First Financial Bancorp. (NASDAQ:FFBC) Q4 2024 Earnings Call Transcript

First Financial Bancorp. (NASDAQ:FFBC) Q4 2024 Earnings Call Transcript January 24, 2025

Operator: Thank you for standing by, and welcome to the First Financial Bancorp Fourth Quarter 2024 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 Instructions] I’d now like to turn the call over to Scott Crawley. You may begin.

Scott Crawley: Yes. Thank you, Rob. 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 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, we refer to the forward-looking statement disclosure contained in the fourth quarter 2024 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, 2024, and we will not be updating any forward-looking statements to reflect facts or circumstances after this call. I will 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. Yesterday afternoon, we announced our financial results for the fourth quarter and full year 2024. Before I turn the call over to Jamie, I would like to provide some highlights from the most recent quarter recap this year’s exceptional performance. I’m very pleased with our strong fourth quarter — adjusted earnings per share were $0.71, leading to return on assets of 1.7% and return on tangible common equity ratio of 19.9%. As expected, due to decreases in short-term rates by the Fed, the decline in asset yields outpaced the decline in deposit costs, leading to a reduction in our net interest margin to 3.94%. Balance sheet trends were very strong for the quarter with loan growth exceeding 7% on an annualized basis and total deposits surging by approximately 16% on an annualized basis.

Non-interest income was robust in the fourth quarter with leasing, foreign exchange and wealth management income all increasing by double-digit percentages from the linked quarter. While expenses increased by 5% from the linked quarter, the increase was driven by higher incentive compensation tied to the strong fee income and overall company performance. Our workforce efficiency initiative continued during the quarter, and we’ve eliminated 145 positions to date. We expect to complete this work in 2025. Asset quality was relatively stable for the quarter. Non-performing assets were flat compared to the linked quarter at 0.36%, while classified assets increased by 7 basis points to 1.21%. The increase in classified assets was driven by a mutually agreed upon termination of a foreign exchange trade resulting in a $45 million obligation from the customer, which we believe is fully collateralized.

We expect the customer to pay this obligation in 2025. Net charge-offs were slightly elevated due to the resolution of three loans that have been longer-term workouts. We believe that overall credit trends are improving, and as a result, we anticipate lower credit costs going forward. 2024 was an excellent year for our company. On an adjusted basis, we earned $249 million or $2.61 per share, while return on assets was 1.4%, and return on tangible common equity was 19.9%. While the net interest margin declined from 4.4% to 4.05% due to declining short-term rates, strong loan growth offset most of the impact with net interest income declining by only 2.5%. Non-interest income increased by more than 13% to a record $241.8 million, led by growth in leasing and wealth management income.

The result was record revenue for the company of approximately $854 million, which was a 2% increase over 2023. I’m very pleased with our balance sheet growth for the year. Total loans increased by 7.6% to $11.8 billion and total deposits increased by 7.2% to $14.3 billion. Additionally, tangible common equity increased by 56 basis points to 7.73% and tangible value per share increased from $12.38 to $14.15, which was a 14% increase. Similar to fourth quarter, asset quality was relatively stable for the year. Net charge-offs as a percentage of average loans declined 3 basis points to 30 basis points and non-performing assets as a percent of total assets declined by 2 basis points to 0.36%. With that, I’ll now turn the call over to Jamie to discuss these results in greater detail.

After Jamie’s discussion, I will wrap up with some additional forward-looking commentary and closing remarks. Jamie?

Jamie Anderson: Thank you, Archie, and good morning, everyone. Slides 4, 5 and 6 provide a summary of our most recent financial results. The fourth quarter was highlighted by strong earnings and a net interest margin that exceeded our expectations, as well as both loan and deposit growth. Our net interest margin remains very strong at 3.94%, despite a decline of 14 basis points from the linked quarter. Deposit costs declined 13 basis points during the period while loan yields decreased 37 basis points. Loan growth exceeded our expectations during the quarter, coming in at 7% on an annualized basis. The growth was not concentrated in one particular area, it’s C&I, ICRE, mortgage and leasing, all having strong quarters. Average deposit balances increased $543 million or 16% on an annualized basis.

