First Financial Bancorp.
Q1 2021 Earnings Call Transcript

Published: 23 Apr 2021

[Operator:]

Good morning, and welcome to the First Financial Bancorp First Quarter 2021 Earnings Conference Reference Call and Webcast. All participants will be in listen-only mode. Please note this event is being recorded. I’d now like to turn the conference over to Scott Crawley, Corporate Controller. Please go ahead.

[Scott Crawley:]

Thanks, Jason. Good morning, everyone, and thank you for joining us on today’s conference call to discuss First Financial Bancorp’s first quarter 2021 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 www.bankatfirst.com under the Investor Relations section. We will make reference to the slides contained in the accompanying presentation during today’s call.

[Archie Brown:]

Thank you, Scott. Good morning, everyone, and thank you for joining us on today’s call. Yesterday afternoon, we announced our financial results for the first quarter, which once again reflects strong earnings and our consistent ability to deliver value to our shareholders. While uncertainty remains due to the ongoing pandemic, the accelerated COVID vaccine distribution, the unprecedented fiscal stimulus, and an accommodative Federal Reserve have led to widespread optimism for our economy, which is in stark contrast to our sentiment at this time last year. Our first quarter operating performance reflects this change in sentiment and we are more optimistic as a result of the improved business climates, despite an operating environment that presents ongoing challenges due to very low interest rates and muted loan demand. Highlights for the most recent quarter, after being adjusted to remove non-recurring items included earnings per share of $0.50, return on average assets of 1.24% and a 58% efficiency ratio. Net income for the quarter was bolstered by lower expenses and significantly lower credit costs. Despite expected seasonal declines, non-interest income was strong due to healthy mortgage demand, robust foreign exchange activity and higher wealth management fees. In addition, adjusted non-interest expenses declined $4.6 million from the linked quarter and resulted in a sub-60% efficiency ratio. As I mentioned, credit costs were low with $4 million of provision expense during the quarter, and resulted in an allowance for credit losses of 1.84% of total loans, excluding PPP. Classified assets increased during the quarter, however our overall credit outlook has improved significantly, and our borrowers are seeing benefits from the various stimulus actions in the improved economy. While first quarter net charge-offs increased slightly from prior quarters, this was driven by a single customer relationship. Given our overall credit outlook, we expect the allowance for credit losses to continue to decline over the course of 2021. I continue to be pleased with the progress we’ve made in reducing our CARES Act loan modifications. Active loan modifications at the end of the first quarter totaled $251 million, or 2.5% of total loans, with hotel loans making up $153 million or 61% of these deferrals. We expect loan balances with modifications to steadily decline through the third quarter of this year.

[Jamie Anderson:]

Thank you, Archie and good morning everyone. Slides 4 and 5 provide a summary of our first quarter 2021 results. As Archie mentioned, we were encouraged by our solid first quarter results. Earnings were strong as the net interest margin stabilized, fee income remained elevated and provision expense moderated. In addition, our expense base decrease compared to the linked quarter, and our efficiency ratio remained below 60%. As expected, core net interest margin stabilized during the quarter. Lower loan fees and continued pressure on asset yields lead to a nine basis point decline in total net interest margin on an FTE basis. However, these declines were partially offset by deposit cost reductions. While there will be some volatility in total margin due to loan fees, we expect core margin to decline slightly in the coming periods. Regarding fee income, mortgage banking exceeded expectations despite seasonal headwinds. In addition, Bannockburn had another strong quarter of foreign exchange income and, while trust and wealth management income grew during the period.

