First Financial Bancorp (FFBC) 2015 Q1 法說會逐字稿

Hello, and welcome to the First Financial Bancorp first-quarter 2015 conference call and webcast.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Mr. Eric Stables, Director of Investor Relations. Please go ahead, sir.

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 2015 financial results. Discussing our operating and financial results today will be Claude Davis, Chief Executive Officer; Tony Stollings, Chief Operating Officer; and John Gavigan, 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 supplement presentation are available on our website at www.BankAtFirst.com under the investor relations section. Additionally, please refer to the forward-looking statement disclosure contained in the first-quarter 2015 earnings release, as well as our as SEC filings for a full discussion of the Company's risk factors. The information we will provide today is accurate as of March 31, 2015, 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, Eric. Thanks to those joining the call today. Yesterday afternoon, we announced our 98th consecutive quarter of profitability. Net income for the quarter was $17.6 million, and earnings per share were $0.29, an increase of 12% over the first quarter of last year.

Although the prolonged low interest rate environment remains challenging, we continue to see good opportunities to grow our balance sheet organically, with competitively priced high quality loans, and long duration low cost deposits through our relationship-oriented product structure. Our market-oriented community bank model, which enables our local leadership teams to better serve our clients in a more meaningful way, is a unique advantage as we develop existing relationships and compete for new clients.

In particular, our new Columbus, Ohio market has been quick to embrace this model, and continues to perform better than originally expected, with especially strong fee income growth during the quarter. We are very encouraged by the amount of new high-quality development occurring throughout the markets we serve.

During the first quarter, we committed approximately $121 million to new real estate construction projects in our communities, with strong demand in our Cincinnati and Indianapolis markets for both commercial and residential projects. Of those commitments, we funded approximately $23 million during the quarter, and the remainder will fund as those projects continue to develop over the coming months.

Although total loan balances were essentially flat during the first quarter, we are starting to see positive growth that is more line with our long-term expectations, and we are optimistic that the momentum we are seeing in our loan origination pipeline will result in solid balance growth, especially during the back half of the year. Although I will not comment specifically or speculatively on this topic, our ability to generate sustainable earnings growth, and our strong capital position, will support both significant long-term organic growth, and consideration of additional acquisition opportunities that meet our strategic objectives.

Before I turn the call over to Tony, I am pleased to report that in conjunction with the earnings release yesterday, we announced our quarterly dividend of $0.16 per share to be paid July 1. This translates into a 3.7% yield based on yesterday's closing price, and remains on the upper end, when compared to our peer banks. With that, I'll turn it over to Tony for a discussion of our operating performance.

Thank you, Claude. For the first quarter, we reported net income of $17.6 million, or $0.29 per diluted share, compared to $0.30 in the prior quarter and $0.26 in the first quarter of last year. Return on assets was 0.99%, return on average shareholders equity was 9.06%, and return on tangible common equity was 11.12%. On a net basis, there were no material non-operating adjustments during the period, and all significant expenses related to the Columbus acquisitions have now been recognized.

Average loan balances were essentially flat compared to the prior quarter, with balances increasing $15.5 million, or 1.3% annualized. Period-end loans were relatively unchanged from the linked quarter, as organic loan growth was offset by runoff of the formerly covered commercial loan portfolio. However, this does not reflect the full impact of the quarter's sales efforts, as evidenced by an almost 25% increase in commercial loan commitments during the quarter over the same period in 2014.

As Claude mentioned, we had a particularly solid quarter in the real estate construction space, and as those projects developed and required subsequent funding, we expect to see solid balance growth from those commitments. Likewise, the new loan origination pipelines remain strong, and we expect to see balance growth momentum throughout the remainder of the year, especially during the second half.

Our deposit gathering activities continue to produce a well-balanced strategic mix of core transaction accounts and low cost time deposits. Average total deposits decreased $15.7 million compared to the linked quarter, primarily related to seasonal cash requirements of some of our larger treasury management clients. However, end of the period deposits increased $58.8 million, or 4.2% annualized compared to the link quarter, primarily related to increases in both the core transaction and time deposit portfolios.

