Q2 2019 Earnings Call
Good morning, and welcome to the first financial Bancorp second quarter, 2000, <unk> earnings conference call and webcast.
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Please note. This event is being recorded I would now like to turn the conference over to Mr., Scott Crawley corporate controller.
Mr. Cohen. Please proceed.
Good morning, everyone and thank you for joining us on todays conference call to discuss first financial Bancorps second quarter and year to date 2019 financial result.
Participating on todays call will be Claude Davis Executive Chairman, Archie Brown, President and Chief Executive Officer, Jimmy Anderson, Chief Financial Officer, and Tony Stollings, He VP commercial banking.
Oh, 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 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 32019, we will not be updating any forward looking statements 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 marketing are 100, fiftyth 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 58 cents.
A 1.3% return on average assets.
18.9% return on average tangible common equity.
And it's up 51% efficiency ratio.
For banking trends were positive with loan origination activity strengthening across many of our living units and pay off pressures easing.
These complimentary trends enable us to grow loan balances by approximately 8% on an annualized basis.
Deposit growth was modest as seasonal public fund increases in 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 relates to the workout of the franchise credit disclose 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 bank card income.
Our sub 51% efficiency ratio continues to be a bright spot.
Although we saw a modest expense increased 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 a very successful bentek burn 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.
Patrick Byrne has become an elite performing 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 a 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 23 cents per share.
Which in addition to the bank for an 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 Jamie to discuss 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 three and four provides 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 remain 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 main source merger well ahead of our modeling.
Slide five reconciles our GAAP earnings to adjusted earnings highlighting items that we believe are important to our understanding our second quarter performance.
For the quarter adjusted net income was $57.4 million or 58 cents per share.
Which excludes severance and merger related costs.
As shown on slide six 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 seven net interest margin on a fully tax equivalent basis declined six 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 seven 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 further when he addresses our outlook. We expect further margin pressure in the back half of the year, mainly from a decrease in assets asset yields.
Given the expected fed rate cuts and the impact on our loan portfolio, which is 58% variable rate.
As shown on slide eight the yield on securities declined 15 basis points.
And a four basis point increase in gross loan yields was offset by a four 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 nine depicts our current loan mix and balance shifts compared to the linked quarter.
End of period loan balances increased $172 million as IC, Ari and mortgage loan growth outpaced slight declines.
And see an eye and small business banking.
While we remain optimistic regarding future growth potential, 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 cost 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 five 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 eight 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 acquisition, we continue to evaluate capital strategies and deployment opportunities such as additional M&A activity in dividend levels that support the company's plan 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.
Thanks, 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 long term weeks, we target mid to high single digit growth given the investments we've made in talent.
Our core operating markets in our conference at product offerings.
Regarding the net interest margin projections will be largely depend on the past the 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.
However, 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 continually 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 spending from closing, we will evaluate our capital return strategies 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 and we'll now open up the call for questions.
We will now begin the question and answer session to ask a question Press Star then one touch Samsung.
If you are using a speakerphone please pick up your handset before pressing the keys.
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This time, we will pause momentarily to assemble our roster.
Our first question comes from Scott Siefers Sandler O'neill Scott. Please proceed.
Good morning, guys. Thanks for taking the question.
He's got <unk>.
Jamie maybe first question for you just on the margin it looks like at the at the mid point in the third quarter, maybe eight basis points or so of core margin compression I guess main puts and takes as you see them for the third quarter and then.
As as we worded or as we look beyond maybe beyond the third quarter is that eight basis points representative of what would happen with each the fed rate cut if the fed were to do more or would the impact be less assuming deposit betas are deposit costs started to come back down just would be curious to hear your thoughts.
Yep.
Yeah, so for the third quarter, Yeah. So I would say the impact in the third quarter would be slightly greater than what we would expect going forward, but so that's the main kind of.
Items, there if you look at.
You know what what is what's going to happen here in the third quarter assuming.
We have a fed a 25 basis points at a rate cut here at the end of the at the end of the month would be you know you got so we have basically about if you look out at about 60% of our loan book that floats and would move down that Ah that 25 basis points. So you're talking you know you had about it or call. It a 10 basis point drop on the asset side and you know what.
