Earnings Call Transcript - FFBC Q2 2025

Operator, Operator

Thank you for your patience, and welcome to the First Financial Bancorp Second Quarter 2025 Earnings Conference Call and Webcast. I will now hand the call over to Scott Crawley. You may begin.

Scott T. Crawley, Director of Investor Relations

Good morning. Thank you, Rob. Good morning, everybody, and thank you for joining us on today's conference call to discuss First Financial Bancorp's second 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 second quarter 2021 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 June 30, 2025, and we will not be updating any forward-looking statements to reflect facts or circumstances after the call. I'll now turn it over to Archie Brown.

Archie M. Brown, President and CEO

Thank you, Scott. Good morning, everyone, and thank you for joining us on today's call. Yesterday afternoon, we announced our financial results for the second quarter, and I'm thrilled with our performance this quarter. We achieved record revenue of $226.3 million, which represents a 5% increase over the same quarter last year, and drove adjusted earnings per share of $0.74, a return on assets of 1.54% and a return on tangible common equity of 20%. The company's industry-leading profitability was once again driven by a robust net interest margin. Loan growth was 2% on an annualized basis, and we were pleased with broad-based growth in most portfolios apart from commercial real estate, which declined due to higher payoffs. Q3 scheduled maturities in the IC portfolio are lower, and we expect higher overall loan growth in the second half of this year. We recorded adjusted noninterest income of $67.8 million in the second quarter, which was an 11% increase over the linked quarter and a 10% increase over the second quarter of 2024. Growth in fees was broad-based with mortgage, bankcard, leasing business and foreign exchange income, all increasing by double-digit percentages over the linked quarter. We were also pleased with our expense management, with adjusted noninterest expenses increasing 1% compared to the first quarter. Excluding leasing business expenses, which continue to increase as our operating lease portfolio grows, adjusted noninterest expenses increased by less than 2% on a year-over-year basis. Asset quality was stable for the quarter. Net charge-offs declined 15 basis points from the first quarter to 21 basis points of total loans, and classified asset balances were relatively flat. Our outlook for asset quality remains positive, and we expect net charge-offs to be in the 20 to 25 basis points range for the remainder of this year. We're pleased with the strength of our capital levels. Regulatory ratios are very strong, and tangible common equity has continued to grow, increasing 16% over last year to 8.4%. Tangible book value per share increased to $15.40, which was a 4% increase from the linked quarter and 19% over the same period last year. We're also pleased to announce that our Board of Directors approved a $0.01 or 4.2% increase in the common dividend of $0.25. The dividend payout remains approximately 35% of net income and continues to provide an attractive yield. With that, I'll now turn the call over to Jamie to discuss these results in greater detail. After Jamie's discussion, I'll wrap up with some additional forward-looking commentary and closing remarks.

