First Financial Bancorp Reports First Quarter 2014 Financial Results

CINCINNATI, April 29, 2014 /PRNewswire/ -- First Financial Bancorp (Nasdaq: FFBC) ("First Financial" or the "Company") announced today financial and operational results for the first quarter 2014.

First quarter net income was $15.1 million and earnings per diluted common share were $0.26.  This compares with fourth quarter net income of $3.8 million and earnings per diluted common share of $0.07 and first quarter 2013 net income of $13.8 million and earnings per diluted common share of $0.24.

• Continued solid quarterly performance
  • ­Quarterly results included several items which reduced earnings per diluted share by approximately $0.02 on a net basis
  • ­Return on average assets of 0.96%; 1.02% as adjusted for the items noted below
  • ­Return on average tangible common equity of 10.49%; 11.13% as adjusted for the items noted below
• Capital ratios remain strong
  • ­Tangible common equity to tangible assets of 9.23%
  • ­Tier 1 capital ratio of 14.42%
  • ­Total risk-based capital ratio of 15.67%
• Total uncovered loan growth for the quarter of 12.6% on an annualized basis
  • ­Strong performance in traditional C&I / owner-occupied CRE and franchise lending
  • ­Solid growth in investment CRE lending
• Quarterly net interest margin of 3.82%
  • ­Decline of 8 bps on a reported basis and 4 bps on an adjusted basis compared to the linked quarter
  • ­Yield on investment securities increased 14 bps to 2.52%
• Continued improvement in asset quality metrics
  • Total nonperforming assets declined $11.0 million, or 15.2%, and represent 0.95% of total assets compared to 1.13% for the linked quarter
  • ­Net charge-offs declined $1.6 million, or 44.4%, compared to the linked quarter and totaled 23 bps of average uncovered loans on an annualized basis

During the quarter, the Company incurred certain pre-tax expenses of $0.4 million resulting from the execution of its efficiency initiatives.  The Company also incurred pre-tax acquisition-related and market expansion costs of $0.6 million as well as legal settlement expenses of $0.5 million.  Additionally, pre-tax net gains of $0.1 million were recognized resulting from the sales of investment securities.  In the aggregate, these items reduced pre-tax earnings by $1.4 million, or approximately $0.02 per diluted share after taxes.

The board of directors has authorized a dividend of $0.15 per common share for the next regularly scheduled dividend, payable on July 1, 2014 to shareholders of record as of May 30, 2014.

Under the announced share repurchase plan, the Company repurchased 40,255 shares during the first quarter 2014 at an average price of $17.32 per share.  Subsequent to the signing of a definitive merger agreement to acquire Guernsey Bancorp, Inc. in a transaction including $13.5 million of cash consideration and an increasingly active M&A environment industry-wide, the Company expects to continue the first quarter suspension of its share repurchase plan for the second quarter 2014.

Claude Davis, President and Chief Executive Officer, commented, "Our financial results for the first quarter were impacted by seasonal and weather-related events that drove a decline in noninterest income and increases in employee benefit-related expenses and occupancy costs.  Excluding the effect of these items, our operating performance remained strong and was consistent with our results from the prior quarter.

"As we announced in a separate release, we strengthened our entry to the dynamic Columbus, Ohio market with the signing of a definitive merger agreement to acquire the parent of The Guernsey Bank, an institution with $122.9 million in assets and $100.5 million in deposits across three banking centers, all of which are located in demographically attractive communities.  Guernsey has built a strong retail banking franchise that provides an excellent strategic complement to the asset generation platforms of The First Bexley Bank and Insight Bank.  Taken as a whole, these transactions position First Financial as one of the larger community banks serving the growth oriented Columbus market and provide a strong foundation for future growth.  Integration activities related to the First Bexley and Insight transactions are progressing well and we continue to expect that the deals will close during the second quarter.

"Regarding our expansion into Fort Wayne, we are pleased with the progress our new commercial and mortgage lending teams are making as they build the First Financial brand in the market.  The commercial team has been active with origination and commitment levels exceeding expectations to date and with the long winter behind us, the mortgage team is building a strong pipeline as we move into the second quarter.

