Transcript
Coming up, we're talking with a bank CEO known for balancing growth ambitions with community and customer responsiveness. My man Steve Williams and I, Al Dominick, are excited to welcome Archie Brown, CEO of First Financial, to this episode of Plugged In.
Archie, what's happening, my friend?
Al, it's really good to be here on Plugged In for the first time. I'm looking forward to our conversation.
Hopefully longtime listener, first-time caller.
Steve and I love using this show to talk with the troublemakers doing interesting things in our industry. The way we do it is to pull some songs that give us inspiration as we wander through the next 20 minutes. I have five songs that I'm going to surprise both of you with.
While putting the set list together, I took a minute to look at the Cleveland Fed's website. Only bank nerds understand why you'd be listening to music and going to the Cleveland Fed at the same time. They had published a piece about you in July 2022, and one of your comments stood out to me.
You said there is always going to be adversity and things that go differently than expected. Nobody planned on COVID, but it happened and we had to respond. You keep moving, applying what you've learned, and there are going to be better days.
As the resident optimist, I loved that message and thought we'd apply it to this conversation. Steve, can I use a quote like that to get Archie teed up?
I am, but I want you to connect it to a song somehow.
I was listening to The Cure while looking at this, and Pictures of You came up. That made me think about the picture of First Financial: roughly 10 years of average annual return on equity above 17%, annual earnings growth above 8%, 139 consecutive profitable quarters and a dividend yield around 4%.
That picture sounds pretty good. So how can a high-performing bank like yours get a little more respect from investors?
I think these actually are pretty good days in banking. The economy is still solid and bank performance is really strong right now. What we don't have is investors being in love with us at the moment, so hopefully there are better days ahead for investor sentiment.
Someone asked me recently what you do about that. My answer was simple: control the controllables. There isn't much else you can do. It's frustrating, and I'm not the only leader of a midsize banking company who feels that frustration. You focus on the things you can control and keep getting better.
That's similar to what we talked about in Cleveland a few years ago. You can always find things to improve. Control the controllables, keep getting better, and eventually the rest has to work itself out.
Steve, you talk like this all the time. What are you seeing?
I think the market tends to overweight two fears. One is competitive disruption. Someone announces a stablecoin, the next digital thing or a fintech, and immediately the assumption is that banks are under threat. But banks evolve, and we'll talk about that evolution.
The second is credit. I don't think the market appreciates how different credit risk is today compared with 10 or 20 years ago. One issue happens with an auto dealer or office property, and suddenly a broad swath of banks or loans gets painted with the same brush.
A downtown New York City office tower is not the same risk as a two-story dental office in Ohio, but markets can react as though it is. The challenge is helping investors understand the modern credit-risk environment and showing that banks can evolve through competitive disruption.
History doesn't repeat exactly, but it rhymes. There are lessons from 10, 15 and 20 years ago that should give investors some comfort around a franchise like First Financial, which performs consistently.
When you consider the backstop of capital, the loan-loss reserve, collateral and guarantees, I don't think people always understand how buttoned up credit can be at well-run banks compared with some of the stories you hear in shadow banking.
Archie, we're clearly fans of what you're doing.
I appreciate that. There are two reference points I think public investors still use. The first is the Great Financial Crisis. A lot of concerns about banks get filtered through that experience, even though that was closer to a once-in-a-century event.
Banks are much healthier today. Capital is stronger, liquidity is stronger, management teams are better, and risk-management practices and controls have improved substantially.
The second reference point is 2023. Investors watched several banks fail almost overnight and thought, "I never expected that." For smaller banks and non-universal institutions, there is now this persistent concern that maybe there's something hidden on the balance sheet that could suddenly create a problem.
We've gone through multiple rounds of investors saying, "Oh no, they have hotels," or "Oh no, it's restaurants," or "Oh no, it's office loans." You can pick the next category. A couple of banks report an issue and everybody gets nervous.
What we've demonstrated over time is that we're in the risk-management business. Credit losses are part of banking, but current credit losses for midsize banks are still very low by historical standards. We're talking about levels such as 15 or 20 basis points in many cases.
We have the talent, skills and balance sheet to manage those risks when they do show up.
