First Financial Bancorp (FFBC) 2019 Q2 法說會逐字稿

Good morning, and welcome to the First Financial Bancorp Second Quarter 2019 Earnings Conference Call and Webcast.

(Operator Instructions) Please note this event is being recorded.

I'd now like to turn the conference over to Mr. Scott Crawley, Corporate Controller.

Mr. Crawley, please proceed.

Thanks, Ian.

Good morning, everyone, and thank you for joining us on today's conference call to discuss First Financial Bancorp's Second Quarter and Year-To-Date 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; and Tony Stollings, EVP Commercial Banking.

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 will 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 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 June 30, 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 second quarter.

Before I turn the call over to Jamie to discuss those results in greater detail, I'd like to make a few comments regarding our quarterly performance and recently announced acquisition of Bannockburn Global Forex.

Our second quarter results were very strong, reflecting continued top-quartile performance and marking our 115th consecutive quarter of profitability.

The quarter was highlighted by strong loan growth, exceptional fee income and disciplined expense management.

For the quarter, our adjusted performance metrics included earnings per share of $0.58, a 1.3% return on average assets, 18.9% return on average tangible common equity and a sub-51% efficiency ratio.

Core banking trends were positive with loan origination activity strengthening across many of our lending units and payoff pressures easing.

These complementary trends enabled us to grow loan balances by approximately 8% on an annualized basis.

Deposit growth was modest as seasonal public fund increases and retail CD growth more than offset declines in money markets and brokered CDs.

Our core net interest margin remained strong and in line with the range previously provided, despite continued headwinds from lagging interest-bearing deposit pricing pressures.

Aside from additional provision related to the workout of the franchise credit disclosed last quarter, credit costs were better than expectations and overall credit remained stable.

Our fee income performance was exceptional this quarter with growth of over 29% year-over-year driven by record client derivative fees and solid mortgage and bankcard income.

Our sub-51% efficiency ratio continues to be a bright spot, although we saw a modest expense increase during the quarter, even after adjusting for severance and merger-related items, largely driven by annual merit increases and performance-based incentives.

We're excited for the opportunity to partner with the very successful Bannockburn team, which will allow us to broaden the product offering to our clients, while also enabling us to provide banking services to their extensive customer base.

Bannockburn has become an elite performer in the foreign exchange transaction and advisory market.

The company primarily focuses on middle-market clients that have a need for tailored foreign exchange solutions.

We see significant synergies across our businesses and look forward to closing the transaction within the next quarter, which will signify another step towards our goal of constructing the best-in-class commercial bank.

Additionally, we were pleased to announce that First Financial's Board of Directors has approved an increase in the quarterly shareholder dividend to $0.23 per share, which in addition to the Bannockburn acquisition reflects our commitment to deploying capital in a way that sustains financial and operating success, while also directly rewarding shareholders.

Although the announced acquisition impacted potential share repurchase activity during the quarter, our strong capital levels provide the flexibility for further capital deployment opportunities moving forward.

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

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

Jamie?

Thank you, Archie, and good morning, everyone.

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

As Archie mentioned, we were pleased with our performance as loan growth, net interest margin, fee income and efficiency all met or surpassed our expectations.

Our profitability metrics remained strong in relation to our peer group.

And with a tangible book value of $12.79, we are on pace to earn back the dilution from the MainSource merger well ahead of our modeling.

Slide 5 reconciles our GAAP earnings to adjusted earnings, highlighting items that we believe are important to understanding our second quarter performance.

For the quarter, adjusted net income was $57.4 million or $0.58 per share, which excludes severance and merger-related costs.

As shown on Slide 6, these adjusted earnings equate to a return on average assets of 1.63% and a return on average tangible common equity of 18.9%.

Further, our 50.3% adjusted efficiency ratio reflects our ability to appropriately manage expenses.

Turning to Slide 7. Net interest margin on a fully tax equivalent basis declined 6 basis points in the quarter -- in the second quarter to 4.04%.

The decline was primarily driven by higher funding costs and a greater number of days in the quarter.

Basic net interest margin declined 7 basis points compared to the linked quarter, as funding costs were impacted by a lag from rising interest rates and competitive pressures.

As Archie will discuss further, when he addresses our outlook, we expect further margin pressure in the back half of the year, mainly from a decrease in asset yields, given the expected Fed rate cuts and the impact on our loan portfolio, which is 58% variable rate.

