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spk03: three earnings conference call and webcast all lines have been placed on mute to prevent any background noise after the speaker's remarks there will be a question and answer session if you would like to ask a question during this time simply press star followed by the number one on your telephone keypad if you would like to withdraw your question again press the star one thank you scott crawley corporate controller you may begin your conference
spk05: Thank you, Rob. Good morning, everyone. Thank you for joining us on today's conference call to discuss First Financial Banking Corp's second quarter and year-to-date 2023 financial results. Participating on today's call will be Archie Brown, President and Chief Executive Officer, Jamie Anderson, Chief Financial Officer, and Bill Herr, 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. We'll 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 2023 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 June 30th, 2023, and we will not be updating any forward-looking statements to reflect facts or circumstances after this call. I'll now turn the call over to Archie Brown. Thank you, Scott. Good morning, everyone, and thank you for joining us on our call. Yesterday afternoon, we announced our financial results for the second quarter. I'll provide some high-level thoughts on our recent performance and then turn the call over to Jamie to provide further details. I continue to be pleased with our performance this year. Earnings in the second quarter were once again very strong, as an expected increase in deposit costs was mostly offset by higher asset yields. Adjusted earnings per share was 72 cents, which was a 29% increase compared to the same quarter in 2022. while the adjusted return on assets and tangible common equity were 1.62% and 26.46% respectively. Net interest margin exceeded expectations during the period as our asset-sensitive balance sheet has enabled the company to successfully navigate the higher interest rate environment. We were encouraged by the stabilization of deposit balances in the last half of the quarter. Personal, business, and public fund deposits were stable to increasing from May to June, while the mix continued to shift to interest-bearing products. Our fee income largely exceeded our expectations this quarter, with strong performance from mortgage banking, client swaps, and wealth management. Summit Funding Group had another nice quarter in originations, although the mix has shifted to a higher level of finance leases and loans. This shift has bolstered our net interest income, but resulted in less fee income during the period. Loan growth was in line with expectations for the quarter. While loan activity slowed early in the quarter and we experienced higher commercial line paydowns, loan pipelines have strengthened in recent weeks and we expect moderate loan growth in the second half of the year. We were pleased that asset quality remained strong during the quarter. Net chargeoffs were 22 basis points on an annualized basis after having zero last quarter and a net recovery in the fourth quarter of 2022. while classified assets declined 13% from the linked quarter. With that, I'll now turn the call over to Jamie to discuss these results in greater detail. And after Jamie's discussion, I'll wrap up with some additional forward-looking commentary. Jamie. Thank you, Archie.
spk07: Good morning, everyone. Slides four, five, and six provide a summary of our second quarter financial results. Our performance was excellent, driven by solid earnings, strong net interest margins, high fee income, and stable asset quality. Our asset-sensitive balance sheet continued to react positively to the current interest rate environment, with our net interest margin declining only seven basis points during the period. We continued to anticipate modest net interest margin contraction in the near term due to fewer rate hikes and additional pressure on deposit pricing. Total loans grew 4.5% on an annualized basis, which was in line with our expectations. Loan growth was concentrated in the leasing and residential mortgage books with relatively stable balances in the other portfolios. Fee income remained strong in the second quarter with wealth management posting another record quarter. Additionally, Bannockburn had a solid quarter and mortgage rebounded compared to previous quarters. Summit had another strong origination quarter, although as Archie mentioned, the production mix shifted to a higher level of finance leases and loans. This shift was additive to our net interest income, but resulted in less fee income during the period. Non-interest expenses increased slightly from the linked quarter due to higher employee and marketing costs. Second quarter expenses were slightly better than we anticipated due to lower leasing business expenses and fraud costs. Asset quality was stable during the quarter, Classified assets declined $20 million or 13% during the period. Net charge-offs in the second quarter were 22 basis points as a percent of total loans on an annualized basis compared to zero in the first quarter, resulting in near-to-date net charge-offs of 11 basis points. We recorded $10.7 million of provision expense during the period, which were driven by slower prepayment rates, net charge-offs, and loan growth. As a result, our ACL coverage ratio increased by five basis points to 1.41%. From a capital standpoint, our regulatory ratios remain in excess of both