Ken Lovik - VP, IR & Corporate Development
Claude Davis - President & CEO
Frank Hall - EVP, CFO & COO
Doug Lefferson - EVP & Chief Banking Officer
Jill Wyman - EVP & Co-Chief Retail Banking Officer
Jill Stanton - EVP, Co-Chief Retail Banking Officer
Greg Harris - SVP & Senior Operating Officer
Kevin Woodard - SVP & Sales and Service Officer
Kevin Langford - EVP & Chief Administrative Officer
Richard Barbercheck - EVP & Chief Credit Officer
Tony Stollings - EVP & Chief Risk Officer
Joe Steven - Steven Capital
Emlen Harmon - Jefferies
Chris McGratty - KBW
Matthew Keating - Barclays
Jon Arfstrom - RBC
Kenneth James - Sterne Agee
Jelani Jackson - Opus Capital
First Financial Bancorp (FFBC) Investor Day Conference Call August 15, 2012 12:45 PM ET
Good afternoon everyone. My name is Ken Lovik, Vice President, Investor Relations and Corporate Development and I would like to welcome you to First Financial Bancorp’s Investor Day. Before we begin the presentation, I would like to take care of a few administrative matters.
Today’s event is accessible via conference call and webcast with the webcast link and all the presentations available on our website at bankatfirst.com under the Investor Relations Section. Additionally, the call is being recorded and will be available for replay and the webcast will be archived on our website.
This slide contains our forward-looking statement disclosure to aid in the discussions for the day we will be providing significantly more financial and operational detail than we normally do on our quarterly releases or our investor presentations.
Statements contained within the presentations are based on information and assumptions available at this time and are subject to risk and uncertainties which may cause future results to differ materially. Unless otherwise noted, the information presented is as of June 30, 2012 and we do not expect to be updating these items on a regular basis. For a complete discussion of the company’s risk factors please refer to this slide as well as our SEC filings.
This slide presents our agenda for the day. As you can see, we have several members of our executive management team presenting and you can find their biographies on the last page of the printed and online versions of their respective presentations.
We will be hosting two Q&A formats today. First, beginning with Doug Lefferson’s presentation on the commercial banking line of business, we’ll have a brief topic specific Q&A session following each presentation. As such, I would request that questions during this time directly relate to the presentations you have just heard and be more strategic in nature.
After conclusion of the last presentation, we will be having a broader Q&A session with all the presenters where questions of a macro nature that touch on multiple business lines or drill down into the numbers a little bit more would be more appropriate.
I will now turn it over to Claude Davis, our President and Chief Executive Officer, who will be giving our first presentation.
Thanks Ken and welcome everyone. We appreciate those who are in attendance and those on the phone over the Internet for our first ever First Financial Investor Day. So welcome. I would like to begin by thanking Ken, and the Head of our Investor Relations Group, all the finance team it’s here, all of our administrative group; they did such a great job in preparing us for today, so thanks to all of them.
I want to give a bit of an overview and then we’ll get into the specific topic presentations, but it’s hard to believe that less than four years ago we were $3.7 billion asset company with a market cap of $460 million, because of the franchise repositioning efforts we undertook prior to the financial downturn, the strength of our balance sheet and credit profile, we are well positioned to capitalize on some tremendous growth opportunities.
Today, we are $6.3 billion asset company with a market cap close to $1 billion. We have a much stronger presence in our metropolitan markets that we think leave us better positioned from a growth perspective. In the Cincinnati and Dayton markets and with a handful of others, and Indianapolis market, we are positioned as the largest community bank operating in these markets.
Above us are the money centers and the large regionals and below us much smaller community banks. This is the position we like and one that we think we can exploit to gain additional market share. Our mission statement focuses on building long-term client relationship. Throughout today’s presentation you will hear how we are fulfilling this mission and how in doing so we’ll drive asset, sales and revenue growth going forward.
This slide presents an overview of our business units and the services we provide to our clients and as you can see the operated straight forward community banking business model, with business lines consisting of commercial banking, retail banking and wealth management. These units are supported by seven functional areas that all contribute to the overall growth and strategic objectives of the business, while ensuring that we operate in a manner adhering to both the letter and the spirit of the many laws and regulations that apply to us.
Before our business unit leaders get into their presentations, I want to highlight a concept that will be new to those of you who follow First Financial. In our quarterly reporting of loan activity we differentiated between uncovered loans and loans covered under loss share agreements with the FDIC which is consistent with what has become the industry standard for companies like us, that have successfully participated in the FDIC auction process.
As part of our quarterly supplement, we also provide additional color as to what we consider the strategic and non-strategic components of the portfolio which is shown on the pie chart on the right hand side of the slide. In terms of how our commercial and retail business units actually manage their portfolios internally refurbish primarily on the strategic balances which represent client relationships that are serviced with a long-term view on growth and profitability.
These strategic balances consisted both uncovered and covered loans and the existence of a loss share agreement has no bearing on the way those relationships are managed. Additionally, with regard to covered loans that are reported on our balance sheet at a discount, our relationship managers handle these loan balances with no bias towards the mark.
In other words, the loans are managed based on the unpaid principle balance and the exact same manner that an uncovered loan is treated. As a result, some of the loan balance information you will see in the business unit presentations will look different when compared to the quarterly reporting that you normally see. However, for purposes of today’s discussion we feel this approach will give you a much better perspective on our overall recent performance and our strategic growth objectives going forward.
Throughout today’s presentations, we will touch on several key recurring things that serve as a foundation of our overall strategy. First and foremost, we have a values based people led strategy and the successful execution of our business model is built upon having well trained service oriented associates; a high caliber of talent allows us to execute on our mission of developing long-term client relationships. We take the time to understand their personal business and wealth management and then take a holistic approach to provide expert advice and sound financial solutions.
I mentioned earlier that we are positioned as the largest community bank operating in our key metropolitan markets. As you will hear from all of our business line executives today, we think our size gives us the ability to offer many of the same products and services as the larger competitors, but our local focus allows us to do so in a much more personal and responsive manner.
Our commercial retail and wealth management teams have developed a sales culture that is aggressive in building client relationships and achieving our growth objectives and we think the strong sales culture gives us the ability to not only retain our solid market share position in key metro markets, but also leverage that position for continued growth. Tony Stollings will also, who is our Chief Risk Officer will discuss what we think is the strong risk management program that we have in place and how it serves as a base for supporting growth objectives.
Our current strategic priorities are consistent with our long-term strategic plan and are clearly focused on sales and revenue growth. We are maximizing our efficiency management of our balance sheet and capital, rethinking in a shareholder friendly manner. And from a business development perspective, our primary objective is to attract and develop deeper client relationships with a strong focus on metropolitan markets I mentioned earlier.
Over the past several years we have made significant progress in building out our presence in Cincinnati, and we are working hard to leverage the 2011 acquisitions and build greater scale in Dayton and Indianapolis. We are continuing to enhance the delivery of our products and services and Kevin Langford our Chief Administrative Officer will touch on some of the key technology initiatives and how they are impacting our client experience. We also remain focused on streamlining our processes; analyzing profitability of the company and our branch franchise; it is an ongoing process as demonstrated by our leasing consolidation plan announced earlier this year.
I also mentioned on the second quarter earnings call that we are initiating a full review of our cost structure in order to ensure that we achieve our operating efficiency ratio target of 55% to 60%. As we execute our strategic plan, we are always also on a lookout for opportunities to deploy capital in a shareholder friendly and risk appropriate way, including organic growth, acquisitions and capital management tools.
Before I turn over to business unit leaders, I want to take a few minutes to cover a few aspects of our overall strategy and the impact of our company. First of all, I want to highlight significant change in the geographic focus of First Financial over the past several years. That would be interesting to show you how our banking locations have changed since 2004 as compared to our current franchise.
As you can see while we did have some scale in the Northern part of Greater Cincinnati 2004, a significant portion of locations were spread-out across rural markets in Ohio and Indiana where loan and deposit growth was going to be a future challenge. In 2006, we implemented our plan to begin focusing an increasing amount of resources in metropolitan markets that offered substantially greater growth opportunities. The first step in this process was to begin divesting certain small market locations where we thought branch profitability was limited and is well within 10 locations in 2006. Another component of the plan is we moved our Corporate Headquarters to Cincinnati in 2007 and expanded our operations to serve a greater part of the metropolitan area.
As most of you know, our metropolitan strategy had a significant boost with our acquisitions in 2009. First in July of 2009 we acquired Peoples Community which added 19 banking centers to our Cincinnati market and then in September of 2009 when we acquired Irwin we added 12 central Indiana locations and positioned us as the market share leader in the Columbus, Indiana MSA and added to our limited presence in Indianapolis market.
Most recently in 2011, we executed two branch acquisition transactions which significantly enhanced our presence in Dayton and Indianapolis, two markets that we have specifically identified in our strategic plan for future growth. Prior to these deals, we had commercial loan teams as well as a limited retail and wealth management presence, but this added the increased visibility and scale to allow us the marketing opportunities to grow our presence in all three of these critical markets. Throughout the business unit presentations you will hear from our executives on how this migration towards building greater scale is a key component of our strategy.
The second item I want to cover is our branding strategy. Initially, we branded the company in 2006; developing a branding mission anchored and been client centered as our business model and that drives everything that we do. Our strategy for creating the brand and raising awareness of what its stands for incorporates many elements. One of the more visual aspects of this strategy is our award wining sales and banking center prototype. Our banking centers were created to provide an open and inviting environment with strong visual merchandizing, helping clients relate to successful moments in their lives.
We also pursued targeted marketing in media relations initiatives. We were benefited from building strong relationships with media in our local markets, because we think we have a good story to tell, we have been a growth oriented organization that media has been interested in covering First Financial.
We are also highly engaged in our communities; targeted sponsorships and community involvement have build awareness. We continue to reinforce the consistent brand messaging while more importantly having a positive impact on the local communities we serve. Just last night, we sponsored the World Choir Games which were held in Cincinnati and another example of our involvement in support of the Price Hill Financial Opportunity Center which represents our philanthropic focus on improving financial literacy.
The results of our efforts are illustrated in the graphs on this slide; prior to initially branding in 2006, we commissioned independent research to determine baseline awareness of First Financial, in Ohio, in Indiana, which as you can see from this slide, was extremely well. Using consistent questions and methodologies we updated the study in 2009 and 2011. With the execution of our brand strategy we have experienced tremendous growth in our brand awareness exceeding 50% in Indiana and approaching 50% in Ohio; provided this growth in brand awareness need for our business. Throughout the business line presentations today you will hear today our executives speak directly to how the increased awareness is a key component of the strategies driving our sales and growth initiatives.
First to put this in the minds of our business prospects. Second, we have to expand our market presence and market share in our key metropolitan markets and provides opportunities for us to successfully deepen client relationships and deliver solutions across multiple business lines. And finally, it allows you to tie our brand with a differentiated client experience.
The final topic I will talk about and I turn it over to here Frank, is to discuss what we call associated engagement. As I mentioned a few moments ago, our primary competitive advantage must be our people. Highly engaged associates were aligned with our business are formerly likely to clients. Research [leads] specific businesses results to associate engagement moves with top quartile engagement achieved substantially lower absenteeism in turnover and conversely higher client engagement, productivity and profitability.
Our vision is to be employer of choice for high performing associates in the communities we serve, developing a cultural engagement allows us to attract and retain people who are committed to our company and our clients who do want to build their careers with First Financial.
In 2010, we engaged Gallup to facilitate what we called top key survey, designed to help us measure and develop associate engagement. The name top Q reflects our goal to have top quartile engagements at First Financials compared to other financial services companies.
We completed the initial survey in 2010 and then performed a second identical survey in 2012, allowing us to measure our progress in fostering associate engagement. In both surveys, we had a 95% participation rate which is 5% higher than the top quartile participant rate in the Gallup database.
As shown in the graph, the results of the 2012 survey, showed marked improvement to 2010. Gallup indicates an increase of [0.15] from one year to the next is significant and ours increased to 0.22.
Furthermore, not only did we improve our overall score but we also made meaningful improvement on every single survey item. One result that I thought would be interesting to share is on the survey item I give clients new ideas, our score on this item was a 84 percentile in the Gallup database when you consider the building client centered relationships is at the heart of our brand and people are competitively advantaged. I feel really good about the future of First Financial and what our engaged associates can accomplish.
Letting a cultural engagement and realizing it was loads of an energized workforce is a long-term proposition and we remain focused on the continual improvement. We are increasing our investment in management development because we recognize that managers are the key to improving associate engagement as well as we want to know that our associates are performing in a way that they need to have good feedback and our feedback and recognition elements are making improvements each year.
People want to be a part of something growth oriented and positive and we feel like we are creating an environment at First Financial that reinforces our mission values and strategy in a way that engages our associates and provides a roadmap for our continued success. I will be happy to answer questions at the end of the session and I will now turn it over to Frank who will talk about financial management.
Thank you, Claude and for those of you here in the room in Cincinnati welcome to Cincinnati. As this is our first ever Investor Day, we want to provide insights and information that is not generally covered in typical investor presentations or earnings calls. We will speak our operating results throughout the presentations without noting the accounting impact of acquisitions as Claude mentioned earlier.
And in general, the presentations are organized to provide an overview of the business strategy context to enhance your understanding of each business unit, a discussion of revenue generation and growth opportunities and an overview of opportunities for expense savings or enhanced operating efficiencies. As we begin, I would provide some broad context for the comments you will hear from our business leaders related to our revenues expenses, credit and capital levels. I’ll also provide a brief update on our previously announced efficiency initiatives and finally I‘ll share some insights into how we manage the business through financial reporting.
As it relates to our net interest income, I would like the obvious statement that we are operating in a challenging environment. Historically low interest rates and tepid economical recovery have created unprecedented revenue challenges. For our earning assets, competitive pressures create both of scheduled repricing and an opportunity for our clients to restructure their own balance sheets. This client behavior has led to a faster prepayment of earning assets and more frequently repricing as has been noted in recent quarters.
But it also created more opportunities for us to bid on new business. For the investment portfolio, the current low yield environment and the spread amongst security asset classes remains low, this simply means that asset class diversification does not compensate the investor for the relative increase in risk. We do expect this to change overtime and when it does, we would be prepared to take advantage of those opportunities in a balanced and risk appropriate manner. All these simply mean is that our focus needs to remain on a quality organic growth now more than ever if we expect earnings to grow.
On the liability side, the industry continues to experience historically low [loan] to deposit ratios. And we have noted in our most recent earnings release that we still have a net interest margin opportunity in our deposit pricing. I thought it would be helpful to illustrate this point in the next few slides.
Presented here on slide six is our CD pricing by term in a regional competitive landscape as of August of last year. Several noteworthy items are apparent. First, the range of pricing noted by the vertical line at each maturity date is wide. It illustrate if you observe the nine months maturity on those chart, the range in pricing rose from less than 15 basis points up to a 125 basis points. Within those range the median was about 15 basis points, while our First Financial was priced at about 65 basis points.
