First Financial Bancorp: Outlook For The Topline Remains Bright (NASDAQ:FFBC)

Earnings of First Financial Bancorp (NASDAQ:FFBC) will most probably continue to surge next year on the back of moderate loan growth. Further, margin expansion will lift earnings. Overall, I’m expecting First Financial Bancorp to report earnings of $2.25 per share for 2022, up 5%, and $2.59 per share for 2023, up 15% year-over-year. Compared to my last report on the company, I’ve slightly increased my earnings estimates, mostly because I’ve revised my loan balance estimates following the third quarter’s remarkable performance. Next year’s target price suggests a moderate upside from the current market price. Based on the total expected return, I’m maintaining a buy rating of First Financial Bancorp.

Loan Growth Unlikely to Drop too Low

First Financial Bancorp’s loan portfolio surged by 4% during the third quarter, which beat my expectations. On an annualized basis, this is the strongest loan growth since 2018. As it’s unusually high, this growth cannot be sustained in future quarters. Further, high borrowing costs will discourage borrowers. The management also mentioned in the conference call that loan pipelines are moderating and that it expects loan growth to moderate to high-single digits over the fourth quarter.

On the other hand, strong job markets will keep loan growth from falling too low. First Financial Bancorp mostly operates in Ohio, Kentucky, Indiana, and Illinois. Unemployment rates in all four states have remained near record lows this year.

The management mentioned in the earnings presentation that it expects loan balances to grow in the high-single-digit range. Considering the factors mentioned above, I’m expecting loan growth to be below the management’s guidance. I’m expecting the loan portfolio to grow by 1.25% in the last quarter of 2022, taking full-year loan growth to 7%. For 2023, I’m expecting the loan portfolio to grow by 5%. Compared to my last report on First Financial Bancorp, I haven’t changed my loan growth estimates. However, my loan balance estimates are now much higher than before because of the third quarter’s surprisingly good performance.

Meanwhile, I’m expecting deposits to grow somewhat in line with loans. The following table shows my balance sheet estimates.

Financial Position	FY18	FY19	FY20	FY21	FY22E	FY23E
Net Loans	8,768	9,144	9,725	9,156	9,794	10,293
Growth of Net Loans	47.1%	4.3%	6.4%	(5.9)%	7.0%	5.1%
Other Earning Assets	3,366	3,191	3,751	4,654	4,126	4,209
Deposits	10,140	10,210	12,232	12,872	12,463	12,969
Borrowings and Sub-Debt	1,611	1,731	943	706	1,528	1,574
Common equity	2,078	2,248	2,282	2,259	1,937	1,995
Book Value Per Share ($)	23.2	22.7	23.3	24.1	20.4	21.0
Tangible BVPS ($)	12.9	12.5	13.0	12.5	8.9	9.5
Source: SEC Filings, Author’s Estimates(In USD million unless otherwise specified)

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The Pace of Margin Expansion to Subside

First Financial Bancorp’s net interest margin surged by 52 basis points in the third quarter, which was much higher than the second quarter’s growth of 29 basis points. This commendable margin expansion was attributable to a favorable loan mix. Variable-rate loans made up a whopping 65% of total loans at the end of September 2022, as mentioned in the earnings presentation. It’s no surprise therefore that the average yield and margin surged during the quarter.

Going forward, the pace of margin expansion will most probably subside. The management mentioned in the conference call that it was expecting deposit pricing pressures due to competition. Therefore, the margin expansion in upcoming quarters will be lower than the third quarter. The management is expecting the deposit beta (rate sensitivity) to rise to 30% over the full cycle.

Deposit beta has been well below normal so far in this rate cycle. The deposit beta was only 4% in the first nine months of the year, as mentioned in the presentation. In comparison, the deposit beta was much higher at 24% in the last up-rate cycle from 3Q15 to 2Q19. Mean reversal is natural and therefore, highly likely in the next few quarters.

The results of the management’s interest-rate simulation model show that a 200-basis point hike in interest rates could boost the net interest income by 9.56% over the first year and 12.74% over the second year of the rate hike.

As mentioned in the presentation, the management expects the margin to increase to 4.30% – 4.45% from 3.93% in the third quarter.

Considering the factors given above, I’m expecting the margin to increase by ten basis points in the last quarter of 2022 and 20 basis points in 2023.