internal and regulatory targets. Accumulated other comprehensive income declined $25 million during the period. As a result, tangible book value increased 26 cents or 2.4%, while a tangible common equity ratio improved by nine basis points. Slide seven reconciles our gap earnings to adjusted earnings, highlighting items that we believe are important to understanding our quarterly performance. Adjusted net income was $68.7 million or 72 cents per share for the quarter. Adjusted earnings exclude the impact of a $1 million tax credit investment write down, $1.7 million of costs associated with our online banking conversion, and $1 million of other costs not expected to recur. As depicted on slide 8, these adjusted earnings equate to a return on average assets of 1.62%, a return on average tangible common equity of 26.5%, and an efficiency ratio of 54.9%. Turning to slide 9, net interest margin declined seven basis points from the linked quarter to 4.48%. As we expected, higher funding costs outpaced increases in asset yields, primarily due to a 40 basis point increase in the cost of deposits. That being said, we were pleased that asset yields increased 33 basis points due to higher rates and a more profitable mix of earning asset balances during the period. On slide 10, asset yields increased during the second quarter as loan yields grew by 40 basis points. Investment yields increased seven basis points due to the repricing of floating rate investments and slower prepayments on mortgage-backed securities. Our cost of deposits increased 40 basis points compared to the first quarter, and we expect these costs to increase further in reaction to sustained competitive pressures in the coming quarters. Slide 11 details the betas utilized in our net interest index. Increase with greater velocity in the second quarter, moving our current beta up six percentage points to 27%, with our through-the-cycle beta estimated at approximately 40%. Slide 12 outlines our various sources of liquidity and borrowing capacity. We continue to believe we have the flexibility required to manage the balance sheet through the expected economic environment. Slide 13 illustrates our current loan mix and balance changes compared to the linked quarter. As I mentioned before, loan balances increased 4.5% on an annualized basis with growth driven by summit and mortgage loans. The other loan portfolios were relatively unchanged when compared to the prior quarter. Slide 14 provides details on our loan concentration by industry. We believe our loan portfolio remains sufficiently diversified to provide protection from deterioration in a particular industry. Slide 15 provides details on our office space loans. As you can see, less than 5% of our total loan book is concentrated in office space, and the overall LTV of the portfolio is strong. While our portfolio is not immune to general economic stress on office space, we continue to believe that lending to borrowers with Class A and B assets in primarily suburban markets within our footprint mitigates much of our risk. Slide 16 shows our deposit mix, as well as the progression average deposits from the linked quarter in total average deposit balances declined 98 million dollars during the quarter driven primarily by a 287 million dollar decline in non-interest-bearing accounts and a 102 million dollar decline in savings accounts this was expected as higher interest rates have driven customers to more expensive products like cds and money market accounts additionally brokered cds increased 214 million dollars during the period partially offsetting the decline in transaction accounts. Slide 17 depicts trends in our average personal, business, and public fund deposits, as well as a comparison of our borrowing capacity for uninsured deposits. While personal deposit and public fund balances were relatively stable in the quarter, business deposits continued to decline. As we discussed last quarter, this decline is primarily related to a post-COVID decline from record high balances. On the bottom right of the slide, you can see our adjusted uninsured deposits for $2.5 billion at June 30. This equates to 20% of our total deposits. We are comfortable with this concentration and believe our borrowing capacity provides sufficient flexibility to respond to any event that would stress our larger deposit balances. Finally, with respect to deposits, slide 18 depicts average deposits by month. As you can see, deposit levels experienced a decline in the first part of the year, but normalized thereafter. April was negatively impacted by two large business customers who initiated large transactions that resulted in lower deposit balances. Deposit balances were stable in the last two months of the quarter. Slide 19 highlights our non-interest income for the quarter. Wealth management had another record quarter, while Bannockburn continued to pose strong results. In addition, mortgage income rebounded during the period. Summit had another very strong quarter. However, leasing income declined during the period due to a shift in product mix to finance leases. While the fee portion of the business was lower than the first quarter, the contribution from Summit to the net interest margin exceeded first quarter amounts. Noninterest expense for the quarter is outlined on slide 20. Core expenses were lower than we initially expected. However, they were a slight increase compared to the first quarter. This increase was driven by elevated employee costs and higher marketing costs. These increases were