Q4 2020 First Financial Bancorp Earnings Call
Good day and welcome to the <unk>.
Fourth quarter and full year 2020 earnings call and webcast.
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Now I'd like to turn the conference over to Scott Crawley Corporate controller. Please go ahead.
Thank you Sarah good morning, everyone and thank you for joining us on today's conference call to discuss first financial Bancorp's fourth quarter and full year 2020 financial.
Participating on today's call will be Archie Brown, President and Chief Executive Officer, Jamie Anderson, Chief Financial Officer, and Bill Harrod, Chief Credit Officer.
Both the press release, we issued yesterday and the accompanying slide presentation are available on our website at www Dot. Thank you first dot 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 statements disclosure contained in the fourth quarter of 2020 earnings release as well as our SEC filings for a full discussion on the company's risk factors.
The information we will provide today is accurate as of December 31st 2020, and we will not be updating any forward looking statements to reflect facts or circumstances. After this call on.
Now I'll turn the call over to Archie Brown.
Thanks, 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 2020.
Before I turn the call over to Jamie to discuss those results in greater detail I want to reflect on this past year and then provide some highlights on the most recent quarter.
When considering our year on which we encountered a global pandemic.
First widespread government mandated shutdowns and stay at home orders and reduction in the fed funds rate of 150 basis points.
I am very pleased with our response to these challenges and our overall management of the company.
Despite the challenging backdrop in 2020, we grew loans and deposit balances.
<unk> record C&I and mortgage loan production assets under management income and total revenues.
On an adjusted basis, we earned $1 66 per diluted share.
105% return on average assets strength in tier one common equity total capital.
Definitely bolstered our allowance for credit losses from 0.63 per cent of loans to.
177%.
And extremely low levels of charge offs.
Business conditions remained difficult in the fourth quarter.
Work for our quarterly financial metrics were strong with adjusted earnings per share of 51 cents.
Adjusted return on assets of 123 per cent.
And then adjusted efficiency ratio of 56, 8%.
An increase in interest income, which includes the PPP loan forgiveness fees strong mortgage banking and record foreign exchange income drove our solid quarterly results.
Loan origination activity rebounded to near record levels with record production and C&I.
And continued strong production in mortgage.
Transactional deposit growth was again very strong with increases from the prior quarter of $544 million on average or 22% annualized.
All client segments seeing growth.
Our sub 60 efficiency, 60% efficiency ratio reflected our diligent expense management, despite adapting to remote working environment.
Continued investment on processes and technologies to position the company for.
For long term success.
Credit trends remained relatively stable.
However, with the COVID-19 cases, and Ed West remaining at peak levels are slower than anticipated vaccine rollout.
In general economic uncertainty, we reported $11 million on provision expense <unk>.
Resulting in an increase in our allowance for credit losses to 189% of total loans excluding P. P T.
We believe the increase in our allowance has positioned us to absorb future losses anticipated by the pandemic or otherwise.
I am most pleased with the response of our associates and their commitment to our clients and communities.
He demonstrated amazing flexibility and.
And resilience and pivoting from normal business activities and processes.
Work remotely or with significant changes to their in office routines.
From the beginning of the pandemic, we prioritized keeping our associates safe and engaged which enabled them to support our clients from one of the most stressful and uncertain periods in our history.
Our associates were constant stewards embodying our organizational belief that banking is an essential function and the lives of consumers.
Business is in our communities and we're focused on ensuring that we remain faithful to our mission.
Notably our corporate wide effort and branding approximately 7000, PPP loans totaling over $900 million.
In a matter of months with something to remember.
I'm very proud of the effort and commitment of our first financial team.
I'll now turn the call over to Jamie to discuss the details of our fourth quarter results.
And then after Jamie's discussion I will wrap up with an update on cares Act modifications.
Our hotel on franchise portfolios and then provide some forward looking commentary Jamie.
Thank you Archie and good morning, everyone slide.
Slides four and five provide a summary of our fourth quarter and full year 2020 results.
As Archie mentioned, we were very happy with our fourth quarter financial performance.
Earnings continue their upward trajectory as loan fees led to an increase in the net interest margin and fee income remained particularly strong.
