First Financial Bancorp (FFBC) 2011 Q1 法說會逐字稿

Hello and welcome to the First Financial Bancorp first-quarter 2011 earnings conference call and webcast. All participants will be in listen-only mode. (Operator Instructions)

After today's presentation, there will be an opportunity to ask questions and instructions will follow at that time. Please note that the event is being recorded. (Operator Instructions)

I would now like to turn over the conference to Mr. Kenneth Lovik, Vice President, Investor Relations and Corporate Development. Mr. Lovik, please go ahead.

Thank you, Keith. Good morning, everyone, and thank you for joining us on today's conference call to discuss First Financial Bancorp's first-quarter 2011 financial results.

Discussing our operating and financial results today will be Claude Davis, President and Chief Executive Officer; and Frank Hall, Executive Vice President and Chief Financial Officer. Before we get started I'd like to mention that both the press release we issued yesterday announcing our financial results for the quarter and the accompanying supplemental presentation are available on our website at www.bankatfirst.com under the Investor Relations section.

Please refer to the forward-looking statement disclosure contained in the first-quarter 2011 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, 2011 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 Claude Davis.

Thank you, Ken, and thank you to those joining the call today. We are pleased to announce another strong quarter of performance, reporting net income of $17.2 million or $0.29 per diluted common share, representing a return on average assets of 1.11% and return on average shareholders equity of 10.04%.

Our net interest margin remains strong, increasing to 4.73%, and our credit results on uncovered loans improved as both net charge-offs and the provision for loan losses were down significantly compared to the fourth quarter of 2010. I'll take a few minutes to discuss certain strategic and operational highlights for the quarter and then turn the conversation over to Frank who will address our financial results in greater detail.

During the quarter, we remained focused on improving the efficiency of our operations and managing our costs. As of March 31, we closed five branches in Michigan and Louisville as a part of the previously announced exiting of those markets.

We also consolidated seven banking centers located in our Ohio and Indiana strategic footprint. We expect these strategic decisions to enhance efficiency going forward without sacrificing our operations and brand awareness in our core strategic markets.

We began to realize the effects of cost management initiatives implemented last year as our operating costs net of nonstrategic items and other items not expected to recur declined 15% on an annualized basis compared to the prior quarter. The reduction in non-interest expenses were driven by lower compensation costs, data processing costs, marketing and communication expenses and professional services fees.

Our provision for loan losses related to our legacy and originated portfolio was $647,000 for the quarter, down from $9.7 million during the fourth quarter of 2010. Net charge-offs were down 57% to $4.2 million from $9.8 million for the linked quarter. While total non-performing loans were essentially flat and non-performing assets declined modestly to $95.5 million, total classified assets went down over 8% to $185.7 million.

Additionally, our 30- to 89-day past dues declined 8.8% during the quarter. We continue to aggressively monitor credits that show sign of potential deterioration and the result was that our resolution efforts outpaced the inflow of downgraded loans during the quarter.

Please note that our provision for loan losses is the result of our modeling efforts to estimate the quarter-end allowance for loan losses and that the decrease in our recorded provision reflects the positive migration trends in classified assets and delinquent loans as well as the impact of improving macroeconomic trends.

However, we also realize that recovery is going to be a prolonged event as borrowers are still challenged by conditions in our strategic markets. Additionally, should real estate values decline further, the impact will be detrimental to our resolution efforts.

Credit costs for our uncovered portfolio did include approximately $3 million in a write-down on our OREO properties due to updated appraisals. Loan demand was soft in our strategic markets as average balances were up 1% in total quarter-over-quarter but were down slightly by quarter-end.

We were encouraged though as originations in several loan product lines were stronger at the end of the quarter as March numbers showed improvement over February results. Our lenders continue to increase their calling efforts and remain keenly focused on their clients and new business opportunities.

As a result, we feel optimistic as the pipeline is building across all product lines. Our continued strong focus on sales was evident in our deposit generation activities during the quarter.

