First Financial Bancorp (FFBC) 2014 Q2 法說會逐字稿

Good day and welcome to the First Financial Bancorp second-quarter 2014 earnings conference call and webcast. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Mr. Ken Lovik, Senior Vice President Investor Relations and Corporate Development. Please go ahead, sir.

Thank you, Denise. Good morning, everyone, and thank you for joining us on today's conference call to discuss First Financial Bancorp's second-quarter 2014 financial results. Discussing our operating and financial results today will be Claude Davis, President and Chief Executive Officer; and Tony Stollings, Executive Vice President and Chief Financial Officer.

Before we get started, I would 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 second-quarter 2014 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 June 30, 2014, 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.

Great. Thanks, Ken, and thanks to those of you joining the call today. For the quarter, we reported net income of $16 million, or $0.28 per share, compared to $0.26 in the prior quarter. The increase in earnings reflect improvements in noninterest income as deposit related to mortgage revenue improved from seasonal and weather-related decline experienced during the first quarter, as well as lower credit costs related to the uncovered loan portfolio.

Our results for the quarter were impacted by nonoperating items related to acquisition-related expenses and the continued execution of our efficiency initiatives, which reduced reported pre-tax income by $500,000.

On an adjusted basis, return on assets was 1.01% and return on tangible common equities 10.94%. As you may have read in the earnings release, we are pleased to announce that we have received regulatory approval to close the First Bexley and Insight transactions. We are in the process of planning the official closing date and expect that to occur sometime in August.

With the last hurdle cleared, we are extremely excited to formally launch the First Financial brand in the Columbus market. Through the combined efforts of the First Bexley, Insight, and First Financial teams, we have done an excellent job of retaining the talent at the two institutions as evidenced by the growth they continue to produce.

Since we have announced the deals, they've grown their loan balances in excess of 20% and are exceeding our initial projections. We continue to produce solid loan growth at First Financial as average balances increased $101.6 million or 11.6% on an annualized basis. And quarter-end balances increased $48.5 million or 5.4% on an annualized basis.

Our specialty finance team had an especially strong quarter, with growth of over $19 million, primarily driven by our business credit product. Residential mortgage activity rebounded during the quarter and originations of our portfolio product also contributed to the quarterly growth. Our C&I and owner-occupied CRE lending and franchise finance teams had solid quarters as well.

Period-end balances did not match the double-digit growth we experienced last quarter, as some anticipated late quarter productions slid to July closings. Adjusting for these items, we would have seen period-end annualized growth of approximately 10%.

As a result, we have gotten off to a good start in the third quarter and the commercial pipeline is very strong as we enter July, with commitments up over 30% compared to the prior quarter. Our investment in specialty finance is paying off, as the product line is beginning to hit its stride with continued growth and a record pipeline entering the quarter, much of which is expected to fund in July.

Briefly, with regard to asset quality, the favorable trends experienced during the last several quarters continued as net charge-offs dropped to 11 basis points of average loan balances for the quarter and contributed to the decline in the provision for loan losses.

Total nonperforming assets decreased $3.1 million, or 5% during the quarter, driven by a decline in nonperforming loans of $3.7 million or 7.6%. Nonperforming assets as a percentage of total assets dropped to 89 basis points from 95 basis points for the prior quarter.

Excluding accruing TDRs from total NPAs, the ratio dropped to 70 basis points. Additionally, our allowance coverage ratio in nonaccrual loans improved almost 130% from 122% for the prior quarter. In conjunction with the earnings release, we announced our quarterly dividend of $0.15 per share to be paid October 1, which translates into a 3.7% yield based on yesterday's closing price and remains on the upper end compared to peer institutions.

With regard to share repurchases, as we discuss on last quarter's call and mentioned in the earnings release, we were out of the market during the second quarter. In light of the pending Guernsey transaction, which is in all cash deal, we expect to continue our suspension of the share repurchase plan during the third quarter and perhaps longer, as activity in the M&A market continues to increase.

As we have mentioned in the past, capital return decisions are determined quarterly by the Board of Directors in the context of our overall capital management strategies, including considerations related to organic and acquisition-related growth initiatives. Capital levels continue to remain strong, as tangible book value per share increased $0.25 to $10.49 per share and we ended the quarter with a tangible common equity ratio of 9.39%, a Tier One ratio of 14.34%, and a total capital ratio of 15.59%.

Adjusting for the Columbus transactions and the estimated impacts of both the commercial law share expiration later this quarter and [Boswell Three], we still have sufficient capital to support further organic growth and acquisitions. With the approval to close the First Bexley and Insight transactions and the process related to Guernsey well underway, we expect the remaining integration activities related to our Columbus new yields will be manageable from a time and resource perspective.

