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Text: Today's call will also include non-GAAP financial measures.
Non-GAAP financial measures should be viewed in addition to and not as an alternative for our reported results prepared in accordance with GAAP.
In the fourth quarter, net income of $25.7 million drove earnings per share of $0.27, beating the consensus estimate of $0.23 per share.
Core ROAA and the core efficiency ratio were 1.14% and 56%, respectively.
Our core pre-tax pre-provision ROAA was 1.76%, due to an increase in the core net interest margin to 3.29% and continued strength in non-interest income driven by mortgage, interchange income, wealth management and SBA.
Fourth quarter loan volumes and commercial C&I lending were soft due to lower utilization of lines of credit and some payoffs.
This masked [Phonetic] the strength we saw in the consumer businesses and resulted in a contraction in the overall loan portfolio ex-PPP.
Expenses for the quarter were up due to higher salaries and benefits, particularly hospitalization expense.
Provision expense of $7.7 million included a pass-through item of $3.2 million in unfunded commitment expense.
It's important to note that we adopted the CECL methodology for the allowance for credit losses in the fourth quarter.
Shifting gears, as we think about the future, we think a lot about our customers' change in behavior.
This is why we continue to make significant investments in next-generation technology in 2020 with the new online mobile platform, a new treasury management system, 100% issuance of a contactless debit and credit cards and new P2P solutions like Zelle and real-time payments, and we refreshed our digital account opening, customer experience with the new mobile responsive design.
In a year challenged by a global pandemic, these digital tools enabled our customers to bank when, where and how they want it.
Here is a sampling of some of the growth and changes we've seen.
Debit card interchange income was up 11% or over $2.3 million year-over-year, driven by robust increase in transactions and dollar volume.
New digital deposit account openings were up 189%.
Digital customer conversations are up 233% from 2019.
This interactive conversation feature available through our new online mobile platform lets customers start conversations with us anytime, day or night.
Mobile remote deposit capture users increased 45%.
Image deposits at ATMs increased 84%.
Virtual meeting collaboration increased 175% to over 2,600 a month.
Our leaders are finding ways to keep our employees engaged with each other and with customers.
And then there is our favorable Apple Store rating of 4.8 on our FC Mobile Banking app.
Our customers are telling us what we're doing wrong and what we're doing right with our mobile app and we listen.
We're proud of our progress with our digital strategy over the last several years and particularly in 2019 and 2020.
However, we must continue to improve our user experience in digital new account openings across consumer and business banking.
Just a few more reflections before I hand it over to Jim Reske, our CFO.
On the credit side, we proactively marked our credit early and often while reaching out to our clients in the midst of the pandemic.
During 2020, and per Page 10 in our supplemental deck, we quickly built our loan loss reserve using qualitative overlays.
It now stands at 1.61% of total loans ex-PPP and covers fourth quarter non-performing loans of $54.1 million by 187%, the highest coverage figure for the year.
NPLs or non-performing loans, as a percentage of loans, was 0.80% or 80 basis points and net charge-offs in 2020 were 27 basis points for the year.
On Page 13, the increase stems almost entirely from expanding deferrals to a handful of hospitality credits totaling $76 million or 29.6% of that particular portfolio.
These types of deferrals are constructive and will enable a handful of our developers through the late innings of this pandemic.
These deferrals also tend to come with a quid pro quo to include increased recourse or another -- and credit enhancement on a loan.
Here again, we feel well-positioned with credit in 2021.
During 2020, we grew our top line some $7 million while our expenses grew only $2 million, net of some restructuring charges.
This is yet another year despite formidable interest rate headwinds of positive operating leverage.
Our full-year core efficiency ratio fell from 56.97% in 2019 to 56.28% in 2020, indicative of the result of the management team.
We wielded an internal initiative dubbed Project Thrive to spur revenue growth, improve efficiency, protect margin and optimize capital.
Among dozens of initiatives here, we consolidated some 20% of our branches before year-end after starting the process in late March.
We also nimbly used the remainder of a previously authorized buyback to purchase 2 million shares at a weighted average of $7.84 per share in the fourth quarter.
