First Financial Bancorp (FFBC) 2016 Q3 法說會逐字稿

Good morning. Welcome to the First Financial Bancorp third-quarter 2016 earnings conference call and webcast.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Scott Crawley, Controller. Please go ahead.

Thank you Kate. Good morning everyone. And thank you for joining us on today's conference call to discuss First Financial Bancorp's third-quarter 2016 financial results. Participating on today's call will be Claude Davis, Chief Executive Officer; Tony Stollings, Chief Operating Officer; and John Gavigan, Chief Financial Officer. Both the press release we issued yesterday and the accompanying slide presentation are available on our website at www.bankatfirst.com under the investor relations section. We will make reference to the slides contained in the accompanying presentation during today's call.

Additionally, please refer to the forward-looking statement disclosure contained in the third-quarter 2016 earnings release as well as our SEC filing for a full discussion of the Company's risk factors. The information we provide today is accurate as of September 30, 2016, and we will not be updating any forward-looking statements to reflect facts or circumstances after this call. I'll now turn the call over to Claude Davis

Thanks, Scott, and thanks to those joining the call today. Yesterday afternoon we announced our financial results for the third quarter. As shown on slide 3 we had another solid quarter, which is our 104th consecutive quarter of profitability.

Consistent with our performance through the first half, the third quarter reflects continued focus on the execution of our core strategy, including solid loan growth, a stable net interest margin, positive impact from fee income strategies, disciplined expense management and a steady credit environment. Through the efforts of all of our associates we have experienced an 18% growth in earnings through the first nine months as compared to 2015. In the third quarter we achieved a sub 60% efficiency ratio, a 1.09% return on average assets, and a 14% return on average tangible common equity.

End of period loans increased approximately 6% on an annualized basis compared to the linked quarter. While production mix varies from period to period, this was a quarter where we experienced strong CRE lending but also saw elevated prepayments in the C&I portfolio.

As we start the fourth quarter we are working hard to build on the momentum from the first three quarters. Though not at the levels we saw during the first half of the year, our lending pipelines remain solid and we expect to achieve our full-year loan growth target of high single-digits.

We continue to see solid credit demand and financial performance from our clients and prospects and expect fourth-quarter production will be biased toward C&I lending. We believe the overall credit outlook across our markets remain steady and conducive to continued growth opportunities.

During the quarter we also announced some strategic changes to our senior leadership team. We're confident that these leadership changes will bring fresh insights and energy to our business lines, and able us to build upon our track record of success.

As we close out 2016 our focus remains centered on serving the financial needs of our business, consumer and wealth management clients while remained disciplined in our approach. Overall the Company remains well-positioned to continue to grow organically and execute on our core strategies. With that I will now turn the call over to John.

Thank you Claude and good morning everyone. Turning your attention to slide 5, we provide a reconciliation of our GAAP earnings to adjusted earnings which exclude items we do not expect to occur on a regular basis. For the third quarter, adjusted earnings equaled GAAP earnings at $0.37 per diluted share as gains on sales of investment securities were offset by the combination of severance costs, gains related to branch consolidation activities and a legal recovery during the period.

Turning to slide 6, net interest income for the third quarter was $68.8 million, an increase of $1.7 million or approximately 3% when compared to the linked quarter. Higher interest income from loans more than offset a decline in interest income earned on investment securities and modestly higher funding costs during the period. With the decline in income from securities primarily driven by a lower average portfolio balance as we continue to redeploy cash flows to fund loan growth.

Additionally, net interest margin was 3.66% on a fully tax-equivalent basis, down 1 basis point from the prior quarter as the shift in our earning asset mix largely offset a modest decline in the yield earned on investment securities and a slight increase in funding costs.

Slide 7 details our noninterest income mix. For the third quarter, noninterest income totaled $16.9 million, a $3.2 million or 16% decline compared to the prior period. This decline was primarily driven by lower loss share related income as well as the decline in other noninterest income as the second quarter included a $2.4 million gain on the redemption of a limited partnership investment.

Excluding these items, noninterest income increased modestly compared to the linked quarter with higher deposit service charges, mortgage revenue and gain on sale of investment securities being the primary drivers. Of note, we were particularly pleased with the almost 14% increase in deposit service charges during the quarter. This increase was primarily driven by higher commercial deposit fees and reflects our continued focus on growing fee income.

