FFBC
#Good morning, and welcome to the First Financial Bancorp second-quarter 2016 earnings conference call and webcast.
(Operator Instructions) Please note, this event is being recorded.
I would now like to turn the conference over to Mr.
<UNK> <UNK>, Corporate Controller.
Please go ahead.
Thank you, Allison.
Good morning, everyone, and thank you for joining us on today's conference call to discuss First Financial Bancorp's second-quarter 2016 financial results.
Discussing our financial results today will be <UNK> <UNK>, Chief Executive Officer; <UNK> <UNK>, Chief Operating Officer; and <UNK> <UNK>, Chief Financial Officer.
Before we get started, I'd like to highlight that we've updated the press release announcing our financial results to a more streamlined format and added an accompanying slide presentation this quarter.
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 will make reference to the slides contained in the accompanying presentation during today's call, and welcome any feedback you may have on the format of the release.
Additionally, please refer to the forward-looking statement disclosure contained in the second-quarter 2016 earnings release, as well as our SEC filings, for a discussion of the Company's risk factors.
The information we provide today is accurate as of June 30, 2016, and we will not be updating any forward-looking statements to reflect facts or circumstances after this call.
I will now turn the call over to <UNK> <UNK>.
Thanks, <UNK>, and thanks to those joining the call today.
Yesterday afternoon, we announced our financial results for the second quarter.
As shown on slide 3, we had another solid quarter of results, which is now 103 consecutive quarters of profitability.
We are pleased with our results, which reflect continued strong loan growth across our Metropolitan markets and specialty finance businesses.
Net interest margin remained stable, as we manage our balance sheet [metrics] and funding costs.
We are also pleased with the rebounded fee income during the second quarter from the seasonal lows we experienced early in the year, and remain focused on improving our performance in this area.
Expense management remained disciplined during the second quarter as we remained focused on improving the efficiency of our businesses, while continuing to invest in strategic areas.
Finally, while the second quarter was marked by significant market volatility resulting from global economic and political uncertainty, we continue to see solid credit demand and financial performance across our clients and prospects.
We believe the overall credit outlook across our markets remain steady and conducive to continued growth opportunities.
As we work towards improving the performance level of the Company, our focus remains centered on serving the financial needs of our business, consumer and wealth management clients, while remaining disciplined in our approach.
Overall, the Company remains well-positioned to continue to grow organically and meet our strategic objectives.
With that, I'll now turn the call over to <UNK>.
Thank you, <UNK>.
I'd like to turn your attention to slide 3, highlighting our second quarter performance and the key drivers of that performance.
To touch on a couple of points, GAAP earnings were $0.36 per diluted share, with a return on average tangible common equity of 14.5%.
Loan growth was the star of the quarter, as period-end loans increased 14% annualized compared to the first quarter, primarily in the C&I an investor CRE categories.
As in previous quarters, this growth was largely in our metro markets, but all markets are seeing good opportunity.
Credit quality is stable, with metrics and lost coverage ratios trending favorably.
Capital ratios remain strong, but dipped slightly, given the balance sheet growth.
On slide 5, we provide a reconciliation of our GAAP earnings to earnings that reflect adjustments for those items that we do not expect to occur on a regular basis.
Including these adjustments, earnings per diluted share were $0.35.
The largest adjustment was the recognition of previously unrealized income on a limited partnership investment that was realized when the investment was redeemed in cash.
Slide 6 provides the loan portfolio product mix, with additional granularity on the CRE portfolio, as well as the drivers of the linked-quarter growth.
While market pricing remains competitive, the weighted average return on our second-quarter production exceeded our internal hurdle rates, demonstrating our ability to remain disciplined.
The specialty platforms and national lending verticals had solid quarters as well.
Our asset quality metrics, as shown on slide 7, remained stable, with the increase in provision expense primarily driven by the quarter's strong loan growth.
The uptick in classified assets was driven by the downward migration of a few credits, but nothing material and no indication of broader issues at this time.
With that, I will now turn the call over to <UNK>.
Thank you, <UNK>, and good morning, everyone.
