Q3 2024 First Financial Bancorp Earnings Call
Yeah.
Thank you for standing by my name is Judy and I will be your conference operator today.
Speaker Change: At this time I would like to welcome everyone to the first financial Bancorp third quarter 'twenty 'twenty four earnings conference call I'm, Mike Katz.
Speaker Change: All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question Press Star one again, thank you.
Speaker Change: I would now like to turn the conference over to Scott Crawley you may begin.
Scott Crawley: Yeah. Good morning, Thank you Judy and good morning, everybody and thank you for joining us on today's conference call to discuss first financial Bancorp's third quarter and year to date financial results.
Scott Crawley: Dissipating on today's call will be Archie Brown, President and Chief Executive Officer, Jamie Anderson, Chief Financial Officer, and Bill Harrod, Chief Credit Officer.
Scott Crawley: Both the press release, we issued yesterday and the accompanying slide presentation are available on our website at Www Dot bank at first Dot com under the Investor Relations section.
Scott Crawley: We will make reference to the slides contained in the accompanying presentation during today's call.
Scott Crawley: Additionally, please refer to the forward looking statement disclosure contained in the third quarter 2024 earnings release as well as our SEC filings for a full discussion of the Companys risk factors.
Scott Crawley: The information we will provide today is accurate as of September 32024, and we will not be updating any forward looking statements to reflect facts or circumstances. After this call I will now turn the call over to Archie Brown.
Archie Brown: Thanks, Scott Good morning, everyone and thank you for joining us on today's call.
Yesterday afternoon, we announced our financial results for the third quarter.
Archie Brown: I'll provide some highlights this morning, and then turn the call over to Jamie to provide further details.
Archie Brown: The third quarter financial results reflect our ongoing commitment to driving industry leading performance.
Adjusted earnings per share was <unk> 67.
Which resulted in a return on assets of $1 four 2% and return on tangible common equity of $19, 77%.
Archie Brown: We're particularly pleased with our four point.
Archie Brown: Percent net interest margin with only a two basis point decline from the second quarter. The market has proven to be more durable than expected due to higher asset yields from agile investment.
Archie Brown: Portfolio restructuring and moderating funding costs.
Average deposit balances grew four 9% on an annualized basis as declines in our low cost products moderated.
Archie Brown: Consistent with our expectations loan growth slowed during the third quarter as softer pipelines in the second quarter led to fewer fundings in the current period loan growth was also impacted by higher payoffs in our commercial banking and investment commercial real estate portfolios.
Archie Brown: Loan pipeline strengthen during the third quarter, and we expect higher growth rates as we close out the year.
Archie Brown: Third quarter noninterest income was $45 7 million or <unk> $58 8 million on an adjusted basis with strong earnings from foreign exchange wealth management and the leasing business.
Archie Brown: There were several large non recurring items that impacted noninterest income, including $17 $5 million of losses on securities, which included a $9 $7 million impairment charge on two bonds secured by skilled nursing homes.
While the third quarter noninterest income was a little noisy noninterest expenses were relatively flat compared to the prior quarter.
Archie Brown: We remain diligent in managing our expenses.
Archie Brown: And our workforce initiatives efficiency initiative has resulted in the elimination of 120 positions to date with additional savings expected into 2025.
Archie Brown: Asset quality was stable for the quarter and our ACL increased to 137% of total loans.
Archie Brown: Additionally, third quarter net charge offs were 25 basis points on an annualized basis in line with our expectations and nonperforming assets as a percent of assets increased one basis point to 36 basis points.
Archie Brown: We are optimistic about asset quality and are confident in our ability to manage the portfolio through the expected interest rate reductions and.
Archie Brown: And economic uncertainty in the near term.
Archie Brown: With regard to capital strong earnings under the decline in interest rates led to significant improvement in tangible book value per share and tangible common equity.
Archie Brown: Book value per share increased 10% from the linked quarter and over 30% from the same quarter last year to $14.26.
