First Financial Bancorp (FFBC) 2015 Q3 法說會逐字稿

Good morning, and welcome to the First Financial Bancorp third-quarter 2015 conference call.

(Operator Instructions)

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

Thank you, Rocco. Good morning everyone, and thank you for joining us on today's conference call to discuss First Financial Bancorp's third-quarter 2015 financial results. Discussing our 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 the press release we issued yesterday announcing our financial results for the quarter is 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 third-quarter 2015 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 September 30, 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.

Thanks Eric, and thanks to those joining the call today. Yesterday afternoon we announced a significant milestone in the history of our Company with our 100th consecutive quarter of profitability. Our ability to remain profitable for a quarter of a century and through some pretty tough economic environments is reflective of the resilience of the communities in which we do business, the clients we serve and the hard work of each of our associates. This milestone achievement caps off a quarter in which we grew our core Bank One portfolio by $121 million, announced and closed the acquisition of Oak Street and executed $120 million subordinated debt offering.

Before I turn the call over to Tony to discuss our financial results, I want to talk briefly about our strategic and competitive advantages. Our robust and sophisticated product mix and high-touch service strategy differentiates us from our local competitors and our nationwide lending platforms offer unique revenue and diversification characteristics. We also view the ability to continue to attract low-cost core deposits to be a primary driver of our continued success. I believe that our Company is well positioned to continue to grow organically with mid to high, single-digit annual growth rates. With that, I will now turn the call over to Tony.

Thank you, Claude. As Claude mentioned, the third quarter marked our 100th consecutive quarter of profitability. Net income for the quarter was $18.7 million, an increase of approximately 22% over the third quarter last year. Earnings per diluted common share for the quarter were $0.30, with return on average assets of 0.97% and return on average tangible common equity of 12.33%. Excluding approximately $3.3 million of pretax non-operating expenses, which were primarily related to the Oak Street acquisition, net income was $20.9 million, or $0.34 per diluted common share, return on average assets was 1.09% and return on average tangible common equity was 13.77%.

As we discussed last quarter, we continue to see good opportunities to organically grow our balance sheet with competitively priced high-quality loans and longer duration low-cost deposits. As John will discuss in a moment, loan growth for the quarter, excluding Oak Street, was in line with our long-term expectations of mid- to high-single digits. Our client relationship, centered strategy and strong cross-sell culture continues to produce sustainable growth, and recent market disruptions have created new opportunities. We are optimistic that the momentum that we are seeing in the loan origination pipeline across all product sets, particularly in our metro markets, will result in continued balance growth.

Likewise, the Oak Street pipeline is quite strong heading into the fourth quarter. As we have previously discussed, the Oak Street acquisition was expected to be immediately accretive to operating earnings. For the partial third quarter, Oak Street contributed $0.02 per diluted common share, excluding deal costs, and 10 basis points to net interest margin, both of which were in line with our initial projections. We remain very optimistic about Oak Street's long-term growth potential and product line expansion opportunities.

Marking their one-year anniversary, the three Columbus, Ohio acquisitions have exceeded our initial expectations and continue to perform at a high level. We are especially pleased with the strong leadership team that has enabled us to attract new clients, retain existing clients as well as key business development and client service associates in that market. Earlier this month we opened a new banking center in the downtown area, and now have six full-service locations in Columbus.

Before I turn the call over to John, I'll mention that during the third quarter we repurchased approximately 150,000 shares at a weighted average price of $18.68 under our previously announced share repurchase plan. We will continue to evaluate future share repurchase opportunities on a quarter-to-quarter basis, weighing against other potential uses of capital and growth prospects.

Our ability to generate sustainable earnings growth compared with our strong capital position will continue to support additional acquisition opportunities that align with our strategic objectives, such as Oak Street, as well as significant long-term organic growth. With that, I'll turn it over to John for further discussion of our operating performance.

Thank you Tony, and good morning everyone. Net interest income for the third quarter was $63.2 million, an increase of $4.5 million, or 7.6% when compared to the linked quarter, as strong organic loan growth was complemented by the addition of the high-yielding Oak Street loan portfolio during the period. Net interest margin was 3.67% on a fully tax equivalent basis compared to 3.62% in the prior quarter, with the 5 basis point increase primarily resulting from higher yields on loans and investment securities, while also impacted by our subordinating debt offering and the prepayment of Federal Home Loan Bank debt during the period.