That's important because you're competing with all kinds of players, some known and some unknown. Competing with the biggest banks can feel daunting, but in a recent investor presentation you said there is a huge opportunity to be a better alternative than the big banks in areas such as commercial banking and wealth management.
I queued up the New Radicals' You Get What You Give because I'd love to hear how you differentiate beyond the cliché of personal, friendly service. What are you doing across the client experience?
I use that idea a lot because a midsize bank has to figure out what it can be really good at and then go hard at it. We're a little over $20 billion in assets.
We're built on legacy community-bank markets, and those markets are where we get strong core funding. We need to continue nurturing that. But where we can really differentiate is commercial banking and wealth management for middle-market companies.
Cincinnati is a good example of how this developed. If you look at the top deposit players in greater Cincinnati, we're the only midsize bank among a group dominated by universal banks and super-regionals.
That difference has helped us recruit best-in-class bankers, often people trained at the larger institutions. They come here because we can be more responsive and flexible, customize solutions, provide access to decision-makers and still offer a very broad product set.
Compared with most midsize banks, our product set is robust. Then it comes down to execution.
We've been at this for a while. In Cincinnati, we're gaining deposit market share and winning entire relationships from competitors. Every year we add another nucleus of talent, and we've become an employer of choice for middle-market bankers. We're trying to replicate that in other markets where we believe we can create the same advantage.
Being a magnet for talent is something we've talked about with other Plugged In guests. The right people create the foundation for the products, services and financial performance that follow.
But you also said something important, Archie. You have to keep the product set close enough to the national banks so talented people don't join and immediately say, "When I was at PNC, we had this and that." You've kept up on products, treasury management and wealth in a way that gives you a real chance to compete.
We've also bought several nonbank companies to add capabilities. We acquired a foreign-exchange company and an equipment-finance company. Some capabilities we've built organically, others we've acquired.
Technology is another part of it. You have to be willing to invest in good technology that makes the bank more responsive and lets people get things done faster, easier and with less friction. We use best-in-class origination technology in commercial banking, and we're constantly working on those kinds of improvements.
You need the right product set and the right technology so bankers can do what they do best.
Being a commercial bank can never be an excuse not to lean into technology. That's a major difference from 10 years ago.
Last week I was listening to Mike Mayo talk about AI and the investments the biggest banks are making. He said, "Goliath is winning," referring to the massive institutions. But another participant made an important counterpoint: community and regional banks can move faster because they have fewer layers of decision-making and are closer to customers.
That closeness to customers can make their data more actionable. I like your point that you can equip your people to do the right thing the first time without layer after layer of bureaucracy.
I do think fewer layers are an advantage. If a banker wants me to see or call a client, it's an email or phone call. I'm usually back to them that day, and we move. You can get that done at a company like ours.
We don't have the resources of the universal banks, but we have strong vendor partners bringing many of the same tools into our workplace.
In the last two years, we've reduced full-time-equivalent headcount by about 8%. We've done that through better tools and technology, identifying capacity and improving processes.
Our AI focus is similar: take out cost, make processes faster and easier, reduce client friction, and create a virtuous cycle where savings can be reinvested in the business.
That leads perfectly into my next song. Steve and I are going to be in Nashville together, so I'm pulling Kenny Rogers and The Gambler. You have to know when to hold 'em, know when to fold 'em, know when to walk away and know when to run.
As you think about your footprint and capabilities, how do you decide where to double down and where to say no?
It goes back to figuring out what we can do best. For us, that's commercial banking and wealth management.
Years ago, I was at a roundtable with someone who had built a strong wealth business. I asked how he got there, and he basically said, "I hated it every step of the way, but after 25 years I'm glad I did it." There is some truth in that.
We have a huge commitment to the commercial platform and wealth business. We keep investing in people, technology and process. We expect returns and we're getting them, but we continue investing because we want those businesses to get better and better.
Other areas we control more tightly. You're not going to see us put 15 branches into a metro area tomorrow because I don't think we'd ever see an acceptable return.
The same discipline applies to acquisitions. For about eight years, we did no bank acquisitions, but we did roughly four nonbank acquisitions. Those came opportunistically and added fee revenue.
Fee income is now around 30% of total revenue, which is an outlier for a midsize bank. Much of that diversification came from those acquisitions, whether through fee revenue, revenue diversification or earning-asset generation.
