First Financial Bancorp (FFBC) 2006 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the First Financial Bancorp's second quarter earnings release conference call.

[OPERATOR INSTRUCTIONS.]

It is now my pleasure to introduce your host, Mr. Claude Davis, President and Chief Executive Officer of First Financial Bancorp. Thank you. Mr. Davis, you may begin.

Thank you, Jen.

This has been another busy quarter for First Financial as we worked to complete our transition over the last six months of 2006. Before we provide some additional commentary on the quarter, Frank Hall, our CFO, will read the forward-looking statements. Frank.

Thank you, Claude.

As we begin, I would like to remind everyone that our discussion today may involve certain forward-looking statements, which are not statements of historical fact. The second quarter earnings press release should be read in conjunction with the consolidated financial statements, notes, and tables attached and in the First Financial Bancorp Annual Report on Form 10-K for the year ended December 31st, 2005.

Management's analysis contains forward-looking statements that are provided to assist in the understanding of anticipated future financial performance. However, such performance involves risks and uncertainties that may cause actual results to differ materially.

Factors that could cause actual results to differ from those discussed in the forward-looking statements include but are not limited to the ability of the company to implement its strategic plan, the strength of the local economies in which operations are conducted, the affect of and changes in policies and laws of regulatory agencies, inflation, and interest rates.

For further discussion of certain factors that may cause such forward-looking statements to differ materially from actual results, refer to the 2005 Form 10-K and other public documents filed with the SEC. These documents are available on the Investor Relations section of our web site at www.ffbc-oh.com, and on the SEC's web site at sec.gov.

Claude.

Thanks, Frank.

As we announced in our second quarter earnings release today, we continue to make progress in our transition as a company. We are making solid improvements in our operating performance. We announced our new brand for the entire company and we announced plans for a problem loan sale and the resumption of our stock buyback program.

During the second quarter we announced our plan to consolidate the company under one brand. The rollout of the new brand will officially begin rates in the third quarter and includes several elements: The consolidation of all of our businesses and markets under the First Financial name, including our banking business, First Financial Bank. The introduction of our new logo and color scheme. A set of brand promises for how we manage our business and deliver value to clients. And a consistent marketing message and campaign that will position us for growth as we become the new First Financial.

Our plans to complete our strategic transition by the end of 2006 are still on-track. As we have announced in prior releases, this has included several elements. The final steps in the process are on target, including our plans to reduce expenses and realize additional revenue opportunities of $0.21 to $0.27 per share, are still expected and should be fully realized in 2007.

We also continue to look for additional revenue enhancements and expense savings to further improve our core earnings and efficiency ratio. Our technology enhancements and core system conversion is on target and will be completed by the fourth quarter of this year. The planned sale of 10 branch offices will be complete by the end of August, with an expected gain in the third quarter of $12.5 million or $0.21 per share. We will also consolidate an additional seven offices in early August in existing markets.

The negative financial impact of our strategic transition has been a drag to 2005 and 2006 earnings, but we continue to be very optimistic about the long-term future of First Financial, and that these changes will substantially improve the strategic and financial outlook for the company. We expect 2007 to be indicative of the new First Financial Bancorp.

Frank will now discuss the financial performance of the company and other planned initiatives.

Thank you, Claude.

The second quarter operating performance of First Financial included several material items related to our strategic planned implementation. Specifically, $0.04 per share in all severance related charges, $0.02 per share in data processing conversion related expenses, $0.01 per share in professional services, and $0.01 per share in higher tan expected healthcare costs.

Our net interest margin increased over the linked quarter by 7 basis points to 4.11% due to the combined effect of the full quarter impact of our balance sheet restructuring, asset repricing with the last prime rate increase, and an increase in production on higher yielding commercial loans, partially offset by deposit repricing and product shift, a late fee accrual adjustment, and the planned runoff of the mortgage and indirect portfolios. We are maintaining our full year 2006 margin forecast between 4.05 and 4.1%.

