First Financial Bancorp. (NASDAQ:FFBC) Q4 2022 Earnings Call Transcript

First Financial Bancorp. (NASDAQ:FFBC) Q4 2022 Earnings Call Transcript January 27, 2023

Operator: Hello and welcome to the First Financial Bancorp Fourth Quarter 2022 Earnings Conference Call and Webcast. My name is Glenn and I’ll be the operator for today’s call. I will now hand you over to your host, Scott Crawley, Corporate Controller. Scott, please go ahead.

Scott Crawley: Thank you, Glenn. Good morning everyone, and thank you for joining us on today’s conference call to discuss First Financial Bancorp’s fourth quarter and full year 2022 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 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 fourth quarter 2022 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 December 31, 2022, and we will not be updating any forward-looking statements to reflect facts or circumstances after this call. I will now turn it over to Archie Brown.

Archie Brown: Thank you, Scott. Good morning, everyone and thank you for joining us for today’s call. Yesterday afternoon, we announced our financial results for the fourth quarter and full year of 2022. Before I turn the call over to Jamie, I would like to provide some highlights from the most recent quarters and recap this year’s outstanding performance. I am extremely pleased with our fourth quarter which was exceptional on many levels. Earnings per diluted share were $0.73, return on assets was 1.63% and our adjusted efficiency ratio improved to 55%. Diluted earnings per common share increased 24% from the third quarter, and we achieved record operating revenue of $214 million driven by a 15% increase in net interest income and a 32% increase in fee income.

Rate increases continued to positively impact our asset sensitive balance sheet, with our net interest margin expanding by 49 basis points to 4.47% as increasing asset yields outpaced deposit costs. The growth in noninterest income was due to record quarters from Bannockburn and Summit, which more than offset softness in mortgage, client derivative fees and service charge income. We were also very pleased with $502 million of broad-based loan growth in the quarter, which is a 20.3% increase on an annualized basis and included a $130 million increase at Summit. We expect loan growth to moderate in the first quarter of 2023 due to seasonality and economic uncertainty. During the quarter, we experienced modest outflows in personal interest-bearing transaction accounts; however, this was offset by seasonal inflows in our public fund and business deposits.

The result was a stable core deposit base and a loan to deposit ratio of 81%. Loan quality remained strong across our portfolio, with nonperforming assets declining by 16% to 23 basis points of total assets and 1 basis point of net recoveries for the period. Our ACL to total loan coverage increased slightly during the fourth quarter due to slowing prepayments and the general outlook for the U.S. economy. 2022 was a great year for First Financial. Adjusted earnings per share of $2.36 was a record, and increased 3% compared to 2021, resulting in a 1.36% adjusted return on assets and an adjusted efficiency ratio of 60%. Revenue increased 14% compared to the prior year to $709 million, which was a record for our Company. Net interest income grew by 15% with short-term rate increases providing a catalyst, while record fee income increased by 11% for the year as our acquisition of Summit Funding drove new fees and Bannockburn revenue grew by 23% to a record $55 million.

Our recent acquisitions have diversified our income sources as we intended, and we are very pleased that they effectively insulated the Company from much of the fee pressure that impacted the broader industry in 2022. Loan growth exceeded $1 billion for the year, representing an 11% increase from 2021. We were pleased that the growth was broad-based, and included strong contributions from Summit Funding, which we acquired at the end of 2021. Summit’s originations exceeded $400 million for the year, which was an all-time high for them and surpassed our expectations, contributing to over 20% of the Company’s overall loan growth. Asset Quality was very strong for the year. Net Charge-offs were 6 basis points of total loans, which was a 20 basis point decline compared to 26 basis points in 2021.

And lastly, nonperforming assets declined $20 million, or 34%, to 23 basis points of total assets. With that, I’ll now turn the call over to James to discuss these results in more detail. After Jamie’s discussion I will wrap up with some additional forward-looking commentary. Jamie?

James Anderson: Thank you Archie and good morning everyone. Slide 4, 5, and 6 provide a summary of our fourth quarter financial results. As Archie stated, fourth quarter financial performance was excellent, driven by outstanding net interest margin, strong loan growth, elevated fee income and stable asset quality. Our asset sensitive balance sheet continued to react positively to additional rate hikes with our net interest margin increasing 49 basis points. We anticipate stable to slight expense of the net interest margin in the near term due to zero rate hikes and expected deposit pricing pressures. We were once again pleased with strong loan growth during the quarter. Total loans grew 20% on an annualized basis with the growth widespread across the portfolio.

