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First Financial Bancorp (FFBC -0.84%)
Q2Â 2019 Earnings Call
Jul 19, 2019, 8:30 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning and welcome to the First Financial Bancorp's Second Quarter 2019 Earnings Conference Call and Webcast. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded.
I'd now like to turn the conference over to Mr. Scott Crawley, Corporate Controller. MR. Crawley, please proceed.
Scott Crawley -- PAO and Corporate Controller
Good morning, everyone, and thank you for joining us on today's conference call to discuss First Financial Bancorp's second quarter and year-to-date 2019 financial results. Participating on today's call will be Claude Davis, Executive Chairman; Archie Brown, President, and Chief Executive Officer; Jamie Anderson, Chief Financial Officer; and Tony Stollings, EVP, Commercial Banking
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 references to the slides contained in the accompanying presentation during today's call. Additionally, please refer to the forward-looking statements disclosure contained in the second quarter 2019 earnings release, as well as our SEC filings for a full discussion of the Company's risk factors. The information we provide today is accurate as of June 30, 2019, 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 Archie Brown.
Archie M. Brown -- President and Chief Executive Officer
Thank you, Scott. Good morning and thank you for joining us on today's call. Yesterday afternoon, we announced our financial results for the second quarter.
Before I turn the call over to Jamie to discuss those results in greater detail. I'd like to make a few comments regarding our quarterly performance and recently announced acquisition of Bannockburn Global Forex. Our second-quarter results were very strong, reflecting continued top quartile performance and marking our 115th consecutive quarter of profitability.
The quarter was highlighted by strong loan growth, exceptional fee income and disciplined expense management.
For the quarter our adjusted performance metrics included earnings per share of $0.58 a 1.3% return on average assets, 18.9% return on average tangible common equity and a sub 51% efficiency ratio. Core banking trends were positive with loan origination activity strengthening across many of our lending units and pay-off pressures easing. These complementary trends enabled us to grow loan balances by approximately 8% on an annualized basis. Deposit growth was modest as seasonal public fund increases and retail CD growth more than offset declines in money markets and brokered C.D.
Our core net interest margin remains strong and in-line with the range previously provided despite continued headwinds from lagging interest-bearing deposit pricing pressures. Aside from additional provision related to the workout of the franchise credit disclosed last quarter, credit costs were better than expectations and overall credit remained stable.
Our fee income performance was exceptional this quarter, with growth of over 29% year-over-year driven by record client derivative fees and solid mortgage and bank card income. Out sub 51% efficiency ratio continues to be a bright spot, although we saw a modest expense increased during the quarter, even after adjusting for severance and merger-related items largely driven by annual merit increases and performance-based incentives.
We're excited for the opportunity to partner with a very successful Bannockburn team, which will allow us to broaden the product offering to our clients, while also enabling us to provide banking services to their extensive customer base. Bannockburn has become an elite performer in the foreign exchange transaction and advisory market. The company primarily focuses on middle-market clients who have a need for tailored foreign exchange solutions. We see significant synergies across our businesses and look forward to closing the transaction within the next quarter which will signify another step toward our goal of constructing a best-in-class commercial bank.
Additionally, we were pleased to announce that First Financial's Board of Directors has approved an increase in the quarterly shareholder dividend to $0.23 per share, which in addition to the Bannockburn acquisition, reflects our commitment to deploying capital in a way that sustains financial and operating success while also directly rewarding shareholders.
Although the announced acquisition impacted potential share repurchase activity during the quarter, our strong capital levels provide the flexibility for further capital deployment opportunities moving forward.
With that, I'll now turn the call over Jamie to discuss the further details of our second-quarter results and then after Jamie's discussion, I'll wrap up with some forward-looking commentary and closing remarks. Jamie?
James M. Anderson -- Executive Vice President & Chief Financial Officer
Thank you, Archie, and good morning, everyone. Slides 3 and 4 provide a summary of our second quarter 2019 performance. As Archie mentioned, we were pleased with our performance as loan growth, net interest margin, fee income and efficiency all met or surpassed our expectations.
Our profitability metrics remain strong in relation to our peer group and with a tangible book value of $12.79, we're on pace to earn back the dilution from the MainSource merger well ahead of our modeling.
