FIRST FINANCIAL BANCORP. All reclassifications of prior period amounts, if applicable, have been made to conform to the current period's presentation and had no effect on the Company's previously reported net income or financial condition.
EXECUTIVE SUMMARY
First Financial Bancorp . is a$16.0 billion financial holding company headquartered inCincinnati, Ohio , which operates through its subsidiaries primarily inOhio ,Indiana ,Kentucky andIllinois . These subsidiaries includeFirst Financial Bank , anOhio -chartered commercial bank, which operated 139 full service banking centers as ofSeptember 30, 2021 . First Financial provides banking and financial services products to business and retail clients through its six lines of business: Commercial, Retail Banking, Mortgage Banking, Wealth Management,Investment Commercial Real Estate and Commercial Finance. Commercial Finance provides equipment and leasehold improvement financing for franchisees in the quick service and casual dining restaurant sector and commission-based financing, primarily to insurance agents and brokers, throughoutthe United States . Wealth Management had$3.2 billion in assets under management as ofSeptember 30, 2021 and provides a range of services which includes financial planning, investment management, trust administration, estate settlement, brokerage services and retirement planning.
MARKET STRATEGY
First Financial develops a competitive advantage by utilizing a local market focus to provide superior service and build long-term relationships with clients while helping them achieve greater financial success. First Financial serves a combination of metropolitan and community markets inOhio ,Indiana ,Kentucky andIllinois through its full-service banking centers, and provides financing to franchise owners and clients within the financial services industry throughoutthe United States . First Financial's investment in community markets is an important part of the Bank's core funding base and has historically provided stable, low-cost funding sources. First Financial's market selection process includes multiple factors, but markets are primarily chosen for their potential for long-term profitability and growth. First Financial intends to concentrate plans for future growth and capital investment within its current markets, and will continue to evaluate additional growth opportunities in metropolitan markets located within, or in close proximity to, the Company's current geographic footprint. Additionally, First Financial may assess strategic acquisitions that provide product line extensions or additional industry verticals that complement its existing business and diversify its product suite and revenue streams.
COVID-19 CONSIDERATIONS
The Company's operations and financial results for the majority of 2021 and 2020
were substantially influenced by the COVID-19 pandemic. At the onset of the
pandemic, the Company updated operating protocols to continuously provide
virtually all banking services while prioritizing the health and safety of both
its clients and associates. Banking centers offered drive through services
without interruption, while lobbies were fully open or accessible to clients via
appointment, conditional to virus trends at any point in time. Sales associates,
support teams and management largely worked remotely.
In the second half of 2020, banking centers resumed more normal operations as
local governments and experts permitted relaxing physical restrictions.
Associates located in the Company's corporate offices and operations centers
returned to those physical locations in the third quarter of 2021, albeit with
greater flexibility than pre-COVID.
To assist clients during the pandemic, the Company implemented distinct COVID-19
relief programs to provide payment deferrals and fee waivers, in addition to
temporarily suspending vehicle repossessions and residential property
foreclosures. Further, the Company continuously monitored the actions of federal
and state governments to proactively assist clients and ensure awareness of each
financial assistance program available to them, while focusing internally on
enhancing remote, mobile and online processes to better support a bank anytime,
anywhere environment.
The Bank underwent a significant level of cross training and redeployment of
associate resources to rapidly meet the influx of
client requests in response to the passage of the CARES Act, the establishment
of the Paycheck Protection Program and the
approval of the Consolidated Appropriations Act. The Company's response to the
PPP resulted in successes in providing
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customer relief, and as of September 30, 2021 , the Company had outstanding PPP
loans totaling $167.9 million in balances, net of $7.8 million of unearned fees.
Further, as of September 30, 2021 , the Company had $101.2 million in loans,
concentrated in the hotel or restaurant industry, that were still in a payment
deferral to provide relief to borrowers adversely impacted by the pandemic. As
provided in the CARES Act and subsequently amended by the Consolidated
Appropriations Act, loan modifications in response to COVID-19 that were
executed on a loan that was not more than 30 days past due as of December 31,
2019 and executed between March 1, 2020 , and the earlier of 60 days after the
date of termination of the National Emergency or January 1, 2022 are not
required to be reported as TDR.
OVERVIEW OF OPERATIONS
Third quarter 2021 net income was$60.0 million and earnings per diluted common share were$0.63 . This compares with third quarter 2020 net income of$41.5 million and earnings per diluted common share of$0.42 . For the nine months endedSeptember 30, 2021 , net income was$158.2 million and earnings per diluted common share were$1.64 . This compares with net income of$107.5 million and earnings per diluted common share of$1.10 for the first nine months of 2020. Return on average assets for the third quarter of 2021 was 1.49% compared to 1.04% for the same period in 2020, and return on average shareholders' equity for the third quarter of 2021 was 10.53% compared to 7.40% for the third quarter of 2020. Return on average assets for the nine months endedSeptember 30, 2021 was 1.32% compared to 0.93% for the same period in 2020, and return on average shareholders' equity was 9.34% and 6.50% for the first nine months of 2021 and 2020, respectively A discussion of First Financial's operating results for the three and nine month periods endedSeptember 30, 2021 follows.
NET INTEREST INCOME
First Financial's principal source of income is net interest income, which is
interest received from earning assets, including loan-related fees and purchase
accounting accretion, minus interest paid on interest-bearing liabilities. The
amount of net interest income is determined by the volume and mix of earning
assets, the rates earned on such assets and the volume, mix and rates paid for
the deposits and borrowed money that support the earning assets. Earning assets
consist of interest-bearing loans to customers as well as marketable investment
securities.
For analytical purposes, net interest income is presented in the following table
adjusted to a tax equivalent basis assuming a 21% marginal tax rate. Net
interest income is disclosed on a tax equivalent basis to consistently reflect
income from tax-exempt assets, such as municipal loans and investments, in order
to facilitate a comparison between taxable and tax-exempt amounts. Management
believes it is a standard practice in the banking industry to present net
interest margin and net interest income on a fully tax equivalent basis as these
measures provide useful information to make peer comparisons.
Three months ended Nine months ended
September 30, September 30,
(Dollars in thousands) 2021 2020 2021 2020
Net interest income $ 113,410 $ 112,180 $ 341,312 $ 338,038
Tax equivalent adjustment 1,434 1,628 4,705 4,916
Net interest income - tax equivalent $ 114,844 $
113,808
Average earning assets$ 13,724,403 $
13,456,501
Net interest margin (1) 3.28 % 3.32 % 3.30 % 3.46 % Net interest margin (fully tax equivalent) (1) 3.32 % 3.36 % 3.34 % 3.52 %
(1) Calculated using annualized net interest income divided by average earning assets.