Fee income was particularly robust in the fourth quarter with record results from multiple business lines. Bannockburn and Summit both posted the best quarter in their histories. When we acquired these two companies, the goal was to effectively diversify our fee income sources, so it was particularly satisfying to see that come to fruition during the fourth quarter. As expected, mortgage banking income continued to decline as higher interest rates impacted mortgage activity. Our wealth business had another solid quarter and overdraft income stabilized following program changes implemented earlier in the year. Non-interest expenses were slightly higher than our expectations due primarily to incentive compensation tied to elevated foreign exchange income and the company’s overall performance.

Additionally, we made a $2.5 million contribution to the First Financial Foundation during the period. We were pleased on the credit front with 1 basis point of net recoveries and non-performing assets declined to 23 basis points of total assets. While asset quality remained strong, we recorded $10 million of provision expense during the period, which was driven by loan growth and slower prepayment rates. As a result, our ACL coverage ratio increased by two basis points. From a capital standpoint, our regulatory ratios remain in excess of both internal and regulatory targets. Accumulated other comprehensive income was relatively stable during the period. Therefore, tangible book value increased $0.49 and our tangible common equity ratio improved by 16 basis points.

Photo by Tierra Mallorca on Unsplash

Slide 7 reconciles our GAAP earnings to adjusted earnings, highlighted items that we believe are important to understanding our quarterly performance. Adjusted net income was $68.9 million or $0.73 per share for the quarter. As depicted on Slide 8, these adjusted earnings equate to a return on average assets of 1.63%, a return on average tangible common equity of 30% and an efficiency ratio of 55%. Turning to Slides 9 and 10, net interest margin increased 49 basis points from the linked quarter to 4.47%. Once again, this increase was primarily driven by an increase in asset yields resulting from rising interest rates. The increase in asset yields was partially offset by higher funding costs. As a result of rising rates asset yields surged during the period with loan yields increasing 96 basis points.

In addition, investment yields increased 57 basis points due to higher reinvestment rates and slower prepayments on mortgage backed securities. Our cost of deposits increased 31 basis points compared to the third quarter, and we expect these costs to increase further in reaction to competitive pressures from an increasing rate environment. Slide 11 details the asset sensitivity of our balance sheet. We remain well positioned for expected rate increases as approximately two thirds of our loan portfolio re-prices fairly quickly. Slide 12 details the betas utilized in our net interest income modeling. Although deposit costs increased with greater velocity in the fourth quarter, our modeling remains relatively unchanged over the full cycle. Slide 13 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 14 illustrates our current loan mix and balance changes compared to the linked quarter. As I mentioned before, loan balances increased 20% on an annualized basis with every portfolio growing compared to the linked quarter except for franchise. The largest areas of growth were in the CNI, ICRE and Summit Portfolios, while Oak Street and Mortgage also increased. Slide 16 shows our deposit mix as well as the progression of average deposits in the linked quarter. In total, average deposit balances increased $261 million during the quarter, primarily driven by a $319 million increase in brokerage CDs. Outside of this increase, deposit balances were relatively stable, which we viewed positively given the competitive landscape.

Slide 17 highlights our non-interest income for the quarter, which surpassed our expectations. Both Bannockburn and Summit had the best quarter in the history of those businesses and wealth management posted another solid quarter. Deposit service charge income was relatively flat compared to the third quarter, which reflected a bit of a normalization as the impact from program changes implemented early in the year have now fully materialized. Consistent with the third quarter mortgage demand was solved due to higher rates and we continue to expect further pressure on this business for 2023. Non-interest expense for the quarter is outlined on Slide 18. On an operating basis and excluding Summit, expenses increased $11.2 million compared to the linked quarter, due primarily to incentive compensation tied to the record quarterly performance from Bannockburn as well as the company’s overall performance.

In addition, we made a $2.5 million contribution to the first financial foundation in the fourth quarter. Operating adjustments include $6.4 million of tax credit investment write downs and $700,000 of other costs not expected to recur such as acquisitions, branch consolidations and severance costs. Turning now to Slide 19, our ACL model resulted in a total allowance, which includes both funded and unfunded reserves of $151.4 million and $10 million in total provision expense during the period. This resulted in an ACL that was 1.29% of total loans at the end of the year, which was a 2 basis point increase from the third quarter. Similar to the third quarter, provision expense was driven by our strong loan growth and slower prepayment speeds, which increased the duration of the portfolio.

Despite the increase in provision expense, asset quality remained stable. We had 1 basis point of net recoveries on an annualized basis, while non-performing assets declined to 23 basis points of total assets. We expect our ACL coverage to remain stable or increase slightly in the coming periods as our model responds to changes in the macroeconomic environment. Finally, as shown on Slide 21 and 22, regulatory capital ratios remain in excess of regulatory minimums and internal targets. During the fourth quarter tangible book value increased $0.49 and the TCE ratio increased 16 basis points due to our strong earnings. Accumulated other comprehensive income was relatively stable compared to the linked quarter, but remains a drag on our TCE ratio.

