First Financial Bancorp (FFBC) 2015 Q4 法說會逐字稿

Good day, and welcome to the First Financial Bancorp fourth-quarter 2015 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. 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 fourth quarter and full-year 2015 financial results. Discussing our 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 the press release we issued yesterday announcing our financial results for the quarter and full year 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 fourth-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 December 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.

Great. Thanks, Eric, and thanks for those joining the call today. Yesterday afternoon, we announced our financial results for the fourth quarter and for the full year of 2015, and before I turn the call over to Tony and John to discuss our results, I wanted to recognize the outstanding effort of all of our Associates who make our success possible. And their hard work resulted in a strong 2015, as we celebrated our one-year anniversary of being in the Columbus, Ohio market, which has performed well above our expectations. As well as for the completion of the Oak Street acquisition, which we think, along with our franchise finance business, gives us a great alternative to our core community banking markets and [two] nationwide lending platforms. Finally, we had great results in producing a 15% year-over-year net income growth.

Overall, I continue to be pleased with the progress we make in building a company that can consistently and responsibly produce top quartile results. I believe that our Company is well positioned to grow organically with mid to high single digit annual growth rates, as well as continue to take advantage of acquisition opportunities when they develop, and meet our strategic objectives. With that, I wanted to turn the call over to Tony.

Thank you, Claude. Net income for the quarter was $19.8 million, an increase of $1.2 million, or 6.6% over the fourth quarter last year. Earnings per diluted common share were $0.32, with return on average assets of 0.99%, and return on average tangible common equity of 12.98%. Excluding approximately $1 million of pre-tax non-operating expenses, which were primarily related to severance benefits accrued during the period, net income was $20.5 million, or $0.33 per diluted common share. Return on average assets was 1.02%, and return on average tangible common equity was 13.4%.

Net income for the full year was $75.1 million, an increase of $10.1 million, or 15.5% over the prior year. Earnings per diluted common share for the year were $1.21, with return on average assets of 1%, and return on average tangible common equity of 12.66%. Excluding approximately $5 million of pretax non-operating expenses, primarily related to severance benefits, expenses related to the acquisition of Oak Street, and adjustments to reserves for litigation-related items, net income was $78.3 million or $1.27 per diluted common share. Return on average assets was 1.04%, and return on average tangible common equity was 13.2%.

Consistent with our comments over the last few quarters, we continue to see good opportunities to organically grow our balance sheet, with competitively priced high-quality loans and low-cost core deposits. End of period loans increased by approximately $173 million, or 13% on an annualized basis, compared to the linked quarter, exceeding our long-term expectations of mid to high single digit growth. Average loan balances increased $212 million or 17% on an annualized basis during the period, despite more than half of our period-end loan growth coming in the final week of the quarter.

End of period deposits increased by $98 million or 6%, and average total deposits increased by $287 million or 19%, both on an annualized basis compared to the linked quarter, with strong quarter-over-quarter growth in both non-interest-bearing and interest-bearing demand accounts. Our overall cost of interest-bearing deposits was unchanged from the linked quarter, at 42 basis points.

Loan origination pipelines, particularly in our metro markets and specialty finance businesses, remain strong, and we head into 2016 with positive momentum. Our client relationship centered strategy, broad product offerings and strong cross-sell culture continue to produce sustainable growth. New growth opportunities have also been driven by recent market disruptions here, and we expect them to continue.

Turning briefly now to Oak Street, the acquisition was expected to be immediately accretive to operating earnings. Consistent with those expectations, for the fourth quarter, Oak Street contributed approximately $0.04 per diluted common share. We remain very optimistic about Oak Street's long-term growth potential and product line expansion opportunities. While we may from time to time highlight their strategic developments, they are now fully integrated into our performance metrics, and as a result, we do not intend to highlight their individual line of business contribution going forward. With that, I will now turn it over to John for further discussion of our operating performance.