Net interest income for the third quarter of 2021 was$113.4 million , an increase of$1.2 million , or 1.1%, from third quarter 2020 net interest income of$112.2 million . Net interest income increased as a$6.5 million , or 46.6%, decrease in interest expense more than offset a$5.2 million , or 4.2%, decrease in interest income. Net interest income on a fully tax equivalent basis for the third quarter 2021 was$114.8 million compared to$113.8 million for the third quarter 2020, and was$346.0 million for the nine months endedSeptember 30, 2021 compared to$343.0 million for the same period of the prior year. 40
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Net interest margin on a fully tax equivalent basis for the third quarter of 2021 was 3.32%, a decrease of 4 bps compared to 3.36% for the same period in 2020 as interest rates declined and accretion on acquired loans continued to moderate. Net interest margin on a fully tax equivalent basis for the nine months endedSeptember 30, 2021 was 3.34%, a decrease of 18 bps compared to 3.52% for the same period of the prior year. Interest income declined$5.2 million , or 4.2%, in the third quarter of 2021 when compared to the same quarter in 2020 as a 23 bp decrease in the yield on earning assets more than offset the impact of higher earning asset balances. The declining yield on earning assets resulted from a reduction in the fed funds target rate in response to the pandemic. Average earning assets increased to$13.7 billion in the third quarter of 2021 from$13.5 billion in the same quarter of 2020 as investment securities balances increased in conjunction with Company's strategy to deploy excess balance sheet liquidity. The increase in the size of the investment securities portfolio was partially offset by a reduction in loan balances, which was attributed to PPP run-off. For the nine months endedSeptember 30, 2021 , Interest income declined$29.6 million , or 7.5%, to$365.3 million compared to$394.9 million for the same period of the prior year. Similar to the third quarter, the year-to-date decline was driven by lower interest rates on earning assets. Interest expense decreased$6.5 million , or 46.6%, in the third quarter of 2021 when compared to the same quarter in 2020 due to lower rates paid on deposits and the Company's deliberate management of funding costs, including the repayment of borrowings. Lower interest rates led to a decline in the cost of interest-bearing deposits, which was 0.15% in the third quarter of 2021 compared to 0.39% for the same period in the prior year. Additionally, average deposits grew$1.1 billion , or 9.6%, to$12.7 billion in the third quarter of 2021 when compared to the third quarter of 2020. This increase in deposits led to a strategic shift in overall funding mix, which included a$956.8 million , or 63.0%, decline in average borrowed funds compared to the same period in the prior year, further lowering interest costs. Interest expense for the nine months endedSeptember 30, 2021 was$24.0 million and was$56.9 million for the same period in the prior year. Similar to the third quarter decline, the year-to-date change was also driven by the decline in the cost of interest bearing deposits and the shift in funding mix to lower cost transactional deposits. 41 -------------------------------------------------------------------------------- Table of Contents CONSOLIDATED AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS Quarterly Averages
Year-to-Date Averages
September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020
(Dollars in thousands) Balance Yield Balance Yield Balance Yield Balance Yield
Earning assets
Investments
Investment securities $ 4,189,253 2.31 % $ 3,162,832 2.86 % $ 4,035,639 2.40 % $ 3,147,655 2.96 %
Interest-bearing deposits with other banks 32,400 0.28 % 40,277 0.31 % 41,582 0.24 % 57,138 0.51 %
Gross loans (1) 9,502,750 4.03 % 10,253,392 4.00 % 9,760,545 4.01 % 9,827,033 4.42 %
Total earning assets 13,724,403 3.49 % 13,456,501 3.72 % 13,837,766 3.53 % 13,031,826 4.05 %
Nonearning assets
Allowance for credit losses (157,727) (165,270) (168,449) (147,349)
Cash and due from banks 245,212 233,216 238,531 251,147
Accrued interest and other assets 2,183,920 2,317,563 2,176,624 2,225,018
Total assets $ 15,995,808 $ 15,842,010 $ 16,084,472 $ 15,360,642
Interest-bearing liabilities
Deposits
Interest-bearing demand $ 2,960,388 0.06 % $ 2,668,635 0.08 % $ 2,961,043 0.07 % $ 2,563,633 0.21 %
Savings 4,150,610 0.09 % 3,342,514 0.14 % 4,021,895 0.11 % 3,164,753 0.25 %
Time 1,574,951 0.49 % 2,015,933 1.20 % 1,659,401 0.54 % 2,276,064 1.54 %
Total interest-bearing deposits 8,685,949 0.15 % 8,027,082 0.39 % 8,642,339 0.18 % 8,004,450 0.60 %
Borrowed funds
Short-term borrowings 249,864 0.11 % 180,956 0.11 % 245,624 0.10 % 740,712 1.16 %
Long-term debt 313,100 5.10 % 1,338,792 1.76 % 486,010 3.44 % 768,770 2.52 %
Total borrowed funds 562,964 2.88 % 1,519,748 1.57 % 731,634 2.32 % 1,509,482 1.85 %
Total interest-bearing liabilities 9,248,913 0.32 % 9,546,830 0.58 % 9,373,973 0.34 % 9,513,932 0.80 %
Noninterest-bearing liabilities
Noninterest-bearing demand deposits 3,981,404 3,535,432 3,942,210 3,172,841
Other liabilities 504,198 529,326 502,421 465,116
Shareholders' equity 2,261,293 2,230,422 2,265,868 2,208,753
Total liabilities and shareholders' equity $ 15,995,808 $ 15,842,010 $ 16,084,472 $ 15,360,642
Net interest income $ 113,410 $ 112,180 $ 341,312 $ 338,038
Net interest spread 3.17 % 3.14 % 3.19 % 3.25 %
Contribution of noninterest-bearing sources of
funds 0.11 % 0.18 % 0.11 % 0.21 %
Net interest margin (2) 3.28 % 3.32 % 3.30 % 3.46 %
Tax equivalent adjustment 0.04 % 0.04 % 0.04 % 0.06 %
Net interest margin (fully tax equivalent) (2) 3.32 % 3.36 % 3.34 % 3.52 %
(1) Loans held for sale and nonaccrual loans are included in gross loans.
(2) The net interest margin exceeds the interest spread as noninterest-bearing
funding sources, demand deposits, other liabilities and shareholders' equity
also support earning assets.
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RATE/VOLUME ANALYSIS
The impact on net interest income from changes in interest rates and volume of
interest-earning assets and interest-bearing liabilities is illustrated in the
table below:
Changes for the nine months ended September 30 ,
Changes for the three months ended September 30, 2021 2021
Comparable quarter income variance Comparable quarter income variance
(Dollars in thousands) Rate Volume Total Rate Volume Total
Earning assets
Investment securities $ (4,391) $ 5,971
(2) (6) (8) (116) (28) (144)
Gross loans (1) 796 (7,617) (6,821) (30,076) (1,995) (32,071)
Total earning assets (3,597) (1,652) (5,249) (43,501) 13,911 (29,590)
Interest-bearing liabilities
Total interest-bearing deposits (4,818) 252 (4,566) (25,493) 837 (24,656)
Borrowed funds
Short-term borrowings (2) 19 17 (5,845) (379) (6,224)
Long-term debt 11,249 (13,179) (1,930) 5,287 (7,271) (1,984)
Total borrowed funds 11,247 (13,160) (1,913) (558) (7,650) (8,208)
Total interest-bearing liabilities 6,429 (12,908) (6,479) (26,051) (6,813) (32,864)
Net interest income $ (10,026) $ 11,256 $ 1,230 $ (17,450) $ 20,724 $ 3,274 (1) Loans held for sale and nonaccrual loans are included in gross loans.
