First Financial Bancorp Q1 2009 Earnings Call Transcript

| About: First Financial (FFBC)

First Financial Bancorp (NASDAQ:FFBC)

Q1 2009 Earnings Call Transcript

April 30, 2009, 09:00 am ET


Claude Davis - President and CEO

Frank Hall - SVP and CFO

Patti Forsythe - IR


Scott Siefers - Sandler O'Neill

Joe Steven - Steven Capital


Welcome to the First Financial Bancorp first quarter 2009 Earnings Call and web cast. (Operator Instructions).

Now I'd like to turn the call over to Patti Forsythe. Miss Forsythe?

Patti Forsythe

Thank you, Ryan. I would also like to thank everyone for joining us on today's call to discuss First Financial Bancorp's first quarter 2009 results. Joining me on today's call are First Financial's President and Chief Executive Officer, Claude Davis; and First Financial's Executive Vice President and Chief Financial Officer, Frank Hall.

I would like to remind everyone that our discussion today may involve certain forward-looking-statements, which are not statements of historical fact. Our first quarter 2009 earnings release should be read in conjunction with the consolidated financial statements, notes and tables attached and in the First Financial Bancorp's Annual Report on Form 10-K for the year ended December 31, 2008.

Management's analysis contains forward-looking-statements that are provided to assist in the understanding of anticipated future financial performance. However, such performance involves risks and uncertainties that may cause actual results to differ materially.

Factors that could cause actual results to differ from those discussed in the forward-looking-statements include, but are not limited to, management's ability to effectively execute its business plan, the risk that the strength of the US economy in general, and the strength of the local economies in which First Financial conducts its operations, may be different than expected; and the effects of, and changes in policies and laws of regulatory agencies, inflation, and interest rates.

For a further discussion of certain factors that may cause such forward-looking statements to differ materially from actual results, please refer to our 2008 Form 10-K and our other publicly filed documents with the SEC, Securities and Exchange Commission.

These documents are available within the investor relations section of our website at, and on the SEC's website at Additional information will also be set forth in our quarterly report on Form 10-Q for the quarter ended March 31, 2009, which will be filed with the SEC no later than May 11, 2009.

Please note that the content of this call contains time sensitive information that is accurate only as of today, Thursday, April 30, 2009.

Now I will turn the call over to Claude Davis. Claude?

Claude Davis

Thank you, Patti. Good morning and thank you for joining us. We are pleased with our profitability this quarter, including strong loan and deposit growth, and a relatively stable net interest margin, given the difficult economic conditions we are operating under.

For the first quarter of 2009 our reported net income was $5.7 million, with net income available to common shareholders of $5.2 million or $0.14 per diluted common share. Net income available to common shareholders reflects net income less the $578,000 in dividends we paid to the US Treasury on their $80 million in First Financial preferred securities.

As mentioned in the news release, the unprecedented level of economic stress has caused our credit quality to weaken somewhat, and we expect these challenging conditions to continue throughout 2009, not only for us, but for the entire industry. However, we do believe that our historically conservative underwriting practices and proactive management of resolution strategies for problem credits have produced asset quality ratios that continue to be better than our industry peers.

Our first quarter 2009 provision expense, although lower than the fourth quarter level, represented approximately 115% of first quarter 2009 total net charge-offs, and the allowance for loan and lease losses as a percent of period-end loans, remained stable at 1.33%.

Total net charge-offs declined $1.2 million from the fourth quarter. However, nonperforming loans increased $6.7 million. This increase is primarily attributable to deterioration within our commercial lending portfolio. This higher level of nonperforming loans adversely impacted our first quarter 2009 allowance to nonperforming loan coverage ratios.

Our coverage ratio is largely dependent on the size of loans entering the nonperforming category, and the associated reserves that are assigned to those loans. Larger credits will typically have individual reserve coverage ratios below one to one. We believe that our coverage ratios still continue to compare favorably with the industry and our peers.

