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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, and welcome to the First Financial Bancorp Fourth Quarter 2018 Earnings Conference Call and Webcast. [Operator Instructions] Please note, this event is being recorded.
I'd now like to turn the conference over to Mr. Scott Crawley, Corporate Controller. Please go ahead.
Thank you, Nicole. 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 2018 financial results. Participating on today's call will be Claude Davis, Executive Chairman; Archie Brown, President and Chief Executive Officer; and Jamie Anderson, Chief Financial Officer.
So, 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 references 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 2018 earnings release, as well as our SEC filings for a full discussion of the company's risk factors. The information we'll provide today is accurate as of December 31, 2018, and we will not be updating any forward-looking statements to reflect facts or circumstances after this call.
I will now turn the call over to Archie Brown.
Thank you, Scott. Good morning and thank you for joining us on today's call.
Yesterday afternoon, we announced our financial results for the fourth quarter and full year 2018. Before I turn the call over to Jamie to discuss results in greater detail, I'd like to recap the progress we've made this year and provide some highlights from the most recent quarter. After Jamie's discussion, I'll wrap-up with some forward-looking commentary and closing remarks.
2018 was an exciting and landmark year for First Financial. We completed the merger with MainSource Financial Group successfully integrating management, sales, support teams and migrating clients to unified banking platforms. Additionally we continue to invest in strategic areas such as sales depth and technology.
Our full-year 2018 earnings were very good and on an adjusted basis reflected top quartile performance versus our peers. The earnings power of our high-performing company enabled us to achieve full year earnings of 2.28% per share, a 1.62% return on average assets, a 20.5% return on average tangible common equity and a 51% efficiency ratio when adjusted to remove merger-related and non-operating items.
Our fourth quarter results were exceptionally strong and marked our 113th consecutive quarter of profitability. We are very pleased with the operational performance of the company delivering industry-leading returns on assets and average tangible common equity, while expanding our net interest margin nine basis points.
Core banking trends were positive and loan originations were stronger than they had been all year. However, elevated payoffs particularly in investment commercial real estate led to a decline in overall loan balances. We are particularly pleased with our deposit growth during the quarter and maintain the pricing discipline that we believe benefits both our clients and our shareholders.
Additionally, I'd like to announce that First Financial's Board of Directors has approved a 10% increase in the quarterly shareholder dividend to $0.22 per share. We also recently announced a share repurchase plan of up to 5 million shares or approximately 5% of the Company's issued and outstanding shares. Our strengthening capital levels in earnings consistency support capital deployment strategies while still retaining capital sufficient to support future growth.
2018 was a significant year of change for First Financial. We're highly encouraged by the way in which the company has come together culturally and performed financially successfully completing a transformational merger while producing top quartile returns reflects the hard work of our Associates and dedication to serving the needs of our clients and shareholders.
With that I'll now turn the call over to Jamie to discuss further details of our fourth quarter results.
Thank you, Archie and good morning everyone.
Slide 3 and 4 provide an overview of our fourth quarter 2018 performance. As Archie mentioned, we are pleased with our quarterly results highlighted by strong earnings, revenue growth, net interest margin expansion, and increased efficiency.
On Slide 5, we've provided a reconciliation of our GAAP earnings to adjusted earnings highlighting items that we believe are important to understanding our quarterly performance. For the fourth quarter, adjusted net income was $59.7 million or $0.61 per share which excludes income related to the exercise of the cleanup call on securitizations associated with our 2009 FDIC assisted transaction, as well as severance and merger-related costs.
As shown on Slide 6, these adjusted earnings equate to a return on average assets of 1.72% and a return on average tangible common equity of 21.3%. Further, our 49.3% adjusted efficiency ratio reflects continued diligence in managing expenses subsequent to the merger.
Turning to Slide 7, net interest margin on a fully tax equivalent basis for the fourth quarter increased nine basis points from the linked quarter to 4.21% as the impact from higher asset yields, higher loan fees, and a shift in funding mix outpaced higher deposit cost during the period. The purchase accounting impact to margin was 29 basis points in the fourth quarter which was unchanged from the linked quarter. However, we would expect this impact to moderate in 2019 and have modeled as such in future periods.