We continued to build the core deposit franchise as strategic transactions -- our transaction savings balances increased over $109 million or 4.5% compared to the prior quarter with strong gains coming from both the commercial and retail business lines. In particular, our savings account product line performed exceptionally well with average balances increasing 6.4% over the prior quarter and over 20% as compared to first quarter 2010. We continue to be successful at replacing higher cost time deposit balances with lower cost transaction and savings account while maintaining strong discipline in the pricing of our deposit products.

Our strong earnings performance continued to add to capital levels, easily supporting the 20% increase in the dividend paid during the quarter. We ended the quarter with a tangible common ratio of 10.4% and a total risk-based capital ratio of 21.77%, providing a solid base to support organic growth and allowing us to capitalize on strategic opportunities while also ensuring we have a sufficient cushion to manage any changes to regulatory capital requirements.

From an operational perspective, we began moving associates into our new corporate administrative center located in Cincinnati. We're very excited by this transition as we will ultimately unite nearly 400 associates that were previously located in disparate facilities, adding to the efficiency of our operations.

We have also made progress on the construction of our new regional hub facility in one of our core markets Columbus, Indiana. And we continue to evaluate our market presence in key locations and look to build the First Financial brand through new prototype banking centers that enhance the client experience.

In closing, we're very pleased with our results for the quarter. Our strong net interest margin, positive credit trends, continued core deposit growth and lower strategic operating costs were all bright spots in the quarter. As the economy begins to show signs of improvement, pursuing organic loan and revenue growth remains our top priority as we focus on sales initiatives across all business lines.

While origination volumes dropped during the quarter, we remain confident that we will regain momentum in our residential mortgage and small business banking units as well as realize increased contributions from business credit and equipment finance. In terms of capital management, evaluating and maintaining a prudent dividend policy continues to be a point of emphasis for our Board and future increases will be based on our ability to maintain a strong earnings profile.

We also remain receptive to analyzing acquisition opportunities, either traditional acquisitions, FDIC-assisted deals or branch acquisitions that are aligned with our strategic plan, make sense from a financial perspective and build long-term shareholder value. At the appropriate time, we will also incorporate share repurchase plans as an additional tool to manage capital levels.

And finally, despite our strong profitability, our balance sheet risk remains low as 32.5% of our loan portfolio is covered under loss-share agreements with the FDIC and less than 50% of our balance sheet consists of 100% risk-weighted assets. I will now turn the call over to Frank for further discussion on our financial performance.

Thank you, Claude. I will start by providing a few comments on the operating results of the quarter and the major components of performance. We have also provided supplemental information furnished separately that is available on our website bankatfirst.com in the Investor Relations section or in the 8-K we filed this morning.

As in previous quarters, this supplement is crucial to establishing and maintaining a clear understanding of our reported results as well as the concepts that have a material effect on our current and future performance. As many of you know from following our Company, our operating results are materially impacted by unique accounting and reporting requirements and the strategic distinctions we have made related to our 2009 acquisitions.

However, to aid in a clearer understanding of our strategic activities, we will focus primarily on the ongoing or strategic aspects of our business on this call. Our earnings release and our supplemental information should provide sufficient information and transparency into the purchase accounting details and the impact of nonstrategic components of our results.

These complexities have also been discussed at length in our previous earnings calls and the technical accounting call that we hosted on February 4 of this year. This information is also available on our website.

First-quarter 2011 GAAP earnings per diluted share were $0.29. The most significant items affecting our earnings for the first quarter as compared to the prior quarter were a lower provision for loan losses partially offset by higher credit costs related to acquired loans and a write-down of an OREO property in the legacy portfolio that Claude mentioned in his comments.

Looking at page 3 of the supplement, you will see a quarterly progression of pretax pre-provision income. You will see that we have produced a fairly consistent level of adjusted pretax pre-provision earnings over the past five quarters earning $27.1 million in the first quarter.

As net interest income was essentially flat, the decline compared to the linked quarter was driven by lower non-interest income, offset partially by lower operating expenses. Note that the pretax pre-provision amount does include the $3.1 million write-down related to the afforementioned OREO property. Excluding this amount, pretax pre-provision income would've been $30.2 million for the quarter.