Moving to capital related matters, there has been much media attention given to companies participating in the capital purchase program, such as First Financial. As we discussed on our fourth quarter call, our rationale for participating in CPP, at the request of our regulators, because we are a healthy institution, was to, number one, provide us with additional capital to further strengthen our capital ratios in preparation for the uncertain economic environment, along with the ability to take advantage of the growth opportunities we are seeing our core markets.

Similar to many other financial institutions, we are disappointed with the many changes in the program that has occurred since our participation. We are frustrated, as many in the banking industry, with the continued negative press blurring the lines between a commercial bank and investment bank, and mortgage companies.

Furthermore, Congress's actions to change the rules without regard to the original terms we agreed to, has created distractions from our focus on the business of banking. However, we continue to believe that our initial rationale for participating in the capital purchase program is still relevant today.

The changes that have been enacted to-date have not significantly impaired either our business model or the ability for us to execute our core business strategy. Our Board of Directors will continue to evaluate our capital plan and structure, including the merits of our continued participation in this program.

Our tangible common equity to tangible assets ratio, which is unaffected by the CPP preferred stock, was 6.54% at the end of the first quarter, strong relative to industry peers. We believe we have adequate capital cushion from even more severe economic downturn and resulting credit stress.

Both our loan and deposit balances increased from fourth quarter levels. Average total loans increased $23 million with average commercial loans up $66 million, and average total deposits increased $42 million or 6% annualized. While loan growth has been strong in recent quarters, we are very pleased to see positive results from the initiatives we implemented late last year to grow our deposit base.

Our increase in average total deposits from the fourth quarter of 2008 are results of recent deposit pricing strategies and other initiatives we implemented late last year that were designed to grow and retain more transaction based retail and commercial deposits.

As a result of these initiatives, we saw average commercial transaction deposits increase nearly $37 million and average commercial time deposits increase $6 million from the fourth quarter of 2008. Despite the volatility in the industry, we have remained focused on the fundamentals of banking; high quality service for our clients, prudent loan growth, and new deposit initiatives.

During the quarter we opened a new banking center in the Cincinnati market, we have announced plans to build additional banking centers later this year in St. Mary's Ohio, which is part of our northern Ohio market; in northern Kentucky, and in Columbus Indiana. The Indianapolis market, which we entered last August, is also in expansion mode. We have added additional staff and plan to continue to add to the existing team of commercial lending officers located there throughout the rest of the year.

I will now hand the call over to Frank to provide additional detail on our first quarter financial performance. Frank?

Frank Hall

Thank you, Claude. I will highlight some of the details of our quarterly performance, but first want to address some additional metrics we've included in the earnings release.

First, in table two of the release, we've provided our pre-tax, pre-provision income, both with and without securities gains. Given the recent volatility in the credit performance and outlook, and the often material impact of securities transactions, we want to provide a clear point of reference for the operational effectiveness and performance for First Financial.

Secondly, we've added some additional capital ratios to our financial highlights section of the earnings release, to provide reference points for the strength of our capital. Specifically our tangible common equity to risk-weighted assets is noted at a current level of 8.38%, down approximately 10% from a year ago versus our tangible common equity to tangible assets of 6.54%, down over 13% for the year. This is indicative of our 14% year-over-year balance sheet growth, driven largely by a near doubling of our investment portfolio.

One other item of note is the sale of our property and casualty portion of our insurance business. The associated revenue and expense from this business is approximately $1.6 million pre-tax for both revenue and expense.

Net interest margin was a non-tax equivalent 3.61% for the first quarter, a linked quarter decrease of six basis points. Comparable quarter year-over-year net interest margin is down a modest 17 basis points. Our balance sheet remains asset sensitive, and has experienced most of the impact from the last Fed rate cut.

Our margin was bolstered by the short funding strategy supporting our investment securities purchases associated with the capital purchase program. At this time, we believe this is an appropriate funding strategy, given the current rate outlook and the duration of the related securities.

Our earning assets have again increased through organic loan growth and planned increases in the investment portfolio. Claude has already highlighted our success in the lending area. I should also note that we continue to see wider spreads in our loan pricing, which should help offset some of the downward margin pressure associated with Fed funds declines, potential purchases of lower yielding securities, and the possibility of a more permanent wholesale funding strategy.

