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spk04: Hello and welcome to the First Financial Bank Corp First Quarter 2022 Earnings Conference Call and Webcast. My name is Emily and I'll be coordinating the call today. During the presentation, you will have the opportunity to ask a question by pressing start followed by one on your telephone keypads. I now have the pleasure of handing the call over to our host, Scott Corley from First Financial Bank Corp. Please go ahead, Scott.
spk07: Thank you, Maureen. Thank you, Emily. Good morning, everyone, and thank you for joining us on today's conference call to discuss First Financial Bancorp's first quarter 2022 financial results. Participating on today's call will be Archie Brown, President and Chief Executive Officer, Jamie Anderson, Chief Financial Officer, and Bill Harriot, Chief Credit Officer. Both the press release we issued yesterday and the accompanying slide presentation are available on our website at www.bankatfirst.com under the Investor Relations section. Additionally, please refer to the forward-looking statement disclosure contained in the first quarter of 2022 earnings release, as well as our SEC filings, for a full discussion of the company's risk factors. The information we will provide today is accurate as of March 31, 2022, and we will not be updating any forward-looking statements to reflect facts or circumstances after this call. I'll now turn it over to Archie Brown.
spk08: Thanks, 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. Before I turn the call over to Jamie to discuss those results in greater detail, I'm going to provide a few comments on our performance. Like others in the industry, our recent quarter was impacted by revenue pressures from rising mortgage rates and the wind down of PPP. Despite these challenges, the first quarter was in line with our expectations and a good start to what we expect will be a very strong year. For the quarter, we achieved adjusted earnings per share of 46 cents a 1.09% return on average assets, and a 15.75% return on average tangible common equity. These results were driven by provision recapture of $5.8 million, resulting from strong credit quality trends, stable economic conditions, and improved expense management. Improvement in the core margin highlighted the quarter, with the margin increasing 12 basis points when excluding PPP and other more volatile loan fees. The margin benefited from the upward shift in rates driving asset yields higher. Given interest rate forecasts in our asset-sensitive balance sheet, we should see additional improvement in our margin during the year. In addition, credit quality trends remain excellent, evidenced by stable classified asset levels, lower net charge-offs, and provision recapture. We were also pleased with our ability to diligently manage expenses, which were in line with our expectations. despite some elevated healthcare costs. First quarter fee income was lower than we anticipated as rising rates negatively impacted mortgage banking revenue. While foreign exchange declined for the fourth quarter levels, Bennett Burns' income can vary from quarter to quarter, and we expect it to rebound in coming quarters. Consumer deposit balances grew modestly as our customers continue to maintain substantial liquidity levels. Overall loan growth was muted in the first quarter as originations were slowed by the peak of Omicron in January and higher payoffs continued in our commercial lines of business as many borrowers sold their businesses or underlying assets. We are pleased to see growth in all of our business lines with the exception of ICRE and franchise where payoffs were elevated. Loan pipelines are strengthening and we are optimistic about improved loan growth for the remainder of 2022. The integration of Summit continues to go as expected. Its first quarter financial performance was in line with our expectations, and the cultural fit has proven to be as we had hoped. Given the impact of acquisition accounting, our projection is that Summit's contributions will be neutral to overall 2022 financial results, and we remain bullish on the future success of this addition to our company. With that, I'll now turn the call over to Jamie to discuss the first quarter results in more detail. After Jamie's discussion, I'll wrap up with some additional forward-looking commentary. Jamie.
