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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. [Operator Instructions] Please note this event is being recorded.
I’d now like to turn the conference over to Scott Crawley, Corporate Controller. Please go ahead.
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.
Additionally, please refer to the forward-looking statement disclosure contained in the first quarter 2021 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, 2020, 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 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.
As you know, the first quarter was again an active period for the payment protection program. And through March 31, we originated over $307 million in second draw of PPP loans with an average fee of 5.3%. We expect forgiveness payoffs for this round to flow in through the remainder of this year. Excluding PPP activity loan balances declined slightly for the quarter due to accelerated mortgage and HELOC payoffs, increased borrower liquidity, and muted business loan demand.
As a result of these trends, we anticipate slower growth in the near-term, with some acceleration in the second half of the year. As of March 31, consumers and businesses were holding record levels of deposits, with average balances increasing during the quarter as a result of the stimulus package approved by Congress last December. We anticipate further deposit balance growth in the second quarter after the passage of the most recent stimulus bill. This anticipated growth will likely continue to suppress loan, demand and service charge income in the near-term.
From a capital standpoint, our ratios remained strong through the first quarter. The combination of our current capital levels and our improved credit outlook led us to repurchase approximately 840,000 shares during the quarter. Absent higher priority capital deployment alternatives, we anticipate additional buyback activity in the second quarter.
I’ll now turn the call over to Jamie to discuss the details of our first quarter results. And after Jamie’s discussion I’ll wrap up with some additional forward-looking commentary. Jamie?
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.
Net charge-offs in classified assets increased during the period due primarily to a single $7 million charge-off and COVID-related credit migration. While these trended negatively, these events were largely anticipated in previous quarters, and we continue to believe our current reserve levels are more than adequate to absorb any further credit deterioration in 2021.
In addition, we capitalize on market conditions and repurchased approximately 840,000 shares during the quarter. Our capital ratios remain strong and are in excess of both internal and regulatory targets. We continue to believe that our balance sheet is well positioned for both the near and long term. And our stress testing results continue to indicate our ability to maintain these capital levels for the foreseeable future.
Slide 6 reconciles our GAAP earnings to adjusted earnings highlighting items that we believe are important to understanding our quarterly performance. Adjusted net income was $49 million or $0.50 per share for the quarter, which excludes $1.3 million of severance costs, and another $1.3 million of nonrecurring items.
As depicted on Slide 7, these adjusted earnings equate to a return on average assets of 1.24% and a return on average tangible common equity of 15.8%. In addition, our 58.4% adjusted efficiency ratio remains very strong, reflecting our ability to diligently manage expenses.
Turning to Slides 8 and 9, net interest margin decreased nine basis points from the linked-quarter to 3.4%. This decline was primarily related to lower loan fees, including PPP forgiveness fees. Despite the overall decline in margin, we were very pleased that basic net interest margin increased five basis points as declines related to funding mix and costs outpaced the impact from lower asset yields and changes in asset mix.
The low interest rate environment continues to negatively impact asset yields, which declined during the period. Similar to the fourth quarter, a higher mix of investment securities contributed to the decline in total asset yields in the period as we deployed excess liquidity on the balance sheet. In response to these declining yields, we continue to aggressively lower our cost of deposits, which declined six basis points during the period to 14 basis points. These lower deposit costs reflect strategic rate adjustments, as well as a shift in funding mix from higher price CDs to lower cost core deposits. While some additional decline is expected in the coming periods, we expect this to be more gradual as we approach our expected pricing floor.
Slide 10 illustrates our current loan mix and balance changes compared to the linked quarter. Excluding the increase in PPP loans, end of period loan balances declined slightly as an increase in ICRE loans was offset by declines in mortgage and consumer loans and a modest decline in C&I loans.
Slide 11 shows our deposit mix as well as a progression of average deposits from the fourth quarter. In total, average deposit balances grew $447 million during the first quarter, driven primarily by increases in low cost transactional deposits. We remain very pleased with the trajectory of deposit balances, as average transactional deposit balances increased 21% on an annualized basis during the period.
In addition, noninterest bearing deposits grew $137 million during the quarter as clients receive tax refunds and another round of stimulus checks. We remain focused on deposit pricing, and we will continue to make any necessary adjustments based on market conditions and our funding needs.
