First Financial Bancorp. (NASDAQ:FFBC) Q2 2025 Earnings Call Transcript

First Financial Bancorp. (NASDAQ:FFBC) Q2 2025 Earnings Call Transcript July 25, 2025

Operator: Thank you for standing by, and welcome to the First Financial Bancorp Second Quarter 2025 Earnings Conference Call and Webcast. [Operator Instructions] I’d now like to turn the call over to Scott Crawley, you may begin.

Scott T. Crawley: Good morning. Thank you, Rob. Good morning, everybody, and thank you for joining us on today’s conference call to discuss First Financial Bancorp’s 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. Additionally, please refer to the forward-looking statement disclosure contained in the second quarter 2021 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, 2025, and we will not be updating any forward-looking statements to reflect facts or circumstances after the call. I’ll now turn it over to Archie Brown.

Archie M. 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 second quarter, and I’m thrilled with our performance this quarter. We achieved record revenue of $226.3 million, which represents a 5% increase over the same quarter 1 year ago, and drove adjusted earnings per share of $0.74, a return on assets of 1.54% and return on tangible common equity of 20%. The company’s industry-leading profitability was once again driven by a robust net interest margin. Loan growth was 2% on an annualized basis, and we were pleased with broad-based growth in most portfolios apart from commercial real estate, which declined due to higher payoffs.

Q3 scheduled maturities in the IC portfolio are lower, and we expect higher overall loan growth in the second half of this year. We recorded adjusted noninterest income of $67.8 million in the second quarter, which was an 11% increase over the linked quarter and a 10% increase over the second quarter of 2024. Growth in fees was broad-based with mortgage, bankcard, leasing business and foreign exchange income, all increasing by double- digit percentages over the linked quarter. We were also pleased with our expense management, with adjusted noninterest expenses increasing 1% compared to the first quarter. Excluding leasing business expenses, which continue to increase as our operating lease portfolio grows, adjusted noninterest expenses increased by less than 2% on a year-over-year basis.

Asset quality was stable for the quarter. Net charge-offs declined 15 basis points from the first quarter to 21 basis points of total loans, and classified asset balances were relatively flat. Our outlook for asset quality remains positive, and we expect net charge-offs to be in the 20 to 25 basis points range for the remainder of this year. We’re pleased with the strength of our capital levels. Regulatory ratios are very strong, and tangible common equity has continued to grow, increasing 16% over last year to 8.4%. Tangible book value per share increased to $15.40, which was a 4% increase from the linked quarter and 19% over the same period last year. We’re also pleased to announce that our Board of Directors approved a $0.01 or 4.2% increase in the common dividend of $0.25.

The dividend payout remains approximately 35% of net income and continues to provide an attractive yield. With that, I’ll now turn the call over to Jamie to discuss these results in greater detail. After Jamie’s discussion, I’ll wrap up with some additional forward-looking commentary and closing remarks.

James Michael Anderson: Thank you, Archie. Good morning, everyone. Slides 4, 5 and 6 provide a summary of our most recent financial results. The second quarter results were excellent and included strong earnings, record revenues driven by a robust net interest margin, solid loan and deposit growth and declining net charge-offs. Our net interest margin remains very strong at 4.05%, which represented a 17 basis point increase from the first quarter. Funding costs declined 12 basis points, driven by a 13 basis point decrease in deposit costs, while asset yields increased 5 basis points. Loan balances increased modestly during the quarter as growth in C&I, consumer and our specialty businesses offset elevated prepayments in the ICRE portfolio.

Average deposit balances increased $114 million due primarily to a seasonal influx in public funds and higher noninterest-bearing deposits. We maintained 21% of our total balances in noninterest-bearing accounts and remain focused on growing lower-cost deposit balances. Turning to the income statement, second quarter fee income was solid, led by double-digit percentage growth in mortgage and bankcard income. Additionally, our leasing and foreign exchange businesses had good quarters. Noninterest expenses increased slightly from the linked quarter due to increases in marketing expenses and incentive compensation, which is tied to the company’s overall performance. Our efficiency efforts continue to impact our results positively, and we expect to see further benefits in the coming periods.

Our ACL coverage increased slightly during the quarter to 1.34% of total loans. We recorded $9.8 million of provision expense during the period, which was driven by net charge-offs and loan growth. Overall asset quality trends were stable. Net charge-offs declined 42% to 21 basis points on an annualized basis, while NPAs as a percentage of assets increased slightly during the period. Classified asset balances were relatively unchanged during the period of 1.15% of total assets. From a capital standpoint, our ratios are in excess of both internal and regulatory targets. Tangible book value increased $0.60 to $15.40, while our tangible common equity ratio increased 24 basis points to 8.4%. Additionally, our Board of Directors elected to increase our common dividend during the period.