Expecting Earnings to Grow by 15% Next Year

The anticipated loan growth and margin expansion discussed above will drive earnings through the end of 2023. Meanwhile, I’m expecting the provisioning for expected loan losses to remain near the normal level. I’m expecting the provisioning expense to make up around 0.19% of total loans in 2023, which is the same as the average from 2017 to 2019.

Overall, I’m expecting First Financial Bancorp to report earnings of $2.25 per share for 2022, up 5% year-over-year. For 2023, I’m expecting earnings to grow by 15% to $2.59 per share. The following table shows my income statement estimates.

Income Statement	FY18	FY19	FY20	FY21	FY22E	FY23E
Net interest income	449	484	457	452	504	605
Provision for loan losses	15	30	71	(18)	7	20
Non-interest income	103	131	189	172	180	190
Non-interest expense	324	342	391	401	437	475
Net income – Common Sh.	173	198	156	205	213	246
EPS – Diluted ($)	1.93	2.00	1.59	2.14	2.25	2.59
Source: SEC Filings, Earnings Releases, Author’s Estimates(In USD million unless otherwise specified)

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In my last report on First Financial Bancorp, I estimated earnings of $2.22 per share for 2022 and $2.52 per share for 2023. I’ve slightly increased my earnings estimates, mostly because I’ve raised my loan balance estimates following the third quarter’s strong growth.

My estimates are based on certain macroeconomic assumptions that may not come to fruition. Therefore, actual earnings can differ materially from my estimates.

Moderately High Total Expected Return Justifies a Buy Rating

First Financial Bancorp is offering a dividend yield of 3.8% at the current quarterly dividend rate of $0.23 per share. The earnings and dividend estimates suggest a payout ratio of 35.5% for 2023, which is below the five-year average of 46%. Therefore, there is room for a dividend hike. Nevertheless, I’m not expecting any change in the dividend level because First Financial Bancorp does not increase its dividend regularly.

I’m using the historical price-to-tangible book (“P/TB”) and price-to-earnings (“P/E”) multiples to value First Financial Bancorp. The stock has traded at an average P/TB ratio of 1.93 in the past, as shown below.

	FY17	FY18	FY19	FY20	FY21	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
Historical P/TB	2.31x	2.26x	1.97x	1.23x	1.88x	1.93x
Source: Company Financials, Yahoo Finance, Author’s Estimates

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Multiplying the average P/TB multiple with the forecast tangible book value per share of $9.5 gives a target price of $18.4 for the end of 2023. This price target implies a 24.2% downside from the December 30 closing price. The following table shows the sensitivity of the target price to the P/TB ratio.

P/TB Multiple	1.73x	1.83x	1.93x	2.03x	2.13x
TBVPS – Dec 2023 ($)	9.5	9.5	9.5	9.5	9.5
Target Price ($)	16.5	17.4	18.4	19.3	20.3
Market Price ($)	24.2	24.2	24.2	24.2	24.2
Upside/(Downside)	(32.1)%	(28.1)%	(24.2)%	(20.3)%	(16.4)%
Source: Author’s Estimates

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The stock has traded at an average P/E ratio of around 13.2x in the past, as shown below.

	FY17	FY18	FY19	FY20	FY21	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
Historical P/E	17.2x	15.2x	12.3x	10.1x	11.0x	13.2x
Source: Company Financials, Yahoo Finance, Author’s Estimates

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Multiplying the average P/E multiple with the forecast earnings per share of $2.59 gives a target price of $34.1 for the end of 2023. This price target implies a 40.8% upside from the December 30 closing price. The following table shows the sensitivity of the target price to the P/E ratio.

P/E Multiple	11.2x	12.2x	13.2x	14.2x	15.2x
EPS 2023 ($)	2.59	2.59	2.59	2.59	2.59
Target Price ($)	28.9	31.5	34.1	36.7	39.3
Market Price ($)	24.2	24.2	24.2	24.2	24.2
Upside/(Downside)	19.4%	30.1%	40.8%	51.5%	62.2%
Source: Author’s Estimates

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Equally weighting the target prices from the two valuation methods gives a combined target price of $26.2, which implies an 8.3% upside from the current market price. Adding the forward dividend yield gives a total expected return of 12.1%. Hence, I’m maintaining a buy rating on First Financial Bancorp.