First Financial Bancorp's CEO Discusses Q2 2011 Results - Earnings Call Transcript

First Financial Bancorp ( FFBC)

Q2 2011 Earnings Call

July 29, 2011 9:00 AM ET

Executives

Kenneth Lovik – VP, IR and Corporate Development

Claude Davis – President and CEO

Franklin Hall – EVP and CFO

Analysts

Jon Arfstrom – RBC Capital Markets

Scott Siefers – Sandler O’Neill

Christopher McGratty – KBW

Joseph Stieven – Stieven Capital

Unidentified Company Representative

David Long – Raymond James

Matthew Keating – Barclays Capital

Kenneth James – Sterne Agee

Bryce Rowe – Robert W. Baird

Presentation

Operator

Good morning and welcome to the First Financial Bancorp’s Second Quarter 2011 Earnings Call and webcast. All participants will be in listen-only mode. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Kenneth Lovik. Please go ahead.

Kenneth Lovik

Thank you, Denise. Good morning, everyone, and thank you for joining us on today’s conference call to discuss First Financial Bancorp’s second quarter 2011 financial results. Discussing operating and financial results today will be Claude Davis, President and Chief Executive Officer; and Frank Hall, Executive Vice President and Chief Financial Officer.

Before we get started, I would like to mention that both the press release we issued yesterday announcing our financial results for the quarter, and the accompanying supplemental presentation are available on our website at www.bankatfirst.com under the Investor Relations section.

Please refer to the forward-looking statement disclosure contained in the second quarter 2011 earnings release, as well as our SEC filings for a full discussion of the company’s risk factors. The information we will provide today is accurate as of June 30, 2011 and we will not be updating any forward-looking statements to reflect facts or circumstances after this call.

I will now turn the call over to Claude Davis.

Claude Davis

Thanks, Ken, and thank you to those joining the call today. We reported net income of $15 million or $0.27 per diluted common share for the second quarter, representing a return on average assets of 1.03% and a return on average shareholders’ equity of 9.05%. Our results for the quarter clearly demonstrate our company’s ability to continue to produce recurring high-quality earnings despite persistent economic uncertainty both nationally and throughout our footprint.

Our pre-tax pre-provision earnings were up $3.8 million or 13.9% from the first quarter. Our provision for uncovered loans increased approximately $5 million from the first quarter or $0.06 per share. Our credit profile and metrics, however, remained stable and, as a result, our allowance remained relatively flat on a linked quarter basis.

The second quarter was an exciting one for us as we announced our first transaction since the FDIC-assisted acquisitions two years ago. We signed an agreement to acquire 16 Ohio-based branches from Liberty Savings Bank, the majority of which are located in the Dane area and will help to accelerate our growth plans in that key market. We are well into our integration activities and are still on track to close the transaction during the third quarter.

We are also pleased to announce that the Board of Directors has authorized up to a 100% dividend payout ratio of quarterly earnings consisting of two components; one, a recurring dividend based on our previously stated target payout ratio of 40% to 60% of earnings, which is currently $0.12 per share; and a variable dividend that will equal the remainder of our quarterly earnings which, for the second quarter, equals $0.15 per share. In total, the dividend represents a 125% increase over the most recent dividend we paid to shareholders.

Our stated capital ratio thresholds included tangible equity ratio of 7%, a Tier 1 leverage ratio of 8% and total capital ratio of 13%. Obviously, our current capital levels are well in excess of this amount and are capable of supporting significant asset growth.

Under the most constraining of our thresholds, we still have capacity to support more than $2 billion in additional assets. Using the second quarter as an example, if we paid out only our recurring dividend of $012 per share, we would generate approximately $8.8 million of new retained earnings. Applying a leverage ratio of 8% to this newly-generated capital would support $110 million of asset growth on top of the $2 billion we can already support. It is an instrumental growth capacity that we are returning to shareholders.

The variable dividend is intended to provide an enhanced return to our shareholders and avoid unnecessarily adding to our capital position until we have capital deployment opportunities, such as acquisitions or organic growth that moves us closer towards our capital thresholds.

Obviously, it is hard to foresee how long we will maintain the variable dividend as the timing of certain capital utilization opportunities, such as acquisitions, are hard to predict. The board will evaluate the variable dividend on a quarterly basis, but expects to approve a payout ratio exceeding our current dividend for the foreseeable future.

At quarter-end and prior to the payment of the upcoming variable dividend, our tangible common ratio was 11.11%, and total risk-based capital ratio was 21.43%. Our regulatory capital ratios did decline slightly during the quarter due to the early redemption of $20 million of trust preferred securities. However, the impact of the trust preferred redemption was offset by earnings for the quarter.

Generally speaking, credit quality was stable compared to the prior quarter as total classified assets remained flat at $185 million. The provision for loan losses related to our legacy and originated portfolio was $5.8 million, which covered net charge-offs of $5.7 million for the quarter.

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