Earnings Call Transcript - FFBC Q4 2024

Operator, Operator

Thank you for joining us, and welcome to the First Financial Bancorp Fourth Quarter 2024 Earnings Conference Call and Webcast. All lines are muted to avoid background noise. Following the speakers' presentations, there will be a question-and-answer session. I will now hand the call over to Scott Crawley. You may begin. 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, CEO

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 hand the call over to Jamie, I would like to highlight some key points from the most recent quarter, summarizing this year's exceptional performance. I'm very pleased with our strong fourth quarter, as adjusted earnings per share were $0.71, resulting in a return on assets of 1.7% and a return on tangible common equity ratio of 19.9%. As anticipated, the decrease in short-term rates by the Fed caused the decline in asset yields to outpace the decline in deposit costs, which led to a reduction in our net interest margin to 3.94%. Balance sheet trends were impressive for the quarter with loan growth exceeding 7% on an annualized basis and total deposits increasing by approximately 16% on an annualized basis. Non-interest income was strong in the fourth quarter, with leasing, foreign exchange, and wealth management income all rising by double-digit percentages from the previous quarter. Although expenses grew by 5% from the previous quarter, this increase was primarily driven by higher incentive compensation linked to the robust fee income and overall company performance. Our workforce efficiency initiative progressed during the quarter, resulting in the elimination of 145 positions to date. We expect to complete this project in 2025. Asset quality remained stable for the quarter, with non-performing assets unchanged compared to the previous quarter at 0.36%, while classified assets increased by 7 basis points to 1.21%. The rise in classified assets was attributed to a mutual agreement to terminate a foreign exchange trade, resulting in a $45 million obligation from a customer, which we believe is fully collateralized. We expect the customer to fulfill this obligation in 2025. Net charge-offs were slightly elevated due to the resolution of three loans that had been long-term workouts. Overall credit trends appear to be improving, and we anticipate lower credit costs moving forward. 2024 was an excellent year for our company. On an adjusted basis, we earned $249 million or $2.61 per share, with a return on assets of 1.4% and a return on tangible common equity of 19.9%. While the net interest margin declined from 4.4% to 4.05% due to falling short-term rates, strong loan growth mitigated most of the impact, resulting in a net interest income decline of only 2.5%. Non-interest income rose by more than 13% to a record $241.8 million, driven by growth in leasing and wealth management income. This led to record revenue for the company of approximately $854 million, 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 grew by 7.2% to $14.3 billion. Additionally, tangible common equity rose by 56 basis points to 7.73%, and tangible value per share increased from $12.38 to $14.15, representing a 14% increase. Similar to the fourth quarter, asset quality remained relatively stable throughout the year. Net charge-offs as a percentage of average loans decreased by 3 basis points to 30 basis points, and non-performing assets as a percentage of total assets fell by 2 basis points to 0.36%. With that, I'll now pass the call over to Jamie to delve into these results in greater detail.

Jamie Anderson, CFO

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, as C&I, ICRE, mortgage, and leasing all had 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 by 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 costs 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 by 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, our 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 Brown, CEO

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 in 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 3.90% over the next quarter. We expect our credit costs to be modestly lower over the next quarter with 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 and $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.

Operator, Operator

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

Daniel Tamayo, Analyst

Thank you. Good morning, guys.

Archie Brown, CEO

Good day, Daniel.

Daniel Tamayo, Analyst

Maybe first, you provided guidance for the first quarter, which I appreciate regarding loan growth. However, it's a bit lower than what you achieved in 2024. I'm wondering if there's any seasonality in the first quarter numbers or something unusual that might suggest growth will increase as the year progresses. I'd also like to hear your thoughts on loan growth throughout the year, if you have any. Thanks.

Archie Brown, CEO

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 the outlook from our clients overall is, I think, generally positive.

Daniel Tamayo, Analyst

Okay. Terrific. Now, regarding the margin, I have a question for Jamie. You mentioned a range of 3.85% to 3.90% in the first quarter. I'm interested in your thoughts on the rest of the year and how the Federal Reserve's interest rate cuts might impact that.

Jamie Anderson, CFO

Yes. We provided guidance for the first quarter. In our forecast for 2025, we have included one rate cut during the year, specifically in June. Our margin is expected to remain in the range of 3.85% to 3.90%. As we start 2025 with the recent cuts, deposit costs will continue to decline. The June cut we’ve factored into our forecast will have an immediate impact, slightly lowering the margin due to the contractual nature of the loan portfolio. Deposit costs will begin to decrease again and eventually catch up, allowing our margin to stay relatively stable within that range.

