First Financial Bancorp /Oh/ Q3 FY2025 Earnings Call

Thank you for joining us, and welcome to the First Financial Bancorp Third Quarter 2025 Earnings Conference Call and Webcast. I'll now hand the call over to Scott Crawley. You may proceed. Thank you, Rob. Good morning, everyone, and thank you for joining us on today's conference call to discuss First Financial Bancorp's third quarter and year-to-date financial results. Participating on today's call will be Archie Brown, President and Chief Executive Officer; Jamie Anderson, Chief Financial Officer; and Bill Harrod, Chief Credit Officer. Both the press release we issued yesterday and the accompanying slide presentation are available on our website 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 third 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 today is accurate as of September 30, 2025, and we will not be updating any forward-looking statements to reflect facts or circumstances after this call. I'll now turn it 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 third quarter. The third quarter of '25 was another outstanding quarter for First Financial. Adjusted net income was $72.6 million and adjusted earnings per share were $0.76, which resulted in an adjusted return on assets of 1.55% and an adjusted return on tangible common equity of 19.3%. We achieved record revenue in the third quarter, driven by a robust net interest margin and record noninterest income. We have successfully maintained asset yields while moderating our funding costs, which combined to result in an industry-leading net interest margin. In addition, our diverse income streams remained a positive differentiator for us with our adjusted noninterest income representing 31% of total net revenue for the quarter. Expenses continue to be well managed. Excluding incentives tied to strong performance and the record fee income, total noninterest expenses were flat compared to the second quarter. Our workforce efficiency efforts continued during the period. And to date, we've successfully reduced our full-time equivalents by approximately 200 or 9% since we began the initiative 2 years ago. We expect further efficiencies subsequent to the integration of our pending acquisitions. Loan balances declined modestly during the quarter, falling short of our expectations. Lower production in our specialty businesses along with a greater percentage of construction originations, which fund over time drove the modest decline. Loan pipelines are very healthy as we enter the fourth quarter, and we expect to return to mid-single-digit loan growth to close out the year. Asset quality metrics were stable for the third quarter. Nonperforming assets were flat as a percent of assets and annualized net charge-offs were 18 basis points, which was a slight improvement from the linked quarter. We're very happy that our strong earnings led to continued growth in tangible book value per share and tangible common equity during the quarter. Tangible book value per share of $16.19 increased 5% from the linked quarter and 14% from a year ago, while tangible common equity increased 47 basis points from June 30 to 8.87% at the end of September. I'll now turn the call over to Jamie to discuss these results in greater detail. And after Jamie is done, I'll wrap up with some additional forward-looking commentary and closing remarks.

Thank you, Archie, and good morning, everyone. Slides 4, 5 and 6 provide a summary of our most recent financial results. The third quarter was another exceptional quarter with outstanding earnings, robust net interest margin and record fee income. Our net interest margin remains very strong at 4.02%. Asset yields declined slightly while we managed deposit costs to a modest increase. Loan balances declined slightly during the quarter as production slowed in our specialty lending areas and slower funding construction originations increased as a percentage of the portfolio. Average deposit balances increased $157 million due to higher broker deposits and money markets, offset by a seasonal decline in public funds. We maintained 21% of our total balances in noninterest-bearing accounts and remain focused on growing lower-cost deposit balances. Turning to the income statement. Third quarter fee income was another record, led by our leasing and foreign exchange businesses. Additionally, we had higher syndication fees and income on other investments. Noninterest expenses increased from the linked quarter due to an increase in incentive compensation, which is tied to fee income. Our efficiency efforts continue to impact our results positively and remain ongoing. Our ACL coverage increased slightly during the quarter to 1.38% of total loans. We recorded $9.1 million of provision expense during the period, which was driven by net charge-offs. Overall, asset quality trends were in line with expectations with lower net charge-offs and nonperforming asset balances remaining flat. Net charge-offs were 18 basis points on an annualized basis, while NPAs and classified assets were both relatively flat for the period. From a capital standpoint, our ratios are in excess of both internal and regulatory targets. Tangible book value increased $0.79 to $16.19, while our tangible common equity ratio increased 47 basis points to 8.87%. 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 $72.6 million or $0.76 per share for the quarter. Noninterest income was adjusted for a small loss on the sale of investment securities, while noninterest expense adjustments exclude the impact of acquisition and 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 1.55%, a return on average common equity of 19% and a pretax pre-provision ROA of 2.15%. Turning to Slides 9 and 10. Net interest margin decreased 3 basis points from the linked quarter to 4.02%. Asset yields declined 2 basis points from the prior quarter, while total funding costs increased 1 basis point. Slide 12 illustrates our current loan mix and balance changes compared to the linked quarter. Loan balances decreased $72 million during the period. As you can see on the right, the decline was driven by decreases in the Oak Street, ICRE and C&I portfolios, which outpaced growth in Summit and consumer. Slide 14 shows our deposit mix as well as the progression of average deposits from the linked quarter. In total, average deposit balances increased $157 million during the quarter, driven primarily by a $166 million increase in brokered CDs and a $106 million increase in money market accounts. These increases were offset by a seasonal decline in public funds. Slide 16 highlights our noninterest income for the quarter. Total fee income increased to $73.6 million during the quarter, which was the highest quarter in the history of the company. Bannockburn and Summit both had solid quarters. Additionally, other noninterest income increased $2.8 million for the quarter due to higher syndication fees and elevated income on other investments. Noninterest expense for the quarter is outlined on Slide 17. Core expenses increased $5.7 million during the period. This was driven by higher incentive compensation related to fee income and the overall strong performance by the company. Turning now to Slides 18 and 19. Our ACL model resulted in a total allowance, which includes both funded and unfunded reserves of $180 million and $9.1 million of total provision expense during the period. This resulted in an ACL that was 1.38% of total loans, which was a 4 basis point increase from the second quarter. Provision expense was primarily driven by net charge-offs, which were 18 basis points for the period. Additionally, our NPAs to total assets held steady at 41 basis points and classified asset balances totaled 1.18% of total assets. 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 in future periods as our model responds to changes in the macroeconomic environment. Finally, as shown on Slides 20 and 21, capital ratios remain in excess of regulatory minimums and internal targets. During the third quarter, tangible book value increased to $16.19, while the TCE ratio increased 47 basis points to 8.87%. Our total shareholder return remains strong with 33% 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.