partially offset by lower fraud and leasing business expenses. Turning now to slide 21. Our ACL model resulted in a total allowance, which includes both funded and unfunded reserves, of $161 million and $10.7 million of total provision expense during the period. This resulted in an ACL that was 1.41% of total loans, which was a five basis point increase from the first quarter. Provision expense was driven by slower prepayment speeds, net charge-offs, and loan growth. Overall, asset quality remained relatively stable. Net charge-offs increased from zero in the first quarter to $5.7 million, or 22 basis points of total loans on an annualized basis. While this amount is higher than the previous two quarters, we believe 11 basis points of net charge-offs year-to-date is a reasonable amount. Classified assets decreased 13% to $139 million. Non-accrual loans increased during the period due to the downgrade of two relationships. We continue to expect our ACL coverage to increase slightly in the coming periods as our model responds to changes in the macroeconomic environment. Finally, as shown in slides 23, 24, and 25, regulatory capital ratios remain in excess of regulatory minimums and internal targets. During the second quarter, Tangible book value increased 26 cents, or 2.4%, and the TCE ratio increased nine basis points due to our strong earnings. Accumulated other comprehensive income declined $25 million during the second quarter and continues to impact our TCE ratio. Absent the impact from AOCI, the TCE ratio would have been 8.76% in June 30 compared to 6.56% as reported. Slide 25 demonstrates that our capital ratios would remain in excess of regulatory targets, including the unrealized losses in the securities portfolio. Our total shareholder return remains robust, with 33% 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. 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?
spk05: Thanks, Jamie. Before we end our prepared remarks, I want to comment on our forward-looking guidance, which can be found on slide 26. As I mentioned earlier, loan pipelines strengthened in recent weeks, and we expect Summit to remain a significant contributor to growth the rest of the year. We continue to be more selective in certain segments, but we expect overall growth to stay in the mid-single digits in the near term. Regarding securities, we will continue to utilize the portfolio cash flows to support loan growth. We expect deposit balances to grow modestly in the near term as our pricing strategies continue to gain traction. There's still some uncertainty around Fed rate management, loan demand, and deposit pricing competition. Our asset-sensitive balance sheet has helped us offset much of the positive pressures thus far in the cycle. We continue to expect modest contraction in the third quarter with our net interest margin in a range between 4.25% to 4.35% based on an additional anticipated July interest rate increase. Specific to credit, we're still in a period of uncertainty regarding inflation and the impact of higher rates to the economy and our customers. Over the third quarter, we expect continued stability in our credit quality trends and ACL coverage to be slightly higher. We expect the income to be stable in total in the third quarter and in a range between $53 and $55 million, including the leasing business. Specific to expenses, we expect to be between $117 million and $119 million, which includes the depreciation expense from the lease portfolio. Excluding leasing expense, we expect expenses to be stable in the third quarter. Lastly, our capital ratios remain strong, and we expect to maintain our dividend at the current level. We're extremely pleased with our second quarter results. The position of our balance sheet, our strong net interest margin, consistent loan growth, robust fee income, and stable asset quality are expected to sustain our performance in the back half of the year. Additionally, our earnings power, strong and increasing capital levels, and high reserve levels provide additional support in the event of a downturn in the economy. With that, we'll now open up the call for questions. Rob?
spk03: At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. And your first question comes from the line of Daniel Tamayo from Raymond James. Your line is open.
spk01: Good morning, guys. Thanks for taking my questions. Maybe just starting first on the margin guidance, if you could just let me know what the assumptions baked in there for noninterest-bearing degradation or declines going forward are. And then just let's start with that. Thanks.
spk07: It's Jamie. So what we're looking at here, we obviously saw the mixed shift from the first quarter to the second quarter, like many are saying. We expect generally that same type of mixed shift to continue on in the third quarter. And essentially the same level of deposit cost increase and maybe slightly more than what we saw in the second quarter. So we had a 40 basis point increase from 1 to 140 linked quarter here in the second quarter. And we expect that to continue around that same level and with that same general level of mixed shift that we saw in the second quarter to continue on in the third quarter. And maybe, again, on the cost side, Just with the pressure that we're seeing, maybe even a little bit more of an increase on the deposit costs than we saw in the second quarter. We're just seeing those ramp up pretty significantly. But again, that's baked into our forecast of the margin range that we gave in the outlook there.
