Q4 2023 First Financial Bancorp Earnings Call
Thank you for standing by and welcome to the first financial Bancorp fourth quarter 2023 earnings conference call and webcast I would now like to welcome Scott Crawley.
Controller to begin the call Scott over to you.
Thank you Marty.
Scott T. Crawley: Thank you everyone and thank you for joining us on today's conference call to discuss first financial Bancorp's fourth quarter and full year 2023 financial results.
On today's call will be Archie Brown, President and Chief Executive Officer, Jamie Anderson, Chief Financial Officer, and Bill Harrod, Chief Credit Officer.
But the press release, we issued yesterday and the accompanying slide presentation are available on our website at www Dot banking first dot com under the Investor Relations section.
We will 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 our fourth quarter 2023 earnings release as well as our SEC filings for a full discussion of the Companys risk factors.
<unk>, who will provide today is accurate as of December 31, 2023, 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.
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 fourth quarter and full year 2023.
Before I turn the call over to Jamie I'd like to provide some highlights from the most recent quarter and recap this year's record performance.
I am very pleased with our fourth quarter performance adjusted earnings per share was <unk> 62.
Which resulted in a return on assets of 137% and.
And our return on tangible common equity ratio of 22, 2%.
As expected rising funding costs outpaced the increase in asset yields. However, our net interest margin remained very strong.
Two 6%.
Additionally, balance sheet trends were positive during the quarter with loans, increasing $286 million or 11% on an annualized basis.
And average deposits increased $416 million or 13% on an annualized basis.
Noninterest income and expenses were both lower than we expected during the quarter.
The decline in noninterest income included a $4 6 million or loss on that traded bannockburn.
However, excluding this loss foreign exchange income was within our range of expectations.
Leasing income also declined during the period due to lower end of term fees and lease originations shifting to a greater mix of finance leases.
While the ship increased interest income and the net interest margin. It resulted in lower noninterest income during the period.
Noninterest expenses declined for the quarter, primarily due to lower incentive compensation, which.
Which is tied directly to noninterest income.
Asset quality was stable for the quarter with underlying credit trends improving.
Net charge offs were 46 basis points during the quarter and were driven by one relationship that included a borrower fraud.
This loan had been on non accrual for most of the year and was almost fully reserve coming into the fourth quarter.
Additionally, nonperforming assets declined by 12% to 38 basis points.
Scott T. Crawley: And classified asset balances were relatively unchanged from the third quarter.
2023 was a record year for first financial adjusted earnings per share increased 17% from the prior year to $2 77.
While return on assets was 155% return on tangible common equity was 25, 4% and our efficiency ratio was 56%.
Revenue of $840 2 million was the highest in the company's history, increasing 18, 5% over the prior year.
Our balance sheet responded favorably to the interest rate environment, resulting in a 21% of net interest income.
Additionally record years from wealth management and summit drove a 12% increase in noninterest income.
We're extremely pleased with the performance of our balance sheet during 2023.
Especially given the turmoil in the banking industry in the first half of the year loan production was solid exceeding 6% and balanced growth while average deposit balances increased two 4% compared to the prior year. We're also very happy with the 122 basis point expansion in the tangible common equity ratio and 24% increase in tangible book value per share for the year.
Asset quality trends were a bit elevated during the year.
Net charge offs increased to 33 basis points for 2023. After we achieved a record low of six basis points in 2022.
This increase was driven by two large relationships as well as the loss on the sale of a small portfolio of icr's loans non performing assets to total assets ended the year at 38 basis points.
Scott T. Crawley: We are well positioned to manage the coming year and we are cautiously optimistic regarding asset quality in 2024.
With that I'll now turn the call over to Jamie to discuss these results in greater detail. After Jamie's discussion I will wrap up with some additional forward looking commentary and closing remarks.
Okay.
Thank you Archie and good morning, everyone.
<unk> four five and six provide a summary of our fourth quarter financial results. The fourth quarter was another good quarter highlighted by strong earnings net interest margin that exceeded expectations stable asset quality metrics and solid loan and deposit growth.
Our balance sheet continues to respond favorably to the current interest rate environment, while our net interest margin declined slightly the pace was less than we expected and remains very strong at $4 two 6%.
We anticipate further net interest margin contraction in the coming periods due to additional pressure on deposit pricing and changes in funding mix.
Total loans grew 11% on an annualized basis, which exceeded our expectations.
Loan growth was concentrated in the leasing specialty finance investor CRE and residential mortgage books with relatively stable balances in the other portfolios.
Noninterest income declined in the fourth quarter. The largest decline was foreign exchange, which was negatively impacted by a $4 $6 million loss on the trade. However, this loss was mostly offset by lower noninterest expenses.
Additionally, leasing business income declined during the quarter. However, this was primarily a function of product mix as summit originated a larger volume of finance leases during the period.
Noninterest expenses declined from the linked quarter due to lower employee cost and marketing expenses.
Overall asset quality trends were stable with lower net charge offs black classified assets and declining nonperforming asset balances.
Annualized net charge offs were 46 basis points during the period and were driven by a single 9 million dollar relationship that we had previously reserved for.
We recorded $10 $2 million of provision expense during the period, which was driven by net charge offs and loan growth.
Scott T. Crawley: Our ACL coverage remains conservative at 129% of total loans.
From a capital standpoint, our regulatory ratios remain in excess of both internal and regulatory targets.
Accumulated other comprehensive income improved $100 million during the period as a result tangible book value increased 13, 5%, while our tangible common equity ratio increased by 67 basis points during the period.
