First Financial Bancorp
NASDAQ:FFBC
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First Financial Bancorp
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Good day, and welcome to the First Financial Bancorp Fourth Quarter 2019 Earnings Conference Call and Webcast. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Mr. Scott Crawley, Corporate Controller. Please go ahead.
Thanks, Alyssa. Good morning, everyone. Thank you for joining us today -- on today's conference call to discuss First Financial Bancorp's First -- Fourth Quarter and Full Year 2019 Financial Results. Participating on today's call will be Archie Brown, President and Chief Executive Officer; and Jamie Anderson, Chief Financial Officer.
Both the press release we issued yesterday and the accompanying slide presentation are available on our website at www.bankatfirst.com under the Investor Relations section. We will make reference to the slides contained in the accompanying presentation during today's call.
Additionally, please refer to the forward-looking statement disclosure contained in the fourth quarter 2019 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 December 31, 2019, and we will not be updating any forward-looking statements to reflect facts or circumstances after this call. I'll now turn the call over to Archie Brown.
Thank you, Scott. Good morning, everyone, and thank you for joining us on today's call. Yesterday afternoon, we announced our financial results for the fourth quarter and full year 2019. Before I turn the call over to Jamie to discuss those results in greater detail, I'd like to recap this year's performance and provide some highlights from the most recent quarter. 2019 was another successful year for first Financial. While we faced headwinds from the fed rate cuts and the large charge-off of a single franchise loan, the year was highlighted by record earnings, top quartile returns, shareholder-focused capital actions and the Bannockburn acquisition.
The addition of this experienced team and its capital market offerings will create new opportunities for our bank, clients and shareholders. Additionally, we continue to invest in strategic areas such as digital talent and technology, which will further enhance longer term performance.
Our 2019 performance demonstrates continued strength in our businesses despite a more challenging interest rate backdrop. Highlights include full year earnings of $2.14 per share, a 1.49% return on average assets, a 17.44% return on average tangible common equity and a sub-53% efficiency ratio when adjusted to remove acquisition-related and nonoperating items.
We were pleased with our fourth quarter results, which mark our 117th consecutive quarter of profitability and were highlighted by the strongest loan volume of the year, a full quarter of fee income from the Bannockburn acquisition and significant improvement in classified assets.
For the quarter, our adjusted performance metrics included earnings per share of $0.52, a 1.4% return on average assets, a 16.73% return on average tangible common equity and a 56% efficiency ratio.
Positive core banking trends include strong C&I and CRE loan demand, which resulted in record fourth quarter originations and 6% balanced growth on an annualized basis. Deposit trends were encouraging with over 8% growth in total average deposit balances and 20% growth in our average noninterest-bearing balances on an annualized basis.
Our net interest margin remained strong and on the high end of the range previously provided. Credit quality trends significantly improved as net charge-offs normalize during the period and we resolved a number of problem loans, resulting in significantly lower classified asset balances. We are pleased with our fee income performance this quarter with growth of almost 25% year-over-year driven by the full quarter impact of the Bannockburn acquisition and continued strength in client derivative fees and mortgage banking revenues. Expenses were elevated during the period due to higher variable costs. However, we continue to be focused on following a disciplined approach to managing our efficiency. Lastly, during the quarter, we continued our share repurchase program and bought an additional 1.6 million shares.
With that, I'll now turn the call over to Jamie to discuss further details of our fourth quarter results. After Jamie's discussion, I will wrap up with our forward-looking commentary and some closing remarks. Jamie?
Thank you, Archie, and good morning, everyone. Slides 3 and 4 provide a summary of our fourth quarter 2019 performance. Fourth quarter results remain solid as loan growth, net interest margin and fee income all met our expectations. While our efficiency ratio was a bit higher than we would have liked, this was a trade-off we were more than willing to make as the increase in noninterest expenses was primarily related to variable compensation and elevated collection expenses. These elevated expenses were a direct result of strong annual earnings and a significant decline in classified assets. Capital ratios declined slightly as a result of share repurchases during the year but remained strong overall for the year. Our tangible common equity ratio increased from 8.79% to 9.07% during 2019, despite repurchasing 2.8 million shares and increasing the common dividend by 15%.