The investment portfolio has grown significantly throughout 2008 and 2009. $225 million of the $387 million year-over-year net growth is due to the utilization of the capital purchase program proceeds. Our investment philosophy is to buy intermediate term agency guaranteed mortgage backed securities opportunistically. This approach has helped us maintain significant value in our investment portfolio, which is noted by our net unrealized gain of approximately $16.8 million.

We do not have a target size for the investment portfolio, but view the portfolio as a vehicle to enhance our net interest income when there are opportunities in the market to do so. Our primary businesses are lending, deposit gathering, and wealth management, and we will manage our capital such that we have sufficient capacity for those activities.

In our deposit portfolio, the gradual mix shift from time deposits to transactional deposits continues. This quarter our average overall deposit portfolio grew, despite an approximate 3% decline in the CD portfolio. Our linked quarter average results show strong growth in the transaction and savings accounts, with an approximate 13% annualized increase. Approximately half of this growth is the seasonal effect of a large public fund deposit.

Most of our deposit growth has occurred primarily in our business deposit and public funds products, with consumer accounts remaining somewhat flat. Pricing has remained disciplined, with some late quarter relief in competitive pricing.

Our availability of wholesale funding remains strong, with an expansion of sources of wholesale funding continuing. As of quarter end, we had over $1.6 billion available in wholesale funding sources. We maintain a detailed contingency funding plan, and continually update it for current market conditions. We also actively manage our derivative counter parties list to address current market conditions.

Our non-interest income, excluding the significant items listed in table six of our earnings release continue to decrease as a result of two key external factors. First, the overall decrease in market values of our trust assets under management; and second, the decline in consumer spending has had a negative influence on NSFBs and interchange income on debit and credit cards.

We continue to experience significant improvement in our client derivative program, designed to allow our lending clients to take advantage of fixed rates in this low rate environment, while we receive a variable payment, thus helping us manage our interest rate risks. We had a record quarter of fees from this product of just under $1 million, an approximate $200,000 increase over the linked quarter. This benefit, unfortunately, was more than offset by lower executive life insurance income.

Our normalized non-interest expenses for the fourth quarter and for the full year remained relatively flat, with prior period variances due largely to the effects of external factors, such as FDIC insurance premium increases.

Our capital ratios remain strong. As of March 31, and including the receipt of the $80 million Capital Purchase Program capital, our leverage ratio was 9.51%. Total capital ratio was 13.39%, tangible equity to tangible assets was 8.60%, and our ending tangible common equity to tangible assets ratio was 6.54%.

Excluding the investment securities purchased as a result of the capital purchase program, our tangible common ratio was 6.95%. We remain diligent in managing our capital and will deploy it in a prudent manner in this difficult operating environment.

Due to the continued uncertainty in the overall economy and consistent with our previous practice, we will not provide earnings guidance for 2009. We will remain focused and disciplined in executing our strategic plan but are mindful of the challenges facing us.

This concludes the prepared comments of our call. We will now open the call for questions. Ryan?

Question-and-Answer Session


(Operator Instructions) Our first question comes from Scott Siefers of Sandler O'Neill.

Scott Siefers - Sandler O'Neill

Frank, first questions are probably for you. I know you suggested you'll be opportunistic on securities purchases with no target size for the portfolio, but I'd be curious to hear your thoughts on your willingness to leverage the TARP capital further. As it stands now, you guys seem to have struck a pretty good balance between leveraging it and also keeping the TCE high. So, I'd just be curious to hear your thoughts there.

Then, as an unrelated follow-up, maybe you could add a bit more color on the dynamics of the margin holding up so well. You mentioned some of the short-term funding issues but I think we've seen so many margins just kind of collapse this quarter unexpectedly. I'd just be curious to hear your thoughts there.

Frank Hall

Sure. First on the investment portfolio and the leverage of the CPP capital. Our objective and our near-term approach on that was to really cover the cost associated with the capital and we've achieved that. So, we would not look at this time to leverage it further, again unless the securities market should turn in a direction where we can be opportunistic, but I would say setting expectations, we've achieved our near-term objective with that capital and the related investment portfolio and will likely [view] at those levels.