Slide seven reconciles reconciles our GAAP earnings to adjusted earnings highlighting items that we believe are important to understanding our quarterly performance.
Adjusted net income was $59 million 62 per share for the quarter adjusted earnings exclude the impact of the FDIC special assessment as well as costs not expected to recur such as acquisition severance and branch consolidation costs.
As depicted on slide eight.
These adjusted earnings equate to a return on average assets of 137% a return on average tangible common equity of 22% and an efficiency ratio of 58%.
Turning to slide nine net interest margin declined seven basis points from the linked quarter to $4 two 6%.
As we expected higher funding costs outpaced the increase in asset yields.
Primarily due to a 31 basis point increase in the cost of deposits.
These costs were partially offset by a favorable shift in funding mix and a 14 basis point increase in asset yields due to higher rates and a more profitable mix of earning asset balances during the period.
Scott T. Crawley: On Slide 10, you can see the increase in asset yields.
In eight of 11 basis point increase in loan yields. Additionally, the yield on the investment portfolio increased 13 basis points.
As I previously mentioned our cost of deposits increased 31 basis points compared to the linked quarter and we expect these costs to continue to increase in the first quarter, but at a slower pace than we saw in the fourth quarter.
Slide 11 details the beta is utilized in our net interest income modeling.
Deposit cost to increase with greater velocity in the fourth quarter moving our current data up five percentage points to 38%.
Our modeling indicates that our through the cycle beta is approximately 40%.
Slide 12 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.
Scott T. Crawley: Slide 13 illustrates our current loan mix and balance changes compared to the linked quarter as I mentioned before loan balances increased 11% on an annualized basis with broad broad based growth.
Specialty finance ICR and mortgage all had strong quarters, while the other loan portfolios were relatively flat.
Slide 14 provides detail on our loan concentration by industry.
We believe our loan portfolio remains sufficiently diversified to provide protection from deterioration in any particular industry.
Slide 15 provides detail on our office portfolio.
About 4% of our total loan book is concentrated in office space and the overall LTV of the portfolio is strong.
No office relationships were downgraded during the quarter and our total non accrual balance for this portfolio declined to $23 million.
Slide 12 shows our deposit mix as well as the progression of average deposits from the linked quarter.
In total average deposit balances increased $416 million during the quarter, driven primarily by a $284 million increase in money market accounts and $123 million increase in public funds and a $158 million increase in combined retail and brokered Cds.
These increases offset a decline in noninterest bearing deposits and savings accounts.
This was expected as the current interest rate environment has driven customers a higher cost deposit products.
Slide 17 illustrates trends in our average personal business and public fund deposits as well as the comparison of our borrowing capacity to our uninsured deposits.
We saw increases in all three deposit types with personal deposits, increasing $97 million business deposits, increasing $124 million and public fund balances increasing ladder $23 million.
On the bottom right of the slide you can see our adjusted uninsured deposits were $3 2 billion at the end of the year.
This equates to 24% of our total deposits.
We are comfortable with this concentration and believe our borrowing capacity provide sufficient flexibility to respond to any event that would stress our larger deposit balances.
Slide 18 highlights our noninterest income for the quarter.
Income declined $47 million during the fourth quarter. The biggest driver of the decline was lower foreign exchange income, which was negatively impacted by a $4 $6 million loss on a trade.
This loss was offset by a reduction in the related employee costs and noninterest expenses.
Leasing business income declined during the period due to a heavier mix of finance lease originations during the period. Additionally, wealth management had another solid quarter in other noninterest income increased during the period driven by higher syndication fees.
Noninterest expense for the quarter as outlined on slide 19 core expenses declined $4 $7 million during the period.
This decrease was driven by lower employee costs, which are tied to fee income as well as lower marketing expenses.
Turning now to slides 20, and 21, our ACL model resulted in a total allowance, which includes both funded and unfunded reserves of $160 million and $10 $2 million of total provision expense during the period.
This resulted in an ACL that was 129% of loans, which was a seven basis point decrease from the third quarter.
Provision expense was driven by net charge offs and loan growth net charge offs were $12 6 million or <unk> 46 basis points on an annualized basis and were primarily driven by a $9 million relationship that had been previously reserved for.
And other credit trends non accrual loans decreased during the period due to the charge off I previously mentioned, while classified asset balances were relatively flat quarter over quarter.
Our ACL coverage was 129% at year end as I mentioned last quarter, we have modeled conservatively in prior quarters to build a reserve that reflected the losses, we expect from our portfolio.
We expect our ACL coverage to remain relatively flat in the coming periods.
Finally, as shown on slides 22, 23, and 'twenty four regulatory capital ratios remain in excess of regulatory minimums and internal targets.
During the fourth quarter tangible book value increased 13, 5% and the TCE ratio increased 67 basis points or 10, 3% due to a $100 million improvement in accumulated other comprehensive income.
Absent the income from OCI, the TCE ratio would've been 9.0% to 5% at the end of the year compared to seven 7% as reported.
Slide 23 demonstrates that our capital ratios will remain in excess of regulatory targets, including the unrealized losses in the securities portfolio.
Our total shareholder return remains robust with 39% of our earnings returned to our shareholders during the period through the common dividend.
We believe our dividend provides an attractive return to our shareholders and do not anticipate any near term changes. However, we will continue to evaluate various capital actions as the year progresses.
I'll now turn it back over to Archie for some comments on our outlook going forward RJ. Thank you Jamie.