Increasing the common dividend is further proof of our commitment to deliver value to our shareholders. 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 $70.6 million or $0.74 per share for the quarter. Noninterest income was adjusted for gains on the sales of security — of investment securities, while noninterest expense adjustments exclude the impact of acquisition and efficiency costs and other expenses not expected to recur. As depicted on Slide 8, these adjusted earnings equate to a return on average assets of 1.54% and a return on average tangible common equity of 20% and a pretax pre-provision ROA of 2.14%. Turning to Slides 9 and 10, net interest margin increased 17 basis points from the linked quarter to 4.05%.

Asset yields increased 5 basis points compared to the prior quarter as loan yields increased 3 basis points and the yield on the investment portfolio increased 9 basis points. Total funding costs declined 12 basis points, driven by a 13 basis point decrease in deposit costs compared to the linked quarter. Slide 12 illustrates our current loan mix and balance changes compared to the linked quarter. Loan balances increased 2% on an annualized basis, with growth in C&I, consumer and specialty businesses outpacing a decline in ICRE, driven by elevated prepayment activity. Slide 14 shows our deposit mix as well as the progression of average deposits from the linked quarter. In total, average deposit balances increased $114 million during the quarter.

There was a seasonal influx in public funds, and we had solid growth in noninterest-bearing deposits, while on the consumer side, growth in retail CDs helped to offset declines in money market and interest- bearing demand accounts. Slide 15 illustrates trends in our average personal, business and public fund deposits as well as the comparison of our borrowing capacity to our uninsured deposits. On the bottom right of the slide, you can see our adjusted uninsured deposits were $3.8 billion. This equates to 27% 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 16 highlights our noninterest income for the quarter.

Total adjusted fee income was $68 million, with leasing, mortgage and interchange having stronger growth quarters. Noninterest expense for the quarter is outlined on Slide 17. The core expenses increased $1 million during the period. This was driven primarily by higher incentive compensation tied to the company’s strong results as well as increases in marketing expenses. As I mentioned earlier, our ongoing efficiency initiative is positively impacting our results, and we expect this work to continue in the back half of 2025. Turning now to Slides 18 and 19, our ACL model resulted in a total allowance, which includes both funded and unfunded reserves of $176 million and $9.8 million of total provision expense during the period. This resulted in an ACL that was 1.34% of total loans, which was a slight increase from the first quarter.

Provision expense was primarily driven by loan growth and net charge-offs, which were 21 basis points for the period. Overall credit trends were stable with a 42% reduction in net charge-offs and classified asset balances totaling 1.15% total assets. As expected, our ACL coverage was relatively flat compared to the linked quarter, 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 flat or increase slightly in future periods as our model responds to changes in the macroeconomic environment. Finally, as shown on Slides 20 and 21, capital ratios remain in excess of regulatory minimums and internal targets. The TCE ratio increased 24 basis points to 8.4%, and our tangible book value per share increased 4% and to $15.40.

Our total shareholder return remains strong, with 33% 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. I’ll now turn it back over to Archie for some comments on our outlook. Archie?

Archie M. Brown: Yes. Thanks, Jamie. Before we end our prepared remarks, I want to comment on our forward-looking guidance for the third quarter, which can be found on Slide 22. Loan pipelines remain strong. Over the second half of the year, we expect easing payoff pressures combined with higher production to accelerate our growth. Specific to the third quarter, we expect loan growth to be in the low to mid-single digits on an annualized basis. Core deposit balances are expected to be stable over the next quarter, excluding seasonal deposit outflows. Our net interest margin remains very strong and industry leading, and we expect it to be in the range between 4% and 4.05% over the next quarter, assuming a 25 basis point rate cut in September.

We expect our credit cost to approximate prior-quarter levels and charge-offs to be in the 20 to 25 basis point range for the third quarter, while ACL coverage as a percentage of loans is expected to be stable to slightly increasing. We anticipate fee income to be between $67 million and $69 million, which includes $14 million to $16 million of foreign exchange and $19 million to $21 million for leasing business revenue. Noninterest expense is expected to be between $128 million and $130 million and reflect our continued focus on expense management. We’re excited about our recent announcement to acquire Westfield Bank in Northeast Ohio and are actively engaged in the integration process. Appropriate applications have been filed with our regulators, and we continue to expect approval and closing to occur this year.

In summary, we’re very pleased with our second quarter and year-to-date financial performance, and we remain very excited about our outlook for the remainder of 2025 and beyond. We’ll now open up the call for questions. Rob?

