First Financial Bancorp. (NASDAQ:FFBC) Q1 2025 Earnings Call Transcript

First Financial Bancorp. (NASDAQ:FFBC) Q1 2025 Earnings Call Transcript April 25, 2025

Kelvin: Good morning, ladies and gentlemen, and thank you for standing by. My name is Kelvin, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Financial Bancorp First Quarter 2025 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. Thank you. I would now like to turn the call over to Scott Crawley. Please go ahead.

Scott Crawley: Thank you, Kelvin. Good morning, everyone. Thank you for joining us on today’s conference call to discuss First Financial Bancorp’s first quarter 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 at bankitfirst.com under the Investor Relations section. We will make reference to the slides contained in the accompanying presentation during today’s call. Additionally, please refer to the forward-looking statements disclosure contained in the first quarter 2025 earnings release, as well as our SEC filings for a full discussion of the company’s risk factors.

The information we will provide is accurate as of March 31, 2025, 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: Thanks, Scott. Good morning, everyone, and thank you for joining us on today’s call. This afternoon, we announced our financial results for the first quarter. Before I turn the call over to Jamie, I’d like to provide a few comments on our recent performance. We are pleased with our performance overall. Adjusted earnings per share was $0.63, a return on assets of 1.33%, and a return on tangible common equity of 17.8%. Our net interest margin remained strong but declined slightly for the quarter as the decline in loan yields outpaced the decrease in deposit costs. Given current short-term interest rates, we expect the margin to expand in the near term. Loan balances were stable during the quarter. First quarter loan production was seasonally lower.

This, along with the workout of several C&I credits and accelerated payoff pressure in the ICRE portfolio, impacted loan growth for the period. We expect a modest level of growth in the second quarter as loan pipelines in our consumer, C&I, and ICRE lines of business are very healthy. However, elevated prepayments in ICRE are expected to continue. Fee income was in line with our expectations at $61 million, representing a decline from the linked quarter due to seasonal fluctuations and less foreign exchange income, which offset another record. We expect seasonal rebounds in the second quarter and a healthy increase in fee income overall. We are very pleased with our expense management during the quarter as non-interest expenses declined by 3.3% due to a decrease in incentive compensation and lower fraud losses.

Our efficiency efforts are ongoing and, excluding the acquisition of Agile in the first quarter of last year, have resulted in a 7% reduction in FTE. We remain diligent in managing our expenses and expect additional benefits from our efforts. We were pleased with improvements in our asset quality metrics for the quarter. Net charge-offs declined four basis points from the linked quarter, while non-performing assets declined by 9.5%. In the near term, we expect asset quality to continue to improve. With respect to tariffs, we do not yet know their impact and remain in close contact with our clients to assist them through any uncertainty. Capital ratios are strong and continue to grow in the first quarter. All regulatory ratios were well in excess of regulatory minimums, and our tangible common equity ratio increased to 8.2%.

Tangible book value per share increased to $14.80, representing a 5% increase from the linked quarter and 18% over the last year. We are focused on growing our tangible book value and are pleased that in the last three years, our tangible book value per share has increased by 35%. Lastly, I want to mention how proud I am of two other first-quarter events. First Financial has been selected for the Gallup Exceptional Workplace Award for Associate Engagement. This distinction is earned by less than 3% of the thousands of companies that Gallup partners with worldwide. Engagement is a core part of our strategy. I want to acknowledge and thank our associates who work tirelessly to drive associate engagement, which directly leads to highly satisfied clients and increased shareholder value.

Additionally, we have received another outstanding Community Reinvestment Act rating from the Federal Reserve. This rating reflects our commitment to our communities, which is a foundation of our strategic plan. I’m proud of our strength in service, investments, and lending, particularly to low and moderate-income areas within our footprint. With that, I’ll now turn the call over to Jamie to discuss results in greater detail. After Jamie’s discussion, I’ll wrap up with some additional forward-looking commentary and closing remarks.

Jamie Anderson: Thank you, Archie, and good morning, everyone. Slides four, five, and six provide a summary of our most recent financial results. The first quarter was highlighted by strong earnings and a robust net interest margin. Our net interest margin remains very strong at 3.88%. This represented a decline of six basis points from the linked quarter. Deposit costs declined twelve basis points during the period, while asset yields decreased eighteen basis points. Loan balances were relatively stable during the quarter as payoffs in C&I and ICRE offset modest growth in our other portfolios. Average deposit balances decreased $99 million due primarily to a seasonal decline in public funds and lower broker deposit balances.