The increase in commercial loan volume is due primarily to talent recruited into First Financial and the new markets we have targeted for growth, and is an early indication of the success of our strategic plan.

Non-interest income for the quarter highlights the success of our previously announced overdraft honors program, with an increase in NSF fee income of roughly $1 million over the prior year. Our non-interest expenses continue to show the effects of many unusual and infrequent items associated with our strategic plan implementation. These transition related items are expected to be completed by the end of 2006.

As noted in the earnings release, salaries and benefits expense for the second quarter has been affected by severance charges and unexpected healthcare costs. It is important to note, however, that the underlying annualized core salaries expense for First Financial is moving in the right direction, and the target yearend FTE count for First Financial is expected to be 1,152 versus our current level of 1,365, a [15.6%] decrease.

Operating performance improvement strategies identified to date, still have us on pace for a proforma 65 to 66% efficiency ratio from our current core level operating performance. We continue to review opportunities for additional expense savings and will expect the efficiency ratio to improve as we grow organically with managed expense levels.

We still support our long-term efficiency ratio target of between 55 and 60% and expect some of the remaining gap to be filled with organic growth as we fill the capacity of new sales staff.

In the second quarter we recognized the accounting effects of the anticipated commercial loan sale that will likely close in the third quarter of 2006. We have identified $39 million in commercial, commercial real estate, and residential real estate loans that we have deemed appropriate to sell.

This is a significant move forward in improving both our current credit quality and positioning ourselves to better manage future problem credits. Even by excluding the write-down of the held for sale portfolio, the underlying credit quality of First Financial remains stable with modest signs of improvement. We believe our credit quality outlook is stable.

As part of our commitment to manage our capital levels we are pleased to announce our plans to resume our stock repurchase program. As noted in the earnings release, our previously approved plans were halted at the time of the Dutch tender offer in December of 2005, and could only be resumed in a quiet period. Due to the extensive list of projects of a material nature since December 2005, First Financial has not been able to resume the program until now.

Our planned level of repurchase over the next 12 months is between 750,000 and 1,250,000 shares. The total number of shares available for repurchase under previously approved plans is 7.4 million shares.

This concludes the prepared comments section of the call. We will now open up the cal for questions. Jen?

[OPERATOR INSTRUCTIONS.]

Our first question is from [Kevin Calega] with Prudential.

Morning, guys.

Hi, Kevin.

Hi, Kevin.

Hey, first of all, I'm applauding that you will be back in the market buying your stock. And, secondly, if you can give an update on some of the lenders that you've hired, how that's going, and maybe you can speak to the competitive landscape and what you're seeing out there?

Sure. I'd be happy to. We have continued to kind of recruit and add various lenders, especially in the Cincinnati, Dayton, Northern Kentucky marketplaces. And what we have found is actually some very good early success, in our opinion. As noted in the press release, we're up about 10% over yearend annualized. However, that includes a reduction in the final totals of commercial loans for the problem loan sale. If we had not deducted those out of the commercial loan totals we would have actually grown by about 15%.

So we're seeing some nice growth in the commercial business, and we're still at a stage where many of the lenders we've hired are still under non-solicitation agreements, as well as we've just in the last six months hired some additional lenders that are still in the process of building their pipeline. So good early indications of the success of the commercial strategy.

What were a lot of those lenders hired form?

You know, it's a combination of forms. A lot of the large regional banks within our area that we compete with.

So not all of them came from, say, [Huntington], or just…

Yes, a combination of several of those and a couple of others, as well. No one specific institution.

And what would you say for the most part the non-competes go away so they can be in loans?

Well, it's over time, depending on the kind of the -- if we hired those individual lenders, and we really, you know, began recruiting aggressively about this time or a month or two earlier last year. And so, you know, we'll see it throughout the balance of '06 and into '07.

On the loan sales that you made, was there any concentration to a particular sector or segment of those problem loans? Or it was just, again, across the board, the bad apples were tossed?