spk06: Thank you, Archie. Good morning, everyone. Slides four, five, and six provide a summary of our first quarter financial results. Our first quarter was solid and was highlighted by strong asset quality, a net interest margin that exceeded expectations, and prudent expense management. As Archie mentioned, we believe this quarter lays a strong foundation for what we think will be a very profitable 2022. Basic net interest margin benefited from the first Fed rate hike, increasing 12 basis points during the quarter. Given our asset-sensitive balance sheet, we believe this trend will continue as the Fed increases rates further in 2022. We were particularly pleased on the credit front, as classified assets were relatively stable during the period and net charge-offs declined to 10 basis points. These two factors drove $5.8 million of provision recapture during the period. Fee income was lower than we expected during the period, with declines from fourth quarter levels. In particular, mortgage banking revenue declined due to rising rates, which is in line with the broader industry trends. Given the inherent volatility in our foreign exchange business, we remain confident that Bannock Burn will rebound in the coming quarters as we have seen in the past. Non-interest expenses were in line with our expectations, as lower incentive compensation offset a significant increase on health care claims and seasonally high payroll taxes during the period. From a capital standpoint, our regulatory ratios remain in excess of both internal and regulatory targets. Due to rising rates, accumulated other comprehensive income declined $142 million, negatively impacting both tangible book value and our tangible common equity ratio. Given the summit acquisition, we paused our share repurchase program and expect to remain on the sidelines in the near term. Slide 7 reconciles our gap earnings to adjusted earnings, highlighting items that we believe are important to understanding our quarterly performance. Adjusted net income was $43.6 million, or 46 cents per share, for the quarter. These adjusted earnings account for $300,000 of summit-related acquisition costs and $2.5 million of other costs not expected to recur, such as severance and branch consolidation expenses. As depicted on slide eight, these adjusted earnings equate to a return on average assets of 1.09%, a return on average tangible common equity of 15.8%, and an efficiency ratio of 67.7%. Turning to slides nine and 10, Net interest margin declined six basis points from the linked quarter to 3.17%. This decline was primarily driven by a decline in loan prepayment and PPP forgiveness fees. The impact on the net interest margin from these changes was partially offset by an increase in asset yields during the period, which was driven by rising interest rates. Asset yields increased during the period following the initial Fed rate hike. Investment yields increased due to higher reinvestment rates and slower prepayments on mortgage-backed securities. Excluding fees, loan yields also increased slightly during the period, and we expect to realize the full impact from the initial Fed rate hike in the second quarter. Our cost of deposits declined two basis points when compared to the fourth quarter, and at this point, we believe we have reached our pricing floor. Slide 11 details the asset sensitivity of our balance sheet. As you can see, we believe we're well positioned for the expected rate increases as approximately 60% of our loan portfolio will reprice in the short term. Slide 12 details the betas utilized in our net interest income modeling. And while we don't expect much initial pressure from rising rates, As additional rate increases occur, we expect our deposit beta to be approximately 30%. Slide 13 illustrates our current loan mix and balance changes compared to the length quarter. Loan balances decreased slightly during the period, primarily due to the expected runoff in PPP loans. Excluding the $34 million of PPP forgiveness, loan balances decreased $12 million. as declines in ICRE and franchise loans were partially offset by increases in other portfolios. Slide 15 shows our deposit mix as well as the progression of average deposits from the end of 2021. In total, average deposit balances decreased $101 million during the quarter, driven primarily by a $167 million decline in brokered CDs. We were pleased with the growth in lower-cost transaction deposits during the quarter, which included increases of $74 million in interest checking and $48 million in savings accounts. Slide 16 highlights our non-interest income for the quarter. As I mentioned previously, first quarter fee income fell short of our expectations, primarily in mortgage banking, foreign exchange, and derivative fees. Increasing rates and record production in 2020 and 2021 has softened mortgage demand significantly, and we expect industry-wide pressure on this business for the remainder of 2022. Foreign exchange was also lower than expected during the quarter. However, we fully expect that business line to return to its anticipated run rate in the coming quarters. On a bright note, wealth management continues to produce strong results. Non-interest expense for the quarter is outlined on slide 17. Non-interest expenses declined $6.8 million during the period. On an operating basis and excluding summit, expenses declined compared to the first quarter, despite a significant increase in health care costs and seasonally high payroll taxes during the period. Turning now to slide 18, our ACL model resulted in a total allowance which includes both funded and unfunded reserves of $137 million and $5.8 million in total provision recapture during the period. This resulted in an ACL that is 1.34% of total loans. The provision recapture was driven by relatively flat classified asset balances, an 11% decline in non-performing assets, and a 69% decline in net charge-offs during the period. Net charge offset percentage of loans decreased to 10 basis points on an annualized basis. 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 steadily releasing those reserves. We expect further provision recapture and reserve release in the near term with a neutral to slightly positive provision expense in the back half of 2022. Finally, As shown on slides 20 and 21, regulatory capital ratios remain in excess of regulatory minimums and internal targets. During the quarter, both tangible book value and the TCE ratio declined. These declines were caused by unrealized losses on the investment portfolio due to rising interest rates. Absent the change in the portfolio, the TCE ratio would have increased 32 basis points during the quarter. As I previously mentioned, we did not repurchase any shares during the quarter and do not expect any additional share repurchases in the near term. Additionally, we do not anticipate any near-term changes to the common dividend. 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.
