Executive Summary / Key Takeaways

• First Financial Bancorp demonstrated strong adjusted earnings performance in Q1 2025, with adjusted EPS of $0.63, ROA of 1.33%, and ROTCE of 17.8%, reflecting operational efficiency and strategic focus.
• The net interest margin remained robust at 3.88% (FTE), showing resilience despite declining asset yields, with management anticipating expansion in Q2 2025 driven by accelerating deposit cost reductions.
• Asset quality metrics showed improvement in Q1 2025, with net charge-offs declining linked quarter to 36 basis points annualized and non-performing assets decreasing by 9.5%, contributing to management's expectation of further improvement.
• Capital levels are exceptionally strong, with a tangible common equity ratio increasing to 8.2% and tangible book value per share growing 5% linked quarter and 18% year-over-year to $14.80, providing significant financial flexibility.
• Strategic expansion into niche commercial finance verticals and new metro markets, coupled with ongoing efficiency initiatives, positions FFBC for continued modest loan growth (4-5% expected for FY 2025) and stable expense management despite a challenging economic backdrop and competitive pressures.

A Foundation of Relationships and Niche Expertise

First Financial Bancorp, an $18.5 billion financial holding company rooted in its 1863 founding, operates primarily through First Financial Bank across Ohio, Indiana, Kentucky, and Illinois. While serving its core regional footprint with traditional commercial and retail banking services, FFBC has strategically evolved, layering on specialized financial services that extend its reach and diversify its revenue streams. This blend of local market focus and national niche expertise forms the bedrock of its competitive approach.

In the competitive landscape, FFBC operates alongside larger regional and national players like Fifth Third Bancorp (FITB), Huntington Bancshares (HBAN), PNC Financial Services Group (PNC), and KeyCorp (KEY), as well as smaller community banks and increasingly, fintech firms. Against larger rivals, FFBC differentiates itself through a relationship-centric model and a focus on specific industry verticals where it has built expertise. Its regional brand fosters customer loyalty, particularly in its established community markets, providing a stable, lower-cost funding base. This deposit efficiency is a key strength, evidenced by robust deposit growth trends in recent periods, contrasting with some larger peers who have faced greater pressure on funding costs and deposit mix.

FFBC's strategic acquisitions have been pivotal in shaping its current competitive positioning. The integration of businesses like Summit Funding Group (equipment lease financing), Bannockburn Global Forex (foreign exchange), and most recently, Agile Premium Finance (insurance premium financing) has established national platforms in targeted, higher-margin verticals. These specialty finance businesses not only contribute significantly to fee income but also provide diverse loan portfolios that complement the core banking book. This targeted approach allows FFBC to compete effectively beyond its traditional branch footprint, carving out market share in areas less dominated by broad-based banking services.

While the banking industry increasingly relies on technology for efficiency and customer experience, FFBC's technological differentiation is primarily centered on operational optimization and leveraging technology to support its business model rather than a unique, proprietary core banking technology moat with quantifiable performance metrics like those seen in manufacturing. The company has invested in technologies that support its digital banking offerings and internal processes. Notably, an ongoing workforce efficiency initiative, partly enabled by investments in technology and tools, has created capacity within the system, leading to a 7% reduction in FTE (excluding the Agile acquisition). This focus on operational efficiency and cost control, rather than a distinct technological product, is a key aspect of its strategy to maintain profitability in a competitive environment. The company also utilizes technology for sophisticated internal modeling, such as the quantitative estimation of expected credit losses and interest rate risk sensitivity analysis, which are critical for risk management. While not a customer-facing technological moat, these internal capabilities are vital for navigating complex financial risks and maintaining stability.

Performance Reflecting Strategic Execution

First Financial's recent financial performance underscores the impact of its strategic focus and operational discipline. For the first quarter of 2025, the company reported adjusted net income of $60.2 million, translating to adjusted earnings per diluted share of $0.63. These figures represent a return on average assets of 1.33% and a return on average tangible common equity of 17.8% on an adjusted basis, highlighting strong profitability relative to its asset base and tangible capital.