As Claude mentioned earlier when discussing our credit quality, the most significant item affecting our earnings for the first quarter as compared to the prior quarter was a lower provision for loan losses on our legacy portfolio. This lower provision expense was driven both by key model inputs such as loan classifications but also by markedly lower charge-offs.

As such the allowance for loan and lease losses declined. Net interest margin increased to 4.73% for the quarter. As mentioned earlier, lower funding costs helped to offset the impact of continued paydowns and amortizations of acquired loans.

As in prior quarters, we put our excess liquidity to use purchasing over $161 million of agency mortgage-backed securities during the first quarter. We also had the full quarter impact of the $362 million we repurchased in the fourth quarter of 2010.

If loan growth remains challenged, we will continue to deploy additional liquidity resulting from the combination of our strong earnings, core deposit inflows and acquired loan paydowns. With regard to our investment portfolio, since the end of the third quarter 2010, the duration of the portfolio has increased from 1.1 years to 2.1 years at the end of the first quarter 2011.

While we have extended the duration albeit from a very low starting point, we continue to manage the overall performance of the portfolio to provide a stable and predictable revenue stream across a variety of interest-rate scenarios and market conditions. This is consistent with our intent to remain in an asset-sensitive position while providing a suitable balance of quality and diversification.

Non-interest income for the quarter was lower than the previous quarter due to both seasonality and the likely effects of financial regulatory reform on fee revenue as service charges declined. Additionally we experienced lower gains on sale from residential mortgage originations and lower bank card fee income.

Non-interest expense was negatively impacted by approximately $3.1 million due to the revaluation of the ORE property we previously discussed. This property represented the largest single property in the ORE portfolio and after revaluation still represents approximately 23% of the total.

The remaining properties in the ORE portfolio have an average balance of approximately $260,000. Operating expenses remain elevated (inaudible) non-strategic staffing and facilities costs including lease termination fees related to the exited markets of Michigan and Louisville. We do expect these costs to decline significantly as the market exit was completed on March 31.

Excluding the impact of the ORE write-down and acquired non-strategic operating expenses, non-interest expenses on a linked quarter decreased by approximately $2 million or 4% on the quarter driven by lower personnel cost and professional service fees. As I mentioned earlier, I will not discuss the details of purchase accounting related items. But I will note that the performance of the acquired portfolios continues to exceed our initial estimates and the quarter-to-quarter changes continue to be positive. I will now turn the call back over to Claude.

Great, thanks, Frank. This concludes our prepared comments for the call and Keith will now open it up for questions.

(Operator Instructions) Jon Arfstrom, RBC Capital.

The OREO write-down, can you give us an idea of what the status is on that credit? Is this something where you were preparing it to sell, getting it to a fair market value or what is the plan with that credit?

This is Claude. It was a part of our standard OREO process where we have had that property which is primarily land for close to a year and we went through an updated appraisal process and because of the uniqueness related to that land, the appraisal declined fairly significantly which resulted in the write-down.

Okay, so it's not something that's imminently leaving the bank?

No. Obviously it's being marketed as all of our OREO properties are.

Yes, that makes sense. And, Frank, what is possible here on your efficiency initiatives? I know you laid out some pretty good core declines in expenses. But obviously the 3.1 million comes out and you have some branch expenses come out. What is possible here as we look forward?

Yes, we stay committed to the 55 to 60% target and feel that that is certainly achievable. I think the time to achieve that is going to be impacted by some revenue as well, but the 55 to 60% remains the target and we will get there.

But aside from the $3.1 million coming out, your expectation is that we will see that continued slope down in expenses in the core number?

We do continue to see opportunities to reduce operating expenses, yes.

Okay and then, Claude, one more question for you on lending. You talked about originations in some product lines increased and then you also talked about the pipeline increasing across sounds like all product lines. Can you talk about what in particular was strong toward the end of the quarter?

Sure, Jon, what we saw was January and February were very slow and then March began to build and we saw an improvement similar to what we saw in the fourth quarter where we saw an improved pipeline, improved closings, and I would say the predominant area we've seen improvement is in the commercial segment and small-business segments. So those would be the two main areas.

