Q4 2019 Earnings Call

So the press release we issued yesterday and the accompanying slide presentation are available on our website at ww.w bankatfirst.com. The investor relations section. We will make reference to the slides contains in the existing 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 off. The information 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 on the Outer Edge over 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 turned the car off 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 face 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 of Bannockburn acquisition.

This experience 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 and our businesses. Despite a more challenging interest rate back drop off.

the addition of

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 changes in equity and a 53% efficiency ratio, when adjusted to remove acquisition-related and non-operating items.

We were pleased with our fourth quarter results, which Mark are hundred Seventeen consecutive quarter of profitability and we're 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

Performance metrics included earnings per share of $0.52 a 1.4% return on average assets a 16.73% return on average tangible, and a 56% efficiency ratio.

Positive core banking Trends include strong and Siri loan demand which resulted in record fourth-quarter origination ins and 6% balanced growth on an annualized basis deposit transfer issue with over 8% growth in total average deposit balances and 20% growth in our average non-interest-bearing balances on an annualized basis are not interest margin remains strong and on the high end of that range previously provided.

Credit quality significantly improved as net charge-offs normalized During the period and we resolved the number of problem loans resulting in significantly lower classified asset balances.

We were pleased with our 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.

We continued our share repurchase program and bought an additional 1.6 million shares.

last

With that all 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 Colby. Thank u r g and good morning everyone slides 3 and 4 provide a summary of our fourth quarter 2019 performance fourth-quarter results remains solid as loan no 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 a non interest expenses was primarily related to variable compensation and elevated collection expenses.

These elevated these elevated expenses were direct result of strong annual earnings in a significant decline in classified assets.

capital

Declined slightly as a result of share repurchases during the year, but remain strong overall for the year are tangible common equity ratio increased from 8.69% to 9.07% during 2019, despite repurchasing 2.8 million shares and increasing the common dividend by 15% off.

Slide Five 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 dollars or $0.52 per share for the quarter which excludes a 2.9 Million Dollar historic tax-credit write down 700,000 of September and merger-related cost and one point seven million dollars 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 six these adjusted earnings equate to a return on average assets of 1.41% and a return on average tangible common Equity of 16.7 months despite the slight increase during the quarter are 56.4% adjusted efficiency ratio remains strong and reflects our diligent approach too expensive or turning to slide seven net interest. Margin on a fully tax-equivalent. Basis was 3.89% for the fourth quarter of 2019. The 7 basis-point declined from the third quarter was better than we anticipated declined due to the September in October fed interest rate Cuts. However, the impact of the margin was partially offset by a favorable shift and funding costs and mix

as shown on

5-8 the yield on loans declined 25 basis points in the investment yield dropped five basis points. We partially offset these declines by proactively lowering our cost of deposits six basis points and delivering the Investment Portfolio by approximately three hundred million dollars in the back half of the year to pay down higher cost of borrowings.

5-9 to fix our current loan mix and balance changes compared to the linked quarter into. Loan balances increased $138, which was primarily driven off origination. The remainder of the portfolio was relatively stable as Oak Street and mortgage increases offset slight declines and traditional home and small business banking loans.

Slide ten shows the mix of our deposit base as well as a progression of average deposits from the linked quarter average deposit balances grude 204 million dollars during the fourth quarter non-interest-bearing public fund an interest-bearing DDA growth outpaced a decrease in retail CDs.

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Declining asset yields. We actively managed 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.

Flight eleven 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 continuing them inclined derivatives and Mortgage Banking activities.

Not interest expense for the quarter is shown on slide twelve higher salaries and benefits were driven by incentives tied to the overall company performance outpacing our peer group home. Well as the aforementioned strong client derivative and Mortgage Banking income.

In addition non-interest expenses included a 2.9 Million Dollar write-down of a historic tax-credit investment $700,000 of severance and merger-related cost and approximately 1.7 million dollars 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 down to $89 or 62% as a percentage of total assets

In addition fourth-quarter net charge-offs declined to 3.5 million dollars or fifteen basis points of total loan and provision expense declined to four point six million dollars off sufficiently covered fourth-quarter net charge-offs and our loan growth.

