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spk00: Thank you for standing by. My name is Ian, and I will be your conference operator today. At this time, I would like to welcome everyone to the first Financial Bancorp second quarter 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. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. to enter the question queue. Once again, that is star followed by the number one. If you would like to withdraw your question, again, press star one. Thank you. I will now hand the call over to Scott Crawley, controller. Scott, you may begin your conference.
spk04: Thank you, Ian. Good morning, everyone, and thank you for joining us on today's conference call to discuss first financial bank or second quarter and year-to-date financial results. Participating on today's call will be Archie Brown, President and Chief Executive Officer, Jamie Anderson, Chief Financial Officer, and Bill Harrod, Chief Credit Officer. Both the press release we issued yesterday and the accompanying slide presentation are available on our website at www.bankatfirst.com under the Investor Relations section. We'll make reference to the slides contained in the accompanying presentation during today's call. Please refer to the forward-looking savings disclosure contained in the second 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 June 30, 2024, and we will not be updating any forward-looking statements or select facts or circumstances after this call. I'll now turn the call over to Archie Brown.
spk05: Thank you, Scott. Good morning, everyone, and thank you for joining us for today's call. Yesterday afternoon, we announced our financial results for the second quarter. I'll provide some highlights on our recent performance and then turn the call over to Jamie to provide further information. We had an outstanding quarter. Adjusted earnings per share was $0.65 in the second quarter, which resulted in a return on assets of 1.4% and a return on tangible common equity of 20.9%. Long growth was exceptionally strong again this quarter, with balances increasing by 11% on an annualized basis, and this was a significant driver in the increase in net interest income. Growth was broad-based and was led by commercial banking. Similarly, average deposits grew approximately 11% for the period, with interest-bearing deposits and a seasonal increase in public fund balances driving the increase. Our 4.1% net interest margin was unchanged from the first quarter and remains at or near the top of the peer group. Total adjusted revenue increased 14.4 million, or 7%, compared to the linked quarter. Additionally, we posted record adjusted non-interest income of $61.6 million. Growth in fee income was broad-based for the period, with foreign exchange revenue growing more than 60% from the linked quarter. Leasing business income, mortgage banking, and bank card income all increased by double-digit percentages, and wealth management income posted another record quarter. Adjusted expenses increased by 1.2% compared to the first quarter. The increase included a full quarter of Agile expenses, the impact of annual salary adjustments that occurred late in the first quarter, and variable compensation tied to our record fee income. Through our workforce efficiency initiative, we have eliminated 90 full-time positions to date, and this work will continue through the remainder of the year. I am pleased with the 23 basis point decline in net charge-offs to 15 basis points, which marks the third consecutive quarter that charge-offs have declined. We did experience some downward credit migration during the period. However, this was not concentrated in any particular loan type, and not forming loans as a percentage of total assets was relatively flat compared to the prior quarter. Our ACL increased to 1.36% of total loans, and based on our outlook for loan growth and credit quality, we would expect provision to decline to levels approximately to the first quarter in coming periods. With that, I'll now turn the call 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. Jamie?