[Archie Brown:]

Thank you, Jamie. Before we end our prepared remarks, I want to further comment on our forward-looking guidance, which can be found on Slide 23. Loan balances excluding PPP are expect to remain flat over the near term as we continue to see pressure in certain portfolios and we expect low single-digit growth as we get into the back half of the year. Average securities balances are projected to increase further by approximately $250 million in the second quarter as deposit balances are expected to stabilize without additional stimulus activity. The net interest margin is expected to be positively impacted by further PPP forgiveness payoffs and the associated acceleration of fee 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 subsequent increases to our securities portfolio. Regarding credit, we expect the provision expense to continue to decline throughout 2021. Specific the fee income, we expect continued strong mortgage performance with seasonal increases to volume partially offset by pressure on premiums. Foreign exchange income should remain consistent with prior quarter and deposit service charges are expect to remain under pressure given stimulus activity. But we expect some modest growth in our interchange revenues as customer spending accelerates. We expect expenses to be consistent with the prior quarter over the near term, this could fluctuate some with fee income.

[Operator:]

Thank you. Our first question comes from Scott Siefers with Piper Sandler. Please go ahead.

[Scott Siefers:]

Good morning, guys. Thanks for taking the questions.

[Archie Brown:]

Hi, Scott.

[Scott Siefers:]

I guess, the first question was just on net charge-offs that you had cited? Is that sort of fully resolved or would you expect any further charges? And then I guess just to look forward would the expectation generally be for charge-offs to revert back to and I guess, last couple quarters, at least has been sort of at 20% to 25%, pardon me basis points range, something like that reasonable to look at going forward?

[Archie Brown:]

Yes, Scott. We would expect the charge-off rate to come back down from the first quarter levels based on what we’re seeing right now, kind of more normal in the range that you’re describing. And I’ll let Bill, maybe talk about the resolution of that credit specifically to give you an answer there. Bill?

[Bill Harrod:]

Yes, absolutely. Thanks, Archie. Hi, how are you doing, Scott?

[Scott Siefers:]

How are you?

[Bill Harrod:]

Good. Yes, this was a longtime customer of the bank, of the Commercial Finance Group. Over time, it morphed from our traditional agency deal into an aggregator of medical malpractice. And we had some – there were some issues between the carrier and our borrower, and that relationship broke down. And that led us to cut a deal with the carrier. So this should be all behind us after this quarter or after discharge.

[Scott Siefers:]

Okay. So this isn’t even really related to any areas that would be sort of, kind of COVID impacted. I mean, this strikes me it’s kind of a special situation. Fair enough conclusions.

[Bill Harrod:]

Yes, Scott, think, I think we’d say if it were completely COVID related, we probably would have – we had a different outcome in terms of provision, but because it was something outside of that, it led to probably the more provision.

[Scott Siefers:]

Yes. Okay. Perfect. Thank you for that. And then maybe just as we look to the second half of the year, certainly understand what’s going on the consumer side. And then I think we’re all sort of waiting for this recovery on the commercial side, maybe, to that end, any color you can provide on where utilization rates are currently versus what a typical number is, and where you might expect those to go as we look to sort of the second half/2022 recovery in commercial?

[Archie Brown:]

Scott, I’m sorry, on the first part, you said utilization rates?

[Scott Siefers:]

Yes, commercial utilization rates.

[Archie Brown:]

Yes. Scott, we think they’ll – in the back half of the year, we think they’ll start to move up. I mean, you have several things happening. Certainly the liquidity that is sitting on balance sheets, I mean, we’re seeing record, balances sitting in demand deposit accounts, both consumer end and business you have that going on. There’s still, I think, some clarity around the pandemic and making sure we’re getting to, final firm footing. And then there are still some supply disruptions and think all that’s got to work through but we would think that would start to get better in the back half of the year.

[Scott Siefers:]

Yes. Makes sense. Perfect. Okay, thank you guys very much.

[Archie Brown:]

Yes. Thanks, Scott.

[Operator:]

The next question is from Chris McGratty from KBW. Please go ahead.

[Chris McGratty:]

Hey, good morning guys.

[Archie Brown:]

Hi, Chris?

[Chris McGratty:]

Jamie maybe just kind of start with you on a balance sheet question the expectation to add to the bond book and loan portfolio kind of stay flat. Given all the liquidity is, I mean, do you expect earning assets to have an upward bias? Or we kind of just remix in for a couple quarters?