As it relates to the margin, that really has been the benefit in our linked quarter margin, was the ability to stay relatively short in our funding. As we look at the rate outlook and forecast, we feel that that's appropriate and is where we're comfortable being positioned at the moment. It's something that we continue to monitor and may alter our funding strategy if anything materially changes in the market, but at this point, we're comfortable at those levels.

Claude Davis

The only thing I would add Scott, to Frank's comment is that I think, which Frank mentioned in his comments. I think a bit better loan spread has assisted us as well as some of the growth in the transaction or core deposit side. So, it has been a combination.

Scott Siefers - Sandler O'Neill

Then if I sort of interpreted those comments plus some of the prepared comments correctly, would it be fair to assume that the directional pressure might still be downward, but with some mitigating factors, i.e., improved loan spreads and a richer mix on the funding side, etcetera?

Frank Hall

Yes, that's probably a fair assessment. I would say if you look at, again our asset sensitivity, how it's performed in previous down rate periods. Most of the effect is felt in the first and second quarter after the rate cuts. So your assessment is probably fair.

Scott Siefers - Sandler O'Neill

Then Claude, maybe one or two questions I think are probably best for you. The pace of reserve build was perhaps a bit lower than I had forecast. So maybe if you could speak on credit, based on what you see. Is there anything out there that you see currently, that would lead you to believe that more substantial reserve building could be necessary in coming quarters?

Then a related question, just qualitatively, if you could just comment on sort of the pace of deterioration you're seeing in your markets or perhaps bottoming as compared to what you would've witnessed say 60 or 90 days ago?

Claude Davis

Sure. Yes, we're probably not in a position to provide guidance related to reserve build, Scott, but I can give you some qualitative thoughts, I think just around what we're seeing in the market, which certainly has an impact on our clients.

Comparable to my prepared comments and some of the things in the press release, it is still very difficult, economically. I think what we're expecting is that 2009, in our market areas will be very difficult. I don't know that we're seeing maybe a few positives, but I would say for the most part we expect recovery not to occur yet this year. I think it's probably out into 2010.

I think our concern, with our clients that we're trying to monitor and stay on top of and that is even if it's bottoming, which it feels like it might be but it's still hard to tell, is that the longer you go, whether you're on downward pace or whether you're at the bottom and just bumping along the bottom, is that the longer you go the more stressed the liquidity of our clients becomes. I would say that's what we're most focused on, whether that be in C&I type credits or residential developments, etcetera. Our antennae are up and we're not expecting significant improvement yet this year. It will be bumpy.


Our next question comes from [Joe Steven of Steven Capital.]

Joe Steven - Steven Capital

Scotty sort of asked part of my question, but I just wanted to ask sort of a related question. If you look at the yield on your loans, actually look at the yield on your loans compared to the yield on your investment securities, it looks like you guys will have some room to sort of re-price up a lot of the loans in time. Just sort of want to hear about your efforts when loans come up for renewal. How much are you able to move things right now? Thanks guys, good quarter in a pretty tough environment.

Claude Davis

Yes. Thanks, Joe. I would tell you, we are seeing some pricing flexibility on the loan side that we had not seen prior to three to six months ago. So, as we would track it, the spreads through our internal transfer pricing has moved up, and we think there's some pricing capability in the market, without treating our clients inappropriately or unfairly. There's still some competition but we are seeing some flexibility.


We have a follow up question from Scott Siefers of Sandler O'Neill.

Scott Siefers - Sandler O'Neill

Just one sort of ticky tack question I forgot to ask. Frank, do you have offhand what the duration is of the securities that you've been buying?

Frank Hall

Sure. I'll put it in terms of the total portfolio. Our total portfolio has a duration of just under two years about 1.9, and the CPP portfolio is just a little longer than that, about 2.2, but that is part of that total portfolio number as well.


(Operator Instructions) At this time, I'm showing no further questions.

Frank Hall

Well thank you, Ryan and thanks everyone for your interest in First Financial and we appreciate your participation in today's call. Thank you.


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

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