Yahoo Finance First Financial Bancorp. (NASDAQ:FFBC) Q1 2024 Earnings Call Transcript
First Financial Bancorp. (NASDAQ:FFBC) Q1 2024 Earnings Call Transcript April 26, 2024
First Financial Bancorp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Thank you for standing by. My name is Mondeep and I'll be your conference operator today. At this time, I'd like to welcome everyone to the First Financial Bancorp 2024 Earnings Conference Call and Webcast. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. [Operator Instructions] Thank you. I would now like to turn the conference over to Scott Crawley, Corporate Controller. You may begin.
Scott Crawley: Thank you, Mondeep. Good morning, everyone, and thanks for joining us on today's conference call to discuss First Financial Bancorp's first quarter 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 first quarter 2024 earnings release, as well as our SEC filings for a full discussion of the company's risk factors.
The information we will provide today is accurate as of March 31, 2024, and we will not be updating any forward-looking statements to reflect facts or circumstances after this call. I'll 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 first quarter. I'll provide some high-level thoughts on our recent performance, and then I'll turn the call over to Jamie to provide further details. I'm pleased with our first quarter results and encouraged by our trends, several of which were bolstered by actions we took during the quarter. These actions included a repositioning of a portion of the investment portfolio, a workforce efficiency initiative, and the acquisition of Agile Premium Finance. We also commenced the restructuring of a portion of our bank-owned life insurance portfolio, which is expected to increase income in the back half of the year.
Adjusted earnings per share was $0.59, which resulted in a return on assets of 1.3% and return on tangible common equity of 19.1%. At 4.1%, the net interest margin remains very strong. Asset yields remained steady during the quarter. However, as expected, the continued rise of funding costs negatively impacted our net interest margin. Additionally, loan growth was robust for the second consecutive quarter with balances increasing by 10% on an annualized basis. Average deposit growth slowed for the quarter to a 2.3% annualized growth rate, and it included a seasonal outflow of approximately $100 million in business deposits early in the quarter. I'm pleased that noninterest income rebounded from the fourth quarter with increases across most of our fee revenue areas.
During the quarter, we incurred a loss on the sale of investment securities associated with the repositioning of a portion of the investment portfolio. This repositioning has a very short earn back and should enhance our asset yields going forward. We also intensified our focus on expenses during the quarter. Our workforce efficiency initiative resulted in the reduction of approximately $5 million in annual expenses and we expect to realize an additional $10 million to $12 million in annualized expense reductions by the end of 2024. While expenses increased on a linked quarter basis, most of the increase was related to seasonal employee costs and variable compensation tied to the increase in fee income. We are excited to add Agile to our mix of specialty businesses.
An overview of the company and transaction can be found on slide 13. Agile operates an impressive business model which originates high-quality, short-duration loans at attractive yields. At closing, we acquired $93 million in loans which grew to $119 million at the end of the quarter. Agile will further diversify the loan portfolio and is a perfect complement to our Oak Street and commercial banking businesses. Asset quality was stable for the quarter. Net charge-offs declined for the second consecutive quarter to 38 basis points and were primarily driven by charges on two office loans that had been on nonaccrual since early 2023. These two loans have been charged down to their net realizable value and no other office loans had a classified risk rating at the end of the first quarter.
Overall classified assets increased 12 basis points to 0.92% of assets, while nonperforming assets declined 9.8% from the prior quarter. With that, I'll now turn the call over to Jamie to discuss these results in greater detail, and then after Jamie's discussion, I'll wrap up with some additional forward-looking commentary and closing remarks.
Jamie Anderson: Thank you, Archie, and good morning everyone. Slides four, five and six provide a summary of our first quarter financial results. The first quarter was another solid quarter highlighted by strong earnings, net interest margin that was in line with expectations, solid loan growth, and the purchase of Agile Premium Finance. Similar to last quarter, our net interest margin declined due to increasing deposit costs but remains very strong at 4.1%. Additionally, we repositioned a portion of the securities portfolio which included selling $228 million of securities at a $5.2 million loss. We expect the reinvestment from these sales will bolster the margin in coming periods with a 278 basis point increase in yield. We anticipate further net interest margin contraction in the coming periods due to additional pressure on deposit pricing and changes in funding mix.
However, we expect the pace of the decline to moderate. Total loans grew 10% on an annualized basis, which exceeded our expectations. Loan growth was concentrated in commercial real estate with smaller increases across the various other portfolios. Loan balances also included $93 million of acquired balances from Agile, which is a finance company specializing in insurance premium lending. We acquired Agile in an all-cash transaction at the end of February and the deal resulted in the creation of $5.6 million of intangible assets, primarily consisting of goodwill and a customer list asset. Excluding the loss on the sale of investment securities, noninterest income increased compared to the linked quarter. Leasing and wealth management once again had solid quarters while foreign exchange, client derivatives, and mortgage income increased from lower levels in the fourth quarter.
Non-interest expenses increased from the linked quarter due to seasonal employee costs and higher variable compensation. Overall, asset quality trends were stable with lower net charge-offs and declining nonperforming asset balances with an increase in classified assets. Annualized net charge-offs were 38 basis points during the period, which was an 8 basis point decline from the linked quarter, while nonaccrual loans decreased 10%. We recorded $11.2 million of provision expense during the period, which was driven by net charge-offs and loan growth. Our ACL coverage remains conservative at 1.29% of total loans. From a capital standpoint, our regulatory ratios are in excess of both internal and regulatory targets. Tangible book value increased slightly, while our tangible common equity ratio increased by 6 basis points during the period.
