Earnings Call Transcript - FFBC Q4 2025

Operator, Operator

Thank you for waiting. My name is JL, and I will be your conference operator today. I would like to welcome everyone to the First Financial Bancorp Fourth Quarter 2025 Earnings Conference Call and Webcast. I will now hand the call over to Scott Crawley, Corporate Controller. You may begin.

Scott Crawley, Corporate Controller

Thanks, JL. 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, please refer to the forward-looking statements disclosure contained in the fourth quarter 2025 earnings release as well as our SEC filings for a full discussion of the company's risk factors. The information we provide today is accurate as of December 31, 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.

Archie Brown, CEO

Thanks, Scott. Good morning, everyone, and thank you for joining us on today's call. Yesterday afternoon, we announced our fourth quarter and full year financial results. I'm very pleased with our record earnings performance for the quarter. Adjusted earnings per share were $0.80, leading to an adjusted return on assets of 1.52% and an adjusted return on tangible common equity of 20.3%. The net interest margin, which declined slightly from the third quarter, has proven resilient as reduction in funding costs negated most of the impact of short-term rate reductions by the Federal Reserve. Balance sheet trends were solid for the quarter with loan growth of 4% on an annualized basis. Total average deposits increased by approximately 7% on an annualized basis, excluding the impact from the Westfield acquisition. I'm especially pleased with our robust noninterest income for the quarter. Total adjusted fee income was $77 million and increased 5% compared to the linked quarter. Wealth management and foreign exchange income both increased by double-digit percentages, while leasing and mortgage income also remained strong. While adjusted noninterest expenses increased by 6% from the linked quarter, most of the increase was driven by the Westfield acquisition. Asset quality was relatively stable for the quarter and provision expense was in line with our expectations at $10.1 million. Nonperforming assets increased slightly to 0.48% of assets and classified assets declined slightly to 1.11% of assets. Three loans drove the increase in NPAs, while net charge-offs were 27 basis points, which was within our range of expectations. Turning to the full year. 2025 was another great year for First Financial. On an adjusted basis, our net income was $281 million or $2.92 per share. Adjusted return on assets was 1.49% and adjusted return on tangible common equity was 19.3%. We are pleased with the performance of the net interest margin for the full year. While the margin did decline year-over-year from 4.05% to 3.98%, we were able to offset most of the impact of short-term rate decreases through the diligent management of deposit costs. Adjusted noninterest income increased by 16% to a record $280 million, led by growth in wealth management, foreign exchange, and mortgage income. The result was record revenue for the company of almost $922 million, an 8% increase over 2024. Similar to the fourth quarter, asset quality was relatively stable for the year. Provision expense declined 21% from 2024. Net charge-offs as a percent of average loans declined 5 basis points to 25 basis points, and our ACL coverage increased by 6 basis points to 1.39%. Capital levels remained strong during 2025. While the acquisition of Westfield negatively impacted our capital, our strong earnings drove increases to tangible book value per share of 11% from $14.15 to $15.74. I'll now turn the call over to Jamie to discuss these results in more detail. And after Jamie talks, I'll wrap up with some additional forward-looking commentary and closing remarks.

