Q4 2019 Earnings Call
I would now like to turn the conference over to Mike Reagan president.
And CEO , please go ahead. Thanks Harley, and thanks to everyone in advance for that joined us for our call Welcome to the earnings conference call and webcast 4th quarter ending December 31st, 2019 joining me this afternoon or Mark Hardwick our chief operating officer and Chief Financial Officer as well as John Martin our chief credit officer First Merchants release earnings in a press release this morning at approximately 8:00 a.m. Eastern time and our presentation today speaks to material from that release the directions that took it to the webcast. We're also contained at the back of back end of the release and my comments begin on page for a slide titled fourth quarter 2019 highlights.
First Merchants posted 47.8 million and net income or 87 cents a share by comparison with 41.7 Thursday the 4th quarter of 2018 or 85 cents a share in November . We were pleased a complete a well-executed systems conversion of Monroe Bank & Trust Financial in the office. It's very satisfying for our clients and our team-mates to get off to a great run rate and we think we've accomplished that.
including
It in the results for the quarter, we're integration expense totaling 1.9 million or 3 cents per share.
We had a strong fourth-quarter with Marketplace execution delivering some of the growth that we were looking for. You might recall in late October . We talked about having a full pipeline going into the quarter much of found its way through closings on to our balance sheet and virtually every credit and Loan category, including our deposit Gathering. And so what we saw was organic loan growth of 161000 a 7.8% annualized growth rate and organic non maturity deposit growth of 154 million is 7.7 annualized growth rate.
Our third quarter also strong in my view and included $0.17 of acquisition expense. Whereas our fourth quarter included only $0.03 off. It allows is the bottom bullet point on page four captures a resumption of our high performance metrics, whether you look at our return on average assets of over 1.5% nearly 11% return on average Equity or about a 51% efficiency ratio even to include the three sense of of acquisition expense included and so strong fourth-quarter plays into a full year, which I'll speak on again on page five and some of the resumption of metrics that I was talking about my life seen most readily either and Mark's comments, which follow mine or in one of the trended quarter of material in a press release financials.
so on page five
Key takeaways from our full-year 2019 performance record net income of 164.5 million dollars a 3.3% increase over a 2018 Ed earnings of 159.1 million.
Earnings per share with of $3.19 excluding Twenty One cents of all in full-year acquisition expense, which would have totaled to a normal life is $3.40 in comparison to 2018 s earnings of $3.22 per share.
Talked all throughout the year about our excitement to expand our franchise in the Michigan that actually took place on the legal event, which was September 1st and the fourth quarter then capturing phone now or all three months and full-year capturing four months of activity from our time in Michigan the acquisition expenses. I referenced earlier was three thirteen point seven million pre-tax or $21 a share.
balance
NASA it's grew 26% over 2018 to 12.5 billion.
Serving a healthy economy Healthy Communities discipline Market coverage throughout the year produced organic loan growth of 507 million a 7% growth rate organic deposit growth of $979 million dollars or 12.6% growth rate.
Or tangible Book value increased to $21.94 a share or 14.7% over a year end 2018 marks going to pick up from here and get a little deeper into the financials. Thanks. Mike. My comments will start on slide seven. We're total assets and line seven increased by two point six billion or 26% since you're in 2018 month total total loans online to of increased by one point two billion this year or 17.1% acquired loans totaled $733 million is organic growth totaled $507 or 7% is Mike mentioned Investments online one increased by $963 billion or nearly 59% from your end due to strong deposit growth and acquired liquidity and additionally online for Goodwill and intangible has increased by $109 million negative amortization due to the purchase of Monroe Bank & Trust
on September 1st of 2000
Nineteen the composition of our eight point five billion dollar loan portfolio shown on slide 8 continues to produce strong loan yields have the loan portfolio yield for the fourth quarter of 2019 totaled 5.19% down from the year-to-date average of 5.27% is the graph on the right illustrates 66% of our loans are variable with half for pricing daily demonstrating the asset sensitivity of our bank.