spk01: Okay, great. Thanks, Jamie. And then maybe help me think about post-rate hikes. Obviously, you guys have really seen asset yields come through nicely as rates have risen. Once we get into that post-rate hike timeframe, potentially in the fourth quarter, how do you think the overall margin reacts at that point? I mean, you expecting more or budgeting for more deposit increases and do the asset side stay relatively flat at that point?
spk07: Yeah, as we get towards the end of the year, I think we'll still see some deposit increases and deposit costs coming through. But, I mean, if you look out maybe even a little bit farther and assume then that the Fed, let's say the Fed pauses for a little while, you know, our margin, we think our margin stabilizes somewhere around 390 to 4 in the middle of next year. And that assumes, again, that assumes that the Fed, you know, increases here in July, you know, but pauses, you know, at a minimum there in the first half, in the first part of 2024. But then mid next year, looking at a margin kind of before any rate cuts, if those do come, somewhere in that 390 to 4 range.
spk01: Okay. Terrific. Yeah, I'll go ahead and step back. I appreciate all that color, Jamie.
spk03: All right. Thanks, Danny. Your next question comes from a line of Brendan Novel from Piper Sandler. Your line is open.
spk08: Hey, good morning, guys. Hope you're doing well.
spk05: Thanks, Brendan.
spk08: Maybe on the leasing piece, can you walk through the mixed dynamics within leases this quarter between operating and financing and any kind of how that progresses from here and how that kind of factors into the fee and expense guide?
spk07: Yeah. This is Jamie again, Brendan, and welcome to the call, by the way. So in the second quarter, we did see a pretty significant change. So first of all, I can bounce around a little bit from quarter to quarter. It's not necessarily always the same consistent mix quarter to quarter. So in the second quarter, we saw a pretty dramatic shift of production and it was virtually all finance leases with a small, virtually all finance leases and all of the lease virtually all of the leases 90 to 95 percent of the leases were held in the portfolio as opposed as opposed to we'll have some quarters well where we will sell some leases out into the secondary market and produce some fee income so the combination of those two things a high finance lease production quarter a high uh quarter where we're holding most of the leases you're going to see that the leasing income contract a little bit. So going forward, we typically see finance leases in that 60%, 70% range. But we are holding the vast majority of the leases going forward. So you may not see that the leasing income line growing as much as we were seeing when we first had the division. So when we look at it, we had about $10.3 million in leasing business income down in the fee income section. And we see that growing by about $1.5 million each quarter here for the next couple of quarters. And that's probably as much of a of a lens that we have into it at the moment and then um and then the and so typically what we see is the ratio um on the fee income side to the expense side is about one and a half to one so then we see the expense side growing by about a million so we had right about around seven million in uh leasing business expense so we see that part growing by about a million each quarter for the next couple quarters.
spk08: All right. Fantastic. That's super helpful commentary, Jamie. Thank you. Maybe one more from me. Can you guys offer a little more color on what drove the increase in MPAs this quarter as well as the charge-offs you experienced? I guess kind of were they both driven by the same two credits you noted in the release? And if so, how do you feel you reserve for those at this point?
spk04: Yeah, this is Bill. Good morning. The increase in the non-performing assets, as we talked about earlier, was really driven by two borrowers, one on the CNI space, one on the CRA space, which when looking at them, we don't consider them systematic across our portfolio, very unique circumstances, and we're obviously working through resolutions on both. The CNI credit was really related to management issues and the cre credit is a small office that's been having challenges with their lease rollover um we have you know the charge-offs were driven mainly by um the write-down of our cre loan in the non-accrual to bring it down to appraised values and we are you know properly uh reserved um on the other
spk08: All right, excellent. Thank you for taking my questions.
spk03: And again, if you would like to ask a question, press star, then the number one on your telephone keypad. Your next question comes from the line of Chris McGrady from KBW. Your line is open.
spk06: Hi, this is Nick Mutafakas for Chris McGrady. Good morning, guys. Maybe just on deposits. If you bifurcate, you know, commercial and retail on the – at least on the non-interest side and the mix as a whole, maybe you can make a comment on how those two segments have bifurcated and kind of the dynamics between commercial and retail. Are you seeing, you know, commercial is already – you've already seen the outflows in commercial and then maybe there's a catch-up in retail? Maybe you can make a comment on that.