We had broad-based growth across all product types, excluding savings accounts and high-cost brokered CDs. We maintained 21% of our total balances in noninterest-bearing accounts and are strategically focused on growing lower cost deposit balances. Turning to the income statement. Fourth quarter fee income was solid, led by foreign exchange, leasing and record wealth management income. Non-interest expenses increased slightly from the linked quarter due to higher incentive compensation, which was tied to fee income and our overall company performance. However, the impact from our efficiency initiative is becoming more meaningful and we expect to see further benefits in the coming periods. Our ACL coverage decreased 4 basis points during the quarter to 1.33% of total loans.

This resulted in $9.4 million of provision expense during the period, which was driven by loan growth and net charge-offs. Overall, asset quality trends were stable. NPAs as a percentage of assets were relatively flat at 36 basis points, while fourth quarter net charge-offs were 40 basis points on an annualized basis. This put our year-to-date total in-line with expectations at 30 basis points. Classified assets increased 7 basis points to 1.21% of total assets, as a single asset offset an otherwise strong quarter of resolution efforts. From a capital standpoint, our ratios are in excess of both internal and regulatory targets. Tangible book value was $14.15, while a tangible common equity ratio was 7.73%. 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 $67.7 million or $0.71 per share for the quarter. 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 8, these adjusted earnings equate to a return on average assets of 1.47%, a return on average tangible common equity of 20% and a pretax pre-provision ROA exceeding 2%. Turning to Slides 9 and 10. Net interest margin declined 14 basis points from the linked quarter to 3.94%. Asset yields declined 31 basis points compared to the prior period, as loan yields declined 37 basis points and the yield on the investment portfolio increased 4 basis points. Offsetting these increases, total funding costs declined 17 basis points from the linked quarter as deposit cost declined 13 basis points, while average deposit balances increased 4%.

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 7% on an annualized basis, with growth in almost every portfolio. As you can see on the right, growth was driven by C&I, leasing, ICRE and mortgage. 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 metrics remain strong.

One office relationship was downgraded to non-accrual during the quarter, and our total non-accrual balance for this portfolio is approximately $26 million. Subsequent to year-end, the remaining balance of this relationship of $9 million paid off. Slide 16 shows our deposit mix as well as the progression of average deposits from the linked quarter. In total, average deposit balances increased $543 million during the quarter with increases in most core product types. There was a seasonal increase in public fund balances, while on the consumer side, growth was concentrated in money markets and retail CDs. Slide 7 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 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 $70 million during the quarter with Bannockburn and Summit having strong quarters, while Wealth management posted record results. Non-interest expense for the quarter is outlined on Slide 19. Core expenses increased $6 million during the period. This was driven by higher incentive compensation, which is tied to fee income and the company’s overall performance.

As I mentioned earlier, we are recognizing more of the expected benefit from our ongoing efficiency initiative and expect to complete this work in 2025. Turning now to Slides 20 and 21. Our ACL model resulted in a total allowance, which includes both funded and unfunded reserves of $174 million and $9.4 million of total provision expense during the period. This resulted in an ACL that was 1.33% of total loans. Provision expense was primarily driven by loan growth and net charge-offs which were 40 basis points for the period. However, about half of those charge-offs have been reserved for in prior periods. Additionally, our NPAs to total assets held steady at 36 basis points. In other credit trends, classified asset balances increased to 1.21% of total assets.

The largest driver of this increase was related to a single asset that was recorded following the mutually agreed upon termination of a foreign exchange transaction. Excluding this item, classified assets declined $27 million during the quarter. Our ACL coverage decreased slightly. However, we continue to believe that 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 and capital ratios remain in excess of regulatory minimums and internal targets. Absent the impact from AOCI, the TCE ratio would have been 9.39% compared to 7.73% as reported.