That two to three basis points that we would pick up on the on the funding side in the third quarter and that's that you know call it seven or eight basis point drop.
They're in the.
In the third quarter.
And then going forward I mean, we are we are projecting given every.
25 basis point cut in rates, where our balance sheet is a six to eight basis point drop.
Our net interest margin and just depending on how much. We can you know that the the deposit competition, how much we can get in and train them.
Managed rate deposits and get those rates down it would be it would be on the lower end of that and potentially even lower than the six basis point pressure that we would see so, but but conservatively 60 basis points for every 25 basis point drop.
Okay perfect. That's terrific I appreciate it and then just as we look at the impact of purchase accounting adjustments I guess at least vis-a-vis my own model, maybe they stayed a little more elevated than I would've thought.
But.
One I can always be wrong [laughter], but then to just hear your thoughts going forward as well.
Yeah, so going forward for the third quarter were projecting that to be.
Based on our model and expected prepays or 19 basis points for the third quarter.
And then that drops about a basis point to a basis point and a half.
Every quarter there going forward.
Okay.
All right. Thank you very much 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 is as you see it was the Twoq you as you sort of normalize back toward a more typical range was that better originations lower pay downs, how do those dynamics workout.
Yes, Scott. Thanks, you know our origination side was.
Just a little bit stronger than Q1 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 pay off side pay offs drops.
By probably 25% from Q1.
And you know, that's even and that was even down from Q4, so significant drop in in pay offs in as we think about our outlook I think we we guided here to kind of mid single digits, we still see strong origination activity in Q3, but with a little bit more of a tick up.
In pay off balances in Q3.
Okay.
Perfect. That's terrific. Thank you guys very much.
Thanks Scott.
Our next question comes from Chris Mcgratty KBW, Chris. Please proceed.
Yes, good morning.
Jimmy I start with just one follow up on Scotts question on the margin I think you said 58 or 60% of the book floats could you remind us at 630, the break down between prime and LIBOR or and and others because it would seem I recall you guys have a lot of LIBOR exposure. So this quarter plus next quarter with.
Suggest that you might be at the higher end of the compression if the fed moves and then.
Overtime, you may not feel as much pressure because you have.
It's kind of like where leaving and then you've got the deposit repricing catch up so could you just review those numbers for us.
Yeah. So overall I'm going to give you dollar amounts here as opposed the percentages but.
Roughly three and a half billion on the loan side between three and a half billion and 4 billion is LIBOR based and about a billion and a half is.
Prime day.
Okay.
And then they have three basically you know, let's say you know Chris we also have a about a half a billion.
In the investment portfolio as well.
That is that floats as well and it is it is mostly.
Index, a three month LIBOR.
Okay. So that was part of the decline in the a and the securities yield this quarter.
Right Yeah, Okay. The two to three basis point.
Kind of easing of the of the funding costs that you're talking about if the fed moves yep.
How do you feel you know if we get more than one cut the ability to you know.
Increased the negative beta if you will on a on the deposits like whats can you go to like you know some banks have talked about like a 40% to 50% move but were also at a lower rate interest rate that start with any thoughts there.
Yeah. So the majority of that of the two to three basis points that were projecting in the third quarter would be related to borrowings.
That does move move or on the funding side that would move automatically so right now when you look at our at our CD book.
We are that were close to where our where the run off rate and new Cds as washing out but not quite there yet we're about 10 I would say, we're about 10 basis points upside down and where I would say probably a couple of months away from that washing out in there. So I think what you'll see is in subsequent.
With given subsequent rate cuts that will 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 trim 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 there's a period in there where you can do that and then you have the floor.
Got it Okay. That's helpful. Thank you me maybe last one for you all on capital you talked to in your prepared remarks about not being able to buy stock and given that the deal.
I guess two questions number one on are you able to buy stock now that the deal can announce and is the expectation to look at the buyback and secondarily I think last quarter you talked about.
Depository deals and in Michigan, and Ohio, maybe an update there whether that might be a better use of capital.
Given where valuations are thanks.