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 another outstanding quarter, highlighted by record earnings, a strong net interest margin, organic growth in both loans and deposits, and the acquisition of Westfield Bank. Our net interest margin remains very strong at 3.98%. Funding costs declined 15 basis points from the linked quarter, while asset yields decreased 19 basis points. Loan balances increased $1.7 billion, including $1.6 billion acquired in the Westfield transaction. Organic growth was $131 million or 4% on an annualized basis and was driven by Summit and C&I. Total deposit balances increased $2 billion, including $1.8 billion acquired in the Westfield transaction. Organic growth was $264 million with increases in the majority of our deposit types. We maintained 21% of our total balances in noninterest-bearing accounts and remain focused on growing lower-cost deposit balances. Additionally, we issued $300 million of subordinated debt during the fourth quarter. These notes have a 10-year maturity and carry a 6.375% interest rate. Turning to the income statement. Adjusted fourth quarter fee income was a record, led by leasing, foreign exchange, and wealth management. Noninterest expenses increased from the linked quarter due primarily to the impact of the Westfield acquisition. Our ACL coverage remained relatively unchanged during the quarter at 1.39% of total loans despite a large increase in the ACL balance. Most of that balance change was due to the Westfield acquisition. In addition, we recorded $10.1 million of provision expense during the period, which was driven primarily by net charge-offs and loan growth. Asset quality trends were relatively stable as net charge-offs increased 9 basis points from the third quarter and classified assets as a percentage of total assets declined 7 basis points. Net charge-offs were 27 basis points on an annualized basis, while NPAs as a percentage of assets were 48 basis points. From a capital standpoint, our ratios are in excess of both internal and regulatory targets. Tangible book value was $15.74, while our tangible common equity ratio was 7.79%. 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 $77.7 million or $0.80 per share for the quarter. Noninterest income was adjusted for $12.6 million of losses on the sales of investment securities, while noninterest expense adjustments were primarily related to acquisition activity. As depicted on Slide 8, these adjusted earnings equate to a return on average assets of 1.52%, a return on average tangible common equity of 20%, and a pretax pre-provision ROA of 2.14%. Turning to Slides 9 and 10. Net interest margin decreased 4 basis points from the linked quarter to 3.98%. Asset yields declined 19 basis points compared to the prior quarter. Total deposit costs declined 15 basis points, partially offsetting the impact of lower asset yields. Slide 12 illustrates our current loan mix and balance changes compared to the linked quarter. Loan balances increased $1.7 billion during the period. As you can see on the right, $1.6 billion was a result of the Westfield transaction. Absent the impact from the acquisition, organic loan growth was $131 million or 4% on an annualized basis. Organic growth was driven by C&I and Summit. Slide 14 shows our deposit mix as well as the progression of average deposits from the linked quarter. In total, average deposit balances increased $1.4 billion, including a $1.2 billion impact from the Westfield transaction. Organic growth during the quarter included increases in the majority of our product types, while some were seasonal in nature. Slide 16 highlights our noninterest income. Total adjusted fee income increased to $77.3 million, which was the highest quarter in the history of the company. Bannockburn and Summit both had strong results. Wealth had a record quarter, while mortgage and deposit service charge income also increased from third-quarter levels. Noninterest expense for the quarter is outlined on Slide 17. Core expenses increased $8.6 million during the period. This was driven by the impact from the Westfield acquisition. Turning now to Slides 18 and 19. Our ACL model resulted in a total allowance, which includes both funded and unfunded reserves of $207 million. This includes $26 million of initial allowance on the Westfield portfolio. We recorded $10.1 million of total provision expense during the period. At December 31, the ACL was 1.39% of total loans, which was up slightly from the linked quarter. Provision expense was primarily driven by net charge-offs and loan growth. Additionally, our NPAs to total assets increased slightly to 48 basis points, while classified asset balances as a percentage of total assets decreased to 1.11%. Finally, as shown on Slides 20 and 21, capital ratios remain in excess of regulatory minimums and internal targets. During the fourth quarter, tangible book value and the TCE ratio were negatively impacted by the Westfield acquisition. Tangible book value was $15.74, and the TCE ratio was 7.79% at the end of the period. Our total shareholder return remains strong with 40% of our earnings returned to shareholders during the period through the common dividend. We maintain our commitment to providing an attractive return to our shareholders, and we'll 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 conclude our prepared remarks, I want to comment on our outlook for the first quarter, which can be found on Slide 22. Excluding the impact from Bank Financial, we expect payoff pressure to ease in the coming quarter, resulting in low single-digit organic loan growth on an annualized basis during the first quarter. And for the full year, as originations ramp up, we expect loan growth to be in the 6% to 8% range. We expect core deposit balances to decline modestly in the near term due to seasonal outflows of public funds. Our net interest margin remains among the highest in the peer group, and we expect it to be in a range of between 3.94% and 3.99% over the next quarter, assuming a 25 basis point rate cut in March. We expect first-quarter credit costs to approximate fourth-quarter levels and ACL coverage to remain stable as a percentage of loans. We expect fee income to be between $71 million and $73 million, which includes $14 million to $16 million for foreign exchange and $19 million to $21 million for leasing business revenue. This range includes the impact from both Westfield and Bank Financial. Noninterest expense is expected to be between $156 million and $158 million and reflect our continued focus on expense management. This range includes the impact from both Westfield and Bank Financial, which should approximate $11 million and $10 million, respectively. While we remain confident that we will realize our modeled cost savings, we expect those savings to materialize later in 2026 once both banks have been fully integrated. To conclude, we're very proud of our overall performance in 2025. In addition to outstanding financial results, we successfully launched our Western Michigan banking office in Grand Rapids and acquired 2 banking companies, which strengthened our core funding and provides us with a platform for growth in 2 of the largest metropolitan markets in the Midwest. We received our second consecutive outstanding CRA rating, demonstrating our commitment to creating opportunities for lower-income communities in our footprint. And we were one of only 70 companies worldwide to be recognized by Gallup as an exceptional workplace. Finally, I want to recognize and thank our associates for their hard work and commitment. It's due to their efforts that First Financial consistently delivers industry-leading performance. And with that, we'll now open up the call for questions.