We continue to remain interested in exploring further strategic opportunities and have the capacity to manage additional acquisitions that meet our strategic, operational, and financial criteria.

With that, I will now turn it over to Tony for further discussion on our financial performance.

Thank you, Claude. Our second-quarter adjusted pre-tax pre-provision earnings of $24.1 million, which exclude certain items related to cover loan activity as well as other significant items, increased to $0.5 million or 2% from the first quarter, primarily due to a rebound in noninterest income, which was partially offset by lower net interest income during the period.

I shared on slide 3 of the supplement pre-tax pre-provision earnings as a percent of average assets were unchanged from the first quarter at 1.50% on an annualized basis.

Total interest income decreased $300,000 compared to the linked quarter, as modestly lower interest income on loans and securities was partially offset by the lower amortization on the indemnification asset related to covered loans. The lower second-quarter interest income on loans was primarily the result of a $47 million or 11% decline in the average balance of covered loans during the period.

The impact on the decline was partially offset by another solid quarter of loan production as we saw a $102 million or 3% increase in the average balance of uncovered loans during the period.

Interest income continues to be impacted by the prolonged low interest rate environment as the yield earned on the uncovered loan portfolio declined 8 basis points during the second quarter due to an approximately 85 basis point negative spread between average yield on new loan originations and the average yield on loans that were paid off during the quarter. The spread is a little tighter than we saw in the first quarter, but still has a negative impact on interest income.

Interest income from investment securities decreased $100,000 or 1% during the quarter, as the impact of marginally higher portfolio balances was offset by a 5 basis point decline in the portfolio yield due to the period's lower reinvestment rates and higher prepaid fees on mortgage-related assets. The overall duration of the investment portfolio decreased to 3.9 years as of June 30 and 4.2 years as of March 31.

Total interest expense increased approximately $300,000 compared to the linked quarter. Average transaction deposits grew 15% on an annualized basis and the cost of funds related to interest-bearing deposits increased 2 basis points, primarily as a result of this deposit growth and changes in the mix of the deposit base. The Company remains focused on growing core deposit relationships and managing our funding base.

Debt interest margin declined 12 basis points to 3.70% from 3.82% for the linked quarter. While the margin continues to be influenced by activity in the covered loan portfolio as well as the negative impact on the uncovered portfolio yield from the lower interest rate environment, we do believe an inflection point on net interest income is within sight.

The crossover point between the positive impact from uncovered loan growth and the negative impact from runoff in the covered loan portfolio will be expected in the second half of the year.

With our growth in runoff assumption [told], we believe a mid-single-digit decline remains a reasonable expectation for the third quarter of 2014, but we expect net interest income to be stable to slightly higher in the third quarter as compared the second quarter.

Now moving to noninterest income, excluding covered loan activity and other items as noted in table 1 of the earnings release, noninterest income increased $1 million from the linked quarter to $14.6 million from the second quarter. This increase was driven by a rebalance from the first quarter seasonal lows and service charges on deposit accounts and bankcard income as well as higher net gains on the sales of residential mortgages and portfolio valuations related to client derivatives during the second quarter.

Noninterest expenses for the second quarter, excluding covered expenses and other items as noted in table 2 of the release, totaled $44.8 million and were unchanged from the linked quarter, as higher salaries and employee benefit costs and other expenses were offset by lower net occupancy and professional service costs during the period.

We remain focused on operating efficiency, as evidenced by our recent announcement to consolidate three of our Indianapolis banking centers into other locations. As client banking habits and preferences evolve, we are constantly evaluating our delivery systems to best meet their needs.

Turning briefly to covered assets, I will highlight a couple of points. First, as shown on slide 5 of the supplement, the balance of covered loans likely to exit declined to $66 million at June 30, representing a 24% decline from the first quarter and a 70% decline from the comparable quarter one year ago.

Second, the balance of covered loans declined to 9% of total loans at June 30, down from over 15% of total loans one year ago and from 42% of total loans when we acquired the covered loan portfolio in the third quarter of 2009. These declines reflect both our continued success in resolving problem covered assets and the diminishing impact covered assets are having on our balance sheet.

Certainly, as we approached the third-quarter expiration of commercial law share coverage and the midpoint of single-family law coverage, it's important to remember that the expiration of law share does not change the overall accounting framework for these loans.

And finally, although we do not typically give earnings guidance, I want to make a comment regarding the forecasted earnings impact from the Columbus, Ohio, transactions. We believe that the impact and the delay in the closing of Bexley and Insight will be substantially offset by the higher-than-forecasted growth they have experienced since the announcement.