At that time, our pricing for last was made in the context of uncertain liquidity needs due to acquisitions but this quickly prove to be an opportunity for improvement based on the ultimate behavior of the client. In contrast to a year ago, noted on this slide is the current competitive landscape in CDs. Two important items to note, first the competitive range has narrowed substantially, the same nine months maturity from the previous slide now has a competitive range of about 25 basis points, down from approximately a 110 basis points a year ago.
And secondly, First Financial is offering rates just below peer median. A key observation is that longer maturity CDs that were originated just a year ago are now repricing into a lower target rate environment with no rational competitive behavior.
Moving on to non-interest income on slide eight, our opportunities are highly dependent on what our larger competitors do to react to recent regulatory mandates. Therefore, our best opportunity to grow fee revenue is to grow the underlying product volumes from which the fees are derived.
As a standalone item however, our wealth management business remains the single largest opportunity for fee revenue growth. As you will hear shortly from [Greg Haas] and Kevin Woodard the opportunity to grow within our recently penetrated metro market is significant.
We're also ever mindful of potential future products or services that maybe acquired or developed overtime and we will pursue them in a manner that is consistent with our overall strategy of delivering solutions to our clients.
Moving on slide nine, our non-interest expenses are impacted by recent branch acquisitions and should improve overtime due to the scale inherited in the branch network. You will hear later from our retail team about the capacity for growth that is in our retail network.
Our expenses may also be impacted by our future allocation of resources to invest in technology that broadens or enhances our delivery channels. And lastly, non-interest expenses will be favorably impacted by a recently announced [deficiency] initiatives, which I'll discuss in a few minutes.
Richard Barbercheck will discuss our credit process and position shortly, but I do want to provide an overview of our impressions. In the second quarter, we noted the credit quality volatility calls by large single credit behavior. We do not expect this risk to change. Our outlook remains cautiously largely to the unprecedented macro influences on the economy. As such the discussion around the returns are normal becomes difficult to answer as to what that even means let alone when it will occur.
Our capital position remains as it has been for several years, we are very well capitalized and have sufficient capital for meaningful growth. A preliminary analysis under its proposed [depository] rules also suggests that we remain well capitalized even under conservative interpretations.
I will now briefly discuss the process related to our efficiency initiative. Our process we utilized area specific key performance indicators and peer information to identify initial areas for opportunity. These KPIs are in all areas including sales production and operational areas, while we have used these KPIs historically in our financial reporting and management, this initiative when complete will establish a clear deadline for achievement.
Preliminary, we are targeting a 5% reduction in core operating expenses which should bring us close to our efficiency ratio target of between 55% and 60%. While some savings opportunities may take as long as 24 months to realize, the majority should impact full year 2013 results. We will share more information about specifics in our third quarter earnings release.
I thought it may be interesting to take a deeper dive into an aspect of our operations that really takes center stage. As Claude mentioned, our organization structure and support alignment helps us generate desired outcomes and deliver a better overall experience to our clients.
The finance team is an integral part of the support structure and has area specific and integrated personnel working with all areas of the bank. Some of the financial tools supported by this team include monthly management reporting, loan and deposit pricing models, a comprehensive profitability model, capacity utilization reporting and a full range of other ad havoc analysis and decision support.
Illustrated on this slide is the evolution of our analytics, reporting systems and processors dating back to only 2005, when we first implemented funds transfer pricing which is cornerstone of our pricing decision and profitability reporting. We are since evolved with this to comprehensive profitability system which has helped change pricing behavior on the frontline and we are presently continuing down the evolutionary path of managing to key performance indicators and driver based rolling forecast versus the traditional budgeting process.
Our financial reporting and management process is comprehensive and its effectiveness is bolstered by monthly meetings to discuss results, risks and opportunities in any move for [cost] correction to ensure that we deliver superior performance to all of our constituents. The KPI scorecards are broadly distributed among the business units to add another level of visibility and accountability for performance, and recently we began adding broader industry reference points for comparisons to our own results to ensure we are keeping pace with industry trends were appropriate.
A large three [wing] binder that I am holding is a comprehensive monthly reporting package that is distributed to the entire management team that contains details on the KPIs operating plans, performance and executive commentary on each business units and support area; copies of this binder are not available on our website.
And as I noted earlier, our forecast and planning process continues to evolve to a driver based rolling five year forecast versus additional budget. This allows us to see trends sooner, make cost corrections when necessary and also allows us to ensure that all aspects of a business decision are captured in future periods. For example, a planned staffing decision triggers a range of additional resources from information technology to employee benefits. Another example mean loan or deposit production triggers operational resources that impact capacity planning in the future. All of these related components are impacted by altering a single planning driver.
And finally, presented here is a graphic overview of how data evolves and the results through the organization. This also highlights the importance of the historic work we've done to create a strong platform from which to support the analysis, decisions and results that underpin what you will hear throughout the day-to-day from our business units.
I will now turn the presentation over to Doug Lefferson, our Chief Banking Officer.
Good afternoon. As Frank said I am Doug Lefferson. I am the Executive Vice President and Chief Banking Officer and I'll present the commercial banking overview.
I lead a team of 61 commercial relationship managers and 13 treasury management advisors. Our segments focus on the traditional, commercial and industrial borrower along with the related real estate borrowing needs, an investment commercial real estate group that provide solutions to a wide variety of projects. Two relatively new segments, asset based lending and equipment finance which have expanded the products available to our commercial borrowers and opened access to additional markets and our First Franchise Capital Group which will be covered at the end of my presentation.
Together, the commercial group represents over two-thirds of our strategic loan balances at 2.4 billion and 1.5 billion in deposits as of June 30, 2012.
Slide three highlights many of the products we offer within the various segments. We have offered a variety of traditional loan and deposit solutions for many years. Others were developed to meet growing demand for financing solutions within our markets and other products like Franchise we acquired.
On the other side of the balance sheet, our commercial deposit and treasury management portfolio is a key part of our strategy and product offering. We have expanded it to include our international wires, enhance the some of fraud detection and partner with third parties for improved payroll and online banking services.
Our management structure places decision makers very close to the client. Slide four highlights the regional president leadership we have in our key markets centered on the metropolitan markets of Cincinnati, Dayton and Indianapolis.
Others include the product and sales leaders for treasury management, investment and commercial real estate, our specialty finance group and franchise. Not included on the chart, but in a role to our commercial team and reporting to me is our credit administration group.
The senior leaders have 25 to 30 years of more experience in their respective areas and bring backgrounds from a number of regional banks. Our culture supports a client-focused approach that engages associates and leaders and is one of our differentiating factors as an employer choice.
This flat structure helps us in a number of ways, it facilitates clear communication of our strategic direction, eliminates multiple layers of management that might hinder decision making or responding to client needs and it assigns clear responsibility and accountability within the groups. We are able to collaborate together for creative solutions and draw upon our collective experience.
Our target client is presented for each segment. Our house limit of $15 million gives us some latitude in addressing the financing needs for clients. Our typical C&I borrower is a middle market client often too large for small community banks and yet may not get the attention and expertise of a larger regional bank.
The specialty lending asset-based lending and equipment finance were developed over the past 18 months as we assembled sales and leadership teams to provide solutions to clients where we had a gap in our product offering. Leasing has grown to over $30 million, ahead of our original projections and the asset-based lending product has provided structured financing for some of our growing companies. We also have the ability to execute interest rate swaps for our clients in regard to their commercial borrowing needs.
Our expertise with SPA products has helped create many opportunities for businesses while balancing our risk. We have been recently recognized as a national leader in SPA lending for the small bank group and last year, we were second place behind a large regional competitor for SPA volumes.
The graphs highlight some of the diversification of our portfolio spread across our three strategic markets. Investment in commercial real estate represents 49% of our loan balances, the other 51% is split between our C&I Group with 42% in C&I and occupied real estate and the remaining 9% split between our business banking and specialty and lending groups.
By industry, the largest segment is our real estate rental and leasing. You can see the rest of the portfolio is spread across many different industries and segments.
Shifting to our deposit relationships for a moment. We continue to emphasize this important part of our business, while being disciplined in product offerings and pricing. The cost of funds in the segment has been monitored closely and we have worked the cost down 19 basis points over the past year. While improving our deposit mix, we have increased our non-interest-bearing deposits to 41% of our total balances.
The competitive landscape in our markets is quite strong. Most banks have fully recovered from the downturn and are aggressively competing for the strongest credit. While the supply loans for credit worthy borrowers is quite strong, the demand is still muted. Many companies are still focused on deleveraging and paying down debt. Others appear to be cautious in this economic environment. As I mentioned earlier, the access our clients have to decision makers provides a clear advantage.
We recently won a new relationship from a competitor, when the relationship manager, the regional president, regional credit officer went to site visit following an initial call. The advance work for the relationship manager in sourcing the deal and discussions and tour with the client allowed the team to make the decision on the spot.
In the client's prior experience he was not interacting with local decision-makers which created challenges in regard to timing and request for additional information. The disciplined underwriting process and credit management approach allow for a risk appropriate balance. We remain diligent about establishing the right credit structure, guarantees and other credit enhancements when needed and regularly monitoring and testing of loan covenants.
The graph illustrates some of our recent loan growth. As we noted in the press release, we have experienced strong origination volume over the past year. However there was some significant pay downs of larger credits.
Slide eight summarizes some of the key competitive differences and advantages we offer when compared to larger and smaller banks. Overall, we find the space to be a good fit for a bank our size with a presence we maintain in the markets. We’re large enough to deal effectively with the regulatory environment offer a range of products and services that are competitive with larger institutions and have substantial capital.
Our model of significant local market based decision making is a key positive differentiator from our larger competitors. At our size, as a senior management team, we make conscious efforts to stay close to the client.
In addition to our CEO, my role, our direct sales team, our CFO, Chief Risk Officer, General Counsel, Chief Administrative Officer and others also visit clients. This allows us to strategically stay in touch with our clients, gain valuable insights and with our size be more responsive.
Clients have indicated they appreciate this level of interest and attention and it appears it would be another differentiator. In order to execute on our strategic priorities including asset generation and growth, the sales process and sales management process has been refined over the past 18 months.
We've instituted regular reviews of pipelines developed in in-house system for call tracking and pipeline reporting and broadened the visibility so that everyone from the CEO to the newest relationship manager can view their pipeline activity.
Weekly sales meetings in both the markets and company wide provide an opportunity for a discussion and follow up. This provides a structure of accountability and provides insight in to client needs and competitive trends.
The sales effort is also closely aligned with an incentive plan that aligns individual goals with the company goals for a balanced approach that rewards production, but is also mindful of risk and credit management. The incentives also focus on multi relationships, so the referrals are made to wealth management for retirement plan services or state planning for the principles, treasury management, the commercial deposit solutions and to retail for our work wise product bundle.
The maps on slide 10 really highlight the impact we have made since 2004, with the expansion of our banking center network through de novo offices and acquisitions. While loan production office may work for some competitors, the physical presence we have in these markets provides a distinct advantage to meet the needs of our commercial clients.
For example, as we grew in Indianapolis in 2009 and 2010 often we heard and allow to me paraphrase we like your attention and focus, but here you don’t have much of a presence with two or three offices. The acquisition of the banking centers in late 2011 increased our visibility and helped drive some of our results.
Our increased presence has also aided in recruiting talent in these markets. We continue to look for individuals that can produce and are looking for a value proposition that separates us from many of the banks in the market.
Moving from the strategic to a bit more tactical components of implementing the strategy, our recent initiatives center on achieving top quartile performance. We began this by segmenting sales groups as I detailed earlier and establishing sales targets and portfolio sizes that are in line with the best performing banks.
We have increased expectations in our production targets and provided more visibility and accountability to these targets. We have improved processes and aligned support and credit functions with the line of business offerings such as investor commercial real estate, asset-based lending and equipment finance to improve efficiency for us and the client.
I mentioned our sales management process and the pipeline tracking and reporting we do on a weekly basis. Slide 11 highlights the growth we've experienced in our late stage pipeline balances. These are deals that are going to work through the calling and underwriting process and have been accepted by clients and are moving toward the closing.
At over 300 million we expect to see steady originations from there. The overall pipeline has little over a billion in various stages, some in early calling, others were in discussions and information sharing is occurring. Our growth is occurring in all markets and the expansion in the Dayton and Indianapolis markets that are key part of the increase pipeline.
The treasury management structure and focus of the team was meaningfully revised this year. We've assigned a core group to work with existing clients, our regional advisors to expand relationships and provide support to those clients. This has freed our solutions advisors to seek out new clients in our key markets.
The Treasury Management Group is also responsible for managing our public fund deposits. While we maintain cool relationships with many government entities. We have strategically worked the portfolio down from last year. With our current funding position, strategically there is no need to pay up for these deposits. Now that the relationships are managed centrally, one advisor for Ohio and Kentucky and one for Indiana, we can better serve these clients with specialists and manage it more effectively
One important measure we evaluate is our client satisfaction, our in -depth client survey process was expanded last year to include all regions and focuses on our target clients with over $500,000 in loan and/or deposit balances. While we’re proud of our results, there is still room for improvement. The fact that nearly all are above the industry benchmark of 85% is encouraging, we would like to push it all above to 90%.
The fact that only 42% use First Financial bank for all their banking needs highlights a couple of items. First, we have the opportunity to grow relationships with our existing clients and second the fact that some clients were left stranded by their bank during the last crisis suggests that some may be worried of single banking relationship. This maybe more of an industry issue than just our bank.
The commercial team also completed their first year of commercial process review, a top-to-bottom multi-function review and collaboration effort that took a client centered approach to every step and function within our lending process. This helped streamline the entire effort, reduce the number of touches that occur and enhance the client experience. We have also adjusted our focus from five regions down to three and proactively addressed underperforming individuals and markets. These efforts will further enhance our origination ability while improving our overall efficiency.
Earlier this summer, we expanded in the threshold for loans process through business banking. Our model based evaluation standard documentation process has been working well over the last several years and is an efficient platform for meeting the credit needs of many business borrowers. Our expanding limit to $1 million, we expect to serve even a larger segment of our client base through this model and can efficiently deliver to new clients. With a straight forward underwriting process, this will better suit many borrowers that were previously evaluating under a traditional commercial lending model.
Furthermore, we expanded local credit approval limits, while still conservative, the increased amount and power of decision making by local sales and credit teams, improving as I noted before response time to the clients.
We have leveraged our commercial process improvement team to form a cross functional team representing all areas of the bank along with other client first teams in different business lines we should be able to better improve our time to market for new products, evaluate ongoing process improvements and better align our focus on our client needs.
With my 26 years at First Financial, my perspective is that we are in a best position that we have ever been in. We are focused on execution through expanding experienced and specialized sales force with products that meet our clients need and provide an appropriate return to our shareholders. We are also much more visible and recognized in our key markets.
Now I will briefly touch on the franchise side of our specialty lending. As a matter of background, the franchise group was acquired in 2009 as part of the urban FDIC transaction. Since the acquisition with the bank’s continued commitment and strong balance sheet the group is originated with $300 million in loans. It’s important to note that most of the associates dedicated this line of business have extensive experience in franchise lending across all disciplines, from sales to credit to documentation to portfolio monitoring. As such the franchise group is recognized as one of the premiere lenders in the specialty finance area.
