First Financial Bancorp. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Unless noted, dollar amounts are in millions. First Financial is a regional bank holding company operating principally in Ohio, Indiana, Kentucky and Illinois.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net interest income | $121.5 | $123.5 | $365.4 | $323.3 |
| Noninterest income | $33.1 | $28.7 | $94.6 | $73.9 |
| Provision for loan losses | $5.2 | $3.2 | $26.0 | $9.3 |
| Noninterest expense | $86.2 | $85.4 | $249.1 | $240.5 |
| Net income | $50.9 | $50.7 | $149.4 | $117.6 |
| Diluted EPS | $0.51 | $0.51 | $1.51 | $1.36 |
| Net interest margin, fully tax-equivalent | 3.96% | 4.12% | 4.03% | 4.06% |
- Q3 return on average assets was 1.41% and return on average equity was 9.13%, compared with 1.45% and 9.94%, respectively, in Q3 2018. Nine-month returns were 1.41% and 9.29%, versus 1.29% and 9.50%.
- At September 30, total assets were $14.48 billion; loans and leases were $9.06 billion; deposits were $10.08 billion; and shareholders’ equity was $2.26 billion.
- Allowance for loan and lease losses was $56.6 million, or 0.62% of loans. Nine-month net charge-offs were $26.0 million, compared with $5.6 million in the prior-year period.
- Total borrowed funds were $1.71 billion, including $1.21 billion of short-term borrowings and $498.8 million of long-term debt.
- Cash provided by operating activities was $108.1 million for the first nine months, versus $174.6 million in 2018. Investing activities used $50.7 million and financing activities used $51.1 million; cash and due from banks increased $6.3 million to $242.5 million.
Material changes and drivers
- Q3 net income was broadly unchanged year over year; nine-month earnings increased, with management attributing much of the growth in net interest income and noninterest revenue to the 2018 MainSource merger and increased scale.
- Q3 net interest income fell 1.6%, as higher interest expense outpaced increased interest income. Management cited higher deposit and borrowing costs and moderated accretion on acquired loans; the fully tax-equivalent margin declined 16 basis points year over year.
- Noninterest income rose 15.5% in Q3, led by mortgage loan-sale gains, client derivative fees and $1.7 million of foreign-exchange income following the Bannockburn acquisition. Bankcard income fell 37.0%, which management attributed to the Durbin Amendment interchange-fee cap.
- Loans increased 2.7% from year-end 2018, led by commercial real estate and residential real estate growth. Deposits were roughly flat, while the mix shifted: savings declined and time deposits increased.
- Asset quality was mixed. Nonperforming assets declined to $80.8 million (0.56% of assets) from $88.2 million at year-end, while elevated charge-offs and downward credit migration contributed to higher provision expense. Management identified $16.3 million of 2019 charge-offs tied to three franchise relationships, including $13.2 million related to one franchise credit.
Outlook, risks and notable items
- Management expected a 2019 effective tax rate of approximately 18.50%, including tax credits anticipated in Q4. The filing gives no explicit full-year earnings or revenue guidance.
- The company completed its $114.6 million Bannockburn Global Forex acquisition in August 2019, funded with $53.7 million cash and $60.9 million in stock. It recorded approximately $58.0 million of goodwill; purchase accounting remained subject to refinement.
- Management estimated that adoption of the expected-credit-loss standard (CECL) on January 1, 2020 would increase the reserve to 1.12%–1.32% of total loans. The estimate was preliminary and subject to portfolio, economic and model assumptions; management warned provisions may become more volatile.
- Liquidity sources included $282.2 million of cash and interest-bearing bank deposits, $2.9 billion of unused wholesale funding capacity and $458.4 million of remaining FHLB borrowing capacity. The company also had a $30 million undrawn credit facility maturing in September 2020.
- Regulatory capital ratios were strong: consolidated CET1 11.52%, total risk-based capital 13.62% and leverage 9.75%. Management said the company met capital requirements and remained well-capitalized.
- Interest-rate sensitivity analysis showed estimated NII changes of -6.29% for a 100-basis-point decline and +3.96% for a 100-basis-point increase. Management described the balance sheet as asset-sensitive and within policy limits.
- Outstanding commitments to extend credit were $3.2 billion and letters of credit were $32.0 million. The company reported ongoing litigation matters but said losses were not considered probable or reasonably estimable; no litigation reserves were recorded.
- The board authorized a Q4 dividend of $0.23 per share. Under its repurchase plan, the company bought back 1.14 million shares during the first nine months for $27.4 million, with 3.86 million shares remaining authorized at quarter-end.
Important facts for investors to verify
- Whether elevated franchise-related charge-offs and the higher credit-loss provision persist, and how credit quality develops in commercial lending.
- Whether funding costs continue to pressure net interest margin as deposits reprice and borrowing needs change.
- The final CECL adoption impact versus the preliminary 1.12%–1.32% reserve estimate.
- Bannockburn’s contribution to revenue and earnings, and whether acquisition goodwill or integration costs change materially.
- Progress toward the stated tax-rate outlook and the sustainability of capital returns alongside liquidity and capital needs.