Archie Brown: Tangible common equity increased 75 basis points from June 30 to $7 nine 8% as of the end of September.
Speaker Change: With that I'll now turn the call over to Jamie to discuss these results in greater detail and after Jamie's discussion I will wrap up with some forward looking commentary and closing remarks.
Jamie Anderson: Thank you Archie and good morning, everyone.
Jamie Anderson: Slide four five and six provide a summary of our most recent financial results. The third quarter was highlighted by strong earnings and net interest margin that exceeded our expectations and a 10% increase in tangible book value.
Jamie Anderson: Our net interest margin remains very strong at 4.08% our margin declined two basis points from the linked quarter is flat asset yields combined with a favorable shift in funding mix to offset a modest increase in the cost of deposits.
Jamie Anderson: Similar to the second quarter, we were pleased that the increase in deposit costs moderated in comparison to prior quarters. However, we expect margin contraction in the coming periods due to recent rate cuts.
Jamie Anderson: Loan growth was modest during the quarter as growth in the leasing and mortgage books, which was partially offset by higher payoffs in other portfolios.
Average deposit balances increased $166 million or four 9% on an annualized basis.
Jamie Anderson: Overall, the deposit mix continues to shift slightly towards higher cost deposits.
Jamie Anderson: However, we maintained 23% of our total balances and noninterest bearing accounts and are strategically focused on maintaining deposit balances.
Jamie Anderson: Turning to the income statement third quarter fee income was solid led by foreign exchange wealth management and leasing income.
Jamie Anderson: Noninterest expenses increased slightly from the linked quarter due to higher leasing expenses and a supplemental contract contribution to our foundation.
Jamie Anderson: However, the impact from our efficiency initiative is becoming more meaningful we expect to see further benefits in the coming periods.
Jamie Anderson: Our ACL coverage increased one basis point during the quarter to 137% of total loans.
Jamie Anderson: This resulted in $10 6 million of provision expense during the period, which was driven by net charge offs and slower prepayment speeds.
Jamie Anderson: Overall asset quality trends were in line with expectations annualized net charge offs were 25 basis points during the period and NPA is as a percentage of assets were relatively flat at 36 basis points.
Jamie Anderson: From a capital standpoint, our regulatory ratios ratios are in excess of both internal and regulatory targets.
Jamie Anderson: <unk> book value increased $1, 32, or 10, 2%, while our tangible common equity ratio increased 75 basis points to 798% during the period.
Jamie Anderson: Slide seven reconciles our GAAP earnings to adjusted earnings highlighting items that we believe are important to understanding our quarterly performance.
Jamie Anderson: Adjusted net income was $63 6 million or <unk> 67 per share for the quarter adjusts.
Jamie Anderson: Adjustments to noninterest income were $4 $4 million deferred tax gain as well as $17 $5 million of losses on securities.
Jamie Anderson: The loss on Securities includes $8 million in losses from sales of $9 7 million of impairment losses on securities with credit deterioration that we anticipate selling in the near term.
Jamie Anderson: Noninterest expense adjustments exclude the impact of efficiency cost as well as acquisition severance and branch consolidation costs.
Jamie Anderson: As depicted on slide eight these adjusted earnings equate to a return on average assets of one point to 142% a return on average tangible common equity of 20% and a pretax pre provision ROA of 2%.
Turning to slides nine and 10 net interest margin declined two basis points from the linked quarter at 4.08% asset yields were relatively flat compared to the prior quarter as loan yields declined one basis point and the yield on the investment portfolio increased one basis point.
Jamie Anderson: Funding costs were also relatively flat compared to the linked quarter as a favorable mix shift, mostly offset a slight increase in deposit cost our.
Jamie Anderson: Our cost of deposits increased five basis points compared to the linked quarter. However, as you can see on the bottom right chart that pace of growth declined significantly from previous periods and was essentially flat on a month to month basis by the end of the quarter.
