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#Good morning, and welcome to the First Financial first-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 <UNK> <UNK>, Controller.
Please go ahead.
Thank you, Andrew.
Good morning everyone, and thank you for joining us on today's conference call to discuss First Financial Bancorp's first-quarter 2016 financial results.
Discussing our financial results today will be <UNK> <UNK>, Chief Executive Officer; <UNK> <UNK>, Chief Operating Officer; and <UNK> <UNK>, 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 first-quarter 2016 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 March 31, 2016, 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 <UNK> <UNK>.
Thanks <UNK>, and thanks to those joining the call today.
Yesterday afternoon we announced our financial results for the first quarter.
Before I turn the call over to <UNK> and <UNK>, I would like to comment on another strong quarter of operating results, which is now 102 consecutive quarters of profitability.
We are pleased with our results, which reflect continued strong loan growth across our markets and products, stable net interest margin, and disciplined expense management.
While we have areas for improvement, with fee income being top of mind, we continue to capitalize on our comprehensive suite of credit products and unique client-focus strategy to grow our commercial and specialty product segments, both in our metropolitan markets and across our two nationwide lending platforms, Franchise and Oak Street.
The first quarter was marked by significant market volatility related to concerns around energy, the strength of the US currency, and other global economic headlines.
Despite this global economic backdrop, we continue to see solid credit demand, and financial performance across our clients and prospects.
While individual credit relationships come under stress from time from time, we believe the overall credit outlook across our markets remain stable and conducive to continued growth opportunities.
As we work towards our strategic objective achieving top-quartile performance, our focus remains centered on serving the financial needs of our business, consumer, and wealth management clients, while remaining disciplined in our approach.
Overall, the Company remains well positioned to continue to grow organically and meet our strategic objectives.
With that, I will now turn the call over to <UNK>.
Thank you, <UNK>.
Net income for the quarter was $19.8 million, an increase of $2.2 million, or 12%, over the first quarter last year.
Earnings per diluted common share for the quarter were $0.32, with return on average assets of 0.98%, and return on average tangible common equity of 13.06%, excluding approximately $500,000 of pre-tax non-operating expenses, which were primarily related to the consolidation of six branches during the period.
Net income was $20.1 million, or $0.33 per diluted common share.
Return on average assets was 1%, and return on average tangible common equity was 13.27%.
Consistent with our comments over the last few quarters, we continue to see opportunities to organically grow our balance sheet across a number of diversified products, including our two national lending platforms, First Franchise and Oak Street Funding.
We remain focused on a disciplined underwriting approach to optimize capital employment and increase yields, while still managing credit risk.
End-of-period loans increased approximately $116 million, or 9% on an annualized basis, compared to the link quarter, and is in line with our long-term expectations of mid to high single-digit growth.
Average loan balances increased $175 million, or 13% on an annualized basis during the period, as we recognized the full-quarter impact from late fourth-quarter 2015 originations, in addition to another strong quarter production, particularly in the CNI and specialty finance portfolios.
Loan origination pipelines, primarily in our metro markets and our specialty finance businesses, remains strong, and we head into the middle of the year with positive momentum.
Our client relationship, centered strategy, diverse product offerings, and strong cross-sell culture continue to produce sustainable growth.
End-of-period deposits were relatively unchanged from the fourth quarter, with total average deposits declining $111 million, or 7% on an annualized basis, primarily as a result of seasonality in our public funds deposits.
Our overall cost of deposits increased 3 basis points from the link quarter to 36 basis points, as we recognized the full-quarter impact on our indexed accounts from the late fourth-quarter increase in interest rates.
Turning briefly to Oak Street, the significant areas of integration are now complete.
The new associates are adapting well to the banking environment in general, and more specifically to the First Financial culture.
I'll note that we are learning from Oak Street as well, and we remain very optimistic about their long-term growth potential.
With that, I will turn the call over to <UNK> for further discussion of our first-quarter results.
Thank you <UNK>, and good morning everyone.
Net interest income for the first quarter was $66.6 million, an increase of $500,000, or approximately 1% when compared to the link quarter, as strong organic loan growth was complemented by the impact of the December interest rate hike, as well as the higher yield on our securities portfolio during the period.
Net interest margin was 3.68% on a fully tax-equivalent basis, compared to 3.69% in the prior quarter, as a modest decline in loan yields was largely offset by the higher yield earned on investment securities.