"Our solid pipeline at the end of the year translated into strong loan production during the first quarter as our uncovered portfolio increased $108.6 million, or 12.6% on an annualized basis, compared to the linked quarter and was up $365.4 million, or 11.2%, year-over-year.  Furthermore, uncovered loan production outpaced the decline in covered loan balances as total loan balances increased $60.1 million during the quarter.  As business confidence continues to improve in our markets, the level of new business opportunities continues to grow as well and we remain optimistic about our ability to keep our loan production momentum moving forward into the second quarter.

"From a credit perspective, our resolution efforts have continued to produce positive results as our level of nonperforming assets has declined to its lowest level since the second quarter of 2009.  Additionally, the positive trend experienced in charge-off activity over the last five quarters continued as net charge-offs dropped to 23 bps of average loan balances for the quarter and contributed to a decline in credit costs."

NET INTEREST INCOME AND NET INTEREST MARGIN

Net interest income for the first quarter was $54.8 million as compared to $55.8 million for the fourth quarter 2013 and $58.7 million for the first quarter 2013.  Compared to the linked quarter, total interest income decreased $0.9 million, or 1.4%, and total interest expense increased $0.1 million, or 3.1%.  Net interest margin was 3.82% for the first quarter as compared to 3.90% for the fourth quarter 2013 and 4.04% for the first quarter 2013.  Included in the fourth quarter 2013's interest income was the recognition of $0.6 million of previously reserved interest related to loans that returned to accrual status.  Excluding this amount, net interest margin for the fourth quarter 2013 was 3.86%, resulting in a decline of 4 bps during the first quarter.

Interest income earned on loans decreased $3.2 million, or 6.1%, compared to the prior quarter.  Excluding the reserved interest recognized in the fourth quarter 2013 discussed above, interest income on loans decreased $2.6 million, or 5.1%, during the first quarter.  The decrease in interest income earned on loans was driven primarily by a decline of $55.5 million, or 11.3%, in average covered loan balances as well as a decline in loan fees earned on the uncovered loan portfolio.  Partially offsetting the negative impact from covered loan activity was the lower amortization of the FDIC indemnification asset which declined $1.0 million, or 41.9%, as the average balance of the asset declined $34.5 million, or 44.1%, during the quarter.

Growth in average uncovered loan balances of $85.3 million, or 2.5% on a linked quarter basis, helped to partially offset the impact on net interest income from covered loan activity during the quarter as well as the lower level of loan fees.  Excluding the reserved interest recognized in the fourth quarter 2013, the yield earned on the uncovered portfolio during the quarter was approximately 4.34%, an 11 bp decrease compared to the linked quarter.

Interest income earned from investment securities increased $1.3 million, or 13.3%, compared to the prior quarter as average balances increased $153.2 million, or 9.3%, and the yield earned on the portfolio increased 14 bps to 2.52%.

The slight increase in total interest expense was due to an increase in deposit and short-term borrowing costs.  Average time deposit balances increased $20.5 million, or 2.2%, with the related cost of funds increasing 4 bps compared to the linked quarter.  The cost of funds related to total interest-bearing deposits increased 1 bp to 36 bps compared to the fourth quarter 2013.  Average short-term borrowing balances increased $259.5 million, or 49.6%, during the quarter with the impact on net interest margin partially offset by a decline of 3 bps in the related cost of funds. 

NONINTEREST INCOME

The following table presents noninterest income for the three months ended March 31, 2014 and for the trailing four quarters, adjusted to exclude the impact of covered loan activity and other select items on the Company's reported balance.

Excluding the items highlighted in Table I, noninterest income earned in the first quarter was $13.6 million compared to $14.9 million in the fourth quarter 2013 and $14.3 million in the first quarter 2013.  The decrease of $1.2 million compared to the linked quarter was driven by seasonal declines in service charges on deposit accounts and bankcard income as well as lower net gains on sales of residential mortgages, rental income from covered OREO and portfolio valuations related to client derivatives, partially offset by higher trust and wealth management fees.