Thank you, Tony, and good morning everyone. Net interest income for the fourth quarter was $66.1 million, an increase of $2.9 million, or 4.6%, when compared to the linked quarter, as strong organic loan growth was complemented by the full quarter's impact of the acquired Oak Street loan portfolio, and was also impacted by a full quarter of subordinated debt. Primarily driven by these same two factors, net interest margin was 3.69% on a fully tax-equivalent basis, compared to 3.67% in the prior quarter. The effective yield earned on the loan portfolio increased 10 basis points from the third quarter to 4.62%, primarily as a result of the higher-yielding Oak Street loans. The effective yield earned on the securities portfolio increased 5 basis points to 2.44%, benefiting from reinvestment mix into higher yielding securities in recent periods.

Non-interest income for the fourth quarter was $15.8 million, declining 22% compared to the linked quarter, with the most significant driver being a $3 million decrease in accelerated discount on covered and formerly covered loans, as the number and size of loans that prepaid during the period declined. Other fee income sources also contributed to the linked quarter decline, as client derivative fees came down from the exceptionally strong performance in the third quarter, and gain on sales of mortgage loans was impacted by seasonal and other industry factors.

Additionally, distributions from our limited partnership investments and gain on sale of securities also declined from the third order. Non-interest expense decreased $1.7 million or 3% from the prior quarter to $51.3 million, primarily related to $4 million of acquisition-related and other non-recurring expenses during the third quarter, partially offset by higher incentives, severance, healthcare and OREO-related cost during the fourth quarter.

Turning to asset quality, we are again pleased with our credit team's efforts, and the resolution activity that occurred during the quarter, as total non-accrual loans declined 22% during the period. While accruing TDRs increased 43%, and classified assets increased 3% during the quarter, these increases were primarily related to the downgrade of a single performing commercial loan relationship, on which First Financial expects to receive all contractual principal and interest. 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 1.11% as of December 31, from 1.17% at September 30. We remain well reserved against potential credit losses.

On capital, the Company's regulatory capital ratios declined moderately during the fourth quarter, reflecting the strength of our asset generation efforts during the period, and are now at or near our publicly stated targets. In the years since our 2009 FDIC-assisted acquisitions, we have methodically and deliberately managed into our capital structure through strong growth, both organic and by acquisition, the variable dividend, and share repurchases. Additionally, our capital ratios also reflect the natural shift from lower risk-weighted covered assets to higher-weighted uncovered assets over time. Our capital position remains strong and in combination with our earnings, we'll continue to support our organic growth going forward, as well as consideration of other strategic opportunities, should they develop.

Overall, we are pleased with our 2015 results, and in particular, our ability to grow earnings through the combination of strong organic loan growth, the Oak Street acquisition, higher fee income, and a continued focus on efficiency. Turning our attention to 2016, we look forward to the challenges and even greater opportunities ahead. In regards to the loan portfolio, and as Claude mentioned earlier, we continue to target mid to high single digit loan growth for the year.

On fee income, and we expect a decline in accelerated discount income on covered and formerly covered loans, as that portfolio continues to run off. As evidenced in our fourth-quarter results, accelerated discount can vary period to period based on customer behaviors. Ultimately, it is a matter of timing, as we will recognize these discounts either through interest income, if the borrowers continue to pay as agreed, or through non-interest income, should they choose to prepay. Conversely, we remain optimistic about the growth opportunities across our other fee income sources.

With respect to expenses, we expect to maintain a relatively stable expense base for the year, while pursuing additional efficiencies in our service delivery, to offset continued investment in our business. We believe the approximately $50 million adjusted non-interest expense total from the fourth quarter represents a reasonable indication of our quarterly operating expense base for 2016, with some modest seasonal factors anticipated in the first quarter.

With regard to net interest margin, we expect first-quarter 2016 margin to remain relatively consistent with the fourth quarter, though it remains dependent on production mix and prepayment activity. Our focus remains on growing net interest income dollars by continuing to grow loans at risk-appropriate returns, and growing low-cost core deposits.