We maintained 21% of our total balances in non-interest-bearing accounts and remain focused on growing lower-cost deposit balances. Turning to the income statement, first-quarter fee income was solid, led by leasing and record wealth management income. These results were partially offset by losses on the sale of securities as we restructured a portion of our investment portfolio. Non-interest expenses declined from the linked quarter due to lower incentive compensation and fewer fraud losses. Additionally, the quarter was positively impacted by our efficiency initiatives in 2024, and we expect to see further benefits in the coming periods. Our ACL coverage was unchanged during the quarter at 1.33% of total loans. This resulted in $8.7 million of provision expense during the period, which was driven by net charge-offs.

Overall asset quality trends were stable. NPAs as a percentage of assets declined slightly, while first-quarter net charge-offs were 36 basis points on an annualized basis. Classified assets decreased five basis points to 1.16% of total assets during the period. From a capital standpoint, our ratios are in excess of both internal and regulatory targets. Tangible book value was $14.80, while our tangible common equity ratio increased 43 basis points to 8.2%. 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 $60.2 million or $0.63 per share for the quarter. Non-interest income was adjusted for $9.9 million of losses on the sales of investment securities, while non-interest expense adjustments exclude the impact of efficiency costs, tax credit investment write-downs, and other expenses not expected to recur.

As depicted on slide eight, these adjusted earnings equate to a return on average assets of 1.33%, a return on average tangible common equity of 18%, and a pre-tax pre-provision ROA of 1.85%. Turning to slides nine and ten, net interest margin declined six basis points from the linked quarter to 3.88%. Asset yields declined eighteen basis points compared to the prior quarter as loan yields declined twenty-two basis points and the yield on the investment portfolio increased seven basis points. Total deposit costs declined twelve basis points from the linked quarter, partially offsetting the impact of lower loan yields. Slide eleven 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 twelve illustrates our current loan mix and balance changes compared to the linked quarter. Loan balances decreased 1% on an annualized basis, with payoffs in C&I and ICRE outpacing modest growth in other portfolios. Slide thirteen 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 fourteen 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 metrics remain strong. No office relationships were downgraded to non-accrual during the quarter, and our total non-accrual balance for this portfolio is approximately $17 million.

Slide fifteen shows our deposit mix as well as a progression of average deposits from the linked quarter. In total, average deposit balances declined $99 million for the quarter. Excluding broker deposits, total average deposits increased $63 million from the linked quarter. There was a seasonal decline in public funds, while on the consumer side, growth was concentrated in retail CDs, money market accounts, and interest-bearing demand accounts. Slide sixteen illustrates trends in our average personal, business, and public fund deposits, as well as the comparison of our borrowing capacity to our uninsured deposits. On the bottom right of the slide, you can see our adjusted uninsured deposits were $3.7 billion. This equates to 26% of our total deposits.

We remain comfortable with this concentration, and we believe our borrowing capacity provides sufficient flexibility to respond to any event that would stress our larger deposit balances. Slide seventeen highlights our non-interest income for the quarter. Total adjusted fee income was $61 million, with leasing having another strong quarter and wealth management posting record results. Additionally, we rebalanced a portion of the investment portfolio, selling $165 million of investments. This negatively impacted non-interest income by $10 million. However, we expect the earn-back on these sales to be a little over two years. Non-interest expense for the quarter is outlined on slide eighteen. Core expenses decreased $4 million or 3% during the period.

This was driven by lower incentive compensation and fewer fraud losses. As I mentioned earlier, we continue to recognize the impact from our ongoing efficiency initiative and expect to complete this work in 2025. Turning now to slides nineteen and twenty. Our ACL model resulted in a total allowance, which includes both funded and unfunded reserves, of $172 million and $8.7 million of total provision expense during the period. This resulted in an ACL that was 1.33% of total loans, which was unchanged from the fourth quarter. Provision expense was primarily driven by net charge-offs, which were 36 basis points during the period and were primarily related to a single C&I relationship. Additionally, our NPAs to total assets declined slightly to 32 basis points, and classified assets declined five basis points as a percentage of total assets from the linked quarter.

While our ACL coverage was flat compared to the linked quarter, 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 twenty-one and twenty-two, capital ratios remain in excess of regulatory minimums and internal targets. The TCE ratio increased forty-three basis points to 8.2%, and our tangible book value increased 5% to $14.80. Our total shareholder return remains strong, with 45% 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 Brown: Thank you, Jamie. Before we end our prepared remarks, I want to comment on our forward-looking guidance for the second quarter, which can be found on Slide twenty-three. While pipelines remain healthy, and we expect production to rebound from prior quarter seasonal lows, we expect some continued pressure on prepayments in ICRE to keep growth in the low single digits on an annualized basis for the near term. For securities, we expect the portfolio to remain relatively stable and grow with earning assets. Core deposit balances were up in the first quarter, and we expect to see continued modest growth over the next quarter. We continue to make progress on reducing deposit costs and believe reduction will accelerate in the near term.