Finally as shown on slides 14 and 15 Capital ratios remain strong and or an excess of our stated targets during the fourth quarter. We repurchased 1.6 million chairs, bring bringing the 2019 total to 2.8 million shares which further demonstrates our focus on shareholder value while sustaining financial and operational success. Our Capital ratios were modest modestly impacted by the share repurchases, but remain above all internal targets and we'll 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 ten basis points the 9.07% off on I'll turn it back over to our chief or thoughts on our 2020 Outlook and closing comments.

Thank you, Jamie before we had our prepared remarks. I want to provide some commentary on our full-year 2020 Outlook as shown on slide sixteen.

A long pipeline remains strong and we were optimistic about our ability to maintain mid single-digits 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 a net interest margin can fluctuate depending on a variety of factors, and we were actively working to mitigate downward rate pressure on the asset side through discipline deposit pricing management.

I would look 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.

Incomes expected to be in the range of $145 to $155 million dollars 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 to $358, which includes six to eight million dollars 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 our prepared comments. Alyssa will now open up the call for questions. Thank you. We will now begin the question-and-answer session to ask a question. You may press * then 1 on your touchtone know if you were using a speaker phone, please pick up your handset before pressing the keys. If at anytime your question has been addressed and you would like to withdraw your question, please press * then two at this time. We will pause momentarily to assemble our roster.

The first question today comes from Scott ciphers of Piper Sandler, please go ahead morning guys Scott. I'm 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 the Securities portfolio has, you know connected to a little from loan growth. It's been shrinking a bit. Well that revert 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 thinking about. Yeah. So the plan at the moment would be mean we're going to depending on what the funding side looks like and deposit growth looks like is to keep the secured portfolio flat for for 2020 and and then so the earning asset growth will be really all based on the loan side.

Okay, perfect.

Thank you, and then separately just curious for any updated thoughts on what you would anticipate from Bannockburn revenues. I think when the transaction was announced we're thinking maybe over thirty million of them. Looks like the Run rate is a little closer to $25. Just just curious if that should build up to the original anticipation or or how you're thinking about that as well.

Yes. This is Archie. We do anticipate that over the course of your will see that bank Revenue continue to ramp up. You know quarter for was certainly a little stronger than what we saw in the is the one month. We had it in Q3, and we we do expect it to exceed $39 in revenues this year.

Okay, perfect. All right. Thank you.

The next question today comes from Chris negrotti of please go ahead.

Hey, good morning. Thanks. Jamie. Just starting with the margin commentary. You guys are remixes the balance sheet, which is certainly helping the margin a bit when you say stability that are we talking core off the the fourth quarter look like the fourth quarter is a little high and a little bit out performed your expectations cuz it's a blown fuse. I'm just trying to get a sense of of what that starting base might be dead. Yeah. No, we think it's we think it's flat from this point out any kind of 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 you know, the categories that you would expect in terms of money market accounts page and whatnot that are that will offset the asset that declined an asset you in the first quarter. So and when we talk about flat margin for mm

We're talking about the core margin. Uh

Excluding purchase accounting. So we are looking at having a flat core margin 4:20 and then you know, you'll see some trailing that decline that we've been seeing here on the bond-purchase account that we that we forecast in terms of purchase accounting that should continue on in a 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 month on the Capitol Front looks like you got a little over two million shares left. Can you just maybe question for you can just remind me Capital priorities talking about strategic m&a wage. Should we be thinking that you've finished the buy back and come back for more or would you maybe consider pivoting toward the neck position may be done some comments on type of deals you look at things.

Regard to maybe Capital priorities. We believe the dividend payouts about the high end up kind of the ranges. We've outlined in the table kind of took the high end of that range learning about going forward with regard to buy back. Probably I'd say we're more of a on a policy here in the first quarter just given given Cecil and then as we get into accuse 2 3 4 will probably you know, if conditions are favorable and right we would I think you'd see any more active on the buy back again. And I I think we'll also be you know active in m&a if if the right opportunities present themselves over the course of the year.

And on on the m&a, just if I could sneak that in.