Our segment focuses on delivering relationship driven, creative, tailored financing solutions to establish multi-unit restaurant franchisees borrowing needs include purchase of real estate and/or equipment, store models, acquisition of units from either franchise or another operator or partner buyouts.
Financial products include fixed or variable rate term debt in the form of the equipment loans, real estate mortgages, resold mortgages and building improvements or acquisition loans that may include any combination of the above.
Our franchise group represents a little less than 20% of the commercial strategic loan balances at $464 million as of June 30, 2012. In addition, the group services franchise loans for others in the originated and sold loans to manage our risk and exposure levels.
Real estate represents 42% of loan balances; the other 58% is secured by equipment and related cash flow from the businesses. This group is unique within our organization as there is a national platform to originate loans while it’s headquartered here in Cincinnati associates are located across the US.
Targeted concepts operate nationally or in diverse regions and have been systemically applied operating standards. Strong relationships with select and proven concepts provide a real-time understanding of operational initiatives and unit level economics. Concept support including franchisee approval and site selection and internal credit review of concept performance and collateral location are key to manage risk.
Geographic diversity and lending the multi unit operators is viewed as a positive when the companies buy appropriate risk mitigation parameters and tools to manage portfolio risk. We target 10 to 20 concept with a finite number of franchisees nationwide; examples include Dunkin’ Donuts, Wendy’s and Papa Johns. Pricing is generally 150 basis points over commercial loans given the nature of the lending product reported primarily by the cash flow of the business and secondarily by the collateral value.
Most of our loan products are in the form of term-debt with fixed rate pricing. We manage exposure risk, geographic, concept or borrower by selling loans, servicing retain on a select basis. Focus is on repeat business as first franchise capital is sold as primary lender to many clients.
The competitive landscape in the franchise lending segment is relatively strong and there are some new entrants. Major competitors include GE Capital, TCF Leasing, Banking and large national banks, such as Bank of America, Wells Fargo and Regions Bank. Community banks have resurfaced as aggressive competitors for real estate transactions and attempt to grow assets.
The amount of refinancing has increased due to historically low interest rates resulting in both opportunities and challenges. Opportunities for franchisees to achieve significant cash flow savings by consolidating and refinancing debt and challenges faced by lenders protecting its asset base, new store development had somewhat stalled due to the uncertainty surrounding the upcoming elections and the potentially significant impact of Healthcare Reform.
Despite the overall uncertainty and economy that has now fully recovered topline sales over the past 12 to 18 months at most of our targeted concepts have rebounded. We feel both our expertise and long standing relationships with many clients and our portfolio provides a competitive advantage. There is a strong top of mind awareness of our brand in the marketplace and our products are very competitive.
Our high level of our service and execution are keys to our future success. We are well positioned in this segment and we will provide individual attention to our clients consistent with the strengths of the bank and other commercial areas.
Thank you for your attention. I will now take a couple of questions at this point.
Joe Steven - Steven Capital
Hi this is Joe Steven from Steven Capital. Doug, how large will you guys go -- in your franchise running, how large will you take that or could you grow that to in the portfolio?
Well, as far as the ability to grow it, there is significant room to grow and fit into our balance sheet and our structure. I think strategically, you know, we look at that doesn’t mean it will grow to those levels, but there is certainly some ability for growth there. And once influencing the amount of growth that you get from here on out.
In the franchise sector in particular, I think the strongest influences of that are there is a couple things I think internally are again our own appetite for how big a piece we want this to be of our balance sheet, how it fits in with our capital constraints and requirements from a risk perspective. We can also make that as we mentioned from loan sales. So I think internally where we want to go is one piece and then I think the external factors are another piece that are still affecting everything we do, not just franchise, but all the commercial business.
The economy I am sure will be talked about, some people speak to that today. You know, it’s a tough read. Its good in some places, good for some of our clients, some are doing extremely well. In other cases, it’s still challenged. So it’s a real mix bag. So I think pressures on that industry and how that industry plays out, the fast food, quick service restaurant industry could impact there.
Competition is another thing, I mentioned, we see a lot more, this is kind of a niche business that some of our folks are more experience with in past relationship as well, we bought some loans from this before, we even acquired it. So we think we have a lot of more expertise in it, we see more and more people entering it, chasing the asset growth that a lot of people are.
Emlen Harmon - Jefferies
This is Emlen Harmon from Jefferies. You talked about the brand awareness, and given the opportunities I think kind of both organically and in terms of hiring. Could you give us a sense just as you look to grow the commercial operation; how much of an opportunity is there to just kind of increase the efficiency, are there existing lenders versus how much new hiring you can get kind of in the pipeline you talked to having 61 commercial lenders today and may be give us a sense of how large you like that group to grow overtime?
Yeah, that 61 is a mix serving all our different areas, but we think that in some regards I am very optimistic about what we can do in these metro markets, because one, they are good Midwest markets on their own, but two, we have the ability to take from some of our larger competitors, they have the ability to take market share. And we are a very good story right now; we have people that are interested in as far as attracting talent, so we have kind of shown a decent growth pattern, a good brand recognition doing some of these things. If you just take the City of Cincinnati for example, if you think about this building and if you saw our name on one of the skylights here on the building compared with P&C and US Bank and others that are here, those kind of things people start to notice us more, so everything that we are doing that help build the brand helps us get new business and recruit talent.
Chris McGratty - KBW
It’s Chris McGratty, KBW. You talk about our Ag business, how big it is and given the impact of the drought?
Yeah, Ag business is not really that I would say material part of our business, if we do touch it because of the markets that we are in and some of the history of the company as well; folks we have acquired throughout Ohio and Indiana primarily. So we do touch some of the Ag business because of the market that we are in and we have some lenders that are experienced in that; there is some real specific competitors in that line of business, so we just kind of doing it to serve the folks in that market, but its not a large segment of our business at all.
Hi, this is Claude, the biggest part of our business is in Northern Ohio and actually that’s had less of a drought. They have had some strategic rains overtime and I think that the overall business is about, a little less than $100 million.
Matthew Keating - Barclays
Matthew Keating with Barclays; Doug, I got appreciate the color on both the late stage commercial pipeline and the overall pipeline. In the past quarters, the pipelines have often been fairly strong, but really yet to translate into meaningful growth. Can you talk about when you loose loans from this pipeline is it more due to price or structure; how do you kind of look at that?
Yeah, in some cases I am not sure what we are losing in the pipeline, it’s a fact that some of the pay offs that are happening on the backend, due to competition, due to businesses being sold, is an example we have seen a lot of activity with a that, so changes in structure and things are going on in the economy. So well, I would say originations have been pretty strong and our pipeline pretty solid. We are still loosing some of that on the backend, so that’s more of what we are fighting.
Our pipeline, as I said is pretty solid. We look at that weekly, study it weekly, so maybe more than that, but it’s not a lot of fallout from the pipeline. There is always some which will be due to competitive environment, rate structure, things that we won’t don’t we’ll stick to our certain disciplines which have served us well.
So those are things that cause some of the fallout, but it’s not a pipeline I am always concerned about when you look at pipelines and you say [millionaires] these people putting down a lot of stuff, you know, lot of calls, it’s not going to materialize. That’s not what this is. We’ve been doing this long enough now. It’s a pretty meaningful pipeline. We do lose some because of structure or rate and things that we either not comfortable with or we are going to stick to our disciplines.
Matthew Keating - Barclays
Just one other question. Could you remind us how big the franchise portfolio was when you acquired it in 2009?
Yeah, it was close to about $700 million some.
Matthew Keating - Barclays
Is it 600?
Jon Arfstrom - RBC
Jon Arfstrom RBC. I will tried to ask questions you don’t have express an opinion but it’s about the election. We hear this consistently the election is holding borrowers back but the commitments are there but the lines are undrawn. What are your clients telling you? Are they saying, this just an excuse or did they say presidents reelected, they’re going to put their head in the sand and not grow. If [Romney] wins all the commitments are going to withdrawn and life is going to be wonderful and banking again. What was -- handicap this in terms of how you think it plays out regardless of the outcome?
Yeah, and often when we talk about it, it’s interesting because I don’t think it’s one way or the other. I don't think. Obviously it’s very important whether it’s republican and democrat in some sense but in lot of cases that’s not what they’re talking about. It’s the uncertainty of not knowing is another part of the issue whether you are thinking one the company is good or not or whether a change is good or not.
A lot of it is the uncertainty because we don’t know and obviously and that’s what our clients are telling us and obviously there is some big legislative changes that are out there and happening are happening with Dodd Frank, the healthcare reforms and other things that are beginning to impact our borrowers especially small-to-medium size borrowers, so they have some concern about that and they talk about that, they don’t know whether those are going to stay or whether those are going to change or get overturned or get revised, but they have some concern about that.
One of my concerns when we talk our group about going through the summer which would see a significant drop off because of the presidential election and other things in play. In some sense, we haven’t seen such a significant drop off yet our pipeline is still strong but our clients are talking about it, so I hope that gives you some flavor.
This is Claude again. I could add one Jon to that, a good example one of our board members is a large McDonalds franchisee and she talks a lot about the healthcare reform and the impact on quick service restaurants and the unwillingness of some to expand because they kind of employ such a larger number of entry level, some part-time is what’s going to be the expectation of them in a cost structure that results as healthcare continues to go roll out. And so we know it’s amusing a lot of new store production in that area as just one example.
Yeah, the franchise we have heard some talk about that we got another story from how they are addressing it which was taking time, they are taking time to address, the folks in all these small-to-mid size businesses are good smart people and they are running their businesses effectively and they are looking how the things are going to affect them. In the healthcare reform, we heard couple of our clients said we are major operators say Wendy’s and McDonalds they weren’t together but they are talking about sharing employees due to the impact of the healthcare. So those kind of they are taking it very seriously whether they would go to something like that, those are the kind of discussions that are happening. So we know it’s having, we know it’s out there.
Joe Steven - Steven Capital
This is Joe Steven again; the FDIC acquisition process we are is probably in the ninth inning in baseball terms. However, you guys developed a real expertise in the processing and collection of the FDIC loans and as acquisitions are not that readily available, is there a way for you to use your expertise as we have actually watched the FDIC’s balance sheet grow as they are keeping more and more and more assets on balance sheet?
I think I will kick that one to Frank or Claude.
Joe Steven - Steven Capital
If you answer that later I didn’t note this was the right time or not?
I am happy to address, this is Frank. You know really FDIC has managed the process overall I think it has been interesting to watch, they have done a fantastic job in making sure that’s stability in the system and our experience with them has been fantastic. You are right I don’t there are many opportunities for us to have a system transactions in our particular area, but I would say just generally we try to stay plugged into their current thinking and we are trying to be opportunistic around ways that we could further extract values on a host of fronts.
So certainly speak in either specifics of what the FDIC is doing because they talk a lot about doing different types of things, I would just say that we remain well positioned to take advantage of any opportunities that we think represent themselves they can add shareholder value.
And I would tell you from core business side one of the things we have developed lot of expertise like you said that is helping our core business anyway, you know, collections other things that are there.
So that’s a good expertise, its helping our core also. And I will go turn it back over to…
Thanks a lot. I know it’s not on the agenda right now. But just let’s take a quick 10 minute break. So audience members can get a beverage or snack or use the restroom and we will get back to it in about 10 minutes or so. Thanks.
Okay, let’s get back to our presentation. Our next presentation is going to be retail banking and I would like to introduce Jill Wyman, our Executive Vice President and Co-Chief of Retail Banking.
I am Jill Wyman one of the Co-Chief Retail Banking Officer at First Financial Bank and this first summary that you see here depicts an overview of our retail line of business along with our award winning prototype self center.
Our strategies are very client-centered approach that focuses on sales, household and revenue growth while maximizing efficiency and resources to all of our channels. We look at our clients very holistically so we can best serve them, my partner Jill Stanton and I [put] our leadership responsibilities.
Today, I'll be speaking about the banking markets and its support team and afterwards, Jill will discuss our lending products. To further expand on our responsibilities and structure you can see the breakout on this organization chart. Our regional markets and sales centers, our client service centers, insurance program manager and our retail development and administration report directly to me while you see the lending pieces rolling up to Jill Stanton.
Competitively, we believe we’re large enough with enough scale and flexibility to compete well with large banks. We are closer to the client with our flatter organizational structure and with the strong relationship focus we have the ability to make local decisions as well as tailor solutions based on our clients’ needs quickly and with attention to detail that we believe our clients need. We are also local and relevant in the communities that we serve so as to compete well with smaller banks. We have a strong depth of products and offerings, the efficiency of scale and our resources and capital and are very involved in all of the communities that we serve.
In 2008, we introduced the needs based sales process that’s focused on building relationship and has a structured sales tracking and incentive process, that are along the corporate strategies and it does have the ability to flex the strategies evolved. We have done full demographic and competitive studies to understand within a radius around each office, client needs and opportunities with the appropriate risks and return.
We have a product slip similar to a large regional bank but our flatter organization enables us to be closer to the client and increases speed of delivery and resolutions. Retention is a share of [valet] growth as well as organic growth and the household growth are important strategies in our core market with opportunity.
We have institute irrational process around optimization of our sales centers; we regularly assess sales center profitability, strategic fit opportunities to grow and adjustments needed. Our prototype is an extension of our brand increase the desired client experience; we take our clients on a journey of successful moments in life. Its relationship focused, (inaudible) and not just transactions, it is transparent and facilitates the environment for our needs based sales process. It is designed to be inviting, engaging and client focused. We are evolving our structure to be more client centered and specialized.
We have sales center managers who focused on driving the inside retail business upon client reach and building consumer books of business and services for household. They are developing and coach their teams to be successful with their sales process. Our business banking sales managers are tied to the sales center and focused on our site calling efforts specifically focusing on small business opportunities and bringing those back to the sales center.
Our sales associates have the flexibility to serve clients whatever their financial need. They not only work with clients in a sales center but focused on building consumer books of business and personal clienteles to up on calling efforts and focus on key sales behaviors that drive relationship.
I would like to share a sales success story for last month with you in a focused meeting with one of my regional managers. We discussed that half of the sales centers are performing very well and the other half are struggling, and we decided on hands-on approach to our client out reach sales program where he made 90 minutes appointments with all the sales associates, they did pre-call planning, utilized internal loan list and then worked side-by-side with his team on client out reach.
The results on new loan originations more than doubled in one month time. Finally, we streamlined our sales center operation and support work to have consistent process by office and markets, and to ensure our sales associates and sales managers are focused on sales and service are not other duties.
We believe this will not only enhance our client experience but keep us focused on growth. To all of the more focused roles were identifying and driving improved deficiencies to process tech and people. As we focus on growing our share valet and expanding relationships as well as acquiring new core clients it is an integrated sales approach for our associates and clients that they responded to positively. Both are engagement levels and satisfaction levels are aligned. Prior to beginning our retail sales process called Compass, our sales centre client satisfaction score was at 80%.
By implementing our consistent sales process, after one month in the sales centers, our clients felt like we're more knowledgeable, had better products and were more satisfied. What had really changed? For the sales process, consistency and the client experienced the point of sale.