Turning to slide 8, noninterest expense increased $1.7 million or 3% from the linked quarter to $51.1 million. Third-quarter expenses included approximately $800,000 of employee exit costs, a $200,000 net benefit from branch consolidation activity, as well as adjustments to compensation accruals based in our year-to-date performance. Excluding these items, noninterest expense was in line with our $50 million quarterly run rate and our efficiency ratio remained in line with our targeted range of 55% to 60%.

Slide 9 depicts the loan portfolio product mix as well as the drivers of our linked quarter growth. As Claude mentioned, loan balances increased 6.2% annualized during the period with growth coming primarily in the investor CRE space. Given the recent regulatory focus on CRE lending, I'll note that we remain well below the 100% and 300% regulatory thresholds. As shown here, our loan portfolio remains well-balanced and we will continue to manage below those thresholds going forward.

Turning to slide 10, credit quality remains stable. Provision expense declined during the quarter on slower loan growth and lower net charge-offs, while nonperforming assets and classified assets declined modestly and the allowance increased slightly. Overall, we remain pleased with the performance of the portfolio and the efforts of our credit team.

On slide 11, our capital ratios remain robust and benefited from another solid quarter of earnings. Finally, on slide 12 we provide an update on our thoughts regarding the balance of 2016, including fourth-quarter and full-year loan growth in the high single-digits. Continued stability in our net interest margin consistent with our year-to-date performance, noninterest expenses are expected to remain flat at approximately $50 million and a full-year effective tax rate of approximately 32.5%. This concludes my remarks, and I will now turn the call back over to Claude.

Thanks, John. And Kate we'll be happy to open the call up for questions now.

We will now begin the question-and-answer session.

(Operator Instructions)

Scott Siefers, Sandler O'Neill & Partners

Good morning, guys

Hi Scott, morning Scott.

Claude, I was hoping you could expand a bit on your thoughts on the overall lending environment. You had suggested, if I heard it correctly, lending pipelines are still good just not as robust as what we have seen earlier this year, which in a sense is pretty consistent with what we are hearing from others.

By the same token, no real change to the overall guidance except maybe just a little softening. Just curious if you can expand upon the thoughts you offered in your prepared remarks?

Sure, Scott. No, I think your commentary there describes it pretty well. I mean the first half of the year was very strong, we had a second-quarter growth rate of close to 14% which as we said then we didn't expect to continue at that level.

Third quarter was a little softer, but still at 6% in our mid to high single-digit expectation of what we see long-term. I think as we go into fourth quarter, as I mentioned and you described is solid. John talked about high single-digit for fourth quarter and full-year which is what we're thinking. And we're seeing, I would say good steady growth across the product lines.

The one thing I would just note on the environment is we have seen, both during the second quarter, third quarter and we expect to continue in the fourth quarter, some prepayments on the C&I side mainly due to acquisition. We're seeing a lot more M&A activity in the private company space. So, when that occurs with one of our clients, good for them, but obviously we see a loan paydown.

We also expect over time, and fourth quarter is probably one of those, where we see a similar activity on the commercial real estate side where projects stabilize and our borrowers then tend to liquidate or sell or go to the permanent nonrecourse market.

So all of those things are going on right now. We still view it as a very healthy lending market, but absolute growth rates will vary from quarter to quarter.

Okay. That's helpful color, I appreciate it. Then maybe switching gears just a little to the margin. If we were to get a Fed increase in, or Fed rate increase I should say in the fourth quarter, I imagine probably not much movement one way or the other, or not much impact one way or the other to the margin, but maybe you can just sort of refresh your thoughts on what the Company's rate sensitivity looks like and how you would be positioned for if the Fed does move later on this year.

Sure Scott. This is John. I'll take that one. Based on our modeling we are currently estimating approximately $2 million to $2.5 million annualized increase to net interest income from a 25 basis point rate hike. I will note there that, that assumes we hold the line on managed rate deposits which we would expect to do.

Okay. That's perfect. Thank you very much.

Thank you.

Jon Arfstrom, RBC Capital Markets

Thanks, good morning everyone

Hi John.

