First Financial Bancorp.

Thank you for standing by. My name is Jeannie and I will be your conference operator today. At this time, I would like to welcome everyone to the First Financial Bank Corps Third 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. If you would like to withdraw your question, press star 1 again. Thank you. I would now like to turn the conference over to Scott Crawley. You may begin.

Yeah, good morning. Thank you, Jeannie. Good morning, everybody, and thank you for joining us on today's conference call to discuss Fresh Financial Bancorp's third 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 O'Hara, 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 savings disclosure contained in the third 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 September 30, 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.

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. I'll provide some highlights this morning and then turn the call over to Jamie to provide further details. The third quarter financial results reflect our ongoing commitment to driving industry-leading performance. Adjusted earnings per share was $0.67, which resulted in a return on assets of 1.42% and a return on tangible common equity of 19.77%. We're particularly pleased with our 4.08% net interest margin with only a two basis point decline from the second quarter. The margin has proven to be more durable than expected due to high asset yields from Agile investment portfolio restructuring and moderating funding costs. Average deposit balances grew 4.9% on an annualized basis as declines in our low-cost products moderated. 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. Loan pipelines strengthened during the third quarter and we expect higher growth rates as we close out the year. Third quarter non-interest income was $45.7 million, or $58.8 million on an adjusted basis, with strong earnings from foreign exchange, wealth management, and the leasing business. There were several large non-recurring items that impacted non-interest 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 non-interest income was a little noisy, non-interest expenses were relatively flat compared to the prior quarter. We remained diligent in managing our expenses, and our workforce efficiency initiative has resulted in the elimination of 120 positions to date, with additional savings expected into 2025. Asset quality was stable for the quarter, and our ACL increased to 1.37% of total loans. Additionally, third quarter net charge-offs were 25 basis points on an annualized basis in line with our expectations. And non-performing assets as a percent of assets increased one basis point to 36 basis points. We are optimistic about asset quality and are confident in our ability to manage the portfolio through the expected interest rate reductions and economic uncertainty in the near term. With regard to capital, strong earnings and the decline in interest rates led to significant improvement in tangible book value per share and tangible common equity. Tangible book value per share increased 10% from the linked quarter and over 30% from the same quarter last year to $14.26, while tangible common equity increased 75 basis points from June 30 to 7.98% as of the end of September. 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.

Thank you, Archie, and good morning, everyone. Slides 4, 5, and 6 provide a summary of our most recent financial results. The third quarter was highlighted by strong earnings, a net interest margin that exceeded our expectations, and a 10% increase in tangible book value. Our net interest margin remains very strong at 4.08%. The margin declined two basis points from the linked quarter as flat asset yields combined with a favorable shift in funding mix to offset a modest increase in the cost of deposits. Similar to the second quarter, we're 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. Loan growth was modest during the quarter as growth in the leasing and mortgage books was partially offset by higher payoffs in other portfolios. Average deposit balances increased $166 million or 4.9% on an annualized basis. Overall, the deposit mix continues to shift slightly toward higher cost deposits. However, we maintain 23% of our total balances in non-interest bearing accounts and are strategically focused on maintaining deposit balances. Turning to the income statement, third quarter fee income was solid, led by foreign exchange, wealth management, and leasing income. Non-interest expenses increased slightly from the linked quarter due to higher leasing expenses and a supplemental contribution to our foundation. However, the impact from our efficiency initiative is becoming more meaningful. We expect to see further benefits in the coming periods. Our ACL coverage increased one basis point during the quarter to 1.37% of total loans. This resulted in $10.6 million of provision expense during the period, which was driven by net charge-offs and slower prepayment speeds. Overall asset quality trends were in line with expectations. Annualized net charge-offs were 25 basis points during the period, and NPAs as a percentage of assets were relatively flat at 36 basis points. From a capital standpoint, our regulatory ratios are in excess of both internal and regulatory targets. Tangible book value increased $1.32, or 10.2%, while our tangible common equity ratio increased 75 basis points to 7.98% during the period. Slide 7 reconciles our gap earnings to adjusted earnings, highlighting items that we believe are important to understanding our quarterly performance. Adjusted net income was $63.6 million, or $0.67 per share for the quarter. Adjustments to non-interest income were a $4.4 million deferred tax gain, as well as $17.5 million of losses on securities. The loss on securities includes $8 million in losses from sales and $9.7 million of impairment losses on two securities, with credit deterioration that we anticipate selling in the near term. Non-interest expense adjustments exclude the impact of efficiency costs as well as acquisition, severance, and branch consolidation costs. As depicted on slide 8, these adjusted earnings equate to a return on average assets of 1.42%, a return on average tangible common equity of 20%, and a pre-tax pre-provision ROA of 2%. Turning to slides 9 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. Funding costs were also relatively flat compared to the linked quarter as a favorable mixed shift mostly offset a slight increase in deposit costs. 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. 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. 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. As you can see on the right, growth was driven by mortgage and leasing, which offset an increase in prepayments during the period. Slide 14 provides detail on our loan concentration by industry. We believe our loan portfolio remains sufficiently diversified to protect us from deterioration in any particular industry. Slide 15 provides detail on our office portfolio. Similar to last quarter, about 4% of our total loan book is secured by OfficeSpace, and the overall portfolio performance metrics remain 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. Slide 6 shows our deposit mix as well as a progression of average deposits from the linked quarter. In total, average deposit balances increased $166 million during the quarter, driven primarily by increases in retail CDs and money market accounts. These increases offset seasonal declines in public funds as well as 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 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. On the bottom right of the slide, you can see our adjusted uninsured deposits were $3.3 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 18 highlights our non-interest income for the quarter. Total fee income was $46 million during the quarter, or $59 million as adjusted, with Bannockburn, Summit, and Wealth Management all having solid quarters. Additionally, mortgage, deposit, service charge, and other non-interest income increased from the second quarter. Non-interest expense for the quarter is 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 benefit from our ongoing efficiency initiative and expect to see further cost reductions in the coming periods. 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 1.37% of total loans, which was a one basis point increase from the second quarter. Provision expense was primarily driven by net charge-offs, which were 25 basis points for the period. Additionally, our NPAs to total assets held steady at 36 basis points. In other credit trends, classified asset balances increased to 1.14% 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 22 and 23, 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. Absent the impact from AOCI, the TCE ratio would have been 9.34% compared to 7.98% as reported. Our total shareholder return remains strong, with 44% of our earnings returned to our shareholders during the period through the common dividend. We maintain our commitment to provide an attractive return to our shareholders, and we continue to evaluate capital actions that support that commitment. I'll now turn it back over to Archie for some comments on our outlook. Archie? Thank you, Jamie.