When associate engagement is increased, it translates into our client experience and improves client engagement. The client considers anything, 0.15 or greater to be a significant growth.
The trends of the key performing industries we pay attention to have also aligned with desired results. Prior to implementing our compass sales process in April of 2008, we've identified much opportunity to improve our key performing indices.
Our sales process and daily focus on building client relationship has helped to drive increases in our cross sell and households, increase in our services per household, increases in our profitability for clients while at the same time, improving our household for sales center and driving revenue growth.
Prior to our implementation of Compass, our services for household were at 1.86. By focusing on share wallet growth as well as cross sell to new clients, we've made some dramatic improvements. Executing at a high level and focusing on key behaviors serves all constituencies well and enables us to continue to maximize our opportunities.
We currently have 229,000 total household and each product or service counts as one. We have a total of 21 available products or service categories to offer our clients based on their needs. To share how this number is calculated and what it takes to move the dial I wanted to give you an example. Let's say Family A has three checking accounts, two savings, a visa check card, and online banking.
That equates to four services for household. Three checking accounts equals one, two savings account equals one, the check card and online banking each equal one plus the total of four services per household. However, this family does have seven total accounts with us. Our focus to build the breadth of our core relationships has been important to move in this style.
Organic growth is a core revenue opportunity and we are focused on both asset and core deposit growth to grow and expand our client relationships. Our same-store sales are a good measure of our legacy footprint and how we are growing. You can see our same-store sales growth depicted for loan production and transaction deposit.
In 2010, we came up with a strong action plan to improve retail loan growth. At that time we were at 1.99 new loans per banking center.
Today we have more than tripled that number. Included in those loans are all of our retail loans and credit cards. Our goal is to earn more of our clients business across all financial needs and you can see by this penetration of products that growth opportunity exist. You can also see that some of our most profitable products have the strongest penetrations.
We got into our metro areas to expand our scale and to take advantage of the growth potential. Our metro areas represent continued opportunities to maximize and build core relationships especially in our new markets. This graph depicts the available capacity in deposits by sales center, we continually to look to evaluate and redirect efforts to realize our opportunities for growth and take proven sales processes and implement next to keep them at a high level.
Growing core deposits is an important retail strategy and we have specific initiatives that have contributed to deposit growth and profitability. We have a disciplined pricing approach that aligns with the 50 percentile of our peers. We reprised our acquisition deposit base accordingly. We focused on growing more profitable accounts and developing more profitable relationships through our compass sales process, enrolling that in to our new markets.
Our outbound calling efforts and client list which is part of our sales process that I highlighted earlier and we focused on reducing single service CDs and non core relationship accounts. As a result of these efforts, in our highest penetrative product, cost of funds has steadily declined in the percent of non-interest nearing deposits to our total has increased.
Our core transactional deposits increased 19% year- over-year driven by both acquisition and organic growth. We recently introduced as part of our compass sales process, a referral program for the client service centre. We anticipate great opportunity to further leverage this client channel by increasing closed referrals, increasing agent participation and improving processes with a future goal to adding services and accounts to point of sale.
We are currently averaging 5.5 closed referrals per agent per day. Approximately 70% of closed referrals have been in retail loan products. Our branching strategy is inclusive of 5 components as part of our assessment process and is a balanced approach of growth and reductions around expense. Expansion of our current footprint with new prototype sales centers based on geographic fit and opportunity, we've recently opened our new Kenwood sales center in the Central part of Cincinnati and our downtown location here at First Financial Center and we are planning a new location in Anderson Township in Cincinnati some time next year.
We've through acquisition filled in our Indianapolis and Dayton Metro footprints as well. Relocation of key sales centers where opportunity exists. Through our acquisitions, we have some offices that are not conveniently located and there is an opportunity to relocate and grow revenue. Recently we relocated our Montgomery office and our downtown Columbus Indiana office and have plans to relocate our [Hixon] office in Northwest Indiana later this year.
Rationalization of sales centers, where there is limited opportunity for poor fit, all consolidation of offices when fewer can sufficiently serve our clients needs. This year we have consolidated 11 sales centers and at the end of August we will close five remote locations.
And finally we review profitability and capacity utilization monthly, identifying revenue opportunities missed or expense reductions needed. We developed strategies for the centers and monitored results for improvements to achieve financial metrics or take other appropriate actions. Through these efforts of retail operating expenses have declined and our efficiency rates have improved.
We continue to utilize this disciplined branching approach as we work to maximize location opportunities. We have flattened our client service centre organizational structure to place all managers closer to the client. All external costs from our sales centers are received by the client service centre. We have specialists in place to accommodate and resolve more complex needs as well as daily needs that a client may have with great urgency.
We have defined processes that also handle any sales centre internal questions or business client needs. This allows our associates in the centers to focus on sales and service. Key performing indices determine our efficiency or the need for adjustments.
At this time, I am going to turn over the podium to Jill Stanton, my counterpart.
Thank you, Jill. As previously mentioned I am Jill Stanton and I'm going to walk through the various retail lending lines of business with you today. The front slide illustrates the type of loans originated through the retail channel along with the current portfolio composition and revenue contribution. We have just over $1 billion in retail loans which are largely in home equity and mortgage.
As you can also see close to half the loans are in the Cincinnati MSA area with the rest closely split between Northern Ohio and Central Ohio as well as Indiana. The first area that I am going to talk about is the mortgage lending line of business. This product line is somewhat new under its current strategy. In 2007, we made the intentional decision to exit the seller servicing business and outsource all processing, underwriting and back office staff due to the high overhead and a low origination volume we had at the time.
As the mortgage landscape had changed quite a bit since 2007, in 2009 we made the decision to rebuild our back office to allow us to originate on a service release basis and to build our loan origination team.
Today, we offer a complete product offering to meet the needs of our target client base and allows us to competitively effectively compete in the market and be a true mortgage player.
Our focus on origination has been to build a high quality purchase platform. The strategy is twofold. The first out of necessity due to the secondary servicing portfolio that we sold in 2007, and the second our belief in the importance in purchase volume to ensure long-term revenue stability first as refinances more volatile production activity.
Also this strategy will allow us to be well positioned to outperform our peers as interest rates thrive and refinance activity slows. We've focused on building relationship with realtors including marketing agreements with large real estate companies. As an example, we have some agreements with the largest real estate companies in Indianapolis, Dayton and Cincinnati. A few of these are very new, but our longest agreement just reached the one-year mark and with that company, we were able to move from their 17th lender in that company to the number two lender.
We believe, when executed well, these relationships are extremely valuable in building our name in the realtor community and is a key mortgage player. In addition to having a more consistent activity, the purchase volume focused, it also provides a higher percent of new households to the bank. This provides a low cost structure for new households and allows us to expand the relationship beyond the mortgage loan.
We've focused heavily on improving our client satisfaction score and in the last year have moved from slightly below 80% to just over 90% client satisfaction. We've focused on building a strong origination team with a disciplined approach to hiring top talent. One key to attracting top talent is being able to close within the timeframe set from realtors providing those leads to our loan originators.
Today we average 21 days from application to close where our peers averaged 46 days. We believe because we are exceeding this and in treating these refinances differently than our peers that we are making a name for ourselves that will be recognized long term.
As the graph illustrates, we have really bolstered MLOs by hiring and retraining top talent that can bring purchase volume. Our mortgage portfolio has grown as a result of increased focus in the business. We primarily utilize and originate in itself; but will periodically hold non select or select non-conforming products in our portfolio.
Recently we introduced a new product called Simplified First. The loan program retains the high credit standards with a minimum FICO of 700 but reduces some of the secondary underwriting requirements that bring little value from a risk perspective. To provide an example today a borrower making a non-customary deposit of $500 will be asked for proof of deposit and an explanation. This is a borrower with $10,000 in income. We believe this proves frustrating to the clients and this modification allows us to serve the client more efficiently and it makes us more efficient as well.
The next area of focus in the consumer lending line. Our consumer lending products offering consist of home equity lines and installment, credit cards and installment loans. Our integrated branch sales efforts have resulted in increased originations since 2011. We continue to increase our sales focus in areas and has stepped up outbound phone is still too earlier.
In June our originations reached an all-time record high. We also originate credit cards through the retail channel and since upgrading our system and our product offering in 2011, we have increased our focus and tripled our sales. Referring back to slide number 2 that showed credit cards as only 3% of our assets, but represent 8% our revenue. This is a result of a greater focus on sales and newer cards that have lower balances that generate interchange income.
We believe we can leverage our brand awareness and target consumer products and drive sales. Opportunities exist to grow portfolios and expand our product suit if economic conditions and strategic markets improve. Market had wins and slow economic recovery with depressed real estate values and consumer deleveraging. However we are positioned well when the economy and the mortgage markets recover.
To capture new sales through marketing and our branching strategy benefits from increased lying utilization to maximize our integrated sales approach to efforts to grow loan balances and to execute upon our tactical sales effort to cross sell additional loan products.
As displayed on the graph our net interest income increased slightly, year-to-date 2011 to year-to-date 2012. The originations were strong showing a 21 % increase. These new originations should allow us to grow net interest income going forward as aligned and increased utilization rate.
As Doug Lefferson mentioned earlier, in relation to the commercial world, business banking loans are also originated through the retail channel by our business banking sales managers. We find this to be effective and low cost originations for channels. Our focus on clients, we focus on clients who are underserved by larger institutions and desire greater attention from their banking partner. We recently increased the relationship from $0.5 million to $1 million which we believe will allow us to further increase the origination volume through this lower cost and more efficient business unit.
Business banking loans originated are typically priced at an attractive spread over traditional commercial loans. Both balances and revenues have increased significantly year-over-year as we made the strategic initiative to grow our business banking portfolio. Also in the pie chart, you will see the split of balances distributed. One of the areas of focus for us has been in the SCA loan area. Given the capital advantage and the benefits it provides to the clients for loans that may not need traditional financing.
We experienced significant success with the use of the SCA program. In 2010 we were recognized by SCA as a Small Business Lender of the Year. SCA awards two awards; one for small bank category and one for large bank category. The award is based on various factors such as overall volumes, increasing volumes and loss and delinquency performance.
We have continued this momentum and in 2011, ranked number one in the Southwest Ohio market in dollar volume and annual increased volume ahead of many of our larger competitors. With our momentum in this area, we see business banking as a key way to continue to increase loans in the retail channel. We still have a great deal of untapped opportunity to increase services for households with our business clients that we believe we have the proper strategies to do so.
Our disciplined credit approach for all regional products has been reflected through our improving credit metrics of originated loans. This slide provides a snapshot of our average loan size and credit metrics for newly originated loans versus our total portfolio. 2012 year-to-date originations reflect a greater larger loan amount as well as stronger credit portfolio when compared to the total portfolio. One area that seems to get a lot of attention is with TSE repurchases. We have experienced minimal repurchases which allows us to stay focused and not be tied up with litigation and disruptions.
In summary, the retail line of business is extremely focused on growing revenues with a disciplined and focused approach. We will center our attention on attracting and retaining clients and building market share by focusing on the full relationship and the increased client satisfaction in all type client touch point. We are intent on increasing valet share through our developed sales profit of sales for banker, cross sales efforts and same store sales.
We will leverage our increased brand awareness and visibility as well as capabilities of our prototype banking center. We will continue to review sales centers to optimize the retail delivery network and allocate resources in markets providing greatest opportunities for growth. And lastly, we will maintain a disciplined cost structure and rationalized sales center where growth potential is limited.
And that concludes my portion, so I can open it up for a few questions for Jill and I.
Kenneth James - Sterne Agee
Kenneth James from Sterne Agee; I have a question on the slide; you noted a 10% I think year- over-year increase in overdraft income from the deposit; I just wanted to – it’s rather unusual, it gives more strictly volume of new customer or if you change the way you process some of your top rated products?
I think its combination of several things; one, new account growth and then also I would say more disciplined approach to waivers, so I would say it comes from multiple areas.
We haven’t changed how we pay to that if a relationship there.
Kenneth James - Sterne Agee
And then on the opportunity what’s on the slide of opportunities for mortgage portion; what does that imply in terms of your appetite for putting mortgages on the balance sheet?
We do have appetite and we have concentration limits that we set and we have quite a bit of room within that, so at this point, strong assets, good loans, we do have an appetite for.
And I would mention just the products that we are using to put on balance sheet. The products we’ve made available to portfolio.
We have. Historically, we use ARMs, one, three, five year ARM products and at this point we do have 10 and 15 year fit that we are allowing to go in the portfolio which has not been something we have typically done, so that simplified first product that we talked about that can have a 30 year amortization through the one, three, five or 10 or 15 fix.
Just a quick question, appetizing kind of product for customer; what’s the biggest opportunity there; what do you think you guys kind of have a gap or what are the next products that you are really pushing out to those retail customer base?
Are you speaking of new product or the products that we have that……?
I would say the existing, that the existing products that, where is your greatest opportunity to kind of add on to that?
It would be more on the loans side. Just with the kind of because since origination of this company, it has been a primary focus and we kind of laid out it why, if you look at our houseful, its under 3% and have a mortgage with them. There is a secondary one you want to talk about?
The question about the prototype banking centers; how many do you have now and what’s the average cost to operate one of the resources average cost for branch?
I said some of that in the earlier presentation, but we have been scaling our prototypes that we have our full size prototypes in our hub areas and we are now scaling back to smaller prototypes so we can go in quicker at less cost and be satellite type offices for us. Let’s say, I would have to say that we probably have three, four, -- 34 prototypes, I would say – the prototypes and some we launched in 2007 in addition to creating a prototype, we want to create a brand of experience for our clients so we have been rebranding through a process we call FIT, which is our Facility Improvement Team and we bring them all of our banking centers, so we have a consistent experience for our clients.
Matthew Keating - Barclays
Matthew Keating, Barclays; just on that sort of branch strategy, a competitor in Ohio, just recently looked to in store branches; what are your thoughts on in store, whether its supermarket etcetera in future and do you see that as a possibility or how are you kind of committed to closing underperforming branches and have seen more of these prototype units?
That is our strategy today. However, you know, we have some Walmart locations that we feel really add scale and scope in our Indianapolis market and then we have some grocery store banking centers in fact one of them because of its size and scope and the profitability, we are opening a small new prototype and I think I referenced in our in Hixon in Northwest Indiana.
(Inaudible) can you compare the profitability of the prototypes, the normal ones, the smaller ones of the existing branches?
We’re just getting ready to build our smaller one. Our Hixon office will be our new one. The last time we compared it, we looked at approximately 20% lift when we build a new prototype facility. There is a lot of wins with that. The lighting; the green aspects of the building, beyond, its not only a lift for our client, but is an exciting place to come into, it’s a great lift for our associates.
This is Frank; I would also add that the return on expectations for any of our offices don’t differ, so prototype versus non-prototype office have the same financial return expectation.
Our next presentation is going to be wealth management and beginning that will be Greg (inaudible), Senior Vice President of Wealth Management Group.
Good afternoon. It’s great to see everyone here today and this is certainly a pleasure. My name is Greg Harris and I serve as one of the co-leads for the wealth management business here at First Financial Bank. Today, my colleague Kevin Woodard and I are very pleased to provide an overview of the wealth management business.