Operator, Operator

Your first question comes from the line of Daniel Tamayo of Raymond James.

Daniel Tamayo, Analyst

Maybe starting on the fee income guidance, I mean, fourth quarter was a good quarter. The guidance was a little bit below where I was looking for. Within that, FX looks like it's going to be down and then leasing over the last couple of quarters has trended down. So just curious if you can kind of walk us through where you're seeing the path for the rest of the year in those 2 line items and then more broadly, the fee income path for the rest of the year.

Archie Brown, CEO

Sure, Danny. As you said, the fourth quarter was a great quarter all around, and FX certainly shined. I think they had their best quarter ever. There's a little bit of seasonality in Q1. And they have added quite a bit of talent where some nonsolicits will burn off after the first quarter, which I think is going to create more opportunity for them as they go forward. But with that, I'll have Jamie maybe talk about fees, you can talk about FX or go beyond that and maybe fees more broadly for the year.

James Anderson, CFO

Yes, Danny. For the fourth quarter, we experienced a record quarter with significant revenue from Bannockburn in the foreign exchange sector. We do observe some seasonality in that business regarding revenue. The second half of the year generally sees larger figures, and we expect a decline in the first quarter, followed by an increase as the year progresses. Additionally, some of the teams we brought on board over the past year will start to show results as the nonsolicits begin to expire. Overall, there is a notable difference in seasonality from the fourth quarter to the first quarter across all lines. Looking ahead to the latter part of '26, especially in the second, third, and fourth quarters, we anticipate reaching a fee income range of $75 million to $80 million as the year continues.

Daniel Tamayo, Analyst

Okay, that's helpful. I assume the FX business is expected to grow year-over-year as we consider the overall outlook for '26. Regarding leasing, do you think that business is slowing in its growth rates?

Archie Brown, CEO

Yes. On FX, we do expect, as Jamie said, Jamie, for it to keep growing. If you look at it, we acquired it in 2019. I think their compound annual growth rate is probably close to 14% or 15% a year over that time, and they're still going to grow probably low double digits over the next few years. So we think foreign exchange will continue to grow in capital markets overall at nice clips. In the case of Summit, I mean, their origination numbers were up last year. They'll be up some more this year. It's sometimes more of a question of what the mix is. And they're probably doing more finance leases and a little bit less operating leases as a percent of the mix. That's probably why you're seeing that number maybe a little bit on the flatter side.

James Anderson, CFO

Yes, Danny, it's Jamie. I think we were experiencing growth on the leasing side in the range of 10% to 15% in past years, and now it's more in the high single digits. The portfolio is beginning to mature. We acquired that company four or five years ago, and the leases generally have terms within that range. So, we're starting to see some activity in that portfolio at this point.

Daniel Tamayo, Analyst

Okay. That's helpful. I appreciate it. And then, maybe one bigger picture here for you, Archie, just on the plan for growth in Grand Rapids. You mentioned that in your commentary and in the release. Just curious what you have in place there and what you're planning to do in terms of investments there?

Archie Brown, CEO

We brought a team over gradually throughout most of the first quarter last year, and they have ramped up nicely. They are close to $100 million in commitments on the loan side and in the $20 million to $30 million range for deposits. We have added some other banking team members, particularly in private banking, and we plan to open a full banking office there this year and add some mortgage services as well. We will continue to build it out. While we don’t have anything concrete yet, we believe there are more opportunities in Michigan, especially with the larger mergers and acquisitions happening among banks. We think this could create opportunities for us to expand in that market over time. Therefore, we see it as a strong investment opportunity.

Operator, Operator

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

Brendan Nosal, Analyst

Maybe just to circle back to the loan growth outlook, I think you guys said 6% to 8% growth for the full year. Just want to confirm that, that's on an organic basis and not including Bank Financial, which closed earlier this quarter.

