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 differentiated business model, which reflects relatively greater diversification in terms of revenue, lending, and geography versus similarly sized institutions. First Financial’s banking franchise is well-entrenched in its legacy footprint with respectable scale and market share and is augmented through its national lending channels, primarily specialty finance verticals, which provide another layer of diversity against its local economies, though we recognize that these markets have been comparatively stable over a long period of time. KBRA also favorably views the high-quality noninterest income component that has tracked between 25%-30% of revenues in recent periods and is largely derived from foreign exchange, equipment leasing, and wealth management revenues, which have demonstrated durability and a degree of predictability over the years. Strong noninterest income combined with a healthy NIM, which is due to well-contained deposit costs and a higher-yielding loan portfolio that contains a considerable amount of C&I, have facilitated favorable returns during this challenging interest rate cycle (core ROA of ~1.4% during 1H24). However, given the asset sensitivity, FFBC’s NIM is expected to decline as the Fed reduces its target rate, though returns should likely remain above average in the rating category. KBRA also recognizes First Financial's solid deposit base, which has been maintained over the years due to long-standing and established presence within key operating markets and a conservative approach to liquidity management. The core deposit base is also comparatively granular and contains a minimal amount of uninsured deposits (excluding collateralized relationships). However, the company has reflected a greater reliance on noncore funding in recent years due to stronger loan growth. With that said, we acknowledge that the wholesale borrowings were largely utilized to fund its specialty finance lending verticals that reflect low-double-digit loan yields, which was accretive to the margin. 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 in the core loan portfolio or driven by its national lending channels, which, as mentioned, are slightly higher risk, though provide solid risk-adjusted returns. Moving forward, we believe First Financial is well positioned for the potential headwinds facing the industry, notably from higher rates and challenges in the CRE sector, given its below average exposure to investor CRE (213% of total risk-based capital as of 2Q24) and manageable exposure to the office sector (4% of loans). Additionally, with a largely variable rate loan portfolio, a majority of the loan repricing has already occurred (average loan yield was 7.40% for 2Q24), which somewhat mitigates repricing risks. Capital ratios remain solid overall (CET1 ratio of 11.8% as of 2Q24) and are expected to continue to grow prospectively from the high level of retained earnings due to its strong profitability and digestible dividend payout, conservative balance sheet growth, and minimal appetite for share buybacks. Moreover, the negative AOCI impact to the TCE ratio is not overly material (even including the minimal amount of unrealized losses within HTM securities). Additionally, regulatory capital ratios remain solid when incorporating those losses, including an adjusted CET1 ratio of 10.0%.

Rating Sensitivities

A rating upgrade is not expected, though maintenance of a top-quartile ROA throughout a declining interest rate environment while continuing to reflect peer-leading fee income, as well as further improvements in core capital, and manageable credit performance could result in positive rating momentum over time. Conversely, a downgrade is unlikely, though any significant deterioration in the funding/liquidity position, or above peer credit issues resulting in a decline in earnings/capital could potentially pressure ratings.

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