Business context and reporting period
First Financial Bancorp. (NASDAQ: FFBC) is an Ohio-based financial holding company operating principally in Ohio, Indiana, Kentucky and Illinois, with 130 full-service banking centers. Its businesses include commercial and retail banking, mortgage banking, wealth management, investment commercial real estate and commercial finance. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2023.
Financial performance and condition
Unless otherwise noted, amounts are in millions of dollars. Period results are compared with the corresponding 2022 period; balance-sheet changes are compared with December 31, 2022.
| Metric | Third quarter 2023 | Nine months 2023 |
|---|---|---|
| Net interest income | $155.5; up 12.7% year over year | $474.0; up 31.2% |
| Net interest margin | 4.28%; 4.33% fully tax-equivalent (FTE) | 4.41%; 4.45% FTE |
| Noninterest income | $56.6 | $165.4; up 23.8% |
| Noninterest expense | $122.0 | $359.4; up 8.6% |
| Net income | $63.1; diluted EPS $0.66 | $199.1; diluted EPS $2.09 |
| Net charge-offs | $16.4; 0.61% of average loans, annualized | $22.0; 0.28%, annualized |
Third-quarter net income rose from $55.7 million and diluted EPS from $0.59 a year earlier. Nine-month net income rose from $148.5 million and diluted EPS from $1.57. FTE net interest margin increased 92 basis points year over year for the nine-month period, but declined 15 basis points from the second quarter as deposit pricing pressure lifted funding costs.
At September 30, total assets were $17.05 billion, loans and leases $10.65 billion, deposits $12.92 billion, and shareholders’ equity $2.13 billion. Loans grew 3.4% from year-end, led by residential real estate and lease financing. Deposits increased 1.7%, while borrowed funds declined to $1.32 billion from $1.63 billion. The allowance for credit losses on loans and leases was $145.2 million, or 1.36% of loans.
Cash provided by operating activities was $370.8 million for the first nine months, compared with $174.2 million in 2022. Investing activities used $187.6 million and financing activities used $170.4 million. The company declared dividends of $0.23 per share for the quarter.
Consolidated regulatory capital ratios at September 30 included common equity Tier 1 of 11.60%, Tier 1 of 11.94%, total capital of 13.51%, and leverage of 9.59%. Management reported that the company met capital requirements and was categorized as well-capitalized.
Material changes and notable items
- Interest expense rose sharply year over year as deposit and borrowing rates increased. Average interest-bearing deposit cost was 2.44% in the third quarter, up from 0.19% in the comparable 2022 period.
- Noninterest income growth was supported by leasing and foreign-exchange activity. Nine-month leasing income increased $18.0 million, primarily reflecting growth in the leasing business following the Summit acquisition.
- Nonaccrual loans increased to $74.9 million, or 0.70% of loans, from $28.6 million at year-end. Management attributed the increase mainly to downgrades of two large commercial real estate relationships and one large C&I relationship. Nonperforming assets were $75.1 million, or 0.44% of assets.
- Third-quarter net charge-offs included a $6.9 million loss on one C&I loan and $6.1 million from a loan sale undertaken to manage portfolio risk. Management said the allowance increased year to date due to slower prepayments, loan growth and changes in economic forecasts.
- Available-for-sale securities had a $375.7 million after-tax unrealized loss in accumulated other comprehensive income at quarter-end, primarily reflecting higher interest rates. Management said it did not intend, and was not more likely than not required, to sell the securities before recovery; it recorded no credit-loss reserve for them.
- Deposits shifted toward higher-cost products: time deposits increased 51.3% from year-end, while noninterest-bearing deposits declined 16.8%. Uninsured deposits were $5.3 billion, or 40.7% of deposits; excluding public funds and intercompany accounts, adjusted uninsured deposits were $3.0 billion, or 23.3%.
- The company acquired Brady Ware Capital and Brady Ware Corporate Finance in 2023, recording approximately $4.3 million of goodwill. Purchase accounting valuations remain subject to refinement.
Outlook, risks and contingencies
The filing provides no specific earnings or revenue guidance. Management described the balance sheet as asset-sensitive: its September 30 model estimated that an immediate 100-basis-point rate increase would raise first-year net interest income 3.72%, while a 100-basis-point decline would reduce it 6.50%. Management cautioned that rising deposit costs could moderate asset sensitivity and that interest-rate models depend on assumptions, including deposit repricing and customer behavior.
Key risks include credit deterioration, particularly in commercial real estate and other identified sectors; deposit migration and funding costs; interest-rate and liquidity exposure; securities valuation losses; and operational, cyber, regulatory and litigation risks. The company reported $4.5 billion of commitments to extend credit and $32.4 million of letters of credit. It had no litigation reserves at quarter-end; management said pending claims were not probable or could not be reasonably estimated. The company also had $101.9 million of unfunded tax-credit investment commitments. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether elevated nonaccrual loans and charge-offs persist, and how the allowance responds to further credit deterioration.
- Whether deposit costs, deposit mix and uninsured-deposit levels affect net interest margin and funding needs.
- Whether unrealized securities losses remain manageable and the portfolio can be held through recovery without forced sales.
- How leasing and other fee businesses perform relative to rising associated expenses, and whether Brady Ware acquisitions meet expectations.
- Whether reported liquidity and capital buffers remain adequate as loan commitments, market conditions and regulatory requirements evolve.