I will begin with our business objective move to an overview of the leadership team, provide a brief discussion on the evolution of our business and give a quick financial summary and then I will end with a summary of the competitive landscape. Kevin will discuss our target client and then provide an overview of our three primary business lines, wealth advisory, retirement plan services and brokerage and then Kevin will close with a summary of our strategic plan going forward.
I would like to direct your attention to the second slide which contains our wealth management business objective. Our objective is simply to be a regional, a leading regional wealth management firm. By providing comprehensive wealth management services and fully integrating with the commercial and retail lines of business, we intend to deliver the client the experience that will further distinguish First Financial as a premier relationship company.
Slide three provides an overview of our leadership team at wealth management. As I stated earlier Kevin and I serve as co-leads for the business. We delineated the reporting structure so that the sales and service or our client interfacing functions share a singular report line. Additionally, our back office and product manufacturing areas also follow a single report line. We believe this structure best provides for client focus and an efficient operation.
Slide four illustrates the evolution of the wealth management business. Historically, we have offered products and services to the traditional lines of business including trust, insurance and brokerage. We also manufactured asset management products mainly our proprietary mutual funds or the first funds for distribution outside of the First Financial client base.
This two pronged strategy was intended to serve our existing trust and investment management clients and simultaneously grow the asset management business through external distribution. Overtime this strategy proved difficult to consistently execute and resulted in fragmented outcomes. As a result, we have been busy within the past three years reshaping the wealth management business for future profitable growth.
We began in 2009 by exiting the mutual fund and insurance agency businesses to better focus on our core. The integration of the Irwin acquisition provided an opportunity to streamline our operations to ensure scale and ongoing profitability. We also made great progress on integrating the all First Financial Bank lines. This has provided opportunities to better the leverage existing banking client relationship and increase cross selling activity.
And finally, we continue to refine our investment management process. Work has already begun on the construction of disciplined risk based asset allocation strategies. We believe this approach serves many of our clients well and provides the organization the benefits for consistency, scale and competitive product. While we have more work to do, we believe the progress made within the last several years has positioned us well to gain market share, specifically within our growth markets of Cincinnati and Indianapolis and Dayton.
Slide five illustrates the financial impact of the wealth management business to the overall bank. The purpose of this presentation in an order to represent the Wealth Management Group’s true impact to the bank, it’s most accurate to compare year-over-year results due to the various seasonal factors that may impact our business. As stated on the slide, wealth management represented 28% of First Financial Bank’s non-interest income for 2011.
Additionally, the pie chart on the lower right hand corner of the slide shows the breakout of revenue of the wealth management business lines. Wealth advisory which is our traditional trust in investment management business is clearly the most meaningful as 76% of total revenue. Brokerage is second at 15% and retirement plan services is third at 8%. All other revenues are derived primarily from custodial services.
Slide six provides a summary of competitive landscape. We see a primary competition either from other regional bank wealth management division or small [boutique] investment firms and registered investment advisors. As it relates to the bank wealth management groups, particularly the large and regional players, we feel that our deliberate focus on personal service combined with our comprehensive capabilities positions us well to the underserved clients of these organizations.
In fact, much of the competition continues to raise the minimum asset targets for clients, also moving million dollar clients to call centers for servicing. We believe this provides us a great opportunity to gain profitable market share. Smaller boutique firms generally provide competitive investment management process. However, they typically lack the comprehensive service offering. We feel that our broader approach to investment management, expertise within trust administration, our deep financial planning capabilities and the strength in the First Financial bank brand positions us to complete with business space.
I will now turn it over to Kevin Woodard to review the detail of each of the wealth management business line.
Thank you, Greg. As Greg mentioned I will be discussing the business lines of wealth management. As we look at slide seven, we see that wealth management has three main business lines wealth advisory, brokerage and retirement plan services.
Let’s start with an overview of wealth advisory. Wealth advisory services entail traditional trust administration, stake settlement, financial planning and investment management. The target clients for wealth advisory are high net worth individuals, the emerging affluent and institutions such as community foundations, not for profits and municipalities.
The focus line of business partner for wealth advisory is the commercial division. The business development contacts are business development officers, trust officers and portfolio managers. As of June 30, total assets managed are approximately $1.7 billion for a total of approximately 3,200 clients. As detailed in the map road of wealth advisory services section we have trust offices with dedicated personnel located throughout our footprint.
Our office locations are structured to be as close to the majority of our clients as possible. There you will see the following locations as indicated by the red dots. In Ohio, we have a location here in downtown Cincinnati in order to compete with some of the larger bank competitors. We also have locations in Westchester Union Center, Middletown Town in Hamilton where many of our clients live as well as the location in this line of inward area.
In Indiana, we have trust offices in Columbus to share (inaudible) North Manchester; also we have a trust office in downtown Indianapolis to assist with our growth strategy of increasing market share in metropolitan markets. The portfolio management team is located centrally here in downtown Cincinnati.
Next on the slide you will see second business unit brokerage, which is the delivery of retail brokerage services. We utilize Raymond James is a brokerage platform which allows to efficiently manage the business. Our target clients are the mass affluent with investable assets of $25,000 to $250,000. This is the wealth management initial entry point for many of our clients, a growth or asset based further will require more complex solutions such as trust administration; we will transition them into the wealth advisory unit.
With this business unit, we partner retail banking network but our financial advisors are also expected to generate their own leads in addition to what is sourced through our existing client base. Each of our financial advisors are employee of First Financial and a register representative of Raymond James. Total assets within the brokerage book of business is approximately $750 million with approximately a total of 7,400 clients.
As you will see in the map below our financial advisors are spread throughout the footprint. In Ohio, we have advisors on Westchester Union Center, Antwerp, Middle Town and Dayton. In Kentucky, we have advisor in Florence and even in Indiana we have advisors located in Columbus, Indianapolis, (inaudible) and North Manchester.
A retirement plan service is probation of fiduciary and administration services for 401K pension another qualified plans. For the provision of services, First Financial has teamed to a selected plan administration specialist for record keeping in related services while First Financial is able to concentrate on investment fiduciary services and client servicing. The target clients are small to midsized business which range with plan sizes from $500,000 to $15 million. The focus line of business partners the commercial division, the business development contacts are the new business officers and retirement plan services officers.
Total assets within the [RPS] line of business are approximately $188 million with a 106 clients. We have retirement plan services personnel located in Indianapolis, Cincinnati and Hamilton. And I press the right button, I was impressed. As Greg mentioned, the wealth advisory line of business is the largest revenue generator for wealth management specifically generating 76% of wealth management revenue. As such is the core and primary business focus of the wealth management position.
The key aspects of the wealth advisory business line are the length of client relationships with most being trust relationships spanning generations, the recurring asset based fees that are not tied to other banking operations and the limited incremental capital requirements while its for lending and other banking operations. We believe that we are well positioned in our markets to provide comprehensive wealth advisory services to the currently underserved segments in these markets.
As discussed earlier, wealth advisory services are traditional trust administration, financial planning, investment management and state administration services. We believe that both in the growth metropolitan markets and traditional community markets opportunities exist for the provision of wealth advisory services to underserved client segments.
In the metropolitan markets we are targeting the underserved emerging affluent that do not receive the level of services from our large bank competitors or local advisory and brokerage firms.
In the traditional community markets, we maintain personnel to ensure that we are viewed as the remaining local bank with the capacity to provide the full range of wealth advisory services. We have performed very well as of late with total revenues increasing 8% year-over-year while expenses have reduced 20% over the same timeframe.
As Greg noted earlier, one of 2011 initiatives was to focus on operating the business more efficiently which we’ve accomplished.
Moving on to slide nine and the retail brokerage line of business, as I mentioned earlier, this is the delivery mainly through referrals in the retail banking sales centers, a brokerage services through the Raymond James brokerage platform. The financial advisors provide full service brokerage services with a focus on those clients with investable assets of less than $250,000.
In 2010, the compensation structure for financial advisors which restructured to better align with and reward proper production levels while ensuring that lower producers do not damage the efficiencies of the program.
As you can see by the bar chart on the slide, the revisions to the compensation structure resulted in a 17% decrease in expenses for the brokerage business. Additionally, during the same time revenues increased 8%. So we believe that the model we utilized of incenting our financial advisors stay strictly on their production was effective.
Now let’s discuss retirement plan services provided by First Financial. We feel this is an exciting area of opportunity for us. The focus of this business line is 401K fiduciary and administration services. We recently completed the transition of the accounts to our new model of delivery. Specifically, we transitioned to the model where First Financial provides investment fiduciary area services as well as the feet on the ground, plan sponsor and plan participant interaction while administration and record keeping are provided by highly qualified plan administration partners.
This team approach permits us to focus on our strengths while also delivering a first class record keeping platform and services. As you can see from a growth trends, this is an area of growth and opportunity for the bank; total fees are up 15% in 2011. Assets under management are up 47% since 2010. These services present a perfect cross sell opportunity to our commercial clients and often service the first additional service provided to these clients outside of the already provided commercial services.
As an example, we recently closed $4 million 401K opportunity and partnership with the commercial division. We are also excited about the opportunity in the area due to the recently effective Department of Labor Regulations regarding disclosure by service providers to plan sponsors and plan participants. Finally, there will be clarity for plan sponsors and participants regarding the actual fees embedded in and part of their 401K plans. First is approach 401K services on a fully disclosed basis and delivers that in an open architecture format, this clarity will help as we demonstrate the prospects the value for cost of the services provided by our retirement plan services group.
In summary, the strategic plan encompasses many of the points and concepts that I have already touched upon. Now we believe separates us from our competitors as our sales and service culture combined with the experience and knowledge of our trust and retirement plan services staff all placed within the scalable model. We realized that success in the wealth management arena is driven by relationships, specifically deepening your current relationships and working to create new relationships.
Our people led strategy is the proper focus in executing relationship based strategy. As you can see under initiatives, this focus is yielding sales results in 2012, through June new client assets are up over 100% from the same period in 2011. We will continue to execute our strategy awaiting the proper mix of personnel in our metropolitan markets while looking to take market shares from our larger bank competitors.
In addition, we will continue to deepen our referral and cross sell relationships with the commercial and retail divisions of the bank. All of this will be accomplished while remaining focused on cost containment.
So I think now Greg and I will open it up to a few questions.
Christopher McGratty - KBW
Can you talk about the margin you get in each of these businesses today versus long-term aspirations?
Well if you look at, and I think this is come out both through Frank’s and Claude’s statements. We are a division that’s like rest of the division; we are working towards our target expense ratio. So our target expense ratio is 55% and we have taken great strides this year, the year before and the year before to really track towards that expense ratio. So that is our target and that’s what we strive towards everyday both from a revenue and a cost containment perspective.
The presentation was so good only one question.
Okay with that why don’t we take our regularly scheduled break and help yourself to a drink or use the rest room and we reconvene in 10 minutes to 15 minutes.
Okay. Let’s get started with our next presentation. Our next one would be Kevin Langford, our Executive Vice President and Chief Administrative Officer who is going to talk you about technology and innovation.
Thanks Ken and good afternoon. As a client centered company, we believe in a relationship driven and integrated approach to serve our clients with all the products and services necessary to successfully manage his or her financial life.
All of our associates whether client facing or in a support role need to have a clear line of sight that our clients need and under their role in delivering a high level client experience.
We view technology as an important tool and enabler, both for our clients and for our company. It adds simplicity, functionality and convenience for our clients while still spinning money process and creating efficiencies for us.
As clients have become far more technologically savvy and perform an increasing number of banking transactions through electronic means, offering a robust suite of technology options, that’s not no longer cutting edge, but rather a prerequisite to attracting and retaining clients.
We continue to make strategic investments in technology and systems that are aligned with our client centered business model and deliver that value added experience for our clients that exceed their expectations. On this slide, you will see what you have already heard from others today.
The clients are at the center of our company strategy. Obtaining primary and secondary research about our clients is an important component that drives greater understanding of their expectations. We are leveraging more enhanced data and analysis to redefine and refine our target client segments through a deeper dive into lifestyle, banking habits and channel usage, adaptive relationship, propensity to buy, profitability and other behaviors that are indicative of what’s next on their financial radar.
Obtaining and analyzing data at such a detailed level allows us to know far more about our clients than ever before. It ensures that our products and services remain relevant and aligned with our target segments and allows our associates to provide expert advice to our clients in a timely manner. It also supports the early identification of product innovation and delivery channel opportunities.
Knowing more about our clients also create an awareness of geographic market variances, so appropriate strategies are developed and applied to grow within our target segments. It also identifies client retention strategies and programs for existing clients such as attrition modeling and relationship pricing.
And finally it ensures that marketing and brand messaging are aligned and resonate with our target segments. How are we using most sophisticated client data and enhanced delivery channels to improve our value proposition and client experience. Over the next few minutes I will highlight current and ongoing initiatives underway to further our corporate mission of exceeding our client’s expectations.
We are investing in client facing technologies to offer more competitive and comprehensive online banking experience. In the third quarter, we are launching a new online banking platform that enables clients to customize our online banking experience, initiate person to person payments through email or text message and aggregate all accounts in a secure personal financial management platform called Panorama for budgeting, analysis and planning purposes.
Furthermore they will be able to deposits checks through a service called Snapshot in which they email our text a photo of the check to the bank. As we compare our online banking and bill payment penetration to our competitors, while we have seen significant growth in these convenient services, we also had a tremendous opportunity to further penetrate our existing client base as well to attract and retain new business helping to drive sales and revenue growth going forward.
The proliferation of mobile phones and tablets has created client needs and opportunities to further differentiate the First Financial brand of banking and enhance the client experience. We are seeing exponential increases in mobile traffic to our website and are hearing the articulated need from our clients for more robust mobile apps and access.
In fact mobile traffic to our website is up 187% year over year. o deliver what our clients are asking for, new mobile apps and banking options are included with a the new online banking rollout in the third quarter. The new mobile apps and platform will support full mobile banking including mobile transfers, mobile bill pay and directions to the nearest banking center or ATM for our on the go clients.
While clients desire to access their funds 24/7 to the convenience of nearby ATMs is no longer a new concept in banking, their expectations of ATM capabilities have increased substantially. To accommodate their needs, we have begun deploying new image capture ATMs across our footprint.
By year-end we will have deployed 134 of this new units. These ATMs will deliver enhanced functionality such as touch screen technology, extended cut-off time for deposits and will accept a combination of image checks and cash. To drive greater sales and awareness, the new technology also enables targeted marketing and brand messaging on the screen.
Clients will enjoy the same look, feel and functionality to the deployment of this new ATMs across our footprint. This supports a consistent and branded experience for all of our clients. As this new ATMs are capable of performing many of the same transactional functions as a banking centre location, but at a much lower cost the new units will deliver greater efficiency in our operational processes.
Finally we will partner with (inaudible) in 2013 to begin driving our ATMs and to ensure that we achieve industry-leading capabilities. Payment systems continue to evolve and First Financial is evolving along with the industry. We have made recent investments in our online and card platforms all focused around improving our client’s experience. We still have opportunities in classic payment Systems technologies such as bill pay, debit card and credit card penetration to our existing clients and are pursuing these with appropriate efforts.