On slide nine or Investment Portfolio has a longer than pure duration, which is a good offset to our variable rate loan portfolio and during the year. We've increased the portfolio to $2,000 billion from 1.6 billion at your end to deploy excess liquidity and protect the bank against falling interest rates, as of December Thirty One 2019 or annualized gain total 71.5 million and the portfolio yield totaled 3.23%
On slide ten total deposits increased by 2.1 billion or 26.9% Monroe Bank & Trust accounted for 1.1 billion of the growth while organic wage growth totaled $979 million or an annualized 12.6%
common equity on line 7 is increased by $378 million during 2019 Beyond normal earnings dividends and other comprehensive income fluctuations the all stock purchase Monroe Bank & Trust increased Equity by 230 million. Additionally we repurchased
22 million dollars of stock through throughout 2019
capital and liquidity ratios are positioned. Well for the future and management is pleased with the structure of our balance sheet our loan-to-deposit ratio tools 86% of our loan loan to agent ratio and 68% of tangible. Common Equity totals 10.16%
As I previously mentioned the mix of our deposits on slide seven is the true strength of our company fourth-quarter deposit cost total of 118 basis points down from year-to-date cost of 126 basis points off or deposit cost also increased by fifteen or decreased by 15 basis points in the fourth quarter compared to the third quarter. This is our first decrease in a decrease in interest expense since the feds started raising interest rates the FED funds rate back in June of 2017. Additionally, we're pleased that interest expense for the quarter declined by nearly 1 million even after adding an additional two months in the fourth quarter for Monroe.
All regulatory Capital ratios on slight 12 or above the regulatory definition of well-capitalized in our internal targets providing Capital strength and flexibility into the future off the corporation's net interest. Margin on slide thirteen reflects a growing net interest income line driven by driven in 2019 by balance sheet growth 2019 full year net interest. Margin totaled 369 down from 2018 is total of 4% net interest margin for the for the fourth quarter equal the third quarter of 3.62%
Don't anticipate that fair value accretion will continue to run as high as the 18 basis points that we recognized in the fourth quarter throughout all of 2020, but we feel good about our deposit pricing strategies and um and our ability to continue to decrease our interest costs going forward.
Total non-interest income on slide 14 total of 86.7 million as of December Thirty One 2019 an increase of ten point two million or 13.3% off customer specific line items accounted for ten and a half million dollars of increase in total non-interest income customer specific line items driving the improve the improved Revenue wage growth and derivative hedge income of 2.9 Million fiduciary and wealth management fee increases of 2.7 million card payment Fee Fee's of 2.2 million and service charges on deposits of two million.
Not interest expense on slide fifteen total 246.8 million and 2019 a 26.8 million increase from 2018 of the increase merger-related expenses total 13.7 million.
Now on slide sixteen is Mike mentioned in his opening remarks on line 9 EPS total $3.19 for the year ended up 12:31 2019 and when adjusted for merger-and-acquisition expenses of $0.21 eps total 3.4 $3.40 an increase of 5.6% over 2018.
Online 10 the efficiency ratio for the year total 52.73% and when adjusted as highlighted in the footnotes when adjusted for acquisition expense totaled 49.69%
On the slides Seventeen and eighteen you can see yours quarterly results and the corresponding acquisition expense adjustment. We're very pleased that we can follow up a record 52% Improvement in earnings per share in 2018 with another positive growth story on slide. Nineteen our total compound annual growth rate up tangible. Common Equity per share is 10.13% going all the way back to 2010 and our dividend yield is just over 2.5% Thanks for your attention and John Martin will discuss loan portfolio composition and related asset quality trends.
All right. Thanks.
Mark and good afternoon. I'll provide a year end and quarterly summary of the loan portfolio mentioned review the asset-quality and the asset-quality roll-forward cover the allowance of provisioning then close with a few remarks on Cecil and the credit environment.
Turning to slide Twenty-One the pace of loan growth picked up in the quarter growing $161 or 7.8% annualized for the quarter cup came from commercial and Industrial lending online One Construction lending online 3 in Public Finance on line 7. Our sponsor Finance business is now roughly three hundred twenty million dollars in outstandings and $420 in commitments. And that's a part of in is included in the cni loans online. One of these boxes are in commercial industrial loans online one and are highlighted doing I'm highlighting it do it to our growing activity in the unit over the last several quarters and years a little more construction loans were up $117 on line three as funding stroke growth in the quarter while are originated stabilized and moved to the permanent Market model. So I reduction in c r e non
owner-occupied online for
With net reductions of $109 for the quarter from projects moving to the secondary market and the sale of properties.
Online seven Public Finance grew by $75 million dollars where we saw several larger opportunities in the Public Finance book where we generally take more interest with longer-term fixed assets while credit risk is mitigated by the taxing abilities of the various governments and their agencies turning to asset-quality on slide 22000 on portfolio is asset quality remains strong online One non-accrual loans were down six point seven million dollars for the quarter and 10.1 million dollars for the year off even after adding roughly 5.5 million dollars from the acquired Michigan portfolio last quarter to provide a little color behind the quarterly change the decline resulted largely out from the finance and pay off of an agricultural relationship which represented 3.5 million dollars in outstandings, uh, moving down the slide two lines two and three other real estate owned and phone number.