Jamie Anderson: Slide 11 outlines our various sources of liquidity and borrowing capacity. We continue to believe we have the flexibility required to manage the balance sheet through the expected economic environment.
Jamie Anderson: Slide 13 illustrates our current loan mix and balance changes compared to the linked quarter loan balances increased 1% on an annualized basis with modest growth in almost every portfolio.
Jamie Anderson: As you can see on the right growth was driven by mortgage and leasing which offset an increase in prepayments during the period.
Jamie Anderson: Slide 14 provides detail on our loan concentration by industry.
Jamie Anderson: We believe our loan portfolio remains sufficiently diversified to protect us from deterioration in any particular industry.
Jamie Anderson: Slide 15 provides detail on our office portfolio similar to last quarter about 4% of our total loan book is secured by office space and the overall portfolio performance metrics remained strong.
No office relationships were downgraded to non accrual during the quarter and our total non accrual balance for this portfolio remains approximately $17 million.
Jamie Anderson: Slide six shows our deposit mix as well as a progression of average deposits from the linked quarter.
Jamie Anderson: In total average deposit balances increased $166 million during the quarter, driven primarily by increases in retail Cds and money market accounts.
Jamie Anderson: These increases offset seasonal declines in public funds as well as modest declines in noninterest bearing deposits and savings accounts.
Jamie Anderson: <unk> recent quarters. This was expected as the current interest rate environment has driven customers to higher cost deposit products.
Jamie Anderson: 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.
Jamie Anderson: On the bottom right of the slide you can see our adjusted uninsured deposits were $3 $3 billion. This.
Jamie Anderson: This equates to 24% of our total deposits.
Jamie Anderson: We remain comfortable with this concentration and believe our borrowing capacity provide sufficient flexibility to respond to any event that would stress our larger deposit balances.
Jamie Anderson: Slide 18 highlights our non interest income for the quarter total fee income was $46 million during the quarter or for our 59 million as adjusted with Bannockburn Summit and wealth management, all having solid quarters. Additionally, mortgage deposit service charge and other noninterest income increased from the second quarter.
Jamie Anderson: Noninterest expense for the quarter as outlined on slide 19 core expenses increased $2 2 million. During the period. This was driven by higher leasing business expenses and a supplemental contribution to our foundation.
As I mentioned earlier, we're recognizing more of the expected benefits from our ongoing efficiency initiatives and expect to see further cost reductions in the coming periods.
Jamie Anderson: Turning now to slides 20, and 21, our ACL model resulted in a total allowance, which includes both funded and unfunded reserves of $176 million and $10 6 million of total provision during the period.
This resulted in an ACL that was 137% of total loans, which was a one basis point increase from the second quarter.
Jamie Anderson: Provision expense was primarily driven by net charge offs, which are 25 basis points for the period. Additionally, our NPA to total assets held steady at 36 basis points.
Jamie Anderson: And other credit trends classified asset balances increased to $1, one 4% of total assets, primarily due to the downgrade of four relationships.
Jamie Anderson: These downgrades were not concentrated in any loan or collateral type.
Our ACL coverage increase and we continue to believe we haven't modeled conservatively to build a reserve that reflects the losses, we expect from our portfolio.
Jamie Anderson: We anticipate our ACL covered coverage will remain relatively flat or increase slightly in future periods as our motto responds to changes in the macroeconomic environment.
Jamie Anderson: Finally, as shown on slides 22, and 'twenty three regulatory capital ratios remain in excess of regulatory minimums and internal targets.
During the third quarter tangible book value increased 10% and the TCE ratio increased 75 basis points.
Jamie Anderson: Absent the impact from a OCI, the TCE ratio would've been 934% compared to $7 nine 8% as reported.
Jamie Anderson: Our total shareholder return remained strong with 44% of our earnings returned to our shareholders during the period through the common dividend.