As shown on Slide 8, our loan yields improved by 20 basis points and the yield on securities increased nine basis points meeting the impact from a nine basis point increase in our cost of deposits. Similar to the fourth quarter in which end of period securities balances increased in response to slower loan growth, we will continue to manage the size of the securities portfolio based on overall balance sheet trends.
Slide 9 depicts our current loan mix and balance shifts compared to the linked quarter. End of period loan balances were relatively flat compared to the third quarter. Fourth quarter loan originations were stronger than they have been all year increasing 10% over the linked quarter. But the impact from the increased origination activity was offset by elevated commercial real estate payoffs. As a result, increases in our C&I, commercial finance and mortgage portfolios were not enough to drive total loan growth for the period.
Slide 10 shows the current mix of our deposit base, as well as our progression of average deposits from the third quarter. Average deposit balances increased by $162 million driven by growth in non-interest-bearing deposits, and brokered CD balances. In addition to balance growth, we are encouraged by our ability to maintain pricing discipline that benefits both our clients and our shareholders.
Slide 11 depicts our asset quality trends for the last five quarters. Classified asset balances which we consider a leading indicator of credit losses declined 5%, while net charge-offs and non-performing assets both increased during the quarter leading to higher provision expense.
Fourth quarter net charge-offs were 29 basis points of loans on an annualized basis while full-year net charge-offs of 15 basis points were relatively flat when compared to 2017. The increase in nonperforming assets of $23.5 million was primarily driven by further deterioration of a single franchise finance relationship for which we believe the enterprise value exceeds the outstanding loan balance.
Finally as shown on Slide's 12 and 13, capital ratios expanded during the period and remain in excess of stated targets, while tangible book value dilution from the MainSource merger has been substantially recovered. We will continue to evaluate capital strategies and deployment opportunities that support the company's plan growth while delivering strong shareholder returns.
I'll now turn it back over to Archie for some commentary on our first quarter 2019 outlook.
Thanks Jamie.
Before we end our prepared remarks I want to leave you with some insights into our outlook. As seen on Slide 14, we believe that we are well-positioned for continued success in the coming year. Given our staffing investments and improved production levels we'll remain optimistic in our ability to grow the loan portfolio. We expect loan balances to increase by low to mid-single digits on an annualized basis for the first quarter of 2019.
With regard to deposits, we expect some declines in the first quarter driven by outflows of seasonal balances that will remain optimistic in our ability to grow low-cost core funding over the longer term.
Excluding the impact of purchase accounting and loan prepayment activity, we expect net interest margin to be relatively stable over the near-term. Over the longer term assuming no further Fed tightening, we will likely see some gradual decline in the margin from the impact of lagging deposit pricing pressures.
Our near-term credit outlook is stable with expected losses similar to the full year 2018 levels. We expect fee income to seasonally decline over the next quarter and then rebound. Growing non-interest income over the longer term is a strategic priority and we will continue to devote time and resources towards this effort. Of note will be the decline in interchange income over the back half of 2019 due to the lower rates required by Durbin.
With respect to expenses, we remain focused on efficiency while continuing to make strategic investments to support the long-term success of our business. We anticipate an efficiency ratio in the 30% to 52% range moving forward. As I have previously mentioned in the last few weeks we’ve announced several capital actions related to the common dividend and share buybacks. Our continued strong earnings combined with modest balance sheet growth provide the company with enhanced capital flexibility.
In addition to the actions announced today, we are interested in strategic acquisitions that will enable the company to drive higher non-interest income particularly in the wealth and capital markets areas. We are actively pursuing opportunities such as these.
Overall I'm pleased with our progress in 2018 and building our company that can consistently and responsibly produce top quartile returns. As we enter 2019, I'm excited to focus on our strategic objectives to grow the company in a efficient, risk appropriate fashion. We remain confident in our ability to sustain our high performance and our outlook for the future continues to be optimistic.
This concludes the prepared comments for the call. Nicole will now open up the call for questions.
[Operator Instructions] Our first question comes from Scott Siefers of Sandler O'Neill. Please go ahead.