On interest rates, we do not project future rate changes in our planning process; however, I will note that our interest rate risk modeling indicates we are slightly asset sensitive under slow and modest short-term rate increases. On taxes, we expect an approximately 33% effective tax rate for 2016.

Finally, I will note that the first quarter is typically impacted by a number of seasonal factors that affect both income and expenses, and that should be considered in establishing quarterly estimates. This concludes my remarks and I will now turn the call back over to Claude.

Great, thanks, John. And Keith, I think you can open the call up for questions now.

(Operator Instructions)

Scott Siefers, Sandler O'Neill & Partners.

John, maybe first question is for you. You suggested that the most volatile line in the fee-base, that accelerated discount will likely be, if I interpreted it correctly, will likely be down year over year in 2016. Are you able to give any more color on potential order of magnitude, just because of couple million dollar swing that it can have quarter over quarter? Is there any way to capture how high or low you think it could go, just given the size of total remaining balances?

Scott, it is obviously tough to predict borrower behavior there, but I think, based on our best estimates, we do not think the fourth quarter is necessarily indicative of a new run rate. If you look at the earlier quarters in 2015, second and third quarters both included some significant pre-pay activity on some larger covered or formerly covered franchise credits there. We don't necessarily expect that to repeat. So if you look at fourth quarter versus the earlier quarters, and somewhere in the middle is probably a decent indication of what we expect for 2016. But again, tough to predict borrower behavior there.

I understand, that is narrowing it down a bit, it is helpful nonetheless, so thank you. Second question was on the margin. As I looked at it, came in maybe a little bit better than I thought, and I think than you had suggested, as well. Maybe John, if you can give a little bit of what you thought the big puts and takes were, right? Because the only noise was the full-quarter inclusion of Oak Street. But it sounds like now that is fully embedded in the run rate, still expecting the margin to hold firm, which is a favorable delta relative to how the organic margins have been behaving last year. So maybe your thoughts on the major drivers in the fourth quarter, and then to the extent you can give any glimpse out beyond the first quarter, that might be helpful, as well, please.

Sure, Scott.

In the fourth quarter, I think you know the major inputs there. It was really the full quarter's impact from Oak Street as well as the full quarter's impact from sub debt, and those were largely as expected. Some of the production mix and fee volatility came in relatively in line with our expectations. I think if you look back last quarter, we had guided towards stable, but probably plus or minus a few basis points, and I would say we came in line with that.

Going forward, obviously Oak Street and sub debt are now baked into the quarterly run rate. We will see here in the first quarter the full impact of the December rate hike. That should help close the spread between new originations and payoffs, though I don't know that it entirely closes that gap there.

We will get some lift on the portfolio, on the balance of the portfolio on floating rate loans there. So we expect that to be, as I noted in my interest rate sensitivity comments there, a modest positive there. So again, it really comes down to what is the production mix and prepayment activity during the quarter.

This is Claude, Scott. I would also add we are a little, I would say, cautious, just given the market volatility and what is going on with rate curves. So we are cautious about going too much further than the first quarter.

Yes. Okay, fair enough. All right. That's good color, so thank you very much.

Emlen Harmon, Jefferies.

It seems as though last quarter that you were going to give us what the Oak Street contribution was. One last gasp on what we should expect for 2016? You said $0.04 this quarter. Is that a fairly representative run rate, in terms of what you think they're going to be able to do on a quarterly basis, or do you feel like that was maybe high or depressed for any particular reason?

Emlen, this is Tony. I think Oak Street, when we made the original announcement, we had modeled their contribution at that time of $0.16 to $0.20, and they are tracking on that. At this point, we don't see any reason to change that. I would say they are meeting expectations right now.

Got it. Thanks. Then, you have started to utilize the share buyback a little bit more, the last couple of quarters. Is that something we continue to see next year, and how are you thinking about how you deploy that? Are you trying to be opportunistic? I know the capital stack is a little thicker, now that you have got the sub debt in there. Does that change your appetite there at all? Just curious on your appetite for the buyback.

Sure. Emlen, this is Claude.