Jamie Anderson: We maintain our commitment to provide an attractive return to our shareholders and we continue to evaluate capital actions that support that commitment.
Jamie Anderson: I'll now turn it back over to Archie for some comments on our outlook Archie Thank you Jamie before.
Archie Brown: Before we end our prepared remarks, I want to comment on our forward looking guidance, which can be found on slide 24.
Archie Brown: Loan pipelines have strengthened and we expect seasonally high production, our summit business unit to contribute to mid single digit growth on an annualized basis for the fourth quarter.
Archie Brown: For Securities, we expect the portfolio to remain relatively stable deposit growth has been significant thus far this year.
Archie Brown: And we expect to continue to see strong growth for the next quarter as we experienced some year end seasonal inflows.
Archie Brown: Our net interest margin continues to be strong and industry, leading but we expect it to come down to between $3, 85% to 395% for the next quarter as.
Archie Brown: As the fed eases, assuming another 25 basis point rate cut in both November and in December.
We expect our credit cost remained flat over the next quarter, while ACL coverage as a percentage of loans is expected to be stable to slightly increasing.
Archie Brown: For the full year, we expect net charge offs net charge offs to be approximately 25 to 30 basis points.
Archie Brown: Fee income is expected to be between 63% to $65 million, which includes $13 million to $15 million for foreign exchange and $18 million to $20 million for the leasing business revenue.
Archie Brown: Noninterest expense is expected to be between 126 and $128 million.
Archie Brown: With potential variability of leasing business and fee based incentive expense as they are tied directly to revenue.
Archie Brown: In closing, we're very proud of our financial results for the first nine months of 2024 overall.
Archie Brown: Overall, the economy remains healthy and a general easing of interest rates should extend economic growth in the coming periods.
Archie Brown: We believe we are in a great position to finish the year on a high note and head into 2025 with continued momentum.
With that we'll now open the call to open up the call for questions Jamie.
Jamie Anderson: Thank you the floor is now open for questions. If you have dialed in I would like to ask a question. Please press star one on your telephone keypad raise your hand and joined the queue.
Jamie Anderson: If you would like to withdraw your question simply press Star one again.
If you are called upon to answer your question and are listening will be allowed CCAR new device. Please pickup your handset and ensure that your phone is not on mute when asking your question.
And press star one to join the queue.
Speaker Change: And your first question comes from the line of Daniel <unk> with Raymond James. Please go ahead.
Speaker Change: Thank you good morning, guys.
Speaker Change: Thanks.
Speaker Change: Maybe starting on the on the loan growth so little bit slower as you guys mentioned and expected in the third quarter. You are you guided to that.
Improving in the fourth quarter and Archie you mentioned, some seasonal strength from summit.
Speaker Change: Just curious as we as we look into.
Speaker Change: You know beyond fourth quarter and kind of what you guys have done.
Speaker Change: This year was pretty strong we've got mid single digit guidance for the fourth quarter, but curious how you think we should think about what would be a more normalized growth rate for you guys.
Speaker Change: Given the additions you've had from agile and other businesses recently.
Speaker Change: Looking into 2025.
Speaker Change: Yes, Danny.
Speaker Change: We feel I mean, I think we feel pretty good about.
Speaker Change: Certainly the fourth quarter, improving and then as you look into 2025.
Speaker Change: We're finalizing our plans for next year, but I would tell you we're probably in that mid to upper single digits in terms of annualized loan growth in 2025.
Speaker Change: Pretty balanced across most of the portfolios.
Even some of this quarter, where I think we're rationalizing more making sure that.
Speaker Change: If it's a lower return type of a of a relationship alone we probably exited a few of those in the quarter and will continue to be disciplined around that so that may temper growth from what it could be but even with that we still see kind of a mid to high single digits for 2025.
Speaker Change: Okay terrific.
Speaker Change: And then I guess, maybe on the on the yield side. There. If you can give us a sense you know the.