NONINTEREST INCOME
Third quarter 2021 Noninterest income was$42.5 million , decreasing$7.0 million , or 14.1%, compared to$49.5 million for the third quarter of 2020. This decrease was driven primarily by a decline in Gains on the sale of loans and Foreign exchange income, partially offset by increases in Other noninterest income, Wealth management fees, Service charges on deposits and Bankcard income. Net gains from sales of loans decreased$10.0 million , or 53.8%, to$8.6 million in the third quarter of 2021 as mortgage originations declined from historic levels in the third quarter of 2020 and premiums moderated. Foreign exchange income decreased$1.3 million , or 12.7%, from the comparable period in 2020 due to lower customer demand for currency transactions in the third quarter of 2021. Other noninterest income increased$1.7 million , or 61.5%, to$4.4 million in the third quarter of 2021when compared to the same period of 2020, largely due to higher income from limited partnership investments and insurance proceeds. Wealth management fees increased$1.0 million , or 19.4% compared to the same quarter in the prior year, to$5.9 million due to increases in both trust and brokerage fees as the market recovered from pandemic uncertainty. Service charges on deposit accounts increased$1.2 million , or 16.2%, and Bankcard income grew$0.7 million , or 22.9% in the third quarter of 2021 as customer transactional activity rebounded after being suppressed in 2020 due to the pandemic. Noninterest income for the nine months endedSeptember 30, 2021 was$125.8 million , decreasing$1.8 million , or 1.4%, compared to$127.6 million for the same period of 2020. Gains from sales of loans decreased$11.6 million , or 30.3%, to$26.5 million due to record origination volumes in the first nine months of 2020, while Client derivative fees decreased$2.7 million , or 32.2%, to$5.6 million as a result of lower demand for customer swaps in 2021 when compared to 2020. Foreign exchange income increased$4.9 million , or 18.1%, to$32.0 million in 2021 due to increased customer demand for currency transactions. In addition, Other noninterest income increased$2.6 million , or 33.5%, to$10.4 million largely due to income from limited partnership investments and insurance proceeds, while Wealth management fees grew$1.9 million , or 11.6% to$17.7 million as the market recovered from pandemic uncertainty. Service charges on deposits increased$1.4 million , or 6.6% to$23.2 million and Bankcard income increased$2.0 million , or 23.4%, to$10.7 million as customer activity rebounded after declines in 2020.
NONINTEREST EXPENSE
Third quarter 2021 noninterest expense was$99.1 million , increasing$1.5 million , or 1.6%, compared to$97.5 million for the third quarter of 2020 primarily due to higher Other noninterest expenses and Data processing costs, partially offset by lower Salaries and benefits expenses. Other noninterest expenses increased$3.2 million , or 46.8%, in the third quarter of 2021 from the comparable quarter in 2020 largely due to write-downs of certain tax credit investments placed into service. Data processing expenses increased$1.1 million , or 16.3%, to$8.0 million in the third quarter of 2021 as the Company continued to make strategic investments to enhance its digital capabilities. Salaries and employee benefits were$61.7 million during the third quarter of 2021 and decreased$2.1 million , or 3.2%, from the same period in 2020. This decrease was primarily due to 43 -------------------------------------------------------------------------------- Table of Contents lower incentive compensation in 2021 resulting from a reduction in foreign exchange income and mortgage banking revenue, which reached record levels in the third quarter of 2020. Noninterest expense for the nine months endedSeptember 30, 2021 was$291.2 million , increasing$15.3 million , or 5.6%, compared to$275.9 million for the same period of 2020. Salaries and employee benefits increased$9.2 million , or 5.3%, to$183.8 million due to higher incentive compensation tied to increased fee income and annual compensation adjustments. Other noninterest expenses increased$6.2 million , or 28.7%, to$27.9 million due to legal settlement costs in the second quarter of 2021 and write-downs of various tax credit investments placed into service during the year. Additionally, Data processing costs increased$2.9 million , or 14.1%, to$23.1 million due to strategic investments in digital technology and Marketing costs increased$1.4 million , or 32.1%, to$5.8 million . These increases were partially offset by a$1.2 million , or 18.0%, decrease in Professional services due to a reimbursement of previously expensed legal fees received in the first quarter of 2021 and elevated IT consulting costs in the first quarter of 2020 driven by the pandemic.
See Note 11 - Commitments and Contingencies in the Notes to Consolidated Financial Statements for further discussion of legal settlement costs.
INCOME TAXES
Third quarter 2021 Income tax expense was$7.0 million , resulting in an effective tax rate of 10.5%. This compared to Income tax expense of$9.3 million and an effective tax rate of 18.3% for the third quarter of 2020. The decrease in the effective tax rate in 2021 is primarily due to tax credit investments realized during the period, which more than offset the impact from higher pre-tax income. For the nine months endedSeptember 30, 2021 , Income tax expense was$28.1 million , resulting in an effective tax rate of 15.1% compared with Income tax expense of$23.2 million and an effective tax rate of 17.8% for the same period of 2020. The lower year-to-date tax rate in 2021 was primarily due to tax credit investments placed into service in the third quarter of 2021.
The Company's effective tax rate may fluctuate from period to period due to changes in tax jurisdictions, tax-enhanced assets and tax credit investments.
LOANS
Loans, excluding Loans held for sale, decreased$540.0 million , or 5.5% to$9.4 billion as ofSeptember 30, 2021 from$9.9 billion as ofDecember 31, 2020 . Driven largely by repayment of PPP balances, C&I loans decreased$404.7 million , or 13.5%, to$2.6 billion . In addition, Residential real estate loans declined by$80.6 million , or 8.0%, to$922.5 million and Home equity decreased$34.0 million , or 4.6%, to$709.1 million . These declines were partially offset by higher Commercial real estate loan balances, which increased$130.5 million , or 3.0%, to$4.4 billion as ofSeptember 30, 2021 .
Third quarter 2021 average loans, excluding Loans held for sale, decreased
OFF-BALANCE SHEET ARRANGEMENTS
Off-balance sheet arrangements include commitments to extend credit and financial guarantees. Loan commitments are agreements to extend credit to a client absent any violation of any condition established in the commitment agreement. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. First Financial had commitments outstanding to extend credit totaling$3.7 billion and$3.4 billion atSeptember 30, 2021 andDecember 31, 2020 , respectively. As ofSeptember 30, 2021 , loan commitments with a fixed interest rate totaled$158.8 million while commitments with variable interest rates totaled$3.6 billion . Comparatively, as ofDecember 31, 2020 , loan commitments with a fixed interest rate totaled$123.6 million while commitments with variable interest rates totaled$3.3 billion . The fixed rate loan commitments have interest rates ranging from 0% to 21% for bothSeptember 30, 2021 andDecember 31, 2020 and maturities ranging from less than 1 year to 30.0 years atSeptember 30, 2021 and less than 1 year to 30.8 years atDecember 31, 2020 . Letters of credit are conditional commitments issued by First Financial to guarantee the performance of a client to a third party. First Financial's letters of credit consist primarily of performance assurances made on behalf of clients who have a contractual commitment to produce or deliver goods or services. First Financial has issued letters of credit aggregating$36.2 million and$36.1 million atSeptember 30, 2021 andDecember 31, 2020 , respectively. Management conducts regular reviews of these instruments on an individual client basis. 44
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First Financial is a party in risk participation transactions of interest rate swaps, which had total notional amount of$321.6 million and$242.4 million atSeptember 30, 2021 andDecember 31, 2020 , respectively.
ASSET QUALITY
Nonperforming assets consist of nonaccrual loans, accruing TDRs (collectively, nonperforming loans) and OREO. Loans are classified as nonaccrual when, in the opinion of management, collection of principal or interest is doubtful or when principal or interest payments are 90 days or more past due. Generally, loans are classified as nonaccrual due to a borrower's continued failure to adhere to contractual payment terms, coupled with other pertinent factors. When a loan is classified as nonaccrual, the accrual of interest income is discontinued and previously accrued but unpaid interest is reversed.
