First Financial Bancorp - Q3 2024

Transcript

Operator (participant)

Thank you for standing by. My name is Jeannie, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Financial Bancorp Third Quarter twenty twenty-four earnings conference call and webcast. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the conference over to Scott Crawley. You may begin.

Scott Crawley (Head of Investor Relations)

Yeah, good morning. Thank you, Jeannie. Good morning, everybody, and thank you for joining us on today's conference call to discuss First Financial Bancorp's third quarter and year-to-date financial results. Participating on today's call will be Archie Brown, President and Chief Executive Officer, Jamie Anderson, Chief Financial Officer, and Bill Harrod, Chief Credit Officer. Both the press release we issued yesterday and the accompanying slide presentation are available on our website, www.bankatfirst.com, under the Investor Relations section. We'll make reference to the slides contained in the accompanying presentation during today's call. Additionally, please refer to the forward-looking statement disclosure contained in the third quarter two thousand and twenty-four earnings release, as well as our SEC filings for a full discussion of the company's risk factors.

The information we will provide today is accurate as of September thirtieth, two thousand and twenty-four, and we will not be updating any forward-looking statements to reflect facts or circumstances after this call. I'll now turn the call over to Archie Brown.

Archie Brown (CEO)

Thanks, Scott. Good morning, everyone, and thank you for joining us on today's call. Yesterday afternoon, we announced our financial results for the third quarter. I'll provide some highlights this morning and then turn the call over to Jamie to provide further details. The third quarter financial results reflect our ongoing commitment to driving industry-leading performance. Adjusted earnings per share was $0.67, which resulted in a return on assets of 1.42% and a return on tangible common equity of 19.77%. We're particularly pleased with our 4.08% net interest margin, with only a two basis points decline from the second quarter. The margin has proven to be more durable than expected due to high asset yields from Agile, investment portfolio restructuring, and moderating funding costs.

Average deposit balances grew 4.9% on an annualized basis as declines in our low-cost products moderated. Consistent with our expectations, loan growth slowed during the third quarter as softer pipelines in the second quarter led to fewer fundings in the current period. Loan growth was also impacted by higher payoffs in our commercial banking and investment commercial real estate portfolios. Loan pipelines strengthened during the third quarter, and we expect higher growth rates as we close out the year. Third quarter non-interest income was $45.7 million or $58.8 million on an adjusted basis, with strong earnings from foreign exchange, wealth management, and the leasing business.

There were several large, non-recurring items that impacted non-interest income, including $17.5 million of losses on securities, which included a $9.7 million impairment charge on two bonds secured by skilled nursing homes. While the third quarter non-interest income was a little noisy, non-interest expenses were relatively flat compared to the prior quarter. We remain diligent in managing our expenses, and our workforce initiative, efficiency initiative has resulted in the elimination of 120 positions to date, with additional savings expected into 2025. Asset quality was stable for the quarter, and our ACL increased to 1.37% of total loans. Additionally, third quarter net charge-offs were 25 basis points on an annualized basis, in line with our expectations, and non-performing assets as a % of assets increased 1 basis point to 36 basis points.

We are optimistic about asset quality and are confident in our ability to manage the portfolio through the expected interest rate reductions and economic uncertainty in the near term. With regard to capital, strong earnings and the decline in interest rates led to significant improvement in tangible book value per share and tangible common equity. Tangible book value per share increased 10% from the linked quarter and over 30% from the same quarter last year to $14.26, while tangible common equity increased 75 basis points from June thirtieth to 7.98% as of the end of September. With that, I'll now turn the call over to Jamie to discuss these results in greater detail, and after Jamie's discussion, I will wrap up with some forward-looking commentary and closing remarks.

Jamie Anderson (CFO)

Thank you, Archie, and good morning, everyone. Slides four, five, and six provide a summary of our most recent financial results. The third quarter was highlighted by strong earnings, a net interest margin that exceeded our expectations, and a 10% increase in tangible book value. Our net interest margin remains very strong at 4.08%. The margin declined two basis points from the linked quarter as flat asset yields, combined with a favorable shift in funding mix to offset a modest increase in the cost of deposits. Similar to the second quarter, we're pleased that the increase in deposit costs moderated in comparison to prior quarters. However, we expect margin contraction in the coming periods due to recent rate cuts. Loan growth was modest during the quarter, as growth in the leasing and mortgage books was partially offset by higher payoffs in other portfolios.

