First Financial Bancorp (FFBC) 2019 Q1 法說會逐字稿

Good day, everyone, and welcome to the First Financial Bancorp's First Quarter 2019 Earnings Conference Call.

(Operator Instructions) And please note that today's event is being recorded.

I would now like to turn the conference over to Scott Crawley, Corporate Controller.

Please go ahead.

Thank you, William.

Good morning, everyone.

And thank you for joining us on today's conference call to discuss First Financial Bancorp's first quarter 2019 financial results.

Participating on today's call will be Claude Davis, Executive Chairman; Archie Brown, President and Chief Executive Officer; Jamie Anderson, Chief Financial Officer; Tony Stollings, EVP Commercial Banking; 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 statements disclosure contained in the first quarter 2019 earnings release as well as our SEC filings for a full discussion of the company's risk factors.

The information we provide today is accurate as of March 31, 2019, 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 and thank you for joining us on today's call.

Yesterday afternoon we announced our financial results for the first quarter.

Before I turn the call over to Jamie to discuss those results in greater detail I would like to say a few words regarding our performance.

For the quarter we achieved adjusted earnings of $0.48 per share, a 1.38% return on average assets, a 16.45% return on average tangible common equity and also achieved a sub-52% efficiency ratio when adjusted to remove merger related items.

These measures reflect the $0.08 per share after-tax impact from the credit loss in our franchise-lending portfolio.

Aside from the credit loss, we're pleased with our overall performance, which marks our 114th consecutive quarter of profitability.

Our results reflect continued increases in loan origination activity across our commercial and investment commercial real estate business lines, stable net interest margin and disciplined expense management.

Core banking trends continue to be positive and loan origination activity, generally new commitments, increased to its highest level since the merger.

However, growth in our loan portfolio was offset by continued payoff headwinds within our commercial construction portfolio.

We were also pleased with modest deposit growth during the quarter as increases in time deposits offset seasonal declines with our business and public fund clients.

Our core net interest margin remains strong despite the decline in purchase loan accretion and the loan prepayment fee volatility that we often see in our commercial finance unit.

The decline in other fee income categories reflects seasonally low trends that negatively impact deposit service charge and bank card revenues.

Our sub-52% efficiency ratio continues to be a bright spot although we saw a modest expense increase during the quarter when adjusted for merger related items largely driven by seasonally high personnel benefits and occupancy expense.

In response to the previously disclosed franchise loss, we've added Slide 14 to our presentation.

We have a 10-year history in the business of lending to quick serve restaurant franchisees within well-regarded national brand concepts in the contiguous 48 states.

But I think the proven operators with appropriate capitalization is for 3 primary purposes: development of new stores, remodeling of existing stores and acquisition.

Our dedicated team of sales, underwriting and servicing experts has extensive experience and in-depth knowledge with the specialty lending space.

Our management team follows a disciplined process for overall concept reviews, annual reviews of each borrower and ongoing monitoring of the financial performance and sales trends.

Franchise portfolio is quite granular with an average relationship size of $3.4 million with our largest exposure being $17.5 million.

$518 million of the total $540 million portfolio is internally rated as pass.

With $6.8 million of substandard nonaccrual classification being recently incurred charge off with another $5.3 million expected to pay off in the third quarter.

The remaining $9.4 million rated as special mention is isolated to 3 different relationships across 3 different concepts.

While we're disappointed with the specific loss reported for the quarter, our overall outlook for credit remain stable as our underlying markets remain healthy, providing continual opportunities for growth.

With that, I'll now turn the call over to Jamie to discuss further details of our first quarter results.

And then after Jamie's discussion I'll wrap up with some forward-looking commentary and closing remarks.

Thank you, Archie.

And good morning, everyone.

Slides 3 and 4 provide a summary of our first quarter 2019 performance.

Given the large credit loss, results did not reflect our usual standard.

However, we were pleased with our overall performance, including a strong net interest margin and our ability to effectively manage expenses.

Our profitability metrics remained solid and above the median of our peer group, even with the elevated provision expense related to the franchise charge off.