Q&A Session

Operator: [Operator Instructions] Your first question comes from the line of Daniel Tamayo from Raymond James.

Daniel Tamayo: Maybe we start just on the margin, but specifically on the funding side. So the second quarter, you really had — you showed a good ability to continue to lower deposit costs. Even non-maturity deposit costs came down pretty meaningfully. So just curious, kind of how you see that continuing to play out here as we go forward? And where maybe we — you would see bottom in terms of funding costs, absent any kind of rate cuts?

James Michael Anderson: Yes. I think — Daniel, it’s Jamie. I think we’re pretty close to that at this point. And when we look out over the next — really the next quarter, we see deposit costs just coming down slightly now like 2 or 3 basis points. And then — so with our outlook — included in our outlook is a rate cut in September and a rate cut in December. So as we get into fourth quarter that we see deposit costs maybe coming down a little bit more than that. But I think we’re kind of close — with rates stabilizing here, I think we were — we were maybe a quarter behind some of our competition in terms of lowering deposit costs and really kind of ringing out those last few basis points. So I think you’ll see that 12 or 13 basis point drop in our deposit costs, maybe a little bit more than the peer group, and that’s that lag that I was referring to.

So when we look out here in the third quarter, included in that margin outlook in that 4 to [ 4 05 ] range is about a 2- to 3-point drop in the deposit costs.

Daniel Tamayo: Okay. So given that and then the fact that your asset yields are already pretty strong, loan yields up towards — pushing towards 7, is it fair to say you think that the 4 to [ 4 05 ] will be a peak for you guys and then maybe bounce around that level, again, kind of before we consider what happens with rate cuts?

James Michael Anderson: That’s right. Yes. When we — again, when we look out and kind of start bleeding in the rate cuts into our model, and we said this kind of all along that the slow kind of methodical 25 basis point rate cuts, we can manage through those. Obviously, like you mentioned, we’re asset sensitive. So it’s going to impact the margin negatively. But those kind of quarterly 25 basis point rate cuts impact the margin by about 5 or 6 basis points each.

Daniel Tamayo: Okay. All right. Helpful. And then just a cleanup question on the deposit outflows. The seasonal deposit outflows that you referenced that the guidance excludes, what would you expect those to be in the third quarter?

James Michael Anderson: Yes. The — on average, they’re about $100 million. So we get a little — we get a pop in the second quarter. And these relate to Indiana property taxes at our public funds. So those come in May and November. And in May is kind of a bigger pop as some people pay the full year. So we will — we see that 100 to 150 basis points — $150 million jump in public funds in the second quarter. Those flow out — those come in kind of mid — early May start to flow out. So on average, we see that it’s roughly $100 million. And those flow out towards the end of the quarter. So quarter-to-quarter, down $100 million.

Operator: Your next question comes from the line of Terry McEvoy from Stephens Inc.

Terence James McEvoy: Archie, in the prepared remarks, you talked about the ongoing efficiency initiative producing results, and you can see that in the overall efficiency ratio. Can you just dig a little bit deeper and talk about kind of where across the company or within the bank, you’re really focused on cutting costs and driving that operating leverage?

Archie M. Brown: Yes, Terry, we’ve been at this more than a year now. And we really are going through the whole bank to do the work. So literally looking at every function, every department. We like to say we’re kind of going need to need with our associates in understanding the task and looking for ways to improve the processes that they’re using. In some cases, it’s technology. In some cases, it’s just some process redesign. So I would say, we’re probably 80% of the way through the company at this point in terms of the reviews that we’ve done and the work that we’ve done. And then there’s probably 20% to go over the next several quarters. There’s some technology in a couple of these areas we’re implementing in the back half of this year. And then we’ll probably do some final work as we get into early 2026. And then from there, I think we view the recently announced acquisition will also provide some additional help in terms of efficiency as we go deeper into 2026.

Terence James McEvoy: And then as a follow-up, can you just talk about the impact the payoffs are having on loan growth? I’m trying to get a sense of more normalized loan growth. I know it’s low to mid-single digits over the near term, but that includes payoffs, which are subsiding. So kind of ex payoffs, what’s that underlying growth?

Archie M. Brown: Terry, if you just had a — if you had a norm to think about for us, the way we think about this is, yes, 6%, 7% loan growth over the longer term is kind of how we think and how we’ve been planning. We have seen, as we’ve talked about some higher level of payoffs, specifically in our commercial real estate group; what we’re seeing for Q3 is scheduled maturities are lower, a little bit higher level of production coming for the quarter. Commercial real estate in Q3 will probably — it probably won’t grow. We’re not forecasting that particular part of the book to grow in Q3, maybe slightly down, but it will be a lot better than what we’ve seen in the last couple of quarters. And what that will allow is the other areas that are have really good production, their growth will be more reflected and show through the overall company. So that’s why we’re taking it up a little bit in Q3. But longer term, 6% to 7% is how I think about it.

