Q3 2021 First Financial Bancorp Earnings Call
Good morning, Good afternoon, and welcome to the first financial Bancorp third quarter earnings.
My name is Adam and nobody ever are priced at today, if you'd like to ask a question. During the Q&A portion of today's call. You may do so by pressing star one on your telephone keypad I'll now hand, you over to Scott Crawley to begin Cisco. Please go ahead when you're ready.
Thank you Adam Good morning, everyone and thank you for joining us on today's conference call to discuss first financial Bancorp's third quarter 2001.
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 Dot banking first dot com under the Investor Relations section.
We will.
Going back to the slides contained in the accompanying presentation during today's call.
Additionally, please refer to the forward looking statements disclosure contained in the third quarter 2021 earnings release as well as our SEC filings for a full discussion of the Companys risk factors.
The information we will provide today is accurate as of September 32021, and we will not be.
Any forward looking statements to reflect facts or circumstances. After this call I will now turn it over to Archie Brown.
Thanks, Scott Good morning, everyone and thank you for joining us on todays call yes.
Yesterday afternoon, we announced our third quarter financial results, which were highlighted by strong earnings loan growth solid fee income lower credit.
Cost and improving credit trends.
Third quarter results were exceptional across the board with earnings per share of 63.
Our return on assets of 149%.
And then adjusted efficiency ratio of 61%.
Third quarter earnings were the highest they've been since the main source merger in 2000.
Updating and were highlighted by significant provision recapture of $10 $1 million.
Provision recapture during the period was a result of improving credit quality trends, specifically lower net charge offs and declines in classified asset balances.
And we expect further reductions in credit cost in the fourth quarter of 'twenty.
18, one and the first part of 2022, given our optimism for further economic recovery.
In addition earnings were positively impacted by elevated mortgage and wealth management revenues and we were encouraged by strong loan originations during the period.
Total loan balances declined $156 million.
21 by $225 $4 million and T. P P forgiveness during the quarter.
Core loan balances increased $74 $8 million for the period as a result of strong origination activity.
She was approximately 12% higher than the second quarter.
We're very pleased with the growth in our C&I.
Drew portfolio of 16% on an annualized basis.
Our origination levels more than offset the loan payoffs, which remain high particularly in our specialty finance and our ICL units.
Additionally, we are encouraged by the bottleneck pipeline activity has increased over the course of the last quarter.
Deposit balances remained elevated as we saw some modest increases towards the end of the quarter as.
As clients continue to maintain substantial liquidity levels.
The third quarter continued to be a very active for a PPP loan forgiveness.
Every quarter in over 98% of round one.
We're at 50% of ramp.
Two loans have been forgiven.
We expect the majority of remaining round two payoffs to flow in over the remainder of the year.
During the quarter, we repurchased approximately two and a half million shares at an average price of $23.04, bringing our total shares repurchased in 2021.
To approximately $4 six.
Yeah.
When combined with the common dividend.
The share repurchases approximated returned to shareholders of 131, 7% of quarterly earnings.
There are approximately 367000 shares remaining in our buyback authorization.
We were also very excited to bring our associates back to physical office.
6 million in the quarter.
Albeit with greater flexibility that pre COVID-19.
We firmly believe were stronger when we're together and we've already witnessed how combining best practices learned from the pandemic.
With our culture of collaboration positively impacts our clients and financial performance.
With that I'll now turn the call over to Jamie to discuss the details of our third.
<unk> results and after Jamie's discussion I'll wrap up with some additional forward looking commentary Jamie.
Thank you Archie and good morning, everyone.
Slides four and five provide a summary of our third quarter 2021 financial results.
We are very happy with our performance, which included strong earnings loan growth stable.
Third quarter net interest margin provision recapture and elevated fee income.
The highlights of our quarter included 3% annualized loan growth excluding P. P. P forgiveness, which was driven by commercial and small business banking.
In addition, the core net interest margin remained relatively stable as a positive.
Net in funding costs was offset by the impact from the repricing of earning assets and more days in the quarter.
While there will be some volatility in total margin due to loan fees. We continue to expect core margin to face modest pressure in the coming periods, given the prolonged low interest rate environment and excess balance.