The effective yield earned on the security portfolio increased 15 basis points to 2.59%, benefiting from the December rate hike, as well as our efforts to reposition the portfolio and improve the yield profile in recent periods.
Looking forward, we expect net interest margin for the second quarter to again be relatively stable with the first quarter, with potential fluctuation in either direction, depending on production mix and pre-payment activity.
Further, I'll note that our interest rate sensitivity continues to trend toward higher asset sensitivity, and we remain well positioned for rising interest rates should we see additional rate hikes later this year.
Non-interest income for the first quarter was $15.5 million, in line with the prior quarter, but impacted by seasonal declines in deposit service charges, bankcard income, and mortgage revenues during the period.
Additionally, while wealth management fees benefited from seasonal tax services during the first quarter, fees were negatively impacted by market volatility through much of the period.
Client derivative fees were stronger in the first quarter, increasing 16% over the fourth quarter, while covered and formerly covered loan-related income declined on a link-quarter basis.
As <UNK> noted earlier, we are focused on improving fee income performance, and have multiple initiatives in process across the Company to grow fee income by optimizing product pricing and positioning, particularly with respect to commercial deposit relationships.
Non-interest expense decreased by $600,000, or 1% from the prior quarter, to $50.7 million on a GAAP basis.
Excluding the $500,000 of pre-tax non-operating expenses related to branch consolidation activity during the period, non-interest expense was relatively unchanged from the link quarter at $50.3 million, as improvement in OREO related costs was offset by a seasonal increase in compensation costs, as well as higher than expected healthcare expense during the period.
Turning to asset quality, we are again pleased with our credit team's efforts and the resolution activity that occurred during the quarter, as non-performing loans declined 8%, and OREO balances declined 10% from fourth-quarter levels.
That charge-offs declined 27% from the fourth quarter, with provision expense declining 11%, while the allowance for loan and lease losses increased modestly to $53.7 million at March 31.
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 1.08% as of March 31, from 1.11% at year end.
Overall, our credit outlook remains stable, and we are well reserved against potential credit losses.
This concludes my remarks, and I will now turn the call back over to <UNK>.
We will now begin the question-and-answer session.
(Operator Instructions) At this time of will pause momentarily to assemble our roster.
The first question comes from <UNK> <UNK> of Sandler O'Neill and Partners.
Please go ahead.
Hi, <UNK>.
I wanted to ask you first, a couple different comments from you and <UNK> on fee income initiatives.
I wonder if you could drill down a bit more into a couple things.
One, if there are areas where you guys are disappointed with where you've been doing, or just haven't had the focus you like.
Are you saying that there are things that you guys haven't done well, or is it just there's a lot of understandable market choppiness that makes it tougher to sustain momentum and fees.
Beyond that, if you can maybe just give some examples of some of the initiatives and what you're focused on most intently.
Go ahead, <UNK>.
Sure, <UNK>.
As we mentioned, we've got multiple initiatives across the Company there.
I wouldn't say it's something that we are necessarily disappointed in, it's just areas that we feel we have room for improvements.
In past years, we been focused on some of the acquisitions, and this is really focusing on executing on our existing products and services here.
Multiple initiatives across the Company, I would say broadly targeted across really three categories ---+ first being product pricing relative to market; second being price and governance and being disciplined in the level and frequency in which we're granting exceptions; and then the third one being product penetration.
These aren't necessarily second-quarter events, per se.
These are longer-term strategies, but I do think some of the earlier strategies that we're working on would start to see income hopefully in the second half of the year.
Okay, perfect.
This is more or less just natural strategic extension, an appropriate extension, as opposed to anything else, it sounds like then.
Exactly.
Yes, this is <UNK>, <UNK>.
We feel like we've got ---+ that we've been under market a bit in a few areas that we've got some opportunities to improve.
Yes, it's more about improved operating leverage.
Okay, that's perfect.
Thank you for the clarification there.
Then <UNK>, I was wondering if you could talk a little bit about the construction book.
It's still ---+ in the aggregate, it's not a huge part necessarily of who you guys are, but it has grown very rapidly over the last couple of years.
Just curious about your comfort level and outlook for overall growth in the construction book.
Yes, <UNK>, it has grown.
We ---+ I'd say started from a relatively low base that didn't really grow much coming out of the crisis until really the last ---+ to your observation, the last couple of years it's grown.
