FFBC - First Financial Bancorp: A Regional Bank To Trade

2023-07-24 14:06:41 ET

Summary

• Diverse factors are influencing the banking industry, with many of the stocks in the space recently experiencing selloffs due to uncertainty following recent bank failures.
• You can peel some income here from the First Financial Bancorp. 4.1% stock yield waiting for a turn.
• Loans grew and deposits were stable.
• First Financial return metrics and asset quality suffered a bit due to macro challenges but still remain strong.

We have recently started our coverage of Q2 regional bank earnings. This is a sector we follow closely for both trading opportunity and income opportunities through sustainable dividends. Diverse factors are influencing the banking industry, with many of the stocks in the space recently experiencing selloffs due to uncertainty following recent bank failures, while others have seen substantial gains, particularly major banking entities. Regional banks, however, remain a subject of uncertainty.

In this analysis, we delve into the earnings of First Financial Bancorp. ( FFBC ), a Southeastern bank headquartered in Nashville, TN, with a presence in four states. We want to have a sense of the bank's performance and its position amidst the prevailing market conditions. As we continue to experience interest rate hikes, the banking sector is navigating through a complex landscape. While costs of funds have risen and margins have peaked in the space, there is the added concern of strong competition for deposit dollars, compounded by the attractiveness of U.S. Treasuries and money market funds offering robust yields. While loan demand remains relatively strong among solid banks, the overall sector performance remains uncertain. Today we revisit First Financial, a regional bank stock we think can be purchased in the low $20s and sold above $25 for a nice trade.

Top line growth

First Financial just reported its Q2 earnings , and aside from concerns about deposit stability, First Financial's overall operational performance has held up, though some metrics were mixed. That said, we like the stock, and think you can peel some income here from its 4.1% stock yield. While the bank has shown consistent dividend payments over time, we need to ensure performance metrics are holding up. The bank reported a 27.3% jump in top line revenues to $212.6 million from the previous year, beating consensus estimates by $0.59 million. Although net interest income remains strong, it has been on the decline this year with the sector. The bank's net income for the quarter amounted to $65.7 million, equivalent to $0.72 per share adjusted. However, this was a decline from Q1, as cost of funds have weighed on margins. The results exceeded estimates by $0.02 as well. Growth was driven by robust activity in loans and deposits since last year.

Loan and deposit growth

Amid sector pressures, First Financial displayed positive growth in loans. This growth in loans and deposits is crucial for a bank's performance, especially during a quarter marked by such concerns. With total assets reaching $16.97 billion by the end of the quarter, up from $16.94 billion at the quarter's start, the bank's total loans also increased and now stand at $10.5 billion, up from $10.2 billion to start the year. Remarkably, total deposits amounted to $12.7 billion at quarter-end, which was up from last year, but ticked down from $12.8 billion in deposits to start the quarter.

The cost of deposits is on the rise, as evidenced by the doubling of the cost of funds from the last quarter. First Financial's cost of funds marked a 40 basis points increase from Q1, while yields were up 33 basis points. Consequently, the net interest margin narrowed to 4.48% from 4.55% in Q1. We predict that margins will likely remain in the range of 4.2-4.5% in the upcoming quarters, which is quite strong. Margins may have peaked, but did not fall as much as other banks we have covered. We anticipate the cost of funds and yield on the loan portfolio to remain elevated throughout 2023. Net interest income was almost flat from Q1 at $159 million.

Return metrics

First Financial demonstrated mixed performance in terms of return on average assets and return on average equity. The return on average assets declined from 1.69% in Q1 to 1.55% in Q2, but it still represents an increase from last year. The return on average equity narrowed to 25.27% in Q2, compared to 29.02% in Q1, but improved from a year ago. The bank's efficiency ratio also was very healthy at 54.9% adjusted. But what about asset quality?

Asset quality

Well. Here is where there were mixed results. In Q2, the provision for loan losses reached $12.9 million, versus a credit last year. Nonperforming assets worsened too, declining from 0.21% of all assets to 0.33% quarter-over-quarter. This is the highest it has been in some time. Although the allowance for credit losses increased to 1.51% of all loans from 1.44% in the last quarter, the net charge-offs were 22 bps on an annualized basis after being zero last quarter.

Final thoughts

Our analysis suggests that First Financial is performing well. While the net interest margin may have peaked for the sector, First Financial Bancorp. remains operationally stable. The bank did see a dip in asset quality but enjoyed loan growth and stable deposits. With the 4% dividend yield and the stock starting to recover, we see upside here as the Federal Reserve's rate hiking campaign comes to a close. We think First Financial Bancorp. Stock can be bought for a trade.

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