Q2 2021 First Financial Bancorp Earnings Call
Turn on assets of 139% and.
And on efficiency ratio of 58, 4% after being adjusted for nonrecurring items.
The quarterly performance was bolstered by higher fee income and interchange and record revenue in wealth management in Bannockburn.
Additionally, provision recapture during the period positively impacted our results.
Driven by improved credit quality trends.
Which included declines in net charge offs and classified asset balances.
We're optimistic about the economic environment and expect further reductions in credit cost in the coming periods.
We are pleased with a 23% increase in loan originations for the quarter driven.
Driven primarily by our core commercial markets in addition to consumer and mortgage banking.
Loan payoffs accelerated during the quarter in almost all commercial banking areas with.
With larger payoff amounts in commercial finance and Icr's driving an overall reduction in core loan balances for the quarter.
Given the state of our loan pipeline, we expect originations to remain strong in the second half of the year. However, we also anticipate higher payoffs to continue due to the amount of liquidity in the market.
The second quarter was again very active for PPP loan forgiveness with $301 million in round, 1 and $41 million in round 2 pay offs.
Through quarter end, 86% of round, 1 and 13% of round 2 loans have been forgiven.
We expect the majority of round, 1 forgiveness payoffs to complete in the third quarter, while round to pay offs are expected to continue to flow in over the remainder of the year.
Average transaction deposits increased 18% on an annualized basis as clients continued to build liquidity.
From recent government government stimulus actions however, we.
We believe these balances may have peaked as we began to experience some outflows late in the quarter.
Our capital ratios remained strong in excess of both internal and external targets.
We also remained active in our share buyback program repurchasing over 1 million shares during the quarter.
When combined with the common dividend the share repurchases approximate a quarterly return to shareholders of 98% of adjusted earnings.
We anticipate further share buyback activity on the third quarter absent higher priority capital deployment alternatives.
With that I'll now turn the call over to Jamie to discuss the details of our second quarter results.
And after Jamie's discussion I will wrap up with some additional forward looking commentary Jamie.
Thank you Archie and good morning, everyone slides 4 and 5 provide a summary of our second quarter 2021 financial results.
Second quarter results results were solid with strong earnings stable net interest margin provision recapture elevated fee income and a sub 60% efficiency ratio.
As expected core net interest margin declined slightly during the period as a result of the low interest rate environment, our decision to grow the securities portfolio and increased day count in the second quarter. However, we were able to offset some of the downward pressure with additional reductions in funding costs.
While there will be some volatility in total margin due to loan fees. We continue to expect core margin to decline slightly in the coming periods, given the prolonged low interest rate environment and excess balance sheet liquidity.
On fee income, both Bannockburn and wealth management had record income during the quarter.
While mortgage income remained strong despite lower premiums driving an expected decline from historic levels in 2020.
We were also pleased to see interchange income increased 19% from the linked quarter.
And what we believe is a sign that our clients are starting to return to pre pandemic spending habits.
Our net charge offs on classified assets both declined during the period.
These 2 factors combined with a positive economic outlook resulted in $4.2 million of provision recapture during the period.
In addition, we took advantage of market conditions and repurchased approximately 1.3 million shares during the period.
Our capital ratios are strong and remain in excess of both internal and regulatory targets.
We continue to believe that our balance sheet is well positioned for both the near and long term and our stress testing results indicate our ability to maintain these capital levels for the foreseeable future.
Slide 6 reconciles our GAAP earnings to adjusted earnings highlighting items that we believe are important to understanding our quarterly performance.
<unk> net income was $56.3 million or <unk> 58 per share for the quarter, which excludes $3.8 million of legal settlement settlement costs $2.8 million of branch consolidation costs and $1.2 million of tax credit investment write downs.
As depicted on slide 7 these adjusted earnings equate to a return on average assets of 139% and a return on average tangible common equity of 18%.
In addition, our 58% adjusted efficiency ratio remains very strong, reflecting our ability to diligently manage expenses.
Turning to slides 8 and 9 net interest margin decreased 9 basis points from the linked quarter to 331%.
This decline was primarily driven by lower asset yields our decision to this decline was primarily driven by lower asset yields our decision to deploy excess liquidity into the securities portfolio fewer loan fees and additional days in the quarter.
Despite these headwinds core net interest margin only declined 7 basis points as we were able to successfully lower funding costs.