Archie Brown, CEO

Yes, I think that's right, Brendan. To provide a bit more insight on loans overall, we had an outstanding origination quarter in Q4, marking our best quarter significantly in 2025. Our fundings increased by 36% compared to the previous quarter. Additionally, Q4 also saw a record level of payoff activity, which was up 56% from Q3 last year, making it our largest quarter for payoffs. Typically, Q1 experiences a seasonal dip in origination, but we anticipate a healthy ramp-up as the year progresses. The pipelines appear to be in better shape than even last year, leading us to believe that originations will remain strong throughout the year. While we expect payoffs to decrease from their high levels in Q4, they won't hit rock bottom in Q1. We're projecting a slight growth in Q1, which should build momentum, and we estimate a growth rate of 6% to 8% for the year, reflecting our legacy bank's performance.

James Anderson, CFO

Yes, yes. So that would exclude any of the acquired balances.

Brendan Nosal, Analyst

Okay. Perfect. Perfect. Maybe turning to the margin outlook for the first quarter, that 3.94% to 3.99%, can you break out the estimated purchase accounting accretion number with Bank Financial coming in and a full quarter of Westfield? PAA is I think 4 basis points this quarter. What does that look like in the guide for 1Q?

James Anderson, CFO

Yes, the 4 basis points for Westfield should remain stable. We don't anticipate a significant impact from the purchase accounting related to the Bank Financial deal for a couple of reasons. First, they had limited loan balances initially, and we are selling a large portion of their multifamily portfolio as previously announced. They had about $700 million in loan balances, and we are selling around $450 million. This means they will retain about $200 million to $250 million in loan balances after the sale, so the purchase accounting impact should be minor. In the fourth quarter, Westfield contributed 4 basis points, and since we only had them for two months, you can expect approximately a 5 or 6 basis point impact from the deals.

Brendan Nosal, Analyst

Okay. Okay. That's really helpful. One more from me, just staying on the topic of margin. Like outside of short-term rate cuts, just kind of walk us through the major driver of margin over the course of 2026. Like if there's no more cuts, is there a natural drift in the margin one way or the other? Or is it really just dependent on what the short end does?

James Anderson, CFO

I would say it's really dependent on the actions at the short end. If we do not see any rate cuts, our margin for 2026 is expected to remain relatively stable. However, we are anticipating some effects from potential rate cuts, with our forecast including two cuts—one in March and another in June. In this scenario, we project our margin for the year to decrease slightly to the low 3.90s, around 3.90% to 3.95%. So, if those rate cuts occur, there will be some impact. If they do not happen, the margin would essentially remain flat but at a higher level.

Brendan Nosal, Analyst

Fantastic. I really appreciate the color and the commentary.

Archie Brown, CEO

Welcome. Thanks, Brendan.

Operator, Operator

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

Terence McEvoy, Analyst

It really feels like a Friday morning, not a Thursday morning. You kind of threw me off this quarter. I'm going to be I'll run that by the boss. Just a question, the quarterly expenses, the $156 million to $158 million, where does that trend through the fourth quarter once you achieve the cost savings? I'm just trying to get a better sense for the quarterly trajectory.

James Anderson, CFO

Yes, Terry, it's Jamie. We have a couple of factors at play that are somewhat opposing. For the two deals with Westfield, we had a significant conversion event in March, which means we'll start realizing substantial cost savings for that deal afterward. We have already achieved some savings, but not the substantial amount we typically expect. In June, we have the conversion for Bank Financial, which will come a quarter later, and we will begin to see cost savings from that as well. However, as we mentioned in response to Danny's question about fees, we expect an increase in foreign exchange revenue in the latter half of the year, which will lead to higher commissions and variable compensation related to not just Bannockburn, but also several other fee-based businesses. This will partially offset some of the cost savings we anticipate. Nonetheless, we will have the revenue on the other side. Looking ahead to the latter half of the year, we are estimating expenses to be in the low $150 million range.

Archie Brown, CEO

We are considering a conversion timeline of 90 days. If we convert Westfield in March, most of the integration expenses will be gone by June. In June, we will also have the conversion for Bank Financial. Three months later, we have some employees who are contracted to remain with us for 90 days after conversion. Therefore, after 90 days post-conversion, all the expenses will be eliminated.

Terence McEvoy, Analyst

Perfect. Great color there. And then maybe as my follow-up, what are the plans in Chicago, the $1.2 billion that comes from Bank Financial? It's a massive market. And what's the strategy to grow? Is it de novo hiring bankers? Or is that an M&A market for you potentially?