spk01: Thank you, Archie, and good morning, everyone. Slides four, five, and six provide a summary of our most recent financial results. The second quarter was really strong, highlighted by exceptional earnings, a flat net interest margin, record fee income, and solid balance sheet growth. Our net interest margin remains very strong at 410. This was unchanged from the linked quarter due to increases in both loan and investment yields, offsetting the pressure on deposit costs. We were pleased that the increase in deposit costs moderated in comparison to prior quarters, and we expect this trend to hold. However, we expect slight margin contraction in the near term. Total loans grew 11% on an annualized basis, which exceeded our expectations. Loan growth was broad-based with larger increases in CNI, Summit, and Agile. Average deposit balances increased $350 million, or 10.6%, on an annualized basis and included a seasonal increase in public funds. Overall, the deposit mix continues to shift to higher-cost deposits. However, we maintain 22% of our total balances in non-interest-bearing accounts, and are strategically focused on maintaining deposit balances. Turning to the income statement, second quarter fee income was the highest in the company's history. Foreign exchange and leasing had solid quarters, and wealth management had their best revenue quarter ever. Non-interest expenses increased slightly from the linked quarter due to higher variable compensation. However, we are starting to recognize the impact from our efficiency efforts and expect to see further benefits in the coming periods. Our ACL coverage increased seven basis points during the quarter to 1.36% of total loans. This resulted in $16.4 million of provision expense during the period, which was driven by loan growth and slight credit migration. Overall, asset quality trends were mixed with significantly lower net charge-offs and an increase in classified assets. Annualized net charge-offs declined 23 basis points during the period, and NPAs as a percentage of assets were relatively flat at 35 basis points. From a capital standpoint, our regulatory ratios are in excess of both internal and regulatory targets. Tangible book value increased 44 cents, or 3.5%, while our tangible common equity ratio was flat during the period. Additionally, our board of directors elected to increase our common dividend during the period. We have always been focused on delivering value to our shareholders, and this step is further proof of that commitment. 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 $61.7 million, or 65 cents per share for the quarter. Adjusted earnings exclude the impact of our efficiency initiative as well as acquisition, severance, and branch consolidation costs. As depicted on slide 8, these adjusted earnings equate to return on average assets of 1.4%, a return on average tangible common equity of 21%, and pre-tax, pre-provision ROA of 210 basis points. Turning to slides 9 and 10, net interest margin was unchanged from the linked quarter at 4.1%. Loan yields increased 10 basis points during the period, and the yield on the investment portfolio increased 22 basis points. The increase in investment yields was driven by higher reinvestment rates as well as the full quarter benefit from the portfolio repositioning we executed in the first quarter. Funding costs increased 13 basis points during the period, which was significantly lower than in prior periods. Our cost of deposits increased 14 basis points compared to the linked quarter. However, as you can see on the bottom right chart, that pace of growth declined significantly by the end of the quarter. Slide 11 details the betas utilized in our net interest income modeling. The increase in deposit costs has moved our current beta of two percentage points to 45%, which matches our internal modeling. Going forward, we expect deposit cost increases to be a function of mix. 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 11% on an annualized basis with growth in almost every portfolio. As you can see on the right, the largest areas of growth for the quarter were in CNI, Summit, and Agile. We expect Agile's growth to moderate in the coming period as historically the second quarter is the strongest quarter for originations. Slide 15 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. Similar to last quarter, about 4% of our total loan book is concentrated in office space, and the overall portfolio performance metrics remain strong. No office relationships were downgraded to classified during the quarter, and our total non-accrual balance for this portfolio remains approximately $17 million. Slide 17 shows our deposit mix as well as the progression of average deposits from the linked quarter. In total, average deposit balances increased $350 million during the quarter, driven primarily by a seasonal increase in public funds as well as increases in retail CDs, money market accounts, and broker deposits. These increases offset modest declines in non-interest-bearing deposits and savings accounts. Similar to recent quarters, 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 for $3.2 billion. This equates to 23% 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 non-interest income for the quarter. Total fee income increased to $62 million during the quarter, which was the highest quarter in the history of the company. Bannockburn and Summit both had solid quarters, and Wealth Management posted its best revenue quarter ever. Additionally, mortgage, bank card, and deposit service charge income increased from first quarter levels. Non-interest expense for the quarter is outlined on slide 20. Core expenses increased a modest $1.4 million during the period. This was driven by an increase in variable compensation tied to fee income, the full quarter impact from Agile, and annual salary adjustments. We have also started to recognize some of the expected benefit from our ongoing efficiency initiative. Turning now to slides 21 and 22, our ACL model resulted in a total allowance which includes both funded and unfunded reserves of $173 million and $16.4 million in total provision expense during the period. This resulted in an ACL that was 1.36% of total loans, which was a seven basis point increase from the first quarter. Provision expense was driven by loan growth and credit migration. Net charge-offs declined 23 basis points to 15 basis points, and our NPAs to total assets held steady at 35 basis points. In other credit trends, classified asset balances increased to 1.07% of total assets, primarily due to the downgrade of four relationships. These downgrades were not concentrated in any loan or collateral type. Our ACL coverage increased, 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 second quarter, tangible book value per share increased 3.5%, and the TCE ratio was flat due to balance sheet growth. Absent the impact from AOCI, the TCE ratio would have been 9.13% 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 strong, with 36% of our earnings returned to our shareholders during the period through the common dividend. As I mentioned earlier, we were very pleased that the board elected to increase the common dividend, demonstrating our commitment to provide an attractive return to our shareholders. 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? Thank you, Jamie.