James Michael Anderson, CFO

Thank you, Archie. Good morning, everyone. Slides 4, 5 and 6 provide a summary of our most recent financial results. The second quarter results were excellent and included strong earnings, record revenues driven by a robust net interest margin, solid loan and deposit growth and declining net charge-offs. Our net interest margin remains very strong at 4.05%, which represented a 17 basis point increase from the first quarter. Funding costs declined 12 basis points, driven by a 13 basis point decrease in deposit costs, while asset yields increased 5 basis points. Loan balances increased modestly during the quarter as growth in C&I, consumer and our specialty businesses offset elevated prepayments in the ICRE portfolio. Average deposit balances increased $114 million due primarily to a seasonal influx in public funds and higher noninterest-bearing deposits. 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, second quarter fee income was solid, led by double-digit percentage growth in mortgage and bankcard income. Additionally, our leasing and foreign exchange businesses had good quarters. Noninterest expenses increased slightly from the linked quarter due to increases in marketing expenses and incentive compensation, which is tied to the company's overall performance. Our efficiency efforts continue to impact our results positively, and we expect to see further benefits in the coming periods. Our ACL coverage increased slightly during the quarter to 1.34% of total loans. We recorded $9.8 million of provision expense during the period, which was driven by net charge-offs and loan growth. Overall asset quality trends were stable. Net charge-offs declined 42% to 21 basis points on an annualized basis, while NPAs as a percentage of assets increased slightly during the period. Classified asset balances were relatively unchanged during the period at 1.15% of total assets. From a capital standpoint, our ratios are in excess of both internal and regulatory targets. Tangible book value increased $0.60 to $15.40, while our tangible common equity ratio increased 24 basis points to 8.4%. Additionally, our Board of Directors elected to increase our common dividend during the period. Increasing the common dividend is further proof of our commitment to deliver value to our shareholders. 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 $70.6 million or $0.74 per share for the quarter. Noninterest income was adjusted for gains on the sales of investment securities, while noninterest expense adjustments exclude the impact of acquisition and efficiency costs and other expenses not expected to recur. As depicted on Slide 8, these adjusted earnings equate to a return on average assets of 1.54% and 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 increased 17 basis points from the linked quarter to 4.05%. Asset yields increased 5 basis points compared to the prior quarter as loan yields increased 3 basis points and the yield on the investment portfolio increased 9 basis points. Total funding costs declined 12 basis points, driven by a 13 basis point decrease in deposit costs compared to the linked quarter. Slide 12 illustrates our current loan mix and balance changes compared to the linked quarter. Loan balances increased 2% on an annualized basis, with growth in C&I, consumer and specialty businesses outpacing a decline in ICRE, driven by elevated prepayment activity. Slide 14 shows our deposit mix as well as the progression of average deposits from the linked quarter. In total, average deposit balances increased $114 million during the quarter. There was a seasonal influx in public funds, and we had solid growth in noninterest-bearing deposits, while on the consumer side, growth in retail CDs helped to offset declines in money market and interest-bearing demand accounts. Slide 15 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 $3.8 billion. This equates to 27% 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 16 highlights our noninterest income for the quarter. Total adjusted fee income was $68 million, with leasing, mortgage and interchange having stronger growth quarters. Noninterest expense for the quarter is outlined on Slide 17. The core expenses increased $1 million during the period. This was driven primarily by higher incentive compensation tied to the company's strong results as well as increases in marketing expenses. As I mentioned earlier, our ongoing efficiency initiative is positively impacting our results, and we expect this work to continue in the back half of 2025. Turning now to Slides 18 and 19, our ACL model resulted in a total allowance, which includes both funded and unfunded reserves of $176 million and $9.8 million of total provision expense during the period. This resulted in an ACL that was 1.34% of total loans, which was a slight increase from the first quarter. Provision expense was primarily driven by loan growth and net charge-offs, which were 21 basis points for the period. Overall credit trends were stable with a 42% reduction in net charge-offs and classified asset balances totaling 1.15% total assets. As expected, our ACL coverage was relatively flat compared to the linked quarter, and we continue to believe we have modeled conservatively to build a reserve that reflects the losses we expect from our portfolio. We anticipate our ACL coverage will remain flat or increase slightly 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. The TCE ratio increased 24 basis points to 8.4%, and our tangible book value per share increased 4% to $15.40. Our total shareholder return remains strong, with 33% of our earnings returned to our shareholders during the period through the common dividend. As I mentioned earlier, we were very pleased that the Board elected to increase the common dividend, demonstrating our commitment to provide an attractive return to our shareholders. I'll now turn it back over to Archie for some comments on our outlook.

Archie M. Brown, President and CEO

Yes. Thanks, Jamie. Before we end our prepared remarks, I want to comment on our forward-looking guidance for the third quarter, which can be found on Slide 22. Loan pipelines remain strong. Over the second half of the year, we expect easing payoff pressures combined with higher production to accelerate our growth. Specific to the third quarter, we expect loan growth to be in the low to mid-single digits on an annualized basis. Core deposit balances are expected to be stable over the next quarter, excluding seasonal deposit outflows. Our net interest margin remains very strong and industry-leading, and we expect it to be in the range between 4% and 4.05% over the next quarter, assuming a 25 basis point rate cut in September. We expect our credit cost to approximate prior-quarter levels and charge-offs to be in the 20 to 25 basis point range for the third quarter, while ACL coverage as a percentage of loans is expected to be stable to slightly increasing. We anticipate fee income to be between $67 million and $69 million, which includes $14 million to $16 million of foreign exchange and $19 million to $21 million for leasing business revenue. Noninterest expense is expected to be between $128 million and $130 million and reflect our continued focus on expense management. We're excited about our recent announcement to acquire Westfield Bank in Northeast Ohio and are actively engaged in the integration process. Appropriate applications have been filed with our regulators, and we continue to expect approval and closing to occur this year. In summary, we're very pleased with our second quarter and year-to-date financial performance, and we remain very excited about our outlook for the remainder of 2025 and beyond. We'll now open up the call for questions.