The low interest rate environment continues to negatively impact asset yields.
As I previously mentioned and similar to the first quarter, our higher mix of investment Securities contributed to the decline in total asset yields as we deployed excess liquidity on the balance sheet.
In response to these declining yields we continue to aggressively lower our cost of deposits, which declined 2 basis points during the period to 12 basis points.
These lower deposit costs reflect strategic rate adjustments as well as a shift in funding mix from higher price retail and brokerage Cds to lower cost core deposits.
Our outlook on funding costs remain the same.
While some additional decline as expected in the coming periods, we anticipate a gradual decline as we approach our pricing floor.
Slide 10 illustrates our current loan mix and balance changes compared to the linked quarter.
The majority of the decline in balances were related to the pay offs of PPP loans. However, we did experienced slight declines in each loan type other than consumer loans during the period.
Slide 12 shows our deposit mix as well as the progression of average deposits from the first quarter income.
In total average deposit balances grew $339 million during the quarter, driven primarily by increases in low cost transactional deposits and public funds.
We remain very pleased with the trajectory of deposit balances as average transactional deposit balances increased 18% on an annualized basis during the period.
We continue to be mindful of deposit pricing and we'll make any necessary adjustments based on market conditions as well as our funding needs.
Slide 13 highlights our non interest income for the quarter as I mentioned previously second quarter fee income remained strong and was driven by record production from Bannockburn and wealth management.
Mortgage income remained strong despite expected declines and we are encouraged by the 19% increase in interchange income compared to the linked quarter.
Seasonal headwinds in government stimulus continue to suppress the trajectory of deposit service charge income.
Though we remain optimistic that this will rebound some in the back half of the year.
Noninterest expense for the quarter as outlined on slide 14.
Overall core expenses were in line with our expectations and increased slightly when compared to the linked quarter driven by higher employee cost marketing expenses and professional services.
As operations continue to normalize we expect expenses to increase slightly with some volatility expected depending on the level of fee income generation.
Turning now to slide 15.
Our ACL model resulted in a total allowance, which includes both funded and unfunded reserves of $173 million and $4.2 million in total provision recapture during the period.
The decline in provision expense from the linked quarter was driven by improved economic forecast lower net charge offs and declining classified asset balances.
Net charge offs as a percentage of loans declined to 23 basis points on an annualized basis, while classified asset balances declined $14 million or 7% during the period.
Our view on the ACL and provision expense remains unchanged. We believe we've captured the risk from future Covid related credit stress in the ACL model and have been conservative in releasing reserves at this point given the unknown impact from the Delta variant.
Barring something unforeseen we expect further provision recapture and declines in the reserve for the remainder of 2021.
Finally, as shown on slide 17, and 18 capital ratio capital ratios are in excess of regulatory minimums and internal targets.
All capital ratios remained strong in both the tangible common equity ratio and our tangible book value increased during the period.
In addition, we repurchased approximately 1.3 million shares during the quarter further enhancing our shareholder return.
Once again, we do not anticipate any near term changes to the common dividend how's.
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 Archie Thank you Jamie.
Before we end our prepared remarks, I want to comment on our forward looking guidance, which can be found on slide 23.
Yeah.
Loan balances, excluding PPP are expected to grow in the low single digits over the remainder of the year.
Securities balances are projected to remain consistent with June ending balances as deposits are expected to remain stable over the near term.
The net interest margin is expected to be possibly impacted by further P. P. P forgiveness pay offs and the associated accelerated E recognition.
Through the remainder of the year.
Excluding our more volatile variables, such as PPP fees purchase accounting and loan fees.
We expect the margin to be under modest pressure from the low interest rate environment as well as the excess liquidity on the balance sheet and increased balances on our securities portfolio.
Regarding credit we expect provision recapture from the remainder of the year with further declines in the allowance for credit losses.
We expect fee income to be between 39% and $41 million.
In the third quarter with some declines in mortgage banking income due to lower premiums.
And foreign exchange income to be around $10 million to $11 million.
Specific to expenses, we expect to be between 91% and $93 million, but this could fluctuate some with fee income.
And lastly, we will continue to evaluate capital deployment opportunities with share repurchases expected to resume later this month.
Throughout the summer the number of associates working in our offices has increased steadily and anticipation of a broader return and we're very much looking forward to welcoming all of our associates back in the beginning of August.