Before we end our prepared remarks I want to comment on forward looking guidance, which can be found on slide 25.
Sure.
Loan pipelines remain healthy and we expect loan growth to moderate as we approach seasonal lows and activity and be in the mid single digits over the near term for.
The securities we expect the decline in balances as we continue to utilize the portfolio of cash flows to support loan growth.
Deposit growth in the recent quarter was very strong and we expect some of the seasonal flows to reverse in the first quarter, causing balances would be stable to slightly down.
Our net interest margin has remained strong and resilient despite the deposit pressures impacting the industry.
We expect some further compression in the first quarter with the net interest margin in a range between four 5% to $4, one 5% assuming no fed cuts.
Specific to credit we expect our credit cost remained consistent with the prior quarter, while ACL coverage as a percentage of the loans of loans is expected to be stable to slightly increasing.
We expect noninterest income to be in a range between 53% and $55 million is foreign exchange and end of term leasing income rebounds to more normal levels and the operating lease portfolio continues to grow.
We expect expenses to be between $120 million to $122 million, which includes the depreciation expense from the lease portfolio.
Specific to capital our capital ratios remained strong and we expect to maintain our dividend at the current level.
Finally, I want to commend our associates for the great year and record financial results.
They were client focused and executed at a very high level. Despite the industry uncertainty earlier in 2023.
I'm extremely proud of the work our team accomplished during the year.
As we entered the new year, we have strengthened our team by adding.
Talent in key areas, including wealth management, and commercial banking, we've expanded into new markets, including Chicago Cleveland in Evansville, Indiana.
And we built a strong and diverse company that I believe positions us well to have some sustained success.
In 2024 and beyond.
With that we'll now open up the call for questions.
The floor is now open for your questions to ask a question at this time simply press the star followed by the number one on your telephone keypad.
Again.
I'll ask a question simply press the star followed by the number one on your telephone keypad.
Now take a moment to compile a roster.
Okay.
Our first question comes from the line of Daniel Tamayo with Raymond James. Please go ahead.
Good morning, guys. Thanks for taking my question was answered.
The first of them.
Scott T. Crawley: Maybe just expanding on the on the NIM guide.
I know you've got some pressure expected in the first quarter without any any cuts, but as you think about the rest of the year.
Maybe relative to to the fed's outlook with three cuts in the back half of the year. Just curious how you think that would impact the margin or net interest income.
Danny This is Jamie.
So yes, we do we do anticipate.
So maybe I'll kind of take it in two parts there we do anticipate some pressure there in the first quarter when we look at.
The way, our deposit pricing and our cost of deposit says.
Performed here over the last year or so it looks like we were about.
Scott T. Crawley: A quarter behind from a lagging perspective, so I think.
I think thats why youll see here in the fourth quarter, our cost of deposits.
Moving up a little bit higher than the peer group.
So I think we have one more quarter of that which we've that's included in the in that.
$5 to $4 15 guide.
But I think we will have another quarter of that and we think it's round.
Scott T. Crawley: 15 basis points or so.
And then going forward so.
As we add a lot of banks I mean, as we get the.
As we get the first.
Cut or so.
Lot of its going to depend on what we can do from a from a pricing perspective, and how quickly we can move.
Move deposit prices down and so in that first cut.
We are anticipating that we would get.
That we would get very little relief, except from the ones that are basically you know.
Indexed.
But very little relief from the deposit side.
And that in that first cut but then.
Start to get some relief as the fed.
Cuts further so that first cut youre probably talking about.
Dilutive impact to the margin.
Yeah.
10 basis points to 10 to 12 basis points and then it mitigates quite a bit from there and further cuts where it's more like.
Five or six basis points. So and then so we have we have four cuts in our forecast.
We have one in March but it obviously late in the quarter. So if you have a lot of impact basically one each quarter and we have our margin.
In the back half of in the back half of 'twenty four in that.
And that $3 90 range.
Okay.
Okay, Alright, that's that's very helpful. I appreciate it.
Scott T. Crawley:
I'm just curious I next question just really it relates to the leasing business. The shifts that you mentioned in the comments.
Due to the.
Finance leases.
What drove that is that is that related I'm, just curious what drove that and what your expectations are for maybe what would drive that in the future.
Scott T. Crawley: Yeah I think.
Scott T. Crawley: We're obviously.
Learning a little bit more about this business as we as we have it.
As we own it longer we've owned it for a couple of years now, but I mean really the economics of those transactions are are virtually the same whether it's a it's a finance lease or an operating lease.
It's really more up to the top to the customer than it is really us driving it so they've.
They've just had more customers fall into that category and so.
It's really just the geography.
<unk> have an issue on the financial statements as at.
It goes into the that goes into the margin with a finance lease as opposed to the operating lease which shows the gross amounts and.
Noninterest income and noninterest expense.
So that's why I mean, when you look at our.
Our overall the volume of earning assets I think we finished the year a little bit higher than what we had.
Scott T. Crawley: Then what we had anticipated and some of that is driven off of the fact that we are including those.
Scott T. Crawley: That we had more finance leases and including those in earning assets versus down in the.
Down in other assets.
Okay I understand so so there's some geography moving around but ultimately about neutral to the bottom line.
Scott T. Crawley: Correct, yes, okay.
I appreciate you taking my questions all good stuff.
Right Yep.
Yeah.
Our next question comes from the line of Terry Mcevoy with Stephens. Please go ahead.
Hi, Good morning, Archie good morning, Jamie.
Archie: Hey, Terry good morning.