[Jamie Anderson:]

Yes, I mean, so right now, we’re going to add to the bond book to the investments securities. And so that will go up. Our targeted balance now is right around $4 billion for investment security. So overall, yes, earning assets will go up period-to-period by that amount. And that’s just with loan staying relatively flat. And so from a – Chris, when you think about that, you’re probably – your next question probably about when talking about the margin, maybe when you think about that, that’s going to have an effect on the net interest margin and dilute the margin slightly. When we’re reinvesting right now, on the security side, we’re getting somewhere around in that 2% range, maybe to 2.10%. And so you think about that, obviously, that is a dilutive to the margin. And we’re still seeing a little bit of repricing on the loan side as well. And then when you look at the deposit side, we had a large move down in the first quarter that we were expecting. We were we could see that coming. We knew, we had some room on the deposit side, and we moved from 20 basis points on deposit costs to 14 basis points. And that starts to – there’s not as much room to move down here going forward. So we think we can get that down by another two or three basis points, not all in one quarter, but it just takes a little bit of time here over the next two or three quarters to get that down. So from a rate perspective on the margin in the second quarter, we’re going to see some pressure just given that putting that excess liquidity to work in the securities book, and just some continued repricing on the loan side.

[Chris McGratty:]

Okay, that’s great color. Thanks. You guys referenced the efficiency ratio a few times in your prepared remarks. Just a question about that, I mean, is the expectation that in this environment, you can stay below 60? And then just a clarification, the near-term expense flat, is that relative to the reported number or the adjusted number?

[Jamie Anderson:]

Yes. So that’s relative to the adjusted number. So yes, whenever we’re talking about that, we’re talking about the operating number. So we think that here in the short term, we’ll remain relatively flat. And then in the back half of the year, just as things open up a little bit, you start to see T&E expenses start to come back a little bit in the back half of the year. We may see those expenses tick up a little bit. But yes, it’s off the operating number, flat in the short term, and maybe up a little bit, and then in the back half of the year.

[Archie Brown:]

And then on the revenue side, I mean, certainly we see fee income, slightly improving from here and with the additional securities book. Hopefully, that we can hold revenue and maybe that efficiency ratio will stick. Yes.

[Chris McGratty:]

Okay. And then maybe the last one kind of housekeeping on PPP, do you have the average balances in the quarter and then also the fees that were in the quarter and what might be still to come?

[Jamie Anderson:]

Yes. So I don’t have that average balances right in front of me. But Chris, but at the end of the quarter, we’re talking about the fees we have – from the first round and in this last round of PPP, we have about $22 million of unearned fees that will still come in and we’re expecting the bulk of those to come in over the remainder of the year. We think the second quarter is actually going to be a little on the low side. Just with the kind of the first round, kind of wrapping up in this last round kind of really has the forgiveness hasn’t kicked in quite as much. So we think overall, if you’re trying to project those, we think it’s – maybe roughly one-third of those come in the second quarter, and then the other two-thirds will be spread out in the third and fourth quarter.

[Chris McGratty:]

All right. Thanks, Jamie.

[Operator:]

The next question is from Jon Arfstrom from RBC. Please go ahead.

[Jon Arfstrom:]

Thanks. Good morning, guys. Just talk a little bit about, maybe following up on Scott’s question, you talk a little bit about the commercial pipelines and what they look like maybe relative to a quarter ago.

[Archie Brown:]

Sure. Jon, this is Archie. Actually the pipeline overall is slightly higher than it was a quarter ago. And even in recent weeks, we’re seeing more activity, especially in our improved pipeline that is starting to move up. So we think again, in the near term, a little more flattish. But we’re starting to see some momentum and that is some things improved supply chain, all that stuff worked its way through, we think in the back half. We will start to see some growth out of that group.

[Jon Arfstrom:]

Well. How would you describe the competitive environment, also maybe relative to a quarter ago?

