First Financial Bancorp
NASDAQ:FFBC
Earnings Call Analysis
Q4-2023 Analysis
First Financial Bancorp
First Financial concluded 2023 with a flourish, delivering a fourth quarter that boasted an adjusted earnings per share of $0.62, cascading into an impressive 22.2% return on tangible common equity ratio and a robust return on assets of 1.37%. The bank's strategic maneuvers amidst rising funding costs yielded a steadfast net interest margin of 4.26% and evident growth with an 11% rise in loan balances and a 13% uptick in average deposits. Notably, a $4.6 million loss incurred at Bannockburn was a blemish on the otherwise commendable quarter.
Across the challenging banking landscape of 2023, First Financial's balance sheet demonstrated resilience. With an aggregate revenue reaching a historic peak of $840.2 million, the bank's commitment to asset diversification paid off, achieving a 21% increase in net interest income and a 12% rise in noninterest income. This strategic growth was curbed slightly by increased net charge-offs, predominantly from two large relationships and a minor loan portfolio sale, yet the bank's asset quality remains cautiously optimistic for 2024.
Expectations were surpassed as First Financial's loan growth rallied by 11%, focusing on strong sectors like leasing and residential mortgage, and the bank sustained a competitive net interest margin of 4.26%. The quarter's decrease in noninterest income was notably cushioned by decreased expenses, evidencing prudent financial management. The bank's future steps are measured to confront margin pressures and maintain asset quality, keeping a conservative allowance for credit losses (ACL) coverage at 1.29% of total loans, signaling confidence in the bank's credit environment.
Despite a decline in noninterest-bearing deposits, First Financial celebrated a rise in money market accounts and CDs, indicative of adaptive strategies in a fluctuating interest rate environment. Yet, this tactical shift has resulted in higher-cost deposit products. Fee income experienced a dip influenced by the foreign exchange trade loss, but wealth management output and syndication fees provided a counterbalance. With a calibrated reduction in core expenses and remaining vigilant, First Financial is poised to maneuver through any market uncertainties with finesse.
Fortifying its position, First Financial sets its gaze on moderate loan growth in the mid-single digits and aims for a dynamic balance sheet with measured deposit growth and net interest margin projections between 4.05% and 4.15%. With a focus on maintaining strong credit health and a stable noninterest income range, the bank projects its expenses to hover between $120 million and $122 million. The firm's capital league remains robust, bolstered by an unwavering dividend policy, suggesting an unwavering commitment to delivering shareholder value. In pursuit of sustainable success, growth avenues have been expanded to new markets, promising a blend of traditional excellence and innovative reach as they navigate through 2024.
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Thank you for standing by, and welcome to the First Financial Bancorp Fourth Quarter 2023 Earnings Conference Call and Webcast.
I would now like to welcome Scott Crawley, Corporate Controller to begin the call. Scott, over to you.
Thank you, Mandy. Good morning, everyone, and thank you for joining us on today's conference call to discuss First Financial Bancorp's Fourth Quarter and Full Year 2023 financial results. 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 that 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 fourth quarter 2023 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 December 31, 2023, 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.
Thank you, Scott. Good morning, everyone, and thank you for joining us on today's call. Yesterday afternoon, we announced our financial results for the fourth quarter and full year 2023. Before I turn the call over to Jamie, I'd like to provide some highlights from the most recent quarter and recap this year's record performance.
I'm very pleased with our fourth quarter performance. Adjusted earnings per share was $0.62, which resulted in a return on assets of 1.37% and a return on tangible common equity ratio of 22.2%. As expected, rising funding costs outpaced the increase in asset yields. However, our net interest margin remained very strong at 4.26%. Additionally, balance sheet trends were positive during the quarter with loans increasing $286 million or 11% on an annualized basis and average deposits increasing $416 million or 13% on an annualized basis.
Noninterest income and expenses were both lower than we expected during the quarter. The decline in noninterest income included a $4.6 million loss on a trade at Bannockburn. However, excluding this loss, foreign exchange income was within our range of expectations. Leasing income also declined during the period due to lower end of term fees and lease origination is shifting to a greater mix of finance leases. While this shift increased interest income and net interest margin, it resulted in lower noninterest income during the period.
Noninterest expenses declined for the quarter primarily due to lower incentive compensation, which is tied directly to noninterest income. Asset quality was stable for the quarter with underlying credit trends improving. Net charge-offs were 46 basis points during the quarter and were driven by one relationship that included a borrower fraud. This loan had been on nonaccrual for most of the year and was almost fully reserved coming into the fourth quarter. Additionally, nonperforming assets declined by 12% to 38 basis points and classified asset balances were relatively unchanged from the third quarter.