NONINTEREST EXPENSE

The following table presents noninterest expense for the three months ended March 31, 2014 and for the trailing four quarters, adjusted to exclude the impact of covered asset activity and other select items on the Company's reported balance.

Excluding the items highlighted in Table II, noninterest expense in the first quarter was $44.8 million compared to $43.2 million in the fourth quarter 2013 and $47.7 million in the first quarter 2013.  The increase of $1.6 million compared to the linked quarter was due to seasonal increases in benefit expenses and higher weather-related occupancy costs, partially offset by lower state intangible tax, marketing and other noninterest expenses.  Acquisition-related expenses include $0.2 million of professional services expenses, $0.2 million of data processing costs and $0.2 million of employee benefit expenses.  Other items not expected to recur from the first quarter 2014 consist of legal settlement expenses.

INCOME TAXES

For the first quarter, income tax expense was $7.1 million, resulting in an effective tax rate of 31.9%, compared with an income tax benefit of $1.2 million and an effective tax rate of -47.4% during the fourth quarter 2013 and income tax expense of $6.4 million and an effective tax rate of 31.5% during the first quarter 2013.  The increase in the effective tax rate as compared to the linked quarter is primarily related to higher pre-tax income in the first quarter as a result of the valuation adjustment to the FDIC indemnification asset recognized during the fourth quarter 2013 as well as favorable state tax adjustments resulting from the completion of 2012 state tax returns and a related adjustment to deferred taxes recognized during the prior quarter.  While the effective tax rate may fluctuate from quarter to quarter due to tax jurisdiction changes and the level of tax-enhanced assets, the overall effective tax rate for the full year is expected to be in the range of approximately 32.0% - 34.0%.

CREDIT QUALITY – EXCLUDING COVERED ASSETS

The following table presents certain credit quality metrics related to the Company's uncovered loan portfolio as of March 31, 2014 and the trailing four quarters.

Net Charge-offs

For the first quarter, net charge-offs declined $1.6 million, or 44.4%, to $2.0 million compared to the linked quarter.  Significant charge-offs during the quarter included a $0.5 million valuation adjustment related to a commercial credit as well as a $0.4 million charge-off associated with the disposition of a commercial real estate credit.

Nonperforming Assets

Nonaccrual loans, including nonaccrual troubled debt restructurings, decreased $2.3 million, or 6.0%, to $35.3 million as of March 31, 2014 from $37.6 million as of December 31, 2013.  The decline in nonaccrual loans as compared to the linked quarter was primarily related to payments on two commercial real estate credits totaling $1.0 million as well as the charge-offs discussed above.

Accruing troubled debt restructurings decreased $1.7 million, or 11.2%, to $13.4 million as of March 31, 2014 from $15.1 million as of December 31, 2013.  This decline was primarily related to a $0.7 million performing loan that was refinanced at market terms upon maturity and is no longer classified as a troubled debt restructuring as well as a $0.8 million loan that was reclassified to nonaccrual status during the first quarter.

OREO decreased $7.1 million, or 35.7%, to $12.7 million during the first quarter as resolutions and valuation adjustments of $8.3 million exceeded additions of $1.2 million during the quarter.  While there were no individually significant additions during the first quarter, resolutions during the period included a single commercial property totaling $7.9 million which was added to OREO during the fourth quarter 2013.

Classified assets declined $7.0 million, or 6.4%, to $103.5 million as of March 31, 2014 from $110.5 million as of December 31, 2013 and decreased $27.0 million, or 20.7%, from $130.4 million as of March 31, 2013.  Classified assets are defined by the Company as nonperforming assets plus performing loans internally rated substandard or worse.

Delinquent Loans

As of March 31, 2014, loans 30-to-89 days past due totaled $13.9 million, or 0.38% of period-end loans, compared to $13.6 million, or 0.39%, as of December 31, 2013 and $18.2 million, or 0.56%, as of March 31, 2013.  The increase of $0.3 million, or 2.0%, during the first quarter was driven primarily by a $2.1 million increase in delinquent commercial real estate loans, partially offset by declines in delinquencies across the commercial, residential real estate and home equity loan portfolios during the period.