Your loans were mostly unchanged increasing.
Hundred thousand dollars and $200,000 respectively all 90 days past due we run changed it only $100,000.
Online eight classified loans or those loans with a regulatory definition of a well-defined weakness were up in the quarter $18 and have been relatively stable hovering around two point one to 2.4% of loans over the last several years turning to slide twenty-three which reconciles the migration of non-performing assets month. We started the quarter in the far right column titled 2019 with 31 and 90 day delinquencies. We added sixteen point seven million dollars of New Jersey are cruel loans, which includes the five point five million dollars from the Michigan portfolio. I mentioned earlier
We resolved 12.8 million dollars of the same online 3 with seven point four million dollars moving from non-accrual owns two or three online for resulting large from a $6 or 63% participation in a Skilled Nursing Facility dropping down to line five. We had gross charge-offs of six point six million dollars, which netted to a 10.1 million dollar decrease in non-accrual loans on line six then dropping down to line eight. You can see the net effect of the transfer to other realities of the Six Million Dollar property just mentioned, um, increasing other real estate owned by seven point five million dollars for the year. The net results of the movement was an annual reduction of six thousand nine million dollars of ending npas and 90-day delinquencies online 13 or online 13 with ending non-performing assets of 24.4 million dollars a month.
14 or roughly 20
2% decline for the year
moving then to slide twenty-four which highlights the a triple L and fair value summary. We started the quarter with an allowance of eight point six million dollars or .97% of loans and $800,000 in net charge-offs with $500,000 in provision expense. And this leaves us with a final incurred loss allowance of $80,000 down $300,000 2.95% of loans, which includes specific reserves of $700,000 and an allowance coverage to non-accrual loans of five hundred and 3% Just a quick note. This slide will materially change the next quarter. Of course with Cecil current expected credit losses model for the allowance as the thirty six point six million dollars of fair value adjustments gets partially reallocated to the allowance. We would expect the allowance next quarter to increase between 55 a m.
55% with
coverage of around 1.5% of loans
finally turning two and summarizing on slide twenty-five, you know acid quality remains solid with improving NPA trends for the quarter in the year. We've had good thoughts on growth with origination across the bounce mix of the commercial portfolio. The Michigan portfolio is performing as expected from our due diligence work supported by an Engaged and talented a talented team of Bankers. Um, you know, and after a journey or Cecil work is complete with our Auditors and model validators working on the completion of their work and then 5:00 or you know, I would mention that a moment ago as I mentioned a moment ago with an expected increase the allowance is will increase between 55 and 65% or roughly 1.5% off loans and to include another $18 in other liabilities for unfunded commitments.
that
Who's my remarks and Michael turned back over you?
Thank you, John . I'm going to speak to the bullet points on page twenty-seven the slides titled looking forward. It starts with a a couple of highlight items from some of John's closing thoughts around Michigan Bank & Trust having joined us and First Merchants presence now in the Michigan Market with our conversion and change of a going smoothly. We feel like we can get after 2020 opportunities strong. We like our leadership that's in place Tom Myers and executive with Monroe Bank & Trust Lubbock. We'll head up as region president our effort there Doug chafing you might recall from an 8-k filed the end of last quarter former Monroe Bank & Trust. CEO is joined First Merchants corporate board. So we feel like we have a lot of the leadership from that company working on our behalf now and Tom's teams ready to go relationship management and growth dead.
You know speaks to a clear desire to get our clients comfortable with the change of events.
Retain and grow our client relationships and we're ready to compete for new ones when I think about 2020 I think about the maturation of our expanded Community lending Journal throughout our larger markets are primary Metro markets. These are kind of a mortgage lead effort intended to initiate new bank relationships. So we start out 2020 optimistic coming off of a strong fourth-quarter John talked about the origination in the quarter. You can see that year quarter and balances had kind of higher end of our range organic growth rates, which we kind of thought would happen based on the pipeline knowing that it's an imperfect science. So when you start the year with the condition of our clients the condition of our communities, we looked at grow our net interest income at the Top Line use pricing discipline Mark Hardwick spoke to it both in credit extension and in deposit Gathering
Pipeline we have now supports our optimism. I think so we're looking at other strategic items are are digital delivery. I think we're very aware of the changing preferences around how they use our company. And so we're evaluating where our ongoing vendor Partnerships go or ongoing technology investment in service office is going to be made.
and
On a positive note. Our team was proud that our 2019 results affirm our culture of high performance as Forbes Magazine lists First Merchants in its top five for achievement three years running. So we like the momentum that we have and I believe we're open to take questions at this point.