2023 was a record year for First Financial. Adjusted earnings per share increased 17% from the prior year to $2.77 and while return on assets was 1.55%, Return on tangible common equity was 25.4% and our efficiency ratio was 56%. The total revenue of $840.2 million was the highest in the company's history, increasing 18.5% over the prior year. Our balance sheet responded favorably to the interest rate environment, resulting in a 21% in net interest income. Additionally, record years from Wealth Management and Summit drove a 12% increase in noninterest income.
We're extremely pleased with the performance of our balance sheet during 2023. And especially given the turmoil in the banking industry in the first half of the year, loan production was solid, exceeding 6% in balance growth, while average deposit balances increased 2.4% compared to the prior year. We're also very happy with the 122-basis point expansion in the tangible common equity ratio and 24% increase in intangible book value per share for the year. Asset quality trends were a bit elevated during the year.
Net charge-offs increased to 33 basis points for 2023 after we achieved a record low of 6 basis points in 2022. This increase was driven by two large relationships as well as the loss on the sale of a small portfolio of ICRE loans. Nonperforming assets to total assets ended the year at 38 basis points, we believe we're well positioned to manage the coming year, and we're cautiously optimistic regarding asset quality in 2024.
With that, I'll now turn the call over to Jamie to discuss these results in greater detail. After Jamie's discussion, I will wrap up with some additional forward-looking commentary and closing remarks.
Thank you, Archie, and good morning, everyone. Slides 4, 5 and 6 provide a summary of our fourth quarter financial results. The fourth quarter was another good quarter, highlighted by strong earnings, net interest margin that exceeded expectations, stable asset quality metrics and solid loan and deposit growth.
Our balance sheet continues to respond favorably to the current interest rate environment. While our net interest margin declined slightly, the pace was less than we expected and remains very strong at 4.26%. We anticipate further net interest margin contraction in the coming periods due to additional pressure on deposit pricing and changes in funding mix. Total loans grew 11% on an annualized basis, which exceeded our expectations. Loan growth was concentrated in the leasing, specialty finance, investor CRE and residential mortgage books with relatively stable balances in the other portfolios.
Noninterest income declined in the fourth quarter. The largest decline was foreign exchange, which was negatively impacted by a $4.6 million loss on the trade. However, this loss was mostly offset by lower noninterest expenses. Additionally, leasing business income declined during the quarter. However, this was primarily a function of product mix as Summit originated a larger volume of finance leases during the period. Noninterest expenses declined from the linked quarter due to lower employee costs and marketing expenses.
Overall asset quality trends were stable, with lower net charge-offs, classified assets and declining nonperforming asset balances. Annualized net charge-offs were 46 basis points during the period and were driven by a single $9 million relationship that we previously reserved for. We recorded $10.2 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 remain in excess of both internal and regulatory targets.
Accumulated other comprehensive income improved $100 million during the period. As a result, tangible book value increased 13.5%, while our tangible common equity ratio increased by 67 basis points during the period. Slide 7 reconciles our GAAP earnings to adjusted earnings, highlighting items that we believe are important to understanding our quarterly performance. Adjusted net income was $59 million or $0.62 per share for the quarter. Adjusted earnings exclude the impact of the FDIC special assessment as well as costs not expected to recur, such as acquisition, severance and branch consolidation costs.
As depicted on Slide 8, these adjusted earnings equate to a return on average assets of 1.37%, a return on average tangible common equity of 22% and an efficiency ratio of 58%. Turning to Slide 9. Net interest margin declined 7 basis points from the linked quarter to 4.26%. As we expected, higher funding costs outpaced the increase in asset yields. Primarily due to a 31-basis point increase in the cost of deposits. These costs were partially offset by a favorable shift in funding mix and a 14-basis point increase in asset yields due to higher rates and a more profitable mix of earning asset balances during the period.
On Slide 10, you can see the increase in asset yields included an 11-basis point increase in loan yields. Additionally, the yield on the investment portfolio increased 13 basis points. As I previously mentioned, our cost of deposits increased 31 basis points compared to the linked quarter, and we expect these costs to continue to increase in the first quarter but at a slower pace than we saw in the fourth quarter.
Slide 11 details the betas utilized in our net interest income modeling. Deposit costs increased with greater velocity in the fourth quarter, moving our current beta up 5 percentage points to 38%. Our modeling indicates that our through-the-cycle beta is approximately 40%. Slide 12 outlines our various sources of liquidity and borrowing capacity. We continue to believe we have the flexibility required to manage the balance sheet through the expected economic environment.