And our tangible book value decreased slightly to $14.15. Our total shareholder return remains strong with 35% 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: 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 remain healthy, and we expect loan growth to moderate as we approach seasonal lows and activity and be in the low single digits on an annualized basis for the first quarter. For securities, we expect the portfolio to remain relatively stable. Deposit growth has been very strong in the last several quarters, and we expect some of the seasonal flows that came in this past quarter to reverse in the first quarter causing public funds and business balances to be slightly down. Our net interest margin continues to be strong and industry-leading and assuming no additional rate cuts, we expect it to be in the range between 3.85% and 3.9% over the next quarter.

We expect our credit costs to be modestly lower over the next quarter with the net charge-offs lower than the current period. ACL coverage as a percentage of loans is expected to be stable to slightly increasing. On fee income, we expect to be between $63 million and $65 million, which includes $11 million to $13 million of foreign exchange and $19 million to $21 million for leasing business revenue. Non-interest expense is expected to be between $128 million, $130 million and stay stable, excluding the leasing business and fee-based incentive expense. Related to capital, our capital ratios remain strong, and we expect to maintain our dividend at the current level. During the year, we were excited to add the agile team, and I want to thank them for making an immediate contribution to our company.

We continue to gain momentum in our expansion markets of Chicago, Evansville, Cleveland, Ohio. And at the beginning of 2025, we expanded into Grand Rapids, Michigan with the commercial banking team. We look forward to the continued growth and success of our expansion strategies performing at a consistently high level requires an engaged team that is committed to its clients, and that’s describes the team here at First Financial, I want to thank our associates for their outstanding work in 2024. We’ll now open up the call for questions.

Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Your first question today comes from the line of Daniel Tamayo from Raymond James. Your line is open.

Daniel Tamayo : Thank you. Good morning guys.

Archie Brown: Good day, Daniel.

Daniel Tamayo : Maybe first, you guys gave guidance for the first quarter. I appreciate that on loan growth. But it’s kind of down from what you did in 2024. So just curious if that’s a — is there some seasonality in the first quarter number or something unusual there that you would expect growth to pick up as the year goes on? Or just kind of your comments on loan growth throughout the year, if you have some. Thanks.

Archie Brown : Yes, Daniel, this is Archie. We’ve seen some pickup in payoffs primarily on the commercial real estate side. Rates just a little bit in the mid-fourth quarter, and the payoffs kind of accelerated then of course, rates backed up some by the end of the year. But we’ve got a little bit higher expectation for payoffs on that side of our book. Loan activity is good. Seasonally, it’s a little bit lower in Q1 so it’s kind of a combination of those two things. But overall pipelines are healthy, as we said, and outlook from our clients overall is, I think generally positive.

Daniel Tamayo : Okay. Terrific. And I guess then shifting over to the margin. One for Jamie. Similar type of question. You gave the range [3.85% to 3.90%] (ph) in the first quarter. Just curious how you’re thinking about the rest of the year and how the Fed funds cuts would play into that?

Jamie Anderson : Yes. So we have — we gave that guidance for the first quarter. And then — so in our forecast for 2025 at this point, we have a cut built into the forecast in June. So one cut during the year. And our margin essentially remains in that [3.85% to 3.90%] (ph) kind of band. So as we get into the first part here of ’25, where we just had the cuts, deposit costs continue to come down. Then obviously, with the June cut that we have built into the forecast, we get an immediate impact from that, which will bring the margin down slightly due to the contractual nature, obviously of the loan book, where those will come down. The deposit costs start to pick back — start to decline again and catch back up and our margin, again stays relatively tight within that range of — in that [mid-380s] (ph) call it.

Daniel Tamayo : Okay. That’s helpful. Appreciate it, Jamie. And then I guess, just a quick last one here for you, Archie. You guys have been expanding into new markets, as you pointed out, with Grand Rapids, the latest here in 2025. Just curious kind of the depth of those investments that you’re making in those markets? How quickly you think they may turn into meaningful growth for the bank and if there’s any other markets that you’ve got your eye on for de novo?

