First Financial Bancorp. Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 25, 2024

There are 8 speakers on the call.

Operator

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 20 24 Earnings Conference Call and Webcast. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

Thank you. I would now like to turn the conference over to Scott Crawley. You may begin.

Speaker 1

Yes, good morning. Thank you, Jeannie. Good morning, everybody, and thank you for joining

Speaker 2

us on today's conference call to discuss First Financial Bancorp's Q3 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 O'Hara, Chief Credit Officer. Both the press release we issued yesterday and the accompanying slide presentation are available on our website at 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 Q3 2024 earnings release as well as our SEC filings for a full discussion of the company's risk factors.

Speaker 2

The information we will provide today is accurate as of September 30, 2024, and we will not be updating any forward looking statements to reflect facts or circumstances after this call.

Speaker 1

I'll now turn the call over to Archie Brown. Thanks, Scott. Good morning, everyone, and thank you for joining us on today's call. Yesterday afternoon, we announced our financial results for the Q3. I'll provide some highlights this morning and then turn the call over to Jamie to provide further details.

Speaker 1

The Q3 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 percent and return on tangible common equity of 19.77%. We're particularly pleased with our 4.08 percent net interest margin with only a 2 basis point decline from the Q2, 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 Q3 as softer pipelines in the 2nd quarter led to fewer fundings in the current period.

Speaker 1

Loan growth was also impacted by higher payoffs in our commercial banking and investment commercial real estate portfolios. Loan pipelines strengthened during the Q3 and we expect higher growth rates as we close out the year. 3rd quarter non interest income was $45,700,000

Speaker 3

or

Speaker 1

$58,800,000 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 $17,500,000 of losses on securities, which included a $9,700,000 impairment charge on 2 bonds secured by skilled nursing homes. While the 3rd 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.

Speaker 1

Additionally, 3rd quarter net charge offs were 25 basis points on an annualized basis, in line with our expectations and non performing assets as a percent 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 30 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.

Speaker 1

And after Jamie's discussion, I will wrap up with some forward looking commentary and closing remarks.

Speaker 3

Thank you, Archie, and good morning, everyone. Slides 4, 5 and 6 provide a summary of our most recent financial results. The 3rd quarter was highlighted by strong earnings and 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 2 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.

Speaker 3

Similar to the 2nd quarter, we were 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 $166,000,000 or 4.9 percent on an annualized basis. Overall, the deposit mix continues to shift slightly toward higher cost deposits.

Speaker 3

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. 3rd 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.

Speaker 3

We expect to see further benefits in the coming periods. Our ACL coverage increased 1 basis point during the quarter to 1.37% of total loans. This resulted in $10,600,000 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.

Speaker 3

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 percent, while our tangible common equity ratio increased 75 basis points to 7.98% during the period. Slide 7 reconciles our GAAP earnings to adjusted earnings, highlighting items that we believe are important to understanding our quarterly performance. Adjusted net income was $63,600,000 or $0.67 per share for the quarter. Adjustments to non interest income were a $4,400,000 deferred tax gain as well as $17,500,000 of losses on securities.

Speaker 3

The loss on securities includes $8,000,000 in losses from sales and $9,700,000 of impairment losses on 2 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 percent, a return on average tangible common equity of 20% and a pre tax pre provision ROA of 2%. Turning to Slides 9 10, net interest margin declined 2 basis points from the linked quarter at 4.08%. Asset yields were relatively flat compared to the prior quarter as loan yields declined 1 basis point and the yield on the investment portfolio increased 1 basis point.

Speaker 3

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 5 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.

Speaker 3

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.

Speaker 3

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 $17,000,000 Slide 6 shows our deposit mix as well as the progression of average deposits from the linked quarter. In total, average deposit balances increased $6,000,000 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.

Speaker 3

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 $3,300,000,000 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.

Speaker 3

Total fee income was $46,000,000 during the quarter or $59,000,000 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 2nd quarter. Non interest expense for the quarter is outlined on Slide 19. Core expenses increased $2,200,000 during the period. This was driven by higher leasing business expenses and a supplemental contribution to our foundation.