Thank you, Jamie. Before we conclude our prepared remarks, I want to comment on our outlook for the fourth quarter, which can be found on Slide 22. As we close the year, we expect origination volumes to increase, which should accelerate our growth. Specific to the fourth quarter, excluding Westfield, we expect loan growth to be in the mid-single digits on an annualized basis. We expect core deposit balances to increase and combined with seasonal public fund inflows to result in strong deposit growth. Our net interest margin remains among the highest in the peer group, and we expect it to be in a range between 3.92% and 3.97% over the next quarter, assuming a 25 basis point rate cut in both October and December. This includes a modest bump in margin from the addition of Westfield in early November. We expect our fourth quarter credit cost to approximate third quarter levels and ACL coverage to remain stable as a percent of loans. We're estimating fee income to be between $77 million and $79 million, which includes $18 million to $20 million for foreign exchange and $21 million to $23 million for the leasing business revenue. This range includes the expected impact from Westfield. Noninterest expense is expected to be between $142 million and $144 million and reflect our continued focus on expense management. This range includes the impact from Westfield, which is expected to be approximately $8 million for the month of November and December. While we remain confident that we will realize our modeled cost savings, we expect the majority of those savings to materialize in the middle of 2026 once Westfield has been fully integrated. With respect to our pending acquisitions, we have received formal regulatory approval for the Westfield transaction and anticipate closing in early November. Our initial preparations for the BankFinancial close are underway, and we are more excited than ever to expand our reach into the Chicago market. We have filed the necessary applications and expect to receive approval from the regulators in coming months, eyeing a close during the first quarter of 2026. We're very excited to have the Westfield and BankFinancial associates join our team. In summary, we're very proud of our financial performance through the first 9 months of the year, which resulted in industry-leading profitability. We expect to have another strong quarter to close 2025 and build positive momentum as we head into 2026. With that, we'll now open up the call for questions.

Your first question today comes from the line of Brendan Nosal from Hovde Group.

Maybe just starting off here on a topic that's of interest today, NDFI loan exposure. I think if I look at your reg filings from last quarter, it's a little over $450 million or 4% of loans. I know that it's not huge, but can you just kind of walk us through that book and let us know whether that exposure falls into any of the known commercial verticals that you already have today?

Yes. Brendan, we'll have Bill Harrod cover that. All right. Great. We've got, as of the end of the quarter, about $434 million in the NDFI portfolio. It's a diversified, conservatively managed and anchored in high investment-grade tier with currently no adversely rated credit. The bulk of the portfolio is made up of traditional REITs of about $304 million across 46 notes, averaging about $7 million, consisting of a variety of publicly traded or privately held entities with investment grade or equivalent. We do have a securitization book within that portfolio of $73 million across 7 relationships with loans structured using S&P methodology to high investment-grade ratings. And we monitor those on a monthly basis with borrowing bases and independent third-party exams on a routine basis. And that makes up the bulk of what we have in that NDFI portfolio.

Awesome. That's really helpful color. Maybe turning to the net interest margin. I totally get the guide for next quarter, no surprise given recent and forthcoming rate cuts. I'm just kind of curious, so if we get those 2 cuts in the fourth quarter, how should we think about margin early in next year? I think in the past, you said that each cut is 5 to 6 basis points of near-term pressure before it grinds back up on lag funding costs. So any color there would be helpful.

