Q3 2022 First Financial Bancorp Earnings Call

And by declines in foreign exchange service charges mortgage and other non interest income.

Bannockburn met our expectations for the quarter. However, there their total income was lower in the third quarter following record output in the second quarter.

Also consistent with our expectations.

Deposit service charge income declined in the third quarter as we realize the impact from overdraft overdraft program changes.

Consistent with the second quarter mortgage demand with light due to higher rates and record production in prior years and we continue to expect further pressure on this business for the remainder of the year.

Finally, other noninterest income normalized during the period, which was higher in the second quarter due to elevated income from limited partnership investments.

Noninterest expense for the quarter as outlined on slide 17.

The second quarter, the third quarter was relatively quiet on the noninterest expense front.

On an operating basis and excluding summit.

Expenses increased $2 $6 million compared to the linked quarter due primarily to an additional incentive compensation tied to the company's performance.

Turning now to slide 18.

CL bottle resulted in a total allowance, which includes both funded and unfunded reserves of of.

Of $141 million and $8 $3 million in total provision expense during the period.

This resulted in an ACL that was one point to 7% of total loans at September 30.

As I mentioned previously the provision expense was driven by our strong loan growth and slower prepayment speeds, which increase the duration of the portfolio.

Despite the increase in provision expense credit quality remained stable net charge offs as a percentage of loans decreased slightly to seven basis points on an annualized basis, while nonperforming assets declined to 29 basis points of total assets.

In addition, <unk>.

That's a five assets declined $4 six declined $4 $6 million during the quarter.

Our view on the ACL and provision expense remains unchanged, we expect our ACL coverage to remain stable or increase slightly in the fourth quarter as our motto responds to changes in the macroeconomic environment.

Finally, as shown on slides 20, and 21 regulatory capital ratios remain in excess of regulatory minimums and internal targets.

During the third quarter tangible book value and the TCE ratio continued to decline due to a drop in accumulated other comprehensive income.

Absent the impact from <unk>.

The TCE ratio would've been eight 1% at September 30th compared to five 8% as reported.

Our total shareholder return remains robust with approximately 40% of our earnings returned to our shareholders during the period through the common dividend.

We believe our dividend provides an attractive return to our shareholders and do not anticipate any near term changes. 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 going forward 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 22.

Loan demand remains solid pipelines are beginning to ease and we expect growth to moderate to high single digits over the fourth quarter.

We expect total deposit balances remain flat or decline slightly over the near term.

Our asset sensitive balance sheet continues to benefit from rising rates and although there are many variables that impact the magnitude and timing.

We expect the margin to continue to expand to a range of $4 three to $4 four 5% in the fourth quarter.

Based upon anticipated interest rate increases.

The competition for deposits is increasing and we expect the margin expansion to moderate as we get further into 2023.

Regarding credit much uncertainty remains regarding inflation and the impact of rate hikes to.

To the economy and our customers.

Over the fourth quarter, we expect continued stability in our credit quality trends.

And ACL coverage remains stable to slightly higher.

We expect fee income to be between $44 million to $46 million in the fourth quarter with continued strength in our diversified Steve producing businesses.

Specific to expenses, we expect to be between 100 $507 million.

But instead of expenses could fluctuate with fee income performance.

As our operating lease portfolio grows we will see a corresponding depreciation expense growth of approximately $1 million per quarter, which.

Which is included in our range.

Regarding summit, our outlook is unchanged and we expect the acquisition to have minimal impact on overall 2022 earnings.

And provided approximately $4 million in annual originations.

Lastly, our capital ratios remained strong and we expect to maintain our dividend at current levels.

Overall, we had a really nice quarter and we're optimistic that we can sustain that momentum over the remainder of 2022.

And into the new year, our strong balance sheet is well positioned to continue to benefit from rising rates.

With a loan deposit ratio under 80% strong liquidity and positive credit trends.

We believe we are well situated to manage potential economic downturn.

We will now open up the call for questions.

Victoria.