LOANS (EXCLUDING COVERED LOANS)

The following table presents the loan portfolio, excluding covered loans, as of March 31, 2014, December 31, 2013 and March 31, 2013.

Loans, excluding covered loans, totaled $3.6 billion as of March 31, 2014, increasing $108.6 million, or 12.6% on an annualized basis, compared to the linked quarter and $365.4 million, or 11.2%, compared to March 31, 2013.  The increase relative to the linked quarter was driven by growth in traditional C&I and owner-occupied commercial real estate, franchise finance and investment commercial real estate.

INVESTMENTS

The following table presents a summary of the total investment portfolio at March 31, 2014.

The investment portfolio remained flat on a linked quarter basis as $139.7 million of purchases were offset by sales, amortizations and other portfolio reductions.  The Company sold $92.5 million of securities during the quarter consisting primarily of certain CLOs in response to the potential regulatory impact under the Dodd-Frank Act (the "Volcker Rule") and, to a lesser extent, hybrid securities, CMOs and corporate securities, recognizing a net pre-tax gain of $0.1 million.  As of March 31, 2014, the overall duration of the investment portfolio decreased slightly to 4.2 years compared to 4.3 years as of December 31, 2013.  The yield earned on the portfolio during the quarter increased 14 bps to 2.52% from 2.38% for the linked quarter, driven by higher reinvestment rates and continued stabilization in premium amortization.  Due primarily to a tightening of mortgage and fixed income spreads during the quarter, the net unrealized loss included in accumulated other comprehensive loss related to the investment portfolio decreased $3.9 million to $12.4 million as of March 31, 2014.

DEPOSITS

Non-time deposit balances totaled $3.9 billion as of March 31, 2014, decreasing $20.8 million, or 0.5%, compared to the linked quarter.  Seasonal factors drove declines in commercial and public fund transaction balances of $21.5 million and $49.1 million, respectively.  This was offset by an increase in consumer balances of $50.0 million across multiple product offerings.

Time deposit balances increased $3.7 million, or 0.4%, due to an increase in public fund balances, partially offset by a slight decline in consumer balances.

The Company's total cost of deposit funding, inclusive of noninterest-bearing balances, was 28 bps for the quarter, representing an increase of 1 bp compared to the prior quarter and a decrease of 4 bps compared to the first quarter 2013.

CAPITAL MANAGEMENT

The following table presents First Financial's regulatory and other capital ratios as of March 31, 2014, December 31, 2013 and March 31, 2013.

Shareholders' equity increased $9.2 million during the quarter due to net income for the quarter and a decline in the unrealized loss related to the investment portfolio, partially offset by dividends declared and share repurchases.  The Company's regulatory capital ratios declined during the quarter due primarily to increases in tangible assets and risk-weighted assets resulting from the increase in uncovered loans.  The Company's tangible common equity ratio increased modestly during the quarter as the increase in tangible common equity outweighed the increase in tangible assets.  Regulatory capital ratios as of March 31, 2014 are considered preliminary pending the filing of the Company's regulatory reports.

Teleconference / Webcast Information

First Financial's executive management will host a conference call to discuss the Company's financial and operating results on Wednesday, April 30, 2014 at 8:30 a.m. Eastern Time.  Members of the public who would like to listen to the conference call should dial (888) 317-6016 (U.S. toll free), (855) 669-9657 (Canada toll free) or +1 (412) 317-6016 (International) (no passcode required).  The number should be dialed five to ten minutes prior to the start of the conference call.  The conference call will also be accessible as an audio webcast via the Investor Relations section of the Company's website at www.bankatfirst.com.  A replay of the conference call will be available beginning one hour after the completion of the live call through May 15, 2014 at (877) 344-7529 (U.S. toll free), (855) 669-9658 (Canada toll free) and +1 (412) 317-0088 (International); conference number 10045038.  The webcast will be archived on the Investor Relations section of the Company's website through April 30, 2015.

Press Release and Additional Information on Website

This press release as well as supplemental information and any non-GAAP reconciliations related to this release is available to the public through the Investor Relations section of First Financial's website at www.bankatfirst.com/investor.