Net interest income, the company's primary revenue source, stood at $149.3 million in Q1 2025, a decrease of 3.3% from the linked quarter. The net interest margin on a fully tax equivalent basis was 3.88%, a 6 basis point decline from Q4 2024. This linked-quarter compression was driven by an eighteen basis point decline in earning asset yields, primarily a 22 basis point drop in loan yields, which outpaced the 12 basis point decrease in total deposit costs. However, management noted that the pace of deposit cost increases has moderated significantly, and they anticipate deposit cost reductions will accelerate in the near term, supporting margin expansion in Q2 2025. Year-to-date, net interest income increased slightly by 0.4% compared to Q1 2024, as higher average earning asset balances (up 6.7%) offset lower earning asset yields (down 35 bps).

Noninterest income in Q1 2025 was $51.1 million ($61.0 million adjusted), a decrease of 26.9% from Q4 2024. This decline was primarily due to $9.9 million in losses on sales of investment securities as the company strategically repositioned a portion of its portfolio to increase future yields, lower foreign exchange income due to reduced client demand, and decreased other noninterest income. Despite the linked-quarter dip, year-to-date noninterest income increased by 9.8% compared to Q1 2024, driven by strong growth in foreign exchange income (up 20.2%), leasing business income (up 28.2%), and wealth management fees (up 21.9%). These trends highlight the growing contribution and diversification benefits of the specialty finance and wealth management businesses.

Noninterest expenses totaled $128.1 million in Q1 2025 ($126.6 million adjusted), a decrease of 13.4% from Q4 2024. This significant linked-quarter reduction was primarily due to lower salaries and employee benefits (reflecting reduced incentive compensation), decreased professional services costs (related to prior quarter optimization efforts), and lower amortization of tax credit investments. Year-to-date, noninterest expenses increased by 4.7% compared to Q1 2024, mainly due to higher leasing business expenses (tied to portfolio growth) and increased salaries and benefits (linked to higher fee income). The ongoing efficiency initiative is expected to yield further benefits, contributing to stable core expenses.

Asset quality metrics showed positive trends in Q1 2025. Net charge-offs were $10.5 million, or 36 basis points annualized, a decrease from 40 basis points in Q4 2024. While Q1 included a $7.0 million loss on a single C&I relationship, management expects net charge-offs to decline further in Q2, bringing the first half closer to their full-year expectation of 25-30 basis points. Nonperforming assets decreased by 9.5% to $59.8 million, or 0.32% of total assets, from $66.0 million (0.36% of total assets) at December 31, 2024. Classified assets also declined to 1.16% of total assets from 1.21%. The allowance for credit losses (ACL) on loans and leases remained stable at 1.33% of total loans. Management expressed confidence in the improving trajectory of asset quality and believes the ACL is conservatively modeled.

Strength in Capital and Liquidity

First Financial maintains a robust capital position, providing significant financial flexibility. As of March 31, 2025, the company's regulatory capital ratios were well in excess of minimum requirements and categorized it as well-capitalized. The Common Equity Tier 1 capital ratio was 12.29%, the Tier 1 capital ratio was 12.61%, the Total capital ratio was 14.90%, and the Leverage ratio was 10.01%. Total regulatory capital exceeded the minimum requirement by $617.3 million.

Tangible capital metrics also showed strong improvement. The tangible common equity ratio increased to 8.16% at March 31, 2025, up significantly from 7.73% at December 31, 2024. Tangible book value per share grew to $14.80, a 5% increase from the linked quarter and an impressive 18% increase over the past year. Management is focused on continuing to grow tangible book value, highlighting a 35% increase over the last three years. This capital strength is a direct result of consistent earnings generation and an improvement in accumulated other comprehensive income (AOCI) due to lower interest rates impacting the investment portfolio's unrealized losses.