Slide 13 illustrates our current loan mix and balance changes compared to the linked quarter. As I mentioned before, loan balances increased 11% on an annualized basis, with broad-based growth. Summit, specialty finance, ICRE and mortgage, all had strong quarters while the other loan portfolios were relatively flat. Slide 14 provides detail on our loan concentration by industry. We believe our loan portfolio remains sufficiently diversified to provide protection from deterioration in any particular industry.
Slide 15 provides detail on our office portfolio. About 4% of our total loan book is concentrated in office space, and the overall LTV of the portfolio is strong. No office relationships were downgraded during the quarter, and our total nonaccrual balance for this portfolio declined to $23 million. Slide 12 shows our deposit mix as well as the progression of average deposits from the linked quarter. In total, average deposit balances increased $416 million during the quarter, driven primarily by a $284 million increase in money market accounts and $123 million increase in public funds and a $158 million increase in combined retail and brokered CDs.
These increases offset a decline in noninterest-bearing deposits and savings accounts. This was expected as the current interest rate environment has driven customers to higher-cost deposit products. Slide 17 illustrates trends in our average personal, business and public fund deposits as well as the comparison of our borrowing capacity to our uninsured deposits. We saw increases in all three deposit types. With personal deposits increasing $97 million, business deposits increasing $124 million and public fund balances increasing $123 million. On the bottom right of the slide, you can see our adjusted uninsured deposits were $3.2 billion at the end of the year. This equates to 24% of our total deposits.
We are comfortable with this concentration and believe our borrowing capacity provides sufficient flexibility to respond to any event that would stress our larger deposit balances. Slide 18 highlights our noninterest income for the quarter. Fee income declined to $47 million during the fourth quarter. The biggest driver of the decline was lower foreign exchange income which was negatively impacted by a $4.6 million loss on a trade. This loss was offset by a reduction in the related employee costs and noninterest expenses. Leasing business income declined during the period due to a heavier mix of finance lease originations during the period.
Additionally, wealth management had another solid quarter and other noninterest income increased during the period, driven by higher syndication fees. Noninterest expense for the quarter is outlined on Slide 19. Core expenses declined $4.7 million during the period. This decrease was driven by lower employee costs, which are tied to fee income as well as lower marketing expenses. Turning now to Slides 20 and 21. Our ACL model resulted in a total allowance, which includes both funded and unfunded reserves of $160 million and $10.2 million of total provision expense during the period. This resulted in an ACL that was 1.29% of loans, which was a 7-basis point decrease from the third quarter.
Provision expense was driven by net charge-offs and loan growth. Net charge-offs were $12.6 million or 46 basis points on an annualized basis and were primarily driven by a $9 million relationship that had been previously reserved for. In other credit trends, nonaccrual loans decreased during the period due to the charge-off I previously mentioned, while classified asset balances were relatively flat quarter-over-quarter. Our ACL coverage was 1.29% at year-end. As I mentioned last quarter, we have modeled conservatively in prior quarters to build a reserve that reflected the losses we expect from our portfolio.
We expect our ACL coverage to remain relatively flat in the coming periods. Finally, as shown on Slides 22, 23 and 24, regulatory capital ratios remain in excess of regulatory minimums and internal targets. During the fourth quarter, tangible book value increased 13.5%, and the TCE ratio increased 67 basis points or 10.3% due to a $100 million improvement and accumulated other comprehensive income. Absent the income from AOCI, the TCE ratio would have been 9.05% at the end of the year, compared to 7.17% as reported.
Slide 23 demonstrates that our capital ratios will remain in excess of regulatory targets, including the unrealized losses in the securities portfolio. Our total shareholder return remains robust with 39% of our earnings returned to our shareholders during the period through the common dividend. We believe our dividend provides an attractive return to our shareholders and do not anticipate any near-term changes. However, we will continue to evaluate various capital actions as the year progresses.
I'll now turn it back over to Archie for some comments on our outlook going forward. Archie?
Thank you, Jamie. Before we end our prepared remarks, I want to comment on forward-looking guidance, which can be found on Slide 25. Loan pipelines remain healthy, though we expect loan growth to moderate as we approach seasonal lows in activity and be in the mid-single digits over the near term. For securities, we expect a decline in balances as we continue to utilize the portfolio of cash flows to support loan growth.
Deposit growth in the recent quarter was very strong, but we expect some of the seasonal flows to reverse in the first quarter causing balances to be stable to slightly down. Our net interest margin has remained strong and resilient despite the deposit pressures impacting the industry. We expect some further compression in the first quarter with the net interest margin in a range between 4.05% to 4.15%, assuming no Fed cuts. Specific to credit, we expect our credit costs to remain consistent with the prior quarter, while ACL coverage as a percentage of the loan -- of loans is expected to be stable to slightly increasing.