In 2020, we also had a record year with $94 million in non-interest income, as interchange, mortgage, wealth management and SBA all had record years as well.
Non-interest income for the fourth quarter was 28% of revenues and was 26% for the entire year.
Ex-PPP, total loans grew $111 million or 2% in 2020 on the backs of strong consumer and mortgage lending and modest growth in small business.
This momentum was more than offset by a slight downdraft in CRE lending and a palpable decrease in our C&I portfolio in 2020.
Once again, however, our newer Ohio markets found the path for broad-based growth and they now account for 34% of total loans.
We are optimistic about our pipelines in early 2021 and our ability to grow meaningfully in 2021.
In 2020, we became virtually -- better in virtually every aspect of our business to include each revenue-producing line of business, each geographic region of our Company, our fee businesses, our expense focus, our credit and enterprise risk culture and, lastly, our digital strategy.
We are genuinely excited about our prospects for growth in 2021.
Let me highlight a few things from our fourth quarter financial results before offering some guidance for 2021.
First, fee income was strong in the fourth quarter.
We anticipated but did not see a seasonal slowdown in mortgage originations in the fourth quarter.
Fee income was actually suppressed by $1.2 million due to the mark-to-market on a single derivative.
Despite this, fee income still came in at near-record levels.
We talk a lot about mortgage, but we're very pleased to see our wealth businesses coming along nicely compared to where they were a year ago as well.
Second, the net interest margin expanded from 3.11% last quarter to 3.28%[Phonetic] this quarter, in part due to our intentional efforts to reduce excess customer cash levels.
Core NIM expanded by 1 basis point in the quarter from 3.28% last quarter to 3.29% as the cost of deposits continued to come down.
Third, core non-interest expense was up from last quarter as strong mortgage originations and other activity drove increased incentive expense, while at the same time reduced loan originations in other areas resulted in a slowdown of 1091 [Phonetic] expense deferrals.
Hospitalization expense was up by $600,000 from last quarter and we had a $400,000 expense in the fourth quarter related to the annual true-up of our BOLI liability.
So those two items alone accounted for $1 million of the increase in expense from last quarter.
Now, let's talk about guidance for 2021.
Note that our assumptions do not yet include another round of PPP and any government stimulus because it's way too early to understand their impact.
While concrete guidance is elusive, hopefully we can provide some helpful thoughts as to what we believe may influence our financial performance in 2021.
Let's start with loan growth and fee income.
We expect fairly robust loan growth next year.
For years, our guidance for loan growth has been mid-single digits.
We believe that we can be at the higher end of that range this year.
We expect that fee income will remain strong through at least the first half of 2021, in particular because we had expected to see some softening of the mortgage refi boom by now, but mortgage originations remain strong.
Fee income in the second half will largely depend upon the extent to which the mortgage refi boom continues.
Now, for our net interest margin and non-interest expense.
As far as we can tell right now, we believe that our core NIM will be approximately 5 basis points on either side of 3.20% in 2021, but many factors could change that number and we'll update you as the year progresses.
The NIM is expected to be profoundly affected in 2021 by PPP forgiveness and further stimulus, both of which could leave us with a lot of excess cash to reinvest and PPP round two, which will add more low-margin assets to the books.
All of that would suppress the NIM.
There are however three "arrows in our quiver" that may work to offset some of these NIM pressures.
First, we expect a phenomenon of negative loan replacement yields to soon run its course.
Our expectation had been that we'd reach neutrality in asset yield in mid-2021, but in the fourth quarter negative replacement yields only brought down the loan portfolio yield by 2 basis points, so we're almost there.
Second, on the liability side, we see continued runway for reductions in deposit costs.
We have $471.2 million in CDs maturing in 2021 with $289.9 million yielding 1.21% maturing in the first half.
And we also have $129.4 million in money market savings deposits that currently yield 1.22% that will reprice in the first half of 2021.
Third, and most importantly, our balance sheet remains asset-sensitive.
The blended Moody's rate forecast that we use call for a modest steepening of the yield curve this year and more next year, even while short-term rates remain at zero.