Nonperforming assets were
Loans are classified as TDRs when borrowers are experiencing financial difficulties and concessions are made by the Company that would not otherwise be considered for a borrower with similar credit characteristics. TDRs are generally classified as nonaccrual for a minimum period of six months and may qualify for return to accrual status once they have demonstrated performance with the restructured terms of the loan agreement. TDRs totaled$31.8 million atSeptember 30, 2021 , which represents an increase of$9.9 million , or 45.4%, from$21.8 million atDecember 31, 2020 . This increase was driven primarily by a single commercial real estate relationship modified during the period. Classified assets, which are defined by the Company as nonperforming assets plus performing loans internally rated substandard or worse, totaled$165.5 million as ofSeptember 30, 2021 compared to$142.0 million atDecember 31, 2020 . Classified assets were 1.04% of total assets atSeptember 30, 2021 , compared to 0.89% as ofDecember 31, 2020 . The$23.4 million , or 16.5%, increase in classified assets compared to year-end was primarily driven by COVID related credit rating downgrades during the first quarter of 2021, particularly in the hospitality industry. 45 -------------------------------------------------------------------------------- Table of Contents The following table details nonperforming, underperforming and classified assets, in addition to related credit quality ratios atSeptember 30, 2021 and the previous four quarters. 2021 2020 (Dollars in thousands) Sep. 30, June 30, Mar. 31, Dec. 31, Sep. 30,
Nonperforming loans, nonperforming assets, and underperforming assets Nonaccrual loans (1) Commercial and industrial
$ 15,160 $ 27,426 $ 24,941 $ 29,230 $ 34,686 Lease financing 0 16 0 0 1,092 Construction real estate 0 0 0 0 0 Commercial real estate 38,564 45,957 44,514 34,682 24,521 Residential real estate 9,416 9,480 11,359 11,601 12,104 Home equity 2,735 3,376 4,286 5,076 5,374 Installment 91 115 146 163 153 Nonaccrual loans 65,966 86,370 85,246 80,752 77,930 Accruing troubled debt restructurings 11,448 12,070 11,608 7,099 7,759 Total nonperforming loans 77,414 98,440 96,854 87,851 85,689 Other real estate owned 340 340 854 1,287 1,643 Total nonperforming assets 77,754 98,780 97,708 89,138 87,332 Accruing loans past due 90 days or more 104 155 92 169 79 Total underperforming assets$ 77,858
$ 165,462
Credit quality ratios Allowance for loan and lease losses to Nonaccrual loans 225.73% 184.77% 199.33% 217.55% 216.28 % Nonperforming loans 192.35% 162.12% 175.44% 199.97% 196.69 % Total ending loans 1.59% 1.68% 1.71% 1.77% 1.65 % Nonperforming loans to total loans 0.83% 1.03% 0.97% 0.89% 0.84 % Nonperforming assets to Ending loans, plus OREO 0.83% 1.04% 0.98% 0.90% 0.86 % Total assets 0.49% 0.62% 0.60% 0.56% 0.55 % Nonperforming assets, excluding accruing TDRs to Ending loans, plus OREO 0.71% 0.91% 0.87% 0.83% 0.78 % Total assets 0.42% 0.54% 0.53% 0.51% 0.50 % Classified assets to total assets 1.04% 1.14% 1.22% 0.89% 0.84 %
(1) Nonaccrual loans include nonaccrual TDRs of
INVESTMENTS First Financial's investment portfolio totaled$4.3 billion , or 27.0% of total assets, atSeptember 30, 2021 and$3.7 billion , or 23.1% of total assets, atDecember 31, 2020 . AFS securities totaled$4.1 billion atSeptember 30, 2021 and$3.4 billion atDecember 31, 2020 , while HTM securities totaled$103.9 million atSeptember 30, 2021 and$131.7 million atDecember 31, 2020 . The increase in the investment securities portfolio was a result of the Company deploying excess balance sheet liquidity resulting from an increase in deposits during the period. The effective duration of the investment portfolio increased to 3.8 years atSeptember 30, 2021 from 3.2 years as ofDecember 31, 2020 , primarily due to an increase in the size of the portfolio and an increase in interest rates during the period. The Company invests in certain securities whose realization is dependent on future principal and interest repayments, thus carrying credit risk. Prior to purchase, First Financial performs a detailed collateral and structural analysis on these securities and strategically invests in asset classes in which First Financial has expertise and experience, as well as a senior position in the 46 -------------------------------------------------------------------------------- Table of Contents capital structure. First Financial continuously monitors credit risk and geographic concentration risk in its evaluation of market opportunities that enhance the overall performance of the portfolio. AtSeptember 30, 2021 , the Company's Consolidated Financial Statements reflected a$37.9 million unrealized after-tax gain on debt securities as a component of equity in accumulated other comprehensive income and a$0.4 million unrealized gain on equity securities within other noninterest income. Comparatively, the Company's Consolidated Financial Statements reflected a$73.6 million unrealized after-tax gain on debt securities as a component of equity in accumulated other comprehensive income and a$9.0 million unrealized gain on equity securities within other noninterest income as ofDecember 31, 2020 . The decline in unrealized gains was driven by a significant rise in interest rates. First Financial will continue to monitor loan demand and deposit activity, as well as balance sheet composition, capital sensitivity and the interest rate environment when considering future investment strategies.
DEPOSITS AND FUNDING
Total deposits were$12.7 billion as ofSeptember 30, 2021 and$12.2 billion as ofDecember 31, 2020 . This change was driven by a$543.1 million , or 14.8%, increase in savings deposits and a$255.5 million , or 6.8%, increase in noninterest bearing demand deposits, which were partially offset by a$355.3 million , or 19.0%, decrease in time deposits. The increase in total deposits was attributed to increased consumer savings rates resulting from customers retaining stimulus payments, PPP loan proceeds and tax refunds. Average deposits for the third quarter 2021 grew$1.1 billion , or 9.6%, to$12.7 billion from$11.6 billion for the comparable quarter of 2020. This increase was driven by an$808.1 million , or 24.2%, increase in average savings deposits; a$446.0 million , or 12.6%, increase in average noninterest-bearing deposits; and a$291.8 million , or 10.9%, increase in average interest-bearing demand deposits, partially offset by a$441.0 million , or 21.9%, decrease in average time deposits. Borrowed funds were$502.1 million as ofSeptember 30, 2021 compared to$942.8 million as ofDecember 31, 2020 . First Financial may utilize short-term borrowings and long-term advances from the FHLB as wholesale funding sources to meet liquidity needs. First Financial had Short-term borrowings of$188.9 million and$166.6 million as ofSeptember 30, 2021 andDecember 31, 2020 , respectively. This increase was driven by$107.0 million of short-term borrowings with the FHLB atSeptember 30, 2021 , while there were none as ofDecember 31, 2020 . The Company utilized these short-term FHLB borrowings as a funding source subsequent to repaying longer term PPPLF funding. Short-term advances from Fed funds purchased and Repurchase agreements were$81.9 million and$166.6 million atSeptember 30, 2021 andDecember 31, 2020 , respectively, with changes driven by customer deposit activity under the repurchase agreements. Long-term debt, which included FRB and FHLB long-term advances, subordinated notes and an interest free loan with a municipality, was$313.2 million and$776.2 million atSeptember 30, 2021 andDecember 31, 2020 , respectively. The Company had no FRB advances from the PPPLF included in long-term borrowings as ofSeptember 30, 2021 , compared to$435.0 million atDecember 31, 2020 , as the Company paid off these borrowings in conjunction with PPP loan repayments. The PPPLF was established by theFederal Reserve to supply a source of liquidity and term financing to financial institutions participating in the PPP. These borrowings carried a 0.35% interest rate and were secured by the Company's PPP loans. Outstanding subordinated debt totaled$310.7 million as ofSeptember 30, 2021 and$318.6 million as ofDecember 31, 2020 . The decline in subordinated debt resulted from the Company redeeming$8.4 million of 6.00% fixed rate private placement subordinated debt that had been acquired in conjunction with the MSFG merger in 2018. The Company issued$150.0 million of fixed to floating rate subordinated notes in the second quarter of 2020. These subordinated notes have an initial fixed interest rate of 5.25% to, but excludingMay 15, 2025 , payable semi-annually in arrears. From, and including,May 15, 2025 , the interest rate on the subordinated notes will reset quarterly to a floating rate per annum equal to a benchmark rate, which is expected to be the then-current three-month term SOFR, plus 509 basis points, payable quarterly in arrears. The subordinated notes mature onMay 15, 2030 . These notes are redeemable by the Company in whole or in part beginning with the interest payment date ofMay 15, 2025 . The subordinated notes are treated as Tier 2 capital for regulatory capital purposes and are included in Long-term debt on the Consolidated Balance Sheets. 47 -------------------------------------------------------------------------------- Table of Contents First Financial had no FHLB long-term advances atSeptember 30, 2021 as the Company implemented alternative funding strategies to manage liquidity and interest rate risk. FHLB long-term advances were$20.0 million as ofDecember 31, 2020 . First Financial's total remaining borrowing capacity from the FHLB was$1.5 billion as ofSeptember 30, 2021 .
