First Financial Bancorp. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Figures are unaudited; dollar amounts are in millions unless stated otherwise. First Financial is a regional bank holding company operating primarily in Ohio, Indiana, Kentucky and Illinois. Its 2018 MainSource acquisition closed April 1, 2018, so the six-month year-over-year comparison is not fully comparable: 2018 results include MainSource only from the acquisition date.
Financial results and key metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net interest income | $122.3 | $124.0 | $243.8 | $199.8 |
| Provision for loan and lease losses | $6.7 | $3.7 | $20.7 | $6.0 |
| Noninterest income | $34.6 | $28.3 | $61.5 | $45.2 |
| Noninterest expense | $84.4 | $102.8 | $162.9 | $155.0 |
| Net income | $52.7 | $36.4 | $98.5 | $66.9 |
| Diluted EPS | $0.53 | $0.37 | $1.00 | $0.83 |
| Net interest margin, fully tax-equivalent | 4.04% | 4.15% | 4.07% | 4.03% |
- Q2 return on average assets was 1.50% versus 1.05%; return on average equity was 9.85% versus 7.36%. For the first six months, those measures were 1.42% versus 1.18% and 9.37% versus 9.19%, respectively.
- Q2 net interest income declined 1.4% as interest expense rose faster than interest income. The fully tax-equivalent margin fell 11 basis points year over year, primarily because of higher funding costs.
- Q2 noninterest income increased 22.6%, led by client derivative fees, bankcard income and loan-sale gains. Q2 noninterest expense fell year over year, principally because Q2 2018 included $23.9 million of nonrecurring merger and severance costs. First-half expenses were higher in 2019, which management attributed primarily to the company’s post-merger scale.
- First-half net charge-offs were $15.7 million, or 0.36% of average loans on an annualized basis, compared with $6.0 million, or 0.16%, in first-half 2018. The increase included a $10.0 million charge-off on a single franchise relationship in Q1 2019.
Balance sheet, funding and cash flow
- At June 30, 2019, total assets were $14.44 billion, loans and leases were $8.98 billion, and deposits were $10.11 billion. Loans grew $156.6 million from year-end 2018; deposits were broadly stable.
- The allowance for loan and lease losses was $61.5 million, or 0.69% of loans, compared with $56.5 million, or 0.64%, at year-end. Total borrowed funds were $1.86 billion, including $1.31 billion of short-term borrowings and $547.0 million of long-term debt.
- Cash and due from banks was $169.7 million; including interest-bearing deposits at other banks, cash and short-term liquidity totaled $271.4 million. Management reported $3.2 billion of unused and available overnight wholesale funding and $484.6 million of remaining FHLB borrowing capacity.
- For the first six months, operating cash flow was $59.7 million, investing cash outflow was $298.9 million, and financing cash inflow was $172.6 million. Cash and due from banks decreased $66.5 million to $169.7 million.
- Consolidated Common Equity Tier 1, total risk-based capital and leverage ratios were 12.00%, 14.20% and 10.02%, respectively. Management said the company met capital requirements and remained well-capitalized.
Material changes, outlook and risks
- Nonperforming assets were $90.2 million, or 0.62% of assets, versus $88.2 million, or 0.63%, at December 31, 2018. Classified assets rose to $147.8 million from $131.7 million. Total TDRs increased to $48.4 million from $38.5 million, largely reflecting an accruing $14.9 million franchise relationship.
- In June, First Financial agreed to acquire Bannockburn Global Forex for approximately $117 million in cash and stock. Closing was expected in Q3 2019, subject to regulatory approvals and other conditions.
- Management expected a full-year 2019 effective tax rate of approximately 19.5%. The board authorized a $0.23-per-share dividend payable September 16, 2019. The 2019 repurchase plan authorizes up to 5 million shares; none had been repurchased through June 30.
- Management expected adoption of the expected-credit-loss standard (CECL) on January 1, 2020 to increase the allowance, but the amount was still being evaluated. The filing gives no quantified estimate.
- Interest-rate sensitivity modeling indicated moderate asset sensitivity: an immediate +100 basis-point rate shock was estimated to increase Year 1 net interest income 3.98%, while a -100 basis-point shock was estimated to reduce it 6.45%. Actual outcomes depend on model assumptions, including deposit repricing.
- Risks cited include credit and economic conditions, liquidity and interest rates, regulatory changes, technology and operational risks, and execution or integration of acquisitions. Litigation matters were described as not probable or not reasonably estimable; no litigation reserves were recorded at quarter-end.
Key investor verification points
- Assess whether higher funding costs continue to pressure net interest margin and earnings.
- Review the credit quality and reserve implications of the franchise exposure, rising TDRs and first-half charge-offs.
- Track the Bannockburn acquisition’s closing, purchase accounting, funding and integration costs.
- Confirm the eventual CECL transition allowance and retained-earnings impact when management completes its estimate.
- Monitor deposit mix, reliance on short-term wholesale funding, liquidity capacity and capital ratios.