Slide seven reconciles our GAAP earnings to adjusted earnings, highlighting items that we believe are important to understanding our quarterly performance. Adjusted net income was $55.8 million, or $0.59 per share for the quarter. Adjusted earnings exclude the impact of the FDIC special assessment, losses on the sales of investment securities as well as acquisition, severance, and branch consolidation costs. As depicted on slide eight, these adjusted earnings equate to a return on average assets of 1.3%, a return on average tangible common equity of 19%, and an efficiency ratio of 60%. Turning to slides nine and 10, net interest margin declined 16 basis points from the linked quarter to 4.1%. As we expected, higher funding costs outpaced increases in asset yields, primarily due to a 19 basis point increase in funding costs.
These costs were partially offset by a modest increase in asset yields during the period. Our cost of deposits increased 22 basis points compared to the linked quarter, and we expect these costs to continue increase in the coming months, but at a slower pace than we saw in the first quarter. Slide 11 details the betas utilized in our net interest income modeling. Deposit costs increased in the first quarter, moving our current beta up 5 percentage points to 43%. Our modeling indicates that our through-the-cycle beta is approximately 40% to 45%. 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.
Slide 14 illustrates our current loan mix and balance changes compared to the linked quarter. As I mentioned before, loan balances increased 10% on an annualized basis with growth concentrated in ICRE and moderate growth in almost every other portfolio. Additionally, the acquisition of Agile contributed $119 million of growth during the quarter. Slide five 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 16 provides detail on our office portfolio. About 4% of our total loan book is concentrated in office space and the overall portfolio performance metrics are strong. No office relationships were downgraded and nonaccrual during the quarter and our total nonaccrual balance for this portfolio declined to $17 million.
Slide 17 shows our deposit mix as well as a progression of average deposits from the linked quarter. In total, average deposit balances increased $76 million during the quarter, driven primarily by a $198 million increase in money market accounts and a $186 million increase in retail CDs. These increases offset declines in noninterest-bearing deposits, public funds, and savings accounts. This was expected as the current interest rate environment has driven customers to higher-cost deposit products. Slide 18 illustrates trends in our average personal, business, and public fund deposits as well as a comparison of our borrowing capacity to our uninsured deposits. On the bottom right of the slide, you can see our adjusted uninsured deposits were $3.2 billion.
This equates to 24% 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 19 highlights our noninterest income for the quarter. Total fee income was relatively unchanged at $46.5 million during the first quarter and included the loss on the investment portfolio that I previously mentioned. Wealth management and leasing business income remained strong while mortgage, foreign exchange, and client derivative income all increased from fourth quarter levels. Noninterest expense for the quarter is outlined on slide 20. Core expenses increased $4.2 million during the period. This was driven by an increase in variable compensation tied to fee income, as well as higher employee costs, which includes annual raises and a seasonal increase in payroll taxes.
Turning now to slides 21 and 22. Our ACL model resulted in a total allowance which includes both funded and unfunded reserves of $160 million and $11.2 million of total provision expense during the period. This resulted in an ACL that was 1.29% of total loans, which was unchanged from the fourth quarter. Provision expense was driven by net charge-offs and loan growth. Net charge-offs were $10.6 million, or 38 basis points on an annualized basis, which was an 8 basis point decline from the linked quarter. In other credit trends, nonaccrual loans decreased 10% during the period while classified asset balances increased to 92 basis points of total assets, primarily due to the downgrade of two relationships. Our ACL coverage was unchanged 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 relatively flat or increase slightly in future periods as our model responds to changes in the macroeconomic environment. Finally, as shown on slides 23, 24, and 25, regulatory capital ratios remain in excess of regulatory minimums and internal targets. During the first quarter, tangible book value increased slightly and the TCE ratio increased 6 basis points due to our strong earnings. Absent the impact from AOCI, the TCE ratio would have been 9.18% compared to 7.23% as reported. Slide 24 demonstrates that our capital ratios would remain in excess of regulatory targets, including the unrealized losses in the securities portfolio. Our total shareholder return remains robust with 43% 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. Archie?
Archie Brown: Thank you, Jamie. Before we end our prepared remarks, I want to comment on our forward-looking guidance which can be found on slide 26. Loan pipelines remain healthy, payoff trends remain lower and we expect seasonal tailwinds from our recent acquisition of Agile to contribute to overall growth of 10% to 12% on an annualized basis over the near term. For securities, we expect the portfolio to remain stable. Deposit growth has been solid and we expect to grow moderately over the next quarter. Our net interest margin has remained strong and resilient and we expect it to be between 3.95% and 4.05% for the next quarter assuming no fed cuts. We expect our credit costs remain consistent with the prior quarter --prior quarter, while ACL coverage as a percentage of loans is expected to be stable to slightly increasing.
For the full year, we expect net charge-offs to be approximately 30 basis points. Fee income is expected to be between $56 million and $58 million as fees increase from seasonal lows, and this includes $12 million to $14 million foreign exchange and $15 to $17 million for leasing business revenue. Noninterest expense is expected to be between $120 million and $122 million, which includes $9 million to $11 million in depreciation expense for the leasing business. Specific to capital, our capital ratios remain strong and we expect to maintain our dividend at the current level. Overall, I'm pleased with our quarter and the work our teams are doing to continuously improve the company while we're in a difficult operating environment for the industry, I'm encouraged by our results and trends and expect that we will continue to have a strong year.
We'll now open up the call for questions.
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