Our NIM would benefit from that scenario.
Turning now to non-interest expense, we believe core NIE should come in at between $52 million to $53 million per quarter.
That's up from $206.4 million in 2020 and from our previous guidance.
Part of the increase was due to a $2 million to $3 million expected increase in collection and repo expense, but that remains quite unclear, especially if foreclosure, moratoriums and unemployment insurance are extended.
One other potential tailwind to expected costs could be the next round of PPP, which will allow us to defer origination expense, potentially lowering non-interest expense.
The rest of the increase is more straightforward.
We are not hesitating to invest in loan growth talents, including commercial lenders and consumer lending teams, as well as credit and treasury management personnel because we sense growth opportunity as the crisis abates.
Furthermore, we believe that the work-from-home environment will wind down and corporate travel and client entertainment will resume at some point in the latter half of this year.
Finally, on a more exciting note, share repurchases will continue.
As we announced yesterday, our Board has approved an additional $25 million share repurchase program.
We expect repurchase activity to play out relatively slowly over the course of 2021, especially in response to dips in our stock price.
I'll walk you through some prepared credit comments and then we'll go to Q&A.
Our strong fourth quarter results underscore the effectiveness of our portfolio management practices, risk management strategies and disciplined credit culture.
Over the past few years, we tapped the brakes on certain higher risk factors.
We selectively reduced certain segments, such as energy, we've adjusted our corporate and consumer loan guidelines to achieve a more moderate risk profile, we improved our portfolio risk through geographic and industry diversification, and we've reduced our concentrations of credit by limiting single transaction exposures.
Our consumer delinquencies at year-end continue to be very low and were only 2 basis points, I'm sorry our commercial delinquencies.
Our consumer delinquencies kicked up a bit at year-end to 45 basis points, due to seasonality.
We were pleased to see that our investments in the collections team resulted in a favorable comparison to pre-COVID-19, 12/31/19, consumer delinquencies at 54 basis points.
Criticized loans increased by approximately $114 million, largely due to downgrades in the hospitality portfolio.
Non-performing loans at year-end totaled $54.1 million, an increase of $4.3 million from the prior quarter.
We had a number of smaller credits that we moved to accrual and one hospitality relationship with the balance of approximately $7 million that was moved to non-accrual.
The net increase was $4 million in non-performing loans.
Non-performing loans as a percentage of total loans, excluding PPP, was 0.86% and our allowance for credit losses as a percentage of non-performing loans increased to a healthy 187%.
Non-performing assets as a percentage of total assets increased from 0.55% in Q3 to 0.62% in Q4.
Net charge-offs for the fourth quarter came in at $4.8 million.
Net charge-offs as a percentage of average loans, excluding PPP, was 0.30%.
Given the economic conditions, they were generally in line with our internal targets.
Now, let me provide some color regarding reserves.
First, you should note that we adopted CECL at 12/31/2020 and booked a transition amount of $13.4 million.
We utilized certain Moody's models to support our estimates of key economic indicators, including GDP and unemployment.
As the economic models -- as the economic uncertainties play out and conditions improve, we might see some tailwinds toward the back half of 2021.
Provision for Q4 was $7.7 million, including $3.2 million related to the unfunded commitments.
The provision reflects our strong credit metrics and improving economic indicators.
As noted on Page 10 of the supplemental slide deck, the total qualitative reserve factors increased by a net $8.3 million quarter-over-quarter.
Specific to the identified COVID-19-related high risk portfolios, the qualitative reserve is applied for the quarter of $9.1 million.
Credit carefully considered the five high risk portfolios as outlined on Page 13 of the slide deck.
These five portfolios will be evaluated quarterly and reserves will be adjusted accordingly.
The reserve build slide in the deck provides a bridge from a 12/31/19 balance of $51.6 million to the year-end reserve of $101.3 million.
This is exclusive of the $3.2 million of provision for unfunded commitments.
Reserves to total loans grew to 1.50% of total loans and 1.61% of total loans net PPP loans.
Overall, we've been conservative in our approach and have solid reserve coverage ratios.

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q4 earnings per share $0.27.

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