I guess what's the appetite you guys have done both small and large deals. What's what's kind of the the boards thinking, you know in a from a I don't think it's changed a lot for maybe Thursday last time we talked about it, but from a Friday perspective certainly in Market Metro transaction would be the most desirable in in the current footprint off, but other other Acquisitions Bank Acquisitions did brought certain business lines or capabilities in in our geography would be another name maybe or good good low-cost funding and finally, I think we you know, maybe middle of last year we started to

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 the current footprint. That's that's probably where you would see us consider additional Acquisitions. We prefer Acquisitions, maybe on the you know, surfing the quarter to a half our size if we see more deals in the last year, of course, that would be more of a m o e I wouldn't say we ruled that out but the conditions would have to really line up for something like that to happen in terms of low premium all the social factors in these. You know, those are those are just difficult to do

And then the last name you said tax rate ft.

You're not ft the 19% That's that would be the effective tax rate. Yeah, so ft. Okay, great. Thanks.

Again, if you have a question, please press * then 1 hour. Next question today comes from John Armstrong of RBC Capital markets, please go ahead. Thanks morning guys. Hey, John a couple of things that stood out the Improvement in credit Archer Jamie. Just wondering if you could talk a little bit more about that. And you know, what exactly happened there. It's obviously positive and is is there more to come there? Did you accomplish what you wanted for the quarter?

Yeah, John , we were really pleased I mean we you know, we worked diligently all the time on on credit and trying to work through the problems and you get certain corded where it all comes together and that certainly happened in the fourth quarter. We had probably twenty five million dollars or so just in and pay offs during the quarter of classified loans we could do a small sale of about about twelve million dollars of small business loans that were in that kind of substandard non-accrual classification areas any of these are very grain. They're small kind of loans, but we felt it was best to to get those moved out and we were able to do so and, you know take them done at carrying value. So we didn't have any additional charges related to that to that movement. So that was probably the other big piece.

okay, the other number that's

Stood out to me in the release of your comments. You talked about a thirty 1% increase in loan originations 1/4. Just wondering if you could talk a little bit about what changed it off. If anything. Well, you know for us has been strong all year and certainly Q4 was was our strongest quarter replied. I think the thing we were most pleased about was what happened on the commercial banking side our strongest quarter and origination for the year. Probably Thursday hiring any other quarter. So just really a really nice origination port 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 were able to get closed during the the quarter and you know, we think we think that momentum will probably be stronger in 2020 than it was overall in 2019.

I will say that.

We had a a significant jump in origination long growth was I think moderate for the quarter. We did have our highest payoff quarter as well in Q4 in addition to the you know, larger amount of work out that we were successful in accomplishing. So a lot happened but very pleased with the origination side. Okay, and on your loan growth, I think what you're saying is maybe a little bit more optimism on Commercial than for 2020. That's right. Okay, one more small one on your expense guidance for 2020. You have the the line six million of tech Investments. Can you talk a little bit about what that is, you know, obviously support that but talk a little bit about what it is with different bulbs. Yes, John 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 age.

Where we want to be long-term to be long-term relevant and use digital technology in a way to help.

What's 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. I rolled out industry-leading technology and for digital mortgage commercial loan origination. This quarter will roll out new digital online deposit account opening and 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 Raw Talent working on Automation and implementing some technologies in various processing areas of the companies. There's a lot happening but it's a combination probably half of that talent and half of that would be in technology spend.

Okay. Okay good. Thank you. I guess just one more if I can maybe for you Jamie flagging seasonality for non-interest income you have nanak or noun and obviously have Mortgage Banking and a few other things. What do you what's the message on that? Yeah, I think I mean I think the the only real message there. I mean our first quarter is typically off like when it comes to fee income just with the activity and Mortgage Banking down and the number of days and whatnot for the for. The first quarter is typically down know some of the couple of those categories are just like Mortgage Banking are typically down, you know ten twenty percent in that first quarter and then it just ramps back up and and is more linear throughout the year off. All right, that's what I thought. Yeah. Okay. All right. Thanks a lot. I appreciate it.

This concludes our question-and-answer session. I would like to turn the conference back over to our Jeep.

around 4 and closing remarks

Thank you, Alyssa. Thank you all for joining our call today. We are excited about our story in the work we're doing and we look forward to talking to you again in the future a nice day.

Circumference is now concluded. Thank you for attending today's presentation. You may now disconnect.