In addition, our expense base remained relatively flat and provision expense declined from third quarter levels as asset quality remained relatively benign.
While our level of nonperforming loans has remained stable, we recorded $11 $5 million on provision expense during the quarter.
We believe our current reserve levels have reached their peak and position us to absorb expected credit deterioration as the economic impact of the pandemic further materializes in 2021.
Once again, our capital ratio has improved during the quarter and remain in excess of both internal and regulatory targets.
We believe that our balance sheet is well positioned in our stress testing results continue to indicate that our core fundamentals provide us with the ability to maintain these levels for the foreseeable future.
With this in mind, we will continue to evaluate any near term capital deployment and share back.
Buyback opportunities to capitalize on the strength of our balance sheet.
Net interest margin increased 13 basis points compared to the prior quarter, driven by higher loan fees and disciplined deposit cost reductions.
Given the low interest rate environment, we will continue to face pressure on asset yields. However, we believe that the fundamental pieces of the core net interest margin will remain relatively stable as we head into 2021.
Similar to recent trends the income was the highlight of the quarter and was the principal driver of our operating results.
Mortgage banking exceeded expectations, despite declining from record levels in the third quarter.
In addition, bannockburn had another record quarter and foreign exchange income and deposit service charges maintain their gradual ascent to pre pandemic levels.
While not part of our operating results. It's also noteworthy that we recorded a non operating gain related to our class B visa shares.
During the quarter, we sold a portion of our shares to a third party and the remaining shares are recorded on the balance sheet at their current market value.
We utilized the total gain of $13 $4 million to fund the first financial foundation and pay off higher cost F. H L D borrowings.
Fourth quarter results indicate that we remain well positioned from a regulatory capital standpoint, as capital ratios improved across the board on a linked quarter basis.
Total capital increased 18 basis points in our tangible common equity ratio increased 22 basis points on the fourth quarter to 847%.
Or 883%, excluding the impact on P. P. P. Additionally.
Additionally, our tangible book value per share grew by 37 cents.
The $12 93 at the end of the year.
Slide six reconciles our GAAP earnings to adjusted earnings highlighting items that we believe are important to understanding our quarterly performance.
Adjusted net income was $49 $7 million or <unk> 51 per share for the quarter.
Which excludes the aforementioned visa b game $7.3 million of debt extinguishment costs.
$5 $1 million write down of a tax credit investment.
A 5 million dollar contribution to the first financial foundation, and $2 $9 million of Covid related and other nonrecurring items, such as branch consolidation costs.
As detected as depicted on slide seven.
These adjusted earnings equate to a return on average assets up one point to 3%.
Return on average tangible common equity of 15, 9%.
Our 56, 8% adjusted efficiency ratio remains very strong despite elevated incentive compensation tied to our fee income.
Turning to slide eight net.
Net interest margin increased 13 basis points from the linked quarter to 349%.
This increase was primarily related to higher loan fees, which were driven by P. P. P forgiveness.
Basic net interest margin declined slightly due to the negative impact from changes in our asset mix.
In the first quarter, we expect some benefit to the margin as we prepaid $120 million of longer term FHL be dead late in the fourth quarter, the full impact of which will be realized in 2021.
Slide nine shows our yields and costs and average balance changes.
Loan yields increased 18 basis points and the investment yield dropped 15 basis points.
A higher mix of investment securities is putting pressure on total asset yields.
We increased the balance on our investment portfolio due to the liquidity on the balance sheet.
On the funding side, we continue to aggressively lower our cost of deposits, which declined seven basis points during the period to 20 basis points.
These lower deposit costs reflect strategic rate adjustments as well as a shift in funding mix from higher priced higher price retail and brokerage Cds, the lower cost core deposits.
Slide 10 illustrates our current loan mix and balance changes compared to the linked quarter.
Excluding excluding the decline in P. P. P loans end of period loan balances were flat as increases in ICR, a C&I loans were offset by modest declines in all other loan types.
Slide 11 shows the mix of our deposit base as well as a progression of average deposits from the third quarter.
In total average deposit balances grew $362 million during the fourth quarter driven by increases in non interest bearing accounts public funds and transactional deposits.