As a result, we expect our net interest margin to remain very strong and expand to a range between 3.95% and 4.05% over the next quarter, assuming a twenty-five basis point rate cut in June. We expect our credit cost to be stable over the next quarter, with net charge-offs declining further. ACL coverage as a percentage of loans is expected to be stable to slightly increasing. We expect fee income to be between $64 million and $66 million, with $20 million to $20 million for leasing business revenue. Non-interest expense is expected to be between $126 million and $128 million and remains stable, excluding the leasing business and fee-based incentive expenses. Specific to capital, our ratios remain strong. In closing, while there’s much uncertainty regarding the outlook for the economy, I believe we are well-positioned to manage through any turbulence.

We have very robust capital levels, strong and improving asset quality, diverse revenue streams, well-managed expenses, strong liquidity, and industry-leading profitability. I’m very pleased with our start to the year, and I look forward to growing and serving clients in this challenging environment. I now open up the call for questions, Kevin.

Q&A Session

Operator: Your first question comes from the line of Chris McGratty of KBW. Please go ahead.

Angel Arfstrom: How’s it going? This is Angel Arfstrom on for Chris McGratty.

Archie Brown: Hello.

Angel Arfstrom: Yeah. So I guess just given where you know, we are today with the rates, I guess, are you or have you taken any steps to reduce the asset sensitivity on the balance sheet? And then can you just remind us what the sensitivity is to the NII and margin for each additional twenty-five basis point rate cut? Thanks.

Jamie Anderson: Yeah. I think I missed the first part of your question. On the second part, in terms of our balance sheet, as you know, our balance sheet is asset sensitive. However, where we are in terms of the rate cycle and how we saw the rate move down in the fourth quarter, that’s still bleeding through those rate cuts are still bleeding through our deposit cost. So you’re going to see the tail of those rate cuts still rolling through the deposit cost. So, absent any rate cuts, in our guidance, we have rate cuts built into the forecast and three rate cuts: one in June, one in September, and one in December. When you look at our outlook, that 3.95% to 4.05% guidance for the second quarter includes a June rate cut, so it wouldn’t have a whole lot of impact.

But what we’re seeing in the second quarter is that tail on the deposit cost still winding down, and so we’re going to see a ten to fifteen basis point drop in our deposit cost in the second quarter, which is going to benefit the margin. Going forward, when you have the rate cuts coming through, a twenty-five basis point cut will typically have about a five to six basis point drop in our net interest margin, absent anything else going on. The one thing, though, when you look at our deposit cost, we’ve held them up a little bit higher here through the cycle, focusing a little bit more on liquidity. So we think we still have a little bit of room to ratchet those deposit costs down and really mitigate some of that asset sensitivity from future rate cuts.

We think we can take that five to six basis point typical drop in our margin with a twenty-five basis point cut and mitigate that to about half. So you’re going to see, if methodical twenty-five basis point rate cuts, our margin still in that 3.90% to 3.95% range.

Angel Arfstrom: Okay. Great. Thank you. That was great color. And then just switching gears a little bit, I guess given the current environment with the tariff uncertainty, is there any change in your view toward capital deployment? I know you said repurchases aren’t expected in the near term, but I guess are M&A deals being considered at this time? Thanks.

Archie Brown: Yeah. This is Archie. I think our view is probably just a little more longer-term in thinking. So there have been more M&A discussions that we’ve had in the last quarter than probably a long time. Some of those discussions are ongoing. I don’t know how some of that will play out and when, but certainly, some of the current uncertainty and noise have probably slowed down some of those discussions and maybe prolongs or puts it off further into the year. We’ll just see how things unfold. But clearly, there’s interest and activity. I just think we’re all waiting to see what happens in the environment over the next few months.

Angel Arfstrom: Okay. Thank you. I’ll step back.

Operator: Your next question comes from the line of Terry McEvoy of Stephens Inc. Please go ahead.

Terry McEvoy: Thanks. Good morning, Archie. Good morning, Jamie.

Archie Brown: Hey, Terry.

Terry McEvoy: Maybe in the press release, you talked about the workout of several C&I credits, and I did see the C&I charge-offs increased to eighty-five basis points. I think Jamie mentioned maybe one loan in particular, but could you just go through the review process and any kind of specific trends or industries that you worked through this last quarter?