First thing I was hoping you guys could talk a little about is the NPA and charge-off increase. I know Jamie in your prepared remarks you had noted the single franchise finance credit. Was that - so that's the same I imagine as was migrated to special mentioned last quarter I guess one if you could speak to that.
And then second just the increase in both of those, was that nuance all related to those special mention credits from last quarter or is there anything else that's kind of moving around in your non-performers or charge-offs?
Scott this is Archie. Yes, it was related to credits that had migrated in the third quarter we had previously been talking about and of course one was I think it was much larger of the two. I would say that if we think about the root cause or what happened with this borrower, just as a borrower this really been expanding probably too fast outside of just the part that we’re involved with, so if he had other interest, as you said expanding too fast has caused some problems for them, so that's really the core.
Nothing else stemic really happening in the overall portfolio. Now if you look at our classified ratio it's only been flat to declining over the last five quarters so we feel pretty good about where credit is and again as I said in my outlook remarks, I think it will be probably similar levels overall charge-offs as we had in 2018.
Scott, this is Jamie just to add on that quickly, on the charge-off side you know charge-offs were little over 6 million for the quarter and coming off of the third quarter where we actually had net recovery. So you look at the two and it's not kind of blended at that 15 basis points but in the 6 million there were two credits that made up over half of that charge-off number.
And those were credits that we had identified in the third quarter as problem credits and they migrated through to non-accrual and we charge those down to net realizable value in the quarter. So as you know the charge-offs can be no little lumpy and so we had good quarter in the third quarter, and then we had a couple of hit in the fourth quarter to drive that number up.
But it sounds like the bottom line is - these are just sort of a couple discrete items as opposed to anything broader based so.
Correct.
And then just one question on the tax rate and since this has moved because you had given the expectation for the first quarter, but the first quarter actually was maybe couple 100 basis points below where it's been, looks like it will come back up in the first quarter. So I guess one anything unusual in the fourth quarter number that took it down, and then second just want to confirm when you talk about the effective tax rate of 19.5% in the first quarter that is simply an effective tax rate it’s not a fully taxable equivalent rate right?
Right, that's the effective tax rate the 19.5% going forward and to just clarify for the fourth quarter - there was a one-time item in there like a big refund or anything that we got from our previous period. It was really just truing up the overall tax rate for 2018 and so it was really just a year end type of adjustment to get to our true tax rate. We were a little conservative in the first three quarters with our - in our accruals and just truing that up for the year.
And to a smaller extent we got some clarification on some - the deductibility of some executive comp that you saw. In the third quarter our rate was a little bit higher than is like 20.3% and that drove it up there plus just being on the conservative side in our overall accrual. So, it's really all within 2018 it’s just truing it up to our - to an accurate tax rate for the year.
Our next question comes from Chris McGratty of KBW. Please go ahead.
Archie you talked about the pay-downs in the commercial real estate book and I think it was pretty well telegraphed, there wasn't going to be a ton of growth this quarter. I guess as it stands today what gives you the confidence to go out with a low-to-mid single for the first quarter. Are you seeing any change in the pay-down activity or is it just the production in the fourth quarter was really, really strong and pipelines may have changed? Thanks.
Yes Chris, I think a couple of things, one as we believe some of those pay-downs that occurred in the Q4 were just accelerated, they were many cases in the construction book that - where that goes long. So to reach construction we’re probably in some sort of stabilization period and they refinanced earlier than we had predicted. But we still had them coming out this year. So we think we accelerated into Q4 some of that. So that means we think we'll ramp up a little bit better as we start this year.
And then just looking at - we are at this point in the first quarter looking at our pipelines and various lines of businesses. They are actively projecting going forward and in our commercial business, in our ICRE business, our commercial finance business, our mortgage business all are showing what we believe to be some decent growth for the quarter. So, that’s kind of where we're getting our - I guess our confidence or view about the quarter.
And with that as a backdrop, in terms of funding the growth should we assume in kind of it comes from deposits one-for-one or kind of there going to be a bit of a remix from the bond portfolio maybe that's for you Jamie?