We expect noninterest income to be in a range between $53 million and $55 million as foreign exchange and end-of-term leasing income rebounds to more normal levels and the operating lease portfolio continues to grow. We expect expenses to be between $120 million and $122 million, which includes the depreciation expense from the lease portfolio. Specific to capital, our capital ratios remain strong, and we expect maintain our dividend at the current level. Finally, I want to commend our associates for the great year and record financial results.
They were client focused and executed at a very high level despite the industry uncertainty earlier in 2023. I'm extremely proud of the work our team accomplished during the year. As we enter the new year, we have strengthened our team by adding talent in key areas, including wealth management and commercial banking. We've expanded into new markets, including Chicago, Cleveland and Evansville, Indiana. And we've built a strong and diverse company that I believe positions us well to have some sustained success in 2024 and beyond.
With that, we'll now open up the call for questions.
[Operator Instructions] Our first question comes from the line of Daniel Tamayo with Raymond James.
First, maybe just expanding on the NIM guide. I know you've got some pressure expected in the first quarter without any cuts. But as you think about the rest of the year, maybe relative to the Fed's outlook with 3 cuts in the back half of the year. Just curious how you think that would impact the margin or net interest income?
Yes. Daniel, this is Jamie. So yes, we do anticipate -- so maybe I'll kind of take it in two parts there. We do anticipate some pressure there in the first quarter. When we look at the way our deposit pricing and our cost of deposits has performed here over the last year or so. It looks like we were about a quarter behind from a lagging perspective. So I think that's why you'll see here in the fourth quarter, our cost of deposits moving up a little bit higher than the peer group.
And so I think we have one more quarter of that, which we -- which -- that's included in the -- in that 4.05% to 4.15% guides. But I think we'll have another quarter of that. We think it's around 15 basis points or so. And then going forward, so as we -- as a lot of banks, I mean as we get the first cut or so, it's just -- a lot of it is going to depend on what we can do from a pricing perspective, how quickly we can move deposit prices down. And so -- and that first cut, we are anticipating that we would get very little relief, except from the ones that are basically indexed, but very little relief from the deposit side in that first cut, but then start to get some relief as the Fed cuts further.
So that first cut, you're probably talking about a dilutive impact to the margin of around 10 basis points, 10 to 12 basis points, and then it mitigates quite a bit from there and further cuts where it's more like 5 or 6 basis points. So -- and then -- so we have four cuts in our forecast. We have one in March, but obviously late in the quarter, so we have a lot of impact. But basically, one each quarter, and we have our margin in the back half of '24 in that 390 range.
Okay. All right. That's very helpful. I appreciate it. I'm just curious, the next question relates to the leasing business, the shift that you mentioned in the comments to the finance leases. What drove that? Is that rate related? I'm just curious what drove that and what your expectations are for -- maybe what would drive that in the future?
Yes. I think we're obviously learning a little bit more about this business as we have it, as we own it longer, we've owned it for a couple of years now. But I mean, really, the economics of those transactions are virtually the same, whether it's a finance lease or an operating lease, I think it's really more to the customer than it is really us driving it. So they just had more customers fall into that category. And so it's just -- it's really just a geography type of an issue on the financial statements as it goes into the margin with a finance lease as opposed to the operating lease, which shows the gross amounts and noninterest income and noninterest expense.
So that's why -- I mean, when you look at our overall -- the volume of earning assets, I think we finished the year a little bit higher than what we had, than what we had anticipated. And some of that is driven off of the fact that we are including those that we had more finance leases and including those in earning assets versus down in the -- down and other assets.
Okay. I understand. So there's some geography moving around, but ultimately about neutral to the bottom line.
Correct. Yes.
Our next question comes from the line of Terry McEvoy with Stephens.
I guess I got to ask, can you just shed some light on the $4.6 million trading loss? What changes have been put in place to prevent that from happening again? Or is this just kind of the nature of that business?
Yes. Terry, I want to have Bill here, our Chief Credit Officer, answer the question on the trading loss.
Sure. Terry. The [trick] with a long-term customer of the trading team even before joining the institution. They had a material business interruption and they're unable to fill their side of the trade. And when you lay this out over about the 40,000 trades you do year in and year out, it's really kind of a onetime thing. It was some spot trades. And so we don't expect it to be systematic through platform. And we have the right oversight and continue to do the lodge and worse on our normal stuff. So we've enhanced some things, but not materially because it's one of the thousands.