Average deposit balances increased one hundred and sixty-six million, or 4.9% on an annualized basis. Overall, the deposit mix continues to shift slightly toward higher cost deposits. However, we maintain 23% of our total balances in non-interest-bearing accounts and are strategically focused on maintaining deposit balances. Turning to the income statement. Third quarter fee income was solid, led by foreign exchange, wealth management, and leasing income. Non-interest expenses increased slightly from the linked quarter due to higher leasing expenses and a supplemental contribution to our foundation. However, the impact from our efficiency initiative is becoming more meaningful. We expect to see further benefits in the coming periods. Our ACL coverage increased one basis point during the quarter to 1.37% of total loans.

This resulted in $10.6 million of provision expense during the period, which was driven by net charge-offs and slower prepayment speeds. Overall, asset quality trends were in line with expectations. Annualized net charge-offs were 25 basis points during the period, and NPAs as a percentage of assets were relatively flat at 36 basis points. From a capital standpoint, our regulatory ratios are in excess of both internal and regulatory targets. Tangible book value increased $1.32 or 10.2%, while our tangible common equity ratio increased 75 basis points to 7.98% during the period. Slide seven reconciles our GAAP earnings to adjusted earnings, highlighting items that we believe are important to understanding our quarterly performance. Adjusted net income was $63.6 million or $0.67 per share for the quarter.

Adjustments to non-interest income were a $4.4 million deferred tax gain, as well as $17.5 million of losses on securities. The loss on securities includes $8 million in losses from sales and $9.7 million of impairment losses on two securities, with credit deterioration that we anticipate selling in the near term. Non-interest expense adjustments exclude the impact of efficiency costs as well as acquisition, severance, and branch consolidation costs. As depicted on slide 8, these adjusted earnings equate to a return on average assets of 1.42%, a return on average tangible common equity of 20%, and a pre-tax, pre-provision ROA of 2%. Turning to slides 9 and 10, net interest margin declined two basis points from the linked quarter at 4.08%.

Asset yields were relatively flat compared to the prior quarter, as loan yields declined one basis point and the yield on the investment portfolio increased one basis point. Funding costs were also relatively flat compared to the linked quarter, as a favorable mix shift mostly offset a slight increase in deposit costs. Our cost of deposits increased five basis points compared to the linked quarter. However, as you can see on the bottom right chart, that pace of growth declined significantly from previous periods and was essentially flat on a month-to-month basis by the end of the quarter. Slide 11 outlines our various sources of liquidity and borrowing capacity. We continue to believe we have the flexibility required to manage the balance sheet through the expected economic environment. Slide 13 illustrates our current loan mix and balance changes compared to the linked quarter.

Loan balances increased 1% on an annualized basis, with modest growth in almost every portfolio. As you can see on the right, growth was driven by mortgage and leasing, which offset an increase in prepayments during the period. Slide 14 provides detail on our loan concentration by industry. We believe our loan portfolio remains sufficiently diversified to protect us from deterioration in any particular industry. Slide 15 provides detail on our office portfolio. Similar to last quarter, about 4% of our total loan book is secured by office space, and the overall portfolio performance metrics remain strong. No office relationships were downgraded to non-accrual during the quarter, and our total non-accrual balance for this portfolio remains approximately $17 million. Slide 6 shows our deposit mix, as well as the progression of average deposits from the linked quarter.

In total, average deposit balances increased $166 million during the quarter, driven primarily by increases in retail CDs and money market accounts. These increases offset seasonal declines in public funds, as well as modest declines in non-interest-bearing deposits and savings accounts. Similar to recent quarters, this was expected as the current interest rate environment has driven customers to higher cost deposit products. Slide 17 illustrates trends in our average personal, business, and public fund deposits, as well as a comparison of our borrowing capacity to our uninsured deposits. On the bottom right of the slide, you can see our adjusted uninsured deposits were $3.3 billion. This equates to 24% of our total deposits. We remain comfortable with this concentration and believe our borrowing capacity provides sufficient flexibility to respond to any event that would stress our larger deposit balances.