As shown on Slide 8, the yield on securities declined 15 basis points and a 4 basis point increase in gross loan yields was offset by a 4 basis point increase in our cost of deposits.

The lower investment yields were driven by accelerated prepayments, lower reinvestment rates and the day count differential between the first and second quarters.

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

End-of-period loan balances increased $172 million, as ICRE and mortgage loan growth outpaced slight declines in C&I and small business banking.

While we remain optimistic regarding future growth potentials, we expect that pace to moderate a bit from second quarter results.

Slide 10 shows the mix of our deposit base as well as the progression of average deposits from the linked quarter.

Average deposit balances increased by $29 million, as public fund and retail CD growth outpaced declines in brokered CDs and money market accounts.

While deposit costs are still increasing, they have begun to moderate, and we expect overall cost to stabilize given the expected direction of interest rates.

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

Provision expense declined during the period, although it was a bit higher than expected, as we recorded $4 million of additional reserves, related to the franchise loan discussed in the first quarter.

Absent the single franchise loan, provision expense was sufficient to cover net charge-offs and account for loan growth during the period.

Classified and nonperforming assets, as a percentage of total assets, were relatively flat, while net charge-offs declined to 8 basis points.

Finally, as shown on Slide 12 and 13, capital ratios remain strong and are in excess of our stated targets.

Tangible book value per share increased 5% during the second quarter to $12.79.

While we were not actively repurchasing shares during the quarter, primarily due to the pending announcement of the Bannockburn acquisitions, we continue to evaluate capital strategies and deployment opportunities, such as additional M&A activity and dividend levels that support the company's planned growth while delivering appropriate shareholder returns.

I'll now turn it back over to Archie for some thoughts on our third quarter outlook and closing comments.

Archie?

Thank you, Jamie.

Before we end our prepared remarks, I want to comment on our forward outlook as shown on Slide 14.

We remain optimistic in our ability to maintain loan growth this year, given continued strength in our loan pipelines.

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

In the 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.

Regarding the net interest margin, projections will be largely dependent on the path that Fed takes moving forward.

Our outlook of 3.7% to 3.75%, excluding purchase accounting assumes the Fed cuts rates by 25 basis points later this month.

As always, the net interest margin can fluctuate depending on a variety of factors and we actually work to mitigate downward rate pressures on the asset side through disciplined deposit pricing management.

As stated earlier, credit quality is stable with a normalized provision covering charge-offs and accounting for loan growth.

Our individual loans can have a transitory impact from time to time.

We expect fee income to decline from our record levels in the second quarter and be in the range of $27 million to $29 million over the next quarter, as derivative fees moderate and interchange income declines after Durbin begins.

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 in the range of $77 million to $79 million, and anticipate an efficiency ratio in the 51% to 53% range for the next quarter.

Our strong capital levels and earnings consistently provide flexibility for capital deployment strategies.

Post-Bannockburn closing, we will evaluate our capital return strategies including share buybacks.

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.

Ian, we'll now open up the call for questions.

(Operator Instructions) Our first question comes from Scott Siefers, Sandler O'Neill.

Jamie, maybe the first question for you, just on the margin.

It looks like at the midpoint in the third quarter maybe 8 basis points or so of core margin compression.

I guess main puts and takes, as you're seeing for the third quarter.

And then as we were -- as we look -- maybe beyond the third quarter, is that 8 basis points representative of what would happen with each Fed rate cut, if the Fed were to do more?

Or would the impact be less, assuming deposit betas or deposit costs started to come back down?

Just would be curious to hear your thoughts.

Yes.

So for the third quarter, yes, so I would say, the impact in the third quarter would be slightly greater than what we would expect going forward.

But for that -- the main kind of items there, if you look at what's going to happen here in the third quarter, assuming we have a Fed -- 25 basis points Fed rate cut here at the end of the month would be -- you guys -- so we have -- so basically with us, if you look at about 50% of our loan book that flows in would move down that 25 basis point.

You're talking -- we had about, call it, a 10 basis point drop on the asset side and 2 to 3 basis points that we would pick up on the funding side in the third quarter.

And that's a, call it, 7 or 8 basis point drop there in the third quarter.

And then going forward, I mean we are projecting, given every 25 basis point cut in rates, it's where our balance sheet is, a 6 to 8 basis point drop in our net interest margin.