Absent the impact from AOCI the TCE ratio would have been 8.2% year end compared to 6% as reported. Our total shareholder return remains robust with approximately 30% of our earnings returned to our shareholders during the period through the common dividend. We believe our dividend provides an attractive return to our shareholders, and do not anticipate any near-term changes. However, we will continue to evaluate various capital actions as the year progresses. I’ll now turn it back over to Archie for some comments on our outlook going forward. Archie?

Archie Brown: Thank you, Jamie. Before we end our prepared remarks, I want to comment on our forward-looking guidance, which can be found on Slide 23. Our asset sensitive balance sheet continues to benefit from rising rates, and although there are many variables that impact magnitude and timing, we expect more moderated expansion in the first quarter to a range of 4.5% to 4.6% based upon anticipated remaining interest rate increases. The competition for deposits is increasing and we expect the margin to peak this quarter will continue to be dependent upon the Fed. Regarding credit, much uncertainty remains regarding inflation and the impact of rate hikes to the economy and our customers. Over the first quarter we expect continuous stability in our credit quality trends and ACL coverage to be slightly higher.

We expect fee income to be between $45 million and $47 million in the first quarter with more normalized level of foreign exchange and leasing income after our exceptional fourth quarter. Specific to expenses, we expect to be between $109 million and $111 million with lower incentive expenses given fee income performance. As operating lease portfolio grows, we’ll see corresponding depreciation expense growth, which is included in our range. Lastly, our capital ratios remain strong and we expect to maintain our dividend at current levels. The outstanding performance we achieved this year is a direct result of our associates executing at a very high level. I want to thank them for their commitment to our clients, our communities, and to each other.

While we’re proud of our 2022 financial results, we believe we have further opportunities to improve execution and we’re committed to doing so. As we look forward to 2023, we remain focused on delivering consistent sustained industry leading results. We’ll now open up the call for questions. Glenn?

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Q&A Session

Operator: Thank you. We have out first question comes from Scott Siefers from Piper Sandler. Scott, your line is now open.

Scott Siefers: Thanks for taking the question guys. So, I mean, the margin performance has just been extraordinary. It sounds like it will sort of peak out at a higher rate than you might have anticipated previously. I think you were saying 440 to 450 previously now 450 to 460, but then it will come down thereafter. I guess, Jamie, do you have a sense for maybe the trajectory after the first quarter, maybe a thought on like what a margin flow might look like given any actions you’ve taken, protracted and sort of how long it might take to get there?

James Anderson: Yes, so yes, on the margin. So yes, definitely it is peaking a little higher than what we had originally anticipated. So, but I think we end up settling at a spot that we, where we kind of thought we would be in the beginning before, maybe before the fourth quarter, maybe even a little bit higher than that, Scott. So we are — we have that outlook, the projection of the margin there really, and that would, I would say that’s really the first quarter margin. Then as deposit costs start to catch up, we will see a little bit of deterioration in the margin as we move forward and then as we get, I think that really kind of stabilizes towards the back end of 2023 and we think that stabilizes somewhere in that 410 to 420 range.

Scott Siefers: All right. That’s perfect and thank you very much for that. That’s great. And then separately, when we talk about Bannockburn returning to more historical levels, I guess what does that mean in your guys view anymore? It feels like I might have said somewhere around $10 million a quarter previously, but I mean that thing’s just been just really, really strong. So is it too low. And if you feel like that’s something that can still grow year-over-year, just given how strong 2022 was?

Archie Brown: Yes, Scott, this is Archie. It was such an incredible quarter for Bannockburn a record quarter and you know, their business can be a little bit lumpy. What they’ve done a nice job of is, is continuing to add new customers to their roll and that is helping sort of lift the base of clients in terms of revenue. So, yes, we would tell you Q1 is probably more in line of $12 million to $14 million. And if you think about that compared to the last two years that, that is stepping up in terms of kind of the base level of revenue. As far as the full year, I’m not sure that it’s going to just be a straight trajectory up, but if they did what, 54, 55 in this year, we certainly would expect them to be at least in that range, maybe a hair more.

Their business is probably more and I — as we continue to get deeper into business and talk with Mark Immelt who runs it, their business has more of a stair step approach to it. So it will go through big growth spurts then it will level off a little bit for a period then it will grow again. And so it grew a lot faster last year than we were even thinking. We think we’ll hold that this year maybe just a hair more.