Perfect. And then as a follow-up question, you had impressive growth in loans in the fourth quarter. What portfolios do you think should provide some loan growth over the near term; the mid-single digits is the outlook? And then the flip side is, do you expect to see contraction in any portfolios due to just the business itself or some areas that you might be deemphasizing given the economy and interest rates, et cetera?
Yes. Terry, this is Archie. Look, it will be somewhat I think broad-based commercial, you may have seen in the slide, our commercial numbers were a little bit softer in the quarter, and a lot of assets related to continued line paydowns last year, where customers just had liquidity and chose to use that liquidity and pay the line down since rates have moved up. So we don't think there's a lot more of that. If anything, maybe we should start to see some line draws as we go into 2024.
But -- so I think commercial banking will be stronger. Our Oak Street unit had a really good Q4. I think they'll continue to have some strength early into the year. Summit, Jamie was talking about some of it but Q4 is always just their largest quarter of the year. So that will soften up a little bit in Q1 and then keep ramping through the year. Mortgage has been one that's kind of been a steady grower, mainly originations may be a little softer, but the payoffs have also been a lot softer. So we think that will continue to grow because of low payoffs. And then ICRE grew a little bit in the quarter, that was -- in Q4, that was primarily line draws on construction loans that drew up. I don't know that, that will continue at the pace that it did in Q4. Otherwise, the origination activity there is a little softer. So I think we'll get some decent broad-based growth, but it won't be at higher levels. With regard to areas we're deemphasizing, probably most notably is the franchise fixer portfolio. You know that portfolio in the story that over the years, down about $0.25 billion at the end of the year or so. And that's -- we think that will just continue to amortize down as we have really deemphasized the originating side of that.
On the ICRE side, we have certain product areas that we're -- our team is focusing on. But as you can imagine, we really have deemphasized, really for 3 to 4 years now, office, hotels, and we're very selective even in multifamily and healthcare, industrial. So I think ICRE will be kind of a slow grower as we go through the year.
[Operator Instructions] Our next question comes from the line of Chris McGratty with KBW.
Great. Jamie, maybe on net interest income, if I put the pieces together of the remixing of the earning assets and your margin comments, it would feel that kind of the trough would be midyear, Q2, Q3, kind of mid-140s. Is that about right?
That's right. Yes.
Okay. And at that level, like kind of 146, 147 is kind of a fair step down?
That's right. Yes.
Okay. And then on -- Archie, maybe on capital, you guys have been consistent like dividends stable and strong buybacks aren't a priority. Is there a capital return narrative for the bank in 2024. You guys have a multiple. Obviously, marks are less onerous. But is M&A something that might be on the horizon?
Yes, Chris, thanks for the question. First, supporting growth, we think we've got a diverse kind of a diverse business now that we think is pretty resilient and can grow. And so we're going to support growth, internal organic growth first. The dynamics of M&A need to continue to improve. We saw some -- with rates moving down in December, we saw some I think changes in how purchase accounting may impact capital.
And we think that needs to continue to improve to really make that something that's more I think, more realistic in 2024. So we'll have our mind on it some. We're not a -- probably about 6 years since we've done any bank acquisition mergers. So we're not out there doing a lot of it. There are some areas, markets, types of companies where, I think, have an interest in. And to the extent the accounting works and we feel good about the economy, then I think maybe in the year, you could see us use capital in a way like that. But first and foremost, organically.
Okay. Great. And then in terms of credit, your charge-offs and provisions have been a little bit higher than peers. I think it's partly business mix. But can you help us about forecasting what you think is normal in this kind of environment? Should provision levels stay kind of elevated in this range? Or do you expect movement either way?
I was looking at some of this -- Chris, if you just go back over the last 5 or 6 years and look at, for example, ROA, our ROA is running kind of top quartile of the KRX over that window. And our net charge-offs were maybe 10 basis points higher than kind of the median for KRX. So we like the trade of much higher, consistently higher earnings in that performance. And where is it going to end this year? If you said 25 basis points of charge-offs, plus or minus, that's probably how we think about it for this year and as we said at the current level of provision at current reserve levels staying stable, slightly increasing.
We think we can do that and have a really good year on the earnings side.
I would now like to turn the call over to Archie Brown for closing remarks.
[ Lendy ], thank you. I want to thank everybody for joining today's call and hearing about our results in the fourth quarter and the full year, we really are proud of the results, and we're excited about 2024.
We look forward to talking to you again next quarter. Have a great day and weekend. Thank you.
This concludes today's call. You may now disconnect.