We are comfortable reaffirming our initial projected combined earnings impacts for 2014 and 2015 of approximately $0.05 and $0.13 per share, respectively. This is before one-time acquisition-related costs.

Now we'll turn the call back over to Claude.

Okay. Thanks, Tony. Denise, I think we're ready to open the call up for questions.

(Operator Instructions) Scott Siefers, Sandler O'Neill & Partners.

Tony, first question is on kind of the margin. I appreciate the near-term margin outlook as well as your thoughts on NII potentially inflecting here pretty immediately.

I guess I'm curious -- just as you look at the core margin absent the impact of the covered portfolio, do you have a sort of a best guess as to when that would stop grinding lower? I guess the -- that gap between new and rolling-off loans is still kind the high, but do you have a sense when that -- the core margin will inflect as well?

Well, you know, it changes from quarter to quarter with the origination fees, but I'll tell you in the second quarter, we actually had a positive impact on our new loan originations and fee income. As you look at -- as you decompose the change in the margin for the quarter, that was the positive in all of that.

So the drop was really driven by the increase in earning assets base and the covered loans. We did have a little bit of a decline there related to the investment portfolio, but -- both things are going to happen, but we are seeing some positive trends on the origination side and they are contributing to the margin, not negatively impacting it.

Okay, perfect. And then maybe switching gears just a second onto the expense outlook -- obviously, in the third quarter, the two Columbus deals are going to start impacting the aggregate expense base, but just as you look at the -- the core legacy FFBC cost base, it sounds like you have done a little more with rationalizing the branch network, at least a bit.

But how are you thinking about any upward pressures on the expense base or any additional rationalizations that you could have that might keep things flattish or even down?

Well, we're always looking at the expense base, Scott, and I will tell you that our discretionary spending remains under very critical review here, just in the normal course of business. We think we're still on a good track with our expense base and expect to see it continue to decline.

The costs associated with law share continue to rapidly fall and we believe that we will also see some improvement in professional fees that are associated with that. We had a little blip here in this quarter with some higher healthcare cost and some incentive plan resets, but overall, we feel good about where we are tracking and believe we're still on course there.

Okay, that's perfect. Thank you guys very much.

(Operator Instructions) Emlen Harmon, Jefferies.

Claude, just your comments on M&A. It sounds like just the general M&A environment is improving. What you guys seeing individually in terms of opportunities, just kind of relative volume, but what's incoming, the willingness of sellers, and just kind of the relative strategic fit of what you've been seeing?

Yes, you know, Emlen, obviously, we'll just talk in general terms. I think the -- not only from what we see from others and just the pace of deal activity is certainly picked up, which we can all see that and know it.

But as I've commented, I think, in the last couple of calls, we just see the general activity and discussions being more productive and being more frequent, I guess, is the best way to describe it. So our outlook on M&A is that it will continue to be a good M&A environment, good opportunities for buyers like ourselves, so in that context, we want to make sure we preserve capital appropriately. So that, I guess, in a general context, that's our perspective.

Got it. Okay. And then just your comments on the better growth out of the Columbus market. Is that based on what's been happening at those three banks that you guys are acquiring or is that just kind of -- you are seeing opportunities to add to those franchises after the deals close?

Yes, the numbers I referenced were specifically related to the First Bexley Bank and Insight Bank, both of whom, which is why we were attracted to them, have just been outstanding banks in terms of their client service and their penetration into the Columbus market.

And as I mentioned, that even has accelerated since we announced the deals. Which is not normal in acquisition deals, so I credit those teams for staying focused. I think it's also helped that we've worked with them during this period of time on being able to handle bigger deals, so we partnered with them on some larger deals which has helped that growth as well, so first is just the quality of those teams and I think the quality of the institutions we were able to partner with.

Second, I think it relates to the quality of the Columbus, Ohio, market. I think it's if not the best market we're going to be in, it's certainly at the top with others of how high quality that market is, the activity that we see in the Columbus market. And in terms of adding, yes, there are some additional resources I think we will add over time, probably in the treasury area.

We will look at some additional banking services in different neighborhoods in the Columbus, Ohio, market. And then there's some product lines that they don't offer because of size, like the asset-based lending equipments enhanced product lines that we will look to expand as well. So we think there's just great opportunity in that market for us once we get the deals closed.

Great, thanks for taking the questions.

(Operator Instructions) In showing no additional questions, this will conclude the question-and-answer session. I would like to hand a conference back over to Claude Davis for his closing remarks.

Great, thanks, Denise. And again, thanks everyone for your interest in First Financial and joining our call today. Thank you.

Ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation. You may now disconnect your line.