Yes, Kevin. It was really across the board. There was no one area of concentration. In fact, the marketing of the portfolio, at least on the commercial side, were actually marketed in 10 different pools. So no one concentration.

Okay. And in terms of the economy in that part of Ohio, in terms of the auto exposure I guess the greater exposure to some of the big three and the related parts suppliers would be probably, what? The northern part of the state as opposed to your markets?

Southwest Ohio has a much lower auto concentration than what other parts of Ohio would have. You're exactly correct. You know, it still affects some parts of our marketplace but not in as significant a way as some of the northern Ohio regions would.

Okay. And in terms of pricing competition for both loans and deposits, any change there?

It's still very competitive. Yes, I would say it's competitive both on the loan and the deposit side. And it's one, we think we've been able to still achieve reasonable pricing, both on the loan and the deposit business that we've been able to attract, but it is competitive.

You know, one of the other factors, Kevin, which we acknowledged in our release is that as rates move-up one of the things we are seeing is some product mix shift on the deposit side, as customers look for higher rates of return in money market or CDs.

Okay. Thanks.

Yes, thank you.

[OPERATOR INSTRUCTIONS.]

Our next question is from Eric Grubelich with KBW.

Hi, good morning.

Hi, Eric.

Frank, what did you say the program balance was on your repurchase program?

As far as the remaining shares available for repurchase?

Exactly.

7.4 million.

Oh, it's 7.4 million, okay, okay. That's what I thought you said. I had a lower number. I'll correct that.

The other two questions I had for you were really on the fee, income side. Anything of a non-repeating, nonrecurring nature, out of the ordinary there, like in the other category? Or was it pretty much business as usual?

On the non-interest income?

Yes.

Other than what was mentioned with the bank and life insurance.

Right.

No, that's recurring.

Okay, okay. That's good. And the other question I had for you was when you get all done with your big restructuring effort here, on the expense side, things like professional services, where do you think that's going to be on a run rate basis? Like an annualized number?

You know, Eric, what we tried to show there is the components of that that we think are onetime in nature.

Right.

So if you deducted those from the run rate that should keep you pretty safe.

Okay. And the same thing, again, it's a small number but on the marketing side, you know, you've been running a little less than today $700,000 a quarter. You're doing this rebranding program, which is going to take, have some expense that you identified in the press release for that. But is there anything else there on the marketing side that we would expect to materially increase going forward to promote the business?

No, I really don't think so. We've looked at that number pretty hard, and we've looked at who is performing the services for us. So we think that we'll be able to deliver what we need to with about the same dollars. And, of course, if that changes we'll let you know.

Okay. And then the – you have the detail in here on the problem loan sale, and you took a hefty write-down, I guess, on the value of those products to move them forward and out of the bank. Is that pretty much your last run at it? I mean this is sort of, it's for the time being, all the problem loans?

Yes, we think so, Eric. We've spent some time going through the portfolio and really pulling out those loans that we thought were best sold. And, yes, that's the case.

And, again, some of these were non-performing, some of them we're still accruing, right?

That's correct.

Okay, so the 8.3 million is against that loan, against that portfolio that the number of credits there that you're going to kick out.

That's correct.

Okay, good. Thank you.

Our next question is from Brad Ness with Friedman Billings.

Hey, guys. How are you doing?

Hey, Brad. How are you?

Good, good. A few questions here. You mentioned being on-track for 65 to 66% [efficiency] ratio, and I didn't hear the timeframe?

That is, that's after the conclusion of all of our strategic initiatives which should conclude by the end of the year. So that's rolling into '07 with all of the projects that we've announced. Now, obviously, as we've mentioned, that's not our target. We're hopeful that we can identify some additional expense savings. But with the published information that we have out there right now that'll get you to about a 65, 66%.

Okay. with the long-term target between 55 and 60. You know, when do you think 60% would be achievable? A couple years later? Maybe early '09?