Slide 5 reconciles our GAAP earnings to adjusted earnings, highlighting items that we believe are important to understanding our second-quarter performance. For the quarter, adjusted net income was $57.4 million or $0.58 per share, which excludes severance and merger-related costs.
As shown on Slide 6, these adjusted earnings equate to a return on average assets of 1.63% and a return on average tangible common equity of 18.9%. Further, our 50.3% adjusted efficiency ratio reflects our ability to appropriately manage expenses.
Turning to Slide 7, net interest margin on a fully tax-equivalent basis, declined 6 basis points in the quarter -- in the second quarter to 4.04%. The decline was primarily driven by higher funding costs and a greater number of days in the quarter.
Basic net interest margin declined 7 basis points compared to the linked-quarter as funding costs were impacted by a lag from rising interest rates and competitive pressures.
As Archie will discuss further when he addresses our outlook, we expect further margin pressure in the back-half of the year, mainly from a decrease in asset yields given the expected Fed rate cut and the impact on our loan portfolio, which is 58% variable-rate.
As shown on Slide 8, the yield on securities declined 15 basis points and a 4 basis point increase in gross loan yields was offset by a 4 basis point increase in our cost-of-deposits. The lower investment yields were driven by accelerated pre-payments, lower reinvestment rates and the day-count differential between the first and second quarters.
Slide 9, depicts our current loan mix and balance shifts compared to the linked-quarter. End-of-period, loan balances increased, $172 million as ICRE and mortgage loan growth outpaced slight declines in C&I and small business banking.
While we remain optimistic regarding future growth potential, we expect that pace to moderate a bit from second-quarter results.
Slide 10, shows the mix of our deposit base as well as a progression of average deposits from the linked-quarter. Average deposit balances increased by $29 million as public fund and retail CD growth outpaced declines in brokered CD's and money market accounts. While deposit costs are still increasing, they have begun to moderate and we expect overall costs to stabilize given the expected direction of interest rates.
Slide 11, depicts our asset quality trends for the last five quarters. Provision expense declined during the period, although it was a bit higher than expected as we recorded $4 million of additional reserves related to the franchise loan discussed in the first quarter. Absent the single franchise loan provision, the expense was sufficient to cover net charge-offs and account for loan growth during the period. Classified and non-performing assets as a percentage of total assets were relatively flat, while net charge-offs declined to 8 basis points.
Finally, as shown on Slide 12 and 13, capital ratios remain strong and are in excess of our stated targets. Tangible book value per share increased 5% during the second quarter to $12.79. While we were not actively repurchasing shares during the quarter, primarily due to the pending announcement of the Bannockburn acquisition, we continue to evaluate capital strategies and deployment opportunities such as additional M&A activity and dividend levels that support the Company's planned growth while delivering appropriate shareholder returns.
I'll now turn it back over to Archie for some thoughts on our third-quarter outlook and closing comments. Archie?
Archie M. Brown -- President and Chief Executive Officer
Thank you, Jamie. Before we end our prepared remarks, I want to comment on our forward outlook as shown on Slide 14. We remain optimistic in our ability to maintain loan growth this year given continued strength in our loan pipelines.
We expect loan balances to increase by mid-single-digits on an annualized basis for the third quarter of 2019. And long-term mix, we target mid-to-high single-digit growth given the investments we've made in talent, our core operating markets and our comprehensive product offerings. Regarding the net interest margin projections will be largely dependent on the path that Fed takes moving forward.
Our outlook of 3.7% to 3.75%, excluding purchase accounting, assumes the Fed cuts rates by 25 basis points later this month. As always, the net interest margin can fluctuate depending on a variety of factors, and we actually work to mitigate downward rate pressures on the asset side through disciplined deposit pricing management.
As stated earlier, credit quality is stable, with a normalized provision covering charge-offs and accounting for loan growth, however, individual loans can have a transitory impact from time-to-time. We expect fee income to decline from our record levels in the second quarter and be in the range of $27 million to $29 million over the next quarter as derivative fees moderate and interchange income declines after Durbin begins.
With respect to expenses, we continually focus on efficiency, even while making strategic investments to support the long-term success of our business. We expect expenses in the range of $77 million to $79 million and anticipate an efficiency ratio in the 51% to 53% range for the next quarter.