Slide 12 highlights our noninterest income for the quarter. As I mentioned previously, first quarter fee income remained strong and was driven by elevated mortgage banking and foreign exchange income. We were also pleased with the increase in wealth management fees. Seasonal headwinds and the additional round of government stimulus needed the trajectory of deposit service charge income that we remain optimistic that this will rebound in the back half of the year.
Noninterest expense for the quarter is highlighted on Slide 13. Overall core expenses were in line with our expectations and declined when compared to the linked quarter driven by a decrease in incentive compensation and lower professional fees during the period.
Despite the decline from the prior period, salaries and benefits remained elevated due to incentive compensation tied to our high fee income as well as increased health care costs.
Turning now to Slide 14. Our first quarter ACL model resulted in a total allowance, which includes both funded and unfunded reserves of $183 million and $4 million in total provision for credit losses. The decline and provision expense from the linked quarter was driven by improved economic forecasts, which were partially offset by elevated net charge-offs. The model utilizes the Moody’s baseline economic forecast released at the end of March, which was improved from the forecast utilized in the fourth quarter. Net charge-offs as a percentage of loans increased to 38 basis points on an annualized basis, primarily driven by a $7 million charge related to a single relationship.
Additionally, as shown on Slide 15, classified assets increased $54.8 million, as pandemic related stress resulted in some negative credit rating migration during the period. The potential for this credit migration led to our significant reserve bill in 2020. And at this point in time, we believe we’ve captured the risk from future COVID related credit stress in the ACL model. Borrowing something unforeseen, we expect lower levels of provision expense for the remainder of 2021.
Finally, as shown on Slides 16 and 17 capital ratios remain in excess of regulatory minimums and internal targets. All capital ratios remain strong. However, the shift in interest rates at the end of March led to a decline and other comprehensive income and resulted in a slight decrease in our tangible common equity ratio and our tangible book value during the period.
In addition, we resumed our share buyback program during the quarter and repurchase approximately 840,000 shares. Once again, we did 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 commentary related to our outlook going forward. Archie?
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.
Lastly, we will continue to evaluate capital deployment opportunities including share repurchases over the remainder of the year. Overall, we’re pleased with our improved performance and outlook from this time last year. We started to transition associates back into their physical office locations. And we look forward to implementing the lessons learned over the past year to create an efficient, safe and collaborative workplace. As local and national economies continue to improve, we believe we’re well positioned to deliver industry leading services to our clients and returns to our shareholders.
With that, we’ll now open up the call for questions. Jason?
Thank you. [Operator Instructions] Our first question comes from Scott Siefers with Piper Sandler. Please go ahead.
Good morning, guys. Thanks for taking the questions.
Hi, Scott.
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?
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?
Yes, absolutely. Thanks, Archie. Hi, how are you doing, Scott?
How are you?
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.
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.
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.
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?
Scott, I’m sorry, on the first part, you said utilization rates?
Yes, commercial utilization rates.
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.
Yes. Makes sense. Perfect. Okay, thank you guys very much.
Yes. Thanks, Scott.
The next question is from Chris McGratty from KBW. Please go ahead.
Hey, good morning guys.
Hi, Chris?
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?
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.
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?
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.
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.
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?
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.
All right. Thanks, Jamie.
The next question is from Jon Arfstrom from RBC. Please go ahead.
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.
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.
Well. How would you describe the competitive environment, also maybe relative to a quarter ago?
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.
Can you touch on franchise finance for a second? And how that business is doing?
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.
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.
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?
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.
I think we’re seeing what, Bill, the occupancy is north of 50% now.
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.
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?
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.
Okay. Thanks a lot, guys. Appreciate it.
Thanks, Jon.
The next question is from David Long from Raymond James. Please go ahead.
Good morning, everyone.
Hey, Dave.
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?
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.
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?
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.
Got it. Thank you, Jamie. I appreciate the color.
Yes, David.
[Operator Instructions] The next question is a follow-up from Scott Siefers from Piper Sandler. Please go ahead.
Hey, guys. Thanks for taking the follow-up.
Yes.
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?
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.
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?
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.
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 [indiscernible].
Yes. That’s a longer discussion. Thanks Scott. I appreciate it.
Thank you, guys.
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.
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.
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.