I guess I got to ask can you just shed some light on the $4 6 million dollar trading loss.
What changes have been put in place to.
Terry: Prevent that from happening again or is this just kind of the nature of that business.
Yes, Sir.
Terry: Bill Harrod, our Chief credit officer in answer to the question on the on the trading loss, which Sir sure.
Sure thing how are you doing Terry.
This is a long term customer.
Of the trading team even before.
Joining the institution.
They had a material business interruption.
And they were unable to fulfill their side of the trade.
And when you lay this out over about before 40000 trade, we do year in and you're out.
It's really kind of a one time, one time thing and it was some spot trades.
And so we don't expect it to.
The systematic through platform.
And we have the right oversight.
And continue to do to the watch and worse than a normal stuff.
Unnamed Host: Thank you for standing by, and welcome to the first Financial Daring Corp. fourth quarter 2023 earnings conference call. We're glad to have you with us. I would now like to welcome Scott Crawley.
Enhanced some things, but not materially.
101 thousands.
Scott T. Crawley: Corporate Controller to begin the call. Scott over. Thank you, Monty.
Perfect. Thanks for the incremental color there and then as a follow up question you had impressive growth in loans in the fourth quarter. What portfolios do you think should provide some loan growth over the near term. The mid single digits is that is the outlook and then the flip side is do you expect to see contraction in <unk>.
Scott T. Crawley: Good morning, everyone, and thank you for joining us on today's conference call to discuss our financial bank report for the quarter, and full year 2023 financial. Participating on today's call will be Archie Brown, President and Chief Executive Officer, Jamie Anderson, Chief Financial Officer, and Bill Heron, Chief Credit Officer. But the press release we issued yesterday and the accompanying slide presentation are available on our website at www.bankexperts.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 4th Quarter 2023 Earnings, as well as our SEC finalists for a full discussion of the company's risk factors. The information we will provide today is accurate as of December 31st, 2023, but we will not be updating any forward-looking statements, like facts or circumstances, after this call. I'll now turn the call over to Archie Brown.
Any portfolios due to just the business itself or some areas that you might be deemphasizing, given the economy and interest rates et cetera.
Yes, Terry this is <unk>.
It will be somewhat I think broad based commercial.
They have seen on the slide our commercial numbers were a little bit softer in the quarter.
A lot of that was related to our continued line pay downs last year, where customers just had liquidity.
Chose use that liquidity.
Pay the line down since rates have moved up so we don't think there's a lot more of that if anything maybe we should start to see some line draws as we go into 2024, but.
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 fourth quarter and full year 2023. Before I turn the call over to Jamie, I'd like to provide some highlights from the most recent quarter and recap this year's record performance. I'm very pleased with our fourth quarter performance.
So I think commercial banking will be stronger or Oak Street unit had a really good Q4, I think they will continue to have some strength early in end of the year summit.
Jamie was talking about some of the Q4 is always just there their largest quarter of the year. So that will soften up a little bit in Q1, and then keep ramping through the year.
Adjusted earnings per share was $0.62, which resulted in a return on assets of 1.37% and a return on tangible common equity ratio of 22.2%. As expected, rising funding costs outpaced the increase in asset yields. However, our net interest margin remained very strong at 4.26%. Additionally, balance sheet trends were positive during the quarter, with loans increasing $286 million, or 11% on an annualized basis. An average deposit is increasing by $416 million, or 13% on an annualized basis. Non-interest income and expenses were both lower than we expected during the quarter. The decline in non-interest income included a $4.6 million loss on the trade at Vandenberg.
Jamie: Mortgage has been one that has kind of been a steady grower mainly to originations you know maybe a little softer, but the payoffs have also been a lot softer.
So we think that'll continue to grow because of low pay offs.
And then Icr's grew a bit in the quarter that was in Q4 that was primarily line draws on construction loans.
Jamie: Drew up.
<unk>.
I don't know that that will continue at the pace that it did in Q4.
Jamie: Otherwise the origination activity there is a little softer so I think we'll get we'll get some decent broad based growth, but it won't be at the higher at higher levels.
Speaker Change: With regard to areas we're deemphasizing.
However, excluding this loss, foreign exchange income was within our range of expectation. Leasing income also declined during the period due to lower end-of-term fees and lease origination shifting to a greater mix of financial. While the ship increased interest income in the net interest margin, it resulted in lower non-interest income during the period. The expenses declined for the quarter primarily due to lower incentive compensation, which is tied directly to non-interest income.
Probably most notably is the franchise.
Quick serve portfolio.
That portfolio in the story of that over the years down about a quarter billion dollars at the end of the year.
So and that's we think that will just continue to amortize down as we have really deemphasize the originating side of that.
On the Ics side, we have certain product areas that where our team is focusing on but as you can imagine.
Asset quality was stable for the quarter with underlying credit trends improving. Net charge-offs were 46 basis points during the quarter and were driven by one relationship that included a borrower fraud. This loan had been on non-accrual for most of the year and was almost fully reserved coming into the fourth quarter. Additionally, non-forming assets declined by 12% to 38 basis points, and classified asset balances were relatively unchanged from the third quarter. 2023 was a record year for First Financial.
And we're very selective even in multifamily.
Health care industrial so.
I think ICR, you will be kind of a slow grower as we go through the year.
Okay.
Great. Thanks for taking my questions and I Hope you have a nice weekend.
Thanks, Eric Thanks, Terry.
Yes.
Speaker Change: As a reminder, the floor is now opened for your questions to ask a question at this time simply press the star followed by the number one on your telephone keypad.