Operator, Operator

Your first question comes from Daniel Tamayo from Raymond James.

Daniel Tamayo, Analyst

Maybe we start with the margin, particularly regarding funding. In the second quarter, you demonstrated a good ability to continue lowering deposit costs. Even non-maturity deposit costs decreased significantly. I'm curious about how you see this trend continuing and where you might expect to find a bottom for funding costs, assuming there are no rate cuts.

James Michael Anderson, CFO

Yes, I think we're pretty close to that at this point. When we look ahead to the next quarter, we see deposit costs decreasing slightly, by about 2 or 3 basis points. Included in our outlook is a rate cut in September and a rate cut in December. As we move into the fourth quarter, we anticipate deposit costs may decrease a bit more than that. With rates stabilizing, we may have been a quarter behind some of our competitors in reducing deposit costs and capturing those last few basis points. Expect to see a drop of 12 or 13 basis points in our deposit costs, possibly more than the peer group, which is the lag I mentioned. Looking at the third quarter, our margin outlook in the 4 to 4.05 range includes about a 2 to 3-point decline in deposit costs.

Daniel Tamayo, Analyst

Given your strong asset yields, with loan yields nearing 7, do you believe that the 4 to 4.05 range will represent a peak for your organization, and then potentially fluctuate around that level until we assess what might happen with rate cuts?

James Michael Anderson, CFO

That's right. When we look ahead and start incorporating the rate cuts into our model, we've mentioned that we can handle gradual 25 basis point rate cuts. As you noted, we are asset sensitive, so this will negatively affect our margin. However, each quarterly 25 basis point rate cut will impact the margin by approximately 5 or 6 basis points.

Daniel Tamayo, Analyst

Okay. All right. Helpful. And then just a cleanup question on the deposit outflows. The seasonal deposit outflows that you referenced that the guidance excludes, what would you expect those to be in the third quarter?

James Michael Anderson, CFO

Yes. On average, they are about $100 million. We see a notable increase in the second quarter related to Indiana property taxes at our public funds, which are collected in May and November. The payments in May tend to be larger since some individuals pay the full year at that time. Therefore, we anticipate a jump of about $100 million to $150 million in public funds during the second quarter. The funds start to flow in around early May and continue to come in until the end of the quarter. So, quarter-to-quarter, there will be a decrease of $100 million.

Operator, Operator

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

Terence James McEvoy, Analyst

Archie, in the prepared remarks, you talked about the ongoing efficiency initiative producing results, and you can see that in the overall efficiency ratio. Can you just dig a little bit deeper and talk about kind of where across the company or within the bank, you're really focused on cutting costs and driving that operating leverage?

Archie M. Brown, President and CEO

Yes, Terry, we've been at this for more than a year now. And we really are going through the whole bank to do the work. So literally looking at every function, every department. We like to say we're kind of going knee to knee with our associates in understanding the task and looking for ways to improve the processes that they're using. In some cases, it's technology. In some cases, it's just some process redesign. So I would say, we're probably 80% of the way through the company at this point in terms of the reviews that we've done and the work that we've done. And then there's probably 20% to go over the next several quarters. There's some technology in a couple of these areas we're implementing in the back half of this year. And then we'll probably do some final work as we get into early 2026. And then from there, I think we view the recently announced acquisition will also provide some additional help in terms of efficiency as we go deeper into 2026.

Terence James McEvoy, Analyst

And then as a follow-up, can you just talk about the impact the payoffs are having on loan growth? I'm trying to get a sense of more normalized loan growth. I know it's low to mid-single digits over the near term, but that includes payoffs, which are subsiding. So kind of ex payoffs, what's that underlying growth?

Archie M. Brown, President and CEO

Terry, we generally anticipate a loan growth of around 6% to 7% over the long term. We have observed some increased payoffs, particularly in our commercial real estate division. For the third quarter, we expect scheduled maturities to be lower and production levels to be slightly higher. We do not forecast any growth in commercial real estate for Q3, and it may even see a slight decline. However, this performance will improve compared to the previous couple of quarters. This situation will allow for better reflection of growth in other areas with strong production, which is why we're slightly adjusting our expectations for Q3. But overall, the long-term outlook remains at 6% to 7%.