We continue to aggressively manage deposit pricing on two fronts. First, on a regional basis we've begun to lower some of the premium pricing from our acquired deposits, and second, we have reduced offering rates on certain time deposit maturities, particularly longer-term and special programs. As we discussed last quarter, the expiration of the commercial loss share agreements resulted in changes regarding the balance sheet presentation and asset quality matrix. Recovered and formerly covered loan portfolios have now been combined into total loans, and their related reserve has been combined into the allowance for loan loss.

Likewise, related charge-off and credit quality ratios have been combined. Net charge-offs for the first quarter totaled $1.8 million or 16 basis points of average total loans on an annual basis, compared to $3.2 million or 27 basis points for the fourth quarter of 2014. Non-accrual loans increased $0.7 million or 1.4%, while total non-performing assets decreased by $1.6 million, 1.8%, and classified assets decreased $1 million or 0.6% compared to the linked quarter.

The allowance for loan loss is unchanged at 1.11% of total loans, compared to the linked quarter. Additionally, the allowance for loan loss and remaining purchase accounting loan marks, net of the indemnification asset, and as a percentage of total loans declined to 1.43% as of March 31, 2015, from 1.51% at the end of the year. We believe this is a more appropriate and meaningful credit risk coverage ratio -- metric for our total loan portfolio. Additional detail regarding this metric can be found in the 8-K filing associated with the earnings release.

Capital levels for the first quarter remained strong. Total shareholders equity increased during the quarter by approximately $12 million, or 1.5% to $796 million. Likewise, tangible book value per share increased 1.5% to $10.54 per share as of March 31, from $10.38 as of December 31, 2014. We ended the period with a tangible common equity ratio of 9.16%, a Tier 1 ratio of 12.29%, and a total capital ratio of 13.27%. The Company's Tier 1 and total capital ratios both declined during the quarter, primarily due to an increase in risk-weighted assets resulting from the new Basel 3 regulatory capital rules, which became effective on January 1.

While we have an active share repurchase plan in place, we have not repurchased shares in recent quarters, and given our view on growth opportunities, we believe it is prudent to continue that strategy. With that, I will now turn it over to John for further discussion of our financial results.

Thank you, Tony, and good morning, everyone. As Claude and Tony noted in their remarks, we continued executing on our strategy during the first quarter, with solid loan and deposit sales efforts across our footprint, complimented by the operating leverage generated by strong fee income and expense management efforts.

Directing your attention to slides 3 and 4 of the supplement, you will see our first-quarter adjusted pre-tax pre-provision earnings of $28 million, which excludes certain items, as detailed on slide 4, decreased $800,000 or approximately 3% from the fourth quarter, primarily due to seasonal factors, as we indicated will be the case on our call last quarter. As shown on slide 3, pretax pre-provision earnings as a percentage of average assets remained stable at 1.58% on an annualized basis.

Total interest income decreased $2.7 million compared to the linked quarter, primarily driven by fewer days in the quarter and a decline in loan fees, partially offset by an increase in average loan balances during the period. Total interest expense decreased approximately $200,000 compared to the linked quarter, driven by the modest decline in average interest-bearing deposits related to seasonal outflows from public fund and commercial depositors during the quarter.

Excluding the benefit from interest income recapture during the fourth quarter, net interest margin on a fairly tax-equivalent basis declined 3 basis points to 3.67% for the first quarter from 3.70 for the linked quarter. The net interest margin continues to be impacted by the low interest rate environment, and the mix of loan origination and payoff activity during the period. Based on our current loan growth and runoff assumptions, we believe the net interest margin will remain relatively stable through the second quarter, with a few basis points of decline possible similar to the first quarter.

Moving now to non-interest income, excluding covered loan activity and other items as noted in table one of the earnings release, non-interest income increased $1.4 million from the linked quarter to $16.6 million. The increase was primarily driven by higher fee income from our client derivative program, and the recapture of a previously accrued liability, due to the favorable resolution of a former Irwin subsidiary issue, as well as higher trust and wealth management fees and income from SBIC funds. These increases were partially offset by a seasonal decline in deposit service charges during the period.