On Slide 5 we provided a reconciliation of our GAAP earnings to adjusted earnings, highlighting items that we believe are important to understanding our quarterly performance.

For the first quarter, adjusted net income was $47.3 million or $0.48 per share, which primarily excludes merger-related costs.

As showed on Slide 6, these adjusted earnings equate to a return on average assets of 1.38% and a return on average tangible common equity of 16.5%.

Further, our 51.7% adjusted efficiency ratio reflects continued diligence in managing expenses subsequent to the merger.

Turning to Slide 7. Net interest margin on a fully tax equivalent basis declined 11 basis points in the first quarter to 4.10%.

The decline was primarily driven by fewer loan fees and an expected decline in purchase accounting accretion during the period.

Basic net interest margin was flat compared to the linked quarter as the positive impact on asset yields was offset by higher funding costs and changes in both asset and funding mix during the quarter.

As shown on Slide 8, the yield on securities increased 14 basis points, meeting the impact from a 4 basis point decline in loan yields and a 10 basis point increase in our cost of deposit.

The decline in loan yields was driven by fewer loan fees and lower purchase accounting accretion.

Similar to the fourth quarter, end-of-period securities balances rose in response to slower loan growth as we continue to manage the size and composition of the investment portfolio relative to overall balance sheet trends.

Slide 9 depicts our current loan mix and balance sheet shifts -- and balance shifts compared to the linked quarter.

End-of-period loan balances were relatively unchanged as increases in ICRE and mortgage loans were offset by declines in C&I and small business banking.

However, we remain optimistic regarding future growth potential as loan origination activity increased 8% over the linked quarter, surpassing our previous post-merger highs.

Slide 10 shows the mix of our deposit base as well as the progression of average deposits from year-end.

Average deposit balance -- average deposit balances increased by $18 million as retail and brokered CD growth outpaced seasonal declines in public funds and business DDA.

While we are confident in our ability to manage deposit pricing over time, we do anticipate some competitive headwinds, which could negatively impact net interest margin in the near term.

Slide 11 depicts our asset quality trends for the last 5 quarters.

As Archie previously mentioned, credit quality metrics were negatively impacted by the isolated franchise charge off resulting in net charge offs of 64 basis points as a percentage of total loans.

Given the isolated nature of the franchise charge off and flat loan balances, the loan loss reserve was flat compared to the fourth quarter, both in dollars and as a percentage of loans, while provision expense was sufficient to cover net charge offs.

Finally, as shown on slides 12 and 13, capital ratios continue to expand during the period and remain in excess of our stated targets.

While we were not actively repurchasing shares during the quarter, we will continue to evaluate capital strategies and deployment opportunities that support the company's planned growth while delivering appropriate shareholder returns.

I'll now turn it back over to Archie for some comments on our performance since the merger and second quarter outlook.

Thank you, Jamie.

Before I move into the forward-looking commentary I want to recognize our first anniversary as a combined company and take a brief moment to review the merger successes that we've achieved to date.

As seen on Slide 15, our performance since the merger has been exceptional, resulting in a 1.58% return on average assets, a nearly 20% return on tangible common equity and a 51% efficiency ratio when adjusted to remove merger related and nonoperating items.

The earnings power of our high-performing company has enabled us to build significant capital with $1.1 billion in tangible common equity.

Total capital levels of $140 million is above our internal targets, and a $0.44 increase in tangible book value from pre-merger levels.

Turning to our forward outlook.

We believe that we are well positioned for continued success over coming quarters as can be seen in our growth strategies and outlook on slides 15 and 16.

Although we've fallen short of our loan growth expectations thus far, given continued momentum in our loan originations we remain optimistic in our ability to grow the loan portfolio this year.

We expect loan balances to increase by low to mid-single digits on an annualized basis for the second quarter of 2019.

Long term, we target mid to high single-digit growth given the investments we've made in talent, our core operating markets and our comprehensive product offerings.

Excluding the impact of purchase accounting and loan prepayment activity, we expect net interest margin to be slightly down over the near term, driven by lagging deposit pricing pressures.