Ask a question. You may press * then 1 on your touchtone phone. If you're using a speaker phone, please pick up your handset before pressing the keys to withdraw your question. You can press * then two.
Our first question will come from Scott siefers with Piper Sandler afternoon guys. Thanks for taking the question mark for Chef Marc first question for you. Just one regarding the core. Margin if somebody of expected it to hold a in a little better. I guess just curious your thoughts as to how it compared to what you guys were hoping to see and then second question is do you think it can stabilize from here? And when I refer to the the core margin just pulling out the purchase counting conclusion. Yeah. We were pleased by the stated margin because fair value accretion was strong. Like I said in my comments, I don't expect to see eighteen basis points per quarter going forward. And so we're going to have to rely on a continued reduction of our interest expense on deposits going forward and we were dead.
pleased to see the 15 basis-point production this
Quarter and we feel like those strategies still have some room as we continue to execute across the board on on all of our deposits from a position of strength wage with great liquidity.
Okay, and I guess when you so if we look at the sort of 344 that you're at on a core basis is that given the opportunities on the the deposit cost side? Is that something you think you can you can walk in that that range going forward? Assuming no more rate move side effect. Yeah, I think that qualification is a good one. Assuming no more rate moves. We feel great about the current level of our margin on a go-forward basis. Okay, and then I know the purchase guiding benefits will be less than this quarter's 18 basis points that you have a a sense is you know, is it going to suck down to sort of that that prior 9 to 10:00 expectation we would have before Monroe or does it kind of meet somewhere in the middle and then start to come down rapidly over time?
Yeah, we were we were anticipated.
More like 12 basis points as you go through 2020 and but I would say after every acquisition for the especially for the first 12 months. It's off. It can be unpredictable as some of the some payoffs have tend to drive that number higher in the first twelve months of the year. Yeah. Okay. Thank you very much. Thank Scott. Our next question comes from Terry McEvoy with Stevens.
Good afternoon.
Hi Terry, how are you? Great. Thank you Capital ratios. As you mentioned well above your targets. I was wondering if you just rank-order Capital priorities as you think about utilizing that extra discount for going forward. Well organic growth is always the the highest priority but it tends to use about a third of the earnings. That would do soooo. Our payout ratio typically is about a third of earnings and so I would anticipate keeping it at that type of level and then the 8th we added in 2019 was the ability to do some some share repurchases that we've we've really been out of the market from a buyback perspective for quite some time. And so we're encouraged by our ability to use the remaining what we had about a remaining fifty two million dollars to use in 2020 on the stated program or
see three million on the state of program
That we had of seventy-five and and we've we feel like we've had some nice opportunities to put that to work at least in the first month of 2020. So home prices allowed for some some good buying opportunity and then we would always like to use some of our excess capital for cash and Acquisitions and our history does not show that we have a preference for that. I think our last five Acquisitions have been all stocked but on a go-forward basis, we would anticipate um, as long as the the seller is interesting. I would love to use cash for as much as up to twenty 25% of the purchase price.
And then just as a follow-up John that 36.6 million fair value adjust adjustment. You said a portion of that moves into the ACL? I was wondering if you could quantify quantify that as I just try to work through and and think about the capital impact from from Cecil overall.
Yeah.
I'll take the first half of the question with the capital. I'll leave to mark But what I would say Terry is that number is around seven million dollars that moves in who's out and and the the range that we've communicated including the amount that goes to two other expanse, I guess for the money goes through other comprehensive income. But if you take the entire amount that will be reserving and it's a it's between 33 to 36 points on tangible common equity and it decreases the tangible book value per share by around somewhere between $76.87.
You're welcome. Our next question will come from Damon Delmont.
Hey, good afternoon, guys, how's it going? My good day man. How are you? Good. Thanks. Just to kind of follow up on that the Cecil question mark how are you thinking about the provision level now going forward wage, even the work you guys have done on on on on the implementation of this.