And pricing on those products you feel is fair? There's some mixed signals we hear from your peers that it's ultracompetitive and others will say it's fair. Just curious what your assessment would be.

You know, it's I think from most of the press releases I've read thus far, I think everybody is struggling with the fact that the market is slow and loan growth is slow. Certainly as you get into bidding or competing with other banks on what I would call A-quality credits, it's very competitive.

And I would say more competitive on pricing, but I think to the extent that people begin to get too concerned or overly concerned about lack of loan growth, then what we don't want to see happen which we haven't seen to too much extent yet is I'd call it structural competitiveness return like it would have been in the '06/'07 timeframe. But this far it's been more about pricing, a little bit of structure, but it is competitive.

Scott Siefers, Sandler O'Neill.

Good morning, guys. Let's see, I guess, Claude, first question probably for you. Just in terms of capital management priorities, I guess given the kind of -- I understand your comments on the loan growth outlook. But still kind of a slow environment. I guess I'm just curious, why not more aggressive or ambitious on the share repurchase given the kind of muted overall growth outlook?

Sure, no, understand, that's why we've mentioned in terms of the -- we certainly feel like we have ample capital to continue the first two priorities we always have in capital management which is support organic growth and make sure we have a growing and sustainable dividend. Putting those two aside, I think it's not a secret, our capital ratios are far in excess of peer, far in excess of our targets. So what is the plan for that?

I guess our outlook on it is to be patient. We think that's always served us well. And to be patient, you need to look for what are the right ways to deploy it long term.

And so we are not opposed to share repurchase when we think the time is right, but I would say right now we're being patient to make sure we look at all opportunities for how we deploy the capital. And certainly if it makes sense, share repurchase might be one of those.

Okay, and then separately, either Claude or Frank, just the -- so the average commercial loans were up but the end of period were down. What was the dynamic that caused that higher average Versus the end of period? Anything in particular?

We had a strong end of fourth quarter volume growth and then we saw in January and February, pretty slow on the origination front, Scott, and then some -- obviously some paydowns as we always see during the first part, and then the origination build didn't occur back until you know like we talked about, the end of March. So it just resulted in a slightly higher average versus the end of period.

Okay, so largely it sounds like kind of follow through from fourth quarter then?

Yes, in terms of the beginning balance average.

Yes, okay. And then final question for Frank. Just in the non-interest expense table, what is the -- can you go through what the loss share and covered asset expense is? I think that one is a new disclosure, and why was it up so much sequentially?

Yes, the loss share and covered asset expense, I believe we had an OREO write-down in that line item.

Which would be different than the legacy OREO write-down.

That's correct, coincidentally the same amount.

Okay, alright, perfect. So I guess that just then is a non-legacy one. In other words that's from the deals.

That's correct. And if you look at page 9 on the supplements, you'll see that in that component of credit losses on covered assets as well.

Perfect, thank you very much.

Chris McGratty, KBW.

Could you maybe just talk about kind of deal flow in the market both traditional M&A? Are we seeing any signs of that in traditional I guess more recent FDIC deals?

Sure, this is Frank. Obviously we don't speak to anything specific, but I think others have commented that there are conversations that are occurring in the market. But as we all see the announcements or lack thereof.

So that's probably the best indicator of what is actually happening. And as far as FDIC-assisted transactions, again, the announcements you've seen have been I would say fewer and smaller than I think early expectations may have been.

And, Frank, on the provisioning for the legacy book, obviously it came down quite materially given the improvement in credit. How should we think about future provisioning for the legacy book? I mean is there a chance that you have a negative provision going forward?

Again provision is sort of the fallout number of our allowance adequacy valuation or estimation. So depending on what charge-offs are, depending on what the AQR migration is quarter to quarter, that's really what is going to drive the provision number.

Last on the commercial line utilization, do you have a number for us?

Chris, we have not traditionally kind of disclosed that number in terms of what our line utilization is. And I don't know, I don't have that here in front of me.