About First Financial Bancorp

First Financial Bancorp is a Cincinnati, Ohio based bank holding company.  As of March 31, 2014, the Company had $6.5 billion in assets, $4.0 billion in loans, $4.8 billion in deposits and $691 million in shareholders' equity.  The Company's subsidiary, First Financial Bank, N.A., founded in 1863, provides banking and financial services products through its four lines of business: commercial, consumer, wealth management and mortgage.  The commercial, consumer and mortgage units provide traditional banking services to business and retail clients.  First Financial Wealth Management provides wealth planning, portfolio management, trust and estate, brokerage and retirement plan services and had approximately $2.5 billion in assets under management as of March 31, 2014.  The Company's strategic operating markets are located in Ohio, Indiana and Kentucky where it operates 106 banking centers.  Additional information about the Company, including its products, services and banking locations is available at www.bankatfirst.com.

Important Information for Investors and Shareholders

This communication does not constitute an offer of any securities for sale. This communication is being made in respect of the proposed transactions involving First Financial, The First Bexley Bank and Insight Bank.  In connection with the proposed transactions, the Company filed with the SEC registration statements on Form S-4 that included proxy statements/prospectuses for the shareholders of First Bexley and Insight.  INVESTORS AND SECURITY HOLDERS ARE URGED TO READ THE PROXY STATEMENTS/PROSPECTUSES AND ANY OTHER RELEVANT DOCUMENTS FILED WITH THE SEC IN CONNECTION WITH THE PROPOSED TRANSACTIONS BECAUSE THEY CONTAIN IMPORTANT INFORMATION ABOUT FIRST FINANCIAL, FIRST BEXLEY AND INSIGHT AND THE PROPOSED TRANSACTIONS.  Investors and security holders may obtain free copies of these documents through the website maintained by the SEC at http://www.sec.gov.  Investors may also obtain these documents, without charge, from First Financial's website at http://www.bankatfirst.com or by contacting First Financial's investor relations department at (877) 322-9530.

Forward-Looking Statement

Certain statements contained in this release which are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act.  Examples of forward-looking statements include, but are not limited to, projections of revenues, income or loss, earnings or loss per share, the payment or non-payment of dividends, capital structure and other financial items, statements of plans and objectives of First Financial or its management or board of directors and statements of future economic performances and statements of assumptions underlying such statements.  Words such as ''believes,'' ''anticipates,'' "likely," "expected," ''intends,'' and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.  Management's analysis contains forward-looking statements that are provided to assist in the understanding of anticipated future financial performance.  However, such performance involves risks and uncertainties that may cause actual results to differ materially.  These factors include, but are not limited to: economic, market, liquidity, credit, interest rate, operational and technological risks associated with the Company's business; the effect of and changes in policies and laws or regulatory agencies (notably the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act); management's ability to effectively execute its business plan; mergers and acquisitions, including costs or difficulties related to the integration of acquired companies, including the recently announced proposed acquisitions of The First Bexley Bank, Insight Bank and Guernsey Bancorp; the Company's ability to comply with the terms of loss sharing agreements with the FDIC; the effect of changes in accounting policies and practices; and the costs and effects of litigation and of unexpected or adverse outcomes in such litigation.  Please refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2013, as well as its other filings with the SEC, for a more detailed discussion of these risks, uncertainties and other factors that could cause actual results to differ from those discussed in the forward-looking statements.  Such forward-looking statements are meaningful only on the date when such statements are made, and the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such a statement is made to reflect the occurrence of unanticipated events.

SUPPLEMENTAL INFORMATION ON COVERED ASSETS

ACCELERATED DISCOUNT ON LOAN PREPAYMENTS AND DISPOSITIONS

During the first quarter, First Financial recognized approximately $1.0 million in accelerated discount on covered loans, net of the related adjustment on the FDIC indemnification asset.  Accelerated discount is recognized when covered loans, which are recorded on the Company's balance sheet at an amount less than the unpaid principal balance, prepay at an amount greater than their recorded book value.  Prepayments can occur through either customer driven payments before the maturity date or loan sales.  The amount of discount attributable to the credit loss component of each loan varies and the recognized amount is offset by a related reduction in the FDIC indemnification asset.