We remain very pleased with the trajectory of deposit balances.
On average non interest bearing deposits grew $173 million during the quarter with additional growth expected as the most recent round of stimulus checks or just first to our clients.
Deposit pricing remains a near term focus and we will continue to make any necessary adjustments.
Based on market conditions, and our funding needs.
Slide 12 highlights our non interest income for the quarter as I mentioned previously fourth quarter fee income remained strong and was driven by record foreign exchange and elevated mortgage banking income.
We were also pleased as service charges continued to rebound and wealth management fees were in line with expectations.
Noninterest expense for the quarter as outlined on slide 13.
Overall expenses increased compared to the linked quarter. However, they were relatively flat on an operating basis.
The increase was driven by $7 $3 million of debt extinguishment costs of $5 $1 million write down on the tax credit.
And a 5 million dollar contribution to the first financial Foundation.
Additionally, we incurred $2 $9 million on COVID-19 related and other another costs not expected to recur such as branch consolidation costs.
Turning your attention to slide 14.
Our fourth quarter ACL model resulted in a total allowance, which includes both funded and unfunded reserves of $188 million, an $11.5 million in total provision for credit losses.
The model utilized the Moody's baseline economic forecast released at the end of December which was slightly improved from the forecast utilized in the third quarter.
Similar to the first three quarters of 2020, the majority of the fourth quarter's provision expense related to the expected economic impact from Covid.
At this point in time, we believe we've captured the risk from future Covid related credit stress and do not anticipate further reserve build in the near term.
As shown on slide 15 asset quality remained stable as we had $6 $6 million of net charge offs for the period and only slight increases in nonperforming and classified asset levels.
Net charge offs were 26 basis points as a percentage of loans, which remains lower than historical levels. Despite the slight increase compared to the linked quarter.
While our credit metrics don't reflect much stress at the current time and our portfolio performed better than we might have anticipated at the beginning of 2020, we expect some deterioration in 2021 as the economic impact from Covid continues to materialize.
Finally, as shown on slides 16, and 17 capital ratios remained strong and are in excess of regulatory minimums.
Each of our capital ratio has increased during the quarter and all ratios continue until you've seen internal targets.
Our tangible common equity ratio grew by 22 basis points during the period and our tangible book value increased to $12 93.
Once again, we do not anticipate any near term changes to the common dividend. However, we will continue to evaluate various capital actions as the economic impact on the Covid pandemic further materializes.
I'll now turn it back over to Archie for commentary related to specific areas of focus on the loan portfolio.
Our deferral program and our outlook going forward Archie.
This is Jamie.
Continued economic circumstances related to the COVID-19 pandemic, we've updated slides 20 through 22.
Which cover cares Act modification center hotel on franchise portfolios.
This can be seen on slide 20.
I'm very pleased with the substantial reduction on our cares act modifications at year end.
Only 29 million and loan balances were on full payment deferrals.
With another 291 billion in loan balances, making interest only payments, bringing our total on modifications to $320 million you're in.
Additionally, as of loans they have exited deferral, we've not seen any material credit issues.
Slide 21 provides detail on our hotel portfolio, which will require additional time to stabilize.
It makes up $186 million from 58 per cent of our total cares Act modifications.
As of December 31st.
The overall health of the hotel portfolio with strong pre Covid and we've seen limited deterioration in average ltvs and in an updated appraisals.
Given time on additional stimulus measures. We believe this portfolio will eventually stabilize.
But in the meantime, we'll continue to monitor the status of our borrowers and work with them to ensure the best possible outcome.
Our franchise portfolio as seen on slide 22 has also improved substantially.
With $44 million in cares act modifications remaining at year end.
Drives from a delivery concepts have demonstrated strong performance.
Well buffet style concepts within our sit down book continued to be impacted by pandemic related headwinds.
There's a vaccine becomes more widely distributed we expect the performance of this concept to improve.
Let me throw outlook Slide 23 provides some forward looking guidance.
Which will still be impacted by the ongoing pandemic and related government stimulus programs in 'twenty and 'twenty one.
Loan growth excluding P. P. P is expected to remain flat over the near term.
