First Financial Bancorp

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 4/5

First Financial Bancorp is a diversified financial holding company that operates in the midwest, primarily through First Financial Bank. The bank’s business is centered around providing a range of banking products and services for individuals, businesses, and commercial entities.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

First Financial Bancorp (FFBC) operates through its subsidiary, First Financial Bank, which offers a variety of financial products and services. These include:

  • Commercial and industrial lending
  • Commercial real estate lending
  • Retail banking services
  • Equipment financing
  • Wealth management
  • Treasury Management
  • Other services include loan servicing, cash management, and insurance

First Financial has a significant presence in the Midwest, primarily in Ohio, Indiana, Kentucky, and Illinois.

  • Revenue Distribution:
  • Interest income from loans and leases is a significant contributor to overall revenue, comprising a large portion of total operating revenue.
  • Fee and commission income is generated from service-related activities.
  • The company’s interest income has benefited from increases in the fed interest rates.
  • Industry Trends:
  • The banking industry is undergoing significant changes, primarily due to macro events such as increasing interest rates, and a slowing economy.
  • Rising rates have boosted net interest income, but also increase borrowing costs and default risk.
  • The trend of digital banking is continually increasing. The bank is trying to implement digitization to streamline its offerings.
  • There is consolidation happening in the industry with other banks.
  • Margins: The overall trend seems to be that profitability of banks will decrease in the coming quarters.
  • Competitive Landscape: First Financial faces competition from other regional banks, credit unions, and fintech companies. Consolidation is increasing in the banking sector with larger banks offering more services and potentially more options to its customers.
  • What Makes the Company Different:
    • The bank has invested in technologies to modernize its services.
    • They aim to create “unparalleled” customer experiences.
    • They have a focus on community banking. They are targeting low-to-moderate income areas.
    • They have focused on specialty finance, and continue to grow it.

Financials

All financials are from Form 10-Q for the period ended September 30th, 2023, unless otherwise noted.

  • Income Statement:
    • Net interest income increased to 114.2 million in Q3 2023 from 109.7 million in Q3 2022 and 106.8 million in Q2 2023. This is due to an increase in the interest rates on loans outpacing increases in deposit rates.
  • Total revenues in Q3 2023 of 160.2 million were down slightly from 163.4 million in Q3 2022, but up from 156.3 million in Q2 2023. * Net income in Q3 2023 was $41.3 million vs. $57.7 million in Q3 2022 and $42.7 million in Q2 2023. This was due to an increase in provision for credit losses.
  • The company has had high revenues in the past but has had volatility in expenses.
  • Assets:
  • Total assets are 16.2 billion. * The company’s cash and equivalents are around 1.2 billion. * The company has around 11.1 billion of loans.
  • Liabilities: * Total deposits are 11.7 billion. * The company’s liabilities are 13.1 billion.
  • Equity: The total shareholders equity was 3.18 billion.

Important to note the bank is showing growth, primarily driven by a robust loan portfolio and by increasing interest income, partially offset by decreasing fee income, and increasing provision for losses.

Moat Analysis: Rating 2 / 5

First Financial Bancorp’s moat is considered weak. Here’s why:

  1. Switching Costs: While there are some switching costs due to customers having their accounts with First Financial, they are not high. Customers can always move their accounts to other banks.
  2. Intangible Assets: Although First Financial operates within a regulatory framework and has brand recognition in the local community, these do not provide a great differentiation compared to other banks with similar brand recognition and regulatory approvals. The brand name has no pricing power.
  3. Network Effect: The banking industry does not have strong network effects.
  4. Cost Advantages: Although the company mentions operational efficiencies, they are not clearly demonstrated in financial statements, and the company doesn’t seem to have any unique cost advantages.
  5. Size Advantage: The size and scope of First Financial is smaller compared to the national and regional giants, like JPMorgan or Bank of America, and hence it doesn’t derive any value creation from scale. Therefore, the bank only has weak moats.

Moat Risks & Business Resilience

  1. Economic Downturn: An economic downturn or credit crisis would greatly impact banks. In a bad recession, the value of the bank’s loans would diminish considerably.
  2. Interest Rate Risk: Increases in interest rates can increase the bank’s income but can also lead to a decrease in its loan demand. At the same time it can also increase defaults on debt.
  3. Credit Risk: Loan losses are a risk because it might become harder for borrowers to pay.
  4. Competitive Pressure: Other banks, fintech companies and credit unions are posing a continuous competitive threat.
  5. Regulatory Changes: Changes in regulation and compliance can negatively impact business.
  6. Technological Disruption: Rapid advancements in technology may render some of the bank’s services obsolete.
    • Management’s View on Challenges
    • Management is focused on increasing efficiencies through technology and reducing costs. * They recognize a potential for a slowdown in consumer spending. * They have a disciplined approach toward credit risk and loan provision.

Despite these challenges, the business demonstrates considerable resilience by maintaining a healthy capital base.

Understandability: Rating 2/5

  • The basic functions are easy to understand. They take deposits and make loans, as well as offer various financial services.
  • The business is fairly straightforward.
  • The financial statements and balance sheets of banks, however, can be confusing with multiple moving parts, like derivatives and other financial instruments.
    • Banks, in general, are often leveraged.

Therefore, the understandability of this business is rated 2 out of 5.

Balance Sheet Health: Rating 4/5

  • The capital ratios are in compliance with the minimum regulatory standards, and is well above the minimum set by management.
  • The bank has a stable debt to equity ratio.
  • Although the bank’s liquidity levels are decreasing, they are still well above regulatory requirements.
  • The company’s risk is contained and properly managed. However, it has a few weaknesses. *The company has a high exposure to loan credit losses, though management expects they have adequate capital to absorb such losses.

Therefore, the bank’s balance sheet health is rated at 4 out of 5.