spk05: Yeah, this is Archie. I think we show on the one slide, I think it's 18, you can look at the balance trends there by month, and you'll see pretty much a stabilization that's occurred during the quarter, really for each of our segments, so personal, public funds, and business. So, I mean, at this point, as Jamie said, we're going to continue to see some mix shift going forward, but We feel like we're at the place now where deposits are going to grow, and we're kind of in more, I guess, more normal operating cycles with businesses. So they still have some liquidity. Even in the past quarter, they used some of that to pay some lines down. So we'll probably see a little bit of pressure on the business NID balances like we've seen. But generally, they're going to grow overall and maybe a little more tick up in the interest-bearing side. Jamie's got another comment. Yeah, Nick, this is Jamie.
spk07: The other thing on the personal side, so I would tell you as we've seen the last few months, we're seeing the average balance per account come down, but we are growing the number of accounts, net new accounts, and it's helping to offset that. But we are seeing pressure just on the you know, each individual account, the average dollars that are sitting in those accounts coming down, which is what we expected just given the large increase in the, you know, throughout, you know, 20 and 21 during COVID and the large increase in deposits. But we're offsetting a good portion of that with the fact that we're adding accounts.
spk06: Great. And maybe, I don't know if it's in the slide deck, if I missed it too, but just the, as far as the CD growth, maybe the duration of the CD portfolio as a retail broker.
spk07: Yeah. Yeah. All of that is relatively short. I mean, we were putting on, you know, our specials would typically run either in like the seven months or 11 months. um but it's all less than uh you know 12 to 15 months brokers would typically be in that 6 to 12 month range okay thanks guys your next question comes from the line of terry mcavoy from stevens your line is open thank you good morning
spk02: Maybe let's start with a question or two on the loan portfolio. Could you just talk about what you're seeing and hearing from your customers in commercial and small business banking, maybe pipelines, and what are their concerns given some of the macro headlines out there?
spk05: Yeah, Terry, this is Archie. We saw, especially at the beginning of the quarter, some softness, and I think it had a lot to do with some of the turmoil that had occurred at the latter part of the first quarter in the industry so pipelines certainly softened activity slowed and then somewhere around mid-quarter it just shifted and we're seeing much stronger and better activity at this point and i say that i'm talking about primarily on the commercial banking side probably middle market side in particular with respect to commercial real estate it's sort of mixed i mean there's There's opportunities, but certainly the industry and we are being more selective or a little more defensive in the areas we're targeting. And we are seeing, relative to quality in that space, we're seeing a lot better structures, more equity into projects and things like that when we do them. So CNI side, much better demand in the back half of the quarter. CRE side, there is demand, but we're just much more selective. So it's a little, I'd say it's just a little slower activity because of that.
spk02: Appreciate that. Thank you. And getting back to the discussion on Summit and some of the moving parts, are the economics different at all to the bank, whether it's run through fee income or net interest income? And I'm just thinking about the capital that goes with the holding it in the loan portfolio.
spk07: Yeah, this is Jamie. it's relatively um you know marginal on either side from a from an economic standpoint and if you think about the um the capital side of it from a risk-weighted assets um standpoint whether it's sitting in that i think they're they are so they're both 100 risk-weighted whether sitting in other assets or whether they're sitting in the loan book so from a capital allocation standpoint They're both at 100%. But the economics, I mean, the timing of it moves a little bit, but the economics are virtually the same.
spk02: Great. And maybe one last one. Is the company considering selling any loans going forward in order to either, like, reduce concentration in the portfolio or de-risk a certain asset class?
spk04: Yeah. And, Terry, that is part of our normal operating rhythms. periodically go out and test the market, getting price and discovery on various pools. And, you know, we take a look at that to get a lens of what's happening in the market. And then, you know, we're under no obligation to execute, but we will take a look and, if this case makes sense, we'll do it.
spk02: Great. Thanks for taking my questions. Have a nice weekend.
spk04: Thanks, Terry.
spk03: And there are no further questions at this time. Mr. Archie Brown, I'll turn the call back over to you for some final closing remarks.
spk05: Yeah, Rob, thank you. Thank you. I want to thank everybody for joining the call this morning. We're glad that you were on with us hearing more about our quarter and our story. We look forward to talking to you again next quarter. Have a nice day.
spk03: This concludes today's conference call. Thank you for your participation. You may now disconnect. This concludes today's conference call. Thank you for your participation. You may now disconnect.
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