spk05: Before we end our prepared remarks, I want to comment on our forward-looking guidance, which can be found on slide 26. Loan pipelines continue to be healthy, though we expect a modest increase in payoff trends and seasonally low production in our Agile business unit to contribute to overall loan growth in the low single digits on an annualized basis over the near term. For securities, we expect the portfolio to remain stable. Deposit growth has been steady, and we expect to grow more modestly over the next quarter as seasonal public funds move out. Our net interest margin continues to remain strong and resilient, and we expect it to be between 4% and 4.05%. For the next quarter, this assumes a 25 basis point rate cut by the Fed in September. We expect our credit costs to decline slightly in the back half of the year, 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 25 to 30 basis points. The income is expected to be between $58 and $60 million, which includes $13 to $15 million for foreign exchange and $16 to $18 million for the leasing business. Non-interest expense is expected to be between $122 and $124 million and remain stable, excluding the leasing business. Finally, we're pleased to announce that our board of directors approved a one cent increase to the common dividend to 24 cents. The 4.3% dividend increase results in a dividend payout ratio within our target range of 35% to 40% of net income and increases our already attractive yield. I'm encouraged with our operating performance through the first half of 2024 and look forward to continued success for the full year. We'll now open up the call for questions.
spk00: At this time, I would like to remind everybody that in order to ask a question, please press star, follow the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Our first question comes from the line of Chris McGrady with KBW. Your line is opened.
spk02: Oh, good morning. Jamie, Jamie, maybe start with a margin question. Obviously I'll perform expectations this quarter and, Um, your slides show a cumulative beta of 45 on the deposit, 70 on a loan. How are you thinking about NIM if the forward curve plays out? I think, I know you have a September cut, but I know the market's expecting more next year. How do we think about margin into next year?
spk01: Yeah. So, uh, you know, obviously we were asset sensitive, benefited from the increase in rates over the past, uh, uh, you know, uh, six, eight quarters. But so when we look at it and we look at rate cuts, you know, kind of a methodical, you know, 25 basis point rate cuts by the Fed. I mean, the first couple, we think that we're going to have some difficulty reducing deposit costs significantly. I mean, we'll get some relief on some of the more rate sensitive categories. So we think that the first uh cut or two impacts the margin a little bit more significantly than the ones going forward so uh the first couple of rate 25 basis point rate cuts we think we get about an eight nine basis point uh decline in the margin and then going forward from that um we're gonna get like a five or six basis point decline in the margin um in the uh in the subsequent cuts we just think the first couple of cuts it's going to be difficult to get the full impact on the uh on the deposit side and and also i mean i would tell you our strategy at this point is that um just given the fact that we've seen um some outside loan growth the acquisition of agile as well over the past two or three quarters we've been leaning more towards being a little more aggressive on the deposit side and bringing in um bringing in deposit balances and having a uh and trying to match off that uh that loan growth with uh with deposit growth even if it's in the some of the higher cost buckets that's great thanks for that and and archie maybe a question on capital you've got
spk02: you know, really good capital generation. Your CET1 ratio is, you know, pretty solid. How are you thinking about using, potentially using your excess capital and your multiple into 25?
spk05: Yeah, Chris, primarily I'd say funding the company's growth internally would be first and foremost. Certainly we just did the dividend increase. But it's those kind of things. I don't think we see a buyback in the near term. And part of this is we're focused on growing our tangible value continually increases.
spk02: And in terms of traditional bank M&A versus a fee income deal, are you seeing, I think there's a deal this morning, are you seeing more opportunities to grow that way as well?
spk05: Yeah, Chris, let's maybe talk about bank M&A first. Some conversations happening, early stages, I don't see anything in the near term that would come. But, you know, I think there's a little bit more interest in discussion just because of where we are in the cycle. And I think especially with some expectations that rates will start to come down and maybe we're approaching a soft landing. On the non-bank side, I don't really think we're pursuing any other acquisitions at this time.
spk02: Okay. And then finally, could you just remind us your parameters when you look at it? You haven't done one since the main source deal, you know, five or six years ago.
spk05: Well, I mean, they can change over time. I can certainly tell you deposit franchises are a lot more important today than they would have been several years ago. But we like in-market. We like more density area markets, more metro kind of focus areas in our footprint or I would say adjacent to our footprint.
spk02: Great. Thank you. Yep.
spk00: Your next question comes from the line of Terry McEvoy with Stevens, Inc. Your line is open.