Just maybe a follow-up to Scott's question on loan growth, more on the CRE side, thanks for pointing out the concentration piece of it. Maybe if you could touch on commercial real estate pricing just because we've heard some different things, some say it's getting a little bit better as other heavily concentrated banks back off, others say it's still tight. Maybe comment on that and just in terms of your overall appetite to keep CRE growing?

Sure, John. First of all I would say pricing has moderated and I think with the regulatory focus on it we think we can do better on pricing. So, I would say it's stable to kind of upward in terms of the possibility, but every deal stands on its own because the quality of the sponsor.

In terms of growth rate, as we put here I would just describe our strategy right now as we've moderated our construction lending, we feel like the concentration levels we're at are a good level to maybe even over time seeing those decline on the construction side. Not because we're worried necessarily about credit quality, but we've seen a shift there where we see more deals go from construction to permanent market much faster and when we see that the profitability for the bank is not nearly as high. So construction lending I think you'll see moderate to possibly decline.

Now it will jump around from quarter to quarter because of draw rates and funding rates of our existing commitments, but in terms of new origination that is what I would expect. On the overall CRE portfolios, as we pointed out here, we were about 227% of total capital. We think we've still got some room to grow that but we will be well below the 300% and we'll grow it with we think what are the right sponsors and the right projects.

Okay. Okay. That's helpful. And then just on back on C&I would you say -- is it more about the paydowns or is it just kind of a change in mood or cautiousness overall, if that makes sense? I know you touched on it a bit with Scott, but is there one side that is tipping the scales more than the other?

Yes, that's a good question. I would say it's -- we saw in the third quarter less activity overall. So, in the first and second quarter it was very active, so we saw some slower activity, but what impacted the flat fact that we were relatively flat in C&I were some larger prepayments.

The other thing I would point out is that there is some seasonal activity there. So as an example, Oak Street is more heavily dominated in the fourth quarter activity versus especially second or third quarter activity, so that tends to be a slower period for them. Finally, I would say that I think we have seen some slower activity through the summer months and it's hard to know whether or not that -- what that was related to because it was such a short period of time.

Some say maybe the election, maybe it was just such a strong second quarter that we sell a lot of that front-loaded so it's really hard to tell. I'm anxious to see how the fourth quarter and the first quarter activity shapes up. I would put all that though in the context that our clients continue to perform well. So their business is good, profitability is good, so in that context I feel I am optimistic, but you know we want to see the activity come back.

Okay. Okay. And then just one quick one for either Tony or John. We talked about this in the past, but how much more room -- just thinking about overall balance sheet growth, how much of that earning asset mix shift room is left on the balance sheet, kind of out of securities and into loans?

Yes, John, I think as we've talked about in the past the securities portfolio today I think is just under 22% of assets. We will vary that over time depending on the opportunities we see on the loan side, but probably target range we generally like to see it 15% to 20%, so we will continue to manage it somewhere around that range just depending on the opportunities we see on the loan side.

Okay. Okay. Thanks guys.

Thanks Jon.

Erik Zwick, Stephens, Inc.

Good morning

Hi Erik.

First just on the loan-loss provision, last quarter you suggested that the provision would be reflective of loan growth and potential credit developments. Given that the third-quarter provision was quite a bit lower than the second quarter, can you just talk about the factors that went into determining the provision this quarter?

Sure Erik. I think if you look at the loan growth we had in 2Q versus the loan growth here in 3Q you see that was certainly a factor in the decline in the provision expense. And then also in 2Q we talked about the increase in provision expense during the quarter was really roughly equally driven by the strong loan growth we saw that period as well as the increase in classified assets. So here in the third quarter classified assets ticked down modestly. So really it was a function of slower loan growth, net charge-offs were very low and we did not have a similar increase in classified assets there. So there was relatively little to no impact to provision there.

Got it, and then looking at your capital ratios after declining for a number of quarters they ticked up slightly in the third quarter. What are your thoughts on the appropriate level of capital today and also deploying capital for growth versus returning it to shareholders by dividends or buybacks?

Yes, this is Claude. I will make a comment and then let John kind of fill anything in. We've talked about before that we have kind of three target ratios that we look at. The two most significant though are the tier 1 to total that we target, this is not a minimum or a max, but we target 10.5% and at 10/20 in the third quarter we're slightly below that level.