Turning to slide 8, net interest income for the second quarter was $67.1 million, an increase of $600,000 or approximately 1% when compared to the linked quarter.
Higher interest income from loans and modestly lower funding costs more than offset a decline in interest income earned on investment securities during the period.
With the decline in income from securities primarily driven by a lower average portfolio balance as we continue to redeploy cash flows to fund loan growth.
Net interest margin was 3.67% on a fully tax-equivalent basis, down 1 basis point from the prior quarter, as modest declines in the yields earned on loans and securities were largely offset by lower funding costs and the shift in our earning asset mix during the period.
Slide 9 details our noninterest income mix and trend.
For the second quarter, noninterest income totaled $20.2 million, a $4.7 million or 30% increase over the prior period.
As <UNK> mentioned, noninterest income included $2.4 million of previously unrealized income from the redemption of a limited partnership investment, as well as $200,000 of losses on sales of securities during the quarter.
Excluding these items, noninterest income increased $2.5 million as compared to the linked quarter, with higher client derivative fees, mortgage revenues, bank card and loss share-related income being the primary drivers.
Turning to slide 10, noninterest expense declined $1.3 million or 3% from the linked quarter to $49.4 million, including approximately $200,000 of expenses related to branch consolidation activity.
Primary drivers of the linked quarter decline include lower occupancy costs from branch consolidation activities, and lower professional services expense from seasonal tax services associated with our wealth management business.
As <UNK> noted, our second-quarter results reflect the continued efforts of our associates to improve the efficiency of our operating platform, while allowing us to continue investing in strategic priorities.
Slide 12 provides an update on our thoughts regarding the second half of 2016, including full-year loan growth trending toward high single-digit and possibly low double-digit growth.
Continued stability in our net interest margin over the near-term, with potential fluctuation in either direction, dependent on production mix and prepayment activity.
Additionally, I'll note that our interest-rate risk profile continues to trend toward higher asset sensitivity, but we remain positioned to be no worse than neutral under flattening yield-curve scenarios.
And finally, we expect noninterest expense to remain flat through the second half of the year.
This concludes my remarks, and I'll now turn the call back over to <UNK>.
Great.
Thanks, <UNK>.
And Allison, we will open the call up for questions now.
(Operator Instructions) <UNK> <UNK> of Sandler O'Neill.
Hi, <UNK>.
<UNK> or <UNK>, I was hoping that one of you could expand upon <UNK>'s comments from the beginning on credit costs specifically, and then I guess the increase in classified.
I mean, it sounds like there's just a handful of things.
But if there was one delta relative to what I was looking for, was that the provision came in higher.
So one, any expanded thoughts you can give on deterioration you are seeing in the classified piece.
And then two and more broadly, just your thoughts about how you're thinking about the credit environment and provisioning levels.
And I think mostly, my best guess is, there is no real deterioration, but you guys are just looking at things with a more conservative lens, particularly in light of such strong balance sheet growth.
So I guess I would just be curious to hear your thoughts.
Sure.
Yes, I will start, <UNK>, and then let <UNK> or <UNK> fill in.
You know, on the classified piece, that was the one move up in terms of absolute dollars.
And you know, it was a handful of predominantly C&I credits where we saw some deterioration in performance also.
In almost all those cases, we expect that our clients and believe our clients have plans in place to improve performance, so we are monitoring it closely.
Any time a credit goes substandard, you want to be cautious and manage appropriately.
But at this point, we don't see that it is any kind of systemic issue or broader portfolio concern or question.
And we feel good about our overall portfolio.
If you look at all the other metrics, very solid.
Provision was predominantly driven by the growth in the loan portfolio being unusually strong, so that was really the main driver of that.
I don't know, <UNK>, if there is anything you would add on the provision piece.
No, I think you covered the key components there, with the two drivers being the very strong loan growth we saw during the quarter, as well as the modest uptick in classified, and some of the reserving that was associated with that.
All right, that is helpful, thank you.
And then maybe if I could switch gears to fees for a second.
Just curious, your thoughts.
I know fees have been a more recent area of focus, and it seemed to shine through in the second quarter.