Sure.
Fee income surpassed our expectations as both mortgage banking and wealth management remains strong.
We also realized elevated income from limited partnership investments and insurance proceeds.
Third quarter Foreign exchange income declined slightly from record levels in the first half of.
Alex here, However, we anticipate Bannockburn, who will return to the typical run rate of $10 million to $12 million in the fourth quarter.
Noninterest expenses were in line with our expectations, despite elevated incentive compensation, which was tied to our overall company performance and slight increases in marketing.
For the year and professional services expenses.
We were particularly pleased on the credit front as both net charge offs and classified assets declined during the period.
These two factors combined with a positive economic outlook resulted in $10 $1 million a provision recapture during the period.
From a capital.
Point, we continue to take advantage of market conditions and repurchased approximately two 5 million shares during the third quarter.
Our capital ratios are strong and remain in excess of both internal and regulatory targets to date, we have repurchased $4 6 million of the 5 million shares we are at.
Stinker eligible to repurchase.
Under the plan approved in late 2020.
We expect that will that we will repurchase our remaining a lot and then in the fourth quarter, but do not anticipate any further repurchase activity beyond that in 2021.
Slide six reconciles our GAAP earnings to adjusted.
That we are highlighting items that we believe are important to understanding our quarterly performance.
Adjusted net income was $59 9 million or <unk> 63 per share for the quarter.
As depicted on slide seven these adjusted earnings equate to a return on average assets of 149% and our returns.
That earn on average tangible common equity of 19%.
Turning to slides eight and nine net interest margin increased one basis point from the linked quarter to 332%.
This slight increase was primarily driven by higher P. P. P forgiveness fee.
The impact on the net interest.
Returning from changes in asset yields and funding costs, largely offset one another and there was a small negative impact to the margin, resulting from the additional day count in the third quarter.
Asset yields increased modestly during the period due to higher loan fees, which include P. P. P forgiveness in.
In the first.
Margin of the year, we increased the size of the investment portfolio, which has negatively impacted the margin over the course of 2021. However, we expect the portfolio to remain at its current size in the near term.
In response to the current interest rate environment, we have continued to aggressively lower our cost of deposits.
Which declined another two basis points during the period to 10 basis points.
These lower deposit costs reflects strategic rate adjustments as well as a shift in funding mix from higher priced retail and brokerage Cds to lower cost core deposits.
Our outlook on funding costs remain remains the same.
We anticipate a gradual decline in the near term 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 was related to the payoff of PPP loans.
These payoffs we are encouraged by $75 million of growth in the rest of the portfolio.
Which was driven by our commercial and small business banking group.
Slide 12 shows our deposit mix as well as the progression of average deposits from the second quarter and total average deposits declined $44 million during the quarter.
Driven primarily by declines in higher cost brokered and retail Cds.
These declines were largely offset by increases in lower cost transactional deposits.
We continue to be mindful of deposit pricing and we'll make any necessary adjustments based on market conditions and our funding needs.
Slide 13 highlights our noninterest income for the quarter as I mentioned previously third quarter fee income remained strong and was driven by elevated production for mortgage and wealth management.
We were also encouraged by the 13% increase in deposit service charge income compared to the linked quarter and 27% increase.
<unk> and derivative income.
In addition, other noninterest income increased 34% during the period due to increases in income on limited partnership investments and insurance proceeds.
With regard to Bannockburn foreign exchange income declined from record levels in the second quarter. However, we.
And climbed to return to their historical run rate in the fourth quarter.
Noninterest expense for the quarter as outlined on slide 14 overall.
Overall core expenses were slightly higher than we expected an increase modestly when compared to the linked quarter.
Driven by higher employee costs marketing expenses and professional.
Expected losses.
Turning now to slide 15.
Our ACL model resulted in a total allowance, which includes both funded and unfunded reserves of 161 million and $10 $1 million in total provision recapture during the period.
The.
<unk> signed and 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 10 basis points on an annualized basis, while classified asset balances declined $17 million or 9%.
The decline period.
Yeah.