This year we've announced two bank deals. One closed in November and another is expected to close in January. They have to fit both financial and strategic disciplines.
For us, that means asking whether they help core funding, strengthen market share in markets where we're already invested, and are of a size where execution risk is manageable. Then they also have to meet our financial hurdles.
We go through those decisions methodically.
That 30% fee-income ratio really is an outlier. During the zero-rate era, when everybody was growing balance sheets, that percentage kept falling at many midsize banks. A lot of peers are closer to 15% to 20%.
And that's with a margin around 4%.
Exactly.
We're somewhat asset-sensitive, so if the Fed brings rates down, fee revenue becomes an even larger percentage of total revenue. We're proud of where it is, especially with a margin that high.
Steve, curveball. Who's the king of pop?
Michael Jackson.
Favorite Michael Jackson song?
Man in the Mirror.
You want to sing it for us?
I'm looking at the man in the mirror.
We're not paying royalties for this karaoke moment.
You and Archie had a banking-and-pop-music analogy years ago. In your words, why does the king of pop make an appearance on Plugged In?
A long time ago in Indiana, Archie was running MainSource Bank, which is now part of First Financial. I was speaking at an officer retreat, and we were talking about digital and mobile disruption.
Archie said banking was like pop music. The style changes, the way it's delivered changes and what it sounds like changes, but it's still pop music. The question was whether the team could evolve while keeping the core intact.
Archie, do you still think banking works that way in a world of fintech, embedded finance and new technology?
I do. Bill Gates made the point years ago that banking would remain even as the way people access it changed. How it's delivered and the tools people use will evolve, but banking continues.
When I made the pop-music analogy years ago, I was watching disruptors come from every direction. Many ultimately got acquired or rolled into something larger, but they still influenced the business in meaningful ways.
Pop music has absorbed all kinds of influences over the years and still remains pop music. Banking has done the same.
I do sometimes wonder what traditional banking looks like over the long term. From a client and community perspective, I believe it remains important. What we do is highly valued in local communities. You don't see a universal bank lending into a local community in exactly the way we do or having the same local impact.
From an investor perspective, I'm less certain what the long-term structure looks like. But the competitive forces and innovations ultimately make us better at what we do and give clients something better. So I still believe the premise is true.
I think the next interesting era will be technology in commercial and wealth banking. Retail has gotten a lot of attention. Integrating data and technology into the industries you bank is going to be one of the major stories of the next five years.
Let's close with a song everybody recognizes a little more easily. I've been listening to Good Times Roll by The Cars.
That made me think about leadership in a digital-first world. Pop music evolves with technology and culture, and leadership does too. It looks different today than it once did, but it still comes down to setting the right tone and being the right person, not simply holding the title.
Employees, like customers, now expect answers and access whenever they want them, and they're surprised when they don't get it. How has digital changed the way you lead and stay connected to people when so much happens through a screen?
That part has changed a lot, although even before the pandemic we already had people working across different locations. It wasn't the old model where everyone sat in one building. We had leaders, managers and professionals all over the footprint.
The tools of the last five years have made that much better. In the past, I regularly talked with people in Indianapolis by conference call. Video technology is dramatically better today.
It has also allowed us to be more creative with work arrangements. Most of our people are in the office most of the time. Some have hybrid arrangements with a minimum of three days in. That lets us maintain culture while providing flexibility, which matters particularly to younger professionals.
We're also heavily focused on employee engagement and have been a Gallup partner for years. We did that at MainSource, and we've continued it here for about six years.
Most recently, our engagement results put us around the 98th percentile among Gallup companies, and we've received an Exceptional Workplace Award.
If I boil down the philosophy, everybody brings something to the table. Our job is to help people identify what that is and then harness it so the organization can benefit.
That puts a heavy focus on managers helping people become the best they can be. We use tools like CliftonStrengths, invest heavily in management development and stay focused on core engagement principles.
We reinforce those ideas through town halls, in-person market rallies, community events and regular communication. For us, that approach is working very well.
We love it. On behalf of Steve Williams, the whole Cornerstone Advisors team and me, Al Dominick, thanks for getting Plugged In with us today.
Great to get caught up.
Thank you. I appreciate what you guys do.
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