And Keith if you would like to ask a question. Please press star one on your telephone keypad.

I would like to withdraw your question. Please press <unk> one.

Ask your question. Please ensure that your line is on mute telephony.

And now our first question comes from Scott <unk> of Piper Sandler.

Please go ahead your line is open.

Thank you good morning, guys How's everybody doing.

Got it got it got it.

Good.

Okay.

I guess, Jamie maybe first question for you. So it kind of in terms of looking at almost every turn.

In the tightening cycle you guys have been maybe a little more asset sensitive than.

And then you had model.

Sounds like we'll get another big lift in the fourth quarter.

You had noted moderating.

And into 2023 as deposit cost sort of so to keep up but.

Before we get to a point, where the fed stops raising rates, maybe just some thoughts on.

How much further could you expand the margin and can you sustain NII positive NII momentum after the fed stops raising rates.

Yeah.

Yeah. Scott This is Jamie so yeah, we do we do expect to see another pretty sizable increase here in the fourth quarter and the margin. It's just I mean from the pace.

The interest rate hikes.

And how they're there they're a these are coming on.

We expect to see that lift here in the fourth quarter as well and then even into the even into the first quarter. If you look at based on the.

The fed fund futures and what we're expecting in terms of rate hikes filling in for the beginning of next year, but then so we expect the margin to peak. So if you'd have asked me maybe six.

A few months ago, where our margin was going to peak out.

Have said, maybe in that and that $4 20 range, but just given that the the way things have changed I think it is the peak is a little bit higher so the peak is probably somewhere in that.

In the first quarter of next year, and where the peak is going to be a little bit higher and somewhere in that.

For $40 to $4 50 range and into next year and then.

As as the fed stops and on the back side of that the deposit side starts to catch up I mean, we just we just had no tie in for the deposit side to really ramp up to where it should be that's going to happen more on the back side.

When the fed stops so you'll then start to see the margins start to come back.

Come back down and.

And moderate in the in the middle to the back half of next year.

Yes.

Perfect Alright, thank you for that color and I guess, just given that we're getting closer to the end of the tightening cycle and hopefully.

Have you guys given any thought to sort of moderating our asset sensitivity to protect against a turn in rates.

You guys are putting on swaps out to do so.

But if so what would be the vessel demand.

Yeah.

We're looking at several things was.

Kind of a I would say evaluating we haven't done anything yet I would say material maybe the only thing.

We've done at this point is some slight rebalancing in the investment portfolio to maybe extend some.

Duration there on the on the investment portfolio, but that's I would say that's on the fringes, but I mean I would tell you we're evaluating various.

Various options to protect the NIM on the downside and reduce that asset sensitivity I mean, we're looking at Costless collars and looking at build against some floors and whatnot, but haven't done anything yet, but expect to do so here in the in the next in the next.

Within the next quarter.

Perfect Alright, good. Thank you guys very much for taking the questions.

Hey, Scott.

Thank you very much for your question. Our next question comes from Tim I asked Raymond James. Please go ahead. Your line is open.

Thank you and good morning, guys.

Alright.

Okay.

Maybe we just start on the on the fee guidance.

The decline there.

Talk through some of the.

Puts and takes in terms of what drove that and maybe if we could just.

Talk a little bit about what your expectations are for Bannockburn in particular going forward that'd be great. Thanks.

Yeah.

Danny I'll start this is Jamie so kind.

Kind of just going through the various line items like so the first one like we disclosed I think a few months ago, we made some changes to our overdraft program.

It is impact the impact was was what we expected its not any different than what we expected, but that didn't drive that service charge revenue down.

Down in the in the third quarter.

So that impacted that line item in terms of mortgage I mean no.

As you.

Back I mean R. R.

Mortgage rates are up.

400 basis points or so from a year ago. So in terms of.

That activity has has fallen off dramatically, so obviously seeing an impact there.

On the on the wealth management side.

Out of those fees are based on our market values of the portfolios in light of the assets under management, so getting impacted by.