spk03: Hi, thanks. Good morning, everybody. Maybe a question for you. Hi, just back on the margin, you said kind of sensitivity to deposit mix over the near term. Just wondering what your thoughts are on the non-interest bearing balances over the course of the year and maybe any early insight into the third quarter. And what do you find the loan growth with higher costing deposits?
spk01: Yeah, I think, I mean, if you look at the chart and the deck in terms of deposit costs, I mean, we really started to see that the pressure on deposit costs subside significantly in the last couple of months of the quarter. You know, we saw maybe two or three basis points in those months. So we're really starting to see both from a cost perspective and the momentum that we were seeing from a mixed shift, both of those subside pretty significantly. So we think we're at or near that. The bottom in terms of non-interest-bearing balances and especially the percentage of non-interest-bearing, the total deposits somewhere in that low, we're projecting that those were going to drop somewhere in the low 20s, and we're at 22% now. So I think that we've hit the bottom there or close to it. But going forward, yes, I mean, we are looking to – and you can see in the outlook, our deposit for the back half of the year, our loan growth projections are softened from what we were seeing in the first half. which were relatively strong. So we were looking to fund that growth going forward here, especially over the next two, three quarters from the deposit side and not the borrowing side. But understanding that some of that might be, you know, the mix of that might be a little bit on the higher cost side and, you know, in CDs and money market accounts.
spk03: Perfect. Thanks for that, Jamie. And as a follow-up, just the transportation sector, keeps coming up this earnings season when discussing credit. Any comments on your transportation C&I portfolio or within Summit and whether you're seeing any stress there or just taking a step back, any segments within C&I you're monitoring and keeping a close eye on?
spk06: Yeah, we are watching. the transportation sector very closely, as most banks are, just with some of the challenges that they've been facing heretofore. We haven't had any material issues, and overall we feel pretty good about the book. But there is some stress, especially in some of the smaller and some of the larger trucking companies out there, but our exposure is manageable.
spk03: Thanks for taking my questions.
spk02: Thanks, Terry. Thanks, Terry.
spk00: Your next question comes from the line of Daniel Tomeo with Raymond James. Your line is open.
spk07: Hey, good morning, guys. Thanks for taking my questions. I know you talked a little bit about this. I apologize if this question's been asked. I jumped on late. But the loan growth guidance down, I heard you mention seasonally strong, um, agile in, in the second quarter. So I, I get that part, but, um, anything else that's driving that? I mean, is it more of a normalization? Um, just curious, kind of, I guess, on the commercial side, you know, how, how pipelines look and, and, um, and how, how we should think about, um, you know, loan growth over the next several quarters. I know it's not the official guidance, but kind of, if you take a step back and think about what, um, opportunities for you might be over the next several quarters to be helpful.
spk05: Yeah, Danny, this is Archie. We've had a couple of really strong quarters in loan growth, and it's been a combination of some decent production, but also much lower than normal payoff activity, especially in our commercial real estate portfolio. So that's buoyed at some As we look forward, pipelines, I would say, softened some in the mid part of the second quarter. They seem to be strengthening back now. But that will create a little bit of building that back into production in the back half. So that's a piece. We mentioned Agile. Their big part of the year is the early to mid part. So that will flatten out for most of the back half of the year. And we are anticipating more payoffs of commercial real estate. We start to see some late in the quarter. We'll see more Q3, our Oak Street unit. We've got a few large payoffs that we're expecting to come in the back half of the year. So that payoff activity is just a little bit stronger combined with Agile. And I would say on the CRE side still, that production is a little bit lower than it has typically been. And you can imagine just the market with rates where they are, the market's a little softer, and we're probably a little bit – more selective there in the current environment.
spk07: Okay. Thanks, Archie. And then maybe on the expense side, you guys have done a really good job of managing expenses despite this good revenue growth and balance sheet growth. I'm just curious where you've been able to, you know, pull out the FTEs or identify cost savings opportunities in this environment. And, you know, just as you've been going through that, just curious how that's been going, if you've had any issues or identified any kind of areas that you need to invest as you think about continued growth over the next few years.
