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First Financial Bancorp (NASDAQ:FFBC)
Q4 2019 Earnings Call
Jan 24, 2020, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the First Financial Bancorp Fourth Quarter 2019 Earnings Conference Call and Webcast. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]

I would now like to turn the conference over to Mr. Scott Crawley, Corporate Controller. Please go ahead.

Scott T. Crawley -- Corporate Controller and Principal Accounting Officer

Thanks, Elisa. Good morning everyone, thank you for joining us today on today's conference call to discuss First Financial Bancorp's 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 31st 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.

Archie M. Brown -- President and Chief Executive Officer

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, 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, I like to 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 non-operating 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% balance growth on an annualized basis.

Deposit trends were encouraging with over 8% growth in total average deposit balances and 20% growth in our average non-interest 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 normalized 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?

James M. Anderson -- Chief Financial Officer

Thank you, Archie and good morning everyone. Slides 3 and 4 provide a summary of our fourth quarter 2019 performance. Fourth quarter results remained 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 non-interest 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 remain 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 writedown, $700,000 of severance and merger-related costs and $1.7 million of other non-recurring 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 the 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 cost 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 point 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 a 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 non-interest 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.

Non-interest 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, non-interest expenses included a $2.9 million writedown 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 five 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 remain 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 as 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.

Archie M. Brown -- President and Chief Executive Officer

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. The 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 remained 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 the successes over the coming year.

This concludes the prepared comments. Elisa, we'll now open up the call for questions.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from Scott Siefers of Piper Sandler. Please go ahead.

Scott Siefers -- Piper Sandler -- Analyst

Good morning guys.

Archie M. Brown -- President and Chief Executive Officer

Good morning, Scott.

Scott Siefers -- Piper Sandler -- Analyst

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?

James M. Anderson -- Chief Financial Officer

Yes. So the plan at the moment would be, I mean, and 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.

Scott Siefers -- Piper Sandler -- Analyst

Okay. Perfect. Thank you. And then separately, just curious for any updated thoughts on what do we anticipate from Bannockburn revenues. I think when the transaction was announced, we're thinking maybe over $30 million of annualized fee income, it looks like the run rate is a little closer to $25 million, so just curious if that should build up to the original anticipation or how you're thinking about that as well?

Archie M. Brown -- President and Chief Executive Officer

Yes. Scott, this is Archie. We do anticipate that over the course, you will see that Bannockburn revenue continues to ramp up. The quarter four was certainly a little stronger than what we saw in the one-month we had it in Q3. And we do expect it to exceed $30 million in revenue this year.

Scott Siefers -- Piper Sandler -- Analyst

Okay, perfect. All right, thank you.

Archie M. Brown -- President and Chief Executive Officer

Yes.

Operator

The next question today comes from Chris McGratty of KBW. Please go ahead.

Chris McGratty -- KBW -- Analyst

Hey. Good morning. Thanks. Jamie, just starting with the margin commentary, you guys are -- remix the balance sheet, which is certainly helping the margin a bit. When you say stability, are we talking core off the fourth quarter? Looks like the fourth quarter is a little high, and a little bit outperformed your expectations because of loan fees. I'm just trying to get a sense of what that starting base might be?

James M. Anderson -- Chief Financial Officer

Yes, now, 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 saying here on the 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.

Chris McGratty -- KBW -- Analyst

Okay, that's great. Maybe on the capital front, it looks like you got over 2 million shares left. Can you just -- maybe a question for Archie, can you just remind me capital priorities. I mean you keep talking about strategic M&A, should we be thinking that you should finish the buyback and come back for more or would you maybe consider pivoting toward an acquisition, maybe some comments on type of deals you look at? Thanks.

Archie M. Brown -- President and Chief Executive Officer

Sure. Chris, I think with regard to maybe capital priorities. We believe the dividend payout is about the high-end, kind of, the range that we've outlined and we think it'll be able to 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 bit more on a pause here in the first quarter, just given CECL. And then as we get into Q2 through Q4 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.

Chris McGratty -- KBW -- Analyst

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?

Archie M. Brown -- President and Chief Executive Officer

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 end market, Metro transaction would be the most desirable in the current footprint. But other acquisitions -- bank acquisitions that brought certain business lines or capabilities in our geography would be another priority maybe or good low-cost funding.

And finally, I think we, maybe middle of 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 a field 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, a quarter to half our size, but we've seen more deals in the last year, of course, that would be more of MOE. I wouldn't say we rule that out, but the conditions will have to really line up perfectly for something like that to happen in terms of low premium, all the social factors, as you know those are just difficult to do.

Chris McGratty -- KBW -- Analyst

Great. And then the last one, Jamie. Is that tax rate FTE or non-FTE, the 19%?

James M. Anderson -- Chief Financial Officer

That would be the effective tax rate. Yes, so FTE.

Chris McGratty -- KBW -- Analyst

Okay. Great. Thanks.

Operator

[Operator Instructions] Our next question today comes from Jon Arfstrom of RBC Capital Markets. Please go ahead.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Thanks. Good morning, guys.

James M. Anderson -- Chief Financial Officer

Hey, John.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Couple of things that 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?

James M. Anderson -- Chief Financial Officer

Yes, John, we were really pleased. I mean we work 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's 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 we're in that kind of sub-standard non-accrual classification areas.

And yes, these are very granular or small kind of loans, 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.

Jon Arfstrom -- RBC Capital Markets -- Analyst

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.

James M. Anderson -- Chief Financial Officer

Yes.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Just wondering if you could talk a little bit about what changed it, if anything?

Archie M. Brown -- President and Chief Executive Officer

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 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 were able to get closed during the quarter. And we think that momentum will probably stronger in 2020 then 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 workout that we were successful in accomplishing. So lot happen but very pleased with the origination side.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Okay. And on your loan growth guidance, I think what you're saying is maybe a little bit more optimism on commercial, then for 2020?

Archie M. Brown -- President and Chief Executive Officer

That's right.

Jon Arfstrom -- RBC Capital Markets -- Analyst

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, you support that, but talk a little bit about what it is? What's different now?

Archie M. Brown -- President and Chief Executive Officer

Yes, Jon, we started about a year ago, really, evaluating where we were on technology. We actually had some third-party -- 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 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, in our digital marketing areas as well as in our IT groups. Some of this will also include talent working on automation and 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 would be in technology spend.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Okay, good. Thank you. And then I guess just one more if I can, maybe for you, Jamie. You're flagging seasonality for non-interest 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?

James M. Anderson -- Chief Financial Officer

Yes, I think -- 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 activity in mortgage banking down and the number of days and whatnot for the first quarter. It's typically down some of the -- a couple of categories are -- 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.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Okay, all right. That's what I thought. Thanks.

James M. Anderson -- Chief Financial Officer

Next quarter, John. Yeah.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Yes. Okay, all right. Thanks a lot, guys. I appreciate it.

James M. Anderson -- Chief Financial Officer

Thanks, John.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Archie Brown for any closing remarks.

Archie M. Brown -- President and Chief Executive Officer

Thank you, Elisa. 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.

Operator

[Operator Closing Remarks]

Duration: 27 minutes

Call participants:

Scott T. Crawley -- Corporate Controller and Principal Accounting Officer

Archie M. Brown -- President and Chief Executive Officer

James M. Anderson -- Chief Financial Officer

Scott Siefers -- Piper Sandler -- Analyst

Chris McGratty -- KBW -- Analyst

Jon Arfstrom -- RBC Capital Markets -- Analyst

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