What I would say is we have seen lots of good opportunities, especially in the last two years in our metropolitan markets around a few different categories ---+ some being multi-family, some being health care, some being build to suits, whether for a variety of tenant types.
I'd say we are now at a point where while you may see that balance grow some just as those projects finish out or build out, we're not looking for significant growth in the construction portfolio.
We'll look at good opportunities, we will continue to serve our clients well.
We'll see some movement up, but you won't see the same kind of growth over the next two years that you've seen over the past two, maybe is a better way of saying it.
You bet.
<UNK> <UNK>, Jefferies.
Please go ahead.
Hi, good morning, guys.
Yes.
Sure <UNK>, this is <UNK>.
I think the interest rate hike in December really manifested itself exactly as we expected.
You saw that with margin holding pretty much in line with fourth quarter, which was in line with our expectations.
The December rate hike significantly closed the gap between loan origination and payoff spreads.
Saw some lift on the securities portfolio, as well.
Saw some lift on the deposit side as well, as we have had success in recent years with an index money market product for clients who are rate-sensitive.
It also gives us a good opportunity to sell, and bring new money into the bank there.
With respect to the last part of your question around the public funds, you're exactly right, we did see the typical cyclical outflow of public fund deposits, which starts late in the fourth quarter.
They tend to come back in mid to late first quarter.
We saw that this year as we have in years past, but it was a little bit larger this year.
Don't know that there's anything specific driving it, but we certainly noticed it as well that the magnitude of the outflow was a little larger than we've seen in the last few years.
<UNK>, this is <UNK>.
It does.
I think we continue to see good growth opportunities organically, and given that, we don't for see any repurchase activity here in the near term.
We look at it every quarter as a Board, but at this point I would say your assumption is accurate.
Hi, <UNK>.
Yes, <UNK>, the branch consolidation activity that we referenced in the release, that was ---+ certainly there's some expense saved there, but that was included in the guidance we gave back in January for the full-year operating expense run rate of approximately $50 million a quarter.
We opened a couple branches late last year.
We've got one or two more coming this year.
Those are some of the efficiencies that we've spoken about in the past that we're looking to realize to help offset some of the continued investments we're making elsewhere in the business.
Yes, <UNK>.
We're still expecting in the low 33% range there, probably a little lower than what you saw here in the first quarter, but in that ---+ probably between 33% and where you saw it here in the first quarter.
Sure.
Thanks, <UNK>.
Good morning, <UNK>.
Yes, I'll start.
<UNK>, this is <UNK>.
I'll let <UNK> give his thoughts, as well.
We're doing a couple things.
One is obviously we're always trying to grow core DDAA, which is always the best way to reduce those costs ---+ and really doing it through continued proactive sales efforts, which we've always done; but we've also added a couple people to call into the franchise book of business, as well as to call into the Oak Street book of business.
You could maybe some treasury management opportunities within that group.
Those, from a core sales perspective, are the main initiatives.
Yes, <UNK>, I would just add to <UNK>'s comments there.
This also touches on the pricing governance comment that I made earlier around being a little more disciplined around the exceptions and the level of exceptions we're allowing to our standard pricing.
Yes, <UNK>.
I would say we're now in the high 80%s, depending on where deposit flows are.
I think we could easily be in the mid-90%s as an optimal level, so we've got some runway there.
Just given the size of our securities portfolio, I think certainly we can convert that into loans, that would be more efficient for the balance sheet.
That's what we think about is more in the mid-90%s range.
Sure.
Certainly our goals, as we've talked about in the past, is to move that number closer to the 110%, given the current rate environment.
We think obviously continued organic growth in that mid-to-high single-digit range that we've discussed, we think with the combination of growth platforms that we have now from our core community markets to the metropolitan markets, to some of our end market specialty product, to Oak Street and Franchise, some of which have higher yields associated with them, we think we can do that in a stable-margin-type environment, and get operating leverage by holding expenses down.
That's I would say primary.
Secondary be some of the fee income strategies that <UNK> referenced earlier.
It really is about that core blocking and tackling, continuing to realize the growth we've talked about, with maintaining the expense discipline ---+ assuming a well-behaved credit environment.
That's the way I would describe the walk-forward of it.
Yes, we're still maintaining our expectation of a $50-million operating expense run rate through the balance of the year, quarterly.