As we've seen pressure in certain portfolios, we expect improvement and continue to target mid single digit growth for the year.
Yeah.
Regarding deposit balances, we expect further increases given our current round three P. P P pipeline and potential for additional stimulus activity.
The net interest margin is expected to be positively impacted by further P. P. P forgiveness pay offs and.
And the associated accelerated fee recognition over the next several quarters.
Excluding our more volatile variables such as P. P fees purchase accounting loan fees, we expect the margin to be relatively stable.
Regarding credit the full impact of the pandemic has yet to play out how are we expect moderate declines in our provision expense going forward.
We've added $140 million to our allowance for credit losses during 2020 to address future losses that may materialize.
This brings our total ACL to greater than three times the balance at 12 31 19.
We do not anticipate any further increases to the reserve as a percentage of loans moving forward.
Specific to fee income, we expect continued strong mortgage originations in the first quarter.
However, we expect some seasonal decline in volume and lower premiums.
Foreign exchange income should remain strong.
Low the peak level of our fourth quarter performance.
Deposit service charges are expected to continue to move toward the pre pandemic trend after seasonal lows in the first quarter.
With respect to expenses, we expect to be in the range of $88 million to $92 million per quarter, but this could fluctuate some.
With fee income.
In light of accelerated changes in customer behavior observed during the pandemic, we continue to evaluate our distribution channel for opportunity to become more efficient and this quarter, we will consolidate three banking centers.
Lastly, given our strong earnings and capital position, we expect to resume share repurchases in the first quarter.
Our newly authorized share repurchase program.
And we'll look to be active in the market.
The first quarter.
2020 was a challenging year for many and I'm extremely proud of.
Our associates came together to support the wellbeing of our customers and our communities.
I'm also very pleased with our strong financial performance. This year, the overall safety and soundness of our company and our ability to remain focused on growing long term shareholder value. Despite the challenging business conditions.
As we move forward into 2021, we remain confident in our ability to navigate this difficult operating environment and believe we positioned the company for even stronger financial performance.
On the health crisis subsides.
We'll now open up the call for questions.
Thank you we will now begin the question and answer session to.
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At this time, we will pause momentarily to assemble our roster.
Yeah.
My first question first.
That's my first with Piper Sandler. Please go ahead.
Good morning, guys. Thanks for taking the question.
Hey, what's just curious you've given a lot of good color on credit expectations and you certainly have a pretty substantial reserve right. Now are just as you look through the course of the year on the extent of your comfortable was hoping you might give us a sense for where you would expect actual loss content to kind of peak out and.
When that manifests itself you know was that a first half event or a second half of the year. How are you thinking about those dynamics.
Okay.
Yes, Scott.
Still gonna be dependent upon what happens with the pandemic.
Actually in distribution, but I would just say we were talking about kind of.
Mid part of the year into third quarter, probably is where I think we would see it peaking now and you know again, that's somewhat dependent upon what happens.
With with some of those bigger issues on the economy.
Any other comments on that.
That's accurate.
Yeah.
Okay, and any sense for sort of order of magnitude of deterioration in their losses are so so low now and you've got a you know very substantial reserve what's under Cecil is.
Presumably there to a pole expected lifetime losses, or or you know sort.
They have a bucket for lifetime losses in any sense for order of magnitude of deterioration.
Scott I don't I don't know that we have a sense for it yet we saw just a little bit more in Q4, you know for the year losses were 14 basis points on.
On a quarter 26, and it was primarily related to you know one.
One buffet style concept.
In which some stores are we we've learned some source and that job.
Without one bar are not going to reopen it would've been close permanently and so we made we made a partial charge for that we had limited deterioration outside of that so it's difficult to say right now I'd say, there's still going to be on the lower side.
As we get further in a year, we may have a little more clarity, but it doesn't feel like a.
A significant increase in charge offs at this moment.
Alright perfect.
Perfect.
And then just in terms of overall loan growth, which presumably will snap back in the second half I'm just curious when you're when you're talking about a mid single digit growth number is that for the full year on an X P V P basis or are you, suggesting that we.
Just sort of snap back to a mid single digit annualized rate in the in the second half of the year in other words, I guess I'm getting two order of magnitude of that snapback.