Daniel Tamayo, Analyst

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, CEO

Yes. Thanks, Dany. I mean the ones we've opened up in the last year and a half are performing well, both on the loan and deposit side. I wouldn't call them rapid growth, but 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 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 that provides a chance to bring a team in, 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; it's just, again, when an opportunity presents itself that makes sense to us, we'll take that opportunity to capitalize on it.

Daniel Tamayo, Analyst

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

Archie Brown, CEO

Thanks, Dany.

Operator, Operator

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

Terry McEvoy, Analyst

Hi, good morning everybody.

Jamie Anderson, CFO

Hi, Terry.

Terry McEvoy, Analyst

Maybe I understand the expense guide. If the foreign exchange is at the midpoint of about $12 million and leasing is $20 million in the first quarter, is that trend included in the total non-interest expense of $128 million to $130 million?

Jamie Anderson, CFO

Yes, that's correct. We see about a $1.5 million increase in expenses from the fourth quarter to the first quarter, mostly due to payroll taxes starting over. This explains why expenses are not decreasing even as some variable costs go down, which affects the expense trend from the fourth quarter to the first quarter. Yes, this is included in the $128 million to $130 million range.

Terry McEvoy, Analyst

Okay. As a follow-up, regarding the classified asset, which pertains to an FX transaction, I would like to inquire about any potential credit risk associated with that business. Can you also clarify if there is a specific reserve for this business? Any additional insights would be appreciated.

Bill Harrod, Chief Credit Officer

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, Analyst

Appreciated. Thanks for all the color there.

Archie Brown, CEO

Thanks, Terry.

Operator, Operator

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

Christopher McGratty, Analyst

Hi, guys. Good morning. Jamie or Archie, I believe you mentioned 30 basis points of charge-offs in your prepared remarks. Is that your perspective on normalized losses for this bank?

Archie Brown, CEO

I'm sorry, is that how we think?

Jamie Anderson, CFO

30 basis points of charge-offs. Yes.

Archie Brown, CEO

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, Analyst

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, CEO

Yes, I believe there is increased optimism for various reasons, particularly in the coming year or two, regarding more opportunities. It seems that the window for deal approvals is becoming a bit wider, and the process might be faster than it has been previously, bringing a bit more certainty. We are actively engaging in discussions with banks that align with our profile, mainly focusing on those in the $1 billion to $5 billion range within or near our operational area. While we are in these discussions, I cannot provide further details about the chances of something materializing.

Christopher McGratty, Analyst

All right. Perfect. Thank you.

Operator, Operator

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

Jon Arfstrom, Analyst

Thanks, good morning.

Archie Brown, CEO

Hi, Jon.

Jon Arfstrom, Analyst

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

Archie Brown, CEO

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 in 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 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, CFO

Yeah, Jon, I would just like to add that on the foreign exchange side and within the capital markets group, we experience some revenue volatility from quarter to quarter. We generally average around $15 million to $16 million, although there may be some stronger quarters with revenue hitting $17 million. However, over a three or four quarter period, we see that business steadily growing by 10% to 15% each year.

Jon Arfstrom, Analyst

Thank you for your insights. You shared a great slide on agile, which has more than doubled. Could you discuss that business a bit more? Also, how long do you think you can sustain this growth given your balance sheet capacity?

Archie Brown, CEO

Yes. When we acquired that, we only inherited a little over $100 million in receivables at the time. We anticipated that production numbers would significantly contribute to growth, especially in the first year. This year, we expect a 25% year-over-year increase in production, likely healthier than last year's figures since we have full-year access now, compared to just 10 months last year. Production is projected to rise slightly more, with origination numbers around 250 million, which is where we expect the year-end balances to be.

Jon Arfstrom, Analyst

Okay, thank you.

Jamie Anderson, CFO

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, Analyst

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, Chief Credit Officer

Yes, great question, Jon. I appreciate it. In the fourth quarter, we resolved several credits that had been pending for a while. Aside from the trade you mentioned, we did not see significant inflows. Taking a broader view of our criticized assets, we did notice some minor increases. However, I'm feeling more optimistic about our path forward based on the intake into the substandard and classified categories. So I'm feeling positive.

Jon Arfstrom, Analyst

Okay, good. All right, thanks, guys, appreciate it.

Bill Harrod, Chief Credit Officer

Thanks, Jon.

Operator, 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, CEO

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, Operator

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