First Financial Bancorp. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. First Financial Bancorp. is an Ohio-based bank holding company operating primarily in Ohio, Indiana, Kentucky and Illinois. Unless noted, financial amounts below are in millions.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net interest income | $111.6 | $122.3 | $225.9 | $243.8 |
| Provision for credit losses: loans and leases | $17.9 | $6.7 | $41.7 | $20.7 |
| Noninterest income | $42.7 | $34.6 | $78.1 | $61.5 |
| Noninterest expense | $88.7 | $84.5 | $178.4 | $163.0 |
| Net income | $37.4 | $52.7 | $66.0 | $98.5 |
| Diluted EPS | $0.38 | $0.53 | $0.67 | $1.00 |
| Net interest margin, fully tax-equivalent | 3.44% | 4.04% | 3.60% | 4.07% |
- Q2 return on average assets was 0.96% (1.50% prior year); return on average shareholders’ equity was 6.88% (9.85%). For the six-month period, the respective returns were 0.88% and 6.04%, versus 1.42% and 9.37%.
- Higher mortgage loan-sale gains and foreign-exchange income lifted noninterest income; lower deposit service charges and bankcard income partly offset those gains. Expense growth reflected compensation, technology and PPP-related processing costs, and acquisition-related amortization.
Balance sheet, credit and liquidity
- At June 30, total assets were $15.9 billion, loans and leases were $10.2 billion, deposits were $11.7 billion, borrowed funds were $1.4 billion and shareholders’ equity was $2.2 billion. Total assets increased from $14.5 billion at December 31, 2019.
- Loans increased $980 million, or 10.7%, from year-end, chiefly reflecting $885.3 million of PPP loans, net of unearned fees. Deposits rose $1.5 billion, driven in part by customer savings and retained stimulus payments and PPP proceeds.
- Cash and interest-bearing deposits with other banks totaled $322.5 million. The company reported $4.5 billion of unused wholesale funding capacity and $1.3 billion of remaining FHLB borrowing capacity.
- Operating cash flow was negative $66.2 million for the first six months, versus positive $59.7 million a year earlier. Investing cash use was $990.3 million, mainly reflecting loan growth; financing cash provided was $1.14 billion, primarily from deposit growth and borrowings. Cash and due from banks ended at $283.6 million.
- The loan allowance for credit losses was $158.7 million, or 1.56% of period-end loans, versus $57.7 million, or 0.63%, at year-end. Adoption of CECL added $61.5 million to the loan allowance and reduced opening retained earnings by $56.9 million; pandemic-related expected losses drove additional provisioning.
- Nonperforming assets were $78.1 million, 0.49% of total assets, compared with $61.6 million, 0.42%, at year-end. Nonperforming loans were $76.3 million; classified assets were $125.5 million. Management attributed the rise primarily to a specialty-finance credit downgraded and designated a TDR.
- The company had modified $2.1 billion of commercial loans and $126.2 million of consumer loans under pandemic relief programs. These eligible short-term modifications were not reported as TDRs under CARES Act provisions. Management said most initial deferrals would expire in July and August, with some borrowers seeking extensions.
- Regulatory capital ratios at June 30 included consolidated Tier 1 capital of 11.87%, total capital of 15.19% and leverage of 8.98%. Management said the company remained well-capitalized and exceeded minimum total regulatory capital requirements by $517.9 million.
Changes, outlook and risks
- Compared with Q2 2019, net income fell 29% and diluted EPS declined from $0.53 to $0.38. Lower interest rates reduced asset yields and fully tax-equivalent net interest margin; lower funding costs provided a partial offset. Credit-loss provisioning increased substantially amid the pandemic and CECL adoption.
- Noninterest income rose year over year, supported by higher loan-sale gains from elevated mortgage originations and $6.6 million of foreign-exchange income associated with the 2019 Bannockburn acquisition. Pandemic-related fee waivers and reduced transaction volumes weighed on service charges and bankcard income.
- Management provided no specific earnings or financial guidance in the supplied filing text. It described continued monitoring of pandemic-affected borrowers and industries, and greater scrutiny for requests to extend payment deferrals.
- COVID-19 creates uncertainty around customer repayment capacity, economic conditions, asset values, credit losses, funding and demand. Management’s CECL estimates incorporate economic forecasts and qualitative adjustments; actual outcomes may differ and require further provision. Franchise, hotel and investor commercial real estate exposures were identified as areas of potential stress.
- Interest-rate sensitivity analysis showed estimated net interest income increases of 6.79% in year one and 9.04% in year two under an immediate +100-basis-point parallel shock; a -100-basis-point shock reduced those measures by 0.87% and 1.42%. Results depend on modeling assumptions.
- The company issued $150 million of fixed-to-floating subordinated notes in April, initially bearing 5.25% interest and maturing in 2030. It used $811.8 million of Federal Reserve PPPLF advances, secured by PPP loans, at an average rate of 0.35%. The board authorized a $0.23-per-share dividend payable September 15, 2020.
- No goodwill impairment was recorded following an interim assessment at June 30. The filing notes that prolonged economic disruption could nevertheless adversely affect operations, asset valuations and results. Litigation reserves were zero; management said pending matters were not considered probable or reasonably estimable at period-end.
Most important facts for investors to verify
- Whether PPP loan forgiveness, repayment and runoff affect loan balances, interest income, funding and capital as expected.
- How pandemic-related deferrals perform when initial relief periods expire, and whether extensions or credit deterioration increase TDRs, nonaccrual loans or charge-offs.
- Whether the $158.7 million loan allowance and $16.7 million unfunded-commitment allowance remain adequate as economic forecasts and borrower conditions change.
- Whether margin pressure from low rates and asset repricing is offset by deposit-cost reductions, and how actual results compare with the filing’s interest-rate sensitivity assumptions.
- Whether capital, liquidity and borrowing capacity remain sufficient amid loan growth, deposit movements and credit needs; review the maturity and cost implications of PPPLF advances and subordinated debt.