Just as you look at things, how much of that was just a natural seasonal improvement, and then how much was related to some of your more recent efforts.
I would say, <UNK>, that certainly we do see a seasonal uptick after the first quarter, which we always see as unusually low.
So that would be the biggest part of that improvement and what I would call the core-fee income.
We certainly are focused on and trying to improve it.
We've been looking at pricing, as well is just volume increases and sales, whether that's in mortgage, trust and investment, consumer DDA, treasury management.
Those are all of our key focus areas.
And that is the one area I would say that we continue to feel like we've got opportunity to improve more significantly than even other areas.
I would just add to that, <UNK>.
As we said on the call last quarter, we are taking a much more strategic and intentional plan of action on fees related to deposits.
But you are likely to see more of just an increasing trend there than any kind of a step increase.
These things take time.
So we would expect that you would see just more of an upward trend.
Okay, all right, that's perfect, thank you.
And just one final point.
Whoever was responsible for the format change in the release, I think, probably deserves a raise.
I like it quite a bit, so please keep that up.
Thank you, yes, we appreciate it.
We were looking for feedback on the approach change.
We thought it would be a bit more understandable and straightforward.
So appreciate that comment.
I agree.
So thanks again.
<UNK> <UNK> of Jefferies.
Just one more question on the provision.
You guys did have particularly strong end-of-period loan growth this quarter.
With similar levels of ---+ were you to see similar levels of loan growth going forward, is the reserve build in this quarter representative of what we should expect going forward.
Or how should we think about what you are actually quantitatively putting aside for the loan growth portion versus what was the classified build.
Yes, <UNK>, this is <UNK>.
I think certainly if we continue to see strong loan growth, you should expect to see the reserve build and provision associated with that.
Now, it's not, obviously we are putting on pass-rated loans, so those aren't going to be our allowance ratio as a percentage of total loans.
At 99 basis points, it is not going to be dollar for dollar or point for point there.
The reserve rates on pass-rated credits are generally lower than that, but we would expect to build provision and the allowance in lock-step with loan growth there.
And then outside of that, you've got a couple other moving pieces, with classified trends and any credit migration you are seeing.
And those, obviously as they move down the credit spectrum, they're going to get higher general reserve rates.
If they go non-accrual, they flip over into specific reserves, and you can be a little more granular there, as well as just macroeconomic conditions and some of the qualitative factors that go along with it.
So it depends on the facts and circumstances, where we are in those future periods.
But absolutely, we would expect to build the reserve along with loan growth.
Got it, thanks.
That was helpful.
Sorry to belabor that point.
And then it's interesting to see the commercial real estate as the driver of growth this quarter.
Are you seeing any better opportunities there as a result of the regulatory environment, in that product.
Yes, <UNK>, this is <UNK>.
I wouldn't say anything better.
We have seen strong commercial real estate markets in our metropolitan markets, mainly Cincinnati, Columbus, Indianapolis.
This quarter we saw more growth in that category than we did the C&I.
However, I think if you look at the chart on slide 6, you'll see that as a percentage of the total portfolio, we have seen about a 2-point pick-up in construction and CRE versus the 4-point pick-up in C&I.
And as we think about the balance of the portfolio, with about 47% in C&I and owner-occupied CRE, and about 35% in the ICRE categories, those are right relative mixes, with a plus or minus of a few points.
We think there is no trend there, other than over time, you'll see the construction bucket plateau.
We saw some usually good construction deals over the last year, year-and-a-half.
We don't expect to see the same level of growth in construction that we've had during that period.
Got it, okay.
Thanks for taking the questions.
Yes, hey, <UNK>, this is <UNK>.
I think you are correct.
As conditions stand today, we expect the securities portfolio to continue to migrate down similar through the second half, similar to what you saw in the first half.
And we don't have a hard peg or target on the securities portfolio.
It's really dependent on what we see on the loan production side and what our opportunities are there.
But I will say, in the last few years, the securities portfolio has probably been higher than we generally would prefer it to be, probably peaking out somewhere around 25%, 26% of assets.
Ideally, we probably would prefer to see that 15% to 20% of assets.
But again, it depends on the opportunities we see on the loan side.