Before we end our preparatory remarks, I want to comment on our forward-looking guidance, which can be found on slide 24. Lung pipelines have strengthened, and we expect seasonally high production or summit business unit to contribute to mid-single-digit growth on an annualized basis for the fourth quarter. For securities, we expect the port pillar to remain relatively stable. Deposit growth has been significant thus far this year, and we expect to continue to see strong growth for the next quarter as we experience some year-end seasonal inflows. Our net interest margin continues to be strong and industry-leading, but we expect it to come down to between 3.85% to 3.95% for the next quarter as the Fed eases, assuming another 25 basis point rate cut in both November and in December. We expect our credit costs to remain flat over the next 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 25 to 30 basis points. Fee income is expected to be between $63 and $65 million, which includes $13 to $15 million for foreign exchange and $18 to $20 million for the leasing business revenue. Non-interest expense is expected to be between $126 and $128 million, with potential variability of leasing business and fee-based incentive expense as they are tied directly to revenue. In closing, we're very proud of our financial results for the first nine months of 2024. Overall, the economy remains healthy, and the general easing of interest rates should extend economic growth in the coming periods. We believe we're 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 up the call for questions. Jeannie?

Thank you. The floor is now open for questions. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again. If you are called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Again, press star one to join the queue. And your first question comes from the line of Daniel Tomeo with Raymond James. Please go ahead.

Thank you. Good morning, guys. Maybe starting on the loan growth, so a little bit slower as you, as you guys mentioned and expected in the third quarter, you, you, uh, you guided to that, um, improving in the fourth quarter and Archie mentioned, uh, some seasonal strength from summit. Um, just curious as we, as we look into, um, you know, beyond fourth quarter and, and kind of what you guys have done, uh, this year was, was pretty strong. You know, 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, given the additions you've had from Agile and other businesses recently looking into 2025?

Yeah, Danny, I think we feel pretty good about certainly the fourth quarter improving, and then as you look into 2025, 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. Pretty balanced across most of the portfolios, and even some of this quarter, I think we're rationalizing more, making sure that if it's a lower return type of a relationship or loan, we probably exit a few of those in the quarter, and we'll 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.

Okay. Terrific. And then, you know, I guess maybe on the, on the yield side there, if you can give us a sense, you know, the loan yields certainly have, have, have remained stronger than, than I was expecting. And you mentioned the mix shift there with agile again, but if you could give us a sense for, you know, where those loan yields are coming on the books and rolling off as maybe we do see some pressure begin to show itself here in the fourth quarter and next year.

Yeah, I could tell you on the, we'll look here for the runoff side of that, but on the origination side for the quarter, origination yields were probably in the high seven, say seven, eight-ish or so. And even in September, they were only down maybe, 10 basis points, so still kind of high 770-ish in September. So, you know, as Fed cuts, there's going to be some continued decline. That's baked in, of course, how we look at the margin.

