mersukrugoksu/iStock via Getty Images
High rate sensitivity of margin will boost First Financial Bancorp’s earnings.Nasdaq: FFBC) by the end of 2023.On the other hand, normalization of allowance for doubtful accounts Limited revenue growth. Overall, First Financial Bancorp expects he will report earnings of $2.22 per share in 2022, up 4% year-over-year. In 2023, he expects earnings to grow 13% to $2.52 per share. The year-end target price suggests a slight upside from the current market price. We assign a Buy rating to First Financial Bancorp based on total expected returns.
Loan structure suitable for rising interest rate environment
Average loan yields are highly rate sensitive as the loan portfolio is focused on commercial and industrial (“C&I”) and commercial real estate (“CRE”) loans, which comprise approximately three-quarters of the loan portfolio is. These loans are primarily based on variable or adjustable interest rates. On the contrary, residential real estate loans (10% of total loans) are mostly based on fixed interest rates, according to the details provided in the 10-Q filing.
On the other side of the balance sheet, deposit books are also very interest rate sensitive. Interest-bearing demand deposits and demand deposits accounted for 58% of total deposits at the end of June 2022.
Since most securities are based on fixed interest rates, high security balances also hinder margin growth. Available-for-sale and held-to-maturity securities represented 29% of total earning assets at the end of June 2022.
The results of management’s interest rate sensitivity analysis, given in the 10-Q filing, show that margins are highly interest rate sensitive, although some of the impact is lagging. According to management’s analysis , a 200 basis point increase in interest rates could increase net interest income by 12.19% in the first year and 16.01% in the second year of the hike.
Q2 2022 10-Q Filing
Given these factors, we expect 40 basis points of growth in the second half of 2022 and 20 basis points in 2023.
Loan growth likely to return to mid-single digits
After four consecutive quarters of decline, the loan portfolio increased by 2.0% in the second quarter of 2022, or 8.1% on an annualized basis. Second quarter performance was stronger than usual and impressive. Loan balances have historically grown in the mid-single-digit range. We expect growth to return to historic levels in the second half of the year, largely because high interest rates will restrain demand for credit.
Meanwhile, a strong job market will support loan growth. First Financial Bancorp. operates primarily in Ohio, Kentucky, Indiana and Illinois. Of these states, only Indiana has an unemployment rate below the national average. Nonetheless, job markets in all four states have historically improved significantly.
In January 2022, First Financial Bancorp. completed the acquisition of Summit Funding Group, an equipment financing platform. The acquisition was an early success, with equipment financing loans up 34% in the first half of the year and down 7% in the same period last year. We expect this new platform to further support loan growth.
Taking these factors into account, we expect our loan portfolio to grow by 1.25% quarter-on-quarter through the end of 2023.
Reserve Release Trend Reversing Soon
First Financial Bancorp. has reported loan loss reserves for the past five consecutive quarters. In my opinion, this trend will reverse in the second half of the year due to high inflation. In addition, interest rates are higher than they used to be, reducing the credit quality of your portfolio. That said, I’m not too concerned because the existing tolerance level is fairly high relative to the credit risk in the portfolio. By the end of June 2022, his allowance and non-accrual loan ratio had risen to 302.9% from his 272.8% at the end of December 2021, according to details provided in the 10-Q filing.
Given these factors, we expect net provisions to return to historical levels in the second half of 2022. The net provisioning charge is expected to account for his 0.20% of total loans (annualized) each quarter through the end of 2022. 2023. By comparison, from 2017 to 2019, net preparation costs averaged 0.19% of gross loan value.
Expected to increase revenue by 4%
Expected loan growth and significantly higher margins should boost earnings through the end of 2023. On the one hand, the normalization of provisions will constrain earnings growth. Overall, First Financial Bancorp expects he will report earnings of $2.22 per share in 2022, up 4% year-on-year. In 2023, he expects earnings to grow 13% to $2.52 per share.
First Financial Bancorp. is expected to announce its third quarter results on October 20, 2022. I expect the company to report earnings of $0.62 per share, about 13% higher than his earnings of $0.55 per share in the second quarter.
The following table shows my annual income statement estimates.
| FY18 | FY19 | 2020 | 21st year | FY22E | FY23E | |||||
| Profit and loss statement | ||||||||||
| net interest income | 449 | 484 | 457 | 452 | 488 | 574 | ||||
| Bad debt allowance | 15 | 30 | 71 | (18) | 3 | 20 | ||||
| non-interest income | 103 | 131 | 189 | 172 | 189 | 199 | ||||
| non-interest expenses | 324 | 342 | 391 | 401 | 416 | 462 | ||||
| Net profit – Ordinary Sh. | 173 | 198 | 156 | 205 | 210 | 238 | ||||
| EPS – diluted ($) | 1.93 | 2.00 | 1.59 | 2.14 | 2.22 | 2.52 | ||||
|
Source: SEC Filings, Earnings Releases, Author’s Estimates (Millions of U.S. dollars unless otherwise specified) |
||||||||||
Actual earnings may differ materially from estimates due to the risks and uncertainties associated with inflation and the resulting timing and magnitude of interest rate increases. In addition, if the recession is stronger or lasts longer than expected, the provision for expected credit losses could increase beyond my estimates.