Non-interest expenses for the first quarter, excluding covered expenses and other items as noted in table 2 of the earnings release, totaled $47.2 million, a $400,000 decrease from the linked quarter, primarily as a result from lower salaries and benefits expense during the quarter. We were especially pleased with our ability to absorb the impact from seasonal payroll tax increases and annual merit adjustments, while maintaining a stable expense base for the quarter. We remain intently focused on maintaining a scalable and efficient operating platform, and believe our first-quarter results reflect these efforts.

Finally, as Tony noted, our first-quarter results do not reflect the full impact of our loan production efforts during the period. We continue to target mid to high single-digit growth loan growth for the full year, and our success in this regard remains the single largest driver of variability in our results going forward. This concludes my remarks, and I will now turn the call back over to Claude.

Thanks, John, and Keith, we will now be happy to open the call for questions.

(Operator Instructions)

Scott Siefers, Sandler O'Neill & Partners.

You gave some good color on loan growth expectations, particularly the ramp-up that you would expect through the course of the year. And I guess, Claude, I was hoping you might just expand on those comments. And I think largely what you see is the main puts and takes as we look out, of course it looks like some of those commitments that will fund over the course of the year, and particularly second half, will be a big tailwind.

But wonder if you can talk about things like payoffs, any other pricing or structure concerns that you see, that might give you pause, or just any other dynamics or cross currents that you see at play?

Sure, Scott. You're right. I think it is. What we're seeing in the loan market is a combination of factors, on the pay-off side and I noticed a couple of the banks commenting on this, especially in the real estate market.

One of the things that we're seeing are some of the loans going to the permanent market faster than they have traditionally, which causes earlier payoffs then we and others might expect to see in more normal times. But I think the permanent lenders, and there are many in the space, looking for yield so they're willing to take on loans earlier in their cycle than has at least been typical in the recent past. That's been a headwind for us in the real estate space.

In the first quarter, our C&I originations were a little bit slower than we had seen leading up to that. We're not concerned about it, because we have seen the pipeline continue to build, both in the traditional C&I space as well in our specialty space, that we would expect to see some improvement in 2Q and in 3Q.

As you talked about, I think the construction commitments, by far and away our largest construction origination quarter in the first quarter, and good projects across a variety of industries, multi-family to healthcare, to some build-to-suit, and those will fund up over the balance of 2015.

So a combination of factors. I think we continue to be positive, as John mentioned, at mid to high single-digit is our target for loan growth for the year. That said, to your last point on pricing and structure, we as many others have commented, are sensitive to that.

We're trying to be disciplined in it, and I think it's just a very competitive market. I wouldn't say that I'm overly concerned. We certainly see anecdotal individual situations where pricing is, we think, irrational, or structure gets too loose, but in general, we feel like we're still able to originate, consistent with our standards and that's the discipline we'll stay true to.

Firstly, I appreciate that color. Then maybe if I can switch gears for just a second, just M&A, obviously you have such a good reputation as an acquirer, and certainly the capital and infrastructure wherewithal, but we haven't seen anything for a little while. Just curious on your updated thoughts on potential activity out there.

Sure. We continue to be optimistic that we'll see some opportunities. I would tell you though, we're cautious in this regard, and that is, as we look at acquisitions on a go-forward, we're really focused on making sure that they are in markets that we think have growth potential, and that they are companies that either have an asset growth platform associated with them, or one that fits well into our current asset growth platform.

To just acquire and pay the prices that we're seeing being paid for a franchise, that we don't think has good growth characteristics, is probably not something we would be interested in. So I would say we're still active, interested, but selective.

That's perfect. Thank you very much. I appreciate it.

Emlen Harmon with Jefferies.

Just wanted to talk about the loan yields a little bit, down 12 basis points quarter over quarter. A portion of that was that you didn't have the non-accrual recapture this quarter. Just hoping you can help us breakdown the components of the decline, how much was a non-accrual, how much was loan fees, and what you saw as core compression. And then just whether we should continue to see some similar levels of core compression going forward?