Assuming no further fed actions, this impact will likely wane over the coming quarters, which still poses a risk to the net interest margin.

As stated earlier, our near-term credit outlook is stable.

We expect fee income to rebound and be in the range of $29 million to $31 million over the next quarter as deposit service charges, bank card interchange and mortgage revenue seasonally increase.

Of note will be the decline in interchange income over the back half of 2019 due to the lower rates required by Durbin.

With respect to expenses, we continuously focus on efficiency even while making strategic investments to support the long-term success of our business.

We expect expenses to slight -- to increase slightly to a range of $77 million to $79 million and anticipate an efficiency ratio in the 50% to 52% range for the next quarter.

Our strong capital levels and earnings consistency provide flexibility for internal capital deployment strategies, while still retaining capital sufficient to support potential M&A activity.

In addition to the common dividend increase and share buyback actions discussed in the prior quarter, we are interested in strategic acquisitions of fee-based businesses, particularly in wealth and capital markets.

(inaudible) yields that meet our enterprise growth goals to either strategically fit into our current market footprint or other adjacent markets remain attractive.

Overall, the company remains well positioned to grow organically and to take advantage of our strong capital position by deploying through other growth opportunities that meet our objectives.

This concludes the prepared comments for the call.

We'll now open up the call for questions.

(Operator Instructions) And our first questioner today would be Scott Siefers with Sandler O'Neill.

I guess the first question I want to ask, Archie, was just on loan growth.

So we were sort of in a position where average balances were flat to down towards the end of last year.

Now up just slightly, it looks like a bit more acceleration in the first quarter.

But just curious if you can provide a little more color on sort of visibility to that acceleration.

In other words, anything that would suggest prepayments begin to subside.

And then what's your best guess on sort of how long it takes to bridge the gap between sort of a low to mid-single digit expectation here in the near term and then the longer term mid to high single-digit aspiration?

Yes, Scott, thanks.

I mean a little more color.

We talked about our commitments continuing to move higher each quarter.

And they grew a little over 8% in the last quarter from the prior quarter.

And as I was looking back over it, on the commercial banking side, C&I side, our commitments were up about 30% over Q4.

Our ICRE commitments were up, the new commitments were up 50% over the prior quarter.

So we're seeing some pretty good overall activity.

Q1 on the C&I side we did have some, several of our large clients have some revolver pay downs that we would expect to start drawing back up for the rest of the year.

And we'll continue to see we believe origination activity.

That momentum will move up.

On the ICRE side, really having record-level commitments at this point.

And we think Q1 was -- we think Q2 will continue to be along that trend line.

So we believe really for us it's watching the overall payoff side, especially related to the construction book and looking to see that it would wane over some time.

We think that starts to happen this quarter and into the balance of the year.

And as that happens, we believe we'll start to see stronger growth.

We're seeing a little bit more this quarter.

And then as we get in the back half with the momentum in our originations and a little slowdown in payoffs we think that will more to the mid-single digits.

Okay.

Perfect.

That's good color.

Thank you.

And then Jamie, just wanted to ask really quickly, as you look at the core margin, expected a little more pressure here in the second quarter.

Just wondering if you could talk about the puts and takes, is that primarily going to come from pressure on deposit costs that you sort of articulated during your comments?

Or are loan fees a factor?

Just curious for the overall things that you're thinking about as you do the outlook.

Yes, the primary driver of that is absolutely on the funding side.

We saw from the -- in the third quarter to the fourth quarter, fourth quarter to the first quarter about 9, 10 basis points of deposit cost increases.

And we expect that to come down, but we're still seeing pressure on the deposit side and -- but we think it's about half of that.

So deposit costs going up 4 or 5 basis points.

And that's really the driver of that, of the entire pressure on the margin there.

And we're really seeing that, Scott, I would say we're really seeing that on the -- in that -- in the areas of the highly rate-sensitive accounts, we're talking money markets, CDs and public funds.

And our next questioner today will be Nathan Race with Piper Jaffray.

Coming back to the discussion on the core margin going forward.