Yes, Brendan, this is Jamie. Regarding the margin, we need to consider the impact of Westfield, which will introduce some variability but will ultimately help reduce our asset sensitivity going forward. Looking at the legacy company, we typically experience about 5 basis points of margin pressure for each 25 basis point rate cut. The initial effect of the cuts will be felt immediately, but as deposit costs adjust, we will start to recover some margin. Right now, our margin is in the 4% range, so with two expected cuts, we might start the year around 3.90%. However, taking Westfield into account and the adjustments from purchase accounting, we should see some improvement in the margin, which will alleviate some of the pressure from the anticipated rate cuts at the end of the year.

Your next question comes from the line of Mark Shootley from KBW.

Maybe one more on the margin. I'm trying to think about on the asset side, loan yields were strong and actually ticked up in the quarter. So I was just curious like what new loan originations are coming on today with you guys sort of returning to growth and what you're expecting for the total sort of portfolio yield in the near term?

Yes, Mark, this is Archie. I'll start, and Jamie, you can kind of comment on me if you want to amplify. But the rate cut certainly that we had affects origination yields as well. And so we were probably before the cut around 7% on origination yields, and it's closer, I guess, high 6s. So you said 6.80%, 6.90% and it's going to come in closer to the mid-6s you look at the month of September, it was probably right around 6.50%, maybe 6.50% and change. So we'd say sort of right now in that range, maybe drop down a little bit more with some more rate cuts because, again, a lot of what we do is commercial oriented tied to variable rates.

Yes. Mark, as we have discussed in previous quarters, when considering the legacy First Financial portfolio, excluding Westfield, we still have about 60% of our loan book that is tied to short-term rates. Therefore, those rate cuts will affect the yield on the loan side.

Yes, that makes sense. I'm curious about the growth you mentioned. You talked about strong pipelines, so which specific verticals or markets do you expect will drive that growth in the upcoming quarters?

Yes, Mark, this is Archie again. Let's discuss overall loan growth. When looking at total commitments, Q3 was consistent with Q2, indicating strong performance, potentially the best of the year for both quarters. However, we noticed a decrease in actual fundings compared to the previous quarter, primarily due to construction-related factors. Additionally, there was a decline in line utilization on the commercial side, which contributed to the lower overall growth for the quarter. As we approach Q4, strong commercial activity is our main focus. We have various sectors within commercial, but that will be the key driver. Summit funding typically peaks during this quarter, which will also contribute significantly. We expect some growth in commercial real estate in Q4. Conversely, our Oak Street Group may face some pressure, as they are anticipating more payoff challenges in Q4. Nonetheless, all these factors lead us to project an annualized growth rate of 5%.

Your next question comes from Daniel Tamayo from Raymond James.

Maybe just one on the fees and expenses. So the 4Q guide pulling out Westfield just for a second was higher than what we were looking for and certainly what the 3Q number was. Just curious if there's something seasonal, unusual, unique in the fourth quarter? Or maybe if you can kind of give us some indication of what the run rates would look like going into '26.

Yes, Danny, it's Jamie. The significant change from the third quarter to the fourth quarter, particularly excluding Westfield and focusing on the legacy First Financial numbers, primarily stems from Bannockburn. The forecast we have from them for the fourth quarter is slightly above what we achieved in the strong third quarter. There’s also a small increase related to Summit concerning the operating leases. Additionally, our wealth department, especially in M&A and investment banking, has seen a slight uptick from that division. So, these three areas are contributing, with the main driver being Bannockburn. As we've mentioned before, Dan, there can be some variability there. However, looking at that business year-over-year, we're seeing growth generally in the 10% range.

Yes. And Dan, those are all commission-based kind of businesses. So when they do well, you're going to see more commission paid out, which drives the salary costs.

That's great. That's very helpful. And my other question, I guess, on the credit side. So a good quarter from a credit perspective, guiding to similar credit costs. Just curious how long you think those play out? I think in the past, we've talked about a little bit higher run rate on the charge-off side. Any read-throughs in the near term past the fourth quarter on credit?

Yes, Dan, this is Archie. I think it's pretty steady. We've been indicating throughout the year that a range of 25 to 30 basis points, around the mid-20s, appears to be our run rate in the current environment. Over a few quarters, that’s what we would anticipate.

Understood. Okay. And then lastly, on the capital front, so you got the 2 deals closing here in the near term, take a little bit of a hit to capital. But curious, you'll still have pretty strong CET1. How you're thinking about buybacks? You probably think the stock is a little undervalued right now. Once we get past the deals, like if there's a bogey you're looking at on the capital side or any color there would be great.