See Note 8 - Borrowings in the Notes to Consolidated Financial Statements for further discussion of First Financial's borrowed funds.
LIQUIDITY
Liquidity management is the process by which First Financial manages the continuing flow of funds necessary to meet its financial commitments on a timely basis and at a reasonable cost. These funding commitments include withdrawals by depositors, credit commitments to borrowers, shareholder dividends, share repurchases, operating expenses and capital expenditures. Liquidity is derived primarily from deposit growth, principal and interest payments on loans and investment securities, maturing loans and investment securities, and access to wholesale funding sources. First Financial's most stable source of liability-funded liquidity for both long and short-term needs is deposit growth and retention of the core deposit base. In addition to core deposit funding, First Financial also utilizes a variety of other short and long-term funding sources, which include subordinated notes, longer-term advances from the FRB and FHLB and its short-term line of credit. Both First Financial and the Bank received investment grade credit ratings fromKroll Bond Rating Agency, Inc , an independent rating agency. These credit ratings impact the cost and availability of financing to First Financial, and a downgrade to these credit ratings could affect First Financial's or the Bank's ability to access the credit markets and potentially increase borrowing costs, negatively impacting financial condition and liquidity. Key factors in maintaining high credit ratings include consistent and diverse earnings, strong credit quality and capital ratios, diverse funding sources and disciplined liquidity monitoring procedures. The ratings of First Financial and the Bank atSeptember 30, 2021 were as follows: First Financial Bancorp First Financial Bank Senior Unsecured Debt BBB+ A- Subordinated Debt BBB BBB+ Short-Term Debt K2 K2 Deposit N/A A- Short-Term Deposit N/A K2 For ease of borrowing execution, First Financial utilizes a blanket collateral agreement with the FHLB. First Financial pledged$6.0 billion of certain eligible residential, commercial and farm real estate loans, home equity lines of credit and government, agency and CMBS securities as collateral for borrowings from the FHLB as ofSeptember 30, 2021 . First Financial's principal source of asset-funded liquidity is marketable investment securities, particularly those of shorter maturities. The market value of investment securities classified as AFS totaled$4.1 billion and$3.4 billion atSeptember 30, 2021 andDecember 31, 2020 , respectively. HTM securities that are maturing within a short period of time can be an additional source of liquidity. As of bothSeptember 30, 2021 andDecember 31, 2020 , the Company had no HTM securities maturing within one year. Other sources of liquidity include cash and due from banks plus interest-bearing deposits with other banks. AtSeptember 30, 2021 , these balances totaled$239.5 million , and First Financial had unused and available overnight wholesale funding sources of$4.6 billion , or 28.8% of total assets, to fund loan and deposit activities in addition to other general corporate requirements. Certain restrictions exist regarding the Bank's ability to transfer funds to First Financial in the form of cash dividends, loans, other assets or advances and the approval of the Bank's primary federal regulator is required to pay dividends in excess of regulatory limitations. Dividends paid to First Financial from the Bank totaled$50.0 million for the third quarter of 2021 and$125.0 million for the first nine months of 2021. As ofSeptember 30, 2021 , the Bank had retained earnings of$744.3 million , of which$163.4 million was available for distribution to the Bancorp without prior regulatory approval. As an additional source of liquidity, First Financial had$94.1 million in cash at the parent company as ofSeptember 30, 2021 .
Share repurchases also impact First Financial's liquidity. For further information regarding share repurchases, see the Capital section that follows.
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Capital expenditures, such as banking center expansions and technology investments, were$5.4 million and$3.6 million for the third quarters of 2021 and 2020, respectively. Capital expenditures were$10.6 million and$13.4 million for the first nine months of 2021 and 2020, respectively. Management believes that sufficient liquidity exists to fund its future capital expenditure commitments.
Management is not aware of any other events or regulatory requirements that, if implemented, are likely to have a material effect on First Financial's liquidity.
