KBRA Affirms Ratings for First Financial Bancorp

KBRA affirms the senior unsecured debt rating of BBB+, the subordinated debt rating of BBB, and the short-term debt rating of K2 for Cincinnati, Ohio-based First Financial Bancorp (NASDAQ: FFBC) ("First Financial" or "the company"). In addition, KBRA affirms the deposit and senior unsecured debt ratings of A-, the subordinated debt rating of BBB+, and the short-term deposit and debt ratings of K2 for its main subsidiary, First Financial Bank. The Outlook for all long-term ratings is Stable.

Key Credit Considerations

The ratings are supported by FFBC’s diversified business model, which incorporates respectable scale and market share in its banking footprint, as well as high-performing non-bank subsidiaries that together provide the company with a favorable revenue balance between spread and fee revenue that we consider durable. First Financial’s noninterest income levels in aggregate has represented 25%-30% of total revenues in recent periods (25% for 1H23). With an asset sensitive balance sheet, the company reflects stronger performance in higher interest rate environments, which has been the case during this tightening cycle, with ROA nearing 1.60% for 1H23. However, despite maintaining a meaningfully higher-than-peer NIM (4.35% for 2Q23), FFBC is not immune to the acceleration in funding costs, with management projecting NIM compression prospectively. With that said, NIM outperformance is expected to persist, ultimately resulting in the maintenance of healthy returns. KBRA also recognizes FFBC’s attractive deposit base, which has been maintained over the years due to long-standing and established presence within key operating markets, resulting in respectable related deposit market share, as well as conservative liquidity management and prudent loan growth. Combined with a meaningful level of noninterest balances, these factors have allowed for below-peer deposit costs throughout multiple interest rate cycles, including a total cost of 1.40% for 2Q23. However, in common with the rest of the industry, First Financial has experienced core deposit outflows in tandem with the Fed's tightening measures, though core deposit levels remain favorable overall at 78% of total funding as of 2Q23, which are relatively in line with pre-pandemic levels. Moreover, with a granular deposit base, notably stemming from its legacy markets, this facilitates a below average level of uninsured/uncollateralized deposits at just 20% of total. The company, at times, has reflected modestly higher NPA and NCO levels in its recent operating history, though these have generally been isolated one-off type of events or driven by its national lending groups, which are slightly higher risk, though provide solid risk-adjusted returns. Moving forward, we believe First Financial is well positioned for the current headwinds facing the industry, notably from higher rates and challenges in the CRE sector, given its below average exposure to investor CRE (225% of total risk-based capital as of 2Q23) and manageable exposure to the office sector (just below 5% of loans). Additionally, with a largely variable rate loan portfolio, a majority of the loan repricing has already occurred (average loan yield was above 7% for 2Q23), which mitigates repricing risks. Capital ratios remain solid overall (CET1 ratio of 11.3% as of 2Q23) and are expected to continue to grow prospectively from a high level of retained earnings, conservative balance sheet growth, and a pause in share buybacks. Moreover, we believe the negative AOCI impact to both TCE and regulatory capital ratios is not overly material, with the CET1 ratio dropping to a still sound 9.5% when including all unrealized losses.

Rating Sensitivities

An upgrade is not currently expected, though continued outperformance, notably with earnings and credit, throughout weakening economic conditions could facilitate positive rating momentum over time. Conversely, a rating downgrade is unlikely, though any expected significant deposit outflows or liquidity issues, or above peer credit problems through a downturn could potentially pressure the ratings.

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