The effective yield earned on the loan portfolio increased 7 basis points from the second quarter to 4.52%, primarily as a result of the addition of the Oak Street loan portfolio, while the effective yield earned on the securities portfolio increased 5 basis points to 2.39%, benefiting from reinvestment mix as well as slower prepayment activity during the quarter. Given the continued low interest rate environment, we expect net interest margin for the fourth quarter to be in line with the third quarter, though it could fluctuate a few basis points in either direction depending on production mix and prepayment activity. Our focus remains on growing net interest income by continuing to grow loans at risk appropriate returns and growing low-cost core deposits.

As Tony mentioned earlier, loan growth was stronger in the third quarter, with period-end loans increasing $363 million, or 30% annualized compared to the linked quarter. Excluding Oak Street, the loan portfolio grew $121 million, or 10% on an annualized basis during the quarter. Average loan balances increased $233 million, or 19% annualized during the period.

Deposits also grew during the period, increasing $366 million, or 25% on an annual basis over the second quarter, including approximately $212 million of short-term brokered CDs with an all-in weighted average cost of 51 basis points generated in conjunction with the Oak Street transaction. Average total deposits increased by $188 million, or 13% on an annualized basis compared to the linked quarter, with solid growth in both interest-bearing and non-interest-bearing accounts. Our overall cost of interest-bearing deposits was unchanged from the linked quarter at 42 basis points.

Non-interest income for the third quarter was $20.4 million, a 4.9% decline compared to the linked quarter, driven by lower gain on sales of investment securities, FDIC loss, share-related income and gain on sales of mortgages, partially offset by higher swap-fee income during the period. Noninterest expense increased by $4.2 million, or 8.6% over the prior quarter, to $53 million primarily driven by $2.6 million of acquisition-related costs as well as the addition of the Oak Street operating expense base midway through the quarter.

Additionally, other expenses increased by $1.9 million from the linked quarter, including $700,000 related to the prepayment of Federal Home Loan Bank debt and $700,000 to resolve two separate legal matters during the period. We continue to expect noninterest expenses to total approximately $50 million on an operating basis for the fourth quarter.

Turning now to asset quality. We are again pleased with our credit team's effort and the resolution activity that occurred during the period. Total non-performing assets as a percent of total assets declined 13 basis points to 90 basis points at September 30, while net charge-offs decline 33% from the second quarter.

Consistent with our overall credit performance, the allowance for loan losses plus the remaining purchase accounting marks on acquired loans net of the indemnification asset as a percentage of total loans declined to 1.17% as of September 30 from 1.27% at June 30. We remain well reserved against potential credit losses.

Finally, capital levels for the third quarter reflect our continued investment in the franchise with the Oak Street acquisition, as well as our shareholder-friendly capital management efforts through the $120 million subordinated-debt offering we completed in late August. Total shareholders equity increased by $10.6 million, or 1.3% to $813 million during the quarter. And consistent with our expectations, tangible book value decreased to $9.74 per share as of September 30 from $10.65 per share at June 30 as a result of the goodwill generated by the Oak Street acquisition.

We ended the period with a tangible common equity ratio 7.84%, a tier-1 capital ratio of 10.52%, and a total capital ratio of 13.37%. Our capital position remains strong, and will continue to support our organic growth as well as consideration of other strategic opportunities should they develop. With that, I will now turn the call back over to Claude.

Thanks, John. And Rocco, would you now open the call up for questions?

Thank you, sir.

(Operator Instructions)

Our first question comes from Scott Siefers of Sandler O'Neill and Partners. Please go ahead.

Hey, good morning, guys. This is actually Brendan from Scott's team on the line.

Hey, how are you?

Good morning.

Great, thanks. Hoping we could start with the margin. I appreciate the color you gave, that you guys expect the fourth quarter to come in and around the third quarter's level. I was hoping maybe you could discuss some of the moving parts in there in terms of where you see core compression coming in versus any additional benefit from Oak Street that you might see in the fourth quarter?

Sure. As you said, there's a number of moving pieces here, but the primary drivers for the fourth quarter I would say are really threefold. A full quarter's impact from Oak Street, a full quarter's impact from the sub debt offering and then last, mix and fee volatility. Again, given those moving pieces, we expect the fourth quarter margin to be in line with third quarter. We really can't fight the math on margin. So our focus is on growing net interest income.