Yeah, Chris This is Archie Yeah. We are we are in position.
In the market at least be able to do buybacks.
This you're going for this coming quarter.
It's certainly one of the key strategies will be evaluating relative to you know other priorities as well.
Oh in in the coming quarter, we as we've said, we've got the capital flexibility and.
Assuming that's kind of our our analysis in terms of overall pricing.
It will be one of the levers we'll evaluate closely.
With regard to acquisitions.
I think our primary focus is still on.
Trying to identify.
Some additional fee based businesses.
We talked before about trying to do and the wealth space, we continue to work hard there.
On the banking side.
Preference number one is still to do something.
In marketing in Metro's, where were 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.
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 nothing that we see on the horizon.
Got it thank you I appreciate it.
Our next question comes from Terry Mcevoy Stevens Terry. Please proceed.
Good morning.
Hi, Terry.
Maybe just do you have any updated comments on the credit performance of the franchise portfolio last quarter outside of the one credit that was in the press release and in mentioned earlier.
Sure Terry you know overall, we feel good about that portfolio.
The.
Maybe just kind of give you a little bit of a run down we saw one credit during the quarter move.
Oh from a watch status.
Into an accretive accruing TDR substandard status.
That's a large multi concept.
Operator that.
And so it's really it's our only participation credit and we've worked with the lead bank.
And the bar, we don't think there's any loss in that credit.
And the problem that in that credit is really related to the smaller portion of this concept smaller concept in this portfolio.
When we pretty much done a deep scrub deep dive in the portfolio, we have I think maybe.
Four loans totaling around $11 million in 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.
Thanks, and then just as a follow up to 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 just will it be call. It chunky going forward, where it could bounce anywhere between two and $5 million just given a given activity in the quarter.
Yeah sure. It is it is kind of chunky and it will cease can range from.
You know 40000 30000, then they can range on up to you know 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 just there's a smaller pool, but in the in the quarter we had.
Two or three sizable ones that happened so we don't forecast that kind of.
That kind of level going forward, although we still think so.
Given the interest rate remember, we still think.
Three with fees will be.
Well be something it performed pretty well for us.
Great. Thanks, Archie Yep.
And as a reminder, if you have a question. Please press Star then one.
Our next question comes from Nathan race of Piper Jaffray.
Nathan Please proceed.
Hey, guys good morning.
Good morning Nate.
Going back to Terry's question on credit I. Appreciate your commentary in terms of expecting stability going forward. So is it fair to assume you know the provision line goes back to what we saw perhaps in the back half of last year absent the issues that we've seen in the <unk>.
Well tied to the one of.
Credit within the Oh quick service portfolio.
Yeah, we we feel pretty good if you know if you just look at our charge offs over the last year aside from that franchise credit or charge offs were averaging somewhere in that 15 basis point range and.
Oh, I think that's kind of how we we view it. So you know at least our current outlook.
So when we think about that plus loan growth that's or.
Maybe 78% of loan growth, that's kind of how we we view you know provision kind of going forward.
Okay, great and if I could just ask one last one more related to the core NIM. It seems like the big challenge on the NIM. This quarter was the uptick in Oh.
And.
And.
And the cost and so I'm just curious to know 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 80% level that we see today are you guys looking to kind of keep that close to 90% or I guess, how should we think about overall balance sheet growth dynamics, assuming you know you get to that kind of 4% to 6% loan growth target going forward.
Yeah, Hi, this is Jamie so yeah, we do have some room in our loan to deposit ratio no. We can let that let that run a little bit and I can you know get into the.
You know somewhere in the low Ninetys, I think where we would be where we'd be comfortable with that so yeah that could that could affect the obviously goes back the funding mix I'm, a little bit and then have an impact on the.
On the margin and that's just you know dependent on.
What we see here going forward with with loan growth, but you know in that in that mid single digit range, you know that that loan to deposit ratio could or could tick up a little bit.
Okay perfect I appreciate you guys, taking the questions. Thank you.
Thank you.
Once again, if you have a question. Please press Star then one.
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 and I want to thank everyone for joining our call today and we look forward to talk to you again soon have a nice day.
The conference is now concluded.
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