The adjusted earnings per share increased 17% from the prior year to $2.77, while return on assets was 1.55%, return on tangible common equity was 25.4%, and our efficiency ratio was 56%. Total revenue of $840.2 million was the highest in the company's history, increasing 18.5% over the prior year.
Our next question comes from the line of Chris Mcgratty.
Mcgratty with key BW. Please go ahead.
Great. Thanks, good morning.
Hey, Chris.
Jamie maybe on net interest.
If I put the pieces together of the Remixing of the earning assets and your margin comments. It would feel that kind of a trough would be mid year Q2, Q3, you're going to kind of mid <unk> does that is that about right yes.
That's right yes, okay.
And at that level and kind of 140 647 is kind of a fair step downs.
Our balance sheet responded favorably to the interest rate environment, resulting in a 21% net interest income. Additionally, record years in wealth management and summit drove a 12% increase in non-interested income. We're extremely pleased with the performance of our balance sheet during 2023. Especially given the turmoil in the banking industry in the first half of the year, loan production was solid, exceeding 6% in balance growth, while average deposit balances increased 2.4% compared to the prior year. We're also very happy with the 122 basis point expansion in the Tangible Common Equity Ratio and 24% increase in the Tangible Book Value per share for the year. At that point, since we're a bit elevated during the year, Net Charge Offs increased to 33 basis points for 2023 after they achieved a record low of 6 basis points in 2022.
That's right yes.
Speaker Change: Okay.
Speaker Change: And then Archie maybe on capital.
You guys have been consistent dividends stable and strong buybacks aren't a priority is there a capital return narrative for the bank in 2020 for you guys have a multiple obviously marks are less onerous, but is M&A something that might be on the horizon.
Yes, Chris Thanks.
Thanks for the question first.
<unk> growth, we think we've got a diverse.
Chris: Kind of a diverse business now that we think is pretty resilient and can grow and so we're going to support growth.
Organic growth first.
The dynamics of M&A.
We need to continue to improve we saw some with.
With rates moving down in December you saw we saw some.
These changes and how purchase accounting may impact capital and we think that needs to continue to improve to really make that something thats more.
I think more realistic in 2024, so we'll have our mind ordered some were not.
About six years since we've done any bank.
Acquisition mergers so we're not out there doing a lot of it there are there are some areas markets types of companies I think have an interest in <unk>.
This increase was driven by two large relationships as well as the loss on the sale of a small portfolio of ITRE loans. Continuing assets to total assets into the year 38 basis points. We believe we're well-positioned to manage the coming year, and we're cautiously optimistic regarding asset quality in 2024. With that, I'll now turn the floor over to Jamie to discuss these results in greater detail. After Jamie's discussion, I will wrap up with some additional forward-looking commentary and closing remarks. Thank you, Archie, and good morning, everyone.
To the extent.
The accounting works and.
And we feel good about the economy I think maybe in the year you could see us use capital in a way like that but first and foremost organically.
Okay, Great and then thank you and in terms of credit.
Your charge offs and provisions had been a little bit higher than peers, I think it's partly business mix, but can you help us about.
Forecasting what do you think is normal in this kind of environment, you should should provision levels stay kind of elevated in this range or do you expect movement either way.
Slides 4, 5, and 6 provide a summary of our fourth quarter financial results. The fourth quarter was another good quarter, highlighted by strong earnings, a net interest margin that exceeded expectations, stable asset quality metrics, and solid loan and deposit growth. Our balance sheet continues to respond favorably to the current interest rate environment.
I was looking at some of this Chris if you just go back over the last five or six years.
And look at for example, the RMA.
Roy is running kind of top quartile of the kers.
Over that window.
And our net charge offs for maybe 10 basis points higher than the median for <unk>. So we.
We like the trade, we'd like the trade of <unk>.
Much higher consistently higher earnings.
While our net interest margin declined slightly, the pace was less than we expected and remained very strong at 4.26%. We anticipate further net interest margin contraction in the coming period due to additional pressure on deposit pricing and changes in funding. Total loans grew 11% on an annualized basis, which exceeded our expectations. Loan growth was concentrated in leasing, specialty finance, investor CRE, and residential mortgage, with relatively stable balances in the other portfolio. Non-interest income declined in the fourth quarter. The largest decline was foreign exchange, which was negatively impacted by a $4.6 million loss on a trade.
And that performance and.
Where is it going to end this year I know you said 25.
<unk> points of charge offs plus or minus.
That's probably how we think about it for for this year and as we said at the current level provision of current reserve levels staying stable slightly increasing.
We think we can do that and have a really good year on the earnings side.
Got it so risk adjusted returns get it totally got it. Thank you.
Yes.
I would now like to turn the call over to Archie Brown for closing remarks.
Thank you I want to thank everybody for joining today's call and hearing about our results.
The fourth quarter and the full year, we really are proud of the results and we're excited about 2024 and look forward to talking to you again next quarter have a great day and weekend. Thank you.
This concludes today's call you may now disconnect.
However, this loss was mostly offset by lower non-interest income. Additionally, leasing business income declined during the quarter. However, this was primarily a function of product mix, as Summit originated a larger volume of finance leases during the period. Non-interest expenses declined from the previous quarter due to lower employee costs and marketing expenses.
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Chris: Okay.
Overall asset quality trends were stable with lower net charge-offs, less classified assets, and a declining non-performing asset balance. Annualized net charge-offs were 46 basis points during the period, and were driven by a single $9 million relationship that we'd previously reserved for the future. We recorded $10.2 million of provision expense during the period, which was driven by net char costs and loan growth.