Yeah, We think it's still mid <unk> mid single digit growth for the full year Scott.
Yeah I'll go on what we've seen is commercial C&I originations and production is strong it was really strong on fourth quarter record levels and that momentum. We believe is going to continue and grow stronger through the year.
Where we saw pressure was with all the mortgage production, we saw some pressure on the mortgage.
Portfolio loans, we keep on balance sheet are getting refinanced day on home equity pressure.
Got refinance down and franchise.
We are probably more intentionally running down we had we have some additional payoffs. There. So that's that's where we saw pressure, but C&I production strong and we still feel like as we come out of the pandemic theres going to be some good momentum.
Perfect.
Alright, Thank you very much.
Yep.
Our next question comes from Jon <unk> with RBC capital markets. Please go ahead.
Morning, guys.
Hey, John.
Oh, it's Archie that's good to hear on on the C&I, that's a good sign.
Yes.
Maybe bill maybe Archie.
Theoretical question, but in a normal stable economy.
What kind of reserve levels, you think you would need to hold what would be more normal.
For your company I know, it's a tough question, but just what.
What are your thoughts on that.
Yeah, John I would say somewhere probably in that.
On a 130 ish kind of range.
I think where you would think if.
We were in the middle of a pandemic and we were kind of in just normal business conditions, probably at that level.
Yeah. So John this is Jamie So you know if you look at if you look at.
Where our day one.
Cecil number came out.
It was about $119 million, which was 129 of loans. So I mean in theory, you would say, we'd get down somewhere in that level, whether it's you know in that 125 to 135 range, but.
Somewhere back to that level as things start to stabilize.
Okay.
And then Jamie your your one of your last comments was you expect some deterioration in credit.
In 'twenty one.
I think what you're saying is charge offs is that right charge offs. So yeah, absolutely. Yeah. We're talking we're talking about you know just on the back side of the of the pandemic I'm expecting some some lift in charge offs, which again, we've already baked that into the reserve right. So yeah.
<unk> that to a flow through and really you know it is kind of back to Scott.
Question that he had before is just the order of magnitude of what those charge offs are but you know at this point.
You know a little more optimistic than what we would've been in the you know in the.
The spring of 'twenty, but but yes, that's what we're talking about we're talking about.
Lift and the level of charge offs.
So that's really the underlying messages.
Hmm I'll put words in your mouth, but very little at least on the near term until growth picks up in terms of provisioning required because that's true that's true.
George offs, which has come out of existing reserves.
Correct, Yeah, unless something would change from a macro level at this point you know we would you know in any given quarter you know it could be it could be lumpy as well right charge offs work, so but in any given quarter unless things would deteriorate from from this point.
Most we would be providing for the charge offs and probably releasing some reserves on.
Going forward.
Okay.
And then a last topic is just margin.
I think it's it's nice I know you're fighting the good fight on this but you know it's nice to see the word relative stability.
Can you help us understand some of the puts and takes and maybe the.
The magnitude of the debt prepayment benefit to them yeah. Yeah. So I mean, obviously, we're going to see I mean with with rates stabilizing I mean, we're still gonna, but on a lower level, we're going to see.
Low reinvestment rates on the securities portfolio, putting pressure on yields and then just overall some lagging repricing on the loan side putting pressure on.
We still have a little bit of room on the deposit side fourth quarter, our deposit costs were 20 basis points, we see those coming down.
Into the low teens in the middle of 'twenty one.
And then again like we did pay off those.
S. H L V advances, which were 120 million at a cost of about 250, So that's going to save US you know in the ballpark of about 3 million a little bit less than 3 million by close to $3 million a year.
Good.
Whilst editorial comment but business.
Business conditions remain difficult to something you said a couple of times Archie and it's.
Notable to me that you put up a 16 return on tangible equity in this environment, so to say nice job guys.
Hey, John.
Our next question comes from Chris Mcgratty with K B W. Please go ahead.
Hey, good morning.
Hi, Greg.
Give me maybe just start with you on on the margin I think just want make sure I got the jumping off point the.
The stability that you're talking about is relative to that basic to 91, plus the factors if you identify right.
Yes, yes, so I mean, we'll get some volatility.