Additionally we are working closely with our strategic partners like Visa in Q2 to follow developing trends like near field communications, the Square Starbucks alliance and the strategic deployment of general purpose re-loadable cards.
Our intent is to utilize the R&D strength of our partners and become a fast follower of industry proven technologies. As you would expect, we’re closely monitoring emerging technologies such as Digital Wallet and determining the strategic value as user preferences and best practices if all.
As highlighted earlier by Joe (inaudible) our sales center continue to be an important channel for our clients, but now with a much stronger focus on sales as opposed to routine banking transactions.
As we study client traffic and in store transactions volume, we continue to refine and right size our sales center prototype based on sales and revenue opportunities within a particular geographic market.
For example, we've developed many prototypes that incorporates our brand experience but also reflects new channel economies as we continue to work on maximizing our operating efficiencies. An example of our mini prototype is located here in downtown Cincinnati at the street level of our corporate headquarters.
We understand the criticality of making our sales center scalable to ensure we achieve an appropriate return on the investment. Since 2008, we've opened 13 new prototype sales centers in premiered locations throughout our footprint.
These sales centers leverage our brand to generate great awareness and drive increased sales. We also continue to evaluate high traffic desirable locations in key growth markets throughout footprint.
Furthermore, over the past four years, we’ve implemented a strategic facilities improvement plans. Based on ROI model, sales centers were prioritized for remodeling to included key elements of our prototype. Today approximately 75% of our sales centers have been remodeled and refreshed. These investments and facilities provide that consistent look, feel and experience for our clients and reinforce elements for brand strategy.
The final delivery channel I will touch on is our call center or what we refer to as our client service center. Earlier Joe (inaudible) discussed certain aspects of the client’s service center and mentioned the clients have found it to be very effective and accessible delivery channel to get information and resolve issues.
This may sound fairly obvious, but even as clients perform an increasing number of transactions electronically they appreciate the option to speak with a client service agent rather than working their way through an automated process if they have a question or an issue that needs to be resolved.
Providing this capability reinforces our commitment to our client centered banking model. However, we believe this channel is currently under utilized and as Joe mentioned represents a meaningful sales opportunity for us. In conjunction with the sales effort of Jill's team we are continually exploring the appropriate technology and infrastructure to make the client service center a cost effective full service channel for our clients.
In conclusion, First Financial is using technology in a strategic and value added ways to fulfill client needs and build long-term relationships to make banking more simple, easier and more convenient for them.
Our technology and delivery channels are additive to our sales and new business efforts as we attract and retain an increasing number of clients. Our strategy is to be a fast follower of proven technologies which means that we will not likely be first in the market with most cutting edge technologies, but we will be alert to the right opportunities to leverage new technology, best practices and enhance delivery channels.
Accordingly we continue our strategic implementation of appropriate technologies and processes to improve our service delivery as well as out operating efficiency. We will leverage innovative solutions, new ideas and creative thoughts. We are not hesitant to make changes that improve the client experience, streamline our processes and produce an appropriate return on invested dollars. Finally we believe that our recent investments in technology and service delivery are well aligned to deliver on our strategic vision and goal as well as our brand promises to our clients.
At this point I will take any questions or will turn it over to Richard.
Without getting too detailed because most of us probably don’t have your technical backgrounds, but are all of your more systems all on the exact same platforms is that a work in progress because we have many banks who would say our deposits systems aren’t talking to our loan systems and our tellers don’t have the right information? So can you tell us a little bit about your systems and your teller's abilities or your customer service ability to really see everything that the client either need or wants?
First, I would say we are pretty fortunate having gone through several acquisitions that for any individual function, we don’t have any replication of system. So every major function might its system, but there won’t be two or three systems that we are trying to balance. In terms of data and migration and information to the teller there is certainly always room for improvement there. But our systems are pretty mature and we have been pretty strategic about ensuring that they are aligned and share data appropriately and we manage that amount of data appropriately through the finance group and the technology group.
(Inaudible) where would you see most of your transactions are taking place right now and how is that evolving. I mean I guess you can obviously say mobiles increasing quite a bit, but you know, your largest place for transactions right now?
I’ll look, there are some others, I don’t know Frank do you have a breakdown quickly?
I think that would lets say, in terms of transactions I think less than 30% of our transactions are now done in the banking center, the other 70% plus are done through either [ACH] or online or other forms and we’ve seen that progressively increase as it relates to other areas of transaction and the banking center and transaction kind of big payment system type transactions continues to decline really every month and every year. And so we’re transforming our banking centers really to sales centers and to accommodate transactions when people come in and need them, but most transactions are actually incurring in some electronic form.
Well then it’s mostly your transactions are taking place outside the branch right now and those probably are not sales oriented. I guess what you can do to get more traffic flow into the branches where sales are going to take place?
Jill, why don’t you talk about the approach to that?
(Inaudible) of our sales process; we understand the transactions that are happening and trying to get people into our banking service, especially in new market has been as specific part of our sales process that we’ve been focusing on. So we have one list, we have all sorts of internal list that we look at it as well market list as well. And that does help drive a lot of the traffic into the banking centers that way.
This is Frank, I would also add that this isn’t a choice of either or it’s really about the right balance across all of the delivery channels, so even though we are building new branches and we are continuing to invest there even the transaction volumes may be slipping, it’s still an important part of the overall mix of the client experience in what we are trying to achieve here. So they are very important we have actually seen a good lift in activity in Indianapolis for instance and in the other areas we have more offices. So other business is enjoying the benefits of that increased visibility and the people that are dedicated to the sales efforts there.
May be just kind of a quick follow-up to that conversation, I guess we have the portion of transactions take place in the branches what portion of new accounts are opened there and kind of what’s the……
I don’t know the exact number, but I can tell you a vast majority of the new accounts are still opened in the banking center.
In fact, we have opportunity for us; we have done some recent benchmarking that would say some of our more advanced technological peers are seeing up to 20% plus of new accounts either opened via call center or via online and that’s why we have talked about that as a real opportunity for us that certainly still drive traffic to the banking centers for new accounts. But to become better in our case that opening accounts via the call center, via online and that’s the reason for the significant investments we have made really in the last six to 12 months to really be able to have that capability of providing that 20% is going to a 25%, 30% and plus.
Okay thanks Kevin. We will get started with the next presentation which will be Richard Barbercheck, our Executive Vice President and Chief Credit Officer who will be speaking to you about our credit management.
Good afternoon and thanks for sticking around for the exciting part of the presentation. It’s been a long day and now are going to really equipped and put it on a plate, so be with us where you are at. First Finance’s credit team is responsible for policies, underwriting, credit management and problem resolution of the entire portfolio. Well all the reason above, the deployment of these responsibilities oversight and guidance to providing credit risk appropriate client focus to credit products provided to the various components for the First Financial credit team.
The credit team also has a direct responsibility for the management, sorting problem of credits within the strategic portfolio totaling $123 million as of June 30th as well as responsibility for non-strategic covered credits representing $496 million as shown here in slide two.
The covered and uncovered loan portfolios have a common management approach and the recovery effort to ensure that process and strategies applied to both portfolios are consistent and represent actions in the best interest of all our stakeholders. In order to ensure the appropriate application of these methods and strategies is one of credits is of specialized teams aligned with credit product involves with definitions or problem asset designations. Problem assets are managed under a common practice of managing to a least cost resolution to maximize value.
There are some of the other presentations you have heard today present loan portfolio information in a format that very small normal quarterly reporting. The statistics that we referred to throughout this presentation will represent the uncovered portfolio only and remain consistent with our publicly filed information and we are using this approach because as most of you know from our quarterly reporting the existence of a loss share agreement on the covered loans significantly reduces the actual credit cost associated with that portfolio.
At First Financial our sound credit culture is established by setting clear expectations throughout the organization regarding our credit approach. The client selection, application of sound underwriting, the loan structuring policies followed by disciplined action oriented credit management. We believe that’s all in our niche values, brand promises and vision that hopes us establish a long-term value added consultative relationship with our borrower. Thereby setting the stage for sound well managed and profitable credit relationship.
We specifically define the target client associated with each client product which gives us focus and clarity when originating new loans and pursuing sales and revenue growth opportunities. The credit approach applied to these clients and loan products is established in a collaborative environment between the product line and the credit management teams. This approached alliance with our credit inclusive product team structure where product and sales managers are teamed with credit officers, underwriters and portfolio analysts, specifically focused on the particular product and borrower characteristics.
In addition, prior to any new credit product introduction, detailed credit policies, underwriting standards and credit management processes are developed, reviewed by the comprehensive team for alignment with First Financial credit culture. Throughout the portfolio, these teams ensure that we apply risk appropriate underwriting standards thereby responsibly underwriting approval processes and allow our decisions to be made as close to the client as practical.
Each individual credit portfolio has general and/or specific credit management expectations. We find at the time of underwriting and origination. These requirements are reported to the credit teams on a weekly credit management dashboard to proactive relationship needs with the borrower. Each relationship manager is provided a detailed list in the credits in their portfolio that have payment, maturity and information reporting requirements to be met by the client. In addition to the assigned portfolio analyst, they are responsible for achieving satisfactory performance levels in each of these critical areas.
Each product team portfolio of analyst monitors their assigned credits for credits management requirements and participates in the acquisition and determination of credit metric compliance. As the more severe problem credits are identified through these credit management process, they are managed by dedicated special assets team that reports to Chief Credit Officer.
In addition, to the credit management dashboard referred to previously, we monitor segments of the credit portfolio with quality. We apply concentration and stress testing models to the portfolio and further analyze the risks associated with any particular segment. These approaches coupled with the additional insight from our internal credit risk and audit teams helps us ensure that the risks associated with any particular credit or portfolio segment are addressed in an appropriate and timely manner. Various regulatory and external audit reviews further validate the effectiveness to our approach of portfolio performance management.
Furthermore, to ensure that all these activities are occurring as expected Fist Financial has established key performance indicators to identify efficiency and productivity levels and service level agreements to ensure appropriate client responsiveness. As an example, in such metrics as portfolio analysis reports for analysts, portfolio size for credit officer, credit approval requests completed for underwriter, participation by credit officer in deals in discussions and probably most importantly our approval response time to the client.
As you have heard from others today, at First Financial we believe the delivery of banking products should be done with a strong client focus. In the delivery of credit products, this means that we maintain a clear line of site to client from all areas of the bank. Each of us has the responsibility to ensure that we exceed our client’s expectations and satisfy their financial needs. We strive to maintain a common perspective amongst the sales and support areas of the bank in regards to the delivery of risk appropriate credit products, thereby minimizing the typical stress that occurs between the sales and credit staffs and banking.
The commercial lending segment of our portfolio is defined for clients with credit exposures greater than $1 million. This segment of our portfolio allows for customized client focus product designs and it includes our investment commercial real estate franchise lending with more finance business credit asset based lending and general commercial and industrial credit products. As Doug Lefferson discussed earlier, these products are delivered through relationship managers assigned to our specialized product teams using a proactive relationship based management approach.
Our business banking product services, clients with credit needs of $1 million or less, the product is delivered through an expanded delivery model that includes our business banking center retail officers and our business advisor promotion lending team. In this manner, we can capture revenue and opportunities from multiple client entry points. The business banking product is designed with a streamline client focus credit process allowing for an expedited approval within 48 hours and this is accomplished through centralized undervaluing system that utilizes the credit scoring model coupled with the specialized underwriter risk identification and decision making.
We believe our client centered approach provides place provides the ability to attract and retain increased level of new business while maintaining sound asset quality in the portfolio. Once the business banking will resume the portfolio as a centralized management process to capture efficiencies and risk appropriate monitoring.
The retail lending portfolio of First Financial offers a comprehensive way for mortgage and consumer loan product offerings. We have recently expanded our retail sales team and our growth opportunities include established and strong relationships with key real estate brokers in our communities and integrated sales efforts in banking centers where retail portfolio quality is managed through well defined underwriting requirements and centralized decision making.
Risk ratings are implied to all loans of our various credit portfolios. These risk ratings vary by portfolio types that are critical to our management of credit risk throughout the organization. Various risk rating models are used to identify the risk associated with specific credits as well as the entire portfolio. These models are used to supplement other risk identification efforts and are used to further support credit decisions.
Periodically reviews and refreshers are applied to the risk ratings in each portfolio to ensure that we maintain a current and clear indication of risk within the portfolio. Historically, these ratings have served us well and as you can see in the data present on slide six, our risk ratings continue to provide evidence of strong credit quality within our portfolios and asset quality rating or as we call it AQR is assigned to each loan in our commercial portfolio. There are 12 different AQR ratings ranging from 100 to 800 with 100 rating credits representing the best or lowest risk and 800 ratings credit representing charge off.
An AQR of 550 is considered special mention, indicating the borrower has potential weakness that should negatively impact repayment performance. As indicated in slide, 88% of our commercial portfolio currently has risk ratings better than AQR 550 and are determined to credit with stable and solid performance.
In a similar perspective, a business banking [SPSS] score above the 165 would be considered a strong performing credit. These credits represent 90% of the business banking portfolio. In the retail portfolio, we monitor the borrowers FICO score as the primary risk indicator. FICO score is measured in 660 show clear evidence and strong repayment performance and amount to 90% of the retail portfolio and as Jill Stanton mentioned earlier recent retail lending production has been achieved our FICO score is exceeding our portfolio average.
As is evidenced in the graph on slide seven, delinquency levels and trends vary throughout this portfolio. The commercial portfolio as evidenced by the blue line show a significant changes between each of the six month period shown, this is generally due to large dollar volatility associated with commercial lending. Overall, the delinquency trend in this portfolio has been relatively stable and volatility is typically caused by [known] event on a managed problem credit.
Retail portfolio shows a slight increase over the past year but continues to remain stable within the historical performance range increases are usually situational in nature and resolve within a reasonably short period of time. The orange line represents the business banking portfolio, it indicates a gradual and continued improvement; this portfolio has provided solid historical payment performance and represents approximately 80% of all our commercial loan borrowers.
The franchise lending portfolio is represented by the green line. As you can see, it’s down dramatically over the past year. This is representative of the portfolio of quality improvement we have seen in the segments since the depth of the recession. For our commercial portfolio, we coordinate a weekly delinquency call to specifically define the expected activity on delinquent commercial loans.
Retail credit delinquency is managed daily through this specialized collection group. This group is part of the special assets division and reports directly to our product management group. Classified asset levels have improved over the past seven consecutive quarters, our reserve coverage classified assets has grown over the same period each in the level of 35% of classified assets.
As of the end of second quarter of 2012, (inaudible) and appropriate coverage for the portfolio. As shown in the graph on the right size of slide eight, the improvement in classified asset levels has come from improvement in the commercial and business banking portfolios. Non-performing assets are comprised with non-accrual loans, troubled debt restructured loans also known as TDRs which includes accruing TDR and real estate owned. Our levels in distributions within these categories have fluctuated over the past two years; the level of non-performing assets has been relatively unchanged.