Archie Brown: Yeah. Terry, I’ll say one quick comment, and I’ll turn it to Bill to maybe give a little more color. So we did see, with regard to commercial, we did see some payoffs of some classified loans during the quarter. We would consider healthy workouts. Then we did have one large C&I credit that probably made up seventy percent of the charge-offs. It was in a specific industry, so Bill can talk about that one in particular.

Bill Harrod: And that one in particular was in the industry that had some bankruptcies in the upstream for their supply. It really just died under the weight of that and a new market that they were trying to get into. There’s nothing systemic across it. It was just a deal that didn’t really work out as anyone had planned. It was a flooring manufacturer, and just didn’t get the volume through their chain, and they were affected by lumber liquidators’ bankruptcy.

Terry McEvoy: Great. Thanks, Bill. And then as a follow-up, what’s the outlook for Summit, Oak Hill, Agile, and do you manage those businesses any differently in a softer economy?

Archie Brown: Yeah. Terry, Agile will seasonally ramp up here in the middle part of the year, and that business, we believe, is just because of the short-term nature of the loans and the way they’re structured, we think the asset quality will continue to be very good there. So no concerns there. Oak Street, same thing. I feel like if you look at their asset quality over the longer term, it’s been really solid, and I think it could present some good opportunities for us in the near term or intermediate term, but no change in our look there. Summit, we continue to work, and Summit continues to have great rich originations. We continue to learn and grow with them in the portfolio, but the only pressure we’ve seen there is probably in the smaller ticket items.

So if you think, some of the vendor-managed small ticket programs, there’s been a little bit of deterioration in the small business set, but if you look in the middle market and larger clients, Terry, they’re performing really well. It’s within a band of expectations. So we feel pretty good about where they’re going, and I don’t think if anything, that business could soften in the back half of the year if the economy softens in terms of demand. In terms of asset quality, we feel pretty good about it.

Terry McEvoy: Great. Thanks for taking my questions, and enjoy the weekend.

Archie Brown: Thanks, Terry. You too.

Operator: Your next question comes from the line of Daniel Tamayo of Raymond James. Please go ahead.

Daniel Tamayo: Hey. Good morning, Archie and Jamie.

Archie Brown: Hey, Dan. Morning.

Daniel Tamayo: So I guess maybe first on loan growth. You know, saw the guidance in your comments this morning that, you know, the second quarter is going to be a little bit pressured. It sounds like it’s mostly from elevated payoffs continuing. Is the right way to think about the back half of the year and kind of more normalized growth still what you were thinking before, in maybe the mid to high single-digit range?

Archie Brown: Yeah, Danny. I’d say if I were to look back to the beginning of the year, we were probably thinking six percent to seven percent for the full year. We’re probably thinking four percent to five percent for the full year now, given the first quarter was a little softer in the payoffs. As we look at the near term, the payoff, I mean, pipelines are strong, healthy activity remains good now. The back half of the year is a little harder to see, especially with some of the noise out in the economy. The payoff pressure is really happening as we see in the second quarter coming up in our CRE book. There’s probably three things going on. One, we’re exiting some of these maybe office credits that are maturing or some multifamily that we’re on purpose maybe exiting.

That may be a third of the payoff expectations. A third is really related to the private credit markets, and we’ve seen them enter more in this space. Let’s say a multifamily deal that’s coming up with a maturity, and we may want to get a curtailment on the loan and then extend it for a period. Well, they can go into private credit markets and have more flexibility in terms of those kinds of terms. So we’re seeing a little bit more payoffs come from that source that we probably hadn’t seen in prior periods. And then depending on where rates go, if rates fall, especially the ten-year, that falls into the very low fours or more, we could see a little more pressure just getting refinanced from the Freddie Fannie Freddie side. So it’s those areas creating that, but on the other hand, the activity, the origination side of CRE is pretty strong.

So all in all, we still feel pretty good that we’re going to have loan growth, just a little bit, maybe a tick or two lower than we were thinking at the beginning of the year.

Daniel Tamayo: Okay. That’s helpful, Archie. Thanks. Maybe one for Jamie on credit. So you know, you talked about the net charge-offs expected to come down in the second quarter, maybe a little bit higher than you expected here in the first quarter. Just curious. Yeah. I think last quarter you talked about twenty-five to thirty basis points being a normalized number. If yes, I guess, it’s couched around assuming we’re not going into a recession here. Is that still feel like a fair number? And are we still kind of on a glide path down to that range by the back half of the year, so we might be a little bit above that near term. Is that kind of the most current thoughts?