spk08: Archie? Thank you, Jamie. Before we enter our prepared remarks, I want to comment on our forward-looking guidance, which can be found on slide 22. Our near-term forecast for loan growth is strengthening, and we expect balances to grow low to mid-single digits over the near term, excluding PPP and Summit. Securities balances are projected to be consistent with the first quarter ending balances, while deposit balances are expected to remain relatively stable over the near term. Our asset census balance sheet positions us very well to benefit from the expected rise in interest rates. A significant portion of our loan portfolio is indexed to short-term rates, and although there are many variables that impact magnitude and timing, we expect our margin to improve from rising rates, especially early in the cycle when deposit rate pressures are muted. Regarding credit, we expect continued improvement in asset quality trends and additional provision recaptured in the near term, so less than in recent quarters the allowance for credit losses is expected to continue to decrease on a percentage basis but much uncertainty remains regarding the impact of supply chain bottlenecks pandemic evolution and inflationary pressures on our client base we expect the income to be between 47 and 49 million dollars in the second quarter with continued growth in summit leasing revenue some rebound in capital markets fees, and modest seasonal increases in mortgage banking and interchange income. Rate headwinds will continue to put pressure on overall mortgage banking income trends, and we expect some decreases in overdraft income due to updates to our program. Specific to expenses, we expect to be between $100 and $102 million, but this could fluctuate with fee income performance. Regarding summits, Our outlook is unchanged and we expect the acquisition to have a minimal impact on overall 2022 earnings, with a slightly negative impact near term from the intangible amortization. We expect the acquisition to provide $400 million in annual originations, which will provide a strong lift to loan growth as the year progresses. Lastly, our capital ratios remain strong and we expect to maintain our dividend at current levels. Overall, our first quarter performance has laid a strong foundation for the year, And we believe our asset-centered balance sheet is well-positioned for rising rates that are expected over the course of 2022. We've made strategic efforts to diversify our product offerings in recent years, and we believe those efforts position us to deliver industry-leading services to our clients and returns our shareholders have come to expect. With that, we'll now open up the call for questions.
spk04: Thank you. If you would like to ask a question, please do so now by pressing star followed by one on your telephone keypad. When preparing to ask your question, please ensure that your device and your microphone are unmuted locally. If you change your mind and wish to withdraw your question from the queue, please press star followed by two. Our first question today comes from the line of Scott Severs from Piper Sandler. Scott, your line is open.
spk11: Good morning, guys. Thank you for taking the question. Let's see. I think I wanted to start first on – hey, guys.
spk02: I wanted to start first on fees. Archie, I appreciate the comments toward the end in your guidance commentary. Just hoping for maybe a little more color in helping to bridge the gap between the sort of $41.5 million run rate in the first quarter and then the $47 to $49 million. Again, I feel like directionally, um you you kind of pointed us where to go with uh with bannockburn and some uh capital markets as well as some other things but just given the magnitude of the gap um you know how uh how much should we be anticipating that some of these things do come back here in the near term yeah scott it's it's jamie um so uh a couple things there we expect um
spk06: So, Bannockburn had a lower quarter than what we had anticipated, and they can have some, you know, a little bit of volatility to their income. So, if you look back in the last year, their third quarter was a light quarter, and then they had a record fourth quarter, and then it just came back down a little bit here in the first quarter. So, we're expecting that to increase by roughly a couple million dollars. And seasonally, even though rates are moving up on the mortgage side, we should see some seasonal lift on the mortgage side just with activity picking up overall. And then generally, we see a lift in debit card income seasonally as well. We had a low quarter in the first quarter related to swap fee income. We're expecting that as demand comes back and as, you know, we get a little more activity there on the loan side for that to pick up. And then Summit as well. So Summit, the amount that is in fee income for Summit in the first quarter was roughly around $6 million. We're expecting that to be a lift of between a half a million to another million. So it's really, I would say, roughly kind of across the board. The biggest contributors, though, being those I just talked about.