Just curious within the context where the weighted average rate on new loan production was in the quarter relative to the portfolio yield, around 537, just trying to get a sense of with the fed on hold do kind of loan yields kind of stagnate around their current levels going forward?

Yes.

So the one thing we did look at -- when you look at the newer loan yields versus what we are, the roll-off yield, that differential is about 20 basis points to 30 basis points positive.

But the, I would say given the fact of the gross loan yield with purchase accounting, the new loan yields, that's about a push given based on the -- what we -- our new rate going on versus the existing portfolio rate.

Okay, got it.

That's helpful.

So I guess in kind of thinking about the core NIM trajectory in the back half of the year, just given the positive differential on loans coming on and so forth, should we expect some margin stability with maybe some moderation deposit pricing pressures with the…

Correct.

Yes, correct.

I would say -- so I think we have 1 or 2 quarters here where we have that catch up for the lag and deposits.

We'll definitely see that I think in the second quarter.

We'll have to look at the market and the competitive pressures on deposits in the third quarter.

But we see that more stabilizing in the back half of the year for sure.

Okay.

Got it.

That's helpful.

I appreciate that.

Thanks, Jamie.

And then if I could just ask you one more on the back to -- I'm sorry on the franchise relationship that was charged off in the quarter.

I'm just curious if anything has changed in terms of your review process and so forth within that group.

Just curious if there's any notable lessons to be learned to be applied within this group going forward?

Yes, Nathan.

This is Archie.

Yes, as you can imagine, we have spent some time evaluating that credit and what happened and could we do something different in the future.

And my best summary of that is this was a longer-term borrower that we had a good relationship for more than 5 years.

And I think sometimes you can get comfortable in a relationship like that and maybe give the benefit of the doubt a bit longer than you should.

And I think when you're doing enterprise value lending, which is really what we do in the franchise business, when we start to see signs of stress, we've got to be acting on it immediately and not relying so much on the longer-term competence of that relationship.

So I think the lesson there is we need to act quicker when we see some weakness occurring.

And our next questioner today will be Jon Arfstrom with RBC Capital Markets.

Question on the provision.

In your outlook you talk about a stable credit outlook and I just looked back to the model and is the message the provision goes back to the type of level maybe we've seen over the last 4 or 5 quarters, somewhere in that range?

Yes, Jon, it's Jamie.

So that would, yes, provision would go back down to those levels you saw pre first quarter, so ex the $10 million obviously.

So yes, so in that essentially covering charge offs and 80 basis points to 100 basis points of the –- of any growth.

Okay, that helps.

And then Slide 7 on the margin.

I know this is for you, Jamie, it's not an easy question to answer, but we've talked about the core margin, you have the purchase accounting accretion and loan fees.

How do you want us to think about that?

I mean, I can see averages for it.

And we're all focused on the core, but how do you want us to -- anything you want to flag this quarter for example or prior quarter?

Yes So I mean if you look on Slide 7 that we have where we break the margin out, our core margin really fourth quarter to the first quarter was relative -- what we consider our core margin was relatively flat.

So kind of just the pure spread.

I mean if you look at the loan fee portion, the contribution for that, it can be volatile.

So we got in the fourth quarter of '18 we got a fairly significant prepayment fee.

And that boosted the margin a little bit in the fourth quarter.

It can be volatile.

So that is -- that's -- and it came down to one of its lowest levels in the -- that we've had over -- well, the lowest level that we've had in the last 5 quarters.

In the first quarter of '19 it only contributed 11 basis points.

So that -- that's going to bounce around a little bit.

But typically that's going to average in that 13, 14 basis point contribution level.

And then in terms of purchase accounting, we -- the model would dictate purchase accounting is 20 basis points in the second quarter and then that goes down by 1 basis point to 2 basis points each quarter going forward.

Okay, good.

That's very helpful.

And then one quick follow-up, Archie, for you on Scott's initial question.

You talked about the 8% increase in origination activity.

What would you attribute it to?

Is it your hiring, your new teams?

Is it the environment?

Is it change in approach?

Can you put your finger on that for us?