Well, Brad, we're not putting a specific date on that. What we do believe is that, as Frank described, that 65 to 66 is based on the current revenue stream with, excuse me, the announced onetime items that we have or nonrecurring items, and the performance improvement plan savings that we've already announced, you know, our expectation and hope is to find additional savings. We don't believe we will be within that range in 2007 because we have made some adjustments in growth, but our long-term plan is to still, to be in that range without putting a date on it.

Okay. And when you look at loan growth, say in 2007, I know you're showing great growth in the commercial side, but your indirect and residential portfolios are being managed down. What do you think growth kind of shakes out at in 2007?

You know, that's a good question. I think we'd be more comfortable sharing that information as we start to see sort of the full affect of the new lenders that we brought on, coming fully online. But the growth that we've published to date, again, takes into account some of the points that Claude mentioned, that we still have some new lenders that we brought on operating under non-solicitation agreements. And we continue to recruit good lenders.

So we're pleased with the 15% annualized growth rate. What does the future hold? You know, I would hope better than that, but to put a number on it, I'd hesitate to do that.

And when you're sitting down with the balance sheet restructuring, I'm looking at them right now. And with your guidance it seems like an interest margin could be heading south in the third quarter and the fourth quarter. Where, how are you positioned in '07? Say, we've got, say the Fed gets one more move upward, and then the Fed is flat for '07? You know, if you've got a flat yield curve or a little wider yield curve, you know, how do you think you are positioned?

Yes, and how we look at that is really with a most likely rate scenario type analysis, and we are just slightly at the -- I'd actually call it more neutral than anything. What we've seen happening and what's anticipated in that margin forecast is possibly some more deposits, account mix shift, that we've seen, and competitive pricing pressures. So I don't – we certainly can't predict consumer behavior, but there is some element of that in that forecast of 4.05 to 4.10.

And looking at one statement here in the press release, that says 'the combined improvements of the strategic initiatives remain in the range of $0.21 to $0.27.'

That's right.

And if you look at what you were doing before the initiative kicked in, we'll say the first quarter of '05 or the fourth quarter of '04, doing around $0.23 a share, you know, is it as easy as adding $0.23 to what you were doing before the strategic initiative? And, you know, another $0.23 with these cost base? So maybe a run rate of $0.46?

I don't want to say it's that easy. That would be pretty close to giving guidance there. And I hesitate doing that. So we tried to articulate really the significant elements of what it is we're trying to achieve, and disclose what the anticipated impact is there, but I guess I don't want to guide you too much on that math.

Okay. One last question. With the rather large charge-off in the quarter, you know, have you reassessed your credit underwriting or have you made any changes in light of these recent charge-offs?

What we actually have done, really early in mid-2005 we began a process of really reengineering the entire credit process, both commercial and consumer, and have made several significant changes in that area, including the addition of and the expansion of our credit staff, bringing in several individuals, both a chief credit officer, as well as the regional credit officers that underwrite our credit, that we believe our credit underwriting process is substantially improved.

The majority of the loans that we are selling, if not all, were originated pre-2005, and so it's a chance for us to move out some credits that we don't think fit our profile and have a higher risk characteristic.

Okay, great. Thanks, guys.

Our next question is from Fred Cummings with KeyBanc Capital Markets.

Yes, good morning.

Hey, Fred.

Hi, Fred.

Can you comment on the tax rate, the outlook for the tax rate? I know there's a lot of moving parts this quarter, Frank, and for the second half of the year should we be looking at an effective tax rate in the range of 36%?

No. Our effective tax rate is in the 31 to 33% range. Our marginal tax rate is in that area, but the effective tax rate is lower.

Okay. All right. And then just one clarification on the nature of the onetime healthcare accrual. Could you expand on that?

Yes, there really is we think an anomaly in our healthcare expense. That's not something that we expect to continue, but in the same sense I'd say we obviously can't predict the future there, but it is unusual for us.