We've learned a great deal from a remote environment. During the last 16 months and are excited to incorporate best practices derived from that experience.
Into our culture, moving forward, including greater associated flexibility.
Overall, we continue to believe that we're well positioned to deliver industry, leading services to our clients on returns to our shareholders.
As we work towards improving the performance level of the company over the second half of the year on.
Our focus remains centered on serving the financial needs of our core business consumer and wealth management customers while remaining disciplined.
And our approach.
With that we'll now open up the call for questions.
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Yeah.
We're ready for questions now Nick.
Yeah.
Okay.
Yeah.
Well now begin the question and answer session to ask mcglasson, thus far the more on longer Touchtone phone.
And as people small please pickup your handset before pressing the keys.
We brought on quality.
Barb.
This time, we'll pause momentarily to assemble the roster.
First question comes from Scott <unk> Micro Sandler. Please go ahead.
Hey, guys. Thanks for taking the question.
Hey, Scott.
I guess first question I wanted to ask 1 on the deposit levels are aren't you suggested in the release on and then some of your comments on some of those loans could be it could be reversing I guess.
Based on what you're seeing and what you guys are pursuing.
I'm expecting that sort of what makes you say that rather than just thinking mill no kind of stick around for a while and what's what's your best guess regarding how much of those deposit inflows that we've gotten over the last year or so.
Thinking wrong.
Yeah, Scott, let me start maybe Jamie can follow on because this also relates to some of our decision on the securities portfolio.
We saw we saw balances.
Peaking.
In the second quarter deposit balances.
And depending on you only got several ways 1 on ways I look at it is.
The average balance per account for state business in consumer and we could we could see an inflection point occur.
Kind of mid part of the quarter. So we think it's gradual we don't think it's a rapid descent down, but we do see just sort of a gradual outflow.
This is beginning to occur and we think will continue for foreseeable future Jim Unipod all debt.
Scott This is Jamie.
So as Archie mentioned, we did see deposit balances peak around that April timeframe.
And the May we get some public funds and kind of seasonally but when we look at kind of core consumer and business deposits.
We did see those I mean, I don't know if we necessarily hit.
And the inflection point, where it's going to start flowing out rapidly, but we did see balances in June go down for the first time in a while so and when I say they were down I mean, they were down like only about $20 million to $30 million. So but it did it did go the other way for the first time.
In a while so it's something that we are obviously monitoring given the fact that we.
Increase the securities portfolio and we are.
Ready to unwind that if they start flowing out.
Faster than what we anticipated so we think.
Just as the economy opens back up.
People start getting out spending again that will start to see those balances.
Like you said at a minimum they are not going to keep going up.
Stable to down over the next year.
I guess I'd follow on 1 more 1 more point fees.
Interchange income, we already fall did jumped nicely in the quarter and we.
We think that's a.
Demonstration that the consumers is out spending again.
And probably even more so maybe on the back to school timeframe that we're approaching.
And then finally with the P. P forgiveness fees coming through a lot of those businesses that were sitting on the dollars waiting for their forgiveness. Once they get it then they start to do something with its part of our Paydowns during the quarter 1 aspect of the loan Paydowns was.
Excess liquidity paying.
Paying down loan balances so that was part of the story.
Yeah Okay.
That's all great color and I appreciate that.
Just to sort of real thank you talked ones. Jamie do you have the remaining PPP fees for around 1 or 2 by any chance.
At $16 million.
You're talking about the unearned fees right yeah.
Yes, exactly yeah, yeah. So we had 630, we had imbalances about 400 million and total PPP balances with about.
Just just north of $16 million in fees like $16.4 million in fees sitting out there.
Okay.
And Scott like we mentioned I mean, we think we think the rate.
Round, 1 fees, we've obviously amortized quite a bit of those at this point, so it's skewed more towards that.
That round 2 tranche, but you know the.
The timing of that is.
A little bit of a wildcard, but we think that that comes in here in the back half of the year and then obviously in the third and fourth quarter.
Okay perfect. Thank you and then I guess my final 1 is I'm just on the legal fees on anything.
Just curious what that net.
So based on that you can discuss it.
Yeah, Scott this Archie.
Many banks we've.
We've been subject to some lawsuits relative to overdraft fees have been going on for a while now specific specifically for us in Indiana and Ohio.
We believe there are practices are fully disclosed and we work hard to make sure that our customers are informed.