Jamie, I don't know if you see what the... Yeah, so the lows going on in the books right now, Danny, like we originated in the third quarter, we're going on an average yield of about in the high sevens and like the 775, 780 range, and the payoff yields are just slightly below that, maybe 20 basis points below that at this point. Okay. All right, that's helpful. Okay.

I think that's what I wanted to cover. Yep, I'll go ahead and jump off. I appreciate the color, guys.

Thanks, Danny. Thank you.

Your next question comes from the line of Terry McEvoy with Stevens. Please go ahead.

Hi, good morning, Jamie. Good morning, Archie. Thanks for taking my questions. If you could just start. The $8 million of losses from restructuring activity, could you just talk about Yields on the securities you sold, the reinvestment, maybe when it occurred in the quarter so we could figure out the benefit and how that comes into play in your forward guide.

Yep. Yep. So just so you know, we've taken that into account when we, you know, the 385 to 395 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. I would say it all happened kind of in the middle of the quarter. The reinvestment can take a little bit of time, too. So we didn't really get 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. Um, and we picked up about 330 basis points on the, uh, on the reinvestment. So the earn back on that is a little bit less than two years, about 1.7 years. And we've been trying to keep those. We've done, um, a few of those, um, in the year. We did one in the fourth quarter of last year as well. Just kind of small, um, incremental, uh, type restructurings there. You know, nothing huge. But so the $8 million loss, you know, we're picking up about $4.5 million or so on a go-forward run rate on those sales. So about 330 basis points on the $140 million. Great.

Thanks for all the details, Jamie. And then maybe just a question on Summit. How are the credit trends performing there? Relative to projections, it 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 in a few specific industries.

Yeah. Yeah. The portfolio we put on the portfolio, obviously, a couple of years ago, we've grown it and it's now stabilized at a good size. And, you know, what we're seeing in there, It's not unexpected. Overall, we have seen some transportation come through, the launch and worse that you would expect based on some of the headwinds there, but nothing really out of the ordinary from all the key KRIs on credit. Performing very well.

Terry, this is Archie. They're not a huge and small ticket in terms of the overall mix of the portfolio and And Bill talked about a couple of the transportation-related. I think their total exposure is under $100 million in that book, probably $80 to $90 million. I think in total, Bill, what are we? $221 million. $220 million or so in the total book for the company.

Great. Thanks for all the color. Have a nice day. Thanks, Terry.

Thanks, Terry.

Again, if you would like to ask a question, press star, then the number one on your telephone keypad. Your next question comes from the line of Chris McGrady with KBW. Please go ahead.

Hey, how's it going? This is Andrew Leischner on for Chris McGrady. Hey, Andrew. Hi. So just on capital, you guys continue to have strong capital generation and, you know, CAT1 up to 12% now. Can you just remind us where your capital deployment priorities lie and maybe some thoughts or conversations you're having around M&A? Thanks.

Andrew, this is Archie. On the M&A front, look, we're primarily focused on organic growth and executing our strategy. I do believe we're interested in Bank M&A and believe there are going to be more opportunities over the next year or two. We do remain disciplined, though, in our kind of our pricing, you know, disciplined around our pricing and how we model potential opportunities. And 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. I hope it will play, but it's going to be something that really fits well for our shareholders.

Yeah, and Andrew, on the capital front, in terms of capital deployment, we don't see us doing any stock buybacks at this point, where our stock is trading in terms of relative to tangible book value. You know, we did increase the dividend by a penny last quarter. So, I mean, at this point, we're still, I think, in the capital building mode and growing tangible book value. We just think that's important here for the time being. You know, but like Archie said, if we see something that looks attractive, we'll be opportunistic there.

Okay, thank you. And on the income guidance, it looks to be about a $5 million step up from this quarter. How should we be thinking about growth there relative to Q4 entering 2025? In terms of, are you talking about in terms of non-interest income? Yeah, yeah, non-interest income.

Yeah, so, you know, we have, We see good growth there going forward, you know, both from – and one of the main drivers that we have there is Summit ramps up their balance sheet. When they put on operating leases, obviously that hits down, you know, those payments hit down in fee income. So, you know, the growth in non-interest income will be – driven by what I would call the normal lines in terms of Bannockburn on the wealth side. Our capital markets group with Bannockburn has been growing 10% or 15% a year. But again, 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 term of those leases that they put on the books are roughly four years. So we're still ramping up the balance sheet until we get to kind of a more stable asset base there and stuff starts to to churn, that fee income line will continue to grow there for the leasing business.

Okay, great. Thanks for the color. I'll step back. Thank you.

That concludes our Q&A session. I will now turn the conference back over to Archie Brown for closing remarks.

Thank you, Jeanne, 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 after the fourth quarter. Have a great day.

That concludes today's conference call. Thank you for joining. You may now disconnect.