The Board looks at it every quarter, so we -- we're taking a look at that, as well as the other capital options. I would say at this point it is not likely, at least in the next quarter or two, that you will see much in the repurchase side, mainly due to the strong organic growth that we are seeing. And as Tony mentioned in his script, really strong late fourth-quarter growth. We want to be cautious and make sure that we preserve that capital for our growth opportunities, both organic and acquisitive, so I don't see a lot right now happening in the repurchase area.

Got it. All right. Thanks for taking the questions.

Jon Arfstrom, RBC Capital Markets.

To follow up on the loan question, maybe for you Tony or Claude. Just talk a little bit about the late fourth-quarter growth, if there was anything unusual there, broad-based, give us your thoughts as to why it happened late in the quarter.

This is Claude, John.

It was across multiple business units, which is a positive, and I don't know that I can pinpoint it to anything macro driven, other than just several different things lined up, that caused them to close literally in that last week to two of the quarter. We also have some good carryover into January. So nothing of note, other than it was across the board, and I think activity in general in the fourth quarter were strong, but particularly strong late.

Okay. And it looks like some of this, when I look at the period-end balances is commercial real estate and construction. Can you give us your thoughts on the health of that business, and your markets?

We've been talking most of the year about, we have seen strong construction demand, some of that funded up, started to fund up some more in the fourth quarter, so we saw some of that. I would say late in the fourth quarter, we saw as much on the C&I side across Oak Street franchise and core C&I business. Some of that can show up in the real estate line, because it may be owner occupied real estate that is a part of that package that we may do for a particular company. What we noticed is it was a pretty good blend or mix between real estate, commercial real estate, investment commercial real estate and C&I, along with the owner occupied.

As it relates to the question on the health of the commercial real estate market, it continues to be strong. We see lease-ups happening as modeled or better than modeled. We continue to see the permanent market taking loans out earlier than we have ever experienced, so at least to this point, we have seen a pretty strong and healthy market. And obviously it is by subcategory, so there are certain categories that are still soft that we do not do a lot of blending into, but those that we have been continue to be solid.

That's helpful. John Gavigan, just a quick question. I appreciate all the help on the modeling and expectations. You talked a little bit about Q1 seasonal factors. I am assuming you are seeing a little bit higher comp, maybe a little lower service charges and possibly mortgages. Are those the items you are referring to, or is there something else?

Those items you mentioned, as well as fewer days in the quarter.

Okay. All right. Okay, that's it. Thank you.

Erik Zwick, Stephens.

With regard to the severance expense that was recorded in the quarter, I am curious, is that related to general year-end trimming, or was there a particular business line that had some room for additional efficiency improvements?

No, it was just general activity. It was not related to Oak Street. So just things that happen over the course of the year.

I am curious if you can provide a little more color on that one commercial loan that was added to the classified bucket. Was there a particular industry or borrower situation that led to the downgrade there?

It was a specific borrower situation, that we think is just a short-term issue, but it did impact current performance. And we felt it needed to be identified as a TDR, and managed appropriately. But as John mentioned, we don't expect to see a loss there, and we think, based on the current performance review, that sometime in 2016 we will see that credit improve and be potentially upgraded.

Great, and then finally, you mentioned you have been in Columbus for over a year, acquired Oak Street in 2015. How do you view your desired balance between organic and acquisition growth today, and how would you classify sellers' expectations?

Our primary strategy has always been, and our preferred strategy is always to grow organically, and then to supplement when it makes sense with a strategic acquisition opportunity. I would say that is still where we are.

Our strong preference is to focus on organic growth. We continue to look at are there product line extensions that we could potentially take a look at, whether that is in the lending space, or in the wealth management area.

And then on the whole Bank side, we're always having conversations. I think expectations are, I wouldn't say have changed from where they were over the last year or two, and we look at them all based on what we think the right approach for us is in terms of market penetration or market expansion. But we think we're still in a good spot to continue to grow organically, and if the right deal comes along, we will take advantage of it.

Great. Thank you for the commentary.