And just depending on how much we can -- the deposit competition, how much we can get in interim, manage rates, deposits and get those rates down, it would be on the lower end of that.

And potentially even lower than the 6 basis point pressure that we would see.

So -- but conservatively, 6 to 8 basis points for every 25 basis point drop.

Okay.

Perfect.

That's perfect.

And I appreciate it.

And then just as we look at the impact of purchase accounting adjustments, I guess vis-à-vis my own model, maybe you stayed a little more elevated than I would have thought.

But one, I could always be wrong, but then two, just to hear your thoughts going forward as well.

Yes.

So going forward, for the third quarter, we're projecting that to be, based on our model and expected prepays, 19 basis points for the third quarter.

And then that drops about 1 basis point to 1.5 basis point, every quarter there going forward.

Okay.

All right.

And then final question, maybe Archie, just a little more color on loan growth, I know pay-downs have been a factor in the past few quarters.

Just curious as you see it was the 2Q, as you sort of normalize back towards a more typical range, was that better originations, lower pay-downs, how did those dynamics work out?

Yes, Scott, thanks.

Our origination side was just a little bit stronger than Q1, it was our strongest quarter post-merger.

So we did see a slight tick up in originations for the second quarter, but the real -- the big impact was on the payoff side.

Payoffs drops by probably 25% from Q1.

And that's even -- and that was even down from Q4.

So a significant drop in payoffs.

And as we think about our outlook, I think we guided here to, kind of, mid-single digits.

We still see strong origination activity in Q3, but it was a little bit more of a tick-up in payoff balances in Q3.

Our next question comes from Chris McGratty of KBW.

Jamie, can I start with -- I just want to follow up on Scott's question on the margins.

I think you said 58% or 60% of the book floats.

Could you remind us at [6 30] the breakdown between PRIME and LIBOR and others?

Because it would seem, I would call it, you guys had a lot of LIBOR exposure.

So this quarter plus next quarter would suggest that you might be at the higher end of the compression, if the Fed moves.

And then over time, you may not feel as much pressure because you have kind of LIBOR leading and then you have the deposit repricing catch up.

So could you just review those numbers for us?

Yes.

So overall -- and I'm going to give you dollar amounts here as oppose to percentages.

But roughly $3.5 billion on the loan side -- between $3.5 billion and $4 billion is LIBOR-based and about $1.5 billion is PRIME-based.

Okay.

And then the 2 to 3 basis points...

Just so you know, Chris, we also have a -- about a $0.5 billion in the investment portfolio as well that is -- that floats as well.

And it is mostly indexed at 3-month LIBOR.

Okay.

It was -- so that was part of the decline in the securities yield this quarter?

Correct.

Yes.

Okay.

The 2 to 3 basis point, kind of easing of the funding costs that you're talking about if the Fed moves.

How do you feel, if we get more than 1 cut, the ability to increase the negative beta, if you will, on the deposits?

Like, what's -- can you go to like -- some banks have talked about like a 40% to 50% move but were also at a lower rate, interest rate to start with.

Any thoughts there?

Yes.

So the majority of that -- of the 2 to 3 basis points that we're projecting in the third quarter would be related to borrowing, that just move -- on the funding side that would move automatically.

So right now when you look at our CD book, we're close to where our -- where the runoff rate and new CDs is washing out.

But not quite there yet.

We're about 10 -- I would say we're about 10 basis points upside down in the, I would say, probably a couple of months away from that washing out.

And then -- so I think what you see is in subsequent -- given subsequent rate cuts, we'll start to see some -- the overall cost of our CD book is going to come down.

And then we can also take a look at the other -- like, money market accounts and just other interest-bearing deposit accounts and turn those rates as well, especially if rates come down further.

And then obviously, at some point, you hit a floor where you just can't bring those down anymore.

So there's a period in there where you can do that and then you hit the floor.

Got it.

Okay.

That's helpful.

Maybe last one for you all on capital.

You talked, in your prepared remarks, about not being able to buy stocks given the deal.

I guess 2 questions.

Number one, are you able to buy stock now that the deals has been announced and is the expectation?

Two, look at the buyback?

And secondarily, I think last quarter you talked about depository deals in Michigan or Ohio, maybe an update there of whether that might be a better use of capital given where valuations are.

Yes.

Chris, this is Archie.