Speaker Change: Loan yields certainly have have remained stronger than than I was expecting and.
Speaker Change: You mentioned the mix shift there.
I'll again, but.
Speaker Change: If you could give us a sense for where those loan yields are coming on the books and rolling off is as maybe we do see some some pressure began to show it show itself here in the fourth quarter and next year.
Speaker Change: Yes, I mean I can tell you on the well look here for the run off side of that on the.
Speaker Change: Origination side for the quarter origination yields were probably in the high seven say seven to eight ish or so.
Speaker Change: And even in September.
Down maybe.
Speaker Change: 10 basis points was still kind of highest high 700 770 ish.
Speaker Change: September.
Speaker Change: As fed cuts theres going to be some continued decline that's baked in of course, how we look at the margin <unk> stayed with a yes. So yes. It does.
Loans going on the books right now Danny or like where you originated in the third quarter were going on at an average yield of about in the high sevens in like the $775 $7 80 range and to pay off yields are just slightly slightly below that maybe 20 basis points below that at this point.
Speaker Change: Okay.
Alright, that's helpful.
Okay.
Speaker Change: <unk> thinks it's.
Speaker Change: One I wanted to cover yet all Oh go ahead and jump off I appreciate the color guys.
Speaker Change: Thanks, David Thank you.
Speaker Change: Okay.
Speaker Change: Your next question comes from line of Terry Mcevoy with Stephens. Please go ahead.
Terry Mcevoy: Hi, Good morning, Jamie and good morning, Archie Thanks for taking my questions.
Terry Mcevoy: I think we've just started to see the.
Speaker Change: The $8 million of losses from restructuring activity could you just talk about yields on the securities you sold the reinvestment maybe wind when it occurred in the quarter. So we could figure out the benefit and how that comes into play in your in your forward Guide.
Speaker Change: Yes, yes. So we are just saying that we have taken that into account. When we did the 385 to $3 95 margin that we talk about in the fourth quarter, that's already baked into that number the sales occurred so we sold about $140 million of securities.
Speaker Change: It's kind of I would say in the it all happened kind of in the middle of the quarter that we got at the reinvestment can take little bit of time to so we didn't really get a much of a benefit of that within the third quarter, we'll get the full benefit in the fourth quarter. So we sold $140 million of securities.
Speaker Change: And we picked up about 330 basis points on the <unk>.
Speaker Change: On the reinvestment so the earn back on that is it a little bit less than two years about one seven years and we've been trying to keep that we've done a few of those.
Speaker Change: In the year, we did one in the fourth quarter of last year as well just kind of a small incremental.
Speaker Change: Type restructurings there.
Speaker Change: Nothing nothing huge but so the $8 million loss.
Speaker Change: We're picking up about four and a half million or so on a on a go forward run rate on that.
Speaker Change: On that on those sales so about 330 basis points on $140 million.
Speaker Change: Thanks for all the details Jamie and then maybe.
Speaker Change: Maybe just a question on summit, how are the credit trends performing their relative to projections and continues to be a nice platform for growth.
And I ask that only because we are seeing and hearing some stress in the small ticket area and in a few specific industries.
Speaker Change: Yeah.
Speaker Change: Yeah.
Speaker Change: The portfolio, we put on.
Speaker Change: Our portfolio, obviously, a couple of years ago, we've grown and it's now stayed.
<unk> stabilized at a good size.
Speaker Change: What we're seeing in there is.
Speaker Change: It was not unexpected.
Speaker Change: Overall, we have seen some transportation come through on the watch and worse. So you would expect based on some of the headwinds there, but nothing really out of the ordinary from all the key K. Our eyes are on credit performed very well this archie.
Yes.
Speaker Change: Fusion small ticket.
Speaker Change: In terms of the overall mix of the portfolio and when Bill talked about a couple of transportation related I think their total exposures.
Speaker Change: Under 100 million and net book, probably $80 million to $90 million I think in total Bill what are we to chart 21 during 20 million or so in the total total book for the company.