Andy Stapp, Hilliard Lyons.

Could you talk about any exposure to energy you might have?

Zero to very limited. There may be some tangential groups or areas that may have energy as part of their client base, but nothing material at all.

Okay, what type of construction and commercial real estate are you financing? For example, multi-family, office, retail, et cetera?

Sure. The bulk of it would be multi-family, healthcare, and then there may be specific properties in, say, an office category that may be a build to suit, that we're helping to finance. But I would say the two largest categories we have seen have been more in the multi-family and healthcare spaces.

Okay, great. Thank you.

Daniel Cardenas, Raymond James.

Just given how your capital levels have trended back to where your stated goals are, how should we be thinking about your dividend payout ratio?

We have, our capital ratios have gravitated around our target levels that we have been public about. We continue to see an improvement in EPS, so that is -- obviously our payout ratio has declined, as a result. What we tend to look at, as I mentioned earlier, we review this every quarter with the Board, is what is our growth prospects first. And if we feel like we have got strong growth prospects, we are going to retain the capital for that first, and then if we have got excess capital that is generated, then look at a dividend or other growth opportunities. At this point, we feel comfortable where we are, both from supporting that growth, as well as our current dividend level.

Just in terms of competition, I am sure pricing competition remains intense, but are you seeing any wholesale changes in structural, on the structural side from your competitors?

Yes, I wouldn't say -- pricing is probably the most significant part of the competitive landscape. I would not say wholesale changes on structure. I would say there are selected or individual transactions where we see that occur. But at this point, I would not suggest that it is wholesale, at least in the categories where we are lending into.

Great, and then last question on the deposit side. Just competitive factors there, have you seen any pick-up in competitive factors, as it comes to deposit pricing?

I don't think we have seen any pressure yet on the pricing side for deposits, so everybody seems to be staying pretty disciplined at this point.

Great. Thanks.

(Operator Instructions)

Chris McGratty, KBW.

I have got a question on the investment yields that were ticking up the last couple of quarters. Could you elaborate in terms of what you are buying, and maybe what the premium [M] was in the past two quarters?

Specifically in terms of what we are buying, it is not that different than what we have traditionally bought in the portfolio primarily: agency, mortgage-backed securities and CMOs, as well as some private label CMOs and munis that are highly rated. We have taken advantage of -- our portfolio duration had come down to the low threes. We have gone out a little bit on duration on the reinvestments to pick up some yield there, but overall the portfolio duration is still fairly short, a little under 3.5 years, so we feel good about where we are at there.

You said that was the driver, you're going out of the curve a little bit with the driver of the pick up in yield as opposed to selling premium [Ms], is that right?

Correct.

Maybe if I could on the loan yields, obviously they're moving in the right direction, and I would imagine part of that is because of the deal. Anything unusual in the 462 loan yield in the quarter, with related to elevated loan fees, or a decent barometer going forward?

No. I would say nothing unusual there, as you said. It was largely driven by the higher-yielding acquired portfolio and the full-quarter impact.

Got it, and last one if I could, on the size of the investment portfolio is it similar sized, whether it could be dollars or proportion of earning assets, is that still the right way to think about the size of the balance sheet?

Yes, think dollar wise, where we ended the year, I don't see us necessarily increasing the size of the portfolio. Depending on our growth opportunities, on the loan side, you could see the size of the portfolio migrate down a little bit during the year. It is just one of those things that we will balance on an ongoing basis, depending on our growth opportunities.

Great, thank you.

Andy Stapp, Hilliard Lyons.

Just to add a follow up on the commercial real estate lending. Just wondering what type of cap rates you are seeing on the multi-family and office projects you are financing?

Andy, this is Claude, we need to get back to you on that, in terms of what the appraisers are using. Obviously we go through that whole full appraisal and appraisal review process. We would need to get back to you on specifics there, but it is very market-based, but I don't have that number in front of me.

Okay, all right. Thank you.

Thank you. 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 this is Claude again. Thank you everyone for participating in our call. Thank you.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.