CAPITAL
Risk-based capital.The Board of Governors of theFederal Reserve System approved Basel III in order to strengthen the regulatory capital framework for all banking organizations, subject to a phase-in period for certain provisions. Basel III established and defined quantitative measures to ensure capital adequacy. These measures require First Financial to maintain minimum amounts and ratios of Common equity Tier 1 capital, Total and Tier 1 capital to risk-weighted assets and Tier 1 capital to average assets (Leverage ratio). Basel III includes a minimum ratio of Common equity Tier 1 capital to risk-weighted assets of 7.0% and includes a fully phased-in capital conservation buffer of 2.5% of risk-weighted assets. Further, the minimum ratio of Tier 1 capital to risk-weighted assets is 8.5% and all banks are subject to a 4.0% minimum leverage ratio, while the minimum required Total risk-based capital ratio is 10.5%. Failure to maintain the required Common equity Tier 1 capital will result in potential restrictions on a bank's ability to pay dividends, repurchase stock and pay discretionary compensation to its employees. The capital requirements also provide strict eligibility criteria for regulatory capital instruments and change the method for calculating risk-weighted assets in an effort to better identify riskier assets, such as highly volatile commercial real estate and nonaccrual loans. First Financial's tier 1 capital decreased to 11.92% atSeptember 30, 2021 from 12.20% atDecember 31, 2020 . Likewise the total capital ratio decreased to 14.97% atSeptember 30, 2021 from 15.55% atDecember 31, 2020 . The leverage ratio decreased to 9.05% atSeptember 30, 2021 compared to 9.55% as ofDecember 31, 2020 , while the Company's tangible common equity ratio decreased to 8.21% atSeptember 30, 2021 from 8.47% atDecember 31, 2020 . The decline in the Company's capital ratios during 2021 was primarily driven by the overall increase in risk weighted assets. As ofSeptember 30, 2021 , management believes that First Financial met all capital adequacy requirements to which it was subject. The Company's most recent regulatory notifications categorized First Financial as "well-capitalized" under the regulatory framework for prompt corrective action. There have been no conditions or events since those notifications that management believes have changed the Company's categorization. Total regulatory capital exceeded the minimum requirement by$509.5 million on a consolidated basis atSeptember 30, 2021 . The following tables present the actual and required capital amounts and ratios as ofSeptember 30, 2021 andDecember 31, 2020 under the Basel III Capital Rules and include the minimum required capital levels based on the phase-in provisions of the Basel III Capital Rules. Capital levels required to be considered "well capitalized" are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules. 49
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PCA requirement to be
Minimum capital considered well
Actual required - Basel III capitalized
Capital Capital Capital
(Dollars in thousands) amount Ratio amount Ratio amount Ratio
September 30, 2021
Common equity Tier 1 capital to risk-weighted assets
Consolidated $ 1,316,059 11.54 % $ 797,985 7.00 % N/A N/A
First Financial Bank 1,502,914 13.20 % 796,907 7.00 % $ 739,985 6.50 %
Tier 1 capital to risk-weighted assets
Consolidated 1,359,297 11.92 % 968,981 8.50 % N/A N/A
First Financial Bank 1,503,018 13.20 % 967,672 8.50 % 910,750 8.00 %
Total capital to risk-weighted assets
Consolidated 1,706,513 14.97 % 1,196,977 10.50 % N/A N/A
First Financial Bank 1,590,214 13.97 % 1,195,360 10.50 % 1,138,438 10.00 %
Leverage ratio
Consolidated 1,359,297 9.05 % 601,054 4.00 % N/A N/A
First Financial Bank 1,503,018 10.01 % 600,361 4.00 % 750,452 5.00 %
PCA requirement to be
Minimum capital considered well
Actual required - Basel III capitalized
Capital Capital Capital
(Dollars in thousands) amount Ratio amount Ratio amount Ratio
December 31, 2020
Common equity tier 1 capital to risk-weighted assets
Consolidated $ 1,325,922 11.82 % $ 785,338 7.00 % N/A N/A
First Financial Bank 1,452,403 12.95 % 784,807 7.00 % $ 728,749 6.50 %
Tier 1 capital to risk-weighted assets
Consolidated 1,368,818 12.20 % 953,625 8.50 % N/A N/A
First Financial Bank 1,452,507 12.96 % 952,980 8.50 % 896,922 8.00 %
Total capital to risk-weighted assets
Consolidated 1,744,802 15.55 % 1,178,007 10.50 % N/A N/A
First Financial Bank 1,560,457 13.92 % 1,177,211 10.50 % 1,121,153 10.00 %
Leverage ratio
Consolidated 1,368,818 9.55 % 573,526 4.00 % N/A N/A
First Financial Bank 1,452,507 10.14 % 573,094 4.00 % 716,367 5.00 %
Shareholder dividends. First Financial paid a dividend of $0.23 per common share
on September 15, 2021 to shareholders of record as of September 1, 2021 .
Additionally, First Financial's board of directors authorized a dividend of
$0.23 per common share, payable on December 15, 2021 to shareholders of record
as of December 1, 2021 .
Share repurchases. Effective January 2021 , First Financial's board of directors
approved a stock repurchase plan (the 2020 Repurchase Plan), replacing the plan
approved that expired on December 31, 2020 (the 2019 Repurchase Plan). The 2020
Repurchase Plan continues for two years and authorized the purchase of up to
5,000,000 shares of the Company's common stock. First Financial repurchased
2,484,295 shares at an average price of $23.04 for the third quarter of 2021 and
4,633,355
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shares at an average market price of $23.33 under this plan during the nine
month period ending September 30, 2021 . At September 30, 2021 , 366,645 common
shares remained available for repurchase under the 2020 Repurchase Plan.
Under the 2019 Repurchase Plan, First Financial did not repurchase any shares
during the three month period ended September 30, 2020 . However, it repurchased
880,000 shares at an average market price of $18.96 during the nine month period
ended September 30, 2020 .
Shareholders' equity. Total shareholders' equity was
For further detail, see the Consolidated Statements of Changes in Shareholders' Equity.
RISK MANAGEMENT First Financial manages risk through a structured ERM approach that routinely assesses the overall level of risk, identifies specific risks and evaluates specific actions to mitigate those risks. First Financial continues to enhance its risk management capabilities and has embedded risk awareness into the culture of the Company. First Financial has identified the following types of risk that it monitors in its ERM framework: credit, market (composed of interest rate, liquidity, capital, foreign exchange and financial risk), operational, compliance, strategic, reputation, information technology, cyber and legal. For a full discussion of these risks, see the Enterprise Risk Management section in Management's Discussion and Analysis in First Financial's 2020 Annual Report on Form 10-K. The sections that follow provide additional discussion related to credit risk and market risk. CREDIT RISK Credit risk represents the risk of loss due to failure of a customer or counterparty to meet its financial obligations in accordance with contractual terms. First Financial manages credit risk through its underwriting process, periodically reviewing and approving its credit exposures using credit policies and guidelines approved by the board of directors. ACL. The ACL is a reserve accumulated on the Consolidated Balance Sheets through the recognition of the provision for credit losses. First Financial records provision expense in the Consolidated Statements of Income to maintain the ACL at a level considered sufficient to absorb expected credit losses for financial assets in the portfolio over their expected remaining lives with consideration given to current and forward looking information. The ACL on loans and leases was$148.9 million as ofSeptember 30, 2021 and$175.7 million as ofDecember 31, 2020 . As a percentage of period-end loans, the ACL was 1.59% as ofSeptember 30, 2021 and 1.77% as ofDecember 31, 2020 . Excluding PPP loan balances, the ACL was 1.62% and 1.89% of loans as ofSeptember 30, 2021 andDecember 31, 2020 , respectively. The decline in ACL was primarily driven by improvements in economic forecasts, particularly related to the impact of the pandemic, in addition to the Company's improved credit quality and outlook. The Company utilized the Moody's September baseline forecast as its R&S forecast in the quantitative model, which included consideration of the impact from both the COVID-19 pandemic and the related government stimulus response. For reasonableness, the Company also considered the impact to the model from alternative, more adverse economic forecasts, slower prepayment speeds and increased default rates. These alternative analyses were utilized to inform the Company's qualitative adjustments. Additionally, First Financial considered its credit exposure to certain industries believed to be at risk for credit stress related to the COVID-19 pandemic, such as hotel, franchise and investor commercial real estate lending when making qualitative adjustments to the ACL model. The ACL as a percentage of nonaccrual loans was 225.7% atSeptember 30, 2021 and 217.6% atDecember 31, 2020 . The increase in this ratio was primarily driven by a$14.8 million , or 18.3%, decline in nonaccrual loans during the period. The ACL as a percentage of nonperforming loans, including accruing TDRs, was 192.3% as ofSeptember 30, 2021 and 200.0% as ofDecember 31, 2020 . The decline in this ratio was driven by the decline in the ACL outpacing the decline in nonperforming loans during the period. The Company recorded net charge-offs of$2.5 million , or 0.10% of average loans and leases on an annualized basis, in the third quarter 2021, compared to net charge-offs of$5.4 million , or 0.21% of average loans and leases on an annualized basis, for the same quarter of 2020. 51 -------------------------------------------------------------------------------- Table of Contents Provision expense is a product of the Company's ACL model combined with net charge-off activity during the period. During the third quarter of 2021, the Company recorded$8.2 million of provision recapture for loans and leases compared to provision expense of$15.3 million during the third quarter in 2020. The decline in provision expense during the third quarter of 2021 was driven by the Company's improved credit outlook and economic forecasts. For the nine months endedSeptember 30, 2021 , the Company recorded a provision recapture on loans and leases of$9.5 million compared to a provision expense of$57.0 million for the same period of 2020. The ACL on unfunded commitments was$11.6 million as ofSeptember 30, 2021 and$12.5 million as ofDecember 31, 2020 . First Financial recorded$2.0 million of provision recapture for credit losses on unfunded commitments for the three months endedSeptember 30, 2021 , compared to a$1.9 million of recapture in the same period 2020. For the nine months endedSeptember 30, 2021 , the Company recorded provision recapture on unfunded commitments of$0.9 million compared to$2.0 million of provision expense for the same period of 2020. See Note 5 - Allowance for Credit Losses in the Notes to Consolidated Financial Statements for further discussion of First Financial's ACL. 52
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The table that follows includes the activity in the ACL for the quarterly
periods presented.