Rising interest rates hurt stocks’ book value
First Financial Ban Corporation has a large amount of available-for-sale securities on its books, which could harm the valuation of its shares in an environment of rising interest rates. At the end of June 2022, available-for-sale securities represented 28% of total earning assets. As interest rates rise, the market value of fixed-rate available-for-sale securities declines, resulting in unrealized losses. These losses directly reduce the book value of the stock without impacting the income statement.
First Financial Bancorp stock has already fallen 8% in the first half of the year due to an unrealized mark-to-market loss. Further decline is likely in the third quarter as the Federal Reserve raised the Federal Funds rate by 150 basis points. Additionally, the Fed expects another 125-150 basis points of rate hikes by the end of 2023.
Considering these factors, we expect unrealized losses to reduce the book value of our shares by 2% in the second half of 2022. On the other hand, retained earnings push up the book value of the stock. The following table shows my balance sheet estimates.
| FY18 | FY19 | 2020 | 21st year | FY22E | FY23E | |
| financial position | ||||||
| net loan | 8,768 | 9,144 | 9,725 | 9,156 | 9,537 | 10,022 |
| net lending growth | 47.1% | 4.3% | 6.4% | (5.9)% | 4.2% | 5.1% |
| Other earning assets | 3,366 | 3,191 | 3,751 | 4,654 | 4,314 | 4,401 |
| deposit | 10,140 | 10,210 | 12,232 | 12,872 | 12,524 | 13,032 |
| Borrowings and Subdebt | 1,611 | 1,731 | 943 | 706 | 1,273 | 1,312 |
| common stock | 2,078 | 2,248 | 2,282 | 2,259 | 2,092 | 2,244 |
| Book value per share ($) | 23.2 | 22.7 | 23.3 | 24.1 | 22.2 | 23.8 |
| Tangible BVPS ($) | 12.9 | 12.5 | 13.0 | 12.5 | 10.7 | 12.3 |
|
Source: SEC filing, author’s estimate (Millions of U.S. dollars unless otherwise specified) |
Adoption of buy valuation with moderately high total expected return
First Financial Bancorp. offers a dividend yield of 4.0% at a current quarterly dividend rate of $0.23 per share. Earnings and dividend estimates suggest a payout ratio of 36.5% in 2022, which is below the five-year average of 46%. Therefore, there is room for a dividend increase. However, First Financial Bancorp. does not increase its dividend on a regular basis, so we do not expect the dividend level to change.
We use historical price-to-tangible assets (“P/TB”) and price-to-earnings (“P/E”) multiples to value First Financial Bancorp. This stock trades at an average P/TB ratio. of 1.93 in the past as shown below.
| FY17 | FY18 | FY19 | 2020 | 21st year | average | |
| T. Book value per share ($) | 11.6 | 12.9 | 12.5 | 13.0 | 12.5 | |
| Average Market Price ($) | 26.8 | 29.2 | 24.6 | 16.1 | 23.5 | |
| Past P/TB | 2.31 times | 2.26 times | 1.97 times | 1.23 times | 1.88 times | 1.93 times |
| Source: Company Finance, Yahoo Finance, Author’s Estimates | ||||||
Multiplying the average P/TB multiple by the projected tangible book value of $10.7 yields a target price of $20.7 at the end of 2022. This target price represents an 11.2% drop from the October 14 closing price. The following table shows the target price sensitivity to the P/TB ratio.
| P/TB multiple | 1.73 times | 1.83 times | 1.93 times | 2.03 times | 2.13 times |
| TBVPS – December 2022 ($) | 10.7 | 10.7 | 10.7 | 10.7 | 10.7 |
| Target price ($) | 18.5 | 19.6 | 20.7 | 21.7 | 22.8 |
| Market price ($) | 23.3 | 23.3 | 23.3 | 23.3 | 23.3 |
| Upside/(Downside) | (20.4)% | (15.8)% | (11.2)% | (6.6)% | (2.0)% |
| Source: Author’s estimate |
As you can see below, the stock has historically traded at an average P/E of around 13.2x.
| FY17 | FY18 | FY19 | 2020 | 21st year | average | |
| Earnings Per Share ($) | 1.56 | 1.93 | 2.00 | 1.59 | 2.14 | |
| Average Market Price ($) | 26.8 | 29.2 | 24.6 | 16.1 | 23.5 | |
| Past PER | 17.2 times | 15.2 times | 12.3 times | 10.1 times | 11.0x | 13.2 times |
| Source: Company Finance, Yahoo Finance, Author’s Estimates | ||||||
Multiplying the average P/E multiple by the projected earnings per share of $2.22 yields a target price of $29.3 at the end of 2022. This target price represents a 25.8% increase from the October 14 closing price. The following table shows the sensitivity of the target price to the P/E ratio.
| PER Multiple | 11.2 times | 12.2 times | 13.2 times | 14.2 times | 15.2 times |
| EPS 2022 ($) | 2.22 | 2.22 | 2.22 | 2.22 | 2.22 |
| Target price ($) | 24.8 | 27.0 | 29.3 | 31.5 | 33.7 |
| Market price ($) | 23.3 | 23.3 | 23.3 | 23.3 | 23.3 |
| Upside/(Downside) | 6.7% | 16.2% | 25.8% | 35.3% | 44.9% |
| Source: Author’s estimate |
Equally weighting the target prices from the two valuation methods yields a total Target price $25.0, which represents a 7.3% increase from the current market price. Adding future dividend yields gives a total expected return of 11.2%. Therefore, I have a Buy rating on First Financial Bancorp.