That's great, thanks. And just following up on that. Was there any impact to the margin from the proceeds from the debt issuance? Maybe just sitting in cash for a quarter before being utilized and possibly benefiting the margin a little bit?

There was a little bit of that, but I would say was marginal.

Okay. Great. And then maybe just one last one. On capital, as you mentioned, your TCE ratio dipped a little bit below 8%, which is still a very healthy level and you guys repurchased some shares this quarter. Do you have a sense of where you would like to see your capital levels trend over time? Are you comfortable bringing them down little more? And then maybe talk a little bit about your appetite to repurchase shares going forward?

Sure. This is Claude. What I would say is we have a range of capital levels that we look at the Board level, and we've talked about publicly our target ratios. And I would say they are maybe comparable to where we are today, with one of, like, risk-based maybe being a touch higher than our target ratios. So I would expect plus or minus to be around where we are today. The repurchase side, what we look at is every quarter what are we seeing from an organic growth perspective, M&A opportunities, and then we make that call.

That's great. Thanks for the color and thanks for taking my questions.

You bet.

Our next question comes from Emlen Harmon of Jefferies. Please go ahead.

Good morning.

Hey, Emlen.

Just to keep it going quickly for a little bit on the repurchases. I mean, it's been quite a while since you utilized that program. I think it's been outstanding since 2012. I mean, for you guys to get aggressive with that repurchase program, does it take volatility in the stock like we kind of saw this quarter? I mean, are those the opportunities that you're really looking for when you utilize that?

Well, I think it's a factor for sure. But keep in mind we, for the first time, have some tier 2 capital and have the ability to look at our whole capital stack and the efficiency of it. So I think that plays a role in it as well since we do have another capital instrument that we can manage against the common side. So it's growth, it's that and it's just how the stock is performing.

Got it. Thanks. You took my second question there on the sub debt, so I'll throw a third one at you. Just on the one-time expenses in the quarter, could you walk us through just kind of the different components of that? Because I know just reading the press release it looked like Oak Street, you guys had said Oak Street added, I think $2.6 million in expenses. And I guess I'm just trying to figure out what portion of those were nonrecurring versus -- what kind of fell into the nonrecurring items? I was just having trouble adding up kind of what were the merger expenses, the sub debt and the litigation charges?

Sure, The $2.6 million that you referenced there, that was all deal-related costs and that's all considered to be nonrecurring. We also mentioned in the press release in addition to the $2.6 million we had about $900,000 of additional operating expenses from half a quarter with the Oak Street team onboard there. In addition to the $2.6 million of nonrecurring deal-related cost, we had $700,000 related to legal matters resolved during the period. And then in addition to that, our expenses were also impacted by about a $700,000 prepayment fee on the Federal Home Loan Bank debt during the quarter.

Okay. So if I take those three pieces, so I get the -- I get about $4 million, I guess. And I think you guys -- out of those three pieces, I get about $4 million, and I think you guys said it was $3.3 million of nonoperating expenses. So is there an offset in there?

The $3.3 million would be the $2.6 million of deal costs and the $700,000 on the litigation matters.

Got it. So there is (multiple speakers) yes.

The prepayment fee on the Federal Home Loan Bank debt, while not expected to recur, we consider that an operating expense.

Got it. All right, thank you. That does it.

Sure.

Our next question comes from John Arfstrom of RBC Capital. Please go ahead.

Thanks, good morning guys.

Hey, John.

Just one finer point question and a couple bigger picture ones. But John, maybe a follow-up on the margin. Appreciate the guidance in the near term, I guess. Ask you to step back a little bit when you think about longer term with the Oak Street impact and the sub debt impact and everything else going on. Do you feel like this kind of level around the 3.60% margin is something that is sustainable beyond Q4? I know you don't give the longer-term guidance, but just help us out a little bit. Does this feel like a decent level?

Yes. John, this is Claude. That is a hard one, only because if you look at what I would call core commercial bank portfolios, if we don't see an increase in rates, and we see a continued significant variable rate origination model, which is what we've had more of in the last year, especially with C&I and some of the other product, that's going to create just ongoing margin pressure. So we still experience that. I think with the Oak Street add it helps to offset that because their core originations are at higher rates, also variable but at much higher rates. So one of the things we're looking at, it's a real question of mix as well as rate outlook as to what happens to the margin. So I think we have some good defenses against it, but all else being equal, no rate increase, there's going to be some of that compression that we experience.

