Business context and reporting period
First Financial Bancorp. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2018. The Cincinnati-based bank holding company operates primarily in Ohio, Indiana, Kentucky and Illinois.
Comparisons are materially affected by the April 1, 2018 acquisition of MainSource Financial Group (MSFG); 2018 results include MSFG only from the acquisition date, while 2017 figures are not presented on a combined basis unless identified as pro forma.
Financial results and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net interest income | $123.5 million | $70.5 million | $323.3 million | $207.9 million |
| Net interest margin, fully tax-equivalent | 4.12% | 3.57% | 4.06% | 3.61% |
| Net income | $50.7 million | $24.8 million | $117.6 million | $72.0 million |
| Diluted earnings per share | $0.51 | $0.40 | $1.36 | $1.16 |
| Provision for loan and lease losses | $3.2 million | $3.0 million | $9.3 million | $3.8 million |
| Noninterest income | $28.7 million | $22.9 million | $73.9 million | $57.8 million |
| Noninterest expense | $85.4 million | $54.4 million | $240.5 million | $157.0 million |
- Third-quarter return on average assets was 1.45% (1.13% prior year); return on average equity was 9.94% (10.85%). Nine-month figures were 1.29% and 9.50%, respectively, versus 1.12% and 10.82%.
- At September 30, total assets were $13.8 billion, loans and leases $8.85 billion, deposits $9.75 billion, and shareholders’ equity $2.04 billion. These balances rose substantially from year-end 2017, primarily because of MSFG.
- Cash provided by operating activities for the first nine months was $174.6 million; investing activities used $46.9 million and financing activities used $85.0 million. Cash and due from banks ended at $193.3 million, up $42.6 million from year-end.
- Borrowed funds totaled $1.86 billion, including $1.29 billion of short-term borrowings and $570.0 million of long-term debt. The company reported $222.3 million of cash and short-term investments and $2.8 billion of unused overnight wholesale funding capacity.
- The allowance for loan and lease losses was $57.7 million, or 0.65% of loans, versus $54.0 million, or 0.90%, at year-end. Nine-month net charge-offs were $5.6 million, or 0.09% of average loans on an annualized basis.
- Consolidated regulatory capital ratios included common equity Tier 1 of 11.52%, Tier 1 risk-based capital of 11.93%, total capital of 13.77%, and leverage of 9.41%. Management said the company met applicable capital requirements and was categorized as well-capitalized.
Material changes and notable items
- MSFG consideration was approximately $1.1 billion in stock and other consideration. The acquisition added $4.4 billion of assets, including $2.8 billion of loans and $3.3 billion of deposits, and generated $676.9 million of goodwill. Purchase accounting values remain preliminary and may be refined through April 2019.
- Merger-related expenses were $7.4 million in Q3 and $33.3 million for the first nine months. Expenses increased across most categories as the combined company expanded; management said most merger-related activity was complete and emphasized efficiency alongside investments for growth.
- Net interest margin improved, with management attributing the increase to higher asset yields, rising rates and purchase-accounting accretion, partly offset by higher funding costs. The company reported slower organic loan growth in recent periods, citing lower line utilization and elevated prepayments.
- The effective tax rate fell to 20.2% for both Q3 and the first nine months, from 31.1% and 31.4%, respectively, primarily reflecting the Tax Cuts and Jobs Act’s reduction of the federal corporate tax rate to 21%. Management expected a full-year 2018 effective tax rate of approximately 20%.
- After-tax unrealized losses on debt securities were $29.4 million at quarter-end, compared with $0.2 million at year-end 2017. The company reported no other-than-temporary impairment and said it did not intend, and was not more likely than not required, to sell temporarily impaired debt securities before recovery or maturity.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. Management described expected 2018 effective tax rate as approximately 20% and said it would continue monitoring loan and deposit demand, balance-sheet composition, capital sensitivity and interest rates.
- Interest-rate models showed estimated first-year net interest income changes of -5.18% for an immediate 100-basis-point rate decline, +0.76% for a 100-basis-point increase and +1.43% for a 200-basis-point increase. Management characterized the position as modestly asset-sensitive and within policy limits; outcomes depend on modeling assumptions, including deposit repricing.
- Nonperforming assets were $64.6 million, or 0.47% of total assets, versus $44.4 million, or 0.50%, at year-end. Nonperforming loans increased, driven largely by acquired MSFG balances and two commercial relationships downgraded to nonaccrual. The allowance covered 92.08% of nonperforming loans, including accruing troubled debt restructurings.
- Outstanding commitments to extend credit were $2.9 billion and letters of credit were $34.0 million. These off-balance-sheet amounts do not necessarily represent future cash requirements because commitments may expire undrawn.
- The company reported no litigation reserves and said pending matters were not considered probable or reasonably estimable at quarter-end. It identified merger integration and realization of anticipated merger benefits, credit, liquidity, interest-rate, operational, technology, regulatory and litigation risks among factors that could affect results.
- Management concluded disclosure controls were effective at a reasonable-assurance level and reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- How much reported earnings growth and margin expansion reflect MSFG, purchase-accounting accretion and merger-related costs, versus sustainable organic performance.
- Progress on realizing merger synergies, completing integration, and finalizing acquired asset and liability fair values and goodwill.
- Loan quality trends, including nonaccrual balances, classified assets, the allowance’s coverage of problem loans and the performance of acquired loans.
- Funding costs, reliance on wholesale borrowings, deposit retention and liquidity capacity as interest rates and funding mix change.
- Exposure to unrealized securities losses and the sensitivity of earnings and economic value to interest-rate movements and deposit-beta assumptions.