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Chris: Okay.
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Our ACL coverage remains conservative at 1.29% of total load. From a capital standpoint, our regulatory ratios remain in excess of both internal and regulatory targets. Accumulated other comprehensive income improved $100 million during the period.
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Chris: Okay.
Okay.
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As a result, tangible book value increased 13.5%, while our tangible common equity ratio increased by 67 basis points during the period. Slide seven reconciles our gap earnings to adjusted earnings, highlighting items that we believe are important to understanding our quarterly performance. Adjusted net income was $59 million, or $0.62 per share for the quarter.
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Chris: [music].
Adjusted earnings exclude the impact of the FDIC special assessment, as well as costs not expected to recur, such as acquisition, severance, and branch consolidation, as depicted on slide 8. These adjusted earnings equate to a return on average assets of 1.37%, a return on average tangible common equity of 22%, and an efficiency ratio of 58%. Turning to slide 9, the net interest margin declines 7 basis points from the linked quarter to 4.26%. As we expected, higher funding costs outpaced the increase in assets, primarily due to a 31 basis point increase in the cost of the pod. However, these costs were partially offset by a favorable shift in funding mix and a 14 basis point increase in asset yields due to higher rates and a more profitable mix of earning asset balances during the period. On slide 10, you can see the increase in asset yield included an 11 basis point increase in loan yield. Additionally, the yield on the investment portfolio increased by 13 days.
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Chris: [music].
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As I briefly mentioned, our cost of deposits increased 31 basis points compared to the linked quarter, and we expect these costs to continue to increase in the first quarter, but at a slower pace than we saw in the fourth quarter. Slide 11 details the betas utilized in our Net Interest Income Model. Deposit costs increased with greater velocity in the fourth quarter, moving our current data up 5 percentage points, to 38%.
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Our modeling indicates that our through-the-cycle beta is approximately 40%. PriceWells 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. As I mentioned before, loan balances increased 11% on an annualized basis with broad daily growth. Summit, Specialty Finance, ICRE, and Mortgage all had strong quarters while the other loan portfolios were relatively flat. Slide 14 provides detail on our loan concentration by industry. We believe our loan portfolio remains sufficiently diversified to provide protection from deterioration in any particular area.
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Slide 15 provides details on our office portfolio. About 4% of our total loan book is concentrated in office space, and the overall LTV of the portfolio is strong. No office relationships were downgraded during the quarter, and our total non-accrual balance for this portfolio declined to $23 million.
Yes.
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Slide 12 shows our deposit mix as well as the progression of average deposits from the linked quarters. In total, average deposit balances increased $416 million during the quarter, driven primarily by a $284 million increase in money market accounts, a $123 million increase in public funds, and a $158 million increase in combined retail and brokered CDs. These increases offset a decline in non-interest-bearing deposits and savings accounts. This was expected as the current interest rate environment has driven customers to higher cost deposit prices. Slide 17 illustrates trends in our average personal, business, and public fund deposits, as well as a comparison of our borrowing capacity to our uninsured deposits. We saw increases in all three deposit types. Personal deposits increased $97 million, business deposits increased $124 million, and public fund balances increased $123 million. On the bottom right of this slide, you can see our adjusted uninsured deposits were $3.2 billion at the end of the year.
This equates to 24% of our total deposit. We are comfortable with this concentration and believe our borrowing capacity provides sufficient flexibility to respond to any event that would stress our larger deposit power. Slide 18 highlights our non-interest income for the quarter. The income declined to $47 million during the fourth quarter.
The biggest driver of the decline was lower foreign exchange interest rates, which was negatively impacted by a $4.6 million loss on a trade. This loss was offset by a reduction in related employee costs and non-interest expenses. Leasing business income declined during the period due to a heavier mix of finance lease originations during the period.
Additionally, wealth management had another solid quarter, and other non-interest income increased during the period driven by higher syndication. Non-interest expense for the quarter is outlined on slide 19. Core expenses declined $4.7 million during the period.
This decrease was driven by lower employee costs, which are tied to fee income, as well as lower marketing costs. Turning now to price 20 and 21, our ACL model resulted in a total allowance, which includes both funded and unfunded reserves, of $160 million and $10.2 million of total provision expense during the period. This resulted in an ACL of 1.29% of loans, which was a 7 basis point decrease from the third quarter. Provision expense was driven by net charge-offs and loan growth.
Net charge-offs were $12.6 million, or 46 basis points on an annualized basis, and were primarily driven by a $9 million relationship that had been previously reserved for them. In other credit trends, non-accrual loans decreased during the period due to the charge-off I previously mentioned, while classified asset balances were relatively flat quarter-over-quarter. Our ACL coverage was 1.29% at year-end. As I mentioned last quarter, we modeled conservatively in prior quarters to build a reserve that reflected the losses we expect from our portfolio. We expect our ACL coverage to remain relatively flat in the coming years. Finally, as shown on slides 22, 23, and 24, regulatory capital ratios remain in excess of regulatory minimums and internal targets. During the fourth quarter, tangible book value increased 13.5%, and the TCE ratio increased 67 basis points, or 10.3%, due to a $100 million improvement and accumulated other comprehensive income. Absent the income from AOCI, the TCE ratio would have been 9.05% at the end of the year compared to 7.17% as reported.
