First Financial Bancorp. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet amounts are as of March 31, 2019. First Financial is a regional bank holding company operating primarily in Ohio, Indiana, Kentucky and Illinois. Results include MainSource Financial Group (MSFG), acquired April 1, 2018, so year-over-year comparisons are not on a like-for-like basis.
Financial performance and position
| Metric | Q1 2019 / March 31, 2019 | Comparable / prior date |
|---|---|---|
| Net interest income | $121.5 million | $75.8 million in Q1 2018 |
| Net interest margin | 4.05%; 4.10% tax-equivalent | 3.80%; 3.84% tax-equivalent in Q1 2018 |
| Provision for loan and lease losses | $14.1 million | $2.3 million in Q1 2018 |
| Noninterest income / expense | $26.8 million / $78.5 million | $16.9 million / $52.3 million in Q1 2018 |
| Net income | $45.8 million | $30.5 million in Q1 2018 |
| Diluted EPS | $0.47 | $0.49 in Q1 2018 |
| ROAA / ROAE | 1.33% / 8.88% | 1.40% / 13.31% in Q1 2018 |
| Total assets / shareholders’ equity | $14.07 billion / $2.13 billion | $13.99 billion / $2.08 billion at December 31, 2018 |
| Loans and leases, gross | $8.81 billion | $8.82 billion at December 31, 2018 |
| Deposits | $10.13 billion | $10.14 billion at December 31, 2018 |
| Borrowed funds | $1.59 billion | $1.61 billion at December 31, 2018 |
| Allowance for loan and lease losses | $56.7 million; 0.64% of loans | $56.5 million; 0.64% at December 31, 2018 |
Operating cash flow was $38.0 million, versus $52.3 million in Q1 2018. Investing activities used $58.9 million and financing activities used $46.3 million. Cash and due from banks declined $67.2 million during the quarter to $169.0 million; cash and short-term investments totaled $219.2 million at quarter-end.
Net interest income rose 60.3% year over year, principally reflecting the MSFG acquisition, higher average earning assets and improved asset yields. Higher funding costs partially offset those benefits. Diluted EPS declined despite higher net income, alongside a substantial increase in average shares outstanding after the stock-funded merger.
Material changes and credit quality
- The MSFG acquisition added $4.4 billion in assets, including $2.8 billion in loans and $3.3 billion in deposits; purchase consideration was approximately $1.1 billion. Final purchase-accounting adjustments were recorded in Q1 2019. Merger-related expense was $1.7 million in the quarter.
- Net charge-offs increased to $13.9 million, or 0.64% of average loans on an annualized basis, from $1.9 million, or 0.13%, in Q1 2018. Management attributed the increase chiefly to a $10.0 million charge-off tied to one franchise lending relationship.
- Nonperforming assets were $83.9 million, or 0.60% of assets, down from $88.2 million, or 0.63%, at year-end. Classified assets increased to $142.0 million from $131.7 million. TDRs totaled $35.9 million, down from $38.5 million.
- Q1 2019 included a $23.9 million net-of-tax improvement in other comprehensive income, mainly from unrealized gains on debt securities; accumulated other comprehensive loss narrowed to $19.6 million from $44.4 million.
- Under the new lease standard, the company recorded a $59.0 million right-of-use asset and $64.6 million lease liability at March 31. Adoption of hedge-accounting guidance also moved $268.7 million of held-to-maturity securities to available-for-sale and resulted in a $0.2 million loss.
Liquidity, debt and capital
Deposits were broadly stable versus year-end, with time deposits up $136.2 million and interest-bearing demand and savings balances lower. Short-term borrowings included $952.4 million of FHLB advances. Long-term debt was $546.4 million, including $170.7 million of subordinated notes and $376.1 million of long-term FHLB advances. The company reported $219.2 million in liquidity on hand and $3.0 billion of unused, available overnight wholesale funding. Its $30 million bank credit facility was undrawn and matures in September 2019.
At March 31, consolidated regulatory capital ratios were 12.03% CET1, 12.43% Tier 1 risk-based, 14.24% total risk-based and 9.84% leverage. Management said the company met capital requirements and remained well-capitalized. The board declared a $0.22-per-share dividend payable in June; no shares were repurchased under the 5-million-share authorization during the quarter.
Outlook, risks and contingencies
- Management expected the full-year 2019 effective tax rate to be approximately 19.5%; the filing provides no specific earnings or revenue guidance.
- Management said merger-related activity was largely complete and highlighted continued focus on efficiency and strategic investments. Organic loan growth had slowed amid lower line utilization and elevated prepayments.
- The company modeled moderate asset sensitivity: a parallel +100-basis-point rate shock was estimated to increase year-one NII by 3.63%, while a -100-basis-point shock was estimated to reduce it by 6.13%. Outcomes depend on deposit pricing and other modeling assumptions.
- Management expected adoption of the current expected credit loss standard (CECL) on January 1, 2020 to increase the allowance and reduce retained earnings through a one-time adjustment; the amount remained under evaluation.
- Risks identified include credit and interest-rate exposure, liquidity and funding conditions, regulation, integration and realization of expected MSFG merger benefits, technology and operational risks, and litigation. The company reported pending ordinary-course claims but no litigation reserves, stating potential amounts were not probable or could not be reasonably estimated.
Important facts for investors to verify
- How recurring post-merger earnings and cost savings compare with acquisition-related expenses, and whether future comparisons are adjusted for the merger’s timing.
- Whether credit costs normalize after the $10.0 million franchise-loan charge-off, and how classified assets and nonperforming loans develop.
- The composition and durability of deposits, wholesale funding reliance, and the effect of rising funding costs on net interest margin.
- The eventual CECL allowance increase and its effects on earnings, retained earnings and regulatory capital.
- Whether the stated full-year tax-rate expectation and dividend remain consistent with subsequent results and board decisions.