Okay. That's helpful. And then just follow-up on that, Claude, maybe for you or Tony. You talked about the Oak Street pipeline was strong and then some of the new product potential. Can you help us better understand that?

Yes, obviously we are still gaining our understanding as well. Oak Street's had nice growth rates. If you look at their third-quarter level where they are today versus third quarter last year, they are about 18% up year over year. They've seen similar origination patterns where they tend to have a stronger late third and fourth quarter production cycle. So we are optimistic where they at kind of going into the year. But they've -- and even previous to this last 12 months they have seen 20% to 25% type growth rates. So we're trying to understand that better ourselves and what the forward growth rates can be. That just gives you some color on the past.

As we said when we announced the deal, we view Oak Street as a good platform for other, what are called industry verticals, probably in the professional services space, things like [IRA], potentially CPA firms. So we're looking at those. But certainly it's way too early for us to have a good sense of what production levels that could result in. But we do see what they have, and their technology platform is a good platform for us to grow. I would also mention our other kind of industry -- other line of business platforms or pipelines, I would say are still solid, comparable to where they were going into the third quarter. So we've also been encouraged by that activity.

Good. That's very helpful. And then just one more, maybe a little higher level. You talk about top quartile performance as an objective. Help us understand how you feel you're doing there and where you think there's still work to do?

Sure. We certainly think we have made progress. Our view of top quartile are those banks that are in the 110% to 120% ROA space. We are continuing to look at our efficiency levels, how we continue to improve those especially given the kind of margin challenges that all of us face, as well as looking hard to expand some of our fee-based businesses, whether that's in some of the fee areas in our commercial business, wealth, mortgage, as well as then trying to leverage the platform of Oak Street now that it's onboard, So I think all of those are things we're focused on, Jon, in addition to the core bank growth that has been pretty solid for us over the last couple of years.

All right, good. All very helpful. Thanks a lot.

You bet.

And our next question comes from Michael Perito of KBW. Please go ahead.

Hey, good morning.

Good morning.

First question, maybe another question on the growth. I mean, it sounds like the Oak Street pipeline is strong and the core bank is strong as well. And there's some solid opportunities in the Columbus market as well where you guys opened a new bank center. So if I'm putting all the comments together and I look at your last couple of quarters here, you hit 7% organic growth annualized in the second quarter, 10% in 3Q. I know you guys don't give longer-term guidance, but if we're trying to think about the longer-term growth potential of the combined companies now, should we be gravitating more toward the 3Q number as opposed to the second quarter growth?

What we've said is that we're really targeting kind of mid- to high single digit over the long term. They're going to be quarters where we can be closer to 10% and they're going to be quarters, as was it the first quarter, that could be flattish, just depending on what's going on in the economy as well is what we feel the right credit risk profile is. So I think it's safer to think about mid- to high single digit.

Yes, I would think that Oak Street would be a little north of that. But still we're about 70 days into that acquisition and the jury's still out a little bit there. But I would expect them to be a little bit higher than that.

Okay. And then another quick kind of related growth question. I saw a smaller competitor of you guys in Fort Wayne announce that they hired a lending team there. Can you guys confirm that there was no members of your prior team that you lifted out take in, and also maybe just give an update on that market for you guys? Thanks.

No, our core team is still in place. Fort Wayne had a really nice initial growth year. It's been a bit slower this year, but we are still committed to the market. Think it gives us a good kind of long-term opportunity, And as we talked about when we entered Fort Wayne, it was a de novo market. It's a long-term play for us. And so we are committed long term to it. We feel like it creates a good regional hub for us. We've got some good long-term markets that we've been for a long time. They're all around Fort Wayne, both in Northeast Indiana as well as in Northwest Ohio. So good market, continue to invest there. And we see good long-term prospects for that market for us.

All right, great. Thanks.

(Operator Instructions)

Our next question comes from Andy Stapp of Hilliard Lyons. Please go ahead.

Good morning.

Good morning, Andy.

What was the purpose of the $212 million brokered deposits raised turn the quarter? Was that to refi Oak Street borrowings? Just trying to get an understanding there.

Yes, that's correct. Oak Street was bank-line funded. So we took out the short-term brokered CDs there to repay that debt as part of that transaction.

So that came after the Oak Street acquisition? That's part of your margin guidance?

Correct.

Okay. Okay, got you. And are you seeing any moderation in the competitive environment for loan pricing?

This is Claude. No. It's still extremely competitive. And yes, we don't see that changing anytime soon.