Our strong capital levels and earnings consistent provide flexibility for capital deployment strategies. Post Bannockburn closing, we will evaluate our capital return strategy strategies, including share buybacks.
Overall, the Company remains well-positioned to grow organically and to take advantage of a strong capital position by deploying through other growth opportunities that meet our objectives.
This concludes the prepared comments for the call. Ian will now open up the call for questions.
Operator -- President and Chief Executive Officer
We will now I begin the question-and-answer session. [Operator Instruction]. Our first question comes from Scott Siefers from Sandler O'Neill. Scott, please proceed.
Scott Siefers -- Analyst
Good morning, guys. Thanks for taking the question. Jamie, maybe first question for you, just on the margin, it looks like at the mid-point in the third quarter, maybe 8 basis points or so of core margin compression. I guess Main puts and takes as you see them for the third quarter and then as we were to -- as we look maybe beyond the third quarter. Is that 8 basis points representative of what would happen with each Fed rate cut, if the Fed were to do more or would the impact be less assuming no deposit betas or deposit costs started to come back down, just would be curious to hear your thoughts?
James M. Anderson -- Executive Vice President & Chief Financial Officer
Yes. So for the third quarter, yes, I would say the impact in the third quarter would be slightly greater than what we would expect going forward, so that's the main kind of items there, if you look at what would -- what's going to happen here in the third quarter assuming we have a Fed -- 25 basis point Fed rate cut here at the end of the month would be -- you guys -- so we have basically about --- if you look at it, about 60% of our loan book that floats and would move down that 25 basis point. So you're talking -- you have about, call it a 10 basis point drop on the asset side and 2 to 3 basis points that we would pick up on the funding side in the third quarter, and that's that, call it 7 or 8 basis point drop there in the third quarter.
And then going forward, I mean, we are projecting, given every 25 basis point cut in rates, that's where our balance sheet is, a 6 to 8 basis point drop in our net interest margin and just depending on how much we can -- the deposit competition, how much we can get in, and trim, manage rate, deposits and get those rates down, it would be on the lower end of that. And potentially even lower than the 6 basis point pressure that we would see. So -- but conservatively, 6 basis points for every 25 basis point drop.
Scott Siefers -- Analyst
Okay, perfect. That's terrific. I appreciate it. And then just as we look at the impact of purchase accounting adjustments, I guess at least, vis-a-vis my own model, maybe they stayed a little more elevated than I would have thought. But one, I could always be wrong, but then two, just to hear your thoughts going forward as well.
Archie M. Brown -- President and Chief Executive Officer
Yes. So going forward for the third quarter, we're projecting that to be -- based on our models and expected pre-pays 19 basis points for the third quarter and then, that drops about a basis point to a basis-point-and-a-half, every quarter there going forward.
Scott Siefers -- Analyst
Okay, all right. Thank you very much. And then final question, maybe Archie, just a little more color on loan growth. I know pay downs have been a factor in the past few quarters. Just curious as you see it was the 2Q as you sort of normalized back toward a more typical range, was that better originations, lower pay downs? How did those dynamics work out?
Archie M. Brown -- President and Chief Executive Officer
Yes. Scott, thanks. Our origination side was just a little bit stronger than Q1, and was our strongest quarter post-merger. So we did see a slight tick-up in originations for the second quarter. But the real -- the big impact was on the pay-off side, pay-offs dropped by probably 25% from Q1 and that's even -- and that was even down from Q4, so significant drop in pay-offs.
And as we think about our outlook, I think we guided here to kind of mid-single-digits. We still see strong origination activity in Q3, but with a little bit more of a tick-up in pay-off balances in Q3.
Scott Siefers -- Analyst
Ok. Perfect. That's terrific. Thank you guys very much.
James M. Anderson -- Executive Vice President & Chief Financial Officer
Thanks, Scott.
Operator -- Executive Vice President & Chief Financial Officer
Our next question comes from Chris McGratty of KBW. Chris, please proceed.
Chris McGratty -- Analyst
Good morning. Jamie, can I start with -- I just want to follow on Scott's question on the margin. I think you've said 58% or 60% of a book floats. Could you remind us at 6:30 the breakdown between Prime, and LIBOR and others? Because it would seem on record you guys have a lot of LIBOR exposure. So this quarter plus next quarter would suggest that you might be at the higher end of the compression if the Fed moves, and then over time, you may not feel as much pressure because you have kind of LIBOR leading and then you've got the deposit re pricing catch up. So could you just review those numbers for us?