Operator: Your next question comes from the line of David Konrad from KBW.

David Joseph Konrad: Just real quick question on asset quality. It’s been really solid and admittedly, it’s off a really low levels, but we did see a little bit of a growth there in C&I in terms of the nonaccruals. So any color on that growth rate there would be great.

Archie M. Brown: Yes, David, Bill will cover that a little bit here.

William R. Harrod: Yes, absolutely. So our quarter-over-quarter increase in the NPAs is driven by downgrades of 2 commercial borrowers, one of which was significantly impacted by the tariffs. But recently, they have shown some improvement as the dust is settling and their impacts. The other relationship is a contract manufacturer, which is currently going through a sale process. We’ve taken the bulk of our expected charge-off this quarter with the remainder in reserve for — as the dust settles before the end of the year, and we expect a resolution by the end of the year.

David Joseph Konrad: Great. Okay. And then Jamie, I appreciate the asset sensitivity color, and I know Westfield is not a big asset change for you. But I just wondered if your asset sensitivity would change a little bit next year as you integrate that balance sheet.

James Michael Anderson: Yes. First of all, welcome to the call on your debut here. So yes, yes, yes, you’re doing a great job. No, I would say, of course, the size of this acquisition is relatively small, but — so they’re slightly liability sensitive. So — and obviously, then you got to kind of wash through here for a while some of the purchase accounting noise that takes place in the first couple of years. But overall, they’re going to help our asset sensitivity and bring us a little bit more closer to neutral. But again, obviously, the size of their earning asset base is roughly around 10%-ish of our earning assets. So it’s on the margin, but it does help, for sure.

Operator: [Operator Instructions] Your next question comes from the line of Karl Shepard from RBC Capital Markets.

Karl Robert Shepard: Just to start on loan growth real quick. I appreciate the comments on CRE trends. Are you guys signaling a consistent pace of growth in the other businesses? Or do you think that there’s, I guess, opportunity for acceleration there in the second half as well?

James Michael Anderson: Yes. This is Jamie, Karl. Yes. So what we’re really seeing is really just that headwind on the CRE side in terms of the payoffs and prepayments, some level of maturities. But the — and really in the other business lines, we’re seeing consistent growth. Now those business lines would have varying levels of growth. So like when you look at consumer, C&I, consistently on the C&I, we had a good quarter in the second quarter on the C&I side. But C&I, consumer are going to be — if we’re talking 5% to 7% loan growth, we’re getting kind of maybe the lower end from those types of businesses, and then our specialty lines will grow maybe in that 10% to 12% range. And when you blend it all together, it’s in that, call it, 7%, obviously, the specialty lines make up around 20% of the loan book.

Archie M. Brown: And Karl, what you’ll see typically in the back half of the year, Summit, their volume really strengthened, especially as we get into Q4. So they’ll ramp up more in the back half compared to the first half.

Karl Robert Shepard: Perfect. I love Slide 12. And then one quick one on the margin. Methodical cuts you guys could manage through, is it — can you just remind us a little bit of leading impact to asset yields, though, and then the deposits maybe catch up a half quarter later, is that fair? So just thinking about the timing of custom…

James Michael Anderson: Yes, that’s a good question. And so when we’re looking out and we have like the September cut, obviously, it doesn’t have a whole lot of impact for the third quarter. But as rates start to move down in anticipation of that cut, we will see our loan yields start to move down, maybe starting 30, 45 days in advance of that. And then you’re right. I mean we try to get in front of the deposit cost as much as we can. But that’s more — that’s obviously not contractual like the loan side is, and it’s more market competition-type base. So yes, typically, that will have a quarter lag on the deposit side. And that’s kind of what you saw here in the second quarter with us. And we tend to — given the fact that our margin is so high, we tend to we tend to lag the deposit side just to make sure we’re retaining balances more and are kind of on the side of liquidity and not bring them down and maybe have to readjust and bring them back up.

So yes. So you’ll see that lag on the deposit side typically with us.

Operator: And we have reached the end of our question-and-answer session. I will now turn the call back over to Archie Brown for some final closing remarks.

Archie M. Brown: Thank you, Rob. Thank you by for joining us on today’s call and tracking with us on our really great second quarter. We look forward to talking to you again next quarter. Have a great day and weekend. Bye now.

Operator: This concludes today’s conference call. Thank you for your participation. You may now disconnect.