If we compare this to the blue line in the graph located at the bottom left side of slide nine, we begin to see that natural migration of working out of troubled credits. As previously mentioned, the reduction in classified loans as most evident in this chart indicating a much lower rate of classified rate loan formation that may eventually contribute to improved future non-performing asset levels.
During that same period of time, non-accrual loans as evidenced by the yellow bars are slights below the second quarter 2010 results of $67million and currently set at $63 million. The increase from the most recent low point of $54 million in the fourth quarter of 2011 is driven entirely by the addition of a single investment commercial real estate property that lost a single tenant and is owned by an individual experiencing financial stress in their overall commercial real estate portfolio.
This property currently assigned leases with new tenants that should help to return the loan to accrual status in the near future. Absent this credit, our non-accrual loans were experienced in the approximate 10% decrease in the most recent quarter-over-quarter metrics. It is important to note that in our loans designated as troubled debt restructures 50% of them are accruing but a higher percentage of them are actually performing under current original contractual terms.
Therefore, as we find resolution to some problem credits, if they fall under the accounting guidance to finding that TDR, they will negatively impact our reported level of non-performing assets. Therefore, we don’t necessarily believe that a performing TDR is a negative indicator. But rather, its an indicator that the problem has been or is been addressed in a manner that it turns significant loan assets back to an income generating status.
This seems to be benefit for all interest parties. Our other real estate owned portfolio has remained relatively stable with some relatively minor variations over the course of two years. As we navigate through an economic recovery, we continue to consider alternative solutions to problem credit management that will further improve the non-performing asset levels of the bank.
As problem credits are brought to resolution, we are experiencing net charge-off levels that are slightly above our two year average. Our current methodology for problem credit resolution is driven by a least cost resolution approach. This approach often indicates that returns on a problem credit are best achieved through an expedited charge-off in liquidation of the related asset as opposed to the longer term rehabilitation of the credit.
As these decisions are applied in each loan situation, there are cumulative effect reflected in the net charge off levels. Depending up on asset resolution strategy selected each of charge-off levels could be elevated or muted in future quarter end results. As we continue to manage through problem credits.
In addition, as described previously in the non-performing assets portion of this presentation, large dollar loans can have significant impacts on our credit quality metrics. This is further evidence in some of the volatility of our charge-off numbers represented in a quarterly comparisons on slide 10.
As the portfolio improves through the reduction of classified asset levels, the nominal amount of our allowances has declined in a more noticeable reduction. The allowance to total loans ratio has declined from a peak of 2.07% in the second quarter of 2010 to the current level of 1.69%.
The non-performing asset level is essentially unchanged over the same period and non-performing assets have specific reserves allocated to each loan. In addition, the classified loan levels are down significantly over the period and will be assigned a general reserve allocation. A general reserve allocation for classified loan is generally higher than any specific reserve allocation due to the ambiguity surrounding the situations eligible for general reserve allocation and the degree of due diligence conducted to determine what specific reserve allocations are applied. Therefore, the general high reserve of assets have declined while the specific lower reserve assets have remained stable thereby generating a lower percentage of allowance to total loans.
In the table on slide 11, you will see the long-term targets for First Financial bank’s core credit metrics. You’ll also notice some of them are clearly indicate the need for us to achieve continued improvement, you will notice the trend line column that the early stage indicators of problem credits are improving or the late stage indicators continue to evidence some level of stress. We believe with our strong credit culture, solid underwriting, focused credit management and a determined approach to resolving problem credits but these late stage indicators will improve as existing problem credits are resolved at a pace that exceeds the addition of new problem credits into the portfolio.
However, we also believe the current state of the economy continues to generate significant ambiguity surrounding the state of any particular industry or classic borrower, therefore it will be only be our ability to identify problems early through a focused credit management and our willingness to engage in early stage problem resolutions with our borrowers that will allow for continued credit quality improvement.
This concludes presentation of the Investor Day presentation. We are more than happy to take any questions.
Christopher McGratty - KBW
McGratty from KBW. Your capital is obviously very strong can you talk about your appetite for bulk sales and also on that point what the secondary market is today in terms of pricing activity?
Bulk sales is either strategy that we would consider in managing our problem asset portfolio, we have deployed the strategy in the past we have looked at it overtime obviously the recessionary environment we have recently been through it just not been a really viable avenue for us. Some of the most recent indicators we were getting from the market is that troubled sales are moving somewhere in the vicinity of about $0.50 may be $0.60 kind on the types and portfolio mix still continues to be strategy in our (inaudible) but not something that we determine today that we have done a few isolated one off sales.
Christopher McGratty - KBW
That single assets sales from time to time. You had some specific comments on TDRs and from an outsider’s perspective I guess I think your comment was some that you imply that some of these TDRs are actually very good and how do we as outsiders sort that out that’s number one, number two and do you believe that the current accounting rules for TDRs are appropriate?
The second part of that question I am going to avoid. I am not going to past judgment on how the accounting industries are going to apply their methodology, but I can tell you that I do believe, I don’t know that I would say TDRs are very good, but I do believe that they are different than what is implied by our non-performing asset category. Some of them truly deserve the non-performing asset designation in my mind because they are performing. But we also have others in the portfolio that either through (inaudible) or application definition will continue to perform. So it’s truly weak credits that’s the first (inaudible) to TDR definition anyway.
So we got a weakness component now but they continue to perform. So I do think there is going to be a challenge for you as you look at banks across the board and you are looking at NPA numbers to try and better understand what’s in that TDR bucket. I don’t think as Frank addressed I don’t think our disclosure break it to that level of detail, but I mean instead of going to the institution asking and all.
Christopher McGratty - KBW
Next question is what percentage of your non-accrual loans are paying as agreed?
I don't know that I am going to have a number for that.
Yeah, it's not a number that we've disclosed Joe and I don’t have a number off the top of my head. But I guess to reemphasize your point and Richard’s point on the accruing TDR is something that we separately disclosed and it is something that it's probably the best data point that you'll have to try to make sense out of what's really on the number.
Because a non-TDR, non-accrual loan in that definition isn’t performing.
And us taking a shot at you guys. Tour numbers are good. It's just very complex from an outsider’s perspective.
Christopher McGratty - KBW
And then final thing, have you looked at the new FASB proposal on re-bucket model? Do you have any comment on that?
We looked at it, but no comments.
(Inaudible) from Jefferies. Kind of talked about earlier on in the presentations talk about several kind of new lending areas, so especially at lending franchise add. Could you give us a sense just of specific investment that you have made from a risk management perspective and just how I mean those are businesses that take a little bit of different underwriting approach and your moderating process. Could you just give us a sense as to what investments you made to make sure that you have your arms around the risk there?
Sure, I think there is a couple we’ve talked about on the course today. You know, where we have kind of expanded into some of our specialty areas obviously. The franchise group what we have picked up a specialty portfolio as a whole and have retained and made sure that we have intact underwriters and portfolio analysts and systems to support that appropriately.
Probably the one that is more out of the ground that I would evidence as our business credit asset based lending piece. That’s the piece that really supports the strategy in our C&I focus and we've brought into that technology, the software and the staffing necessary to truly do fully followed ABL lending and as that is starting to prove dividends, it’s a slow growth type of an environment just due to the nature of C&I and asset based credit, but as that’s starting to prove out those investments are starting to pay dividends for it. We feel good about that.
But why don’t you just speak to the specifics of each of those in terms of the technology and in the people that do the underwriting in the ABL Group.
Yeah in the ABL Group, we have got a lead individual in that, that oversees the entire piece of it and then there are business development officers associated with that as well as portfolio manager that monitors on a daily basis. We couple that with a centralized team in our operations area that monitors all the borrowing base and recording information that flows through on a daily basis so that we are ensuring that everything is happening with that.
There is, we use a system that's called (inaudible) that all that information on the daily basis is put into end monitors and the receivable base, the advanced levels. How much money is available to the borrower or not and then there is direct communication back to the borrower, either by the operations team or by the portfolio management team in the actual business development group.
Okay, well thank you very much Richard. Let me introduce our last formal presentation of the day, Tony Stollings, Executive Vice President and Chief Risk Officer will be speaking to you about our risk management.
Thank you, Ken. Hello good afternoon everyone. It's certainly great to hear the phrases. Risk appropriate disciplined approach (inaudible) just warms my heart. Again I am Tony Stollings, the Chief Risk Officer. Alright Ken. I would like provide an overview of what risk management means at First Financial as well as highlight some of key roles and responsibilities of the risk management group. The risk managing of progress was one part of the enterprise risk framework.
It works closely with the risk committee of the board, the enterprise risk management committee which is comprised of the executive management and the various risk committees representing a corporate business and operational areas of the bank. It leads to discussion with management and the board regarding the development and updates to the risk appetite ensuring it is aligned with our strategic objectives.
The partners with the lines of the business to identify evaluate and mitigate risk including regulatory or compliance risk. It drives the process to comprehensively evaluate new products and initiatives. So primary regulatory contact and coordinated for all exams that occur and risk management participates in the acquisition due diligence activities.
We believe we have structurally sound framework and have solid risk managers for some time.
As you can see, our framework focuses on eight areas of risk throughout the company. We have the right talent at the top with a culture that requires risk ownership and accountability in the lines of business and operating areas.
We have a strong track record of derisking or eliminating portfolios and addressing issues. This is evidenced by our action of residential mortgage portfolio lending and indirect auto lending both in 2005. Identifying, evaluating and mitigating risk at the enterprise level has been a key focus in recent years.
We have taken a number of steps to develop a strong enterprise wide approach including establishing a separate risk committee. Risk was initially part of the audit committee but was split out over two years ago developing a comprehensive ER and playbook with key roles with clear rules and responsibilities approving our risk appetite in a statement aligned with our strategic objectives.
We have upgraded our risk talent. We currently have about 25 associates representing credit or loan review operational risk, regulatory or compliance risk, community reinvestment activities and fraud. We continue to invest technologically in the ERM including the current implementation of an integrated platform that is expected to provide for better collaboration of the various areas and more efficient delivery of enterprise risk reporting.
And finally we have established 14 risk committees to manage the various risks of the company which are all overseen by the enterprise risk management committee. That committee structure is shown on slide five.
We believe we have a balance sheet that has less operational and market risk than peers. We’ve already seen some of this. That we have a strong liquidity position with significant core funding and access to diversified liquidity sources, solid capital ratios exceeding all regulatory threshold and providing ample opportunity for growth, significantly better than peers and our percentage of risk adjusted assets and the return on those assets.
And finally a strong interest rate risk management process and high-quality investment portfolio. So let's see the environment that we operate in. Dodd Frank, CFPB, Basel III Stress Testing, what more can I say.
We've strengthened our compliance staff and are heavily focused on consumer lending areas in CRA as well as the BSA AML framework. Compliance is a component of all risk assessments and we keep that at the forefront of our discussions. Our reporting to the board and management is a key step in the compliance process and we provide them with formal regulatory update each quarter. Our only national platform as has been said is franchise lending and that’s a commercial base product.
So how do we view our progress and what are our next steps. You can look at it in a number of different ways but we believe we’re moving to the next evolutionary level of our framework. This includes building on the history that we’ve developed thus far, migrating to a more granular and scalable approach to key risk indicators or KRIs continuing to expand our reporting in an enterprise fashion, continuing to refine the risk appetite and more broadly incorporating risk analytics, providing more and improved risk management consideration in our daily decisioning, and while we're not there yet and who knows wherever there is or if you can ever get there, we feel we are doing the right things both culturally and in an analytical scaleable fashion.
So how do we apply the governance around risk management. It is a combination of strong board and risk committee oversight, a high level of transparency between the board and management as well as open cross committee communication. We are dependant on the line of business involvement as they operate in the risk environment every day.
There is a high level of collaboration with other risk management functions such as internal audit and the (inaudible) process. And as an indication of this collaboration internal audit has a representative on each risk committee. So what does the framework look like at First Financial. As I mentioned earlier, 14 risk committees represent the various products or risk disciplines and are overseen by the enterprise risk management committee.
Those committees are chaired by the head of the business line or the function. Each committee meets quarterly and is responsible for updating risk scorecards and metrics noting changes to the risk profile of their area. Business lines provide current and emerging market color including potential impacts on First Financial, while risk management facilitates the risk discussion.
Committees assist in the development of the internal control environment and are responsible by appropriately clearing issues generated by internal audit to the regulators or management. The board risk committee receives a quarterly risk profile report with an assessment of the measured risk across the various disciplines and it is compared to the approved risk appetite.
The risk committee also receives each quarter detailed reporting on credit, operational compliance and strategic risks at both the line and enterprise levels. The quarterly risk assessments are driven by the key risk indicators. These are metrics specific to business or are functioned as identified and agreed to by the committee.
Acceptable ranges are thresholds of performance have been developed that are consistent with the risk appetite and the strategic objectives. Example KRIs include targets related to portfolio concentrations, both loans and investments, operational losses and vendor or third party compliance. We've made operating within objectively measured metrics increases the likelihood of our success in a risk appropriate fashion.
Here is an example of our risk assessment template. Each committee has a risk assessment designed to identify and score various risk events; their inherent level of risk, our response to the risk and ultimately the resulting residual risk. This is reviewed and updated each quarter.
Risk assessments are under continuous refinement as our processes, products and the environment are ever changing. Risk events are aligned with our strategic objectives which again are aligned with the risk appetite.
We have a process to review and identify risks that may arise from new products, processes, geographies or regulatory changes and it is the new initiatives risk assessment or NIRA. NIRA is a tool with regulatory guidance as its foundation, but it does have a sound business practice as well. You may have recently seen the introduction of risk from new products was identified by the OCC in their semi-annual risk discussion as a top industry risk.
NIRA has a financial component to ensure valid business base as part of the overall analysis, but it does not solely make the business base for the initiative. It’s a collaborative process that requires the various designated areas to sign off all issues have been resolved or that more work is needed. The NIRA program operates under a service level agreement with the lines of business to ensure the process does not become bogged down or bureaucratic.
Recently, the NIRA’s collaborative process was successfully utilized in developing enhancements to the company’s data protection program and in the expansion of both the residential lending and equipment finance strategies.
We worked very hard to communicate that everyone has a role in the RM. Risk management is more than a department. It’s a company wide attitude and approach. It is driven and overseen by the Board, facilitated by the risk management function with significant responsibility for risk identification and mitigation owned by the lines of business. And finally, internal audit discharge with providing an independent assessment are affecting the RM framework.
Just thriving to improve on what we believe is the core competency of the company. We have demonstrated our ability to manage risk. Our associates are aware of the importance of an effective risk management framework as it is one of our core strategic objectives. We continue to refine and adapt with the changing environment. And finally, we believe we have the right combination of talent, culture and governance that is scalable for the foreseeable future.
That concludes my comments and I am happy to take any questions you might have related to the risk management function.
Okay, alright. Thank you very much Tony, that concludes the formal presentation part of today’s event and now I am going to turn it over to Claude Davis for…..
Scratch their heads, so just give us your thoughts on what’s going on out there?