spk05: Yeah, Danny, we've talked a little bit about this in both quarters, so it's a good question for us to talk a little bit more about it. First, we view good expense control and management as part of what we need to always be doing. But if you think about what's happened in recent years, the industry, but certainly us, have invested heavily in great technologies and tools, and we believe have created a significant amount of capacity in the system. So we embarked. late last year some, I guess I'd call them beta testing in an area or two to really do, we call it almost like desk-to-desk review of all our production areas and support areas. We started in a group or two kind of proof of concept on what we were trying to do and we identified excess capacity that we could take out of the system and and now we're going through a methodical review throughout the whole company. It's more been in the support areas at this point, but before we're done, which we hope will be through this work by the end of the year, we'll have touched all or most of the company. To date, we're about 35% to 40% through the work, and I'm not sure that the same numbers will hold up through the rest of the process because we'll get into some areas that we think don't have as much capacity. But we're going to keep doing that work, and each quarter as we go through it, we'll update certainly all of you and all of the other stakeholders on the progress that we're making.
spk01: And Danny, just to jump in as well to Jamie, I mean, what that has also allowed us to do is, you know, we were able to essentially absorb the expenses with Agile through that. and the expense base didn't go up a lot, and also use those savings to invest in other areas that will help us grow in the future.
spk05: So the office in Cleveland. To Jamie's point, we have opened a couple offices, commercial banking offices, added a few other salespeople in our wealth group, and still been able to keep a lid on the expenses.
spk07: Yes, it's certainly showing through. So I appreciate all that, Keller. Thanks.
spk02: Thanks, Danny.
spk00: As a reminder, to ask a question, please press star, follow the number one on your telephone keypad. Our next question comes from the line of John Arfstrom with RBC. Your line is open.
spk08: Good morning, guys. Hey, John. On Chris McGrady's question about the margin coming down, afraid to come down, can you talk about how you expect the fee businesses to perform short rates come down. Do you think that will have any kind of an impact on maybe some improvement there?
spk05: John, maybe slightly. We think that Bannockburn has shown in multiple rate environments at this point that they can generate income with their clients. So we think they'll continue to perform effectively. leasing volumes are strong. We'll continue to see the leasing income side grow, I think, in even a different rate environment, maybe even more. And then on the mortgage side, it's really going to depend on probably what happens more in the 10-year part of the curve, but we would expect a little bit of an increase maybe on the mortgage side. You know, if the markets hold up, wealth is going to continue. We've put a lot of investment in our wealth group. And we think they're going to continue to just incrementally make improvements as we go forward. So those are the big areas.
spk08: Yep. Okay. You touched on leasing. It's obviously been very strong. It feels like it's a little bit different than the commercial outlook. Can you just talk a little bit about the pipelines and leasing and what you're seeing there? Is it market activity or market share? What is it?
spk05: Well, they're on more of a national platform, and they've got salespeople throughout the country and other connections, how they do business. So we do get a lens into maybe things more broadly, and things are pretty healthy, especially in, I would say, larger companies, and they tend to do a lot of business with larger companies. So pipelines are good. If anything... we're probably restraining the ability to originate there a little bit in the environment where we're focused more on funding. We do also, if you just look back last year, we've had a couple of year-ends now with them, they will see their strongest amount of origination activity occurs in the back part of the year, especially in that fourth quarter. So that will pick up. I think we said low single-digit growth in the near term. Not sure what fourth quarter looks like, but they'll certainly have a strong fourth quarter. Okay.
spk08: Good. That helps. And then, Bill, can you talk a little bit more about the downgrades? We probably know what the themes are, but any themes, and then should we expect the classified increases to continue for the next few quarters? Thanks.
spk06: Yep. So the downward credit migration of the classified bucket was driven by two multifamily and two C&I credits. The first multi-family deal is currently under an LOI. The other has experienced conversion and stabilization delays. The two C&I credits are both long-time customers, 20 plus years, that are just navigating through some shifts in the respective markets. And we think there's reasonable solutions for all of them. And as we look out, we do expect our class sizes to remain stable. Looking at our special mentions for the quarter, they were down a little flat, and so that's kind of what we're looking at at this point, kind of stable. Okay.
spk08: All right. Thanks, guys. I appreciate it.
spk06: Thanks, John. Thanks, John.
spk00: There are no further questions at this time. I would like to turn the call back over to Archie Brown for some closing remarks.
spk05: I want to thank everybody for joining today and hearing our story for the quarter. We look forward to talking with you again next quarter. Have a great Friday, a great weekend. Bye now.
spk00: This concludes today's conference call. You may now disconnect. Have a good day.
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