Slide 5 reconciles our GAAP earnings to adjusted earnings, highlighting items that we believe are important to understanding our quarterly performance. Adjusted net income was $51.4 million or $0.52 per share for the quarter, which excludes a $2.9 million historic tax credit write-down, $700,000 of severance and merger-related costs and $1.7 million of other nonrecurring costs, including real estate divestiture and other branch consolidation expenses.
In addition, net income was negatively impacted by $747,000 of taxes for merger-related executive compensation. As shown on Slide 6, these adjusted earnings equate to a return on average assets of 1.41% and a return on average tangible common equity of 16.7%. Despite this slight increase during the quarter, our 56.4% adjusted efficiency ratio remained strong and reflects our diligent approach to expense management.
Turning to Slide 7. Net interest margin on a fully tax equivalent basis was 3.89% for the fourth quarter of 2019. The 7 basis point decline from the third quarter was better than we anticipated. Asset yields declined due to the September and October fed interest rate cuts. However, the impact to the margin was partially offset by a favorable shift in funding costs and mix.
As shown on Slide 8, the yield on loans declined 25 basis points and the investment yield dropped 5 basis points. We partially offset these declines by proactively lowering our cost of deposits 6 basis points and delevering the investment portfolio by approximately $300 million in the back half of the year to pay down higher cost borrowings.
Slide 9 depicts our current loan mix and balance changes compared to the linked quarter. End-of-period loan balances increased $138 million, which was primarily driven by ICRE originations. The remainder of the portfolio was relatively stable as Oak Street and mortgage increases offset slight declines in traditional C&I and small business banking loans.
Slide 10 shows the mix of our deposit base as well as the progression of average deposits from the linked quarter. Average deposit balances grew $204 million during the fourth quarter as non-interest-bearing, public fund and interest-bearing DDA growth outpaced a decrease in retail CDs. To mitigate declining asset yields, we actively manage deposit costs, resulting in a 6 basis point reduction to 74 basis points. Over the near term, we will continue to manage deposit pricing based on market conditions and our funding needs.
Slide 11 highlights our noninterest income for the quarter. Fourth quarter fee income was positively impacted by the full quarter impact of the Bannockburn acquisition as well as continued momentum in client derivatives and mortgage banking activity.
Noninterest expense for the quarter is shown on Slide 12. Higher salaries and benefits were driven by incentives tied to the overall company performance outpacing our peer group as well as the aforementioned strong client derivative and mortgage banking income. In addition, noninterest expenses included a $2.9 million write-down of a historic tax credit investment, $700,000 of severance and merger-related costs and approximately $1.7 million of other costs not expected to recur, such as branch consolidation costs.
We also incurred $840,000 of unplanned collection expenses during the quarter, which helped drive the significant reduction in classified assets. Next, I'll turn your attention to Slide 13, which depicts our asset quality trends for the last 5 quarters, which were overwhelmingly positive in the fourth quarter. We believe classified assets are the leading indicator of credit losses. During the fourth quarter, we were able to resolve a number of problem loans, which resulted in a 35% decline in classified assets to $89 million or 0.62% as a percentage of total assets.
In addition, fourth quarter net charge-offs declined to $3.5 million or 15 basis points of total loans and provision expense declined to $4.6 million, which sufficiently covered fourth quarter net charge-offs and our loan growth. Finally, as shown on Slides 14 and 15, capital ratios remained strong and are in excess of our stated targets. During the fourth quarter, we repurchased 1.6 million shares, bringing the 2019 total to 2.8 million shares, which further demonstrates our focus on shareholder value while sustaining financial and operating success. Our capital ratios were modestly impacted by the share repurchases but remain above all internal targets and will surely serve us well as we evaluate strategic M&A and other capital deployment opportunities in the future.
Tangible book value per share increased 1% during the quarter to $12.42, and tangible common equity declined 10 basis points to 9.07%.
I'll now turn it back over to Archie for thoughts on our 2020 outlook and closing comments.
Thank you, Jamie. Before we end our prepared remarks, I want to provide some commentary on our full year 2020 outlook, as shown on Slide 16. Our loan pipeline remains strong and we are optimistic about our ability to maintain mid single-digit loan growth for the full year. Regarding the net interest margin, assuming no further cuts, we expect it to remain relatively flat, excluding purchase accounting. As always, the net interest margin can fluctuate depending on a variety of factors, and we are actively working to mitigate downward rate pressure on the asset side through disciplined deposit pricing management. Our outlook for credit quality remains stable with a normalized provision covering charge-offs and accounting for loan growth. However, individual loans may cause volatility from time to time.