Slide 23 demonstrates that our capital ratios will remain in excess of regulatory targets, including the unrealized losses in the securities portfolio. However, our total shareholder return remains robust, with 39% of our earnings returned to our shareholders during the period through the common dividend. We believe our dividend provides an attractive return to our shareholders and do not anticipate any near-term changes. However, we will continue to evaluate various capital actions as the year progresses. Now I'll turn it back over to Archie for some comments on our output going forward. Archie.
These were in our prepared remarks, so I'm going to comment on the forward-looking guidance, which can be found on slide 25. Long pipelines remain healthy, so we expect long growth to moderate as we approach seasonal lows in activity and be in the mid-single digits over the near term. For Securities, we expect a decline in balances as we continue to utilize the portfolio cash flows to support the long-term.
Deposit growth in the recent quarter was very strong, but we expect some of the seasonal flow to reverse in the first quarter, causing balances to be stable to slightly down. Our net interest margin has remained strong and resilient despite the deposit pressures impacting the industry. We expect some further compression in the first quarter with the net interest margin at a range between 4.05% and 4.99%, and Dan Levy. Here's the details on Denise's original account and that's what I'm going to ask me to ask you because I know it's not right for you to just continue your own accounts over there because it is your oath to trust. So, you can create your account, but you still have a Cosmo done, obviously. What appears to indicate that your account has been approved.
What apparently also appears to indicate that your account is still being approved. And you've got to have some inquiries in there. So, that's the most important part of it. One of the things that you have to keep an eye out for is that because your existing acquiring acción is a bit more bent than your not having acquirable accions, some occurrences might be very rare.
We expect non-interest income to be in a range between $53 and $55 million as foreign exchange and end-of-term leasing income rebounds to more normal levels and the operating lease portfolio continues to grow. They expect expenses to be between $120 and $122 million, which includes depreciation expense from the lease portfolio. Specific to capital, our capital ratios remain strong, and we expect to maintain our dividends at the current level. Finally, I want to commend our associates for a great year and record financial results. They were client-focused and executed at a very high level despite the industry uncertainty earlier in 2023. I'm extremely proud of the work our team accomplished during the year.
As we enter the new year, we have strengthened our team by adding talent in key areas, including wealth management and commercial banking. We've expanded into new markets, including Chicago, Cleveland, and Evansville, Indiana. And we've built a strong and diverse company that I believe is positioned as well to sustain success in 2024 and beyond. With that, we'll now open up the call to questions. The floor is now open to your questions. To ask a question at this time, simply press the star followed by the number 1 on your telephone.
Unnamed Host: Again, to ask a question, simply press the star followed by the number 1 on your telephone. We will now take a moment to continue. Our first question comes from the line of Daniel Tomeo with Raymond James. Please go ahead.
Daniel Tomeo: Good morning guys, thanks for taking my questions. First, maybe just expanding on the NIM guide, I know you've got some pressure expected in the first quarter without any cuts, but as you think about the rest of the year, maybe relative to the Fed's outlook with three cuts in the back half of the year, I'm just curious how you think that would impact the margin error net. If you have a, Yeah, this is Danny. So yeah, we do, we do anticipate, so maybe I'll kind of take it in two parts there. We do anticipate pressure there in the first quarter.
When we look at the way our deposit pricing and our cost of deposits have performed here over the last year or so, it looks like we were about a quarter behind from a lag perspective. So I think that's why you'll see here in the fourth quarter our cost of deposits moving up a little bit higher than the peer group. And so I think we have one more quarter of that, which is included in the 4.05 to 4.15 guide, but I think we'll have another quarter of that. I think it's around, you know, 15 basis points or so. And then going forward, so, you know, as we, as a lot of banks, I mean, as we get the first cuts or so, you know, it's just a lot of it that's going to depend on what we can do from a pricing perspective and how quickly we can move deposit prices down.
And so in that first cut, we are anticipating that we would get very little relief, you know, except from the ones that are basically, you know, indexed, but very little relief from the deposit side in that first cut, but then, you know, start to get some relief as the Fed cuts further. So that first cut, you're probably talking about a diluting impact of the margin of, you know, 10 basis points, 10 to 12 basis points, and then it mitigates quite a bit from there in further cuts where it's more like, you know, five or six basis points.
So, and then, we have four cuts in our forecast. We have one in March, but obviously late in the quarter, so we have a lot of impact, but basically one each quarter, and we have our margin, you know, in the back half of, in the back half of 24 in that, in that 390 range. Okay. All right. That's very helpful.
I appreciate it. I'm just curious about the next question, which relates to the leasing business, the shift that you mentioned in the comments to finance leases. What drove that?
Is that rate related? I'm just curious what drove that and what your expectations are for maybe what would drive that in the future. Yeah, I think, you know, we're obviously learning a little bit more about this business as we have it. We own it longer. We've owned it for a couple of years now.
But I mean, really, the economics of those transactions are virtually the same, whether it's a finance lease or an operating lease. I think it's really more up to the customer than it is really us driving it. So they just had more customers fall into that category. And so it's really just a geography type of issue on the financial statements as it goes into the margin with a finance lease as opposed to the operating, which shows the gross amounts and non-interest income and non-interest expense.
So that's why, I mean, when you look at our overall volume of earning assets, I think we finished the year a little bit higher than we had anticipated. And some of that is driven by the fact that we had more finance leases than including those in earning assets, down in other aspects. Okay, I understand, so there's some geography moving around, but ultimately, about neutral to the bottom right?
Correct. Yeah. I appreciate you taking my questions; I'll go ahead and step back.