NET INTEREST MARGIN IMPACT

Net interest margin is affected by certain activity related to the covered loan portfolio.  The majority of these loans are accounted for under FASB ASC Topic 310-30 and, as such, the Company is required to periodically update its forecast of expected cash flows from these loans.  Impairment, as a result of a decrease in expected cash flows, is recognized as provision expense in the period it is measured and has no impact on net interest margin.  Improvements in expected cash flows, in excess of any prior impairment, are recognized on a prospective basis through an upward adjustment to the yield earned on the portfolio.  Impairment and improvement are both partially offset by the impact of changes in the value of the FDIC indemnification asset.  Impairment is partially offset by an increase to the FDIC indemnification asset as a result of FDIC loss sharing income.  Improvement, which is reflected as a higher yield, is partially offset by a lower yield earned on the FDIC indemnification asset until the next periodic valuation of the loans and the indemnification asset.  The weighted average yield of the acquired loan portfolio may also be subject to change as loans with higher yields pay down more quickly or slowly than loans with lower yields.

The following table shows the estimated yield earned by the Company on its covered and uncovered loan portfolios and the FDIC indemnification asset for the three months ended March 31, 2014.

COVERED ASSETS

The following table presents the covered loan portfolio as of March 31, 2014, December 31, 2013 and March 31, 2013.

As of March 31, 2014, 10.2% of the Company's total loans were covered loans.  During the first quarter, the total balance of covered loans decreased $48.5 million, or 10.6%, compared to the prior quarter.  Of this decline, $27.4 million consisted of covered loans classified as likely to exit and resulted from the continued successful execution of resolution strategies.  As required under the loss sharing agreements, First Financial must file quarterly certifications with the FDIC on all covered loans.  The payment of claims is subject to the FDIC's review for compliance with the loss sharing agreements and to date, all certifications have been filed in a timely manner and without significant issues.  The Company's loss sharing agreements with the FDIC related to non-single-family loans expire during the third quarter 2014 and the agreements related to single-family loans expire in the third quarter 2019.

Covered OREO decreased $4.1 million, or 15.0%, during the first quarter to $23.0 million as of March 31, 2014, driven primarily by $4.8 million of resolutions and valuation adjustments.  The Company recognized an immaterial net loss on sales of covered OREO during the quarter, which was offset by a corresponding increase in FDIC loss sharing income of approximately 80% of the net loss recognized.

ALLOWANCE FOR LOAN AND LEASE LOSSES - COVERED

Under the applicable accounting guidance, the allowance for loan losses related to covered loans is a result of impairment identified in ongoing valuation procedures and is generally recognized in the current period as provision expense.  However, if improvement is noted in a loan pool that had previously experienced impairment, the amount of improvement is recognized as a reduction to the applicable period's provision expense.  Additional improvement beyond previously recorded impairment is reflected as a yield adjustment on a prospective basis.  The timing inherent in this accounting treatment may result in earnings volatility in future periods.

The following table presents activity in the allowance for loan losses related to covered loans for the three months ended March 31, 2014 and for the trailing three quarters.

As a percentage of total covered loans, the allowance for loan losses totaled 2.58% as of March 31, 2014 compared to 4.13% as of December 31, 2013.

Net charge-offs on covered loans during the first quarter were $6.1 million compared to net recoveries of $1.5 million for the fourth quarter 2014.  During the first quarter, the Company recognized a negative provision expense of $2.2 million compared to a negative provision expense of $5.9 million for the linked quarter.  The difference between provision expense and net charge-offs / recoveries primarily relates to the quarterly re-estimation of cash flow expectations required under FASB ASC Topic 310-30.

In addition to the provision expense, the Company incurred loss sharing and covered asset expenses of $1.6 million, consisting primarily of credit expenses, and an immaterial amount of net losses related to covered OREO.  The negative FDIC loss sharing income of $0.5 million for the quarter reflects the quarterly re-estimation of expected cash flows and the corresponding offset related to the loss sharing and covered asset expenses and the net losses on sales of covered OREO.

SOURCE First Financial Bancorp