Three months ended Nine months ended
2021 2020 September 30,
(Dollars in thousands) Sep. 30, June 30, Mar. 31, Dec. 31, Sep. 30, 2021 2020
Allowance for credit loss activity
Balance at beginning of period $159,590 $169,923 $175,679 $168,544 $158,661 $175,679 $57,650
Impact of adopting ASC 326 0 0 0 0 0 0 61,505
Provision for loan losses (8,193) (4,756) 3,450 13,758 15,299 (9,499) 57,038
Gross charge-offs
Commercial and industrial 2,617 3,729 7,910 1,505 1,467 14,256 3,840
Lease financing 0 0 0 0 852 0 852
Construction real estate 0 0 2 0 0 2 0
Commercial real estate 1,030 2,041 1,250 6,270 3,789 4,321 5,830
Residential real estate 74 46 1 203 22 121 285
Home equity 200 240 611 386 460 1,051 1,155
Installment 37 77 36 21 59 150 127
Credit card 230 179 222 169 171 631 716
Total gross charge-offs 4,188 6,312 10,032 8,554 6,820 20,532 12,805
Recoveries
Commercial and industrial 869 205 337 367 265 1,411 2,540
Lease financing 0 0 0 (6) 6 0 6
Construction real estate 0 3 0 3 0 3 14
Commercial real estate 223 75 195 844 760 493 1,418
Residential real estate 56 54 44 145 91 154 236
Home equity 426 317 177 428 209 920 704
Installment 53 37 34 65 35 124 93
Credit card 67 44 39 85 38 150 145
Total recoveries 1,694 735 826 1,931 1,404 3,255 5,156
Total net charge-offs 2,494 5,577 9,206 6,623 5,416 17,277 7,649
Ending allowance for credit losses $148,903 $159,590 $169,923 $175,679 $168,544 $148,903 $168,544 Net charge-offs to average loans and leases (annualized) Commercial and industrial
0.26 % 0.48 % 1.01 % 0.14 % 0.14 % 0.60 % 0.06 %
Lease financing 0.00 % 0.00 % 0.00 % 0.03 % 4.29 % 0.00 % 1.38 %
Construction real estate 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % 0.00 %
Commercial real estate 0.07 % 0.18 % 0.10 % 0.50 % 0.28 % 0.12 % 0.14 %
Residential real estate 0.01 % 0.00 % (0.02) % 0.02 % (0.03) % 0.00 % 0.01 %
Home equity (0.13) % (0.04) % 0.24 % (0.02) % 0.13 % 0.02 % 0.08 %
Installment (0.07) % 0.19 % 0.01 % (0.21) % 0.12 % 0.04 % 0.06 %
Credit card 1.29 % 1.12 % 1.59 % 0.69 % 1.16 % 1.33 % 1.63 %
Total net charge-offs 0.10 % 0.23 % 0.38 % 0.26 % 0.21 % 0.24 % 0.10 %
MARKET RISK
Market risk is the risk of loss arising from adverse changes in the fair value
of financial instruments due to changes in interest rates, foreign exchange
rates and equity prices. The primary source of market risk for First Financial
is interest rate risk and liquidity risk.
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Interest rate risk is the risk to earnings and the value of the Company's equity
arising from changes in market interest rates. Interest rate risk arises in the
normal course of business to the extent that there is a divergence between the
amount of interest-earning assets and the amount of interest-bearing liabilities
that are prepaid, withdrawn, re-priced or mature in specified periods. First
Financial seeks to achieve consistent growth in net interest income and equity
while managing volatility from shifts in market interest rates.
First Financial monitors its interest rate risk position using income simulation
models and EVE sensitivity analyses that capture both short-term and long-term
interest rate risk exposure. Income simulation involves forecasting NII under a
variety of interest rate scenarios. EVE is calculated by discounting the cash
flows for all balance sheet instruments under different interest-rate scenarios.
First Financial uses EVE sensitivity analysis to understand the impact of
changes in interest rates on long-term cash flows, income and capital. For both
NII and EVE modeling, First Financial leverages instantaneous parallel shocks to
evaluate interest rate risk exposure across rising and falling rate scenarios.
Additional scenarios evaluated include various non-parallel yield curve twists.
First Financial's interest rate risk models are based on the contractual and
assumed cash flows and repricing characteristics for the Company's assets,
liabilities and off-balance sheet exposure. A number of assumptions are also
incorporated into the interest rate risk models, including prepayment behaviors
and repricing spreads for assets in addition to attrition and repricing rates
for liabilities. Assumptions are primarily derived from behavior studies of the
Company's historical client base and are continually refined. Modeling the
sensitivity of NII and EVE to changes in market interest rates is highly
dependent on the assumptions incorporated into the modeling process.
Non-maturity deposit modeling is particularly dependent on the assumption for
repricing sensitivity known as a beta. Beta is the amount by which First
Financial's interest bearing non-maturity deposit rates will increase when
short-term interest rates rise. The Company utilized a weighted average deposit
beta of 37% in its interest rate risk modeling as of September 30, 2021 . First
Financial also includes an assumption for the migration of non-maturity deposit
balances into CDs for all upward rate scenarios beginning with the +100 bps
scenario, thereby increasing deposit costs and reducing asset sensitivity.
Presented below is the estimated impact on First Financial's NII and EVE
position as of
% Change from base case for
immediate parallel changes in rates
-100 bps(1) +100 bps +200 bps
NII-Year 1 (5.15) % 8.52 % 16.41 %
NII-Year 2 (7.03) % 11.96 % 22.46 %
EVE (10.97) % 6.91 % 12.35 %(1) Because certain current interest rates are at or below 1.00%, the 100 basis point downward shock assumes that certain corresponding interest rates approach an implied floor that, in effect, reflects a decrease of less than the full 100 basis point downward shock.