Yes, Jon.

I think if you go back to post merger, we have had -- we were still really replacing some bankers in some of our markets and adding bankers and markets.

And I think they're just getting in place and we're starting to see some momentum.

We made a few other leadership changes and shifts in the back half of the year as well.

So all that I think is just starting to take hold and I believe we continue to build momentum.

(Operator Instructions) And our next question will be Chris McGratty with KBW.

Archie, maybe a question on capital.

With loan growth kind of treading water for the past few quarters but your ROE pretty high you guys are building capital or rebuilding it pretty quickly.

In terms of the buyback, is it a certain level in the stock that's preventing you from doing it?

Or maybe it's just that you'll start?

Or is it kind of more optimism that you might be closer to something either inorganic on the fee side or the bank side?

Chris, I think part of it was timing in the first quarter.

If you think about, at one point the stock rebounded nicely and got higher.

And at the point that it did it was probably little higher than we really wanted to go into the market.

And then as we got later in the quarter and the stock started to come back down, we were more on a blackout situation, we couldn't really do that much in terms of take action.

So it's more of a timing thing at the point.

We have some view about where we think we would be in the market.

And it probably does depend mostly on where that price is, would dictate when we come in.

Okay.

But as we stand today kind of you got the credit issue kind of behind you.

Would this be a level kind of -- you have pulled back from kind of the high 20s to the kind of mid.

Is this a level where it's reasonable to assume that you would consider picking away at it?

Or is it have to be kind of more in a market where the kind of the banks roll over again like it did in the fourth quarter?

Kind of where we are maybe on the higher side, but it's still probably in the range of something we would consider doing.

We get back to where we were a couple months ago.

We probably would then start to get too high again.

And then we would balance that with what else are we evaluating and looking at.

Again, we have -- we do have -- we outline here our desire to try to make some acquisitions and we continue to work on that.

Don't know when that may occur yet, hopefully this year, but we'll balance that.

But I would tell you we're kind of on the high end of the range.

We would consider doing something around the buyback side.

Okay, that's helpful.

And on the kind of the deal front.

I saw you included the comment about fees, fee income wealth management, and you talked about that last quarter.

On the bank side, now that you've gotten the scale that you need, that beyond $10 billion, is there a change at all in how you're thinking about targets?

Could you consider something small because you don't need to get through that inefficiency through $10 million?

Are there new markets that you need to get into or deepen existing markets?

Any help on the bank side would be great.

Sure.

Yes, I think, so we continue to say if we can find a banking company that we think really strengthens our market share in one of our metros, that's probably objective number one.

But I would say we would consider smaller deals if they add some sort of strategic value in a small market somewhere or they've got some niche.

I would also say that we have been thinking more about bank acquisition and whereas before we probably have been more focused on in-market.

I think we are evaluating does it make sense to consider more adjacent market as well.

And I think we probably would have more interest to look at some thinking companies in adjacent markets that we think are the right one.

So we're probably broadening that a little bit from where we were a year ago.

And I think maybe there are opportunities like that.

Okay, that's helpful.

And then Jamie, one quick one on you -- for you.

Expectations for deposit growth, maybe kind of the comment on what you're trying to do with the investment portfolio.

Some of your peers are lengthening duration.

You guys haven't really put too much growth in the security stuff.

But any kind of thoughts on securities management and duration risk, that'd be great.

Yes.

It obviously depends on timing and magnitude of loan growth going forward and the – and how the competitive nature around the funding side.

But typically I think going forward here you'll see the securities portfolio flat to potentially down.

And I don't see us necessarily doing anything, any major shift in duration and extending that out.

But I think balance wise, I think you would see that flat to potentially down.

And this will conclude our question-and-answer session.

I would now like to turn the conference back over to Archie Brown for any closing remarks.

Thank you, William.

We really appreciate you guys being on the call today.

We are overall -- again overall pleased with results and we look forward to what we do this quarter.

Thank you for your interest.

Have a good day.

And the conference has now concluded.

Thank you all for attending today's presentation.

And you may now disconnect your lines.