And that they have the tools available to avoid overdraft charges.
Seeing this type of this type of litigation is very <unk>.
Time consuming.
In expensive in large part.
Because the amount of data that we've got to assort and disclose as some cases goes back 10 to 15 years.
So we just determined is in our best interest to settle the Indiana law suit.
Signed a settlement agreement that's being presented to the court for approval.
We do have overdraft litigation in Ohio remaining we continue to believe that our defenses are adequate and available to us to get that suit resolved.
Okay, Alright, perfect that is all very helpful. I appreciate it on the call.
On.
Thanks Scott.
Thank you. The next question comes from Johannes Braun.
RBC capital markets. Please go ahead.
Thanks, Good morning good.
Morning, John John.
Hum.
Interesting discussion on deposits.
And you touched on it or.
Or should we keep it.
Do you wear.
The commercial customer deposits are growing.
<unk>.
Capex type of spending a minute.
The stronger growth.
You have to use on them.
John I was having a little hard time hearing I think your question was what are we seeing with regard to commercial customers and in terms of capex growth and investment.
Yeah.
On the deposit flow question, Yeah, you touched on it with PPP and I'm just curious if you.
You have ideas, where that where that money is going on as it into capex, which leads to growth later.
Yeah.
I don't know that I know fully what we're experiencing so far and it was not it was not the major story. It was it was probably 1 of 3 major themes in the pay offs that we saw was customers are taking commercial customers aren't taking excess liquidity and paying down debt.
So that's a piece of the story, we saw that was that.
15% or so.
The <unk>.
Maybe additional payoffs that we saw on the quarter I'd say it was related to that.
On this this quarter I spent a lot of time with our our business clients and I can touch on they're all saying something similar things like.
Having our best year ever it's that kind of a theme happening over and over the 2 main problems.
The primary 1 at this point is it's a surface is around supply chain.
Disruption.
And the second course, being labor, but I think the supply chain disruption.
Gets into the second part of the Capex discussion as this can they get what they need to.
To go ahead and invest in plant and equipment and other things or is that going to take time to play out until some of the supply disruptions.
Work themselves out I know I talked to 1 client 2 days ago.
They bought a major piece of machinery.
Over in Europe and.
Certainly on expect delivered till later in the year, but right now they think us on time, but they are prepared that that could go into next year. So I think that disruption could delay how some of that cash gets deployed but they're all having really.
Kind of.
Great years, our best year ever type type of experiences. So I think it's coming.
Just maybe Moreover, the back half later in the year or even into 'twenty, 2 where we see a lot of that spending.
Okay.
And I guess, that's probably reflected on pipelines and that's where you're seeing longer pipelines and it's just a matter of everything.
Everything pulling through.
I think that's right.
Pipeline really started to strengthen up pretty quickly in the spring and they have been.
I don't think they spike I would say, we're not quite at that level, we were pre COVID-19, but were pretty close and they're steady at that level.
Well, Jamie I understand your guidance on the margin and thanks for those.
Comment a few numbers on the PPP, but how do you feel about net interest income.
Feel like you can continue to bump along here on hold but relatively stable on return potential for NII growth in the second half of the year.
Yeah, I mean, a lot of that is going to depend John on the on the amount of loan growth that comes in.
You know our <unk>.
We can we're going to get like like we mentioned, we're going to we're going to see.
When you kind of cut through the margin and look at strip out day cow strip out loan fees.
That sort of thing.
<unk>, we're going to see in PPP fees.
We're going to see a couple of basis points of margin pressure.
Every quarter here for a little while till it until it stabilizes maybe.
3 or 4.5 quarters from now in the middle of next year. So.
What the variable there obviously is if we can if we can get some loan.
Loan growth here in the back half of the year and and grow the earning asset base. Our plan at the moment is to.
We will look at the funding side for this is to keep the securities book.
Flat and then grow the earning asset base off of the off of the loan growth that we get in the in the back half of the year.
So Archie I'll pick up on the loan growth a little bit.
We are we're saying low single digit kind of growth in the back half.
I think.
The other variable we saw on pay offs.
This past quarter was.
Kind of a category of sale of business or refinance the permanent market.
That was a little bit elevated compared to what we've.
We've seen in recent quarters and.
While we may still see some some of our ICL product going to the permanent market.