James M. Anderson -- Executive Vice President & Chief Financial Officer
Yes. So overall, and I'm going to give you dollar amounts here as opposed to percentages, but roughly $3.5 billion on the loan side -- between $3.5 billion and 4 billion is LIBOR-based and about $1.5 billion is Prime-based.
Chris McGratty -- Analyst
Okay. And then, the 2 to 3 basis points...
James M. Anderson -- Executive Vice President & Chief Financial Officer
Just so, you know Chris, we also have about a $0.5 billion in the investment portfolio as well that floats as well and it is mostly indexed to 3-month LIBOR.
Chris McGratty -- Analyst
Ok, so that was part of the decline in the securities for this quarter.
James M. Anderson -- Executive Vice President & Chief Financial Officer
Correct. Yes.
Chris McGratty -- Analyst
Okay. The 2 basis point to 3 basis point kind of easing of the funding costs that you're talking about if the Fed moves.
James M. Anderson -- Executive Vice President & Chief Financial Officer
Yes.
Chris McGratty -- Analyst
How do you feel, if we get more than one cut, the ability to increase the negative beta, if you will, on the deposits, like what's -- can you go to like, some banks have talked about like a 40% to 50% move, but we're also at a lower rate -- interest rate to start with. Any thoughts there?
James M. Anderson -- Executive Vice President & Chief Financial Officer
Yes. So the majority of that, of the 2 to 3 basis points that we're projecting in the third quarter would be related to borrowings, that just move on the funding side that would move automatically. But right now, when you look at our CD book, we are -- that we're close to where our -- where the runoff rate and new CDs is washing out, but not quite there yet. We're about 10 -- I would say we're about 10 basis points upside down, and we're, I would say probably a couple of months away from that washing out and then, so I think what you'll see is in subsequent -- given subsequent rate cuts that we'll start to see some -- the overall cost of our CD book is going to come down. And then, we can also take a look at the other like money market accounts and just other interest bearing deposit accounts and trim those rates as well, especially if rates come down further. And then obviously, at some point you hit a floor where you just can't bring those down anymore. So there's a period in there where you can do that and then you hit the floor.
Scott Siefers -- Analyst
Got it. Okay, that's helpful. Thank you. Maybe last one for you all on capital. You talked in your prepared remarks about not being able to buy stock given the deal. May I ask two questions? Number one, are you able to buy stock now with the deals announcing is the expectation to look at the buyback? And secondarily, I think last quarter you talked about depository deals in Michigan and Ohio, maybe an update there whether that might be a better use of capital given where valuations are? Thanks.
Archie M. Brown -- President and Chief Executive Officer
Hey Chris, this is Archie. Yeah, we are in a position in the market, at least to be able to do buybacks going forward this coming quarter. It's certainly one of the key strategies as we'll be evaluating relative to other priorities as well in the coming quarter. As we've said, we've got the capital flexibility and assuming it's kind of our analysis in terms of overall pricing. It will be one of the levers we'll evaluate closely. With regard to acquisitions, I think our primary focus is still on trying to identify some additional fee-based businesses. We talked before about trying to get a wealth space, we continue to work hard there. On the banking side, preference number one is still to do something in market, in metros where we're headquartered. We did say last quarter we would consider maybe something in some of the adjacent states. But, I can tell you there's really nothing close there in terms of what we're evaluating right now. I think we're open to looking at some things, but at this point, nothing that we see on the horizon.
Chris McGratty -- Analyst
Got it. Thank you. Appreciate it.
Operator -- Analyst
Our next question comes from Terry McEvoy of Stephens. Terry, please proceed.
Terry McEvoy -- Analyst
Good morning.
James M. Anderson -- Executive Vice President & Chief Financial Officer
Hi, Terry.
Terry McEvoy -- Analyst
Maybe just give any updated comments on the credit performance of the franchise portfolio last quarter outside of the one credit that was in the press release and mentioned earlier.