Archie Brown: Yes. Thanks, Dany. I mean the ones we’ve, I guess, opened up in the last year, 1.5 years, I think are performing well, both on the loan and deposit side. I wouldn’t call them rapid growth or steady growth which is appropriate. We want to build relationships, not just build assets. So they are going well. We’ve got teams probably in those markets anywhere from if you think Chicago is, I think around five to seven people, Cleveland, maybe just a little bit less four or five people to-date. The team in Grand Rapids initially is four. They were part of a bank that has a lot of market share. So I think they are hitting the ground running. We tend to look at these more opportunistically. So we’ve got a range of markets that are kind of in or adjacent to the first financial footprint.

And we kind of take the opportunity when something comes up to provides an opportunity to bring a team in, that’s — I think that’s when we sort of act. So that’s how we think about it. We don’t really have a certain number that we’re going to add this year is just, again, when an opportunity presents itself that makes sense to us, we’ll do that — we’ll take the opportunity to capitalize on it.

Daniel Tamayo : All right. Great. Well, thank you for all the color.

Archie Brown: Thanks Dany.

Operator: Your next question comes from the line of Terry McEvoy from Stephens Inc. Your line is open.

Terry McEvoy : Hi, good morning everybody.

Jamie Anderson : Hi, Terry.

Terry McEvoy : Maybe just maybe — sure I understand on the expense guide. If the FX is in the midpoint of, say, $12 million and leasing is $20 million in the first quarter, that trend — that’s baked into the $128 million to $130 million of total non-interest expense?

Jamie Anderson : Yes, that’s correct. Yes. We get — and so just kind of working through a little bit of the dynamics there on the expense side from the fourth quarter to the first quarter, we get about $1.5 million or so of increase in expenses was just all the payroll taxes starting over. So that’s part of why you see a little bit of that increase in the — you’re not seeing the expenses go down even when we have some of the variable costs going down. So that plays into that fourth quarter to first quarter expense trend. But yes, it is included in the $128 million to $130 million, correct.

Terry McEvoy : Okay. And then as a follow-up, the classified asset, it was kind of an FX transaction. And I guess my question is, is there a credit risk in that — or can you talk about the credit risk in that business? And do you have a specific reserve for that business? And just provide a little bit more insight would be appreciated.

Bill Harrod : Yes. The trade itself, we entered into a series of forward contracts with the company that had changes in the value between the USD and CAD. And then the macroeconomic conditions in respective interest rate policies of the central banks of Canada and the U.S. have resulted in CAD depreciation versus the USD, which has created the negative mark. Based on the size we jointly decided to terminate the trade to lock in the negative position and then we recorded that as a receivable, okay? We have collateral to fully support the receivable, including cash on deposits mortgages on real estate, pledges collateral, including all the company’s equity and personal guarantees. And on this, we do expect to be repaid in 2025.

Terry McEvoy: Appreciated. Thanks for all the color there.

Archie Brown : Thanks Terry.

Operator: Your next question comes from the line of Christopher McGratty from KBW. Your line is open.

Christopher McGratty : Hi, guys. Good morning. Jamie, or Archie, the 30 basis — I think you mentioned 30 basis points of charge-offs in your prepared remarks. Is that how you think about normalized losses for this bank?

Archie Brown : I’m sorry, is that how we think?

Jamie Anderson : 30 basis points of charge-offs. Yes.

Archie Brown : Yeah. I mean if we look ahead over a longer window, I think if we said to you, 25 to 30 basis points feels kind of a norm. The last two years I think 33 was – two years ago 30 was last year. The way we’re starting out this year, we feel like it could be a little bit less than that. But if you said over the long-term, Chris, kind of in that range, I’d say it’s right.

Christopher McGratty : Okay, thanks. And then any kind of comment that you could provide on inorganic growth. There is a lot of optimism in the banks for de-regulation, and you do have a multiple and strong capital thoughts on incremental M&A in ’25?

Archie Brown: Yes. Well, I think we all have a little more optimism for lots of reasons, Chris here, at least in the next year or two, that there’ll be more opportunities I think the window is a little more open, certainly seems like getting deals approved will be a little bit quicker than maybe in the past, and we’ll provide a little more certainty. We are having more active discussions with kind of banks that we think fit our profile and kind of things we are looking for, generally, banks in that $1 billion to $5 billion space in or adjacent to our footprint. So we are having active discussions, but there is really — I can’t provide any more color than that in terms of the likelihood of something happening.