Maybe directionally is it -- I mean are we still at trough levels or have we seen any kind of improvement?

Yes, I think we are still at lower levels than we've seen -- I don't if I'd call it trough. But I would describe our commercial client base as still in a pretty conservative posture as it relates to just the uncertainties they are worried about and see in the market. So yes, we're at lower line utilization levels than we have seen in the past.

David Long, Raymond James.

Most of my questions have been answered but just to follow up on the commercial loan growth and really the pipeline that you talked about, seems like it's picking up here in March. Any geographies or specific industries that seem to stand out at this point? Thanks.

Sure, I would tell you that we have seen more activity in our kind of metro markets which would be more Cincinnati, Dayton, Indianapolis in terms of that activity. But there are some near markets too that have also seen some nice pipeline growth.

I would say if I had to put it in a sector, it is -- I think the manufacturing sector is healthier than some of the other sectors that would lend into. But there are some other sectors that are starting to show signs as well. We have had some recent deal activity in just some service companies and so you know, it's a bit early to see, but I would say manufacturing is the strongest.

(Operator Instructions) Kenneth James, Sterne Agee.

I have a question, Frank, I apologize, you said you didn't want to discuss purchase accounting, but my question is about loan yields, particularly acquired loan yields. As the portfolio continues to run off and I guess the economy's getting a little better and loans are performing, portfolios getting smaller, the yield keeps going higher and higher, is there any particular or theoretical maximum yield that this thing can reach or as it continue to get smaller could it theoretically the yield just keep going higher, 12, 15%? And I'm just ballpark numbers but I'm just asking if there is a limit to how high the covered portfolio could yield.

That's a good question. I don't know that I could answer it sort of in the pure theory I guess, theoretically a lot is possible there. But what's occurring over time and what I would say in the final period if you will of these loans in the pools, as you think about exit events, you're taking certain credits out of the pools that were established on day one, you are seeing the impact of impairments that we're recognizing in the current period and pushing improvements out into future periods.

So decoupling all of those events, it would be difficult to really predict with any sort of accuracy what those yields could go to. But we have seen in some of the pools yields in the mid-20s, low 30s but whether or not that continues over time has yet to be seen.

Okay, but theoretically if the economy is stable to better and the performance of those loans is stable to better, there's still upside to that yield. Things would have to get worse economically and from a credit perspective that yield to go down, I am assuming.

It is theoretically possible for the yield to continue to increase, yes.

Joe Stieven, Stieven Capital.

First of all, good quarter. Almost all of my questions have been answered. But let me ask one final one.

If you look at the acquired book of loans, there's sort of a fear that the whole thing just runs off, it drops off the edge of the cliff. But take a step back, can you give a guesstimate, because I'm sure it's just a guesstimate of what percentage of those loans are loans that you guys are very happy to have on your books, will want to keep on your books because they are essentially the type of loans you would want to make on a normal operating basis anyway? I know that is sort of a tough question, but can you sort of just give us a number of what you think you really just want to keep anyway? Thanks guys.

Yes, Joe, I appreciate it and appreciate the comment on the quarter. I would say for all of the callers, listeners, on page 7 of the supplement, we break out what we view as the strategic kind of loan book versus the non-strategic -- so the strategic would include both our legacy portfolio but also those loans that are still covered that we view as loans that we want to retain.

So that's about 83% or a little over $3.4 billion of the total book and about $700 million of which we view as non-strategic that will probably be a several year duration that they will be with us, but not clients that we will pursue either new business with or look to renew existing loans. So that's how we tend to split it out, if that is helpful.

Now, that's it, that is very good. Thank you.

You bet.

There are no more questions at the present time, so I'd like to turn it back over to Claude Davis for any closing remarks.

Thanks, Keith, and again, I would just to let everyone know, appreciate your interest in First Financial. And again, we are pleased with the quarter's performance, pleased with the position of our balance sheet, our capacity for growth and the position of our earnings for the quarter. So appreciate your interest and thanks for being on our call today.

This concludes today's conference. You may now disconnect your phone lines.