Total capital we target at 12.5%, and we're slightly above that ratio. So, the combination of that we feel pretty good about where our ratios are at. Obviously our dividend is still a high 2%, 3% type yield which we feel like is also a good return to shareholders. But as a Board we look at that dividend level every quarter and evaluate it. I don't know John if you would add anything to that or not.

Yes, no I would agree with those comments. We think we are at or near our capital targets, we're managing it accordingly at I do think over time we would like to see our tier 1 capital ratio kind of rebuild a little bit higher up toward our target there. We saw some of that this quarter. And the other thing I would just say it's, as Claude mentioned, it's a discussion we have with the Board every quarter, but it's a balance between retaining capital to support future growth opportunities versus the dividend and we make that evaluation on a regular basis.

Great. Thanks for taking my questions.

Sure.

Thanks.

Andy Stapp, Hilliard Lyons.

Good morning.

Morning Andy.

Was the increase in commercial deposit service charges driven by a pricing increase?

This is Claude. We have updated our pricing which we do annually, and one of those was an increase in some commercial pricing as well as we continue to see a new account growth.

So is Q3 level a good run rate?

Yes, I think Andy, we are happy with the performance we saw this quarter on deposit service charges and some of the fee income strategies we've talked about in the past. We still think we have some opportunity here and we have some additional strategies that are under evaluation. But it's going to take some time for things to play out and kind of demonstrate sustainability in run rate. But again, pleased with the early returns we're seeing there.

Okay. And is the 32.5% guidance for the Q4 tax rate a good run rate for 2017?

You know, Andy, we're in the middle of our 2017 planning currently so we'll come out with some more guidance on 2017 in our January call and we will speak to that then.

All right. And how much of the -- how much was the incentive comp adjustment in Q3?

Andy, we don't give a number on that, the point I was trying to make in my earlier comments was just that given our year-to-date performance through the first three quarters, there was a true-up for the first half of the year there to a higher level there. And if you exclude that as well as the other nonoperating expenses that we called out on slide 5, we were right in line with our $50 million guidance.

Okay. That's helpful. Thank you.

Sure.

Chris McGratty, Keefe, Bruyette & Woods.

Hello, this is actually Kelly Motta on for Chris McGratty, thanks for taking my question. I think most of my questions have already been asked, but I guess turning back to capital and priorities -- capital deployment priorities, I was just wondering given where your trading up two times tangible book, I was wondering how -- where strategic M&A fits in with your capital priorities and if you are seeing any increase in conversations or interest? Thank you.

Hey Kelly, thank you. We think about M&A really not in the context of so much stock price as we do our focused on first, strategic fit and does it make sense for us in our long-term franchise value. Second, is it operationally feasible and does it make sense for us to be able to execute on a deal. And then third we look at the financial elements and that's really where our current stock price comes into play as well as what the target may be expecting, what our earn back period is, et cetera. So, it's one piece of one factor that we take a look at.

As I mentioned I think in last quarter's call, maybe the one before, right now we are predominantly focused on organic growth because we feel good about the operating leverage that we're getting from our organic growth. We continue to look at opportunities and certainly if the right strategic one comes along we won't be afraid to, as we've done in the past, to pull the trigger, so that's how we think about it. Our focus on the capital side is really first on supporting organic growth as a company.

Thank you.

(Operator Instructions)

Daniel Cardenas, Raymond James & Associates.

Good morning guys.

Hey Dan.

Morning, Dan.

Maybe your quick thoughts on the competitive nature on the deposit side, and then maybe where do you kind of see your loan to deposit ratio maxing out?

On the competitive nature, Dan, we are not really seeing any competitive pricing pressures in the markets right now. I would say if anything for us the focus is just on making sure that our deposit growth keeps pace with our asset generation. Right now we're roughly at 92% loan to deposit ratio, we've talked about in the past ideally we would love to see that right at 95%. So we will continue to manage along those lines.

Okay. Great. Thanks, all my other questions have been asked.

Thanks Dan.

There no additional questions at this time, this concludes our question-and-answer session. I would like to turn the conference back over to Claude Davis for closing remarks.

Thanks Kate. And again, just thank everyone for their interest in First Financial and we will look forward to the fourth-quarter call. Thank you.

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