The downturn in the market and then.

Offsetting that a little bit we are still seeing strong income on the foreign exchange side.

So we were down a little bit this quarter, but coming off of.

What was a record quarter for them in that and you know they have a base of income and then there are some.

Quarter to quarter fluctuations, but when we look at that income at this point, there's somewhere in that.

$12 million a quarter range, so about 48 million ish on an annual basis of revenue at at Bannockburn and we.

Going forward, we expect that to <unk>.

Kris and that 5% to 10% range on an annual basis for the.

For the near term.

Okay, Great that's helpful. Jamie Thanks.

Then.

So similar question, but on the expense side.

In particular, it looks like the guidance for the fourth quarter is.

Similar to what you what you put up in the third quarter.

And then you called out specifically the.

Increase in.

In leasing expenses, just curious how we should be thinking about kind of kind of growth rates from from there.

That's just a unique situation in the fourth quarter were expenses should be roughly stable ish.

And also if that million dollars is included in the.

In the guidance that you've given.

It is yeah. The million is included in that guidance and that's just obviously as we put out but operating leases.

<unk> on the books that line item there is going to is going to continue to grow but I mean absent that.

I would tell you. It's it's really just the pressure that we are seeing is really on the is really on the employee cost side so outside of.

That I would just call it inflationary pressure on unemployed cost.

Expenses are relatively flat.

So you got essentially you have that increase on the some inside every.

Every quarter kind of just ramping up and then some some pressure there in.

Wage cause health care costs, and whatnot that is impacting the employee cost line, but outside of that relatively flat.

This is archie.

The other items on the corresponding side. It says as the leasing business expense goes up but you also see a corresponding benefit in the fee side, yeah, correct from the operating leases yes.

Yeah.

Alright, Thanks for all the color guys Thats all from me.

Does that give.

Thank you for your question Danielle. Our next question comes from Terry Mcevoy At Stephens, Inc. Please go ahead. Your line is open.

Good morning. This is Brendan route on for Terry.

My first question about deposits.

Yep.

Non interest bearing deposits pre COVID-19 2019, or about 26% of total deposits and this last quarter. They were about 32 and a half.

They can return back to that pre COVID-19 levels next year year, and a half or so.

Yeah, Brent this is Archie.

Certainly there is some money thats searched into to demand deposit accounts during COVID-19 and you would expect over time that will work its way back out.

As businesses and individuals spend some of that or start to put some of that money to work. So I don't know that we're really able to hold it at the low thirties.

But I think we we believe just given our strategy and focus on.

Growing our business sector, particularly we think that number will probably be higher than where it was pre COVID-19.

Okay perfect. Thank you.

Next one here is are you.

<unk> sectors or regions across your footprint that you're expecting to drive your loan growth going forward.

This is Archie again, I mean, I think it's across the.

It's across our paper and yard Cooper's pretty tight if you think about where they're located.

For four hours, four and a half hours across the whole footprint. So it's coming really from all of those markets, but we also have as you know we have some national businesses.

With Oak Street and summit didn't even.

In our some of our.

More recently in commercial real estate. So all of those those areas will help drive some of that growth as well.

Gotcha. Thank you.

Two year kind of go hand in hand talking about credit can you talk about how your.

Restaurant franchise borrowers are managing the current environment and also can you remind us your exposure to office hotel and retail CRE, just kind of how you stress those portfolios for the higher interest rates.

Yeah, I'm, sorry, Jim I'll start and I'll turn it to bill to kind of get into the.

To the tails on them on the restaurant book and Hotel book just to.

We have those books are much smaller than they used to be so I think the restaurant portfolio was is now.

Now under 300 million. So it's about half of what it was four years ago and the hotel book is down about 40% from where it was two two and a half years ago. So it's I think it's.

Hum.

Over $300 million or so so they are much smaller, but we will have built here at our cheap for us we're talking about.

What are you seeing in those those portfolios as well as.

I think you said.

The retail CRE portfolio.