Christopher McGratty: All right. Perfect. Thank you.

Operator: Your next question comes from the line of Jon Arfstrom from RBC Capital Markets. Your line is open.

Jon Arfstrom : Thanks, good morning.

Archie Brown : Hi, Jon.

Jon Arfstrom : Can you guys talk a little bit about your overall non-interest income growth expectations. I mean you had a good great year in ’24 across categories. Just curious what you think might be possible for ’25 on fee income?

Archie Brown : Yes, Jon, I’ll start. Jamie may have something to say here, too. I mean, generally if you exclude leasing business income for a moment, I think it’s more gradual kind of steady growth more traditional service charge categories. Wealth continues to do well. I think they will continue to grow at a pace that’s been similar to the last couple of years. Our swaps has probably been one of the areas that’s been a little down. So with more activity, I think that has an opportunity to improve. But I think outside of leasing business income, those numbers feel pretty much like a steady kind of a steady growth kind of trend line. Leasing business income, of course, can move up a little bit more just based on the amount of operating leases that we add to the balance sheet.

Jamie Anderson : Yeah, Jon the only thing that I would add, I mean, just on the foreign exchange side and then in that capital markets group, we just get – there is some volatility to that revenue from quarter-to-quarter. I mean, we might — but we average roughly in that $15 million, $16 million range where we get — we’ll get some chunky quarters where it’s $17 million and whatnot so. But we feel like that business is when you look at it over a three or four quarter window, it is just steadily growing 10% or 15% a year.

Jon Arfstrom : Okay. Good. Thank you. And then you guys — you provided a nice slide on agile it is more than doubled. Can you just talk a little bit about that business? And how long do you think the runway is in terms of your balance sheet capacity for that?

Archie Brown : Yes. Jon, when we bought that, I think we only brought over around a little over $100 million in receive — $110 million in receivables at the time. So we knew the production numbers were going to drive a lot of growth, especially in the first year. But again even this year, I think we are expecting that, that’s probably going to grow 25% year-over-year production probably being a little healthier than last year’s production because we got — first we have them for the whole year. Last year, we had it for 10 months. So production is going to go up a little bit more to — I can’t remember exactly the numbers at this point. [250ish] (ph) for originations, and that’s kind of where we think the balances are going to end over the end of the year.

Jon Arfstrom : Okay, thank you. And then –.

Jamie Anderson : Hi, Jon, real quick on that. The one thing that on the Agile side, I mean there is some seasonality to their business as well. That’s why you saw the balances decline in the fourth quarter a little bit. It is not anything that we purposefully did or anything like that or it was potential. That’s just the seasonality of their business. And so we get a run-up in originations really in the middle of the year in the second quarter and then it kind of bleeds off a little bit. But they are heavy in the second quarter. So that’s why you’ll see that more here in 2025, as the business has stabilized a little bit, and we are not ramping up the balances from what we bought.

Jon Arfstrom: Okay. That makes sense. And then, Bill, one for you just on the classifieds. If you take out the FX issue, it’s a pretty big step down in classified. And I’m just curious how you’re feeling about that? And do you think we may have hit a peak? Or is there anything new that you are seeing or concerning?

Bill Harrod : Yes. Great question, Jon. I appreciate it. The Q4, we finalized resolution on a number of credits that were sitting in the bucket, classified buckets for a while. And outside of the trade, as you mentioned, we did not have significant inflows. And as we take a step back — step up and look at our criticized, we did have some small increases there. But I feel much better about the trajectory based on what we are intake into the substandard and classified. So I’m positive.

Jon Arfstrom: Okay, good. All right, thanks guys appreciate it.

Bill Harrod : Thanks, Jon.

Operator: And there are no further questions at this time. I will now turn the call back over to Archie Brown for closing remarks.

Archie Brown : Thank you, Rob. I want to thank everybody for joining us today and hearing about our quarter and our year. We’re excited about 2025. We look forward to talking with you again in a few months. Have a good day.

Operator: This concludes today’s conference call. Thank you for your participation. You may now disconnect.