spk02: All right. That's perfect color. And thank you. And switching gears just a bit, you talk about low to mid single-digit loan growth in coming periods. Maybe a little more color and a can sort of see the numbers on slide 13 but in your view sort of why a slower start to the year than we might have anticipated and then maybe a thought on what reported loan growth might look like we've got a couple moving parts between summit coming on PPP still going off etc yes got this Archie the I think the big thing that we saw during the quarter
spk08: was just a little more elevated payoff activity, especially in our ICRE group, where, in many cases, assets were being sold. A little bit in our commercial banking group, we saw companies being sold. And then in franchise, we moved out one large credit that concerned us, kind of a hangover from the pandemic. And we saw a few loans that I think paid off, we just weren't willing to agree on the terms. In some cases, releasing guarantees or rates that we thought were just too low for the risk in that business. So we saw some pay downs in that business. So that probably brought down some of the growth we were expecting in the quarter. And we still see some potential elevated payoff activity in, I would say, ICRE and maybe a little bit of franchise in the near term. which is why we maybe downshifted to, say, low to mid-single-digit growth, excluding Summit. When you take Summit, including Summit in the loan growth picture, I think you're talking more high single digits, maybe more in that, say, 7% to 8% kind of range, including Summit.
spk02: Okay. Perfect. All right. That's great. Thank you guys very much. Yep.
spk04: Our next question comes from Daniel Tamayo from Raymond James. Daniel, your line is open.
spk10: Good morning, guys. How are you? Maybe we just start on the NII and NIM expectations. Obviously, you guys are very asset sensitive and expecting that to improve nicely in the year, but you talked about deposit beta assumptions, but You know, just kind of want to make sure that we're still on the same page in terms of impacts from rate hikes, maybe how many you guys are expecting or budgeting for during the year and that sort of thing.
spk06: Yeah. I mean, and Daniel, Jamie. So in our internal forecast, we have Fed funds ending the year around 225. So, you know, but regardless of that, I mean, when you look at our the makeup of the loan portfolio, we have right around 60% of the loan book that's going to reprice, and the vast majority of that reprices in a very short period of time, within three months of a rate hike. So we get a pretty good pop in net interest income as those rate hikes hit. And then on the deposit side, the first rate hike, we really did not see hardly any pressure on the deposit side other than maybe in some kind of a case-by-case basis on some public funds and whatnot. And I think if we get a 50 basis point move in May, um, you know, we won't hit that full beta that I was, that we have in the, in the deck in, uh, you know, in that 25, 30% range, it's going to, it'll kind of slowly ramp up to that as we start to get, um, you know, further rate hike. So that I would, I would think that, um, that initial next hike of, of let's call it 50 basis points that we get in an early May will, uh, we won't see that full impact on the deposit side.
spk10: So at the end of the day, it's still kind of an eight-ish basis point impact on the interest margin early and then maybe coming down to five to six basis points over time.
spk08: Hey, Daniel, we can't hear you. I don't know if it's something on your end. Maybe try to repeat that question.
spk10: I apologize. Can you hear me better now?
spk06: Yeah, perfect now. Thanks.
spk10: Okay, sorry. Yeah, no, so I just said at the end of the day, we're still kind of around eight basis points for the initial hikes and then trending downward toward five to six basis points as we get more.
spk06: Correct, yeah.
spk10: Okay, great. And then how are you thinking about that you've got significant excess liquidity still? How are you thinking about the deployment of that excess liquidity and how that is impacted by any kind of assumptions you're making for deposit flows?