Thanks, <UNK>.
Hi, <UNK>.
Yes, I would say in their core insurance business, we've seen a couple of bigger deals since we closed the deal.
As you get with strong borrowers that are of larger size, they may be at lower margins than what the core business is.
But I would say the bulk of their originations have been consistent with what they were originating pre-transaction.
Yields have been comparable.
That said <UNK>, I think we're seeing yield pressure in all the business lines.
I think they will ---+ Oak Street will continue to see it, as well.
But I give that Management team credit.
They have been able to hold yields pretty strongly, still realize the growth we expected.
At this point, nothing material or significant, but I would expect as we do bigger deals that on those specific relationships you will see lower yields than what their overall portfolio is at.
Yes, we have seen some movement in and out, <UNK>.
We had one larger deal move out, another larger deal move in.
We've seen some ---+ again, some singular credit movement that's caused those variances ---+ nothing of particular concern or significance at this point; but yes, any time we see those numbers move around we're sensitive to it, and try to get on top of it quickly.
Yes, we are.
I think the pipeline continued to be solid going into the second quarter.
We still feel good about that mid-to-high single-digit-type organic growth rate.
That said, it's still very competitive.
We continue to try to stay disciplined, both from a pricing and structure standpoint.
I always put the caveat in there about that, that we would rather not do a deal than to do a deal that's too high risk.
We'll balance those two, but at this point we think that guidance is appropriate.
Well, I will take your second question first, there.
On the securities book, it really depends on the growth we see on the loan side.
To <UNK>'s earlier comment, our preference is to deploy capital in the loan portfolio.
You saw on a period-end basis securities book was down about $50 million here as of March 31 versus year end.
If loan growth trends continue and we continue to see you good deals with risk-appropriate returns, then I think it's probably safe to say you would see the securities portfolio come down, similar to what you saw here in the first quarter.
Your second question on the yield curve, we disclose in our Qs and K the similar interest-rate sensitivity disclosures to others, which are primarily on a parallel shop.
We also run additional scenarios that are more of a slow, bear-flattener-type scenario.
We continue to be right around neutral to slightly asset-sensitive under those scenarios, as well.
The other thing I would mention we're seeing is ---+ and we've mentioned this the last couple of quarters ---+ is the vast majority of our originations have been variable-rate originations, which are obviously priced off the shorter end of the curve.
At least at this point, the longer end move-down has not had a significant impact.
Yes, we don't really give guidance out beyond the near term and the next quarter, but as I commented earlier, we're expecting margin to remain relatively stable.
Good morning.
Sure, Dan.
This is <UNK>.
The way we're thinking about M&A right now is that we really feel like the work we've done over the last few years, we've positioned the franchise in really the markets and products that we were interested in being in.
Right now we're most focused on organic growth and the execution of the strategy.
We'll certainly look at deals if they're strategic and it makes sense for us, either from an asset platform or from a market extension, but I would tell you that's not the first priority right now.
Really, it's about organic growth and executing on the core strategy.
Yes, I'd say it's been interesting.
It's been episodic in terms of different moves and competitive conditions.
We've seen it most competitive lately in what I would call some of the middle market, CNI-type business, where I would say both rate and structure have been competitive.
We're trying to compete against that, but still stay true to our strategy and our risk profile.
Commercial real estate continues to stay competitive, but I think that's plateaued as it relates to structure and pricing.
Then on the deposit side as well, as the other loan products, it just tends to be market by market, and depending on which competitor may at that point be more aggressive than another.
I would say it's still a market we feel like we can compete in, we can grow in and hit our yields and returns in, but it's still very competitive.
Thanks.
Hi, <UNK>.
Well, to answer the last question first, yes.
It's one of those where we all get it ---+ that if you're going to go, you need to go, and we're very cognizant of that.
We certainly don't want to do a deal just to do a deal, and then put us into a situation where we see lower returns because of the $10-billion issue.
We are sensitive to that.
That won't cause us not to do a good strategic deal.
The way we look at it, <UNK>, is we've got probably three to four years of organic growth runway before we would do it on an organic basis.
But that said, it's soon enough that we are preparing for ---+ and <UNK> can speak to some of the things we're doing.
All right, <UNK>, thank you.
Great.
Thanks, Andrew.
Again, thanks everyone for joining our call today, and for your interest in First Financial.
Thank you.