I don't have that offhand, <UNK>.
But I can tell you that the formerly covered loan accretion, that contributed about 7 basis points to our overall margin.
Yes.
I think we have talked about it in the past, just the mix of that portfolio being a little more biased towards the consumer assets now than it once was.
We expect it is going to be a slow and gradual burn down.
Yes, <UNK>, the way we are approaching M&A is, as we said on slide 12, we are predominantly focused on organic growth.
We feel really good about the combination of markets' business lines and what that is producing in terms of growth.
So we don't feel the need to do M&A for growth purpose, unless we find a deal that's strategically compelling.
So I would assume that we are predominantly focused on organic, unless we find that right deal in that right market.
Then we will take a look at it.
But otherwise, it is predominantly focused organically.
Good morning, <UNK>.
Well, first thing, and this is <UNK>, is I think what helps us is that ability to remix.
So as we put on loan growth, having that come from investment securities is providing a nice remix opportunity, one.
I think two has been the mix of our business that we've been doing, the combination of some solid C&I, in terms of core C&I.
Some of our specialty platforms that may have higher yields, as well as even on the ICRE side, we are trying to hold pricing.
<UNK> referenced in this comments that we monitor all of our production versus internal hurdle rate, and we had a good strong quarter this last quarter.
So it's the mix of business, it's the remix of the balance sheet.
All that said, it is competitive, especially for the best clients.
And we will just have to see if the yield curve flattens even more, what that holds for loan pricing.
But to this point, we have not seen it degrade to where it goes below our hurdle rates.
Well, a couple things.
I think one is, our teams continue to do a good job of focusing on the core deposit business.
We also see some seasonal change, first quarter being low, and we see some improvement in the second quarter.
So some of that was seasonal as well.
Yes, <UNK>, this is <UNK>.
I don't have the exact figure.
We have taken a look at it with some of the guidance that the FDIC has put out there.
We expect it to probably be a couple hundred thousand dollar-per-quarter-type benefit to us.
But that, I will just note, that, that's included in my guidance on our non-interest expense levels for the second half of the year.
You bet.
Good morning, <UNK>.
<UNK>, I think that is just a function of the production mix.
I think in recent periods, our loan production has been pretty heavily biased towards floating-rate loans.
So that's going to put some pressure on the overall portfolio yield.
But to <UNK>'s earlier comments, we are hoping to offset that.
We are seeing stronger growth out of our specialty finance businesses, which are higher yields generally, so that helps.
And then the earning-asset remix out of the securities portfolio and into loans, should help as well.
Just higher mortgage production.
We saw a good quarter in mortgage, which has continued to be a building business for us.
But second quarter was stronger than first.
I don't have that percentage in front of me.
We are not a large refinance shop.
We tend to do more purchased, just because we don't have a large servicing portfolio.
But it was a higher percentage in the second quarter than it had been previously.
I just don't have it in front of me, <UNK>.
You bet, thank you.
Good morning, Dan.
Yes, when you look at it in terms of what moves the needle, especially in a quarter like this, it's going to be some larger deals.
I would say the average loan size was high, was higher.
But I don't know that it's any higher than it's been over the last four to six quarters.
<UNK>.
Yes, I would say, just as I mentioned, I think, on <UNK>'s question, just a few C&I credits were really the driver of that.
And it was really related to some downgrade in their performance, most of which we think is manageable, and they have plans to improve.
So at this point, we don't see it as a portfolio-level issue.
But anytime you see even a small increase in a classified category, you are sensitive and want to manage it aggressively.
And not get specific to any single industry.
No.
Correct.
Thank you.
Hey, <UNK>.
Well, we're continuing to see strength, <UNK>.
I wouldn't expect that level of strength.
As <UNK> mentioned, we just hit on all cylinders in the second quarter.
You also can see a couple of big deals hit that will move the dial a little bit.
But we expect good solid growth in the second half that leads to that high single digit, low double digit for the year that <UNK> mentioned.
But the second quarter was unusually strong.
Thanks, Allison.
And again, thanks to everyone for joining the call, and your interest and support of First Financial.
Thank you.