spk06: Well, so on the liquidity side, I mean, we essentially have ramped up the overall balance in the investment portfolio. So, you know, that will – the investment portfolio and the deposit side, I mean, those are going to kind of play off of each other. So, If we start to see deposit outflows, then we're just going to adjust the investment portfolio to mirror that. But at this point, our plan is to keep the investment portfolio relatively flat, but obviously monitoring deposit balances and shifts in deposit mix as well. And we will adjust the portfolio accordingly. And we have good cash flow coming off of the investment portfolio. It's right around a billion dollars over the next 12 months. So, again, if we start to see – and we have good capacity for borrowing, short-term borrowings on the balance sheet side. So if we start to see deposits run off more than what we're expecting, we can react accordingly.
spk10: Okay, that's all I had. Thanks for taking my questions.
spk04: Our next question comes from Terry McEvoy from Stevens. Terry, your line is open.
spk09: Hi. Good morning, Archie. Good morning, Jamie. Hey, Terry. Maybe if you could just walk me through the first quarter impact of Summit. You gave us the fees. You gave us the expenses. And I'm just curious, the NII contribution, And maybe what does the size of the, I guess, the loan portfolio need to be for that to break even in order for us to kind of model that out? And also, since this is the first quarter, we're seeing leasing business income. Do you expect much volatility on a quarterly basis as it relates to fees?
spk06: Yeah, good question. So if you look at the first quarter, again, I think we disclosed what we had on the on the non-interest income side and the expense side, if you look at just the spread income that it created, when we brought it over, their balance sheet and their on-balance sheet operating leases, or I'm sorry, finance leases, were relatively small. So that contribution in the first quarter in terms of net interest income was relatively small, about $800,000, $900,000. And so as we ramp the balance sheet up, you know, that obviously is going to, it's obviously going to increase. And so our, at the end of March, we had finance leases of roughly 80 million operating, which obviously are down in other assets of about 70. And so we see that we're still expecting about $400 million of total originations for the year for that business, with about $300 million of that in finance leases and $100 million in operating leases. And then they still, based on credit and or a few other factors, they will still sell about 30% to 35% of their production. So they're going to have roughly sales of call it $140 million, and then the rest will go on the balance sheet in one form or the other in terms of finance or operating leases. And then in terms, Terry, of the leasing business income, that is mostly driven by the sales of production and residual income that they get on the backside. So we expect that to actually, there could be some volatility to it, but the overall base is going to increase as we go throughout the year.
spk09: Again, maybe just as a follow-up, the loan growth guidance, is that annualized? And then if it isn't, I guess a follow-up question, I was having a tough time kind of funding that loan growth given the actions with the securities and just the balance sheet mix, is it going to be funded with cash flow from the securities portfolio, assuming deposits are stable or maybe drift lower?
spk06: Correct. Yeah. Yeah, we would fund that either from with, you know, just short-term borrowings, you know, overnight borrowings or whatnot, and then and or cash flow from the securities portfolio.
spk08: And it is annualized growth when we talk about low, mid, single digits, or my answer to Scott, 7% to 8%, that's annualized growth.
spk09: Perfect. OK, thank you both. Appreciate it.
spk04: Next up for questions, we have Chris from the KBW. Chris, your line is open.
spk03: Hey, good morning. Thanks. Jamie, just a question on credit. Obviously a lot of concerns in the economy right now. I'm sure you've done some scrubbing of the portfolio. If we're going to get a pressure point this year or next year, where is it in your book?
spk05: Yeah, this is Bill Herron. A couple areas we're focused on right now. In the C&I book, obviously we're We're thinking about the supply chain, inflation, doing some deep dives into our impact in CNI space. And then also we're getting ahead of the office portfolio. As leases come up for expiry, we're getting ahead of that, doing a deep dive, because we do expect some changes in the office space world in post-COVID life. So those are two main areas that we're focused on right now.
spk03: Okay, great. And then I may have missed this. Can you remind us of the percent of loans that reprice within three months? I know Jamie said a lot of the variable rate does, but just the specifics.
spk06: Yeah, I mean, we have, Chris, we have 60% that reprice within a year, and the majority of those are within three months.
