp. is a Cincinnati-based bank holding company serving Ohio, Indiana, Kentucky and Illinois, with nationwide franchise and insurance-sector lending businesses. This unaudited filing covers the three months ended March 31, 2021; year-over-year comparisons are with Q1 2020 unless otherwise noted.
Financial results and position
- Earnings: Net income was $47.3 million, up from $28.6 million; diluted EPS was $0.48 versus $0.29. Return on average assets was 1.20% (0.79% prior year) and return on average equity was 8.44% (5.21%).
- Income and margins: Net interest income was $113.9 million, down 0.4%; fully tax-equivalent net interest margin declined to 3.40% from 3.77%. Noninterest income increased 14.0% to $40.3 million, while noninterest expense rose 3.2% to $92.5 million. Effective tax rate was 18.0%, compared with 17.1%.
- Cash flow: Operating cash flow was $147.0 million, investing cash flow was negative $366.1 million and financing cash flow was $198.2 million. Cash and due from banks declined $20.9 million during the quarter to $210.2 million.
- Balance sheet and liquidity: Total assets were $16.2 billion, up from $16.0 billion at year-end. Loans and leases were $9.9 billion, nearly unchanged; deposits grew to $12.6 billion from $12.2 billion. Cash plus interest-bearing deposits with other banks totaled $229.4 million. The company reported $4.6 billion of available overnight wholesale funding sources and $1.7 billion of remaining FHLB borrowing capacity.
- Debt and capital: Borrowed funds fell to $765.1 million from $942.8 million, including $583.7 million of long-term debt. The consolidated total capital ratio was 15.41%, Tier 1 ratio 12.19%, and leverage ratio 9.34%; management said the company remained well-capitalized.
- Credit: The loan-and-lease allowance was $169.9 million, or 1.71% of period-end loans, versus $175.7 million and 1.77% at year-end. Q1 net charge-offs were $9.2 million, or 0.38% of average loans annualized, including a $7.1 million charge-off on one C&I relationship. Nonperforming assets were $97.7 million, or 0.60% of assets, versus $89.1 million and 0.56% at year-end.
Material changes versus comparable periods
- Net income increased substantially as provision for loan losses fell to $3.5 million from $23.9 million. The prior-year quarter included elevated provisioning following the onset of COVID-19; Q1 2021 also recorded $9.2 million of net charge-offs.
- Interest income declined 12.1%, largely because lower market rates reduced earning-asset yields; lower funding costs reduced interest expense 65.4%, largely offsetting the income decline. Average earning assets increased to $13.8 billion from $12.4 billion.
- Noninterest income benefited from loan-sale gains of $9.5 million versus $2.8 million, higher foreign exchange income and bankcard income. Deposit service charges and client derivative fees declined.
- Deposits grew, particularly savings and noninterest-bearing balances, while time deposits decreased. PPP loans, net of unearned fees, increased to $690.0 million from $594.6 million at year-end.
- AFS securities increased to $3.8 billion from $3.4 billion, but the after-tax unrealized gain on debt securities in accumulated other comprehensive income fell to $42.6 million from $73.6 million, reflecting lower bond prices as interest rates rose. This contributed to modestly lower capital ratios.
- Nonperforming assets and classified assets increased. Management attributed the increase in nonperforming assets partly to two relationships downgraded to nonaccrual; classified assets rose to $196.8 million from $142.0 million, primarily due to COVID-related credit downgrades.
Outlook, commentary, risks and unusual items
- The filing provides no numerical earnings or revenue guidance. Management said it was monitoring loan demand, deposit activity, balance-sheet composition, capital sensitivity and interest rates.
- Management cited improved economic forecasts and a better credit outlook as reasons for the modest decline in the allowance. Its CECL analysis also considered more adverse economic scenarios and exposures in franchise, hotel and investor CRE lending.
- COVID-19 remains a material uncertainty. Active COVID-related loan modifications not classified as TDRs totaled $251.1 million at March 31, 2021, concentrated in hotel and franchise loans; this was down from $320.2 million at year-end. PPP balances and forgiveness activity also affect funding and liquidity.
- Interest-rate sensitivity analysis showed an asset-sensitive position: estimated year-one net interest income increased 8.69% under an immediate +100 bp shock and declined 5.11% under the modeled -100 bp scenario. Results depend on assumptions, including deposit repricing behavior.
- Q1 included $1.3 million of severance costs within compensation expense. The company redeemed $8.4 million of acquired subordinated debt and repurchased 840,115 shares at an average $21.40; it declared a $0.23-per-share dividend.
- Litigation is described as arising in the ordinary course; management said pending matters were not probable or reasonably estimable and reported no litigation reserves. The filing identifies credit, market, liquidity, operational, cyber, regulatory and pandemic-related risks.
Important facts for investors to verify
- Whether credit trends stabilize, particularly the rise in nonperforming and classified assets, TDRs and charge-offs; track performance of hotel, franchise and investor CRE exposures.
- Whether PPP forgiveness, deposit flows and customer loan demand sustain funding and liquidity, and how reliance on available wholesale funding evolves.
- Whether margin pressure from low rates and asset repricing is offset by deposit-cost reductions and asset growth.
- How interest-rate-driven changes in AFS securities’ unrealized gains affect accumulated other comprehensive income and regulatory capital.
- Whether mortgage gains, foreign exchange income and other fee revenue continue to offset expense growth, and whether share repurchases and dividends remain consistent with capital priorities.