Emlen, this is John. I think you touched on a little bit of it. The biggest piece was really the mix of the production during the quarter. It was very heavily tilted towards floating-rate assets, so those are going to be on the lower end, yields there.

The other piece you mentioned in your comments there, the loan fees were down from prior quarters. That's a double edged sword there. You lose some of the prepay fee income that you might otherwise get in prior quarters, but that means you're retaining some of those assets. So I think those were the two biggest drivers in the decline in yield this quarter.

Got it. And so as far as the mix of fixed versus floating originations, you probably see, a little bit, presuming that you continue to be biased toward floating, we'd probably see a little more compression there, at least.

Yes, as I commented, I think our expectation is, for the second quarter, that it will probably look a lot like the first quarter.

Emlen, leading to where you're probably going to is, what's that mean for overall margin. And we would expect stable to down a few basis points, similar to what we saw this quarter. Because on the flip side of the loan yield we think we've got some capability, as Tony mentioned in his comments, to reduce deposit costs. If you look at our deposit costs compared to peer, we're still a bit high, mainly due to some of the acquisitions and the deposits that we acquired there, that we think we can move rates down. So there's a bit of compression on both sides, which we think results in a stable to slightly down margin.

Perfect, and just a quick one. On the construction originations line there, what is your -- what's their typical utilization rate on your construction lines?

I don't have an average utilization rate. I would tell you on most of them, because of the size of the projects, it's going to be a 12 to 18 month fund-up cycle, just based on normal construction periods. So that's probably the best way to think about it. Our overall line utilization, including everything, would be around 48%.

Got it. Thanks a lot.

Michael Perito, KBW.

So, question on the fee-income growth potential. I appreciate the comments that the Columbus acquisitions had a good growth quarter. What's your outlook for the income growth? Is low single digits too conservative, given what you're seeing and some of the opportunities you are getting in Columbus? Or any commentary on that would be helpful.

Yes, not so much giving guidance on the percentage increase, and the reason being, Michael, is that our fee-income mix right now, the more stable fee-income sources are service charges on deposits, which as we said, are seasonally low in 1Q. You should see an increase in 2Q and 3Q and 4Q. Second would be trust and wealth fees, which are pretty stable. And then mortgage, which we had a nice mortgage quarter, and we'd expect to see that continue and slightly increase, hopefully more in the mid single digits or more in 2Q.

The variability in the fees and where we specifically saw Columbus as a positive story, especially being relatively new to us, is in derivative fees related to commercial transactions, and those can be more variable, depending on what originations are, and the make up and mix of the originations. And then second is, as we become more active and have been more active in the SBA space, there's an active market, as you know, for SBA deals.

So the commercial-oriented fees tend to be more variable based on current production, so I would hate to put an expected growth rate on those, other than we see them as good continuing opportunities.

Okay. That's fair, thank you. Just a more broad question on the margin, your last 10-K, I think the asset sensitivity was still relatively neutral, maybe a little liability sensitive. I understand there's a lot of assumptions that go into that. But are you doing anything today to improve your positioning for higher rates, or how are you thinking about just the overall balance sheet position, if the short end of the curve was to start to rise middle or later this year?

Yes, sure, this is John. With respect to our interest rate sensitivity, it hasn't changed too much. We continue to pivot around a risk-neutral position that we did become slightly asset sensitive here in the quarter.

Really, we're looking at a lot of strategies, trying to balance near-term pressure on net interest income with the longer-term view on rising interest rates, and I think a variety of the strategies we've implemented over the past 12 to 24 months around the deposits, I mentioned the heavy bias toward floating rate assets, loan production during the first quarter. We feel we're well-positioned for when rates do start to rise.

I just add to that one of our primary tools is the investment portfolio, and we continue to manage that to a shorter duration as well, in anticipation of rising rates. You'll note the duration has dropped pretty steadily from this time a year ago.

Okay. Great. Thanks. Appreciate you taking my questions.

Jon Arfstrom, RBC Capital.