Archie M. Brown -- President and Chief Executive Officer
Sure Terry. Overall, we feel good about that portfolio. Maybe just to kind of give you a little of a rundown. We saw one credit during the quarter move from a watch status into an accruing TDR sub-standard status. That's a large, multi-concept operator that -- and it's not just really -- it's our only participation credit. And we've worked with the lead bank and the bar, we don't think there's any loss in that credit and the problems in that credit is really related to the smaller portion of this concept, the smaller concept in this portfolio.
We've pretty much done a deep-scrub, deep-dive in the portfolio, we have, I think maybe four loans totaling around $11 million of special mention. One other small sub-standard accruing TDR and that's about it. So I think we feel better about the book now than we probably had in the last few quarters.
Terry McEvoy -- Analyst
Thanks, and then just as a follow up, the decline in derivative fees round up to call it $5 million last quarter. Could you talk about the size of those fees? Is it -- will it be call it chunky going forward where it could bounce anywhere between $2 million and $5 million just a given activity in the quarter?
Archie M. Brown -- President and Chief Executive Officer
Yeah, Terry, it is kind of chunky. And those fees can range from $40,000, $30,000 and they can range on up into the hundreds of thousands. So from time-to-time we'll get a very large ones and then more often, it's just, there's a smaller pool. But in the quarter, we had two or three sizable ones that happened. So we don't forecast that kind of level going forward, although we still think given the interest rate environment, we still think derivative fees will be something that performs pretty well for us.
Terry McEvoy -- Analyst
Great. Thanks, Archie.
Operator -- Analyst
[Operator Instructions] Our next question comes from Nathan Race of Piper Jaffray. Nathan, please proceed.
Nathan Race -- Analyst
Hey, guys. Good morning. Going back to Terry's question on credit, I appreciate your commentary in terms of expecting stability going forward. So is it fair to assume, the provision line goes back to what we saw perhaps in the back-half of last year? Absent the issues that we've seen in the rope tied to that one-off credit within the quick service portfolio?
Archie M. Brown -- President and Chief Executive Officer
Yes, Nate. We feel pretty good. If you just look at our charge-offs of the last year, aside from that franchise credit, our charge-offs were averaging somewhere in that 15 basis point range. And I think that's kind of how we view it, at least our current outlook. So when we think about that plus loan growth, that's maybe a 78% of loan growth, that's kind of how we view provision kind of going forward.
Nathan Race -- Analyst
Ok, great. And if I could just ask one ask one more related to core NIM, it seems like the big challenge to the NIM this quarter was the uptick in the cost, and so I'm just curious, given the uptick in wholesale funding toward the end of the quarter. Is it fair to assume that you guys are comfortable letting the loan-deposit ratio rise from the 88% level that we see today? Or are you guys looking to kind of keep that close to 90% or I guess, how should we think about overall balance sheet growth dynamics, assuming you get to that kind of 4% to 6% loan growth target going forward?
James M. Anderson -- Executive Vice President & Chief Financial Officer
Yes, Nate. This is Jamie, So, yeah, we do have some room in our loan-to-deposit ratio. Now, we can let that run a little bit and that can get into the --somewhere in the low 90s, I think where we would be comfortable with that. So yes, that could affect the -- obviously it could affect the funding mix a little bit and then have an impact on the margin. And that's just, dependent on what we see here going forward with loan growth, but, in that mid-single-digit range that loan-to-deposit ratio could tick up a little bit.
Nathan Race -- Analyst
That perfect. I appreciate guys taking the questions. Thank you.
James M. Anderson -- Executive Vice President & Chief Financial Officer
Thank you.
Operator -- Executive Vice President & Chief Financial Officer
Once again [Operator Instruction]. This concludes our question and answer session. I'd like to turn the conference back over to Archie Brown for any closing remarks.
Archie M. Brown -- President and Chief Executive Officer
Thank you, Ian. I want to thank everybody for joining our call today and we look forward to talk to you again soon. Have a nice day.
Operator -- President and Chief Executive Officer
[Operator Closing Remarks]
Questions and Answers:
Duration: 28 minutes
Call participants:
Scott Crawley -- PAO and Corporate Controller
Archie M. Brown -- President and Chief Executive Officer
James M. Anderson -- Executive Vice President & Chief Financial Officer
Scott Siefers -- Sandler O'Neill -- Analyst
Chris McGratty -- KBW -- Analyst
Terry McEvoy -- Stephens -- Analyst
Nathan Race -- Piper Jaffray -- Analyst