Slide 18 highlights our non-interest income for the quarter. Total fee income was $46 million during the quarter, or $59 million, as adjusted, with Bannockburn, Summit, and Wealth Management all having solid quarters. Additionally, mortgage, deposit, service charge, and other non-interest income increased from the second quarter. Non-interest expense for the quarter is outlined on Slide 19. Core expenses increased $2.2 million during the period. This was driven by higher leasing business expenses and a supplemental contribution to our foundation. As I mentioned earlier, we're recognizing more of the expected benefit from our ongoing efficiency initiative and expect to see further cost reductions in the coming periods. Turning now to Slides 20 and 21.

Our ACL model resulted in a total allowance, which includes both funded and unfunded reserves of $176 million, and $10.6 million of total provision during the period. This resulted in an ACL that was 1.37% of total loans, which was a one basis point increase from the second quarter. Provision expense was primarily driven by net charge-offs, which were 25 basis points for the period. Additionally, our NPAs to total assets held steady at 36 basis points. In other credit trends, classified asset balances increased to 1.14% of total assets, primarily due to the downgrade of four relationships. These downgrades were not concentrated in any loan or collateral type. Our ACL coverage increased, and we continue to believe we have modeled conservatively to build a reserve that reflects the losses we expect from our portfolio.

We anticipate our ACL coverage will remain relatively flat or increase slightly in future periods as our model responds to changes in the macroeconomic environment. Finally, as shown on Slides 22 and 23, regulatory capital ratios remain in excess of regulatory minimums and internal targets. During the third quarter, tangible book value increased 10%, and the TCE ratio increased seventy-five basis points. Absent the impact from AOCI, the TCE ratio would have been 9.34% compared to 7.98% as reported. Our total shareholder return remains strong, with 44% of our earnings returned to our shareholders during the period through the common dividend. We maintain our commitment to provide an attractive return to our shareholders, and we continue to evaluate capital actions that support that commitment. I'll now turn it back over to Archie for some comments on our outlook. Archie?

Archie Brown (CEO)

Thank you, Jamie. Before we end our prepared remarks, I want to comment on our forward-looking guidance, which can be found on slide 24. Loan pipelines have strengthened, and we expect seasonally high production in our Summit business unit to contribute to mid-single-digit growth on an annualized basis for the fourth quarter. For securities, we expect the portfolio to remain relatively stable. Deposit growth has been significant thus far this year, and we expect to continue to see strong growth for the next quarter as we experience some year-end seasonal inflows. Our net interest margin continues to be strong and industry-leading, but we expect it to come down to between 3.85% to 3.95% for the next quarter as the Fed eases, assuming another 25 basis point rate cut in both November and in December.

We expect our credit costs to remain flat over the next quarter, while ACL coverage as a percentage of loans is expected to be stable to slightly increasing. For the full year, we expect net charge-offs to be approximately 25-30 basis points. Fee income is expected to be between $63 and $65 million, which includes $13-$15 million of foreign exchange and $18-$20 million for the leasing business revenue. Non-interest expense is expected to be between $126 and $128 million, with potential variability of leasing business and fee-based incentive expense as they are tied directly to revenue. In closing, we're very proud of our financial results for the first nine months of two thousand and twenty-four.

Overall, the economy remains healthy, and the general easing of interest rates should extend economic growth in the coming periods. We believe we're in a great position to finish the year on a high note and head into two thousand and twenty-five with continued momentum. With that, we'll now open up the call for questions. Jeannie?

Operator (participant)

Thank you. The floor is now open for questions. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. If you are called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Again, press star one to join the queue. And your first question comes from the line of Daniel Tamayo with Raymond James. Please go ahead.

Daniel Tamayo (Analyst)

Thank you. Good morning, guys.

Archie Brown (CEO)

Danny.

Daniel Tamayo (Analyst)

Maybe starting on the loan growth, so a little bit slower, as you guys mentioned and expected in the third quarter, you guided to that. Improving in the fourth quarter, and Archie, you mentioned some seasonal strength from Summit. Just curious, as we look into you know, beyond fourth quarter and kind of what you guys have done this year was pretty strong. You know, we've got mid-single-digit guidance for the fourth quarter, but curious how you think we should think about what would be a more normalized growth rate for you guys, given the additions you've had from Agile and other businesses recently, looking into twenty twenty-five.