Our view on the ACL and provision expense remains unchanged. We believe we acted aggressively when building reserves in response to the pandemic and have been relatively conservative to this point and releasing reserves given the unknown unknown impact from the Delta variance.
Center, something unforeseen, we expect further provision recapture and declines in the reserve for the remainder of 2021 and the beginning of 2022.
Finally, as shown on slide 17, and 18 capital ratios remain in excess of regulatory minimums and internal targets.
Barnes capital ratios remained strong despite slight declines in our ratios during the period.
As I previously mentioned, we repurchased approximately two 5 million shares during the quarter, bringing our 2021 total shares repurchased to $4 6 million.
Once again, we do not anticipate any near term changes.
All of them and dividend. However, we will continue to evaluate various capital actions.
As the year progresses.
Now I'll 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 20.
So the Cologne balances, excluding PPP are expected to grow in the low to mid single digits over the remainder of the year.
Loan demand remained strong though.
Portfolios are expected to continue to face payoff pressures.
Security balances are projected remain consistent with September ending balances as deposits are expected to see some modest.
Increases in the near term.
The net interest margin will continue to be positively impacted by the remaining excuse me P. P for P. P forgive us loans or payoffs.
And the associated accelerated fee recognition.
We expect the majority of remaining payoffs to occur in the fourth quarter with a minimal amount.
Seasoning over to the first quarter of 2022.
The shooting or 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 in our securities portfolio.
Regarding.
Trade it.
Further improvement in quality and quality trends, we continue to expect additional provision recapture in the near term with further declines in the allowance for credit losses.
We expect fee income to be between 40 and $42 million in the fourth quarter.
With foreign exchange income rebounding to the.
Incredible Mandar range and some seasonal declines.
In mortgage banking revenue.
Specific to expenses, we expect to be between 91 and $93 million, but this could fluctuate some with fee income.
Lastly, we will continue to evaluate capital deployment opportunities with all remaining shares under the 2000.
Tend to join repurchase plan expected to be repurchased during the fourth quarter.
Finally, I'm very pleased with our exceptional performance this quarter with record earnings and much improved credit trends.
As we look to close out 2021 our focus remains centered on serving the financial needs of our core business consumer and wealth management.
20 months.
Overall, the company remains well positioned to manage in the current environment and we're optimistic about our ability to sustain these successes through continued execution of our core strategies.
Well now open up the call for questions.
Okay.
As a reminder, if you'd like to ask a question today. Please press star followed by one who knows.
Telephone keypad now.
Please keep you had sort of plugged in on me too likely.
Our first question today comes from Scott Cyphers from Piper Sandler. Please go ahead. Your line is open.
Good morning, guys. Thanks for taking my question.
Hey, Scott.
And he wanted.
Wanted to ask first about.
The loan growth outlook sort of puts and takes in your <unk>. Your view what are sort of the portfolios that you see doing well and then maybe a little more color on the ones that you suggested would stay pressured for the time being.
Scott Thank you.
So as we sort of highlighted C&I is strong.
Plans are strong in.
Increasing so we would I think we will continue to see some decent growth coming in there there are some payoff pressures there, but not not as much as we're seeing a few other portfolios.
And the ICR.
Portfolio, we've got strong originations, but we're just having record level payoffs and it's it seems mostly tied to the.
Multifamily, where the properties are being sold or going into the permanent market.
But it was across a few other product types as well so strong originations there, but very very strong or a high levels of payoffs and on the origination side in some cases.
Well Doug.
We'll put the loans out but.
Many of our construction in nature, so theres a draw period, so even though originations were really strong and it takes time for those to draw fully up.
The other place we're seeing some payoff pressure is in our specialty finance unit.
You'll see one of our slides in the quarter, we showed franchise.
Went back about.
The $29 million to $30 million for the quarter.
In some cases.
Refinancing for.
We thought we were overly aggressively aggressive terms in other cases.
We exited a couple.
In some cases, a few sales and then we're seeing it also in the finance company we've.
Loans in some cases to our eye as or insurance agents in many of those businesses are selling.
In the current environment is so much liquidity in the market. So the payoff pressure is probably felt mostly in the ICR re especially specialty finance units, but we're seeing against strong originations in commercial.