Archie Brown: Yeah. Dan, this is Archie. I’ll maybe start with this, and Jamie can jump in if he wants or Bill. So thirty-six basis points, if you go back to 2023, thirty-three basis points of charge-offs, 2024, thirty basis points of charge-offs. We would say this year twenty-five to thirty would kind of be our expectation. That one credit that we’ve already talked about was the driver. But if you look at the other parts of the book, very healthy and improving trends. Reductions in classified, reductions in non-perform, we just feel like it’s going to continue to get better. Our expectations for Q2 would be probably charge-offs that are even lower than our annual expectations. Let’s start to bring the first half of the year kind of back into that twenty-five to thirty basis point balance. With right now expectations probably in that range or maybe slightly better in the back half.

Daniel Tamayo: Okay. Great. So really looking for a pretty relatively clean rest of the year. Assuming nothing gets worse from a macro perspective.

Archie Brown: Yeah.

Daniel Tamayo: I guess, lastly, just you talked about too early to tell on tariffs and its specific exposure, but just curious kind of in the work you’ve done looking at your portfolio, what you’re kind of zoomed in on or thinking, you know, we need to keep an eye on this because there might be exposure. You know, obviously, we go into a recession, everything’s at risk, but is there a part of the book that you think might be worth watching a little bit closer as this whole thing plays out?

Archie Brown: Yeah, Danny. Well, first, I mean, our number one job, and Bill’s been leading an effort with our ARC clients with our bankers to just let’s make sure we’re staying close to our clients and understand for each one how do tariffs impact their cost structure, their demand? Demand side of their business. So our bankers are in the middle of just spending time with their clients and doing that, and we’ll service out, you know, do we see anything specific. I don’t think we’ve got one business that’s more susceptible to a tariff issue. There are some, you know, some that may have more direct supply coming right from China could see more disruption in their business, and I’m sure we’ll have a client or two during the year that will surface.

But for the most part, there’s some concern we’ll see a little bit of increase in cost, and they’ve got to manage that in various ways, either by reducing their costs, passing the costs on to consumers, etc. So we’ll see some of that. The bigger concern is maybe in the back half. Does this affect, does this create some sort of demand slowdown? And, you know, all of a sudden, everything just gets softened up in terms of the revenue. So those are the kind of the general high-level concerns. I’m always impressed by our business clients knowing that they’re focused more than anybody else on being successful, and they continue to navigate the kind of things we’ve seen over the last five or six years. They continue to navigate it really well. I know they’re working hard to do it now and got a lot of confidence in them.

Daniel Tamayo: Alright. Great. I appreciate that color, Archie. Thank you for taking my questions.

Archie Brown: Sure. Have a good weekend.

Operator: Your next question comes from the line of Karl Sheppard of RBC Capital Markets. Please go ahead.

Karl Sheppard: Hey. Good morning, guys.

Archie Brown: Hey, Karl.

Karl Sheppard: Just to pick up on the tariff conversation for one second, I understand the concern and the demand and cost structures in those things. But anything from these conversations surprising you? You know, anyone more optimistic?

Archie Brown: I mean, with our client base, anything? Yes. You know, we continue to talk to our bankers that are working with their clients, and I guess as much noise as we’ve all been reading about and hearing about, it’s just interesting to me that the pipelines are continuing to be pretty strong in the near term with really good activity. I think they all have some concern about where this is going, but I think there’s also a view of, well, this is gonna play out a little bit. Let’s see what happens. So probably anything, it’s just that things are a little stronger and healthier in the near term with a little more uncertainty maybe in the back half.

Karl Sheppard: Okay. And then on the foreign exchange business, I know it’s kind of normal course for it to move around quarter to quarter, but does the macro uncertainty, does that create a little bit more volatility or more demand for the products?

Archie Brown: Yeah. Generally, volatility is good for the business. So I’ve spent a little time with our team over the last few weeks listening to what’s happening there, and I think, you know, we’ve put in our outlook what we expect the quarter to be, which is kind of on par with where we are, maybe a little stronger. But they think the volatility will continue to drive good activity for them.

Karl Sheppard: Okay. Thanks for the help.

Operator: No further questions at this time. With that, I will now turn the call back to Archie Brown for final closing remarks. Please go ahead.

Archie Brown: Thank you, Kelly. Thank you, Kelvin. Well, we are glad that you joined our call this morning to hear about our story for the first quarter and outlook for Q2. We remain optimistic about the year overall and look forward to telling you more at the end of next quarter. Thanks, and have a great weekend.

Operator: Ladies and gentlemen, this concludes today’s conference call. We thank you for participating and ask that you please disconnect your lines.