Tony, I missed the number. What was the number you said on the C&I pipeline.

It was up about 25% over this time last year, and those actual commitments.

Commitments. Okay. So that's one of the reasons for your bit more optimism in terms of the growth outlook? That plus the construction?

Yes. And the other thing, Jon, is with our product mix and diversity, we see where one category might be a little soft in a quarter, another one has a natural tendency to kick in, like our specialty tends to be more of a mid-to-late year volume, as opposed to something else. So over the course of the full year, we feel pretty good about our growth view.

That was my next question, in terms of specialty. What are you seeing there, and which segments are the bigger contributors?

Just a reminder, Jon, this is Claude. We include in specialty three main categories. One being the franchise finance space, which was a little soft in 1Q. We expect that to continue to pick up.

Second is the asset-based lending, or what we call business capital. That, and then the third being equipment finance, and those were also softer than they had been in especially last year's 2Q and 3Q. We would expect those, and the pipelines are such that we expect those to pick up in this year's second and third quarter.

Good. And then John, maybe a question for you. The comp numbers, there's a little bit of discussion in the release, in terms of maybe some loan incentive approvals, but a little surprised to see the comp number down. Interested in that, and then also maybe a broader overall opportunities left on the efficiency side?

Sure. Specific to the salaries and benefits line, I think, as we noted in the release, the big driver there was really healthcare expense, in which we saw the benefit here in the quarter of some of the actions we've taken over the past year or two, adjusting some of our benefit plans, and that really showed up here in the first quarter.

Overall, with respect to expenses, we're working hard to maintain a stable expense base, and balancing that with the need to continue to invest in the business. We expect the non-interest expense level from the first quarter here is probably a pretty good indication for our run rate for the balance of the year, though we will reassess that as necessary, based on our asset generation levels.

Great, thanks for the help.

Jon, one other point. This is Claude. The other thing we had, which we noted, is we had a -- we always have a seasonal blip, which most do in 1Q, around payroll taxes, which is about $1 million.

That was really the heart of the question, a lot of the other banks, we see those numbers up. So the healthcare explanation helps. Thank you.

(Operator Instructions)

Andy Stapp, Hilliard Lyons.

Do you expect the fund-loan growth to deposit growth, or cash flow from your securities portfolio?

Andy it's obviously, our objective is always to grow both loans and deposits, and so we're always trying to grow the franchise in all categories. From quarter to quarter, it can move up and down. You can see our borrowings were down over the last couple of quarters, as we've had deposit growth that was in excess of loan growth.

So it bumps around from quarter to quarter. But generally, we would expect to fund it with deposit growth. We feel pretty comfortable with where our investment portfolio is at today, in that $1 billion, $750 million range. That would be the objective.

Okay. And with your reserve coverage of loans being so strong, including purchase accounting marks, do you think there's room for that combined coverage as a percentage of loans to come down, further income (multiple speakers)?

Andy, this is Tony. That's very much model driven, and based on the portfolio characteristics. It's really hard to say that there's any kind of an opportunity there. I'll just tell you, we're comfortable with where it is, and think it reflects the right characteristics. The portfolio, as you know, it's analyzed every quarter, and can change, but we don't see a huge opportunity in terms of credit leverage.

Okay. Any color that you can provide regarding expectations for the purchase accounting line items, and non-interest income and expense, or is it, your guess is good as mine?

We hope our guess would be better than yours.

Right.

And John, chime in here. Those are pretty volatile, very tied to loan specific activity, so it's really hard to say. There's certainly a trend there, but it's very deal-specific.

This is Claude. The other thing I would add, Andy, which I think the deals were wonderful for us, but it's also nice to be at a point where those movements are less material than they once were, and so while they're hard to predict, the impact is certainly much less significant.

Right. Okay. That's all I had. Thanks.

And as there are no more questions at the present time, I would like to turn the call back over to management for any closing comments.

Thanks, Keith, and just thank everyone for joining the call today, and your interest in First Financial. Thank you.

Thank you the conference is now concluded. Thank you for attending today's presentation. You may now disconnect.