Yeah, Hi, CRE the consumer side is.
Running somewhat flattish so decent originations not I wouldnt say record level by any stretch but.
Just sort of running kind of in a flat mode right now.
Okay.
Okay. Thank you for that and then I was hoping to get a little more color on the Forex revenue. So.
You know this quarter was $9 million was maybe a bit below.
So the guide for 90 days or so but the outlook is bound back toward the more typical orange and in fact, I think you sort of bumped up that top end of the range. So maybe just some of the nuance of what generates the rebound and sort of how you're thinking about.
Sort of longer term as well.
Yeah Scott.
Talk to you again.
Revenue.
It works, it's a little it can be a little bit.
Chunky Theres a core.
There's a core base of revenue.
That's pretty consistent and actually when we look at third quarter. The core base of revenue was probably a little bit stronger than it had been in prior.
We just didn't have as many kind of chunky transactions that we would typically see so.
As we look into the coming quarter.
We had some near term visibility into knowing that a few chunky deals we're going to be happening on top of kind of the normal course stuff. So that gives us some confidence.
So it's going to rebound back into that 10 to 12 million range.
Okay perfect. Thank you very much.
Yep.
Our next question comes from Terry Mcevoy from Stephens, Inc. Sir Your line is open.
Hi, good morning, guys.
Good morning.
Maybe Jamie.
Starting a question for you the the pressure from low rates on the net interest margin could you maybe just expand on how much of that is on the loan side and just new loan yields versus the security side and then you know all things being equal at what at what point are the low rates kind of fully priced in where where your outlook would shift.
More and more stable.
Yes.
Well I mean, I would tell you it's coming from both.
Both the loan side and the reinvestment side on the securities portfolio. So.
Speaking directly to the investment portfolio.
Two men about.
Call it between 101 hundred $50 million.
A month in cash flow off of the offer the securities portfolio and those reinvestment rates or just a little bit lower still than our overall yield on the portfolio. So that's putting some pressure on.
On the securities portfolio.
And then from a loan perspective when.
When you look at the yields runoff yields and the origination yield.
Our new loans coming on the books in the third quarter was coming on at about $3 35.
And in a loan coming off.
Rolling off paying off maturing.
30 basis points higher than that so we still have that.
About 25 to 30 basis point differential.
<unk>.
On the loan side as well so and then when we see that stabilizing and then obviously on the deposit side I mean, you know our our deposit.
So we're at 10 basis points.
At this point, so getting more relief from the deposit side.
<unk> is really just not going to happen much we may get another basis point or.
Or two but at this point, we're basically at the floor. So when you look out into when that kind of stabilizes we're.
Talk out into the middle of next year, when the margin stabilizes somewhere around a core margin of three.
Great that was very helpful and then as a follow up question.
It sounds like the remaining authorization on the share repurchase 366000, and that's what we should assume.
We're looking worst quarter if.
If that's the case at the end of this year there'll still be a fair amount of excess capital. So could you maybe just remind me what your targeted capital ratio is and as you think about next year would we expect another share repurchase plan or would you like to see capital grow to evaluate our capital deployment opportunities.
For the full use your terminology here on your slide.
Yeah.
Yes, Terry this is Jamie so yes, so for if you're building out your model, we will our plan is to.
Complete the 350000 or so during the 60000 chairs.
In the fourth quarter and then.
So obviously that $5 million.
Repurchase plan that authorization will be gone.
And we will I suspect that you know.
Dependent on how the board looks at it when we go back to them here at the end of the year, but.
Two would be to.
Renew that plan and.
I would suspect another 5 million shares, but just to have the flexibility but it'll.
It'll be dependent on what I would consider.
<unk> to be normal capital.
Capital management.
<unk> of weather.
Our plan would see other opportunities potentially on the M&A side, and then also obviously dependent on on where.
And where are prices at that point.
As we look out into the future, but yeah, I mean, we will.
We will want that flexibility to have.
Another playing out there.
Great appreciate that and have a nice weekend. Thank you.
Sure.