Yes Chris, this is Jamie. So if you look at the balance sheet their ending balance and the securities portfolio was up about 150 million period-to-period and that was by design based on just kind of back half of the year we didn't really see the loan growth that we were hoping for. So increase the securities portfolio by about 150 million to kind of - I would say fill in that gap in that earning asset base. So, we will monitor that and see how the deposit - the competition and the deposit marketplace is looking.
And then as that growth comes we will slowly bleed back down the securities portfolio to potentially match that. Depending on how the deposit balances go here over the next - over the short-term three to six months that will determine how much we bring the securities portfolio down but you'll probably see a combination of the two.
And if I could sneak one more in on the capital. The buyback I guess can you speak to ability or desire to use it, is the plan in place just to have the flexibility or is it a level maybe in your stock that you might considered it to regularly use the buyback? Thanks.
Yes Chris, this is Archie. We’ll always look at future growth prospects organically as well as strategic M&A and actually we can support the dividend. But I think our view of the actual buyback is that we'll plan to be opportunistic with regard to share repurchases evaluating this alternative compared to other potential uses of capital.
We’ll not plan to have a specific - we don’t have a specific plan or target for the level of repurchases but when market conditions warrant, we’ll take the opportunity under our plan to repurchase shares. And then quarterly we’ll provide an update on the level of repurchases made for the previous quarter.
Our next question comes from Nathan Race of Piper Jaffray. Please go ahead.
Just going back to the credit discussion around the franchise loan that occurred this quarter, I was just wondering if you give us any other color in terms of - I assume this was a quick service restaurant finance loan. And I’m just curious if this was a club deal or a share net full creditor, just any other background if you could provide on the credit would be helpful?
Sure Nathan. No, it's our loan we originated it, it’s - again that the main thing here is we provided financing for some acquisition of some stores for the borrower. And then outside of all that I'm trying to do some other things and grow fast and I think she has put pressure overall on the credit.
And then just changing gears and thinking about expenses going forward, I appreciate the guidance for 1Q and I imagine you'll probably have some seasonal relief in the second quarter as some of those payroll items come off. So just curious how we should kind of think about the progression non-interest expenses as we go through 2Q into the back half of 2019?
Yes, so this is Jamie. The outlook there for the first quarter in that 76 million to 78 million does have a little bit like you're talking about little seasonal pop there that we have in some of the payroll taxes and whatnot. And then as those, but if you think about it as those bleed off then we have merit increases that kick in throughout the year. And so that level stays pretty steady throughout 2019 that 76 million to 78 million.
And Archie perhaps just an update on some of the hires that you guys were speaking to last quarter, I know that's going to focus of you guys more recently so just curious - give an update on the front?
Yes, we’re pretty close to the full - I think full staffing of our commercial banking groups in all of our markets. We have one or two hires to make but all intents and purposes I think we’re there. So I feel we’re starting out the year right in terms of staffing our ability to go forward.
Outside of commercial we did spend the timing in the last quarter and particularly adding to our mortgage banking group as well and while the environments a little tougher there, we think we’re going to add some high-quality originators that will help through the year as well.
Our next question comes from Terry McEvoy of Stephens. Please go ahead.
Just to make sure I'm clear on the margin outlook for the first quarter, that five basis point range how much is that impacted by the loan fees which jumped up four basis points. I know Archie did mention loan fees I just want to understand that correctly.
Yes, Terry this is Jamie, so if you look at the - so loan fees, excuse me, there is some volatility to our loan fees. So if you look on Page 7 of the slide deck where we talk about the margin, we did - in the fourth quarter we did get over and above the third quarter we did get about a four basis point lift in our margin from loan fees. And those are primarily some larger prepayment fees that we see in our commercial finance area.
But if you look over the last several - few quarters first quarter, second quarter, third quarter it was averaging in that you know in that 13 to 15 basis point range and we got 17 basis point contribution of fees to the margin.
So a little bit higher than the average, so on a conservative basis if you look in the first quarter where those could potentially come down a little bit that does contribute to - a little bit of I guess pressure from the fourth quarter on the margin.
And then the other thing that you can see on this page that we got as well in the fourth quarter that could potentially flip the other way, is we got a nice benefit in the fourth quarter from a change in our funding mix and some of that is seasonal based on businesses. We saw a lift in our business DDA accounts and that helped our margin by four basis points.