Great. Thanks for all the color and have a nice day.
Speaker Change: Thanks Terry.
Speaker Change: Again, if you would like to ask a question Press Star then the number one on your telephone keypad.
Speaker Change: Our next question comes from the line of Chris Mcgratty with <unk>. Please go ahead.
Speaker Change: Okay.
Speaker Change: Hey, How's it going on this is annualized <unk> on for Chris Mcgratty.
Speaker Change: Hey, Andrew.
Speaker Change: Hi, Jeff.
Speaker Change: So just on capital you guys continue to have strong capital generation and in the CET one upset at 12% now and can you just remind us where.
Speaker Change: Total deployment priorities lie and maybe some thoughts or conversations you are having around M&A. Thanks.
Archie Brown: Andrew This Archie.
Andrew: On the M&A front.
Archie Brown: And look we are primarily focused on organic growth and executing our strategy I do believe we're interested in bank M&A and we're going to be more opportunities over the next year or two.
Archie Brown: We remain disciplined in our kind of our pricing.
Archie Brown: Disciplined around our pricing and how we model and potential opportunities.
Archie Brown: We're going to be patient to make sure that if we do a deal when we do a deal it's going to have the best outcome for our shareholders. So I think there'll be opportunities. So hopefully with a play but this could be something that really fits well for our shareholders.
Speaker Change: Yes, Andrew on that on the capital front in terms of capital planning, we don't we don't see us.
Speaker Change: Doing any stock buybacks at this point, just where our stock is trading in terms of relative to tangible book value.
We did increase the dividend.
By a penny last quarter. So I mean at this point, we're still I think in the end.
Speaker Change: Capital building mode, and growing tangible book value.
Speaker Change: We just think thats important here for the time being.
Speaker Change: But if like Archie said, if we see something that looks attractive we will be opportunistic there.
Speaker Change: Yeah.
Speaker Change: Okay. Thank you and on the.
Speaker Change: Income guidance looks to be about $5 million step up from this quarter.
Speaker Change: Should we be thinking about.
Speaker Change: Growth there relative to Q4 entering 2020.
Speaker Change: Todd.
Speaker Change: In terms of are you talking about in terms of noninterest income.
Speaker Change: Yes, yes.
Speaker Change: Yeah. So.
Speaker Change: Have we see good growth there going forward, both from and one of the main drivers that we that we have there as summit ramps up their balance sheet when they put on when they put out operating leases obviously that.
Speaker Change: That hits down those payments hit down in fee income, so the growth and and noninterest income will be.
Speaker Change: Driven by the what.
Speaker Change: What I would call the normal.
Speaker Change: Normal lines in terms of.
Speaker Change: Banik burn on the wealth side.
Speaker Change: <unk>.
Our capital markets group advantaged burner has been growing.
Speaker Change: 10, or 15% a year, but.
Speaker Change: Again as.
Speaker Change: As summit puts on more operating leases and ramps up their ramps up their balance sheet, we've owned them for three years. So the average.
Speaker Change: Average term of those leases that they put on the books are.
Speaker Change: Lastly for years, so we're still ramping up the balance sheet until we get to kind of a.
More stable.
Speaker Change: The asset base, there and stuff starts to jud to churn that.
Speaker Change: That fee income line, we will continue to grow there for that for the leasing business.
Yeah.
Speaker Change: Okay, great. Thanks, Thanks for the color I'll step back.
Speaker Change: Sure.
Speaker Change: Thank you.
Speaker Change: That concludes our Q&A session I will now turn the conference back over to Archie Brown for closing remarks.
Archie Brown: Thank you Jamie and thank you all for joining us today to hear about our progress in the third quarter, we look forward to talking to you again.
Speaker Change: After the fourth quarter have a great day.
Speaker Change: That concludes today's conference call. Thank you for joining you may now disconnect.
Speaker Change: Okay.