Terry Mcevoy: Right, yep. Our next question comes from the line of Terry McEvoy with Stevens. Please go ahead. Good morning, Archie. Good morning, Jamie. Good morning.
Terry Mcevoy: I guess I've got to ask, can you just shed some light on the $4.6 million trading loss? What changes have been put in place to prevent that from happening again, or is this just kind of the nature of that business? Yes, Terry, I'm going to have Bill here, our chief producer, to answer the question on the trading loss. Yes, sir. Sir, hi Jon and Terry. I was a long-term customer of the trading team, even before joining the institution. They had a material business interruption, and they were unable to fulfill their side of the trade.
And when you lay this out over about the 40,000 trades you do year in and year out, it's really kind of a one-time, one-time thing. It was two spot trades, and so we don't expect it to be systematic on the platform, and we have the right oversight and continue to do the watching works in our normal way, and have some things, but not materially, because it's just one of a thousand. Thanks for the incremental color there.
And then as a follow-up question, you had impressive growth in loans in the fourth quarter. What portfolios do you think should provide some loan growth over the near term, given that single digits is the outlook? And then the flip side is, do you expect to see contraction in any portfolio due to just the business itself or some areas that you might be de-emphasizing given the economy and interest rates, et cetera? Yeah, it's great to talk to Archie.
Wait, it will be somewhat... I think a lot of big commercial, you may have seen in the slide, our commercial numbers were a little bit softer in the quarter, and a lot of that was related to our continued line paydowns last year, where customers just had liquidity and chose to use that liquidity and pay the line down since rates had moved up. So we don't think there's a lot more of that.
If anything, we maybe should start to see some line draws as we go into 2024, but funding commercial banking will be stronger. Our Oak Street unit had a really good Q4. I think they'll continue to have some strength early in the year.
James talked about some of it, but Q4 is always just their largest quarter of the year. So that'll soften up a little bit in Q1 and then keep ramping through the year. Mortgage has been one that's kind of been a steady grower. Mainly originations, you know, may be a little softer, but the payoffs have also been a lot softer.
So we think that will continue to grow because of low payoffs, and then ICRE grew a little bit in the quarter, but before that was primarily line draws on construction lawns. I don't know that that will continue at the pace that it did in Q4, otherwise, the origination activity there is a little softer, so I think we'll get some... Thanks for joining us again on the CW Press Briefing. Arnold, and we think that will just continue to amortize down as we have really de-emphasized the originating side of that. On the IT side, we have certain product areas that we're, our team is focusing on, but, as you can imagine, we really have de-emphasized, really for three to four years now, offices, hotels. And we're very selective, even in multi-family and health care and industrial.
So I think ICRE will be kind of a slow grower as we go through the year. Great, thanks for taking my questions and I hope you have a nice weekend. Thanks, Terry. As a reminder, the floor is now open for your questions. To ask a question at this time, simply press the star followed by the number 1 on your telephone.
Unnamed Host: Our next question... comes from the line of Chris, McGratty. KBW. Please go ahead.
Christopher McGratty: Thanks for joining us. Have a great day. Hey Chris.
Jamie, I think on managed income, if I put the pieces together of the remit and the earning assets and the margin common, it would feel that kind of a trough would be mid-year, Q2, Q3, kind of the mid-140s. Is that about right? Yeah. Yeah. And at that level, it's kind of 146, 147 is kind of a fair step down.
That's right, yep. Okay. And then on Archie, maybe on capital. You guys have been consistent with dividends, stable and strong, buyback priority. Is there a capital return narrative for the bank in 2024? You guys have a multiple, obviously, Mark's left in the race, but is M&A something that might be on the horizon? Yeah, Chris.
Thanks for the question. First, supporting growth. We think we've got a diverse, kind of a great distance now that we think is pretty resilient and can grow, and so we're going to support those. The dynamics of M&A need to continue to improve, there are some. With rates moving down in December, we saw some... I think changes in how purchase accounting may impact capital, and we think that needs to continue to improve to really make that something that's more... I think more realistic than 2024. So we'll have our minds on it some, you know, we're not a... for the accounting works and, And we feel good about the economies, and I think maybe in a year you could see us... Okay, great. And then, thank you.
In terms of credit, you know, your charge-offs and provisions have been, you know, a little bit higher than peers. I think it's partly business mix, but can you help us about forecasting what you think is normal in this kind of environment? And should provision levels stay kind of elevated in this range, or do you expect movement either way? You know, I was looking at some of this, Chris. If you just go back over the last five or six years and look at, for example, ROA, ROA is running in the kind of top quartile in the KRF.
Scott Crawley, And our net charge is also maybe 10 basis points higher than the median for KRX, so we like the trade. We like the trade of much higher, consistently higher earnings in that performance. Where's it going to end this year? I don't know.
He said 25, point the chart off, plus or minus. That's probably how we think about it for this year. I think we can do that and have a really good year. Got it, so risk-adjusted returns, get it, totally get it, thank you.
I would now like to turn the call over to Archie Brown for closing remarks. I want to thank everybody for joining today's call and hearing about our results. The fourth quarter in the full year, we really are proud of the results and we're excited about 2024 and look forward to talking to you again next quarter. Have a great day and weekend. This concludes today's call, you may now, ??? ??? ??? ??? ??? ??? ??? ??? ??? ??? ??? ??? ??? ??? ?? ? ??? ??? ??? ??? ??? ??? ??? ??? ??? ??? ??? ??? ??? ??? ?? ?? Thanks for watching!