[Archie Brown:]

Highly competitive. I mean it’s - when you – I mean, it’s very, very competitive on pricing and structure. We’re probably competing a little more when we have to on price, but we’re trying to stick to our disciplines on the structuring side of deals, but it’s highly competitive for loans right now.

[Jon Arfstrom:]

Can you touch on franchise finance for a second? And how that business is doing?

[Archie Brown:]

Yes. We’ll have – maybe Bill give you just a little color, I know we’ve got a slide on the portfolio as well in the deck. But maybe Bill can give a little color on how that portfolio is looking now.

[Bill Harrod:]

Yes. The franchise book has performed very, very well through the COVID and the pandemic, especially in our delivery, and our quick-serve restaurants. So they adapted very quickly to the new normal during the pandemic. We also have some sit downs that we’ve talked about in the past Golden Corral, Denny’s, IHOPs and some things like that. And we’re starting to see a lot of progress being made and Denny’s, IHOP and Golden Corral as those stores reopen. Denny’s and IHOP are a little bit earlier in their performance returns than the Golden Corral, but our portfolio has the bulk of the stores are open now. Not all of them on the GC side, but on the Denny’s and the IHOP they are and with the plans that are in place is all of the Golden Corral should be open by the end of this quarter. And the results have been, not at 2019 level, but rebounding very nicely and all sit down format through the Q4 and Q1 of this year.

[Jon Arfstrom:]

It’s making me hungry, by the way. Just can you touch – a couple more. Can you touch on the classified asset increase? I know you’ve talked about a little bit, but anything going on there that’s unique or different?

[Bill Harrod:]

Yes, I mean the uptick in classified assets really tied into the COVID impacted portfolios about 75% of that uptick was hotel sit down and then a retail credit. And as we put our COVID mods in place, and we monitored the credits, we obviously benchmark them opposite our projections and our plans. And these are ones that, that fell beneath where we thought they wouldn’t we made the rate of adjustment as appropriate. Based on our look out, and we do think that the bulk of this portfolio is set to rebound, as things open up. And with attraction of the vaccine, and the pent-up demand that we’re seeing we feel pretty optimistic about those credits actually improving over time.

[Archie Brown:]

I think we’re seeing what, Bill, the occupancy is north of 50% now.

[Bill Harrod:]

Yes. We’re seeing occupancies uptick in all of our hotel books. And we’re anticipating up around 50%, 52% occupancy based on customer feedback, which is right in line, or a little bit above the Starz reports for the balance of the year.

[Jon Arfstrom:]

Okay. Last one here on credit. This has been popular and other calls as well. So, I’ll let you give it a shot. But do you see a path back to your day one CECL reserve levels? And if so, any thoughts on the timing of that?

[Jamie Anderson:]

Yes, Jon it’s Jamie. So, I think yes, I think in theory, that’s where we should – once everything has kind of cycled through where we should – were the industry really end us should come back to, but timing is the key here, right. And so is it over, the next year or so, I think is probably where we end up landing on that just as with the recovery, it’s kind of see where the recovery is and where things kind of land. And when you think about hotels specifically, those are going to take a little bit of time to kind of see where they’re at post pandemic. So, I think personally that is year out until we start to see that, and it could be even a little bit longer than that. But yes, so our – so when you think about that for us, our reserve, and you take out the PPP loans, we’re at 184 of loans. Our day one was right at 130. So, that’s 54 basis points of release. And obviously, you can come in many different forms, and charge-offs are going to be some of that if we have loan growth that obviously affects the denominator of that equation. But it ever – the signs are obviously pointing to lower provision expense here and the intermediate term.

[Jon Arfstrom:]

Okay. Thanks a lot, guys. Appreciate it.

[Jamie Anderson:]

Thanks, Jon.

[Operator:]

The next question is from David Long from Raymond James. Please go ahead.

[David Long:]

Good morning, everyone.

[Archie Brown:]

Hey, Dave.