Our next question is from Chris Mcgratty from K B W. Chris. Please go ahead. Your line is open.
Hey, good morning, guys.
Hey, Chris.
Archie I just wanted to.
Follow up on that narrative on capital.
Is the I guess, what are you seeing in terms of.
Opportunities for traditional M&A I mean, we've seen a lot.
Across the country I'm trying to decipher if you're trying to send a message that.
Chris you are more optimistic about organic growth or potentially complementing it with deals just the hesitancy on the buyback.
Sure.
Yeah, Chris.
This is archie.
I don't think we have any.
Any near term line of sight on whole bank.
Whole bank deals so.
You know theres been a few things that I would say a discussion as I say you always have some discussions with with.
With banks in the in the region, but.
I'd say nothing that.
You know that I have some confidence in so.
As Jamie said the authorization just gives us.
The ability that we can be.
Based on what our outlook is at any point in time, we can decide do we want to repurchase shares certainly prices appropriate.
Or.
Or hold back and do something else, we prefer to be organic growth.
And if that.
Increases if the balance sheet.
The flex it really move up with the earning assets in 2022, that's the preferred path, but I can't say, we've got anything want US there we do look from time to time.
Fee based businesses and other specialty type companies and.
Oh again have had some conversations but.
Nothing nothing with any clarity at this point.
Starts to cry.
And can you just remind me.
You know as you did a larger transaction years back.
Proving to be pretty successful, what's what's the kind of range of opportunities. If you were to do something.
What's kind of a wheelhouse deal for it.
You know I mean.
Chris Ideally.
<unk>.
It took a banking company in the Midwest.
Because it's more of a metropolitan footprint with more of a commercial bank orientation.
And probably.
You know a quarter to half our size now having said that that's the ideal.
Probably can't find too many that fit that exactly.
It's that exact.
Model, but that probably says.
Do you see yourselves being fairly selective when it comes to a whole bank M&A.
Okay. That's helpful and if I could just one more.
We've heard a lot from your peers about the inflationary pressures that are in the market with wage pressure.
What are your costs.
You guys have been really good about keeping costs down over the years, how are you thinking about.
Intermediate term wage pressure.
Expense pressure broadly.
Yeah, It's Christmas Art, you get it's real.
We're seeing especially.
Well for any of the you can imagine technology talent.
Lending talent security talent fraud risk talent and then even on the entry level side, we're seeing.
Seeing those pressures so I was looking up prior to the call. Our FTE count is down about 50 from year end.
In Dow about another 15 or so from.
Prior quarter and I think our view is keep working on.
On head count reductions, but the tradeoffs going to be.
Higher wages for the folks that are here. So I think it's a combination of that.
Have some branch.
Lee closures I think we have.
A couple this quarter.
And we anticipate more in 2022 and then that will also provide some offsets.
Great. That's helpful. Thanks, a lot.
Yep.
Okay.
As a reminder, if you.
Ranch for a question. Please press star followed by one on your telephone keypad now.
Our next question is from Jon <unk> with RBC. Please go ahead.
Thanks, Good morning, everyone.
Hey, John and John.
Nice job on the buyback first of all.
The big numbers.
Thanks you.
Touch a little bit I think a lot of this has been covered in a lot of the key topics, but can you touch a little bit more on the reserve power.
And where do you think that could go longer term.
Yeah, John this is Jamie so if.
If you like like like we mentioned I mean, I think we were.
We're aggressive in the during the pandemic of building the reserve and especially given.
<unk>.
Our of the makeup of our portfolio our exposure to hotels.
Hotels are exposure to on the franchise side.
And.
So you know we think we were aggressive on the front end and we have I mean, especially given the delta there yet we have been purposefully conservative on the back end of releasing that.
And I'm, just kind of wanted to see where things were going to shake out.
Obviously.
Losses are have been nowhere near what people have expected but.
Where we still have I think we still have some room to go in terms of.
Unless we see things turn the other way in terms of credit, but just given our credit trends given the improvement.
And.
Classified assets the charge offs that were seeing now starting to come down.
We see some additional release occurring here over the next.
Over the next few quarters and so you know if you look at our reserve now you take out the P. P P.