And some of that is seasonal which will flip in the first quarter and also put a little bit of pressure on the margin that will offset the benefit that we see - that will get from the December rate hikes. So our balance sheet still remains slightly asset sensitive. So in the perfect world rates are up - you can see here our asset yields went up 12 basis points, funding cost went up 10 basis points we get a couple basis point lift in our margin. But depending on mix and then the volatility of loan fees could put some pressure on that.
And then just a question for Archie you mentioned interest in fee generating businesses in terms of potential acquisitions. I just want to be clear potential bank acquisitions kind of off the table for 2019?
Yes Terry, thanks for the question. I don’t know I would say they’re totally off the table, but I think we’ll be looking more into - if we did more bank maybe geographic tuck-ins smaller strategic kind of deals. We're really not focused on large bank deals in the current environment I think where we are in the cycle, pretty sensitive to credit risk and just I think we'd shy away from something larger.
[Operator Instructions] Our next question comes from Daniel Cardenas of Raymond James. Please go ahead.
Just a quick follow-up question on the M&A. If you do look at something would it be primarily in footprint or would you be willing to kind of expand the franchise a little bit now that integration seems to be pretty well in place with the MainSource deal?
Yes Dan on bank M&A I still think we think about more within footprint. We think there's market that we certainly could improve our overall brand presence market share and that would probably be a priority if those kind of opportunities came up. I don't think we at this point are - I know we’re not exploring anything but I don't think we really be looking to expand the footprint at this point.
With regard to fee businesses we probably will look a little bit broader than our core geographic footprint but probably still want to stay somewhat close to the markets that we’re in.
And then in terms of branch rationalization is that all completed or is there still a little bit of work left to be done?
Relative to the merger Dan it’s virtually done. There are handful of branch let's say I am talking three or four that we have a little bit of work to do in terms of renovation in order to maybe make some consolidations, but that will happen this year.
And then I would say just outside of the merger there always - we’re always going through a rationalization process and evaluation process of our branch network. So it's possible throughout the year there could be some additional consolidations, but that would be more just normal course of how we do business.
Then last question from me, and I'll step back. As I look at your tangible common equity ratio kind of approaching the 9% level here shortly. What's kind of an optimal level that you guys would feel comfortable with that ratio?
Yes Dan this is Jamie. So internally we kind of look at solidly at that 8% level, and obviously with our profitability and even paying out somewhere between 35% and 40% of our earnings that ratio is starting to build and that's why you saw a little bump in - the 10% bump in the dividend and then announcing the stock buyback just to provide some flexibility in managing capital as we see and we'll assess that and monitor that as we see opportunities potentially in the M&A market or what not.
Our next question is a follow-up from Chris McGratty of KBW. Please go ahead.
Jamie just on the accretable - the comments on the glide down in the accretion. I guess can you let us know what your, kind of the budget is expected accretion for this year, I think it was somewhat $9 million well under $9 million in the past couple of quarters?
Yes, so we've been pretty - if you look at the one slide we've been pretty consistent at getting 29 basis points that's higher than our model. When you think about it based on the comments and what we’re seeing in the loan both in terms of higher prepayments that's consistent with those higher prepayment we’re getting more accretion.
So as we look into 2019 our models would indicate those prepayment slowdown we’re going to start somewhere in that 22 basis point range contribution to margin in the first quarter. And then that goes down by 1 to 2 basis points a quarter throughout the year.
So that 22 contemplates a slowdown in prepays is what - I guess you’re saying okay.
It does. Yes, based on the levels that we’re seeing - that we saw in the back half of 2018, correct.
And then the tax rate, I think you gave the first quarter, could you just repeat or maybe guide - I think first quarter is typically a little noisy for most banks and 19.5 for the first quarter and then do we jump from there?
No, we think it’s 19.5% for all of 2019.
And that's a non-FTE right, that's a GAAP?
That's our effective tax rate, correct.
[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Archie Brown for any closing remarks.
Thank you, Nicole. Just thank you guys for being on the call and your interest in the company and we wish you a good day.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.