2020 fee income is expected to be in the range of $145 million to $155 million with seasonal fluctuations expected. With respect to expenses, we continuously focus on efficiency even while making strategic investments to support the long-term success of our business. We expect full year expenses in the range of $348 million to $358 million, which includes $6 million to $8 million of expenses related to new strategic technology investments. Overall, we continue to be pleased with the strength and performance of our company. 2019 was another successful year for First Financial and reflects the outstanding effort of our talented associates. We are well positioned to manage in the current environment and optimistic about our ability to sustain these successes over the coming year.
This concludes the prepared comments. Alyssa, we'll now open up the call for questions.
[Operator Instructions]. The first question today comes from Scott Siefers of Piper Sandler.
Jamie, I think first question is for you. Just looking for a little thought on what we should expect for the overall base of earning assets this year and how we should expect that to grow? I think the securities portfolio has disconnected a little from loan growth, it's been shrinking a bit. Will that revert such that the growth in the two is aligned? Or will there continue to be a disconnect? I guess, I'm just curious for how you're thinking about that dynamic.
Yes. So the plan at the moment would be -- I mean, we're going to -- depending on what the funding side looks like and deposit growth looks like, is to keep the securities portfolio flat for 2020. And then -- so the earning asset growth will be really all based on the loan side.
Okay. Perfect. And then separately, just curious for any updated thoughts on what you would anticipate from Bannockburn's revenues. I think when the transaction was announced we were thinking, maybe over a $30 million of annualized fee income. It looks like the run rate is a little closer to $25 million. Just curious if that should build up to the original anticipation or how you're thinking about that as well?
Yes. Scott, this is Archie. We do anticipate that over the course of the year we'll see that Bannockburn revenue continue to ramp up. The quarter 4 was certainly a little stronger than what we saw in the 1 month we had it in Q3. And we do expect it to exceed $30 million in revenue this year.
The next question today comes from Chris McGratty of KBW.
Jamie, just starting with the margin commentary. You guys are remixing the balance sheet, which is certainly helping the margin a bit. When you say stability, are we talking core off the fourth quarter? It looks like the fourth quarter is a little high and it a little bit outperformed your expectations because of some loan fees? I'm just trying to get a sense of what that starting base might be?
Yes. No, we think it's flat from this point out. Any, I would say, trailing decline that we're seeing on the asset side, we are managing our deposit costs down. We just made some revisions to the categories that you would expect in terms of money market accounts, CDs and whatnot that are -- that will offset the asset -- the decline in asset yields in the first quarter. So -- and when we talk about flat margin for 2020, we're talking about the core margin, excluding purchase accounting. So we are looking at having a flat core margin for '20, and then you'll see some trailing -- that decline that we've been seeing here on the -- on purchase accounting that we forecast in terms of purchase accounting. That should continue on in 2020. So the overall reported margin will come down slightly, but that's all due to purchase accounting.
Okay. That's great. Maybe on the capital front, it looks like you got a little over 2 million shares left. Can you just -- maybe a question for Archie, can you just remind me capital priorities? You keep talking about strategic M&A. Should we be thinking that you finished the buyback and come back for more? Or would you maybe consider pivoting towards an acquisition? Maybe some comments on type of deals you look at.
Sure, Chris. I think with regard to maybe capital priorities. We believe the dividend payout is about the high end of kind of the range that we've outlined, and we think it will kind of stay at the high end of that range, earnings payout going forward. With regard to buyback, we'll probably, I'd say, a little more of on a pause here in the first quarter just given CECL. And then as we get into Qs 2 through 4, we'll probably -- if conditions are favorable and right, we would -- I think you'd see us be more active on the buyback again. And I think we'll also be active in M&A if the right opportunities present themselves over the course of the year.
And on the M&A comment, just if I could sneak that in. I guess, what's the appetite? You guys have done both small and large deals. What's kind of the Board's thinking?