Liquidity is managed through a diverse set of sources. Core deposits remain the most stable funding base, supplemented by access to wholesale funding, including FHLB borrowings ($735 million short-term at March 31, 2025), a $40 million short-term credit facility (unused), and the Federal Reserve discount window. As of March 31, 2025, the company had $5.2 billion in unused and available overnight wholesale funding capacity. Asset-based liquidity is provided by the investment securities portfolio, with $842.7 million of available-for-sale (AFS) securities unpledged and $1.5 billion available to be sold at breakeven. Expected cash flows from the investment portfolio over the next 12 months total $782.2 million. Uninsured deposits represented 40.6% of total deposits ($5.8 billion) at March 31, 2025, but excluding public funds and intercompany accounts, adjusted uninsured deposits were $3.7 billion, or 26% of total deposits. Management remains comfortable with this concentration, supported by ample borrowing capacity.

Outlook and Key Considerations

First Financial's outlook for the near term reflects a cautious yet optimistic stance, balancing healthy business pipelines with anticipated market dynamics. For the second quarter of 2025, management expects modest loan growth, projected to be in the low single digits on an annualized basis. While pipelines in consumer, C&I, and ICRE are healthy, this growth is expected to be tempered by continued elevated prepayment pressure, particularly in the ICRE portfolio. This pressure is attributed to a mix of strategic exits, competition from private credit markets, and potential refinancing activity if long-term rates decline. For the full year 2025, loan growth expectations have been adjusted slightly lower to 4-5%, down from an earlier 6-7% projection, reflecting the softer start to the year and anticipated payoffs.

The net interest margin is projected to expand in the second quarter, reaching a range of 3.95% to 4.05%. This guidance assumes a 25 basis point rate cut in June and is driven by the expectation that deposit cost reductions will accelerate, outpacing any further decline in asset yields. Management believes their strategy of managing deposit costs has created flexibility to mitigate the impact of future rate cuts.

Credit costs are expected to remain stable in the near term, with net charge-offs projected to decline further in Q2. This outlook is supported by improving asset quality trends observed in Q1. ACL coverage is expected to be stable to slightly increasing.

Fee income is projected to be between $64 million and $66 million in Q2 2025, reflecting an expected seasonal rebound from Q1 lows. Leasing business income is specifically guided between $20 million and $20 million. Non-interest expense is expected to remain stable, in the range of $126 million to $128 million, excluding variable components tied to revenue. This stability is underpinned by the ongoing efficiency initiatives.

Key risks to monitor include the impact of interest rate changes on the asset-sensitive balance sheet, though management believes they can mitigate some of the downside from rate cuts through deposit pricing. Credit risk remains a focus, particularly in specific industries like office commercial real estate (3.2% of total loans, with 95.5% pass rated and $16.8 million nonaccrual in Q1 2025) and transportation, although management views overall exposure as manageable. The potential impact of tariffs on client businesses and broader demand is also being monitored. Competition from larger banks with greater scale and technological resources, as well as fintech alternatives, continues to pose challenges to market share and efficiency.

Conclusion

First Financial Bancorp enters the current period from a position of strength, marked by robust capital levels, improving asset quality trends, and a diversified business model that leverages both its regional deposit franchise and national specialty finance expertise. While navigating the dynamic interest rate environment and competitive pressures from larger, more technologically advanced institutions and agile fintechs, FFBC's focus on relationship banking, niche verticals, and operational efficiency provides a solid foundation. The outlook points to continued profitability, supported by anticipated margin expansion and stable expenses, even as loan growth moderates due to market-specific prepayment dynamics. The company's strong capital base and commitment to growing tangible book value offer a buffer against uncertainty and provide flexibility for future strategic actions, including potential opportunistic M&A. Investors should watch for the execution of efficiency initiatives, the trajectory of deposit costs, and the performance of the specialty finance segments as key indicators of FFBC's ability to sustain its strong performance in the periods ahead.