Okay. And then, Frank, when you guys look at the balance sheet and looking at earning assets. And I know someone else talked about the loan outlook. Securities portfolio, at what point would you feel – one, where do you think earning asset levels bottom? And then, two, at what point would you guys feel comfortable reinvesting in your securities portfolio?

I would say the earning asset level will bottom after the completion of our branch sales. And, again, what we're seeing right now is that the commercial loan growth is equal to and starting to more than offset what we're seeing in the mortgage portfolio and in direct portfolios as far as runoffs. So I would say, you know, fourth quarter, late third, mid fourth quarter that that's probably going to be the bottom as far as earning asset levels.

As far as the securities portfolio, I really don’t see a tremendous amount of growth there, at least in the next 12 months. At what point do we start drawing that, I'd say when we've run out of opportunities for commercial loans. But, you know, I wouldn't put a lot of growth into that number in '07.

Then, lastly, Claude, as it relates to hiring any of these deposit specialists, where do you, what are your plans for that?

We have, actually in this quarter, in the second quarter, we hired an individual to head-up our Treasury Management Group, that has pretty extensive past experience in heading up a treasury management unit and growing that business, both on the sales and management side.

And they are working with our market president pretty actively to recruit treasury management and commercial deposit salespeople. We've had a couple of early successes but that's, it's still relatively early in that process. But it's a key focus for us in late '06 and clearly going into '07.

Okay, thank you.

Thank you, Fred.

Our next question is a follow-up from Eric Grubelich with KBW.

Yes, hi. In your press release you mentioned about the I guess about the 800 or 900 million worth of adjustable rate loans on the portfolio. And I guess it's at 30%. But if I'm looking at your certificate of deposit totals, at least the average balance sheet that you had in the press release, you've got about $1.2 billion of time accounts which have been holding a little bit steady.

When you sell those branches off, you know, when that transaction completes, how many of those $100 million or so of deposits, I think that was the number if I remember correctly, how many of those are time deposits? Do you know off-hand, Frank?

Let me ask you another, while you're thinking about that – I'd like to know of that $1.2 billion plus or minus 100 million, it really doesn't matter, I guess. If you look over the next couple of quarters what are your roll rates in that time deposit category in terms of the volume of CDs that are coming due? And do you have a weighted average cost on those?

Yes, the weighted average cost on our CD portfolio right now is about 371, that's what the yield is on a quarter for all time deposits.

As far as the roll rate, we are somewhat short on those at the moment, so a fair amount of that portfolio. And I'll try to add some clarity to that for you in the Q, but the, you know, we do expect a fair amount of it to roll – I'll try to get you a more precise number there.

Yes, what I was really trying to get at is, Frank, if you have 300 million, 400 million, or whatever the number is, whatever is going to roll, what the cost is on that? And what I would be interested in knowing, as I'm sure other people on the call, in trying to assess your margins for next year and then for the next six months, is while you may have the benefit on the adjustable loans that may soon come to an end if the Fed stops. Yet, if you've got CDs that are still rolling over and market rates are up there may be some pressure from that side of the balance sheet. That's what I was trying to get a handle on.

Right, right.

Between the dollars and the whack.

Right, no, I understand your question.

Okay.

And it's something, again, as we look out further, you know, that certainly is going to be a challenge to the margins. Again, the full year we're comfortable with where our forecasted range is there, but I'll try to add some more specificity to that for you in the Q.

That would be appreciated. Thanks, Frank.

Eric, this is Claude, Eric. Another issue on the margin that I would offer, is that you're right, as a CD portfolio reprices you have that impact. But remember, on our balance sheet the other opportunity we have is our loan mix shift that we're in the process of working through, which is as mortgage loans and indirect auto loans roll-off they are at substantially lower rates on our balance sheet than what are the new commercial loans that we're replacing them with. So there's an offset in that process to the CD portfolio repricing.

That's a fair point, so thanks.

You bet.

[OPERATOR INSTRUCTIONS.]

Gentlemen, I'm showing no further questions in queue at this time.

Jen, thank you, and thank you, everyone, for joining the call.

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.