Archie Brown, CEO

Yes, Terry, this is Archie again. We'll focus on what we can control, which is our organic growth. We have a commercial banking team in place that we established about 1.5 to 2 years ago before the Bank Financial closure. We plan to expand that team and will add wealth bankers and mortgage bankers in the market. Additionally, we intend to improve operations at our retail centers since they haven't been originating much lending. We believe we have a strong HELOC lending capability, and we're going to enhance that. We're making some organic advancements while also bringing in talent where necessary. We retained a few individuals who worked on smaller commercial real estate deals and a leasing team to fill in gaps, and we think this will lead to business growth. Regarding mergers and acquisitions in Chicago, we see potential for add-on opportunities, but that's not our primary focus right now.

Operator, Operator

Your next question comes from the line of David Konrad of KBW.

David Konrad, Analyst

Just a follow-up question on the expenses. Just wondering how the efficiency ratio will trend through the year. It feels like it's going to be like very low 50s based on your commentary.

James Anderson, CFO

Yes, David, this is Jamie. It sounds sick. I'm sorry about that.

David Konrad, Analyst

I'm trying to be great.

James Anderson, CFO

Yes, we have a solid outlook. Regarding the second half of the year, we expect to start seeing the full cost savings from the two deals. When assessing the situation, it's not quite in the low 50s but rather in the mid-50s range, around 55% to 56%. A few factors affect our efficiency ratio, including the impact from Summit and the equipment leasing aspect, specifically how operating leases are accounted for. This plays a significant role in our fee income as well as on the expense side. The rental payments contribute to fee income, while the assets are depreciated under operating leases. Consequently, the efficiency ratio for that particular segment is in the mid- to high 60s, which skews our overall efficiency ratio by a few hundred basis points. Without that factor, we would be looking at the 52% to 53% range.

Archie Brown, CEO

Yes, David, Westfield didn't have a wealth private banking team, which is more related to the banking side. We're actually adding and have already hired one wealth adviser in the market. We're soon adding a second one to grow wealth management assets in Northeast Ohio, as they had none when we acquired them. However, they did have a great quarter, driven by the continued acquisition of new assets and overall growth in assets under management. Additionally, our small M&A advisory unit in that group had a strong fourth quarter, which contributed to their performance.

Operator, Operator

Your next question comes from the line of Brian Foran of Truist.

Brian Foran, Analyst

Just going back to the loan growth commentary, 2 things I wanted to check. So one, would you expect total earning assets to kind of generally follow loan growth this year? Or is there anything we need to be mindful of as we're kind of penciling in cash and securities?

James Anderson, CFO

Yes. Brian, this is Jamie. We're experiencing a significant influx of cash due to the Bank Financial deal. Our plan is to invest that money while being mindful of cash flow from the securities portfolio. The size of the securities portfolio may increase, as we usually aim to keep it around 20% of our assets. You might see that peak at around $5 billion, slightly above our historical percentage, since our total assets will be about $22 billion. As loan growth varies, we intend to reduce the securities portfolio. A rough guideline would be that for every unit of loan growth, we would decrease the securities portfolio by about half. So, we will indeed reduce that.

Brian Foran, Analyst

Can you clarify the timing of when loan growth is expected to improve? Is it primarily due to overcoming high paydowns in the first quarter, or is it more related to the conversions, suggesting we should anticipate stronger growth in the latter half of the year? Could you also revisit the factors that will drive this increase and provide your best estimate on when we might start to see it?

Archie Brown, CEO

There are a couple of factors to consider. First, we typically experience a quieter origination quarter in the first quarter compared to the rest of the year due to some seasonality. For instance, our leasing group, Summit, usually has a strong second half of the year, and the beginning tends to be slower, although we anticipate improved performance this year. Seasonality does play a role here. Additionally, the Westfield team in Northeast Ohio is currently performing well. We plan to increase our resources and full-time employees in the Bank Financial markets, which will contribute to growth in earning assets in our loan portfolio later in the year. This seasonality, paired with the recruitment in the Chicago market, will influence our performance.

Operator, Operator

With no further questions, that concludes our Q&A session. I'll now turn the conference back over to Archie Brown for closing remarks.

Archie Brown, CEO

Thank you, JL. I want to thank everybody for joining us today. We are really pleased with the year and the quarter. Look forward to another great year in 2026, and look forward to talking to you again next quarter. Have a great day.

Operator, Operator

This concludes today's conference call. You may now disconnect.