[David Long:]

You had mentioned on the securities investments, you’re getting about 2%. Obviously, still at that level dilutive to the NIM as the mix is shifting. But the question I have is, what type of securities are you buying to get these yields? And are those yields still in place today?

[Jamie Anderson:]

Yes, that’s about our blend, I would say that’s our blended reinvestment rate is right around 2%. So it would be – when you look at out the mix of our book between roughly 60% agencies, 40% non-agency, it’s essentially the same mix of investment that we would have in our book at the current time. So nothing different, we’re not going out really any longer and extending. Our securities portfolio is in that three and a half to four duration. So it’s not really extending a lot there. And so it’s really going into the same type of securities that we currently have in the book. And yes, we’re still getting that roughly that 2% reinvestment rate.

[David Long:]

Got it. And then second question comes out to the – you talked about the round two the PPP gross fees about 5.3%. Were there some deferred expenses with round two that would offset that gross fee when you start to report your net fees, maybe in the back half of this year?

[Jamie Anderson:]

Yes, no. There’s no deferred expenses with that. No. So all of that 5.3% will be coming in. Now, we are initially amortizing or accreting, I guess, those fees in over the five-year maturity period. And then obviously, as they get forgiven, we’ll bring those in.

[David Long:]

Got it. Thank you, Jamie. I appreciate the color.

[Jamie Anderson:]

Yes, David.

[Operator:]

The next question is a follow-up from Scott Siefers from Piper Sandler. Please go ahead.

[Scott Siefers:]

Hey, guys. Thanks for taking the follow-up.

[Jamie Anderson:]

Yes.

[Scott Siefers:]

First one is sort of ticky-tack one on PPPs. Do you have the breakout of the balances between round one and round two by any chance of today’s balances just round one versus round two?

[Jamie Anderson:]

Yes, Scott, this is Jamie. So at the end of – say at the end of March, we had about $400 million in the first draw – in the first round and about $300 million in the second round. So – and just a follow-up from Chris McGratty’s earlier question, the average for the period in PPP loans for the first quarter was $645 million. And it was – in the fourth quarter was $778 million. And we’re projecting about $600 million of the average balances in the second quarter.

[Scott Siefers:]

Perfect. All right. That’s great. Thank you. And then just on the lower credit costs, I don’t want to make you put like too fine a point on it. But it seems that maybe with the exception of hotels, everything is in pretty good shape, particularly considering that the first quarter sort of charge-off was more or less of special situation. Could you guys see yourself taking a negative provision? Or would you anticipate just very, very modest positive provisions? What sort of the thinking there?

[Jamie Anderson:]

Yes. I was hoping you are going to follow up about the demise of the European Super League, Scott. Yes. But on the – on provision, yes, I guess and I hate to say it depends, but it does depend. So, on the provision expense here going forward. We are, I mean, again, we do think it’s going to be lower, I guess the question becomes, or that whether – what charge-offs look like here going forward. If we have – charge-offs can be lumpy. So I mean, if we have a quarter here over the next – over the next couple of quarters, where charge-offs are on the lower side, call it sub $5 million, there’s a real chance that we could have negative provision expense. The other factors, obviously, going into that would be how much loan growth we would have in the period. And then just what the overall forecast looks like. But, again, a quarter here over the next two or three, where we had low charge-offs, you could see that that happening for us.

[Scott Siefers:]

Okay, perfect. Thank you very much. And then a follow up on, or excuse me off-line, regarding just sort of the influence of British politicians and fans in .

[Jamie Anderson:]

Yes. That’s a longer discussion. Thanks Scott. I appreciate it.

[Scott Siefers:]

Thank you, guys.

[Operator:]

There are no more questions in the queue. This concludes our question-and-answer session. I’d like to turn the conference back over to Archie Brown for any closing remarks.

[Archie Brown:]

Thank you, Jason. I want to thank all of you for being on the call with us today and following on our progress. We look forward to talking with you again next quarter. Have a great day. Bye now.

[Operator:]

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.