First Financial Bancorp. — Q2 2021 Form 10-Q
Business context and reporting period
First Financial Bancorp. is a Cincinnati-based financial holding company operating primarily in Ohio, Indiana, Kentucky and Illinois, with nationwide franchise and insurance-related lending. This unaudited filing covers the quarter and six months ended June 30, 2021; balance-sheet comparisons are to December 31, 2020.
Financial results and condition
| Metric | Q2 2021 | Comparable period / change |
|---|---|---|
| Net interest income | $114.0 million | Up 2.2% from $111.6 million |
| Net interest margin, fully tax-equivalent | 3.31% | Down 13 basis points from 3.44% |
| Noninterest income | $43.0 million | Up 0.6% from $42.7 million |
| Noninterest expense | $99.6 million | Up 12.4% from $88.7 million |
| Net income / diluted EPS | $50.9 million / $0.52 | Up from $37.4 million / $0.38 |
| Return on average assets / equity | 1.26% / 9.02% | Compared with 0.96% / 6.88% |
For the six months, net income was $98.2 million and diluted EPS was $1.01, versus $66.0 million and $0.67 a year earlier. Net interest income was $227.9 million, compared with $225.9 million; fully tax-equivalent net interest margin was 3.35%, down from 3.60%. Six-month noninterest income was $83.3 million and noninterest expense was $192.1 million.
Q2 earnings benefited from lower funding costs and a $4.8 million loan-and-lease provision recapture, partly offset by higher expenses. Interest income fell 5.8%, as lower earning-asset yields outweighed higher average balances. Foreign exchange, wealth management, bankcard and deposit service-charge income increased; gains on loan sales and client derivative fees declined. The $3.8 million Indiana overdraft-fee settlement was included in Q2 other noninterest expense.
- Balance sheet: Total assets were $16.0 billion, up modestly from $16.0 billion at year-end. Total loans and leases declined 3.9% to $9.5 billion, mainly as PPP balances were repaid; commercial real estate loans increased slightly.
- Funding and liquidity: Deposits increased 2.2% to $12.5 billion, with growth in savings and noninterest-bearing accounts partly offset by lower time deposits. Borrowed funds were $785.8 million, down from $942.8 million. Cash and interest-bearing deposits totaled $245.5 million; the company reported $4.5 billion of available overnight wholesale funding capacity.
- Debt: Long-term debt fell to $313.0 million from $776.2 million, including repayment of $435.0 million of PPPLF advances. Short-term borrowings increased to $472.8 million, including $217.0 million of FHLB borrowing.
- Credit: The loan allowance was $159.6 million, or 1.68% of loans, versus $175.7 million, or 1.77%, at year-end. Q2 net charge-offs were $5.6 million, or 0.23% annualized, compared with $3.1 million, or 0.12%, a year earlier.
- Cash flow: Six-month operating cash flow was $206.0 million, investing cash flow was negative $251.9 million and financing cash flow was positive $21.8 million. Cash and due from banks ended at $206.9 million, down $24.1 million from year-end.
- Capital and shareholder returns: Consolidated CET1, total capital and leverage ratios were 11.78%, 15.31% and 9.14%, respectively. Management reported the company was well-capitalized. It repurchased 2.15 million shares for $50.8 million during the six months and declared a $0.23-per-share quarterly dividend.
Material changes, outlook and risks
Nonperforming assets rose to $98.8 million, or 0.62% of assets, from $89.1 million at year-end; management attributed the increase to three large relationships downgraded to nonaccrual. Classified assets increased to $182.5 million from $142.0 million. TDR balances rose to $33.6 million from $21.8 million. Active pandemic-related loan modifications not classified as TDRs declined to $181.7 million from $320.2 million; hotel and franchise loans made up most of the remaining modified balances. PPP loans, net of unearned fees, were $401.1 million, down from $594.6 million.
Management cited improving economic forecasts and a better credit outlook as reasons for reducing the loan allowance, while continuing to consider adverse scenarios and exposures in hotels, franchise lending and investor commercial real estate. COVID-19’s full impact remained uncertain and could adversely affect borrowers, asset values and results. Other material risks include credit quality, interest-rate and liquidity exposure, deposit behavior, litigation, regulation, cybersecurity and execution of business plans. The filing provides no specific earnings or revenue guidance. Management described plans to focus growth and investment in current markets and to consider strategic acquisitions; it reported sufficient liquidity for expected capital expenditures.
The company’s interest-rate models showed estimated NII sensitivity of +7.79% in year one under an immediate +100 bp shock and +14.97% under +200 bp; a -100 bp scenario showed -3.81%. These are model estimates dependent on assumptions, not forecasts.
Important facts for investors to verify
- Whether the rise in nonperforming and classified assets persists, particularly in commercial real estate, hotel and franchise exposures.
- Whether the allowance and provision recapture remain appropriate as PPP balances run off and pandemic support fades.
- How deposit growth, wholesale borrowing and loan demand affect funding costs, net interest margin and liquidity.
- Whether the overdraft-fee settlement is approved and whether other litigation creates additional expense or exposure.
- Whether share repurchases and dividends remain consistent with capital ratios, credit trends and management’s plans.