Okay. And how should we be thinking about the FDIC loss sharing income and the accelerated discount going forward? Or is it just pretty much a random event?

Yes. I mean, there's certainly some volatility in those two lines. They've been higher in recent quarters then in the past, primarily because in the fourth quarter of last year our commercial loss sharing agreements expired. So when we do have formerly covered commercial loans that prepay, there's no related indemnification offset to that accelerated discount income. So that's part of the reason why you see the higher levels of accelerated discount we've seen over the last four quarters. I would tell you in addition to that, in the last two quarters we've had some larger prepay activity coming out of the formerly covered franchise portfolio. So that also contributed to that this quarter.

Okay. Great. That's it for me. Thank you.

Thank you.

Next question comes from Erik Zwick of Stephens. Please go ahead.

Hi. Good morning, guys.

Good morning, Erik.

Just first a follow-up on the brokered deposits. Is that something that you would expect to be replaced with core deposits over time? In your prepared remarks you obviously talked about the ability to continue to attract low-cost core deposits, and just how you think about the deposit composition today with a loan-to-deposit ratio around 85% or 86%?

Sure. Yes, we would hope that long-term we would see that replaced with core deposit growth. That's obviously also impacted by what the core bank loan growth is. So prior to those we had no broker deposits. So if that would stay at a level, whether it's at that level or slightly below it, over some period of time, we are not uncomfortable with that, just given our deposit profile. Certainly we would prefer to be long term at a loan-to-deposit ratio more in the low to mid-90%s for maximum efficiency, and perhaps a slightly lower investment portfolio. But it takes time and we try to be prudent around that. So yes, at 85%, we certainly like to see that number higher.

I would just add to that also around the broker deposits, we did ladder that out between 3 and 9, 12 months to give us that opportunity to grow the portfolio as that brokered portfolio matured.

Got it. Thanks. And then if I could turn to maybe acquisition opportunities and what you are seeing in the markets today. And maybe with some comments on kind of seller expectations, and if you'd seen any increase in activity or interest in your markets?

Sure. We're always kind of looking and talking. I wouldn't say I've seen any dramatic change one way or the other in those conversations. I would say I feel like we are in a good spot where we are comfortable with the markets we are in. We feel good about the business lines we're and their organic growth capability. And we will certainly continue to look for good strategic opportunities, but we will be very selective. And at least at this point don't feel like we need to do anything in order to meet our growth and profit objectives.

Thanks. I appreciate the commentary.

You bet.

Our next question comes from Daniel Cardenas of Raymond James. Please go ahead.

Good morning, guys.

Good morning, Dan.

A good number of my questions have been asked and answered. Maybe just quickly a clean-up question. How should I be thinking about your tax rate going forward? Is it going to be kind of closer to that 35%-plus range, or kind of still in that 34% to 35% range?

Yes, actually Dan I think it's probably going to be a little bit lower than that. I think at the beginning of the year we guided to a 32% to 34% range. We've been coming in right around 33%. I think full year we expect slightly higher than 33%.

Okay. Good, good. And then in terms of yield on the loans that are coming in right now, how does that compare to what we are seeing in terms of runoff? Are you seeing a higher yield in loans running off right now versus what's coming in? Or is it kind of neutral?

Well, certainly the originations, they reflect the current environment and have for a while. So that continues to be under some stress. But the flip side of that, and I think it's also a product of we've been in this rate cycle for so long that we are seeing our payoff rates, at least this quarter, drift a little lower as well. I think you would expect that, again given the duration of the rate cycle that we've been in. So it's a quarter-by-quarter set of numbers that we monitor. But this quarter the pay off rates were lower.

Great. And any room on the funding cost to lower them? Are we pretty much at the bottom of where you guys can go?

Well, I would offer (technical difficulties). I think a lot of that comes down to our ability to generate more BDA business, especially on the commercial side which is a focus of ours. I think that's probably greatest opportunity we have to bring cost down. I think the pricing we have on our interest-bearing deposits is kind of in the middle of the market and we think still competitive. So that would be our greatest opportunity.

Thanks, guys.

You bet.

And this concludes our question-and-answer session. I'd like to turn the conference back over to Claude Davis for any closing remarks.

Thanks, Rocco. And again, just thank everyone for your interest in First Financial and joining our call today. Thank you.

And thank you, sir. Today's conference has now concluded, and we thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.