Archie Brown (CEO)

Yeah, Danny, we feel. I mean, I think we feel pretty good about certainly the fourth quarter improving, and then as you look into two thousand and twenty-five, we're finalizing our plans for next year, but I would tell you we're probably in that mid to upper single digits in terms of annualized loan growth in twenty twenty-five. A pretty balanced across most of the portfolios and, you know, even some of this quarter, we're. I think we're rationalizing more, making sure that if it's a, you know, lower return type of a relationship or loan, we probably exit a few of those in the quarter, and we'll continue to be disciplined around that.

So that may temper growth from what it could be, but even with that, we still see kind of a mid to high single digits for twenty twenty-five.

Daniel Tamayo (Analyst)

... Okay, terrific. And then, you know, I guess maybe on the, on the yield side there, if you can give us a sense, you know, the loan yields certainly have remained stronger than I was expecting. And you mentioned the mix shift there with Agile again. But if you could give us a sense for, you know, where those loan yields are coming on the books and rolling off as maybe we do see some pressure begin to show itself here in the fourth quarter and next year.

Archie Brown (CEO)

Yeah, I mean, I can tell you on the runoff side of that. But on the origination side for the quarter, origination yields were probably in the high sevens, say seven, eight-ish or so. And even in September, they were only down maybe ten basis points. So still kind of high, high seven, seven seventy-ish in September. So, you know, as Fed cuts, there's gonna be some continued decline. That's baked in, of course, how we look at the margin. Jamie, I don't know if you've seen what the-

Jamie Anderson (CFO)

Yeah. So, yeah, the loans going on the books right now, Danny or Doug, we originated in the third quarter, we're going on an average yield of about in the high sevens and like the seven seventy-five, seven eighty range, and the payoff yields are just slightly below that. Maybe twenty basis points below that at this point.

Daniel Tamayo (Analyst)

Okay. All right, that's helpful. I think that's what I wanted to cover. Yep, I'll go ahead and jump off. I appreciate the color, guys.

Archie Brown (CEO)

Thanks, Danny.

Jamie Anderson (CFO)

Thank you.

Operator (participant)

Your next question comes from line of Terry McEvoy with Stephens. Please go ahead.

Terry McEvoy (Analyst)

Hi, good morning, Jamie. Good morning, Archie. Thanks for taking my questions.

Jamie Anderson (CFO)

Hey. Hey, Terry.

Terry McEvoy (Analyst)

Maybe we can just start, the $8 million of losses from restructuring activity. Could you just talk about yields on the securities you sold, the reinvestment, maybe when it occurred in the quarter so we could figure out the benefit and how that comes into play in your forward guidance?

Jamie Anderson (CFO)

Yep. So we just so you know, we've taken that into account when we. You know, the 3.85%-3.95% margin that we talk about in the fourth quarter, that's already baked into that number. The sales occurred. So we sold about $140 million of securities, kind of, I would say. It all happened kind of in the middle of the quarter. So we got to, you know, the reinvestment can take a little bit of time, too. So we didn't really get much of a benefit of that within the third quarter. We'll get the full benefit in the fourth quarter. So we sold $140 million of securities, and we picked up about 330 basis points on the reinvestment.

So the earn back on that is a little bit less than two years, about one point seven years, and we've been trying to keep those. We've done a few of those in the year. We did one in the fourth quarter of last year as well. Just kind of small incremental type restructurings there. You know, nothing, nothing huge. But so the $8 million loss, you know, we're picking up about $4.5 million or so on a go-forward run rate on that, on that- on those sales. So about 330 basis points on the $140 million.

Terry McEvoy (Analyst)

Great. Thanks for all the details, Jamie. And then, maybe just a question on Summit. How are the credit trends performing there relative to projections? It continues to be a nice platform for growth. And I ask that only 'cause we are seeing and hearing some stress in the small ticket area in a few specific industries.