Well, the allowance, you know, as a percent of loans will be higher. So on a go-forward basis, we would anticipate that we have some higher level of provisioning but it does depend on the categories that we grow. It's much more granular in terms of the the calculation and if different allocations for different asset categories and Damon, this is Jacob. I might add that, you know going forward. We will see some volatility just out of the economic model that the allowance is tied to and you know, you can see today our allowance is a percentage of loans is Mark was just referencing is roughly 95 basis points of model is it, you know, we just I described in my prepared remarks is going to be closer to the one and a half percent. So you'll see some uh change from that going forward. So between the economic model the change or the delta in that percentage of coverage or dead.
percentage of total loans as
Well is just what happens to you know Credit in general it's going to add some volatility to it where maybe not so much in the past. Okay like this past year. I think if guys averaged around $700,000 for for provision expense, which was probably on the on the lower side, you know the year before that maybe closer to two million So when you say higher than what we've seen normally do you mean like off of this past year or are you talking if you look back over the last few years and take that average and then kind of go above that?
Well, I would say it's probably back the two-million-dollar number is probably closer to if you just do the math if you took our last quarter and you know ran the hundred and sixty 1 million dollars and did a point in one and half percent. You can start it to see it get closer to that number as a real, you know, just a nice way to think about it. I think we're going to learn this is Mike. I think we're going to learn like a lot of other institutions learn but based on the type of credit that we originated and relatively 6:30 quality of condition. I think John's figure looks more like eighteen quarterly numbers. Yeah. Okay, that's fine. Thank you. And then I guess with respect to you know, the outlook for for expenses here the conversion occurred in the end of the fourth quarter, I believe right or no ma'am.
Or is it occurring the first quarter, you know the conversion?
And was in November , yeah. Okay November . So as we look at the you know, if we take out the 1.9 million of of integration charges this quarter kind of puts the core number around sixty three point three million bucks. So Mark, how do we think about that as we as we go through 2020?
Yep, last quarter. I mentioned that we thought that a good run rate was you know in in the mid-60s and I would say if you take that that 63.3 that you just adjusted to we know after you guys FDIC expense is going to be a million dollars higher next quarter. And then we have a number of strategies that we've you know, we've laid out for twenty twenty years that we're we're going to invest the money, you know, mainly just in the growth of the business and so it's pretty easy for us to to look at that total and get closer to 65 million a shorter than the 63. Okay. All right, that's great. All right. That's all that I have for now. Thank you very much. You're welcome. Thanks, Damon.
our next question
We'll come from Daniel tomorrow with Raymond James.
Good morning, guys. Hey, Daniel, how are you?
Just wanted to to to touch on kind of the same question is Daemon but on the fee sighed, you know, you have some games in in 2018, which will probably or you know, each side in 2019. So what do you thinking about a kind of a good starting point for the the fee base in 2020? You know, I'm I'm looking at an itemized, uh, call shortly composition of our non-interest income. So maybe you're looking at the same thing. It's one of the page has not released our service charges, you know were well, I look at the customer Centric Kathy's whether it's service charges which were six point three million dollars in the fourth quarter our wealth business produced 5.3 almost 5.4 card fees wage should be uninterrupted until we get to the third quarter when the Durban compromised kicks in our mortgage business ought to stay strong would like to pipeline there are hedges, you know came down a little
The fourth quarter from a peek and all-time Peak and the third quarter. We still expect it to be a seven-figure number because of the interest rate environment. I didn't mean to get that granular. It was twenty four point $2,000 as quarter. I'd like the number are other income which tends to capture, you know, miscellaneous items was really low in the fourth quarter. Otherwise are the fees that I can link customer value activities was high. So I I like the number. I think it's 24 or 25 million dollars.
Okay, I mean the the mortgage the gain on sale number of 2.6. You've been you like that going forward even with a Slowdown in in volumes about that neighborhood and because you know so our history with Monroe is short. It's only for a month, but I think you have to factor in that some of the third quarter line items captured one month of Monroe activity in the fourth quarter captured three months and you have a little bit of seasonality in that line item. But yeah, I think the full benefit of Monroe, you know, we're just getting our arms around ourselves in terms of the way is out seasonally, but we're going to run phase.
Okay.
Perfect. Thank you. I appreciate it.
Thank you, Daniel. This concludes our question-and-answer session. I would like to turn the conference back over to my correction for any closing remarks.
It would just be one of appreciation for the listening. But you know more feeling on our part that we get to continue that performance that we've been posting for a couple of years and certainly most recently through 2019. Take all of that. Plus what Monroe brings to us for a strong start for First Merchants in 2020. I appreciate your life. Talk to you in a couple of months.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.