"Risk-neutral" refers to the absence of a strong bias toward either asset or liability sensitivity. "Asset sensitivity" is when a company's interest-earning assets reprice more quickly or in greater quantities than interest-bearing liabilities. Conversely, "liability sensitivity" is when a company's interest-bearing liabilities reprice more quickly or in greater quantities than interest-earning assets. In a rising interest rate environment, asset sensitivity results in higher net interest income while liability sensitivity results in lower net interest income. In a declining interest rate environment, asset sensitivity results in lower net interest income while liability sensitivity results in higher net interest income. First Financial was within policy limits set for the disclosed interest rate scenarios as ofSeptember 30, 2021 . The projected results for NII and EVE reflected an asset sensitive position, due to significant growth in low cost transactional deposits which have replaced wholesale borrowings in the Company's funding mix. First Financial continues to manage its balance sheet with a bias toward asset sensitivity while simultaneously balancing the potential earnings impact of this strategy. First Financial continually evaluates the sensitivity of its interest rate risk position to modeling assumptions. The following table reflects First Financial's estimated NII sensitivity profile as ofSeptember 30, 2021 assuming a 25% increase and a 25% reduction to the beta assumption on managed rate deposits: 54
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Beta sensitivity (% change from base)
+100 BP +200 BP
Beta 25% lower Beta 25% higher Beta 25% lower Beta 25% higher
NII-Year 1 9.89 % 7.14 % 17.74 % 15.08 %
NII-Year 2 13.39 % 10.53 % 23.84 % 21.09 %
See the Net Interest Income section of Management's Discussion and Analysis for further discussion.
Liquidity risk is the potential that an entity will be unable to meet its obligations as they come due because of an inability to liquidate assets or obtain funding or that it cannot easily unwind or offset exposures without significantly lowering market prices because of inadequate market depth or market disruptions. Management focuses on maintaining and enhancing liquidity by maximizing collateral based liquidity availability. First Financial manages liquidity in relation to the trend and stability of deposits; degree and reliance on short-term, volatile sources of funds, including any undue reliance on borrowings or brokered deposits to fund longer-term assets. Management identifies, measures, monitors and controls liquidity while seeking to maintain diversification of funding sources, both on- and off-balance-sheet. The bank has continued to update liquidity risk management processes, such as refining the contingency funding plan, proactively meeting frequently, securing additional contingent borrowing capacity, and developing additional ad-hoc liquidity reporting to monitor funding inflows and outflows. Management is closely monitoring the usage of excess business deposits, the balance of personal deposits and the broader macroeconomic environment during this period of heightened uncertainty and profound fiscal and monetary stimulus. For further discussion of the Company's liquidity, please see the Liquidity section within Management's Discussion and Analysis.
CRITICAL ACCOUNTING POLICIES
First Financial's Consolidated Financial Statements are prepared based on the application of the Company's accounting policies. These policies require the reliance on estimates and assumptions which are inherently subjective and may be susceptible to significant change. Changes in underlying factors, assumptions or estimates could have a material impact on First Financial's future financial condition and results of operations. In management's opinion, certain accounting policies have a more significant impact than others on First Financial's financial reporting. For First Financial, these policies currently include accounting for the ACL - loans and leases, goodwill, pension and income taxes. These accounting policies are discussed in detail in the Critical Accounting Policies section of Management's Discussion and Analysis in First Financial's 2020 Annual Report. There were no changes to the accounting policies for the ACL, goodwill, pension or income taxes during the nine months endedSeptember 30, 2021 .
ACCOUNTING AND REGULATORY MATTERS
Note 2 - Recently Adopted and Issued Accounting Standards in the Notes to
Consolidated Financial Statements discusses new accounting standards adopted by
First Financial in 2021 and 2020, as well as the expected impact of accounting
standards issued but not yet adopted. To the extent the adoption of new
accounting standards materially affects financial condition, results of
operations or liquidity, the impacts are discussed in the applicable Notes to
the Consolidated Financial Statements and sections of Management's Discussion
and Analysis.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this report which are not statements of
historical fact constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Words such as ''believes,''
''anticipates,'' "likely," "expected," "estimated," ''intends'' and other
similar expressions are intended to identify forward-looking statements but are
not the exclusive means of identifying such statements. Examples of
forward-looking statements include, but are not limited to, statements we make
about (i) our future operating or financial performance, including revenues,
income or loss and earnings or loss per share, (ii) future common stock
dividends, (iii) our capital structure, including future capital levels, (iv)
our plans, objectives and strategies, and (v) the assumptions that underlie our
forward-looking statements.
As with any forecast or projection, forward-looking statements are subject to
inherent uncertainties, risks and changes in circumstances that may cause actual
results to differ materially from those set forth in the forward-looking
statements. Forward-looking statements are not historical facts but instead
express only management's beliefs regarding future results or events, many of
which, by their nature, are inherently uncertain and outside of management's
control. It is possible that actual results and outcomes may differ, possibly
materially, from the anticipated results or outcomes indicated in these forward-
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looking statements. Important factors that could cause actual results to differ
materially from those in our forward-looking statements include the following,
without limitation:
•economic, market, liquidity, credit, interest rate, operational and technological risks associated with the Company's business;
•future credit quality and performance, including our expectations regarding future loan losses and our allowance for credit losses;
•the effect of and changes in policies and laws or regulatory agencies, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and other legislation and regulation relating to the banking industry;
•Management's ability to effectively execute its business plans;
•mergers and acquisitions, including costs or difficulties related to the integration of acquired companies;
•the possibility that any of the anticipated benefits of the Company's acquisitions will not be realized or will not be realized within the expected time period;
•the effect of changes in accounting policies and practices;
•changes in consumer spending, borrowing and saving and changes in unemployment;
•changes in customers' performance and creditworthiness;
•the costs and effects of litigation and of unexpected or adverse outcomes in such litigation;
•current and future economic and market conditions, including the effects of declines in housing prices, high unemployment rates,U.S. fiscal debt, budget and tax matters, geopolitical matters, and any slowdown in global economic growth; •the adverse impact on theU.S. economy, including the markets in which we operate, of the novel coronavirus, which causes the Coronavirus disease 2019 ("COVID-19"), global pandemic, and the impact of a slowingU.S. economy and increased unemployment on the performance of our loan and lease portfolio, the market value of our investment securities, the availability of sources of funding and the demand for our products; •our capital and liquidity requirements (including under regulatory capital standards, such as the Basel III capital standards) and our ability to generate capital internally or raise capital on favorable terms: •financial services reform and other current, pending or future legislation or regulation that could have a negative effect on our revenue and businesses, including the Dodd-Frank Act and other legislation and regulation relating to bank products and services; •the effect of the current interest rate environment or changes in interest rates or in the level or composition of our assets or liabilities on our net interest income, net interest margin and our mortgage originations, mortgage servicing rights and mortgage loans held for sale;
•the effect of a fall in stock market prices on our brokerage, asset and wealth management businesses;
•a failure in or breach of our operational or security systems or infrastructure, or those of our third-party vendors or other service providers, including as a result of cyber attacks;
•the effect of changes in the level of checking or savings account deposits on our funding costs and net interest margin; and
•our ability to develop and execute effective business plans and strategies.
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Additional factors that may cause our actual results to differ materially from
those described in our forward-looking statements can be found in our Form 10-K
for the year ended December 31, 2020 , as well as our other filings with the SEC ,
which are available on the SEC website at www.sec.gov.
All forward-looking statements included in this filing are made as of the date
hereof and are based on information available at the time of the filing. Except
as required by law, the Company does not assume any obligation to update any
forward-looking statement.
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