Speaker 3

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 21. Our ACL model resulted in a total allowance, which includes both funded and unfunded reserves of $176,000,000 $10,600,000 of total provision during the period. This resulted in an ACL that was 1.37 percent of total loans, which was a 1 basis point increase from the 2nd quarter. Provision expense was primarily driven by net charge offs, which were 25 basis points for the period.

Speaker 3

Additionally, our NPAs of total assets held steady at 36 basis points. In other credit trends, classified asset balances increased to 1.1 percent of total assets, primarily due to the downgrade of 4 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.

Speaker 3

Finally, as shown on Slides 2223, regulatory capital ratios remain in excess of regulatory minimums and internal targets. During the Q3, tangible book value increased 10% and the TCE ratio increased 75 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.

Speaker 3

I'll now turn it back over to Archie for some comments on our outlook. Archie?

Speaker 1

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 Q4. 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.

Speaker 1

Our net interest margin continues to be strong and industry leading, but we expect it to come down to between 3.85 percent to 3.95 percent 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 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 to 30 basis points. Fee income is expected to be between $63,000,000 $65,000,000 which includes $13,000,000 to $15,000,000 of foreign exchange and $18,000,000 to $20,000,000 for the leasing business revenue. Non interest expense is expected to be between $126,000,000 $128,000,000 with potential variability of leasing business and fee based incentive expense as they are tied directly to revenue.

Speaker 1

In closing, we're very proud of our financial results for the 1st 9 months of 2024. 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 2025 with continued momentum. With that, we'll now open up the call for questions. Jeannie?

Operator

Thank you. The floor is now open for questions. And your first question comes from the line of Daniel Tamayo with Raymond James. Please go ahead.

Speaker 4

Thank you. Good morning, guys. Maybe starting on the loan growth, so a little bit slower as you guys mentioned and expected in the Q3, you guided to that improving in the Q4 and Archie you mentioned some seasonal strength from Summit. Just curious as we look into beyond Q4 and kind of what you guys have done this year was pretty strong. We've got mid single digit guidance for the Q4, 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 2025?

Speaker 1

Yes, Danny. We feel I mean, I think we feel pretty good about certainly the Q4 improving. And then as you look into 2025, 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 2025, pretty balanced across most of the portfolios. And even some of this quarter, we're I think we're rationalizing more making sure that if it's 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.

Speaker 1

But even with that, we still see kind of a mid to high single digits for 2025.

Speaker 4

Okay, terrific. And then I guess maybe on the yield side there, if you can give us a sense, 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 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 Q4 and next year?

Speaker 1

Yes. I mean, I can tell you on the we'll look here for the runoff side of that. But on the origination side for the quarter, origination yields were probably in the high 7%, say 7%, 8% ish or so. And even in September, they were only down maybe 10 basis points, so still kind of high 7%, 7.70% ish in September. So as that cuts, there's going to be some continued decline that's baked in, of course, how we look at the margin.

Speaker 1

Jamie, if you see what

Speaker 3

the Yes. So the loans going on the books right now, Danny, like we originated in the Q3, we're going on at an average yield of about in the high 7s and like the 7.75%, 7.80% range. And the payoff yields are just slightly below that, maybe 20 basis points below that at this point.

Speaker 4

Okay. All right. That's helpful. I think that's what I wanted to cover. Yes, I'll go ahead and jump off.

Speaker 4

I appreciate the color, guys.

Speaker 1

Thanks, David. Thank you.

Operator

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

Speaker 5

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

Speaker 1

Hi, George. Maybe you

Speaker 5

could just start the $8,000,000 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 guide?

Speaker 3

Yes. So just so you know, we've taken that into account when we the 3.85 to 3.95 margin that we talk about in the Q4, that's already baked into that number. The sales occurred. So we sold about $140,000,000 of securities, kind of, I would say, in the it all happened kind of in the middle of the quarter. So we got the reinvestment can take a little bit of time too.

Speaker 3

So we didn't really get much of a benefit of that within the Q3. We'll get the full benefit in the Q4. So we sold $140,000,000 of securities, and we picked up about 3.30 basis points on

Speaker 1

the reinvestment.