Sure.

As far as the of the office.

Reach out books.

Those are the hotel book here.

And very very good.

You know hotels have rebounded nicely.

Yeah.

Some cases youre shooting for.

Pre pandemic levels.

And so we're very happy with that portfolio.

Progress on the franchise booked or you have some cost.

Cost headwinds as far as the labor and input, but we're also seeing.

Rises.

Prices across a lot of the platforms.

Help mitigate that they still have.

Good volumes compared to 2019.

And so we feel pretty bullish there as well on the office Yeah, we continue to.

Monitor that portfolio very diligently.

Looting.

Just asking not only on New York straight environment, one thing about our our vertical book and the real estate side.

The vast majority of that is swapped.

And sort of have interest rate hedges on it so we feel pretty good about that.

That said, we do we do run through our models, including.

Not only interest rate shocks as well as our rent rolls.

And looking out.

You know short term midterm and long term expires.

Richard risking packet cores.

And before you know congratulation with Wolfe research.

So you know when we do that across the board.

For all stakeholders.

Hopefully that helps you got it yes.

That's very helpful. I appreciate you taking my questions. Thank you.

Thank you.

Thank you very much.

As a reminder, he would like to ask a question. Please press star one on your telephone keypad.

And our next question comes from Chris Mcgratty at <unk>. Please go ahead. Your line is open.

Oh, great. Thanks.

Hey, Hey, guys, Jamie a question on the just spot rates do you have.

The spot deposit interest bearing deposit in the spot loan yield.

So like for September is that what you're asking.

We ended the quarter exactly.

Yeah, so our our cost of deposits in September was 27 basis points.

Okay.

Yeah.

And.

Hang on.

Right back into it.

And our loan yields.

For September .

Yeah.

Let's see here.

It's around $5 40.

Okay.

Thank you and the 30% beta you cited was that total or is that interesting just to make sure I'm clear.

Yeah.

Yes.

And obviously, Chris real quick on that I mean.

We haven't really seen a whole lot so far in the cycle.

We're starting to see some pressure and then it's just.

We're seeing that here starting out a little bit in the fourth quarter. Some competitive pressures and you know obviously that data is going to start to move up here and there.

And then on the back side again like I said the.

That data moves up pretty substantially on the on the back side of.

The rate hikes so.

Great I guess, maybe on the loan yield outlook.

If they were priced they continue to reprice higher I mean youre going to have.

Borrowers are going to be paying north of six maybe mid sixes on alone.

At what point does the pressure on the borrower or become more acute with related to credit.

Yes.

Yes.

It's hard to look at that.

Global basis, but you know when we when we look at credits.

And underwrite credits we have built in shock.

And those shocks you don't go out.

And duration and size depending on the.

The deal but.

We test them.

To really ensure that they've been doing that break.

Yeah.

And then.

So a lot of their coworkers.

On the loan side, both in commercial and on the ICR Reed.

Waned, a little bit just with horizon rig environment that we're in right now people are careful not to lose but overall, we're going to protect that way, but it's really through our downside.

Base case downside and severe cases.

But they.

They don't know.

You know of course like any expenses incurred.

Pressures and they'll figure out other ways too.

Yes.

Yeah, Chris This is Archie I think this is part of the case for what we're seeing.

Softening in the pipeline slowing down the growth is just we know, especially in our ICU regroup.

Certain.

Projects are being postponed or put on hold.

Just waiting for the environment to get them, all but look.

Look better so that is driving some of the.

Some of our outlook around loan growth.

Yeah.

Got it thank you.

Yep.

Thank you very much for your question Chris.

At this time there are nice to have a question and I would like to pass back over to Archie Brown for any final remarks.

Okay.

Thank you Victoria and thank you all for joining us on today's call and a hearing or hear more about our story in the third quarter. We're excited about the fourth quarter and our 2023 and we look forward to talking to you again next quarter have a great day.

Yeah.

Thank you everyone for joining today's conference call you may now disconnect.

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