Operator, Operator

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

David Joseph Konrad, Analyst

Just real quick question on asset quality. It's been really solid and admittedly, it's off a really low level, but we did see a little bit of a growth there in C&I in terms of the nonaccruals. So any color on that growth rate there would be great.

Archie M. Brown, President and CEO

Yes, David, Bill will cover that a little bit here.

William R. Harrod, Chief Credit Officer

Yes, absolutely. So our quarter-over-quarter increase in the NPAs is driven by downgrades of 2 commercial borrowers, one of which was significantly impacted by the tariffs. But recently, they have shown some improvement as the dust is settling from their impacts. The other relationship is a contract manufacturer, which is currently going through a sale process. We've taken the bulk of our expected charge-off this quarter with the remainder in reserve for when the dust settles before the end of the year, and we expect a resolution by the end of the year.

David Joseph Konrad, Analyst

Great. Okay. And then Jamie, I appreciate the asset sensitivity color, and I know Westfield is not a big asset change for you. But I just wondered if your asset sensitivity would change a little bit next year as you integrate that balance sheet.

James Michael Anderson, CFO

Yes, welcome to the call. You're doing a great job. The size of this acquisition is relatively small, and they have some liability sensitivity. We will need to navigate some of the purchase accounting adjustments in the initial years. However, it will enhance our asset sensitivity and bring us closer to a neutral position. Their earning asset base is approximately 10% of ours, so while it's marginal, it is beneficial.

Operator, Operator

Your next question comes from the line of Karl Shepard from RBC Capital Markets. The acquisition is relatively small, but they are somewhat sensitive to liabilities. Additionally, we will need to navigate through some of the purchase accounting complexities that arise in the initial years. Overall, this will improve our asset sensitivity and bring us closer to a neutral position. However, the size of their earning asset base is only about 10% of our total earning assets, so while it makes a difference, it is marginal.

Karl Robert Shepard, Analyst

Just to start on loan growth real quick. I appreciate the comments on CRE trends. Are you guys signaling a consistent pace of growth in the other businesses? Or do you think that there's, I guess, opportunity for acceleration there in the second half as well?

James Michael Anderson, CFO

Yes, this is Jamie. We're observing some challenges on the commercial real estate side due to payoffs, prepayments, and maturities. However, in our other business lines, we continue to see consistent growth, although the levels of growth can vary. For example, in consumer and commercial and industrial (C&I) loans, we achieved a solid quarter in the second quarter, but we expect loan growth in those areas to be around 5% to 7%, likely leaning toward the lower end. Our specialty lines are projected to grow at a rate of about 10% to 12%. When we consider everything together, we're looking at an overall growth rate of approximately 7%, with specialty lines representing about 20% of the loan portfolio.

Archie M. Brown, President and CEO

And Karl, what you'll see typically in the back half of the year, Summit, their volume really strengthened, especially as we get into Q4. So they'll ramp up more in the back half compared to the first half.

Karl Robert Shepard, Analyst

Perfect. I love Slide 12. And then one quick question on the margin. Could you remind us of the leading impact on asset yields, and whether the deposits might catch up about half a quarter later? Is that fair? So I'm thinking about the timing of custom...

James Michael Anderson, CFO

Yes, that's a good question. Regarding the September cut, it won't significantly impact the third quarter. However, as rates begin to decline in anticipation of that cut, we can expect our loan yields to decrease, possibly starting 30 to 45 days beforehand. You're correct that we aim to stay ahead of deposit costs, but this is less predictable than the loan side because it's more influenced by market competition. Generally, there is a quarter lag in deposit costs, as we experienced in the second quarter. Since our margin is quite high, we tend to delay adjusting deposit rates to retain balances and maintain liquidity, avoiding the need to raise them again later. So, you can expect that lag in our deposit rates.

Operator, Operator

And we have reached the end of our question-and-answer session. I will now turn the call back over to Archie Brown for some final closing remarks.

Archie M. Brown, President and CEO

Thank you, Rob. Thank you for joining us on today's call and tracking with us on our really great second quarter. We look forward to talking to you again next quarter. Have a great day and weekend. Bye now.

Operator, Operator

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