spk03: Thank you.
spk08: See you, Chris.
spk04: Before we take our next question, as a reminder, to ask any questions today, please press start, followed by one on your telephone keypads now. Our next question is from John Armstrong from RBC. John, please go ahead.
spk01: Thanks. Good morning, guys. Hey, John. Just on... slide 10 on the securities portfolio. I hate to keep asking about it, Jamie, but you guys are talking about another 200 basis points up in short rates through the end of the year. Just curious how you're approaching reinvesting the cash on the securities portfolio. What are you buying? How are you trying to protect yourself? Obviously, we saw the AOCI mark, but just philosophically talk about what you're doing and what you're buying.
spk06: Yeah. I mean, I'm roughly still i mean i would say similar to the makeup of the portfolio as it is now with um you know uh you know a mix between uh agency mortgage banks uh uh municipals and then some uh and then uh some other asset classes but i mean the our philosophy is probably one that you know we're going to look at the securities portfolio I guess as a function of, you know, in terms of the balance as well, as a function of, you know, the amount of loan growth that we're seeing and then the, you know, any runoff on the deposit side. So we're going to stay, I would say, relatively flat on the securities portfolio and potentially trending down as we see, you know, hopefully as we see loan growth improve throughout the year. So, and we'll stay relatively, again, relatively defensive in terms of on the reinvestment side.
spk01: Okay. Got it. Archie, I may have missed this, but can you remind us of the updates to your overdraft program and just kind of walk us through the impact of that?
spk08: Yeah, John, we've been making, I think, just kind of continual tweaks over a period of time. If you go back, probably pre-pandemic, we were probably annually around $22 million in revenue. I think that's probably more in the, this year, probably more in the, at least, our budget was probably around $15 million for this year. But with all the movement we've seen from the larger competitors, and they're all in our markets, we're going to be making some further changes probably mid-year that'll have a little bit of effect, I think, in Q2, probably a little more of an effect in the back half. But there are things like reducing the fee, adding – we already have a cushion before we charge a fee, but raising that cushion, just omitting some of the other peripheral fees, it's a – probably an array of things that are happening, but it'll, I think, have a, you know, a little bit more of an effect in the back half of the year and then the full year effect next year. So if you said, if you said that 22 million pre-pandemic, you know, what does that get to? Is it going to be more than 35, 40% of that for next year? That's probably where we end up when it's all said and done. But second quarter, just a little bit of a, maybe a little bit of a drop down from where we are.
spk01: Okay. Okay. Good. And then just bigger picture on the environment. You've had a couple of questions on loan growth seeming a little bit slower than peers, but I understand, you know, what you're carving out. And I guess the question is, are you, are you more optimistic on growth than last quarter? I mean, obviously we get the math on the margin, so that's pretty positive and, we understand what you're saying on the fees and that's better, but are you, are you more optimistic on, on, on the overall lending environment for the next several quarters?
spk08: I think I am, John. Um, again, probably the main thing that was different was just some of the elevated payoffs we described. I'm a little, probably a little more optimistic than early in the year. And, um, There's still a lot of crazy things going on, which I think create a lot of uncertainty, but we've got teams that are focused on growing loans. We're seeing a nice rebound on the consumer side. We didn't talk about that much this morning, but if you look at what happened in the first quarter, and then we certainly think that's happening in the second quarter. That has been a drain the last few years, and it's not going to be a game-changer for us, but if that If that plugs a hole rather than going the other way, that gives us a level of support. So we have that support along with, I think, improved commercial growth, improved growth coming out of our finance company and out of Summit. All those things together make me feel like it's going to be a better year and get stronger throughout the year.
spk01: Okay, good. That's all I had, guys. Thank you.
spk05: Thanks, John.
spk04: At this time, we have no further questions, so I'll hand back to Archie Brown to conclude today's conference call.
spk08: Thank you, Emily. Thanks, everybody, for joining us today and hearing more about our first quarter results. We look forward to talking to you again next quarter. Have a great Friday and a great weekend. Bye now.
spk04: Thank you, everyone, for joining us today. This concludes our call. You may now disconnect your lines.
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