Speaker 3

So the earn back on that is a little bit less than 2 years, about 1.7 years. And we've been trying to keep those we've done a few of those in the year. We did 1 in the Q4 of last year as well, just kind of small incremental type restructurings there, nothing huge. But so the $8,000,000 loss, we're picking up about $4,500,000 or so on a go forward run rate on that on those sales. So about 3.30 basis points on the $140,000,000

Speaker 5

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.

Speaker 5

And I asked that only because we are seeing and hearing some stress in the small ticket area in a few specific industries.

Speaker 6

Yes. 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 what we're seeing in there is not unexpected. Overall, we have seen some transportation come through, the launch of worse that you would expect based on some of the headwinds there, but nothing really out of the ordinary from all the KRIs on credit performing very well.

Speaker 1

Yes, Trey, this is Archie. They're not huge and small ticket in terms of the overall mix of the portfolio. And Bill talked about a couple of transportation related, I think their total exposure is under $100,000,000 in that book probably $80,000,000 to $90,000,000 I think in total, Bill, what are we $221,000,000 $220,000,000 or so in the total book for the company.

Speaker 5

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

Speaker 1

Thanks, Terry. Thanks,

Operator

Terry. Your next question comes from the line of Chris McGratty with KBW. Please go ahead.

Speaker 7

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

Speaker 1

Hey, Andrew.

Speaker 7

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

Speaker 1

Andrew, this is Archie. On the M and A front, look, we're primarily focused on organic growth and executing our strategy. I do believe we're interested in bank M and A and believe there are going to be more opportunities over the next year or 2. We do remain disciplined though in our kind of our pricing just around our pricing and how we model potential opportunities. And we're going to be patient to make sure that if we do a deal when we do a deal, it's going to have the best outcome for our shareholders.

Speaker 1

So I think there'll be opportunities. So I hope it will play, but this could be something that really fits well for our shareholders.

Speaker 3

Yes. 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. We did increase the dividend by $0.01 last quarter. So I mean, at this point, we're still, I think, in

Speaker 1

the

Speaker 3

capital building mode and growing tangible book value. We just think that's important here for the time being. But if like Archie said, if we see something that looks attractive, we'll be opportunistic there.

Speaker 7

Okay. And on the income guidance, looks to be about $5,000,000 step up from this quarter. How should we be thinking about growth there relative to Q4 entering 2025?

Speaker 3

In terms of are you talking about in terms of non interest income?

Speaker 7

Yes, yes. Non interest income.

Speaker 3

Yes. So we have we see good growth there going forward 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 those payments hit down in fee income. So the growth in non interest income will be driven by what I would call the normal lines in terms of Bannockburn on the wealth side. Our capital markets group with Bannockburn has been growing 10% or 15% a year. But again, as Summit puts on more operating leases and ramps up their balance sheet.

Speaker 3

We've owned them for 3 years. So the average term of those leases that they put on the books are roughly 4 years. So we're still ramping up the balance sheet 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 that for the leasing business.

Speaker 7

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

Speaker 3

Sure. Thank you.

Operator

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

Speaker 1

Thank you, Jeannie, and thank you all for joining us today to hear about our progress in the Q3. We look forward to talking to you again after the Q4. Have a great day.

Powered by Quartr

Key Takeaways

  • First Financial delivered $0.67 adjusted EPS with a ROA of 1.42%, ROTCE of 19.77% and a net interest margin of 4.08%, supported by high-yield assets and moderating funding costs.
  • Loan growth slowed in Q3 due to softer pipelines and higher payoffs, but pipelines strengthened late in the quarter, and the bank expects mid-single-digit annualized loan growth in Q4 and mid-to-upper-single-digit growth in 2025.
  • Non-interest income was $58.8 million adjusted, driven by foreign exchange, wealth management and leasing, but included $17.5 million in securities losses, of which $9.7 million was an impairment charge.
  • The ongoing efficiency initiative has eliminated 120 positions to date, keeping non-interest expenses flat and setting the stage for further savings into 2025.
  • Asset quality remained stable with an allowance of 1.37% of loans, annualized net charge-offs of 25 bps and NPAs of 36 bps, while tangible book value per share rose 10% sequentially to $14.26 and TCE improved to 7.98%.
AI Generated. May Contain Errors.
Earnings Conference Call
First Financial Bancorp. Q3 2024
00:00 / 00:00