Archie Brown (CEO)

Yeah. Yeah, the portfolio, we put on the portfolio, obviously, a couple of years ago. We've grown it, and it's now stabilized at a good size. And, you know, what we're seeing in there is not unexpected. Overall, we have seen some transportation come through the watch list worse than you would expect, based on some of the headwinds there. But nothing really out of the ordinary from all the key KRIs on credit. Performing very well.

Bill Harrod (Chief Credit Officer)

Yeah, Terry, this is Archie. You know, they're not huge in small ticket in terms of the overall mix of the portfolio. And Bill talked about a couple of the transportation-related. I think their total exposure is under a hundred million-

Archie Brown (CEO)

Yeah

Bill Harrod (Chief Credit Officer)

in that, in that book, probably 80-90 million. I think in total, Bill, what are we?

Archie Brown (CEO)

Two hundred and twenty-one.

Bill Harrod (Chief Credit Officer)

$220 million or so in the total book for the company.

Terry McEvoy (Analyst)

Great. Thanks for all the color. Have a nice day.

Archie Brown (CEO)

Thanks, Terry.

Jamie Anderson (CFO)

Thanks, Terry.

Operator (participant)

Again, if you would like to ask a question, press star, then the number one on your telephone keypad. Your next question comes from the line of Chris McGratty with KBW. Please go ahead.

Andrew Leischner (Director and Analyst)

Hey, how's it going? This is, Andrew Leischner on for Chris McGratty.

Archie Brown (CEO)

Hey, Andrew.

Andrew Leischner (Director and Analyst)

Hi. So just on capital, you guys continue to have strong capital generation and, you know, CET1 up to 12% now. Can you just remind us where your capital deployment priorities lie and maybe some thoughts or conversations you're having around M&A? Thanks.

Archie Brown (CEO)

Andrew, this is Archie. On the M&A front, look, we're primarily focused on organic growth and executing our strategy. I do believe we're interested in bank M&A, and believe there are gonna be more opportunities over the next year or two. We do remain disciplined, though, in our kind of pricing, you know, just around our pricing and how we model additional opportunities. And we're gonna be patient to make sure that if we do a deal, when we do a deal, it's gonna have the best outcome for our shareholders. So I think there'll be opportunities. I hope we make a play, but it's gonna be something that really fits well for our shareholders.

Jamie Anderson (CFO)

Yeah, and Andrew, on the capital front, in terms of capital deployment, we don't see us doing any stock buybacks at this point, just where our stock is trading in terms of relative to tangible book value. You know, we did increase the dividend by a penny last quarter. So I mean, at this point, we're still, I think, in the capital building mode and growing tangible book value. We just think that's important here for the time being. You know, but if, like Archie said, if we see something that looks attractive, we'll be opportunistic there.

Andrew Leischner (Director and Analyst)

Oh, okay. Thank you. And on the income guidance, looks to be about $5 million step up from this quarter. How should we be thinking about growth there relative to Q4 entering 2025?

Jamie Anderson (CFO)

Are you talking about in terms of non-interest income?

Andrew Leischner (Director and Analyst)

Yeah, yeah. Non-interest income.

Jamie Anderson (CFO)

Yeah. So, you know, we have we see good growth there going forward, you know, both from. And one of the main drivers that we have there, as Summit ramps up their balance sheet, when they put on operating leases, obviously, that hits down, you know, those payments hit down in fee income. So, you know, the growth in non-interest income will be, you know, driven by, you know, the what I would call the normal normal lines in terms of Bannockburn on the wealth side. You know, our capital markets group with Bannockburn has been growing, you know, 10 or 15% a year. But again, as Summit puts on, you know, more operating leases and ramps up their balance sheet.

We've owned them for three years, so the average, you know, average term of those leases that they put on the books are roughly four years, so we're still ramping up the balance sheet, you know, until we get to kind of a more stable asset base there and stuff starts to churn. That fee income line will continue to grow there for the leasing business.

Andrew Leischner (Director and Analyst)

Okay, great. Thanks, thanks for the call. I'll step back.

Jamie Anderson (CFO)

Sure. Thank you.

Operator (participant)

That concludes our Q&A session. I will now turn the conference back over to Archie Brown for closing remarks.

Archie Brown (CEO)

Thank you, Jeannie, and thank you all for joining us today to hear about our progress in the third quarter. We look forward to talking to you again after the fourth quarter. Have a great day.