162 loans and you look at kind of a proxy where we started pre COVID-19 with <unk>. So we were at around 130 of loans. So if you use that as a proxy.
Obviously, the denominator will change some with with some loan growth, but we expect that over.
Over the next year that that will.
I will come back down into that range, where we started on day one of seasonal so it's another.
30 basis points ish.
Of reserve release.
The timing is probably the the question here over the next.
Over the next year, probably is when that happens and then also you know any any deterioration in credit from here or any anything that.
It could change that in terms of that variable variable, but outs.
Outside of that we see as coming back down to that 100 Thirtyish range.
Okay.
That's helpful.
A question on deposits, it's interesting to see the term seasonal.
In your guidance it almost feels like normal.
Jim.
But what are you thinking on deposit flows do you think this big.
Wave of deposits and liquidity is starting to fade in and we're getting back to more normal deposit flows.
And I guess the other question that continually comes up do you expect some of your commercial customers.
To tap their deposits.
Pause, it's before you see loan growth really pick up do you have any thoughts on that.
Yes, John this is Jamie I'll start.
Yes, the seasonal part of that of that comment.
Is related to our <unk>.
The Indiana operations.
So over in India.
Deanna we have prop.
Property taxes are due may and November and we get a big pop up.
Deposits coming in from our public funds in that November timeframe. So that's the seasonal aspect of it.
But from Ey.
I would say from a.
Outside of that.
You know I feel like I've been wrong on this every quarter in terms of when we have.
Spec. These some of these deposits the surge deposits to start running out and they and you know.
They're really seem.
It seems like you'd be going the other way obviously not at the pace that.
But.
At a minimum they've been flattish year over the last over the last couple of quarters, and you know and that's with seating.
Seating is going down so we are still building into our forecast some deposit outflow.
They were here I'm, just you know just with that surge that we had but it's not it's not meaningful and it's not the.
You know what.
The question is going to be the pace that that occurs and.
And the.
It's coming from but.
Yeah, So we normal now and deposit it seems like.
Hard to predict but like I said I would've I would've thought at this point that we would have seen some more outflow, but we just have it.
Yeah. Jonathan This is Archie a couple of thoughts to add on to Jamie.
If you.
Quarter, we saw some more of it was probably on the consumer side on the business side, its still pretty close to peak or in fact, maybe been edged up a little bit more.
So.
They're flushed with cash we did see.
Failed to mention when we were talking to you about the some of the pressures we have already seen in some cases customers.
Look at our cash.
Cash and pay down lines or do other things, even with that though I would tell you that our.
Our C&I utilization rates moved up during the quarter I think we moved.
From the low thirties to kind of the.
Mid thirties on our line utilization. So I think what it says is there's really good economic activity out there.
Let's say, it's disrupted some of the supply chain stuff, but client business clients have.
Revenue they have orders they have backlogs.
It's a really really positive overall environment from that perspective, just with a lot of these interruptions and questions in the middle So I tend to think they'll use.
Cash.
Pay down some for some things, but they also will be expanding and doing other things with it so I'm probably more optimistic about at all.
Yes, okay.
You kind of do you just touched on what I wanted to ask next Archie was you look at that slide 10, which.
Some of this loan portfolio.
The CRE bounces around from quarter to quarter, and Oak Street and franchise can be somewhat variable but that.
Commercial and small business number really stands out and it sounds to me like you're saying that that's not an aberration that thats a trend.
And you expected.
As you will trend to continue is that fair.
Well I'll tell you that's what we're focusing on.
And we're encouraged certainly encouraged by.
But what you see on that slide and we think that's where where the growth is going to be coming from.
Okay.
Alright, thank you.
Thanks, Sean.
Spec.
Yeah.
As a final reminder, its star one to ask a question today.
Okay.
Okay.
As we have no further questions I'll hand back to Archie Brown for any closing remarks.
Thank you and I want to thank all of you for joining our call today and for your interest in.
Have a great Friday and a great weekend talk to you next quarter Bye now.
Yeah.
Okay.
Thank you for your attendance. This concludes today's call you may now disconnect your lines.
Yeah.
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