Yes. From a -- I don't think it's changed a lot from maybe the last time we talked about it. But from a priority perspective, certainly, in-market Metro transaction would be the most desirable in current footprint. But other acquisitions, bank acquisitions that brought certain business lines or capabilities in our geography would be another priority, maybe more good low-cost funding. And finally, I think we -- maybe middle of the last year, we started to say that we would look further out of the existing footprint, maybe more into the kind of the Midwest region, not going too far afield from where we are. But certainly, if you think about states that would be contingent to the current footprint, that's probably where you would see us consider additional acquisitions. We prefer acquisitions maybe on the -- certainly, the quarter to half our size. We've seen more deals in the last year, of course, that would be more of a MOE. I wouldn't say we rule that out, but the conditions would have to really line up perfectly for something like that to have in terms of low premium, all the social factors. And as you know, those are just difficult to do.
Great. And then the last one. Jamie, is that tax rate FTE or non-FTE, that 19%?
That would be the effective tax rate. Yes. So FTE.
[Operator Instructions]. Our next question today comes from Jon Arfstrom of RBC Capital Markets.
A couple of things have stood out. The improvement in credit, Archie or Jamie, just wondering if you could talk a little bit more about that? And what exactly happened there? It's obviously positive. And is there more to come there? Did you accomplish what you wanted for the quarter?
Yes, John, we were really pleased. I mean we worked diligently all the time on credit and trying to work through the problems, and you get certain quarters where it all comes together and that certainly happened in the fourth quarter. We had probably $25 million or so just in payoffs during the quarter of classified loans. We did do a small sale of about $12 million of small business loans that were in that kind of substandard nonaccrual classification areas. And again, these are very granular, small kind of loan, but we felt it was best to get those moved out, and we were able to do so and get them done at carrying value. So we didn't have any additional charges related to that movement. So that was probably the other big piece.
Okay. The other number that stood out to me in the release in your comments, you talked about a 31% increase in loan originations linked quarter.
Yes.
Just wondering if you could talk a little bit about what changed, if anything?
Well, for us, CRE has been strong all year. And certainly, Q4 was our CRE group's strongest quarter. But I think the thing we were most pleased about was what happened on the commercial banking side. Our strongest quarter in originations for the year, probably 30% higher than any other quarter. So just really -- a really nice origination quarter on the commercial side as well. So just -- again, a lot of work going on. We started to -- we had a few nice successes that we're able to get closed during the quarter. And we think that momentum will probably be stronger in 2020 than it was overall in 2019. I will say that we had a significant jump in originations. Loan growth was, I think, moderate for the quarter. We did have our highest payoff quarter as well in Q4, in addition to the larger amount of work out that we were successful in accomplishing. So a lot happened, but very pleased with the originations side.
Okay. And on your loan growth guidance, I think what you're saying is maybe a little bit more optimism on commercial than for 2020?
Yes, that's right.
Okay. One more small one on your expense guidance for 2020. You have the line $6 million to $8 million of tech investments. Can you talk a little bit about what that is? Obviously, support that, but talk a little bit about what it is? What's different there?
Sure. Yes. John, we started about a year ago, really evaluating where we were on technology. We actually had some third parties come in and help us just look at our gaps to where we want to be long term, to be long-term relevant and use digital technology in a way to help us grow. And from that, we established a set of priorities, including adding talent and various technologies, and we started to do that during the year, that will ramp up even more this year, but we've rolled out industry-leading technology and for digital mortgage, commercial loan origination. This quarter, we will roll out new digital online deposit account opening solution. We've been adding talent in our digital areas and our digital marketing areas as well as in our IT groups. Some of this will also include talent working on automation and use -- implementing some RPA technologies in various processing areas of the company. So there's a lot happening, but it's a combination, probably half of that is in talent and half of that will be in technology spend.
Okay. Okay. Good. And then I guess, just one more, if I can. Maybe for you, Jamie, you're flagging seasonality for noninterest income, you have Bannockburn now and you obviously have mortgage banking and a few other things. What do you -- what's the message on that?
Yes. I mean, I think the only real message there -- I mean, our first quarter is typically light when it comes to fee income. Just with the equity and mortgage banking down and the number of days and whatnot for the first quarter. It's typically down some of -- a couple of those categories are just like mortgage banking are typically down 10%, 20% in that first quarter, and then it just ramps back up and is more linear throughout the year. [Indiscernible] this quarter, John.
This concludes our question-and-answer session. I would like to turn the conference back over to Archie Brown for any closing remarks.
Thank you, Alyssa. Thank you all for joining our call today. We are excited about our story and the work we're doing, and we look forward to talk to you again in the future. Have a nice day.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.