It’s a good question John, it’s one that we have talked about in other calls, but I think it continues to be this issue of seller expectation versus buyer expectation and while we hear conservations that might be starting or occurring, we are not getting any sense of acceleration of those and those who might be obvious sellers, we get the sense that with the performance somewhat improving, or credit metrics being slightly better that they are going to wait until their numbers are better before they show any interest in having deeper conversation. So I still think the gap that bid out spread exists.
You have guys have done large acquisitions in the past, they were successfully integrated and can comment about larger size deals and then really with the Irwin transaction you divested a lot of the Michigan, any appetite to go back to Michigan?
Second question first, you know our focus right now is really Ohio, Indiana and Kentucky and that we never say never on any opportunity but that’s really where we want to focus because we think we know those economies best and we have scaled in those areas.
On the first in terms of larger, and we always talk about is, we really think about it first as a strategic is in the markets we have interest in and I’ll just remind everyone of what those are. It’s our existing markets first with a bias towards the metro markets that we are part of the non-metros that we are part of it and if that makes a strategic sense.
And then this said, look there are other metro markets in our areas that we would have been interested the right opportunity came along, areas like Louisville, Kentucky, Columbus, Ohio, Fort Wayne, Indiana, exaggerate that, if the right opportunity presented itself that fits well with our franchise and so we would take a look at those.
As it relates to relative size again, we probably are biased smaller than the larger just because the operational impact that larger deal has and we have lived through and as you have heard today our initial focus is on improving execution. We believe that the industry has changed in the last few years and the need to really be more efficient, to be better technologically and to figure out how you compete client by client has to continue to be our primary focus.
Jelani Jackson - Opus Capital
Jelani Jackson, Opus Capital; can you remind us of kind of I know you mentioned strategic priority and returns after that, of the return expectations for an M&A?
Of what they are?
Jelani Jackson - Opus Capital
Just kind of pay back, how you think about your hurdle rates, that sort of thing?
Sure, we talked before about, first of all we look at internal rate of return and we think about that as being in excess of our cost to capital; people always ask what's cost to capital; you know we would say somewhere in that 10% to 12% range today in our view. We have also said we like tangible book value dilution payback within a five-year period. So those have been the broad metrics we look at, but it is for a strategic second operational capability and third return.
I don’t know Frank is there anything to add to that?
Jon Arfstrom - RBC
Jon Arfstrom from RBC; I am sure the anticipation, but just when you are benchmarking your expenses and you talk about efficiency, where are you finding you an outlier one way or the other and where are the biggest cost saving opportunities?
Sure. We always talk about strategic cost or efficiency target and we've been very transparent about the fact that we got to report it efficiency numbers, they are very good, but we know that that’s improved by the acquisition income and the accounting for it. What we talk about it in terms of where we think about opportunities as Frank mentioned the new management reporting platform where we have gone into a lot of work about capacity management and so we are going to every part of the business saying what’s the capacity of the business and where are we currently at.
And we see opportunities in the branch banking center area which we have been doing a lot of work in; we see it in some of the other sales areas both in commercial and wealth that we probably have excess capacity versus what the origination is right now. And then some of our operational or support areas especially if as see the nature of transactions change as we have talked about earlier to be left kind of human intensive and more electronic.
So all of those areas are ones we are taking a hard look at; a final area I would say as we have been high in professional services because of all the work we have done around the FDIC deals, so we would like to see those numbers come down pretty substantially everything from consulting to legal to accounting related costs.
Jon Arfstrom - RBC
Just to follow up maybe Frank, but when you look at that goal of 55% goal how much revenue lift you need to do that or is this standalone this is what you can do with your existing cost base?
And I would actually target more in a range of 55 to 60, I think 55 right now given the interest rate environment and given we don’t talk a lot about is the growth in our investment portfolio that was intentional because of the branch acquisitions to position us in Indianapolis and Dayton have caused us to be a late fire if you will into the securities portfolio to lower yield and so we have got to have some patience as we see yields come back over the next few years to get those returns up.
So I would first of all counter on the 55 to 60 as well as we are going to look to deal with the cost side always in first, the revenue we see as an ongoing kind of need to improve and grow. But we acknowledge the revenue side it got some headwinds.
Jon, I guess I would just also add to that. The near term the revenue headwinds that we talked about so the thing that we can act upon most quickly is on the expense side.
Matthew Keating - Barclays
Matthew Keating, Barclays. Just wanted to go back to the credit outlook. Your cautious outlook is somewhat more cautious I guess than what we are hearing from some other banks. Can you talk about what might be driving that, is that just your recent asset quality experience and just a conservative outlook or is it more a function of you dealing with smaller borrowers and you are having a hard time in this environment?
Yeah I would say our cautious credit outlook is first that’s our nature. Second is I would say the comments that Richard that, if you look at the overall portfolio a lot of the early indicators as we have said are actually improving, classified assets are down, delinquencies are in good shape etcetera. So if we feel like as overall portfolio things have improved and are improving and we feel very good about that. One of the reasons why we are cautious is just a couple of large deal impacts.
I have been saying that actually since we started the crisis in ’08 and I think on every call, I talk about large credit volatility and we saw that this year with the one $10 million credit which actually is repairing itself pretty quickly. So when you lost one 10, we saw go immediately to non-performing. I am always one of those who says look you have to always be aware that the outlier can cause a problem.
Joe Steven - Steven Capital
Joe Steven. This is actually an entire capital and capital management discussion. First of all, if you look at Basel III for you guys, that's number one, number two is we as investors applaud your capital management techniques. But if I am not mistaken, unless you find some big acquisitions by the time you get to 2013 you will not have used your excess capital yet. So can you give us your thoughts on how much capital you really need to run your business so we can try to figure out really what you have to distribute longer-term?
First question is have we considered Basel III, yes we have and we have done several different scenarios based on the details published that has been just published and I just make one comment there. Frank mentioned in his presentation, we are above the Basel III requirements. So we feel good about our position. But we’re not very happy about Basel III kind of details because we think it has really punitive impact especially residential mortgage finance.
And so we will be going through and giving our own comment letter, trying to argue against some of those positions. In addition, it requires some data that I think we are going to require all banks to spend a fair amount of time and money, getting to where you know out of origination, everyone value, every home equity loan as an example. So we got some data work to get in an exact calculations on the Basel III standards.
So that said, going to where we are at today yes we do have excess capital. We have been pretty open about the fact that if you look at our thresholds for capital that we published 7% of TCE, 8% leverage, 13% total capital; we are well above those. And yet those are thresholds, so we say threshold in fact minimum we don’t want to get below those.
So one of the conversations that we have as a board every quarter is where we are at in relationship to a threshold and best everything we know we are comfortable with that and I think to your point as we get in 2013 we look at all the capital management opportunities to first deploy which is always first and then second to the extent we have excess capital well that we can’t deploy near term how do we approach that, and we give into that and we do every quarter and as we get toward the end of 2013 which is what we said is the exploration or the time period which we are comfortable with the (inaudible) we will be talking about that and letting investors know.
I will just remind everyone the reason why we came up and said that we would continue this through 2013 is we are getting lots of questions about like the approach as you said Joe but how long, what can we expect and so that’s why the board decided to say this is the period that we will be comfortable. But I think in the context for us Basel III coming into play but also the expiration of lost share for us in 2014, we need to factor all of that and along with deployment opportunities to say what’s the right capital management strategy. There are lots of different factors there that will play into it.
Frank on the efficiency target, can you give us the adjustments you are making I think you are starting with the 65% base where you excluding any first accounting to gets the 35 to 60 long-term target I guess looking at second quarter numbers is that what you are referring to?
Yes when we talk about the starting point it is also operating number which excludes things related to FDIC loss share income, the cost associated with managing the non-strategic assets. So we have a publishing number what that operating efficiency ratio is currently but its’ mid 60s.
Frank one more question for you may be when you look at the CD replacing kind of how that is coming over the last couple of years and look at the table you provided at the presentation pretty much right across all the terms you guys are below competitors, could you talk a little lit bit about whether there is additional repricing opportunity there and whether on longer term if you get the kind of just continue to price on your customers and what your ability is there?
Sure and that really is the opportunity that we see, it is both the natural repricing of the portfolio and into a lower rate environment but also a change in our competitive posture. So if those two items that are really driving our expectation around a lower cost of interest earning deposits.
And to be clear on the assumption of chart, the chart obviously is our current pricing. Our CD portfolio cost is in the 160 range, so as those prices those come in at the current pricing levels.
Kenneth James - Sterne Agee
Kenneth James from Sterne Agee. Just have a question on the competitive winding environment. Your non-covered loan yields are a little bit better than average I am wondering average, how much if any business do you feel like you felt on the table just strictly due to price in your markets?
First of all, the relationship manager in the room. We have a pricing model and actually the relationship managers and regional presidents have the flexibility to price anywhere that they want above target and even to go the below the target return if they think it’s appropriate and strategic. So, we gotten a lot of sense and I don’t know Doug if you would offer anything of that we lost a lot of deals because of price. We lost in deals more because of structure. As we talked about where we lost deals and we typically around structure won’t be as negotiable if we think that’s the right credit approach but I know Doug everyone else…
Fact but I don't know if there is anything unique or that we’ve positioned ourselves any differently. I mean it’s a very competitive market I’ve heard Ohio is a most competitive banking market and its one of our key markets. So we definitely see that and have key competitors in that and pricing is a challenge. It's a daily challenge but I don’t think that there is anything different then what its’ been in recent times.
It’s also why as well strategically because I think it’s important the build up the product offering with asset based lending as well the equipment finance, but there are also product lines that get higher yields and so we think those are good additives of product lines for us both from the strategic but also financial perspective, and as we mentioned, franchise also gives higher yields.
You guys have really come through the cycle in great shape compared to most people. So the company’s roll as an industry leader of especially of your size is noteworthy. You talked a little bit about some of the problems you see in Basel III. It gets back the capital. H the capital. How it seems like asset quality for the entire industry has been getting better for eight consecutive quarters and we keep having regulators say we need more capital.
What’s the number how much is enough and give us your thoughts on this process. It just seems like the horse has been out of the barn actually for four or five years has been getting better for the last two and it seems like everybody just keeps coming after the industry and you guys are one of the new industry leaders what are you going to help us do?
Sure, a couple of thoughts. I do believe kind of going into the crisis, we definitely have some larger banks that we are not capitalized appropriately and I think this whole process has forced that to be a real change and I think that’s good for the industry because them being undercapitalized and creating problems I think has led to a lot of what things like us are now dealing with to be perfectly honest.
How much is enough. That’s a hard one to answer. I worry about I would have no problem with the existing capital standards and even certain parts of Basel III other than some of the provisions like I said around residential mortgage lending as well as some of the springing capital provisions within Basel III where credit goes from one position and if it has a problem, all of a sudden your capital requirement goes up substantially, at the same time that you are providing a loan loss reserve for it as well for the expected loss. That to me makes no sense. For the ratio numbers, I have no problem with it's just some of the details within Basel III that I am particularly concerned about, how you manage capital, especially going into a recession that's a real concern.
We talked about bulk sales earlier. I think that if Basel III goes through as currently kind of proposed you are going to see different strategies have to be deployed just to manage capital.
Same comments I think the interplay between capital requirements and reserve just really haven’t been addressed and it is exactly right. I think too much effort will be expended trying to manage the capital ratio on your number versus concentrating it on good quality earning asset growth and doing it in a risk appropriate way. It is and I guess it takes a blind eye to any quality distinction whatsoever.
(Inaudible). Just the question on brand awareness. Were you surprised at all how quickly your brand awareness in Indiana has jumped. I mean it is now higher than Ohio and it seems like it is really moved up markedly. Cam you just speak to that?
Unidentified Company Representative
Yeah actually been surprised at both how well we’ve been able to improve our brand awareness within Indiana and Ohio and we credit both our sales team as well as you had a very focused marketing strategy because if you remember going back to 304, we actually operate under multiple brands. We actually had seven different banking charters, all with different brands and brand identities.
So consolidating those and then having a very intentional marketing message that we just have kept pounding away at all those markets has really improved the awareness in a pretty meaningful way. You had seen that in the acquisitions and the fact that we did pretty well through the crisis. We also were able to get a lot of good positive PR in both Indiana and Ohio and I think it’s the combination of those who just made a nice improvement for us.
(inaudible). So when you've acquired new customers, what's generally been the catalyst? Are they (inaudible) with another bank? Has the outgoing sales efforts, branding initiative looks kind of generally been the story there?
Unidentified Company Representative
Yeah, I don't know if I can turn it over to some of our sales group within (inaudible) Doug or Jill or Jill.
First some of that from what we’ve seen on the commercial side. We do a lot what you heard today, we do believe is our competitive advantage and allows us the opportunity to take market share from some of a larger regional competitors. Some of them for various reasons. Some of them as Claude just mentioned through the crisis and after, we were going -- each bank was experiencing their own issues of a different type. Some of them were pretty high magnitude. So they had to treat their current clients and customers a certain way. Some of those good clients felt it wasn’t really appropriate treatment, but again those banks were doing dealing with a lot of things but it did give us an opportunity to get in and kind of show our client service at a different level.
So I think that has been a case and some of those things that we mentioned away, some of the larger regionals approach clients by pushing them into call centers or certain high level non-touch not high touch interactions in some cases and again a lot of those are for efficiency reasons and other things. I am not saying it’s all terrible, but our clients do notice that and it has given us some opportunities.
Our folks are accessible, are flatter and empowered organizational structure has really helped to be able to react quickly to clients and have quick resolution and turnaround time and I would also add that our brand really does put us into the considered set when a client is disgruntled or willing to change banks and the positive press that we have gotten, getting through this crisis so to speak has also enabled us to really get clients to reach out and find out what we are all about.
Unidentified Company Representative
And I will just add to that, it's the reason that brand awareness is so important that you may not be able to isolate all the reasons why somebody changes, if somebody is ready to change, we want to make sure that they are thinking about us or they know about us.
I guess I would add to that is the people -- we have been able to bring on a lot of talent. It goes back to branding. The consumer hears about it and wants to come, but then so does the employee. So we have got a lot of talent in the business banking world, in the mortgage world and that has brought a lot of new clients as well.
Unidentified Company Representative
And that brings an interesting point that we have probably for the last two years really focused on how we integrate all our lines of business and working together on our clients and looking for opportunities to best serve their needs and I would add that along with what Jill said.
And I thought that was an interesting metric what you said 42% of the client that gets to do all of their banking at First Financial, how does that compare to peers and then what headwinds are there to increase that number I don’t know 60% or 70%?
Unidentified Company Representative
Yeah and that was specifically in the commercial banking business that Doug referenced. I don’t know if we have a peer number.
Unidentified Company Representative
I am not aware one on that particular statistic.
Unidentified Company Representative
Yeah and Doug did mention in his prepared remarks that one thing has changed and we've seen it both with our clients as well as new clients that we've acquired that because of the way some clients got handled at the beginning of the crisis. Many now are now saying we want to do business with both those banks and we just want to be able to protect ourselves in the event we ever see this again. So that is a newer phenomenon coming out of the distance that we had not seen as much before
Any final question? Great. Well thank you very much and I think and this ends our – yeah I guess this concludes our event for the day. It concludes the formal presentations and Q&A. So with that, we will end the Investor Day Event.