I don't think we're going to see the same level of sales that we have businesses that we've seen in the second quarter.
So 1 we think while they may be elevated payoffs may not be quite as high and we are seeing at least quarter to date, some some nice growth to start the quarter, which.
<unk> supports where we are on the pipeline. So we think based on what we're seeing is we're going to get into that low single digit level from the rest of the year.
Alright, thanks, guys very helpful.
Thank you next question comes from Daniel Raymond James. Please go ahead.
Good morning, guys.
Wanted to just wanted to.
Just wanted to see if I could get your current thoughts on what the M&A environment looks like for you including on.
What would be an ideal acquisition given.
The environment overall, and your strong capital position.
Yes, Daniel.
We think there's a case for M&A when you think about.
What what's coming in 'twenty, 2 'twenty 3 the industry won't have PPP in mortgage banking is.
Returning a little bit more to normal.
While we will still.
They have some provision recapture.
And going into next year even.
Just the environment for the industry is going to get a little more difficult I think and so I think that sets up well for.
For M&A.
So we would have an interest to be involved in M&A. It certainly if we can find the right opportunities ideally for us it would be.
Banking companies that would be.
Say, 15% to 25% of our size.
In Midwestern Metropolitan markets.
On which they have a meaningful share.
Now that's ideal.
We'll see what the overtime what may come out, but that's part of what we would be thinking about if we could.
Have it our way.
And in terms of our internal kind of profitability metrics that you think through when you're considering that.
Decisions what are those look like.
When you say profitability metrics you'd be just sort of like.
So from like from an earn back on.
Certainly well under well under 3 years.
I think the environment setting up to be maybe even lower than that.
Certainly.
<unk> north of 15.
You know some meaningful accretion once you.
Once you get through this the.
The first year of.
Of all the integration work.
Yes.
Great Alright, thanks for taking my questions I appreciate it sure.
Thank you next question comes from Chris Mcgratty of Gay BW. Please go ahead.
Great Good morning.
Hey, Chris.
Dan maybe a question for you I think you reference.
On the high Fifty's efficiency, and obviously, the tough great and growth environment is that kind of if it feels like there'll be a little upward pressure on that just because of mix.
In loan demand, but can you just help me sort through if this rate environment persist for another year.
My guess is low sixty's is kind of fair.
Yeah, that's that's true I mean, what we're getting.
Obviously, we're getting some benefit now from on the revenue side of it is it's really not a function of the expenses, it's really a function of the revenue side the pressure that we're seeing there.
That side of the equation. So when you look at that we're getting some benefit now from especially from.
The PPP loans.
When that going into next year when that goes away.
Likely see our efficiency ratio.
Move up to those that area, where youre talking about Christmas Archie I think.
The other thing that I think about on.
On the efficiency side is that while we will on the expense side, we will see a little bit of normalization further normalization of expenses you know things like <unk>.
As people are.
More fully back to work and visiting clients et cetera.
But we're also going to do some work further efficiency work primarily in the branch rationalization category. We've done some day she will do some more.
As we head into next year and try to offset some of that expense pressure, but I think Jim is right. The other side of that is just how much can we keep revenue up.
Understood got it and then just on credit can you remind me I didn't it wasn't obviously in the deck.
Were seasonal day, 1 reserves were in kind of.
It's about the risk.
Of the book today versus maybe a year ago and could you go over Luke could.
Could you go below.
At that level.
Yeah, Chris maybe I'll start and then maybe bill you can talk about the portfolio.
But so Chris Flynn.
Pre pandemic day, 1 seasonal.
Our reserve was at $1.29.
And and compare apples to apples now if you take out the PPP loans. Our reserve is at 175 so in theory.
As things normalize.
The question Mark is the timing of when this occurs.
Whether thats over we think internally here when we when we talk about it we think that just given the composition of our portfolio.
Hmm.
<unk> are going to be a little slower to recover.
Here, we think that that happens here over the next.
Give or take over the next year or so where we get back to that.
On that day 1 range.
So that's for us that's another.
45 basis points of of.
A reserve release either through.
Is it through charge offs are running it through the.
Obviously running it through the provision expense.
That's really helpful. Thank you.
Sneak 1 more in on capital.
Can you just remind us targets because I'm trying not to read too much into the comments about buybacks and then flip into a deal I'm just trying to get a sense of if you were to do something on the on the near term like what's the what the bogie is on capital.