And you know like we do it in my own fees, obviously with a with a P. P. P. You know that's going to bounce around yeah, we have a little bit of volatility quarter to quarter and purchase accounting, but yes, we're talking about that.
Kind of you know.
Core to 91, you know excluding all those factors.
And what is the what are the remaining our revenue is coming from P. P. P and the accretion that you have that we should model in.
So at year end or our total P. P. P balances are right at or right at 600 million and the remaining fees related to those is just under 14 million $13 seven.
And on the accretion.
Do it.
On the accretion helped me out what's your what you're asking.
Just the what's left on the purchase accounting.
Coming through.
Yeah.
Okay.
On the purchase accounting from the last deals is that what you're asking yeah exactly sorry about that yeah.
Hang on let me get that.
Yeah.
Okay.
Yeah.
Yeah. So I mean, we still we had 12 basis points of purchase accounting accretion in the fourth quarter and I mean, we should see a roughly that in it and it did it trailing off here over the next year or so.
Okay. Okay.
Okay. So is the message if we just take a step back and understand that the challenges of predicting margin. In this environment is a is the message that a mid single digit loan growth and a little bit of it.
Lower NIM should should allow for general stability in core and on high is that is that a right interpretation.
Yeah, excluding the P. P P fees correct Yep Yep, Okay Yep.
Okay, and then and then just finally on the pace of capital return, how do I think about the $5 million, which I know is a two year authorization against you know some some cautious optimism on the economy, how aggressive are you going to be with the with the buyback.
Yeah, I mean, I think I think we're gonna be methodical about it.
And not you know, we're not going to do 5 million in the first quarter by any stretch, but I think we will be.
In the market, but you know kind of that a consumer.
System level, and then kind of see how the.
You now see how the pandemic materializes here, what credit looks like and really constantly.
Taking a look at crowded and and seeing what it looks like but you know if we said we would do in that ballpark of a million shares a quarter that would be plus or minus where we would be.
Okay. Thanks.
Thanks for that and then just lastly on the tax rate, obviously, there's a lot of moving parts this quarter, but what's the right number we should be using going forward.
18 per cent.
And that's a that's a GAAP that's a GAAP number right.
Yes.
Perfect. Thanks Al.
Okay.
Again, if you'd like to ask a question. Please press Star then one.
Our next question comes from David Long with Raymond James. Please go ahead.
Good morning, everyone.
Okay.
It's encouraging to hear about the C&I growth pipeline in the numbers that you're talking about there just curious where the growth is coming from is it have you been taking market share have you hired or is this just the overall health of your client base at this point.
Yeah, David I think it's a little a little each we are we are taking some.
Share of clients from a companion makes that started.
Probably more.
But pronounced after the early round of P. P. P last year, where we were.
You had some nice wins that came because of some.
Probably some competition maybe not not.
Meeting some expectations of their borrowers and we started to get some windfall there and so there's a little bit of it.
Have added bankers.
And kind of from a larger middle market space.
Throughout the latter part of <unk>.
2020, and they're now starting to produce.
So nice some nice new relationships force across our footprint. So lets say its those two primary draw.
Drivers and overall I mean, our client bases.
Pretty strong and we're seeing that you know obviously with liquidity.
That our clients have and that's sitting in our bank.
As well as.
Just general low delinquencies, just general better credit performance than than we were thinking a few months ago.
Yeah.
Got it and then just if you could comment on the spreads that you're seeing in the C&I business. It still seems to be pretty competitive you know in past cycles coming out you've seen some widening of the spreads but I haven't been hearing that this cycle just curious what you're seeing on <unk>.
Commercial spreads are at this point.
Yeah I don't.
I don't think they've improved.
At this point, so I'd say, there they're kind of similar if anything maybe slightly tighter than they were even a couple of months ago.
It's pretty competitive out there.
Yeah.
Got it great. Thanks for taking my questions.
Yep.
This concludes our question and answer session I would like to turn the conference back over to Archie Brown for any closing remarks.
Okay.
Thank you very much Sir I want to thank all of you for joining today and Oh anymore about a quarter. We look forward to talking to you later in the year have a great day bye now.
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