Yes, Dan, this is Jamie. I think you expressed it well. Over the next two to three quarters, we will allow the deals to come in and assess our capital ratios at that time. We are currently building our tangible common equity and tangible book value relatively quickly. The tangible common equity will experience approximately a 120 basis point decrease once we finalize the Westfield deal due to its all-cash structure. We will observe how the next two to three quarters unfold and evaluate our position and trading multiples. If we are trading at or below 150% of tangible book value, we may consider buybacks at that time.

Your next question comes from the line of Terry McEvoy from Stephens.

From talking to some of the other banks that are in your metro markets in your footprint, kind of surprised with the deposit competition a bit stronger than I would have guessed. And your cost of funds up a few basis points quarter-over-quarter. So can you maybe just talk about deposit competition? And you didn't have loan growth this quarter. Next quarter, you're guiding towards that. Does that kind of drive those deposit costs higher as you look to fund that growth?

Yes, Terry, this is Archie. I'll begin. It was slightly up for the quarter, and I would say it feels flat. With the recent rate cut, we took some decisive actions regarding deposits that took effect this quarter. We anticipate more short-term rate cuts ahead, which we expect will lead to a decrease in our deposit costs in Q4. We made quite an aggressive cut. The market is competitive, but considering our current loan-to-deposit ratio, we believe we can pursue more aggressive actions despite some loan growth. We plan to do more as the Fed makes further cuts. Additionally, one appealing aspect of BankFinancial is that they have lower deposit and funding costs compared to us, and their market appears to have slightly more rational pricing compared to what we are experiencing in Southwest Ohio.

Yes. The other thing to keep in mind is that we have some increased loan growth in the fourth quarter and moving forward. However, we do not believe this will significantly impact our deposit costs due to the liquidity we expect from the BankFinancial deal, especially if it closes in the first part of 2026. They currently have a relatively low loan-to-deposit ratio, and by selling the multifamily portfolio, we will create even more liquidity that can be used for additional loan growth, paying off borrowings, or reinvestment.

That's great. And nice to see the FX trading and the 4Q guide higher at $18 million to $20 million. I just want to make sure that run rate looking out into '26, do you think that is more consistent of next year? Or is this more of just a couple of strong quarters and next year we will go back to some of your prior comments on the outlook for that revenue line?

Certainly, Q4 would be a peak for them if they achieve the projected numbers. As Jamie noted, it tends to fluctuate. We view it more on an annual basis over four quarters. We've owned them for quite some time, and our observations indicate they tend to grow, may plateau briefly, then experience another growth spurt. Overall, a growth rate of 5% to 10% seems reasonable based on our expectations for them.

Yes, Terry, this is Jamie. As we consider 2026, I wouldn't annualize the fourth quarter number we're discussing. Instead, I would anticipate a run rate in 2026 in the range of $65 million to $70 million for them.

Your next question comes from the line of Jon Arfstrom from RBC.

Jamie, in your prepared comments, you touched on the workforce efficiency efforts. And can you talk a little bit about where you are in that journey? And then when you look at the 2 acquisitions, what kind of opportunities do you see there? Because it seems like you're going to apply this framework over the top of those 2 deals.

Yes, Jon, this is Archie. I'll begin. We're approximately 90% through integrating the First Financial legacy company. There are still some areas to address, but we expect it will take a few more quarters to maximize the opportunities there. As mentioned in our comments, we believe the potential for increased efficiency primarily comes from the two acquisitions. In the case of Westfield, we previously indicated about a 40% expense reduction from the merger, and we are on track to meet or potentially exceed that target. For BankFinancial, the reduction might be slightly less due to a larger number of branches, but we are also well on our way to surpassing our initial projections for that as well. This plan includes adding roles in both markets to boost revenue, bringing in expertise that these banks may not have had. Even with these additions, we still expect to achieve the expense reductions we forecasted in those transactions.

Yes. Okay. That makes sense. Yes, some good opportunities there, obviously, for production. And Terry took a couple of my questions on deposits. But Jamie, can you just remind us of the typical seasonal flows on deposits that you see in the fourth quarter? Yes, to remind everyone, we experience a seasonal increase in public funds, primarily from Indiana, due to reduced property taxes. These deposits typically arrive in May and November. On average, we receive about $150 million to $200 million in additional deposits during those quarters, with a slight skew towards the second quarter. After that, these funds usually diminish in the following quarter, returning to baseline levels, which happens consistently each quarter. In the third quarter, we observed a decline in public funds by $100 million to $150 million, and we often replace them with brokered CDs or borrowings.

And that concludes our question-and-answer session. I will now turn the call back over to Archie Brown for closing comments.

Thank you, Rob. I want to thank everybody for joining us today. We really feel great about the quarter we had and are excited about fourth quarter and the momentum we're building for 2026 with the pending acquisitions. We look forward to talking to you again in a quarter. Have a great day and weekend.

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