Yes, we are in a position in the market, at least, be able to do buybacks this -- going forward this coming quarter.

It's certainly one of the key strategies that we'll be evaluating relative to other priorities as well in the coming quarter.

As we've said, we've got the capital flexibility, and assuming if it's kind of our analysis in terms of overall pricing, it's going to be one of the levers we'll evaluate closely.

With regard to acquisitions of -- I think our primary focus is still on trying to identify some additional fee-based businesses.

We've talked before about trying to get in the wealth space.

We continue to work hard there.

On the banking side, preference #1 is still to do something in market, in metros where we're headquartered.

We did say last quarter we would consider maybe something in some of the adjacent states.

But I can tell you there's really nothing close there in terms of what we're evaluating right now.

I think we're open to looking at some things.

But at this point, nothing that we see on the horizon.

Our next question comes from Terry McEvoy of Stephens.

Maybe just -- given the updated comments on the credit performance of the franchise portfolio last quarter, outside of the one credit that was in the press release you mentioned earlier.

Sure, Terry.

Yes, overall, we feel good about that portfolio.

The -- maybe just kind of give you a little bit of a rundown, we saw one credit during the quarter move from a watch status into an accruing TDR substandard status.

That's a large multi-concept operator that -- and it's really -- it's our only participation credit.

And we've worked with the lead bank and the borrower.

We don't think there's any loss in that credit.

And the problems in that credit is really related to the smaller portion of this concept, a smaller concept in this portfolio.

When -- we've pretty much done a deep scrub, deep dive into the portfolio.

We have, I think, maybe, 4 loans totaling around $11 million and special mention, one other small substandard accruing TDR, and that's about it.

So I think we feel better about the book now than we probably have in the last few quarters.

And then just as a follow-up, the client derivative fees, round up to, call it, $5 million last quarter.

Could you just talk about the size of those fees?

Is it -- will it be, call it, chunky going forward, where it could bounce anywhere between $2 million and $5 million just given activity in the quarter?

Yes.

Terry, it is kind of chunky.

I mean those fees can range from $40,000, $30,000, and then they can range on up to into the hundreds of thousands.

So from time to time, we'll get a very large one and then more often than not it's -- there's a smaller pool.

But in the quarter, we had 2 or 3 sizable ones that happened.

So we don't forecast that kind of level going forward.

Although we still think -- and given the interest rate environment, we still think derivative fees will be something that performs pretty well for us.

(Operator Instructions) Our next question comes from Nathan Race of Piper Jaffray.

Going back to Terry's question on credit.

I appreciate your commentary in terms of expecting stability going forward.

So is that fair to assume the provision line goes back to what we saw, perhaps, in the back half of last year.

S&P issues that we've seen tied to that one credit within the -- like, quick service portfolio.

Yes.

Nate, we feel pretty good.

If you just look at our charge-offs over the last year aside from that franchise credit, our charge-offs were averaging somewhere in that 15 basis point range.

And I think that's kind of how we view it, at least our current outlook.

So when you think about that plus loan growth, that's -- or maybe a 78% of loan growth.

That's kind of how we view provision kind of going forward.

Okay.

Great.

And if I could just ask one more related to the quarter.

And then it seems like the big challenge in NIM this quarter was the uptick in -- of -- in the cost.

And so I'm just curious, given the uptick in wholesale funding towards the end of the quarter.

Is it fair to assume that you guys are comfortable letting the loan deposit ratio rise from the 88% level that we see today?

Or are you guys looking to kind of keep that closer to 90%?

Or I guess, how should we think about overall balance sheet growth dynamics assuming you get to that kind of 4% to 6% loan growth target going forward?

Yes.

Nate, this is Jamie.

So -- yes, we do have some room in our loan-to-deposit ratio.

No, we can let that run a little bit and that can get into the -- somewhere in the low-90s, I think where we would be comfortable with that.

So yes, that could affect the -- obviously affect the funding mix a little bit and then have an impact on the margin.

And that's just dependent on what we see here going forward with loan growth.

But in that mid-single-digit range, that loan-to-deposit ratio could tick up a little bit.

(Operator Instructions) This concludes our question-and-answer session.

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

Thank you, Ian.

I want to thank everybody for joining our call today, and we look forward to talking to you again soon.

Have a nice day.

The conference is now concluded.

Thank you for attending today's presentation.

You may now disconnect.